The Custom-House

What programming tasks can be

What programming tasks can be outsourced to India?

Eduardo Porter reports on the limits some firms (and even U.S.-Indian entrepreneurs) have reached in outsourcing programming jobs to India, in today's New York Times.

"Mr. Pradhan, who is Indian-educated, disagrees with critics who say that Indian-trained workers lack creative ability...

But Mr. Pradhan agreed that the need for proximity to the final user of the technology does place limits on what types of tasks can be outsourced. "Whenever the pace of innovation is very rapid," he said, "is when the work should be done closer to the client."

In the future international division of labor, Mr. Pradhan said, the production of the technology will be done in places like India, which can deliver it reliably at a low cost. What cannot be sent to India, he said, is the invention of new business processes and technologies.

Conceiving inventory-management software that helps a retailer make the best use of electronic product tags, for example, might be something best done by system designers in the United States working closely with the retailer. Once such a system and its tasks have been mapped out, though, the software code could be written by programmers in India.

...Innovative business processes result from "an understanding of the business that happens when people get into a room and talk to each other," Mr. Pradhan said. "That is very difficult to outsource."

The creativity problem is not due to inherent limits on Indian creativity. It is due to the problems programmers face in a rapidly changing environment when, because of distance, they have an unavoidably limited knowledge of customer needs. Daniel Drezner quotes some other parts of the article.

Do trade preferences help developing countries?

A country that imposes tariffs on imports deters supplies from abroad, increases the prices paid by its consumers, and increases profits for its producers.

Sometimes, developed countries will give poor countries a break on tariffs, allowing some exports from these countries to enter at reduced tariff rates.  Producers in the poor country would enjoy the higher prices in the developed country, without paying the higher tariffs required from other foreign suppliers.  This "preferential access" can encourage the location of industry and the creation of jobs in the poor country.

The U.S. African Growth and Opportunity Act (AGOA), is an instance of this sort of tariff break.  Last week the Boston Globe carried a story (by Carter Dougherty) on the impact of AGOA on Lesotho.  The thrust of the story was that AGOA has been good for Lesotho, creating industry and jobs, but that these will be lost if a key provision of AGOA is not extended.

In general, the potential impacts of preferential tariff arrangements are more complex.  Vernon Topp, of the Australian Bureau of Agricultural and Resource Economics (ABARE), outlines the potential downsides in "Are trade preferences helpful in advancing economic development?"  (I appreciate Peter Gallagher letting me know about Topp's paper.)  Topp is really skeptical about the use of these preferences.  Key elements of his critique:

• The preferences tend to be underutilized.  Perhaps because the costs of learning about them, meeting their conditions (for example, limits on foreign content), and working with them, are often greater than the benefits.


• Poor country producers get a high price for their exports to the developed country.  The high price for the exports would attract poor country resources into the production of that good. If the country puts a disproportionate number of its industrial eggs in a single basket, it may become more vulnerable to economic shocks.


• The people who benefit from the preference are likely to be the people who own the fixed resources needed to compete in the industry at the time the preference becomes available.  If the land that can be used is in fixed supply, or the licenses needed to compete are in fixed supply, the owners of these inputs should receive the bulk of the benefits.  New entrants would have to buy access to these fixed resources in order to enter the business.  Their potential future profits would be incorporated into the price they pay for entry to the business.  The benefits from the program go to the people who were in when the program was set up.  People who buy in later pay for the future benefits they will receive.


• Note that the capitalization of the benefits of the preferences into the land, increase its market price and increase the cost of land to the nation's other industries.  The increased costs could reduce the competitiveness of these industries in other export markets, and reduce national diversification even more.


• The firms that are receiving the artificially high price for the export good would have relatively weak incentives to keep their costs down.  Firms that might not be able to compete profitably at world prices may be drawn into the business.  The poor countries high cost producers would not be able to compete outside of the protected market of the preference granting importer.


• Poor workers are unlikely to be beneficiaries of these programs.  Only the poor who own land or capital will benefit.  Other poor will only benefit if the "direct beneficiaries" of the program buy consumption goods and services from the poor with the additional income they earn from the preferences.  The benefits of this "trickle down" effect will be even smaller if the owners of the capital and land live in other countries and spend their income at home.

With respect to this last point, the Globe story suggests that many workers in Lesotho benefit more directly from AGOA's tariff preferences:

"If the fabric rule is not extended, people like Chen's employee Litabe will feel the worst pinch. Litabe earns about $89 per month sewing labels, while others in the factory make as much as $121. Though measly by American standards, the job gives Litabe an annual income of $1,068, roughly double what the World Bank calculated as Lesotho's per capita income in 2002.

About 52,000 other people in Lesotho enjoy similar income levels thanks to AGOA..."

Rethabile Masilo commented on a post of mine last week, and suggested the same thing:

"A lot of people in Lesotho have jobs because of the legislation and the bringing down of trade tariffs. These same people today are able to go home and face their families, because today they can buy basic foodstuffs and so on. These same people are,on the other hand, often maltreated and subjected to bad working conditions by factory owners that are in Lesotho precisely because of Agoa. It's hard to embrace Agoa, yet harder, even, to dismiss it and seek its withdrawal."

The first point above noted that the complexity of the tariff and preference arrangements might pose a barrier to their use.  The Globe story suggests that the cost of using these provisions may be high:

"...American officials note that the government of Lesotho played an important role in making AGOA work. It built factory space that companies could then lease, and by working closely with the US Customs service to follow detailed American import regulations.

But the presence in Lesotho of experienced managers like Chen was crucial, because they understood the garment sector, which is governed by a Byzantine array of rules, and which requires timely sourcing of raw materials and punctual delivery to demanding customers..."

Look at the role of foreign direct investment:

" Many Taiwanese began small-scale manufacturing in Lesotho two decades ago. Chen arrived in 1989.

When the US law came into force, she was able to seize the opportunity in a matter of months. She merged her company into the operations of Carry Wealth Holding, a Hong Kong-based company that provided capital to expander her operations in Lesotho. Chen soon nearly quadrupled the size of her factory in Lesotho..."

Roots of recent anti-Americanism

Roots of recent anti-Americanism

Political scientist Walter Russell Mead traces the some of the roots of recent anti-Americanism to events in the 1990s, including a French strategic decision that U.S. power was too great, and the Clinton administration's response to the East Asian financial crisis of 1997, in an interview with Bernard Gwertzman of the Council of Foreign Relations:

"...the groundwork for a lot of the anti-Americanism that has flared in the last few years was laid in the 1990s.

I always assumed Bush's personality and policies were largely responsible for the anti-Americanism. [Gwertzman - Ben]

The French had already made the decision in the 1990s that American power was too great and France needed to resist it. I think Bush gave them some opportunities. But the French strategic decision to reduce American power and build a multipolar world evolved from the foreign policy that was emerging in the 1990s. And in East Asia, the United States is blamed for not doing much to help those nations out after the 1997 financial crisis. A lot of the anti-Americanism in South Korea was really inflamed by that, and continues to be a factor to this day. The utter collapse of Indonesia and the new anti-Americanism that you see and the opportunity for radical Islamic groups to gain strength in Indonesia have their origins in the catastrophic consequences of both the collapse itself and the reaction to it.

What was the Clinton administration's reaction to the East Asia crisis?

It supported the International Monetary Fund in very tough adjustment programs. What people said at the time was that when Mexico collapsed in 1994, the Clinton administration proposed a very generous bailout. And then when it happened in East Asia, it was very tough. Most people would agree the Clinton bailouts did not help in Asia..."

New Alexander Hamilton Biography

New Alexander Hamilton Biography

"By the time Alexander Hamilton was my age he'd been dead for three years." (to paraphrase an old Tom Lehrer joke). In that time he'd been a successful businessman, chief aide to General Washington in the revolution, served in the constitutional convention, written his share of the Federalist papers, served as Secretary of the Treasury and laid the foundation for U.S. commercial greatness, practiced law in New York, and more. His new biographer, Ron Chernow, describes his life as a "a case study in the profitable use of time."

David Brooks gives this new biography, Alexander Hamilton a good review in tomorrow's New York Times.

The pivotal point in Hamilton's civic biography came at Valley Forge:

"At Valley Forge, Hamilton saw how fundamentally weak the nation was, how lacking in the sort of productive capacity one needs to wage a war or survive as an independent nation. This was the formative insight that shaped his career."

This led to his achievements as Treasury Secretary:

"His greatest achievements came as Treasury secretary. He was confronted by an economically weak and fractious nation. He nationalized the debt, binding the states together and creating the fluid capital markets that are today the engine of world capitalism. He was working at a time when many around him had an entirely static view of economics. They scorned credit, banks and stock markets, and considered manufacturing the least productive form of economic activity..."

Why is Africa so poor?

Why is Africa so poor?

Anthony Daniels reviews The Shackled Continent by the Economist's African correspondent, Robert Guest.

"...Robert Guest, the Economist's African correspondent, tries to answer these perennial questions [several questions about Africa's poor economic record - Ben].

On the whole, he succeeds. The main problem in Africa is that personal advancement is possible almost exclusively by the political route: to become rich, or even minimally prosperous, you have either to seek political power yourself, or at the very least cultivate and become a client of those in power.

For many years, the whole purpose of education in Africa, from the pupil's and student's point of view, has been to obtain a position in government from which to extort and expropriate from others...

The more African bureaucrats and politicians extort and expropriate, the less there is to extort and expropriate, which makes the competition for power ever more desperate and violent...

Mr Guest is less good at explaining why such a political culture should have taken root in Africa..."

I learned about this from Institutional Economics.

Social and environmental impacts of

Social and environmental impacts of technological change

Geitner Simmons posts on historian Pekka Hamalainen, and his research on the impact of the horse on the Plains Indian ("The Horse's Disruption of Plains Indian Society").

The introduction of the horse had a tremendous impact on Plains Indians productivity, but Hamalainen argues that it also led to social unheaval and environmental damage. Some good quotes in Simmons' post.

Hamalainen's essay sounds like a good read but only part is available on the web. These are enough to lay out the thesis, but not the details.

How to get a date

How to get a date

Jacqueline Mackie Paisley Passey, blogger and student of economics, offers some frank and practical advice for men looking for dates through online personal ads. Social scientists will notice #3:

"3. Give her adequate information in the first email for her to assess your potential as a mate. You want to know what she looks like -- most of you won't respond to an ad unless there's a picture or physical description, right? Well, she wants to know about your access to resources. Mention your career, educational background, where you live, if you own your own home, etc. Women tend to date and marry up, so you're more likely to succeed with women of a lower income, educational level, or class than you. (Most online personal ad services profiles include fields for occupation, income, education level, etc. so you can filter for women at your level or lower in these areas.)

...You're attracted to health, youth/fertility, and sexual fidelity and we're attracted to money and status. Evolutionary psychology -- deal with it.

Most of these deal with signalling and exchange of information.

Hyperbolic discounting at A Random

Hyperbolic discounting at A Random Walk

Taggert, at A Random Walk, posts a set of links to items on hyperbolic discounting in "Discounting the Future"

Investing in the good things

Investing in the good things government has to offer

Ben Franklin was appalled at the rent seeking he saw as an observer of British elections in the spring of 1768:

"Tis thought that near two millions will be spent in this election. But those who understand figures and act upon computation say the Crown has two millions a year in places and pensions to dispose of, and 'tis well worth while to engage in such a seven years lottery though all that have tickets should not get prizes."

(From H.W. Brands, The First American, page 407.

NAFTA Tribunals NAFTA's Chapter 11

NAFTA's Chapter 11 contains provisions allowing investors from one country to obtain redress for violations of NAFTA provisions by one of the other countries party to the agreement (U.S., Canada, and Mexico). Canadian trade lawyer Todd Weiler provides some background on his web page (click on the "NAFTA Claim Info" button on the left of his page).

"A NAFTA claim [under Chapter 11] is a legal complaint submitted by a NAFTA Investor who has suffered loss by reason of a breach of certain NAFTA provisions by a NAFTA Party. The claim is heard by an international tribunal, normally composed of three members appointed by the Investor and the NAFTA Party being sued. Tribunals are formed under the Investor?s choice of commercial arbitration rules laid out by either the World Bank (through its International Centre for the Settlement of Investment Disputes ? the ICSID) or by the United Nations Commission on International Trade Law (under the UNCITRAL Rules).

After hearing arguments from the Investor and the three NAFTA Parties (i.e. the government being sued for breach of the NAFTA plus the other two governments ? if they choose to intervene), the tribunal will issue its written decision (known as an ?award?). If the tribunal finds in favour of the Investor, the government found in breach of its NAFTA obligations will be ordered to pay compensation to the Investor for the losses it suffered as a result of the breach..."

Today's New York Times has a story headlined: "Nafta Tribunals Stir U.S. Worries. The thrust of it is that tribunals created under NAFTA create a threat to the U.S. consititional order.

"Tribunals like the one that ruled on the Massachusetts case [a case described earlier in the story - Ben] were created by the North American Free Trade Agreement, and they have heard two challenges to American court judgments. In the other, the tribunal declared a Mississippi court's judgment at odds with international law, leaving the United States government potentially liable for hundreds of millions of dollars.

Any Canadian or Mexican business that contends it has been treated unjustly by the American judicial system can file a similar claim. American businesses with similar complaints about Canadian or Mexican court judgments can do the same. Under the Nafta agreement the government whose court system is challenged is responsible for awards by the tribunals.

"This is the biggest threat to United States judicial independence that no one has heard of and even fewer people understand," said John D. Echeverria, a law professor at Georgetown University...

The availability of this additional layer of review, above even the United States Supreme Court, is a significant development, legal scholars said.

"It's basically been under the radar screen," Peter Spiro, a law professor at Hofstra University, said. "But it points to a fundamental reorientation of our constitutional system. You have an international tribunal essentially reviewing American court judgments."

Brad DeLong provides some perspective at his blog today. He's very critical of the Times story, which he characterizes as a "scare" piece. During the course of a detailed analysis of a case described in the Times story, he points out that the NAFTA tribunals are not appeals courts:

"...It has no power to set aside the Mississippi verdict. It has no jurisdiction over the O'Keefes [a Mississippi family involved in the controversy - Ben], and cannot command them to repay a cent of the settlement they have won. The independence of Mississippi's courts is not threatened. The NAFTA tribunal is judging between the Loewens and the U.S. government: has the U.S. government lived up to its treaty obligations to provide foreign investors honest and uncorrupt courts? So far the answer appears to be that the Mississippi court took a serious dive, but that the Loewens still lose because they are not properly foreign investors."

and:

"...these NAFTA tribunals are not review courts, not appeals courts. They do not set aside judgments. Nobody who wins a case in the U.S. has anything to fear from these NAFTA tribunals. No Mississippi court has anything to fear from these NAFTA tribunals--the awards it makes stand, and the flow of this year's campaign contributions to judges from lawyers who have won verdicts over the past decade continues as well. All these tribunals do is to give some possibility of recourse to those foreign investors ground fine by the wheels of America's courts if and only if they can persuade judges like Mikva, Mason, and Mustill that injustice has been done."

Public Citizen takes a dimmer view of Chapter 11 on their web page.

Revised 10:30 PM, 4-18-04