Move over US -- China to be new driver of world's economy and innovation

In the face of flagging NSF/NIH grants, coupled with post-911 immigration restrictions and a tepid domestic reception to science education and issues like stem cell research, much has been made of the US beginning to lag behind in scientific research. This study by Georgia Tech indicates that China is a leading contender:

The study’s indicators predict that China will soon pass the United States in the critical ability to develop basic science and technology, turn those developments into products and services – and then market them to the world. Though China is often seen as just a low-cost producer of manufactured goods, the new “High Tech Indicators” study done by researchers at the Georgia Institute of Technology clearly shows that the Asian powerhouse has much bigger aspirations.

I was surprised to read that China now leads the world in the publication of nanotech articles, though the US still produces more citations per article, which speaks of the quality of US publications and is probably what counts more in academia.

As posted previously though, education has traditionally been highly prized in Chinese society, and coupled with China's push on training scientists and engineers who conduct the research needed to maintain technological competitiveness, suggest that it will continue to grow its ability to innovate. In the United States, the twin forces of declining math and science education performance and strong immigration controls may result in decreased research personnel and technical innovators.

It would be interesting to see if societal and cultural change will accompany this blossoming of the creative technical industry in China. Until a further opening up occurs, with active encouragement of independent thought, I'm uncertain their progress will be more than a trickle. Creativity needs a dynamic environment on which to feed - probably these environments already exist in micro-pockets outside the reach of the PRC police. An increase in personal freedoms, accompanied with economic progress and the flowering of the creative industries, would be China's biggest gain and it's triumphant maturation on the global economic scene.

Same goes for Singapore, I hope.

Prediction Markets: how information flows within an organization

Finally got to reading an article shared by chiao. It's an NYT article titled "Prediction Markets at Google: A Guest Post" by Justin Wolfers.

Essentially, it touches on how information flows within a corporation. The author, in collaboration with Google employees, found that sitting within a few feet of a person tended to facilitate information flow between those persons. Sitting on the same floor as someone barely had an effect. Demographic similarity was unimportant and shared interests helped facilitate information. Interestingly, employees did not necessarily consider people they traded information with as friends. Also, personal relationships tended to persist, even when people were moved away from former bay-mates.

I was struck by this: it almost seemed like a economic justification for laboratory rotations, a process I'm undergoing now. First year PhD students in US colleges generally rotate among 3 different labs a year, spending about 3 months or so in each. Some argue it is a waste of time, as students may not begin their PhD project until their 2nd year. During each rotation, they're exposed to different projects, methods and probably most importantly, they meet different people in the department. Consider it accelerated department interaction. As such, first-years are quickly inducted into the department and build a network for information trading. This can only be beneficial for future work in the department. The organization as a whole works more efficiently.

I'll leave you with a quote from the author - does this reflect your academic environment? :

I don’t know about your firm, but we academics are too self-important to ever sit in cubicles. Our research suggests that this may be unfortunate, and perhaps many of the best ideas in economics never occur, because the idea is waiting for us at a water cooler conversation at which we never arrive. I would love to see my colleagues brainstorm more often and more freely. If we can’t tear down the physical walls between our offices, how can we all change our workplaces to encourage the free flow of information and ideas?

China's biotech industry: An Asian dragon is growing

Long viewed as an artful copier but certainly no innovator, China's foray into the knowledge industries (Biotech here) is inevitable if it is to sustain the roaring growth of its economy. The government has decided to pump money into this ascendant area. Official funding can only go so far though: private venture capital is needed to sustain the long-term growth of the industry. VCs are wary of investing owing to an uncertain financial climate and limited exit strategies.

Notably, the twin Asian giants, China and India, have different strategies regarding biotech: India's efforts are largely on process innovation to improve affordability of existing products while China is gunning for big new products. Both are equally important and laudable and it will be interesting to see which strategy proves to be more successful.

It will also be interesting to see how Chinese scientists might leverage on their vast heritage of Traditional Chinese Medicine (TCM) therapies and use western-style science to legitimize TCM in the international therapy scene, where it is still viewed as pseudo-medicine. Increasingly already, I see many papers on Pubmed on the biochemical mechanisms through which various chinese herbal medicines work on curing diseases. (An example here). The approach works well : Chinese medicine loses its mystical aura and gains from a rational, systematic approach that is verifiable, and the world gains from a vast array of ancient medical knowledge.

The article also discussed returning "sea turtles": Chinese scientists and entrepreneurs trained overseas who return home with scientific talent and international credibility. ("Whales" anyone?) This "reverse brain-drain" was also important for Taiwan's huge dominance in the electronics industry. Might we see the same thing here? Taiwan has had the benefit of an exuberantly democratic political climate though - will China's repressive policies prove to be a stumbling block?

The original Eurekalert article here.

The argument against Conscription

I stumbled across an extremely interesting article on conscription today. The same Bryan Caplan @ Econlib, who below praised Singapore's reduction of employer's CPF contribution as a way of reducing labor costs, asserted that he would not move to Singapore for the simple fact that it has military conscription.

Beyond his lambasting the unpleasantness of military service - "State slavery/full-time Physical Education" - he mentions briefly the existence of textbook arguments against the draft as economically inefficient. Now, that's potentially a rational argument, more substantial than the usual griping I was used to during my time in the same "hell on earth". He links an August 2005 paper by David Henderson titled "The Role of Economists in ending the Draft".

The Henderson paper gives a rather longwinded account of the historical events leading up to the abolishment of the US draft system in the early 1970s. What I found most interesting were the nuggets of economic arguments buried in the history-noise. For instance, one of the first empirical studies of the economics of the draft and of ending the draft was apparently produced by Walter Oi, an econ don then at the Uni of Washington and later at the University of Rochester's Graduate School of Management. Oi argues as follows:

Oi distinguished clearly between the budgetary cost of military manpower and the economic cost. Oi granted the obvious, that a military of given size could be obtained with a lower budgetary cost if the government used the threat of force to get people to join—that is, used the draft. But, he noted, the hidden cost of this was the loss of well-being among draftees and draft-induced volunteers. Using some empirical methods that were sophisticated for their day, Oi estimated the loss to draftees and draft-induced volunteers and found it quite high— between $826 million and $1.134 billion. While this number might seem low today, Oi’s data were in mid-1960s dollars. Inflation-adjusted to 2005, the losses would be $4.8 billion to $6.6 billion.

Other economists who contributed to the literature at the time were Stuart Altman (1969), the late David Bradford (1968), Alan Fechter (Altman and Fechter 1967), Anthony C. Fisher (1969), and W. Lee Hansen, and Burton Weisbrod (1967). Their articles appeared in such prestigious economics journals as the American Economic Review and the Quarterly Journal of Economics. The main idea was that "Conscription is a Tax", elegantly described by William H. Meckling, an economist who was head of the Gates Commission and dean of the University of Rochester's Grad Sch of Management, below. In essence, he argues that the opportunity-cost of military conscription on the general population is a non-equitable tax that exacts a greater toll on the poor than the rich. The actual paragraphs are reproduced below:

Any government has essentially two ways of accomplishing an objective whether it be building an interstate highway system or raising an army. It can expropriate the required tools and compel construction men and others to work until the job is finished or it can purchase the goods and manpower necessary to complete the job.

Under the first alternative, only the persons who own the property seized or who render compulsory services are required to bear the expense of building the highway or housing project. They pay a tax to finance the project, albeit a tax-in-kind. Under the second alternative, the cost of the necessary goods and services is borne by the general public through taxes raised to finance the project.

Conscription is like the first alternative—a tax-in-kind. A mixed force of volunteers and conscripts contains first-term servicemen of three types—(1) draftees, (2) draft-induced volunteers, and (3) true volunteers. Draftees and draft-induced volunteers in such a force are coerced into serving at levels of compensation below what would be required to induce them to volunteer. They are, in short, underpaid. This underpayment is a form of taxation. Over 200 years ago, Benjamin Franklin, in commenting on a judicial opinion concerning the legality of impressments of American merchant seamen, recognized the heart of the issue, and even estimated the hidden tax. He wrote: “But if, as I suppose is often case, the sailor who is pressed and obliged to serve for the defence of this trade at the rate of 25s. a month, could have ₤3.15s, in the merchant’s service, you take from him 50s. a month; and if you have 100,000 in your service, you rob that honest part of society and their poor families of ₤250,000. per month, or three millions a year, and at the same time oblige them to hazard their lives in fighting for the defence of your trade; to the defence of which all ought indeed to contribute, (and sailors among the rest) in proportion to their profits by it; but this three millions is more than their share, if they did not pay with their persons; and when you force that, methinks you should excuse the other.

“But it may be said, to give the king’s seamen merchant’s wages would cost the nation too much, and call for more taxes. The question then will amount to this; whether it be just in a community, that the richer part should compel the poorer to fight for them and their properties for such wages as they think fit to allow, and punish them if they refuse? Our author tells us it is legal. I have not law enough to dispute his authority, but I cannot persuade myself it is.

It seems likely though, there are several key assumptions underlying the argument:

(1) a large enough population exists for there to be sufficient numbers of people won over by the monetary incentives to volunteer for the military yet not disable other sectors of the economy.

(2) the supply of people is elastic - the population will respond to incentives to join the military. This is untenable if the population has severe cultural biases against joining the military, like in a population with a majority of Seventh Day Adventists for instance.

Right now, I still can't persuade myself that Singapore's population is big enough for probability to allow a big enough army. Would sufficient incentives (a substantially higher pay, greater prestige) bring in enough people to compensate for the drain from the loss of the draft?

Singapore: "Automatic Stabilizers" Done Right

Here's some rare praise for Singapore on the international scene. There're some merits to a strong government that isn't afraid to do what's fiscally correct and not what's politically expedient. Strong governments are needed to for harsh corrective measures. For instance, think of India's feticide problems: strong laws and active enforcement are needed to break the cruel cycle that roots in the unreasonable dowry each family pays for its girls to be married out, and which ends in active sex selection and feticide.

In a sense, Singapore's government really does strive for the best of both worlds - a strong government with pervasive societal influence and active spending on it's people but also pro-business.

Now, if only the Singapore government would release the wing-clips on the population's political maturity...different forms of government for different stages of a society's growth eh?

From Bryan Caplan @ Econlog,

Imagine my surprise, then, when I discovered that Singapore has figured out a stunningly clever way to use tax cuts to reduce unemployment. Instead of focusing on stimulating demand, Singaporean tax policy hits the margin that matters: labor costs. When there is a surplus of labor, they cut employers' share of the payroll tax (known in Singapore as the CPF). Details appear in Henri Ghesquirre, Singapore's Success:

The government directly intervened to temporarily lower the cost of business in Singapore through... its power to lower the CPF contribution rate of employers...

Elsewhere, substantial nominal currency devaluation is often the last and only resort in the face of downwardly sticky nominal wages, often with higher inflation as an undesirable side effect. In contrast, Singapore uses the direct intervention methods at its disposal. In addition, there is built-in wage flexibility, because an important portion of workers' remuneration is automatically lowered if GDP falls short of target.

With flexible wages, of course, it doesn't matter who legally pays the a tax. But the whole problem with recessions is that wages are somewhat sticky - you can have surplus labor for years before wages fall enough to restore full employment. By cutting employers' share of the tax, the Singaporeans greatly speed up the wage adjustment process.

We should expect the Singaporean system to work very well. Suppose we conservatively assume that labor demand elasticity is only -.4. Then a 1 percentage-point cut in employers' share of the payroll tax will roughly increase employment by .4 percentage-points. With a more optimistic elasticity of -1.0, every percentage-point cut in taxation would raise employment by 1 percentage-point. This approaches the Lafferian dream of tax cuts that fully pay for themselves. (In savings-obsessed Singapore, unsurprisingly, they also raise the payroll tax during booms).

The original article can be found here.