Going Global

reposted

The mainstream media of Sri Lanka has failed to do its job; again and again and again. Absurdity after absurdity of the government’s actions have passed repeatedly into the public limelight only to be cast aside by the media by the means of ridiculous well-quoted statements from top government officials.

Take Dayan Jayathileke for instance. He was reduced from hero to zero when he was quoted in the media implying that the government was realistically considering implementing the 13th amendment. This to the man who according to government propaganda 'rescued us from unanimous defeat' at the hands of the Western pro-human rights anti-Sri Lankan coalition at the UN.

Where is the media outcry? if not against the sacking of DJ, at least against the implications of the actions taken by the government to the very initiation of the 13th amendment; an integral part of our constitution. The upholding of which is the duty of any free media framework in a country.

Other Epic fails include the lack of initiative in the investigating and reporting of all the dead bodies turning up everywhere even after the war, not that I think dead bodies being found while the war was on is any less justifiable, but the war is over now, and there should at least be a more rational base to justify the revelation of the goings on behind such atrocious activities to the general public. Even to a media prepared to convolute the already very bendable set of 'ethics' it is governed by.

Other epic fails include the complete lack of interest in questioning intelligently the apparent lack of power of the Sri Lankan judiciary (which is also an epic fail of its own but I’ll write about that later), the exorbitant and skewed taxing system and questionable economic policies (economic and financial critical analysis is almost unheard of except for a bit on LBO), the questions on the justification behind the implementation behind seemingly irrational laws (do i need to go into porno and mobile phones? its been well harped about in the blogosphere) and the apparent disregard to intimidation and coercion in undemocratic provincial council elections (like Jaffna for instance). And nobody even gives a rat’s behind about discussing the age old 'problem' of the executive presidency.

The media is a meek dog that barks only when the government wants it to. It is the government’s smokescreen, a tyrannical propaganda machine. Perhaps I wax too lyrical maybe? What; am I a paranoid conspiracy theorist then?

The hotter the waitresses, the weaker the economy. In flush times, there is a robust market for hotness. Selling everything from condos to premium vodka is enhanced by proximity to pretty young people (of both sexes) who get paid for providing this service. That leaves more-punishing work, like waiting tables, to those with less striking genetic gifts...

just added to kottke.org 's expanding list of odd economic indicators. Unfortunately, most our waiters being of the teenage boy variety, using that index here will get you trouble from all sorts of places. I wonder if we can come up with our own customized Sri Lankan economic indicators? like

The Kasippu index; the better off the economy, the lesser the consumption of illicit liquor.

The Bus Traffic index; The better off people are, the lesser demand for buses, the lesser amount of buses on the roads. Divisions based on routes included.

This also leads up to

The polite tuk tuk driver index; the better off the economy, the more people use tuk tuks, the lesser incentive for drivers to be polite.

The Street Food and Drink basket volume index; the better off the economy, higher the tendency for people to go out; translating into higher sales of street food items like vadai, acchaaru, king coconut, faluda, lime juice etc.

Anything else?

The IMF has just approved the long awaited loan and also agreed to release some 300 million of it immediately.

But what of the conditions? Earlier, reports indicated that the IMF was looking for concrete policy reforms in order to release the money. We are all aware of the Government's apparent dislike of IMF interference or 'conditions' but in this case it would seem that they have caved to a certain extent.

Or have they?

The main opposers of the loan were the USA, Britain and France. The concerns raised were mainly the lack of confidence in the Government's ability to carry out feasible reconstruction and ensure long term growth and also the human rights violation aspect of the post war era.

As for the human rights aspect of it, to my mind, they are fine ones to talk. Repeatedly, there have been atrocious abuses on human rights by these very governments that have been brushed aside as 'necessary' to 'secure democracy' etc. To me, the whole human rights issue is pure farce. It is merely a sign of power brokering going on behind the scenes. Of who our powerful allies are and of whom those allies are up against. In this respect, Sri Lanka is just a pawn.

As for the doubts in the government's ability to reconstruct the nation and then assure a robust economy with long term growth prospects, i have to admit i share some of those views as well. The type of structural reforms required for such a measure like the liberation of markets, devolution of power, social reform etc with an intelligent vision with relevance to the future seems out of reach to a government used to bullishly hugging power and having its own way all the time.

But as we wait and see, all we see coming out of the bigwigs in the state in terms of what is going to happen are short term things like repairing the balance of payments etc. These are merely operational changes and will not really improve the chances of our economy to break out of its 'third world' or 'developing' status. For that to happen, like i've been harping on this blog for ages, a vision is needed. It sounds corny when i say 'vision' like that i know, but isn't that how all the more 'developed' nations got to where they are today? If we continue to pay scant heed to events further than the next general election we will be stumbling in the dark as a nation forever.

The loan amount approved was $2.6 billion. $600mn more than what we originally asked for. Which is great. There is also the promised aid from China, India and i think Iran that is yet to materialize. Shit, i hope at least some of it will see the light of day in terms of actual benefit to the public.

On the bright side, we can probably expect a stock market rally again today, and this one may last for a while yet. Holders of high beta shares like JKH and others could probably make a good short term killing.

Not economies in recession, economics; the science that its proponets are calling 'dismal' to the 'uninitiated'. A series of articles published by The Economist has brought the discussion of the death of modern economic theory to blogs and armchairs.

to quote

OF ALL the economic bubbles that have been pricked, few have burst more spectacularly than the reputation of economics itself. A few years ago, the dismal science was being acclaimed as a way of explaining ever more forms of human behaviour, from drug-dealing to sumo-wrestling. Wall Street ransacked the best universities for game theorists and options modellers. And on the public stage, economists were seen as far more trustworthy than politicians. John McCain joked that Alan Greenspan, then chairman of the Federal Reserve, was so indispensable that if he died, the president should “prop him up and put a pair of dark glasses on him.”


In the wake of the biggest economic calamity in 80 years that reputation has taken a beating. In the public mind an arrogant profession has been humbled. Though economists are still at the centre of the policy debate—think of Ben Bernanke or Larry Summers in America or Mervyn King in Britain—their pronouncements are viewed with more scepticism than before. The profession itself is suffering from guilt and rancour. In a recent lecture, Paul Krugman, winner of the Nobel prize in economics in 2008, argued that much of the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst.” Barry Eichengreen, a prominent American economic historian, says the crisis has “cast into doubt much of what we thought we knew about economics.”

And in defence

In its crudest form—the idea that economics as a whole is discredited—the current backlash has gone far too far. If ignorance allowed investors and politicians to exaggerate the virtues of economics, it now blinds them to its benefits. Economics is less a slavish creed than a prism through which to understand the world. It is a broad canon, stretching from theories to explain how prices are determined to how economies grow. Much of that body of knowledge has no link to the financial crisis and remains as useful as ever.

A broad cannon, a prism to look at the world... Yes well, it's hardly a specific science is it? if there was a problem with economics that led to the current crisis, it was the complete trust in certain branches of economic theory, in complete ignorance of other similarly viable economic barnches of theory.

This 'dismal science' primarily studies human behavior, and there is nothing more complex and unpredictable. Psychology is also a science that studies human behavior; on a much more micro level. And it still can't figure out the complexity of our needs and wants.

Economics relies on certain broad based assumptions to carry out analyses and theorize on a macro level. I.e. on the overall impact to the world from the behavior of its people, and this is a complex task. It's something that is impossible for one person to fully grasp or understand, leading to many different viewpoints, theories, models and schools of thought on how the world works.

Nobody understands how the world works. Nobody knows the full consequences of largescale financial decisions for example. Least of all the economists themselves.

The world messed up. Again. And now it looking for something to blame. They've put the blame already on the banks, rich CEOs, rating agencies, governments and even China. This is just normal human behavior IMO.

A mercantilist or neo mercantilist stance is what helped economies like China, India, Japan etc to rise to be the economic powerhouses they are today. it was also the cause behind most of the greatest empires ever seen on earth, and is the root of American industrial power.

It involves a bit of protectionism of course; no doubt angering most liberal thinkers on matters concernig the economy, but mostly this will involve a genuinely cooperative relationship between business and government.

We are talking about reduced red tape and corruption. The whole structure of the government should be geared to help business. Its more than just a set of policy actions; its a mindset of its own.

Right now the government is strapped for cash. 90% of current government revenue is also spent on servicing our debt. that is, our existing debt.

This is resulting in the crippling of business funds for certain essential industries like Tea and Coconut, which rely on reinvestment of the revenue they bring in to develop their industries, having a severe effect on the long term profitability of these businesses.

The government is absorbing cash fom any and every avenue they have access to and this is having disturbing and distorting effects on the economy. The recent stock market bull run has also now slowed as foreign investors begin to sell to cash in on their profits.

Draconian laws and pointless regulation cripple industry and business on many fronts and these will have to be eliminated. Most importantly the mentality of public servants must be changed and the public sector itself must be put through a restructuring process.

Special instances should be managed outside the normal vertical rigid structure of government. for example, this is how Malaysia coped through the Asian Crisis.

Right now all the government seems to be doing is fire fighting away; thats quite understandable seeuing as we just emerged from conflict. heres hoping we find out some concrete and practical vision like a Mahinda Chinthanaya for the economy soon.

Where is the Sri Lankan economy heading?

Recently HSBC economist Prakriti Sofat created a stir in the local media by saying that the Sri Lankan economy would grow by four percent this year. The stir was created by the beautiful and intelligent Ms. Sofat herself just as much as what she had to say on the economy i suspect but lets leave the idle goss out and focus on the question here; is the economy actually heading for good times?

Exports are down, in all the major sectors as demand from major trading partners is still low (Sunday Leader; Exports down 28%). most of the optimism stems from hopes that the US recession will ease up. but this may take a while yet, and other major markets like Europe will only do better once the US recovers. Demand is strong from other markets like the Middle East and tea is pretty much the only major export product that is doing well as a result.

Consumer spending is down as loosening monentary policy is not being translated into consumer markets as banks are spooked by a 9% industry wide non performing loan rate (Sunday Leader; n.p.ls rise), and also due to the oligopolistic nature of the sector; interest rates are still too high. This discourages spending and limits borrowings for businesses, especially the small to medium scale businesses, which provide most of the employment in the country.

Government spending on development projects should be up, except that the government doesn't have any money to spend. Most forecasts are also betting on the IMF loan coming in, and previous optimism that we'd have enough capital inflows to make it unneccessary is likely to fall flat as foreign investment looks at all the other factors reducing the attractiveness of the market, like the lack of foreign inflows for instance, leading to a catch 22 situation.

In addition, penny wise pound foolish fiscal policies like the absurd taxes for petrol users help only in stunting the spending power of the wealthier sections of the population. Fiscal policy needs to be loosened for growth, and equally distributed to prevent distortions. Wherever money is spent its going to boost the economy, and its better off being spent in the market than being mismanaged by the government.

Inefficiency and corruption is another factor that will hold us back; state servants took away 53% percent of taxes as wages last year and we can bet our bottom rupee that there are more efficient ways to be spending our tax money. The creation of new ministries and the expansion of the cabinet doesn't exactly create a favourable impression of the governments plans for reengeneering and modernizing the state sector.

On the upside our trade deficit is taking a dive (Sunday Leader; Exports down 28%) but only because demand for imports have drastically reduced especially cars and electrical appliances. Foreign remittances are still as strong as last year and have helped balance the BOP.

So optimistic outlook? I don't mean to be a cyinc but yes ok. Though we still need a lot of things to fall into place and go our way. It is easy to be cast under the 'peace delusion' and assume that economic prosperity will come along just because the war is over. But the tough times are only beginning. Remember, we had all the chances to make it in the decades preceeding the war, but we lost our way.

Im still hoping for a clear vision or mission statement coming from the government devoid of any pre election crowd pleasing cheese talk. A serious long term plan, say for the next 30 or so years would be great to see being talked about, at least for a start.

Germany just announced a plan to cut taxes in order to stimulate their economy. The worlds third largest economy is in a small patch of quicksand right now. It has already hit recession and forcasts are that it will contract around 3% more this year.

Exports are not doing too well as demand for German products fall along with global spending power. Germany was the world's largest exporter of goods last year. Unemployment is set to increase as the current boom in German employment tops off. This will consequently increase government expenditure in terms of social benefits and welfare.

Reducing taxes at a time like this is a controversial decision. Angela Merkel, the German Chancellor has come under fire because the new policy will lose the government around 15 billion Euros and risk reducing GDP by a further 6% this year.

That is quite a significant amount for a massive economy like Germany. Also with the new tax breaks, the giovernment will be funding a budget deficit. Though Keynesian economic theory states that funding a deficit by reducing taxes can be good for an economy in trouble, as it stimulates inflation, the long term outlook is grim because the any additional cash people recieve will probably be saved instead of spent.

Still, it's a start. As money is saved this will increase the amount of cash in the economy and stimulate capital investment, which will in turn provide jobs and then create a less uncertain environment and aggregate demand will increase as a consequnece of this. But that takes a long time to happen. And Germany may go through some tough times before it gets to more solid ground.

Meanwhile, though markets are changing and demand for some German exports such as Automobiles, electronics, machinery, foodstuffs etc may be effected by changing market trends or if there is a major change in the geo-political landscape. This seems unlikely in the near future. Though competition like Chinese exports could have posed a threat, they would only do so if not for the tightly bound Eurozone regulations, which Germany is extremely particular about. So any threat to their main exports right now, seems minimal; ensuring a strong core economy into the near future at least.

Sri Lankans are Encouraged to be Poor - Dr. Sarath Amunugama.

Since the advent of independence, most governments have focused on concepts like 'nationalism', 'national pride' etc as a method of winning elections. Their policies have alienated segmentsof the population, created huge inefficiencies in the public sector, fostered corruption, and have let self defeating and 'rolling' economic policies (like printing of money to fund budget deficits) to prosper.

Many people wonder why we never turned out to be like Singapore, i think its because of our outlook. We as a nation have no long term plan for success. There is no long term vision. Governments have always seeked to tear down the achievements of previous governments in an effort to appear superior.

I read that Sri Lankans are encouraged to be poor. A cuture of glorifying poverty is popularized by the political machine. And if you think about it, you realize that its true. Most of the teledramas you see on TV with a few exceptions, deal with the lives of poor people. The daily struggle to make ends meet, the problems associated with giving your daughter away in marriage etc being their central concern. Most protagonists in such cases are lower middle class, humble, hardworking individuals committed to a life of doing the same job day in and day out until they drop.

In Italy for e.g. people love wealth. They aspire to it. Even the current scandal surrounding Silvio Burlusconi doesn't prevent Italians from admiring him for his wealth and power, the Americans live and die by the Dream, the Japanese slave for lifelong success. We are what we aspire to; and a culture where being rich is glorified drives the masses to improve themselves and drive the country economically.

The government prints money to give subsidies to appease the people. They print money to cover budget deficits. They drive up inflation and make the public even poorer. Therefore a culture of glorifying poverty definitely helps keep us in check.

The hot seat

On Saturday i was coming into Colombo from Wattala to attend a wedding with a few friends. There was a major traffic jam and we were consequently stuck on the road for quite some time. The reason being of course that His Excellency the President of Sri Lanka was on his way to receive some rare (read: probably obscure) honor for his efforts for providing us with freedom.

There are talks of new taxes being imposed. Apparently there is also a seatbelt fine. You get fined if you don't wear your seatbelt. From what i heard its somewhere like 2000 rupees per offense and repeat offenders get to go directly to the courts. Sri Lankans are notorious for not wearing seatbelts so this should net the government a handy sum if imposed and acted upon.

Im curious, is it cos i don't know of these things or is there really no mechanism that lets the public be aware of the rationale behind new legislation and policy stances? Ideally there should be reasearch studies out about frequencies and causes of road accidents to support the seatbelt tax. What i think happened was that some smart alec minister came up with a good 'suggestion' to find some fast cash without the public getting too pissed off. I mean hey, we can all keep our seatbelts on if we don't want to pay yeah. And most of the voter base doesn't really own cars anyway.

The Military

The army is expanding. I heard from the Armchair Warrior Grapevine that this is necessary to secure the area. More soldiers are apparently required to secure an area than to fight it. Maybe i can see the sense in that. Seeing as the LTTE seem to be regrouping now, but still it doesn't look like the taxes are going to subside becuse of this. Also, for the suparlative and the trivia fan, the Sri Lankan military apparently will be the 10th largest in the world if the expansion is carried out.

This also ties into the IDP issue; the government is insistent on holding them for at least 2 to 3 years while international pressure, for what its worth, keeps insisting they let them go. Reports of opressive paramilitary activities at IDP camps abounded and were pretty morbid. But living conditions have now improved according to the IDMC. The government insists it needs to 'weed out' possible tiger cadres hiding within around 300,000 IDPs in vaious camps in the North East and they have just released about 2000 people who have been camped for about two years now.

Our GDP may sink. As defense ependiture reduces the contribution of government expenditure. Although development may pick it up. I read in the Times that there is a 50 million dollar resort of a number of boutique hotels coming up. Hopefully more development will happen and help us with our forex problems which brings us to,

The Economy

Economy wise we seem to have reached a firmer footing. According to this LBO article our balance of payments crisis which was formed by the CBs soft peg is somewhat over. It happened when they sold what dollars they had to buy back rupees to keep up the rupee exchange rates, perhaps helping temper the cost of war imports. What they also did though, was to print more rupees at the same time, defeating the purpose of the peg. Thereby needing even more dollars to fund the thing and avoid a major currency collapse.

I guess they were gambling it all on the war being over, and it's paid off. There has been some foreign inflow and the government has even pulled of a US bond sale which was oversubscribed by about a 100%. Assertions that the need for that IMF loan have lessened seem a bit credible now. There is investment coming in and development projects in line for the liberated territories especially. Although i am not clear as to how much corruption and inefficiency will stunt it.

Industry seems to be suffering with a lot of jobs being lost in the recent spate of downsizing that hit the garment field and other industries. Foreign remittances are also on the decline and many workers are having to return home.

There are signs that fuel prices may be on the rise, with LIOC lobbying for a price increase, the government has insisted it is not planning on raising prices but that is a regular government tactic to calm the people before they go ahead and increase the prices overnight. As was seen in the past.

Interest rates need to be lowered. There is a reluctance by most banks to do this, the current environment still being favourable for high interest rates, but lending has frozen somewhat and domestic demand needs to be stimulated. There are already efforts to get this underway.

What next?

Overall, I feel the outlook is lukewarm. Im not by nature an optimist. But i'm not too pessimistic about our future either. The end of the war is widely speculated to stimulate interest in investments especially in the North East and this will have spillover effects on the rest of the country as well.

If i am a little skeptical, it is with regard to the country's leadership and direction, will they handle the redevelopment efficiently? And also the environment of suppression of free expression that is prevailing right now is a cause for concern. We need a more independent media capable of pulling up those in charge without fear of repercussions. Someone needs to monitor the monitors afterall.

"The war has hampered the country on many fronts for decades and much of the economic and human resources of the country have been wasted on the war. This has, over the years, pushed one of the most promising nations in the world to an abyss of despair and gloom. Although under- investment in education, infrastructure and health has held back progress of the country, the ending of such a dismal era would naturally invigorate the spirits of its people."

But there needs to be a concentrated effort from the business community together with the government to enable this to happen. Innovative policy instruments should be put in place and removals of bariers like red tape, corruption and non tariff barriers should be ensured. Also collective development of various sectors is needed to enable complementary growth.

As per the official release, the Summit

"..will discuss important matters on topics relating to the economy, banking & financial sector, agriculture, dairy, fisheries & tourism, employment, need for English and ICT as business languages and the importance of governance & accountability, both in the private and public sector".

...pay special emphasis to key challenges confronting the country, which includes post war reconstruction and resettlement, developing the northern and eastern regions, promoting balanced growth and macroeconomic management.

...will explore how challenges could be converted into opportunities and opportunities turned into time-bound action plans. The challenges and opportunities, both external and internal, would require cohesive effort from all stakeholders and the program for the summit has been designed to generate fresh ideas, a consensus view and a clear vision for the development of Sri Lanka."

It costs roughly Rs14,000 for individual participation and they do not provide free passes for students, i checked. So unless someone is willing to generously sponsor me, live updates and blog posts on the outcomes of the summit seems somewhat of a hazy reality. Also, if you're foreign, It costs you $200 which at today's rate comes to roughly 23k and i think that is without taxes.

Im not sure if there is any mechanism in place for the conclusions and ideas ensuing to be released to the public. Ideally they should have organized some sort of a live feed like a twitter/blogging platform and enabled recordings on YouTube etc. The Chamber of Commerce needs to get with the times.

The list of panelists include individuals from the government, international and regional financial/ research sector, local business leaders etc and looks promising. Hopefully, findings and conclusions made will have a concrete nature and would not be afraid to suggest radical change.

Also, the areas of concern seem to be largely related to the immediate future. But thats alright. Hopefully, this will help shape the government's future policy framework for the economy when they get down to it. What I'd really like to see is some serious governmental communications as to what their long term vision for the economy is. Flowery talk and metaphorical allusions to Singapore/Hong Kong etc notwithstanding.

The US was officially classed as an economy in recession after its last peak in December 2007 (NBER) after which it had two consecutive quarters of negative growth. A recession as defined by the National Bureau of Economic Research is

 A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

Anyway to cut a long story short, they identified the last peak of the US economy as December 2007 after a significant period of decline followed it which was sufficient enought to be identified as a time of recession.

Taking the generally accepted definition of a recession i.e. 'a recession is indicated by two consecutive quarters of negative/a decline in real GDP' we can deduce that for the recession to stop and for growth to start the GDP should pick up.


The GDP of an economy is measured as follows

GDP = Consumer spending + Investments + Government spending + (Exports - Imports)

or GDP = C + I + G + (X - M)

Now according to this BBC report the The American Bankers Association's Economic Advisory Committee thinks the US economy is set to grow in the third quarter of 2009. Im sure this is good news all around as a recovery in the US economy will probably mean eventual growth for other nations as well.

But is it really going to be a sustained growth?

Opinions of different schools of economic thought vary on the best option to handle a recession. The end of the Great Depression of the 1930s is credited to the policy ideas of John Maynard Keynes who suggested increasing government spending as a method of boosting production. In practice, this can even involve activities metaphorically akin to the famous paying-people-to-dig-holes-and-fill-them-up-again scenario.

But some are of the opinion that the massive government spending of the second World War is what ultimately brought the world out of the depression, leading to uncomfortable thoughts on the current global economy and political environment.

Monetary economists advocate the use of expansionary monetary policy by reducing interest rates to stimulate borrowing and thereby increasing spending power and eventually consumer spending. The Supply-side economists advocate tax cuts to promote business capital investment.

The general consensus among most economists is that a recession is a problem born of a drop in aggregate demand (meaning the total demand for goods and services within an economy). Therefore, as we can see, theoretical suggestions are mainly directed at stimulating at least one area of an economy that would contribute to a pick up in GDP.

The US's new forecast of a growth of 0.5% seems largely due to an increase in consumer spending which can possibly be attributed to the drastic reduction we have seen in the US's interest rates over the past few months. Also, government spending on dying corporates and banks caused still more money to be injected into the system and would have boosted produtivity somehow, somwhere.

However, unemployment is set to increase to 10% and the overall outlook of employement does not look too good for the next year and a half or so although the increase in consumer spending (which two thirds of the the US economy is driven by), is hoped to temper this.

But there are still deeper problems. According to the BBC the damage caused to the Public Finances and the Labor markets are still substantial and industrial production has fallen more than analysts expected.

There is also the problem of the US's growing trade deficit, which is not helping.

Therefore there are mixed signals on the status of this 'recovery'. It could be the beginning of a slow climb back to the top or it could just be a random spurt of growth brought on by arbitrary circumstances. We should hope for the former.

Here are some really great stories that i thought i'd share.

Inflation, a double edged sword? - The Mises Economics Blog explores the inflationary implications of the US's trillion dollar bailout of the banks. It talks of how although pushing the inflation button and increasing the money supply is easy to do, the hard part is reigning it back in. Although its presumtion that contrationary monetary policy after a 'recovery' 'would also reduce bank reserves, reduce credit availability and loans, and increase interest rates' is true, this does not have quite the ominous ring to it as is hoped by the writer. Once the economy is 'recovered' such a reigning in may be necessary to curb inflation and may be the only option available and may not be all that destructive. Their call back to the Gold standard at the end of it though, seems hardly viable. But a great read nonetheless.

Googlenomics - Ever wondered how google manages to make so much of money while giving away most of their products for free? Ads right? Ever wonder how their system of advertising actually works? Its an economy unto itself thats what it is. Google initialy went the traditional way by having salesmen solicit advertising but then they discovered Adwords (toted by some as the greatest business discovery ever). Adwords uses auction theory to have a cost efficient way of selling advertising to bidders. But theres way more to it than this. Google employs a Chief Economist and also has Macro and Micro elements to its operation. This article is a brilliant read. Thanks to Brad De Long for the pointer.

A good time to die - The Adam Smith Institute Blog. The Us has what they call an estate tax where they have this massiv tax imposed on estates over a certain value when the ownder dies. The estate tax has been largely reduced through Bush pressure and is set to come to zero by 2010. But will return in full force (fifty percent) by 2011. This read explores the possibility of more rich people dying in 2010. Its even a bit morbidly funny. If you'll forgive my insensitivity.

China, The US State Department - This account of China is not exactly some obscure study of sensational interest but gives you everything you need to know about the more recent (special emphasis on the last century) Socio-political and economic activity of what will probably become the the worlds biggest economy in ten years. Interesting learning point for me was the Taiwanese political connection and its origins.

After years of being ravaged by the war the North-East is set for more Booms. But this time we are hoping for a good boom. As in an economic boom.

With the opening up of the territory, firms have already begun to show interest in expanding into the North East. The obvious beginning would be to start with production, like agriculture and fisheries. Once these base industries are developing then there will be more room and demand for industries such as banking and telecommunications to enter the fray.

Tourism is looking positive with firms like John Keells, Softlogic Holdings and some foreign parties expressing interest to invest (FT). Although we will still be under the gloomy canvas of low tourist turnover due to the global financial crisis there should be enough demand to justify large investment in North-Eastern tourism.

Marketing will play a big role in making tourism a success and this is the perfect time for the industry to seize a chance for a comprehensive international campaign. Tourists are more picky with their destinations and will need a lot of convincing to invest their money in a particular alternative, the SL industry must fight now to create the worldwide buzz and top of the mind awarenss of a top tourist destination. I blogged about another possible marketing angle here.

Other industries set to boom include construction and engeneering consultancies. There will hopefully be a lot of inflow of funds with China and Iran already pledging some USD 1 billion and 1.9 billion respectively (FT). Construction funds must be used wisely and wherever possible, local firms should be enlisted to contracts in a way that efficiency is not compromised.

On the topic of efficiency, everyone is now worried about corruption and the mishandling of development funds by corrupt government officials. Of the tsunami aid scenario was anything to go by the Rajapakshe administration will have to ensure that none of that occurs this time around. But this may be asking for too much.

Government revenues are dropping, while expense is set to increase a lot according to Dr. Srimal Abeyratne senior econ lecturer at the Colombo University speaking to the Financial Times. The governments expected revenue increase of Rs. 200 billion is said to be too optimistic as the industries on which it relies on for tax income are suffering too much as a result of the global crisis.

The government needs to ensure optimum efficiency gains and ensure it uses its current strong position to make some concrete changes in the public framework that will improve the government services sector. This includes cutting staff and saying no to loss making departments. '..In the long term, these painful changes will strengthen the government's traditionally weak financial position' says Dr. Abeyratne.

A mini credit crunch in the local banking system is not helping anyone either. With the central bank's reduced interest rates not being translated into cheaper commercial lending rates. leasing companies have jacked up their deposit requirements and the velocity of money is down because of high saving rates and low consumer spending. This needs to be eased up.

Whether these changes happen or not, it is apparent that we may have a shot at having a better chance of riding out the ill effects of the global financial crisis if we experience (and more importantly, take advantage of) a mini boom in Sri Lanka. Hopefully when the boom begins to subside the global system would have reached a more stable position, helping to prolong it.

Looks like we'll be soon confronting higher oil prices again. But the paradox is that the prices will remain low as long as the economy is in a slump. The moment it picks up the pace and starts wanting more fuel to power its machine the prices will start flying.

This Economist report quotes analysts as predicting the arising of more 'super cycles' where the usual boom bust commodity cyles are interrupted and longer periods of price increases are seen as developing economies start absorbing and draining resources and thereby initiating prolonged (and potentially destructive) demand cycles.

The main reasons behind the initial price hike have apparently remain unchanged. All the easy-to-access oil fields are in the hands of governments and the Big Oil firms are having to increasingly resort to drilling in nooks and crannies to find more oil. Also a slump in oil prices back in the 80s have limited investment in oil reserves amd therefore most of current sites not new ones.

The Big oil firms claim to be heavily investing in new oil fields and technology although the benefits will only be reaped in a decade or so. Government companies Like Saudi's Aramco and Brazil's Petrobas have invested heavily in more capacity but other governments like Iran and Venzuela are reluctant to do this due to the current low prices in the market.

Countries like Russia and Venezuela are facing serious cash flow problems and are pressurizing private investement and sub-contractors with more taxes and no wages. In Nigeria the fighting around the Niger Delta with forces such as the MEND are creating some serious barriers to development of production

So oil firms have no new oil to speak of and other pressures on goverment firms will prevent them from increasing output. All except for the Saudi's who have about three times the current capacity of production up their sleeves.

McKinsey, the consultants, argue that governments can help overcome this problem with a few simple measures. The more practical of which are increasing lorry load limits to increase fuel efficiency, increasing emmission standards and efficiency standards even more in the long run will undoubtedly help to curb demand.

Other measures that have been carried out in the past include investment in alternate energy sources, but the disastrous impact of bio fuels should have taught us a thing or two about the importance of thinking out such steps in detail. Electric cars are also a good option and it is encouraging to see quite a few global car makers coming out with models.

But all this has taken a back seat to the financial crisis. When the oil prices dropped so drastically everyone stopped thinking of the 'oil problem' in the classic short termist fashion characteristic of world governance. Bigger problems were at hand and opportunities to perhaps lay a foundation for a whole new energy culture were probably too far fetched and unimportant to care about then.

So now as the economy picks up again we may be confronted with bigger problems because now we won't have a sub-prime morgage crisis to pull us away from strangling each other in a scramble for natural resources. Already oil futures markets are indicating a potential rise in prices.

Which brings me to McKinsey's other suggestion; convincing developing economies to remove oil subsidies. This is something that these economies will definitely not agree to. They will argue that subsidies are essential to their growth. Moreover, they will question the fairness of such a request as economies that are 'developed' today got to such a state by the unrestricted consumption of all the resources they could lay their hands on.

China's Oil demand has risen to pre-crisis levels (and unrelated note: their military prowess has arisen to previously unheard of levels), but global demand is still on a downward trend as decline is still apparent from other big world economies. But as long as oil remians a critical resource, the problem faced a few months ago will materialize again, and specultion will drive the prices even higher, with a corresponding increase in other commodity prices worldwide.

Steps need to be taken starting immeditely to make sure that oil is not a  critical resource, but to this end there is also a lot of disincentive for powerful oil economies and lobby groups. There is always money to be made for the oligarchs, and high oil prices are something they will definitely welcome with open arms.

The Illusion of rational man, enter the economics of fear; by W.A Wijewardena, is a great read.

He offers a simple look into a basically intrinsic assumption in economic theory, that of the existence of the rational man. Rational man as we all practically know, is a figment of the collective imagination. Everything thinks they are rational, but our rationality is also based on our emotions. So we are bringing in our emotions in the consideration of choices and decisions.

But are emotions completely devoid of rationality? Aren't emotions signals from the gut so to speak?

The problem may lie with the basic definition of economic rationality. The Economic man or the Rationl man is generally described to be one who pursues self interest in his actions decisions and thoughts, therefore exercising that self interest and furthering his improvement is a product of his rational mind. As Adam Smith says in the Wealth of Nations

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

Mr. Wijewardena goes on to state that as fear is avoided by rational man due to the fact that it creates 'disutility' (the opposite of utility, which Rational Man is said to pursue) and due to the fact that it is a product of risk (or the fear of the unknown) it is irrational and 'does not tally with the concept of the rational man'.

His argument, if i am correct, is that fear is an irrational emotion and therefore should not fit in to the concept of the rational man.

But here, i feel that we are stuck in the orginal economic definition of 'rational man'. Where the original concept of rationality is one of reason. So does reasoning secificaly have to take place based only on known facts and figures? If man did that, ignoring his gut feeling and emotions, he would surely fall prey to the unknown. Calling gut instincts or emotions a part of 'rationality' or reasoning may seem absurd but in reality, that is exactly how reasoning takes place.

Man is a rational creature, meaning that man engages in reasoning. But trying to label that reasoning within narrow categories that cannot include emotions or any of the other tools that economists feel are not 'rational' as they see it will only lead to problems later on.

As for Mr. Wijewardena's argument that fear is irrational, it is irrational in the context of the 'old' rational man. The man meant to purely base his decisions on 'fact and reason'.

But fear does have its benefits. Fear is a signal and will only improve your ability to respond to events more accurately. But fear can also be irrational, when you are obviously more content to blindly fear things and adopt remedies to counter these fears without stopping to examine if these fears have any credibility. Like fearing antagonism in the job market just cos your skin is a darker shade.

This is a scary prospect and as MR Wijewardena says, has been present in society for a long time and is especially present in the 'era of fear' that we are living in.

heres a quick fix to the financial crisis.

The whole thing happened cos the housing market failed right? So people defaulted on their loans and cleared outta their homes. Leaving banks stuck with useless debt and unsellable houses. So what do they do? They sell the houses to the Indians! and the Chinese and the Sri Lankans! im sure we'll (speaking for all Asians) be glad enough to lap up good houses going cheap in the most developed nation of the world.

But then they'd have to grant us VISAs. Otherwise whats the point? no ones gonna buy a house they cant live in. So they give us VISAs and a million or so more immigrants enter the US. In case ur thinking people over here cant afford to buy US homes, thats not true. Theres a lot of money around these parts. The Indian ocean is gleaming with it.

So the Zombie banks sell their houses cheap and recover most of their money. The people who went to the US are happy cos they are now in 'the land of the free'. The US doesn't mind a coupla million more immigrants as long as they work hard and pay their medical insurance. The defaulters can rent rooms in the houses being bought. OR the owners can stay in Asia and rent their new homes out to homeless Americans.

The crisis will be nullified due to all the toxic assets being taken care of (because every house will be sold to clamouring Indians and Chinese - and the odd Lankan politician - with bulging pockets), banks will be standing on their own two feet again, and soon theother banks wont be so suspicious anymore of lendng out money, and the velocity of money going around the economy will slowly increase and permeat the air with some green crispness.

Trade will pick up as credit eases and confidence increases. Recruitment will start and people will find work again. And we shall all start living life as normal. The rich will once again become richer at a steady pace. no more uncertainty for them. And the poor will once again be poor in confidence. No more uncerainty for them either.

There. problem solved.
Stay tuned for; Conspiracies of the Crunch - predicting possible future credit crunch conspiracy theories (cue ominous music).

1) a non-political central bank (i.e. the Fed Reserve) could assuring a smoothly growing money supply and






But the deregulation of the banks aside, Friedman's idea of a non-political and independent Central Bank hasn't really helped proceedings. And just like the Great Depression, the Fed could be again posthumously accused of worsening the effect of this crisis which we are facing right now through its inability to ease up on monetary policy when the housing bubble was on its way to bursting.

Also, the Fed Reserve, effectively being the controller of the largest economy of the world, being essentiall a non political organization and therefore liable to more bias and adverse interests, is a bloody scary prospect.

March 23, 2009 (LBO) - Sri Lanka's top listed firms, John Keells Holdings, Sri Lanka Telecom and Dialog Telekom, have been included in a new Dow Jones stock market index for the South Asian Region..(more)

The Dow SAFE (South Asian Federation of Exchanges) 100 index measures the performance of the top 100 blue chip firms of five of the eight countries in the er, SAFE. Namely Sri Lanka, Pakistan, Bangladesh, India and Marutius.

Im sure this is a credit and a boon to SL which could definitely use some foreign investment right now. Also, it is a boost to investor confidence in Dialog Telekom, thought by many pundits and my CIM lecturer, to be on the verge of collapse.

The list was revised last week and several new firms were added as 17 Indian and Pakistani companies were removed.

Sri Lanka will not accept any conditions on a loan from the International Monetary Fund (IMF), the island's president has said.

"We will not pawn or sell our motherland to obtain any monetary aid," said Mahinda Rajapaksa.

The Sri Lankan government is in talks with the IMF about a $1.9bn (£1.4bn) loan to help combat the economic downturn and pay for reconstruction.

The IMF usually insists on conditions for any emergency loans.

No forced measures

These involve taking steps such as cutting public spending or raising interest rates.

But Sri Lanka has made it clear.... (more at BBC)


Hmmm.. no  I have not got many thoughts there. As of late the West seems to have simpered a bit to the war efforts and have indicated a lot more support than they used to. With Hillary Clinton's call to the president and her supposed 'support extended with regard to the 'humanitarian improvements' and the elimination of terrorism etc. I still have the Derana News Alert on my phone.

Except she didn't. Well she did call him but internet news reports seem to deny the fact that she had anything good to say, while some others agree a little more with the Temple Trees version of the tale. This phone conversation and what was really said and implied could play a big role on our future relations with the West and entities such as the IMF and World Bank.

SL is very much an import dependent economy for many of its basic essentials and therefore foreign help in terms of loans, exports tariffs, trade deals etc are essential to its survival. And these rarely come completely devoid of conditions. It seems in a polarized world, the only way to maintain true independence is to have a completely closed economy or be the strongest player around. Since we're nothing of either, it looks as if we will have to go through some changes based on the whims of others soon enough.

But obviously, the government will not make it look like they were 'conditions' when they implement them in the economy oh no. And since we seem to have pretty much of a dormant opposition it looks like the real news of what is going to happen in the in the future may not be too clear till months later. By which time it'll be too late to do anything about it. Not that anything much could be done about it anyway. But at least we'll know.