Thoughts on this week's World Economic Forum in Davos

Like many around the world, I have been following this year's World Economic Forum in Davos, Switzerland. As I described in a previous blog post, lots of pressing issues are discussed among the leading policymakers from around the world. I mentioned the key points to this year's meeting and it includes many of the pressing issues that we as a world have to face today. Here is the link to the key moments that had happened during this year's World Economic Forum. From what I gather, this year is the year where a combination of low energy prices, terrorism, growing income inequality and a looming economic malaise surround the world at large. I believe the people at this particular conference talked about some of these pertinent issues and they have overall tackled some of the more pressing issues. These issues are very indeed alarming and I believe some of these issues can be tackled without the "action" that some of the conference attendees have come up with.

Thoughts on the key points of the yearly conference:

1. Reduce inequality, but to promote growth
The most pressing issue around the world is the growing inequality that has been prominent in world headlines and in numerous discussions between economists. As Thomas Piketty's book has reached its popularity around the world, numerous other economists and many politicians around the world has mentioned that this was a huge issue that needed to be tackled. There have been tremendous amounts of press coverage in the last couple of years towards this particular subject and the people at the forum have talked about various ways to tackle this pressing issue. Sustainable growth is something that the people at the forum have talked about as a possible resolution to the most critical issue presented at this particular conference. I believe that while it is possible to reduce inequality through promoting growth, it is also important to consider other possible solutions such as structural reform of key institutions and of how certain private institutions could function within the confines of society. It's interesting to note that while some solutions are offered, I believe there should be more radical solutions such as that posited by Piketty's Capital in the Twenty First Century than the more conservative ones mentioned at the forum.

Here are a couple of video links to certain conversations at the forum that concern this particular problematic issue and other related issues: The World Economic Outlook, IMF Director Christine Lagarde's Address, Issue Briefing: Income Inequality, BBC World Debate.


2. Europe's Quantitative Easing program
As announced in a previous post, the European Central Bank has announced a new massive quantitative easing program of over a trillion that will be pumped into the European economy. There has been a lot of discussion over this particular policy decision by the panel discussants at the forum, by top economists such as Robert J. Shiller, by the top bloggers and with some of my friends. As mentioned in a previous blog posts, there has been a tremendous controversy over this particular issue, with numerous speakers giving their particular opinion on the particular issue. Here's a list of quotes by key forum speakers and here's a video on the discussion of the effects of quantitative easing in the United States and beyond. Here are two contrasting opinion articles on the effects of quantitative easing, one from Professor Jeffrey Sachs and another from Stephen S. Roach. With this particular problem that has already been implemented by Mario Draghi, I believe it is important for them to promote these particular policies, even though there might be strong negative consequences that come from this round of quantitative easing, such as a combination of weak growth and of higher inflation that might come from this monetary policy, but we will have to wait and see.


3. Energy Prices
I think the recent drop in energy prices have been affecting everyone domestically here in the United States and globally around the world. Energy consumers have been given a break in the recent drop in petroleum prices, but energy producers have hit a wall. Countries such as Russia, Iran, Iraq, Venezuela and others will suffer tremendously in the coming years, which might contribute to significant political instability. I mentioned in an earlier blog post about Russia's internal and external problems, which I think will compound in the coming years. This will see a surge in Russia's more aggressive and nationalistic foreign policy. The oil producers will see significant domestic problems, which were already tremendous in volume, expand rapidly throughout the Middle East. We could see trouble in the coming years with this drop in oil prices because it cause an acute global recession.

Here's a video of an interesting panel discussion during the conference that concerned energy.

4. Market Volatility
The last important point that the people at the forum have made concerned with the issue of market volatility. The markets have been very volatile over the years since the Great Recession with the recent drop in energy prices and the global stock market rallies been at the forefront of discussion.

Here are a couple of discussions that deal with this pressing issue: Volatility as the New Normal, The New Growth Context.

Other Important Points:

1. China
A couple of key panel discussants talked about China at this year's conference, which included the Chinese Premier, Li Keqiang. As mentioned in a previous paragraph, he was one of the first to talk about the income inequality issue in an address to the Forum. China has tremendous challenges when it comes to its economy and its new role in the global economy, but I think it can be a tremendous benefit to the world to more fully incorporate a nation of China's size into the world economy. Here are two videos that address the issue of China in the world: Video of Premier Li Keqiang's Speech and China's Impact as a Global Investor.

2. Al Gore and Climate Change
There was a discussion by Al Gore and another discussion throughout the 4 day conference that concerned the topic of climate change. As many have watched Al Gore's documentary and other documentaries that have talked about the pressing issue of climate change, we can conclude that this is one of the more important topics talked among conference participants and conference followers. These two discussions presents the views of many that concerned this particular issue, with several others chiming in on the discussion. I think there are a tremendous number of economic issues that we will run into if we implement Al Gore's plan to combat climate change. I believe the biggest issue has to deal with the continued development of emerging economies and with the issue of lifting billions of individuals, while simultaneously counteracting this increase in carbon emissions and in pollution.

3. Conflict zones
There were a tremendous number of discussions that dealt with the increasing number of conflicts that have developed in the world, which include a variety of countries. This included actual military conflicts such as those in Syria, Ukraine and Iraq along with competing geopolitical games that larger powers are always conducting. The key discussion in this particular subject is that of the development of a new multi-polar world, which always had potentially dangerous consequences. This also leads us to the question of the viability of the democratic institutions, which has been the landmark of industrialized Western countries such as the United States. Is the end of history as describe by Francis Fukuyama not possible or is it a new chapter in history? We will have to wait and find out what unfolds in the coming years.

There were a lot of great panel discussions over the course of these 4 days in Davos. Despite the amount of content that was covered at this year's edition of the World Economic Forum, there are many economic (and political) issues that are still yet to be discussed. With the interesting economic and monetary situation unfolding in Europe and in Greece, we will have to wait and see what unravels.

Some Ideas on the possible application of Game Theory in exploring the lifting of the US embargo on Cuba

As I mentioned in a past blog post, there has been a lot of banter about the current restoration of diplomatic relations with the nation of Cuba. This post concerns something else that has been on my mind the last couple of weeks. It is probable application of game theory towards the field of international economics. Game theory is already used most intensively in several branches of economics (industrial organization, behavioral economics, information economics, political economy), but there's a lack of full application in other branches of economics such as international economics.

I have been intensely reading parts of a book by the late Stanford economics professor, John McMillan. The book goes through the lack of game theory application, despite obvious game theory-like applications within international economics. This book had given me several ideas on the possible wider probable usage of certain mathematical games within the fixture of game theory in order to be applied in the inner-working of international economics, especially in international trade. By utilizing the trade between Cuba and US as a possible example, we could possibly apply game theory to the increased link between the two countries versus the chief adversary of the US in Russia. Here are some possible applications that can be utilized, which also includes some articles on similar topics that I found, which had given me the impetus to write this article.

1. Embargo or No embargo payoff
By utilizing the simple stochastic multi-player games, we can determine payoff costs by comparing the embargo or no embargo payoff between the two different multi-layer outcomes of (Embargo) or (No Embargo). This is a rather simplistic explanation of such a multi-player stochastic game that we will need to construct in order to measure the payoffs in of the each quadrants, but there might be a need to construct algorithmic stochastic multi-player games. This need is not just based on the complexity of the variables, but also on the need to have more well-defined variables, especially when it comes to find the advantages to each variable. To further explore the information, you need to perhaps construct a more complex model, with the help of computer software, in which there needs to be a various number of factors included. These factors include the trade flow variables, the number of zero-sum games and cooperative games performed in each of the variables, etc. There needs to be a construction of a model that is complex enough to find the actual numbers of payoffs for each of the two factors, but I'm sure it'll indicate that the

This article by Professor Dobre Claudia Ioana strikes to me as an interesting implication of certain principles within the mathematical realm of game theory to something found in international economics -> international trade. It also has given me some impetus in coming up with the idea of implicating the methods of game theory in dealing with rather complex trade relations between the countries of Cuba and the US. By utilizing the basic idea around Part 2.3 of the article, we can calculate for the strategic trading policies that could potentially benefit both Cuba and the US. In this simplified case, we can solve for the Nash equilibrium within the confines of a non-cooperative game, the payoffs are as follows:

1. If Cuba does want to open up, the US wants to retain the trade embargo.
2. If Cuba does want to open up, the US removes the trade embargo, the US places favorable conditions for Cuba.
3. If Cuba does want to open up, the US removes the trade embargo and the US places unfavorable conditions for Cuba.

This is just the basic approach to the multi-faceted approach to determining the payoffs and the Nash equilibrium for this particular international trade situation. These are just some ideas of a possible design that could be brought forth and I'm still currently thinking about the various formulas and variables that could be realized to achieve a full and sustained approach to developing a solution to the problem.

2. Extensive Form Games
Another factor that should possibly be calculated is how the United States has to deal with how Russia responds to Cuba and vice versa. This particular situation can be characterized as a multi-player game where we need to figure out the payoffs and similar equilibriums. In this situation, we could potentially utilize extensive form games to factor each of the important factors between these three competing nations. It might be hard to characterize entire large economies as a single one micro body/ individual, but I believe that it can be surmised that all of these countries act as one single body.

The first series of extensive form games you could possibly calculate for certain payoffs between US-Cuba and between Russia-Cuba. By factoring the payoff decision-making numbers of this series of extensive form games (factors including certain firms, certain economic sectors, certain competitive indicators), you could potentially compare the numerical payoffs in each of these insistences.

After this, you could potentially utilize a second series of extensive form games to calculate the numerical payoff results that are resultant from the previous extensive form game. The numerical payoffs, along with certain control variables such as competitive advantage, gains/losses from trade and other indicators, are then calculated to determine whether or not the options are valid through the applicability of such a model.

The calculated effects on Cuba's trade policies in certain segments of their economy and the US economy could potentially benefit the US tremendously in that particular arena versus what the main US adversary has, which is Russia. By calculating for the potential benefits/pitfalls from them, one could be derive a simulation for a potential new international trade model.

(An introduction to Extensive Form games is found here, written/presented by Jonathan Levin, the winner of the 2011 John Bates Clark medal. These explanations are mostly meant for his field of concentration, which is industrial organization, but I think it gives a good idea of what extensive form games are.)

I believe the ideas that Professor Dobre Claudia Ioana and the late Professor John McMillan brought up offers a lot of hope for game theory to become a great potential tool for international economics/international trade researchers to continue to build onto. There could be lots of different ways to utilize these tools in its eventual development into useful tools for analyses of complex international trade situations/conflicts, such as that in this particular situation.

Thoughts on the economic benefits of renewed US-Cuba relations

As everyone is reading the morning paper or the news the last week, one of the most tense diplomatic relations in the history of the United States has finally been resolved. The United States has announced that they are moving to normalize relations with the island nation of Cuba after over 53 years after the implementation of diplomatic severance and economic embargo. This means that trade relations will be repaired between the two nations, which will help to reshape the Cuban economy. The Cuban economy has already been reshaped in the previous years by certain reforms implemented with varying results of success. There are certain activities that need to dealt with in more depth, such as good reform policies, smooth monetary conversion and reform of social institutions. Through the diplomatic restart and the economic benefits it will create, I believe these changes will create enormous economic benefits, despite the qualms that Senator Marco Rubio and others have towards the decision.

It is quite understandable that many, like Senator Rubio, would have problems with the current administration's policy towards the normalization of trade relations with Cuba, but the potential economic benefits are too enormous to ignore. A recent series of papers published by the Brookings Institution talked about the particular challenges in Cuba's shift away from a Stalinist-style central planned economy to a market socialist economy much like the one we see in mainland China or Vietnam. These six papers talk about the current conditions and the changes that are possible in the coming years to make this transformation happen. I think the articles are very informative of the particular situation, both long term and short term, that Cuba will face in the upcoming decade. Organized by the Brooking Institution's Latin American Initiative and the University of Havana's Center for the Study of the Cuban Economy, the six parts talk about important issues that concern this massive leap forward for the Cuban economy. There are several important points that I derived after quick glances at each other of the papers and I have listed them in the subsequent paragraphs.

1. Introduction and Overview - In this introductory section, Richard Feinberg summarized the six papers and provided the readers with the key points of the papers. These points are as follows:

• Cuba's new growth model vs the old growth model
• Building New economic institutions to sustain necessary market reforms
• The State and the Market -> How current political institutions interact with the newly created market economy
• Comparative Experiences in Asia and Latin America -> How Cuba compares to similar reform processes and utilizes Costa Rica as a comparison. 
• Tough Choices: Monetary Reforms and Exchange Rate Regimes -> Ideas and Reforming Cuba's dual-currency regime

2. Policies for Economic Growth: Cuba's New Era - This paper comes out with some particularly interesting ideas about policy ideas that Cuba could possibly implement in the coming decade. The paper focuses mostly on the structure of the Cuban economy and brings up interesting policy recommendations for the Cuban economy. Overall, I think Dr. Cordovi and Dr. Perez bring up interesting points on the need for both macroeconomic re-adjustment of planning policies, coupled with certain challenges in "microeconomic bottlenecks". I think it's special great that the two economists contend it's necessary for there to be an open discussion among economic decision-makers and policy theorists in Cuba.

3. Economic Transformation and Institutional Change in Cuba - Antonio Romero organizes this article into four main sections, which include the current economic transformation and possible steps to achieve maintain the economic change will clearly be implemented smoothly. By protecting these non-state economic enterprises with appropriate social enterprises and with clear established economic and administration decentralization, Dr. Romero makes great points in developing Cuba's economic transformation.

4. Institutional Changes of Cuba's Economic Social Reforms - Carmelo Mesa-Lago clearly articulates that there could be negative consequences to the institutional changes that Cuba has undergone, along with the many obvious positive consequences. While the institutional reforms have managed to develop the early beginnings of key economic institutions that are similar to those that are seen in the market socialist economies of China and Vietnam, there could be more enormous downside during the restructuring process. Dr. Mesa-Lago makes an important point about certain elements of the Cuban regime that might want to prevent the reforms from taking smoothly, especially in their deeply entrenched economic interests. He makes a good point in stating that these reforms should preferably happen under the current political leadership of Raul Castro, just in case the next leader decides to abort the process.

5. Economic Growth and Restructuring Through Trade and FDI - Costa Rican Experiences of Interest to Cuba - Alberto Trejos puts forward a solid case for the the applicability of the economic plan due to similarities between pre-reform Costa Rica and the current situation in Cuba. I think there are some merits to his argument, but it might not be the most feasible solution due to the enormous differences in political and social institutions between the two countries.

6. Monetary Reform in Cuba Leading Up to 2016 - Between Gradualism and the the "Big Bang" - Pavel Vidal Alejandro and Omar Everleny Perez Villanueva compare and contrast the two approaches to monetary reform in Cuba. Cuba currently has a dual-currency regime, between the Cuban Peso and the Convertible Cuban Peso, ever since its implementation in 1994. This has created enormous tensions between sections of the Cuban population due to the creation of a two-tier class system and the Cuban authorities see this as a key step to their economic reforms towards a market socialist system. I believe that a gradual monetary reform will benefit Cuba, but it cannot be put off for too long.

7. Exchange Rate Unification: The Cuban Case - Augusto de la Torre and Alain Ize talk about Cuba's drive to unify the currency system, which was a topic explored in the fifth paper of this paper series. They talk about the possible ways to unify the Cuban currency, along with certain methods in keeping each of the particular Cuban industries in mind. The most interesting aspect of this paper was the three particular choices they had in implementing the new exchange rate unification regime, which regrettably

Overall, I find this particular paper series by the Brookings Institution an enlightening and thoughtful read. It is evident that Cuba's road towards becoming an economic success story will be long and hard, but there are obvious benefits to the Cuban people. The ideas that are provided in these articles might not be implemented, but they showcase the beginning of an economy that will move from relative autarky to integration with the global economic system.

There are naysayers like Senator Marco Rubio, who has berated the resumption of diplomatic activities as a concession towards the dictatorial Cuban communist regime. Despite the obvious concerns that Mr. Rubio has brought attention to, there are other possible complications that might interfere at the speed of which the current developments are coming into fruition. A New York Times article, written by Neil Irwin, describes the possible complications that could come from America's renewed economic relationship with Cuba. The article brings up the thoughts of a recently published book written by Gary Hufbauer and Barbara Kotschwar, which would interest those that are concerned about the process of American economic normalization with Cuba. Gary Hufbauer, who formerly worked in the Nixon Administration during its normalization process with the People's Republic of China, talked about how it was of utmost importance that Cuba moves along with critical reforms. It is highlighted that they want it to be done correctly according to what they think would be beneficial for Cuba. It's highly unlikely that they would be able to implement such changes, but integrating Cuba into the global economic benefits would bring enormous benefits for the general Cuban population. If they could taste the outside world, then their situation could perhaps improve immensely.

By reviewing the information that I have gathered here, it should be evident that the benefits that United States could gain from the restoration of economic relations with the Cuba outweigh the detriments of such decisions. I believe that these changes will have a profound impact on the Cuban population in improving the economic well-being of the average Cuban, which will enable the average Cuban to be a lot freer than before. It will also open the door to American businesses in sectors like agriculture and it could prove to be a boon for established American companies, not just cigar importers.