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Jun 09 2009

Jane Jacobs’ Idea of City and Doha

by at 1:25 pm

Even though cities are not creatures with life like human beings, the structures, shapes and functions have been changed in every moments and locations . The cities offering places where human beings make their lives consist of various and complex structures. They also determine the cities’ rise and fall. Such changes occurring in cities are the attempt to make new cultures and rules.

If so, why are some cities rising whereas others are falling? Jane Jacobs in her book, “Cities and the Wealth of Nations” metaphors cities as the creatures with life which is born, mature, rotten, and reborn. In her book, she criticizes the drab uniformity of the modernism in the space of cities, and its impersonality. She, rather, stresses the importance of diversity and history preservation in cities.

Continue Reading »

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Jun 09 2009

Greif’s Grief over the US Economy

by at 11:58 am

Greif continually comes back to a simple phrase for economic development–”credible commitment.” These two words sum up what is necessary for any government to lead development. First, it must be a credible arrangement that all citizens and the world will recognize. Second, it must be a long-term and mutually beneficial relationship, much like a marriage. Today, in due part to the collapse of the financial sector of the US economy, we are continually threatened by the breakup of our “credible commitments.” US Treasury securities have been considered modern gold for decades, but will this last in perpetuity? History tells us that is unlikely.

Moody’s and Standard & Poor’s have as much global economic influence as the World Bank and the IMF combined. In our “consumer stock market” of late we tend to ignore bonds and focus the more exciting stocks because they allow us to bet on which companies will prosper and which will falter. However, Moody’s is continuously examining the bond ratings for cooperations, municipalities, state governments, and national governments. California is currently on a path to bankruptcy which will devastate their ability to borrow money at decent interest rates. Japan saw their government bonds downgraded and subsequently experienced the “lost decade” of economic stagnation. Is it possible the United States could be in for a similar debacle?

I believe this scenario is fascinating. It rather resembles the prisoner’s dilemma. Should the bond rating agencies destroy the very economy that they reside in? Are they breaking their own “credible commitments” by not fairly evaluating US treasury bonds? Could a worldwide consensus effectively overrule them if they keep denying anything is wrong?

To alleviate this threat, we must have a concrete and absolutely “credible” plan to attack deficits in the near future. I completely support the stimulus plan and, for the most part, the bailouts. However, unless we can agree to rock solid commitments for deficit reductions and debt repayment for the next decade the world market has little reason to believe in our credible commitment.

Greif’s arguments take economic stories from the past to explain why the work of development is so difficult in the present. We may argue about the role of “collectivist” versus “individualist” (the “American Way”) in society’s economic output, but both can cross the finish line to development in the correct economic environment. A society without credible commitments cannot even leave the gate. That is why I worry about our debt, even as I support President Obama’s ambitious stimulus package and bailouts. When I feel like our approach 10 trillion dollars cannot be compared, I take a look at this map. At least we’re not Italy, or Ethiopia…

Debt vs. GDP

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Jun 09 2009

A Little Tech Goes A Long Way

by at 11:56 am

About six months ago I attended a forum on the use of technology in the developing world here at Georgetown. The buzz word of the afternoon was “sustainable technology.” Since I currently work for Georgetown’s IT department, I took these words to heart. Technology without a sustainable framework is as useless as building power plants in developing countries without industries in place to purchase electricity (as Jane Jacobs describes in “Cities and the Wealth of Nations”).

The example given at this forum was a sustainable information line in rural India. Farmers would travel to a central “node” in their network, pay a fee (somewhat considerable for their income), and receive an answer to any agricultural question. If the answer could be found in a database, they received it immediately. If experts were required to deliberate, they received it in a few hours. The entire operation is run through telephone lines (with computers on the other end) to avoid user interface issues and illiteracy problems.

The genius of this program is three-fold: first, it is continually funded by the fees charged to the farmers; the farmers must actively seek this information and are therefore much more likely to use it and value it; and the program allows for increased efficiency of crop yields without abrupt technological change that can lead to displaced workers.

I appreciate this telephone system so much that I wonder if it could be expanded beyond the most basic of economic outputs–agriculture. Why not setup businesses in one country that give advice and technical support to a slightly less developed country? Instead of rich Indian cities answering phones lines for US companies, Indian companies can provide assistance to third-world with their problems related to manufacturing and networking. Sustainability comes from keeping these phone trees within the same level of economic development, but with enough differences in specific manufacturing or technical fields for one country to assist another.

Just as development cannot be bought through constructions of roads and electrical grids, neither can technological advancements be bought through networks without sustainable uses. And even as the rates of illiteracy are falling throughout the world, the jump to computers may be too much for many of the world’s poor. Telephones operating over VoIP (Voice Over IP) can provide the cheapest form of communication on already existing networks. Through Skype the information age may reach those who have been left behind and finally allow them to equate capital with information for modern economic development.

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Jun 08 2009

Thanks to Greif, No Need to Grieve Over Development

by at 11:27 pm

By emphasizing the importance of the way cultural context shapes markets and economic transactions, Avner Greif was able to go beyond North and Putnam’s institutional and social capital-based prescriptions for avoiding path dependency. Continue Reading »

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Jun 08 2009

institutions of trust in piracy and terrorism

by at 8:05 pm

We can transpose Greif’s comparative analysis of disparate economic groups to look at two of the emerging models for economic activity among the bottom billion. The two groups I have in mind are Al Qaeda and the Somali pirates. Although, at a first glance, these two networks may appear to be motivated more by destruction than by production and distribution, I would argue that we take a closer look, at the cultural grounds of each collection of actors. We may find that by comparing the structures and behaviors of each group, we can shed a great deal of light on the growth of economic institutions today. But first, we should generally characterize the cultural background of each group. Continue Reading »

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Jun 08 2009

Russian Bonsai

by at 7:45 pm

So we had the Genovese and Maghribi traders.  Now I’d like to toss the former-Soviet Russians into the analysis bowl.  As the Cold War ended, the communist Soviet Union was led by the Washington Consensus into a market economy of sorts.  Hurray for liberal democracy, right?  Well, not quite.  For their part, Western leaders had not read enough Greif to make this potentially shocking transition go smoothly – or any semblance of smoothly.

Coming from state-centric, vertically aligned communist system, many Russians had a hard time adjusting to a horizontal, state-free market economic system.  Several issues complicated the situation, including but not limited to the following. 1) The socialist state would generally look after citizens regardless of their work ethic. Under a market system, competition was introduced and citizens were expected to work harder for themselves to get by.  This was often seen as a challenge rather than an opportunity. 2) The culture of corruption was too strong to just naturally dissipate through the course of the transition to a market economy. 3) The country was left with a power vacuum after the strong-armed soviet government fell. These key factors combined to result in the rise of business oligarchs and a lack of central power. Any doing business had to pay their “dues” at every step of every process. Why would anyone work their hardest in a system where you’re bound to lose? The economy disastrously collapsed in the late nineties.

From Greif’s perspective, everyday Russians were severely lacking any coercion constraining mechanisms.  Law enforcement didn’t have the resources or were corrupt themselves. Corruption dramatically increased transaction costs. Social capital probably existed in small amounts at the neighborhood level. But as soon as any value was big enough to be noticed, it was targeted by corrupt actors.  The business oligarchs formed dense clusters of power and wealth while the majority of the middle and working classes were kept stagnant.  The culture of corruption was a well established institution. And for the transition to a market economy to succeed, Russians needed stronger law enforcement to account for this institution.

One person understood this very well. But he wasn’t necessarily interested in making Russia a freer, more promising place for everyday Russians. Enter Putin. After the collapse, Putin took advantage of the corruption institution to organize the oligarchy and realize his vision of a world energy super-power. In assembling his designs, Putin took time to understand the Russian business environment well. He saw that corruption and the markets grew and evolved together. He knew it well enough to achieve his goals.

So how does the role of social capital apply to global governance? This example shows us the need of an intimate understanding of the culture surrounding a developing market by policy makers. In this case, more ground-level attention was needed than money and high-level analysis. Policy makers needed to be on the streets talking to everyone, observing and reporting. In this sense, markets are kind of like Bonsai trees that policy makers need to continually tend. Perhaps corruption was a light source that the Russian tree was growing toward; policy makers could have trimmed some branches or introduced another light source.

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Jun 08 2009

Jane walks into a bar

by at 7:34 pm

Haha, I feel like I’m working at Steiglitz’ version of the World Bank — I’m tasked with applying development theories to a poor country without knowing more than statistics and summaries about the place. I am Greif’s nightmare. It’s a good thing that my experiment just involves a hypothetical blog entry rather than millions of dollars in development funds and thousands of people’s livelihoods. Since I’m not an expert in developing nations, I’m going to twist this assignment a bit to fit a stagnant area in the world that I am familiar with: western Pennsylvania.

Greif might be stumped by this one. It’s an area with well-established coercion constraining mechanisms and market infrastructure. The city itself is experiencing growth – new corporate offices downtown, new restaurants and shops in all of the neighborhoods. However, the surrounding areas have been stuck with slow or non-existent growth. It’s like western PA has reached a point in the evolution of its markets that Greif’s theories don’t really apply to. Jacobs might have an easier time talking about Pittsburgh and its surrounding areas. She’d probably say that the Pittsburgh area needs to examine its imports and begin to replace them with locally-produced goods.

Like many areas in America, western PA imports almost everything. There are a few things that the area can focus on in particular though. Jacobs’ theory is that by keeping the buying and spending local, the area enters into virtuous circles and more wealth stays near to everyone’s benefit. Tourism is a good example. Almost everyone heads to the Outer Banks, NC or Ocean City, MD in the summer. There are plenty of lakes in the mountains surrounding Pittsburgh that could be just as nice as beach resorts with a little attention and care. The buying of local vegetables and farm goods seems to be on the rise too. More buying from local farmers means more local tax revenue and more local spending by the farmers themselves.

What can all of this teach us about the economic crisis in America today? Greif might suggest that the market for complex derivative products evolved with an institution of uncertainty of the products and trust in technology, all with coercion from senior executives to go through with the deals. His theories provide a clean framework for us to analyze the past, but I have trouble seeing how they apply to the future. Jacobs, on the other hand, might be more useful for looking at the future rather than the past. She’d say that the stimulus package needs to be distributed, managed, and measured according to cities and their regions rather than states or directly to individuals. She’d also say that those spending the stimulus money need to sit down and get familiar with the situations of the citizens – like shooting the bull at a local pub for a while.

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Jun 08 2009

The US Economic Grief and Greif

by at 7:02 pm

US government and financial organizations will certainly change as a result of the financial crisis, but also as a part of their ongoing historic evolution.  As Avner Greif explains in his article Commitment, Coercion, and Markets the Nature and Dynamics of Institutions Supporting Exchange, “markets and political institutions co-evolve.” (Greif, p.3)  The US financial crisis happened as the result of a failure of what Greif calls contract-enforcement institutions (CEIs).  CEIs “determine the transactions in which one can credibly commit to fulfill contractual obligations and therefore the exchange relationships into which economic agents will enter.” (Greif, p. 4)  CEIs clearly failed in the case of the recent US economic crisis.
The current crisis will almost certainly lead to significant change in public sector CEIs, because it was failures in those CEIs that contributed to the crisis.  These CEIs were ‘designed,’ not organic, because government regulatory organizations are created by government officials and their scope is determined by regulations or laws.  These CEIs are also ‘public-order’ because the institutions’ penalties for rule-breakers are government-imposed.
The Office of Thrift Supervision (OTS) is a designed public order-CEI that played an important role in this crisis and will be affected by the post-crisis backlash.  OTS was responsible for monitoring many of the companies that failed, according to an NPR story by Chana Joffee-Walt from 5 June 2009 entitled “Regulating AIG: Who Fell Asleep On The Job?” (http://www.npr.org/templates/story/story.php?storyId=104979546&ft=1&f=1006).  The insufficient regulation led to, among other things, a $170 billion federal bailout of AIG.  The NPR story, however, makes clear that OTS could never have stood up to AIG, because the small government agency was significantly less powerful than the insurance giant.  Thus OTS was an insufficient CEI.  The regulatory system itself was flawed, because it allowed banks to choose their own regulators and the regulators were paid by the banks they regulated, according to the NPR story.  This corresponds with what Greif says about corruption-constraining institutions (CCIs), which deter abuse of power with the threat of retaliation. (Greif, p.21)  Greif notes that when “CCIs exist, market expansion will lead, ceteris paribus, to further strengthening the economic and coercive power of the commercial sector, and the development of political institutions in which the commercial sector has voice and influence.” (Greif p.40)  In this case, during the years of market expansion, the business sector did develop a great deal of influence in the political and regulatory sectors.  CEIs are influenced by CCIs and preliminary organic CEIs within societies and must be compatible with organic traditions. (Greif, p. 50)  In the case of the US and the West, this is an individualistic tradition which has built up a highly regulated governing structure over time.  This structure will continue to evolve, especially as a result of the recent crisis.  The same NPR story indicated OTS may now become another victim of the economic crisis and be dismantled by the government, illustrating an organizational change resulting from the crisis.
The discovery Bernard Madoff’s $65 billion pyramid scheme during this financial crisis shattered the circle of trust in Jewish investment circles, devastating many Jewish individuals and charities.  A CNN Money article from 30 April 2009 entitled “How Bernie did it” says Madoff’s investment company was “run by a tight clan” (http://money.cnn.com/2009/04/24/news/newsmakers/madoff.fortune/index.htm?postversion=2009042412).  Madoff succeeded partially through what Greif refers to as a multilateral reputation mechanism (Greif, pp. 8-9) among largely Jewish investors.  He gathered investors through “word of mouth”, according to the CNN article.  Madoff is now being punished by the designed public-order judicial system, but if that CEI did not exist, he would otherwise have been punished by the multilateral reputation mechanism that helped him rise.  To be effective, Greif notes that courts have to be able to prove that companies or people did certain things that were illegal, and in this day and age they often can.
The government bailout response to the economic crisis has already changed government CEIs and the atmosphere for large companies.  The bailout has created new positions to hand out and regulate federal money as it is distributed. During this crisis companies such as AIG, GM, and Chrysler that were financially reckless got bailed out by the government because they were considered too big to fail. As a result, large companies may feel too secure in expecting a government bailout in the case of future problems.
Thus Greif shows us that CEIs help determine the success or failure of an economy.  In our individualist society, strong and effective regulatory structures are essential to the successful functioning of an economy.

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Jun 08 2009

“Greif” Lessons for the United States Economy

by at 3:51 pm

Sitting around and mourning the great American economy will get you no where. I’ve learned no one can get out of the way of the financial crisis—it is beyond a snowball or an avalanche.

//nsidc.org/pubs/notes/24/avalanche.gif

Avalanche, http://nsidc.org/pubs/notes/24/avalanche.gif

The economic crisis has affected every American. Perhaps current disparities in economic, political, and social outcomes reflect distinct institutions as discussed by Anver Greif in several of his works.  That’s why I purpose, the United States could take some pointers from Greif on International Development and public policy.

The main problems with the United States economy are that in the past two decades economic growth has mostly been financed by high levels of consumer spending, US house prices have fallen by 10 percent in the past 12 months, there is a low savings ration linked the current deficit and while prices are rising there is a lack of economic growth.

There are several lessons which the United States could learn from Greif’s analysis of history and economic development as well as relationships that helped to build that economic structure. While Greif uses the relationships and exchanges conducted during medieval trade as his main lens for examination, one might see similarities between the coalitions formed in medieval times and those formed in modern times. Coalitions often form bonds of trust—trust in your investors or the value of an investment between two parties. Continue Reading »

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Jun 08 2009

City-regions that struggle together, gain together

by at 3:28 pm

 Avner Greif’s article, “Cultural Beliefs and the Organization of Society…” (1994), presents an important look at how cultural beliefs systems have an impact on trade and markets within societies. When looking at the impact of collectivist societies against individualistic societies, Greif notes that cultural beliefs impact social interactions but can have varying effects on wealth distribution (Greif, 19). The horizontal relationships within collectivism are often very beneficial for individuals in small closed regional economies as they provides the informal institutions of protection and feedback loops, but they do little to grow the market for the overall wealth of the people. It can also have devastating results when groups and their cultural beliefs clash with nearby regions. Continue Reading »

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