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Tuesday, September 8, 2009

A lesson in Economics

Note: This was written with next-to-nothing research. If you are writing a thesis related to Economics, it's probably best to not to copy this wholesale. But if you find documented proof, feel free to steal my ideas!

"Hey baby, do you get the feeling that Ecuador just seems more prosperous than Colombia?"

A sweet treat from the bus operator

The wife took a break from sucking the free lollypop given by the bus operator to all passengers, and nodded in agreement.

Having spent about a month in each of these countries, we could really see the difference in the economic prosperity in these countries.

Exhibit A

Ecuadorian KFC conquered!

There are international fast food chains in Ecuador, but none from what we have seen of Colombia

Exhibit B

Clean and orderly bus terminal in Quito

The bus terminals here can be really spiffy, as compared to the dingy ones even in the capital of Colombia

I have clocked hours of rambling thoughts on rumbling buses to come up with a few possible reasons, or combination of reasons for this apparent prosperity of Ecuador.

1. Using the US Dollar as the national currency
In the early 2000s, the President of Ecuador tried to push for a currency reform, to change the Ecuadorian currency to the US Dollar. In the protests that followed, he was eventually ousted and power was passed on to his Vice-President. In a 'huh?' turn of events, the Vice-President then implemented the currency switch anyway.

The older part of Quito

In addition to creating some relative stability to the value of the currency, the biggest benefit seems to be the relatively small numbers used in day-to-day transactions. Just for reference sake, 1 USD is approximately equivalent to 2,000 COP (Colombian Pesos).

Case in point:
When we were in San Gil, Colombia, we decided NOT to buy a pack of Oreo biscuits because it cost COP 6,000+, as compared to local brand Festival, at about COP 2,000+

When we found ourselves in Puerto Lopez, Ecuador, we were just a hairsbreadth away from buying the same pack of Oreo biscuits for a 'measly' USD 3.

Another example:

I started a new website called Be Fare To Tourists because of the haggling that needs to accompany each and every intercity ride. We've found ourselves bargaining to lower a COP 4,500 bus fare in Villa de Leyva, Colombia, but willingly fork over USD 2.20 for a bus ride of similar length in Quito, Ecuador. (Seriously, we would be embarrassed to bargain for USD 0.50 less!)

In effect, the Dollarisation, and subsequent 'smallerisation' of the monetary values means that people are more likely to bargain less, and therefore pay more, thereby increasing consumer spending.

2. Ownership of a high value tourism spot - the Galapagos Islands
The world-renowned volcanic islands of the Galapagos lie within the territory of Ecuador. And tourists from the world over are willing to pay top dollar to visit the islands. Due to the multiplier effect, these relatively huge amounts of money eventually cascades down to increased spending by the general population as well.

How does the multiplier effect work?
Well, assuming you pay USD 1,000 to the cruise ship that brings you to the Galapagos. The person who owns the ship then pays USD 200 to the crew as a salary. The crew, being better paid than most of their counterparts, are willing to bring their girlfriends to a dinner at a fancy restaurant when they are in port, buying a meal that costs USD 75. The restaurant owner then pays his waiters a better salary because of the higher revenue... and the story goes on from there. Eventually, you are going to find that the USD 1,000 you paid the cruise ship actually caused a chain reaction of eventual payments that could total to a substantial amount, depending on how likely the people in the chain are prone to saving or spending.

Multiply this again by the number of cruise ships and tourists every year, and also factor in costs of domestic flights, costs of accommodation and meals in Quito or Guayaquil (which are the gateways to the Galapagos) and you have again a whole lot of increased consumer spending.

3. The presence of the Chinese
This smacks a little of stereotyping, but I personally feel that the peoples of Chinese origins are just a little more hardworking than their western counterparts. They are a little more economically savvy too - always finding ways to lower costs and maximise profits.

Will you be my special friend rice?

Other than one lone chifa (Chinese restaurant) in Bucaramanga, we did not see any other signs of Chinese presence in Colombia at all. In contrast, in the tiny town of Otavalo in Ecuador, there were no fewer than 10 chifas. These chifas are also seen in bus terminals, along city streets, etc, leading us to believe that there is a largely more significant Chinese presence in Ecuador.

The financial success of the Chinese who came to Ecuador to settle down cannot be ignored. One restaurant owner in Otavalo is well-off enough to send his son to the USA to study. As such, the locals must also raise their game if they wanted to perform as well as this 'foreign talent'. Investments in the local economy therefore increases.

Now, why did I highlight consumer spending and investments above? Simply because the Gross Domestic Product (GDP) of a country is calculated by the formula:

C + I + G + (M-X)

C = Consumer spending
I = Investments
G = Government Spending
M = Imports
X = Exports

Where C and I increases (all other values remaining constant), the GDP also will increase, leading to a better economy and higher prosperity for the country.

An interesting point to note is how the various factors are influenced.

C is influenced by the peoples' willingness to spend.
I in influenced by the businesses' willingness to spend.
G is influenced by Government spending.
M and X are influenced by the presence of resources (either natural resources or a skilled workforce) in a country.

The Singapore Government is also using this same formula to boost its GDP. Have you ever noticed that road works are more prevalent in tough times than good? Government spending has increased to boost the economy. Notice how all these schemes to retrain workers come up? The Government is improving the quality of its resources. Notice how tightly the financial industry is regulated? The Government is creating an arena of rules and stability to attract investments. Notice how the Government doesn't just pay for your Lift Upgrading Program, but sponsors only a part of it? It's an indirect way of increasing consumer spending!

When you understand the economics behind the GDP, it's really quite interesting to look for the purpose behind the various schemes hatched by the Singapore Government!

And yes, (with the utmost respect to Prof. Jayakumar, Dr Yaacob Ibrahim, Mr Tharman Shanmugaratnam, Dr Vivian Balakrishnan and Mr K Shanmugam) the Cabinet is mostly made up of Singaporeans of Chinese origins as well.

P.S Special thanks to my lecturers, Mr Leslie Yuen (from my NYP days) and Mark Harris (from my Stansfield days), who helped some of these concepts stick in my head. I hope I did not get anything wrong!


Yeepster said...

From looking at the size of the KFC chicken it seems Ecuador is even more prosperous than S'pore!

Dannie said...

Haha... but I prefer the KFC in Singapore. Over here, they seem obliged to give you one wing for every 2 pieces you order, and they are really puny in size.

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