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
For more on Economic Growth, Culture & Political
Systems
http://www.ncpa.org/pi/internat/intdex3.html
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
For more on Global Problems/Resources
http://www.ncpa.org/pi/internat/intdex11.html
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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
For more on Global Problems/Resources
http://www.ncpa.org/pi/internat/intdex11.html
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
For New Trends & Technology
http://www.ncpa.org/pi/health/hedex7s.html
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.
For more on Privatizing Bureaucracies
http://www.ncpa.org/pd/private/priv6.html
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
For more on Economic Growth & Technology
http://www.ncpa.org/pi/internat/intdex3.html