The CANADIAN STUDENT
ECONOMIC JOURNAL
Winter 2016 - Vol. 3, Issue 1
PICTURE TAKEN BY PAUL BICA
CALLED "CITY SUNRISE" TAKEN ON
JANUARY 19, 2013 ACCESSED
THROUGH CREATIVE COMMONS
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The CANADIAN STUDENT
ECONOMIC JOURNAL
Designed By Euirim Choi
Winter 2016
Vol. 3, Issue 1
CONTENTS
7
An Interview
with
Mr. Alan MacIntosh
Karl Valentini
11
Review of the Distortions
on the Supply Side
University of British Columbia
Bitcoin: monnaie
Changing Perspectives on
ou innovation?
Marie-Adélaïde Bullukian
24
Alberto Zambon
Marianopolis College
McGill University
18
Ramsey Pricing: A Brief
Economic Development
Peter Koczanski
34
Princeton University
SLASummit: An Unconventional
Approach to Economic
Development
in Latin America
Stephanie Bernal and Andrea Boza
McGill University
SUBMISSIONS
The Canadian Student Economic Journal accepts sub-
Edition can be found on the Canadian Student Busi-
missions of original economics and finance research
ness Review’s website.
papers by Canadian high school and university students. To submit a paper, send an email to csbreview@
gmail.com, or visit the journal’s website found at
The essays found in the Canadian Student Economic
www.csbusinessreview.com. An electronic version of
Journal are copyright of the Canadian Student Busi-
the Canadian Student Economic Journal Winter 2016
ness Review. All rights reserved.
The CANADIAN STUDENT
ECONOMIC JOURNAL
Karl Valentini
President & Founder
Luca D’Angelo
Managing Editor
Ariane Laurin
Head of Marketing
Peter Koczanski
Editor
Senior Writers
Elliot Kaufman
Lloyd Lyall
Jason Xiao
Writers
Stephanie Bernal
Andrea Boza
Marie-Adélaïde Bullukian
Peter Koczanski
Alberto Zambon
4
The CANADIAN STUDENT ECONOMIC JOURNAL
FOREWORD
I
a m proud to pre sent t he W i nter 2 016
The Third Edition shows the commitment
Issue of Third Edition of the Canadian
of the entire Canadian St udent Business Re-
St udent E conom ic Jou rnal. T he Jou rnal has
v iew ’s te a m to cont i nue spa rk i ng conversa-
continued to grow and attract talented student
tions among youth about economics. I would
writers from around the world.
like to thank all the writers, the contributors
T he world is u ndergoing tremendous
and the Managing Editor, Luca D’Angelo, for
change. The Venture Capital industry has been
helping make the Winter 2016 E dition possi-
one of the main drivers of innovation in the
ble.
world; we hope our interview with M r. A lan
MacIntosh can provide insight into this excit-
Sincerely,
ing new space. Readers will find an interesting
Karl Valentini
diversit y in the content of ou r ar ticles; they
President & Founder
cover A sia n econom ic development , prici ng
for monopol ies , t he development of Bitcoi n
and economic development in South A merica.
Winter 2016 – vol III. no. I – www.csbusinessreview.com
5
The CANADIAN STUDENT ECONOMIC JOURNAL
An Interview with
Mr. Alan MacIntosh
BY KARL VALENTINI
B
orn in Scotland, entrepreneur and venture
Following his success with GSM Capital, he then
capitalist Alan MacIntosh studied Off-
started Acta Wireless in 2004, and co-founded Real
shore Engineering at Heriot-Watt University, and
Ventures in 2008, which is currently Canada’s larg-
then received his MBA degree from INSEAD. He
est and most active seed fund. Since its inception,
began his career working as an oilfield engineer with
Real Ventures has raised three venture capital funds,
Schlumberger, and also worked for Hewlett-Packard
and has invested in over 150 companies, including
as a product manager. Sensing opportunities in the
Breather, PasswordBox (acquired by Intel) and Be-
fledgling mobile communications industry, he joined
yond the Rack. A pioneer in the emerging telecom-
Canada’s Telesystem group in 1990, and in 1997, he
munications industry in the 1990’s, Mr. MacIntosh
co-founded GSM Capital, the first global wireless
now continues to spawn new innovations in a va-
venture fund. With GSM Capital, he helped spear-
riety of industries as a co-founder and partner of
head investments in Saraïde (acquired by Infospace)
Real Ventures.
and Paypal (Nasdaq: PYPL).
6
Winter 2016 – vol III. no. I – www.csbusinessreview.com
Interview with Mr. Alan MacIntosh
How has your MBA education served you through-
culture and the product value of a VC backed com-
out your career in technology and venture capital?
pany, and I found the experience intriguing.
I later moved to Montreal to join Charles Sirois
Overall, my MBA degree has given me a more
and participated in a couple of venture capital in-
holistic view of the business world. Initially, I stud-
vestments with him before we narrowed our focus
ied and worked as an engineer, and so I viewed the
to build wireless businesses around the world. In
world through the lens of an engineer, which gave
1991, I made my first VC investment in California
a narrower view of the world. Through the MBA
and we co-invested with Kleiner Perkins. At the time,
program, I learnt many diverse aspects of a busi-
analog cellular was a voice-dominated industry, and
ness, such as its financial underpinnings, marketing
guard bands were used between the voice channels
strategies, organization dynamics and innovation
to improve the signal quality. The company that we
cycles, which exposed me to a whole variety of dis-
invested in, called Cellular Data Inc., had patented
ciplines I had not previously appreciated. The MBA
a way to insert data packets into these guard band
also allowed me to combine these disciplines into a
without disrupting the voice signal, in order to cre-
more integrated way of thinking. Also, due to the
ate new revenue streams for the cellular companies.
fact that the school I went to, INSEAD, was such an
I was really excited because I thought the company
international school, I was immersed in the massive
had amazing tech and business opportunity as well
wave of globalization, and that experience helped
as an amazing circle of blue chip and value added
me understand how connected and interdependent
investors, including KPCB, El Dorado Ventures, Bell
the world was in a very tangible way.
Atlantic and Singapore Telecom.
Many years later, Microcell Telecom won the
What made you decide to pursue an MBA degree?
first PCS license in Canada, and during the bidding
process, they committed to the government of Can-
As an oilfield engineer, the MBA provided a
launch platform to open new career avenues.
ada that they would stimulate wireless innovation in
Canada. To meet that obligation, they started two
initiatives: Microcell Labs and Microcell Capital, a
Why did you decide to enter the world of venture
venture capital firm. Given managements’ early pri-
capital? And, how did it happen?
ority was on building the nationwide network and
launching the Fido brand, the CEO, André Trem-
Venture Capital was a very appealing and excit-
blay, asked me to join the firm to get Microcell Cap-
ing field that I was first exposed to while working
ital off the ground. Initially, it had been conceived as
as a product manager for Hewlett Packard. At HP,
a CAD$ 40 million fund, but then I pitched the idea
our innovation cycles and processes were just not
of a larger fund with other international partners to
always quick enough to meet the demands of our
expand the scope of our investments. In early 1997,
customers and the market, and so, on two occasions
after a year of globe-trotting, we announced the cre-
we partnered with fast moving, innovative and ven-
ation of a USD135 million dollars fund, called GSM
ture-backed companies. These partnerships were the
Capital, that included nine mobile carriers from
first time that I saw the energy, speed of innovation,
around the world who committed to be special limited partners.
Winter 2016 – vol III. no. I – www.csbusinessreview.com
7
Interview with Mr. Alan MacIntosh
Which is your proudest early stage investment?
In your experience, what are the most significant obstacles to a start-up’s success, and what
It is probably a company called Saraïde. The
steps can entrepreneurs take to overcome them?
company had one of the first mobile internet platforms that allowed wireless carriers to get into the
It starts with doing something that your found-
world of the mobile data. With the company, we
ing team is incredibly passionate about and that you
found amazing technology from Nortel Labs, and
are all convinced is going to be big and significant
then also convinced Ericsson to become a partner,
because it will undoubtedly be a tough journey with
which allowed us to create vendor neutrality by hav-
lots of ups and downs. Then, the start-up business
ing both of them as investors. What I loved about
is really about tempering the amount of money and
the investment was that we were deeply involved
time you are spending relative to the progress you
in building and growing the company (including a
are making. Spending must be finely balanced and
European acquisition) and collaborating with our
progress constantly monitored. For companies that
special limited partners – it was not a traditional
are venture funded, there is a well-established and
venture capital investment. A key success factor was
staged funding process, where the investment cri-
managing to convince Hatim Tyabji, who had built
teria at each step are quite transparent. Thanks to
Verifone, to become CEO of this new company – he
the internet, start-ups can find out what the expec-
was an incredibly experienced CEO with great cha-
tations are at each stage of their development, and
risma and a joy to work with and learn from.
get a clear sense of the basis on which they will be
In the end, we had good fortune when it came to
able to raise capital for a given funding round. Once
the timing of the exit. In 1999, we were exploring
they do that, then it becomes a matter of reverse en-
strategic partnerships with several major internet
gineering the process, following through with their
companies, including Infospace, and it turned out
plans and investing their capital and time in focused
that we filled a major gap in their business. Instead
ways that allow them to achieve those objectives in
of a partnership, the CEO of Infospace told Hatim
order to get to their next milestone. Always easier
that he wanted to buy Saraïde. Hatim called me to
said than done…
tell me the news, including the very attractive price
that was being proposed. Although we were suc-
Are you hands-on with the businesses that you in-
cessful, it was a 22x return for the fund, the real
vest in?
fun was being part of building something innovative
with an exceptional leader like Hatim and running
Yes, we try to be very hands-on at Real Ventures
around the world to make it all happen. In the end,
– especially in the early phases but it’s always chal-
I really believe that the most important thing in ven-
lenging to find enough time. To stay involved and
ture capital is to enjoy what you are doing building
increase our effectiveness, we have created a series
meaningful companies with great people, and then
of initiatives and software platforms. For example,
the financial rewards will follow.
we created a talent platform for our companies, our
own miniaturized version of LinkedIn, which can
be really helpful for growing companies who need
to hire top talent in order to continue growing. Our
8
Winter 2016 – vol III. no. I – www.csbusinessreview.com
Interview with Mr. Alan MacIntosh
network is another resource and includes over 350
What is involved in taking a company public in
founders, and in aggregate, they know an awful
an IPO?
lot more than I, or any specific partner. If people
want to learn something specific about, say, Ruby
To put it simply, it is stressful and demanding
on Rails versus Django, I would not be very useful,
with a lot of preparation required. In the US, the
but our network has that knowhow and we try to
Sarbanes–Oxley Act made it even harder to bring a
ensure that people can find someone to help them.
company public. When going through the process,
Overall, we are hands-on, but we also try as much
you have to deal a lot with auditors and lawyers,
as possible to leverage technology in order to give
which also makes it very expensive both to get ready
more value-add to our portfolio.
but also for ongoing compliance. For a fast growing
start-up it is especially difficult because you need
What is the process for raising capital to start a new
to continue to manage the dynamic growth of your
venture capital fund?
market and organization, while, in parallel, also
prepare for the demands of being a public compa-
Venture capital is a small asset class, a subset of
ny. Usually, the IPO process starts at least 9 to 12
private equity and it is time consuming and chal-
months in advance. In order to go public, it is im-
lenging to raise a fund, especially as a new team.
portant to have a CFO with public market experi-
Typically, most venture capital firms have a nucleus
ence in order to effectively navigate the reporting
of partners who previously worked at other venture
requirements and security regulations. Compared
capital firms, and therefore they have some track re-
to VC-backed funding stages, the marketing and
cord, an attractive investment thesis and experience
pricing process is also completely different for an
in raising capital for funds. In that sense, VCs are
IPO including cross-country roadshows with insti-
sometimes similar to law practices where emerging
tutional investors, which is why it is essential to have
law professionals often spin out of the large, estab-
top tier investment bankers to facilitate the process.
lished law firms to create new entities.
In Silicon Valley, people, like Don Valentine,
Sequoia’s founder, and Paul Draper of Sutter Hill
Ventures, helped spawn multiple careers in venture
capital. Funding also depends on where you are located, and like any other market, there are cycles.
As for where the money can come from, the sources
of capital are quite varied but limited; institutional
investors, family offices and high net worth individuals all put money in venture capital funds. Finding
and convincing that highly regarded lead investor,
who then acts as the magnet for others to follow, is
typically a big hurdle to overcome.
Winter 2016 – vol III. no. I – www.csbusinessreview.com
9
The CANADIAN STUDENT ECONOMIC JOURNAL
Bitcoin: monnaie ou
innovation?
PAR MARIE-ADÉLAÏDE BULLUKIAN
E
nviron un mois après la mise en faillite de
Satoshi Nakamoto semble s’être assuré tout
Lehman Brothers, un 31 octobre, plusieurs
anonymat en utilisant une adresse courriel ain-
experts en cryptographie reçoivent le travail d’un
si qu’un site internet non traçables (Davis, 2011).
certain Satoshi Nakamoto, Bitcoin : Un modèle de
En 2011, Nakamoto déclare être « passé à autre
paiement électronique de pair à pair (Casey & Vig-
chose » dans son dernier courriel adressé à Gavin
na, 2015). À peine quelques années plus tard, Satoshi
Andresen, son « successeur », désormais président
Nakamoto est présélectionné pour le prix Nobel
de la fondation Bitcoin. Il ne s’est, à ce jour, plus
d’économie 2016 (Eudes, 2015).
jamais manifesté (The Economist, 2015). Même ses
anciens portefeuilles virtuels n’ont pas été utilisés,
La genèse du bitcoin: Satoshi Nakamoto
alors même qu’aujourd’hui, leurs valeurs avoisinent
Suite à la crise de 2008, un auteur dont l’identité
les $400 millions de dollars (The Economist, 2015)!
reste à ce jour encore un véritable mystère, passe
Dans un premier temps, une telle discrétion pour-
plusieurs mois à développer ce qui deviendra une
rait surprendre. Néanmoins, rester dans l’anonymat
technologie considérée comme « révolutionnaire »
le plus total comporte plusieurs avantages. En effet,
(Chowdhry, 2015).
Satoshi Nakamoto se protège ainsi contre toute men-
Nul n’a rencontré, ni vu ne serait-ce qu’une pho-
ace, contrairement au créateur de Napster, un service
to de l’inventeur de la mécanique du bitcoin. Sa-
de musique en ligne. Ajouté à cela, l’auteur des bit-
toshi Nakamoto n’est qu’un pseudonyme qui n’avait
coins crée un véritable engouement pour sa technol-
jamais été utilisé par un codeur avant l’auteur des
ogie et sa marque grâce à ses origines si mystérieus-
bitcoins (Davis, 2011). D’après certaines sources,
es (The Economist, 2015). Enfin, en agissant ainsi,
Satoshi Nakamoto est un sociologue finnois, pour
l’auteur des bitcoins respecte l’essence même de la
d’autres, il s’agit d’un mathématicien japonais ou en-
technologie qu’il laisse en héritage parce qu’en ne
core d’un étudiant irlandais (The Economist, 2015).
donnant aucune figure d’autorité aux bitcoins, il
Enfin, Satoshi Nakamoto pourrait tout aussi être
garantit un système entièrement décentralisé. Dès
un groupe de personnes qu’un seul individu, étant
lors, en ne laissant aucun visage sur les pièces de sa
donné la complexité du système inventé (The Econ-
monnaie, c’est de facto, celui de la communauté tout
omist, 2015).
entière qui y figure. Les bitcoins sont nés du besoin
de se protéger contre les aléas du système monétaire
10
Winter 2016 – vol III. no. I – www.csbusinessreview.com
Bitcoin: monnaie ouinnovation?
centralisé, notamment en 2008, en construisant un
fondent sur un système monétaire centralisé, gérées
système plus indépendant.
par un tiers. Comment faire confiance à un système
sans État ou banque centrale? Lorsque l’on effectue
Qu’est-ce que le bitcoin ?
un achat avec des bitcoins, comment être certain que
Le bitcoin, est une monnaie (coin) numérique (bit :
l’échange a bien eu lieu?
unité informatique binaire) (Durana, 2015). Comme
La réponse est simple, la transaction se fait aux
le dollar canadien ou l’euro, elle remplit les fonctions
yeux de tous (Gerstein & Hervieux-Payette, 2015).
traditionnelles d’une monnaie ; elle représente une
C’est là même l’ambition des crypto-monnaies ; ré-
unité de compte, un intermédiaire des échanges
soudre le problème de confiance sans l’intervention
ainsi qu’une réserve de valeurs (Mareschal, 2014).
d’un tiers en offrant une plateforme où tout échange
Toutefois, le bitcoin est entièrement virtuel, aucune
est enregistré dans un registre public (public ledger)
pièce de monnaies ou de billets n’est physiquement
(Gerstein & Hervieux-Payette, 2015). Comme le sug-
échangée. Par contre, le solde du compte associé à
gère Larry Summers, ancien secrétaire du Trésor des
une clé publique et une clé privée, change, suite à la
États-Unis, au XVe siècle les banquiers de Médicis
transaction (Figure 1) (Kelleher).
s’intéressaient déjà à la problématique de la confiance (Casey & Vigna, 2015).
L’ambition des crypto-monnaies
Une crypto-monnaie opère au sein d’un système
Le bitcoin se base sur un système monétaire décen-
d’échange (direct) de pair à pair (P2P)), donc d’une
tralisé, donc sans l’encadrement d’un gouvernement
personne à une autre, sans intermédiaire (Gerstein
ou d’une banque. En revanche, les devises usuelles se
& Hervieux-Payette, 2015). Cette idée est loin d’être
Figure 1: Comment s’effectue une transaction en bitcoins (Source : Les Echos)
Winter 2016 – vol III. no. I – www.csbusinessreview.com
11
Bitcoin: monnaie ouinnovation?
nouvelle, plusieurs tentatives avant le bitcoin avaient
nauté du minage, Satoshi Nakamoto n’aurait-il pas
été étudiées, mais elles se sont toutes révélées in-
simplement recréé les défauts du système centralisé
fructueuses (Casey & Vigna, 2015). Pourtant, le
actuel?
bitcoin est suffisamment sophistiqué pour répondre
aux ambitions des crypto-monnaies.
Le revenu des mineurs diminue de moitié tous les
210,000 blocs, donc tous les 4 ans (Kelleher, 2014).
En effet, en 2009, les mineurs gagnaient 50 bitcoins
La création monétaire : Le minage
par minage, en 2014 ils n’en gagnent que 25 (Kelle-
Si le système monétaire des bitcoins est entièrement
her, 2014). La quantité de bitcoin pouvant être créée
autonome, comment la monnaie est-elle créée? Les
via le minage est donc limitée à 21 millions et ne
bitcoins sont générés via un processus nommé le mi-
peut être augmentée, comme illustré ci-dessous (Du-
nage (mining) (Kelleher, 2014). Il s’agit de i) vérifier
rana, 2015). Cette crypto-monnaie ressemble à bien
que la transaction en cours est bien réelle et ii) de
des égards à l’étalon d’or du XXe siècle puisqu’elle
transmettre cette nouvelle donnée à l’ensemble de
est fixe (Durana, 2015).
la communauté dans le registre public. Pour véri-
12
fier que la transaction en cours est bien réelle, une
La technologie révolutionnaire des bitcoins :
personne appelée mineur (minor) doit résoudre
la chaîne de blocs (blockchains)
des calculs complexes afin de fournir la preuve de
Les bitcoins se fondent sur une technologie nommée
l’opération (proof-of-work) et donc de la transaction
« la chaîne de blocs » (blockchains). Cette dernière
(Kelleher, 2014).
consiste en une chaine de blocs regroupant chaque
Le premier mineur qui trouve la solution trans-
transaction vérifiée par ordre chronologique (Du-
forme la transaction en bloc (block) (M. Gagnon,
rana, 2015). Le premier bloc de la chaîne créé par
personal communication, 2015). Ce dernier est ac-
l’inventeur du système, plus connu sous le nom de
cepté par le système et demeure figé dans le temps
bloc de la genèse (genisis block), était de 50 BTC
(Kelleher, 2014). En somme, lors du minage, la
(Casey & Vigna, 2015). La chaîne de blocs s’accroît
transaction est validée donc la monnaie circule. La
donc, au fur et à mesure des échanges au sein de la
durée du minage avoisine les 10 minutes en moy-
communauté. Les détails de toutes les transactions
enne (M. Gagnon, personal communication, 2015).
sont enregistrés dans un registre public qui est acces-
Afin de faire participer la communauté à la circu-
sible à tous les participants (Casey & Vigna, 2015).
lation de la monnaie, le système récompense les
Les avantages d’une telle technologie sont con-
mineurs par des frais de transactions, mais surtout
sidérables. Les échanges se font i) instantanément
des nouveaux bitcoins générés par le système (block
ii) presque sans frais iii) en toute sécurité et iv) sans
reward), d’où la création monétaire (Casey & Vigna,
conditions, notamment celles imposées par les ban-
2015). Néanmoins, une telle activité est désormais
ques pour ouvrir un compte, transférer de l’argent,
réservée aux entreprises comme KnCMiner à cause
etc. (Satoshi Counter, 2015). En effet, certaines
des coûts de personnel, de matériel (les processeurs)
personnes se retrouvent mises à l’écart de l’écono-
et d’électricité nécessaires pour résoudre les calculs
mie moderne parce qu’elles ne peuvent remplir les
tout en maintenant un certain rythme (10 minutes)
critères nécessaires exigés par le système bancaire
(M. Gagnon, personal communication, 2015; Kharif,
(Casey & Vigna, 2015). C’est le cas, par exemple,
2014). En excluant certains membres de la commu-
d’une jeune fille, Parisa, en Afghanistan, qui ne peut
Winter 2016 – vol III. no. I – www.csbusinessreview.com
Bitcoin: monnaie ouinnovation?
se procurer un compte bancaire, mais souhaite par-
minage est devenu difficilement profitable, l’offre
ticiper à l’économie (Casey & Vigna). D’où provien-
s’adapte donc à la demande et le prix du bitcoin se
nent donc les critiques des bitcoins? Que reproche
stabilise (Bitcoin Project, 2015). La volatilité du bit-
t’on à cette monnaie?
coin a plusieurs effets, notamment la réticence de
certaines grandes entreprises à adopter ce mode de
Volatilité
paiement (AFP & Lefigaro.fr, 2014).
Nombre d’experts mettent en garde contre l’utilisation de ce genre de monnaie à cause de son extrême
La législation du bitcoin & Conclusion
volatilité. La volatilité d’une monnaie se mesure via
Suite à certaines affaires de drogue et de fraude, no-
l’index du Chicago Board Options Exchange (CBOE
tamment Silk Road ou encore MtGox, mais surtout
Volatility Index). À l’origine cet index mesure la fluc-
face à la complexité du système bitcoin, certains
tuation de la valeur du bitcoin pour les trente pro-
États légalisent ou interdisent l’utilisation de cette
chains jours, estimée par le marché financier clas-
crypto-monnaie (Benoit, 2015).
sique (Investopedia, 2003). Alors que la volatilité du
Au Canada, le bitcoin est légal et reconnu par
dollar canadien est de 0.43%, l’index de volatilité
l’Agence de Revenu du Canada comme devise (Ba-
du bitcoin avoisine les 5% chaque mois (Dourado,
jpai, 2015). Cela entraîne simplement l’obligation,
2015 ; Montreal Exchange, 2015)! Plusieurs raisons
pour les entreprises, de déclarer les revenus reçus
expliquent ce phénomène. La spéculation ainsi que
avec le bitcoin comme mode de paiement (Lalonde,
les médias sont les principales causes de la volatilité
2014). De facto les bitcoins sont ainsi soumis à la
des bitcoins (Szczepański, 2014). Toutefois, l’échelle
loi contre le blanchiment d’argent et encadrés par le
à laquelle opère le système des bitcoins est si petite
Centre d’Analyse des Opérations et de Déclarations
par rapport aux autres devises que chaque échange
Financières du Canada (CANAFE). Enfin, Ottawa,
au sein de la communauté a des grandes répercus-
en vue des opportunités que représente la technol-
sions sur le prix de la crypto-monnaie (M. Gagnon,
ogie des chaînes de blocs et malgré les risques du
personal communication, 2015). En 2015, environ
système, préfère adopter une approche souple afin
14 millions de bitcoins circulent, soit l’équivalent de
d’assurer le bon développement de cette innovation
presque $7 milliards (CAD) ou $5 milliards (USD),
(Gerstein & Hervieux-Payette, 2015).
ce qui représente « une goûte d’eau » par rapport à
Aux États-Unis, le bitcoin est légal et fait
la masse monétaire du Canada de $13,6 milliards
dorénavant partie du marché des dérivés (Bajpai,
(CAD) ou encore celle des États-Unis de $12,2 mil-
2015). Le Financial Crimes Enforcement Network
liards (USD) (Tradingeconomics, 2015 ; Durana,
(FinCend) du bureau du département du Trésor des
2015). Enfin, une telle volatilité découle aussi du peu
États-Unis ne considère pas le bitcoin comme une
de confiance dans le bitcoin par rapport aux devises
devise (Bajpai, 2015). De ce fait, le bitcoin est soumis
usuelles comme le dollar canadien, américain ou en-
à la Bank Secrecy Act de 1970, une loi visant à aider
core la livre anglaise (Robleh et al, 2014).
le gouvernement à détecter toutes fraudes bancaires
Néanmoins, « au fur et à mesure que le nom-
(U.S Department of the Treasury Financial Crimes
bre d’unités en circulation et les liquidités aug-
Enforcement Network). Néanmoins, le fisc améric-
mentent, cette instabilité diminue » (Gerstein &
ain International Revenue Service (IRS) soumet le
Hervieux-Payette, 2015). Ajouté à cela, comme le
bitcoin à l’impôt comme gain sur le capital en con-
Winter 2016 – vol III. no. I – www.csbusinessreview.com
13
Bitcoin: monnaie ouinnovation?
Figure 2 : La législation des bitcoins dans le monde (Source : CNNMoney)
sidérant la crypto-monnaie comme un bien (McK-
ette, 2015). Enfin, d’un point de vue économique, la
innon & Tracy, 2014).
juxtaposition de deux systèmes monétaires différents
Enfin, en Europe, le bitcoin est légal, mais ne
(centralisé et décentralisé) offre la possibilité, peut-
peut pas être taxé selon le jugement de la Cour de
être unique, d’analyser et de comparer les avantages
justice de l’Union européenne (Marchand, 2015).
et les inconvénients de chaque système monétaire.
Ainsi, les États adoptent diverses approches face aux
bitcoins (Figure 2).
Toutefois, les États se préviendront-ils longtemps
de la fiscalité de cette monnaie ? Et surtout les Cours
Malgré certaines réticences vis-à-vis des bitcoins
de justices au nom propre de l’égalité devant l’impôt,
en tant que monnaie, l’innovation et les possibilités
remettront peut-être en cause l’exonération de tels
qu’offre la technologie méritent toute notre atten-
montants financiers.
tion. En effet, Wall Street, Visa, Nasdaq, Capital
One Financial ainsi que d’autres entreprises ont investi jusqu’à 30 millions dans des startups liées aux
bitcoins (Hope, 2015). De plus, la technologie de
chaine des blocs (block chains) est un code source
ouvert (open source), c’est-à-dire que sa licence permet la libre distribution du logiciel. Par conséquent
les chaines de blocs peuvent avoir d’autres applications, comme les transactions mobilières, par exemple (Bitcoin Project, 2015; Gerstein & Hervieux-Pay-
14
Winter 2016 – vol III. no. I – www.csbusinessreview.com
- McGill University
Bitcoin: monnaie ouinnovation?
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1. AFP & Lefigaro.fr (2014, January 9). Le Bit-
9. Davis, J. (2011, October 10). The Crypto-Curren-
coin Plombé Par Sa ‘Forte Volatilité. Le Figa-
cy. The New Yorker. Retrieved from http://www.
ro. Ret rieved f rom ht t p: //w w w.lef iga ro.f r/
newyorker.com/magazine/2011/10/10/the-cryp-
f lash- eco/2014 /01/09/97002-20140109F I LW-
to-currency
WW00698-le-bitcoin-plombe-par-sa-forte-volatili-
10. Dourado, E. (2015). (4.97%) The Bitcoin Volatil-
te.php
ity Index. Btcvol.info. Retrieved from https://btcvol.
2. Ali, R., Barrdear, J., Clews, R., & Southgate, J.
info/
(2014). The Economics Of Digital Currencies. Bank
11. Durana, G. (2015). Bitcoin : Bulle Ou Révolu-
of Endland. Retrieved from http://www.bankofen-
tion?. Esprit, 415, 88-96.
gland.co.uk/publications/Documents/quarterlybul-
12. Eudes, Y. (2015, November 24). Après Les Cri-
letin/2014/qb14q3digitalcurrenciesbitcoin2.pdf
tiques, Le Bitcoin Séduit Wall Street. Le Monde.fr.
3.Bajpai, P. (2015). Countries Where Bitcoin Is
Retrieved from http://www.lemonde.fr/pixels/arti-
Legal & Illegal (DISH, OTSK). Investopedia. Re-
cle/2015/11/24/apres-les-critiques-le-bitcoin-seduit-
trieved from http://www.investopedia.com/articles/
wall-street_4816598_4408996.html
forex/041515/countries-where-bitcoin-legal-illegal.
13. The Economist (2015, November 2). Who Is
asp
Satoshi Nakamoto?. The Economist. Retrieved
4. Benoit, M. (2015, August 28). La descente
from www.economist.com/blogs/economist-ex-
aux enfers de Mark Karpelès, l’ancien petit génie
plains/2015/11/economist-explains-1
français de l’informatique. Le Monde. Retrieved
14. Gerstein, L’honorable I. R. & Hervieux-Payette,
from http://www.lemonde.fr/m-moyen-format/ar-
L’honorable C. (2015). Les crypto-monnaies: pile
ticle/2015/08/28/la-descente-aux-enfers-de-mark-
ou face?. Rapport du comité sénatorial permanent
karpeles-l-ancien-petit-genie-francais-de-l-informa-
des banques et du commerce. Retrieved from http://
tique_4739054_4497271.html
www.parl.gc.ca/Content/SEN/Committee/412/
5. Bitcoin Project (2015). FAQ. Bitcoin Project. Re-
banc/rep/rep12jun15-f.pdf
trieved from https://bitcoin.org/en/faq
15. Hope, B. (2015, September 9). Visa, Nasdaq,
6. Bitcoin Project (2015). Open Source P2P Money.
Others Invest $30 Million In Bitcoin-Related Start-
Bitcoin Project. Retrieved from https://bitcoin.org/
up. Wall Street Journal. Retrieved from http://www.
en
wsj.com/articles/visa-nasdaq-others-invest-30-mil-
7. Casey, M. J. & Vigna, P. (2015). The Age Of Cryp-
lion-in-bitcoin-related-startup-1441827120
tocurrency. New York : St. Martin’s Press.
16. Investopedia (2003). VIX (CBOE Volatility In-
8. Chowdhry, B. (2015, November 6). I (Shall Hap-
dex) Definition. Investopedia. Retrieved from http://
pily) Accept The 2016 Nobel Prize In Economics
www.investopedia.com/terms/v/vix.asp
On Behalf Of Satoshi Nakamoto. The Huffington
17. Kelleher, J.. Bitcoin Definition. Investopedia. Re-
Post. Retrieved from http://www.huffingtonpost.
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com /bhagwan-chowdry/i-shall-happily-accept-
bitcoin.asp
th_b_8462028.html
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15
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18. Kelleher, J. (2014, September 2). What Is Bit-
26. Szczepański, M. (2014, April 11). “Bitcoin Mar-
coin Mining?. Investopedia. Retrieved from http://
ket, Economics And Regulation”. Europarl.europa.
www.investopedia.com/articles/investing/043014/
eu. Retrieved from http://www.europarl.europa.eu/
what-bitcoin-mining.asp
RegData/bibliotheque/briefing/2014/140793/LDM_
19. Kharif, O. (2014, April 12). Bitcoin Min-
BRI%282014%29140793_REV1_EN.pdf
ing Boom Sputters As Prospectors Face Losses.
27. Tradingeconomics.com (2015). Canada Mon-
Bloomberg Business. Retrieved from http://www.
ey Supply M2. Tradingeconomics.com. Retrieved
bloomberg.com/news/articles/2014-04-11/bitcoin-
from http://www.tradingeconomics.com/canada/
mining-boom-sputters-as-prospectors-see-real-cash-
money-supply-m2
losses
28. Tradingeconomics.com (2015). United States
20. Lalonde, D. (2014, May 29). Le Canada Doit
Money Supply M2. Tradingeconomics.com. Re-
Clarifier Le Statut Juridique Du Bitcoin, Estime
trieved from http://www.tradingeconomics.com/
L’IEDM. Les affaires. Retrieved from http://www.
united-states/money-supply-m2
lesaffaires.com/techno/technologie-de-l-informa-
29. U.S Department of the Treasury Financial
tion/le-canada-doit-clarifier-le-statut-juridique-du-
Crimes Enforcement Network. Bank Secrecy Act.
bitcoin-estime-l-iedm/569370
Financial Crimes Enforcement Network. Retrieved
21. Marchand, L. (2015, October 22). Le Bitcoin
from https://www.fincen.gov/statutes_regs/bsa
Doit Être Exonéré De TVA, A Tranché La Justice
Européenne. Les Echos. Retrieved from http://www.
lesechos.fr/22/10/2015/lesechos.fr/021424743853_
le-bitcoin-doit-etre-exonere-de-tva--a-tranche-lajustice-europeenne.htm
22. Mareschal, E. (2014, February 25). Tout Ce
Qu’il Faut Savoir Sur Le Bitcoin. Le Figaro. Retrieved from http://www.lefigaro.fr/secteur/hightech/2014/02/25/32001-20140225ARTFIG00358tout-ce-qu-il-faut-savoir-sur-le-bitcoin.php
23. McKinnon, J. D., & Tracy, R. (2014, March 25).
IRS Says Bitcoin Is Property, Not Currency. Wall
Street Journal. Retrieved from http://www.wsj.com/
articles/SB100014240527023039497045794615025
38024502
24. Montréal Exchange (2015). “S&P/TSX 60 VIX
Index (VIXC)”. Montréal Exchange. Retrieved from
https://www.m-x.ca/indicesmx_vixc_en.php
25. Satoshi Counter (2015). Blog. Satoshi Counter.
Retrieved from http://satoshicounter.com/blog/
16
Winter 2016 – vol III. no. I – www.csbusinessreview.com
This Page is Intentionally Left Blank.
The CANADIAN STUDENT ECONOMIC JOURNAL
SLASummit: An
Unconventional Approach to
Economic Development in
Latin America
BY STEPHANIE BERNAL AND ANDREA BOZA
INTRODUCTION
H
Summit maintains a focus on the economic growth
ow can you permanently change the lives of
occuring in Latin America. An aim of the conference
30 people with a budget of $5,000? Finding
is to concretely show participants what their roles
an answer to that question is the guiding principle
can be in further developing the economies of the
behind the SLASummit. Such an answer could of-
region. Differentiating itself from case competitions
fer hundreds of university students from across the
that solely focus on the application of critical think-
Americas new opportunities to use their creativity
ing and presentation skills, SLASummit’s ingenuity
and innovation to develop sustainable social entre-
lies in its purpose: to develop winning ideas into
preneurship projects. SLASummit creates connec-
solutions that will visibly improve the lives of Latin
tions between communities who are eager to work
American communities in need.
with Non-Governmental Organizations (NGOs)
18
and student entrepreneurs to implement initiatives
ROOTS: A MEXICAN BIKE SHOP
that foster growth and development. Through a
Initially, SLASummit emerged as a TED-style con-
four-day conference and case competition, SLA-
ference focused on raising awareness about current
Winter 2016 – vol III. no. I – www.csbusinessreview.com
SLASummit: An Unconventional Approach to Economic Development
Latin American issues, and on establishing networks
between McGill and the Montreal Latin American
community. Transitioning from a descriptive dialogue to a prescriptive one, SLASummit began
looking for ways to make a greater impact. We were
inspired by the McGill Spanish and Latin American Students Association (SLASA) project, BiciClub,
which raised $4000 in order to purchase 15 bicycles and all the materials necessary to run a bicycle
shop for the small village of Santo Tomás Ocotepec,
Mexico. In the area, a significant number of primary school children abandon their studies because
of the great distance they have to travel to attend
Latin American economies as well as aspects re-
school, which lies almost 2 hours away. Knowing
lating to social entrepreneurship – examples, chal-
this, BiciClub was implemented not only with the
lenges, etc. – in order to give participants a sense of
goal of reducing that travel time, which was cut by
how to tailor their sustainable development projects
more than half, but also to ensure sustainability in
to their unique environments. These presentations
the form of a bike rental business with its own repair
and speeches were given by individuals and organi-
garage. This is the kind of bottom-up, community
zations who covered both bottom-up project imple-
based success on which SLASummit seeks to build
mentation and the steps needed to be a viable social
upon with its own initiatives.
entrepreneur. The twenty-four hour brainstorming
sessions put participants’ understanding of these
THE SUMMIT: A STEP TOWARDS ECONOMIC
concepts, their outside knowledge and their creativ-
DEVELOPMENT
ity to the test by asking them to, as a team, identify
In 2015, the SLASummit executive team of 14 un-
issues within their assigned Latin American commu-
dergraduates developed the original event format,
nities, and with the advice of mentors, to develop a
which has now been able to make such a profound
financially sustainable solution. Under this model,
impact. The event was organized into two separate
sophisticated clean water initiatives, solar powered
parts, a speakers’ series and a condensed case com-
lighting projects and social capital initiatives, among
petition, giving participants the tools necessary to
many others, were proposed, exceeding the expecta-
develop viable solutions tailored to real communities
tions of many judges and making choosing a winner
in Ecuador, Mexico or Peru. For some specific eco-
more difficult than anticipated.
nomic indicators relating to the communities, please
find them in the appendix under community profile
A BROAD IMPACT
descriptions. The three communities are: 1) Monte
Since its inception, SLASummit has become much
Sinai, Ecuador; 2) Santo Tomás de Ocotepec, Mex-
more than an inter-university network for social-
ico; 3) Pamplona, Peru.
ly-aware, entrepreneurial youth. Last year the win-
During the conference portion, the conference
ning project “Construyendo Conciencia Femenina”
organizers and speakers presented information on
was implemented in the community of Monte Sinai,
Winter 2016 – vol III. no. I – www.csbusinessreview.com
19
SLASummit: An Unconventional Approach to Economic Development
Ecuador. The goal was to provide this marginalized
the SLASummit executives, believe the skills devel-
group with technical, professional skills in order
oped were essential for these women to gain the eco-
to increase their competitiveness in the local job
nomic independence, and the subsequent autonomy
market. The team demonstrated a strong ability to
necessary to become active, contributing members
implement long-lasting change; the continuous par-
in their society.
ticipation of over 120 women in the weekly work-
While the initial impact of our initiative is im-
shops immensely surpassed our initial target of thir-
portant, we also believe longevity and sustainability
ty women. Moreover, 75% of the women completed
are integral in order to make meaningful change. An
courses in craftsmanship, shoemaking and beauty/
essential component needed to achieve those goals
esthetics. The five week training sessions culminated
is working with NGOs directly in the community.
not only in an open house for participants to show-
In Monte Sinaí, we partnered with a local NGO,
case what they had learned to their town, but also
Fundación Hogar de Cristo. This partnership has
in an entrepreneurship fair where they could interact
not only solidified our presence and impact, but also
in markets with other artisans.
opened the door for program expansion in other
These women have gone on to utilize their skills
communities. Part of the team responsible for the
with their individual families and offer services to
project’s implementation has stayed in Ecuador, af-
the greater community. Several have also started
ter graduating, to continue this expansion and im-
small businesses, taking orders for goods and shoes,
prove the work SLASummit helped initiate. These
or opened home beauty centers, adding to their
are the types of opportunities in development and
household income an extra 15-60 dollars USD per
social entrepreneurship that SLASummit can offer
month. While all of our participants continue to be
participants.
homemakers in addition to their new endeavors, we,
20
Winter 2016 – vol III. no. I – www.csbusinessreview.com
SLASummit: An Unconventional Approach to Economic Development
CONCLUDING REMARKS
With respect to the conference itself, SLASummit
was able to garner the support of several important
organizations engaged in social entrepreneurship
and economic development. We had the chance to
welcome 12 professional business makers as judges
and mentors throughout the entire event, including
District 3 Innovation Centre (Concordia), Quartier
de l’Innovation-QI (McGill), DNA (HEC), Zebrea,
La Route des Possibles, and Aimia. The involvement
of these organizations helped shape the project’s viability and sustainability.
Seeking to establish a network of contacts to
help SLASummit during the planning and incubation phases, we have worked with a number of highly-respected professionals both in the field of social
entrepreneurship and Latin American economic
development. More specifically, we worked with
Chad Lubelsky from RECODE, as well as Nancy
Neamtam, chief executive officer of Le Chantier de
l’Economie Sociale. We have also had speakers such
as Francisco del Rio, Ambassador at the Mexican
Consulate in Montreal; Christian Novak, former
Executive Director of Morgan Stanley; and Anita
Novak, Director of Operations of McGill’s Social
Learning for Social Impact MOOC, among others.
Furthermore, SLASummit has been recognized for
its potential to create positive social change as a Top
Finalist of the Forces Avenir Student Entrepreneurship Conference of Quebec - the most prestigious
award in the province for student leadership projects.
The SLASummit invites students, professionals and
volunteers to become part of this movement, helping
to support sustainable development in Latin American communities.
- McGill University
Winter 2016 – vol III. no. I – www.csbusinessreview.com
21
SLASummit: An Unconventional Approach to Economic Development
Appendix
Community Profile Descriptions (Source: SLASum-
professional. The most common jobs among the
mit 2015)
population of Monte Sinaí are those which generate
1) Monte Sinaí, Ecuador
Labor market and Unemployment (Source: Re-
• 27% of the working population works in a do-
port “Monte Sinaí: La herencia de los vulnerados”):
mestic service, and earn less than USD $292 (the
• Of the working population in Monte Sinai, only
minimum wage).
54% are engaged in paid work; the economic mea-
• 62.6% of the working population earns less
sure is most striking when broken down by gender
than the minimum wage, and even the highest pay-
since 64% of the entire female population does not
ing jobs, such as those of drivers, are slightly above
have paid work.
the minimum wage.
• There is a high level of unemployment in the
• The two most common occupations are those
community, and the problem of unemployment is
of out of door housemaid and informal merchant,
particularly problematic among youth
which earn average incomes of USD $290 and USD
• There is a correlation between someone’s years
$ 336.5, respectively. The next two most common
of schooling and their ability to find employment:
occupations are those of indoor housemaid and
77.3% of people with 0-5 years of education are not
washerwoman, which earn average incomes of USD
employed, while those with at least 13 years of ed-
$340.6, and USD $244.5, respectively. These four
ucation can boast an unemployment rate of 31%.
groups represent 82% of the working population,
Income vs. Expenditures:
and in most households, there is only one person
• 62% of the population earns less than USD
employed, which means those incomes often have
$292 per month (the accepted minimum wage in
to sustain entire families.
2) Santo Tomás de Ocotepec, Mexico
Ecuador).
• 70% of the population spends between USD $1$240 per month; many families must borrow money
to pay for their basic expenses.
Labor Market and Unemployment:
• Out of the 4076 inhabitants of Santo Tomás
de Ocotepec, the economically active population
• 16% of the population earns an income be-
represents 46.75%, while the economically inactive
tween USD $0-$65 per month – these people face
population represents 52.86%. The predominant
extreme poverty.
economic activities in Santo Tomás de Ocotepec are
• Only 2% of the overall population of Monte
agriculture and livestock farming.
Sinaí has an income greater than USD $600 per
Agriculture:
month, out of which 156 individuals have superior
• 71% of the population works in the agricul-
levels of education, 31% have a secondary education,
52% have only a primary education.
Earnings according occupations:
22
the lowest incomes.
tural sector.
• The area of landmass used for this activity represents 1,300 hectares.
• The jobs which generate the greatest incomes
• Most of the agricultural activities consist of the
are those which are usually performed by the male
planting of basic grains such as corn seeds (73.82%),
population, and they include, driver and freelance
beans (6.87%), wheat (5.5%), lima beans (2.72%),
Winter 2016 – vol III. no. I – www.csbusinessreview.com
SLASummit: An Unconventional Approach to Economic Development
and potatoes (1.72%). A smaller share of the agricul-
• Among the economically active population
tural activity consists of fruit crops, such as peaches
61.3% are men, and 38.7% are women. On the other
(3.43%), pears (3.43%), apples (1.72%), and plums
hand, among the economically inactive population
(1.29%).
61.7% are women, and 38.3% are men. This high-
• The outcome of the crops is largely dependent
lights a big gender gap.
• The participation in the labor market of teen-
on rainfalls.
• The land is very arid, and soils are inauspicious
for agriculture, since they are poor, dry, and with
agers and of the elderly is of 14.5%, and 34.9%, respectively.
Primary occupations:
very steep gradients.
• There is only one tractor in the village, which
• Occupations among the population aged 15
is shared among the villagers for the cultivation of
years and older include the following: 31.6% are
the grain crops. Only 150 hectares of the farming
unskilled service workers, 22% are skilled service
land are cultivated with the tractor, such that 75%
workers, 17.8% are construction workers and man-
of the overall landmass still depends on the “yunta”
ufacturers.
(wooden plow) technique.
• Among the unskilled service workers, 7.5%
Animal Farming:
are domestic workers, 7.2% are street vendors, and
• 30% of the population is dedicated to livestock
4.1% are cleaners/janitors in offices, hotels or other
establishments.
farming.
• Out of the 3,230 animals kept for livestock
• Among the skilled service workers, 12% are
farming purposes, 91.76% are cattle, 2.32% are
retail vendors, 3.9% are qualified cooks, 1.9% work
goats and 5.91% are pigs.
for security services, and 1.7% are vendors in kiosks
• The aim of cattle farming is twofold: first, the
and markets.
usage of these animals for land plowing, and second
the sale of these animals.
• The aim of goat farming is mostly to sell these
References
1. Hernandez Cotrina, A. Julián & Provis Ramirex,
Javiera Amparo. Monte Sinaí: La Herencia De Los
animals.
Commerce:
Vulnerados. Guayaquil: Hogar De Cristo.
• There are 9 DICONSA community shops (gov-
2. INEI (2005). San Juan De Miraflores: Perfil So-
ernment-run distribution network that supplies
cioeconómico De Las Poblaciones En Riesgo. Lima:
basic goods), and 3 small grocery stores; however,
INEI.
each week, a group of merchants create a small flea
3. Municipio Santo Tomás De Ocotepec (2011). Plan
market in the village’s main plaza.
Municipal De Desarrollo 2011-2013. Municipal De
Desarrollo: Municipal De Desarrollo.
3) Pamplona, Peru
Labor market and Unemployment:
• 49.3% of the population aged 6 years and older
is considered economically active, meaning that they
are either employed or actively looking for employment.
Winter 2016 – vol III. no. I – www.csbusinessreview.com
23
The CANADIAN STUDENT ECONOMIC JOURNAL
Ramsey Pricing: A Brief
Review of the Distortions on
the Supply Side
BY ALBERTO ZAMBON
Note: May the reader please take note that
sidered market, as a proof that the current markup
the published version found in the Canadi-
is not providing undue profit to the firm (a lambda =
an Student Economic Journal is a revised and
1 is a signal of the fact that the break-even constraint
shortened version of the original work of Mr.
is not working anymore, i.e. the firm is maximizing
Alberto Zambon submitted to the University
profit).
of British Columbia.
Up to this point, it might seem that the way of
proceeding suggested by the Ramsey Rule is smooth
An Overview of the Problem
T
he Ramsey rule, intended either as a taxation
We will show, instead, that this iter works well only
formula or a pricing indication, seems to be a
in a uniperiodal scenario since, if a longer period
good and convenient regulation at least in a stat-
of time is taken into account, the same method will
ic and uniperiodal environmen. Indeed, Ramsey
provide the expected results only in the long run,
numbers give both an ex ante reliable suggestion
while it will likely lead to bigger deviations from op-
to regulators who want to minimize the overall im-
timality in the short term. This is the core thesis of
pact of a second-best pricing system on the social
this paper. To support it, we will first provide argu-
net surplus; the first best solution is when there is
ments and evidence for the dynamics of the Average
perfect competition – the price equals the margin-
Cost pricing system (see, AC pricing system) and
al cost – whereas the second best solution includes
then we will extend the same rationale towards the
some deadweight loss. The Ramsey numbers inform
multiproduct case, where the Ramsey pricing system
regulators of when they need to increase the prices
is currently applied.
on those products (or services) whose demands are
It would fall outside of our descriptive purposes
more inelastic, and also provide a trustworthy ex
to even try to provide some tentative solutions to this
post indicator of how much the imposed price level
issue since it is mostly a problem of Marginal Cost
is being respected by the natural monopolist.
perception; therefore, we will just underline how the
Therefore the regulator, supported by the price
24
and reliable, as as it is used for second best solutions.
presented problem will require a greater conscious-
directives and guidelines provided to the regulated
ness on the part of the regulator that the shadow-in-
company, expects to be capable of observing a level
dication provided by the Ramsey number might not
of the Ramsey number below the unit on every con-
always be correct. It is not necessarily useful to seek
Winter 2016 – vol III. no. I – www.csbusinessreview.com
Ramsey Pricing: A Brief Review of the Distortions on the Supply Side
an ex post confirmation of the current price poli-
It is now necessary to point out the symmetry
cy for an indicator that suffers from spillovers and
that makes it possible to move from the time-sen-
distortive biases, which is the case with the Ramsey
sitive examination of the single-product natural
lambda. Indeed, it will be shown that, under some
monopoly, regulated using the Average Cost pricing
precise conditions, “small Ramsey numbers cannot
techniques, to the multiproduct case, which would
be used to refute the charge that the firm under scru-
show the real Ramsey pricing.
tiny is actually a profit maximizing monopolist mas-
Basically, through the analysis of the dynamic
querading in Ramsey clothing” (Brock W. A. and
case we will reach the conclusion that in the case of
Dechert W. D., Dynamic Ramsey Pricing (Interna-
just one service provided – that means, for a normal
tional Economic Review, Vol. 26, No. 3, October,
average cost second-best solution – there will be one
1985), 578).
threshold value (due to the assumption of the single
Finally, we will show that a regulated firm can
inflection point of the benefit function) of immobi-
often produce a falsified signaling indication of its
lized investment (i.e. capacity) which is the limit to
costs, without the intent of trying to trick regulators,
be passed by the initial capacity (that is, the bound-
which ultimately could result in regulators suffering
ary condition in the dynamic system) if a provision
from an asymmetry of information.
of the service in the long run is required. Conversely,
an initial investment below that point would lead
Overall methodological assumptions
to an extinction of the service provision. What is
Throughout the analysis we will refer back to the
really new in the work of Brock and Dechert (1985)
main results of Brock and Dechert (1985), using their
is that, allowing for internal increasing returns into
scheme as a guide.
an adjustment cost model, they found that every
1. On the choice of the budget-constraint
time-evolving investment plan will not necessarily
and the nature of financial markets
converge just to a positive steady state, but either
We will operate under the assumption that the
to a positive steady state or to zero. In other words,
present value of net future cash flows needed to
economies of scale will allow the natural monopo-
achieve a target level can be fixed following the op-
list to evaluate whether, given the market conditions,
timal forecast built up on the full information, ra-
it will be convenient for them to produce a certain
tional expectation of today. In order to follow this
product at all. It follows that a convergence of the
possibility, it will be necessary to assume perfect
investment over time to zero will require, in the case
financial markets, which is what we will do.
of one product, the exit from the market of the firm
Therefore, for the sake of our inquiry and given
that we will work with discounted values of profits
and, in the multiproduct case, the abandonment of
the production of some products.
and benefits, it will be necessary to introduce a de-
It is more convenient to analyze the one prod-
preciation rate and a discount rate, which we will do
uct case first and then to expand its results. This
pro tempore and in keeping with the hypothesis of
is because the idea of the threshold boundary con-
perfect financial markets.
ditions is applied to the single market in which the
2. On the evolution from the one-prod-
firm operates and not to the firm itself, which makes
uct to the multiproduct case
it possible to extend the conclusion reached in the
first part.
Winter 2016 – vol III. no. I – www.csbusinessreview.com
25
Ramsey Pricing: A Brief Review of the Distortions on the Supply Side
3. On comparative dynamics
Brock and Dechert (1985) concerning the regulat-
It will be necessary to briefly understand the na-
ed-firm scenario is that – according to a list of as-
ture of the above mentioned threshold values. While
sumptions on the nature of the benefit function (see
in the static model a monopolist may decide to stay
Appendix) – any optimal intertemporal investment
in the market if its profits are bigger or equal to
path follows monotonic changes in the level of used
zero – and that is the case with Ramsey pricing – in
inputs, and it will converge, in the long run, to a
a dynamic context the monopolist will look at the
steady state that can be either a positive value or zero.
economic convenience of producing at a steady state
As one might notice, the greatest difference from the
level or of completely cutting off the provision of
ordinary theory is that, since the authors develop
some goods.
an Adjustment Cost model allowing for increasing
However, we will overlook all the arguments
returns to scale, the presence of economies of scale
on the speed of adjustment toward the steady state
makes it possible for the regulated firm to slightly
production (i.e. overlook the arguments of Brock
reduce its investments over time to a zero-level as
and Dechert (1985) on the convergence speeds and
well. This happens because, as an increase in the
patterns since they are too technical for the purpose
input progressively drives the marginal benefit down
of our analysis).
so that it becomes uneconomical to leave the input
levels superiorly unlimited (in other words, to keep
Part I – Average Cost Pricing
increasing the inputs cannot be an optimal strategy),
Effects on the supply-side: the Ramsey
there might be a level of initial capacity (henceforth,
numbers as misleading pricing indications
boundary condition) below which it will be conve-
Our purpose for this first section is to recall the
nient to exhaust the future investment. The presence
thesis of Brock and Dechert (1985) that argues that
and the amount of the threshold value that limits the
the overtime pattern of the investment paths in the
convenience to promote further investments come
case of a natural monopolist (i.e. in the presence of
from the nature of the benefit function: in the case
IRS) is the major determinant of the distortion in
of a strictly concave benefit function all the optimal
a regulator’s evaluation of Marginal Costs, which
investment paths would have converged to a positive
in turn creates a deviation in the Ramsey numbers.
steady state, but in our case, the presence of an in-
These, therefore, from a certain moment on provide
flection point makes it possible to have two different
an imperfect indication to the regulator themselves:
convergence equilibria, adding also the possibility
in particular, we will outline how a profit-maximiz-
of some investment paths converging to the origin.
ing monopolist might potentially show a λ < 1 for a
However, this could be only viewed as a ceteris
certain market if its investment is expanding – that
paribus condition, meaning that the firm will also
is, converging to the positive steady state – on that
consider as useful parameters of choice the current
product.
discount and depreciation rates in the market.
Optimal paths in the intertemporal investment decision
26
To understand the rationale behind this argument we have to build up the dynamic system of
First of all, it is necessary to explore the dynam-
investment choices. To do that, it is necessary to con-
ics of the investment decisions inside the regulated
sider that the Gross Investment Cost (the investment
firm. One of the main insights given in the piece by
is supposed to depreciate at a rate δ such that 0< δ <1)
Winter 2016 – vol III. no. I – www.csbusinessreview.com
Ramsey Pricing: A Brief Review of the Distortions on the Supply Side
a utility or a big regulated company has to face, in a
However, the number, the nature and the posi-
dynamic perspective, becomes an Adjustment Cost
tion of the equilibria are determined by the shape
that takes into account both the constant per-unit
and the position of the curve, and so by the size
cost of the investment (It) and some costs of instal-
of the two market factors the firm can currently
lation (c(It)), which are assumed to grow with the in-
observe. In particular: (i) when the rates of interest
vestment level as it was assumed to do by Brock and
and depreciation are very high, and so the above
Dechert (1985) (i.e. c(It) is a strictly convex function,
mentioned curve stays entirely below the MC curve
or more precisely, c(0) =0, c(I) ≥0, c’’(I) >0).
and its intercepts, then the optimal level of invest-
In the end, the social optimum pattern of invest-
ment converges to zero, meaning that in the long
ment of the natural monopolist will be the solution
run it is not worth investing anymore; (ii) when the
of the dynamic optimization:
rates are very low (say, the B’ curve is always above
MC except for one incidence point) as B’ is concave
then the optimal level of investment converges to a
positive steady state, which means that in the long
run it is worth investing some more, though at a con-
whose solution, as we said, converges monotonically either to a steady state or to zero.
The general steady state from the Euler equation
stant rate; (iii) if the rates are such that there are two
solutions and so that there are also two steady states
(one incidence point between B’ and the Marginal
Costs but B’(0) < 1), there will be a threshold value of
is:
investment (i.e. the projection of the incidence point)
such that if the boundary condition of the dynamic
from which we can derive the relation:
system – that is the fixed level of capacity in the first
period – is over the threshold, then the system will
converge to the positive steady state, whereas, if it
The equality, where r is the real interest rate and
is below that same threshold, the optimal path of
δ is the depreciation rate, is telling us that the capi-
investment will converge over time to the equilib-
talized (i.e. discounted and residual from deprecia-
rium in zero.
tion) marginal benefit equals the price (here, unity)
The regulator misperception of Mar-
plus the marginal discounted cost of Investment.
ginal Costs: a measurement bias
Thus, the observation of Marginal Costs is the
The value of a Ramsey number largely depends
crucial point both in the single-market setting and
on the measured Marginal Costs, so that a measure-
under the Ramsey rule. Moreover – as anticipated
ment error can lead to very different results. Indeed,
– the innovation by Brock and Dechert (1985) con-
it is of the utmost importance that a distinction is
cerning the introduction of an increasing returns
drawn between the actual value of Marginal Costs
pattern in an Adjustment Cost model now makes the
and the perceived value of Marginal Costs as per-
scenario of an optimal reduction of the investment
ceived by regulators.
down to zero possible, which means that zero can be
There are two different kinds of Marginal Cost
a steady state equilibrium of the previous dynamic
biases, one active and the other passive. Firstly, the
system (see Appendix for more information).
natural monopolist could have a tendency to pro-
Winter 2016 – vol III. no. I – www.csbusinessreview.com
27
Ramsey Pricing: A Brief Review of the Distortions on the Supply Side
vide a falsified representation of its Marginal Costs
(i.e. a case of distortive signaling). In the second
instance, there could be a lack of information on
the regulator’s side; the regulatory agency is sup-
tive term 𝐸t. This missing information will cause a
discrepancy between the measured Marginal Costs,
as calculated by the regulator, and the real Marginal Costs of the firm.
While the dynamics of 𝑀𝐶t is
posed to be able to know through observation the
quite natural – as it measures the current marginal
price of the product, the technology of the firm and
opportunity costs, both of the fixed component and
also the market conditions, but it could not always
of the adjustment component – the term 𝐸t requires
be capable of gathering information on the Adjust-
information about the upcoming investments at t+1
ment Costs, which remain a substantial part of the
to be computed at time t, which is information that
infrastructural Marginal Costs over time. For the
is only accessible to the firm.
sake of simplicity, the paper will focus on the real
So, we have underlined an investment-path sensi-
measurement bias, and so on the distortions in the
tive component of the Marginal Costs, but how does
measurement of the Adjustment Costs.
𝐸t practically change?
What we want to show is that knowledge of the
level of interest and depreciation rates will not pre-
A first and useful observation is that, as 𝐸t ac-
counts for the upcoming changes in the investments
vent the regulator from misinterpreting the Margin-
and in a steady state – either if it is positive or zero
al Costs. The market rates are part of the distortive
– there are no more changes in the investment (i.e. for
determinants that go into calculating the Adjust-
𝑡 → ∞, It+1 – It = 0, for the definition of steady state),
ment Costs, and it can be shown how the estimated
Ramsey numbers – both in the single-product and
in the multiproduct cases – would result in numbers
too small for a firm which is increasing its investment over time.
it will hold that 𝐸t = 0 in the long run. Therefore, in
the long term, the regulator’s measure of Marginal
Costs will be sufficient.
The problem is with the short run, the period
in which the pattern of investment is changing the
The main reason for that is the spillover effect
most and where 𝐸t is likely to have the greatest size;
caused by the presence of scale economies in the
in particular, if in the short term It+1 – It > 0, or It+1
production: they are the cause for the distortive
> It, then 𝐸t is negative, while if It+1 – It < 0, and so
“biases in the practical measure of Marginal Costs
and Ramsey numbers” (Brock and Dechart, 1985,
p. 578).
It+1 < It, then 𝐸t is positive (for more information,
see Appendix).
This is indeed the turning point: the time-sensi-
We will now try to provide a more formal expla-
tive component of Marginal Costs, that is unknown
nation of this argument. First of all, it is possible to
and non-perceivable by the regulator, has appeared
imagine the dynamic Marginal Cost as consisting of
to be negative in the presence of short-term expand-
two components, one that takes into account only
ing investment and positive in the presence of short-
the information available at time t (𝑀𝐶t) and a sec-
term contracting investment.
ond one that also includes some future information
A self-reinforcing error: how the regulator
(𝐸t):
will not recognize that they are mistaken
As we define the Ramsey pricing equation as:
The problem arises from the fact that no one
except for the firm itself might know the perspec-
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Winter 2016 – vol III. no. I – www.csbusinessreview.com
Ramsey Pricing: A Brief Review of the Distortions on the Supply Side
it follows clearly that, ceteris paribus, any alteration of the Marginal Costs would affect the size of
to their measure of the Marginal Costs – the firm is
regulated and the markup optimal.
the shadow indicator lambda.
The practical implications of this simple asym-
Part II – Ramsey Pricing
metry of information might be enormous. For in-
Brief extension to the multiproduct case:
stance, imagine now a regulator who has to set a
biased Ramsey numbers (for a more in-
‘fair’ price in a single-product market. They want to
depth analysis, please see the last part of
ensure sustainability for the monopolist operating
the model by Brock and Dechert (1985))
there, but at the same time want to limit the damag-
The regulator who follows the Ramsey rule liter-
es on the welfare of society (i.e. the distortive impact
ally would charge a different sustainability-markup
of the second-best). They will then set a price p such
on every product, such that each markup would be
that the markup on the left hand side of the previous
inversely proportional to the demand elasticity of
equation is big enough to cover all the costs faced
its own market. Normally, it would be necessary
by the firm – so that it can easily break-even, as a
to raise prices more on the products that are more
zero profit condition would have implied losses for
inelastic to price variations, but in the case of the
the company.
multiproduct case, the problem appears to be that
The idea is that the regulator – recalculating ex
the inverse proportionality factor between the mark-
post the value of the Ramsey number – will be able
up and the market demand elasticity is exactly the
to say, at a glance, whether the firm is respecting
lambda. The consequence is that the main concerns
the regulated setting or not. An increased lambda
regarding the distortions in the simplified setting
would mean that the monopolist is increasing the
will come out again in the multiproduct setting.
markup, stealing surplus from the consumer. Until
Independent of the level of elasticity of the con-
the responsible authority is capable of controlling
sidered demand, it might happen that over some
the price level and so monitoring the market power
products the firm will be able to raise some more
of the firm, the policy should work quite well.
profits while also losing more than expected on oth-
But everything changes when we introduce the
er margins. If we overlook the specific cost structure
distorted Marginal Costs. In the case of a firm fac-
of the firm itself and the market conditions, we will
ing increasing investment, the regulator will now
not be able to say whether the firm will find it more
overestimate the Marginal Costs (as we know that
convenient to invest more on inelastic markets or
increasing I(t) implies a negative value of 𝐸!, which
vice versa, but it is still possible to speculate on the
should in order to assure, as he did in the previous
- firstly, we might observe an overestimation of
example, the required level of sustainability markup.
the Marginal Costs on a
relatively inelastic product:
The implication is that the firm will be able, in
the regulator will impose a higher price (i.e. they will
the short-run, to gain more in terms of its surplus
grant a higher markup) because of the inelasticity
than it expected to, earning more profit than expect-
of the market demand, that here will be made even
ed. What is disruptive, however, is that the regulator
higher because of the costs overestimation. That is
is neglected by the regulator). The regulator would
four possible scenarios of qualitative comparative
thus be keen on raising the prices by more than they
static that might occur for any random product:
would not recognize such a reality since – according
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Ramsey Pricing: A Brief Review of the Distortions on the Supply Side
– in terms of effects on consumers – the worst con-
the undeservedly higher price will produce more
dition, as the margin-increasing effects are doubled;
harm for those consumers whose consumption is
- secondly, we might observe an overestimation
oriented particularly on that market (e.g. increased
of the Marginal Costs on a relatively elastic product:
prices for necessity goods hurt low-income consum-
the Ramsey markup would be lower because of the
ers), and at the same time it would result in increased
higher elasticity, but the overestimation of the costs
product-specific returns for the producer. In the op-
would produce a countertrending effect that would
posite way, in the case of an underestimation of the
raise the regulated price; there might be some com-
Marginal Costs on a relatively elastic product, there
pensation between the two effects; would be, on the one side, a loss for the monopo-
- thirdly, we might observe an underestimation
list due to too low of a markup (which might most
of the Marginal Costs on a relatively inelastic prod-
likely entail market-specific financial unsustainabil-
uct, for a situation that is specular to the previous
ity) and, on the other side, an improvement in the
one: on the one side the lower elasticity would re-
consumer surplus deriving from the greater discount
quire a higher markup, but, on the other, the un-
on price.
derestimation of Marginal Costs would make the
But this is only an example since it would be
regulator not raise the price enough, possibly mak-
necessary to evaluate on a case-by-case basis the
ing the firm worse off in that market. The overall
economical convenience of every investment deci-
effect on the firm’s returns will depend, of course,
sion, thus it is not unlikely to imagine a scenario in
on the relative dimensions of the two effects, as in
which a firm could find it more feasible to increase
the previous case;
the future investment on one of the more elastic
- finally, we might observe an underestimation
of the Marginal Costs on a relatively elastic prod-
demands, carrying the oversized distortion over to
another class of consumers.
uct, which would produce, on the one hand, a low
Now it should appear clear how all of the add-
Ramsey markup according to the elasticity rule and,
ed distortions consist of a surplus redistribution, or
on the other hand, an even lower regulated price
welfare shifting, and thus how difficult it is to ex-
due to the cost underestimation. Here, in the short-
press an impartial opinion on the topic, given the
run, the firm will face instead product specific losses,
fact that every point of view would implicitly sus-
that might imply some more financial distress on a
tain either the cause of the producer or the one of
market where the investment is already being driven
the consumer. Therefore, we will not express any
down to zero.
further consideration on the distribution of the wel-
In the end, if we try to consider the redistributive
fare deviations, as it would fall outside of our initial
effects on welfare of the four depicted scenarios, it
purpose, and it would imply a value judgment not
will follow that – while in the two intermediate cases
appropriate for this paper.
the two effects of elasticity and wrong measurement
might compensate each other – in the extreme cas-
Conclusions
es instead there would be a tangible deterioration
At this point, the reader should have noticed that
either of the producer surplus or of the consumers
there are two main protagonists in our analysis:
surplus. Indeed, in presence of an overestimation of
time and information; and that the combination of
the Marginal Costs on a relatively inelastic product,
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Ramsey Pricing: A Brief Review of the Distortions on the Supply Side
these two ingredients produces an interesting example of distortive asymmetry of information.
As mentioned since the beginning of this paper,
we have not any corrective intention in the contents
of this paper: the Ramsey rule – if used in the right
regulated environment and if accompanied by careful market observation and cost analysis by the regulator – still provides a good measure for controlling
monopoly prices.
Instead, the final purpose is perhaps to encourage
some further consciousness of the problems deriving
from the practical application of a second-best method in a scenario that goes beyond the paper-drawn,
one-period approach. Indeed, the main point is that
regulators could perhaps try exercising tighter control in the short- run, when they know that their perception of the firm’s Marginal Costs could be subject
to particularly high variance. Just taking this idea
into consideration, the transitory distortions due to
the unexpected redistributive spillovers in the short
term could possibly be smoothed.
A final message
In the end, Ramsey pricing is a policy rule. To set
up a good policy – which could be at the same time
both responsive to changes and positive in its welfare impacts – the regulator must take into account
much more than the current state of the world. The
higher the number of determinants and the longer
they will be considered, the more precise and reliable
the result will be.
- University of British Columbia
Winter 2016 – vol III. no. I – www.csbusinessreview.com
31
Ramsey Pricing: A Brief Review of the Distortions on the Supply Side
Appendix
1. Provided here is a brief list of all the assumptions behind the Benefit Function: (1) the form of
B(x) is:
idea behind the component 𝐸t is that it takes into account the marginal savings due to the already immo-
bilized investment, which will result in the presence
of an expanding investment pattern (that explains
where D(q) is the inverse demand for input x and
q=f(x) is the production function;
(2) B(x) has an in-
why 𝐸t is negative in I is growing over time; a ‘negative’ cost component is indeed a form of saving!)
flection point before which it is convex and only after
which it becomes concave;
(3) the derivative of B(x)
in the right neighborhood of 0 is < ∞;
(4) as x tends
to ∞, then price goes to 0.
Another background assumption is that the input used in production is just
one, say x, and that it is used as a numéraire for all
the analysis instead of using directly I as the optimization function.
2. A great graphical analysis of the phase-diagrams is provided by Brock and Dechert (1985).
There it is easy to see that, given:
the line, and so both the marginal adjust-
ment costs and the price as constraints;
the two rates (r. of discount r and r. of de-
preciation δ) of the market, and so the shape of the
marginal revenues line. With that information, de-
pending on where the initial level of input for the
investment is set, the over-time path of investment
may converge (in equilibrium!) to either zero – or
the vertical axis – or to the intersection with the cost
line – i.e. the positive steady state. See page 576 of
Brock and Dechert (1985).
3. The hypothesis concerning the dynamic cost
structure assumed in Brock and Dechert (1985) is
that:
It accounts for the price of inputs and the cost
of installation, all discounted and depreciated. The
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Ramsey Pricing: A Brief Review of the Distortions on the Supply Side
References
We feel compelled to remark again that our
primary source of information, inspiration
and examples has been the work by Brock W.
A. and Dechert W. D., Dynamic Ramsey Pricing
(International Economic Review, Vol. 26, No. 3,
October, 1985). All the other cited pieces have
been read and analyzed; every voice in this bibliography was food for thought and a helpful
insight on how to find our own perspective on
the problem. The most technical parts of some
papers have been overlooked for their high
complexity.
1. Baumol, W. J., & Bradford, D. F. (1970). Optimal Departures from Marginal Cost Pricing. The
American Economic Review, 60, (3), 265- 283. 2. Boiteux, M. (1971). On the Management of
Public Monopolies Subject to Budgetary Constraints. Journal of Economic Theory, 3, 219-240. 3. Brock, W. A., & Dechert, W. D
(1985). Dynamic Ramsey Pricing. International Economic Review, 26(3). 4. Sheehan, M. (1991). Why Ramsey Pricing is
Wrong: The Case of Telecommunications Regulation. Journal of Economic Issues, 25(1), 26-28. 5. Shepherd, W. G. (1992). Ramsey Pricing – Its
Uses and Limits. Utilities Policy, 2(4), 296-298. 6. Train, K. (1991). Ramsey Prices. Optimal Regulation: The Economic Theory of Natural Monopoly (pp. 115-145). Cambridge: The MIT Press.
7. Vogelsang, I., & Finsinger, J. (1979). A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms. The
Bell Journal of Economics, 10(1), 157-171. Winter 2016 – vol III. no. I – www.csbusinessreview.com
33
The CANADIAN STUDENT ECONOMIC JOURNAL
Changing Perspectives on
Economic Development
BY PETER KOCZANSKI
O
ne of the greatest problems with economic de-
(Hong Kong, Singapore, South Korea, and Taiwan)
velopment today is that countries are expected
all have in common is that they grew very quickly
to fit a developmental mould. An influx of capital is
and now their people are incredibly better off for
supposed to make them grow – that’s why countries
it. Even given the problems Japan has faced over
around the world provide tens of billions of dollars
the last two decades with deflation, its situation is
of development aid to nations each year. However,
markedly better than what it was prior to its spike in
as Peter Bauer, a former professor at the London
growth which started in the 60s. What many derive
School of Economics and the 2002 Friedman Prize
from these episodes of growth is basic tenets of the
winner, points out, what happens in reality is quite
neoclassical model; people see an influx of capital,
different; an influx of capital does not create growth.
and an increased efficiency in the use of capital – in
In fact, Bauer says, “If all conditions for develop-
particular, human capital. This model for develop-
ment other than capital are present, capital will soon
ment, is then cross applied as a general rule; people
be generated locally, or will be available … from
expect amazing growth if you pump enough money
abroad. … If, however, the conditions for develop-
into a country. The reason is quite simple: people
ment are not present, then [external capital] will be
look for the style of development that would best
necessarily unproductive and therefore ineffective”
suit them and the East Asian model looks incred-
(Bauer, 1976). If this is indeed true, why then is there
ibly great. However, the aforementioned analysis
a collective consensus that more capital equates to
of East Asian growth is incredibly simplistic. When
more growth? The reason for this is simply a flawed
one takes a look at endogenous factors of growth,
conceptualization of economic development that
it becomes incredibly clear why Asian development
comes from a focus on anecdotal evidence.
ought to be seen as the outlier as opposed to the rule.
First, to explain the amazing growth of Asia there
34
Growth in Asia
are several things we must consider. Prior to Chi-
The most impressive growth seen in the last few
na’s development, there was the rise of the Asian
decades has been in Asia; we observed the rise of
Tigers. The existence of these countries provided
the Asian Tigers along with amazing growth in
China with a means to access not only technical in-
China and Japan all within the last seventy years.
formation but also follow a model for development.
Growth pushed into the double digits, and in some
Contagion of growth played a role in development.
cases is just slowing down now as is the case with
In general, a “flying geese” model of development
China. What China, Japan, and the Asian Tigers
took place in Asia (Ginzburg & Simonazzi, 2003);
Winter 2016 – vol III. no. I – www.csbusinessreview.com
Changing Perspectives on Economic Development
essentially a ‘lead’ country creates a slipstream for
this broadly covers the main ones. The key takeaway
others to follow. This first happened when Japan
from this explanation, is that the situation in which
moved labour intensive manufacturing to the Asian
China saw massive growth is incredibly dissimilar
Tigers, and then the Asian Tigers outsourced that
from the context that many underdeveloped coun-
to China roughly a decade later. Regional growth
tries are living in today.
is thus self-perpetuating and played an important
Moreover, the growth of the Asian Tigers is sim-
role in what happened in Asia. Next, it is important
ilarly explainable. A cultural focus that rewarded
to note that there was a strong culture of education
hard work, and prioritized innovation by not stig-
within China. Parents believed it was incredibly im-
matizing the innovator created an environment more
portant to get one’s children educated – as such in
conducive to growth. Strong educational institutions
a very short amount of time you were able to get an
also played a large role in facilitating growth and so-
incredibly educated workforce (Chen & Uttal, 1988).
cio-economic liberalization. Most importantly, how-
Third, there existed massive inefficiencies in the al-
ever, and this also applies to China, is that there was
location of human capital prior to growth – people
political stability. In fact, even today, these countries
were literally doing nothing. Farms in China were
are found to have moderate rates of susceptibility
woefully inefficient because of communist policies
to political instability as found by The Economist
and as such China was able to keep production at a
(The Economist, 2011). Political stability creates a
desired level simply by creating an incentive system
favorable climate for private enterprise, and creates
through a free market. China “created a ‘household
a situation where efficiency can be maximized as
responsibility’ system that allowed farmers who had
security concerns are less present. Continuity in gov-
fulfilled their production quotas to sell any extra
ernment policy, and acceptance of the rule of law are
produce at market prices. Agricultural yields (con-
also conducive to growth. To summarize, what you
sequently) exploded” (Bremmer, 2010). Thus, a mas-
get from Asian countries is quite clear: there were
sive shift of human capital occurred which increased
incredibly favourable conditions for development,
productivity in other industries. Fourth, the previ-
ones that haven’t been seen since.
ous existence of a quasi-free market meant it was
easy for Chinese individuals to participate in a na-
Mexico: A More Sustainable Path to Develop-
tion-wide market: capitalism came easy. Fifth, there
ment?
was a massive ‘opening up’ of China which caused
So what then is a more accurate, or say normal, path
an influx of Foreign Direct Investment (FDI) and
to development? One of the most realistic examples
trade, and also allowed for the spread of knowledge.
in this regard is Mexico; it is a country that has been
The Chinese government facilitated the creation of
able to bring about a relative impressive amount of
special enterprise zones that created safe havens for
modernity but still struggles to deal with issues like
foreign entities. As Ian Bremmer puts it, “the spe-
widespread poverty which prevent it from growing
cial economics zones helped cities like Shenzhen and
out of its status as an emerging market. This is de-
Guangzhou transform almost overnight from stag-
spite the fact that Mexico has followed through on
nant backwaters into modern manufacturing pow-
the policies which economists suggest for developing
erhouses” (Bremmer, 2010). There are many more
markets; it has opened oil to private investment and
factors that influenced Chinese growth; however,
works on preventing local monopolies. The current
Winter 2016 – vol III. no. I – www.csbusinessreview.com
35
Changing Perspectives on Economic Development
Mexico City: Wikipedia’s article “Metropolitan areas of Mexico”
Source: https://en.wikipedia.org/wiki/Metropolitan_areas_of_Mexico
government has continued fights against police cor-
icans of the upper social strata. Consequently, even
ruption and the cartels. Yet, since 1994 income per
if the average Mexican citizen manages to become
head has barely grown at the rate of inflation and
well educated, they often have to go into a job they
half the Mexican population remains in poverty
are overqualified for because there is nothing else
(The Economist, 2015). This can be attributed to
available to them1. The lessons we learn from this
the fact that Mexico still faces three main problems:
model of development are even more meaningful.
there exists a lack of infrastructure, an informal and
First, the rate of growth and development which
unreported economy, and finally, the push for ur-
we should expect in countries should be far slow-
banization coupled with a rent-seeking labour mar-
er than those we saw in Asia and the Asian Tigers.
ket with social origins has meant any educational
The gains we see in countries should be measured in
attainments Mexico has are fruitless (The Econo-
decades, not years, and we should appreciate slow
mist, 2015). As a study at the Center for Hemispheric
long run growth as it too eventually leads to mod-
Policy points out, the problem with Mexico’s education is not a lack of government spending or even
36
1
The preceding few sentences can be at-
low graduation rates. Rather, the quality of educa-
tributed to the following source: Heredia,
tional outcomes is generally low. Moreover, social
Blanca. Mexico's Education Problem: Low Re-
origins of the labour market mean that jobs for the
turns to Merit. Centre for Hemispheric Poli-
highly educated are almost solely reserved for Mex-
cy. University of Miami, 2010. Web. Nov. 2015
Winter 2016 – vol III. no. I – www.csbusinessreview.com
Changing Perspectives on Economic Development
ernization and development. Moreover, the interna-
ity in policy. The problem is that these changes are
tional community ought to divert capital directly to
not just short-term fluctuations, but rather almost
the development of local infrastructure. However, it
institutionalized fluctuation which has been going
is also important to appreciate that in many cases
on for decades. That inhibits growth. Moreover,
no matter what we do in terms of assistance, trust
corruption causes distrust in the government which
in governance, stability, and the context for growth
prevents any real rule of law. Governmental and
are things which must appear naturally. As Gordon
political instability can be devastating, hard to fix,
Brown suggests, “in establishing the rule of law, the
and set back growth. The recent Mexican instability
first five centuries are always the hardest”. A peace-
shows itself in the growth data - Mexico’s growth
ful situation for growth to happen is something that
rate is currently half (2.1%) of what it was in 2012
can take an incredibly long time to occur.
(4%) (World Bank, 2015).
Moreover, instability has been particularly damaging to Mexico; in fact, the term of the most recent
Lessons on Economic Development
Mexican president, Enrique Peña Nieto, is a par-
The lessons we’ve drawn by finding a more accu-
ticularly damning case study. During his first year
rate portrayal of development can be most directly
and a half in power, Peña was able to enjoy rea-
applied to development right now. The approach to
sonable success. He passed bills to increase private
development in Africa and the Near East, ought to
investment in Mexico and created robust structural
be one that focuses less on providing large amounts
reforms. For example, Peña nearly doubled domestic
of development aid to governments who never let it
financing to the private sector (Embassy of Mexi-
reach their people, and rather should be one that fo-
co in Belize, 2014). This means that more financial
cuses on creating an atmosphere which is conducive
resources, such as credit, became available to the
to growth. One possibility is to try to take African
private sector and thus enabled business creation to
countries which have successful manufacturing in-
proliferate. However, the past two years have been
dustries right now and trying to mold them into the
particularly damaging. First, came the murder of 43
lead goose of the East Asian model. For example,
student teachers in September 2014 by drug traffick-
in Ethiopia, manufacturing has grown by a double
ers who were working with local law enforcement.
digit average over the last decade or some because
Then there was the fact that government contracts
of its ability to draw FDI (The Economist, 2015).
had been given to a construction company who had
However, even if this approach were to be taken, it
assisted the finance minister in the acquisition of a
would still draw problems for broader African de-
luxury home. This series of events has swayed public
velopment. First, there is a dearth of infrastructure
opinion against Peña which has now made it more
for manufacturing – there is a reason manufactur-
difficult for his policies to be effective. Moreover,
ing is now leaving China and heading to Bangladesh
it has solidified that Mexican democracy can be
and Vietnam as opposed to Africa. However, there
ostensibly weak. Leaders are kept on a short leash,
is seemingly a paradox related to building this infra-
which often stops them from being able to markedly
structure – there is no reason to build it unless work
help the country. Beyond that, frequently changing
is coming; however, there is no reason for work to
governments (it’s expected that Peña’s successor will
come unless it is built. As such, manufacturing and
not be from his own party) cause a lack of continu-
a modified East Asian Tiger approach which focuses
Winter 2016 – vol III. no. I – www.csbusinessreview.com
37
Changing Perspectives on Economic Development
on simulating the conditions which existed in East
Concluding Remarks
Asia are unlikely to succeed.
The current model for development that developed
The best alternative, then, is to target liberal African
nations are trying to impose upon the developing
countries and set up an incentive structure for them
world is unequivocally flawed because it misunder-
to open up and create an environment conducive to
stands the context required for growth to occur.
foreign firms doing business. For example, assistance
However, if a more nuanced conceptualization of
in the creation of special enterprise zones that can be
the endogenous factors associated with growth is
guaranteed to be safe could spark more investment
taken into account, a more realistic model of de-
by foreign firms. Moreover, fiscal policy ought to
velopment can be instilled around the world. It will
be changed; for example, current programs of pro-
undeniably take more time than development did
tectionism and subsidies to lower prices of goods,
in East Asia, but in the long run it will create more
despite being well intentioned, cause a worse world
growth than the status quo does by simply spending
for African’s long run (Euromoney, 2015). As result,
money.
broadly, African governments should cut spending
in this area. That, coupled with higher taxes, would
be able to offset the fact that a large portion of African budgets come from aid money. High taxes are
also feasible given there exists concentrated packets
of wealth in many African nations; the small niches
of expatriates in places, like in Luanda, Angola (the
city with the highest cost of living in the world for
expatriates) (Vanham, 2015) for example, could be
taxed much higher. Oil and mineral wealth have led
to a new class of the super-wealthy in Africa, but in
many cases their income taxes are in the mid-teens
(Trading Economics, 2015); even a modest increase
in the income tax rate could facilitate a rather large
increase in government revenue. Stricter monetary
policy and setting targets for inflation and unemployment are also relatively easy to help facilitate;
it could involve sending a few individuals for institutional guidance, but can also make the African
environment more stable and conducive to investment. It is foolish to assume that growth in one of
the most conflict ridden areas in the world will come
uniformly; however, a modified approach to current
international attempts to facilitate growth could
lead to a situation which better resembles the most
ideal situations for growth possible.
38
Winter 2016 – vol III. no. I – www.csbusinessreview.com
- Princeton University
Changing Perspectives on Economic Development
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