Escaping the Malthusian Trap

1024px-Flag_of_Chile.svg

Chile had escaped the Malthusian trap around the early 20th century. In this I will examine the factors that had enabled substantial growth in the Chilean economy including geography and trade, population, and institution within the period 1840-1930. The Chilean War of Independence against Spanish control began in 1810 with it ending in an independent republic being declared in 1818. From this point onwards Chile began to expand its territorial holdings in regards to assimilating the Mapuche population and gaining Northern territory, but it was only in 1840 that the economy had truly opened (Mamalakis, Markos J).Chile has a diverse regional market due to its geographic nature, as the country spans 6435 km of coastline going from desert in the North to arctic conditions in the South. (Please click to expand images!)

Screen Shot 2014-11-05 at 11.38.44

As Chile lies upon the North-South axis it has distinct diversity in climate and geography, the economy had been able to surpass the Malthusian trap as a consequence of this rather than be limited by it. This diversity enabled trade, demand for its exports, and increasing market integration. Chile had a particular trade advantage due to access to the Pacific Ocean and the Atlantic Ocean through the Drake Passage, and the Strait of Magellan (The World Factbook). This was to prove pivotal for the export of the factor endowments present in Chile. In the central and southern zones there is particularly fertile soil for wheat production and grazing. Then in the northern zone there is the Atacama Desert, which is the source of Nitrate and Copper (The World Factbook). While the border to Argentina is defined by the Andes Mountain range providing Chile with access to natural minerals (The World Factbook). 

Trade routes proved to be integral to the growth of the export and import market that drove forward Chilean growth, which is exemplified by their increasing rate in growth rate of exports considering the data for 1850-1900, 1870-1920, and 1890-1900 shown in the table.

Screen Shot 2014-11-05 at 14.04.58Further examining exports Chile had an absolute advantage in the production of wheat during what was noted as the Great Wheat Trade between 1865 and 1900 (Mamalakis, Markos J).This wheat boom had begun in 1850 as a consequence of demand from the Californian and Australian gold rushes, as exports peaked at 276,664 qq.m (quintals) for California in 1850, then 323,607 qq.m for Australia in 1855 (Mamalakis, Markos J). This highlighted Chile’s advantage due to the pacific trade routes and fertile soil, while the wheat trade was to become global with England becoming a central importer, as production between 1867 and 1900 did not fall below 800,000 qq.m (Mamalakis, Markos J). This absolute advantage in wheat production attracted foreign investment, and led to the introduction of steam ship use in Chile (Mamalakis, Markos J). The wheat trade began to decline by 1900, due to California and Australia producing their own wheat (Mamalakis, Markos J). This decline in the pacific export market for wheat did not hinder Chile’s growth due to the export of copper and nitrate.

image

The nitrate boom began after the War of the Pacific in 1880-82, as Chile had gained the entire Atacama Desert region from Bolivia and Peru (Hutchison, Elizabeth Q., Thomas M. Klubock, Nara B. Milanich, and Peter Winn). This had also landlocked Bolivia, resulting on a trade dependence on Chile. Between 1900 and 1930 more than 50% of government revenue came from nitrate and iodine export taxes (Mamalakis, Markos J), with the nitrate sector resource surplus averaging 14% of GDP between 1882 and 1930 (Mamalakis, Markos J). In regards to helping Chile escape the Malthusian trap the nitrate boom was far more important in regards to it being a source of modernization. Integrally, bringing it closer towards modern capitalism and into contact with the United States and the United Kingdom. However, due to the synthetic production of nitrate, Chile had experienced a rapid boom and bust cycle (Mamalakis, Markos J). In this the greater move towards capitalism became the main benefit of the nitrate boom, as the nitrate bust left behind it ghost mining towns and structural unemployment showing an example of mineral theory (Adelman, M. A., and G. C. Watkins). This left copper as the most sustained specialized export, ensuring growth.

It was specialisation in the extraction of copper that was to lead to sustained growth, institutional development, and greater market integration within the Chilean economy. Until 1880 Chile had been the world’s largest copper producer, but it experienced a rapid decline in easily available stocks as production fell (Mamalakis, Markos J).

Screen Shot 2014-11-19 at 20.12.57

After 1910 the Chilean copper sector experienced a massive transformation, as increasing foreign investment led to greater human and physical capital that resulted in large-scale mining. This had revived copper production, while emphasising an institutional and financial link with the United States (Mamalakis, Markos J). It is debated whether the foreign presence had upheld a weak Chilean economy, or whether it provided the backbone for the modernisation.

Exports

The geography of Chile proved to be vital in providing the correct environment for access to trade, as well as a diverse range of exports. Proving essential to an increase in economic growth and modernisation, in regards to escaping the Malthusian trap increasing income per capita was a result of this trade based growth. However, it is important to consider the demographic transition that occurred in the period.

The demographic transition in Chile took advantage of growth through trade, aiding in the escape of the Malthusian trap. In the table below we see a decreasing rate of increase in population for Chile during the period in question 1840-1930, with the authors estimates with a boom in population growth for 1915-1930. There was no dramatic change in population, with the main factor being the assimilation of indigenous Mapuche population through expanding the Chilean frontier in the south through war (Hutchison, Elizabeth Q., Thomas M. Klubock, Nara B. Milanich, and Peter Winn). Instead this demographic transition was based upon increasing urbanisation and a switch to more service based sectors. In 1930 49.4% of the country’s population was located in urban areas, and increasingly the capital Santiago (Mamalakis, Markos J).

Screen Shot 2014-11-06 at 00.12.57

Screen Shot 2014-11-06 at 00.10.13

This was a consequence of the movement of employment from agriculture to industry and services, shown by the graph considering the production indices, as the public sector, and industry began to match then exceed agriculture in terms of production. This suggests that the Chilean economy had escaped the Malthusian trap between the period 1915-1930, especially considering the table below which considers the relative income and employment between 1907 and 1930, as 43% of the working population was employed in services which accounted for 50% of relative income, compared to 36% of the population being employed in agriculture (Mamalakis, Markos J).

Screen Shot 2014-11-06 at 10.40.54It is important to place the trade and demographic transition that allowed Chile to experience rapid levels of growth into context with the institutions that were available at the time. Having been a Spanish colony there was already the physical and human capital required to facilitate trade, moreover the Spanish had focused on the mining of silver and gold that was to benefit the Chilean economy in regards to the production of copper and nitrate (Hutchison, Elizabeth Q., Thomas M. Klubock, Nara B. Milanich, and Peter Winn). Chilean institution in relation to aiding the escape from the Malthusian trap may be more closely examined through considering capital accumulation through physical and human capital investment, this is a consequence of the government being able to focus on aiding the export sector. Travel was the greatest institutional issue as a result of the length of the country. Therefore, between 1888 and 1930 government development expenditure increased at a rate of 4% per year (Mamalakis, Markos J), this went towards the development of customs facilities, rail network, roads, and ports. Chile had effectively set up new institutions as a result of investment into human capital through education. The government realised that it had previously failed to spread education between 1840 and 1900 this was due to rural population, poverty, inequality, and inadequate enforcement. In 1900 the system was nationalised, creating a progression from primary education until university education. This also led to the rise of vocational education in agriculture, mining, industry, and trade (Mamalakis, Markos J). Therefore, Chile had inherited some degree of institution due to being a Spanish colony creating the base of development, but then was able to develop its own institutions enabling it to improve standards of living and aid in increasing wages beyond subsistence level.

The combination of geography, trade, population, and institution between 1840 and 1930 had placed Chile on the path to escape the Malthusian trap. Chile had a geographic advantage for trade with access to both the Atlantic and pacific oceans, while also being endowed with resources to export such as wheat, nitrate, and copper. Then due to the nature in which foreign investment defined the export sector there was a demographic transition, which resulted in increasing urbanisation. This was led with through the trading institution inherited from the Spanish colonialists. The economy was then transformed, as a strong government was able to build new institutions specifically education. Thereby, leading Chile out of the Malthusian trap by 1910-1920. Correlating to some degree with data map shown below:

Screen Shot 2014-11-06 at 14.04.46

Chile was to go on to experience economic and political turmoil that would stagnate the economy, which meant that it didn’t follow a similar to path to other countries escaping the Malthusian trap until the era of neo-liberalist economics under Augusto Pinochet (Solimano, Andrés)

Bibliography

Adelman, M. A., and G. C. Watkins. Reserve Prices and Mineral Resource Theory. International Association for Energy Economics, 2008. Print.

Hutchison, Elizabeth Q., Thomas M. Klubock, Nara B. Milanich, and Peter Winn. The Chile Reader: History, Culture, Politics. Print.

Mamalakis, Markos J. The Growth and Structure of the Chilean Economy: From Independence to Allende. New Haven: Yale UP, 1976. Print.

Solimano, Andrés. Chile and the Neoliberal Trap: The Post-Pinochet Era. New York: Cambridge UP, 2012. Print.

The World Factbook. “South America: Chile.” Central Intelligence Agency, 22 June 2014. Web. 30 Oct. 2014.

Staring, Chris. “The Nitrate Towns of Chile Photography.” Atlas Obscura.
Web. 29 Oct. 2014.

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

Big Data

With the growth of computing power available to us, we are not only able to manipulate data in new ways but also take into account vast amounts of it. Furthermore, there is increasing comprehensiveness in the collection of data not to mention the detail we are now able to delve into.

I will start with some more traditional date – demographics. We have already been extremely competent in dealing with a wide variety of data, starting at the point of collection up to manipulation. This has been the manner in which we examine the development of nations and whether we are making progress. In the past couple of years however there has been the growth of composite indexes, which look to tell us a lot more, notably HDI becoming IHDI with an accounting for inequality. We are able to develop data this way due to the increasing ease of collecting it.

Here we may differentiate however between developed and developing countries, as access to the internet and mediums of communication leads to even more niche data being collected, allowing us to examine our lives at a micro level while still in macro scale. The best available example of this is London; the BBC recently published images of London in terms of data maps. This verifies the extent to which all elements of our lives are being put into data in a form that may be analyzed and visualized.

Screen Shot 2014-11-18 at 13.44.23

This data map shows luminance of photos taken of tourist attractions upload to the popular photo sharing website Flickr. While it is true that not everyone will use the photo sharing website, or share their photos, we can still see what kind of tourist traffic certain areas get. The map not only showing popular destinations but also routes that may be taken between destinations, the above is only an excerpt of a London wide map. This is a level beyond info-graphics and a type of data that would not be gained through taking a census.

Screen Shot 2014-11-18 at 13.45.33

The data map above shows the route taken of daily commutes between the Home Counties and London. This gives an idea of the most popular travel routes, and where the typical commuting population resides. Furthermore, it shows the willingness of people to commute specific distances. A step beyond this would consider the tube travel routes, and those travelling by car or bus (which could theoretically be achieved by considering those who pay congestion charge). The step further taken here is the data for the exit of London train stations shown below:

Screen Shot 2014-11-18 at 13.45.03

This gives a more in-depth look at how people travel, and where they travel. The complexity of this data is made more tangible through the map, however in this we could consider CO2 emissions, cost of travel, and a whole host of other factors. This type of traffic data is exceptional in where it may be taken, giving us a level of insight previously not afforded by simple census data.

We can even go into a niche understanding of specific areas, in this example looking at twitter traffic in regards to the popularity of London football clubs:

Screen Shot 2014-11-18 at 13.59.22

The growth of big data is what I believe will take economics to the next level of understanding of human behavior and decision-making. Think of the amount of data social networks such as Facebook and Twitter hold about users, or Google in regards to popular searches and specific search traits of people in a given country. Not only is the Internet providing a better image of our lives through data, but also there is increasing amount of data collected from practical activity. Take the increasing use of black boxes in cars, giving information about average speed, intensity of braking, time of driving, etc.

This type of data has many applications, but I believe it will be the most useful to microeconomics. As it is the area where we have to leave most things as theoretical based on at times loose relationships, this depth of data provides the opportunity to delve further into our behavior. Take for example the classic work or shirk scenario, considering leisure hours and potential pay offs.

As an economic community I feel there is a movement towards ensuring that a large variety of data is made publicly available. Of note, Christine Lagarde announced today in Washington D.C. that all of the IMF’s data will be available for free online from the 1st of January. Meaning that there will be an even greater plethora of data to pick and choose from.

Sources:

http://www.bbc.co.uk/news/magazine-29915801

All images are subject to copyright – London: The Information Capital by James Cheshire and Oliver Uberti

 

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

Economics for Telecommunications

Tim Miller is an economic consultant who spoke about his role as an economic consultant specialized in the telecommunications industry. In this specific area there is the the consideration of implementing new networks such as the next generation of data services for example 5G. Furthermore, in his role he provides costing analysis for the functioning of telecommunication businesses. This would take into account termination rates, spectrum holding, antennas, and the amount of users.

Termination rates are a consequence of calling or texting someone who is on a different network provider. Consider calling from your mobile, you connect to antenna, which provides access to the general network. It is at that point where the connection is made, as the other mobile connects to an antenna on its network and is then brought to the general network. In this the termination rate is incurred on the caller, this is due to the call/message going across a network.

In the early 2000s termination rates were around 7 pence per minute, however today they are as low as 2 pence per minute, partly a consequence of regulation by OFCOM in the United Kingdom. This is not the case for the United States with to some extent a duopoly active between Verizon and AT&T both of which charge between $50-$100 for an average contract, in comparison to around £10-£45 in the UK.

If we consider the nature of the termination rates we may note that they are inelastic. In that we have no particular choice in rate, with research suggesting the price elasticity of demand to be around -0.01. Showing the danger that consumers may face if this went unregulated. With termination rates declining year on year, so the question is where does mobile service revenue come from?

Firstly, termination rates are still providing on average £1.5 billion to the four main mobile service providers in the United Kingdom (O2, Three, Vodafone, and EE). Then there are huge profit margins on services such as texts as the average cost per text for the providers is around 0.0007 pence, whereas the average cost per text for the consumer is 5 pence. At first glance one would assume that data provides the next biggest stream of revenue, however from an industry perspective consumers are not paying enough for data and are not willing to spend more. In the majority of data packages for mobile phones once a threshold amount of data is used the provider begins to make a loss for that particular service up until they are able to apply surcharges for the consumer going beyond their data allowance.

The growing issue for mobile service providers is the type of costing analysis they decide to follow. With the greatest issue being the emergence of costs that are difficult to account for when the network is not one whole unit but rather segmented between the different providers. In this we essentially see the issue of share of spectrum, volume of users per spectrum held, and the number of antennas available. Market share is not defined by the share of spectrum held, this is because the share of the spectrum held is a constraint and it is difficult for providers to realize how much spectrum is required in a given area. Furthermore, we can consider antennas in that they are not all owned by the individual provider, but shared as well. With the complexity in costing a result of the need for only one network as it would be inefficient to have two but then the issue of creating a share for each provider of that network.

In regards to the future, as we have a growing consumption of data it will be interesting to see how the industry transforms to deal with the higher data requirement. With now a greater variety of services for calling and messaging rather than through the provider which all use data. For example the average smartphone will be able to have Skype (messaging/calling), Whatsapp (messaging), facebook, and twitter, just to name the popular data based services that can be accessed. This brings up the possibility of having a data only network, and contracts that are only based on data rather than minutes and text allowances.

The main issue in my opinion is still the lack of true competition within this sector, and consequently a lack of drive for innovation. There seems to be an acceptance that we will just go along with one-generation movements as we have seen with 2G, 3G, and now 4G. Contracts with the big four mobile providers in the UK are all relatively similar with the main differences occurring outside of the contract such as EE providing cinema tickets, O2 with priority ticket purchases, etc. To change the situation however would prove intangible, principally a consequence of the fact there is only one network and only so much spectrum that may be accessed.

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

The Failings of Price Mechanism

The free market is defined by the allocation of resources based upon the functioning of the price mechanism. This takes into account the equilibrium between demand and supply schedules. In this essay I will argue that while the price mechanism may be efficient, there are cases where it fails. Specifically focusing on the case of monopolies and then market failure whereby there are externalities.

The price mechanism does provide efficiency, through the price signaling created by demand and supply schedules. This brings us to a point of equilibrium that is Pareto optimal as neither consumer or producer can be better off without the other being worse off. Furthermore, at this equilibrium we also achieve allocative efficiency, suggesting that there is the best allocation of resources possible. This is shown through the diagram below, at the equilibrium of Qe – Pe.

Equilibrium

We may note that there is producer and consumer surplus, this defines our parameters of Pareto efficiency, any move from the market clearing equilibrium either the producer or consumer may be worse-off. This is limited by not considering the type of market structure that is present.

The monopoly market structure provides evidence for the possible inefficiency that may be incurred through the price mechanism system. This is a consequence of monopolies being able to set their prices, and looking to profit maximise at the point where MC=MR as seen below:

P2The scenario above takes the market away from away from allocative efficiency, and incurs a deadweight loss. This is a result of there being social welfare, which is not taken by the consumer or producer (shown below).

P3

This prices out a range of consumers, so the deadweight loss represents transactions that could have occurred and would have been socially beneficial, but have not occurred. This point is not Pareto optimal as the consumer is worse-off, nor is it allocatively efficient. Allocative efficiency and Pareto optimality could be achieved if the monopoly were to go to the equilibrium of Qe-Pe, this would mean the firm prices at the point where MC=AR, returning to market clearing.

It is important to note that a monopoly may achieve dynamic efficiency, which is unlikely for a perfectly competitive firm as a consequence of having normal profit. The monopoly gains abnormal profit (as shown by the profit margin in graph 2) that can be used for research and development. Taking the example of pharmaceutical companies, it can be noted that this abnormal profit is required for new drugs to be developed, otherwise at the cost of innovation perfectly competitive firms would not be able to supply new or better drugs which may benefit society.

We must also consider inefficiency incurred through firms pursuing aggressive tactics such as using the abnormal profit to set up legal barriers, attempt to takeover smaller firms, and abuse the economics of scale to lower the price in order to stop firms entering the market. This generates greater inefficiency in terms of reducing consumer’s welfare while also ensuring future inefficiency as barriers to entry. An example of this behaviour was shown by the De Beers diamond cartel in the 1980s, where it had a market share of up to 90% (Zimnisky, Paul). This was achieved through persuading independent mines to join the cartel; if they chose not to they would flood the market with diamonds reducing their price thereby pricing them out. They also dictated price through stockpiling in order to limit supply (Zimnisky, Paul). Exemplifying firm behaviour through the price mechanism that yields inefficiency in terms of societies welfare.

The price mechanism may also fail to provide efficiency as a consequence of externalities, which are an effect on a third-party that was not involved in the original transaction that is not accounted for in the price. The degree of inefficiency tends to correlate with the typology of the good in question. The manner in which the market forces operate suggests that the price mechanism is still operating efficiently due to the market clearing, as the externality is not directly shown. We must also consider that there can also be a deadweight loss in this scenario. The externality as an inefficiency may be shown through considering marginal private cost and marginal social cost, in that the market equilibrium is at the price and quantity that corresponds with marginal private cost, not accounting for the social cost:

P4

However, this can be countered by the efficiency stated through the Coase theorem. Suggesting that if bargaining in regards to an externality can occur, then an efficient outcome will be reached, providing there are negligible transaction costs. This scenario is shown below:

P5

In this the net social gain is a result of bargaining in regards to the externality between the two parties, which results in net social gain. This is due to the loss of profit, take for the conventional example used of wind turbines and noise. The turbine company is willing to compensate people suffering from the noise due to the greater gain of using the wind turbines. There is also the opportunity to be Pareto optimal at Q1. However, this theory is limited by assuming the negligible transaction costs, which in reality tends to not be the case.

Consequently, we may examine methods of dealing with externalities, such as taxation and compensation. The case of tax effectively raises the cost of the good or service in order to account for the cost of the externality. Depending on the elasticity of demand we may note a change in the quantity consumed, regardless of that the price is “corrected”. Shown below:

P6

Here the red highlighted area represents the active externality. With the size of the tax shown through the shifting upwards of price. Now at Q1 we operate at a Pareto optimal point, while the cost is at C2, when originally at the cost of C2 there would have been Q2 consumed. When we consider compensation, the total compensation paid is up to the point where cost first meets marginal social cost. With the Pareto optimal quantity at Q1, this makes up for the cost that is unaccounted for in the original transaction, as shown below:

P7

Even though these are theoretically capable of dealing with an externality in order to yield an efficient outcome, we must consider that the government carries them out. Therefore, there is government inefficiency that may be carried through the initial inefficiency of the price mechanism, this is due to the inability to determine the degree of compensation or tax that is required to bring price to the point of market clearing.

Take for example the externality present with industrial fishing. While fishing occurs we may assume that the amount of fishing occurring is so that there is supply to meet demand in order for the market to clear at equilibrium. However, this does not account for the negative effect on fish stocks. Due to the demand for fish exceeding the reproductive rate of fish there is a strain on fish stock. Furthermore, the methods by which fishing occurs such as trawling may adversely affect other sea life. Quotas can prove inefficient in dealing with this problem due to the lack of infrastructure related to dealing with each fishing boat and the policing required. Moreover, this can lead to fisherman using the same methods then stock dumping which also carries negative effects towards the health of sea life. We would not consider tax, as it is not in the government’s interest to raise the cost of living for the population, this leaves compensation. This may be towards subsidising fish farms, reducing the burden on natural fish stocks. Additionally, it could go towards subsiding the fisherman to the decrease in revenue if they were to fish by less efficient but more environmentally friendly means.

In conclusion, we may note that the price mechanism can at times be relied upon for providing efficiency. However, it may fail when we consider market structures such as monopolies, or the case of externalities where there are inefficiencies that are unaccounted for in the market equilibrium. To refine this analysis of price mechanism efficiency we would consider the typology of the goods in services in question such as merit and normal goods, or common access resources.

Almog Adir


 

Bibliography

Zimnisky, Paul. “A Diamond Market No Longer Controlled By De Beers.” Kitco Commentary. 06 June 2013. Web. 02 Nov. 2014.

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

Cutting The Deficit

As we near the time of elections in the United Kingdom there is a greater focus on the condition of the economy, and what needs to done in order to return the economy to its previous strength. Austerity has been the way forward, and whoever wins the next general election will have to maintain the burden if it is to be effective.

Now austerity is often subject to ferocious attacks as to its actual benefit to society, and that cuts are never made in proportion to the people they are affecting. I am admittedly glad that I am not in the position of the Chancellor of the Exchequer having to make those unbelievably difficult decisions. There seems to be no way to please everyone, but that is not a new concept in the game of politics.

From an economic perspective we can note that in terms of policy its incredibly difficult to decide what extent a cut occurs, and the time frame for it to occur. If you protect the elderly it might mean putting the younger generation at risk of unemployment or a reduction in education. There are insurmountable opportunity costs that we may realise if we start looking at what to cut. The Financial Times have produced a UK budget deficit calculator, which brought me to frustration as no decision seems favourable to any extent (except cutting overseas aid, and freezing elements of the defence budget). I highly recommend having a go at the calculator, because I never cut enough to reach the required amount, with my best effort being £38 billion:

http://www.ft.com/ig/sites/2014/deficit-calculator/

Copyright Almog Adir © 2014 · All Rights Reserved · My Website