The Big Mac index: Oily and easy

In the latest issue of The Economist I am writing about the latest from the world of burgernomics. An excerpt:

Some currencies lose weight on a diet of QE and cheap oil; others bulk up

Jan 24th 2015 | From the print edition

TWO trends have dominated the world of burgernomics over the past six months: currency markets have bubbled like potatoes in a fryer as the oil price has fallen to finger-licking lows and central banks have cooked up new monetary stances. The currencies of commodity exporters have been burnt, while those of big importers have sizzled. Meanwhile, the end of quantitative easing in America has supersized the dollar, whereas the mere prospect of it in Europe has made a happy meal of the euro.

The Economist whipped up the Big Mac index in 1986 as a bun-loving way of explaining currencies’ relative values. It is based on the theory of purchasing-power parity, which posits that over the long run, currencies should adjust so that a basket of identical goods costs the same everywhere. We fill our basket with just one item: the Big Mac, which is made to the same recipe in almost all countries (India’s Maharaja Mac, a chicken sandwich, is an exception). Buying a Big Mac in Denmark, for example, costs $5.38 at market exchange rates compared with $4.79 in America, so our index suggests the Danish krone is 12% overvalued (see chart). No wonder Denmark’s central bank cut rates this week.

On average, Americans abroad get more burger for their buck than they did last summer. Relatively beefy growth in America has helped to fatten the greenback. Elsewhere, however, central bankers are still trying to add sauce to their economies, in part by encouraging their currencies to fall. In Japan, for instance, a belt-busting bond-buying scheme has caused the yen to waste away. The expectation that the European Central Bank would serve up a hearty dose of QE seems to have prompted Switzerland’s stomach-turning scrapping of the franc’s peg to the euro. Last week a Swiss Big Mac cost $6.38, but now it gobbles up $7.54.

Read the rest here.

Simon Hedlin

Performance indices: Ranking the rankings

This week, I have written my first lead note for The Economist, which concerns the rapid growth in international rankings. Turns out these rankings actually influence policy. An excerpt:

International comparisons are popular, influential—and sometimes flawed

Nov 8th 2014 | From the print edition

EDUCATION ministers across the globe quake in the run-up to the publication, every three years, of the OECD’s Programme for International Student Assessment (PISA), which rates 15-year-olds’ academic performance in dozens of countries. Those that do well can expect glory; the first PISA ranking, published in 2001, surprised the world by putting unshowy Finland near the top in every subject and made it a mandatory stop-off for any self-respecting education policymaker. Germany’s poor showing, by contrast, led to national hand-wringing, school reforms and the creation of a €4 billion ($5 billion) federal education support programme.

Similarly influential is the yearly Ease of Doing Business Index from the World Bank. Government presentations to investors will always show the highlights (provided, that is, there are numbers worth boasting about). The Trafficking in Persons (TIP) report compiled by America’s State Department each year ranks governments on their perceived willingness to combat trafficking. A bad showing blackens a country’s name and can mean losing aid and investment.

Such performance indices, which rank social issues or policy outcomes in different countries by combining related measures into a single score for each, are enjoying a boom. Their number has soared over the past two decades (see chart). For many issues, rival indices must now battle it out. “Numbers, rating and ranking catch people’s attention and make information easy to process,” says Judith Kelley of Duke University, who studies the impact of global indicators on policy. Rankings spread like wildfire on the web: some have been cited online more than a million times.

The best indices are meticulous (PISA, for instance, combines dozens of carefully standardised sub-measures and raises statistical caveats). But others are based on shaky figures that are calculated differently in different countries. And choosing what to include often means pinning down slippery concepts and making subjective judgments. An index of democracy, freedom or happiness means putting hard numbers to the fairness of elections, weighing civil liberties against economic rights, or deciding how much to rely on surveys.

Read the whole article here.

Simon Hedlin

A memoir of gratification: Desire delayed

The following is an excerpt from my first book review in The Economist:

Walter Mischel on the test that became his life’s work

Oct 11th 2014 | From the print edition

The Marshmallow Test: Mastering Self-Control. By Walter Mischel. Little, Brown & Company; 326 pages; $29. Bantam; £20 Buy from Amazon.com, Amazon.co.uk

IN THE 1960s Walter Mischel, then an up-and-coming researcher in psychology, devised a simple but ingenious experiment to study delayed gratification. It is now famously known as the marshmallow test. In a sparsely furnished room Mr Mischel presented a group of children aged four and five from Stanford University’s Bing Nursery School with a difficult challenge. They were left alone with a treat of their choosing, such as a marshmallow or a biscuit. They could help themselves at once, or receive a larger reward (two marshmallows or biscuits) if they managed to wait for up to 20 minutes.

Mr Mischel, now of Columbia University, reveals in his first non-academic book, “The Marshmallow Test”, that the purpose of the study was to look at the methods children use to delay gratification—not to measure how well they did it. He admits now that he did not expect that the time they managed to wait “would predict anything worth knowing about their later years”. But after his daughters, who had attended the Bing Nursery, told him years later about how their friends from pre-school were doing, Mr Mischel noticed that those who did well socially and academically tended to be those who had waited longest in the test.

He went on to survey many of the 550-or-so children who were tested between 1968 and 1974. To his surprise, the longer the five-year-olds had waited for their marshmallows, the higher they scored on standardised tests for college admissions a decade later. The patient children had a lower body-mass index when they grew up, greater psychological well-being, and were less likely to misuse drugs than those who had quickly gobbled up the treat.

Mr Mischel has published more than 200 academic papers, and at the age of 84 is still an active researcher. His book is best read as a memoir of gratification and as a tribute to the many researchers who have explored the field of delayed gratification that he once pioneered. His aim in his new book is to tell the reader about the latest “in the marshmallow work”.

Read the full review here.

Simon Hedlin

Sweden’s school choice

Here is my defense of Sweden’s school choice policy. An excerpt:

Education reform: A good choice?

Oct 6th 2014, 16:06 by S.H. | STOCKHOLM

SCHOOL vouchers are a divisive subject in America. Proponents claim that vouchers not only grant parents the opportunity to send their children to a private school, but also raise the quality of all education by creating more competition between schools. Critics complain that these subsidies divert necessary resources from public schools, and rarely cover the full cost of a private education. To settle this debate, many have looked to Sweden, where vouchers were introduced in 1992. The results there have been cited as both a case for and against vouchers. So, what has been the actual effect of this Swedish experiment?

Swedish students used to lead international rankings, but the country’s education standards have been declining for years. Indeed 15-year-olds in Sweden perform well below average in mathematics, reading and science when compared with students from other OECD countries, according to the most recent global ranking. Critics of vouchers blame school choice for these dismal results. Raymond Fisman of Columbia Business School recently called the Swedish voucher scheme a disastrous experiment and warned Americans not to go down the same path.

But there are good reasons to believe the problem is not school choice. This is because Sweden’s voucher scheme coincided with a host of other reforms, most significantly a change in the national curriculum in 1994, which emphasised individualised learning over teacher instruction. A comprehensive study (in Swedish) published in 2010 found that this was among the most plausible explanations for the drop in student performance. (Sweden duly changed its national curriculum again in 2011.) Norwegian schools implemented similar curriculum changes in the 1990s and saw similar unfortunate results, whereas Finland concentrated on teacher-led pedagogy and saw improvements in student performance.

Read the full story here.

Simon Hedlin

Big data: Turning the tables

Today I am writing an article for the quite newly-launched online edition of The Economist. An excerpt:

New technology has enabled start-ups to predict the behaviour of politicians and big businesses

Sep 3rd 2014 | Business and finance

AS THIS year’s congressional elections in America steadily draw closer, incumbents and hopefuls running for office are planning to spend billions of dollars on their campaigns. Much of this cash will be spent on paying savvy analysts to use big data to forecast how undecided voters will cast their ballots in November. But in this year’s campaign, the trend also seems to be going the other way. Rather than forecasting how ordinary voters behave, firms are now offering to make predictions, based on analysing big data, of how the various candidates would vote if elected to Congress or a state legislature.

These sorts of services are part of a wider movement to increase government transparency, by making it easier to access and analyse government statistics. For instance, OpenGov, a web-based tech firm, gives users access to vast amounts of state and local-government data. Yet even with the help of such services, the sheer volume of information on offer is ovewhelming to most individuals and companies. So a new breed of firm has come along to fill a gap in the market, by processing the data to predict the voting patterns of legislators.

One prominent example is FiscalNote Prophecy, a web-based service, sold on a monthly subscription basis by FiscalNote, a start-up founded last year. The company claims that its self-learning algorithm can—based on public data such as legislative votes, electoral statistics and campaign-finance figures—predict, with an accuracy of over 95%, the outcome of bills in Congress and state legislatures. Another is the Georgia Legislative Navigator, a website owned by the Cox Media Group, a publishing firm. It offers a similar, free service, albeit focused solely on legislative proposals in Georgia’s General Assembly.

Read the full story here.

Simon Hedlin

Does microfinance build lasting relationships among borrowers?

Whether microcredit alleviates poverty or not is a hot topic. And although this undoubtedly is a very important question, other potential consequences of microfinance should not be overlooked. One example is found among the results from a recent field experiment led by researchers of J-PAL (the Abdul Latif Jameel Poverty Action Lab) where it is suggested that access to credit can increase social capital among the borrowers.

Social capital, according to political scientist Robert Putnam, is the collective value of social networks. In the standard microfinance model, which in large part was developed by the Grameen Bank of Bangladesh, a key component is that borrowers form groups of five people and meet on a regular basis. These constellations are intended to put social pressure on borrowers to repay their debt on time. Most research has hitherto focused on whether the meetings with other group members increase the probability of timely repayments. The J-PAL researchers now take the issue in a different direction by instead asking whether these formal meetings lead to the creation of new relationships among borrowers living in urban communities.

In the study, member of 174 different microfinance groups in urban India were interviewed. To see what impact group meetings may have on formation of social capital, the researchers randomly assigned the groups to a different meeting frequency where some borrowers would see each other on a weekly basis whereas others did so only on a monthly basis. Social capital was measured based on how many interactions of both professional and personal nature that the group members had with each other as a result of the meetings.

The results showed that those who met weekly were far more likely to form long-lasting relationships with other group members compared to those who were required to meet only monthly. The economic value of a larger social network may at the onset seem negligble. But these social-capital gains resulted in an increasing willingness to share risks with other group members, which the authors reckon would lead to significant economic returns in the long run.

Increased pooling of risks to make joint investments could certainly give entrepreneurship and innovation a boost. To what extent these social-capital gains could eradicate poverty, however, is unclear since the authors do not provide any estimates of the effect of social capital on income or economic growth.

Social-capital gains may not be how microcredit advocates would normally envision to help the poor, but they may still be pretty useful.

Simon Hedlin

Free exchange: Aid to the rescue

My first Free exchange column in The Economist is published in this week’s issue. An excerpt:

New research suggests that development aid does foster growth—but at what cost?

Aug 16th 2014 | From the print edition

FIFTY years ago the first United Nations Conference on Trade and Development launched a debate about how much money rich countries should give to poor ones to reduce poverty and bolster growth. In the end, the UN settled on a figure of 0.7% of national income—a target subsequently reaffirmed by endless international powwows. Although few countries have met it, aid spending in real terms has nonetheless increased steadily ever since, to $134.8 billion in 2013 (see left-hand chart). Yet economists are still arguing about how much the aid helps—if it helps at all.

Aid comes in many forms, from food and tents handed out to refugees to cash that plugs holes in poor countries’ budgets. Donors tend to stretch the definition, to make themselves look more generous. But the goal, in most cases, is to lift a poor country’s productive capacity through investment in things like roads, schools and maternal health.

What the UN sees as a potent weapon against poverty, others consider money down a rat hole. Critics reckon aid hurts its recipients by fostering dependency, propping up oppressive or incompetent regimes and pushing up the value of poor countries’ currencies, thereby undermining the competitiveness of their exports. If aid helped, they say, the poorest countries would have been getting steadily richer for decades, which they have not (see right-hand chart). Those who favour giving aid argue that it could indeed lift people out of poverty, but rich countries simply do not give enough. It is like sending fire engines to combat a wildfire: it only works if you send a lot of them.

Assessing the impact of aid on economic growth is complicated by the fact that the causality is not always clear. A positive relationship between the two could simply mean that rich countries reward poor ones for implementing policies that would have helped their economies whether or not they had brought in money. Conversely, a negative relationship may just mean that more aid flows to the countries with the most sluggish growth. In neither instance would aid actually be driving growth.

To get around this problem, economists have long hunted for a factor that affects the amount of aid disbursed but is not otherwise correlated with growth—an “instrumental variable”, in the jargon. Finding one is harder than it seems. Many proposed candidates—such as the size of a poor country’s population or even the colonial empire to which it used to belong—have been found by subsequent studies to have an independent connection to economic performance after all.

Read the rest of my article here.

Simon Hedlin