The Dufour Street Journal, Vol. 3

Volume 3 December 2015

Patience 8–10 The Italian Call for Trust 12–14 How Many Goals Does It Take?

25–26 Of Cashews, Marshmallows, and the Wealth of Nations 28–32 Interview with Dr. Peter Dittus, BIS 1

Foreword Patience is a delicate affair, for it can be sin and virtue. Sin, when it is misused to push aside calls for urgent action, virtue, when necessary to calm down premature ones. At the time of this issue’s publication, the world seems to be in a situation of expectant numbness. The global economy – even though showing signs of revival - is not gathering the kind of speed many economists expected after the Great Recession. Migration, climate change and an apparently fast-growing terrorist threat challenge the way we think about the world and where it is heading.

In this turbulent state, we offer you the opportunity to take a step back. Let The Dufour Street Journal guide you on a journey through thoughts, opinions and insights of students and professors alike. Take a stop at economic reforms in Italy, the UN Sustainable Development Goals, or the Austrian School of economics in this issue’s presented school of economic thought. And learn why patience might be just as important for your dinner with friends as it is for the Wealth of Nations.

Piotr Lukaszuk

Benedikt Lennartz

Impressum © Copyright 2015 The Dufour Street Journal The Dufour Street Journal is an accredited student organisation at the University of St. Gallen, and publishes a bi-annual English-language publication on economics and current affairs.

All opinions are the authors’ own, and are not the reflection of any political, economic or social opinions held by the University of St. Gallen or its affiliates.

Volume 3 Published December 2015, St. Gallen, Switzerland Co-Editors-in-Chief: Benedikt Lennartz, Piotr Lukaszuk, Editorial Team: Alexander Bechtel, Gentiana Imeri, Nikita Khandelwal, Vanessa Volland, Hannah Winterberg Layout, Design: Fanny Oppler Illustrations: Tran Ngoc Thanh Mai Supported by:

Content Economics & International Markets Transitions of the Former Eastern Bloc and the Need for NGOs More Patience or Less Procrastination: When should the Fed raise its rates?

The Italian Call for Trust A plea for patience

3 6 9 11

International Affairs How Many Goals Does It Take?

Climate Summit in Paris – why Patience cannot be the Answer Remember, remember,‌ Modern times

13 15 17 19

Research & Academia Interview with Nina Karnaukh The Illusion of Prosperity Of Cashew Nuts, Marshmallows, and the Wealth of Nations Being Ben Bernanke

21 23 25 27

Careers Interview with Dr. Peter Dittus Think in Alternatives!

29 33

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Economics & International Markets

Transitions of the Former Eastern Bloc and the Need for NGOs Maximilian Ambros and Kosta Shatrov

The Example of a Foundation for Underprivileged Children in Bulgaria On a cold November night four years ago, we, a group of five second-year students, gathered together in our apartment in Berlin to watch the BBC documentary “Bulgaria’s abandoned children”. The film unveiled hunger, poverty, and misery. We witnessed shocking images of the miserable living conditions in Bulgarian orphanages. As the documentary came to an end, a long, suffocating silence enveloped each of us. Having observed the orphaned children showing various symptoms of “We witnessed hospitalism, caused by lack of social activities or shocking images of social interaction, activism replaced our overthe miserable living whelming feelings. From a desire to make the lives of these underprivileged children a little better, conditions in Bulthe foundation “Kinderhilfe Bulgarien e.V.” was garian orphanages.” born.

When thinking about Bulgaria, no clear picture comes to mind. We might think of the East, the Soviet Union, poverty, corruption or maybe just the Spring Break spent at Sunny Beach. Some would recall that Bulgaria was part of the Eastern Bloc, and has been a member of the European Union since 2007.

Bulgaria European Union Poland

GNI per capita, PPP (current USD)

40000

30000

20000

10000

0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Year

Source: World Bank 3

Economics & International Markets Bulgaria is far below the EU-27 average in terms of GNI per capita. When the Soviet Union collapsed in 1991, fifteen countries found themselves suddenly independent and open to international trade. The old political system was replaced by democracies (in most cases), and liberal economic reforms were established to make these countries grow faster and eventually catch up with “the West”. However, if a closer look is taken at the economic performance of these countries over the last 25 years, it is evident that some countries (Slovenia, Slovakia, Czech Republic, Poland) have grown much more than others (Ukraine, Bulgaria, Romania, Serbia, Belarus).

Firstly, all former Eastern Bloc countries experienced a GDP drop in the beginning of the nineties (1990-94). This was due to structural changes and the breakdown of production plants, but also due to misreporting during the old era. Secondly, the dip in GDP varied considerably between countries (-22.9 percent per year for Georgia and -2.2 percent per year for Slovenia). Thirdly, while some of these countries managed to grow again in the second half of the nineties, others had more crises and continued to shrink.

It is particularly interesting to compare the development of Bulgaria to that of Poland. Per capita GDP was similar for both countries in 1989 ($5,150 for Poland and $5,000 for Bulgaria). Over the 1995-99 period, Bulgaria continued to shrink on average by 1.96 percent per year while Poland grew by 5.78 percent per year. After a “shock without therapy” in the 90s, Bulgaria experienced a banking crisis in 1996 with inflation rate exceeding 2000 percent in early 1997. The subsequent adoption of a currency board led to economic stabilisation. GDP per capita was at $1,346 in 1997. On the other hand, Poland’s successful transition and economic prosperity throughout the last decades has remained a topic of discussion over this period of time. The gap between Polish standard of living and the EU-average is disappearing faster than the ozone layer. Moreover, the country has stubbornly ignored each of the last crises, riding on a “growing spree” since 1992.

So, how come this huge difference? Well, one possible reason is the general attitude within the society towards the past.

While Polish people have never been that fond of having anything to do with Russia, the very same country has been regarded as the messiah in Bulgaria. So there was not much wondering which way Poland should take in the early nineties, and it was clear from the very beginning that reforms, being the most straight way to prosperity, were urgently needed. Another reason, perhaps especially popular for fans of the gravity model of trade, may be Poland’s immediate proximity to other Western states – Germany is by far the most important Polish trading partner. Last but not least, independent monetary policy. The Bulgarian Lev 4

is still pegged to the Euro, which might be a major obstacle in bad times when the economy needs to blow off some steam.

“While Polish people have never been that fond of having anything to do with Russia, the very same country has been regarded as the messiah in Bulgaria.”

Agriculture, one of the most important industries in Bulgaria, was radically transformed during socialism (consolidation of land and indus­trialisation) and then shaken by the transition to market economy. With the disbandment of big socialist farmer communities, many people became owners of small pieces of land. Ownership issues posed a great difficulty when it came down to working that land. Agriculture eventually collapsed, and a country that in the past fed a significant part of the USSR became incapable of satisfying its own needs. Moreover, the food industry, among others, was doubly blocked: by the East as a reaction to the politics of westernization (see Ukraine today), but also as a result of a vicious cycle in the West – nobody wanted to import Bulgarian products because they are unknown for many.

Furthermore, production remains hindered because of differences in the environmental standards, not something Bulgaria’s agricultural land can be expected to meet overnight.

One might call Bulgaria “the little Russia”, with good reason; political, judicial, economic and media power are concentrated in the hands of the very same few people. It is no wonder thousands of people went on the streets two years ago daring for more democracy, trustworthiness and fairness, or simplified: more swissness. Taking these things into account, investors might not think twice if they have an eye on the SEE region. With alternatives like Romania, Serbia and Turkey – all of them providing attractive stimuli like interest-free credits or tax allowances for foreign investors – the rather corrupt and inefficient Bulgarian government is not the partner one would like to work with.

Structural problems in the country as well as the presence of political instability and corruption have opened the door for responses from civil society.

NGOs and other initiatives “Structural problems take responsibility for what in the country as would usually be the state's duty. In the last four years, our well as the presence foundation successfully com- of political instabilpleted six projects. One of ity and corruption them is “Integration through have opened the Music”, started with funding door for responses from the EU in 2014. The aim of this initiative is to teach or- from civil society.”

Economics & International Markets phans musical instruments and singing, and then arranging concerts with the children. An opportunity to shine, an opportunity to learn, and an opportunity to break the vicious circle.

All in all, we have worked together with over 500 underprivileged children to fight a more general problem: the ethnic discrimination of Roma in Bulgaria. Over the last four years, we have also learned to be patient. It is easy to set up a foundation, but it is much harder to make people share your vision and donate money. The bureaucratic system in Bulgaria puts additional hurdles on our work. You need cleaning certificates (issued in Bulgaria) if you want to donate toys or clothes to the children, permission is needed for almost any endeavour and a single phone call is hardly ever enough. And even after getting a green light for your new project, patience is crucial if you want to go a long way in your deeds.

“One might call Bulgaria ‘the little Russia’”

“It is easy to set up a foundation, but it is much harder to make people share your vision and donate money”

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Economics & International Markets

More Patience or Less Procrastination: When should the Fed raise its rates?

Piotr Lukaszuk

As the standard macroeconomic textbook would tell you, governments ought to spend, spend, spend in a recession and save, save, save during booms. In the recent government debt crisis in the eurozone, for instance, there is a general understanding that insufficient austerity during the upswing was one of the catalysts for the problems in the eurozone’s periphery.

But whereas Europe is still embroiled in dealing with low growth and deflation, things are looking up on the other side of the Atlantic - and they have been for quite some time.

Hence, the fiscal stimulus “was one of the packages and bailouts by the American government have catalysts for long been wounded down and the problems in court cases with the corporathe eurozone’s tions involved in the subprime mortgage crisis settled. periphery” On the monetary side, however, the Federal Reserve (“the Fed”) is yet to follow suit. The central bank has indeed phased out its quantitative easing programme, but it has not raised its rates in almost a decade. According to recent speculations, the Fed is expected to finally decide to do so in December. It would be about time.

6

The days of notorious bank collapses and last-minute bailouts are long forgotten at Wall Street. Despite some turbulence over the summer, the S&P 500 index has increased by 75 percent since the crash of the Lehmann Brothers (September 15, 2008). According to International Monetary Fund (IMF) data, the U.S. economy has been growing on average by 3.8 percent in the last five years and the unemployment rate has fallen to 5.1 percent in August 2015. The positive trend in the macroeconomic indicators has also been reflected in the strong US dollar.

Despite growth, inflation has remained at low levels. During its September board meeting, the Fed predicted an inflation of mere 0.4 percent in 2015 and achieving its long-term goal of 2 percent only in three years time. The consumer prices have been dampened particularly by the unusually low commodity prices, sparking the debate whether the US central bank should not hold back the rate increase until they recover.

Other worries include the danger that the rate hike will strengthen the dollar even further, thus lowering the competitiveness of American exports. Given the fact that multinational companies are already suffering from stagnating growth overseas, the corporations are hoping the central bank postpones its policy adjustment at least to next year.

Economics & International Markets Nevertheless, exports represent albeit 13 percent of the American GDP and there are reasons to believe that the American dollar has been overvalued for some time, as markets anticipate the course correction. Back in 2013, for instance, stocks and currencies in emerging economies plunged over fears of the wind-down of the quantitative easing programme. When the actual curb took place, markets barely flinched. Similarly, it is doubtful that the US dollar will experience a jump when the Fed decides to act again.

One may also argue that the Fed is not just another central bank but instead controls the most important currency in the world and should therefore assume responsibility for its impact on the global economy. Yet this interpretation goes far beyond its actual assigned mandate, namely an inflation target of 2 percent and full employment by assuring “moderate long-term interest “it is doubtful that rates”. As long as these two objectives are not met, the the US dollar will Fed does not have any grounds experience a jump to include other goals and when the Fed deought to focus rather on the American economy. cides to act again” Furthermore, abnormally low interest rates may actually be one of the factors stopping consumer prices from lifting off, as they encouraged businesses to polish their balance sheets rather than to invest into the real economy. If the price of borrowing was to be raised, companies would be incentivised to risk making higher returns, e.g. through expanded R&D expenses, instead of buying back shares as they do at the moment.

“postponing a policy tightening during a boom may lead to the situation where the Fed has little wiggle room left when another recession hits the American economy”

However, the key argument why the Fed should stop procrastinating relates to the very first point: postponing a policy tightening during a boom may lead to the situation where the Fed has little wiggle room left when another recession hits the American economy.

Continuously postponing the decision will force the Fed (again) to experiment with untested monetary policies and in the meantime encourage investors to seek riskier, more speculative investments, thus increasing the risk of another speculation bubble. Instead, the central bank needs to assume its once-famed conservative role and prepare itself for the next storm.

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Economics & International Markets

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Economics & International Markets

The Italian

Call for Trust Pietro Galardi

The country, once accused of being the "real sick man of Europe", the deadweight on Germany's shoulders, the land of Berlusconi's "bunga-bungas" and so on, is now being praised by economic observers from all over the world. 'The Economist' refers to it as one of the most stable and reliable countries in Europe, 'Die Welt' defines its reforms as a success model for the whole continent. The French 'Figaro' recognises the efficacy of the anti-crisis measures adopted in the last couple of years. Yes, surprisingly enough, thanks to concrete economic progress rather than corruption scandals, Italy is finally on the international stage.

“Yes, surprisingly enough, thanks to concrete economic progress rather than corruption scandals, Italy is finally on the international stage.”

But how come? Is Italy not all about "bella vita" and fiscal evasion, a combination that often evokes the word Mafia… Since Berlusconi’s forced resignation from office in 2011 (and ban from politics in 2013), something changed: optimism for a more just system arose in the country and in particular in the younger generation. This is rightly exemplified by the "Movimento 5 Stelle" (literally translated as the five stars movement) political phenomenon. Founded by a comedian as an anti-political movement in 2009, the mandate aimed to revolutionise the leading class of the country. It not only denounced scandals connected to politics that regularly took place in Italy, but also proposed a series of reforms that pursued an entire renovation of the system. Party members agreed to cut down their salaries and invest the money collected to solve issues, instead of wasting time discussing them! Symbolising the disappointment that Italians felt against the political class, it unpredictably gathered 25 percent of the votes during the 2013 elections. Even though the party never 9

won a governmental seat, it brought about some urgent issues that the political scene could not ignore anymore, such as the particularly high number of parliamentarians, the worrying amount of young people unemployed, tax evasion and, above all, corruption.

During this turbulent atmosphere, it was Matteo Renzi who seized the opportunity. Representing the Democratic Party (Berlusconi's opponent) he embedded some of the key concepts presented by the "5 stars" within a concrete agenda.

As 2014 began he was commissioned with setting up a new government, which became the youngest cabinet in Italian history with 47 years of age on average and composed of an equal number of men and women. During the next couple of years Renzi, often referred to as "Rottamatore" (the scrapper), promoted essential reforms to reduce the number of parliamentarians, enact economic measures to re-launch the economy and fight illegality at all levels. Some vital and often discussed measures include the "Jobs Act" and the "Unblock Italy Decree". The first one has liberalised employment easing the hiring and firing process within business.

The measures promptly raised contestation on the Labour Trade Union side, yet the country's employed population has already increased by 1 percent. The "Unblock Italy Decree", on the other hand, is specifically designed to promote investments and lift the economy out of recession (the third that Italy experienced in six years) by means of reduced fiscal pressure.

It is now time to approve the new "Stability Law", which will regulate the State's finances in 2016. Officially presented to the Parliament on October 15th, the new regulation will entail a complete elimination of taxes on domiciliary houses –

an issue debated for very long time in Italy – lower taxes on agriculture and bring more benefits for businesses that will renovate and invest in equipment. But beyond these technical aspects, Renzi's campaign is calling for trust. In a recent speech held to promote the new Stability Law, Renzi expressed his regret for the lack of confidence among the Italian households, a matter that has been confirmed by the fact that private savings have increased by 11 percent throughout the last three years at the expense of consumption and average income has not decreased. In Renzi and the economic minister's opinion, this is enough to show that Italian families are not suffering from the crisis anymore; instead, according to them, Italians are afraid of consuming because they fear the crisis is not over yet, and they would rather continue to save – behaviour that ultimately generates continuous recessive spirals.

Whether this fear will take the wind out of the economy’s sails or not, what the government is trying to do cannot damage the economy. Rather, it could act as the catalyst of overcoming this crisis once and for all. In order to let the economy take off, the country needs to become confident in its means. And to do so, unpleasant labels attributed to Italy, such as the “sick man of Europe”, need to be reverted in people's minds in order to discourage the motivational trigger.

This is exactly what Renzi is aiming at. Through the hashtag campaign on Twitter ("#lavoltabuona", translated in English as "the right time"), tireless speeches throughout the country, constant updates on social networks, Renzi is trying his best to motivate everybody that it is time for Italy to go out and shine again. It is the right moment to show the world what the "Bel Paese" is really capable of doing. This is the call for trust in our businesses, in our people, in our Country.

“what the government is trying to do cannot damage the economy”

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Economics & International Markets

A plea for patience Nikita Khandelwal

The year is 1972. It is a summer day in Uganda when Idi Amin, one year into his military’s rule over the country after it succeeded in overthrowing the elected leader of Uganda in a military coup, sets the deadline for the expulsion of around 60,000 Ugandan South Asians from his state. Thanks to the legacy of the British Commonwealth, many of these immigrants have British overseas citizenship status. Almost half of these immigrants are instructed to leave homes, businesses, and personal wealth behind. Many are entrepreneurial, having enjoyed growing success in Uganda. They set sail for the United Kingdom with little in hand.

Today, many of the formal accounts of the expulsion of East African Asians in the 1970s are derived from narratives, with few quantitative studies done on the economic, political, or sociological impact of the East African Asian community in Britain. A notable “Today, many of exception is social scientist and professor Vaughan the formal accounts Robinson, currently residing at Kings College London, who completed studies on South Asian migra- of the expulsion tion to the UK during his time at Oxford as a Prize of East African Research fellow. Scrutinizing national quantitaAsians in the 1970s tive data on the resettlement of Asians in Britain, are derived from he argues that the impoverished living conditions of the Asians upon arrival, and the onslaught of nar­ratives, with few racism that followed the UK’s decision to admit quantitative studies almost half the expelled individuals to permanentdone on the ecoly integrate into the British social fabric, has not deterred this business-minded community from nomic, political, or growing into one of the most successful diasporas sociological impact.” in the country.

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Economics & International Markets

12

Economics & International Markets Curry is now a British national dish. South Asians fill the halls of the University of Oxford, Cambridge, or the London School of Economics - and later, the corporate headquarters of global elite financial institutions and legal bodies. Some make it into politics, eventually leading elections in their British constituency, though more representation is needed given the numbers of the South Asian population.

“Curry is now a Those more artistically inBritish national clined reject Asian stereodish. South Asians types to mark their territory in music and art. Jay Sean. fill the halls of the Konnie Huq. Anish Kapoor. InUniversity of Oxford, dividuals at the helm of the Cambridge, or the paradigm of migrant community that makes it so difficult London School of today to define a British indiEconomics - and vidual by personal appearlater, the corporate ance.

headquarters of global elite financial institutions.”

Naturally, challenges to their habilitation were plentiful.

Towards the beginning of the twentieth century, citizens residing in the British Commonwealth had extensive rights to migrate to the United Kingdom. East African Indians among other migrants from across the Commonwealth - had begun to arrive on British land in the late 1960s in fear of discrimination from government in Uganda as well as in Kenya. Their arrival was not the catalyst for immigration control.

Elections in 1964 had already seen Labour Members of Parliament (MPs) who opposed the imposition of barriers lose seats in Parliament across Britain.

is also rampant; earlier this year, statistics compiled by the Metropolitan Police indicate a 70% rise in crimes motivated

by Islamophobia. Discussions surrounding the approach to asylum seekers are dominated by the politics of fear; economic research, on the other hand, remains largely focused on short-term outcomes and is inconclusive as to whether a large influx of foreign nationals benefits the country in the long run. More data is needed, and more studies must be done. On the other hand, recognising the benefits to inclusion needs patience, and perhaps forty years. There is no counterfactual for the state of the British economy today had the Edward Heath government declined entry to 30,000 Ugandan Asians in 1972. But when twenty-seven years later, in 1997, the new Ugandan president invited the Asian community to return to their African homes and reignite their lives, warm feelings from the British government’s twentieth anniversary celebrations commemorating the arrival of the Ugandan Asians in the UK still lingered; and many did not return.

“recognising the benefits to inclusion needs patience, and perhaps forty years.

There is no counterfactual.”

The Ugandan Asian influx did, however, serve to amplify the perception that more migrants would raise racial tensions.

Archives from the British Broadcasting Corporation dating back to 1972 frequently cite Conservative MPs declaring that Ugandan Asians have no business in the United Kingdom, ignoring the fact that most had been granted citizen status long prior to their arrival in the country. Antagonistic discussions over immigration fuelled the enactment of legislation against it. With substantial support from the Conservative Party, control measures eventually established themselves as the Commonwealth Immigration Act. Today, it is now known more simply as the Immigration Act. The chicken and egg problem of politics and racial tensions sounds familiar to anyone following the immigration debates erupting across the European continent today. The South Asian population - of which many are first generation Indians, Pakistanis, or Bangladeshis, coming to ride the wave of economic success enjoyed by their predecessors still fall victim to racial hate crime. Religious discrimination 13

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International Affairs

How Many Goals

Does It Take?

Vanessa Volland

Patience is a virtue. Many clever people have arrived at the same clever conclusion. Benjamin Franklin said ‘he that can have patience can have what he will’ and according to Rousseau ‘patience is bitter, but its fruit is sweet.’ Essentially, these statements suggest a positive correlation between patience and success.

The caveat being patience is hard to come by, as Julius Caesar humorously noted ‘it is easier to find men who will volunteer to die, than to find those who are willing to endure pain with patience.’ It seems like a good life philosophy. Be patient even in arduous situations and all will be well. This wisdom is also adopted by numerous religions as for example Roman Catholicism, notably when it comes to poverty. Allegedly, poverty is holy and one will be rewarded for one’s deprivation if one remains patient. Look out for the small print though, one might only reap the benefits in the afterlife. Of course, these preachers – regardless their religious or national origin – do not intend to mock the poor. Rather, they aim to give some meaning and comfort amidst the suffering.

The secular sphere, i.e. international organisations, prefers the seemingly impatient approach of declaring war on poverty. In a famous speech in Nairobi in 1973, then World Bank president Robert McNamara promulgated the idea to eradicate absolute poverty by the end of the 20th century. Evidently and unsurprisingly, his bold vision did not materialise. Accord“The secular sphere ing to the United Nations, there were still 1.7 billion individuals worldwide with less than $1.25 prefers the seemUS (2005 level) to spend a day in 1999. The deingly impatient crease in numbers by 200 million since 1981 was approach of declar- little consolation to the 1.7 billion, though. Howing war on poverty” ever, the development community worked on a narrative and policies to tackle global poverty throughout the 1990s, resulting in the famous Millennium Development Goals, the world’s biggest and most explicit promise to end deprivation. At the Millennium Summit in 2000, every single head of state in the world adopted the MDGs, committing their country to the promise.

This year, the MDGs are ending, and naturally the first question is: were the MDGs a success? As with most good questions, it seems straightforward to answer with 13

International Affairs either yes or no. However, it is not that simple. Hopeless optimists and the development industry like to pat themselves on the shoulder and congratulate themselves smugly for the brilliant work on fighting poverty. One billion people lifted out of poverty since 1990. Excellent. A round of applause, let us continue the efforts. On the other hand, notorious pessimists declare the entire undertaking a gimmick and a waste of time and energy. The MDGs were at best only partially met and fundamentally changed nothing. On the contrary, absolute poverty in Sub-Saharan Africa has actually increased, and China’s and India’s spectacular growth performances are to be lauded in reducing global poverty rates. Some conspiracy theorists go even further and accuse Western powers or the corporate world of either neo-colonialism or distracting through the MDGs from the real issues such as the unjust and structural exploitation of poor countries. On a lighter note, realist critics reject the MDGs at face value as an unrealistic pipe dream and object to the pecuniary focus of the poverty definition. However, they concede the normative benefits of the MDGs and appreciate the power of the idea and narrative in shaping rhetoric and policies.

Similarly, pragmatists admit the flaws of the MDGs but argue that they are successful at keeping policy makers on track towards improving lives of millions of people and raising awareness among the public.

The second big question is: what comes next and does it matter? The short and straightforward answer is the Sustainable Development Goals. Here also lies an indirect answer to the first question: the MDGs were perceived successful enough already in 2012 when the UN Development Programme launched the laborious process of setting the post-2015 agenda. Seeking to learn from the MDG experiment, both the process and the final results were designed to be more inclusive, first by listening to the voices of a wide array of stakeholders including the poor themselves, second by adding issue areas such as energy, third by deciding to render the SDGs applicable to all countries, be they rich or poor, and finally by addressing intergenerational injustices. Moreover, the SDGs tap into the vogue of sustainability and climate change concerns, thereby increasing the legitimacy of the goals. The long list of 17 goals with 169 measurable targets were rubber stamped in September 2015 and will come into force in January 2016.

As to does it matter – well, it is certainly unclear. As one would expect, there are ardent proponents who predict a new era and a fresh wind that will help combat poverty. Everyone will live happily ever after, because the new goals are comprehensive and ambitious. At the opposite end, cynics claim the SDGs a squander of resources, since the SDGs are far too broad and verging on meaninglessness. Indeed, the vast number of goals is also seen as a threat to success by more realist critics. For one, they fear that anyone can simply pick 14

and choose from the laundry list to justify business as usual.

Commitments are easily made by focusing on one SDG in isolation. Critics pointedly add that a lot of the goals are contradictory and no prioritising guidance is offered. How are you to ‘promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all’ while simultaneously ‘ensuring sustainable consumption and production “Commitments are patterns’? Even if one SDG is declared more import- easily made by focusant, on what grounds and ing on one SDG in by whom?

isolation”

A more down-to-earth group acknowledges the difficulties that the wide scope of the SDGs poses and on these premises rejects the SDGs as a blueprint. However, stretching and simplifying are the necessary evils used to mobilise public support and political commitment and to give stakeholders a sense of direction. For complex and testing endeavours such as poverty elimination and development, it is vital to have long-term goals ahead, a vision in mind, in order to avoid surfing the wave of ultimately detrimental short-term successes. The path is strenuous though, and requires perseverance, endurance and not least patience. The SDGs cannot change the path but may appear once in a while along the way, indicating the world has not gone completely astray.

“For complex and testing endeavours, it is vital to have long-term goals ahead”

International Affairs

Climate Summit in Paris – why Patience cannot be the Answer Markus Wellstein

Expectations are running high. At the end of November, heads of states and their representatives meet in Le Bourget for COP21, the 2015 United Nations Climate Change Conference. This huge convention sets itself the ambitious task to create a framework that will help to reduce greenhouse gas (GHG) emissions in order to limit the global temperature increase to 2°C above preindustrial levels.

Since very few people honestly doubt man-made climate change and its effects on the environment, let us assume that there is more or less a consensus on what the underlying issue is. The climate summit in Paris therefore does not address the what-question of problem definition. Rather, the main focus lies in how the nations intend to accomplish reductions in GHG emission. However, not a single conference has produced any advances since the questionable success of the Kyoto Protocol – which was neither ratified by the US nor developing countries – in 1997. Although urgency is pressing and patience is running thin, optimism for Paris seems out of place. But why is it that world leaders find it so hard to concur on a way to save the planet? Even if Paris produces an agreement, (how) could it make a difference and if not, what could be done instead?

Opposing perspectives During COP19, the climate conference in Warsaw two years ago, the G77 and China bloc led 132 countries out of the premises in protest to the unwillingness of the industri-

alised countries to discuss compensation payments. The number reveals the outrage. The US and EU member countries alone have contributed more than half of the cumulative CO2 emissions between 1850 and 2011 according to the World Resources Institute. For emerging countries, it is not only evident what the problem is but much more who has caused it. Putting oneself in the shoes of developing countries, one must conclude that the climate issue in the future is intrinsically linked to climate injustices in the past. Hence, industrialised states should be held responsible and be forced to pay for the conse- “the climate issue quences as well as for the opin the future is portunity costs to emerging intrinsically linked countries of not using cheap fossil energy to boost their to climate injustices economies.

in the past”

Apart from the retrospect, there is also the future outlook: industrialised countries have used and unfortunately continue to use cheap and dirty energy sources to help their economies grow. Coal is a good example: it is cheap and often available within national borders – perfect to overflow growing economic markets with low priced energy. Germany does it, the USA lives with it, and emerging China uses it now for its economic growth. For emerging countries, the rhetoric of climate change and GHG emission reductions look like an attempt of industrialised countries to prevent them from economic development. Obviously, these zestful nations ask 15

International Affairs themselves, ‘why should we not do it, when they have done it for over 100 years and are continuing to do so?’ This is why it has been hard to find an agreement without compensation payments.

What about this year’s edition of the climate summit? President Obama said in 2014, “if there is one thing I would like to see, it would be for us to be able to price the cost of carbon emissions.” Unfortunately, the moral imperative contradicts real political interests: While discussing how to save the world, the “elite” protects their economies by introducing tariffs on photovoltaic (PV) panels from China, since the competition threatens local businesses (EU). This measure prevents PV prices from falling and renewables from spreading faster. Additionally, the “elite” heavily invests in the exploitation of tight oil, and thereby increases world supply of oil significantly (USA). In turn, this forces another global player to flood the market with even cheaper onshore oil, thus allowing crude oil price to collapse totally (Saudi Arabia). The host of the climate summit contributes with its subsidised 58 nuclear power plants in keeping energy prices low in Europe and the troubled economy going (France). We should not have too much hope in the global governance framework in Paris that will deliver another potential “agreement” on going on more or less as before.

Why patience cannot be the answer The countries’ preliminary commitments, the Intended Nationally Determined Contributions submitted earlier this year, will reach a global warming of 2.7°C. This fact further discourages optimistic thinking: even in the case of a patiently worked out agreement, it simply will not be enough.

Instead of more conferences, the world needs more actions.

Emerging countries and civil society should therefore keep expressing their impatience about the lack of actions outside of conference rooms, and should pressure the main contributors to climate change hard. Patience can be important and productive if there is hope for change. Regarding global warming, several reasons such as bigotry limit this hope for change. It is time for emerging countries and the public to remind the “elite” of what their moralism proclaims and that their fancy presidential speeches will not save the planet. If the “elite” really cared about the environment, we would see an increase in energy prices in industrialised countries, no new gas pipelines from corrupt countries to Europe, no tariffs on PVs in order to protect the local economy, no subsidies for dirty energy production, no indirect subsidising of nuclear energy with loose regulation about negative externalities, and no exploitation of tight oil and gas.

Whatever the climate summit in Paris may bring, the issue at heart is not whether the international community can come to detailed and intricate terms about how and how 16

much they want to continue polluting. The actual question is whether the moral “elite” will begin to walk the talk, to which we have all listened patiently for years. Only real and decisive actions will make a difference. It is the job of emerging countries and the public to demonstrate their impatience, and push the “elite” to do on Monday what they preach on Sunday.

“The actual question is whether the moral ‘elite’ will begin to walk the talk.”

International Affairs

Remember,

remember,…

Mikhaël Salamin

Over the past two decades, the amount of information on the internet has increased to such an extent that online search service providers are now an indispensable gateway to the plethora of information. Using these services has a downside for users though: we are bound to trust the search engines to provide all the available information linked to our request. But since 2014, results are no longer complete. Indeed, the ‘right to be forgotten’ permits information to be removed from search engine results on the basis of the “right to determine the development of one’s life in an autonomous way, without being perpetually or periodically stigmatised as a consequence of a specific action performed in the past”.

However, not everyone thinks this is the right way to go.

“we are bound to trust the search engines to provide all the available information”

The roots of the discussion are not so new. Already in the 70’s, the United Kingdom allowed many criminal convictions to be “spent” and therefore not taken into account by insurance companies or employers.

This practice found new followers in France and Argentina with the appearance of personal information on the web. The ‘right to be forgotten’ re-entered the public debate, and led the European Court of Justice in May 2014 to rule over Google in favour of Mr Costeja. This milestone case obliged Google to remove a link harming Mr Costeja’s reputation from its search results. The precedent established the obligation for companies to enact the ‘right to be forgotten’. Subsequently, Google received 12’000 similar requests. A recent leak revealed that this number is now close to 220’000. Half of these requests have already been granted.

The ECJ’s judgment will be further pinned down by the coming European Union’s Data Privacy Regulation. Article 17 defines specific protections concerning the ‘right to be forgotten’. It forces companies such as Google to erase undesired links upon a formal request from applicants. Thereby, the company alone is to decide which information is considered “inadequate, irrelevant or no longer relevant, or excessive in relation to the purposes for which they were processed”. Yet, the lack of transparency from the company prevents people from both understanding how the process is handled and on what basis these decisions are made. Although an applicant can still appeal against the decision in court, should Google reject their request, the Streisand effect may kick in. The phenomenon refers to Barbara Streisand’s attempt to have pictures of her home in Malibu removed in 2003. The move made the news and had the exact opposite effect of widely publicising the issue. Claimants may therefore be more reluctant to file a case, giving Google additional leeway.

“the company alone is to decide which information is considered inadequate, irrelevant or no longer relevant”

Overseas, the discussion took a different turn. In the United States, advocates of the ‘right to be forgotten’ oppose supporters of the freedom of speech and expression. However, despite sporadic cases favouring erasure of certain information, there is no consent to grant such a right. The US is unwilling to let internet search service providers alter the content of the internet upon request from individuals, especially when uploaded by a third party. It is perceived as a form of censorship, or worse rewriting of history.

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International Affairs

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International Affairs If you were to ask most people whether they preferred to have some part of their past modified, the majority would probably find something about which they no longer want to be hounded. It could be anything from serious involvement in a crime to a rushed harmless tweet. In the offline world, it is hard to imagine someone wandering around asking people to simply forget. Only time wilts the freshness of memories.

One needs merely enough patience and people will forgive, allowing a new start – even in online spheres. “Patience is bitter, but its fruits are sweet” wrote Jean-Jacques Rousseau.

Of course people prefer the ‘right to be forgotten’ – who would not want to be left off the hook? Even so, every element of a person’s life is important to understand whom we are really facing, every element is a piece of the whole picture. Is it hence right to crop a part of someone’s history claiming it is “irrelevant” or “inadequate”? Naturally, it is tough to be accused or misjudged upon open information accessible to anyone on the internet, particularly if it is false.

However, if relief comes from private companies with little or no transparency altering the content or functioning of the internet, would we not be better off on the hook?

Society and employers are the ones who should react differently to information collected on the internet, rather than imposing misguiding rules, trusting in abstract opaque entities and restricting free access to information. Indeed, everyone should be patient and embrace a sense of remembrance on our human condition. We are all explorers of life, born without a say, and when making our own choices, paths sometimes lead to undesired places. We should be free to choose, to fail, to change and to start over again without being judged too impatiently or severely. Alas, the ECJ has just granted internet search service providers the power to decide for us which parts of our history can or cannot be removed from our lives.

“We should be free to choose, to fail, to change and to start over again without being judged too im­patiently or severely”

Modern times Prof. Dr. Christoph Frei is an associate professor in the Department of Po­litical Science at the University of St. Gallen.

Christoph Frei When did we start to grow impatient? Here is one line of argument. For many centuries, a firm belief in the necessary imperfection of life was a source of solace for the multitudes in Europe, a bulwark against misery of the soul. Between one generation and the next, expectations remained nearly unchanged. Whatever prospects for improvement existed were inspired by religion. What we would call a state of happiness lay either in the distant past, that is, in Paradise, or in a distant future, that is, in Heaven. The here and now, by contrast, was marked by labour and hardship for most. Suffering was inescapable, but the reward for pious acceptance was nothing less than eternal life.

Today, we are meliorists by conviction and metaphysical necessity, and impatient ones at that. Once the belief in Heaven is viewed as a childish opiate the need to succeed and fulfil oneself on earth will be heightened by the awareness that the time to do so is limited indeed. If eighty years is the sum total of all there ever will be, we had better hurry.

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International Affairs

20

Research & Academia

Interview

with Nina Karnaukh Alexander Bechtel

Nina, tell us something about yourself. Where are you from? When did you come to St. Gallen? What are you doing at the HSG? I grew up in Kiev, the capital of Ukraine. I received my Bachelor’s and Master’s degree in Computer Science at Kiev Polytechnic University. During the last three years of my studies, I worked as a Financial Markets Researcher at the ING Bank. During this time, “During this time, I got a burning desire to combine my programming I got a burning skills with high-quality research in finance. Doing desire to combine a PhD in Finance in the most financially developed my programming country in the world sounded like a perfect plan. I was very lucky to get in touch with Prof. Paul skills with high-­ Söderlind and to get a Swiss Government Excel- quality research in lence Scholarship to finance the first year of my finance.” studies in St. Gallen.

Fall 2011 was my first semester at HSG in the PEF program (PhD in Economics and Finance). The first year was very challenging, because I did not have a sufficient background in finance. To catch up, I attended more than ten classes from the MiQEF, MEcon, and MBF, in addition to the required PEF courses. That was one of the hardest years in my life, but very soon I started feeling that my bold decision to go to St. Gallen in order to pursue my dreams was the right decision.

You are in the U.S. at the moment. Where are you exactly, and what are you doing there?

I am at the Wharton School of the University of Pennsylvania until August 2016.

To get here, I got in touch with Prof. Nikolai Roussanov, one of the leading academics in contemporary currency markets research. I spend most of my time at Wharton working on my research, discussing ideas and findings with Prof. Roussanov and other faculty members as well as PhD students, and attending various research seminars.

What are your first impressions of the University of Pennsylvania? What are the differences to the HSG? I notice three main differences between Wharton and HSG. First, the average re21

Research & Academia search level (in terms of professors’ academic achievements) is much higher than at HSG. This is reflected in the very productive research environment, where most of the people provide high-quality feedback on your work. Second, there are much more research seminars at Wharton than at HSG and the quality of the invited speakers is higher. For instance, I had the chance to listen to the talks and communicate with three Nobel Prize Laureates in Economics: Lars Hansen, Christopher Sims, and Thomas Sargent. Finally, the good location of the Upenn allows me to easily visit other institutions, like the New York University or the IMF. Recently I attended the IMF conference in Washington DC, where I had the unique chance to talk to Ben Bernanke, the former chairman of the Federal Reserve.

However, I miss the beautiful landscape around St. Gallen, especially taking into account that there is no window in my Wharton office (a poster of the Alps is my saver).

A few months ago the Review of Financial Studies (RFS) accepted a paper you wrote together with Prof. Söderlind and Prof. Ranaldo from the Institute for Banking and Finance.

The RFS is one of the top journals in Finance. First, we want to congratulate you to this great success. Who told you that your paper got accepted and how did that feel?

Thanks for your nice words. I very much owe this success to Prof. Söderlind and Prof. Ranaldo. I think I learned the big news from an email, forwarded by Prof. Ranaldo. After the final re-submitting of the paper to the RFS, I had a good feeling. I have read many papers on similar topics in top journals and our paper seemed to be very much of the same quality. Prof. Ranaldo, Prof. Söderlind, and I presented this paper at several academic conferences, where we received encouraging feedback. After all, we spent almost three years working hard on this paper.

In two to three sentences: What is your paper about?

Liquidity is the cost of instantaneously exchanging one asset or currency for another and back (say, Swiss francs to Euros and back to Swiss francs). We study how the liquidity of the foreign exchange (FX) market evolves over time “We show that FX and how it differs across cur- liquidity deteriorency pairs. We show that FX rates with funding liquidity deteriorates with constraints and funding constraints and global risk on stock and global risk on stock bond market.

and bond market.”

The theme of our current issue is “patience”. How long did it take you to write your paper? How did you nail down the topic, and which role did patience play in the process of writing?

I started working on the FX liquidity idea in fall 2012. I got really enthusiastic about it and the first results in December 2012 turned out to be very promising. However, it took almost two years before we submitted the paper to the RFS. These two years involved continuous rewriting, elaborating on the comments from other scholars, and numerous robustness checks (at some point Internet appendix to the paper reached 70 pages). Certainly, patience played a crucial role in this process.

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In general, do you think patience is an attitude a good researcher should possess?

Patience is definitely a necessary trait of a good researcher.

High-quality papers are not written overnight. There will be times when you do not know how to proceed. It might be that you do not get the expected empirical result, or you get tough comments which seem impossible to incorporate. It's normal and is a part of a productive research process. If you want your paper to be published in a top-quality journal, be prepared to devote several years of your life to it. Be patient in getting published, but be impatient in learning new things, producing new ideas, and robust results.

Research & Academia

The Illusion

of Prosperity Rahim Taghizadegan Rahim Taghizadegan is the director of scholarium, a learning enterprise based in Vienna, Austria. After numerous teaching posts, including a position at the Vienna University of Economics and Business, he is currently a lecturer at the IMC in Krems and at the International Academy of Philosophy in Liechtenstein. He has written several books including “Österreichische Schule für Anleger” (Austrian School for Investors) which he co-authored with Ronald Stöferle and Mark Valek.

An economic transformation has been taking place over the past few centuries that is unique to our history. In 1694, the establishment of the Bank of England was one of the first systematic attempts to cover the government’s debt requirements with “capitalistic” means. One may call it a “monetary revolution”, the importance of which for the modern economy is widely overlooked or underestimated.

The alchemical formula has an infinite number of variations, but at its core it exhibits the following pattern: government debt securities are commingled with private sector ones, and serve as the foundation upon which a pyramid of fiduciary media is erected. According to Ludwig von Mises, fiduciary media are bank claims that serve as a substitute for money, but are not fully covered by money with respect to their maturity and liquidity. The expansion of fiduciary media should thus rapidly increase the risk that the issuing banks will become insolvent. The State thus solved the dilemma of financing, by usurping institutions private merchants had built and using them for its own purposes.

Initially, private sector economic activity does not dry up as a result, but is even given a shot in the arm due to the expansion of fiduciary media – at least in the short term.

This modern alchemy, however, is based on granting privileges to the banks in exchange for their help in financing the State, putting them above the laws that were previously governing the conduct of merchants. The modern economic system was erected on this foundation of government and private debt, privileges and currency monopolies.

In the course of the ideological counter-reaction to the conse- “The modern ecoquences of the monetary revo- nomic system was lution, all aspects and instituerected on this tions of the economy have come under general suspicion. foundation of govThe Austrian School of Eco- ernment and private nomics – which was not named debt, privileges and after today’s Republic of currency monopoAustria, but owes its name to the fact that once upon a time, lies.” many of Europe’s leading economic scientists were based in Vienna and attained international renown with their accomplishments – attempted to break through this ideologization and false moralizing. Economic science, in their view, should be understood as value-­ free, its tenets free from presumptions or judgments. Only 23

Research & Academia the “Austrian” perspective reveals that modern-day prosperity is a pyramid built on sand.

From a sober perspective, prosperity is dubious when it lacks a long-term foundation. Consumption is nothing bad, but an expression of human life. However, one of the most devastating economic errors is the confusion between the return on capital and capital consumption. There is quite a difference between milking a cow and slaughtering it before it has a chance to calve. The high level of consumption in our latitudes these days is partially based on a large endowment with capital – but alas, only partially. Without the rapid enlargement of our economic sphere towards Asia that has taken place in recent decades, we would have been forced to drastically reduce our consumption a long time ago. Under a policy of credit expansion, this normally expresses itself in rising prices.

human wants. The acquisition of wealth is an active process.

It describes our potential as free human beings to attain the goals we set out to achieve. Thus, Mises always writes of human goals which economic activity serves, never about cravings, “growth” or the gross domestic product.

This article is based on excerpts from the forthcoming book “Austrian School for Investors”, which is already available in German under the title „Österreichische Schule für Anleger“.

“The modern-day ‘prosperity’ comes at a price: the dissolution of its own long-term foundation, an increasing focus on the short-term, and a decline in quality consciousness. ”

The end of the economic miracle was therefore somewhat delayed. The industry in the euro area was built with the intellectual capital of pre-war Europe and the diligence of post-war Europe. However, its continued existence is under threat, namely by a distortion of the capital structure, and the consequent effect of capital consumption.

The distortion of the economy’s capital structure is a result of the monetary revolution. It has created the typical pattern of business cycles, characterized by alternating periods of distortion and rectification. As long as periods of growth go hand in hand with credit expansion, growth no longer directly follows the expected wants of consumers, but is driven by distorted price and interest rate signals. The consequence is an overstretching of the economy’s structure in certain areas, and a thinning out in others. Correction periods are inevitable and as a rule strike people when unprepared. The corrections are so painful because they reveal the misdirection of human decisions.

An illusion of prosperity results: an overestimation of one’s own wealth, and of the state of prosperity in the economy at large. This results in continuous hidden capital consumption.

According to the Austrian School, capital is composed of much more than mere monetary value. The monetary revolution has far-reaching moral consequences, which are concurrently symptoms and backdrop to economic decline. The modern-day “prosperity” comes at a price: the dissolution of its own long-term foundation, an increasing focus on the short-term, and a decline in quality consciousness.

Austrian School economists like Mises and Hayek analyzed the concatenation between the financial system, business cycles and economic distortions and warned of the destruction of the capital structure in favor of a phantom economy, the production process of which has lost touch with actual 24

Infobox scholarium (scholarium.at), a learning enterprise based in Vienna, is one of the last remaining research centers where the original Austrian School of economics is alive, boasting the largest library on this tradition in Europe. scholarium offers a limited number of selected participants a unique educational program (craftprobe.com), where they can develop through entrepreneurial projects, practical experiments and profound reflection the necessary skills and ideas to create real value.

Research & Academia

Of Cashew Nuts, Marshmallows, and the Wealth of Nations Professor Jean-Robert Tyran Jean-Robert Tyran is Professor of Economics at the University of Vienna and director of the Vienna Center for Experimental Economics. After earning his PhD in economics at the University of Zurich in 1997, he worked as an Assistant Professor at HSG until 2004. Prof. Tyran has published in various field journals as well as in general interest journals such as American Economic Review, Econometrica, Review of Economic Studies, and Science.

The invitation to contribute a piece to this special issue on “patience” reached me while I was reading Richard Thaler’s new book “Misbehaving”. Thaler is one of the founding fathers of behavioral economics and the book recounts his academic journey. He starts by describing his formative encounter with the later Nobelist Daniel Kahneman and the walks and talks they had with Amos Tversky in the late 1970s. He then reviews his enduring struggle to convince “Econs” - as he calls standard economists - of the need to take a more realistic view on how humans (mis-) behave.

Thaler’s book is witty and sprinkled with anecdotes from his personal life. One day, Thaler writes, he was having some friends over for dinner. They were having a pleasant conversation over a glass of wine and a large bowl of cashew nuts to nibble while the turkey was roasting in the oven. When Thaler realized that the bowl will be emptied in no time, he removed the bowl from the table, putting it out of sight. Surprisingly (to an Econ), everyone was thanking the host for doing so.

What was happening in Thaler’s kitchen is, in the language of Econs, an example of dynamically inconsistent behavior.

First, people prefer A over B, later they prefer B over A. Examples of such behavior abound. Recall your thought, early on that Saturday morning, to go to the gym to exercise but then, you ended up on the couch watching a football game in the afternoon. Or think of your last New Year’s resolution.

Thaler’s anecdote is a parable of impatient behavior (thoughtlessly munching the cashew nuts instead of waiting for the turkey to be ready) arising from a mix of temptation and weakness of will. But behaving impatiently is not in the best interest of the party because munching the nuts will ruin the appetite for the main course. Putting the cashew nuts out of sight serves as a commitment device to overcome weakness of will (the anecdote thus reminds us of the famous story of Odysseus tying himself to mast to be able to hear the beautiful song of the sirens without wrecking his ship).

Econs think of how people make choices over time by referring to the notion of a “discount rate”. The idea is that people prefer to get a dollar today to getting a dollar tomorrow.

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Research & Academia The discount rate indicates by how much they do. A high discount rate indicates that the person is very impatient.

Ever since Paul Samuelson formally introduced the notion to the literature in 1937, Econs assume that people discount the future at a constant rate because that is the only assumption guaranteeing that people do not change their minds as time moves forward. And Econs like to assume that people do not misbehave, that is, that they do not fall prey to dynamic inconsistency.

It is important to know how patient people are because it has profound theoretical implications for what Econs call intertemporal trade-offs, both for individuals and entire societies. For example, the discount rate determines whether it is optimal for an individual to consume more today or to put some money aside for a rainy day. It also determines whether it is optimal for a country to spend more on, say, education today or to invest in pollution abatement to combat global warming tomorrow.

While the theoretical implications of patience have been worked out a long time ago, solid empirical knowledge on its factual relevance was scarce until recently. An early contribution were the famous experiments by the Austrian psychologist Walter Mischel. A typical experiment involved placing one Marshmallow on a plate in front of a five-yearold telling him that he would get two Marshmallows if he can resist eating this one for a few minutes. Predictably, many kids could not resist. Mischel’s remarkable discovery was that kids who could resist temptation longer turned out to be more successful later in life according to some measures.

Today, an impressive body of research accumulated by experimental economists shows that patient people tend to have better outcomes in life (Sutter (2014) provides a very nice summary in German). But can low discount rates also make “kids who could a difference for the economic re­sist temptation well-being of a whole country? A recent paper claims longer turned out to be more success- that this is so.

ful later”

Dohmen et al. (2015) use surveys to elicit the patience of people from around the world (in 76 countries), and they combine that data with detailed socio-economic infor­ mation on respondents and the country they live in.

All else equal, the authors find that countries in which people are more patient have higher human and physical capital, invest more into productivity, and have better institutions.

Moreover, they find that countries that are inhabited by patient people tend to have higher contemporary income, but also higher historical growth rates. The paper thus claims that patience is the ultimate cause of the “wealth of nations” and that patience statistically explains the proximate

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causes of growth, like capital “The paper thus accumulation. This is a bold claims that patience claim because it refers to a prefis the ultimate erence as the ultimate driver of growth and thus sharply con- cause of the ‘wealth trasts with contemporary of nations’” growth theory which emphasizes the quality of political and economic institutions as the key determinant of why nations prosper (e.g. Acemoglu and Robinson 2012).

While the idea that patience is conducive to savings, investments and thus growth seems highly plausible, it does not seem like an entirely plausible explanation for specific cases.

Think of the differential experience of North vs. South Korea, or of the rapid transition from rags to riches recently in China or Singapore, or some 150 years ago in Switzerland. Anyway, I think this is a thought-provoking paper and it is likely to trigger a lively academic debate on the relevance of institutions vs. patience for prosperity. I think that only time will tell which account is right, but I just can’t wait to know.

References

Acemoglu, D. and Robinson, J. (2012): Why Nations Fail. Random House: New York.

Dohmen, T., Enke, B., Falk, A., Huffman, D. and Sunde, U. (2015): Patience and the Wealth of Nations. Mimeo. https://www.iame.uni-bonn.de/people/thomas-dohmen/patience Mischel, W. (2014): The Marshmallow-Test. Mastering Self-Control. Hachette: New York.

Samuelson, P.A. (1937): A Note on Measurement of Utility. Review of Economic Studies 4(2): 155-161.

Sutter, M. (2014): Die Entdeckung der Geduld. Ausdauer schlägt Talent.

Ecowin Salzburg.

Thaler, R.H. (2015): Misbehaving. The Making of Behavioral Economics. W.W. Norton: New York.

Research & Academia

Being Ben Bernanke Benedikt Lennartz

Have you ever imagined how it would feel to be the chair(wo) man of the Fed? The Wall Street Journal and the San Francisco Fed give you twinkling answers with their monetary policy games.

In the WSJ version, your goal is to steer Helicopter Ben (Bernanke) through economic recovery. However, be careful: when interest rates hit the zero lower bound, your only solution left is quantitative easing. Sadly, there is no divine coincidence here: keeping inflation stable at around two percent will not necessarily lead to full employment. Does this ring any bells?

For theorists, the game of the San Francisco Fed is probably better: no fancy helicopters, but rather hard facts and economic variables, moving almost in an augmented Phillips

Curve fashion. The best feature: there are different demand and supply shocks, and your aim is to try and find the optimal monetary response. Unfortunately, this time you cannot rely on asset purchases to help you out. Once interest rates are at zero percent, there is no additional stimulus left.

You see, keeping the economy on track can be an exhausting task, with or without the printing press in the basement.

Simply try it out: The WSJ game: http://projects.wsj.com/games/thefederator/ The SFFED game: http://sffed-education.org/chairthefed/

Source: http://projects.wsj.com/games/thefederator

Photograph by Akash Arasu Ë™

Careers

Interview with Dr. Peter Dittus Akash Arasu The Bank for International Settlements is an important hub for research on monetary policy and financial stability.

A mecca among economists, it is on occasion referred to as the bank for central banks, fostering international monetary cooperation by promoting discussions among central bankers on policy, while simultaneously supporting the development of banking sector regulations. The (in)famous Basel Accords, for example, were formulated by an international committee at the BIS, which is headquartered, and I’ve given it away, in Basel.

Enter Dr. Peter Dittus, Secretary-General of the Bank for International Settlements. Completing his education at University of Michigan and Saarland University, Dr. Dittus went on to work as an economist for the World Bank, the OECD, and the BIS (an economic hat-trick if you will), where he’s been for the past 25 years.

economics?” Volkswirtschaft, he clarifies in German, not business economics. “If you look at the great historians and economists of the past – Smith, Hume, Kant – they were very much philosophers. So economics it was, while holding onto the larger perspective.” Second choice perhaps, but it reconciled passion with the need for an income.

Dr. Dittus greets me in the lobby with a smile on his face, arm outstretched. Clean-shaven, the sleeves of a plain white shirt rolled back to the elbows, exhibiting a can-do attitude rampant in perhaps an engineering company but oddly placed in a world of economic suits. Inviting me into his office, he lets me pick his brain for an hour, to attempt to figure out what makes him tick.

Coming from an incredibly rigorous and formal economic education at St. Gallen, I personally have felt deprived of its more romantic philosophical applications. This divergence between economics and philosophy has been occurring for a few decades now. Where is the field of economics heading?

At what point did you realise you wanted to become an economist?

His reply is immediate. “Sometime in high school, around the age of 13, I developed an interest in philosophy,” he explains, “Studying it at university I realized I did not exactly know how to make a living out of philosophy. So why not

He twiddles his pen between his forefinger and thumb, smiling, almost as if to visualize his forthcoming thoughts.

“I think I would be a little pretentious in saying I could answer that. Human beings are sometimes rational, sometimes not so. They are driven by all kinds of considerations that sometimes have very little to do with objective reasoning. So much of what we see in formalisation can be very helpful in clarifying our thoughts. But formalisation for for29

Careers malisation’s sake carries with it risk. In designing financial instruments, you can’t do better than a math or physics major who understands econom“Human beings are ics. But in answering the big sometimes rational, questions of life, I doubt we have advanced beyond Hume sometimes not so. or Smith.”

They are driven by all kinds of consid- So why is this? Have we peakerations that some- ed on economic discourse in big questions? times have very “On big questions, the world has not changed a lot, because little to do with objective reasoning.” people have not changed a lot.”

Do you have a go-to book recommendation?

“Well, that would depend where one’s interests lie,” he replies. A native German, Peter Dittus speaks fluent English, French – which he picked up in a bakery in France over high school summers – and Spanish which he taught himself rather recently, just to prove to himself that he still could.

“Salgado’s Genesis, if photography fascinates you. And if it’s economics, something more traditional like Weber or Wicksell, beyond the norm. If you want to answer the big questions in life, I would perhaps go to El Olvido Que Seremos (Oblivion: A Memoir) by Héctor Abad Faciolince, one of the books that has most impressed me lately.”

Take me through your first two hours in the morning – do you have a routine or ritual?

“I get up at 06.00 and spend the next 20 to 30 minutes doing yoga type exercises. Focusing on body weight, stretching, breathing, and strength. And then I get ready and end up at work by 07.30.”

Do you do this every day without fail?

“No, I don’t believe in every day without fail,” is the reply.

“If I feel like skipping, I skip it. Most of the time, I don’t, but if I make it a fail-safe routine – it becomes just that, a routine. It gets boring. It feels like I have to do it. And if I have to do it, I don’t like to do it.”

Then how do you inculcate discipline? Routine is integral to discipline, or so I’ve learnt.

“Discipline is perhaps the essence of much of what you do.

In private and business life. Imposing discipline to routine is a good thing – Step 1. But Step 2 is enjoying the routine, making it something you want to do.” Here discipline is the lesser alternative to joy.

And it is with joy that this conversation is taking place. The first time I reached out to Peter, I did so via LinkedIn. I shot him a message with a connection request; subsequent email messages led to our first coffee meeting, and then our second.

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It is fascinating when those in positions of power are willing to be approached, as one would assume that the odds are heavily stacked against a genuine conversation.

As you grow older, how do you go about curating your friends and networks? What has become less important, more important in people?

“I find it most important in getting to know new people.

Listen to people and their different points of views. The further you rise in an organization, the more you find people trying to please you – which is logical enough. They tell you what they think you want to hear in an attempt to make themselves more pleasant, more promotable. It is important to be surrounded by a wide range of people. Farmers in the mountains, professors, musicians – nothing that is related to business. The worst is sticking to economists!”

I might quote you on this, your “It is important to PR team will have a field day. be surrounded by a But seriously, how common wide range of peowould you say it is for economists to have an artistic side? ple. Farmers in the “Life is not economics,” he mountains, professays, his voice carrying sors, musicians – weight. “As economics ennothing that is croaches on every aspect of life, I think we need to rebel related to business.” a little bit against putting a price on everything.” Quoting Oscar Wilde, he continues: “Nowadays people know the price of everything, and the value of nothing. What is valuable in life is quite often priceless, by definition making it rather cheap or costing nothing. And the stuff that people aspire to costing millions, it doesn’t buy much personal satisfaction, just status.”

Is the amount of value that we as a society place on the arts diminishing? There are many among us who discourage the arts as a form of living. Art is considered a hobby to be pursued in one’s spare time as it is not a driver of money. Is this disconnect a matter of concern?

“Personally, I think that’s the wrong choice. If you do something that gives you money instead of doing something you like, suddenly you’ve spent over 30 years working over 10 hours a day waiting until you’re a pensioner to pursue what you really wanted. And then you get cancer with one year to live with the millions you’ve made, if you’ve made them.”

Acerbic but not untrue. “In our advanced societies people generally have enough to live. People do not die of hunger.

If you have your basic needs met, pursue living. Whether you make millions or billions or nothing, you will one day die.

Pursuing money, for money’s sake, is one of the poorest things that people can get confined to without realising it.”

Careers

Well for those people who do find themselves in this corner – is it not the system to blame for their perception of what life, money, and work are?

“You cannot blame the system.” (Dr. Dittus is clearly no anarchist) “The system is an influence, but what is it? It’s your parents, friends, family, and classmates, and they all have an impact on what you think. If they think that the right path lies in a big organization, or in a fast-track career like McKinsey, then you obviously do too. But if you think, hey – I just want to play my guitar, you might not because you might look odd.” And no one wants to look odd.

When you wanted to go into economics, did you have those discouraging you?

“Well, everyone. I had very good grades at school, and at that time the better option was to go into medicine. As a doctor you’d make lots of money and have a comfortable living. People said you’ve got the grades, so why don’t you become a doctor? I simply was not interested.”

Which is funny because now when you get good grades, you become an Economist.

Tell me a bit more about key aspects in your life. Can you identify turning points in your career? in your personal life? in friendships?

“Perhaps the most vital was marrying my wife.” An active pianist, she keeps art alive in the world of economics.

“Secondly, I always try to learn new things. I’ve never thought about my career, I just wanted to do interesting things that I liked. The career progression has been a natural consequence of that, albeit a lucky consequence.”

Do you think that luck’s role in our lives tends to be underestimated? Can one mitigate luck through hard work?

“Luck is probably the distinguishing feature, regardless of hard work. If you look at Darwinian theory, it has sometimes been interpreted that the fittest survives. But what defines the fittest? It’s not the most hardworking or cleverest or smartest. It’s the one who, through sheer genetic traits and mutations – random mutations – who happens by luck “If you look at to have the right qualities in Darwinian theory, order to survive in a world as it has sometimes it is currently.”

“You can’t know this ex-ante.

There are plenty of bright and hardworking people, and those who end up at the top, they are lucky, or better put, a random draw. Even among the most hardworking and brightest, it’s a population-wide lucky draw.

been interpreted that the fittest survives. But what defines the fittest? It’s not the most hardworking or cleverest or smartest.”

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Careers You could increase your chances through hard work, discipline, etc. but take a look around: there are very few very dumb people in high positions, but as to whether they are all really all that brilliant, I would doubt.”

What is success to you, and how do you go about measuring it?

“Success is a mark-up, dependent on circumstances present in that environment. What is successful in a Tuareg tribe is not what is successful in New York City. So yes, I’m pretty jaded by what success means. If you are a big boss in a big company, is that success? Despite perhaps leading a miserable life, three divorces, and nothing better to do than latenight TV and alcohol? Success should be measured in terms of the richness of your life, not wealth. As to what society thinks about that, that’s society’s problem, not yours.”

A more fun question. If you were to assemble a circle of advisors, who would you go about choosing?

“I would definitely pick people from different ends of the spectrum, but who have enough of a common background so they can communicate effectively without digressing into semantics. A small group of equals. People who aren’t dependent on you, so that their advice can remain fair and objective. Honest advice to you, even if it is detrimental to their interests.”

The clock’s nearing the 40-minute mark now, and our coffees are cold. When I sat about preparing for this interview, I was doggedly determined in making it as little about economics as possible. This was to be about the man, not the office.

What are you anxious about, Peter?

“I don’t think I’m anxious. When you’re anxious it’s because you want to achieve something badly – and that’s not my case. Perhaps people are anxious about death, but you have to sort of wrap your head around the concept. It takes quite some time to do that, but once you comprehend death, it is not so terrible. Dying perhaps, but death no. So that doesn’t keep me awake at night.”

“Professionally now, I’m not looking for a different job – I’m not anxious about that. There are points in one’s life when opportunities present themselves, bridges you didn’t see coming, taking you some place better, different. At such points, everyone is anxious. You’d be lying if you said otherwise. But you need to exercise perspective. Is it an all or nothing situation, or is it something that I’d like, but not something that will be the end of the world if I don’t have it?

As long as you are able to exercise perspective, anxiety remains within the limits of your control. If you’re being eaten up by it, it’s perhaps because you do not know what exactly it is that you want – or you’re simply succumbing to boundless ambition.”

Remember kids, don’t succumb to boundless ambition.

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Careers

Think in

Alternatives!

Gentiana Imeri Interview with Dr. Dr. Armin Steinbach Armin Steinbach is a Senior Research Fellow of the Max Planck Society for the Advancement of Science (MPG), which is named after its first president, theoretical physicist Max Planck. The MPG conducts basic research in the service of the general public in the natural sciences, life sciences, social sciences, and the humanities. With 18 Nobel laureates under its fellows since its establishment in 1948, it enjoys a world-leading reputation as a research organization. Armin Steinbach who has a background in law and in economics is currently Deputy Professor at the University of St.Gallen’s Chair of Law & Economics, Legal Theory, Public International Law and European Law. We had the chance to talk to him about his academic life.

You are a Senior Research Fellow at the Max Planck Institute (MPI) for Research on Collective Goods. What exactly does it mean to be a “fellow” of a research institute?

As a “fellow” you actively participate in the research community. You develop your individual research agenda, you pursue joint research projects with other researchers and share your research results with others, and vice versa. All this implies a lot of freedom: You decide on your own working schedule, nobody tells you when and where you have to be.

I like it.

There are other research organizations. Why did you choose the Max Planck Society? And why the MPI for Research on Collective Goods?

The MPG certainly enjoys an excellent reputation due to both academic excellence and ideal research conditions. In my view, the working conditions in terms of availability of resources, funding for projects, and academic freedom are by far better than typical researcher jobs at a university. That is why I chose the MPG. The MPI for Collective Goods in par-

ticular is a hotspot for interdisciplinary work and thus matches my mixed background. I meet lawyers, economists, psychologists and sociologists. You may imagine that the interdisciplinary exchange can be quite inspiring and opens you a world beyond your own discipline.

The Max Planck Society hires more than 5000 scientists and it is organized in more than 80 research institutes. You are in the research unit of Prof. Engel, which counts other 17 researchers. How is research organized in such an environment?

Academic freedom is the overarching feature at this institute. Nothing is mandatory, everything is voluntary. You “You talk to other talk to other researchers researchers over over lunch or coffee, somelunch or coffee, times this is how you start a new joint research project. sometimes this is Once per week, researchers how you start a present their work to every- new joint research body else and get feedback –

project.”

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Careers this can be very helpful for your work. The projects, as currently mine, can be very different: I am doing an empirical work on the Euro crisis, but I am also writing a paper on German constitutional law – topics can be very different.

Time horizons can be very different too, depending on the topic. Empirical work usually takes very long, especially if it implies experimental work in a laboratory. Purely legal issues can be accomplished much faster.

Your research area encompasses International, European and Constitutional Law, Economic Policy, Institutional Economics, and Energy Policy. On what are you working currently and to what extent can you profit from the MPI infrastructure?

As every researcher, I have a number of projects going on.

One is empirical: I study the bond spreads of countries during the Euro crisis to find out what made them so volatile.

Another work is legal: Which are the rules and conditions that the European Central Bank and national central banks have to observe when providing liquidity to banks? And a further project is interdisciplinary: We analyze European Law and International Law with economic instruments.

The MPI infrastructure is just excellent. Every researcher has his own individual budget, gets his personal laptop and office, and can order any book he or she wants. In addition, empirical work can cost lots of money, if, for example, laboratory experiments are conducted. The MPI is very generous in supporting viable research projects.

You are also a Gwilym Gibbon Fellow at the Nuffield College (Oxford University). Assuming that there comes a point in time where you have to decide for one institution, for which would you rather go, and why?

Difficult to say, but research-wise I would prefer being affiliated with the MPI at this stage of my career. By contrast, in view of a future permanent post as professor, there is no way around universities. Ultimately, you need to find a university hiring you as a professor. I do not see an alternative to universities if you want to stay in serious academia.

How do you define good research and what is your ultimate goal as a researcher?

Good research means to me to identify an interesting research question, ideally with real world relevance, and then apply solid methods in exploring the question. My ultimate goal as a researcher is to remain motivated in doing interesting research projects that may also be of interest to other researchers.

You are also an official of the German Federal Ministry of Economy and Energy but you are currently on leave. Why are you on leave?

It’s good to have the option to return to public service. It can be an extremely rewarding job if you happen to work on interesting projects in public service. It’s reality, whereas ac34

ademia is often far away from the real world. I can well imagine to return to public service – in my view, it is important to think in alternatives. This is what I would advise every “Good research student: Look around for al- means to me to ternatives and save your opidentify an inter­ tions.

esting research question, ideally with real world relevance, and then apply solid methods in exploring the question.”

You need therefore a plan B if it turns out that academia is not the thing you want to do forever. But how long is the ticket to the “real world” valid? And how do you deal with this (potential) timeout?

Good question. Generally, my impression is that law firms, companies or public service highly appreciate some academic experience, documented through, for example, a PhD. So, going for a PhD is not a waste of time, even if you do not want to stay in academia. However, if you go for a Post-Doc after your PhD, you should have a strong preference for academia. Generally, there is not a strict deadline when it is too late, but the completion of your PhD is certainly some kind of cross-road.

Which advice would you give to young and ambitious PhD students for their future path?

I can share my very personal perspective only: Again, think in alternatives. Don’t confine yourself to one path only, try out different things, at different places, keep in touch with real world problems, look for an academic supervisor who offers you opportunities and promotes your academic freedom.

Careers

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The Dufour Street Journal is an accredited association at the University of St. Gallen, and publishes an English-language student-run publication each semester. In our bi-annual issues, we aim to provide students with a platform to analyse and discuss the latest events in economics, politics and academia.

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