August 16, 2014

Tottenham Hotspur (Lack of)-Economics

Tottenham Hotspur (a football team in the English Premier League) is a perfect example of a demand-driven recession. Two seasons ago, TH sold their best player Gareth Bale to Real Madrid for close to 100 mln. euro, making him the most expensive player in the world. They had more than enough cash to replace Bale and then some. The supply of resources was (and is) clearly there, as the team was sitting on a 9-digit pile of cash. Instead of buying quality talent like Arturo Vidal, Mesut Ozil, Falcao, they brought in sh*tty young and dirt-old players (except for Lloris and Erickson whose 8 mln. price was a joke) who are yet to establish themselves. TH bought in total 13 players since the Bale sale, and have failed to finish in the Top 4 despite the ample resources. 

The problem lies, of course, on the demand side of the equation. No serious player (like the aforementioned Vidal or Ozil or Falcao, or Cavani) in his sane and sober state of mind would agree to join the Hotspur. The supply is there, but there is little demand for TH from the players' side. Exactly the same situation dragged us into the liquidity trap - banks and other financial institutions sat on billions of dollars looking for projects to invest in. The suppy was and is there. What the economy lacked is sufficient market demand and network trust. Nobody serious wants to play for Tottenham, since nobody seriously trusts their Top 4 ambitions. Nobody wants to invest in risky projects (that could speed up growth), since people still haven't recovered the trust in the financial system. Basically, Tottenham is in a liquidity trap ("attracting normal football players" trap) and Daniel Levy is Alan Greenspan.


July 5, 2014

Home and Dowry Foundation - A Financial Plan

Marriage is an extremely important event for Azerbaijanis. For some reason, when a girl is born her parents are already looking for suiting husbands and are contemplating her engagement ceremony. [Sidenote: as far as I heard, in countries like Pakistan the situation is yet more serious - families collect and preserve golden things from the moment of a girl's birth until her marriage, thus preparing her dowry]. Personally, I would be dreaming of seeing my children graduate from a good university or establish themselves as reknown practicioners and experts of some interesting field. The people are so obssessed about marriage that literally the first question that a young male and especially female get asked at any sort of social and/or family gathering is "are you still single?" With the key word being, of course, "still". Being 21 and single for a female is strange. Being 25 and still single is a catastrophe of intergalactic proportions. I have complained about these short-mindended presumptions in earlier posts and this isn't really the point at the moment.

Being an economist, my brain operates strictly in the Samuelsian demand-supply paradigm. If the issue of marriage is so cared for in the region, why not exploit this demographic trend with a proper financial motive? I propose to establish a "Home and Dowry Foundation" which will solve all of the people's problems. The entity will operate as a mutual fund. They already have such vehicles for education-related savings. So, why not structure a similar instrument for marriages?

When a boy is born, caring parents instantaneously plan on purchasing him a home as a gift for his marriage so he can move in with his fiancee/wife. This is a substantial financial investment for families of all financial strata, let alone of the developing world. What the parents do is as soon as the baby boy is born, they register at the Home and Dowry Foundation (HDF) and sign an 20-year contract, assuming that marriage won't happen until then. After 20 years they receive a brand new apartment (withouth furniture, which will naturally be provided by the female side of the marriage arrangement, and can also be financed by the HDF). In return, one of the parents or legal guardians obliges to not leave the country for more than 3 months at a time (except for emergencies) and not change citizenship during the 20-year period.

Upon registration of 1000 babies (for example), the Fund is now in de facto possession of 1000 parents who promised to reside in the country for 20 years - reside, consume, pay taxes, etc. Macroeconomically, this is a very nice arrangement that prevents unwanted labor and population migration. Each baby provides no principal at the start of the contract. In return, the parent/guardian which promised to reside for 20 years, promises to contribute 10% of his monthly salary to the pool. The transactions can occur automatically, like the ones for pension contributions. Assuming a 1000$ monthly wage, the parent contributes 100 per month, 1200 per year, totalling $24000 after 20 years. It is nowhere near the average price for a decent apartment. Considering the 1000 babies in a basket, we have $24,000,000 of total monthly contributions over the 20-month period. The Fund invests contributions, earning a compound interest of, say, 8% with single annual compounding, yielding $59,307,505. These are fairly conservative assumptions, and under positive scenarios the interest gain from capital markets can reach 10% if invested in stock and with favorite macroeconomic conditions. So, with $60 mln, each 18 year-old teenager is entitled to roughly $60,000. The kick is that there is usually a huge difference in apartment prices on a retail (single purchase) and wholesale (building the whole block) level.

With the $59.3 mln, the Fund needs to provide 1000 apartments for the 1000 members if the given basket. On the retail level, each member would have bought an apartment for around $60,000. But the Fund can take advantage of the economies of scale and actually purchase land, build the apartment blocks, and thus save a lot of money for itself (and for the contributing families as well). Now I can speculate that to build an apartment block in Baku, Azerbaijan, one would need land and the actual building. Comparing to comparable prices in London, a piece of land suitable for a large block would cost $2 million. Further $2 million are needed for building design, erection, worker wages, materials, etc. Consider a 20-storied building with 4 flats per floor, yielding 80 flats. Let's build 13 of them, leading to 1040 flats.

So we end up with the required 1000 flats in 13 buildings of 20 stores high, 4 flats per floor, and each building costing $2 million per construction and further $2 million per land purchase. We have spent $52 million. Out of the remaining roughly $7 million, say that $2 million were spent on other expenses during the project - taxes, construction permit, etc. About $5 million remain in pure profits for the Fund. This is about 8.5% of the total amount of $59 million. The same mechanism works for the female side of the marriage arrangement. When the girl is born, parents are planning on purchasing dowry for her future house - furniture, gold, utensils, etc. Maybe not as expensive as purchasing an apartment, but this is also a significant investment. The Fund can collect, invest, and purchase dowry on wholesale level, thus satisfying each participant's needs and maybe even make a profit in the meantime.

The morale of the post is that demographics and people are very important. Their beliefs, traditions, expectations form their consumption and saving behavioral patterns, and thus affect the macro-financial environment and asset prices. Our job is to monitor and locate important demographic trends, design the required economic and financial instruments, and ultimately provide the supply for the demand.

July 1, 2014

Shopping Malls and Economic Demography

I never fully appreciated the erection of multiple huge shopping malls around Baku, until very recently. To me, what all emerging markets need is a better welfare state and creation of an environment that fosters idea-generation and innovation. But what do I know about life. In any case, apart from offering the middle-income consumers shopping and leisure time, the gigantic shopping malls serve a rather peculiar hidden purpose. I am not sure if those who give orders to build the malls actually intended to use them this way, but this is the way I see it.

Several years ago they started with building the luxurious Park Bulvar - a multi-stored shopping mall by the seaside of Baku's gorgeous boulevard. It has everything that Harrods or La Rinascente have (almost). The masses, of course, are magnetically attracted to the mall and start over-crowding the mall: both inside and outside. Slowly, the mall is becoming the epicenter of all social gatherings until there is literally no physical place left. Now we are entering the paradigm of economic geography and demographics. The people are targeting the mall for most of their shopping and recreative activities and migrate towards its location. Now the mall is not just a revenue-generating joint for the owners (state or private, doesn't matter) but also a useful tool for directing intra-city migration.

They continued by building several other shopping malls - all spread out around the city. The interesting thing, and the morale of this post, is that selection of location of any new mall can carry significant demographic consequences. Building a new mall in the relative outskirts of Baku (for those who know - Azurre mall) can alleviate the pressure on Park Bulvar and the 28 Mall. Ideally, with careful strategizing the city council can solve the problem of massive overcrowding in several socially-favourite locations in the city center.

The problem, of course, is that simply erecting another shopping mall in the middle of a desert (Las Vegas alert) will not instantly work. We need infrastructure around the magnet to let the masses get to and out of the mall quickly and safely. If malls are self-sustained, i.e. have places for food, shopping, cinema, recreation, concerts, then nothing else is needed to be built around the mall. Just a single multi-stored building with the right infrastructure (good roads, bus stops, and underground) are enough, in principle, to redirect the masses from the already-populat malls to the newly created ones.

Another positive thing is that in the past people living in the non-central parts of the city would migrate to the Park Bulvar for the weekends and overcrowd the place. Now, with more malls being build around the town, people living in the corner locations can target their closest malls. Granted that a mall built in the corner is just as good as the Park Bulvar, people will see no intrinsic value in commuting to Park Bulvar, waste time, and ultimaltely get the same services; so, they will shop and recreate at the nearest mall. And this is the whole point. Northern population spends its time at the "Northern Mall", Southern at the "Southern Mall", and so on.

As a digression, this is basically how the modern China was built. The famous Westward Expansion project essentially followed the same logic, although on a much more "macro" scale, of course. Erection of one large and good city to the west of Beijing or Shanghai will attract the local population towards the new town and not to the over-populated megapolises. After the new city becomes over-crowded too, a fourth city is built, and so on until the country is geographically non-dispersed in terms of good cities. Shopping malls serve the same purpose - equal demogprahic/urban/geographic spread of population around the capital city through recreational centers that act as magnets for the masses.

June 30, 2014

Ramadan Economics

The month of Ramadan started yesterday, and I decided to add some food for thought on this very important economic phenomenon. Yes, even the religious traditions like Ramadan, which from first sight have no connection to economics and asset pricing, can be easily analyzed through the prism of the subject. Ramadan affects all muslims worldwide, either heavily practicing or nominal, which amounts to a billion people. Every year, millions of people choose to fast (not eat or drink between the sunrise and the sunset). This is an enormous demographic event that should be understood very carefully by businesses, financists, and economists (me).

The demographic channel of transmission from Ramadan to prices is multi-fold. First, people stop consuming food and water during day time. Where do people typically purchase their food and drinks in normal times? Do people mostly eat at home or go out? If the latter holds, then what cuisine do people prefer in general, or at least what types and/or brands of goods they like or dislike the most? Answers to these questions carry a huge importance for price changes during the month of Ramadan. Consider, for instance, that a sharp drop in consumption of retail water (water sold in bottles from shops and small stores) can overload the supply and, given that fasting lasts for 30 days, can put a negative pressure on the price of water. In addition, cafes and restaurants around cities and towns will see a noticable drop in the number of customers during day-time. Depending on consumer preferences, the effect on prices can be heterogeneous. The vast majority of muslims, even those who do not pray regularly (as Islam mandates) usually choose to fast. Therefore, the consumption effect can be huge, and the restaurant business can suffer from an unexpected shock to inventories if business owners do not take the Ramadan effect fully into account.

After the daytime fasting when, as discussed above, retail water and food sellers can witness a drop in demand, people break the fast by usually consuming higher-than-normal amounts of food and water. Now the key question is: where do people prefer to break? If the masses break at home then they would typically prepare for the break by purchasing goods from large supermarkets (Tesco, WallMart, Sainsbury, etc) and cook. A further question then becomes: how do people want to break? This question can point at the types of goods that can be affected by the fast-breaking event. If people prefer to break by going out, then obviously the preferences over cuisine type, location, and household income can affect restaurant food prices.

Another obvious effect that Ramadan has is on the prices and consumption of alcohol. I do not have data on pre- and post-Ramadan alcohol consumption trends, but what I observe is that in muslim-oriented countries where the majority fasts, even those who choose not to fast generally withholds from consuming alcoholic beverages for social reasons. This is an incredibly important factor for alcohol producers and retailers. A similar logic holds for tobacco, although it is not as simple since there is not much in the muslim lore that prohibits nicotine as explicitly as it does alcohol.

Ramadan is a religious holiday. But in economics, it is a demographic event of massive proportions. It affects hundreds of millions of people, their consumption decisions, prices on food, water, and alcohol. There are many other aspects that are indirectly connected with this important holiday. The holistic message of this post is that economics is not just about textbook intersections of supply and demand, taxation, and GDP decomposition. It is more often than not simply about people making everyday consumption decisions which, in the aggregate, can amount to very substantial figures. Our job is to better understand and prepare for the events (such as Ramadan) that trigger demographic trends which, in return, affect markets and prices.

June 28, 2014

Knowledge and Economic Growth

Found this table that I made a while ago for an ILO project, and decided to share it with the readers. It's amazing that I didn't do it earler given the strikingly clear message that the data conveys: there is a 90% correlation between GDP per capita and number of researchers per capita. 90%! I am perfectly aware of causation vs. correlation, endogeneity, and all this stuff, but this is a substantial figure. As a footnote, when I was doing this analysis I was interested in the question of research and growth determination. As an Azerbaijani living in the world of ideas, I wanted to quickly check which of the three factors (expenditures, researchers, or publications) have a better fit for GDP per capita. Simple data collection and correlation analysis produced this result. Money helps, but expenditure alone does not produce ideas, innovation, and growth. This is something I have been preaching for a while now.

Knowledge and Economic Growth
R&D Expenditures, % of GDP
Researchers per Million of Inhabitants
Scientific Publications
GDP per capita, PPP
United States
South Korea
Correlation with GDP per capita*
Note: Scientific data taken from the UNESCO Science Report, 2010. GDP data taken from IMF Statistics, 2012. * - Correlation measured by a basic correlation coefficient between corresponding measures of scientific capacity and GDP per capita.

June 26, 2014

Three Ways To Epica (Also Economic Growth)

There are, in principle, three major demographic drivers of actual economic growth: pure population growth, productivity growth, and labor utilization growth. Population growth stands for what it explicitly implies - simply more people reproducing and more babies crying around. This is, holistically, beautiful but economically not so much. More on that later. Productivity growth is, arguably, the most important single determinant of long-term economic growth. And labor utilization is the capacity to activate, in economic terms, as many potentially employable people as possible.

In the long run we are all Malthusians, because the Earth can accommodate only so many people. Granted continuous rise in living standards, eradication of most deadly diseases, and better access to contraceptives we will continue to witness a continuous decline in fertility and average family sizes, and a longer life expectancy. In addition, better access to education, delayed marriages, and postponed parenthood, will also put a negative pressure on population growth. Which is of course a positive thing because I don't think that economic growth should sustainably rely on population growth.

Productivity is, for better or worse, an uncontrollable factor. Productivity is essentially rising utilization of existing resources at a decreasing cost. For example, being able to produce one object by spending 1 hour instead of 2 means being more productive, ceteris paribus. The amazing thing about productivity is that waves of innovation can deliver extraordinary improvements in the standard of living within short periods of time (just remember the internet and the .com revolution). On the flip side of the coin, innovation is a holistic process and productivity growth is achieved mostly by intellectual effort of original thinkers - innovators - rather than by directed state-driven action. Productivity can be fostered by providing a proper system of intellectual rights protection , lowering taxes, eliminating corruption, etc. But at the end of the day, it can take many years until the next cycle of substantial productivity expansion can take place.

It is incredible that policy-makers are searching for solutions to the problem of stagnated growth in the post-crisis era whereas the easiest most logical solution is right before us - labor utilization. By that I mean three things - female empowerment, active pensioners, and youth employment. Women make up more than 50% of the world's population and are yet to be fully utilized in the developed economies, let alone in emerging markets. Women need better access to education and financing, maternal assistance, and better intergenerational transfers of knowledge. Pensioners traditionally break up all connections with the labor market once they hit the retirement age. The new millenium would welcome more actively engaged pensioners - some can still work in air-conditioned environments when they are 70, even 80 years old; part-time, distant employment, or working from home are other flexible alternatives. Making the mandatory retirement age more flexible is also an interesting alternative. The mobile youth (17-24) can agree to work for low pay and very adjustable schedules and locations. Ironically, historically high youth unemployment is the most catastrophic demographic consequence of the Financial Crisis.

To me, higher labor force utilization (not population growth or better productivity) should be the immediate focus of attention for politicians, economists, and financists. This is a politically feasible, economically sustainable, financially profitable, and demographically holistic solution to stagnating growth.

June 24, 2014

Female Empowerment

Whenever I read or hear about female empowerment and the challenges associated with better utilization of the female labor force, I almost always hear about maternal assistance and access to education. The narrative of female engagement is usually told through these two prisms: women spend much more time, on average, than men on child upbringing. Because the system of maternal assistance for working women is still a work in progress in developing and emerging markets, women often forgo job opportunities and sacrifice a career for their family. Secondly, partially because women get married relatively earlier than men, because of various institutional hindrances, and also because in many parts of the world this is still unfortunatelly a negatively looked-upon phenomenon, women have poor access to education.

Azerbaijan, for one, has placed a handful of girls in top institutions around the world, at both undergraduate and graduate levels. But we are not talking, of course, about a handful selection but about the masses. The two problems mentioned above are important in their own right. But I think that an issue that does not get enough proper attention is poor inter-generational transfers of knowledge. I have touched upon this matter some time ago and would want to add some further points.

What I notice, in Azerbaijan at least, is that most girls are facing a mental rather than an institutional or financial or family-related hurdle when accessing higher education and utilizing their skills. From the young age, girls in many parts of the world are brought up to fulfill a supporting role - taking care of their husband, children, and aging parents. Girls are often forbidden taking courses abroad, let alone studying towards masters and PhD degrees, by their parents - not by governments, society, or institutions. Financially well supported, and facing no explicit institutional barriers, girls face a mentality problem instilled during kindergarten years by their parents and relatives.

Generally, the knowledge transfer follows along the female side. Mothers and grandmothers, with the latter being even more conservative, present themeselves as followable examples which girls must imitate. Much of what they teach is very respectable: qualities such as patience, flexibility, respect. Some teachings on the other hand are outdated and are not appropriate for the new millenium. More and more families now have two fully employed adults. Women often earn more, and much more, than their male partners. Christine Lagarde, Angela Merkel, and many others have proven that women can lead global institutions and nations, and indeed much more successfully than some of their male counterparts.

The biggest problem is marriage expectancy. For an unknown to me reason, it is generally believed that if a girl is still single by the age of 25, all is lost and she will never get married. This is, of course, completely outdated and simply not true. In many countries, such as Italy where I have spent two years, females get married and have children, on average, when they turn 29 or even in early 30s. In other words, there is absolutely nothing that should diminish a girl's "chances" on the "marriage market" if she is 28-32 but already educated, successful, and has a good understanding of how relationships and the world works. Why do the older generations believe that girls, marrying at the age of 21, 20, and for God's sake, 18, can become proper life partners - is beyond me.

Naturally, I am not talking about cases where early marriage, becoming a housewife and taking care of children, is a rational decision taken by the female agent. My problem is that girls should not be brought up in a restricted environment where dreaming big, traveling, studying, working is a portrayed as a "man's thing" and girls are better be left at home. I have no expectation that the conservative older generations will read this post and suddenly "open their eyes" and let the girls strive for greatness. My only thoughts are two-fold: first, the role of the government in this case is clear - instruction and education of the older generations on how to empower young girls is just as important as allowing them to borrow finances for education, or getting a well-paying job. Secondly, young girls reading this should understand that they are grown-up adults and can make their own decisions. Borrowing from a bank, working in an industry you enjoy, saving and spending, travelling, studying abroad, and yet having a good family at the same time - is not just a possibility. This is reality that millions of women in the West currently enjoy. And if they can achieve a perfect work-life balance, then so can you.

June 23, 2014

Good Families

Azerbaijani families are generally very united. And I am not talking of direct and closest relatives only. It is very typical to see one moderately or considerably successful household to support multiple families, one way or another related to it. Vertical family bonds (across generations) are particularly strong. Parents often support their sons (aggressively) until they stand firmly on their feet. Which, of course, can happen anytime between the age of 18 and 38.

Living with parents is very common, although men usually deny that they are living with their parents, instead claiming that their parents are staying with them temporarily. Situation with daughters is a bit different; girls are expected to get married (preferably earlier than later) and do not depend financially on their parents as much as they do, naturally, on their husbands. But, of course, situations differ, and especially these years. On the other hand, children are generally very supportive of their aging parents. The life-cycle is extremely important for societies where family plays an important role as an institution. And so grown-up children treat it as a natural, and expected, responsibility to take care of their old parents. At least partially. 

This is actually an extremely important nuance - that middle-aged Azerbaijanis plan and expect to take care of their parents. Although pension support provided by the state has increased in the past decade, it is nowhere nearly enough to survive, let alone to have a decent living. The fact that 30-60-year olds anticipate supporting their parents affects directly their consumption and saving decisions. Children become, de facto, private pension funds which earn and accumulate wealth which later gets distributed across the middle-aged, the old-aged, and newly-born (third generation) agents.

The primary reason why any normal Azerbaijani expects to support their aging parents is precisely because of the inadequate pension system. Yes, not only are the pension packages small, but the system itself is basically in infant stages. On the flip side of the coin, an important reason why the development of the pension system somehow isn't a nation-wide priority number one (it should be) is exactly the additional support that pensioners receive from non-governmental channels: own private savings, relatives, old colleagues, sons, daughters and their husbands. Basically, we are talking about millions of dollars-worth of wealth that would have been spent by an middle-aged agent if the pension support had been adequate.

Meanwhile, if one considers the average pension package to be small, then the rest of the welfare state is in an even worse shape. Let's just say that the welfare state, including support for the unemployed, single mothers, young females, families with more than 5 children, invalids, is a work in process. Continuing our story with sons supported by their ever-caring parents, boys who complete their high-school and/or university education generally spend one year in the army. After which they begin the joyful stage of job-seeking. Well-educated youth usually find a decently-paying job fairly easily. However, if the work-seeking exercise fails, parents step in by either providing contacts or offering money directly.

Again, the only reason why rational parents understand that an unlucky child (regardless of the gender) needs their help is because relying on alternative options is not realistic. Support for young and/or single mothers, the unemployed youth, young mortgage-paying families, is existant but unsatisfactory. And the primary reason why the formation of an all-around Azerbaijani welfare state is not yet a nationwide strategic agenda for the next 10 years (it really, really should be) is because nobody is seriously voicing concerns about its absense.

Good, strong, supportive families, have long been a cultural thing in this country. And in many other places as well. Ironically, the benefit of the caring father or a loyal child are individually wonderful actions which end up leading to collective sub-optimality. If parents, roughly speaking, threw their adolescent children to the streets as soon as they hit 18, urging them to learn to surivive on their own; if the middle-aged workers were to send their pensioner parents to nursing homes (or leave support-less), the state (or the private sector non-inclusive of the direct family) would need to fill the void. We are effectively talking about the reverse-crowd-out effect here: governmental action could have been, in principle, more generous if not for the overly active individual effort which leaves little or no motive for the state to do anything more than the bare minimum.

The irony is, of course, that neither myself nor anyone I know will consciously agree to not support our parents once they retire. Exactly because I, and everyone I know, do not trust that under the currently designed pension system our parents have any chance of surviving. Individually, I will most certainly make the righteous choice. Collectively though, the cycle will continue until we get the welfare state right.

June 20, 2014

Azerbaijan In The World Of Ideas

When I read that Tural Badirkhanli's "Namo Media" got purchased by Twitter I was happy. Pride, sorrow, hope - all these feelings overwhelmed me. I have never met the guy, and I am not sure that I ever will, but I want to thank Tural for becoming an inspiration for the modern generation of Azerbaijanis. The _correct_ inspiration, that will motivate our youth to achieve money, power, and fame for the sole righteous reason - ideas.

The Soviet Legacy has left many scars on Azerbaijan's identity. I am not in a position to debate on most of these issues. As an economist though it was hurting me for years to see the distortion in the motives and incentives that were driving economic growth and development in my country. Grassroot populism, easy money, rudimentary trade - appeared to be the "sure" paths for the young generation to get a "spot under the sun". Oil didn't make the landscape look any better. The threat of a spoiled generation, corrupted by the black curse, uninterested in learning and education, was looming. The incentive to strive for intellectual greatness tamed by the presence of "rich uncles" who can solve all your problems with a single phone call.

I am generalizing, of course, but for very good reasons. There are plenty of young Azerbaijanis - well educated, ambitious, talanted - who maintain the battle of incentives. Ideas, education, and intellect over lethargy, populism, and easy money. Many of these talents get lost through the battle fronts - some succumb to "easier" paths. Others indulge on empty political slogans and buy their way upward through propagandist nonsense. Very, very few stay loyal to the imperativism of intelligence and ideas.

A stable job, expensive car, elite circle of friends all too often seem the satisfactory end to personal development. Students at universities, and young professionals alike, view the light at the end of the tunnel as a pair of lights from a brand new Toyota Prado (black only) and a managerial position at some local commercial bank. I have absolutely nothing against bankers, or those enjoying their lives while being one. All I am saying that this not the end in itself: rather a means to achieving higher, more spiritually grounded, goals.

Money is good. Power is good. Fame (confidence/self-accomplishment) is good. But all these three necessary evils need to co-exist with their complementary virtues. Money needs to be earned through ideas, patented innovation, new products and services delivering good to societies around the world. Power comes with intellectual superiority, which is a direct product of knowledge - scientific, policy, social, whatever, but Knowledge! Fame, in healthy doses, is very important too. Young generations form ideals and stick to them for decades. The youth must have the right personalities to follow and to imitate.

Tural's story is exactly the story that all Azerbaijani students and young professionals must take very seriously and very personally. A talanted guy from a non-capital city, a Physics wunder-kind, MIT graduate. Life at his feet should he decide to follow the easier path - get an easy job which pays well, establish a social presence, and spend summers in Dubai. Instead, he quits Google (an amazing employer), founds a start-up company, and sells it to Twitter for 50 million dollars. He could have followed a much easier path. Instead he decided to change the world.

Tural is rich, powerful, and now very famous. But he has achieved his greatness by following the right incentives - intelligence, ideas, and hard work. Yes, most of us are probably not very talanted from birth, have limited intellectual capacity for technical subjects, and face various personal or social disturbances that prevent us from achieving our best. But if there is something that everyone in Azerbaijan should take from this story is the following:

Form correct incentives - money, power, and fame are to be achieved only by hard work, intelligence, and ideas.

Follow the right personalities - learn from those who deserve to be imitated, those who have accomplished something in life by doing the right thing.

Nothing is impossible - if a guy from Guba, Azerbaijan (never heard of this town, have you?) can be on the Bloomberg headlines then also can you.

Develop a good working ethic - do not underestimate the power of knowledge. Do not bypass education by seeking easier paths. Work very, very, very hard. It always pays off. Always.

Never give up - life is hard, but 50 miliion dollars is not a bad motivation, is it?

June 19, 2014

Caucasian Black Box

Our article with Balazs Egert (OECD), entitled "Interest rate pass-through and monetary policy asymmetry: A journey into the Caucasian black box", is now published in the Journal of Asian Economics. Link here. Needless to say, data-related work took a considerable amount of effort on our part. Our results should be of particular interest to the monetary economists and bankers connected to the region. Full paper is available upon request from one of us. Abstract is provided below.
This paper analyses the interest rate pass-through for five economies of the Caucasus – Armenia, Azerbaijan, Georgia, Kazakhstan, and Russia. Employing an autoregressive distributed lag (ARDL) specification to monthly data, we find that the interest rate pass-through is systematically incomplete and sluggish, probably due to macroeconomic instability and a low degree of competition in the banking sector. It is not clear whether pass-through has improved over time and asymmetric adjustment is found to characterize the pass-through only occasionally. Overall, our results show a considerable degree of cross-country heterogeneity in the pass-through.