OTEFA Newsletter

Newsletter of the Overseas Thai Economic and Finance Association
December 2010, Volume 2 Issue 2
Published two times annually

Contents
Pages
From the Economics Editor Trade Costs and the English Premium From the Reporters The Economics of Envy Reflection on Research Supervision Member News Member Report OTEFA Annual Meeting 2011 3-5

6-8 9-14

15-16 17

OTEFA Newsletter

Editorial Team
Editors
Pramuan Bunkanwanicha (Finance) Kanda Naknoi (Economics)

Reporters
Paan Jindapon (Economics) Yothin Jinjarak (Economics) Pab Jotikasthira (Finance) Worawat Margsiri (Finance) Onsurang P. Norrbin (Student Affairs) Nattavudh Powdthavee (Economics) Krislert Samphantharak (Finance) Dhanoos Sutthiphisal (Economics) Sirimon Treepongkaruna (Finance)

Contact
Email: otefamail@gmail.com URL: http://www.otefa.org/newsletter/

The authors are solely responsible for any errors in their articles published in the OTEFA Newsletter. All articles do not represent the views of other members of the Overseas Thai Economic and Finance Association. Copyright © The Overseas Thai Economic and Finance Association

OTEFA Newsletter 2

From the Economics Editor

Trade Costs and the English Premium
- Kanda Naknoi In late October Thailand’s Education Ministry scrapped a plan to make English the country's second language, saying it could lead to misunderstandings that Thailand had been colonized in the past. [1] Evidently, the Education Ministry has not realized that competition in the world market is driven by the present skills and technology, rather than the past colonial status. Why is it important to make English Thailand’s second language? English is the language used in a large fraction of international trade in goods, services and assets. Recent empirical studies have found that languagerelated barriers increase trade costs in the goods market by 7 percent. [2] This scale is half of the effect of currency barriers or the use of different currencies. In other words, removing language barriers is 50% as good to competitiveness as joining a currency union. The size of language barriers in the services market, such as software programming and professional services, has not been estimated in the literature. Nonetheless, in the case of Thailand we may quantify the size of language barriers in the service industries from wages and costs of English education. How high is the English premium in Thailand? At the fundamental level, Thai economy reflects the importance of English. Wages in Thailand display a high English premium, namely a large gap between wages paid to Thais who can speak English and wages paid to those who cannot. In 2009, the wage gap between the managerial staffs and the clerical staffs in Thailand was 1,140% and ranked No. 4 out of 56 countries. [3] Of most importance, the wage gap was largely attributed to English language skills. By way of comparison, the corresponding wage gap in Singapore was 500%. If we assume that the distribution of skills excluding language skills is identical across countries, then the English premium in Thailand will become 640%. This high level of the English premium explains why Thais are fond of studying in English speaking countries, despite reluctance among officials to adopt English as the second language. English language skills are tickets to the upper segment of the society as well. Politicians whose English speaking skill is poor are ridiculed by their rivals and the urban middle class. OTEFA Newsletter 3

Consequently, the English premium has become the main driving force behind the expansion of international school industry in Thailand and English programs in Thai universities. If English becomes Thailand’s second language, courses offered in English will be subsidized by public funds. This policy will reduce demand for private international schools and voluntary English programs. Thus, the difference between tuition and fees of English programs and those of Thai programs can serve as an alternative measure of the English premium. For instance, we can compare the annual cost of undergraduate economics programs at Chulalongkorn University. To be precise, the English program in Chula economics department costs 149,000 baths per year, [4] and its Thai program costs 29,000 baths per year. [5] Based on these cost data, the English premium is 149/29 or 514%. Looking ahead 20 years from now Chinese may become as important as English for international trade and investment. Still, English will probably remain important, because Arab countries, Europe, Japan and South Korea express no interests in switching the business language from English to Chinese. In addition, it is quite unlikely that the computer programming language will switch from English to Chinese. In fact, the decision made by Thailand’s Education Ministry is good news for policy makers in Australia and New Zealand. For the Asians who wish to acquire English language skills, Australia and New Zealand are low-cost substitutes for Great Britain, Canada and the United States, because of their proximity to Asia. Policy makers in Australia and New Zealand are well aware of this advantage and welcome an increase of students from Asia. Exporting education services to Asian countries including Thailand has become a primary source of revenues of a large number of educational institutions in Australia and New Zealand. I hope the Education Ministry will reconsider its decision in the near future. References [1] “Plan to make English 2nd language vetoed,” Bangkok Post, October 20, 2010: http://www.bangkokpost.com/news/local/202224/plan-to-make-english-2ndlanguage-vetoed [2] Anderson, James E. and Eric van Wincoop (2004), “Trade costs,” Journal of Economic Literature 42, pp. 691-751: http://ideas.repec.org/p/boc/bocoec/593.html

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[3] “Global Management Pay Report 2009,” Hay Group: http://www.haygroup.com/Downloads/ww/misc/Global_Management_Pay_Report _2009_final.pdf [4] “International Programs Offered at Bachelor Degree Level,” Chulalongkorn University: http://www.inter.chula.ac.th/inter/internationalstudents/frame.htm [5] “Fees for Thai Students,” Office of the Registrar, Chulalongkorn University: http://www.reg.chula.ac.th/fee1.html

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From the Reporters

The Economics of Envy*
- Dhanoos Sutthiphisal Rethinking the Model Everyone agrees that growth in several parts of the world, especially in Asia, has been spectacular for the past 30 years. Some countries even maintain double-digit growth in the last decade. But, does such a remarkable economic growth matter at all? Are we happier now as compared to then? Richard A. Easterlin points out that that we may not feel happier as we enjoy more income from economic growth. He finds that there was no increase (decreasing if any) in self reported happiness in the US, Japan and other nine European countries during 1950 and 1980. Within a country at a given point in time, those with higher incomes are, on average, happier. However, raising the incomes of all does not increase the happiness of all. What could explain such a paradox? ...The science of happiness offers two explanations for the paradox. Capitalism, it notes, is adept at turning luxuries into necessities— bringing to the masses what the elites have always enjoyed. But the flip side of this genius is that people come to take for granted things they once coveted from afar… (The Economist, December 2006) In other words, judgment of well being (and hence happiness) is based on a relative term – how you are doing in relative to your neighbors and peer group – which increases in the same proportion as the actual income of the society. The results from Easterlin’s work suggest that our standard economic models that assume preferences are separable across time and across households may not be particularly appealing, especially when they are used to explain economic agents’ consumption behavior. As a result, in recent years, economists have revised the models to allow for the non-separabilities. The first change is to allow for consumption that is based on the individual’s own past consumption levels, referred in the literature as “habits.” The second change is to allow for consumption that is based on consumption of some outside reference group, typically the average consumption of one’s community, neighborhood or the overall economy. This is often referred to in the literature as “envy,” “catching/keeping up with the Joneses,” “consumption externalities.” How Much can Our Consumption Behavior be Explained by Envy? A growing body of empirical evidence investigates the importance of habit formation in consumption behavior. Most of these studies find that one’s current consumption does indeed depend on his/her past consumption (e.g. Osborn, 1988, Ferson and Constantinides, 1991, Fuhrer and Klein, 1998, Carrasco et al., 2005). On the other hand, there are much fewer attempts to estimate the other type of nonOTEFA Newsletter 6

separability, stemming from envy in consumption. To my knowledge, Ravina (2007), Maurer and Meier (2008), and Alvarez-Cuadrado et al. (2010) are the only three papers that try to infer the degree of envy using data on individual consumption choices. Using a Spanish data set during 1985–1997 that follows households for eight periods, Alvarez-Cuadrado et al. (2010) find that, on average, habits and envy account for about two-fifth and one-fifth of household consumption, respectively (with only the remaining 40% being determined by their current consumption choices). These results are consistent with the results from Ravina (2007) and Maurer and Meier (2008). Envy in Other Contexts In addition to consumption literature, other areas in economics have begun to systematically explore the effects of envy empirically. Here, I highlight recent findings that I think interesting. Luttmer (2005) shows that local average earnings have a significantly negative effect on self-reported happiness. Moreover, the effect of neighbors’ earnings is significantly stronger for those who socialize frequently with neighbors but not for those who socialize more frequently with relatives, friends outside the neighborhood or people they work with. Neumark and Postlewaite (1998) find that a woman is 16 to 25 percent more likely to work outside the home if her sister’s husband earns more than her own husband. Daly and Wilson (2005), considering suicide as a revealed preference, reveal that suicide rates across counties rise as the median income falls further below the income of those at the 90th percentile. In contrast, Grinblatt et al. (2008) analyze the automobile purchasing behavior of residents of two Finnish provinces, and find that one’s purchases are strongly influenced by the purchases of his/her neighbors, particularly purchases in the recent past and by neighbors who are geographically most proximate. The probability of buying a car increases by 12% for each one of the ten nearest neighbors that purchased a car in the last ten days. They, however, conclude that their results capture information sharing rather than envy, based on the fact that the relevant coefficient is much more significant for used cars, where the information asymmetries are more relevant.

References Abel, A. (1990). “Asset Prices Under Habit Formation and Catching Up With the Joneses.” American Economic Review 80, 38–42. Alvarez-Cuadrado, F, J. M. Casado Garcia, J. M. Labeaga Azcona, and D. Sutthiphisal (2010). “Utility Interdependence and Consumption Behavior: The Roles of Envy and Habits.” Mimeo.

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Daly, M.C and D. Wilson (2005). “Keeping Up with the Jones and Staying Ahead of the Smiths: Evidence from Suicide Data.” Dynan, K. (2000). “Habit Formation in Consumer Preferences: Evidence from Panel Data.” American Economic Review 90, 3, 391-406 Easterlin, R. A. (1974) “Does Economic Growth Improve the Human Lot?” in Paul A. David and Melvin W. Reder, eds., Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, New York: Academic Press, Inc. Easterlin, R. A. (1995). “Will raising the incomes of all increase the happiness of all?” Journal of Economic Behavior and Organization, 27, 35-47 Grinblatt, M., M. Keloharju, and S. Ikaheimo (2008). “Interpersonal effects in consumption: Evidence from the automobile purchases of neighbors.” Review of Economics and Statistics. Luttmer, E. (2005). “Neighbors as Negatives: Relative Earnings and Well-Being.” Quarterly Journal of Economics 120(3), 963-1002. Maurer, J. and A. Meier, (2008). “Smooth It like the ‘Joneses’? Estimating Peer-Group Effects in Intertemporal Consumption Choice.” The Economic Journal 118(527): p. 454-476. Neumark, D. and A. Postlewaite (1998). “Relative income concerns and the rise in married women’s employment.” Journal of Public Economics 70. 157-183. Ravina, E (2007) “Habit Formation and Keeping Up with the Joneses: Evidence from Micro Data.” Available at SSRN: http://ssrn.com/abstract=928248.

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From the Reporters

Reflection on Research Supervision: A Case Study of an Honours Students at Accounting and Finance Department, Monash University
- Sirimon Treepongkaruna Background Around mid-February 2010, a student approached my colleague and me to be his supervisors for an honours degree in Finance. This student’s academic record is excellent. He came to the honours program in our Accounting and Finance department with the highest scores. He also received 2 awards from the department as the highest achievement graduate. My colleague and I decided to take him on and give the students the research topic along with the background literature to read. The student contacted us back and expressed that he is interested in working on this research topic. Hence, our first official meeting is held a week before semester 1 starts. In the first meeting, we have made it clear to this student that we need to set up a timeline from the start until thesis submission dates. We will have a regular weekly meeting. Each week, the student is required to show us some progress. At the end of each meeting, I usually summarise to the student on what we expect him to show us for the next meeting and document those lists. The arrangement works well until the student gets an offer for a job in industry and becomes “too lazy” (his own word) to work during the Easter break. The week after the Easter break, an hour meeting was spent on convincing him to stay focused on research. We cannot cross off the working progress for his to-do things list for the first time this week. We guessed something must go wrong and asked him to explain why he turned up for the meeting without any progress. He confessed that he was a strategic learner in his undergraduate degree such that he only prepared for what he expected to be included in the exam – apart from that he simply didn’t study on anything. He finds it is so much harder in the honours year. He needs to put a lot more effort than he used to do in his undergraduate degree. At first, we almost give in to him and allow him to postpone work and cancel the next meeting. However, we manage to convince him that the following week meeting is still on and we expect to see his work. We make it as a challenge for him to try to OTEFA Newsletter 9

impress us. We set only minimum requirement for the following week, however, we ask him to impress us by showing us some extra work. Situation improves afterwards. Finally, he manages to submit the thesis just on time in October 2010. Reflection as a supervisor According to Monash Research Graduate School (MRGS) guideline, chapter 5 specifies responsibilities of the supervisor as follows: “5.2.3 (C) Responsibilities of the supervisor It is the responsibility of the supervisor to maintain a professional relationship at all times with the candidate. The supervisor should ensure the following protocols are met: 5.2.3.1 University policy The direction of the work is entirely under the control of the University and candidate in accordance with University policy. 5.2.3.2 Guidance to candidate Guidance is given about the nature of research and the standard expected, about the choice of research topic, about the planning of the research program and presentation of a research proposal, about literature and sources, attendance at taught classes where appropriate, and about requisite techniques and research methods and other relevant skills such as the ability to interact with industry and to work with diverse communities (including arranging for instruction where necessary). He or she is particularly sensitive to the need to ensure productive use of the candidate’s time, especially in the first year of candidature. The candidate is encouraged to show initiative and self motivation so that he or she will be able to pursue independent research with confidence in the final stages of candidature. Help is given to the candidate to interpret and understand examiners’ reports and guidance as to how to meet their requirements. 5.2.3.3 Establishment of timelines Detailed advice is given on the necessary completion dates of successive stages of work so that the whole may be submitted within the scheduled time.

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A schedule of regular meetings (at least monthly for part-time candidates; every two weeks for full-time candidates) is established and maintained with the candidate and in the light of discussion with the candidate Regular written work, interim reports or research results are requested, as appropriate and such work returned, including the final draft of the thesis, with constructive criticism normally within two weeks for chapter-length drafts and for longer pieces, as negotiated, but normally no longer than one month at most, or within a shorter timeframe which has been determined as appropriate within the academic unit. 5.2.3.4 Employment The main supervisor must be satisfied that: Part-time work proposed by a full-time candidate will not interfere with the progress of the research program, before the supervisor may approve such parttime work. Full or substantially full-time employment undertaken by a part-time student meets with the conditions of part-time candidature, including a period of on-campus residency.” As a supervisor, I have followed the code of conduct and maintain a professional relationship with the student (candidate). I have given the candidate guidance in several ways. These include guidance on related literature, providing explanation on some technical issues, identifying the data source and demonstrating how to download the data, and providing timely feedback on his draft proposal. In addition, when the candidate becomes distracted, I have given him some guidance to self-motivate himself to get back to work, given him an advice to look at things from different perspectives. Finally, I use timeline and regular meeting as a goal for him to work towards deadline. I find timelines and regular meeting is very essential for this particular student as he is not matured enough to work independently without guidance. He also needs regular encouragement to continue to work hard. It should be noted that the approach I have taken in honours supervision is quite similar to what I adopt to my PhD supervision. However, my PhD supervision approach is less strict than what I describe above. Overall, I have followed MRGS’s code of conduct and maintain a professional relationship with my students. However, I do not necessarily give students research topics. I usually give them some guidance of key papers in their area of interests and give them time to read/search for what their real interests are. Further, the regular meetings could also be flexible depending on the candidates’ progress. With PhD supervision, I still use timelines approach to make sure that candidates are right on track.

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Reflection on a candidate According to MRGS, chapter 5 also specifies responsibilities of candidate as follows: “5.2.4 (D) Responsibilities of the candidate It is the responsibility of the candidate to maintain a professional relationship at all times with the supervisor and other University staff and in relation to the following protocol: 5.2.4.1 Regulations and guidelines Be familiar with and adhere to the appropriate degree and academic unit guidelines and other written information including national research codes of practice pertaining to research postgraduate work Undertake induction, training courses, mandatory units as soon as practical after commencing the research project Devote a minimum of the equivalent of 4 working days to their research each week if full-time and a minimum of 2 working days to their research each week if parttime. 5.2.4.2 Use of resources and facilities Utilise the resources, facilities and opportunities available to facilitate progress in the research. 5.2.4.3 Academic Unit activities and meeting with other researchers Contribute to the development of the intellectual community provided by the academic unit, and acquire or improve the skills and knowledge required for the completion of the project. Be aware of opportunities for meeting other researchers in the field and to attend seminars, meetings and conferences, as appropriate. 5.2.4.4 Safe working practices Adopt at all times, safe-working practices relevant to the field of research and adhere to the guidelines established by the University’s Occupational Health and Safety Policy Committee, and as adopted by University Council. 5.2.4.5 Adherence to ethical practices OTEFA Newsletter 12

Adhere to research practices laid down in the Australian Code of Conduct for the Responsible Practice of Research including other codes referred to in the national code and Procedures for dealing with Allegations of Research Misconduct published in the Research and Research Training Operational Manual (see chapter 11 for related links). Follow ethical practices appropriate to the particular discipline and relevant profession, and as specified by the University’s Standing Committees on Ethics in Research on Humans, Animal Experimentation and Biosafety and the ethics guidelines set by any relevant funding body. Seek clarification and further information from the supervisor or other appropriate senior researcher on any aspect of research policy and conduct, if unsure where undertaking research as part of a joint project with a commercial or industrial partner, observe both the ethics guidelines and occupational health and safety requirements of the other institution(s). Prior to disseminating the results of the research by publication or other means consult with, and obtain agreement of, the supervisor. Ensure the research is not unreasonably influenced or redirected by commercial political, commercial or industrial factors. Refer to Section 5 (Publication and dissemination of research findings) and Section 6 (Authorship) of Australian Code for the Responsible Conduct of Research. Develop a personal ethos of appropriate research practices and conduct. 5.2.4.6 Retention of data Ensure that original data is recorded in a retrievable, durable and appropriately referenced form and stored safely for a period appropriate to the discipline, but in any case not less than five years from the date of publication. (Note however, that for specific types of research (e.g. clinical trials), 15 years or more may be appropriate). 5.2.4.7 Meetings/communications with supervisor(s) Initiate discussions or communications with the supervisor and any associate supervisor(s) on the type of guidance and comment considered most helpful, and agree to a schedule of meetings which will ensure regular contact. Notify supervisors of any planned leave or any unexpected absences from the academic unit.

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Negotiate any planned leave with the supervisor and notify the supervisor when intending to leave the country. Discuss with the supervisor, graduate coordinator and Associate Dean (Research Degrees) if there are any concerns with regard to current supervision arrangements and any intention to investigate new supervisory arrangements prior to approaching potential replacement supervisors.” My reflection on candidate is as follows. This student has demonstrated clear understanding of rules, ethics and code of conducts. His potential (in terms of past academic record) is excellent. Hence, it will be such a waste if we can push him to his maximum potential. Although being distracted since Easter break, he manages to finish his thesis just in time before the deadline. The quality of his work is also excellent. On the final note, I would like to highlight a few differences between PhD and honours candidates. Honours candidates are usually less mature and have little or no research experience when they start their honours degree. Further, the process of writing up honours thesis has to be done within less than one year. On contrary, PhD candidates usually have been trained for some certain research skills. They also come into the program with research proposals, which we can help them to refine the topic (instead of given them a topic like what I did for honours students). The period of PhD candidature is also longer than for the honours degree. Hence, some greater flexibility in supervision can be applied to PhD students.

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Member News

Member Report
- Kanda Naknoi Jon Wongswan has two forthcoming articles: The OTEFA currently has 83 members. In the past 6 months some of us have changed affiliations, have been promoted and have been recognized in various publication outlets. Congratulations!

1. “International Transmission of U.S. Monetary Policy Shocks: Evidence from Stock Prices,” with John Ammer and Clara Vega, 2010, Journal of Money, Credit and Banking (forthcoming). 2. “Global Asset Prices and FOMC Announcements,” 2010. with Joshua Hausman, Journal of International Money and Finance (forthcoming).

Yupana Wiwattanakantang moved from Hitotsubashi University to NUS Business School, National University of Singapore. Nattavudh Powdthavee has been appointed as an Assistant Professor of Economics at Nanyang Technological University, Singapore. He has several publications and media appearances.

1. “Does Education Reduce the Risk of Hypertension? Estimating the Biomarker Effect of Compulsory Schooling in England.” Journal of Human Capital, 4(2), 173-202. 2. “Destruction and Distress: Using a Quasi-Experiment to Show the Effects of the September 11 Attacks on Mental Well-Being in the UK.” Joint with Metcalfe, R., Dolan, P. 2010. Economic Journal, conditionally accepted for publication. 3. “Anticipation, Free-Rider Problem, and Anticipation to Trade Union: Re-examining the Curious Case of Dissatisfied Union Members.” Industrial & Labor Relations Review, forthcoming. 4. The Happiness Equation: The Surprising Economics of Our Most Valuable Asset, UK: Icon Books. The copies are now sold in UK, USA, Europe, South Africa, Japan, Australia, Singapore, and Kinokuniya bookshops in Thailand. 5. “The Seven Secrets to Happiness,” the Financial Times (Sep 1, 2010). 6. “Top 10 Things that Make Men Happy,” Askmen.com.

Porntawee Nantamanasikarn changed his job from CBRE Investors in Los Angeles to Citadel Securities in New York City. Kanda Naknoi published “Does the Exchange Rate Belong in Monetary Policy Rules: New Answers from a DSGE Model with Endogenous Tradability and Trade Frictions,” joint with Michael Kumhof and Douglas Laxton, in Macroeconomic Performance in a Globalising Economy, Cambridge: Cambridge University Press (2010); gave a seminar at the University of Michigan, Ann Arbor; and organized the OTEFA Newsletter 15

session on Open-economy Macroeconomics at the annual meeting of the Southern Economic Association. La-Bhus Fah Jirasavetakul finished the MPhil in Economics at the University of Oxford in July 2010, and continued for the The OTEFA is looking for a DPhil (PhD) in Economics (expected to volunteer to serve as the graduate in 2013). Her continued thesis topic webmaster. Please contact is “Labour Markets in Models of Economic otefamail@gmail.com if you are Development: Empirical Evidence from interested. Thailand.” She was appointed as a department teaching associate under the Doctoral Studentship Scheme at the Department of Economics, University of Oxford. She has recently been awarded the Anglo-Thai Society Annual Award for Academic Excellence 2010 for the Humanity and Social Science Category. Pornsit Jiraporn has been promoted to Associate Professor of Finance and has been awarded tenure as well. His research papers that have been published or accepted for publication this year are the following.
1. Jiraporn, P., Kim, J.C., and Kim, Y.S. (2010). “Dividend payouts and corporate governance quality: An empirical analysis.” The Financial Review, forthcoming. 2. Jiraporn. P. & Liu, Y. (2010), “Stagggered boards, accounting discretion, and firm value,” Applied Financial Economics, forthcoming 3. Ahn, S., Jiraporn, P., & Kim, Y.S. (2010). “Multiple directorships and acquirer returns.” Journal of Banking and Finance 34, 2011-2026 4. Jiraporn, P. & Liu, Y. (2010) “The effects of CEO power on bond ratings and yields.” Journal of Empirical Finance 17, 744-762.

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Member News

OTEFA Annual Meeting 2011

You are invited to our 2nd Annual Meeting!
Time: January 7, 2011, 7:30pm – 9:30pm Venue: The Palm Restaurant, 1672 Lawrence Street, Denver, CO 80202. Tel: (303) 825-7256 Agenda: 1. Nominating candidates for Vice President 2. Electing Vice President 3. Reviewing a proposal for an online voting system 4. Reviewing requirements for the registration of the OTEFA as a nonprofit organization. RSVP by December 30, 2010 at: otefamail@gmail.com

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