By Alexander Apostolides on November 30, 2010

DNA, Dog Poop and Limassol

Recently the American radio show "this American life" has mentioned that Limassol municipality is considering using the services of an American DNA company to create a biometric database of dogs in the city, and use it to find out who are the errant pet owners who refuse to pick up after their pets.

This service is up-and running in the US and it is called "Poo-prints". It uses the type of technology that is used to solve serious crimes such as homicide, made possible by the recent determination of the Dog DNA genome. The idea is that dogs are to be led one by one and in isolation to an office (in order for them not to lick each other and thus contaminate the DNA sample) to be swapped and their DNA information stored. Once poo is found in public places (i.e. filling the beautiful park by the old harbour)then the offending article will undergo a chemical treatment by a city worker before shipped for analysis - if it matches the database the owner will get an automatic fine as the error is as small as when DNA of a (human) culprit is found on a murder weapon.

Lets ignore the fact for the moment that this technology is perhaps more advanced that what the police is using for quite serious crimes. It is actually an quite interesting alternative to ways other cities have tried to tackle the issue, such as place cameras in all public places (expensive and invasive to privacy) or have people videotape errant dog owners (creating public tension). The cost of swapping DNA is not much higher than $30, and all dogs in Cyprus already need to get the European identifier chip which costs a lot more than that (and which could be replaced by the DNA identifier).

If we ignore the errant silliness of DNA testing dog faeces, its is actually a good idea and I am all for it. It is innovative and if successful it can promote companies innovating new products that can use Cyprus' advantage of a healthy stock of geneticists who work for next-to-nothing wages at the Cyprus Genetics institute.

In addition the DNA testing, once successful in mapping the population (i.e. once it eliminated the issue of communal dog ownership prevalent in the Mediterranean countries), is proven to be effective, since the owners accept the results. The theory of rational expectations in economics argues that once you can not escape the punishment you will ensure you pick up after your dog since the fine is automatic and unavoidable. Thus the culprits self-monitor themselves - picking your dog's steaming pile becomes more attractive if you know that it will cost 100 euro if you do not. I imagine well to do women explaining the process of picking up ones dog waste to confused Vietnamese girls...

Of course theory and practise diverge - this scheme can only work if all the dogs of Cyprus are included, and many will find the fact that communal dogs will need to be given an owner (who will pick up their fines) or be destroyed as offensive, and their concerns are valid. But the issue of dog waste is a serious problem in parks and public ways in Cyprus, which local governments can not solve without the active participation of dog owners.

By Alexander Apostolides on November 24, 2010

Cheating "a la Greek": Illegal government slaughterhouse

Phileleutheros reported yesterday (23/11/2010)that the government had given a loan of 500,000 euro to the government slaughterhouse through the union of municipalities, effectively breaking EU rules about government funding to companies. The issue is serious since the government is committed in paper not to aid the government slaughterhouse without the EU commission's approval, and now a request for the government to become the guarantor of a loan given to the slaughterhouse by the Bank of Cyprus is in jeopardy. A fine or a suspension of EU payments could be in order since there was a clear attempt to undermine the basic principles of the EU - that it is illegal to sponsor national companies.

Although the amount is relatively small, this once again highlights several issues that are limiting our economy's potential. The slaughterhouse is a monopoly so by definition it is capable of rising prices to the point that it makes a profit. Yet the fact that it has been a government monopoly for so long leads to extremely high wage costs. Overtime payments and over staffing resulted to the slaughterhouse not being profitable at ANY price; its arrears of 30.6 million euros just for the first 9 months of 2010 is set to rival the urgent 35 million loan to the now defunct Eurocypria.

The approach of all governments towards government sponsored companies was not to solve their problems but give them enough money to limp on. The 500,000 euro loan was not going to save the slaughterhouse, but it just pushed the issue 6 months down the line; do that enough times until hopefully another government has to deal with the issue and you are clear of any negative repercussions. This is not new - this has been the state's approach towards other government sponsored companies for decades, including Eurocypria and Cyprus Airways.

What we have failed to understand is that now the economic crisis, combined with the EU rules, have led to the futility of this practise. The hidden 500,000 euro loan can result to fines against Cyprus running to the millions, while the huge debts of these government companies are a damaging drain at a time when the Cyprus government is been warned by all that it should reduce its budget deficit. The issue facing all these government sponsored companies and the government sector as a whole is the relatively high wages and inefficient practises when compared to the private sector, and unless something is done fast about this issue, more government sponsored companies will be in trouble. The time of passing the buck is over; only rapid action will save us from perhaps having to slaughter our own animals for easter souvla.

By Alexander Apostolides on November 17, 2010

The slide is on: Down Down Down...

I was interviewed on the 22nd of October about the potential repercussions of a downgrading of the Cypriot Economy by credit rating agencies. Back then I argued that the downgrading could be avoided if urgent action is brought to bear by the government to resolve the spiralling budget deficit. I also argued that any downgrade would not be dramatic, as most agencies would wait to see if the new 2011 budget introduces radical steps to redress the balance between government spending and expenditure before launching a more radical reduction to our credit score.

However, the argument went unheeded and we have been downgraded. Some investment assets which are required by law in the United States to only hold top rate bonds will sell some of our assets, but the immediate repercussions are much more subtle as we make switch in investors' minds from one of the "safe" states of Europe to one of the "worry" states of the EU.

This change affects international business based in Cyprus. The investment report of Cypriot banks published just last week by Moody's argues that the negative prospects of the economy are clouding the banks ability to preform well, as the majority of their exposure is in Greece and Cyprus. This was surprising to me since our banking sector has weathered the financial crisis surprisingly well, and one is loathe to think that the worries about the government's financial position is hampering the efforts of the Cypriot banking sector to secure better credit abroad.

One can not but worry that a self fulfilling prophesy has started to affect us: If we are seen as a potential future "Greece" and "Ireland" of Europe, people will start to withhold investments or demand a higher interest for loans to the Cypriot government and Cypriot companies, in effect forcing Cyprus in an ever darkening future.

The response to the government was to announce measures that are frankly not radical enough to convince us of their commitment to reduce the government wage bill, let alone convincing any credit rating agency not to further downgrade the republic. The efficiency drive and wage reduction promised are so timid that they are not enough to reduce the government wage bill, and as a result the government will once again starve the economy of much needed investment in order to try and keep the civil servants satisfied but also contain the increase of the budget deficit. We all know what needs to be done in terms of efficiency and wage cuts in government, but we seem to prefer to slide towards a future that looks increasingly similar to Greece rather than do something about it today. My prediction: Look forward to a further downgrade of our economy after the timid budget is passed by parliament in December.

By Alexander Apostolides on November 11, 2010

Economic theory suggests an investigation of the milk market

One of the most common complaints by students when teaching economics is the fact that the government has not done anything to reduce the price of milk in Cyprus. The government has first tried by suggesting an unwise maximum price and then has done nothing over the issue as it is unsure if the high price is due to illegal price fixing.

Yet economic theory suggests that the government should do more to pressure the milk firms. The milk market is an oligopoly market: there are very few firms and their revenues are directly influenced from each other. As a result firms in an oligopoly market are directly dependent to each other in terms in terms of their pricing policy and profitability.

Thus, oligopolistic firms, such as the milk companies, face a dilemma. They dislike competing on price: if they decide to reduce their own price, it might lead to the reduction of the competitor’s price, reducing the profit of all firms in the market. However in such markets there is keen non-price competition as firms they strive to convince the consumers that their product is better in order to make consumers loyal even if the competitor has a price advantage. A good example of a successful loyalty campaign is by coka-cola: how many people do you know that would not drink Pepsi if “Coke” was not available?

Oligopolistic firms in Cyprus do compete using non-price means through mass advertising and product differentiation. You can pretty much bet that 9 out of 10 advertisements on the TV are from firms in oligopoly markets, striving to convince consumers that their products are different and better: banks, diapers, sanitary pads, broadband services and supermarkets in Cyprus spend massively on advertising but are less keen to compete on price.

This is where the milk market is suspect. The non-price competition of the milk market has been lukewarm at best; when was the last time you remember a two for one special offer on milk? There is some advertising and some product differentiation for premium products, but its intensity is nothing like the other markets under oligopolistic competition in Cyprus. Thus an investigation by the government would be suggested by the theory as milk companies might be co-operating in illegally fixing prices as suggested by the relative paucity of their non-price competition.

Other factors also point out that the Cypriot milk market is a ripe contender for collusion. The limited number of companies makes secret price fixing negotiation easier. In addition unlike other oligopolistic markets, the milk market is quite isolated from non-Cypriot competition. Our lack of rapid direct access to other European markets means that the Cypriot companies are not facing the same level of competition than in other Cypriot markets by foreign companies: we buy Danish and Greek cheese as it does not spoil as easily as fresh milk, but it is difficult to see Cypriot consumers preferring Greek fresh milk as there would be valid doubts about its freshness.

The wise solution is not a maximum price of milk as this could lead to chronic shortages of such a basic commodity. The solution is the beginning of an formal investigation, in a national or EU level, with the promise of immunity from damages to any company that first provides evidence of a price fixing cartel. This will reduce the incentives of anyone in the cartel, and allow companies to damage the competition by admitting to price fixing. This common practise of the EU might provide the answer to whether there is collusion, of the market, and give the possibility to firms to clear their name and satisfy my students that the current price of milk is the lowest these companies can aspire.

Sleepwalking into a major crisis: 1931, 2010.

In 1931 the colonial government of Cyprus was facing an unprecedented problem: possible bankruptcy. Having used up its meagre reserves during the economic recession, the government found a market that was unwilling to lend to it and a domestic population that was already squeezed hard by the combined calamity of declining global prices and exceptional drought. The colonial government attempted to raise taxation, but it was denied by the Cypriot legislative council, which was demanding that the government first reduced its wage expenditure. The governor did not want to be in conflict with the organisation he relied for in order to govern, and thus he decided that inactivity was the best policy. The result was a further slide in recession, social upheaval and rioting.
The similarities with the current situation are striking. In 2009 the current government was faced with a similar choice – the possibility that the unsustainable budget deficit would lead to future bankruptcy. Having attempted to raise taxation, they found their way blocked by the parliament, which was perhaps indirectly requesting that government expenditures (of which wages is the largest share) where first contained. The government’s response was to wait and borrow, unwilling to be in conflict with the powerful lobby of government officials that PASIDY represents. The result is that we are sleepwalking through the recession: shops are being shut, unemployment has reached record levels and not performing debts are mounting. The issue of this "wait and see" policy is clear:the government is not active in any major way to help the economy find its way to prosperity.
Like in 1931, the present government, is faced with the choice of either increasing investment to help the economy (which it can only do without borrowing only if it reduces government wages), or reducing investment and keeping those who help it rule satisfied. I worry that it has chosen the latter. The result is an economy that has no government helping hand while our public debt is still creeping towards the danger zone. Let us hope the parallels with 1931 end soon, before it is too late.

By Alexander Apostolides on November 02, 2010

Unemployment in Europe: UK, Cyprus and the success of Malta

The latest budget cuts in England made by Cameron, were made on the assumption that the private sector will pick up the slack in the labour market. However a recent report by the Chartered Institute of Personnel and Development (CIPD) launched a devastating attack on this suggestion by announcing that the spending cuts and VAT rise to cost 1.6m jobs. This is apowerfull a call to action against the excessive "slash and burn" cuts proposed by the conservative party.

Up to now the only silver lining in Britain recession was the fact that it managed to keep unemployment levels lower than the US or other European countries: Unemployment peaked at 7.8% when larger economies are facing a recovery with stubbornly high unemployment such as the Case of the USA (9.2%) and France (10.1%). These cuts, in their rapidity and suddenness, along with the rise of VAT will cause a leap in UK unemployment undermining the only positive news since the recession was officially ended with the recovery of GDP to positive levels.

On another note is the alarming and meteoric rise of unemployment in Cyprus which began in the end of 2008. It is noteworthy that our rise has perhaps one of the most sudden in the EU outside the former eastern block countries. Malta has managed to ride the recession in terms of unemployment quite well, and once again it shows us how small open economies that are good in exploiting the opportunities offered by the EU (both in terms of competitive service provision and absorbing EU funds) can do very well for themselves.