Why should we not care about Debt/GDP ratios?

Such a title might scare some of my fiscally hawkish readers who have – rightfully – identified me as a fiscal hawk. However, I really do believe that the information conveyed by debt/GDP ratios is only “trivial”. The information that holds more value to my eyes is government revenues as a share of GDP and debt as a share of government revenues.

These two pieces of information convey the most importants regarding solvency. If a country has a debt that is equals to 100% of its GDP, but whose government revenues are only 10% of the economy, then things are not as bad as they look. It means that this country might be able to tax more without hampering economic growth. However, if another government has a debt standing also at 100% of GDP but whose revenues already represent 50% of GDP, there is considerably less room for collecting ressources to pay the debt without hampering economic growth (hence obtaining less revenues than projected). I have written on this issue in the past (with Quebec in mind) and I believe it might be time to refocus the technical debate on these pieces of information rather than only Debt/GDP ratio.

Forget bilateral liberalization, forget even multilateral, go for unilateral!

Have you heard of the Doha round of trade liberalization in recent times? To be very honest, I have not either and its no surprise since it is dead. So if this round of trade liberalization negociations is dead, how do we pursue the reductions in trading barriers? The alternative often presented are Preferential Trade Agreements (PTAs). Under PTAs, two countries will negociate a free trade deal between the two of them (maybe more). They will reduce non-tariffs barriers and tariffs barriers for goods they produce. However, this is not free trade, it is managed trade.

Changing the value of trade barriers between two countries might just change relative prices. If the United States dropped their tariff on tires coming from China, but not India (who might be a more efficient producer of tires than China), production in China will increase but it will not increase overall and prices for imported tires may not decline as much as they could. This is why PTAs are not free trade, they are managed trade and they distort international trade. Moreover, such agreements are also subjected to “regulatory capture” with interest groups (lets say tires producers in China competing with Indian producers) convincing governments to pursue such a policy. Hence PTAs are mostly beneficial to certain industries in the participating countries and not as much as they could for consumers (and some argue detrimental).

Multilateral negociations can also block quite easily as we have seen with the Doha round of negociations, so how can we pursue trade liberalization? I think this 1998 paper by Sebastian Edwards might be quite insightful because it concerns the strategy of unilateral trade liberalization that Chile followed. The country chose to create a uniform tariff that would be applied on every good and services imported rather than negociating reductions for X and Y goods. Razeen Sally in an ECIPE paper also underlines quite intelligently how several developping countries (in East Asia) have opted to liberalize – unilaterally.  Of course I am biased in favour of such a policy since in the past, I have written in favour of using this approach in Canada (especially with regards to agricultural supply management schemes).


The Eastern Front: Casualties

In June 2009, I took a class at Montreal University titled Canadian Military History which brought me to France (as a part of the class) to visit battlefields where Canadian forces engaged either forces of the Hohenzollern monarchy during the Great War or of the Third Reich during the Second World War. During my visit of La Somme, one of the bloodiest battle of the Great War, we could walk in the fields and still find bullets, weapons, shells, helmets, belts and all sorts of military remnants (picture here of me with a cannon shell of unknown origin). This gives you an image of how extensive the destruction was. Well, imagine that rather than finding fields of spent ammunitions and supplies, we had instead found fields of human bones…

Then you can imagine how peasants in the Western part of Russia feel when they find human bones in what are now called “bonefields“. Posting data here on this blog on military history (amongst other things) is not sufficient to convey how terrible some realities are. In fact, it took only one single battle – the battle of Kursk in 1943 – for German casualties(201 000 according to Michael Carver’s The Warlords) to exceed those suffered in the campaign to conquer France and the Africa Campaign (154,740 and 102,000 according to McNab). After detailing this, you can now see this graph which illustrates the extent of German Losses (and Soviet losses) on the Eastern Front. You think this is terrible? Consider that at the same battle of Kursk, the Russians lost over 800,000 soldiers against the German. Overall, 27 millions Russians lost their lives during World War II according to Constatine Pleshakov’s Stalin’s Folly and the some 900,000 of those in the first twenty days of the German offensive…

Add-on (July 28th 7h45 PM) – My friend P-A Beaulieu sent me this link with illustrations of findings on the Eastern front (weapons, bones, various accessories of both German and Soviet origin)

Mobile cell phone revolution

Today, Great Britain’s The Guardian (whose readers think they ought to run the country according to Yes, Prime Minister!) highlighted the importance of cellphones for Africa’s future economic growth. Cellphones used to circulate information about prices, it allows producers to coordinate their activities more efficiently and they also permit mobile banking. In short, they reduce transaction costs and allow firms to expand their boundaries, to specialize even more and outsource some activities to other firms.

However, I am quite surprised that all the attention has gone to Africa with regards to cellphone. True, there is an ongoing “cellphone revolution” in Africa, but Guatemala is the country to look at. In the 1990s, Guatemala liberalized its telecommunications industry so as to reduce to a near zero the barriers set by the government for entry in the industry. There are now hundreds of telephone providers in Guatemala and there is an explosion in cellphone numbers.

Let us compare Guatemala with two affluent countries of Africa which are often hailed as “success stories” (Bostwana and Mauritius) and the often-mentionned country of Kenya (UN DATA). For good measure, let us also South Africa and Uganda which is mentionned in the Guardian’s article. As we can see below, Guatemala is by far the country with the most cellphones (pre-paid and post-paid) per 100 inhabitants, in fact it seems that many may in fact have two cellphones.

This is strong testimony to the benefits of liberalization of telecomms in Guatemala and that country should be the one to look at for the fullest extent of cellphones in economic growth.



Working Paper and Data : Intercity buses in Canada

In the last few months, I have been spending a whole lot of time on intercity buses between Montreal, Sherbrooke and Ottawa since I don’t possess a driver’s licence yet. Every time I had to go to the central bus station, I never had the chance of selecting which bus company I wanted to carry me to where I wanted to go. For example, between Sherbrooke and Montréal, I always have to use Transdev Limocar and there is no chance to choose Megabus, Greyhound or Orléans. Between Ottawa and Montréal, I always have to use Greyhound, I have never been offered to take a Orléans or Megabus.

This got me thinking about my time in England and in the United States. In both countries, I travelled between large urban centers and had the chance to select between a whole score of carriers. Case of point, when I was living in D.C., I deliberated between buying a bus ticket to New York with Greyhound where I would have had free wifi and more legspace at a higher price than a Chinatown-based company-whose-name-I-cannot-remember where I knew I would not be as confortable as with Greyhound.

Why do we have so few choices in Canada (at least in Quebec)? It seems that regulatory schemes in most provinces intends us to have few choices. Indeed, in many provinces a licence to operate a profitable route will be granted by the regulatory authorities to a given carrier in exchange that he provides services on less profitable lines.

A 2002 report by the Canadian Senate noted that this system of cross-subsidization had quite detrimental effects on consumers because it imposed higher prices to the vast majority of Canadians while also shielding bus operators from market pressures to become more efficient and more innovative.

This is why I have collected price for 27 lines in Canada in all provinces by 8 providers (Megabus, Acadian, Orléans, Greyhound, Intercar, Transdev Limocar, Malaspina Bus Lines and the Saskatchewan Transportation Company). I have collected the data online on the websites of these various companies during the month of July according to the scenario of a one-way trip on July 29th. I have taken the lowest price and the highest price available to compare price ranges. All of the tickets are for an adult passenger, no discounts for students, military or aboriginals have been taken into consideration. Moreover, I have elected not to take refundable fares since Greyhound Canada did offer that service while other firms do not. Every website mentions the estimated travel time, so I have divided both the lowest price and the highest by the lowest estimated time. This gave me a price per minute of travel which I could then compare with other countries. I have also collected data for 19 lines in the United Kingdom from 3 different providers and for 26 lines in the United States from 6 different providers. In these two countries, the intercity bus industry has been deregulated (and privatized in the case of the UK) since the eighties. This is why I chose to compare Canada with those two countries.

All the hypothetical transactions were evaluated on July 4th 2011 for the UK and the US and the exchange rate used is the one provided by XE Currency Converter. It is likely that that several companies were not counted since they do not make their prices known online. Below is the result of the data, however I will not publish the entire dataset yet since I intend to make a working paper at the very least and if possible, get it published in a academic journal. So please, be patient until I try and publish the paper.