Virtual and Real Economics, learning every day
By Carlos Gustavo Machicado* , La Paz, 22 March 2010.

Two years ago, I wrote an article entitled "Economics from the Internet to Reality" which showed first how the Internet had changed the study of economics by facilitating and universalizing it and second how the real world shows us situations where the economics is fully carried out. I cited the example of the 16th of July Fair in El Alto as the leading exponent of what is a market and how it functions in allocating resources. There is no doubt that in these years the economy has become even more universalized, for example, today anyone can hear and see real-time conferences through the Internet; and for sure the market remains the main institution of the economic science.

By studying a little more in depth the impact of the Internet and of information technologies (ICT), I learned about what is known as the Solow computer paradox or just the Solow paradox. This paradox, in reference to Robert Solow's 1987 quip , "You can see the computer age everywhere but in the productivity statistics" (1), is certainly very important to the extent that today there is almost no doubt that productivity is the basis for economic growth. The paradox has been defined as the discrepancy between measures of investment in information technology and measures of output at the national level, but it is also related to organizational issues.

In recent years there has been a significant increase in the use of ICT in Bolivia. Just to mention as an example, a couple of weeks ago the government announced that it will give away 135,000 laptops to public school teachers between March and April. Certainly, so far it looks like a very interesting project. However, it might give rise to the Solow paradox if it is not accompanied from an adequate place for the operation of the computers at school (internet connection, etc) and also if there is not an educational program that could show the teachers how to use the computers to improve their teaching. Most of the literature dealing with this paradox emphasizes that productivity comes not from computers per se, but from the organizational structure that accompanies them.

Going back to reality, I always teach my students that if there is something that differentiates us, economists, from other professionals, it is that we see the world and interpret the facts differently. I think this is explained mainly by the mathematical training that we receive, but it certainly gives us the capacity to notice some hidden issues. This is precisely what we learn from the frustrated intent to organize the Miss Universe Contest in Bolivia.
 

What can we learn from this episode under an economic lens? Think of an individual who goes to a bank looking for a credit or loan. Before giving the loan, the bank will analyze his payment capabilities by performing a risk analysis, and according to the results it will determine the interest rate for the individual. If the individual is a risky client the interest rate will be high enough so that the client prefers not to get the credit. This is what in microeconomics is called a separating equilibrium. The interest rate is the mechanism that allows the bank to separate good or riskless clients from bad or risky clients. The same happened with the Miss Universe Contest. As Bolivia is considered a risky country for any type of investments, the organizers of the contest included so many requirements in the contract in order to make the government decline from the postulation. In other words, the high interest rate or the excessive requirements are a polite way to say: “Thank you very much, but we don’t want to make business with you, because you represent risk.”