Friday, May 20, 2005

Chronicle of a Catastrophe Foretold?

In a recent blog by Professor Gary Becker and Judge Richard Posner of University of Chicago; they debated regarding the idea of an "optimal" country size given reduced tariffs, diminished telecommunication costs and increased identity consciousness not withstanding this wave of globalization. The idea that political entities have an optimal size in the theoretical literature goes at least as back as Tibor Scitovsky (1958) and Robert Mundell (1968) in lieu of currency areas. But, the true political-economy predecessors of this tradition are the British. The colonial writings of Lord Curzon regarding (unified) Indian Bengal around 1900, the scramble for Africa (no, not Bono versus Bob Geldof) in which the colonial thrust-and-parry games (called Berlin Conference) in 1884-6 etc reveal the modern origins of this idea. The underlying arguments revolved around the tradeoff between administrative gains/costs of running a large entity.

Yet, ironically in the recent Iraq imbroglio few seem to focus on the importance of this issue anymore, barring for the early rumblings of possible tri-vorce of state along ethnic lines - between the Shias, the Sunnis and the Kurds. This idea met understandably with a deaf ear owning to many resonances. Increasingly however, it seems this idea will reemerge owning to the two fundamental inconsistencies inherent in the idea
of Iraq. On one hand the planners and visionaries behind the Iyad Allawi-Ibrahim al Jaafri government insist on maintaining the geographical unit of Iraq as in Saddam's times; on the other hand the exigencies of the transition from an oligarchic to a democratic state-of-the-world forces upon greater instability and thus costs, than perhaps previously anticipated. Consider the following.

(1)Continued prevalence of Iraq as a single unit, implicitly assumes that there are economic and transactionary gain from the original Iraq. That is, internal trade, urban-rural (and North-South) migration and currency units aid in the stability and effectiveness of the nation-state It also assumes that these
gains supersedes the losses due to the inefficiencies imposed in terms of administrative logjams, deadweight losses due to centralized planning processes underway and the continued erosion of the tribal (local) administrative-judicial system owning to increased efforts at 'democratization'.

(2)Further, Iraq typically has been an oligarchic state, where the Baath party officials had sufficient self interest to maintain order, property rights and thus enable low emphasis on redistribtutive taxes. Of course the Iran-Iraq war, the Gulf War, the sanctions etc lay heavy burden on the state machinery; but the common rule of law was maintained with a certain degree of consent, coercion and social sanctions. In contrast, the gains from the democratization process itself presumes that there is free entry and exit for firms (and individuals, ideas and ideologues) and thus enables no rent seeking institutional behavior. By going after the Baath party officials and disbanding the army at first, odious as they are, what has happened it seems that the class of individuals who were most interested in maintaining and fostering property rights (and status quo wealth) have been wiped out. This paradoxically has weakened any immediate gains from the democratization process, at least in the intermediate economic terms. Democracy in absence of property rights leads to old fashioned tribalism; where although decisions are 'democratic' the associated wealth of the citizenry is low owning to free riding and reduced individual effort levels; and more dangerously a difficulty in distinguishing between public and private economic spheres.

So, combining (1) and (2) leads one to conclude that holding onto Iraq as a single geographical unit, has lead to increased economic costs per transaction. An aside, might clarify the issue further. Knowing that bribing only once is enough is often the key to stable economic functioning of the societies. In Kaushik Basu's {Prelude to Political Economy}, he writes about the {rangdari} system in the provinces of Uttar Pradesh and Bihar, in India - where although the state has collapsed an informal but reliable network of bandits have emerged to extort once and thereafter protect travellers on a specific road. In Iraq, it is perhaps increasingly difficult to know whom to bribe and whether he can offer protection against his bandit-competitor. Thus, like Washington's lobbyists, serial extortion by bandits, petty thiefs, ex-Baath officials leads to decreased amounts of efficient transactions and ultimately a breakdown. The incentives for aggrieved parties to break away from the fragile social covenant along ethnic lines and attack the sovereign (and his proxies) thus, in a sense, return to a primary 'state of nature' are rather too high.

Now think about these problems in a highly heterogenous environment; where heterogeneity emerges along relgious, ethnic and income dimensions. If violent behavior is rewarded at the margin even for a small group of people; there would be an increasing incentive for individuals to cleave along their chosen dimension. In such an environment it is perhaps inevitable that the proposal to trifurcate Iraq would rise its head in Washington and Baghdad.

Thursday, May 19, 2005

John Bates Clark Award...

On Daron Acemoglu: In Search of Lost Times...

Casual observance of modern day Economics might lead one to believe that the discipline is devoted to manufacturing apologists for the status quo or Don Quixotes who charge up theoretical windmills riding their mathematical horses. But, like all casual empiricism, beyond a notional grain of truth, this is a false conclusion. The falsity of the original observation is perhaps best exemplified by the wide variety and extraordinary rigor displayed in the works of individuals who go on to win major prizes in the discipline. Every two years, one economist is typically awarded the John Bates Clark (JBC) Award – arguably, the most prestigious (and portentous?) award in the Economics, barring the Nobel itself. This year the award was received by Daron Acemoglu of MIT for a wide range of contributions – for most strikingly his work on the role of institutions in economic growth. The JBC award is given by the American Economic Association to the best economist in the US under the age of 40. (Analogously, mathematicians/computer scientists award the Rolf Nevallina every 4 years as well, won last by Madhusudan of MIT as well.)

An obvious question is. Why is this award prestigious?

The ‘prestige’ component is a natural implication of basic sampling theory. Because of the large sample of economists (real and “policy entrepreneurs” as Paul Krugman identifies some) in the US – the distribution of quality of research is arguably continuous (but unfortunately very rarely ‘differentiable’ vis-à-vis long term implications for the discipline). That is, there are large number of remarkable theorists and empiricists on either ends of the quality spectrum; unlike say in the Economics Association of Sri Lanka or Catalonia owning to their small samples to start with. Thus, prestige emerges by virtue of being conditionally selected from a large sub-sample comprising of other-wise extraordinarily (and sometimes preternaturally) gifted peers.

There is a second component as well. Part of the prestige arrives from the implicit assent by the discipline that this researchers' agenda deserves wider recognition. Most commentators on the JBC (see Stephen Dubner on previous winner Steve Levitt in the New York Times) have made a big deal out of the possible correlation between the JBC winners going on to win Nobel Prizes. The mechanics of how this correlation works is key to understanding how the discipline itself operates. Eleven out of the thirty winners of the JBC have gone on to win the Nobel itself. But as any decent teacher of econometrics will tell you that there is a certain degree of endogeneity in this correlation which makes any such conclusion spurious in a strict sense. Although the JBC in of itself is awarded for “promising work” and as an incentive for sustained contributions; what it more importantly does is provide marginally more visibility to otherwise hyper-competitive array of research agendas. (This blog reaffirms that.) Given this new found visibility, it is entirely conceivable that a large number of existing research work are either tweaked or new ones are spawned given the previous work. Since, the Nobel Prizes are typically given for influencing the course of the discipline and spawning a whole panoply of research ideas -- the JBC ends up, often enough, causing the Nobel prize -- conditional on the Nobel winner being an American.