the dufour street journal, vol. 1

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2–4Will the roasted rooster rear his head?

10–12Duck hunt in Washington

18–22Prof. Lechner talks to the DSJ

27–29Nicolas Cuche-Curti on central banking careers

Leadership

Volume 1 December 2014

Impressum

© Copyright 2014 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 1

Published December 2014, St. Gallen, Switzerland

Co-Editors-in-Chief: Nikita Khandelwal, Piotr Lukaszuk

Editorial Team: Akash Arasu, Alexander Bechtel, Guillaume Gabus, Vassilena Tcholakova, Salome Wittwer

Layout, Design and Illustrations: Fanny Oppler

IT and Web: Linda Verena Hess

Supported by the Mercator Foundation Switzerland within the scope of "Engagier dich!"

As Dr. Seuss wisely wrote, “we have brains in our head, we have feet in our shoes; we can steer ourselves in any direction we choose” - and so each volume of The Dufour Street Journal will steer itself towards the discussion, debate and analysis of a current topic. It seems right that we open the first edition of The Dufour Street Journal with an explo-ration of the notion of leadership, at a time when around the world, the conceptualisa-tion of leadership, authority, and the responsibility it brings has been thrown into question politically, economically, socially, and - perhaps even more disconcertingly - theoretically. An almost chronic dissatisfaction with leaders we elect has led to a broad-er disenchantment with political leadership. Economic leadership is no more successful; much of mainstream economic thought and practice has proved inadequate at dealing with critical issues that are relevant for the economy today.

We founded this journal under the belief that as students, we have an important role in shaping global debates. We would not have published without the support of a multitude of individuals who encouraged and shared our ideas. We hope you read, engage, discuss, and enjoy.

Foreword

Nikita Khandelwal Piotr Lukaszuk

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Economics & International MarketsWill the roasted rooster rear his head? 3

Leadership during bad times & austerity in Europe 5

Flash Boys, by Michael Lewis: a review 7

Management accounting in the Swiss healthcare system 8

International AffairsDuck hunt in Washington 11

Leadership under Modi: a new chance for the poor? 13

Potemkin’s Revival? 15

Leadership and Hypocrisy - do as we say, not as we do. 16

Wanted: Leadership 17

Research & AcademiaSports, econometrics, and the rain map of St. Gallen – An interview with Prof. Dr. Michael Lechner 19

Changing policy making, nudge by nudge! 23

Freakonomics 25

Econpop… or Adam Smith will haunt your dreams 26

CareersNicolas Cuche-Curti on economics, academics, and his career as a central banker 27

Content

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Economics & International Markets

In the beginning of the current century, things were looking up for Russia. The turbulence caused by the collapse of the Soviet Union, initial market shocks and the first stages of capital redistribution were subsiding. In fact, between 1999–2008, GDP growth was averaging 7% and, lured by hefty returns on invest-ment, foreign capital was rapidly flowing into the country. Further, when com-pared to the other so-called BRICS countries, although not without its peculiar-ities, Russia seemed more transparent, western-oriented and attractive as an economic partner.

Unfortunately, this miraculous turnaround had a quiet and abrupt end before it could even take full form. As the global financial meltdown of 2007–2008 en-gulfed the world, Russia, which was initially proclaimed as a ‘safe haven’ by its then financial minister, Sergey Kurdrin, turned out to be less than exceptional. Indeed, in 2009, the GDP dropped by 7.8% as Russia had the worst economic results of the G20 members and the stock market shrank by 80% from its highest point.

In some ways, this grave economic situation was not surprising, and may be best understood by an Old Russian proverb: “the Russian won’t budge until the roast-ed rooster pecks him in the rear”. Undeniably, the need for structural reforms and policy changes away from the country’s oil and gas pumping strategy was felt even before the crisis and the Russian ruling class was “pecked” into action. There was a newfound sense of hope for the new president, Dimitry Medvedev. He was considered innovative, liberally minded and a breath of fresh air to a lackluster economy. He launched several ambitious projects, a policy towards complete modernization, and mobilized all levels of the political hierarchy to-wards “innovation”.

Will the roasted rooster rear his head?Evgeny Avdeev

4

"The current eco-nomic growth figures of Russia indicate that she is heading towards a textbook reces-sion."

"It is becoming harder and harder to distinguish the evening news on state media from the reports on communist achievements of the National Eco-nomy."


Regrettably, Mr Medvedev’s grand plans turned out to be only just that – plans – and in most instances they were either never fully implemented, or completely missed their target. Skyrocketing oil prices stunted the national sense of neces-sity and urgency for change and reform and Mr. Putin, who maneuvered his way back into the Presidency, showed little zeal or ambition towards modernization.

Now, the roasted rooster is approaching again. The current economic growth figures of Russia indicate that she is head-ing towards a textbook recession. Excessive private debt is having a negative impact on consumption. The country is

also faced with rapid outflow of capital and steadily raising inflation that is partially fu-eled by the depreciating Ru-ble. According to the latest data, inflation could exceed an annual rate of 8%. More-over, at the time of writing, the oil price is at a low 80 USD/Barrel, which is significantly below the 95 USD/Barrel Rus-

sia needs in order to be able to balance its budget. On top of this, although they are not the cause of all Russia’s issues, Western sanctions have definitely played a part in exacer-bating the current situation.

It is clear to see that the current slowdown is a result of struc-tural problems, which have compounded over the last couple of decades. This is exemplified mainly by the surging corrup-tion levels, the ‘oil curse’ which plagues the country, terrible energy efficiency levels, grim income inequality and labor productivity levels, and lack of private savings (and as such, investment in deteriorating infrastructure).

To add insult to injury, the ruling establishment appears reluctant to implement any sort of drastic measures in order to avert the impeding crisis. Rather, Russia’s elites are more concerned with preserving the status quo and creating false images of prosperity and stability. It is becoming harder and harder to distinguish the evening news on state media from the reports on communist achievements of the Nation-al Economy. Regardless of its validity or constructiveness, any criticism of Russia is immediately seen as a betrayal or an act of anti-patriotism. As a result, no serious economic transformations are made. Rather, things are regressing, as a move towards broad import substitution and policies aimed at self-sufficiency are being carried out instead of attempts to build up industry and improve the country’s competitiveness. Further, the proportion of government spending on education and healthcare in the upcoming budget is set to shrink, while military and policy spending increase.

There are several reasons for this observed apathy. First, cor-ruption penetrates all levels of the state apparatus and im-mobilizes the whole system from both developing and fulfill-ing any sort of meaningful structural reforms. Second, the country is a regime of manual control; there is no effective governing system of checks and balances. One man, namely Mr. Putin, makes too many key decisions. In addition, the quality of state governance suffers from an acute case of cro-nyism, where 100% of loyalty is exchanged for 50% of pro-fessionalism. Third, the ever worsening economic outlook is unlikely to have much personal negative impact on those in charge of reforms, making them reluctant to act. As the prominent Russian economist, Sergey Guriev, wisely said:

“It is like a Soviet joke about increasing vodka prices: 'Dad, are you going to drink less now? No, son, now you are going to eat less.' Likewise, the economic burden will be redistrib-uted from ruling elites to regular citizens”.1

Where does this bleak analysis leave us? Most accurately, in a state of uncertainty – as Russia still remains a land of un-tapped opportunities. Its plethora of natural resources can help propel Russia to new heights by helping finance the necessary structural reforms. Moreover, as mentioned earli-er, Mr. Putin has effectively consolidated power and is at the peak of his popularity. This gives him the leeway to push through even unpopular re-forms, and do so without any resistance. In a bizarre sense, this could be Russia’s silver lining, as it would allow for quick and targeted solutions. Alas, as Lewis Carroll famously put it in Alice in Wonderland,

“you must run as fast as you can, just to stay in place, and if you wish to go anywhere, you must run twice as fast as that”. The Russian political establishment now has a choice. Adopt this mindset without any hesitation, or face a much more painful peck from the roasted rooster this time around.

1 http://www.bbc.co.uk/russian/russia/2014/07/140729_russia_

sanctions_guriev

All figures are taken from the Ministry of Economic Development of the Rus-

sian Federation, the Moscow Exchange, and the Ministry of Finance of the

Russian Federation.

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What makes a good leader? The skilled politician comes to mind; one who ensures stability and the ability to manage crises and make tough decisions. Or a motivating boss, who exploits his or her employees’ skills to maximize benefit for the firm, even when times are tough and costs need to be cut. A good crisis manager, trying to find an acceptable solution to complex problems, must have the flexibility to adapt to changing environments and reassess future plans. In reality, however, we see many instances of leaders holding on to

their false beliefs and failing to fulfil their responsibilities and reach their objectives.

Being forced into the leading role in coordinating Europe’s response to the euro crisis, many Germans would proba-bly agree that the German government has performed well in this particular task. Some might even propagate that there has been too much consideration and not enough enforcement within this role.

From an economic point of view however, the policies that Germany has “imposed” onto the Eurozone have arguably

been both wrong in their assumptions and a complete failure with respect to the objectives of market and currency stabi-lization.

The first mistake was that of a partially incorrect assessment of the problems that the Eurozone faces. From Germany’s point of view, Southern European countries are in trouble because they lack “competitiveness” and have been sluggish in their pursuit of sustainable public deficit levels. Indeed, if one looks at European inflation rate data since 2004, it becomes clear that Southern nations have had much higher inflation rates than Germany for years. Spanish products were consistently more expensive than German products; in other words: less competitive. The fact that not every coun-try can run huge trade surpluses without exporting their production to a yet unknown alien planet is often missed here.

Secondly, the commonly held belief that a lack of budget dis-cipline is a major part of the problem is actually only true for Greece. Interestingly, until the financial crisis, Spain’s bud-get situation was what we might consider sustainable; it was certainly better than that of Germany. The housing bubble’s burst in 2007 sent the whole country into an economic slump; thus, the situation that Spain is facing at the moment cannot be attributed to the irresponsible behaviour of the Spanish

Leadership during bad times

& austerity in EuropeBenedikt Lennartz

“The difficulty lies not so much in developing new ideas, as in escaping from old ones.”

J.M. Keynes

“A good crisis man-ager, trying to find an acceptable so-lution to complex problems, must have the flexibility to adapt to changing environments and reassess future plans.”

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government in the past. There is not much you can do when your banking system is heading straight into one of the most severe financial crises ever seen.

The third, and possibly most significant, mistake has been the complete negligence of the importance of effective de-mand – simply put, spending in the face of a recession. In a country with interest rates at low levels and the private sec-tor (banks, other firms and consumers) urging to deleverage at the same time, you may run into the problem of inade-quate spending. If everybody in an economy is trying to save more, somebody has to spend what needs to be saved. Unfor-tunately, due to austerity programs pushed strongly from the northern members of the Eurozone, that is exactly what has happened. Southern European economies like Spain and Greece have fallen into stark recessions with huge rates of unemployment; high even for their standards and inflexible labour markets. What we have, essentially, is the prototypi-cal balance sheet recession; or ‘debt deflation’ as the Amer-ican economist Irving Fisher once put it. The result is that debt-to-GDP ratios have actually increased in the countries disproportionally affected by the crisis, as their economies collapse – as is evident by looking at the graph for govern-ment consolidated gross debt as a percentage of GDP from 2004–2013. By trying to consolidate their public sectors, the affected countries have actually increased their debt burden.

One must wonder: what are the implications of failed auster-ity policies? A good leader should no doubt be able to con-stantly reconsider his or her positions on important issues. Germany needs to find a way to couple kick-starting compet-itiveness in the Eurozone with a loosening of the harsh aus-

terity measures implemented in Southern Europe. At the moment, the answer to achieving relative competitiveness has been an “internal devaluation” in the crisis countries – a fancy word for what you would usually call deflation. Defla-tion hurts economies particularly badly because wage rigid-ities result in unemployment rates above 20% in the South and a more difficult position for indebted states and entities. Milton Friedman once made the case for a flexible exchange rate through a comparison to daylight savings, stating that

“all that is required is that ev-eryone decide to come to his office an hour earlier, have lunch an hour earlier … Obvi-ously, it is much simpler to change the clock that guides all, than to have each individ-ual separately change his pattern of reaction to the clock, even though all want to do so.” Clearly, there is no exchange rate in the case of the Eurozone. All Spain and Greece need is a relative devaluation of their economies versus the North. It could be much easier for them, given that Germany had an above target inflation rate for at least some time.

However, there is little hope; Germans most likely see this as irresponsible action on the part of the southern nations, who have apparently lived above their means for some time. The entire issue is presented as a morality play. While it may be easy to say ”now you have to tighten your belts, for you have lived beyond your means for far too long”, Germans must realize that they are part of the problem. Selective memory may be very much at work within the country.

“If everybody in an economy is try-ing to save more, somebody has to spend what needs to be saved.”

200

180

160

140

120

100

80

60

40

20

0

Germany(until 1990, a former territory of the FRG)

Ireland

Greece

Spain

France

Italy

Source: European Commission, Eurostat.

Government consolidated gross debt (as % of GDP) in selected Eurozone countries

2004 2006 2008 2010 20122005 2007 2009 2011 2013

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On May 6th, 2010, in one of the most disputed episodes of the financial sector's history, the US stock market plunged over 900 points in a matter of a few minutes, wiping out approxi-mately $US1 trillion. To complicate the case, equity/futures indices rebounded to recover most of their value by the end of the trading day. Consequentially, the SEC issued a special report in an effort to explain the possible causes of the tem-porary disruption – or the ‘flash crash’ as it was christened by the investment community – identifying high-frequency traders as the likely suspects who had taken advantage of the massive sell order in E-Mini S&P 500 contracts by a Kan-sas mutual fund.

High-frequency trading (HFT) phenomenon and its implica-tions for market transparency are a central theme of Flash Boys, a non-fiction book by Michael Lewis released in April 2014. The protagonist Brad Katsuyama, a young and seem-ingly unambitious trader at the Royal Bank of Canada, is taken aback by the discovery of massive profits ripped off unsuspecting investors by HFT firms & Wall Street banks. The latter had set up complicated algorithms to front-run orders on public exchanges and so-called ‘dark pools’ (private ex-changes managed by a handful of large banks). Enraged and appalled, Mr. Katsuyama soon leaves the bank and recruits a team of tech geeks and HFT insiders to establish an alterna-tive trading system, the IEX. The system, established in 2012, combats predator strategies by delaying data transfer and therefore limiting the opportunities for front-running prof-its, claim the founders.

Lewis, himself a financial journalist, argues that HFT should be treated as a pandemic, posing serious threats to the in-tegrity of the market structure and challenging the very con-cept of efficient markets. The stock market constitutes noth-ing but an illusion, he contends, no longer governed by the principles of fairness and efficiency; the system is instead comprised of haves and have-nots, whereby the former pay for nanoseconds to secure front-running profits and the lat-

ter "had no idea that a nanosecond had value". Ironically, the impressive rise in the HFT activities, which at the moment make up to 50% of all the stock trades in the US, is driven mostly (if not completely) by regulation loopholes and reg-ulator attitudes. Katsuyama recalls, for instance, a discus-sion with the SEC staffers who allegedly pointed out that HFT firms inject liquidity and therefore play an important role as a market maker.

Is HFT illegal? Not necessarily, according to Lewis and Brad Katsuyama’s team who prefer to remain undecided on the issue and concentrate mostly on the moral implications of the so-called algorithmic strategies: a particular emphasis is put on the notion that the HFT ‘villains were committing crimes against the life savings of ordinary Americans’. What remedy could be tackled to disempower the HFT traders? The author remains sceptical of the US regulators’ ability to in-tervene stating that new rules are likely to ‘patch’ the old loopholes by creating new opportunities for the HFT firms to cash in. The only possible solution requires an initiative on behalf of the whole investment community to commit to the development of practices and tools to limit predator be-haviour; one such example is the launch of the IEX.

For good or for bad, the HFT debate is probably going to stick around over the next decade. Notably, the publication of Flash Boys has not only educated the general audience about an important development in the financial markets, but it has also affected regulatory behaviour: this October, Michael Coscia of Panther Energy Trading LLC became the first high-frequency trader charged with offences relating to commodities fraud and spoofing. With Flash Boys, the au-thor remains committed to the goal of revealing yet another dirty scheme on Wall Street in a long succession of dubious machinations. Whatever your take on HFT or Wall Street cul-ture in general could be, Michael Lewis’s passion for investi-gative journalism and ironic style makes Flash Boys an excit-ing weekend read.

Flash Boys, by Michael Lewis:

a review Aliya Khabdulina

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With growing national health expenditures, Swiss hospitals are incurring significant and mounting health costs. Unfor-tunately, few have an understanding of the system by which these costs are measured, how they are comparable, or gen-erally how expensive it is to deliver patient care. This has led to enormous cross-subsidization among patients and tax-payers within the Swiss healthcare system.

In 2012, to increase the efficiency and transparency of the Swiss health care system, and thus reduce health costs, Swit-zerland adopted the Swiss Diagnosis Related Groups (DRG) system for hospital financing. As part of this system, a stan-dard for cost and performance accounting in Swiss hospitals was developed and named REKOLE®; this standard is based on total absorption costing (TAC), a measure of allocating expenditure that ensures all incurred costs associated with a service are accounted for.

Basing the system on such a measure, however, may be ac-companied by some problems; the TAC’s proportional break-down of fixed costs results in a skewed overview of cost and revenue opportunities, which can lead to misguided man-agement decisions. It is a well-known management axiom that what is not measured cannot be managed or improved

– sound management accounting with proper data quality is essential in order to make and execute meaningful opera-tional and strategic decisions. Databases with poor data

Management accounting

in the Swiss healthcare systemIsabel Kobelt

Isabel has a Master in Accounting and Finance, and has written her thesis on the state of cost accounting in the Swiss health care system.

InfoboxExplaining Diagnosis Related Groups (DRG) Systems

The Swiss Diagnosis Related Groups (DRG) system is a 2012-introduced billing system for hospital services. It introduces a four-digit code for each hospital treatment based on all procedures undergone during the hospital visit; a specific treatment is categorized into a specific DRG. This code is then translated into a multiplicator, used in conjunction with a hospital-specific base rate, where the latter is negotiated each year with various interest groups such as insurance companies, hospital associations, etc. The product of the two factors is the invoice the patient receives for his or her treatment. The DRG system is governed by SwissDRG AG, and is intended to increase the comparability and transparency of medi-cal services across Swiss hospitals. Billing systems with similar structures are used across hospitals in Germany, the US, and around the world.

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tend to bias the DRGs, leading to a “garbage in, garbage out” scenario. Mismanagement may create perverse incentives that could negatively affect the quality of care and the pa-tient’s wellbeing.

My research tries to analyse the degree and accuracy of the management accounting systems applied in Swiss hospitals by examining the adequacy of the data quality, various cost accounting systems, and the Swiss DRG System. For this pur-pose the following research questions are considered:

• Does REKOLE® allow for accurate business management in Swiss hospitals?

• Do the data quality and the cost accounting systems used enable the accurate determination of DRGs?

I approach these questions through qualitative interviews and document analysis at two hospitals, as well as at a hos-pital-specializing software company.

My empirical results together with the literature in this area highlight notable differences in management accounting and business management within Swiss hospitals. A similar tendency for differences is observable in Germany. Particu-larly, the leadership and focus of the hospital’s management (which is closely linked to its competitive situation) has a significant impact on documentation and codification pro-cesses – and consequently, the cost accounting data of a hospital. In general, hospitals have huge problems defining and measuring costs for research and teaching: for example, in our sample both hospitals are unaware of how much the research and teaching activities cost.

The findings also outline a significant difference in data col-lection, cost accounting and business management between both hospitals. We will call the two hospitals Hospital 1 and Hospital 2. While Hospital 1 is still in the process of intro-ducing a job order cost accounting method and implement-ing it in SAP, Hospital 2 introduced such a system 12 years ago. In Hospital 1, indirect costs are allocated at almost ar-bitrary rates that have little to do with cause-and effect cri-teria – essentially, the main problem of this hospital is the lack of accurate and detailed cost and performance data. Furthermore, the hospital’s controlling department is not fully accepted by the doctors and the hospital management, who show a lack of trust in the analysis and numbers that are presented. This is quite serious; if a controlling department is brought under question, changing the system and intro-ducing better accounting methods becomes very difficult. In comparison, Hospital 2 has implemented a documenta-tion and codification process of a high quality, providing its management with an accurate and promptly responsive cost and performance gathering system – thus allowing for mean-ingful analyses. Compared to Hospital 1, they allocate most

of the direct costs straight to the cost object (patient), a much more robust method. Lastly, and importantly, the employees and doctors of Hospital 2 take “economic respon-sibility” too, in the sense that they are sensitized to cost awareness.

Taking all this into consider-ation, both research questions can be answered as follows: firstly, the TAC system on which REKOLE® is based can constrain proper business management. My research un-derlines that different co - sting and accounting systems should be used for different decision- making and control-ling purposes. Secondly, it can be seen that currently, the different cost measurement methods in use, as well as the cost heterogeneity, bias an ac-curate determination of Swiss DRGs. Complete and precise data collection and processing is crucial; reasonable solu-tions must also be found for providing accurate and case-re-lated cost allocation and meaningful job order cost account-ing.

Existing laws and REKOLE® currently allow too much leeway and cost heterogeneities, and as it stands, standardised cost accounting is necessary for improving the comparability and benchmarking possibilities between hospitals. Once a year, Swiss hospitals have to submit data to SwissDRG AG for the purpose of calculating DRG values. Imposing sanctions on SwissDRG AG for the poor submission of data, therefore, could improve data quality within Swiss hospitals. Addition-ally, to ensure sustainable and long-term business manage-ment, the REKOLE® certification should solicit the imple-mentation of a parallel variable costing system. Imple - menting these, however, will take some time.

“It is a well-known management axiom that what is not mea-sured cannot be man-aged or improved

– sound management accounting with prop-er data quality is essential in order to make and execute meaningful opera-tional and strategic decisions.”

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International Affairs

In a time when the world is in dire need of global political leadership, the lead-er of the free world appears alarmingly weak. Ever since the 2010 midterm elec-tions, when the Republicans won control of Congress by a landslide, Obama ap-pears to have failed to be an effective leader. Now, the President is what political commentators refer to as a lame duck: a politician who is not up for re-election, and thus has limited support of the House. When faced with an uncooperative Congress, U.S. Presidents are typically unable to pass major leg-islation. Now, the sweeping gains of the Republican Party in the midterms last November, in which they won the majority of the Senate and increased their majority in the House, could deliver the final blow to Obama's remaining presi-dency. However, the gears of political machinery are always shifting in Wash-ington.

In order to understand the impact of the midterm election results on Obama's ability to lead, a few essentials of U.S. politics need to be understood: importantly, the U.S. Constitution was drafted with the intention of making policy-making as hard as possible. To prevent the emergence of monarchy-like governance, power was divided in as many ways as possible. Therefore, the U.S. Con-gress enjoys certain powers that are hardly com-parable to European political practice. Further-more, there is no tradition of deference by the legislator to the executive. Not even in matters of foreign policy.

This power of Congress might lead to curious results. More than once, Congress has killed international treaties that were based on U.S. initiatives and had pre-viously been approved by the President. With this in mind, the new Republican majority in the Senate is clearly the decisive coup de grâce for the lame duck, right? Wrong!

In U.S. politics, matters are never as simple as saying a majority in Congress suffices to determine future politics, a fact that again might seem odd to Euro-

Duck hunt in WashingtonSalome Wittwer

"Now, the President is what political commentators refer to as a lame duck: a politician who is not up for re-elec-tion, and thus has limited support of the House. "

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pean observers. But as any avid House of Cards viewer (like President Obama) knows, majorities on Capitol Hill are more fragile than they might appear at first glance. Most import-ant for our discussion is the American lack of party control

(seldom the case in Europe, where party control is com-mon), which accounts for the independence of the legisla-tor. So, no matter the outcome of last November's elections, US politics will never be as simple as saying XYZ will hap-pen if the Republicans control the Senate. To exemplify this

issue, one might say U.S. Congressmen have three different allegiances simultaneously: they are party members, the representatives of a constituency, as well as legislators. Therefore, with regard to Obama, a divided government doesn't necessarily mean he will not be able to pursue his political aims.

Although such divisions are arguably the norm, polarization in U.S. party politics is a more recent issue. Thus, Obama might be an even lamer duck than his predecessors in for-merly similar constellations: whereas President Reagan, for instance, was able to get agreements through a democratic Congress, it has been and will be more difficult for the cur-rent president to reach agreement across the aisle. Biparti-san cooperation, an issue that culminated in the government shutdown in 2013, has become less and less common. Party polarization may turn out to be the biggest challenge to Obama's leadership – however, dissatisfaction with the par-tisanship in the political system is growing. In times of cri-

ses, public pressure for gov-ernment action might actually break the gridlock in Congress and offer opportunities for presidential leadership.

Indeed, despite the presi-dent’s lame duck image, what might help Obama to lead do-mestically is expanding the use of binding executive or-ders. Although he has issued fewer executive orders than have previous presidents, Obama is unusually straight-forward about using them to pursue his aims in cases of

Congressional inaction. However, this practice has always faced heavy criticism with regard to its legality under the Constitution. And while lame duck presidents are typically freer in taking unpopular decisions, since they are not up for

re-election anyway, they still need to think about the pros-pects of their party's nominee in the next presidential elec-tions.

Meanwhile, when it comes to matters of international poli-tics, the US president traditionally carries a lot of weight, arguably regardless of whether Congress defers to him or not. Obama's foreign policy strategy, labeled “leading from be-hind”, could further strengthen his ability to achieve his goals on the international stage. Supporters of this approach to foreign relations contend that it is a more acceptable and legitimate alternative of taking multilateral actions in place of full American leadership. Established in Libya, “leading from behind” might become the new paradigm for accom-plishing US objectives without a major military commitment

– and thus at lower (political) cost.

However, the success of this strategy, and its use as a new viable model within the minefield that is U.S. foreign affairs is controversial. With the lack of a global government and the recent challenges of international crises in mind, global leadership may appear desirable. Assuming that the rising powers as well as Europe are either not willing or not able to fulfill this role, a remaining option is American leadership. Yet it remains questionable how exactly domestic politics will affect Obama's ability to lead. The Republicans having won the Senate is only one factor in a very complex political game, and although the duck is lame, it is not dead yet. Should the president choose to exhibit more creative – albe-it riskier – leadership strategies, the duck might even take flight once more.


"In U.S. politics, matters are never as simple as saying a majority in Con-gress suffices to determine future politics..."

"With the lack of a global government and the recent chal-lenges of interna-tional crises in mind, global leadership may appear desirable."

"...whereas Presi-dent Reagan, for instance, was able to get agreements through a demo-cratic Congress, it has been and will be more difficult for the current pre -sident to reach agreement across the aisle."

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Narendra Damodardas Modi took office this May as Prime Minister of the world’s largest democracy, after a drawn out election campaign that even challenged Obama’s 2012 cam-paign in terms of spending. It was a landslide victory, giving the BJP (Bharatiya Janata Party), India’s Hindu nationalist party, the first parliamentary majority by a single party since 1984. The outcome effectively moves power structures in the Indian government firmly away from the Gandhian-socialist Congress Party (Indian National Congress) to the Hindu na-tionalist BJP.

Modi has been a heavily debated public figure, who on the one hand has garnered widespread praise from pro-business pundits for his economic pragmatism, but on the other has also been deemed a threat to India’s secular identity. These questions, however, come second to India’s main plight – being home to more poor people than anywhere else in the world.

Back in 2012, Modi himself attributed India’s lack of success in poverty alleviation and stagnating growth figures to a policy paralysis resulting from a lack of leadership. But what has Modi brought to the table to change the government’s style of leadership? Can it usher in a new era for the millions of the poor in India? What have the effects of the change in leadership been so far?What has become clear in Modi’s first five months in office is that he has made massive changes in the way the bureaucra-cy within the Indian government is led. In order to cut down

Leadership under Modi:

a new chance for the poor?Shrey Kapoor

14


on red tape and to enhance creativity, Modi has taken large steps to concentrate power structures within the govern-ment. This can most vividly be seen in reporting structures, where he has been said to remove state ministers from the

line of reporting, instead talking directly to the bureau-crats in charge of executing projects. This makes it harder to play the blame game and to lose track of progress, espe-

cially in infrastructure and sanitation work. While this cer-tainly sounds like an efficient management technique, it can also lead to micromanagement, animosity, as well as fear and suspicion from the side of the ministers and bureaucrats.

Next to economic reforms that are difficult to measure in the short term, one of the most significant initiatives by the Modi government has been the ‘Swachh Bharat’, or Clean In-dia campaign. The goal of the initiative, amongst other things, is to eliminate open defecation in India by 2019, Ma-hatma Gandhi’s 150th birth anniversary. This would be a huge step forward for the country, as 600 million Indians still don’t have access to adequate sanitation systems1 , putting the country at no. 1 on this unfortunate list. The campaign has garnered widespread recognition and praise, with Pres-ident Obama co-signing and supporting it along with the likes of Bill Gates. It is also is a rather surprising move by Mr. Modi, as the focus during his tenure as the state of Gujarat’s Chief Minister had been staunchly set on pro-growth policies, with a patchy track record in furthering social indicators such as health and education, as economist Amartya Sen has commented in the past.

Modi’s first efforts in increasing the bureaucracy’s efficien-cy and in furthering pro-poor campaigns are certainly laud-able. But campaigns alone don’t make actions. Only time will tell whether these policies will actually be followed up on in the medium and long term, where it actually matters, and when the media chatter around Modi’s first term will have died down.

1 http://www.huffingtonpost.com/2014/05/08/one-billion-open-defe-

cation_n_5289049.html

Much more importantly, we should not ignore Modi and the BJPs Hindu nationalist past, including the Prime Minister’s handling of the 2002 Gujarat riots. Despite being acquitted of all charges of neglect, this does not mean that the BJP is a truly secular party that will not disadvantage India’s sub-stantial Muslim population in the future. The combination of the aforementioned concentration of power along with said nationalist sentiments that may or may not creep up in the coming years is not something to be taken lightly. De-spite Mr. Modi’s commendable efforts in good governance during the first months of his tenure as India’s Prime Minis-ter, the future of India’s poor, her minorities, and her mar-ginalized remains uncertain.

“Despite Mr. Modi’s commendable efforts in good governance during the first months of his tenure as India’s Prime Minister, the future of India’s poor, her minorities, and her marginal-ized remains uncertain.”

“Can it (Modi’s reign) usher in a new era for the millions of the poor in India?”

15


To feign economic and political success, Grigory Potemkin, the governor-general of Russia’s newly conquered territories, hoisted false fronts of villages along the Dnieper River to impress – and, to some extent, to fool – the Russian empress Catherine II. Just two years after the Russian conquest of the southern Ukraine and Crimea region from the Ottomans in 1787, Potemkin had pulled one of the most considerable dip-lomatic ruses in history. Not only was he able to curtain his inadequateness by falsifying achievements; but by doing so, he also succeeded in gaining the favour of a person of great influence, impressing both foes and allies.

What worked in a historical narration doesn’t work in today’s multilateral political crisis. The use of international law by Russia as a façade to ensure codetermination in global crises is untenable, given the country’s other involvements in in-ternational affairs. The principle of pacta sunt servanda, that agreements between state parties must be kept, has more than one function: it not only assures an efficient and functioning legal system, but also signals the trustworthi-ness of the two negotiating parties to other states. By ad-

monishing the adherence to international law in one crisis and neglecting the same rules in another conflict, Russia ap-plies a double standard, mak-ing its status as a partner act-ing in good faith doubtable.

In its decision not to take part in the US-led coalition against the Islamic State, the Russian leadership has put deliberations that such an intervention is contradictory to the principles of international law at the forefront. The Kremlin masks itself behind this dishonest interpretation of international law; notwithstanding the fact that neither exercise of nor an effort of compliance with international law by Russian authorities can be proven for the majority of international and internal conflicts so far.

Although the Russian argument is comprehensible from a legal perspective, since neither a mandate from the UN Se-

curity Council nor a formal approval of the Syrian govern-ment currently exists, it does not conceal that Russian influ-ence in foreign politics is still pervasive in the realm of the United Nations. Nor is this rationale in any way hiding the double standards shown by Russia’s annexation of Crimea and the subsequent endorsement of separatist forces in the eastern parts of Ukraine. Blaming both Ukraine and the Sep-aratists for the persistent conflict, Vladimir Putin’s state-ment at the 10th ASEM Summit this October has a Machiavel-lian trait: secretive actions serving the fulfillment of political objectives in Crimea blatantly contrast Russian discourse concerning the use of international law, which was adopted with respect to the Syrian crisis. This balancing act between engagement and rhetoric will bind the Russian leadership to contain itself during upcoming internation-al arguments, suggesting am-biguous leverage for Russia in the short-term in the event of possible American mistakes in Syria as well as the failure of Ukraine and the West to consolidate regional conflicts. On the other hand, criticising others’ action plans to restrain international humanitarian crises will further bedevil Rus-sia’s standing and credibility.

The question thus remains as to what has catalysed the in-consistent behaviour exhibited by the Russian leadership. In an era characterised by multilateral conflicts of unmanage-ably complex dynamics, self-induced restraint may be one strategy to launch indiscriminate accusations against acting parties under the pretext of political tenability and integri-ty. The motivation for such secretive and passive behaviour could be located at two extremes: either Russia’s belief that it is still a major power, not reliant on others; or the country’s contention that all means necessary must be adopted in or-der to maintain – at least in the long run – a certain degree of political influence by giving off the appearance of a pre-eminent international actor.

Potemkin’s Revival?Guillaume Gabus

"What worked in a historical narration doesn’t work in today’s multilateral political crisis."

"...the Russian lead-ership has put de-liberations that such an interven-tion is contradictory to the principles of international law at the forefront."

16

Leadership has been the buzzword recently. Every job de-scription requires leadership skills that can be honed in lead-ership workshops offered at leadership institutes by leader-

ship coaches. Everyone is supposed to be a leader and if not today, then tomorrow. The epitome of a leader is argu-ably the head of a country – be it President, Prime Minister, or Chancellor. The ultimate epitome – if such a thing ex-ists – is the head of govern-ment in a G8 country, a “lead-ing” industrialised country. Obama, Merkel, and Cameron

– they have made it to the top. They must know the very es-sence of leadership, and wouldn’t they make great guest speakers for one of these lovely leadership workshops?

Unfortunately however, Obama & Co. would most probably also qualify for hypocrites who made it to the top. Of course, everyone is a bit of a hypocrite. It is inherent to human na-ture; we may all have had our moments of rambling on about the importance of a healthy lifestyle while drinking our ump-teenth cup of coffee and smoking our umpteenth cigarette. If Obama did this in his backyard talking to his neighbour, it would most probably be quite funny. Yet as soon as he does so in a press conference on public health, this becomes a problem. Any perceived hypocrisy undermines the credibili-ty and authority of leaders.

Admittedly, the life of such high-profile politicians is any-thing but easy and the public is never forgiving, least of all the media. For politicians to maintain a white vest becomes an utterly impossible challenge. Yet it sometimes seems as

if they do not even try. A beautiful example of this is the UK’s ex-prime minister Tony Blair and his handling of the Ex-tractive Industries Transparency Initiative (EITI). In 2002, Blair launched the EITI, a well-intended strategy mandating both the extracting industries as well as governments to publish earnings from resource extraction in order to pro-mote (African) development. Subsequently, Blair promoted the EITI at every occasion, and prompted the UK Department for International Development to manage and implement it. What was curious, however, was that Blair seemed to have forgotten his own country’s signature on the EITI, along with its pledge to become a fully compliant member. The reasons were excellent: Apparently there was no need for the UK to sign such a thing, as the IMF does not list the country as re-source rich. Being one of Europe’s biggest oil producers clearly does not matter. Additionally, the UK already was a

“strong supporter” of the EITI – so why bother signing it, let alone joining? Particularly when British companies enjoy business in countries such as the Democratic Republic of Congo, the EITI would imply having to rein in these business-men. It is much easier to simply demonstrate excellent lead-ership by paying into the fund rather than taking up respon-sibility. The double standards were not lost on other countries, thereby damaging the effectiveness of the EITI. South Africa did not want to sign, shrugging the EITI off as something for poor countries. Angola still refuses the EITI.

Another splendid illustration of a leader’s hypocrisy is Ange-la Merkel’s behaviour during the NSA scandal. When it was revealed that the NSA engaged in elaborate spying activities in Germany, including the tapping of Ms. Merkel’s mobile phone, the German public was outraged and Ms. Merkel, who made it clear she was unaware of the privacy infringement, was not amused. Annoyingly enough, the German magazine Der Spiegel claimed that German intelligence agencies used

Leadership and Hypocrisy

- do as we say, not as we do.Vanessa Volland


“Every job descrip-tion requires leader-ship skills which can be honed in leader-ship workshops offered at leader-ship institutes by leadership coaches”

17


the NSA programme, implying that Ms. Merkel must have known. Germans are quite sensitive when it comes to priva-cy issues, so the scandal put her in a tight spot, particularly so with elections looming and the government’s lax security laws overlooking the spying on its citizens. Indeed, Ms. Merkel’s spokesman emphasized that “bugging friends is unacceptable”, that “we are no longer in a cold war” and that

“mutual trust is necessary”. The commotion around the NSA scandal died down a bit as Ebola, ISIS and Palestine occupied headlines. Then came Der Spiegel again accusing German intelligence agencies for having eavesdropped on John Ker-

ry and Hilary Clinton – how embarrassing. Ms. Merkel pre-ferred to stay as silent and vague as possible, but none-theless the word “hypocrite” did come to appear associated with her name.

However, in all fairness to poor Mr. Tony Blair and Mrs. Merkel, they are not alone but rather in the most amiable company imaginable. Current Prime Minister Cameron, for example, with regards to

Scotland’s independence while floating the idea of wanting to leave the EU. Or President Obama, having second and third thoughts about the Patriot Act. Well, perhaps they should all give one of these leadership workshops a go.

“Apparently there was no need for the UK to sign such a thing as the country is not listed as resource rich by the IMF. Being one of Europe’s biggest oil producers clearly does not matter.”

Prof. Dr. Christoph Frei is an associate professor in the Department of Polit-ical Science at the University of St. Gallen

Christoph Frei

Global governance builds upon a conception of the world as a singular, interconnected whole. It was not until 1968, however, that we actually started to see that whole. Taken by the three pilots of the Apol-lo 8 mission, striking photographs of a blue and seemingly fragile planet gave birth to the notion of ‘Spaceship Earth’.

The metaphor is not entirely beside the point. As Spaceship Earth is blazing through barren space, it sustains numerous passengers. The craft is stocked with major supplies of water, food, and fuel. Its at-mosphere shields us from the sun’s ultraviolet rays, its magnetic field protects us from lethal cosmic rays.

As MIT physicist Max Tegmark recently put it, any responsible crew would make it a top priority to safeguard the craft’s future existence by avoiding onboard explosions, overheating, or the premature depletion of the ship’s supplies. So far, our won-drous human crew has not made any of these issues a real priority. As it stands, Spaceship Earth does not even have a captain.

To be sure, the absence of a captain allows for sov-ereign latitude on the part of the passengers. At the same time, it impedes coherent, let alone swift or decisive action, and serious issues go sadly unre-solved. Welcome to global governance.

Wanted: Leadership

18


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Research & Academia

What does the typical week of a professor of econometrics at the University of St. Gallen look like?

Every week is different. Fixed dates are lectures, external and internal research seminars and various committee meetings. The longer you are around, the more committees you have to attend.

After your doctoral studies and habilitation [German post-doctoral lecture qualification] at the University of Mannheim, you came to the University of St. Gallen in 1998. Why did you choose to come to Switzerland and to the HSG?

In 1998 I entered the academic job market. The offer from the HSG was by far the best. The city was secondary to me. I dug up the atlas – yes we were using atlases back then – and accidently opened the rain map of Switzerland. St. Gallen was exactly at the point where the map was dark-blue.

Since then you have turned down several offers from other universities. St. Gallen seems to suit you quite well?

Especially the economic department has changed dramati-cally since my arrival in St. Gallen. In the beginning the fo-cus was mainly on national economic policy and there was little international research. Today the department is brim-

ming with internationally recognised researchers; we are competitive and among the best universities in various rankings. This progress has allowed us to set up a good PhD

program which is pivotal for the internationalization and reputation building of a department. Hence, for me the HSG became more and more attractive over time. The offers from other universities – although they have been appealing – were simply not interesting enough.

Amongst others, you have visited the London School of Eco-nomics and Harvard. What has your experience been and to what extent do you think the HSG can keep up with these top universities?

I can only speak for the Economics departments. We would be exaggerating our own capabilities if we were to compare ourselves to the LSE or Harvard. These universities – espe-cially Harvard – have much more financial resources. The HSG ranks in the group of universities right after these top universities. Ten years ago, we had a very big Economics de-partment compared to other German-speaking universities. However, we have hardly grown since then and our compet-itors gained on us. This becomes a problem, since size mat-ters if you want to compete with the very best. It enables the

Sports, econometrics, and the rain map of St. Gallen –

An interview with Prof. Dr. Michael LechnerAlexander Bechtel

Additional research and assistance by Hannah Winterberg

Prof. Dr. Michael Lechner is the Managing Director of the Swiss Institute for Empirical Economic Research (SEW) at the University of St. Gallen. According to REPEC, he ranked among the top 1% economists in Europe and top 2% worldwide in 2013. Prof. Lechner focuses on the application and improve-ment of microeconometric estimators.

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Research & Academia

specialization that is necessary to be at the top of an area of research. We are proud of the increasing number of students, but it decreases the time devoted to research as long as the faculty does not grow equivalently.

After being Director of the SIAW (Swiss Institute for Interna-tional Economics and Applied Economic Research) for ten years, you switched to the SEW (Swiss Institute for Empirical Economic Research) in 2008. What were the reasons for changing institutes?

In 2008 some of my colleagues retired. We took advantage of this situation and made the structure of the institutes more homogenous. Prof. Mon-ika Bütler, Prof. Uwe Sunde and I decided to work togeth-

er, because our academic focuses were similar. The SIAW spe-cializes more towards trade nowadays.

Many students have difficulties when approaching the field of econometrics for the first time. Why do you think this is the case?

A classical mistake is that students take too much time be-fore starting to seriously look at the material that is dis-cussed in the lecture. At some point they realize that they are falling behind, but then it is probably too late. This leads to inefficient and high costs of studying. There are also stu-dents who are afraid of formulas. However, ‘our’ formulas are by no means more complex than the ones from micro- or macroeconomics.

What is your current academic focus?Content-wise I currently focus on the area of sports econom-ics. In doing so, I simultaneously deal with methodological questions and questions of application. My theoretical pa-pers try to improve existing estimation methods or to devel-op new ones. The main goal of my applied papers is to provide new and interesting insights. Nevertheless, I always aim at using the most appropriate estimation method even if this requires some developments of existing methods.

At first glance the field of sports economics seems to be a rather unusual area of research. What do the fields of sports and econometric methods have in common?

Econometrics and the application to the field of sports com-plement each other perfectly. We examine for example the ties between sports and the labor market; what effect does individual sport activity have on the success in the labor market? In the case of students, for example, we are inter-ested in the effect of sports exercise on their performance in university or on subsequent employment. For this we ex-plicitly use microeconometric methods. Even when we do not explicitly attempt to answer applied

questions in a particular project, but rather pursue the de-velopment of methods, we always focus explicitly on one area of application. The goal of econometric research is to provide the most appropriate statistical methodology to answer particular applied questions. For this reason we are always guided by economic applications even when the pri-mary goal of a project is the development or improvement of econometric methods.

Your success in the field of econometrics is consistently ac-knowledged by a good placing in various rankings. Is there a scientific contribution you are especially proud of?

I do not think that any single paper is dramatically more successful than the others. It is rather the case that with publishing regularly in good journals one gets to know in-teresting colleagues and is taken seriously. Thereby new opportunities arise. The journals in which a particular paper is finally published is only of secondary importance, at least if you have tenure, and also subject to some randomness. These things are mainly relevant for rankings.

Does that mean you do not necessarily aim at publishing in the top journals?

Certain top journals have thematic focuses that are not suit-able for me. But this is ok. When you have tenure you can enjoy the luxury that the topic is more important for you than the journal. Given the topic, I then of course try to get published in the best jour-nal possible. The more pres-tigious the journal, the wid-er the audience. It is then more likely that parts of my work are used and recog-nized by other researchers, which is of course always nice.

At the HSG we have many PhD students who are currently working on their first papers. Could you give them some ad-vice for their first scientific contribution? What are the at-tributes of a very good paper?

This is very difficult to answer in general. First of all it is very important to know the literature. This is also the second, third and fourth most important thing. At least for our PhD students, part of this can be achieved by attending the courses of the PEF program [PhD in Economics and Finance]. Normally at least one of these courses is related to the topic one would like to deal with in the first paper. These courses have long reading lists that can spark new ideas. Reading those papers allows one to find out where the current fron-tier of knowledge is and how this frontier can be pushed a bit. Unfortunately, one can only find a relevant gap in the literature with a sufficient knowledge of it. Then the goal should be to fill this gap to a sufficient extent in a compre-

“...for me the HSG became more and more attractive over time. “

“I always aim at us ing the most ap propriate estima-tion method even if this requires some developments of existing methods.”

21

hensive and understandable manner, so that it is also inter-esting for others. Of course, someone with more experience might be able to take a bigger risk and tackle a subject for which (almost) no literature exists yet. But that is a very risky strategy for a PhD-student.

How does the allocation of students to supervising profes-sors work in the PEF program?

That varies a lot. Some of the students already have a super-visor when they start the program. In general, by the end of the coursework stage the PhD students have to develop a research plan and find a supervisor. Once admitted to the PEF program, every PhD student is guaranteed a supervisor. However, so far everyone found one on her or his own.

In their bestselling book „Mostly Harmless Econometrics“, Angrist and Pischke suggest that the difference between statisticians and econometricians is that the latter are not fearful of causal relationships...

(Laughs) Yes, we remain fearless.

In your research as well as in your teaching, you place a great amount of importance on the theme of causality – as illus-trated, for instance, in your course „Empirical Strategies for Causal Inference“. Would you agree with the idea that the primary undertaking of empirical research should indeed be to identify causal relationships?

That depends on how broadly you think of empirical research. In economic policy analysis, causality is everything. This field is concerned with questions regarding the effect of legislation, or other policy measures. If I want to understand these relationships in more detail using data, I need to be interested in causal relationships; simple correlations are insufficient here. In finance, for instance, one is often con-cerned with predicting the next-day volatility of an asset. For such an endeavour, causality may be of little importance. The goal of my own research is to emphasize the importance of causal relationships and how to find them; accordingly, my methodological research is also aligned along the lines of causal analysis. I primarily try to answer questions of impact and effect; for instance, what effect does a particular employment program have? Once I mention the word

„effect“, this immediately implies that I am concerned about causality.

Is it necessarily much more complicated to prove the exis-tence of causality in addition to proving a correlation?

It is not necessarily all that difficult in technical terms. The problem, rather, is en-suring that you are able to obtain sufficiently informa-tive data so that you can ac-tually discover causal rela-tionships. Empirically, a causal effect is ultimately estimated by some specific correlations. It is the specif-ic structuring of the empirical analysis that one may enable to interpret correlation as causality in a specific setting.

Do you think that discussions about causality are given suf-ficient attention in academic research today?

Microeconometrics is highly driven by the search for causal-ity. In addition to nonparametrics, developments in micro-econometrics over the last 20 years have been dominated by developing methods for causal analysis. Furthermore, we see these methods spread to more and more applied fields, with various consequences. On the one hand, these tools have reshaped how empirical studies are set up. On the oth-er hand, more and more laboratory and field experiments are now being conducted. Researchers undertake these ex-periments primarily because uncovering causal relation-ships is their overall goal.

Research & Academia

“The goal of my own research is to emphasize the importance of causal relationships and how to find them...”

InfoboxConsultancy for Empirical Economic and Social Research

The University of St. Gallen offers assistance for empirical research via the Consultancy for Empirical Economic and Social Research, which endeavours to supports students studying at all levels as well as members of the faculty. This assistance is free of charge and available throughout the year. Students can contact the Consultancy with a specif-ic question and a detailed description of their problem and its context. The Consultancy does not give feedback on broad concepts or general enquiries; its goal is rather to guide students to develop their own analyses. The website of the Swiss Institute for Empirical Economic Research (www.sew.unisg.ch) offers more useful information; e.g. links to publicly available micro- and macroeconomic data, and suggestions on the differences between statistical software for tackling empirical problems.

Contacts: • For Economics:

Prof. Phd Christina Felfe, [email protected] • For Business Administration, quantitative methods:

Thorsten Schmid, [email protected] • For Business Administration, qualitative methods:

Dr. Klaus Edel, [email protected]

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Research & Academia

Econometric research has advanced dramatically over the last few decades. Is the ever-increasing dominance of economet-rics a desirable development, or does it also come with dan-gers?

The number of academic papers with empirical content has increased significantly over the years. The handling of data will continue to be of increasing importance for economists. The important issue of Big Data will change the face of econometrics and economics soon. We will need new meth-ods to uncover meaningful information from these new data sources that we have yet to develop. At the beginning of my academic career, finding a large enough data set was the

main concern when doing em-pirical work. In the future, the most important endeavour will be to figure out how to filter huge and unordered re-cords for relevant informa-tion. Despite, or even because of, the floods of more and

more data, it should be emphasized that the art of good em-pirical work is to have a sound theoretical framework that underpins the data analysis. Thus, in working extensively with data, we cannot and should not neglect the need for the further development of the theoretical foundations for em-pirical analysis. If economic theory is to become a victim of the flood of the exciting new data, then, at least in the lon-ger run, the quality of empirical studies will decrease despite the availability of better data.

There are indeed some empirical models – for instance, Vector Autoregression (VAR) models – that either partially or completely disregard theoretical foundations. Do I under-stand you correctly in that you tend to look at these with a critical eye?

There is a subjective element to why I decided to pursue the field of microeconometrics. Microeconometricians have a differing understanding of the concept of causality from time series economists. Naturally, the microeconometri-cians implement their own method with the belief that it is superior to those used by time series economists, at least for those applications they look at.

So would you say you have difficulties with the field of mac-roeconometrics in that many of those causal relations found in macroeconomic settings are rather shaky?

(Long silence)

Apparently you do not want to tread on the toes of your mac-roeconomic colleagues…

I do not want to contest the learning aptitude of macroeco-nometricians. They frequently have to handle small and cor-related samples. This is already difficult and limits what can be done with such data. Whether the intensive use of VARs

is a really productive strategy in many cases has to be judged by my colleagues.

It is relatively easy to apply econometric methods to data. It is, however, very difficult to conduct intelligent econometric research. Did the rise of econometrics bring about an in-crease in papers that provide decreasingly valuable insight?

I think the number of papers in which results are over-inter-preted actually decreases. The bigger problem in my eyes is that too many researchers are looking for the possibility of getting good, meaning credible, empirical causal answers instead of searching for good, meaning relevant, questions. Is it better to find a very good answer to a niche-question, or is it better to find an approximate answer to a very im-portant question? I guess this must be decided from case to case. Even in top journals you can find contributions that apply extremely interesting empirical methods in very clev-er ways. However, from a public policy perspective, their findings are totally irrelevant.

Do you have the impression that econometric methods are sometimes misused?

Lobbyists use scientific findings in their everyday work and both theoretical and empirical research can be manipulated, e. g. by exaggerating the rel-evance of the results. The only way to get this under control is by applying quali-ty management when decid-ing on a research agency. Conflicts of interest must be avoided. If a talented scien-tist writes a biased study, it is very hard to detect the bias when only superficially skimming through the work.

What are your plans for the future?At the moment we are planning a collaboration with a Min-istry of Labour from a foreign country. We try to assess whether active labour policy – e. g. sport programs – enables the unemployed to find a job quicker than without such pro-grams. If we succeed in showing positive, or negative, ef-fects this could become an extremely exciting project.

How did you find yourself working with a foreign Minister of Labour?

I gave the keynote at a conference where the Secretary of Labour was present. We had the chance to talk shortly and found out that we share the same interests. In general both ways are possible. Sometimes we approach a government agency and sometimes it is the other way around.

Thank you for the interview!

“The important issue of Big Data will change the face of econometrics and economics soon.”

“Is it better to find a very good answer to a niche-question, or is it better to find an approximate answer to a very important ques-tion?”

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Research & Academia

Behavioural Economics is thriving. It is becoming a core approach to economic regulation in an increasing number of governments, improving public policies and creating new relevance for academic research. Finally.

It took economists a while to let go of Homo Economicus and allow for some common sense in their models, and consequently in policy advisory. The psy-chologist Daniel Kahneman won the Nobel Prize in 2002 for implementing con-cepts from psychology into economic theory, and became one of the founding fathers of Behavioural Economics. New models on risk attitude, biases and bounded rationality lacked the simple elegance of classical models, because they included highly sophisticated mathematical tools. This increased complexity allowed for a better modeling of complex real world behaviour, a development that fostered fruitful academic research. But it was not until recent years that the discipline has emerged from the academic bubble. Moreover, it was not high-brow journal publications that got the non-academics excited; instead, several pop science publications hit mainstream bookshelves, spurring this spike in interest.

“Freakonomics”, “Nudge”, “Thinking, Fast and Slow“, “Simpler: The future of the government” are only a few to name. These books not only provide insights into human behavior and its flaws, but also offer ways to deal with and take advan-tage of them. Regarding public policy, the 2008 bestseller “Nudge” by Cass. R. Sunstein and Richard Thaler stands out. The authors had started a heated debate about Libertarian Paternalism in academic circles before, but with this sharply written book they sold their idea to the public in millions. The concept of chang-ing people’s choice architecture to gently improve their decisions, without in-vading their freedom of choice, became a tool for empirically and behaviourally

Changing policy making,

nudge by nudge!Julia Sandrini

Julia is in her second semester of the Master in Quantitative Economics & Finance. She has a special interest in behavioural economics and finance and has been working on various projects within this field. She has co-authored research on Nudging and Consumer Policy together with Prof. Lucia Reisch (Copenhagen Business School), which is to be published at the end of this year.

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Research & Academia

informed policy making. Nudges allow for low-cost and wel-fare-improving regulatory strategies without being pater-nalistic: default rules, simplifications or social norms can

have more impact than a clas-sic economic price incentive.

Now, the success of behav-ioural economics in pop sci-ence has finally gotten policy makers listening. Govern-ments’ advisory and expert teams for behavioural scienc-es are popping out all over Europe and elsewhere. David Cameron – at the forefront of Nudging since its first days –

is said to have read „Nudge“ eagerly from top to bottom (a scene probably less imaginable with other economic publi-cations – like Piketty’s “Capital in the 21st Century”). After becoming prime minister of the United Kingdom in 2010, he recruited Richard Thaler, one of the authors of this book, as an advisor. That year, Cameron established the Behavioural Insights Team, a team working with behavioural research and experimental trials on a wide range of policies aimed at increasing welfare with simple, low cost changes. And in-crease welfare they did. The team’s trials and implementa-tions include automatic enrollment in pension schemes, which have increased rates of saving. The UK now sees wid-ened participation in organ donor programs through prompt-ed messages, and the team has also increased tax payment rates in the country by implementing policies harnessing social norms or lotteries as incentives. The results have been so successful, that the Behavioural Team – also lovingly

called the “Nudge Unit” - was semi-privatized earlier this year; it now earns money from advising governments all over the world on how to imple-ment behavioural research into policy making.

Following the successful lead of the UK, more and more academic researchers have found their way into governments all over the world. The White House set up its own “Social and Behavioural Science Team” in early 2014. Denmark, Sweden, Germany and the Nether-lands are putting behavioural insights on the agenda as well. The German government now has job openings specifically targeted to behavioural economists and psychologists. On the agenda for all these governments are across-the-board issues, ranging from energy and health policy to consumer and environmental protection as well as finance, corruption and education.

The potential for Behavioural Economics within public policy is also being discussed at the level of international organi-zations. An OECD report published earlier this year describes the application of scientific methods in policy making as a global trend worth embracing. In December, the World Bank is about to follow up with its 2015 Development Report “Mind and Society” which focuses fully on behavioural sciences. It calls for an understanding of human motivations before designing policies, and taking advantage of research to improve welfare.

These recent developments in Behavioural Economics are a step forward, moving away from decision-making based on political gut feeling and towards more informed policy con-struction and regulation on an empirical and testable basis. This in turn is creating more demand for empirical and ex-perimental research on the basis of behavioural economic theory. The discipline is surely on its way to becoming one of the core areas of economic thinking, and is set to be a main part of economic textbooks. We may be saying goodbye to Homo Economicus for good. Finally.

“...it was not high-brow journal publi-cations that got the non-academics excited; instead, several pop science publications hit mainstream book-shelves...”

“Nudges allow for low-cost and wel-fare-improving regulatory strate-gies without being paternalistic...”

“Following the suc-cessful lead of the UK, more and more academic research-ers have found their way into govern-ments all over the world.”

“We may be saying goodbye to Homo Economicus for good. Finally.”

Research & Academia

FreakonomicsAliya Khabdulina

Should parents be financially rewarded for the academic per-formance of their kids? What is the overall contribution of black market transactions to the Italian GDP? Is there a pos-sible way to construct a reliable qualitative model capable of predicting gambling outcomes? The answers to these and many more entertaining questions can be found at freako-nomics.com, a thought-provoking blog launched by econom-ics professor Steven Levitt and prominent journalist / radio personality Stephen Dubner.

Inspired by the tremendous success of their Freakonomics book published back in 2005, Dubner and Levitt assembled a team of high-profile bloggers to illustrate the application of economic theory to daily activities. All you need is suffi-cient data and unconventional thinking, claim the two au-

thors. Freakonomics.com features highly interactive and stimulating content ranging from sporadic contributions of Dubner and Levitt to reviews of the most recent scientific papers and books of interest. The group of guest bloggers features Ivy League-educated economists, lawyers, and en-trepreneurs.

Today, Freakonomics has evolved far beyond a single book and a blog; into a radio show, a documentary and two further books. One can even book Dubner and Levitt for a guest lec-ture at a university or a conference. Not only have the two economists succeeded in bringing economic research into mainstream culture, they certainly show an impressive tal-ent when it comes to monetizing their academic work!

Source: Freakonomics.com

Research & Academia

Remember that cold January evening last year, with just a couple of days left till the exam? Remember, how, instead of letting you look through the slides one more time, your lap-top picked House of Cards to flicker across the screen? Today we free you from your guilty conscience: there is more eco-nomics in these TV shows and movies than you think. Even in The Lego Movie.

“On the extreme end of the central planning spectrum you have Octan Legoland, or in real life – commune economies like fascist or communist regimes,” says Andrew Heaton, the face of the very famous “EconPop” online show. Conceived by John Papola, an American video producer, and Russell D. Roberts, a professor of economics at George Masson Univer-sity, this show is now a blast.

Everything started with a better-than-average rap battle, performed by comedians Billy Scafuri and Adam Lustick as John Maynard Keynes and Friedrich A. Hayek respectively. In

“Fear the Boom and Bust” the two famous economists rap about the crucial differences between their respective eco-nomic theories. The video instantaneously went viral, and, as Papola explained, the success “seemed like an entrepre-neurial opportunity that had to be pursued.”

And this is how the website econstories.tv was born. Now featuring short videos of Heaton “[sifting] through the hay-stack of popular culture to find the needle of economics with-in”, and musical battles between “BFFs” Keynes and Hayek. It whisks Econ 101 with whimsy humor, turning them both into entertaining education. We have to admit, this website is rather addictive – or as the authors say: “[D]on’t miss a single episode, or Adam Smith will haunt your dreams!”

Econpop… or Adam Smith will haunt your dreamsIeva Maniušyte

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Careers

Alongside your full-time position as Deputy Head of Inflation Forecasting at the Swiss National Bank, what motivated you to teach a university class on central banking?

Teaching at the HSG is important to me.First of all, I studied at the HSG at the end of the 1980s and beginning of the 1990s. I had a great time. I have always liked this institution. Second, I am extremely fortunate to have a job where I can apply the last fruits of academic research. Therefore, I want to share my experiences with the next generations of stu-dents. It does not matter whether or not they work at a cen-tral bank after their studies, but I want them to understand how central banks are currently working.Third, students teach me, too. Every day and more than you think. Because of the students, for example, I constantly improve my way of teaching and my class notes. I constant-ly discover new angles, new questions, and new challenges.Finally, teaching “Economics of Central Banking” is also a way to tell my former professors “thank you” for opening me the door to the realm of economics.

Do you think it is important for practitioners to undertake academic endeavours alongside their work?

The main objective of the university is to expand knowledge, i.e. to do research and to teach. Practitioners contribute, even if modestly, to this vast agenda. They play a key role in

giving real-world relevance to the university. Moreover, they constantly show the students the usefulness of research by pointing out cases where it is practical and useful.

It seems like your career has spanned over not only the public and policy area, but the private sector as well. Were there any key differences between these experiences that you can re-flect on? Do you think that this diverse background has helped your career as an economist?

I used to work for a large Swiss bank. Working at a commer-cial bank is different to working at a central bank. The key distinctions essentially concern the mandate of these insti-tutions and the way to conduct business.On the one hand, the bottom line of commercial banks is profit maximisation and the rhythm of business is dictated by the beat of financial markets. On the other hand, due to the unique central banks’ mandate, central bankers have to provide appropriate monetary conditions to ensure price stability in the interests of the country as a whole. To do this job, they assess every aspect of the economy and leave no stone unturned.From my commercial bank time, I have learned to be effi-cient, flexible, and rapidly respond to any events, especial-ly if not expected. Now, working at a central bank, I can use these qualities in an institution that pursues a mandate about which I care a lot.

Nicolas Cuche-Curti

on economics, academics, and his career as a central bankerNicolas Cuche-Curti is the Deputy Head of Inflation Fore-casting at the Swiss National Bank, and a lecturer at the University of St. Gallen.

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Careers

Are there differences between your education in economics and today’s university education in this field that you believe are significant? In your opinion, does university education today prepare you for a professional career as an economist? Why - or why not?

Yes, there are differences, compared to the end of 1980s when I attended the HSG. I got my degree in Spring 1993. Now, the university is teaching topics which did not exist in text-books 25 years ago. For example, think about time series econometrics, like the idea of cointegration, or the current workhorse of macroeconomics, the dynamic stochastic gen-eral equilibrium (DSGE) models. Moreover, several concepts are taught much earlier in the students’ courses, such as optimisation methods.

There is no doubt, that Swiss universities, and in particular the HSG, give a good back-ground to economics students, because they have to learn the details of all the basic con-cepts of economics. Such foundations are important, because they are the pillars of future knowledge acquired on the job. Today, I have probably acquired more knowledge on the job than during my study time.However, several real-life as-pects are still missing. For ex-ample, economics is an empir-ical science. But I am still

amazed how little students know about data, data construc-tion, data interpretation, data shortcomings, etc. Coming back to your questions about practitioners, they can help a lot in this respect, too.

What is one way in which you believe an education in econom-ics has helped you in a perhaps unexpected way? (for in-stance, shifting the way you think or analyse issues; provid-ing you with an alternative world view)

I am an economist and proud to be one. For better or for worse, I see the world like an economist. For example, I think about concepts like optimisation or marginal analysis in ev-ery decision I take and see others’ decisions with the same eye.What I have learned since my time as a HSG student is that economic principles rule the world. No individual or societal problem can really be solved without some economic ap-proach. Economic thinking is a key requirement for any de-cision and solution process. This explains why I am still ill at ease when I see key positions in state agencies or large firms filled by non-economists, when these positions clear-ly need economists running the business. To be clear: econ-

omists are no better than other scientists. But, when it comes to economics, we are the best. Leave it to us.

Do you think the job of an economist at the central bank will be different twenty years from now? Why - or why not?

Good, but difficult question. I am almost certain that it will be different.In the last decades, I have witnessed several develop-ments. Computing power has increased tremendously. We do things with comput-ers that were unthinkable a few decades ago, e.g. Bayes-ian estimation methods. And we can do these things in the office, at home, and in the train. Forecasting needs have also increased. For example, the “in-flation targeting” monetary policy strategy needs much more forecasting ability than the “monetary targeting” strategy did. The mandate of central banks has evolved, too. Maintaining price stability is still the core business, but think about all the new tasks around systemic risk, financial stability, or payment systems. These tasks were much sim-pler, if not absent, a few decades ago.All these trends will keep developing in the future. Moreover, new challenges will emerge. But I am an economist, who is good at forecasting 3 years ahead - you know, the time lag of monetary policy to unfold its effects. For 20-year fore-casts, you should rather ask… a fortune teller.

What advice would you give to aspiring central bank econo-mists?

My advice to central bankers to be is simple. Do not study economics just to get a job in a central bank. Study econom-ics because you want to. Learn the basics very well, learn quantitative methods, and get good grades (…yes it sounds fatherly, but they matter a lot). Eventually, central banks’ doors will open.

“...central bankers have to provide appropriate mone-tary conditions to ensure price stabili-ty in the interests of the country as a whole. To do this job, they assess every aspect of the econo-my and leave no stone unturned.”

“What I have learned since my time as a HSG student is that economic principles rule the world. No individual or socie-tal problem can really be solved without some eco-nomic approach.”

“Do not study econom ics just to get a job in a central bank. Study economics because you want to.”

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Photograph by Ieva Maniušyte

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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.

Interested in writing for the next issue, or getting involved in some way? Contact us at [email protected]!

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