22 November 2007

Institutions matter. Especially in football

My favourite economic cliche is any paper entitled "xxx matters". Governance, institutions, latitude, size - you name it, it's statistically significant in someone's regression.

Last weekend I watched Harvard thrash Yale in New Haven. I was surprised at our victory, but even more surprised at the good humour and complete absence of violence in the crowd before, during or after the game. If you have ever been to, or near to, a football (soccer) match in Europe, you will know what I mean. Any politician who laments the culture of violence in modern society should try putting on a Harvard shirt and walking through New Haven an hour after defeating the local team. We didn't get so much as a whistle from the locals.

So why are otherwise peaceful people like the Brits or Italians so eager to start a fight when it comes to football, while it's a family day out in New England? It can't be a greater police presence: they have them in Europe to. It can't be lack of alcohol: that was freely available at the pre-match tailgate. It can't be weapons: the US in general, and New Haven in particular, has lots of them. Maybe the huge geographic mobility of US society holds back the local pride and partisanship you find elsewhere. But when the Red Sox won the World Series a few weeks ago, I detected a fair bit of local pride at their victory parade.

I think there is a cultural norm at work here: football is a game for the family, so crowd violence is unacceptable. How this norm evolved is anyone's guess, but once it's there it's very hard to change. British police trying to deal with hooliganism in the 1980s had the same problem in reverse: the culture of violence had become an institution, an informally accepted way of doing things.

Social norms underpin economic behaviour wherever you look. Consider fare evasion on the subway. In London or New York, you have to pass through a fare barrier to get to the platform. In Paris, the barriers are as large and heavy as doors, to stop people from vaulting them. In law-abiding Vienna, there are ticket-stamping machines but no barriers. The city transport authority decided it would be cheaper to employ roving inspectors levying on-the-spot fines than build fare barriers in every station. Why do buses travel faster in Berlin than in Boston? Because passengers can use any of the doors to get on the bus, not just one - the driver takes it on trust that they have a ticket.

On a more serious level, business and government is a lot cheaper in high-trust societies. Imagine how much it would cost to send all your business mail by DHL or FedEx because the postal service is insecure. Try keeping a stash of $5 top-up cards in the petty cash box and giving them to your staff one at a time to make phone calls, because you can't get a telephone credit account. Or if you're a retailer, how about counting the inventory in your store at the end of every day to make sure nobody is stealing it?

Institutions matter, in sport as in everything else - we're just a little late to realize it.

13 November 2007

Will your exports make you rich?

Rich countries make rich-country things. Poor countries make poor-country things. According to the theorem of comparative advantage, you should specialize in whatever you have relatively low costs - but we also know that over time, countries grow rich by changing and upgrading what they produce.

But why have some developing countries grown into diversified, mature economies whereas much of Africa is still stuck growing or mining a few basic commodities?

This answer comes from Cesar Hidalgo, Bailey Klinger, Laszlo Barabasi and Ricardo Hausmann, who just got it published in Science (or see here for the full version):This diagram shows the 'product space'. Imagine international trade as a forest, with individual products making up the trees. Firms are like monkeys swinging through the trees. The closer the trees are together, the easier it is for firms to move from one tree to another. Thus firms and countries specializing in products in ‘denser’ areas of the forest can diversify more easily. Countries tend to move into the centre over the time - but the denser the part of the forest where they start, the quicker they will get there.

Where does Liberia fit within this product space? It turns out that most of Liberia’s exports are within the sparsest part of the forest: rubber, cocoa, iron ore and palm oil all have extremely poor links to other products. See where tropical agriculture is in the diagram above . . . and compare it with garments, say, or vehicles and machinery.

The implication of this is that export diversification will not be easy in Liberia, because the economy has specialized in products that are very remote from other products. It takes 7 years for a rubber or cocoa tree to become economically useful. Rubber or cocoa plantations are therefore a huge ‘sunk cost’ and difficult to change. On the other hand, neighbouring countries like Ghana and Nigeria show the perils of trying to develop industries in which you don't have a comparative advantage. Maybe fruit, vegetables and low-tech food processing (canning, juicing) are a way forward.

If you go to the authors' website, you can download the map and the data for your country. A blinding insight or another example of economists restating the obvious in a more complicated way?