February 16, 2012


Economics in small doses


LAURA SEAY of Morehouse College enlightens you about this interesting aspect of Dodd Frank Act (DFA) in this really interesting paper (What’s Wrong with Dodd-Frank 1502? Conflict Minerals, Civilian Livelihoods, and the Unintended Consequences of Western Advocacy – Working Paper 284). DFA has a section called 1502 which aims to increase transparency in financial reporting of all companies engaging in conflict regions of Africa. The law hopes that over a period of time lead to better governance in these countries. The law in particular is directed at Congo which contains rich mineral resources like are oil, gold, diamonds etc.

However Laura says instead of improving conditions in Congo, it has worsened them. Even before Act has become final law, exports from Congo are getting banned and almost 2 million Congolese mine workers have become jobless. Congolese President Joseph Kabila instituted a ban on all mining as a chance to persuade voters that he was engaging in constructive activities to improve the security situation in the east. Even American companies are finding it tough to monitor their relations immediately.

She says section 1502 should be implemented in phases with clear annual benchmarks over three years and Provide immediate assistance to affected mining communities. She says locals should be used to track financial trails and Focus on security sector reform as a distinct issue.


Robert Mundell gave us the first impossible trinity related to international economics. Dani Rodrik recently gave us another version in the international political economy arena. JEAN PISANI-FERRY gives yet another trinity (The Euro crisis and the new impossible trinity) related to European crisis. This one is related to absence of co- responsibility for public debt, the strict no-monetary financing rule and bank-sovereign interdependence.

• Resolution of debt crisis has fallen on national policymakers. There is no fiscal union which can transfer funds to the needy state.

• The wide debt has hurt the banks which hold the debt.

• ECB’s reluctance worsens the crisis.

His main idea is lack of fiscal union is not the only reason for European crisis. The other two issues of a central bank not really responsible for financial stability and interconnectedness of government debt and banks is as problematic.

Though all the three are difficult to resolve and take time, crisis needs some action. Limited fiscal union looks more doable with an attempt to launch Eurobonds on an experimental basis. One should also read a recent paper by C. Randall Henning and Martin Kessler who looks at how fiscal union in US was shaped historically. It was a result of many years of work in progress with certain events shaping certain aspects of the union. The working history of Euro zone is just about 13 years old and is being forced to make changes which took many years in other economies. Euro has clearly has been an experiment ignorant of economic history and wanting to achieve things a bit too quickly.


PETER BOTTEKE’s superb interview serves as a primer on Austrian economics school. Austrian school started out of Vienna in the late 19th century and over a period coalesced around New York University, which became a hub of teaching Austrian economics.

Where other schools are interested in the outcome, in Austrian processes are as important. In a supply and demand curve, a standard economist would focus on the price and quantity vector that would clear the market. The Austrians want to talk about all the exchanges and activity that take place that results in that vector being discovered and the market being cleared.

He covers key contributions of Mises and Hayek and how boom-bust cycle framework

of Austrian economics is the reason behind most crises. In the end, it provides a superb mathematical perspective on Austrian Economics: Most standard economics assumes that the relationships we are trying to understand can be captured by a continuous function that’s smooth and twice differentiable. What the Austrian analytics suggests is that life is not actually a continuous and smooth function that’s twice differentiable. But instead a lumpy function, a discrete function, in which there are all kinds of difficulties in the ability for us to model them.


VERONICA FRISANCHO ROBLES and KALA KRISHNA look at one of the most contentious issues of Indian polity. They assess the impact of reservation policy India’s one of the most prestigious educational institutes: IIT-Delhi. The study is based on a survey filled by graduating class of 2008 which includes around 450 students.

The major finding is reservations do not really work.

• Targeting: The research shows quota has more poor students than rich ones. Hence targeting is effective.

• Catching up: This is the most important objective. However, authors find via various ways that catching up does not happen. In some cases, they might actually be getting worse as general category does even better and widening the divide between them.

• Mismatch: They show students in quotas end up choosing higher-end engineering fields and end up non-performing. So there is a mismatch. They even end up getting lower salaries than the other quota students who choose lower end fields. The minority students who take up selective engineering course are unhappier and remain depressed compared to others as their performance is not upto the mark.

Apart from the debatable findings, what is notable is the vast coverage of the paper. The only problem is its limited sample size.

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