For inflation targeting

Ajay Shah has yet another article on India's inflation. Here's an important one-liner,

Professional economists agree with professional politicians on the importance of low inflation.

I think that sums up the case for inflation targeting.

I have previously been an advocate of currency boards, as the best institutional reform we can go for in the face of spiraling inflation in Sri Lanka, joining the camp of guys like Fuss-Budget and Steve Hanke. I have since changed my views, not so much because I have suddenly have faith in Sri Lankan institutions. I still think they are crap and I have have knee-jerk sympathy for abolishing government institutions (in this case, the central bank). But I think inflation-targeting regulation would better stand the political economy test than currency boards.

As Ajay points out, in this rare case, both politicians and economists (and the general public) agree on something -- low inflation is good. So a mandated low-inflation target for the central bank should be workable.

But I digress. This is the same country which removed inflation alcohol from the CPI index due to moral reasons and has perhaps the only central bank chief who thinks of more than a 9% of 'Core inflation' as being rather low. If there is an inflation target, perhaps the Central Bank would resort to Index manipulation. I guess I am taking a leap of faith afterall.

Despite that, I don't think abolishing the central bank will hold very well with both the electorate and most political parties. I can already hear the JVP and other lefties shouting that our monetary policy is set by Washington (in the case of a dollar-pegged currency board, this might actually be true!). Also, as the currency spate of monetary expansion in the U.S. shows currency boards are not without their problems.

Inflation-targeting on the other hand goes well with most economists I have met and seems to have stood the test of time globally, assuming it survives the current commodity hike. Realistically, this might be the best institutional reform we can get.

Mahinda's biggest lie?

For the past few years, despite high inflation, despite the war, there's one statistic that the government had been harping about -- Sri Lanka's GDP growth has managed to hover at around 7%.

Writing for her regular column in the DM Financial Times, Anila Dias Bandaranaike, the former Asst. Governor for the central bank thinks that figure is fake. Here's a few choice excerpts :

Currently, the Department of Census and Statistics (DCS), the national statistical agency, is solely responsible for compiling and publishing these statistics. In the past, both the Central Bank and the Chamber of Commerce released their own estimates, and DCS was in the happy position of being able to cross check its own information with that of others, thereby leading to stronger and more robust estimates. Unfortunately, since the other two organisations no longer compile these data, this verification process is no longer possible. [..]

DCS, which was an independent institution directly under the President some years ago, currently falls under the Ministry of Finance. I understand that the present ST holds meetings with DCS officials to discuss preliminary GDP estimates, at which senior Treasury officials provide feedback before the estimates are finalised and released to the public. [..]

First, let’s compare agriculture production with prices. The food sub-index of the CCPI(N) rose by over 30%, rice prices rose by unprecedented levels and the Central Bank’s monthly monetary policy reviews specifically referred to the adverse impact of “domestic supply constraints” on inflation in 2008-Q1. Yet, GDP statistics recorded that production of - paddy, other field crops, vegetables, fruits and livestock - rose by between 2% and 8%. [..]

Second, although inflation rose so sharply and FMCG companies reported declining volumes in most categories, domestic trade recorded 5.5% growth in 2008-Q1. Throughout 2007 too, while agricultural and manufacturing sectors producing domestically traded goods had grown at lower rates and paddy output had declined, it was inconsistent that domestic trade had grown by a much higher rate than the goods to be traded! [..]

Fourth, road transportation reported 8% growth, although registration of new vehicles had declined by 17%, indicating lower growth in private transportation. With rising fuel costs, tightening security and road closures, what drove such high growth? [..]

The whole thing here. (unfortunately, the DM site changes the location of pages rather frequently, so if this link is broken, it's their fault.)

Interesting. Looks like somebody's being creative with their statistics.

(un)free enterprise

Recently, Sri Lanka's government decided to impose severe restrictions on the use of mobile phones citing 'Security reasons'. Anything fly in Sri Lanka these days, if you say 'national security'.

The regulation dictates that all Sri Lankans must carry a certificate confirming they own the phone connection. The new regulations will also stop people from sharing mobile phones, and restrict mobility of CDMA phones which most lower-income groups use in both businesses and at home, the law requires users to use them only at a specific address. Much more at Lirneasia.

But even with such idiotic regulations, entrepreneurship reigns. One Sri Lankan mobile operator, Tigo, has already adjusted to the regulations by issuing a plastic ownership cards. The company aims to package the card with other perks for the users.

It's great to see spirit of enterprise alive and well, despite the government. But that's no justification for stupid regulations.

Lies, Damned lies and Naomi Klein

Cato's Johan Norberg has a detailed rebuttal on Naomi Klein's superficial claims about Milton Friedman and free-market policies made in her book, The shock doctrine. Here's a video of Norberg explaining how Ms Klein misrepresents what Friedman said:




Also see this follow up video.

I have leafed-through Klein's book. No one who has actually read Milton Friedman, will take Klein's claims seriously.

One of Klein's main ammunition is in from a out-of-context quote by Friedman, who said that real change happens on a crisis, and the ideas that are lying around at the time will be implemented. Friedman said this to emphasis the importance of working towards ideas which doesn't seem plausible right now, but might be when people are looking for new ideas, such as in a financial crisis. He didn't mean this in the sense of a natural disaster nor did he advocated disaster.

This is clearly an ideologically neutral statement. If in the current financial mess in the U.S., ideas of more regulation holds sway, that will be implemented. In the face of high commodity prices, if someone is able to convince policymakers. price-controls is a good way of handling the 'crisis' there is a chance for that to happen. The former is already sort of happening, the latter doesn't seem to be, thankfully.

It is also true that most important market-reforms did happen in a financial crisis, like that of Sri Lanka in 1977, when the economy was squeezed through central-planing by the previous socialist government, or in the reforms in India in the early '90's. Thanks to those reforms millions are out of poverty. But if a different set of ideas were on the table, things might have gone in another direction.

Obviously, the likes of Klein doesn't have the cognitive power needed to understand this. See Norberg's full rebuttal and also see, Tyler Cowen's take.

$500 Oil, are the Liberals happy?

Williem Buiter writing for Maverecon blog paints a gloomy picture about a world with $500 oil. He thinks when it comes to Oil prices, "sky is the limit". With ever increasing demand from places like India and China, he thinks Oil prices will continue to rise in spite of a global economic slowdown, all of which he thinks will adversely affect the poor.

I find that plausible. High oil prices may not be the driving factor behind Sri Lanka's inflation, but it does have a say in everyone's cost of living.

This reminds me of an exchange between me and Indi, where he (and a surprising number of my liberal tree-hugging friends, I might add) think that this high oil prices is actually a "good thing". Their argument is that high oil prices will lead to behavioral changes towards less energy use and incentivise alternative energy use. I certainly agree, but I don't think that's is enough to call high oil prices a "good thing". You will have to consider adverse consequences on the poor and commerce in general before coming into such conclusions. Forgetting all of that is succumbing into the church-of-gore global warming hysteria, which by the way, I don't think of as being "hippie", but simply, elitist. American-liberals shouldn't impose their values to people who cannot afford them. The same goes for democrat obsession about imposing environmental and labor standards in trade agreements for countries which can barely afford them.

For my part, I don't think of high oil as being either good or bad, high prices just are. In some ways, we should be happy about it. This means that millions of Indians, Chinese (and even some Sri Lankans) are climbing out of poverty and able to afford automobiles and in general, more quality of life. For some reason, this part of the story is often neglected.

However, I'm not as optimistic about the benefits of high oil rise, particularly for developing countries. There are several reasons for this,

First, thanks to high taxes and inefficient refinery, we already have higher gasoline prices at the pump, compared to the U.S. even without considering the heavy subsidies given to cover the daily losses of the state-run Ceylon Petroleum Corporation.

Secondly, any breakthrough from alternative-energy research is unlikely to be spawned by places like Sri Lanka, although my Indian friends might beg to differ. So while global price rise may indeed help incentivise alternative energy research and adaptation, it doesn't justify high taxes in places like Sri Lanka.

Thirdly, behavioral changes in the magnitude that we are seeing in the U.S. and other developed countries are unlikely to be seen in places like Sri Lanka. This is because, high consumption of gasoline in the U.S. is partly due to exuberance -- air travel, SUVs, long trips, so on. and when gas prices rise, Americans change their behavior. So SUV sales are down and Americans are driving less. But consumption of gasoline in places like Sri Lanka has more to do with necessity. Most Sri Lankans use public transport, which doesn't have good alternatives. As for people who are used to driving cars, public transport won't be appealing, given it's poor quality. So even if behavioral changes come (and it will) they will be smaller compared to the U.S. and at a greater cost in terms of living standards of average Sri Lankans.

So no, I don't think high oil prices are a good thing.

But I do have faith in human ingenuity, that when price of oil becomes unsustainable we will find alternatives. I don't know what that alternative is, I don't know whether it's solar, wind or nuclear. I don't know whether we will drive electric cars, or cars which runs on water or hydrogen. But what I do know is we will keep on driving.

For much of human existence, petroleum was a useless, gooey, waste product, until we figured out we can use it for energy. Similarly, we will find something else which can serve the same purpose. Humankind got out of the stone age, not because we ran out of stone, but because we found out new and better things. Similarly, we will come out of the oil-age, with something new and better. But in the meantime, let's be rational about the benefits of high priced oil.

See more stuff about Oil on deaned.

Creative Capitalism

Inspired by Bill Gates' speech at the World Economic Forum, someone has created a creative capitalism blog with an impressive list of contributors, ranging from Gates to Buffet to this latest piece from Jagdish Bhagwati. Even the late Milton Friedman makes a reappearance. Do Check it out.

What about legalizing hard drugs?

Prompted by my earlier post on legalizing marijuana, Jack Point thinks that a good way of tackling the problem of hard drugs, such as heroin is for government to give it away for free for addicts and encourage them to voluntary enroll themselves to treatment. I think that has some sense to it and better than our current policy.

I'm generally skeptical of government programs, once it's passed through the parliament and other bureaucratic processes, it wouldn't be nearly as optimal as one would want to design it. Given budgetary constraints, poor service delivery in places like Sri Lanka, there would inevitably be restrictions on accessible quantity nor would most taxpayers be too thrilled for the fact that they are financing someone else's doping habits. I think the market would do a better job in the goals Jack Point outlines, except in extreme cases where the addiction is uncontrollable.

None of this, including marijuana legalization, will happen anytime soon. At least in places like Sri Lanka where we (or at least the politicians and other intellectual types) like to pretend some sort of morally superior to the west. Even in the U.S. where marijuana usage is rampant -- Barack Obama of all people admitted he "inhaled frequently" both cocaine and marijuana. He even put it in his book. But once the changes comes in the west, not just in terms of attitude, but particularly in marijuana policy and eventually hard drugs, I think you will see changes starting happen here as well.

On the question of whether or not this will significantly reduce crime, I recall this interesting exchange between Tyler Cowen and Megan McArdle.

A great Obama Poster

Despite vowing to oppose unauthorized wiretapping legislation, senator Obama decided to flip-flop on the issue and support wiretapping bill anyway. This is now one of many 'policy shifts' by Obama scrambling to center of the spectrum after taking a ride on to the left to get not-so-well-off democrat votes to win the primaries. So much for "Hope" and "change" the way washington does business. See This NY Times editorial and the economist article for more of Obama's centrism. This doesn't come as a surprise for me, but should be clear to everyone there is a huge difference between the real and the imaginary Obama.

Also see Why not Obama and more on Obama on deaned.

[Poster via Technology Liberation Front]

Are Libertarians ready for the mainstream?

Some observations from the TIME magazine,

Libertarians are getting ready for the mainstream, and mainstream America may finally be ready for them.

The whole thing here.

[Link via Hit n Run]

If you are sober, you are a c**ksucker

That's according to Dialog, Sri Lanka's largest mobile service provider. They offer a SMS dictionary service, so Poojitha of TimesEye decided to test it with the word 'sober'. Here's what dialog sent him:


More at TimesEye. They seem to have fixed it though, when I tried I get the standard explanation. Maybe Dialog was trying to do a pimped-up version of the Urban Dictionary.

Legalizing Marijuana in Sri Lanka

I was recently reminded by a friend that Sri Lanka actually does have legal access medical Marijuana (Ganja). The practitioners of traditional Ayurvedic medicine are allowed to carry 1kg (figure unconfirmed) amount of Ganja to be used for medicinal purposes. Unfortunately, the government doesn't extend the same courtesy to medical doctors in the western tradition.

I am told the veda mahathays (ayurvedic doctors) have access to the best quality stuff, which they often sell for other um, recreational purposes. Don't ask me why, but I believe him.

A dilemma I often face is whether advocating for decriminalization or legalization of Marijuana in a place like Sri Lanka is actually worth it.

Obviously, there is very little case to ban the substance in the first place. Not only because Ganja has medicinal properties, but the risk of addiction is comparatively low, there's also no evidence that it's any more harmful than tobacco. Most arguments for prohibition is based on some notion that this is 'risky'. Well yes it is risky, so is tobacco, alcohol or for that matter, living in Colombo. Should most motorsports, or professions which has risk in it's job description -- policing, security guards, army personnel -- also be banned? I think not. What we have is a social stigma against using stuff like Marijuana. There is almost no objective case.

But now that it's illegal, does it make sense to advocate for legalization? From a purely consequentionalist standpoint, I think the answer leans on being 'No'.

I haven't been to a party in Colombo with late-teens or twentysomethings which didn't have someone lighting up Ganja. Even if you are caught using or carrying moderate amounts of ganja, you can pay the market-price for the bribe in most occasions (unless you really F up). Same goes for most other victimless crimes like prostitution. If you want the service, you can get it. When enforcement is weak like we have in Sri Lanka, does really it make sense to fire up the debate and actually make this an issue? from a user-perspective, I think the answer is No.

However, critical to the overall consequentionalist argument for the status quo is whether keeping marijuana illegal has other consequences, like providing revenue streams and upkeep for criminal gangs. Economics of prohibition is simple. If you ban something that's in high demand, it simply goes underground. Think prostitution, think kassipu (illicit liquor), think almost anything that has wide appeal, and is banned. These things don't disappear, they just fall into the black-market operated by goons and criminals.

People familiar with the Indian scene might remember the case of Scarlett Keeling, the 15-year-old British girl who was raped and murdered in Goa by a few drug dealers. Soon after the incident, I remember Jug Suraiya's article in TOI which hinted that perhaps Scarlett would have survived, had drugs in Goa was legal. In the article (I recommend a read) he presented the following statistics:

UN has estimated the international drug trade at $400 billion a year, a sum larger than the US defense budget and which constitutes 8 per cent of all global trade (textiles account for 7.5 per cent and automobiles for 5.3 per cent). [link]

Most of this trade is not Marijuana, it's probably other drugs. The critical question is how much exactly does Marijuana contributes to crime. This is difficult to answer, since marijuana dealers don't exactly report their accounts to the Inland Revenue Department. But for what it's worth, legalizing may be a good way of cutting down revenue potential for criminals (including perhaps the LTTE) and getting entrepreneurs in to the business of ganja.

If we require a debate at all on this issue, it's this one we should be having. But what are the chances of that happening?

Books & Things

Crosswords in Bangalore. Pic courtesy:Kishore

This last post reminded me how much I rue the fact that Sri Lanka doesn't have good book stores. The Vijitha Yapa is not really a book store, it's a small book-shop. There's no place to just chill, read a few pages of the book you want to buy while you sip a cup of coffee.What's my ideal book store? It should have preferabaly, the following:

• Lots of books (duh! - but a good collection of politics/econ books is a must and for that to hapen your book store must be large) 
• Comfy places to sit around and read, your book store should double as a sort of a library.
• Coffee.
• Wi-fi or a way in which you can read reviews. (same goes for my ideal DVD-store)
• Some things other than books -- DVDs, and other little 'things' you can buy (not essential really, but good business stratergy)

Sady, I haven't found this place yet. The closest I've been to something like this is Books & Things, in Gurgaon, in one of the malls.Gurgaon is this up and coming place just outside of Delhi. Fun place. the store didn't have any coffee or internet, but it had almost everything else right. In fact, India is a good place for book-people. Not only can you find pirated books on the street, if you are someone on a student-budget, but you'd find places like Books & Things or Crosswords. For all the Hindi-movies/Soaps they copy, I wish a few Sri Lankans copied some of that.

There maybe reasons for this though, India (according to some) has the world's largest English speaking population. With 350 million speakers, that's more than the combined populations of the U.S., U.K, Canada and Australia put together. Sri Lanka's whole population is about 20 million, about the same as Mumbai's total population. Fortunately or unfortunately, laws of demand and supply apply to everything. But then again, given all those coffee houses and up-market cafe's, I'm sure there is a market for a decent book store.