Understanding Economic Development

Here is a great article by Professor Bob Higgs about the ten rules for understanding economic development. Rules 8 and 9 are very critical for economic development of Ukraine.
In general, I find it amazing that we tend to share a weird belief that politicians are somehow impartial or selfless.

American Energy Company AES Leaves Ukraine

Couple days ago I talked to my friend who is investment banker in Kyiv. He simply told me that foreign companies were leaving the domestic financial sector. My friend said: "Foreigners are running. Foreign capital is flying from Ukraine." Apparently, foreign companies are leaving not only banking industry but also energy sector. What causes a negative change in foreign investor's confidence? It's extremely high regime uncertainty.

According to the Yahoo! Finance news The AES Corporation (AES) has an agreement with VS Energy International to sell two of its power distribution businesses in Ukraine. The transaction is expected to close by mid 2013.The company will sell its 89.12% and 84.56% equity interest in AES Kyivoblenergo and AES Rivneoblenergo, respectively. AES Kyivoblenergo provides services to 881,000 customers in the Kiev region and AES Rivneoblenergo serves 412,000 customers in the Rivne region. Here is the rest of this story.

The AES holding power had $18 bln in revenues last year. Its net income, however, was negative, -$1.3 bln. Probably, the AES is just getting rid of bad equity. But what is VS Energy International?

Billionaires

We admire them. We envy them. And we hate them. Billionaires. People who made billions of dollars. They are everywhere from Hong Kong to Ukraine. Hong Kong has the highest number of billionaires per million of people. Nigeria has the lowest. In Ukraine and Serbia it is the same. But what is a relationship between the cross-country concentration of billionaires and economic development?

A very cool paper "Billionaires" by GMU Professor Peter Leeson and Tino Sanandaji from the University of Chicago and the Research Institute of Industrial Economics (Sweden) answers this very important question. Professor Leeson and Dr. Sanandaji write: 

"The results of our empirical analysis are simple but striking. First, self-employed entrepreneurs are associated with poverty, not wealth. In contrast, billionaires are associated with wealth rather than poverty.
Second, the institutions consistent with self-employed entrepreneurs differ markedly from
the ones consistent with billionaires. Where well-protected private property rights and supporting, market-enhancing institutions ‡flourish, so do billionaires. But self-employed entrepreneurs don'’t. Where private property rights are weakly protected and interventionist institutions ‡flourish, so do self-employed entrepreneurs. But billionaires don’'t.

Finally, only the institutions that we find are consistent with billionaires are also consistent with the institutions that underlie economic prosperity. The institutions that we find are consistent with self-employed entrepreneurs are the ones associated with comparative economic poverty."

So what does it mean for Ukraine? Since Ukraine is in the bottom of the list, Ukraine must have more poverty than prosperity. Then Ukraine lacks well-protected private property rights and supporting market-enhancing institutions. Ukraine, however, must have a large number of interventionist institutions. Thus, Ukraine must have more self-employed entrepreneurs than billionaires! Can you disagree with something at all? I can't.

True colors ... of Ukrainian Politicans

That's how Ukrainian politicians were caught on tape recently fighting over the "right" to plunder their fellow citizens. That of course is what an election is, after all: a contest to see who gets the "right" to be the chief thief, plunderer, and destroyer of liberty (ht to Thomas DiLorenzo)

One Third of Ukrainians Had Mental Disorder in Their Lifetime

Here is a very interesting paper about psychiatric and alcohol disorders in Ukraine.
Here is its abstract:
This study presents the lifetime, 12-month, and 1-month prevalence estimates of nine psychiatric and alcohol disorders in Ukraine assessed as part of the World Health Organization (WHO) World Mental Health (WMH) research program. The Ukraine WMH survey is the first psychiatric epidemiologic study in a former Soviet Union country to administer a structured psychiatric interview to a nationally representative sample. Method In 2002, a national probability sample of 4,725 respondents ages
18 and older were interviewed with the WMH version of the Composite International Diagnostic Interview (WMH-CIDI). Prevalence estimates, age-of-onset curves, comorbidity, demographic and geographic risk factors, and treatment seeking were examined.

Results: Close to one third of the population experienced at least one Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition (DSM-IV) disorder in their lifetime, 17.6% experienced an episode in the past year, and 10.6% had a current disorder. There was no gender difference in the overall prevalence rates.
In men, the most common diagnoses were alcohol disorders (26.5% lifetime) and mood disorders (9.7% lifetime); in women, they were mood disorders (20.8% lifetime) and anxiety disorders (7.9% lifetime). The odds ratios for most pairs of disorders were highly significant. Age of onset was primarily in the teens and early 20s. Age, education, and living in the Eastern region of Ukraine
were significant risk factors across disorders, with respondents older than 50 years having the highest prevalence of mood disorder and the lowest prevalence of alcoholism and intermittent explosive disorder. Only a minority of respondents talked to a professional about their symptoms.

Conclusion: Prevalence estimates of alcoholism among men and recent depression among women were higher in Ukraine than in comparable European surveys. The results argue for the need to develop and implement educational programs focused on the recognition and treatment of mental and alcohol disorders for the general population, psychiatrists, and general medical providers, who are the main source of mental health care.

A Lesson of History: From Sir Robert Walpole to President Victor Yanukovych

History can teach us really good lessons. For example, the British history can shed light on the current events in Ukraine and other former Soviet states.
So here is a tough question for you. What do Sir Robert Walpole (1676-1745) and President Yanukovych have in common? If your answer is political corruption, you are the history buff.

In the 18th century the House of Commons was useless link in the British government. The House of Commons stood aside doing nothing when the British government expenditure got out of control. The British National Debt experienced a ten-fold increase over the course of the 18th century.

While the British government was approaching the debt crisis, the government of Sir Robert Walpole, First Lord of the Treasury and the de facto first British Prime Minister (1721-1742), went in all history textbooks as the "government by corruption". Walpole who was the Crown's favorite manipulated individual members of the parliament and the aristocratic groups to wield control over parliamentary nomination. He bought and sold seats in the British parliament. The parliamentary members also received bribes for their votes. The legislative branch of the British government became a commodity that was sold and bought. Does it sound familiar?

So what happened to the pervasive corruption in the British Empire? The government implemented several reforms to eradicate the corruption. Intellectual elite actually pressured the government to change the situation. The main advocate for the change was Adam Smith, Scottish political economist. Yes, the same Adam Smith who wrote the Wealth of Nations (1786). Actually, his seminal work was the foundation for critical review of the British government policy.

The British government had economic advisers who represented the Mercantilist school of economics. The Mercantilist economists believed that international trade can reduce the government debt if the British Empire exports more than imports. The Mercantilists were fools who believed that free market is a zero-sum game because someone always gets hurt. The connection between the Mercantilism, socialism, communism, and interventionism is obvious, right? All these fools believe that free market is a bad institution. By the way, American electronic libraries are reporting a significant increase in online search requests for "the Mercantilist school" from China, Russia, and Argentina.  

Agricultural Staticulation

Staticulation is a manipulation of statistics (ht Darrel Huff). Here is an example. Since 2009 production of corn has doubled in Ukraine. The output of corn increased from 10.5 to 21 mln. tons between 2009 and 2012. Great news! It looks like "free market" economy allocated resource efficiently in Ukraine. 

Wait a sec. The corn yield, however, declined slightly from 5 to 4.8 tons per hectare. If the corn yield declines, the total output of corn must decline too, right? Yes, unless the harvested area increases enough to offset the decrease in the crop yield. Indeed, the harvested area has also doubled since 2009. The harvested area increased from 2.1 to 4.4 mln. hectares. Something tells me that farmers foregoing the conventional crop rotation in Ukraine. To double the cropland area for corn, you need to decrease the harvested area of other crops. Otherwise, where did the additional 2.3 mln of arable land come from? 

Ukrainian Vodka

My friends always ask me what is the best Ukrainian vodka?  I am not an expert. But these two that you can see on the following picture are pretty good.
On the left-hand side of the picture,  you can see Zoloto Polubotka (Polubotka's Gold) vodka. It's made in Lviv. It's pretty pricey because it contains golden flakes in the bottle. Basically, it looks like the Goldschlager schnapps liqueur. But it's still vodka.
On the right-hand side of the picture, you can see Nemiroff Medova z Pertzem (Honey-based with Pepper). Nemiroff is a world-known brand of vodka so it's pretty easy to find it here in European/Russian deli stores. The honey-based Nemirroff with red hot chili peppers has a yellow color because the vodka is infused with honey. It also has a sweet and spicy taste because of both honey and red hot chili peppers. Nemiroff vodka is made in a small town of Nemiroff in Vinitsa province.
Both brands of vodka are from the Western Ukraine. I don't have an explanation for this spatial pattern. And on the final note I have to say that both companies avoid classifying their brands as vodka. The Polubotka's Gold is actually horilka (Ukrainian word for vodka). The Nemiroff considers its vodka a liqueur. As I recall, Poland as the EU members filed a request to patent the vodka brand as a hard liqueur made from potatoes. Since both Ukrainian companies don't use potatoes to make their vodka, these companies can't use the term vodka.


Happy Thanksgiving!

 

Lviv, Lvov, and Lemberg

I always mention Lviv every year when we celebrate Ludwig Von Mises' birthday. Mises who is a famous economist, political philosopher, historian, and social scientists was born in the Jewish family in Lemberg, Galicia province, the Austro-Hungarian Empire. Now, Lemberg is know as .... Lviv, Ukraine. During the Soviet regime Lemberg became Lvov. And now it's finally Lviv.
Anyways, here are very beautiful pictures of Lviv. You should check it out (ht to Roman Skaskiw). You should also follow Roman in Ukraine blog. Roman is an American journalist of Ukrainian origin traveling in Ukraine.

Admin Resource

Administrative resource or admin resource is what Ukrainians say when they refer to government's abuse of power. I had a blog post about how the Yanukovych administration rigged the 2012 parliamentary elections using their admin resource to affect election results in hospitals, prisons, armies, public schools, and the rest of the public sector. Now I can show cool data from NGO Maidan. The following charts show that public support of the Party of Regions and voter turnouts are shooting through the roof at the special polling stations like hospitals and prisons. Basically, if you don't know how it's done, you must see that mainly sick people and prisoners support the Party of Regions.