*

Readings/Sources PART B:   Economies in Transition Econ 386 Spring 2003

Those readings marked with a * are suggested  reading for Econ 386.

Listing:44-71
44. GROWTH IS ON THE WAY
45. Even the chefs are  leaving France  By Richard C. Morais Forbes, Nov. 30, 1998
46. August 17, 2001 The IMF Gets It Wrong Again
47. August 17, 2001  Let Private Money Spark   A Recovery in Argentina
48  The WTO's Bombshell WSJ 8-22-01
49. Living With Digital Piracy? It's Been Done Before.August 22, 2001
50.How U.S. Academics Are Riling ArgentinaWSJ August 27, 2001 Americas
*51.POPULATION GROWTH RATE SLOWING
52.FINANCIAL EFFECTS OF PRIVATIZING TELECOMS (in 25 countries)
53. TEMPERATE CLIMES MORE PROSPEROUS
*54.   Economic Growth in East Asia Before and After the Financial Crisis                 Robert J. Barro
55. REVISED BLS NUMBERS CHALLENGE PRODUCTIVITY ASSUMPTIONS
*56.TEMPERATE CLIMES MORE PROSPEROUS
57.ECONOMIC DEVELOPMENT AND WOMEN'S PROPERTY RIGHTS
58.An exit strategy for Argentina Steve H. Hanke, Forbes Global, 08.20.01
*59. The Legal DNA Of Good Economies
*60. The failure of development---A review of....
                    In spite of billions of dollars spent on aid to poor countries, there has been no real progress,
                    says William Easterly  Published: September 7 2001 11:09 | Last Updated: September 7 2001 11:22
61. ECONOMIST MADE SCAPEGOAT FOR WORLD BANK WOES
62. ISLAM AND FREE MARKET CAPITALISM
*63. HUMAN CAPITAL HELPS ECONOMIES RECOVER FROM DISASTERS
64. CAPITAL GAINS TAX CUTS HELP MARKETS RECOVER
65.CHILDREN AND AIDS
66.REPORT SAYS MANY NEWBORNS COULD BE SAVED
*67. Finding cures  by Walter Williams
*68. HOW TO SPUR VACCINE R&D FOR POOR COUNTRIES' DISEAS
*69. HISTORY SAYS MARKETS WITHSTAND SHOCKS
70. THE PUSH FOR PRIVATIZATION IN BRITAIN
*71.  COLDER CLIMES WEALTHIER


GROWTH IS ON THE WAY

We may be closer to the bottom of the slowdown than most people
think, according to a recent analysis by economist Charles Kadlec
of J. & W. Seligman in New York.

Kadlec's key point is that monetary policy has not been as
expansive as the Fed and financial markets think.  Kadlec notes
that the Fed does not control all interest rates, just the fed
funds rate -- the interest rate banks charge each other,
representing the basic cost of the funds banks lend out.

The Fed funds rate was 6.5 percent a year ago, and the Fed has
lowered it in steps since January 2001 to 3.5 percent.  In
theory, lower interest rates lead to monetary expansion because
they lower the cost of holding cash, and because the Fed must add
liquidity to the financial system in order to achieve its
interest rate target.
   o   But the average fed funds rate in January was almost 6
       percent, well above many market interest rates, while the
       Treasury's 30-year bond was just 5.5 percent, and all
       bonds with shorter maturities were even lower (see
       figure http://www.ncpa.org/pd/gif/pd082001fig1.gif).
   o   This meant that banks could not borrow fed funds and
       relend them at a profit; as a result, monetary policy was
       impotent.
   o   But by May the situation had turned around, as the average
       fed funds rate fell to 4.2 percent -- lower than the
       Treasury's 2-year note rate.
At this point monetary policy finally became expansive, and the
money supply began growing.

Kadlec further notes that the economic slowdown is narrowly
concentrated -- falling inventories and investment subtracted 2.7
percent from 2nd quarter GDP growth.  Thus, if investment and
inventories just stop falling, growth could rebound to more than
3 percent quickly.  When firms begin to expand inventories and
investment, growth will be even faster.

Source: Bruce Bartlett, senior fellow, National Center for Policy
Analysis, August 20, 2001; see Charles Kadlec and Mike Aguilar
(J. & W. Seligman & Co. Incorporated), "The Tide May Be Turning,"
Economic Commentary, August 6, 2001.
For Bartlett column
http://www.ncpa.org/oped/bartlett/bartlett01.html
For Kadlec commentary http://www.seligman.com/about/about.htm
For more on Federal Reserve Monetary Policy
http://www.ncpa.org/pd/economy/econ6.html

Even the chefs are  leaving France  By Richard C. Morais Forbes, Nov. 30, 1998

                              LESLIE CARON, the great
                              French actress, owns the
                              stylish but relaxed La
                              Lucarne aux Chouettes
                              restaurant in Burgundy. In
                     this 17th-century inn diners are treated
                     to rabbit pâté and pan-fried perch, wild
                     flowers and peasant earthenware.
                     Charming—but a terrible place to do
                     business. "It's a witch-hunt that's going
                     on," says Caron. "The owner of a
                     business is a villain to be punished at all
                     costs."
                     Caron describes her problems: French
                     law stipulates that the kitchen staff in
                     her size restaurant can work only 43
                     hours a week. But the restaurant
                     business is about long hours, so Caron
                     has to pay overtime up to 150% of the
                     basic wage, plus often giving the
                     employee paid compensatory time off.
                     That's not too far from the situation in a
                     unionized New York restaurant.
                     But in Caron's case, the French view
                     that an employer is an exploiter of the
                     masses led to some spectacular abuse.
                     She says her employees played the
                     system, submitting massive overtime
                     demands calculated to the minute; some
                     wound up with ten weeks' paid
                     vacation.
                     Caron fired one employee who she felt
                     was working extra slowly to increase
                     his overtime. As the law required, she
                     paid him two months' severance.
                     Miffed, he returned with a local union
                     official and they "extorted" six months'
                     pay, threatening her with a traumatic
                     and lengthy battle in a workers' court.
                     Caron, exhausted by the ordeal, caved
                     in.

                     Now you know why restaurant meals
                     cost so much in France. A dinner for
                     two with a modest bottle of wine at
                     Caron's La Lucarne aux Chouettes will
                     set you back about $100. You have to
                     reserve if you want a table during the
                     weekend. Yet Caron claims she is not
                     making any money. "I am desperate,"
                     she says. "I am a whore giving all my
                     money to a pimp, who is the
                     government."

                     A great performer, Caron knows how
                     to dramatize her problems, but her
                     feeling that she is little more than a
                     conduit between the customer and the
                     government is shared by much of
                     French business. Though the current
                     statistics speak of a smart pickup in the
                     French economy, this ancient country
                     of 58 million is facing an economic and
                     social crisis as bad as Japan's, a crisis
                     that bodes ill for the euro, the
                     soon-to-be-born EU currency.
                     The French government's share of GDP
                     is now 54%, far ahead of the 32%
                     extracted by federal, state and local
                     governments in the U.S.—and rapidly
                     closing in on Sweden's 63%. France's
                     top marginal tax rate was just reduced
                     to 54% from 57%, but it is still one of
                     the highest in the world. Even before
                     local taxes and social taxes are added,
                     the deductions beat New York City's
                     combined federal, state and local top
                     rate of 48%. New Yorkers pay 8.25%
                     in sales tax, but the French are
                     burdened by a value-added tax of
                     20.6% on almost all goods and
                     services.
                     Who benefits from these high taxes and
                     the tangle of labor laws that make life so
                     difficult for Leslie Caron? Not the
                     ordinary French person. According to
                     the OECD, France has fallen in the past
                     three decades from 6th to 13th place in
                     the world in per capita purchasing
                     power.
                     The French system divides the nation
                     into two classes: those with jobs and
                     those without. Those with jobs have
                     security, short working hours and long
                     vacations. The jobless—one in
                     eight—get the dole and few prospects.
                     And it is the younger French who pay
                     the highest price. Among people under
                     25, the unemployment rate jumps to
                     22%—one in four young people who
                     leave school can't find work.
                     This reporter spoke with soft-spoken
                     Mustafa Kesabe, 25, standing in line at
                     the unemployment office in Paris's 13th
                     arrondissement. The delivery company
                     he worked for went bust two years ago,
                     and he's been unemployed ever
                     since—15 job interviews with no offers.
                     That he is of North African descent is
                     certainly a handicap in France, but his
                     greater problem is that, at sky-high
                     French wage rates, no one will hire an
                     inexperienced, poorly educated youth.
                     Nor was there a shortage of
                     well-dressed white skins in that
                     unemployment line.
                     It's not that wages are especially high in
                     France. A French factory worker will
                     clear about $17,500 a year. It's the
                     employment taxes that make French
                     labor among the most expensive in the
                     world. The charges are so convoluted
                     it's hard to make direct comparisons,
                     but social taxes cost the employer at
                     least 50% on top of an employee's
                     basic salary. In the U.S. taxes like
                     Social Security and disability cost the
                     employer 7.65% on the first $68,400
                     and 1.45% thereafter. In Britain the
                     maximum an employer pays is 10%.
                     Earlier this year newspapers reported
                     that French pastrymakers and
                     hairdressers were registering their
                     businesses in Wales to avoid paying the
                     punitive social taxes and complying
                     with rigid labor laws.
                     In a way, the labor laws are worse than
                    the taxes. Miriam Haddou, a top-rate
                     hairdresser with 20 years' experience,
                     says she is in danger of losing her
                     year-old salon because she hung out her
                     shingle before completing the official
                     two-year diploma. Haddou was already
                     complying with "noncompete"
                     regulations by opening up more than
                     two kilometers from her last employer.
                     Even a full-time cleaning lady in a
                     school building must first take a
                     national civil service exam before she
                     can push her mop. Employers are
                     routinely raided by "inspectors of
                     work"—demanding detailed
                     explanations for something as simple as
                     a bonus—and the paperwork to cut a
                     simple salary check is so burdensome
                     even the smallest companies are
                     saddled with the weekly services of
                     specialized accountants.
                     France's bizarre answer to
                     unemployment has been to gradually
                     reduce the workweek to 35 hours.
                     Labor inspectors now conduct raids on
                     multinationals like Thomson-CSF and
                     Alcatel to make sure that top executives
                     don't work more than 38 hours without
                     getting overtime pay and extra vacation.
                    Of course, hard-working French
                     executives mostly ignore the law, but
                     the idea has a way of catching on. One
                     entrepreneur tells FORBES his sales
                     manager—ranked 6th in hierarchy at the
                     140-man company—has written the
                     state and the company that he will work
                     only the required 38 hours a week.
                     In the U.S. today it is generally
                     accepted that when a longtime
                     employee is made redundant, he or she
                     is entitled to compensation in some
                     proportion to his length of service.
                     What's fair is fair.

                     But in France employees' rights go to
                     ridiculous extremes. An employer must
                     keep a job open for three years for an
                     employee who goes on maternity leave.
                     Even the lowest-level jobs are tied up in
                     complicated contracts, and pity the
                     employer who fails to provide them:
                     The courts will rule that after just two
                     paychecks the employee was hired
                     indefinitely and it will cost the company
                     from 3 to 12 months' pay to get rid of
                     him. And employers are pressured by
                     collective agreements to reward clerical
                     staff, say, by seniority rather than merit,
                     while raises must first be discussed at a
                     workers' council. Fail to do so and an
                     employer could wind up in court.

                     American businesspeople are fond of
                     saying—and with good reason—that
                     their employees are their most important
                     asset. A business that is adding
                     employees is considered a healthy
                     enterprise. In France, adding a worker
                     means taking on a liability. Thus
                     expansion isn't worth the price.

                     Leslie Caron puts what is happening in
                     colorful—if somewhat
                     exaggerated—terms: "All the factory
                     owners I know are moving to the U.S.
                     All the best chefs have left France. It
                     took me six months of advertising to
                     find a chef. I finally found a Japanese."

                     But she's right. In the past the French,
                     unlike the Germans and Italians and
                     British, did not emigrate in great
                     numbers. That has changed. Either in
                     pursuit of work or in pursuit of a better
                     place to work on their dreams, the
                     French are voting with their feet.
                     According to the country's Office of
                     International Migration, 1.7 million
                     French, or 7% of the total work force,
                     worked abroad in 1997. They are often
                     the best and brightest. A quarter of the
                     nation's graduates now leave the
                     country, with an estimated 180,000
                     French in London alone, according to
                     one internal government report.

                     François Couturier, 46, worked hard to
                     build three Midas Muffler garages in
                     Paris into a $3 million revenue business.
                     In 1992 he cashed out and moved to a
                     small villa overlooking Cannes. He
                     wanted to rebuild his businesses in the
                     south.

                     He couldn't. Tax officials demanded a
                     $2,000 "advance" on taxes before the
                     business was even open; he was faced
                     with hundreds of declarations he had to
                     fill out. "I couldn't stand the hassle," he
                     says. Fed up, Couturier moved to
                     Aspen, Colo., bought out the tiny
                     Rocky Mountain Pie Co. and is now
                     busy expanding that business. France
                     thus lost what every country today
                     needs: an energetic entrepreneur.

                     Pierre Lellouche, a Gaullist deputy in
                     the National Assembly, complains:
                     "The very rich and the risk-takers are
                     leaving the country for London or New
                     York. Those paying into the system are
                     becoming a minority."

                     Many of France's pundits say not to
                     worry. The EU, Maastricht's 3% limit on
                     budget deficits and the euro will
                     combine to force the necessary
                     structural reforms on France.

                     Or maybe the opposite will happen.
                     France today betrays many of the signs
                     of the cultural and social rigidity that
                     has paralyzed Japan. But instead of
                     bending to the outside world, the
                     stubborn French seem intent on making
                     the rest of the world more like France;
                     the government has fought tooth and
                     nail to export its system of government
                     to the rest of Europe. Jacques Delors,
                     the French socialist who was the last
                     president of the EU, wanted 80% of all
                     European laws decided centrally in
                     Brussels and rammed the costly "social
                     charter" into the Maastricht Treaty.

                     Claiming their system is more
                     "humane," most French intellectuals
                     defend it. Jacques Attali—a top aide to
                     the late president François
                     Mitterrand—sneered during a 1996
                     television interview: "I think the status
                     of unemployed French people is often a
                     great deal more enviable than the status
                     of certain American workers."

                     To the French jobless, that's empty
                     rhetoric. Most of those tax francs the
                     French government collects go not to
                     help the disadvantaged, but to
                     middle-class entitlements. According to
                     a four-decade study by David
                     Cameron, professor of political science
                     at Yale, the poorest 40% of France's
                     population received only 39% of the
                     welfare budget, compared with 67% in
                     Britain. France's middle class, in
                     contrast, can tap a laundry list of
                     housing subsidies; comfortable state
                     bureaucrats get pension schemes far
                     more generous than those found in the
                     private sector. "France ranks among the
                     most inegalitarian of the advanced
                     capitalist democracies," claims
                     Cameron.

                     For all its great civilization, France has a
                     history of change coming through
                     violence. During the first days of 1998
                     tens of thousands of young jobless
                     turned desperation into rage. To
                     demonstrate their resentment towards
                     those luckier than they, they stormed
                     through the streets of Strasbourg, Paris,
                     Marseilles and St. Etienne, smashing
                     street windows and burning some 600
                     cars.

                     Even as violent crime is dwindling in the
                     U.S., it is growing in France. As the
                     year drew to an end, millions of
                     commuters in the environs of Paris, Le
                     Mans and Calais were stranded when
                     train and bus drivers walked off the job.
                     This wasn't a pay dispute. The
                     transport workers were demanding
                     better security. They were fed up by the
                     knives, threats, beatings, guns and
                     Molotov cocktails routinely used
                     against them by out-of-control
                     teenagers. To the teenagers, the
                     transport workers represented the haves
                     with the jobs they were denied.

                     A week later 500,000 high school
                     students across the country began a
                     series of demonstrations, protesting the
                     overcrowding and poor state of their
                     schools. This reporter joined 28,000
                     students marching with bongo drums
                     and banners through Paris as thousands
                     of riot police stood by, fingering their
                     batons. Cars were torched, stores
                     smashed, and heads beaten.

                     The students have cause to complain.
                     The French government spends a
                     generous 6.2% of GDP on education,
                     compared with 5.8% in Germany and
                     5.6% (public and private) in the U.S.
                     The trouble is that France's education
                     system is so centralized in the hands of
                     a few Parisian bureaucrats, funds often
                     don't get to where they are needed.

                     "The roof of our class leaks rain, and
                     we have no equipment," complained
                     Sonia, 18, studying to become a
                     seamstress. But it soon became clear
                     that Sonia's angst wasn't about dripping
                     ceilings—but with her dismal job
                     prospects. "My dream of becoming a
                     new Jean-Paul Gaultier is dying," she
                     says.

                     "Who sows misery reaps rage,"
                     proclaimed a sign waved by the jobless
                     illegally occupying a government
                     building.

                     "The country is months away from an
                     explosion," says Philippe Lacombe, a
                     high-ranking social worker who works
                     with the hardest young criminals all
                     across the country. He paints for
                     FORBES a frightening picture of the
                     country's ghettos: "A teacher I knew
                     just quit because her car was broken
                     into four times in one week. She caught
                     the thieves, 10- and 12-year-olds, and
                     they beat and kicked her.

                     "I was in the Bronx two years ago.
                     Things are bad there but getting better.
                     The exact opposite is happening in
                     France. Things are getting much
                     worse."

                     Not for the 6 million French lucky
                    enough to work in the public sector.
                     They hold every fourth job in the nation
                     and enjoy unparalleled security. Frank
                     Bournois, professor of management at
                     the University of Paris II and himself a
                     state employee, says it is impossible for
                     a French bureaucrat to lose his job
                     "unless he rapes someone."

                     "The real difference in France is not
                     between those who work and those
                     who don't work," says Lellouche, the
                     Assembly deputy, "but between those
                     who work in the private sector exposed
                     to risk and competition and those who
                     work for the public sector—lifelong,
                     guaranteed employment."

                     Moreover, this same bureaucracy is at
                     the heart of the corruption that has so
                     corroded French life. Bureaucrats can
                     and do sell their services elsewhere in
                     the public system; sometimes even in
                     the private sector (they are permitted to
                     top up their base salary by 66%).
                     Public disclosure of such conflicts is
                     often not required.

                     Literally hundreds of politicians—from
                     government ministers to senators—have
                     been charged with corruption, housing
                     scandals, kickbacks. France's
                     bureaucrats have become both the
                     grand and the petty nobility of modern
                     France. Of the Fifth Republic's 16
                    prime ministers, 14 have been
                     bureaucrats.

                     Consider the scandals currently filling
                     the French papers: Former prime
                     minister Alain Juppé is under
                     investigation for financial improprieties
                     at his Gaullist party, an investigation
                     dangerously close to President Chirac.
                     Meanwhile, a kickback scandal over a
                     Taiwan arms deal and its investigation
                     swirls around the former socialist
                     foreign minister Roland Dumas. His
                     former mistress, paid to lobby the
                     minister by an oil company, recently
                     wrote the eye-catching book, Whore of
                     the Republic. Today Dumas presides
                     over France's constitutional court.

                     Is there a Margaret Thatcher in the
                     wings to turn France away from corrupt
                     statism? A Ronald Reagan? No sign of
                     it. The fractured center-right of France
                     is largely ideologically indistinguishable
                     from the socialists, just less competent.
                     "Britain's Tony Blair is to the right of
                     the French right," says Lellouche.
                     Yale's Cameron points out that the
                     biggest extensions of the welfare state
                     came under de Gaulle in the 1960s and
                     under the conservative administration of
                     Giscard d'Estaing in the 1970s.

                     The only party offering reform these
                     days stokes the fires of rage. France's
                     extremist party, the National Front, has
                     come from nowhere to claim 15% of
                     the popular vote by promising to evict
                     foreigners from French soil. Hitler did
                     the same thing much more effectively.
                     Not much hope from that quarter, then.

                     Nor have France's fabled intellectuals
                     provided any answers. "France is very
                     close to the old Soviet Union," says
                     Pascal Salin, an economics professor at
                     the University of Paris, Dauphine.
                     "Mainstream thought is shared
                     everywhere—at school, the media, in
                     government. It is very difficult to
                     express different views." Salin warns
                     his doctoral students that they are
                     unlikely to get teaching jobs; selection is
                     controlled by the leftist trade union of
                     academics. What happens to the
                     students? "They leave. Mostly to the
                     U.S."

                     Lellouche calls France a "soft Soviet
                     Union." His book, The Immobile
                     Republic, argued that personal
                     freedoms would serve France better
                     than the state subsidies they get in
                     exchange for accepting so much
                     government. The book was hardly
                     reviewed in France, because, he says,
                     "it was outside the mainstream." Adam
                     Gopnik recently wrote in The New
                     Yorker: "[A] French journalist remarked
                     that leafing through a copy of FORBES
                     is like reading the operating manual of a
                     strangely sanctimonious pirate ship."

                     To this way of thinking, free enterprise
                     capitalism is piracy and any defense of
                     it is sanctimonious. No surprise, really.
                     According to the great economist
                     Friederich Hayek, France's L'Ecole
                     polytechnique is the real birthplace of
                     socialism.

                     It was around the polytechnique at the
                     dawn of the 19th century that the
                     pretentious scoundrel Count Henri de
                     Saint-Simon gave birth to a notion that
                     has justified most statist societies since
                     then. Saint-Simon taught that
                     enlightened scientists, applying their
                     education and reason, could organize
                     society along scientific production
                     methods and thereby eliminate injustices
                     and inefficiencies. There would no
                     longer be the need for "government,"
                     merely "administration."

                     It may be unfair to blame Saint-Simon
                     for the horrors of Stalin and Mao and
                    Pol Pot, to say nothing of Hitler, but
                     there's no question that his arrogant
                     rationalism still infects French thinking,
                     now masquerading as "L'exception
                     française." That's the scribblers' term
                     for the collective delusion that France's
                     bureaucratic statism is the "exception"
                     to the lessons learned in other advanced
                     capitalist societies.

                     The French and American revolutions
                     were contemporaneous and
                     interconnected events, but from the
                     American Revolution grew a society
                     that has been able to change and adapt.
                     In the same period France has had five
                     republican constitutions interspersed
                     with coups d'état and
                     dictatorships—from the Reign of
                     Terror to the 1848 revolution to the
                     German occupation of the 1940s. The
                     most recent coup was a military rising
                     that just 40 years ago brought Charles
                     de Gaulle back to power before turning
                     on him. Five French Republics on, the
                     French still don't have it right. Unless
                     they can get it right, the European
                     Union and its new currency, the euro,
                     are going to be in for a rough time.

                     The Unstable Nation
                     FRANCE'S HISTORY is a trail of
                     coups d'état and bloody uprisings,
                     new constitutional republics
                     interrupted by dictatorships. Since
                     the French Revolution of 1789 to the
                     wobbly Fifth Republic of today,
                     France has had 12 distinct forms of
                     government. They include the
                     Empire (1804-15-Napoleon
                     Bonaparte's dictatorship), the
                     revolution of the Second Republic
                     (1848-52 ) and the WWII Vichy
                     Government (1940-45). Look at this
                     country's troubled history and it's
                     clear that France's culture of change
                     revolves around violent uprisings.

                     • The French Revolution of 1789
                     and the storming of the Bastille
                     quickly turned into the Reign of
                     Terror. Louis XVI and clergy were
                     beheaded, the nation's classic
                     institutions razed. The
                     revolutionaries wanted to create an
                     entirely new society from scratch.

                     • The 1848 revolution was the
                     backdrop for Victor Hugo's Les
                     Miserables and the Second
                     Republic; then came the Second
                     Empire when Napoleon III (above)
                     ruled.

                     • A military coup brought on by the
                     Algerian war of independence
                     returned General de Gaulle to power
                     in 1958 as president of the Fifth
                     Republic. The student riots of 1968
                     brought de Gaulle down. How will
                     the present malaise be resolved?

August 17, 2001

                   The IMF Gets It Wrong Again

                   By David Malpass, a senior managing director at Bear Stearns & Co.
                   From 1984-1993, Mr. Malpass worked in government economic posts
                   in the Reagan and Bush administrations.

                   Earlier this week, the International Monetary Fund published its annual
                   review of the U.S. economy. Diving into U.S. politics, the Fund
                   commented negatively on the size of the Bush tax cut, the safety of the
                   dollar, and the feasibility of individual retirement accounts. It went on to
                   compliment the Clinton tax hike of 1994 and gave it, more than
                   entrepreneurialism or high levels of employment, credit for the fiscal
                   surplus.

                   Luckily, the IMF is not known for its prescience or insight in evaluating
                   economic programs. If anything, its model for economic development is
                   most identified with the sad outcomes in Russia, Indonesia and, in the
                   1980s, Yugoslavia. The IMF's policy is to forego growth, and to instead
                   prescribe austerity, high tax rates, and currency instability. The developing
                   countries that adopt these policies continue to face decline and ruin.

                   Eager Beaver

                   The IMF's policies were harmful even in the 1990s -- a decade of good
                   economic growth (except for IMF clients). But now, given signs of a global
                   recession, they are all the more worrisome. This argues for an urgent and
                   sweeping pro-growth change in the IMF's policy prescriptions. And if its
                   report on the U.S. economy is anything to go by, a lot of work needs to be
                   done before the IMF is a positive factor in global growth.

                   In measuring the impact of taxes, the IMF assumes that tax rates don't have
                   much effect on the economic growth rate: The higher the tax rate, the more
                   the revenue. Under this model, any tax increase -- no matter how onerous
                   -- is assumed to improve fiscal accounts and to lower interest rates. How
                   has this worked in practice? Guided by the IMF, Argentina has suffered
                   through years of tax-rate increases and new taxes, yet tax receipts have
                   fallen steadily, bringing Argentina to the brink of collapse.

                   In the U.S., the IMF determined that the Bush tax cut would cost the
                   economy $2.5 trillion over 10 years. It made no allowance for the added
                   growth that tax-rate reductions would bring. In fact, it suggested that the
                   U.S. implement the tax cut in a "flexible" manner, meaning that the country
                   should raise tax rates back toward their old levels. The IMF, rather than
                   urging faster tax cuts -- as economic logic would argue -- was suggesting
                   we roll back the cuts already made, even as the economy slumps.

                   In assessing the U.S. exchange rate, the IMF deployed its standard
                   austerity model. It explained that trade deficits are dangerous and that they
                   should be curtailed through cuts in consumption. In the IMF's model,
                   exchange rates are expected to adjust to counteract the trade balance,
                   implying a weaker dollar.

                   This advice couldn't have come at a worse time. A weak dollar would be
                   sure to deepen the global recession: U.S. interest rates would rise to
                   compensate for currency weakness. The IMF should have focused on the
                   deflation pressures in the world economy rather than the trade deficit. It
                   could have argued for substantially lower interest rates and a shift to a
                   stable-dollar policy. A proper growth model connects exchange rates to
                   monetary policy rather than trade policy.

                   Ever the eager beaver, the IMF even commented extensively on the Social
                   Security debate. It noted that "if part of the surpluses in the Social Security
                   trust fund were used to finance reforms such as the establishment of
                   individual pension accounts, it would create a new gap in Social Security's
                   finances that would need to be addressed. Also, the guidelines provided to
                   the new [Social Security] commission seemed to suggest that significant
                   reductions in benefits to future retirees may be required . . . " U.S. critics of
                   retirement reform were thrilled.

                   In sum, the IMF used its 55-page report to recommend a tax increase
                   (with the "flexibility" euphemism) and a weaker exchange rate (by linking
                   exchange rates to trade deficits). The report helped to fuel massive turmoil
                   in the currency markets, as the dollar fell against all its major counterparts.
                   This, perversely, added to the IMF's importance in global financial affairs
                   even as its antigrowth policies contribute to a global recession.

                   If this were the only time that the IMF had recommended high tax rates,
                   weak currencies and lower living standards, it wouldn't be so bad. The
                   U.S. is strong enough to withstand IMF advice. But the world's poorer
                   countries don't have the option of ignoring IMF malpractice. The
                   organization continues to occupy a position of massive power and
                   influence: It provides jobs for the elite, holds sway over loans by the World
                   Bank and its regional sister organizations, and even controls bilateral loan
                   programs through the Paris Club process.

                   To earn the IMF's approval, countries systematically make themselves
                   poorer. Turkey has seen its living standard halved over the past year as a
                   result of an IMF tax increase and the resulting collapse in the exchange
                   rate. Tens of billions of dollars of aid commitments still haven't improved
                   Turkey's economic prospects; it now takes 1.46 million Turkish lira to buy
                   a U.S. dollar.

                   Two detailed sets of IMF demands and conditions have failed miserably to
                   stop Turkey's decline. The policies have instead weakened the government,
                   while completely failing to address the key issue of currency stability and
                   domestic interest rates. As a North Atlantic Treaty Organization ally and
                   the linchpin of secular government in the Islamic world, Turkey's success is
                   important to the U.S. and the world. It deserves a growth program based
                   on sound money.

                   That will only happen if the IMF is made to change. To date, U.S. efforts
                   to reform the IMF have focused on limiting its growth and insisting that it
                   make conditions tougher on foreign countries. This won't work. As we've
                   seen recently with the efforts to stop new IMF support for Argentina, the
                   organization is too powerful and intertwined in the world financial system to
                   downsize, at least while the world is in a recession.

                   Furthermore, the IMF and World Bank enjoy a unique loophole in the
                   U.S. budget law, so that U.S. contributions don't show up in the fiscal
                   balance or the national debt. This advantage alone makes it hard to think
                   that the U.S. will curtail its use of the IMF in international affairs.

                   Successful Reform

                   In sum, successful IMF reform would have to go to the heart of the IMF's
                   approach -- changing its focus from austerity programs to growth
                   programs. The U.S. should work with the IMF to champion sound money,
                   reasonable tax rates, and faster growth as part of a common interest in
                   global prosperity. These goals are possible even in poorer countries.

                   No doubt the leaders in many a developing country were snickering at the
                   thought of the IMF -- with its record of failure -- giving the U.S. economic
                   advice. A greater cause for smiles, however, would be if the IMF would
                   admit the backwardness of its approach, and start doing something that
                   really will help the world's struggling economies.

August 17, 2001

                    Let Private Money Spark   A Recovery in Argentina

                   By George Selgin, a professor of economics at the University of
                   Georgia's Terry College of Business.

                   Argentina is in a bind. Unless it can escape its current recession, its
                   finances will continue to erode, forcing the government into default. But
                   high interest rates are hampering a recovery. The prime commercial lending
                   rate is 25% for dollar loans and a wrenching 41% for peso loans.

                   The all-around scarcity of credit in Argentina, and the premium on peso
                   interest rates in particular, reflect investors' fears that Argentina will devalue
                   the peso. Although Argentina has a currency-board system that links pesos
                   to dollars at one to one, and has more dollar reserves than there are pesos
                   in circulation, devaluation remains a serious threat. This is not because the
                   Central Bank of Argentina might run out of dollar reserves, but because the
                   government might be tempted to go beyond its recent efforts to subsidize
                   struggling exporters with a preferential rate, and intentionally abandon its
                   currency-board arrangement. Because government monetary authorities
                   can't be sued, they don't suffer the sanctions that commercial banks face
                   when they break their promises.

                   Official dollarization would do away with pesos entirely, substantially
                   reducing Argentina's bank-lending rates and credit shortage, and helping to
                   resuscitate its economy. Of course Argentina's government could still
                   default on its dollar-denominated debts. But a fully dollarized financial
                   system would untangle the government's credibility from that of private
                   borrowers, allowing private borrowers to benefit from their good credit.
                   That is why the Panamanian government's default during the Latin
                   American debt crisis of the early 1980s did not drive commercial lending
                  rates in Panama's fully dollarized economy to painfully high levels.

                   But dollarization has drawbacks. It would deprive the Argentine economy
                   of seigniorage -- the profit central banks earn by using their own paper
                   notes (which don't pay interest and can be printed for a small fraction of
                   their face value) to purchase interest-earning assets. Argentina's
                   government earns about $600 million a year from issuing
                   peso-denominated paper notes. Dollarization would transfer that
                   seigniorage to the Federal Reserve System. Although $600 million seems
                   like peanuts compared to Argentina's $265 billion economy, it's still a high
                   price to pay for an import -- paper currency -- that might be produced at
                   home, and a price that opponents of dollarization emphasize. Also, the
                   supply of paper dollars would respond only imperfectly to routine changes
                   in demand, because extra currency has to come out of banks' limited dollar
                   reserves.

                   Could Argentina enjoy the benefits from dollarization without these costs?
                   It could, by allowing Argentina's privately owned banks to issue their own
                   dollar-denominated paper notes. The banks would have to redeem their
                   notes in Federal Reserve dollars on demand. That should suffice to make
                   the notes just as secure as dollar-denominated deposits. And Argentina
                   would not have to give up seigniorage to the Federal Reserve. Although the
                   Central Bank of Argentina wouldn't earn any seigniorage, interest earned
                   on banknote-funded investments would stay in Argentina. It would be
                   earned in the first place by Argentina's commercial banks; but ultimately it
                   would be passed along (thanks to competition) to their customers in the
                   form of cheaper loans and better services. The banks might even offer to
                   make interest payments to their note holders in the form of jackpots paid
                   on notes bearing "lucky" serial numbers.

                   According to some estimates, the Argentine public already holds about $17
                   billion in Federal Reserve notes. That makes over $30 billion in total (peso
                   and dollar) paper currency holdings. If Argentina's major commercial
                   banks could persuade the public to hold $30 billion of their own circulating
                   notes instead of either domestic or foreign central bank notes, they could
                   expand their loans and investments by almost the same amount (allowing
                   for the need to hold dollar reserves). Lending rates might therefore fall by
                   considerably more than the present "peso premium."

                   Allowing banks to issue their own currency might seem far-fetched or at
                   least novel, but it is neither. Many financial firms already issue paper
                   travelers checks, which resemble currency although they cannot pass from
                   hand to hand without having to be endorsed. In Scotland and Hong Kong
                   commercial banks actually issue paper currency and have done so for a
                   century or longer, maintaining unblemished records of honoring their
                   promises. How many of the world's central banks can make the same
                   claim?

                   Before the 20th century, commercial banks issued their own notes in most
                   countries. In many cases governments horned in on the private sector
                   because they wanted the profits, not because the private sector was doing
                   a bad job. Strong private-currency systems, like those of Canada and
                   Scotland, suffered very few defaults that harmed note holders or
                   depositors. Other systems were less reliable, not because their currencies
                   were privately supplied, but because of misguided regulations. In the
                   antebellum U.S., for instance, restrictions on branch banking kept banks
                   under-diversified and under-capitalized, and caused notes issued in one
                   part of the country to command less than their face value elsewhere. Yet
                   even the records of weaker private-currency systems look good compared
                   to most of the government currency monopolies that replaced them.

                   Many of Argentina's commercial banks are strong, thanks to a policy of
                   allowing free entry to global banking firms. But even some of Argentina's
                   otherwise strong banks are smarting from devaluation fears. Were there no
                   peso for the Argentine government to devalue -- that is, were the Central
                   Bank of Argentina to redeem all outstanding peso notes using its dollar
                   reserves -- Argentina's banks would be relieved of this remaining source of
                   weakness. The strongest of them ought to be able to get their own notes
                   into general circulation, just as they have been able to convince people to
                   hold their dollar-denominated deposits. It is the Central Bank of Argentina
                   that people distrust, not paper currency per se.

                   Should Argentina's authorities doubt this, they could allow their central
                   bank to issue its own dollar-denominated notes while depriving those notes
                   of any legal-tender status, so that the public can't be forced to accept them
                   and banks cannot use them as reserves. The public could then decide for
                   itself whether it trusts government-issued paper more than that of Citibank,
                   Deutsche Bank, or HSBC.

August 22, 2001
The WTO's Bombshell

The World Trade Organization on Monday issued a long-expected ruling that
the U.S. Foreign Sales Corp. Act is in fact an export subsidy -- and that the
European Union is thus entitled to retaliate with countervailing sanctions. Unless
some modus vivendi is worked out, those sanctions could cost U.S. exporters
some $4 billion.

The Foreign Sales Act allows American corporations to escape domestic taxes
on goods made in the U.S. and sold abroad. In the eyes of the WTO, that's a
world-wide tax system, with a narrow loophole carved out for foreign sales of
American goods. European countries such as Germany, France and the
Netherlands, by contrast, have so-called territorial tax systems, which subject
corporations to income taxes only on domestic income and do not tax the
profits of foreign subsidiaries of domestic companies.

Both the WTO and the EU have agreed that a U.S. tax system that did not
distinguish between income from exports and other forms of income abroad
would be WTO compliant. The obvious course for the U.S. is to go farther
than it did last November and adopt a territorial corporate-tax system like
those of the EU member states. This would have the dual advantages of greatly
simplifying one of the most complex sections of a bearishly complex U.S. tax
code and defusing what U.S. Trade Representative Robert Zoellick has called
the nuclear weapon of foreign trade: the EU's threat of countervailing sanctions
against U.S. businesses.

But there is an even bolder solution: Eliminate the corporate tax code
altogether. This might seem an overreaction. But as long as the Bush
Administration is faced with a serious overhaul of the corporate tax code, why
not take the opportunity to go all the way? The benefits would be manifold.
Here is just a sample:

     Fairness. It is no longer a matter of serious dispute that the U.S.
     corporate tax code results in double taxation, as the profits that are taxed
     at the corporate level are taxed again as income when distributed to
     shareholders.

     Efficiency. The corporate income tax accounts for about 13% of
     on-budget federal revenue. But according to some estimates, the tax
     costs at least as much to enforce and collect as it gathers in revenue.
     Getting rid of the double taxation that now brings the effective rate on
     corporate profits to more than 50% would free up capital and create a
     windfall in the form of faster long-term economic growth.

     Competitiveness. Just ask Ireland, with its 12% corporate rate, what
     low taxes can do for attracting capital.

     Multilateralism. Last but not least, President Bush could finally show
     what a global team player he is by definitively settling a potentially
     enormous trade war. Cries of unilateralism would ring hollow after such a
     resounding example of international cooperation from the President.

In all candor, the likelihood of eliminating the corporate tax code in the 120
days or so left to the U.S. to solve its dispute with the EU is not high. But
Treasury Secretary Paul O'Neill has already made known his desire to throw
out the corporate tax code, and opportunities like this one ought to be weighed
carefully. It's not every day that a White House has an opportunity at once to
do the right thing for the U.S. economy and make Europe's leaders happy. At
least we hope it would make them happy. It's their case, after all.

URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB99843386810000000.djm
 

August 22, 2001
           Living With Digital Piracy?
                   It's Been Done Before.

                   By HOLMAN W. JENKINS JR.

                   Jack Valenti, Hollywood's man in Washington, predicted that the VCR
                   would do to the movie industry what the Boston Strangler did to women
                   home alone. Unless he meant the good Boston Strangler, it didn't work out
                   that way.

                   Mr. Valenti, cresting into his 80s, is still crying
                   wolf, this time about Napster and its offspring. An
                   announcement out of the studios last week,
                   though, suggests that Hollywood has decided to
                   pull itself together and go on anyway. Led by
                   Sony, an industry gaggle including MGM,
                   Paramount, Warner and Universal unveiled plans
                   to make available 100 movies for downloading at
                   $4 a pop.

                   The news came with unctuous boilerplate about
                   how the films would be "protected by encryption,"
                   but the gesture is legal symbolism. A technical fix for piracy was never in
                   the cards. The software code to break DVD encryption has been
                   perfected to the point where it fits on a T-shirt. The music industry's own
                   proudly proclaimed digital watermark was busted in three weeks by four
                   different groups. Now a Dutch cryptographer claims to have found a "fatal
                   flaw" in Intel's design to stop digital broadcasts from being copied and
                   redistributed on the Web.

                   That leaves only a business solution. Hollywood might deserve more credit
                   for now summoning the gumption to explore down this jungle trail if
                   somebody else hadn't already been there and shown it's possible to return
                   alive.

                   The original victim was Microsoft, one of the most profitable companies in
                   the world -- and the most ripped-off intellectual property holder the world
                   is ever likely to see.

                   Since the early 1990s, surveys have routinely established that 90% of the
                   software in use in India, China, Pakistan, Mexico, Brazil, Korea and
                   Malaysia was stolen. These are notorious scofflaw countries, you say? In
                   law-abiding Western lands the figure often approaches 50%. In the U.S.,
                   most honest of the bunch, some 25% of corporate software is purloined.

                   After the Internet took off in 1995, finding bootleg business applications
                   has become even more of a breeze. And let's not get into consumer
                   software like games. Microsoft's controversial new operating system, XP,
                   isn't due until October, but test versions are already easy to find on the
                   Web.

                   When industry gets handed lemons on this scale, it has no choice but to
                   turn them into marketing. A common reckoning is that one-third of
                   software is used illegally, but not every theft represents a lost sale. If
                   economic theory has any claim on the real world, Microsoft's pricing
                   should naturally gravitate toward producing an optimum amount of theft.
                   That is, thieves who wouldn't use the product if they had to pay for it, but
                   who might become future customers or who become part of a network of
                   users that makes the software more valuable to legitimate buyers.

                   All companies in the intellectual property biz face the same issue; always
                   have, always will. This is nothing new.

                   Newspapers and magazines long ago stopped offering more than token
                   resistance to Xeroxing, and publishers make a virtue for advertising
                   purposes of the fact that more people read their copies than pay for them.
                   Likewise, network television became a great industry only after
                   broadcasting pioneers gave up any hope of making viewers pay for
                   programming.

                   In the latest chapter, the record labels may have been caught napping by
                   Napster, but the industry long ago accepted that the public would be
                   getting much of its music free from radio. Then the industry got a little more
                   pregnant in the 1970s when FM stations began holding "album hour" at
                   midnight, even broadcasting a tone to help tapers get their metering right.

                   In other words, copyright absolutism has always been a fantasy. One of
                   the great legal fig leaves is "fair use," invented by the courts to airbrush the
                  fact that technology comes along and renders some forms of stealing
                   impossible to police.

                   Microsoft figured this out because it had to. Now Hollywood will end up
                   adopting many of the same strategies in order to survive the digital age.

                   A sore subject at its antitrust trial, for instance, was Microsoft's practice of
                   awarding large discounts to computer makers who bought a Windows
                   license for every machine they shipped, whether or not Windows was
                   actually loaded. This was supposed to be proof of monopolistic intent, but
                   the only real competitor for Windows is a Windows bootleg. Microsoft's
                   pricing strategy was designed to induce customers not to steal.

                   For the same reason it spends billions upgrading its "monopoly" product,
                   so customers will have a reason to buy the latest Windows rather than
                   illegally transferring Old Windows to their new machines.

                   Another key element is striking the right balance in pricing. Various
                   dancing-on-a-pinhead analyses were put forward by the government to
                   prove Microsoft charges a "supracompetitive" rate because it faces no
                   competition. But Microsoft faces huge competition -- from its own
                   software, which never wears out and can be duplicated at zero cost.

                   The problem, and also the enormous profit potential, with digital goods is
                   that they are easily and infinitely copyable. All it takes is one hacker to
                   break the security seal, or one employee to let an unencrypted version out
                   of the lab. Soon copies are everywhere. Hollywood must understand it
                   can't change this any more than Microsoft could.

                   That's why it's good, after a period of moping, to see Tinsel Town
                   exploring how to keep people paying enough for cultural pollution to make
                   it worth producing. Big record labels have joined together to whip up a
                   Napster worth paying for: with reliable downloads, comprehensive
                   libraries, user friendliness. The movie industry is well on its way to deciding
                   to live in the world too. Mr. Valenti weeps that 300,000 films a day are
                   being illegally downloaded from the Web, including such current releases
                   as "Planet of the Apes" and "American Pie 2." But has this stopped even
                   one customer from buying a movie ticket?

                   The entertainment industry is still getting used to the idea that anybody who
                   wants to take the trouble can get its products for free. But as Microsoft
                   has been showing for years, that's no excuse for not making bundles of
                   money.

WSJ August 27, 2001
Americas

How U.S. Academics Are Riling Argentina

By PAMELA DRUCKERMAN
Staff Reporter of THE WALL STREET JOURNAL

BUENOS AIRES -- There is more than just $130 billion in government debt
riding on whether Argentina averts financial collapse. There is also a dinner.

That is what two U.S. economics professors wagered earlier this year in a bet
on when the South American nation would go into default. "I said summer, he
said winter," recalls Charles Calomiris of Columbia University, on his contest
with Carnegie Mellon University's Adam Lerrick.

Such frank talk isn't the rule among economists. But Messrs. Calomiris and
Lerrick, along with Carnegie Mellon's Allan Meltzer, have caused a stir by
openly discussing the once unspeakable: a so-called constructive default in
which an ailing government like Argentina could stop making payments on some
of its debt and actually strengthen its economy.

To Argentines, these ivory-tower predictions aren't merely academic. Economy
Minister Domingo Cavallo, who last week clinched an additional $8 billion in
International Monetary Fund loans in a scramble to avoid default, insists that
doomsday American professors have the ear of Wall Street, multilateral
organizations and the U.S. Treasury. Their dire calculations, he says, helped
fuel the panic that has left Argentina virtually without credit.

"They are damaging the Argentine economy in a very, very grave way," Mr.
Cavallo said in an interview last month, without citing names.

"I think some people have confused Argentina with a textbook," says Chrystian
Colombo, the country's cabinet chief. Local economists say the educators, who
have gotten lengthy write-ups in the Buenos Aires press, are insensitive to the
devastation a default would bring, and that their prognostications are making
matters worse.

"I think that's utter nonsense," says Mr. Meltzer, 73 years old, who insists
runaway government spending, huge debt levels and a recession are to blame
for Argentina's predicament. "Rational people think about the options they
have, and one of the options is restructuring their debt. The present situation is
untenable."

"It would be very nice to have that kind of influence with the [U.S.]
administration," adds Mr. Lerrick, 44, who along with Mr. Meltzer advises
U.S. House Majority Leader Dick Armey (R., Texas). "I only wish it were
true."

It is clear that the professors, who say they chat by phone at least once a week,
have found common cause. They met two years ago while working on a U.S.
congressional commission headed by Mr. Meltzer, which recommended scaling
back IMF lending. Mr. Calomiris, 43, made waves in April when he argued in
a Wall Street Journal opinion piece that the least damaging option for Argentina
would be a "speedy and simple" debt restructuring.

In May, Messrs. Meltzer and Lerrick proposed the constructive default for
ailing poor nations. Under their plan, the IMF would make available loans that
would allow a country to offer to buy back its outstanding debt at a certain
minimum price. That would create an orderly environment while investors
negotiate a higher price for their holdings, and the loans wouldn't need to be
drawn, they say.

All three economists argue that big bailouts, like the $40 billion aid package the
IMF assembled for Argentina in December, encourage unbridled lending to
developing countries, which encourages crises of greater severity and
frequency. Eventually, they say, the debt-laden governments face painful
reckonings, in which bondholders are rescued and taxpayers in developing
countries foot the bill.

"If you want to help poor people, don't say you're going to do it through an
IMF bailout, when the principal beneficiaries are [foreign] investors," Mr.
Lerrick says.

That view didn't get much of a hearing during the Clinton administration, which
helped assemble jumbo aid packages for Mexico, Brazil, Russia and others.
But it appears to have found some takers under President Bush, whose
Treasury secretary, Paul O'Neill, has said that emergency loan packages paper
over structural problems.

The IMF's new aid for Argentina appears to seek a middle ground. Economists
say $8 billion is enough to calm creditors for a few weeks or months. That gives
the government a chance to implement economic changes. On Friday, an
official said the federal government will insist on changes in its revenue-sharing
plan with provincial governments, as part of an effort to carry out the country's
new balanced-budget law. The government hopes such moves will bring down
interest rates and help revive the economy.

The IMF aid also buys time as Argentina seeks a way to carry out a debt swap
or other type of operation that would reduce its total debt load but wouldn't
involve a forced default. Officials are considering using some IMF loans or
other guarantees to entice investors to participate, rather than compelling them
to take a loss, as the professors have suggested.

"It's true that the debt is high, it's true that the debt is unpayable, but a haircut is
not the solution," says Argentine economist Diana Mondino, head of Standard
& Poor's Buenos Aires office. She warns that a default would be the death
knell for many Argentine banks, since government bonds make up much of their
assets.

Mr. Calomiris concedes the new IMF money means he will probably lose his
bet on a summer default. But he now figures that Argentina will instead default
in three months, after failing to reach agreement on a voluntary debt reduction.
Meanwhile, he is preparing to include Argentina's case in a textbook on
emerging markets that he recently co-authored. For the next edition he will add
Argentina to chapter eight, which covers financial crises.

Write to Pamela Druckerman at pamela.druckerman@wsj.com1
 

POPULATION GROWTH RATE SLOWING

Demographers compare what is happening to the U.S. population to
an upside-down pear -- a huge elderly population tottering on a
working-age group too small to support it.  Many other nations --
both industrialized and Third World -- are similarly positioned,
experts report.

   o   According to the latest U.S. Census and United Nations
       data, worldwide birth rates have fallen 40 percent in the
       last half century and the decline is continuing.
   o   Nicholas Eberstadt of the American Enterprise Institute
       finds that the global annual population growth rate --
       which was 2 percent in the 1960s and is now down to 1.3
       percent -- will drop to 0.8 percent by 2025.
   o   The Social Security Administration estimates that between
       now and 2020, the 65-plus population in the U.S. will grow
       100 percent -- but the number of those ages 20 to 64 will
       grow only 15 percent.
Such prospects have many demographers and world leaders
concerned.  Not only might there come a time when there would be
too few workers to support retirees, but there would also be too
few workers to support economic growth.

Two remedies are being suggested: encouraging people to work
beyond the traditional retirement age of 65, and expanding the
work force through immigration.

Such policies might be applied not only in the U.S., but also in
other nations facing similar population scenarios -- such as
Japan and many European countries.

At any event, the prospect undercuts the arguments of those who
seek zero population growth.
Source: Betsy McCaughey, "As Population 'Boom' Goes Bust, World
Economy Faces Grim Future," Investor's Business Daily, August 28,
2001.
For more on Population and Resources
http://www.ncpa.org/pi/internat/intdex11.html
 

FINANCIAL EFFECTS OF PRIVATIZING TELECOMS

Telecommunications firms were state-owned enterprises in most
developed countries -- with the notable exception of the United
States -- and virtually all developing countries from the
beginning of the electronic age.

But between October 1981 and November 1998, 31 national
telecommunications companies in 25 countries were fully or
partially privatized through public share offerings. In most
cases, the share offerings were the largest ever in those
countries, and the shares often account for 30 percent or more of
total capitalization in national stock markets and an even
greater share of total trading volume.

How have the privatized firms fared financially?

A recent study found that the profitability, output, operating
efficiency and capital investment spending of the telecoms
increased significantly after privatization, while employment and
debt declined significantly.

Almost all telecoms are subjected to new regulatory regimes
around the time they are privatized, and many governments
retained a significant stake in the firms.  These two factors
affected the firms' financial performance significantly -- in
addition to listing on U.S. and U.K. exchanges and opening the
market to competition from other firms.
   o   Competition significantly reduced profitability,
       employment and, surprisingly, efficiency of the former
       government monopolies after privatization, while creation
       of an independent regulatory agency significantly
       increased output.
   o   Mandating third party access to an incumbent network is
       associated with a significant decrease in the incumbent
       firm's investment and an increase in employment.
   o   But retained government ownership is associated with
       increased debt and decreased employment, while price
       controls (regulated prices) significantly increased
       profitability.
Thus the financial effects of privatization on national telecoms
depend in large part on structure of the new market:  with
competition, a level playing field, market price setting and
independent regulation adversely affecting the telecoms.
However, consumers and the economy may benefit from these
developments.

Source: Bernardo Bortolotti et al., "Sources of Performance
Improvements in Privatized Firms: A Clinical Study of the Global
Telecommunications Industry," FEEM Working Paper No. 26-2001,
Fondazione Eni Enrico Mattei, April 2001.
For text http://papers.ssrn.com/paper.taf?abstract_id=263219
For more on Selling Government Enterprises
http://www.ncpa.org/pi/internat/intdex7.html

TEMPERATE CLIMES MORE PROSPEROUS

Why some countries are rich and others poor is a question that
plagues economists, sociologists and others around the globe.
Some suggest that the form of government affects wealth, while
others argue that it is the natural resources of the country.  A
new study suggests that ecology explains the difference between
rich and poor nations.

European culture cannot explain wealth because rich nations
include eastern nations Japan, South Korea and Taiwan.
Colonialism cannot explain poverty, because Latin America has
been free for almost 200 years and is still quite poor.  However,
there is evidence that being situated in tropical zones (zones
near the Equator) explains why some countries are poorer:
   o   Only 2 of the 30 nations classified as rich by the World
       Bank are between the Tropics of Cancer and Capricorn.
   o   Moreover, these nations are small, island nations:
       Singapore and Hong Kong.
   o   Brazil, which spans a large amount of latitude, has poor
       regions in the tropical zone and richer regions in the
       temperate zones.
   o   The per capita income in temperate zones is over 4 times
       that of tropical zones.
The study's authors believe that tropical zones suffer from
several disadvantages:
   o   They have less farm productivity due to poor soil, faster
       erosion, a greater number of pests and the inability to
       use technology designed for temperate zones.
   o   Because there is no winter freeze, disease is far more
       rampant and deadly, more so because the people are
       undernourished.
Due to these disadvantages in food and health standards, the
economies of tropical zones cannot develop very well.  The only
two exceptions, Hong Kong and Singapore, are cities where disease
can be controlled and that do not rely on their own food
production.

Source: "The World's Ecological Divide," Economic Intuition,
Spring 2001; based on Jeffrey D. Sachs, NBER Working Paper w8119,
February 2001, National Bureau of Economic Research.
For NBER text http://papers.nber.org/papers/W8119
For more on Economic Intuition research summaries
http://www.economicintuition.com

For more on Poverty http://www.ncpa.org/pi/internat/intdex11.html
 

                                      NBER WORKING PAPER BIBLIOGRAPHIC ENTRY

                            Economic Growth in East Asia Before and After the
                                               Financial Crisis

                                                 Robert J. Barro

                                           NBER Working Paper No. W8330
                                                Issued in June 2001

                                                 ---- Abstract -----

                              In 1997-98, five east Asian countries -- Indonesia, Malaysia, South Korea,
                              the Philippines, and Thailand -- experienced sharp currency and banking
                              crises. The contraction of real GDP was severe in relation to the previous
                              history and in comparison with five east Asian countries that were less
                              affected by the financial crisis. Recoveries in the five crisis countries in
                              1999-2000 were strong in most cases, but it is unclear whether the
                              pre-crisis growth paths will be reattained. Indications for permanently
                              depressed prospects come from the sharp reductions in investment
                              ratios, which have recovered only slightly, and the lowered stock-market
                              prices. A panel analysis for a broad group of economies shows that a
                              combined currency and banking crisis typically reduces economic growth
                              over a five-year period by 2% per year, compared with 3% per year for the
                              1997-98 crisis in east Asia. The broader analysis found no evidence that
                              financial crises had effects on growth that persisted beyond a five-year
                              period.

REVISED BLS NUMBERS CHALLENGE PRODUCTIVITY ASSUMPTIONS

The Bureau of Labor Statistics has issued revised productivity
figures for the late 1990s into 2000.  They are significantly
lower than earlier numbers and some experts see them as shooting
down the theory that the computer revolution laid a foundation
for more rapid economic growth in the long run.

Productivity is the amount of goods and services produced per
hour of work.  Improving productivity is essential to increasing
profits and wages in the economy.
   o   Originally, productivity was reported to have grown at
       nearly 2.9 percent a year from 1995 to 2000.
   o   That would be double the 1.4 percent rate of growth from
       1973 to 1995.
   o   But the new numbers indicate that the actual rate of
       productivity growth was only slightly above 2.5 percent a
       year in the 1995-2000 period.
   o   The 2.6 percent growth rate in 1999 was cut to 2.3 percent
       -- and the 4.3 percent rate originally reported for 2000
       was reduced to 3 percent.
Some economists contend that the lower numbers cast doubt on the
Congressional Budget Office's projected $5.6 trillion federal
budget surplus over 10 years.

In fact, the CBO this week adjusted downward its forecast of the
future surplus and cut the expected long-term rate of annual
productivity growth to 2.5 percent.

However, economists suspicious of permanent productivity-
enhancement theories also point out that significant progress has
been made in improving productivity -- amounting to perhaps half
a percentage point per year -- and that in the long term that
gain will be significant.

Source: Jeff Madrick (Challenge Magazine), "A Tarnished New
Economy Loses More Luster With Revised Productivity Data," New
York Times, August 30, 2001.

For text
http://www.nytimes.com/2001/08/30/business/30SCEN.html?searchpv=nytToday
For 2nd Quarter 2001 BLS Productivity Release
http://www.bls.gov/news.release/prod2.nr0.htm
For more on Raising Productivity
http://www.ncpa.org/pd/economy/econ9.html
 

TEMPERATE CLIMES MORE PROSPEROUS

Why some countries are rich and others poor is a question that
plagues economists, sociologists and others around the globe.
Some suggest that the form of government affects wealth, while
others argue that it is the natural resources of the country.  A
new study suggests that ecology explains the difference between
rich and poor nations.

European culture cannot explain wealth because rich nations
include eastern nations Japan, South Korea and Taiwan.
Colonialism cannot explain poverty, because Latin America has
been free for almost 200 years and is still quite poor.  However,
there is evidence that being situated in tropical zones (zones
near the Equator) explains why some countries are poorer:
   o   Only 2 of the 30 nations classified as rich by the World
       Bank are between the Tropics of Cancer and Capricorn.
   o   Moreover, these nations are small, island nations:
       Singapore and Hong Kong.
   o   Brazil, which spans a large amount of latitude, has poor
       regions in the tropical zone and richer regions in the
       temperate zones.
   o   The per capita income in temperate zones is over 4 times
       that of tropical zones.
The study's authors believe that tropical zones suffer from
several disadvantages:
   o   They have less farm productivity due to poor soil, faster
       erosion, a greater number of pests and the inability to
       use technology designed for temperate zones.
   o   Because there is no winter freeze, disease is far more
       rampant and deadly, more so because the people are
       undernourished.
Due to these disadvantages in food and health standards, the
economies of tropical zones cannot develop very well. The only
two exceptions, Hong Kong and Singapore, are cities where disease
can be controlled and that do not rely on their own food
production.

Source: "The World's Ecological Divide," Economic Intuition,
Spring 2001; based on Jeffrey D. Sachs, NBER Working Paper w8119,
February 2001, National Bureau of Economic Research.
For NBER text http://papers.nber.org/papers/W8119
For more on Economic Intuition research summaries
http://www.economicintuition.com
For more on Poverty http://www.ncpa.org/pi/internat/intdex11.html

ECONOMIC DEVELOPMENT AND WOMEN'S PROPERTY RIGHTS

A mere century and a half ago, married women had no property
rights and could not enter contractual agreements.  If she worked
outside the home -- a rarity -- her husband legally owned all her
wages and was responsible for supporting her.

But starting around 1850, states began passing "married women's
property acts" -- which gave wives full property rights.  By
1920, all but four states -- Arizona, Florida, Louisiana and New
Mexico -- had changed their laws.

Fordham University economist Rick Geddes and Montana State
University economist Dean Lueck examine the economic reasons for
that change in a forthcoming article in the American Economic
Review.

Here are some of their observations:
   o   Women gained property rights as economic development and
       urbanization increased opportunities for them to work
       outside the home.
   o   The rights of women expanded along with city populations,
       schooling and per capita wealth -- with a 1 percent
       increase in city population, for instance, increasing the
       probability that a state would pass a married women's
       property act by 1.6 percent.
   o   States appeared to reach a tipping point: once per capita
       wealth exceeded $24,000 (1982 dollars), a quarter (23
       percent) of a state's population lived in cities over
       100,000, and three-quarters (73 percent) of women received
       schooling, women's property rights almost always followed.
As wives made economic gains, the authors note, husbands gained
from the women's increasing contribution to family wealth.

Source: Virginia Postrel (Reason magazine), "Economic Scene: It
Was Not So Long Ago that Married Women Had No Property Rights,"
New York Times, August 9, 2001.
For text
http://www.nytimes.com/2001/08/09/business/09SCEN.html?searchpv=nytToday
For more on Women in the Economy
http://www.womenintheeconomy.org/

An exit strategy for Argentina
Steve H. Hanke, Forbes Global, 08.20.01

Currencies issued by central banks in emerging-market countries are often the targets of speculative attacks that almost always end with a
sharp devalution. This is not the case with currency boards, which provide a local currency with the backing of a relatively firm measure of
value, such as the dollar, euro or gold. Yes, currency-board systems do occasionally come under speculative attack. Unlike central bank
currencies, however, those issued by currency boards have always survived speculative onslaughts without devaluing.

Argentina, which has had a currency board--like system since April 1991, is a case in point. In 1995 speculators engaged in a fruitless attack
on the Argentine peso. Today the peso is again under attack, trading at a deep discount to its U.S. dollar anchor on the forward market. The
annualized implied yield on the one-month forward market is 90%; it recently exceeded 150%.

How did Argentina become embroiled in another bout of currency turmoil? Even though Argentina emerged intact from Mexico's tequila crisis
of 1995 and its GDP grew by 5.5% in 1996 and 8.1% in 1997, its economy ran into trouble in 1999 after Brazil's devaluation and before its own
presidential elections.

The inauguration of Fernando de la Rua as president in December 1999 engendered some economic optimism, but the de la Rua
government was a weak left-wing coalition. It quickly proved incapable of reforming the supply side of the economy and bringing order to
Argentina's fiscal affairs. A crisis ensued.

Earlier this year, de la Rua was forced to appoint Domingo Cavallo as his economic czar. Cavallo (who served as FORBES GLOBAL's
publisher until 1999) designed Argentina's unorthodox currency board, which killed the country's hyperinflation. But this time around Cavallo
has made missteps that have worsened Argentina's predicament.

In June, Cavallo introduced a dual-currency regime. Under this setup, all exports (excluding oil) take place with a devalued peso; all imports
with a revalued peso. All other transactions take place at a peso-dollar rate of 1-to-1. Then a law was passed in which the peso's anchor will
switch from the dollar to a basket of 50% euros and 50% dollars once the euro reaches parity with the dollar.

Not surprisingly, these changes were viewed by the markets as moves by Argentina to eventually abandon its currency board. They were not
reassured when, on July 9, the Agence France Presse quoted Cavallo as saying that Argentina "will leave the peg one day." Interest rates shot
up in anticipation of an exit and a devaluation.

This raises the issue of whether, and how, to drop an exchange-rate regime. Countries that exited from flawed soft regimes and adopted
currency boards or "dollarized" in the 1990s have all seen dramatic improvements in their macroeconomic indicators. Examples include
Argentina, Estonia, Lithuania, Bulgaria, Bosnia and Ecuador. Indeed, a shift from a soft regime to a hard one has always ended a currency
crisis.

But not so with shifts from hard regimes to soft. Recall Hong Kong's exit from its currency board in November 1974. The floating Hong Kong
dollar became wildly volatile and steadily lost value against the U.S. dollar. The volatility reached epic proportions in late September 1983.
Hong Kongers panicked, hoarding toilet paper, rice and cooking oil. The chaos ended on Oct. 15, 1983, when Hong Kong reinstated its
currency board.

Domingo Cavallo should understand that merely talking about the idea of abandoning a hard regime in the middle of a crisis is playing with
dynamite. In July the dynamite exploded. (Military history teaches the same lessons about the dangers of discussing exit strategies. In his
new book, Waging Modern War, General Wesley Clark shows that every time the U.S. Department of Defense spoke about exit strategies for
U.S. troops in Bosnia, the Bosnian Serbs would intensify their efforts, causing no end of problems for the allies.)

To stop its financial panic, Argentina should exit its semi-hard regime and adopt a totally hard one, the dollar. Pesos should be removed from
circulation and replaced by dollars. Under this dollarization, any other currency could be legally used in transactions, too. However, if no
currency was specified, the dollar would serve as the default currency.

Dollarization would immediately eliminate Argentina's currency risks, lower interest rates and stop the panic.

Steve H. Hanke is a professor of applied economics at The Johns Hopkins University in Baltimore and chairman of the Friedberg Mercantile
Group, Inc. in New York. Find past columns at www.forbes.com/hanke.
September 6, 2001

WSJ 9-601 Capital

The Legal DNA
Of Good Economies

THE WORLD ECONOMY is putting modern capitalism through another
stress test. Like tests that physicians do for people with heart disease, this one
highlights the system's weaknesses and brings forth various prescriptions for
treating symptoms.

But, just as with heart disease, the stress test raises intriguing questions about
genetic advantages: Do some economies have institutions, laws and commonly
accepted business norms that produce a stronger strain of capitalism, one better
adapted to withstand shocks and improve its people's prosperity?

Specifically, why do the U.S. and Britain have bigger stock markets and more
shareholding citizens than Germany and France, and does that make their
economies more flexible? Why do more companies go public in India than in
Brazil? Why do American businesses use private arbitration more than others to
resolve corporate disputes? Why are U.S. governments more comfortable
settling trade disputes one case at a time than their Continental counterparts?

To a remarkable degree, the answers can be traced to the different legal
traditions that emerged in England and France in the 12th century and spread
through their colonies. Nine hundred years later, these traditions still influence
business, investors and government. And as globalization steadily erodes
national boundaries, the differences are causing unavoidable strains.

WESTERN COMMERCIAL LAW comes from two traditions: the
common law, with roots in England, and the civil law, rooted in ancient Rome
and refined later by continental Europeans. Common-law countries, including
the U.S. and other former British colonies, rely on independent judges and
juries and legal principles supplemented by precedent-setting case law.

In civil-law countries, which include much of Latin
America, judges often are lifelong civil servants
who administer legal codes packed with specific
rules. Case law matters less. Civil-law countries
distrust judges and arbitrators; common-law
countries venerate and empower them. Rule-laden
civil-law countries aren't well-adapted to cope
with change; the case-law approach makes
common-law countries inherently more flexible.

All this has long fascinated law professors. After
the early failures at building capitalism in Russia
following communism's collapse, the issue also attracted a band of economists,
led by Harvard's Andrei Shleifer. They sought to identify conditions essential for
functioning markets and private property. Whatever they were, Russia didn't
have them.

Examining 49 countries from Argentina to Zimbabwe, the economists discerned
a distinct pattern in both rich and poor countries: "Civil-law countries exhibit
heavier regulation, weaker property-right protection, more-corrupt and
less-efficient governments and less political freedom than do common-law
countries," Mr. Shleifer puts it. As France well illustrates, civil law "more easily
accommodates the expansion of government intervention in economic and
social life."

Investors in civil-law countries, Mr. Shleifer and colleagues argue, are less
certain that their property rights will be enforced. One symptomatic example:
Civil-law countries more frequently require shareholders to attend meetings to
vote instead of voting by mail. In these countries, few people own stock, bond
and stock markets are smaller and more companies are controlled by a few big
holders. In the past decade, this has proved a significant constraint on
investment and economic growth. The law matters -- and it matters a lot.

AS FINANCIAL MARKETS outgrow national borders, economies built
on different legal foundations are being forced to reconcile their differences.
When shares of a French company are traded on the New York Stock
Exchange by a Japanese brokerage house, there is pressure to agree on
consistent accounting standards and a shared understanding of
investor-protection rules. The trend is toward the U.S.-British approach, but
the deep roots of the alternative explain the resistance in other countries.

Similar tensions appear in world trade disputes. The U.S. tends to be more
willing to allow World Trade Organization arbitrators to make case law
(particularly when decisions favor the U.S.) than Europe, which prefers clear
rules. The old differences also inform some international environmental disputes:
Civil-law countries, accustomed to well-articulated and rigid rules, are uneasy
relying less on rules and more on tradable pollution permits.

There remains a chicken-and-egg dispute about which came first: The law, as
Mr. Shleifer and allies argue, or the rise of an independent business-investor
class that demanded legal protection, as Columbia law professor John Coffee
Jr. sees it.

In either case, the lesson of history is sharp: Markets and the prosperity they
can provide do not exist independent of the law and the institutions of
government but are intertwined with them. Well-functioning financial markets, in
particular, rest on clear and enforced protections for investors. And when a
changing economy requires new rules -- for auctioning radio spectrum,
modernizing stock markets, regulating new financial products, enforcing
intellectual property rights -- it's wise to remember that the economic impact is
long-lived.

                                                -- David Wessel

Write to David Wessel at capital@wsj.com3

                         Resources

Prof. Shleifer and his colleagues are prolific. To read more see:
Andrei Shleifer at: http://post.economics.harvard.edu/faculty/shleifer/shleifer.html4
Rafael LaPorta at:
http://post.economics.harvard.edu/faculty/laporta/laporta.html5
Florencio Lopez-de-Silanes at:
http://www.nber.org/vitae/vita515.htm6
Robert Vishny at:
http://gsb.uchicago.edu/fac/robert.vishny/7
Edward Glaeser at: http://post.economics.harvard.edu/faculty/glaeser/glaeser.html8
Prof. Coffee's writingsare at:
http://www.law.columbia.edu/law-economicstudies/index_author.html9
Read a relevant essay, "The Legal and Institutional Preconditions for Strong Securities
Markets," by Bernard Black of Stanford Law School at
http://papers.ssrn.com/paper.taf?abstract_id=18216910
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB999721367438698493.djm
Hyperlinks in this Article:
(1) mailto:capital@wsj.com
(2) http://WSJ.com/CapitalExchange
(3) mailto:capital@wsj.com
(4) http://post.economics.harvard.edu/faculty/shleifer/shleifer.html
(5) http://post.economics.harvard.edu/faculty/laporta/laporta.html
(6) http://www.nber.org/vitae/vita515.htm
(7)
http://gsb.uchicago.edu/dynamic.asp?nNodeID=18&intContentID=227&intContentTypeID=2
(8) http://post.economics.harvard.edu/faculty/glaeser/glaeser.html
(9) http://www.law.columbia.edu/law-economicstudies/index_author.html
(10) http://papers.ssrn.com/paper.taf?abstract_id=182169
 

ECONOMIST MADE SCAPEGOAT FOR WORLD BANK WOES

In a widely-praised new book, "The Elusive Quest for Growth" (MIT
Press) and an op-ed article in London's Financial Times, World
Bank economist William Easterly criticizes development aid:

"Contrary to conventional wisdom, aid to the developing world has
been a big disappointment.  Consider the facts and it soon
becomes evident that the $1 trillion spent on aid since the
1960s, with the efforts of advisers, foreign aid givers, the
International Monetary Fund and the World Bank, have all failed
to attain the desired results."

Many developing countries are worse off today, by any measure,
than they were 40 years ago.  However, according to the New York
Times, the World Bank launched an official inquiry, saying
Easterly violated its policy by publishing the Financial Times
article without prior approval.

Many observers believe Easterly is being made the scapegoat for
recent attacks on the World Bank's policies and its president,
James Wolfensohn, who was appointed by Bill Clinton in 1995.
   o   In "Foreign Policy," journalist Stephen Fidler writes that
       "Since June 1995, James D. Wolfensohn has presided over
       what many close to the bank view as a tragic deterioration
       of the world's premier development institution, which they
       describe as rudderless and lacking strategic vision."
   o   In "Foreign Affairs," former World Bank Managing Director
       Jessica Einhorn says Wolfensohn has jumped from one
       development fad to another, adding new responsibilities to
       the bank in areas such as the environment under pressure
       from outside interest groups.
   o   Former Treasury Secretary Lawrence Summers believes
       Wolfensohn is allowing NGOs (non-governmental
       organizations) to guide Bank policy rather than its member
       governments.
Bush administration officials have publicly stated reservations
about where the Bank is going.  But unfortunately, Wolfensohn's
second term runs another four years.  He was reappointed by Bill
Clinton last year.

Source: Bruce Bartlett, senior fellow, National Center for Policy
Analysis, September 12, 2001.
For Easterly article http://www.ft.com/easterly
For Fidler
http://www.foreignpolicy.com/issue_SeptOct_2001/fidler.html
For Fidler
http://www.foreignpolicy.com/issue_SeptOct_2001/fidler.html
For Einhorn
http://www.foreignaffairs.org/articles/Einhorn0901.html
For World Bank web page on Easterly's book
http://www.worldbank.org/research/growth/elusive quest for growth.htm
For more on the International Monetary Fund & World Bank
http://www.ncpa.org/pi/internat/intdex13.html

-----------------------------------------------------------------
 
 

The failure of development
                    In spite of billions of dollars spent on aid to poor countries, there has been no real progress,
                    says William Easterly
                    Published: September 7 2001 11:09 | Last Updated: September 7 2001 11:22

                                     While the industrialised west is preoccupied with
                                     recession, the rest of the world has much greater
                                     economic woes. Contrary to conventional wisdom, aid to
                                     the developing world has been a big disappointment.

                                     Consider the facts and it soon becomes evident that the
                                     $1,000bn spent on aid since the 1960s, with the efforts
                                     of advisers, foreign aid givers, the International Monetary
                                     Fund and the World Bank, have all failed to attain the
                    desired results.

                    Sub-Saharan Africa has not emerged from a decades-long economic crisis; Asia
                    remains the home of the majority of the world's poor; Latin America has known
                    only erratic and low growth; the Middle East has not converted oil riches into
                    sustained development. It is little wonder that protesters have demonstrated so
                    vehemently against the international organisations. Each of the different actors in
                    the development aid community has contributed to this debacle. The first culprits
                    were the economists whose attitude was "build it and they will come". We thought
                    that certain objects associated with prosperity in the industrialised world - dams,
                    roads, schools - could bring success to the developing world.

                    Later, fads changed to include institutional magical objects. Thus we urged
                    governments to embrace democracy, constitutions, independent judiciaries,
                    decentralisation to local governments and other magic bullets. None of them
                    worked.

                    The second culprits were the recipient governments that resisted development
                    and the aid lenders that tried to change their attitudes. The donors failed to realise
                    that conditional loans were a minor factor in politicians' incentives. Governments
                    in many poor countries were torn by conflict over redistribution of the existing pie
                    between regions, political factions and ethnic groups. Or the landed and industrial
                    elite, to whom power was more important than development, were afraid to invest
                    in the masses that might demand their share of power.

                    Multilateral lenders thought it enough to issue recommendations to supposedly
                    malleable governments. The popular slogan was "adjustment with growth". The
                    experiment was tried several times: in the 1980s and 1990s, the IMF and World
                    Bank made 958 conditional loans; during the past decade alone these institutions
                    gave 10 or more conditional loans each to 36 poor countries. Yet with a few
                    notable exceptions, government mismanagement usually continued in these
                    countries. The growth rate of income per person of the typical member of this
                    group during the past two decades was zero. Conditional lending did not cause
                    the zero growth but it certainly failed to deliver "adjustment with growth".
                    Governments were not so malleable after all.

                    To make matters worse, the conditions on the loans were not enforced. Thus
                    indiscriminate donors and multilateral lenders were culprits number three. They
                    created the myth of tough conditionality that developing world citizens blamed for
                    their woes when in fact the bad old governments continued to ruin the economy.

                    Unfortunately, with some exceptions, multilateral and bilateral agencies had
                    incentives to continue lending even when recipient government actions destroyed
                    any hope of economic growth. Sometimes donors and multilaterals gave aid and
                    loans only because the function of donors and multilateral agencies is to give aid
                    and loans. Sometimes aid lenders gave loans to enable old aid loans to be
                    repaid. Sometimes donors gave aid because the recipient countries were political
                    allies of the donor countries. Recipient governments promised the multilateral
                    agencies that this time they would reform, like alcoholics promising never to drink
                    again.

                    The ultimate conditional loan was the conditional debt forgiveness package - itself
                    a sign that the previous conditional loans had not worked. Forgiveness of
                    developing world debt has been called for by such diverse figures as Bono from
                    the rock group U2, the Dalai Lama, Pope John Paul II and President George W.
                    Bush. But, again, this could be pouring good money after bad: if governments
                    mismanaged the original loans, will they manage wisely the proceeds of debt
                    forgiveness?

                    The failure is so widespread that pointing the finger at any single organisation is
                    futile. The economists, international organisations and aid donors all had an
                    interest in overselling "solutions" to economic development that were supposedly
                    easy to implement. But there is a multitude of things that one has to get right for
                    economic development, which is why success is rare.

                    Every component is complementary to every other: equal rights before the law,
                    contract enforcement, stable politics, accountability of public officials, low
                    corruption, trust between market participants and so on. Progress on any one is
                    likely to fail without progress on all.

                    The best the foreign aid community can do is to support genuine change on those
                    precious occasions when it happens.

                    This article was originally published in the some editions of the Financial Times on
                    July 4 2001

                    The writer is senior adviser of the World Bank's research group.
                    more from FT.com
                    Read more from Columnists and Personal View

ISLAM AND FREE MARKET CAPITALISM

Contrary to popular belief, the hatred of capitalism behind the
terrorist World Trade Center bombing does not come from Islam.
Indeed, one could argue that Islam is the most pro-business of
all the world's major religions.

The Prophet Muhammad was a businessman who engaged in extensive
commerce before devoting himself exclusively to religious affairs
in the year 611.  Even afterwards, Muhammad often made comments
and took actions that demonstrated his support for business and
the free market.
   o   For example, he forbade the imposition of price controls,
       saying that prices were in God's hands and that he wished
       to meet God without having to answer for some injustice
       that he might commit in this respect.
   o   Taxes were collected directly from individuals, instead of
       businesses -- he forbade the imposition of special taxes
       on markets, calling the market "a charitable endowment."
   o   The Koran, Islam's holy book, is filled with passages that
       can be interpreted as favoring commerce -- for example, it
       says, "O you who believe!  Squander not your wealth among
       yourselves in vanity, except it be a trade by mutual
       consent....And who does that through aggression and
       injustice, We shall cast him into Fire."
For this reason, scholars have long looked upon Islam as
fundamentally pro-capitalism.  As Maxime Rodinson wrote in "Islam
and Capitalism" (1966):  "Economic activity, the search for
profit, trade, and consequently, production for the market, are
looked upon with no less favor by Muslim tradition than by the
Koran itself."

This is one reason why the Muslim world was the most vibrant on
earth during the latter part of the Middle Ages.
Source: Bruce Bartlett, senior fellow, National Center for Policy
Analysis, September 19, 2001.
For text http://www.ncpa.org/oped/bartlett/bartlett01.html
For more on Culture & Political Systems
http://www.ncpa.org/pi/internat/intdex3.html

HUMAN CAPITAL HELPS ECONOMIES RECOVER FROM DISASTERS

Economists are being asked what the total economic impact of the
destruction and disruption in business activity caused by the
terrorist attacks last week will be.  They are looking to past
experience with wars and natural disasters for answers.

Most research finds that natural disasters like earthquakes and
hurricanes have a relatively small impact on the economy. For
example, in the most destructive earthquake ever in a modern city
-- the 1995 quake in Kobe, Japan -- some 100,000 thousand
buildings were destroyed, 250,000 damaged, and 300,000 people
became homeless.  And 6,500 lost their lives.
   o   A recent study by George Horwitch, a Purdue University
       economist, found that within 15 months manufacturing
       output returned to 98 percent of its pre-earthquake trend
       level.
   o   By July 1996, all department stores and 79 percent of
       small shops had reopened, and investment boomed.
   o   Similar economic recoveries occurred after Hurricanes
       Andrew and Hugo and other natural disasters.
   o   And despite a manmade disaster, the severe bombing of
       German cities in World War II, German economic output grew
       148 percent from 1947 to 1955, well surpassing its prewar
       level.
   o   The major reason cities and countries are able to recover
       so quickly, say economists, is that the knowledge and
       skills of citizens survives intact, and in modern
       economies, this human capital accounts for as much as 70
       percent of national income.
However, there may be lingering economic effects from disasters
that can affect long-term recovery.  Newark, N.J., for example,
never fully recovered from riots in the 1960s.  And the results
of studies by James R. Hines Jr. and Christian Jaramillo of the
University of Michigan of the effects on economic growth of 728
earthquakes in 97 countries in the postwar period, suggest that
although severe natural disasters do not affect short-term
growth, they do reduce Gross Domestic Product around two percent
three years later.

Source: Alan B. Krueger (Princeton University), "Gross Domestic
Product Vs. Gross Domestic Well-Being,"  Economic Scene, New York
Times, September 20, 2001.
For text http://www.nytimes.com/2001/09/20/business/20SCEN.html
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CAPITAL GAINS TAX CUTS HELP MARKETS RECOVER

Even before the terrorist attack last week, Republicans were
proposing a cut in capital gains tax rates, among other measures,
in order to stimulate the economy.  Experts say the case for a tax
cut is even stronger now.
   o   The nearly 800-point decline in the Dow Jones Industrial
       Average this week hurts all American investors and
       imperils the jobs of millions of workers.
   o   Cutting the capital gains tax in half, from 20 percent to
       10 percent, would pump value back into stocks and increase
       investor confidence.
   o   While other tax cuts are desirable, only a cap-gains cut
       provides instant relief for the economy -- and virtually
       every time the rate has been reduced, the stock market has
       risen.
   o   Most recently, when rates were reduced in 1981 and 1997,
       the stock market soared in value.
The reason markets rose is simple: a share of stock is valued at
the expected future earnings of the company -- after taxes. When
the capital gains tax is lowered, the after-tax earnings of every
company in America rise -- thus, the stock market must rise in
value.

The anticipated military response to the terrorist attack also
makes this the right time for the cut, experts argue. From
Lincoln to LBJ, presidents raised taxes when they went to war.
Ronald Reagan -- in his boldest and most ridiculed decision --
did the opposite, cutting taxes and beginning a massive military
buildup. As a result, the stock market boomed, the economy was
revitalized and we won the Cold War.

Source: Stephen Moore (Club for Growth) and Jeffrey Bell (Capital
City Partners), "Cap-Gains Cuts Can Rally Battered Markets," Wall
Street Journal, September 20, 2001.
For text (WSJ subscribers)
http://interactive.wsj.com/articles/SB1000938381220273160.htm
For more on Capital Gains http://www.ncpa.org/pi/taxes/tax62.html

CHILDREN AND AIDS

The HIV pandemic has eroded many of the hard earned gains made in
reducing infant and child mortality, say researchers.
   o   The United Nations Program on HIV and AIDS (UNAIDS)
       recently reported that child mortality is expected to
       double by 2010 in regions with high rates of infection.
   o   Globally, the number of orphans from AIDS will increase
       from the current 13.2 million to 44 million by 2010.2
   o   Already, one child in 10 is an orphan in some countries.
Efforts to prevent transmission of the virus from mother to child
are inadequate in many poor countries, say researchers.   Last
year, 600 000 children were newly infected with HIV, over 90
percent in sub-Saharan Africa.  Almost all acquired the virus by
vertical transmission, from mother to child.
Source: Haroon Saloojee and Avy Violari, "HIV infection in
children," British Medical Journal, September 22, 2001.
For text
http://bmj.com/cgi/lookup?lookupType=volpage&vol=323&fp=670&view=short
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REPORT SAYS MANY NEWBORNS COULD BE SAVED

Millions of deaths of infants in developing countries could be
prevented if governments and international agencies promoted
cheap and simple measures to protect babies in the very early
stages of life, according to a new report.

The report, "State of the World's Newborns," argues that high death
rates could be reduced by such practices as exclusively using
breast feeding, keeping babies warm, and ensuring that there are
skilled attendants at the birth.

By combining these with other measures, such as ensuring that
delivery environments are hygienic and that mothers receive basic
health care and advice, thousands of unnecessary deaths could be
prevented, it claims.

The report has been produced by a new charity based in the United
Kingdom called Women and Children First, in association with the
U.K. Institute of Child Health and the U.S. charity Save the
Children.   According to the report:
   o   The "alarmingly high" number of infant deaths in
       developing countries is mainly due to infections,
       complications during birth, premature birth and birth
       defects.
   o   Around four million babies a year are stillborn, and a
       further four million die before they are a month old.
   o   And the risk of losing a baby in the first few weeks of
       life is 30 times higher for a mother in west Africa than a
       mother in western Europe or North America.
Most mothers give birth without ever coming into contact with a
skilled health worker, say researchers. And since births are not
registered in many countries, policy makers do not realize how
high the death toll really is.

Source: Pat Hagan, "Simple measures could save "millions" of
newborns," British Medical Journal, September 22, 2001.
For BMJ text http://bmj.com/cgi/content/full/323/7314/652/a
For State of the World's Newborns text
http://www.savethechildren.org/mothers/newborns_report.html

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July 19, 2000 / 16 Tamuz, 5760

Walter Williams

Finding cures

http://www.jewishworldreview.com --
DURING THE PAST 50 YEARS, malaria,
tuberculosis and HIV have killed several times as
many people as have all wars. Five million people
succumb to these diseases each year, mostly in
developing countries. The breakdown: Malaria kills
1.1 million people annually, tuberculosis 1.9 million
and AIDS 2.3 million. Each year, an additional 5.8
million people, 70 percent of whom are
sub-Saharan Africans, are newly infected.

What options are there to halt this epidemic? Most
might say more government-funded research is the
answer. But Rachel Glennerster, a staff member at
the International Monetary Fund, and Michael
Kremer, a Harvard University economics
professor, say no in their article "A Better Way to
Spur Medical Research and Development" in the
Summer 2000 Regulation magazine, a publication
of the Washington, D.C.-based Cato Institute.

Government-funded research has a record of mixed
results and quite a few spectacular disasters such
as: the Carter administration's synthetic fuels
program and the Clinch River Breeder Reactor. In
1980, the U.S. Agency for International
Development (USAID) committed over $60 million
to promote the development of a malaria vaccine.
In 1984, USAID announced a "major breakthrough
in the development of a vaccine against the most
 deadly form of malaria in human beings. The
vaccine should be ready for use around the world
... within five years." Fifteen years later, the world's
still waiting; The USAID program was a
monumental failure.

Government-funded research produces the wrong
incentives. Government-funded recipients have
incentives to be overly optimistic; that's how they
get the money. Government project directors have
incentives to fund unpromising research, after all it's
not their money. Recipients of government-funded
research get paid before delivering a product. As
such, they may be tempted to divert resources away from the contracted
research toward activities that promote their personal careers, such as
publishing professional articles.

 Glennerster and Kremer recommend several alternatives to
government-directed research of vaccines for AIDS, malaria and
tuberculosis. A particularly fascinating alternative is to offer prizes for say
a vaccine against AIDS.

Prizes for research have produced results. Napoleon needed better ways
to feed his troops; he established a prize that led to the development of
canning. In 1959, British industrialist Henry Kremer offered a 50,000
pound prize for the first substantial flight of a human-powered airplane. In
1977, Paul MacCready's Gossamer Condor won the prize. The next
year, MacCready won a 100,000 pound prize by flying the Gossamer
Albatross across the English Channel entirely under human power. More
recently, several electric utilities established a $30 million prize for the
most energy-efficient refrigerator. Whirlpool won with a line of
refrigerators that were 70 percent more efficient than their competitors.

Why prizes for research? Prizes provide strong incentives. Unlike
government-funded research, researchers get money only if their research
succeeds. Glennerster and Kremer suggest that prizes might be the way
to go in finding safe and effective vaccines for malaria, tuberculosis and
AIDS.

They propose that once a vaccine is developed, philanthropic
foundations or the government might play a role in its distribution to
people in poverty-stricken nations. Patents might be bought out with
lump-sum payments. Also, the government or a foundation might provide
incentives by committing to the purchase of a certain quantity of the
vaccine at a certain price.

Glennerster and Kremer have produced a brilliant proposal for ways to
save millions of the world's poor. What makes their proposal an
attractive alternative to government- funded research is that it pays
attention to human incentives. With government-funded research,
researchers get paid whether they deliver or not. In the case of prizes, no
delivery, no prize.

One need not be a rocket scientist to figure out which method is more
likely to deliver the goods.

HOW TO SPUR VACCINE R&D FOR POOR COUNTRIES' DISEASES

Societies have encouraged research in a variety of ways. Patents,
government-funded research and development (R&D), and
competitions for prizes traditionally have been used to solve
problems or create innovation. However, these mechanisms have not
spurred the research needed to develop effective vaccines against
HIV, tuberculosis and malaria. Why?
   o   Although HIV, tuberculosis and malaria kill five million
       people a year, the victims are mostly in developing
       countries and cannot afford to pay much more than pennies
       per dose.
   o   To obtain existing vaccines and drugs at below-market
       prices, many governments have limited intellectual
       property rights and produce or import cheap generic
       versions -- discouraging private R&D.
   o   In the case of AIDS, government-funded research in western
       countries is oriented mostly toward treatment, rather than
       an HIV vaccine, and almost all vaccine research is
       directed toward strains common in developed countries,
       rather than those in sub-Saharan Africa.
There is an alternative way to spur vaccine R&D. The government
(or a private foundation) could make a commitment to purchase a
specific quantity of an effective vaccine at a set price, if it
were invented. Unlike government funded R&D, taxpayers would pay
nothing unless and until those vaccines have been developed; nor
would firms undertake such research unless the scientific
prospects were worth the risk. The sponsor could then make the
vaccine available to developing countries in exchange for modest
co-payments.

The Clinton administration and the World Bank expressed interest
in using such market incentives to spur vaccine development for
neglected diseases. Advance commitments to buy large quantities
of vaccines could lead to the development and delivery of
effective vaccines at low cost, saving millions of lives.

Source: Rachel Glennerster (Center for International Development,
Harvard University) and Michael Kremer (Brookings Institution),
"A Better Way to Spur Medical Research and Development,"
Regulation, Volume 23, Number 2, Cato Institute, 1000
Massachusetts Avenue, N.W., Washington D.C. 20001, (202) 842-
0200.
For text http://www.cato.org/pubs/regulation/regv23n2/kremer.pdf
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THE PUSH FOR PRIVATIZATION IN BRITAIN

Almost all of Britain's medical care and education is still run -
- and paid for -- by the state.

   o   In 1998-99, spending on publicly-funded patients treated
       privately was only about 5 percent of total expenditures
       of the National Health Service.
   o   In education, only two publicly-funded schools are now
       being run by private-sector organizations -- with one more
       due to open next year.
But Prime Minister Tony Blair has plans to push privatization
further through his "private finance initiative," or PFI.
   o   In health, the government plans to make use of spare
       capacity in the private sector and to use private health
       managers to run some of the new stand-alone surgery
       centers it is setting up.
   o   The government wants to allow private parties to put
       forward proposals for new schools when the local education
       authorities have identified the need for them.
   o   PFI schemes have already commenced in the prison industry
       -- where private interests have built and are running four
       prisons.
Blair's agenda might seem strange for a Labor Party politician.
And, indeed, he is running into the vehement opposition of Trades
Union bosses who are afraid privatization will mean the gradual
demise of union strength based on public-sector employees.
   o   Although the private sector accounts for three-quarters of
       civilian employment, only 19 percent of its employees are
       union members.
   o   By contrast, the union membership rate in the public
       sector is 60 percent.
So the unions have good reason to fear the transfer of public
sector jobs to the private sector.
Source: "King Tony and the Barons," Economist, September 15,
2001.

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HISTORY SAYS MARKETS WITHSTAND SHOCKS

While there is no direct precedent for the terrorist attacks of
September 11, lesser disasters have struck American financial
markets before.  A look back, observers say, can help us look
forward more clearly and calmly.
   o   An anarchist bomb on Wall Street in 1920 killed 40 people
       (the worst terrorist attack to that date) - but when trading
       resumed the next day stocks rose 1.5 percent.
   o   After Pearl Harbor was bombed, stocks dropped for two
       sessions -- but an investor who bought U.S. blue chips
       just after Pearl Harbor and held them through the end of
       the war would have earned more than 25 percent annually.
   o   The market dropped 2.9 percent the day President Kennedy
       was assassinated, but rose 4.5 percent the next day and
       gained 25 percent over the next 12 months.
   o   The market also shrugged off the 1993 World Trade Center
       bombing when six people were killed and more than 1,000
       injured -- stocks dropped only 0.5 percent the next day
       and rose 13.7 percent over the next 12 months.
The modern financial history of the U.S. holds no example of a
physical disaster or war wreaking havoc on investment returns.
The World Trade Center attack, which already stands apart from
normal experience, could prove the exception, but the odds seem
against it.

Source: Jason Zweig, "What Can We Learn From History?" CNNfn
(Cable News Network fn), September 21, 2001.
For text http://cnnfn.cnn.com/2001/09/21/investing/zweig

COLDER CLIMES WEALTHIER

Having a hard frost every year might explain why the world's
wealthiest countries are found mostly in cooler temperate
regions rather than in the tropics, say U.S. researchers.

Economists largely hold national institutions, such as systems
of law and government, responsible for ongoing poverty in
some tropical countries, says economist William Masters of
Purdue University. But his analysis of global climate
and economic data shows a lack of an annual cycle of warm
and cold weather is probably a more important factor.
   o   Cold weather kills disease-carrying insects, and also
       helps keep soil micro-organisms in check, making more
       nutrients available for use by crops.
   o   Therefore people live longer and in better health.
   o   Comparing global data on Climate Change with economic
       data dating back to the early 1960s,  the presence
       of an annual frost emerged as a common denominator between
       most of the world's wealthiest countries, says Masters and
       his colleague Margaret McMillan at Tufts University.
The interaction between annual climate change and poverty probably
dates back much further into history.  The few wealthy countries
in tropical regions -- such as Hong Kong and Singapore -- are
trade centers that have not depended on their local resources to
accumulate wealth, Masters says.
He adds that while the absence of an annual warm-cold weather
cycle has certainly not been a barrier to the development of
civilization, it remains a key factor in poverty.

Source: Emma Young, "Hard frost key to national wealth," New
Scientist, September 21, 2001.
For text http://www.newscientist.com/news/news.jsp?id=ns99991328
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