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    Panamá’s Economic Puzzle

    Apr 17 • Businesses, Demand, Supply, and Markets, Developing Economies, Financial Markets, International Trade and Finance, Labor, Regulation • 597 Views

    By Mira Korber, guest blogger.

    Just two days ago I bought a plane ticket to Panamá City International Airport in Tocumen. I will be participating in a classical music festival there, somewhat ironically studying music from centuries past as brand-new skyscrapers are erupting all around. Panamá is booming, and not just with music.

    Panamá is among the fastest growing economies in all of Latin America; the 2011 GDP surged at 10.6%, up from 9.2% in 2010. A new, glittering skyline boasts the 70-story Trump tower. Central America’s first subway system project broke ground in 2011.  And a $5.25 billion construction project promises a third channel to the Panamá Canal.

    As international trade has blossomed, the canal has connected the Americas and linked East with West for the past 100 years. Just since December 1999, when the US relinquished control of the canal to Panamá, it generated $6.6 billion in revenue.

    Now, workers feverishly construct a larger, deeper channel to accommodate massive tankers and cargo ships coming from Asia –primarily China — heading to the United States consumer market. The project (if it doesn’t delay) is slated for completion in 2014, a century after the canal’s inaugural year. Once open for passage, the new channel will support 50% more traffic each day, and may encourage ships to travel east to Panamá from Asia, instead of traversing the Suez Canal in Egypt.

    Amidst massive development projects and increasing foreign investment (+33% in 2011) lurk other concerns. Panamá’s history is blighted by crimes, perhaps most notably by ex-military dictator Manuel Noriega, whose 1983-1989 rule was marked by drug trafficking, money laundering, and murder of political opposition.

    As this stigma looms, 40% of the population in Panamá lives in poverty, with an ever-growing divide between the wealthy and the poor. Even the development comes with concerns about an economic bubble – remember all those new skyscrapers? Most are dark — empty — at nighttime.

    The Bottom Line? Panamá’s rapid growth is remarkable. The Economist likens its economic expansion to Singapore, although it’s not even 1/5 as wealthy (“on a per-person basis”).  However quickly Panamá may develop, the risk of corruption and interference with markets rises just as ominously. Case in point: Singapore ranks 2nd on the Index of Economic Freedom; Panamá ranks 55th.

    PS. You’ll get a from-the-ground perspective on the Panamanian economic explosion when I see it in person this June.

    Read about Panamá directly from El País, a Latin American newspaper (in English). NPR podcast on the subject. Delays in the construction of the new Panamá Canal channel?  NY Times offers insights on growth and Panamá’s military history.

     

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  • Decisions Have An Opportunity Cost That Require Tradeoffs

    Free or Fair Government?

    Apr 16 • Businesses, Economic Debates, Economic History, Economic Thinkers, Regulation, Thinking Economically, Uncategorized • 576 Views

    I live in a town where I have to pay for garbage pick-up and recycling or I can dispose of it myself. The fire department is voluntary. Because there is no local high school, the town pays other school districts to educate our teenagers. In our town, government provides less and our property taxes are relatively low.

    Harvard professor N. Gregory Mankiw might use my town as an example of competition among governments. People who want a local high school would not choose to live here. Using the same reasoning, Massachusetts might attract people who want universal health care while New Hampshire is for those who do not.

    Dr. Mankiw said that municipal differences can elevate the quality of government because they lead to competition.  Concerned that its households and businesses are leaving, then a town, a city or a state will improve its services or lower its taxes.

    By contrast, those of us who believe government is responsible for more services and a more equal society have to reject municipal competition. In order to give more to everyone, governments have to redistribute income. Then though, as Dr. Mankiw explains, When you… “take from Peter to pay Paul, Peter may well decide to leave.” How to prevent Peter’s departure? Make everyone more equal everywhere.

    Do I want a national government that gives me what my town does not provide? The next U.S. presidential election will probably let me express my opinion.

    To read more about the free and fair visions of government, you might enjoy this column by H. Gregory Mankiw.  For each side, “free” is defended in this econlife post while the opposite position is in this obituary for Harvard economist John Kenneth Galbraith. Also, you might want to see what Mitt Romney and President Obama have said about the debate.

     

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    Standing In Line

    Apr 15 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Thinking Economically, Uncategorized • 1039 Views

    Walking along 56th Street in NYC, maybe a half block before 5th Avenue, I always see people on line. (New Yorkers say on line. Almost everyone else says in line.) They are waiting to enter Abercrombie & Fitch.

    Usually we associate an economic cost with a line. Time wasted. Irritation. Inadequate customer service. For Abercrombie, though, it might be a benefit.

    Researchers from the University of Chicago Business School concluded that total queue length conveys the value of a product. The longer the line, the better it must be. In addition, they found that the number of people behind you is crucial. If we are ahead of many others, feeling a sense of accomplishment, we attribute more value to our goal. In one example, the researchers actually found that when there are many people behind us, we also tend to spend more.

    Amazing. A long line snaking for blocks at an Apple store. And most of us think about the value of the product rather than the long wait.

    Our Bottom Line: Queues are all about cost and benefit. If the vendor enables us to perceive a benefit, then a line like the one at Abercrombie can become a competitive strategy.

    If you just want to enjoy hearing about lines, this 99% invisible podcast is a pleasure. For a more serious read, here is the U. of Chicago paper.

    And a final thought… wasn’t it the lines that brought down communism? But that is a different story.

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  • US Chicken Paw Exports to China

    Chicken Economics

    Apr 14 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, Government, Macroeconomic Measurement, Money and Monetary Policy, Uncategorized • 914 Views

    Ten chicks.

    If I were teaching in Uzbekistan instead of Summit, NJ, I might have received 10 Serbian chicks as a part of my salary. According to Radio Free Europe, the Uzbek government partially paid certain teachers and doctors with chicks. Their goal was to increase domestic production of eggs, milk, other dairy products and vegetables.

    Elsewhere also, chickens represent more than a meal.

    During the 1990s, during a food shortage, Russia accepted massive exports of surplus dark chicken meat from the US. Still today, dark meat in Russia is called Bush legs and associated with neediness.

    For U.S. chicken raisers, Chinese love of chicken paws was a life saver. As a Purdue representative explained it, U.S. consumers loved the white meat. What to do with everything else? For years, inexpensive pet food was the answer. However, when Purdue discovered that the Chinese especially loved U.S. chicken paws, suddenly, they had a money maker. Large (Purdue) chicken breasts mean juicy feet and the Chinese like juicy feet.

    We’ve accounted for the breasts, dark meat and paws. What about the wings? Maybe the Super Bowl?

    Our bottom line: Chicken shortages and chicken surpluses relate to international trade. Citing comparative advantage, David Ricardo (1772-1823) said that trade enables nations to optimize efficiency and thereby increase world production and well-being. For U.S. chicken producers, exporting what had been waste certainly created value. With the Uzbeks, though, payment in imported Serbian chicks rather than money is a step backwards.

    Radio Free Europe and the Atlantic tell more of the Uzbekistan chicken story. For the China and Russian chicken situation, Businessweek and Freakonomics explain. And here, econlife looks at chicken wings.

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    Size Inflation

    Apr 13 • Behavioral Economics, Businesses, Economic Debates, Macroeconomic Measurement, Uncategorized • 742 Views

    Inflation is not only at the cash register.

    Our story starts at H&M where an Esquire journalist tried on a size 36 pants that were too tight. He continued his search for pants with the 36″ waist label at Old Navy and they were too loose. After that, he sampled a pair of Dockers. Curious, this gentleman did the math. The H&M pants had a 37″ waist, Old Navy, 41″ and Dockers, 39.5″.

    Women also have experienced some “downsizing.” Graphing size changes in the UK, The Economist concluded that women’s sizes have plunged by 2 numbers. If you wore a  size 14 several years ago, now it is labeled a 10. If you wore a 4 or a 6, your size might have declined to a double zero.

    Size inflation–the trend toward smaller sizes getting larger—has its pros and cons. While smaller sizes make us feel good and might elevate retail sales, they enable us to ignore weight gain.

    The bottom line: Price inflation also has pros and cons. Saying that inflationary policy helps borrowers, lowers unemployment, and makes holding cash less attractive, Paul Krugman supports expansionary Fed policy. By contrast, a more traditional view suggests that inflation is a hidden tax that distorts price signals, punishes savers, and creates a less stable business environment.

    So, whether we are at the clothing rack or the cash register, we should think about inflation.

    Here is the journalist who looked for the size 36″ waist, an Economist chart of size inflation, a Bloomberg columnist worrying about inflation and Paul Krugman asking for more. The CPI data is here.

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