Its a Sad Day Today

Milton Friedman died today at age 94. He was, without a doubt, one of the greatest economists in history.

Saudi Inflation

Saudi Jeans mentions an interesting post by Hadeel about inflation. The story she gives is one of corporate greed and opportunism. I have to disagree with that story; I think the reason why prices are going up is because the riyal has been losing value over the past several years and is due for some degree of inflation over the near future.

One thing to keep in mind when discussing inflation in Saudi Arabia is the recent (and likely continuing) depreciation of the dollar against the major currencies of the world. Because the dollar-riyal exchange rate is fixed, the riyal has lost purchasing power against the Euro and Yen. This means that our European and Japanese imports have been getting more expensive, contributing to higher costs of living. For example, when Japanese cars get more expensive, transportation becomes more expensive; the extra cost of transportation must be paid for in part by higher prices to the consumer.

Another important factor, correctly identified by Hadeel, is the recent increase in government wages. When people earn more money, they spend more on consumer goods. Because the provision of products and services is costly, companies require higher prices to be able to supply the additional goods that consumers want to buy. Therefore, the extra spending by consumers causes prices to rise. This is just a basic supply and demand story, which one learns from economics textbooks.

My point is that there is a different story to what is going on, which does not involve evil corporations scheming to screw over the consumer.

But of course Saudi inflation is more complicated than that. The fact that subsidies were reinstated last year on fuels has put some downward pressure on the price level. Another important aspect is the fact that the stock market has shored up so much liquidity over the past few years and people are (still!) reluctant to swallow their losses and leave the stock market.

On the other hand, there is the tremendous amount of public spending underway which will probably exert the biggest pressure on inflation. There is also the fact that real money balances have grown faster that real income over the past couple of decades; the usual textbook model of monetary equilibrium predicts that if velocity were relatively constant, we should have seen some inflation but it was virtually non-existent! (Incidentally, I think this is why Brad Borland had been overestimating inflation in Saudi Arabia in recent years). Has velocity really been decreasing or is the price level index completely rubbish? Why would velocity have decreased? I’m not a monetary economist so I’ll have to pass on these questions.

Finally, the Saudi Monetary Authority did a horrible job of responding to rumours of devaluation over the Eid holiday. That puts some doubt on their commitment to the peg and their overall independence, making it even harder to predict how the price index is going to behave in the future.

أسخف شيء بصراحة

Today's quote of the days is the title of this post, which I found here. See also today's runner up here,

وقال الناقد السعودي في حديث خاص للجزيرة نت إن أي قراءة عميقة للمنتج الثقافي
السعودي، ستجد أنه منتج جبان وممالئ، ولا يقول الحقيقة الكاملة، ولا يمسها من
بعيد، معتبرا أن هذا أمر طبيعي في ظل "ظروف القهر، ووجود سلطة، بل سلطة
اجتماعية ودينية، ومجموعة أعراف وقوانين تضغط على هذا المنتج بحيث تحيله إلى
مجرد لغة أو لعبة لغوية فارغة من المعنى".

which I have to agree with unfortunately.

Sexy Economics

Today I celebrate three months since I submitted my paper to Econometrica, the sexiest economics journal on earth. As a side note, it’s also my birthday.

Finally, a Laptop!

I finally got a laptop today! I’ve been listening to my music all afternoon…oh, how I’ve missed Tool…I’m going to see them live on the 27th at Wembley Arena. I can’t wait!

Corruption in Saudi Arabia

Transparency International’s new report via dokkan.org shows, once again, that Saudi Arabia ranks very low on the corruption perceptions index. I agree with dokkan.org that corruption is rampant in Saudi Arabia; however, dokkan.org thinks the fault lies with the heads of companies as opposed to the employees. While managers certainly are capable of more harmful corruption than their employees, my own experience is that managers are not necessarily more likely than smaller employees to be corrupt. This suggests that the source of corruption affects both managers and employees equally, which in turn suggests that the source must be outside the firm. I think that the source of excessive corruption in Saudi Arabia is legal and cultural.

On the legal side, the average firm has neither the time nor the energy to pursue its corrupt employees or managers; it is just too difficult to catch runaway employees, to fire them, to engage in legal proceedings…etc. So firms opt for more lenient methods like asking corrupt employees to resign with benefits or turning a blind eye to them altogether; this in turn, makes corruption more lucrative – i.e. if I can’t get caught, why not be corrupt? The blame here lies squarely on the Ministry of Interior as I have discussed before.

The cultural aspect of the problem is well known but perhaps much too exaggerated. Family ties are stronger in Saudi Arabia than in most countries. These ties facilitate corruption, particularly in an environment where the rule of law is quite weak. More importantly, however, people respect these ties much more than they respect sound ethical conduct or good citizenship. The reason why I think this aspect is exaggerated is because I think it is subordinate to the legal aspect; that is, if you fix the legal aspects you’ll fix the cultural aspects as well. Good citizenship follows from good government, not the other way around.

Lastly, Saudi Arabia’s CPI index is bad not just because it is an indicator of widespread corruption but because it is (more directly) an indicator of widespread perception of corruption. In a nutshell, if I think corruption is rampant in Saudi Arabia, I'll think twice about starting a business there even if (hypothetically speaking) Saudi Arabia is not that corrupt. Therefore, Saudi Arabia must address not only the corruption issue but also the perception of widespread corruption.

My Second Race

I did much better this time even though I was recovering from a long night of pure debauchery and the weather was really quite cold. I did a 6K in 26:56 minutes, which is a big improvement to the 12kph rate I’ve been keeping since my last race. I think I’ll probably keep this pace.

My Thoughts about the Saudi Stock Market Crash

NYAH HA HA HA HA HA HA HA

Wait, wait…no, seriously…I think

HA HA HA HA HA HA HA HA HA HA HA HA

Ok, ok, I’m getting a hold of myself

HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA!!!!!!!!