The items marked with * are suggest current readings.
Index of items 72-118
*72.ENVIRONMENTAL QUANDARY: MALARIA OR DDT?
*73.ECONOMIC PROGRESS HAS ELUDED ISLAMIC COUNTRIES
74. IMF SEES WORLD ECONOMY AVOIDING RECESSION THIS
YEAR
75. AS U.S. DAWDLES, SWEDEN REFORMS PENSION SYSTEM
*76. Great Awakenings By George Will
77.TEXAS PLAN SHOWS ALTERNATIVE TO SOCIAL SECURITY
WORKS
78.Three Americans Win Nobel for Economics For Challenging
Theory of Efficient Markets
79. INDIA WANTS ELECTRIC POWER
*80.MICROLOANS HELPING WORLD'S POOR TOWARD ENTREPRENEURSHIP
81. The Answer to Terrorism? Colonialism.
By Paul Johnson
82. FIRST GLOBAL RECESSION SINCE WW II PREDICTED
83. Walter Williams Finding cures
84. HOW TO SPUR VACCINE R&D FOR POOR COUNTRIES'
DISEASES
85. PATENTS DON'T LIMIT ACCESS TO AIDS DRUGS
86. INSURING AGAINST THE RISK OF TERRORISM
87. THE NEW ECONOMY & PRODUCTIVITY GROWTH
88. Prosperity Will Rise Out of the Ashes
By Gary S. Becker and Kevin M. Murphy. Mr. Becker
*89. Why Argentina
Is a Mess (and How to Fix It)
*90.Ecuador Bounced Back With The Dollar. Argentina
Could Too.
*91. FRASER INSTITUTE INDEX OF HUMAN PROGRESS
92. PRODUCTIVITY GROWTH BROADER THAN SOME THINK
*93. HOW ISLAMIC INHERITANCE LAW IMPEDED DEVELOPMENT
*94. Globalism Under Siege
95. The Fastest, Fairest Way Out Of the Argentine
Debt Crisis
96. The Hoodwinkers Steve H. Hanke
97. SUDDENLY PRICES ARE TUMBLING
98. WSJ November 12, 2001 Commentary Economic Repression
Breeds Terrorism
99.Putin rides high as
shoppers fuel economic boom London Times TUESDAY
NOVEMBER 13 2001
*100. TRADABLE DEFICIT
PERMITS
*101. Link to article by David Friedman on " Private
Law in Iceland " See also related ideas at Freidman
102. IMF Lowers Global
Growth Forecast for 2002 to Reflect Weaker U.S. Prospects
*103. INNOVATION AND PATENT PROTECTION
104. MEXICAN IMMIGRANTS HEAD BACK HOME
*105. In Latin America, Too Many Constitutional Promises
Thwart Democracy
*106. Mundell's Solution
107. Hong Kong's Political Police
108. Defeating Deflation
109. BEHIND DOOR NUMBER TWO BY GEORGE!
*110The Market Demands Rules
111. THIS YEAR's PRIZEWINNEERS ARE LEADING FIGURES
WITHIN THE FIELD OF "NEW ECONOMIC HISTORY"
1993 press
release for Fogel and North
112. Congress Should Put Trade On the
Fast Track
*113. An Ecuadorean Success Story Emerges, as
Argentina Teeters
*114. Argentina Defends Peso-Dollar Link As Cash Transactions
Are Restricted
*115. 'Race to Devalue' May Gain Currency in Washington
*116. Don't Cry for Argentina
117. FOREIGN AID GAINS POLITICAL SUPPORT
*118. Mexico in Danger of Losing Tropical Forests
During This Century, Study Finds
*119. The Fatal Flaw in
Argentina`s Currency Board
120. EVEN ENRON'S DEMISE HASN'T SIDETRACKED POWER
DEREGULATION
121.There's Nothing Natural About Zimbabwe's
Woes
122 As Time Goes
By, Argentina's Problems Deepen
123.AGRICULTURE AND DEVELOPMENT
Malaria is making a dramatic comeback in parts of Africa.
And
that is raising a painful choice for Western governments
and
international relief agencies. Should bans on the use
of the
chemical DDT -- which was spectacularly successful in
destroying
malaria-bearing mosquitoes -- be lifted, even though
DDT carries
its own environmental risks?
o Malaria -- one of the world's
deadliest diseases -- is now
striking more than
300 million people a year, and is
killing about 1
million of them.
o Although South Africa had
used DDT for 50 years and had
all but wiped out
the malarial mosquito, it bowed to
international pressure
in 1996 and prohibited its further
use -- substituting
far less effective and more expensive
sprays.
o But two years ago, South Africa's
malaria rates suddenly
skyrocketed to 50,000
cases a year from just a few
thousand.
o Even as the developed world
has proposed to ban 12
chemicals as pollutants,
including DDT, South Africa has
gone back to using
DDT once again -- in a so far
successful effort
to control malaria.
The whole exercise has raised the question of how far
rich
nations should go in imposing their own values and risk
standards
on the scourges of poor ones.
Only China and India still produce DDT -- mostly for
domestic
use. A secretive network of brokers fills most of the
rest of the
world's demand for it.
When government officials from around the world met in
Stockholm
in May, they compromised on DDT -- allowing some countries,
including South Africa, an exemption from the otherwise
global
ban.
Source: Roger Thurow, "As a Tropical Scourge Makes a Comeback,
So, Too, Does DDT," Wall Street Journal, July 26, 2001.
For text (WSJ subscribers)
http://interactive.wsj.com/articles/SB996094416815162021.htm
For more on Pesticides
http://www.ncpa.org/pi/enviro/envdex13c.html
ECONOMIC PROGRESS HAS ELUDED ISLAMIC COUNTRIES
Some 1.3 billion people live in countries where Islam
is the
dominant or state religion. Over the centuries,
Islam has
declined from a wealthy and influential culture, historians
say,
to one of poverty and low levels of education.
Angry militants blame the U.S. and Europe for modern Islam's
economic failure -- reasoning that the West's wealth
must have
been stolen from the East.
Poverty levels in many Islamic countries are extremely
high.
Although the following figures are the latest available,
some
date back to the late 1990s.
o Afghanistan's 26 million people
have a per capita output
of less than $200
a year, a life expectancy of about 46
years and more than
two-thirds are illiterate.
o Pakistan's 144 million ring
up only $487 per capita GDP --
in a nation where
less than half are literate and life
expectancy is roughly
61 years.
o Sixty-nine million Egyptians
enjoy a slightly higher per
capita GDP at $1,307
-- as well as a literacy rate
slightly above 50
percent and life expectancy of nearly 64
years.
o Some 66 million Turks produce
the U.S. GDP equivalent of
$2,813 per capita
-- with life expectancy of some 71 years
and an 85 percent
literacy rate.
Experts say that within the 46 Islamic countries, those
who want
to modernize are at odds with fundamentalists -- who
want to
return to the pattern of nomadic and agricultural civilizations
that dominated many centuries ago.
Whether Islamic societies continue to retreat or join
the modern
world depends greatly on the educational opportunities
afforded
to today's Islamic youths.
Source: Peter Benesh, "Behind Radical Muslim Discontent:
Economic
Failure of Modern Islam," Investor's Business Daily,
September
27, 2001.
For more on Economic Growth, Culture & Political
Systems
http://www.ncpa.org/pi/internat/intdex3.html
IMF SEES WORLD ECONOMY AVOIDING RECESSION THIS YEAR
The International Monetary Fund predicts the global economy
will
likely grow at its slowest rate since the early 1990s
-- but will
escape an outright recession in 2001. But other
economists
aren't nearly so sanguine.
o The IMF's latest World Economic
Outlook has the world's
economies growing
at a 2.6 percent rate -- just above the
level of 2.5 percent,
which the fund classifies as a
technical recession.
o The prediction, however, did
not factor in the effects of
the September 11
terrorist attacks on the U.S.
o Kenneth Rogoff, the IMF's
chief economist, says that he
still expects a
relatively strong recovery in the U.S. and
abroad next year
-- with the fund projecting 3.5 percent
global growth.
o But he warned that the attacks
might cause that figure to
be lowered in coming
weeks.
The lending agency has struggled to put a positive face
on
economic prospects -- even though most private economists
argue
that both the U.S. and the world economy will endure
recessions
this year and have significantly weaker growth in 2002
than most
once foresaw.
Source: Joseph Kahn, "IMF Sees World Growth at Its Weakest
in a
Decade," New York Times, September 27, 2001; based on
"World
Economic Outlook: The Information Technology Revolution,"
October
2001, International Monetary Fund, Washington, D.C.
For NY Times text
http://www.nytimes.com/2001/09/27/business/woeldbusiness/27FUND.html
For IMF report
http://www.imf.org/external/pubs/ft/weo/2001/02/index.htm
-----------------------------------------------------------------
AS U.S. DAWDLES, SWEDEN REFORMS PENSION SYSTEM
As ill-advised as Sweden's addiction to the welfare state
may be,
at least it has moved to individual social security accounts.
That's more than the capitalistic U.S can say.
o Since Jan. 1, all Swedes who
earn wages have been able to
put 2.5 percentage
points worth of their 18.5 percent
payroll tax contribution
into an individual account.
o An individual worker may choose
to invest in up to five
mutual funds he
has from among 600 which are available.
o The new program, known as
the Premium Pension System,
passed the Swedish
parliament with 85 percent approval.
o Observers say that journalists
were particularly skeptical
and often compared
projected benefits under the new system
with benefits under
the old system -- even though the old
system was headed
for bankruptcy.
Source: Jeremy Hildreth (American Skandia, Inc.), "Even
They Do
It: Socialist Sweden Surpasses America on Pension Reform,"
Investor's Business Daily, September 27, 2001.
For more on Reforms in Other Countries
http://www.mysocialsecurity.org/index5f.html
Great Awakenings
By George Will
Published June 1, 2000
WASHINGTON -- After agriculture was
invented 11,000 years ago, it took
4,000 years for it to supplant hunting
and gathering as mankind's main source of food,
5,000 years for cities to emerge, 6,000 years for
writing to develop, 7,000 for the invention of
mathematics. After harnesses were devised to hitch
oxen to plows, it took 4,000 years to adapt
harnesses to the long necks of horses. But 66 years
after the Wright brothers flew a distance shorter than
the wingspan of a Boeing 747, a man stood on the
moon, and mankind marveled at the modern pace of
change.
The velocity of change since the late 19th century
has produced "technophysio evolution"--human
evolution that is biological but not genetic. For
example, in just four generations in Holland the
average height of a male has increased eight
inches. Today, changed material conditions may be
radically changing our political agenda. So says
Robert William Fogel, University of Chicago
economist and Nobel laureate in his new book, "The
Fourth Great Awakening & the Future of
Egalitarianism."
Since the 1730s, he says, three "awakenings" --
changes of religious sensibility -- have produced
new political agendas. The First Great Awakening,
which began around 1730, presaged the Revolution
by fomenting skepticism about authority. The
Second Great Awakening, which began around
1800, stressed personal perfection and America's
mission to pursue social perfection, and fueled
anti-slavery passions. The Third Great Awakening,
which began around 1890, during industrialization,
urbanization, labor unrest and immigration, said an
unreformed society, not inherent sinfulness, is the
source of corruption. This produced a modernist or
liberal agenda of material amelioration -- the welfare
state.
Fogel thinks this agenda has been rendered
anachronistic by material progress which has
coincided with the Fourth Great Awakening. It began
in the 1960s and by the end of the 1980s, Fogel
estimates, 60 million Americans were participants in
"enthusiastic religion." America is, he thinks, ripe for
a politics focusing on "immaterial commodities,"
meaning education and other spiritual assets to
enable everyone to use their new leisure and other
assets for "self-realization."
Three centuries ago, "self-realization" was not the
first concern. Malnutrition was nearly universal. Even
the English peerage's diet was deficient in vitamins
and its ladies drank, on average, three ounces of
absolute alcohol a day, enough to cause a high
incidence of birth defects. Until the mid-19th century,
one-fifth of the English population was too
malnourished for regular work.
Prior to 1810, a voyage from Europe to North
America cost the annual income of a European
worker and killed 5 percent to 10 percent of
voyagers. Another 5 percent to 10 percent died of
diseases contracted during the voyage. Still, in the
1790s the average American was four inches taller
than the average Englishman and had a 20-year
advantage in longevity. America had a diet rich in
protein and a population density insufficient to
sustain major epidemics of diseases such as
smallpox.
But cities grew faster than did understanding of
urban public health problems, and between 1790
and 1850 life expectancy in Northern states declined
25 percent. In the 1830s and 1840s, life expectancy
at birth in New York City and Philadelphia was 24
years, six years less than for Southern slaves.
Even in 1900 only half of those born in the same year
were alive at age 40. (Today it is not until age 79 that
only half a birth cohort is left.) Until World War I, 80
percent of American consumption was in food,
shelter and clothing. The workyear, workweek and
workday left little leisure for anything other than
church or drinking, and retirement was essentially
unknown.
Today time available for leisure exceeds time spent
working, and as the workweek declines, Fogel says,
toward 28 hours, retirement at 55 will become
normal. This, he says, raises a "new and urgent set
of distributional issues" involving a "fair access to
spiritual resources." These include -- this gets a bit
murky--"a sense of purpose, a sense of opportunity,
a sense of community, a strong family ethic, a strong
work ethic, and high self-esteem."
Well. If the conquest of economic necessity means
more time for reflection and introspection, education
may be a spiritual as well as economic good. (Fogel
says the democratization of education "may have
been the largest socialist enterprise in history: the
transfer from the rich to the poor and the middle
classes of a form of capital that exceeds the value of
all privately held land and industrial capital, human
capital.") But Fogel's book does not really make the
case for a new political agenda of
government-distributed "immaterial" goods.
Rather, it explains the continuing attenuation of
political intensity. If Americans increasingly have
time and--Fogel does not prove this part -- inclination
for "self-realization" through reflection, this is grand
news, but does not entail new government duties.
TEXAS PLAN SHOWS ALTERNATIVE TO SOCIAL SECURITY WORKS
ce: Scott Burns, "Social Security Can Thrive if Privatized,"
Dallas Morning News, October 9, 2001.
Galveston County, Texas, employees have benefited from
an
alternative to Social Security for 20 years. In
1981, 72 percent
of county employees voted to adopt a privately funded
retirement
plan with a life insurance and disability component comparable
to
Social Security. A year later, Matagorda and Brazoria
counties
also adopted the plan.
Under an option that ended in 1983, the counties dropped
out of
the Old Age Assistance and Disability (OASDI) portion
of Social
Security but remained in Medicare and continue to pay
the
Medicare portion of the payroll tax. To replace
OASDI, employees
contribute the same 12.4 percent to their plan as other
workers
pay to Social Security.
The plan manager pools the money and loans it to a major
financial institution for a competitive and guaranteed
return --
which has varied from five to 15 percent. Although
the returns
are lower than the stock market's, the benefits are generally
higher than Social Security benefits.
o A high-income worker (earning
$51,263) would receive a
lifetime income
of $3,846 a month -- 90 percent of pre-
retirement income.
o The same worker would receive
only $1,540 a month (36
percent of pre-retirement
income) from Social Security.
o A low-income worker with an
annual income of $17,124 would
receive $1,285 a
month from the plan -- again, 90 percent
of pre-retirement
income.
o The same worker would only
get $782 a month -- 54.8
percent of pre-retirement
income -- from Social Security.
Workers also have a choice. They can receive a lifetime
annuity
or they can take the money as a lump sum.
The bottom line, experts say, is that privatizing Social
Security
is a reasonable option.
More information on privatization can be found at the
National
Center for Policy Analysis Web site devoted to Social
Security
(http://www.mysocialsecurity.org).
Sour
For text
http://www.dallasnews.com/business/columnists/scottburns/491872_burns_09bus.
AR.html
For more on Social Security Alternatives
http://www.mysocialsecurity.org/indexc.html
WSJ October 11, 2001
Three Americans Win Nobel for Economics
For Challenging Theory of Efficient Markets
By JON E. HILSENRATH
Staff Reporter of THE WALL STREET JOURNAL
The Nobel prize for economics was awarded to three Americans
who
challenged an assumption that has underpinned economic
theory ever since
Adam Smith wrote of the "invisible hand" that guided
human behavior. That
theory: Markets operate efficiently.
In awarding the most coveted prize in economics to George
Akerlof, 61 years
old, of the University of California at Berkeley, Michael
Spence, 58, of
Stanford University, and Joseph Stiglitz, 58, of Columbia
University, the Royal
Swedish Academy of Sciences is tipping its hat to economists
who subscribe to
less laissez-faire principles.
The three, who will share the nearly $1 million award,
have long argued that
markets don't always operate efficiently because buyers
and sellers don't
always have access to the information they need to make
optimal choices.
"There are all kinds of reasons why liberal economists
say that markets are
inefficient and that we must replace the invisible hand
with a visible hand," said
Jagdish Bhagwati, an economics professor at Columbia
and former classmate
of Messrs. Akerlof and Stiglitz. "These guys found a
new reason for inefficiency
in markets that people had not thought of: imperfect
information."
To some, this line of reasoning, which is based on
theories of so-called asymetric information, amounts to
an economic argument for more government regulation,
which many free-market economists abhor. The
thinking goes that if imperfect information sometimes
distorts markets, then governments sometimes need to
fix those distortions.
Mr. Akerlof helped to pioneer this branch of
economics with a 1970 paper called "The Market for
'Lemons.' " That paper explained why it was hard for
used-car sellers to make a market for their products
when buyers were so uncertain about what problems
resided under the hoods of different vehicles.
"If you are the buyer of a used car, you have to be suspicious
of the motives of
the person who wants to sell the car. But if you are
a seller, you feel that you
can't get the price that you deserve," Mr. Akerlof explained
Wednesday in an
interview.
Mr. Stiglitz wrote a series of papers explaining how
such information uncertainties led to everything from
unemployment to lending shortages. As the chairman of
the Council of Economic Advisers during the Clinton
Administration and former chief economist at the World
Bank, Mr. Stiglitz was able to put some of his views
into action. For example, he was an outspoken critic
of
quickly opening up financial markets in developing
countries. These markets rely on access to good
financial data and sound bankruptcy laws, but he
argued that many of these countries didn't have the
regulatory institutions needed to ensure that the markets
would operate soundly.
Even in the U.S., he says, the breakdown in security at
airports, apparent since
the Sept. 11 terrorist attacks, is an example of new
demands for government
intervention in inefficient markets. "There are certain
activities like airport
security that should not be in the private sphere. That
market is not
self-adjusting," he said Wednesday.
Mr. Spence explained how market participants
sometimes adjusted to information shortfalls by
using what he called "signaling." Employers, for
instance, often rely on the educational background
of job hunters as a sometimes imperfect signal of
how productive they might be as workers.
Ironically, the strongest proponents of efficient
markets in recent years have been at the
University of Chicago, which dominated the Nobel
Prize award for much of the 1990s. But the
economics profession might be gravitating slowly
toward a concern with market inefficiencies. In
April, for instance, the American Economic
Association awarded its prestigious John Bates
Clark medal -- for leading economists under 40 --
to Matthew Rabin, a University of California at Berkeley
economist who has
developed mathematical models to explain why people do
irrational things like
procrastinate.
Gary Becker, a Nobel laureate and economist at the
University of Chicago, said he agreed with this year's
winners that markets are sometimes inefficient because
of bad information. But he said that doesn't lead
logically to a call for more government intervention
in
markets. "Governments face asymetric information too,
and they do things for a variety of reasons," Mr.
Becker said. "I believe the government generally make
things worse."
Messrs. Akerlof and Stiglitz were classmates at the
Massachusetts Institute of Technology during the
mid-1960s, where their questions about the classical
economics of Adam Smith began to germinate. They also
had a close
connection to the Clinton administration: Mr. Stiglitz
was chairman of Mr.
Clinton's Council of Economic Advisers as was Mr. Akerlof's
wife, Janet
Yellen.
The award is formally called Bank of Sweden Prize in Economic
Sciences in
Memory of Alfred Nobel.
INDIA WANTS ELECTRIC POWER
The government of Prime Minister Shri Atal Bihari Vajpayee
proposed ambitious reforms for India's socialist economy;
but
unfortunately, it has failed to follow through.
One result is
that India continues to suffer from electric power shortages,
including blackouts, and the power industry is in dire
straits.
o Currently, the average electric
power shortfall at peak
times is 13 percent
-- more electricity than the entire
peak demand in more-industrialized
Malaysia.
o Most state electricity boards
are bankrupt, despite a
massive $2 billion
in subsidies each year from the federal
government, plus
more from local authorities.
o On average, it costs 3.04
rupees (6 U.S. cents) to
generate one unit
of power, but only 2.12 rupees are ever
collected for every
unit produced -- a 30 percent loss.
o Much of the power simply disappears
through antiquated
transmission and
distribution networks -- some 40 percent
to 50 percent --
and some is simply stolen.
Many consumers pay little or nothing for electricity
(when they
get it); but polls show that most would be willing to
pay more
for reliable service.
Source: Editorial, "Lights On," Far Eastern Economic
Review,
October 11, 2001.
For text http://www.feer.com/2001/0110_11/p008edit.html
For more on Electrical Power
http://www.ncpa.org/pd/regulat/reg-4.html
-
MICROLOANS HELPING WORLD'S POOR TOWARD ENTREPRENEURSHIP
In many parts of the world it doesn't take much money
to
transform a poor person into a self-sustaining entrepreneur.
In
fact, as little as $40 in seed money will often do the
trick.
Programs to advance microloans to would-be businesspeople
are
growing swiftly and their successes often astonish the
experts.
An international coalition of microlending agencies,
known as the
Microcredit Summit Campaign, reports that:
o Since it began an effort in
1997 to reach 100 million of
the world's poorest
families by 2005, it has already
reached about 19.3
million families.
o Loans to the world's poorest
people are increasing by
about 37 percent
a year.
o A total of 13.8 million people
have been granted loans in
Africa, Asia, Eastern
Europe and Latin America -- and
loans are also made
in the U.S.
Two recent studies showed that Microcredit clients in
Mali and
Honduras were more likely than nonclients to have larger
businesses, to see an increase in personal income and
food
consumption, to have personal savings and to feel a greater
sense
of self-esteem.
Source: Ginger Thompson, "Small Loans Help Millions of
World's
Poorest, Coalition Says," New York Times, October 8,
2001.
For text
http://www.nytimes.com/2001/10/08/international/americas/08MICR.html
For more on International Poverty
http://www.ncpa.org/pi/internat/intdex11.html
WSJ October 9, 2001
Commentary
The
Answer to Terrorism?
Colonialism.
By Paul Johnson. Mr. Johnson is the author of many books, including
"Modern Times" and "The Birth of the Modern."
America has no alternative but to wage war against states that habitually
aid terrorists. President Bush warns the war may be long but he has not,
perhaps, yet grasped that America may have to accept long-term political
obligations too. For the nearest historical parallel -- the war against
piracy
in the 19th century -- was an important element in the expansion of
colonialism. It could be that a new form of colony, the
Western-administered former terrorist state, is only just over the horizon.
Significantly, it was the young United States that initiated this first
campaign
against international outlaws (most civilized states accepted the old Roman
law definition of pirates as "enemies of the human race"). By the end of
the
18th century, the rulers of Algiers, Tunis and Tripoli had become notorious
for harboring pirates and themselves engaging in piracy and the slave-trade
in whites (chiefly captured seamen). European states found it convenient
to
ransom these unfortunates rather than go to war. Admiral Nelson,
commanding the British Mediterranean Fleet, was forbidden to carry out
reprisals. "My blood boils," he wrote, "that I cannot chastise these pirates."
By contrast, the U.S. was determined to do so. Pirates were the main
reason Congress established a navy in 1794. In 1805, American marines
marched across the desert from Egypt, forcing the pasha of Tripoli to sue
for peace and surrender all American captives -- an exploit recalled by
the
U.S. Marine Corps anthem: "From the Halls of Montezuma to the Shores
of Tripoli."
It was reinforced in 1815 when
Commodores Stephen Decatur and
William Bainbridge conducted
successful operations against all three of
the Barbary States, as they were called.
This shamed the British into taking
action themselves, and the following
year Admiral Lord Exmouth subjected
Algiers to what was then the fiercest
naval bombardment in history --
38,667 rounds of cannon balls, 960
large-caliber shells and hundreds of
rockets. However, these victories were
ephemeral. The beys repudiated the
treaties they were obliged to sign as soon as American and British ships
were over the horizon.
It was the French who took the logical step, in 1830, not only of storming
Algiers but of conquering the entire country. France eventually turned
Algeria into part of metropolitan France and settled one million colonists
there. It solved the Tunis piracy problem by turning Tunisia into a
protectorate, a model it later followed in Morocco. Spain, too, digested
bits of the Barbary Coast, followed by Italy, which overthrew the pasha
of
Tripoli and created Libya. Tangiers, another nuisance, was ruled by a
four-power European commission.
The eventual decolonization of North Africa was a messy and bloody
business. In Algeria in particular, which the French had ruled for over
120
years, they withdrew only after a horrific war that produced over a million
casualties and overthrew the Fourth Republic. The Italian record in Libya
was so bad that its memory was a key factor in Col. Moammar Gadhafi's
seizure of power and the resumption of outlaw activities.
In the 19th century, as today, civilized states tried to put down piracy
by
organizing coalitions of local rulers who suffered from it too. Arabia
and the
Persian Gulf were a patchwork of small states, some of which were
controlled by criminal tribes that pursued caravan-robbing on land and
piracy at sea. Pirate sheikhs were protected by the Wahabis, forebears
of
the present ruler of Saudi Arabia. In 1815 Britain had to take action
because ships of its East India Company were being attacked in
international waters. But it did so only in conjunction with two powerful
allies, the ruler of Muscat and Oman, still Britain's firm friend, and
Mohamed Ali of Egypt.
British naval operations produced a general treaty against piracy signed
by
all the rulers, great and small, of the Arabian Coast and Persian Gulf.
But
Britain had learned from experience that "covenants without swords" were
useless, and that the sheikhs would only stick to their treaty obligations
if
"enforcement bases" were set up. Hence Britain found itself becoming a
major power in the Middle East, with a colony and base in Aden, other
bases up and down the Gulf, and a network of treaties and protectorates
with local rulers, whose heirs were educated at the British school of princes
in India.
The situation in South-East Asia and the Far East was not essentially
different. Amid the countless islands of these vast territories were entire
communities of orang laut (sea nomads) who lived by piracy. Local rulers
were too weak to extirpate them. Only the Royal Navy was strong enough.
But that meant creating modern bases -- hence the founding of Singapore.
That in turn led to colonies, not only Singapore but Malaya, Sarawak and
Borneo. The Dutch had been doing the same. It was a matter of complaint
by the British that the Americans, while trading hugely in the area, rarely
sent warships on anti-piracy missions -- President Andrew Jackson's
dispatch of the frigate Potomac to bombard the pirate lair of Kuala Batu
in
1832 was a welcome exception.
In this area then the war against piracy was directly linked to colonization
-- British, French, Dutch, Portuguese and Spanish -- a fact finally
recognized by the U.S. when it annexed the Philippines after the
Spanish-American War. The U.S. established a large naval base there, one
of whose duties was pirate-hunting. The lesson learned was that
suppression of well-organized criminal communities, networks and states
was impossible without political control.
The great civilized powers, as now, preferred to act in concert. But this
was easier said than done. In China, a vast but incoherent country, the
Western trading powers had introduced the principle of extraterritoriality,
whereby certain harbors were designated treaty ports and run by Western
consuls and officials under European law.
In 1900, a militant Chinese terrorist group known as the Boxers seized
control of Peking, with the covert approval of the Chinese government.
Western embassies were sacked and the German ambassador murdered.
An international force was organized to retake Peking, and it included
Americans and Japanese as well as European troops. In view of the
German loss, Britain agreed that the commander could be nominated by
Kaiser Wilhelm II, but was taken aback when that intemperate monarch
instructed his field marshal:
"No pardon will be given and no prisoners taken. Anyone who falls into
your hands falls to your sword! Just as the Huns created for themselves
a
thousand years ago a name which men still respect, you should give the
name of German such cause to be remembered in China for one thousand
years that no Chinaman, no matter if his eyes be slit or not, will dare
to
look a German in the face."
America and her allies may find themselves, temporarily at least, not just
occupying with troops but administering obdurate terrorist states. These
may eventually include not only Afghanistan but Iraq, Sudan, Libya, Iran
and Syria. Democratic regimes willing to abide by international law will
be
implanted where possible, but a Western political presence seems
unavoidable in some cases.
I suspect the best medium-term solution will be to revive the old League
of
Nations mandate system, which served well as a "respectable" form of
colonialism between the wars. Syria and Iraq were once highly successful
mandates. Sudan, Libya and Iran have likewise been placed under special
regimes by international treaty.
Countries that cannot live at peace with their neighbors and wage covert
war against the international community cannot expect total independence.
With all the permanent members of the Security Council now backing, in
varying degrees, the American-led initiative, it should not be difficult
to
devise a new form of United Nations mandate that places terrorist states
under responsible supervision.
FIRST GLOBAL RECESSION SINCE WW II PREDICTED
There have been no global recessions in the past half-century.
In periods when the U.S. faltered, the world economy
as a whole
kept growing. Or at points when the U.S. was humming
along,
foreign economies sometimes went into a tailspin.
o In 1991, for example, the
U.S. economy shrank by 0.5
percent -- but the
global economy expanded by 2.7 percent.
o In 1982, the U.S. reported
negative growth of 2 percent --
while the rest of
the world grew by 2.6 percent.
Now Giles Keating, chief economist at Credit Suisse First
Boston
in London, and an increasing number of other forecasters
predict
that the world will plunge into its first global recession
since
World War II this quarter and next.
o For 2002 as a whole, they
see global growth hitting 0.7
percent at best
-- the lowest level since World War II.
o International trade now accounts
for almost 20 percent of
global gross domestic
product -- up from just 10 percent a
decade ago.
o This means that economies
around the world move more in
tandem than they
used to -- and financial markets are more
interlinked and
liquid than they were.
Economic analysts say that countries and regions which
might once
have been relied upon to pull the world out of recession
-- Asia,
Japan and Europe, for example -- are in no condition
to shoulder
the burden this time around.
Source: David Fairlamb, "Economic Trends: Hurting in
Lockstep,"
Business Week, October 22, 2001.
For more on International Economic Growth
http://www.ncpa.org/pi/internat/intdex3.html
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
PATENTS DON'T LIMIT ACCESS TO AIDS DRUGS
Are patents on antiretroviral drugs impeding access to
lifesaving
treatment for the 25 million Africans infected with HIV
(human
immunodeficiency virus)?
If a drug is not patented in a given country, one may
freely
manufacture, import and buy the brand-name drug or its
generic
equivalent. Activists blame patents for creating
monopolies that
keep these drugs inaccessible or unaffordable in poor
countries.
But researchers say it is doubtful that patents are to
blame for
the lack of access to antiretroviral drug treatment in
most
African countries.
Researchers examined the patent status in 53 African countries
of
a total of 15 antiretroviral drugs patented by eight
pharmaceutical companies.
o They found that most antiretroviral
drugs are patented in
few African countries
-- half were patented in fewer than
four countries --
and among the subset of countries
where one or more
patents exist, the number of patented
antiretroviral drugs
is typically fewer than five.
o The exceptions are South Africa,
where 13 of 15
antiretroviral drugs
are patented, and products made by
Agouron, Boehringer
Ingelheim and GlaxoSmithKline, which
are patented in
up to 37 of the 53 countries.
o Overall, of 795 possible patents
manufacturers could have
sought (assuming
all countries offer pharmaceutical
patents, which is
not true), only 172, or 21.6 percent,
actually exist.
There is no apparent correlation between access to antiretroviral
treatment, which is uniformly poor across Africa, and
patent
status, which varies extensively by country and drug.
Other
factors, especially the ubiquitous poverty of African
countries,
must be more to blame.
Currently, both brand name and generic antiretroviral
drugs are
available to poor countries at reduced prices, typically
about 90
percent less than in the United States.
Despite the discounts, without international financial
assistance, few African countries can afford to purchase
and
deliver drug treatment.
Source: Amir Attaran and Lee Gillespie-White, "Do
Patents for
Antiretroviral Drugs Constrain Access to AIDS Treatment
in
Africa?" Special Communication, Journal of the American
Medical
Association, October 17, 2001.
For text
http://jama.ama-assn.org/issues/current/ffull/jsc10222.html
For more on Health http://www.ncpa.org/iss/hea/
INSURING AGAINST THE RISK OF TERRORISM
Facing claims of at least $40 billion for the World Trade
Center
attacks, retail insurance companies are considering exclusions
for terrorist damage, leaving property owners unable
to buy
coverage.
The reinsurance market -- the wholesale market where insurers
lay
off large risks to pools of investors willing to absorb
them --
is paralyzed.
Natural disasters present manageable risks because insurers
know
roughly how frequently they occur, and the magnitude
of the
property damage that might be expected. But insurers
do not know
how to quantify the risk of terrorist attacks.
Thus, the
insurance industry would like the federal government
to become
the insurer of last resort against terrorism.
However, another way to supplement traditional reinsurance
markets is catastrophe bonds.
o Catastrophe bonds, also called
"cat bonds," are generally
sold to large institutions,
and have typically been tied
to natural disasters
like earthquakes or hurricanes, but
they could be used
to provide financial backing for
terrorism insurance.
o A financial intermediary --
a reinsurance company or an
investment bank
-- issues a bond tied to a particular
insurable event,
like a Los Angeles earthquake.
o If there is no earthquake,
investors are paid a generous
interest rate; but
if the earthquake occurs and the claims
exceed a specified
amount, investors sacrifice their
principal and interest.
o Cat bonds are a form of "contingent
security," a concept
first formulated
by Kenneth J. Arrow of Stanford
University.
o Rather than sharing known
risks by pooling funds,
contingent securities
transfer risk to large investors.
Commodities future markets also allow shifting of widespread
risks, such as a freeze in Florida orange groves, to
investors
who are paid to absorb it.
Economist Hal R. Varian says sharing risks through
market
mechanisms is preferable to "risk shafting," which is
when
taxpayers are left holding the bag.
Source: Hal R. Varian, "The Case For Catastrophe Bonds,"
Economic
Scene, New York Times, October 25, 2001.
For NY Times text
http://www.nytimes.com/2001/10/25/business/25SCEN.html
For more on Terrorism http://www.ncpa.org/iss/ter/
THE NEW ECONOMY & PRODUCTIVITY GROWTH
Has trend productivity growth risen to a permanently higher
level
as a result of technological innovation, especially the
Internet?
Some economists are questioning this "new economy" ever
existed.
The answer is important because the speed at which productivity
returns to trend after the recent slowdown will determine
how
fast the economy will recover.
o From 1972 to 1995, average
productivity growth output per
man hour was 1.5
percent (see figure
http://www.ncpa.org/edo/bb/2001/images/bb102901.gif).
o In the 1960s,
productivity had risen at an average annual
rate of 3.2 percent.
o But between 1995 and 2000,
productivity grew at an average
annual rate of 2.6
percent.
A new report from the McKinsey Global Institute looks
at
increased productivity industry-by-industry over the
last five
years. It found that almost all of the aggregate
increase in
productivity in the U.S. economy resulted from higher
productivity in only six industries, representing just
30 percent
of the economy: retail trade, wholesale trade, securities,
telecommunications, semiconductors and computer manufacturing.
While some of the productivity increases in these six
key sectors
resulted from technology, much did not. It came
about because of
basic market forces, such as economies of scale, competition,
shifting consumer demand and managerial innovation.
Thus the McKinsey report concludes that information technology
"was not the most important cause of the post-1995 productivity
acceleration."
However, just because technology was not the most important
factor behind the "new economy" phenomenon, does not
negate the
idea that productivity growth has risen to a permanently
higher
trend. It may simply have a broader base than previously
thought.
Source: Bruce Bartlett, senior fellow, National Center
for Policy
Analysis, October 29, 2001.
For text http://www.ncpa.org/oped/bartlett/bartlett01.html
For more on the Economy http://www.ncpa.org/iss/eco/
October 29, 2001
Commentary
Prosperity Will Rise Out of the Ashes
By Gary S. Becker and Kevin M. Murphy. Mr. Becker, a Nobel
laureate in economics, is a professor of economics and sociology at
the University of Chicago and a senior fellow at the Hoover
Institution. Mr. Murphy is a professor of economics at the Graduate
School of Business of the University of Chicago.
In the 19th century, John Stuart Mill commented on the rapidity of
economic recovery from national disasters and wars. He recognized that
nations recover quickly as long as they retain their knowledge and skills,
the prime engines of economic growth. America retains its vast supply of
both, which suggests that, contrary to fears, the Sept. 11 attacks are
unlikely to worsen the medium- to long-term economic outlook.
The effects of the earthquake that hit the Japanese city of Kobe in 1995
illustrate Mill's conclusion. This quake destroyed more than 100,000
buildings, badly damaged many others, and left hundreds of thousands
homeless. Over 6,000 people died. Estimates place the total loss at about
$114 billion (more than 2% of Japanese GDP at the time). Yet it took only
a little over a year before GDP in the Kobe region returned to near
pre-quake levels.
Ongoing Threats
The uncertainty about the extent of future terrorist attacks may make the
recovery from Sept. 11 different from those after Kobe and other shocks.
But even ongoing threats usually have mostly temporary effects. For
example, the 1962 Cuban missile crisis shocked the economy and
awakened Americans to the possibility of nuclear attack. That crisis did
significantly lower the growth of income for several months, but within
a
quarter or two, growth rates returned to pre-crisis levels, despite the
continuing uncertainty.
While the primary losses from the
terrorist attacks were on the ground,
the airline industry, and related
industries like tourism, have suffered
the greatest impact. But such shocks
are not unprecedented. The oil price
shocks of the 1970s and early '80s
also affected critical sectors of the
economy, and forced substantial
adjustments and reallocation of
resources. Most economists agree
that the oil shocks contributed to the
poor performance of industrial
economies in that period.
Yet history shows that economies adjust. The effect of the oil price
increase fell greatly over time as the U.S. reduced its dependence on oil.
Sectors of the economy that are less energy-dependent grew relative to
those that are highly so, and consumers and producers conserved. As a
result of these shifts, and the subsequent decline in oil prices, oil imports
accounted for only about 0.7% of GDP in 1999, vs. 2.8% in 1980. More
recent energy shocks have had a much smaller impact on the economy.
The effect of the terrorist threat is likely to follow a similar pattern.
Even if
the external threat remains fixed over time, our ability to deal with it
in an
effective and efficient manner will improve, perhaps greatly. The costs
imposed on air travelers in terms of long lines and schedule disruptions
will
be reduced as we find more efficient ways to ensure security, and as
potential travelers move toward video-conferencing and other means of
communication. In the absence of further incidents, the psychological
impact of the attacks will also wane. Already, air travel has recovered
to
about 80% of its pre-attack level, after falling to less than 50% in the
first
week after air travel resumed.
In justifying airline subsidies, some political leaders pointed to the
disastrous effects on the economy of eliminating air travel. But the relevant
question is not what dire consequences would result from elimination, but
what will be the damage from a higher effective price for air travel due
to
the terrorist threat? Air travel, taken in its entirety, may be an
"indispensable" element of the economy, but marginal adjustments are much
less costly. This is one reason why the federal airline bailout was hasty
and
excessive.
Consumers have made a rational reaction to the uncertainty and ongoing
threats. They cut back on purchases of big-ticket items as they husband
resources and maintain flexibility to deal with contingencies. Similarly,
businesses cut back on investment until they have a better idea of what
is to
come. But this reluctance to spend has hardly been universal or long-term.
In fact, purchases of key staples like food and medicines initially increased,
while consumption that required individuals to go out in public places,
like
restaurants and theaters, collapsed. However, publicly consumed goods
have already rebounded strongly -- attendance at Broadway, for instance,
has returned to close to pre-attack levels.
Quantifying the impact of the attacks is instructive, even though estimates
are imprecise. The destroyed World Trade Center was worth $3 billion to
$4 billion. The lost assets of the building's tenants, and the cleanup
cost,
might add another $10 billion. Including the damage to surrounding
buildings and the Pentagon, the planes lost, and the lost productive capacity
of those killed would raise the total economic loss to somewhere between
$25 billion and $60 billion.
To put this in perspective, total physical assets in the U.S. are about
$30
trillion, and total productive assets that also include human capital are
on
the order of $100 trillion. So even a $60 billion loss is only 0.2%
of
physical assets and 0.06% of total productive assets. In contrast, the
$114
billion of physical assets destroyed in Kobe was four times as large when
compared to the Japanese economy.
The impact of an ongoing threat is harder to quantify. To gain a feel for
how large that might be, we use a pessimistic scenario -- namely, that
attacks will be attempted each year for the foreseeable future, but that
security measures will reduce the likelihood of success.
The direct cost of increased airport security has been estimated at about
$4
per passenger per flight segment. We assume that flight delays and security
checks will force travelers to spend an additional half-hour per flight
segment. (However, bad policies could greatly raise waiting times, as when
gasoline rationing caused long lines at gas stations in the 1970s.) If
the
average passenger values time at $20 per hour, increased security would
cost about $10 billion per year.
We further assume that even with enhanced security, terrorists would
destroy one plane each year, resulting in up to 100 deaths. With a generous
value of $10 million per life lost, this would add another $1 billion to
the
annual perceived cost of flying. This gives a total added cost to the airline
industry of about $11 billion per year. Under this pessimistic scenario,
the
terrorist threat would add about 11% to the cost of air travel, and impose
a
cost on the economy of about 0.1% of GDP.
Continuing Attacks
Increased security would also reduce the likelihood of successful attacks
on physical assets. But to err again on the high side, suppose the sustained
annual loss from continuing attacks equals $15 billion. That annual loss
in
assets would reduce net national product by about $15 billion for a given
capital stock, and the percentage point reduction in the net return to
capital
would be five basis points. The investment response to the lower return
to
capital would reduce long-run capital stock by about 0.8%, resulting in
a
loss of about 0.2% in long-run GDP. This is similar to our estimate of
the
direct impact of the costs imposed on air travel. Adding these two
estimates gives a total impact of about 0.3% of GDP.
Note that the impact is small compared to the oil price shocks of 1974-5
and 1979-81. Overall energy costs increased in real terms by 53% and
67% respectively, and each shock increase raised the cost of oil imports
by
over 1% of GDP. Relative to the economy, the impact of either oil price
shock was over four times as large as our estimated cost of future
terrorism.
These calculations do not justify complacency because they assume that
the
U.S. will take more effective measures to reduce terrorism. Besides, bad
economic policies in response to the terrorist threat could easily magnify
the
damage. Nevertheless, the economic future of the U.S. is still highly
promising. Its vast supplies of human and physical capital, and its innovative
skills, should continue to propel the economy to new heights.
LIFTING TRADE BARRIERS WOULD AID DEVELOPING COUNTRIES
Liberalizing global trade barriers could result in lifting
900
million people out of poverty by 2015, according to the
World
Bank's "Global Economic Outlook 2002" report for developing
countries.
To make this happen, developed countries must be willing
to
negotiate liberalized trade in agriculture and textiles
because
those are the products that the world's poor produce.
Removing barriers in agriculture, advancing the timetable
on
removing tariffs and restrictions on textile imports,
and
curtailing antidumping will be discussed at World Trade
Organization meetings to be held in early November.
o If trade is liberalized, it
could increase annual growth
in Gross Domestic
Product in developing countries by an
additional 0.5 percent
over the long run -- and by 2015
lift 300 million
people out of poverty in addition to the
600 million escaping
poverty with normal growth.
o Developing countries stand
to gain an estimated $1.5
trillion of additional
income in the 10 years after
liberalization policies
are begun.
o Developed countries would
see their incomes rise by some
$1.3 trillion.
The report, which takes into account the even further
slowdown
the global economy will see following September 11, found
trade
has also slowed:
o Growth in trade in 2001 has
undergone one of the severest
decelerations in
modern times, from 13 percent in 2000 to
perhaps 1 percent
in 2001.
o As a result, developing countries
are confronting a 10
percentage point
drop in the growth of demand for their
exports, seriously
undermining their growth this year.
o However, the volume of world
exports is expected to grow
at a 7.2 percent
rate over 2002-2003.
As the developed countries return to higher growth rates
in 2002,
says the report, growth will pick up in the developing
world as
well.
Source: Richard Newfarmer et al., "Global Economic Prospects
and
the Developing Countries 2002: Making Trade Work for
the World's
Poor," October 2001, World Bank.
For text
http://lnweb18.worldbank.org/news/pressrelease.nsf/673fa6c5a2d50a67852565e20
0692a79/772cf09b7e66b04b85256af600590aae?OpenDocument
For more on International Trade Liberalization
http://www.ncpa.org/iss/int/
Why Argentina Is a Mess (and How to Fix It)
Memo To: Ken Dam, Deputy Treasury Secretary
From: Jude Wanniski
Re: Financial Meltdown in Buenos Aires
Cc: Domingo Cavallo
I’m writing to you, Ken, figuring you might have a little more time than
your boss, Secretary O’Neill, to understand why Argentina is falling to
pieces and why another big bag of money from the International Monetary
Fund will disappear into the same black hole as have previous credits.
It
really is very simple, as we have been explaining to our clients at
Polyconomics for the last 18 months while predicting this meltdown. Alas,
there is not much of a market for complex problems with simple solutions,
especially when economists and bureaucrats get involved. I’ve tried
e-mailing Domingo Cavallo, the economics minister who is running in
circles trying to avoid national bankruptcy. As I am only a little guy
from
New Jersey, though, all I get in return are nice little notes from an assistant
who thanks me for my concern and assures me they will not devalue the
peso – although that is exactly what Argentina has to do, for the good
of
its people and the Argentine economy and for its creditors at home and
around the world.
Capital is now flying out of the country, Ken, because the collective
wisdom of the market sees that nobody in high places understand that
Argentina is being crushed by the deflation of our American dollar. As
far
as I know, it is the only country in the world which was so sure it would
be doing the right thing by pegging its currency to the dollar – and putting
it
into its CONSTITUTION that the one-for-one parity could not be
touched. It worked fine as long as the dollar price of gold remained
roughly stable against gold at $350 per ounce. Tell Secretary O’Neill to
imagine a man lashing himself to the mast in the midst of a great storm.
It
keeps him from being swept overboard, but when the ship sinks, the poor
sailor is dragged down with it.
O’Neill will probably ask why the U.S. financial markets are not crashing
with the same ferocity as seems to be the case in Buenos Aires. Stocks
have sold off, it is true, but U.S. government bonds are climbing in value
by leaps and bounds. He may remember, when I saw you both in March,
that I explained we were in a slow, grinding deflation that would force
a
downward adjustment of all prices and wages over time, because the
Federal Reserve had paid no attention to the falling price of gold, now
at
$275 or so. The big difference with Argentina, lashed to our mast, is that
our deflation was caused by the 1997 supply-side tax CUTS, which
increased the rewards for successful risk-taking in production.
Argentina not only got caught in this aspect of the deflation – because
of
its constitutional chains to the U.S. dollar – it also never had the benefit
of
the tax cuts that caused the deflation here!! There was no positive force
for expansion. You see? Because Argentina is much more of a
commodity-based economy than the U.S., deflation there moves through
the price stream more quickly and forcefully. As if that were not enough,
the IMF slouched into town and offered the Argentine government a big
bag of money to meet debt obligations – on the condition that it RAISE
taxes. This occurred not once but in three successive waves. Now you
know, Ken, that I have been calling the IMF the “Evil Empire” ever since
the Berlin Wall came down. But the stupidity of raising taxes into a
financial debacle could only be possible when Ph.D. economists are at the
helm -- probably from Harvard, Yale or Stanford. The main reason I’m
writing this to you, Ken, is that your Treasury Undersecretary for
International Affairs, John Taylor, does not have a clue. A sweet man from
Stanford, but clueless. On the other hand, it was child’s play for our
global
team at Polyconomics to predict disaster.
What should Domingo Cavallo do? First and foremost, he has to get out
of the chains pulling down his ship of state, persuade his government to
devalue the peso PRECISELY by 20% AGAINST GOLD, not against
the dollar. This will immediately lift the deflation off the backs of the
domestic economy’s producers AND WILL NOT CAUSE ANY
NOMINAL PESO INFLATION!!! Yes, it would cause a 20% decline in
the peso’s dollar value, but the dollar is deflating, so the devaluation
would
merely build a fire break against the dollar deflation process. Peso debtors
will be able to pay peso creditors and the domestic economy will be able
to right itself. The announcement would bring a tremendous surge in the
both the stock market and the bond market. Interest rates would FALL,
not rise, as the markets would see the economy would be able to function
again and produce the revenues needed to meet debt obligations. The
nation’s hard-currency creditors, for the most part in Spain, but also
in the
U.S., would see the value of the bonds rise and would be eager to get
more while the getting is good. The hemorrhaging of cash experienced
now would reverse. Hey, instead of doing bad things to the economy, try
doing some good things. Like reversing the IMF tax hikes as soon as it
becomes clear the devaluation is working. It would not take long. As soon
as the market learned you were going to devalue against gold and stabilize
there, and NOT DEFAULT on your sovereign debt, it will work in
Argentina’s favor instead of against it. Argentina would be back in
business in no time at all.
Your Ph.D. advisors will say “Why Not Dollarize?” I’m sure if you give
it
a moment’s thought, you will realize that if it is the dollar deflation
that is
wrecking the country that simply changing the color of the currency will
do
zilch.
WSJ November 2, 2001
The Americas
Ecuador Bounced Back With
The Dollar. Argentina Could Too.
By Dora de Ampuero. Mrs. de Ampuero is director of
the Ecuadoran
Institute of Political Economy in Guayaquil, Ecuador.
GUAYAQUIL, Ecuador -- It was not only rumors of an Argentine
default that
sent the risk premium on that country soaring this week.
It was also the growing
fear that the government might devalue the peso. Fiscal
insolvency does not
always mean that the government will resort to printing
fiat money, but as long
as the option exists, so do the risks. That's why Argentina
would greatly
enhance its economic position if it were to officially
retire the peso and replace
it with the U.S. dollar, as Ecuador has done.
Argentina's peso has been governed for almost 10 years
by the convertibility
law, which links the peso to the dollar at one to one.
But investors are now
worried that in order to solve the fiscal quandary, the
government might
abandon the dollar anchor. Thus, even though Argentina
has enjoyed monetary
stability for some 10 years under the convertibility
law, confidence in the peso is
low, fueling great economic uncertainty.
Ecuador had a long history of persistent inflation, although,
unlike most other
Latin American countries, it never had runaway, triple-digit
inflation. But two
years ago, the monetary uncertainty grew to debilitating
levels, as it has in
Argentina today.
Brazil's January 1999 decision to devalue the real led
to a speculative attack on
the Ecuadoran sucre. The government abandoned its crawling
peg
exchange-rate policy and let the sucre float in February.
The sucre promptly
sank, losing about two-thirds of its value against the
dollar over the next 10
months. Ecuador's central bank seemed to have no idea
of how to stop the
sucre's slide. There was an utter collapse of confidence;
the economy shrank
7.3% in 1999.
Ecuador solved the crisis by replacing the sucre with
the dollar in 2000. The country did it despite the
misgivings of the International Monetary Fund and
many "experts." IMF Managing Director Michel
Camdessus remarked, "Dollarization was not, I must be
frank, the kind of policy we would have recommended
at this stage to Ecuador."
Yet dollarization immediately ended the currency crisis
and restored confidence in the economy. The overnight
interbank interest rate immediately fell to 20% from
200%. (In September 2001 it averaged 2.6%.) The
economy grew 2.3% last year and is expected to grow
4% this year and next, making it one of the few bright
spots in Latin America.
Inflation was 91% last year, as prices caught up to the
depreciation of the
currency the year before. Ecuador is now converging toward
a low, U.S. level
of inflation.
The banking system has also been stabilized. In 1999 the
government froze
bank deposits and defaulted on its foreign debt. After
dollarization, a growing
economy and confidence in the currency allowed for freeing
those deposits and
resuming payment on the debt (which has been renegotiated
and reduced).
Ecuador's politics have long been highly polarized, and
effective government is
notoriously difficult. But dollarization has provided
an element of stability that
has helped improve the quality of economic policy. Now
that the government
cannot finance itself by printing money, it has begun
overhauling its archaic,
unworkable budget procedures. There is still a long way
to go on the path
toward modernizing government, but dollarization has
improved the chances for
effective government and consistent growth.
Dollarization has also won broad political support. The
new minister of the
economy, Carlos Emanuel, maintains that dollarization
is here to stay because it
so clearly aids the economic reactivation of the country.
He also points out that
financial integration with international banking -- something
Ecuador has yet to
achieve -- would attract even more capital and improve
the competitiveness of
the financial system. The presidents of the chambers
of commerce in Guayaquil
and Quito, the country's two largest cities, support
dollarization because it
provides greater security, stability, and better knowledge
of costs, and it
facilitates long-term credits. Initially, the influential
confederation of Ecuadoran
Indians and some leftist groups opposed dollarization.
However, their
members, even in remote parts of the country, have accepted
the dollar and
acknowledged the stability it has brought.
In Argentina, as in Ecuador two years ago, the currency
has become a huge
problem. The currency-board-like system can in principle
maintain the
exchange rate of one peso per dollar, but the government
has created doubts
about the system by fiddling with it and by demonstrating
an inability to address
fiscal imbalances. As a result, interbank interest rates
in pesos are as much as
27 percentage points above comparable rates in dollars
within Argentina.
In a recent radio interview, the chief of Argentina's
cabinet, Chrystian
Colombo, said that if the economic crisis forced its
hand, Argentina would
dollarize rather than devalue. Yet Argentina has been
in a recession for more
than three years. Why should the government wait any
longer? There is no
better time than the present for Argentina to retire
its peso and adopt the dollar.
Such a decision would also help Argentine President Fernando
de la Rua win
back popular support and thus govern more effectively.
As was initially the case in Ecuador, misplaced notions
of national prestige seem
to be the main obstacle to making changes that would
be obviously beneficial.
But there is no prestige in pursuing monetary policies
that sustain economic
misery.
Argentina has ample experience of trodding the failed
path of conventional
policy wisdom. For the sake of its own people and the
good of the world
economy, let us hope it now may find the courage to try
the more
unconventional path blazed by Ecuador.
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1004659781431345080.djm
FRASER INSTITUTE INDEX OF HUMAN PROGRESS
The United States ranks first on the Fraser Institute's
Measuring
Development: An Index of Human Progress. This new study
provides
a more complete view of the recent history and current
state of
development throughout the world than does the United
Nations'
often-quoted Human Development Index.
In addition to indicators used in the United Nations'
Human
Development Index, such as life expectancy and educational
attainment, the Fraser Index uses unadjusted Gross Domestic
Product per capita (1995 U.S. dollars) and includes six
additional indicators that measure desirable outcomes.
The cost
of increasing the number of indicators is that fewer
countries
can be included in the Index of Human Progress (128 rather
than
the United Nations' 162) because some do not have complete
data.
Among the findings of the study:
o The top five countries and
the increase in their scores
between 1975 and
1999 are: (1) United States (81.4 to
105.8), (2) Switzerland
(86.0 to 105.5), (3) Luxembourg
(69.6 to 104.8),
(4) Denmark (81.2 to 103.9), and (5)
Japan (76.2 to 103.7).
o Canada came in sixteenth with
a score of 94.0 in 1999, up
from 73.2 in 1975.
o The United States was ranked
second for 1975 through 1990
and first for 1995
and 1999. Canada ranked sixth in 1975,
tenth in 1980, eighth
in 1985, seventh in 1990, eleventh
in 1995 and sixteenth
in 1999.
o Lowest ranked countries are:
(124) Ethiopia (11.6 in 1980
to 16.7 in 1999),
(125) Burundi (11.4 in 1975 to 16.3 in
1999), (126) Mozambique
(15.0 in 1980 to 15.1 in 1999),
(127) Burkina Faso
(7.4 in 1975 to 13.5 in 1999), and
(128) Niger (4.3
in 1975 to 12.2 in 1999).
Importantly, the study found that most countries increased
their
score -- 124 out of the 128 countries ranked have improved.
Source: Joel Emes and Tony Hahn, "Measuring Development:
An Index
of Human Progress," Public Policy Sources No. 36, Fraser
Institute, 4th Floor, 1770 Burrard Street, Vancouver,
B.C. Canada
V6J 3G7, (604) 688-0221.
For study text
http://www.fraserinstitute.ca/publications/pps/52/MeasuringDevelopmentIHP.pdf
For more on Institutions & Growth http://www.ncpa.org/iss/int/
----------------------------------------------------------------
PRODUCTIVITY GROWTH BROADER THAN SOME THINK
The consulting firm McKinsey & Co. recently issued
a study of
economy-wide productivity growth (output per hour of
work) that
found the increased productivity rate of recent years
was due to
just a handful of business sectors -- six of 59 economic
sectors.
If so, this would bode ill for future economic growth.
However, economist Gene Epstein says the productivity
increases
only appear concentrated because of the way McKinsey
presents the
figures.
According to McKinsey:
o Output per worker grew at
a 2.3 percent annual rate from
1995-99, up from
1.0 percent for the period 1987 to 1995.
o The strong productivity gains
of the late 1990s were
concentrated in
only 30 percent of the private sector and
the "growth rate
[of productivity] will probably not be as
high as the 1995-2000
rate." But productivity will
"continue to be...above
the long-term, 1972-95 trend."
However, a recent study by economist Kevin J. Stiroh
found that
"a broad productivity resurgence took place after 1995,
with all
principal sectors and a majority of industries posting
productivity gains."
In fact, the McKinsey study's own numbers end up
supporting
Stiroh:
o Over the post-'95 period in
question, Stiroh found, 70
percent of the private
sector showed an acceleration in
output per worker
of 1.8 percent per year.
o But at the same time,
the other 30 percent of the economy
decelerated its
productivity growth by 0.5 percent per
year.
o So by simple arithmetic, that
positive 1.8 percent and
negative 0.5 percent
nets out to 1.3 percent.
McKinsey simply matched that 1.3 percent overall net
economic
growth with the 30 percent of the private sector that
had 1.3
percent growth. Actually, 70 percent of the private sector
did better.
Source: Gene Epstein, "Why the Whiz Kids Got It Wrong
on
Productivity," Economic Beat, Barron's, October 22, 2001;
Kevin
J. Stiroh, "Investing in Information Technology: Productivity
Payoffs for U.S. Industries," Current Issues, June 2001,
Federal
Reserve Bank of New York.
For text
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1003534738737172680.djm
For Fed Bank study
http://www.newyorkfed.org/rmaghome/curr_iss/ci7-6.pdf
For more on Productivity http://www.ncpa.org/iss/eco/
HOW ISLAMIC INHERITANCE LAW IMPEDED DEVELOPMENT
Until the late Middle Ages, the Muslim world was at least
as
economically developed as Europe. But then the
West began
pulling ahead -- with the result that the disparity today
has
bred resentment.
Economist Timur Kuran has an intriguing theory to explain
why
economic development in the Middle East lagged that of
the West.
Kuran theorizes that Islamic partnership and inheritance
laws
interacted to keep Middle Eastern enterprises small --
never
allowing the development of corporate forms.
o In the Middle Ages, both Islamic
and European law required
that a partnership
be dissolved if one partner died or was
incapacitated --
which tended to limit the size of such
arrangements.
o Then Europe began limiting
the consequences of a partner's
death by allowing
a partner to designate an heir or heirs.
o By contrast, Islamic law prescribed
in rigid detail who
would get pieces
of the estate, including uncles, cousins,
siblings, parents
and so on -- thus fragmenting the
partnership.
o This caused Middle Eastern
enterprises to remain small,
while Europe evolved
new economic forms which led to
transferable shares
and stock exchanges.
When Europeans began dominating Middle East trade, they
seized
the option of organizing their businesses under European
laws.
Not until the 19th century did Middle Eastern governments
begin
adopting secular commercial laws that allowed Muslim-owned
enterprises to grow.
But by that time, growth of Muslim business organizations
had
been stunted for centuries.
Source: Virginia Postrel (Reason magazine), "Economic
Scene: The
Decline of the Muslim Middle East, and the Roots of Resentment,
Can Be Traced to Islamic Inheritance Law," New York Times,
November 8, 2001; Timur Kuran, "The Islamic Commercial
Crisis:
Institutional Roots of the Delay in the Middle East's
Economic
Modernization," USC CLEO Research Paper No. C01-12,
USC Center in Law, Economics and Organization,
University of
Southern California, March 9, 2001.
For text http://www.nytimes.com/2001/11/08/business/08SCEN.html
For SSRN abstract
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=276377
For more on Institutions and Growth http://www.ncpa.org/iss/int/
WSJ November 9, 2001
Commentary
Globalism Under Siege
By John Micklethwait and Adrian Wooldridge. Messrs. Micklethwait
and
Wooldridge, who work for The Economist, are co-authors
of "A Future
Perfect: The Challenge and Hidden Promise of Globalization"
(Crown,
2000).
It is hard to avoid the conclusion that the World Trade
Organization is cursed.
Created in 1995 to replace the much happier General Agreement
on Tariffs and
Trade, the WTO's first attempt to start a new trade round
ended in humiliation
at Seattle in 1999. This obscure-sounding body is now
routinely denounced by
everyone from rock stars to advocates of the poor, and
its meetings hounded
by protestors of every stripe. Unwanted in many parts
of the Western world, it
decided to relaunch itself today at a "neutral" location
-- Doha, in the tiny
Islamic republic of Qatar.
The fact that the meeting is on the edge of a war zone
is appropriate. The
summit could be a turning point in the struggle over
globalization. The underlying
question is: Have the events of Sept. 11 tilted the balance
of power dramatically
against free trade, open borders and internationalism;
or in their favor? In fact,
the threats and opportunities are evenly balanced.
Two Cases
The gloomy case is the easier to make. The world economy,
already flirting
with recession, has tumbled further. The volatile but
economically vital Middle
East is in uproar. The events of Sept. 11 have created
what Paul Krugman has
dubbed a "fear economy" -- one in which the West is fighting
a war against a
hidden enemy who might strike with ferocious force at
any time.
Still worse, the bombers exposed the
fragility of the liberal world order, turning
the global successes of the previous
decade into gaping weaknesses. Aircraft
that were once heralded for making the
world smaller have become missiles;
letters have become death-dealing
devices. Words such as "networks" and
"cells" -- once the stuff of management
tomes -- now have an ominous ring. As
Peter Bergen's fascinating new book
about al Qaeda, "Holy War, Inc.,"
makes plain, Osama bin Laden's web is
as flexible and global as any guru would wish.
And of course they have confirmed that there are plenty
of people who hate
globalization, who view it as an instrument of American
political hegemony and
cultural destruction. This may be overdone: For every
young Pakistani fanatic
queuing up at the Afghan border to fight the great Satan,
there are probably 10
more worldly types trying to get green cards to pursue
the American dream.
But the resentment is plain, and it is not confined to
the Islamic world.
The idea that globalization is inevitable has always been
bunk. Look back 100
years and you can find a world that was convinced it
was "globalizing" just as
irreversibly thanks to the arrival of technologies such
as the telephone and the
car, and the apparent supremacy of liberal economics.
John Maynard Keynes
paints a picture of a Londoner on the eve of World War
I, sipping his morning
tea in bed, while ordering goods from every corner of
the globe. Such a person
was as confident in the permanence of his world as a
1990s San Franciscan
downloading a share tip from Japan onto her Palm Pilot.
Hence the worry that the attack on the World Trade Center
will prove a turning
point, just as the assassination of Archduke Ferdinand
in Sarajevo in 1914
marked the end of the first age of globalization.
This time, it should be added quickly, the danger is not
of world war, but a
process of gradual reversal. Even before Sept. 11, a
backlash against
globalization was gathering force. America's war against
terrorism in
Afghanistan is reinforcing anti-Americanism in Europe,
as the memory of the
crumbling World Trade Center is replaced by images of
Afghan children fleeing
American bombs. The war against terrorism is also demanding
tighter controls
on immigration and capital. The people who fear free
trade and open
commerce -- a constituency that stretches from European
farmers and South
Carolina textile workers to African dictators and French
culture bureaucrats --
will press for more barriers. Fair traders will demand
more restrictions to
protect the environment and labor standards.
Yet all these threats come with opportunities. Globalization
was plainly in
trouble before Sept. 11. And Sept. 11 may have had the
perverse effect of
weakening some of globalization's established critics,
while stiffening some of its
supporters. There are two reasons for thinking that the
attacks may have shifted
the Western world back onto course.
First, the terrorists have forced the U.S. to re-engage
the world. George Bush's
flirtation with unilateralism is a thing of distant memory.
The U.S. has learned
that it cannot hide behind a Maginot line of ingenious
missiles. The world's only
remaining superpower must buttress global institutions
and lead multilateral
coalitions not just for the greater good of mankind but
for its own safety.
The diplomatic offensive has been well catalogued. But
the weeks since the
terrorist attacks have also been productive economically.
America has recently
signed new agreements with Jordan and Vietnam; negotiations
to bring China in
to the World Trade Organization look close to a deal.
A powerful committee of
the House of Representatives has voted to give the president
trade-promotion
authority.
Second, Sept. 11 marginalized the anti-globalization protestors.
The
anti-American part of the movement, arguably the dominant
part in many areas
of the world, has switched its main attention to opposing
the war. The Guardian
and Le Monde are less obsessed about the evils of multinationals.
Within
America, the left has fragmented. Trade unionists have
lined up squarely behind
the war. The radical feminists, who cavorted around Seattle,
find it difficult to
identify with the Taliban, having finally discovered
a male regime still more
oppressive than corporate America. Having run a spectacularly
poor campaign
to defend free trade, the WTO has suddenly been given
a second chance.
It should use it to tie free trade into a broader move
to advance liberal values.
Some people have blamed globalization for the discontent
in the Muslim world.
But the real tragedy is that globalization there has
not gone far or fast enough.
Most Arab countries are kleptocracies whose leaders have
distorted their
economies in order to benefit themselves. Most are state-dominated
societies,
and most are profoundly hostile to open trade. Not one
of the countries that are
most associated with terrorism, from Afghanistan to Saudi
Arabia, is a member
of the 142-strong WTO.
This, it should be said clearly, is nothing to do with
Islam, which is no less
compatible with open borders than Catholicism. Muhammad
was himself a
trader, and one reason why the Islamic world initially
surged ahead of Western
Europe in economic terms was that it took a more benign
view of commerce.
There is nothing in the Quran that dictates that a country's
oil revenues should
be hoovered up by its royal family.
Decent Liberal Message
It has everything to do with the misery that comes from
governments restricting
choice. The illiberal economic policies of the Arab world
have caused
stagnation and inequality. The Organization of Economic
Cooperation and
Development calculates that between 1985 and 1998 real
average income per
head declined in Iran, Iraq, Jordan, Qatar, Saudi Arabia,
Syria, the United
Arab Emirates and Yemen. Take away oil and the economies
of the entire
Arab world are about the size of Finland's. It can hardly
be an accident that the
Muslim countries that have actually succeeded in offering
a better life to their
citizens, most notably Turkey, have also been the ones
that are most open to
free trade.
Open borders, transparency, individual freedom, the promise
that people's
living standards will be determined by their individual
merit rather than their
connections with the powerful: That is a decent liberal
message. Let's hope that
the WTO is not cursed. It has seldom been more needed.
WSJ November 9, 2001
The Americas
The Fastest, Fairest Way Out
Of the Argentine Debt Crisis
By Charles W. Calomiris, a professor of finance and
economics at
Columbia Business School.
Argentina's attempt to swap some $40 billion in domestically-held
debt for
lower-interest bonds is a welcome admission that its
current balance sheet is
unsustainable. Had this been acknowledged a year ago,
much misery might
have been averted.
It is good news, yet also troubling because it falls short
of a resolution of the
current crisis. To achieve that, the government should
shore up currency
stability and carry out a simultaneous global restructuring
of all its debt.
Provided such a plan is accompanied by economic restructuring
-- rapid trade
liberalization, and spending and tax cuts -- it would
lift a cloud of uncertainty
that is inhibiting private investment and growth.
It is often argued that Argentina suffers from an overvalued
currency and that a
devaluation would realign the peso and therefore spur
an economic recovery.
But devaluation would produce financial collapse, since
Argentine debt is
largely denominated in dollars and would be even harder
to service with a
devalued peso. A proposal for the government to revoke
dollar contracts by
decree would be even more destructive, as it would end
foreign interest in
supplying private-sector capital.
The antidotes to currency overvaluation are increased
labor productivity and
falling wages. Wages have already fallen and will continue
to decline,
particularly since the government is now paying some
employees with the new
federal scrip, Lecop, which has limited use as money.
But growth in labor
productivity requires a resumption of capital inflows.
This, in turn, depends on
resolving the debt problem and passing reforms conducive
to private capital
imports and domestic financial stability. Dollarization
would restore currency
credibility and also encourage private capital inflows.
Argentina must resolve its debt crisis without destroying
its banks. Over the
past several months, Argentine banks have been forced
to absorb government
debt, placing the financial system at great risk, as
indicated by the recent
accelerating outflow of deposits. Nevertheless, in an
orderly and rapid
restructuring, I estimate that the write-down that banks
(and other debt holders)
will suffer will not exceed 50%, which will not bankrupt
the banking system.
This is particularly true since a properly managed write-down
would
immediately improve government creditworthiness and produce
a fall in interest
rates, boosting banks' net worth.
To that end it would be best if all debts (foreign and
domestically held) were
restructured at the same time and if the IMF would facilitate
the process by
creating liquidity in the market for defaulted debts
by the means I describe
below. Neither of these ingredients is part of the current
restructuring plan, but
fortunately both are still possible.
The government's current intent is to swap domestically
held debt first. This will
be harmful to local financial institutions because they
will be forced to take a
write-down before market interest rates decline (as they
would following a full
restructuring of debt). Thus the market value of domestically
held restructured
debt will be unnecessarily depressed unless and until
foreign-held debt is
restructured. And, notwithstanding promises to back the
new debt with
dedicated tax revenues, the relatively long maturity
of the new domestic
instruments will effectively subordinate this debt to
debt that matures sooner,
resulting in a further loss in market value.
Moreover, a prior restructuring of the domestically held
debt will reduce the
chance for a speedy restructuring of the foreign-held
debt. In military matters,
one divides to conquer, but the opposite holds in debt
restructuring. The use of
agreements called "exit consents," which change the covenants
in existing bond
contracts and are signed by debt holders who agree to
swap, can encourage
other creditors to swap. But exit consents are only useful
as a threat against
holdouts if a large proportion of creditors choose to
restructure. If all debts are
restructured at once, domestic institutions (which hold
roughly half of bond debt
and are more amenable than foreign creditors) will be
able to encourage
foreigners to exchange debt. But if domestic claims are
swapped first,
foreign-creditor holdout problems could prove more difficult.
Despite the fact that a misguided two-tier restructuring
is already underway,
universal debt restructuring is still possible. The government
has announced that
domestic debt swappers will retain the option to participate
in any subsequent
international swap. If a global swap of all debt can
be arranged quickly, then
much of the harm from a two-tier structure can be avoided.
This should now be
a priority for the Argentine government.
Moreover, the IMF can play a constructive role in minimizing
the fallout from
default. Economists Adam Lerrick and Allan Meltzer have
devised a simple
means for the IMF to place a floor under the market price
of defaulted bonds
during the restructuring -- at a significant discount
to their expected
post-restructuring exchange value. Doing so would prevent
a temporary
collapse in the market for these bonds, thus avoiding
a run on banks. A floor on
bond prices would also ensure liquidity to the market
by making defaulted
bonds valuable as collateral for borrowing. Messrs. Lerrick
and Meltzer have
conducted simulations of a debt-exchange auction with
market participants, and
have found that the mechanism works.
For over a year, senior IMF officials have opposed Argentine
default. They
mistakenly believed that default would necessarily result
in devaluation, that the
contagion effects would be catastrophic, and that a restructuring
would be
protracted and difficult to arrange. So instead they
agreed to a string of
doomed "rescue" packages for Argentina that delayed the
resolution of the debt
problem and contributed to economic decline, the weakening
of the financial
sector, and the poisoning of the domestic political climate.
Now Argentina has one last chance to resolve its debt
burden in an orderly
fashion and begin rebuilding its economy. The IMF, which
is supposed to be in
the business of helping stabilize international financial
markets, can play an
important role. Let's hope that this time it chooses
the right course of action.
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1005265265240438640.djm
Point Of View
The Hoodwinkers
Steve H. Hanke, Forbes Magazine, 11.26.01, 12:00 AM
ET
The chattering classes that oppose currency boards want
us to think they harm economies in places like Argentina and Hong Kong.
Not
so.
Argentina is struggling to keep its economy afloat. A
gaggle of savants would have us believe that the source of that nation's
woes is its
currency board, which fixes the peso at 1-to-1 with the
U.S. dollar. Meanwhile this group, led by New York Times columnist Paul
Krugman,
conveniently overlooks the travails of another emerging-market
nation that's also a U.S. ally: Turkey, which has no currency board. What
Turkey has is a central bank that has brought it to the
abyss with a disastrous move to float the lira, resulting in a harmful
devaluation that has
destroyed banks and businesses.
Argentina's problems have nothing to do with the currency
board. They stem from a slump brought on by
Fernando de la Rua's government--part of a deadly cocktail
mixed by the International Monetary Fund, which
forced Argentina to hike taxes and impose fiscal austerity
as a condition for IMF loans (see my Sept. 18, 2000
column). And the slump has undermined Argentina's ability
to service its debt.
Turns out the currency board country is better off than
the central bank one. The Turkish lira has depreciated
against the U.S. dollar by 58% in less than a year, while
the Argentine peso has remained fixed at parity to the
dollar. Consensus forecasts for 2001 indicate that Turkey's
gross domestic product will decline by 5%,
annual inflation will be 57% and the government's deficit
will be a bloated 16.2% of GDP. The numbers for
Argentina are -1.6%, -0.4% and 2.3%, respectively. In
addition, 18 Turkish banks have gone bust. None of
Argentina's banks ended up in receivership.
To Krugman and his ilk, these facts are best ignored.
Preferring that developing nations install central banks--despite their
wretched record of
permitting double-digit inflation--this bunch is intent
on hoodwinking people into believing a catalog of five falsehoods about
currency boards:
• A nation must meet certain preconditions for them to
work. President Clinton's Council of Economic Advisers, another nonfriend
of the
boards, wrote that they are likely to fail without "adequate
reserves, fiscal discipline and a strong and well-managed financial system,
in
addition to the rule of law." In reality, not one of
the successful currency boards adopted in the 1990s--whether in Argentina,
Estonia,
Lithuania, Bulgaria or Bosnia--was in a place that came
close to satisfying any item on the Clinton checklist.
• Nations using them are more subject to external shocks
than those with central banks. If so, economic growth rates in currency
board
countries would be more erratic. Truth is, there's little
difference between the two types of countries on this score.
• Their inability to lend to banking systems is a weakness.
Central banks have practiced this lender-of-last-resort function with reckless
abandon, provoking bank failures and monetary crises
galore. In contrast, currency board countries have not only avoided such
messes, but
their banking systems--since the bankers knew no bailout
was in store--have tended to strengthen over time.
• A board limits a country's ability to compete. Untrue.
Hong Kong installed a currency board in 1983 and has retained its rank
as one of the
most competitive economies in the world. More recent
adopters also have maintained their edge, measured by exports as a percent
of GDP.
People who don't like currency boards say Argentina's
"artificially strong" peso has left it uncompetitive. Not quite. Exports,
about the only thing
that's growing in Argentina, are up in 2001's first half
by 3.2%, compared with the same period in 2000.
• They only work in small economies. Certainly, that's
where most currency boards today happen to be found. But Argentina's is
the
17th-largest economy in the world, Hong Kong's the 24th-largest.
More than 150 are smaller.
Conceding the successes of currency boards, the IMF has
come around to a grudging acceptance of them. In 1998 the fund vehemently
opposed the establishment of a board in Indonesia. Still,
the IMF has recently praised the five currency boards set up in the 1990s,
as well as
Hong Kong's. According to the IMF, they have strengthened
fiscal discipline and banking systems, kept inflation down, motivated reforms
and
spurred growth. The Krugman coterie remains stubborn
in its opposition.
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.
SUDDENLY PRICES ARE TUMBLING
Economists are reporting that prices are plummeting --
in some
cases faster than they have in 50 years.
o Energy prices have led the
way -- with oil dropping from
its peak of $34
a barrel to $21.17 on Thursday.
o The U.S. import price index
fell 2.4 percent in October --
the largest decline
since the government began collecting
the figures in 1989.
o A gauge of prices paid for
materials by the nation's
factories fell to
its lowest level since 1949.
o The Agriculture Department's
index of prices received by
farmers has recorded
its biggest monthly drop in 26 years.
Then major commodity indexes recorded declines not seen
since the
1950s and the 1960s, experts report.
In times of falling prices, consumers can slow their spending.
They reason that there is no rush to buy an item if they
can get
it more cheaply by waiting a few months.
While the process could lead to a vicious spiral, economists
view
that as highly unlikely. Many of them predict a
rebound by next
spring.
Source: George Hager, "Prices Sink in Wake of Attacks,"
USA
Today, November 9, 2001.
For text http://www.usatoday.com/money/mlead.htm
For more on the Economy http://www.ncpa.org/iss/eco/
WSJ November 12, 2001 Commentary
Economic Repression
Breeds Terrorism
By Gerald P. O'Driscoll Jr., Kim R. Holmes, and Mary Anastasia
O'Grady.
Messrs. O'Driscoll and Holmes, of the Heritage Foundation,
and Ms.
O'Grady, of the Journal's editorial page, are co-editors
of The 2002 Index
of Economic Freedom, which is available in English and
Spanish at
800-975-8625 ($24.95 plus shipping and handling).
The 2002 Index of Economic Freedom, released today by
the Heritage
Foundation and The Wall Street Journal, might just as
easily have been titled "A
Guide to the Sources of Peace and Prosperity." Or, as
a primer for terrorism's
Western apologists, it could be called "Civilization
for Dummies."
The findings of this study, now in its eighth year, have
always been
straightforward: Countries with the most economic freedom
also have higher
rates of long-term economic growth. But this year, another
pattern also jumps
out at the reader. Economically free countries exhibit
greater tolerance and
civility than economically repressed ones, where hopelessness
and isolation
foment fanaticism and terrorism.
The world's largest concentration of economic repression
-- Iran, Iraq, Syria
and Libya -- is also a primitive hotbed of terrorism.
Egypt and Yemen are
"mostly unfree," while Afghanistan, Sudan, the Democratic
Republic of Congo,
Angola and Somalia are all so void of a rule of law that
they are impossible to
analyze.
Yet, on balance, the world is growing freer. For
the eighth straight year, economic liberty has
expanded. World-wide, 73 countries received
better scores than last year, 53 received worse scores,
and 27 remain
unchanged. Of the 156 countries numerically graded in
the 2002 Index, 71 are
either "free" or "mostly free," while 85 are "mostly
unfree" or "repressed."
The Index grades countries on such questions as the liberality
of trade policy,
how much citizens are burdened by taxes and regulation,
the soundness of
monetary policy, whether property rights are protected,
and the size of the
black market, a good indicator of the degree of repression.
Data from the past
eight years are now online at www.index.heritage.org2.
Here, region by region, are the principal findings of the latest Index.
North America and Europe: This remains the world's most
economically free
region, with six of the top 10 freest countries in the
world, one more than last
year. The reforms in Ireland, Estonia, the United Kingdom,
Spain and the
Nordic countries are on the whole similar to those launched
years ago by
Ronald Reagan and Margaret Thatcher. By contrast, France's
economic
freedom score is worse this year precisely because of
further government
economic intervention.
Former Soviet republics account for three of the 10 countries
that have shown
the greatest overall improvement over the eight-year
history of the Index.
Estonia has become one of the freest economies in the
world.
Latin America and the Caribbean: This is a region suffering
from stalled
reforms. Of 26 countries that are graded this year, 11
have improved in overall
economic freedom and 11 are worse. It is the only region
in the world that did
not experience a net gain in economic freedom this year.
Chile is for the first time classified as a "free" country.
But El Salvador, which
was ranked as the freest country in the region last year,
has been downgraded
to "mostly free" because of an expanded fiscal burden
and black market.
Argentina's current economic tribulations could plunge
it into further disarray if
economic reform is not implemented soon. Argentina's
trade policy, regulatory
burden and black market scores are all worse this year.
North Africa and the Mideast: The scores of nine countries
have improved
this year, while eight are worse, giving this region
a net gain in economic
freedom of only one country.
Bahrain remains the most economically free country in
the region, and the 15th
freest economy in the world. But its wages-and-prices
scores worsened this
year, and it fell to the category of "mostly free." The
United Arab Emirates has
the second freest economy in the Middle East, led by
the economic policies of
the emirates of Dubai and Abu Dhabi (such as openness
to foreign investment).
It is followed by Israel, Jordan and Kuwait.
Sub-Saharan Africa: Overall, economic freedom improved
in 2001. The
scores of 17 countries rose, while those of 12 declined.
This makes the region
the second most improved on net.
None of the countries received a rating of "free." However,
for the first time,
five sub-Saharan African countries are designated as
having "mostly free"
economies: Botswana, Ivory Coast, Mali, Namibia and South
Africa. Mauritius
and Uganda miss this designation by a whisker.
Asia-Pacific: With 17 Asian countries improved in the
rankings and only seven
worsened, the Asia-Pacific region experienced the greatest
overall gain. Though
Hong Kong's score is a bit lower this year due to increased
black market
activity, it is once again ranked as the world's freest
economy. For the region
overall, the black market factor was the most problematic,
with six countries
earning worse scores in that category. Better monetary
policy accounts for the
greatest gains, with 11 countries improving. Hong Kong,
Singapore and New
Zealand are classified as the three freest countries
in the world this year.
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1005515943888475160.djm
London Times
TUESDAY NOVEMBER 13 2001
Putin rides high as shoppers fuel
economic boom
FROM RICHARD OWEN IN MOSCOW
WHEN Vladimir Putin meets George W. Bush today, he will do
so with popularity ratings at least as high as those of the American
President.
Russians are only too well aware that their country is no longer a
superpower, but they are daring to hope that President Putin might
have found the formula to make it a great power again.
Their optimism is not a result of Russia's stand in the war against
terrorism, about which many Russians feel ambivalent. Indeed, the
measures that Mr Putin, an increasingly self-assured former KGB
officer, has taken to please the West — active help over
Afghanistan, proposed nuclear missile cuts, the closure of Cold
War listening posts — have alarmed his conservative critics. He
was careful to assure his top generals before leaving for the United
States that he would not do anything to endanger Russia's
strategic defences.
Instead, 75 per cent of Russians back their President in the area
that matters most to them: what they can buy in the shops. Mr
Putin leaves behind a Moscow in which Giorgio Armani has just
opened a salon close to the Kremlin, the latest sign that the drab
Soviet years have been consigned to history. Supermarkets are full
and there are chic new restaurants and modern shopping centres.
While much of the world is entering recession, Russia is enjoying
stability and growth driven by oil revenues and growing consumer
confidence. Under President Yeltsin, Mr Putin's predecessor and
mentor, privatisation had favoured "gangsters, mafiosi and the
President's cronies", one Western diplomat said. Now the market
system is beginning to spread benefits more widely.
Last year Russia recorded unprecedented growth of 8.3 per cent.
This year growth is likely to be about 6 per cent, as oil prices fall
after the attacks on New York.
Mr Putin's economic advisers say that Russia's management of its
short-term and long-term debts means that it is in a far better
position than in 1998, when plummeting oil prices caused financial
chaos.
"The key to prosperity and stability is the rise of the middle class,"
Boris Kargalitsky, once a Soviet-era dissident and now a leading
sociologist, said. "Many of Russia's past revolutionary upheavals
happened because a middle class failed to develop. It is still not
much over one tenth of the population, but it is starting to spend
money."
Nevertheless, corruption and the mafia are still pervasive, and it is
only the business and political elite (and their wives) who can
afford the most expensive items.
The provinces remain poor and not far from the new Moscow
boutiques old women still beg in the Metro. More than 100 people
have died of hypothermia in the city's streets so far this winter.
Copyright 2001 Times Newspapers Ltd. This service is provided on Times
Newspapers' standard terms and conditions. To inquire about a licence to
reproduce material from The Times, visit the Syndication website.
TRADABLE DEFICIT PERMITS
In 1997, members of the European Union (EU) signed the
"Pact for
Stability and Growth," an agreement designed to guarantee
the
fiscal health of the Union. Under this treaty,
member countries
are required to keep their budget deficits to less than
3 percent
of Gross Domestic Product with stiff penalties for those
that do
not. However, economists argue that this is inefficient
and that
the same market mechanism that the United States uses
to reduce
air pollution can be applied to restraining European
deficits.
American regulators realize that certain companies can
reduce
sulfur dioxide emissions better than others. As
a result, the
regulators simply set the overall pollution limit and
let
companies trade permits to pollute among them.
This produced
significant results:
o By 1995, sulfur dioxide emissions
were down 50 percent
from 1980 levels.
o More importantly, this reduction
was achieved at an
impressive 25 percent
to 33 percent efficiency gain,
saving $300 million.
Economists say European deficit regulators should set
an overall
deficit limit and let individual nations trade deficit
permits.
Fines could still result from failure to comply, but
there would
be more flexibility in achieving reduced deficits.
This
procedure has several advantages:
o It abolishes the arbitrary
and political mechanism of
granting exceptions
to nations that cannot maintain the 3
percent ratio.
o It allows flexibility to nations
when they require it, say
in a recession or
if they require fiscal restructuring.
o It gives incentives to "store"
deficit permits for later
use.
o It restores sovereignty to
individual nations and may
entice Great Britain
to join the EU.
In 1995, sulfur dioxide pollution levels were 40 percent
below
target levels in the United States. Economists
say the EU could
achieve similar fiscal gains.
Source: "Deficit Permits and Storable Votes," Economic
Intuition,
Spring 2001; based on Alessandra Casella, "Market Mechanisms
for
Policy Decisions," European Economic Review, May 2001,
and
Alessandra Casella, "Tradable Deficit Permits," Economic
Policy,
April 1999.
For more on Economic Intuition research summaries
http://www.economicintuition.com
For more on European Union http://www.ncpa.org/iss/int/
Nov 15, 2001
IMF Lowers Global Growth Forecast for 2002 to Reflect
Weaker U.S.
Prospects
By Martin Crutsinger
The Associated Press
WASHINGTON (AP) - The International Monetary Fund, updating
its economic forecast to reflect effects of the
Sept. 11 terrorist attacks, significantly lowered its
estimate for growth in the United States next year.
The IMF said it still expects an economic rebound in the
world's largest economy but it slashed U.S. growth for
the entire year to just 0.7 percent. That would be the
weakest performance since the end of the last recession
in 1991.
IMF Managing Director Horst Koehler said it is crucial
for Congress and the Bush administration to agree quickly
on the shape of an additional stimulus plan. "The ongoing
discussion is not something which is
confidence-building," he told reporters at a briefing
on the revised economic forecast.
Treasury Secretary Paul O'Neill, in a separate briefing
Thursday, said he didn't believe the revised 0.7 percent
growth rate was a reasonable forecast.
"I'm convinced that the U.S. economy is putting down the
basis for a return to a good rate for real growth as we
move into next year," O'Neill said. "I think when the
scorekeeping is done for next year, Horst Koehler will owe
me a dinner, probably a very big one," he said.
Still, O'Neill stressed the importance for Congress to
quickly pass an economic stimulus package. "We need a
stimulus package. We need it now."
Just a month ago, the IMF was forecasting that the U.S.
economy would expand at a more respectable 2.2
percent rate in 2002.
The IMF also dramatically cut its forecast for Japan,
the world's second-largest economy, predicting it would
contract by 1.3 percent following a drop of 0.9 percent
this year.
In October, the IMF had forecast a milder slump in Japan
with the economy expected to fall by 0.5 percent this
year but posting slightly positive growth of 0.2 percent
in 2002.
With the significant reductions in growth prospects in
the world's two biggest economies, the IMF lowered its
expectations for global growth to 2.4 percent for this
year and next year.
Many economists believe that any global growth figure
below 2.5 percent constitutes a worldwide recession,
given that increased economic output is not sufficient
to handle an expanding population. Last month, the IMF
had put global growth at 2.6 percent for this year and
3.5 percent for 2002.
However, Koehler told reporters that the IMF did not believe
its new forecast constituted a global recession. He
said the expectation was for a less severe slowdown globally
than during past recessions in the United States in
1990-91 and the early 1980s.
The new growth forecast was prepared for meetings this
weekend in Ottawa of the policy-setting committees of
both the 183-nation IMF and its sister lending institution,
the World Bank.
"The situation is clearly difficult, but it is manageable
and we continue to expect a recovery next year," Koehler
said.
The U.S. economy dipped into negative territory in the
July-September quarter, declining at an annual rate of
0.4 percent. Many analysts believe the contraction is
accelerating in the current quarter.
The National Association for Business Economics released
an updated forecast Wednesday projecting a fall in the
gross domestic product at an annual rate of 2 percent
in the October-December period.
For all of 2001, the NABE forecast put U.S. growth at
1.1 percent, the same estimate the IMF made in its new
forecast. However, IMF economists are more pessimistic
about the U.S. economy next year with the estimate of
0.7 percent growth. The NABE forecast put growth next
year at a slightly better 1.3 percent.
For the European Union, the IMF projected growth this
year of 1.7 percent and 1.4 percent. That represented
slight downward revisions from 1.8 percent for 2001 and
2.2 percent for next year that the IMF had forecast in
October.
Koehler applauded the decision by the European Central
Bank to cut interest rates last week to deal with
weakening economies in Europe.
Koehler said Japan needs to inject more money into its
financial system to counter deflationary forces and he
urged the EU to tackle structural problems including
accelerating reforms in labor markets.
Efforts to deal with the weakening global economy will
be a primary topic when finance ministers gather in
Ottawa for talks Friday through Sunday. Koehler said
the IMF is ready to help individual countries get through
the current troubles.
He said the IMF is preparing to bolster its financial
assistance package for Turkey, saying the executive board
would discuss Turkey later on Thursday.
On Argentina, struggling to avoid default on $132 billion
in foreign debt, Koehler said it is critically important for
Latin America's third-largest economy to continue pursuing
economic reforms and talks with its creditors.
---IMF: http://www.imf.org
INNOVATION AND PATENT PROTECTION
The willingness of governments to override the protection
of
intellectual property embodied in patent law may lead
to less
innovation in the future, warns Frank R. Lichtenberg
of the
Columbia University Graduate School of Business and National
Bureau of Economic Research.
This is true particularly in pharmaceutical research,
where
certain governments have shown a willingness to ignore
patent
protections when the price or availability of a desired
drug
concerns them. For example, Canada ordered the
anti-anthrax drug
Cipro from a generic manufacturer at one point, later
ending the
practice and going back to the patent owner. In
the United
States, Sen. Charles Schumer proposed ignoring the patent,
although nothing came of the proposal.
Weakening patent protection may have a chilling effect
on private
research and development investment, and therefore reduce
the
health and wealth of future generations. That is
because
spending on R&D depends on the expectation of future
returns.
And the actions of government can affect those expectations:
o Thus, for example, the threat
of pharmaceutical price
controls in the
Clinton administration's 1992-93 health
care reform proposals
had a significant negative effect on
pharmaceutical R&D
investment.
o The threat of Clinton health
care reform reduced the
market value of
pharmaceutical firms by 44 percent during
the period from
September 1992 to October 1993, estimate
economists Sara
Ellison and Wallace Mullin.
o On the other hand, passage
of the Orphan Drug Act in 1983
led to a twelvefold
increase in the number of drugs for
rare diseases brought
to market.
Pharmaceutical firms rely more on patent protection than
firms in
other industries. Edwin Mansfield found that 65 percent
of
pharmaceutical inventions would not have been introduced
if
patent protection could not have been obtained; for the
11 other
industries he studied, this percentage was only 8 percent.
Source: Frank R. Lichtenberg, "Cipro and the Risks of
Violating
Pharmaceutical Patents," Brief Analysis No. 380, November
15,
2001, NCPA.
For text http://www.ncpa.org/pub/ba/ba380/
For more on Pharmaceutical Research http://www.ncpa.org/iss/hea/
MEXICAN IMMIGRANTS HEAD BACK HOME
The economic slowdown in the U.S. coupled with fears of
terrorism
is prompting many immigrants from Mexico to return to
their
homeland. The same factors are discouraging many
would-be
immigrants from making the trek to the U.S. in the first
place.
o Last week, Mexico's National
Migration Institute reported
that more than 350,000
Mexican citizens had returned from
the U.S. in the
two months since the Sept. 11 terrorist
attacks -- a 9 percent
increase from the year-earlier
period.
o Migration Commissioner Felipe
Preciado says he expects
another two million
Mexicans to come home by year end.
o For the 12 months up to Sept.
30, apprehensions of illegal
immigrants at the
Southern border dropped 25 percent from
the previous year
-- to 1.2 million, their lowest level
since 1995.
o From Oct. 1 through Nov. 5,
apprehensions dropped by 54
percent, to 43,000
-- an indication that thousands of
casual laborers
have likely decided to postpone their
commute until a
recovery begins in the U.S.
The returnees could spell bad news for the Mexican economy.
So
far this year, Mexico has lost nearly half a million
jobs. Also,
Mexicans working in the U.S. send some $8 billion to
$10 billion
home to their families. A decline in or drying
up of those
assets would add to the country's economic woes.
Source: Joel Millman and Eduardo Porter, "Mexicans Rush
Across
the Border, This Time Headed South," Wall Street Journal,
November 15, 2001.
For text (WSJ subscribers)
http://interactive.wsj.com/archive/data/SB1005775645381021360.htm
For more on Immigration http://www.ncpa.org/iss/imm/
WSJ November 16, 2001
The Americas
In Latin America, Too Many
Constitutional Promises
Thwart Democracy
By Mary Anastasia O'Grady. Ms. O'Grady edits the Americas.
This column
is adapted from a longer essay titled "Too Many Promises:
How Latin
American Constitutions Weaken the Rule of Law." It is
published in the
Heritage Foundation/Wall Street Journal "2002 Index of
Economic
Freedom." The "Index" may be ordered at 800-975-8625
for $24.95.
When Sandinista Daniel Ortega conceded defeat in the Nicaraguan
presidential elections two weeks ago, the civilized world
had a good reason to
feel relieved, whether it knew it or not.
Mr. Ortega's dark history as one of the 1980s' most notorious
Central
American Marxist rebels made his candidacy distressing
to the cause of
freedom. When he last assumed the role of Nicaraguan
"president," he was
leader of the famous nine commandantes, who divided up
the spoils of the
revolution and ruled in gross luxury. In his latest campaign,
he claimed to have
changed his ways. But he remains close to Fidel Castro,
Hugo Chavez
(Venezuela's Maoist president), and Colombia's guerrillas.
In the end his
dubious reputation was too much for Nicaraguans to stomach.
Yet if advocates of liberty celebrated the defeat of this
miscreant who once
terrorized Nicaragua's Moskito Indians and the peasants
of the Atlantic
highlands, they are remarkably subdued about the victory
of his only serious
opponent, Liberal Party candidate Enrique Bolanos. Why
that is so is an
important commentary on the state of democracy, not only
in Nicaragua, but
throughout the Latin American region.
Whereas Latin America's classical liberals might once
have celebrated the
triumph of a Liberal Party candidate over a Marxist as
a hopeful precursor to
reform and modernization, they seem now to look on such
an event with fearful
skepticism. The current president, Arnoldo Aleman, is
also a Liberal, but his
term has been riddled with corruption scandals. What
many now fear is that yet
another supposedly democratic, market-friendly administration
will only repeat
the same pattern -- more scandal and special interest
politics -- and leave
Nicaraguans despairing of democracy. Whether Mr. Bolanos
can break the
death-grip that government holds over its own impoverished
population is the
$64,000 question. It is not unreasonable to view it as
improbable.
This has little to do with Mr. Bolanos as an individual
or a politician. He has
promised Nicaraguans that he will govern on their behalf
and he deserves a
chance to prove himself. But what will make his job so
hard is an institutional,
or more accurately constitutional, problem that nearly
all Latin American nations
share. Latin American democracies today are operating
under constitutions that
grant government nearly unlimited power in the economic
sphere. This creates
destructive incentives and has made reform and development
in the region
nearly impossible.
The trouble starts with the fact that as Latin America
threw off its military
dictatorships and converted to democracy in the late
20th century, it tended to
embrace a naive view of this form of government. Democratically
elected
governments were assumed to be benign and acting in the
interests of the
population at large and therefore they were granted enormous
control over
economic resources. Not only are most of them now free
to intervene at will
but they are constitutionally assigned the obligation
to act as slayer of all
inequalities in life.
This egalitarian obligation has produced two negative
outcomes. The first is that
whenever the government deems it necessary, it can rescind
individual liberties
for the "public good." This leaves democracy defined
almost solely as "majority
rules" and it threatens one of the most basic institutions
necessary for economic
development: private property rights. The second negative
outcome is that this
unchecked power invites corruption and encourages crony
capitalism, and thus
creates more inequality.
The combination of majority rule and unlimited government
power conspires to
create a vicious cycle of populist promises followed
by corrupt and
disappointing leadership. Healthy institutions, which
might contain government
by checks and balances, cannot develop under such conditions
because elected
leaders have no interest in limiting their own power.
Thus, each "reform" of the
constitution expands the power of politicians who have
their own incentives to
retain their power to transfer wealth.
It may be tempting to dismiss Nicaragua's problems as
those of a small country
where a tiny circle of well-to-do families, radical leftists,
and union bosses have
made a pact to control the country. But in fact variations
on the same model
can be found all over Latin America and its roots can
be traced back to
overzealous constitutionalists.
A prime example of government run wild per order of the
constitution is Brazil.
Downloaded from the Web, it is over 200 pages long. It
says Brazil's citizens
have the right to "education, health, work, leisure,
security, social security,
protection of motherhood and childhood, and assistance
to the destitute." They
have a constitutional right to a "salary floor," irreducibility
of wages, and a
year-end salary bonus. They have the right to "overtime
that must be at least
50% higher than that of normal work" and "annual vacation
with remuneration
at least one third higher than the normal salary." And
they are guaranteed "free
assistance for children and dependents from birth to
six years of age, in
day-care centers and pre-school facilities."
"But what is government itself but the greatest of all
reflections on human
nature?" wrote Madison in the Federalist Papers. "If
men were angels, no
government would be necessary. If angels were to govern
men, neither external
nor internal controls on government would be necessary.
In framing
government, which is to be administered by men over men,
the great difficulty
lies in this: You must first enable the government to
control the governed; and in
the next place, oblige it to control itself."
In Latin America no such control exists and thus elected
officials often end up
treating the nation as their own property. Changes in
government tend to
produce a "now-its-our-turn" attitude. This is a perverse
definition of
democracy. Trotting down to the polls every few years
hasn't changed lives
much and it is reasonable to argue that little will change
until limited government
becomes part of the democratic equation.
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB100587591720110360.djm
WSJ international editions 11-1901
Mundell's Solution
Robert Mundell didn't quite square the circle, but
the Nobel laureate economist's observations on the
euro last week could be helpful to the government of
Prime Minister Tony Blair in its campaign to win the
hearts and minds of skeptical Britons. Europhobes
have many objections to dropping the pound, but
the most poisonous arrow in their quiver is that it
entails harmonized (higher) taxes. Mr. Mundell's
solution? Get an opt-out.
"I think that should be a condition, that Britain will
not have to change its tax system," the man known
as "the father of the euro" because of his seminal
work on unified currencies, said in London late last week.
That countries with a single currency -- and thus with a unified monetary
policy -- must adopt a unified
tax system has become such an article of faith that it threatens to be
self-fulfilling. This is a real danger
for a country like Britain, which enjoys lower tax rates than the Euroland
average, and the benefits that
come with that, such as lower unemployment rate, economic dynamism and
freedom to enjoy the fruits
of one's labor.
There is no law of economics that says countries inside a currency union
must give up the freedom to
set their own taxes. Those governments that want to set higher taxes must
of course accept the
consequences of their actions: free peoples, made freer still by open borders
and by the assurance that
government won't destroy their savings through devaluation of the currency,
will often take their money
and talent to where it will be better rewarded.
Of course, political realities being what they are, a harmonizing juggernaut
cannot be ruled out. Mr.
Mundell realizes that high-taxers see economic and monetary union as an
opportunity to do what
they've always wanted to do, limit the ability of people and businesses
to take advantage of a more
favorable tax environment. Britons, quite rightly, don't want to enter
the euro if it means higher taxes.
There are other reasons, of course, for the preponderant skepticism over
the euro in Britain. Among the
most deeply felt is the fear of further attenuating the sovereignty of
Parliament. This is a conversation
that Britain, as any other nation, must have with itself. But on the matter
of harmonization, neither those
on the continent who want to keep their citizens' tethered, nor the europhobes
on the British Isles who
use harmonization as a straw man, have it right.
-- From The Wall Street Journal Euro
WSJ November 19, 2001
International Commentary
Hong Kong's Political Police
As Gilbert and Sullivan aptly put it, a policeman's lot
is not a happy one. This
is often the case when the constabulary duty to be done
is keeping unruly
protesters in check. Be too lenient and other peoples'
right to go about their
business is impinged on. Be too harsh and the citizen's
right to register his
disapproval of government policy is harmed. But as long
as a well-trained,
professional force is making an honest effort to get
this balance right, they
deserve sympathy and support.
Recent events in Hong Kong, however, suggest that the
police there are coming
under increasing pressure from the government to skew
the balance in favor of
"stability" at the expense of free speech. In the last
couple weeks, the police
have torn down banners put up by members of the Falun
Gong spiritual
movement, outlawed in mainland China but still legal
in Hong Kong. They have
also threatened to prosecute the group for causing an
obstruction. The grounds
for the action were suspicious, that approval had not
been secured from the
Food and Environmental Hygiene Department to erect a
display on public
ground.
Why was a law intended to protect public health suddenly
applied to political
speech? The move seems to have been precipitated by a
banner which accused
Chinese President Jiang Zemin of "state terrorism," because
Falun Gong
members have been mistreated and killed while in custody
on the mainland. The
protesters displayed the banner outside the Liaison Office
of the Central
People's Government, where Beijing's representative in
the territory works.
The action against the Falun Gong didn't end with the
destruction of the
banners. Since the, the police have gone door to door
in the area around the
liaison office, asking residents to sign a complaint
against the Falun Gong. The
South China Morning Post reports that several people
living in Cheung Ling
Mansion were approached by officers and offered the chance
to sign a
complaint form.
This isn't the first time that the Falun Gong group, whose
protests are always
peaceful, have been singled out for special treatment.
During the Fortune Global
Forum conference in May, about 100 members of the group
from nationalities
that enjoy visa-free access to Hong Kong were detained
and then deported by
immigration officials at the airport. The point of that
exercise was to reduce the
size of Falun Gong protests and so minimize embarrassment
to Chinese
President Jiang Zemin, who was speaking at the forum.
Also at the Fortune Global Forum, policeman stopped a
van driven by three
protesters carrying a mock coffin. The officers cited
spurious traffic grounds
and then detained the protesters. A judge later found
that the police had acted
illegally and abused their power. He encouraged people
to speak up against the
police in such cases, "otherwise human rights in Hong
Kong will be diminished."
In September of last year, the police arrested seven student
leaders who were
involved in two unregistered demonstrations. Television
images of one protest
caught police spraying pepper spray directly into the
eyes of students who were
seated peacefully on the ground. TV screens also showed
a policeman striking
one student on the head from behind. These arrests provoked
widespread
outrage, with 70 academics taking out newspaper advertisements
voicing their
anger, and the Bar Association saying that the timing
and manner of the arrests
"understandably gives rise to the impression that there
was an attempt to
maximize political pressure on the students."
Hong Kong's lawyers questioned whether the Public Order
Ordinance, which
governs demonstrations, violated the right to assembly
and freedom of
expression. That is now proving to be a legitimate question,
especially given the
way the police are choosing to enforce it. Recall that
the ordinance was relaxed
in 1995 because of fears that after the handover to Chinese
sovereignty the
authorities would use it to muzzle critics. The requirement
that organizers get
permission from the police before holding a demonstration
was changed so that
only advance notice was required. But after the handover,
Beijing's handpicked
temporary legislature reinstated the requirement that
permission be sought seven
days in advance.
To be fair, the right to demonstrate still exists in Hong
Kong. But it is eroding at
the margins. For instance, at the Fortune Global Forum,
protesters were kept
much farther away from the venue than could be justified
from a public safety
standpoint. The real objective was to spare President
Jiang the agony of hearing
dissenting voices, or being photographed with protesters
in the background. In
other words, the right to dissent is now secondary to
the sensitivities of
mainland officials like the ones who work in the Liaison
Office. It's hard to have
much sympathy for the police if they bend easily to the
desires of their political
masters to limit the civil liberties of the Hong Kong
people.
-- From The Asian Wall Street Journal
WSJ November 19, 2001
Commentary
Defeating Deflation
By Richard W. Rahn. Mr. Rahn, a senior fellow at the Discovery
Institute
and adjunct scholar at the Cato Institute, is the author
of "The End of
Money and the Struggle for Financial Privacy."
Deflation is upon us. Put another way, the U.S. economy
is now experiencing
a sustained reduction in the general level of prices.
Last month, the Producer
Price Index posted its biggest decline on record, 1.6%,
and the Consumer
Price Index fell by 0.3%. All of the major commodity
price indices are down by
11% to 20% for the year. Many commodity prices are even
below where they
were 10 years ago. The only question is whether this
deflation will be
short-lived, or turn into the kind of problem Japan has
been experiencing for a
decade.
We normally view falling prices positively because we
can buy more with our
money. We have become used to falling computer prices,
and we all view this
as a good thing. Computer companies, meanwhile, were
able to sustain
price-cutting because they made enormous technological
and productivity
advances.
Other industries, such as the luxury restaurant business,
have had slightly
increasing prices, as their labor costs rose more rapidly
than their productivity
gains. Yet as long as the price declines in some goods
and services roughly
matched the price increases in other goods and services,
we had overall price
stability. Price stability is desirable because it enables
producers, consumers,
debtors and lenders to make long-term plans. Unanticipated
inflation or
deflation leads to a misallocation of resources, increased
risk, and lower levels
of investment and growth.
Deflation, like inflation, upsets stability and inflicts unexpected
hardships. Many producers of commodities, as well as many
high-tech and telecom companies, borrowed large amounts
of money to finance their expansion. This was done under the
reasonable expectation that the Federal Reserve would
maintain stable money. The companies expected their prices
would fall no faster than their productivity increased.
However, the Fed supplied too little money, and their prices
fell more rapidly than expected. As a result, they have been
less able to service their debt.
Other problems will follow. Unless deflation is quickly
stopped, key assets such as real estate will also begin to fall
in price. Deflation means that debtors must pay back in more
valuable dollars than the ones they borrowed. And those who
live off interest from their savings, as do many retirees, will
suffer as the rate of interest drops because of deflation.
The Federal Reserve has been increasing the money supply
rapidly in recent months. If this had been done earlier, it
would have stopped the deflation. Unfortunately, the
Fed waited to start cutting
interest rates until after much of the high-tech sector
was in a depression.
Sensitive prices began falling many months before Sept.
11, and the Fed was all
too slow to realize its tight money policies were killing
economic growth.
Theoretically, if the Fed cuts interest rates and increases
the money supply,
businesses and individuals should find it easier to borrow
money and service
their debt, and the economy should expand. But because
the Fed waited,
businesses were in a riskier situation from the falling
prices of their products,
and lenders added additional risk premiums to loans.
Now, even though
inter-bank interest rates have fallen, the real rate
of interest has actually risen for
many less credit-worthy borrowers and consumers.
Once this process starts, the ability of the Fed to reignite
the economy is
limited. The recent large increase in the supply of money
has not gone into
additional purchases or a rise in asset prices because
people expect prices to
fall and hold their cash. This means the velocity of
money (the number of times
a dollar turns over in a year) is falling. The Japanese
have been in this dilemma
for a decade and, though interest rates are now virtually
zero, their economy
remains stagnant.
The Japanese have tried to spend their way out of the
mess. The only result is
that the Japanese now have a government debt several
times ours on a
per-capita basis and no growth. The Keynesian crowd has
argued that the
increase in debt should cause massive inflation and high
interest rates. In fact,
supply-side economists correctly predicted that tight
monetary policy would
lead to deflation despite massive increases in government
spending and
taxation.
None of us know with certainty when the economy will grow
again. A plausible
case can be made that the fundamentals of the economy
are strong and that as
soon as the uncertainty about the war begins to abate,
the Fed's injection of
money will have its desired effect. The velocity of money
will increase, leading
to a quick demise of deflation and a return to strong
growth. An equally
plausible case can be made that the uncertainty will
remain, that the Fed will not
provide enough dollars to meet world demand, and that
we will replicate
Japan's extended deflation and stagnation. The Japanese
themselves rapidly
increased the supply of yen during the 1990s but still
did not keep up with
demand. Even though the Japanese monetary base as a percentage
of gross
domestic product is about double that of the U.S., they
still have neither
stopped deflation nor reignited growth.
Economic policy makers in Washington are now faced with
the situation for
which there is no clear road map. What should they do?
Given the
circumstances, the responsible and prudent policy maker
ought to take those
actions that will do no harm and are almost certain to
make things better.
First, the Fed needs to say explicitly that it is adopting
price-level targeting
again, and that it is going to look at sensitive commodity
prices as the indication
of where prices are headed rather than the CPI and other
lagging indices. The
Fed should look at a market basket of commodities; if
prices in the basket rise
above a predetermined range, the Fed reduces the money
supply and vice
versa. This change would reduce uncertainty over Fed
policy and make it clear
that it is going to stop the fall in prices.
Second, the Bush administration and Congress need to rapidly
remove the
many well-known tax, trade and regulatory impediments
to economic growth.
The president should use some of his political capital
to encourage Congress to
move on, for example, misguided airline and telecom regulation.
He should also
take direct action through executive orders to remove
counterproductive
regulatory and costly reporting impediments.
Finally, it is time for responsible economic commentators
to debunk the fallacy
that we can create economic growth by increasing government
spending. If
government spending led to economic growth, Japan would
have boomed in
the 1990s, and socialist economies would have been economic
miracles rather
than basket cases. The historical evidence is overwhelming
that private
individuals and businesses spend and invest much more
carefully than do
governments. Every dollar the government spends is sucked
and coerced out of
the private sector through taxation or borrowing at considerable
cost. The big
increase in government spending since Sept. 11 will only
be an economic
depressant, not a stimulus.
We know from Japan the devastating effects of deflation.
We also know from
that country what policies won't work. Let's not make
the same mistakes here.
BY GEORGE!
BEHIND DOOR NUMBER TWO
You gotta love smoked-filled rooms. That's where all
the really good stuff happens. You'll get something
for just showing up.
In France, it's even more important, because if you're
a bureaucrat it's the only way you're going to get
paid. Governments there have operated for decades on
a system of cash payments to government officials
that's paid in addition to their publicly documented
salaries.
Each year, there's a special giant slush fund that's
released to each ministry, which is then parceled out
under the guise of topping up compensation packages
of civil servants to meet private sector earnings rates.
The neat thing is that each minister can either keep
it
all for himself or he can be nice and share it with his
underlings. And it's all without public scrutiny or
record.
But wait, it even gets better than that for these guys.
The lump sums of cash are tax-free. The disclosure of
this age-old system this past week is raising eyebrows
not only in France, but also in most other nations in
the European Union.
While France was joining Germany in criticizing Italy
for its ongoing creative accounting, which could place
the nation in violation of the EU Treaties, others are
now looking at the accusers and asking for more
transparency as well.
This is becoming ever more a battle for the EU
economy as it continues to deal with the global
slowdown. Slower growth means less tax revenues yet
many companies and citizens demand more fiscal
stimulus. And at the same time, the European
Commission and regional financial authorities are
demanding more transparency from companies and
standardization in accounting and financial reporting.
Squabbling in the public sector is no way to drive
reform in the private sector.
Many European companies such as Allianz continue
to balk at releasing traditional full sets of current
and
historic quarterly data, especially in its recent report
last week. It might just come down to shareholders
that walk rather than relying upon companies to
embrace transparency.
And the French slush fund isn't alone. In the US,
there's word that a similar set up has been operating
for years. Through the Office of Personnel
Management and its Senior Executive Service group,
the US government has been taking the French
playbook for secret compensation and running it for
years.
But, not wanting to have pending troubles as the
nation heads closer into the next election season, our
fearless leader has just issued an executive order to
limit compensation and potentially call for greater
accountability of cash bonuses paid to senior
bureaucrats throughout the federal government and its
agencies.
And this demand for more information also holds true
for non-governmental organizations like the venerable
Red Cross. A series of investigative reports printed
over the weekend shows a history of diverting aid
dollars toward other goals and objectives rather than
toward the various crises that were the focus of the
fund raising efforts.
It seems that the questions of where the aid for
victims of the September 11 attacks went or is going
is very similar to another event of note, the Oklahoma
City bombing. And while many families are still
waiting for aid dollars, much of the first spending was
for such items as administrative facilities and an
upgraded phone system.
And while I'm on a muckraking roll, Berkshire
Hathaway's Warren Buffett is seeking public support
for a bailout of his company. In an editorial appearing
today in newspapers around the country, Buffett
outlined his plan for the US government to set up a
guarantee for insurance companies not unlike the
FDIC for banks and thrifts. His argument is that a
single event can snowball to involve many insurers or
the entire industry and that no one can completely
underwrite potential losses other than Uncle Sam.
Of course, who can blame Buffett and other insurance
execs for asking? From their standpoint, it would be
great for business and a boon to their stock prices.
Just
think of it, insurance buyers wouldn't need to examine
the business practices and financials of their
prospective insurers in the same way most depositors
don't lift a finger to determine the financial security
of
the bank they do business with.
Yet free market competition that rewards more risk-
averse banks and insurers with improved demand for
their services and gives them pricing power over their
weaker or haphazard peers would tend to be
supportive for consumers and penalize bad
businessmen and their investors. But instead, banks
are placed on an even footing with depositors, leaving
taxpayers with periodic big bills. The administration
is looking to slide this little request into the giant
"stimulus" package.
Elsewhere, backroom dealings in Sofia, Bulgaria have
resulted in the return of a former communist leader to
the presidency. Georgi Parvanov was declared the
victor and will assume the country's highest post.
King Simeon II, who is the country's prime minister,
will have to battle the improved left-wing leadership
within the nation's parliament. And the nation has just
started selling itself as a potential new member of the
European Union.
In the Philippines, mutiny and switch-hitting are
rocking the military as a group of Muslims continue
to revolt against the government. Count the days
before seeing foreign troops and American assistance
on the way.
Conoco and Phillips are engaged, which should result
in a conjugation to produce the largest gasoline
distributor and third largest oil company in the
market. The pair should face limited anti-trust
scrutiny and given various interesting up- and down-
stream synergies, ConocoPhillips will be a formidable
competitor once petrol prices stabilize at higher
levels.
And finally, with critics of military action facing
continued and sustained silencing in the media and the
public, they're also left with one less voice. Alice
Sachs-Hamburg has marched beyond at 96.
Sachs-Hamburg was one of the leading women's
protestors for peace throughout much of the past
century, leading right up to her death. Her storied past
is featured in "Grass Roots," which is to be published
at the beginning of next month.
Neil J. George, Jr.
Editor
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WSJ November 29, 2001
Capital
The Market
Demands Rules
NOT SO LONG AGO, it was common to hear sober, thoughtful
people
declare that old laws were inadequate for new technology,
that music
companies could never stop people from downloading music
for free, and that
empowering government to intercept encrypted private
e-mail messages was
both wrong and technologically impossible.
The Internet, it was said, was the ultimate frontier beyond
which government
would wither and cyber-freedom would reign forever and
ever.
Today, Microsoft Corp. has been snared by a 100-year-old
antitrust statute.
Napster Inc., the online song-sharing outfit, has been
put into suspended
animation by the courts. And, though the U.S. government
has yet to reopen
the encryption fight, recent antiterror laws give the
police new electronic
snooping authority.
It turns out this new technology isn't so different from
new technologies that
preceded it. Eventually, the market demands rules, and
government often,
though not always, ends up the supplier of choice.
In the 15th century, the perfecting of the compass and
other innovations in
navigation made possible the pioneering voyages of Columbus,
Vespucci and
Magellan, and the treasure-seeking commercial voyages
that followed. As
riches from the New World sailed to the Old, piracy prospered.
There was no
law of the sea. States didn't patrol the oceans. Some
even sponsored their own
pirates, called privateers, among them England's Sir
Francis Drake.
Eventually, merchants and trading companies demanded protection.
"Commerce caught up with anarchy," says Debora Spar
of Harvard Business
School, who retells this story in a new book, "Ruling
the Waves." States
outlawed piracy and privateering in the 1856 Declaration
of Paris, and their
navies enforced the new rules.
"The world always looks chaotic when the technology is
new," Ms. Spar says
in an interview. "Nobody thought you could rule the sea
or the airwaves or the
Net. It turns out that you can, and that it's generally
in the interest of the public
at large and the market that rules be created."
TO RECORD COMPANIES, Napster was a modern-day pirate,
plundering their intellectual property. The companies
turned to the courts and
Congress for help and prevailed. Napster clones persist.
But property owners
are aggressive and armed with new technology of their
own that helps enforce
the rules. A British firm, NetPD Ltd. (www.netpd.com1),
sniffs out songs that
U.S. college students have downloaded and are sharing
illegitimately, and sends
stiff warning letters to college computer-network administrators
on behalf of
copyright holders.
Even without pirates, the attraction of a rules-free
market diminishes as a technology is
commercialized. The full potential of the telegraph
in the early 19th century was unrealized until the
cacophony of competing standards was silenced.
In the 1850s, telegrams from France to the
neighboring Great Duchy of Baden had to be
translated from French to German in Strasbourg,
carried physically across the Rhine and then
retransmitted. Incompatible standards persisted
until an 1865 conference set pan-European
technical standards and conventions for calculating
charges.
In the U.S., the telegraph industry found avenues to coordination
without
government. At first, rules were made by private alliances
that were hampered
by internal feuds. Then Western Union emerged as a private
monopoly that set
nationwide standards. But its clout stirred such strong
opposition -- think
Microsoft -- that Congress gave the Interstate Commerce
Commission
authority to regulate it in 1910.
THE CYCLE IS REPEATED. A revolutionary new technology
emerges --
the compass, the telegraph, the radio, the Internet,
the mobile phone, the
science of cloning. Pioneers profit, enjoying the gold
rush. Pirates arrive.
Pioneers seek to protect their property rights. Problems
of coordination
emerge. Government appears impotent. "It often looks
like this stage will last
forever," Ms. Spar says.
But it doesn't. "The cost of anarchy is too high even
for those inside the
market," she argues, building on work that won economic
historian Douglass
North a Nobel Prize. The demand for rules and
standards grows, and is
satisfied by private cartels or monopolies or, more frequently,
by governments,
either singly or internationally.
The arrival in Washington of platoons of Silicon Valley
lobbyists with sacks of
campaign contributions was a sign that information-technology
pioneers, even
the libertarians, were seeking government protection
and rules, if only to protect
profits. The struggles of the Internet Corporation for
Assigned Names and
Numbers, the private organization established to govern
the Internet and known
as Icann, illustrate the difficulties of setting rules
without the clout of
government. Debates over setting boundaries for scientists
experimenting with
cloning human beings and patenting forms of life suggest
the importance of
government rules to biotechnology.
So the issue isn't whether government has a role. History
suggests its
intervention is almost inevitable. The issue is how.
The way in which the
government crafts rules for information technology and
biotechnology will
influence the speed with which we realize their potential
to improve our lives.
-- David Wessel
Write to David Wessel at capital@wsj.com4
Resources
For more on Debora Spar, see,
directory.hbs.edu/phonebook/results.jhtml?email=dspar5
For more on Douglass North, see,
www.nobel.se/economics/laureates/1993/press.html6
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1006985494915297920.djm
Hyperlinks in this Article:
(1) http://www.netpd.com/
(2) mailto:capital@wsj.com
(3) http://WSJ.com/CapitalExchange
(4) mailto:capital@wsj.com
(5)
http://directory.hbs.edu/phonebook/resultsDetailShow.do;jsessionid=N0YRM2O52C4SXR04CROSFFQ?rowid=6558
(6) http://www.nobel.se/economics/laureates/1993/press.html
Press Release - The Sveriges
Riksbank (Bank of Sweden) Prize
in Economic Sciences in Memory
of Alfred Nobel
KUNGL. VETENSKAPSAKADEMIEN
THE ROYAL SWEDISH ACADEMY
OF SCIENCES
12 October 1993
THIS YEAR's PRIZEWINNEERS
ARE LEADING FIGURES
WITHIN THE FIELD OF "NEW
ECONOMIC HISTORY"
The Royal Swedish Academy of
Sciences has decided to
award the Bank of Sweden Prize
in Economic Sciences in
Memory of Alfred Nobel for 1993
jointly to
Professor Robert W. Fogel, University
of Chicago, USA,
and
Professor Douglass C. North,
Washington University, St.
Louis, USA,
"for having renewed research
in economic history by
applying economic theory and
quantiative methods in
order to explain economic and
institutional change."
Modern economic historians have
contributed to the
development of economic sciences
in at least two ways:
by combining theory with quantitative
methods, and by
constructing and reconstructing
databases or creating
new ones. This has made it possible
to question and to
reassess earlier results, which
has not only increased
our knowledge of the past, but
has also contributed to
the elimination of irrelevant
theories. It has shown that
traditional theories must be
supplemented or modified to
enable us to understand economic
growth and change.
Economic historians often consider
far reaching
problems, the estimation of
which demand an
integration of economics, sociology,
statistics and
history. Robert Fogel and Douglass
North are the
economic historians that have
come furthest in such a
scientific integration. They
were pioneers in the branch
of economic history that has
been called the "new
economic history", or cliometrics,
i. e. research that
combines economic theory, quantitative
methods,
hypothesis testing, counterfactual
alternatives and
traditional techniques of economic
history, to explain
economic growth and decline.
Their work has deepened
our knowledge and understanding
within fundamental
areas of research, as to how,
why and when economic
change occurs.
Robert Fogel's foremost work
concerns the role of the
railways in the economic development
of the United
States, the importance of slavery
as an institution and
its economic role in the USA,
and studies in historical
demography.
Douglass North has studied the
long term development
of Europe and the United States,
and has in recent work
analysed the role institutions
play in economic growth.
Robert W. Fogel's scientific
breakthrough was his book
(1964) on the role of the railways
in the American
economy. Joseph Schumpeter and
Walt W. Rostow had
earlier, with general agreement,
asserted that modern
economic growth was due to certain
important
discoveries having played a
vital role in development.
Fogel tested this hypothesis
with extraordinary
exactitude, and rejected it.
The sum of many specific
technical changes, rather than
a few great innovations,
determined the economic development.
We find it
intuitively plausible that the
great transport systems
play a decisive role in development.
Fogel constructed a
hypothetical alternative, a
so called counterfactual
historiography; that is he compared
the actual course of
events with the hypothetical
to allow a judgement of the
importance of the railways.
He found that they were not
absolutely necessary in explaining
economic
development and that their effect
on the growth of GNP
was less than three per cent.
Few books on the subject
of economic history have made
such an impression as
Fogel's. His use of counterfactual
arguments and
cost-benefit analysis made him
an innovator of economic
historical methodology.
Fogel's painstaking criticism
of his sources, and his use
of the most varying kinds of
historical material, made it
difficult for his critics to
argue against him on purely
empirical grounds. As Fogel
has stressed, it is the lack of
relevant data rather than the
lack of relevant theory
that is often the greater problem
for research workers.
Fogel's use of counterfactual
analysis of the course of
events and his masterful treatment
of quantitative
techniques in combination with
economic theory, have
had a substantial influence
on the understanding of
economic change.
Fogel's second work of importance
(1974), which
aroused great attention and
bitter controversies,
treated slavery as an institution
and its role in the
economic development of the
United States. Fogel
showed that the established
opinion that slavery was
an ineffective, unprofitable
and pre-capitalist
organisation was incorrect.
The institution did not fall to
pieces due to its economic weakness
but collapsed
because of political decisions.
He showed that the
system, in spite of its inhumanity,
had been economically
efficient.
His exceedingly careful testing
of all possible sources
and his pioneering methodological
approach have
allowed Fogel to both increase
our knowledge of an
institution's operation and
disintegration and to renew
our methods of research. Both
his book on the railways
and that on slavery have forced
researchers to
reconsider earlier generally
accepted results, and few
books in economic history have
been scrutinised in such
detail by critical colleagues.
Fogel's third area of research
has been economic
demography, and in particular
the changing rate of
mortality over long periods
of time and its relation to
changes in the standard of living
during recent centuries.
This project is less controversial
than the other two, and
is both interdisciplinary and
international, with fellow
workers from many countries.
His conclusion is that less
than half of the decrease in
mortality can be explained
by better standards of nourishment,
before the
breakthroughs of modern medicine.
This leaves the
greater part of the decline
unexplained. According to
Fogel, a systematic analysis
demands an integrated
study of mortality rates, morbidity
rates, food intake and
individual body weights and
statures. A combination of
biomedical and economic techniques
is required to
achieve this, something that
he has at present set
about accomplishing. It is already
apparent that his
analyses will affect research
in economic history at many
levels.
Douglass North presented in 1961
an explanatory model
for American economic growth
before 1860, that came to
affect the direction of research
not only in the USA.
Starting from an export base
model he had previously
formulated himself, North analyses
how one sector (the
cotton plantations) stimulated
development in other
branches, and led to a specialisation
and interregional
trade.
In 1968 North presented an article
on productivity in
ocean shipping, which has become
one of the most
quoted research works in economic
history. In this article
he shows that organisational
changes played a greater
role than technical changes.
North has more and more
pointed out that economic, political
and social factors
must be taken into account if
we are to understand the
development of those institutions
that have played a
role for economic growth, and
how these institutions
have been affected by ideological
and noneconomic
factors. North maintains that
if political economics is a
theory of choice under certain
specific assumptions and
restrictions, then the purpose
of economic history is to
theorise about the development
of these. North has
pointed out that there is a
risk that economic analyses
may become ahistoric if the
time factor and the conflicts
in society are not taken into
account. A systematic
reintroduction of institutional
explanations in the historic
analysis is an attempt to correct
this deficiency.
In a number of books (1971, 1973
and 1981), North
demonstrated the role played
by institutions, including
property rights. He is one of
the pioneers in "the new
institutional economics". Putting
it simply, North
maintains that new institutions
arise, when groups in
society see a possibility of
availing themselves of profits
that are impossible to realise
under prevailing
institutional conditions. If
external factors make an
increase in income possible,
but institutional factors
prevent this from happening,
then the chances are good
that new institutional arrangements
will develop. North
tested his hypotheses on development
in the USA during
the nineteenth century, and
showed how agricultural
policy, banking, transport,
etc. could be explained by the
institutional arrangements.
In a following book, he
considered the economic development
of Western
Europe from the middle ages
to the eighteenth century,
and showed that economic incentives,
based upon
individual property rights,
were a prerequisite for
economic growth. Changes in
relative prices and
fluctuations in population growth
led to institutional
changes. The speedier industrialisation
in England and
the Netherlands depended upon
the fact that certain
conservative institutions, such
as the guilds, were weak.
Private property rights were
also guaranteed in these
countries, as opposed to the
case of Spain where the
lack of institutional innovation
led to a century long
stagnation. Innovations, technical
changes and other
factors that are generally regarded
as explanations, are
not considered to be sufficient
by North. They are
themselves a part of the growth
process and cannot
explain it. Effective economic
organisations are the key
to economic change. "Institutions
are sets or rules,
compliance procedures, and moral
and ethical behaviour
of individuals in the interest
of maximizing the wealth or
utility of principals".
In his latest book (1990), North
poses the fundamental
question of why some countries
are rich and others
poor. "Institutions provide
the basic structure by which
human beings throughout history
have created order
and attempted to reduce uncertainty
in exchange.
Together with the technology
employed, they determine
transaction and transformation
costs and hence the
profitability and feasibility
of engaging in economic
activity." Greater institutional
changes occur slowly,
since institutions are the result
of historical change,
which has moulded individual
behaviour. The greater the
institutional uncertainty, the
greater become the
transaction costs. The lack
of opportunity of entering
binding contracts and other
institutional arrangements is
a cause of economic stagnation,
both in today's
developing countries and the
former socialistic states.
North has tried to explain the
difficulties that meet these
countries by focusing his analysis
on the political and
legal framework for economic
growth. In his book he
poses fundamental questions
concerning the connection
between economic change, technical
development, and
institutional conditions. He
shows both the difficulties
that neo-classical theory has
had in explaining growth,
and the strength of using this
theory in combination with
the approaches he has proposed,
North has forced
economists to rethink, to be
conscious of when economic
"laws" are sufficient as an
explanation of a given
problem, and of when other factors
must be taken into
account.
North has, like Fogel, inspired
a large number of
research workers. His persistent
stressing of the
importance of stringent theory,
together with his
emphasis on the role of institutions,
has influenced not
only economic historians, but
also economists and
political scientists. Fogel
is an empiricist, who never
leaves any sources unexplored.
North can be compared
to those prize winners who have
previously received the
prize for purely theoretical
works. North is an inspirer, a
producer of ideas, who identifies
new problems and
shows how economists can solve
the old ones more
effectively.
Fogel and North have thus in
different ways renewed
research in economic history,
by making it more stringent
and more theoretically conscious.
WSJ November 29, 2001
Congress Should Put Trade
On the Fast Track
By Henry M. Paulson Jr. Mr. Paulson is
chairman and chief executive officer of the
Goldman Sachs Group, Inc.
The House of Representatives will soon vote on
the question of granting the president Trade
Promotion Authority, also known as fast-track
approval. Some in Congress have argued that now
is not the time to take up legislation that has
encountered such fierce protectionist opposition in
recent years. But in the wake of the terrorist attacks
of Sept. 11 and the current economic slowdown, it
is all the more important that Congress move quickly
to approve this vital measure.
This bipartisan action would inspire confidence in global capital markets.
It would allow America to be
seen as continuing to lead the open trade and globalization that has been
so vital to the prosperity of
both developed and developing countries. And it would send a powerful message
that the president and
Congress speak with one voice, and are committed to advancing freer trade
as part of the war on
terror. Indeed, approval of TPA would signal that the U.S. is not only
seeking a military coalition, but
an economic one.
The benefits of trade hardly need illuminating. America's exports accounted
for approximately one-third
of our extraordinary economic growth over the past decade, and exports
now support over 12 million
American jobs (nearly three million more than a decade ago). Jobs supported
by exports typically pay
13% to 18% more than comparable employment.
Trade brings real economic benefits to the U.S. The North American Free
Trade Agreement, and the
completion of the previous round of trade negotiations (the Uruguay Round),
now generate annual
income gains of $1,300 to $2,000 for the average American family of four.
Trade is also fundamental to
economic growth in the developing world. A recent World Bank study shows
that nations open to
trade grow 3.5 times faster than nations closed to trade. The recent experience
of countries such as
South Korea, China and Chile underscore that trade is a pathway to prosperity.
Trade is a two-way street, and imports also benefit the U.S. They provide
consumers with more
choices and lower prices on a wide variety of goods. Imports also force
our industries to constantly
improve and innovate in order to remain competitive with foreign exporters.
I confess to being a bit mystified by all of the controversy about extending
such a common-sense power
to the president. TPA simply says that when the executive branch completes
negotiations on a trade
agreement and submits it to Congress for approval, that Congress cannot
amend the agreement. It must
simply vote yes or no.
This is standard procedure in other types of negotiations. Union negotiators
don't reach agreements
with management and then allow all their members to amend and debate. And
as I know from 27 years
in investment banking, mergers and acquisitions would never be consummated
if, once negotiated,
rather than being sent to a corporate board of directors for approval,
they were sent to be restructured.
The most obvious aspect of the war on terror is clearly military action.
But we can't forget the economic
component, and primarily the gains we reap from globalization. Let's not
forget that it continues to be
those countries most closed to trade that are prime breeding grounds for
terrorists. Moreover, to truly
wage and win this war, our political unity and military power must be fortified
by the strength of our
economies.
Those economies are increasingly at risk. Global prosperity is threatened
not only by the specter of
terrorism itself, but by the slump that was deepening before the Sept.
11. Worse, it is during periods of
economic distress that pressures to revert to economic nationalism and
protectionism are the greatest.
This is a recipe for disaster, and it must be resisted through bold and
decisive action.
The two necessary actions are clear: a fiscal, consumer-oriented stimulus
package and TPA. Congress
is well on its way to passing a stimulus package, and should take care
to keep it directed at consumers.
Although trade won't provide the sort of immediate boost to the economy
that a stimulus package will,
trade will have greater long-term impact.
While each of the previous five presidents has been granted this authority,
it lapsed in 1994. During the
seven years the U.S. has been without this trade authority, other countries
have moved ahead without
us. Since 1990, the European Union completed negotiations on 20 free trade
agreements, and is
currently negotiating 15 more. Mexico now has eight agreements with 32
countries. Today out of 130
preferential trade agreements and investment agreements in the world, the
U.S. is a party to only three.
This means our exporters encounter higher tariffs -- if not closed markets
-- in other countries. Our
own consumers face higher prices and fewer choices. And the U.S. sits on
the sidelines as the rules of
the game are set on everything from e-commerce to agriculture.
Passing TPA is the first, all-important step to restoring U.S. leadership.
It will allow us to move quickly
on several fronts. We can complete negotiations for free trade agreements
with Chile and Singapore,
build vital support for the proposed Free Trade Area of the Americas and,
most important, lead a drive
for a new round of global trade negotiations.
The stakes are enormous and there has never been a time in our recent history
when American
leadership has been needed more. TPA can be a key part of that leadership,
building confidence in the
global marketplace by clearly signaling that the process of globalization
will continue with renewed
vigor. It will enhance our economic position in the world and strengthen
our national security. The time
for Congress to act is now.
WSJ November 29, 2001
Americas
An Ecuadorean Success Story
Emerges, as Argentina Teeters
By MARC LIFSHER
Staff Reporter of THE WALL STREET JOURNAL
GUAYAQUIL, Ecuador -- Joyce de Ginatta isn't a Harvard-trained
economist. But the Ecuadorean grandmother of 12 has helped achieve a feat
that continues to elude the best and brightest of South America's economic
whiz kids, notably those now trying to extract Argentina from its harrowing
debt crisis: a stable economy.
Her recipe for Ecuador's dyspeptic economy was as simple as a good,
home-cooked meal: Replace the local currency, the sucre, with the U.S.
dollar. From her perch at the helm of a small-business federation in this
steamy Pacific port, the former importer of bathroom fixtures waged a
tireless crusade to make the greenback the nation's legal tender.
The recognized "mother of dollarization" here, Ms. de Ginatta describes
herself as the Virgin Mary of Ecuador's new monetary gospel. "I didn't
need
a man to get things done," she says.
Today, little more than a year after Ecuador adopted the dollar, there
are
plenty of reasons to believe. The shift has given Ecuador the highest
projected 2001 economic growth rate in Latin America, 4.5%. Inflation,
which had been running at over 90% a year, has fallen dramatically.
International investment has doubled. Wages and employment are rising.
Ms. de Ginatta says the benefits of the dollar
are no fluke and shouldn't be limited to this little
country, most famous for its bananas and its
bizarre politics. She and a growing chorus of the
international economic elite say Ecuador's
experience with dollars shouldn't be lost on
Argentina, the continent's current economic
basket case.
Argentina now staggers under a $132 billion
burden of foreign debt. Billions of dollars of
international bailout funds haven't been enough
to keep South America's second-largest economy from heading for a default
on its bonds. "For Argentina, there's no other path but the dollar," says
Ms.
de Ginatta.
Ecuador's surprise move to adopt the dollar was a little like pulling a
rabbit
out of a hat. Wracked by a vicious cycle of inflation, unemployment and
political gridlock, economic prospects were spiraling downward. Convinced
that only the confidence inspired by the dollar could break the cycle,
Ms. de
Ginatta hammered the images of Abraham Lincoln and Alexander Hamilton
into the country's consciousness through a relentless media blitz.
"She became converted to dollarization and preached it with a zeal that
any
television evangelist would be proud of," says Jeffrey Franks, the local
representative of the International Monetary Fund, which was initially
skeptical of dollarization.
Her view, now shared by a growing number on Wall Street, is that
Argentina's band of world-renowned Ph.D. economists, led by Economy
Minister Domingo Cavallo, flirted with dollarization but never went all
the
way to discard their country's peso and the presses that print it. Argentina
remains wedded to Mr. Cavallo's decade-old "convertibility law," which
pegs each Argentine peso to one U.S. dollar.
But because Argentines still have pesos in their pockets, they just aren't
convinced the dollar peg will last forever. In times of economic uncertainty,
many rush to banks to pull out their savings -- as is happening now. Their
mattress stuffing of choice, however, isn't the peso; it's the dollar.
Convertibility means that Argentina's central bank has to provide local
banks
with enough dollars to cover all those withdrawals. In the event of a
full-blown run on deposits, the stash of dollars the government uses to
back
its currency peg would rapidly erode.
To be sure, dollarization might not give Argentina the same quick fix
relatively tiny Ecuador has enjoyed. Economists say a jump in Ecuador's
oil
revenues helped stoke the economy and patch over weak spots like poor
tax collections. Argentina, by contrast, can't count on a single sector
like oil
to power its multifarious economy. And members of Mr. Cavallo's team
have steadfastly argued that outright dollarization could create political
instability in Argentina and would be only marginally different from
convertibility anyway.
The other alternative is a free-floating currency. But in Ms. de Ginatta's
stubborn view of monetary policy a floating currency is nothing more than
a
currency with the potential to sink.
She should know. In July 1997, Ecuador's troubles sent the sucre, which
had already lost 300% of its value against the dollar since 1991, into
a
tailspin. The toilets and sinks Ms. de Ginatta imported from American
Standard Cos. were becoming too expensive. Exasperated, she sold her
businesses and, suddenly finding herself with some free time, began
wondering what Ecuador would be like under the dollar. She drafted a
dollarization plan for the leading presidential candidate, Jamil Mahuad.
He
blew her off.
In September 1998, Ms. de Ginatta took matters into her own hands. She
held a televised news conference pledging to "convert the most influential
economists in the country" to the dollar. Just before Christmas, she
organized a well-attended forum titled "Convertibility, Dollarization or
What?" Still, few took her seriously.
As the economy and sucre fell further under the weight of the Asian debt
crisis, low oil prices, a banana glut and shrimp disease, Ms. de Ginatta
stepped up her dollarization campaign. The media-savvy matron was a
favorite of the working press thanks to the fact that she kept her own
set of
professional television lights in her Guayaquil home.
Behind the scenes, Mr. Cavallo's Mediterranean Foundation had been
consulting with President Mahuad, advising him that convertibility à
la
Argentina was superior to dollarization. In early 1999, Argentine advisers
went to see Mr. Mahuad, thinking they had already sold him on a
convertibility scheme that would begin with a three-day bank holiday.
Instead, the president got the jitters. On March 8, he closed the banks
and
froze bank accounts but failed to follow through with a change in currency
policy.
Prices for everything shot through the roof. The country's second-largest
financial institution, Banco Progreso, went under. Ms. de Ginatta and
Guayaquil business leaders took to the streets, leading an April protest
rally
of 150,000.
By June, the sucre had plunged to 12,000 to the dollar. Ms. de Ginatta
dusted off her dollarization plan, foisting a copy on the vice president
at the
time, Gustavo Noboa, at another one of her dollarization forums. Months
later, the sucre fell to as low as 30,000 to the dollar.
A desperate President Mahuad grasped at the dollar. On Jan. 9, 2000, he
shocked Ecuadoreans, international bankers and the U.S. by announcing
that the greenback would begin to replace the sucre. Mr. Noboa, by then
the president, decided to keep the currency, which completely supplanted
the sucre in September of last year. He credits Ms. de Ginatta with creating
the political atmosphere allowing him to do so.
-- Pamela Druckerman cont
WSJ December 3, 2001
Money & Investing
Argentina Defends Peso-Dollar Link
As Cash Transactions Are Restricted
By DAVID LUHNOW
Staff Reporter of THE WALL STREET JOURNAL
BUENOS AIRES -- In a dramatic deepening of Argentina's
long-running
financial crisis, the government set limits on the amount
of money that can be
withdrawn from banks or sent abroad, a risky effort to
stop a run on banks that
threatens the financial system and the country's decade-old
currency regime.
The surprise weekend moves, which included a separate
measure calling for all
new loans to be made in dollars, signaled that the country
is running out of
space to defend its one-to-one peg between the peso and
dollar, its
fundamental economic rule since 1991. "We had to stop
the run," economy
minister Domingo Cavallo told a news conference on Saturday
night.
Argentines can only withdraw up to $250 a week from their
bank accounts but
may still use other means of payment like checks and
debit and credit cards at
will. The government's hand was forced after reports
that it was considering an
outright freeze on accounts caused panicked Argentines
to pull an estimated
$700 million from banks on Friday alone. Economists estimate
that before
Friday, the central bank only had a financial cushion
of about $5.5 billion to
defend its peso-dollar system before it began to buckle.
Although most loans in Argentina are already in dollars,
the step forcing new
loans to be in dollars was seen as the latest sign that
policymakers here would
eventually rather adopt the dollar as the only legal
tender rather than be forced
to devalue the peso.
Mr. Cavallo, who returned to the helm of Latin
America's third-biggest economy in March but has
been unable to reverse a four-year economic slide,
said the moves should remove doubts that the
country will resort to devaluation. "Argentina is
under attack by those looking to profit ... from a
devaluation of the currency," he said.
The economy chief said the measure restricting
cash withdrawals was temporary and would be
lifted in three months, after the government
completes talks with foreign creditors to
restructure their part of some $95 billion in debt
that the country can no longer pay in full. Having convinced
local banks and
pension funds to exchange up to $50 billion in their
holdings, officials hope that
a successful negotiation with outside lenders will restore
confidence that the
country won't go broke.
Argentina's emergency moves may hurt efforts to get additional
support from
the International Monetary Fund and other official lenders.
The IMF, which
currently has a team of economists visiting Argentina
to study the situation, has
made it clear that further aid is contingent on meeting
goals for budgets and
reserves, and the IMF is likely to view the steps as
muddying the country's
financial picture, economists said.
An IMF official familiar with the situation refused to
comment on how the
moves would affect additional aid. Asked about the agency's
views on the
measures in general, he said: "We're still looking at
it. It's obviously serious."
The limit on withdrawals could also backfire by keeping
cash out of consumers'
hands and accelerating an economic decline that has worsened
in the past few
months. With the Christmas shopping season approaching,
shopowner Maria
Dolmer fears the step could spell the end for her gift
shop. "Many Argentines
use cash to pay for things. I know very few people who
have a credit card,"
she said.
The move was a reminder for many
Argentines of the last time the
government froze deposits in the late
1980s, only to turn them into bonds
whose value plummeted. Indeed, one
woman claiming to be a pensioner
scolded government spokesman Pedro
Baylac in front of television cameras as
he tried to enter the president's official
residence for an emergency meeting on
Saturday. "How dare you take my
savings," she yelled. The unidentified
woman seemed unconvinced by the
spokesman's assurances that her deposits
were safe.
Others also viewed the move as a betrayal. "It's as if
while I'm talking to you
I'm swiping the change from your pocket," said Jose Valenzuela,
a 35-year-old
salesman in a men's clothing store.
Temporary freeze or not, the government may not have had
much choice. An
estimated $16 billion, or nearly 20% of banks' total
deposits, has left Argentina
this year. Because each peso in the economy is backed
by dollars at the central
bank, the steady exodus diminishes the bank's ability
to support the peso.
Argentine bank chiefs, having reluctantly agreed to the
government's recent
debt exchange, demanded action last week from President
Fernando de la Rua,
according to local economists.
Rumors that the government might take drastic action swirled
around financial
markets by the end of the working week, and on Friday
a local news agency
said officials were considering freezing accounts. By
midafternoon, word had
spread despite government denials, and Argentines were
lining up at banks. The
lending rate between banks soared as high as 700% Friday,
showing how little
cash was in the system.
The timing couldn't have been worse for the government,
which was set to
announce a successful debt exchange with local investors
that should save it
$3.55 billion in lower interest payments next year, according
to Mr. Cavallo.
He said the government hoped to exchange a similar amount
of debt with
foreign investors, many of whom fear deteriorating government
finances will
lead to a worse offer for them.
-- Jacob M. Schlesinger in Washington, Pamela Druckerman
in New York
and Michelle Wallin of Dow Jones Newswires in Buenos
Aires contributed
to this article.
Write to David Luhnow at david.luhnow@wsj.com4
WSJ December 3, 2001
The Outlook
'Race to Devalue' May Gain
Currency in Washington
The first law of currency depreciation says two good
things will happen: a country's exports go up and its
imports go down. Therefore, a weaker currency is a
way to "steal" some economic growth from your
trading partners.
Today, given the synchronous slowdown in the
world economy, stealing growth is an idea that
appears to be catching on.
Therein lies a danger. If too many countries try to
play the weak-currency game, a
beggar-thy-neighbor round of competitive
depreciations or devaluations could result. It's a
worry that was touched off most recently a few weeks ago, when top Japanese
officials said they
wouldn't mind seeing the yen weaken against the U.S. dollar, with the Japanese
currency already near a
four-month low. While this could help Japanese multinationals in a fresh
export drive, it could hurt
exporters elsewhere in Asia, unless they drive their own currencies lower
to stay competitive against
Japan or against each other. It is, at this point, only a hypothetical
issue, but the worrying has begun.
In South Korea, for example, officials voiced fears last week about losing
ground in chemicals, steel
and electronics to Japanese companies helped by a cheaper yen.
Jittery, too, are other Asian countries whose exports to U.S. technology
markets already
have been decimated by faltering demand. These countries may also feel
compelled to let
their currencies slide to compete against Japan, and against each other.
(In China, however,
many experts say devaluation of its pegged currency is possible but unlikely.)
Currency weakness is an idea quietly percolating throughout Europe, too,
where the once-macho
defense of a strong euro -- the region's common currency -- has given way
to complacency. Given a
weak European currency, Europe's exports to the noneuro parts of the globe
still are running 3% above
last year's levels.
Unfortunately, a depreciating currency can be harmful, especially for developing
countries. In Asia, for
example, currencies falling vs. the yen or the dollar could add to inflation
by causing import prices to
rise. And it can raise the cost of capital from abroad, something Asian
countries don't need at this point.
But a "race to weakness" has implications for the U.S. as well. A steady
depreciation of Asian
currencies means, by definition, that somebody else's currency has to appreciate,
or undergo a relative
rise in value. That means, to a great extent, the U.S. dollar.
With the U.S. an important destination for Asian exports, which total more
than $1 trillion per year
world-wide, currency depreciation in Asia could mean a relative rise in
the value of the already strong
U.S. dollar, putting a crimp on American exports and inviting a flood of
imports into the U.S. at a time
of economic weakness.
Also, currencies matter to multinational corporations. A weak euro hurts
euro-zone earnings of U.S.
companies when translated back into dollars.
Neither Japan nor Europe is cutting interest rates aggressively. Japan
can't, because rates
are near zero. Europe is easing timidly. Moreover, "Europe and Japan are
unable or
unwilling" to inject strong fiscal stimulus into their economies, says
Robert Sinche, head of
global currency strategy at Citibank, a unit of Citigroup. "So the currency
is maybe the one
lever they can use."
It could be a tempting development, this jockeying to keep one's currency
weak. "Big countries, rich
countries, actually get something when they devalue," says Adam Posen,
senior fellow at the Institute
for International Economics, a Washington think tank. In short, they get
a trade advantage.
But by definition, not everyone can play this game at once, Mr. Posen says.
"Competitive devaluation is
a problem when there's a synchronous downturn. If everybody is in trouble
at the same time and
nobody is sure who is coming out of [the downturn] first, nobody wants
to be the strong currency," he
says.
Indeed, when the U.S. economy was strong, Americans didn't sweat the downside
of a strong
currency. Today, though, the U.S. economy is in recession, and being the
strong-currency country
hurts. Exports are running more than 10% behind year-earlier levels. Job
losses and diminishing
corporate profits could bring business and labor out in favor of a weaker
dollar, just as they did before
the Plaza accord of 1985, which brought about a concerted effort, among
five economic powers, to
weaken the U.S. currency.
Just what might weaken the dollar is anyone's guess. The dollar has held
up remarkably well
in the face of things that should have driven it down, such as falling
interest rates and
persistent record trade deficits. More recently, the dollar has held up
in the wake of the
terrorist attacks of Sept. 11. The dollar remains strong "because the rest
of the world
believes in the V-shaped recovery," says David Hale, chief global economist
at Zurich
Financial Services.
It may be that soon enough, the U.S. economy will be strong enough that
most Americans won't care
about the dollar. If the economic weakness lingers, though, there will
be U.S. voices pushing America
to join the weaker-currency crowd -- if it can.
-- Bernard Wysocki Jr.
Write to Bernard Wysocki Jr. at bernie.wysocki@wsj.com
WSJ 12-4-01
Don't Cry for Argentina
Argentines are scrambling to protect their financial assets
in the face of their government's new controls on bank
withdrawals. "We had to stop the run on the banks,"
Finance Minister Domingo Cavallo told a press conference
Saturday night. The Argentine debt crisis seems finally to
be coming to a head, tipping toward either a
much-discussed dollarization of its economy or a crippling
devaluation.
John Taylor, undersecretary for international affairs at the
U.S. Treasury, told us yesterday in New York that
Argentina's weekend measures were "stopgap" and are no
substitute for serious debt restructuring. He also said the
U.S. intends to oppose further international measures to
bail Argentina out of its debt woes. The IMF expanded
Argentina's stand-by loan agreement in August, but the
U.S. said this was the end of the line. Mr. Taylor added that
he believes "dollarization" would be good for Argentina,
but that the U.S. was not pushing it to do so.
Certainly the weekend banking curbs cannot be maintained for long. Although
Mr. Cavallo left the way open for
credit card and checking account transactions, his limitation of cash withdrawals
to $250 a week and restrictions on
transferring funds abroad will act as a drag on the Argentine economy.
Such measures may have been necessary to
stop or slow bank runs, but they don't fix what ails Argentina.
What ails Argentina is obvious to everyone but politicians in Buenos Aires
and at the IMF. The passage of
Argentina's peso convertibility law a decade ago rescued the country from
years of inflation and trade protectionism.
It effectively set up a currency board, tying the Argentine peso to the
dollar and leaving no possibility for the
Argentine central bank to manipulate the peso. The law created something
of an economic miracle, stabilizing the
peso and reviving trade.
But Mr. Taylor, an eminent economist before joining Treasury, notes that
after those initial gains Argentina's reforms
stalled. It never controlled public spending. The currency board blocked
the government from cranking out pesos to
inflate away this spending, so it borrowed instead. Debt has reached a
crisis level of $132 billion. Any solution now
has to include a restructuring of this public debt, a reduction of the
public deficit and a return to peso credibility.
Initial restructuring efforts have gone forward through debt swaps intended
to reduce interest costs. But although
the Argentine Congress adopted a "zero deficit" law in July and cut state
salaries and some pensions, these
measures have generated little confidence that spending is under control.
One problem is that the central
government has little control over spending by the country's provinces.
We sympathize with Mr. Cavallo's recent lament that Argentina has suffered
from the beggar-thy-neighbor
devaluation of the Brazilian real, though his worry is two years late.
Joined with Brazil in the Mercosur trade bloc,
Argentina had a harder time defending its own dollar-peso peg after that.
But Mr. Cavallo also undermined his own
currency board by adding the weaker euro to the dollar-peso mix. That is
why at this late stage only total
dollarization may be enough to restore peso confidence.
Argentina has raised the specter of "contagion" to other countries if it
doesn't receive more international cash. But
Mr. Taylor told us he sees little evidence of such damage, which is a reassuring
sign that for once the U.S. seems
prepared to call a country's bluff. That would set a good example for countries
tempted by similar fiscal
irresponsibility in the future.
FOREIGN AID GAINS POLITICAL SUPPORT
Polls have shown that Americans view foreign aid with
suspicion -
- with some convinced that sending their tax dollars
abroad is a
waste of resources. The result is that the share
of the federal
budget devoted to foreign aid has declined steadily since
World
War II.
But the terrorist attacks of Sept. 11 have convinced a
number of
Washington politicians that the sums should be increased.
A
bipartisan Senate resolution introduced last month would
triple
the amount of money the U.S. sends overseas over the
next five
years.
o Since the late 1940s, the
proportion of the federal budget
devoted to foreign
aid has declined from more than 15
percent to 0.72
percent this year.
o Top recipients of U.S. foreign
aid in 2000 were Israel and
Egypt -- at $4 billion
and $2.1 billion, respectively.
o Other top beneficiaries include
Colombia, the Palestinian
West Bank/Gaza,
Jordan, Russia, Bolivia, Ukraine, Kosovo
and Peru.
o As a proportion of gross domestic
product, Denmark leads
in foreign aid spending
at 1.06 percent, not including
military assistance
-- followed by the Netherlands,
Sweden, Norway,
Luxemburg, Belgium, Switzerland, France
and the United Kingdom.
The United Nations would like to see countries give at
least 0.70
percent of GDP -- the exact amount pledged by Luxemburg.
Not
including military assistance, the U.S. contributes 0.10
percent
of GDP.
Critics say that too often U.S. aid has been skimmed off
by
corrupt foreign governments, or wasted on projects and
programs
that undercut the growth of important economic sectors
in
recipient countries.
Source: Kathy Kiely, "Importance of Foreign Aid Is Hitting
Home,"
USA Today, December 4, 2001.
For text
http://www.usatoday.com/news/attack/2001/12/04/foreignaid-usat.htm
For more on Foreign Aid http://www.ncpa.org/iss/int/
AP Dec 5, 2001
Mexico in Danger of Losing Tropical Forests During
This Century, Study
Finds
By Lisa J. Adams
Associated Press Writer
MEXICO CITY (AP) - Mexico could lose its tropical jungles
within decades if the government doesn't seriously
hike the amount of money it allocates to deal with deforestation,
according to the environment secretary.
A study released Monday showed that Mexico lost an average
of 2.72 million acres of forests and jungles each
year between 1993 and 2000 - nearly twice as much as
what government officials had previously estimated.
"It has been quite a shock to encounter how grave the
situation really is," said Victor Lichtinger, who blames
the phenomenon primarily on the expansion of farmland
and grazing areas, and to a lesser extent on illegal
logging.
If the government doesn't spend some four to five times
as much money trying to deal with the problem of
deforestation, Mexico will have no tropical jungles left
by the year 2059, he said Tuesday.
Among the jungles in critical danger, he said, are those
on the Yucatan peninsula, in the southeastern Gulf
coast states of Tabasco and Veracruz, and in southernmost
Chiapas state.
Chiapas is home to the Lacandon rain forest, one of the
most biologically diverse areas in the country - and
one that could disappear in 10-30 years if things don't
change, Lichtinger said.
"We've lost 1.3 million acres in tropical forests alone,"
Lichtinger said. All together, Mexico lost 19 million acres
of pine and fir forests and tropical jungles during the
seven-year period.
The loss of trees - evident in dramatic satellite photographs
taken for the study - also has a grave effect on
other areas of the environment, Lichtinger said.
It changes the formation and course of rivers, diminishes
the soil's fertility and capacity to retain
groundwater, reduces rainfall in deforested areas, and
exacerbates natural disasters such as landslides,
Lichtinger said.
He said the rapid loss of forests corresponds to a simultaneous
increase in farming and grazing land cleared by
the 10 million to 15 million poor farmers who have no
other means of making a living, he said.
Mexico's confusing land-registry laws and decades of politically
motivated land reforms have made it unclear
who owns the lands in question, making it easy for squatters
to occupy forests.
Lichtinger blames NAFTA-related government policies that
subsidize the expansion of farmlands in an effort to
compete with the United States' and Canada's farming
subsidies.
A lesser culprit, he said, is illegal logging, an industry
that state and local governments not only have failed to
stop, but from which they have profited. Poor farmers
participate in the industry by selling the most valuable
wood from the forests before burning them to create farm
and grazing land.
AP-ES-12-05-01 0827EST
This story can be found at : http://ap.tbo.com/ap/breaking/MGAJQ8J6VUC.html
The Fatal Flaw in Argentina`s Currency Board
Memo To: Steve Hanke
From: Mike Churchill
Re: The Floating Anchor and the Argentine Meltdown
Your Friday essay for The Wall Street Journal Americas Column
("Who's Killing the Peso in Buenos Aires?") had some good points in it,
Professor, but when I finished reading it my first thought was that you
are
pointing the finger of blame for the collapse of the Argentine economy
at
everyone but yourself. There really is a case to be made that of all the
negative forces bearing down upon Buenos Aires these days, the most
powerful one may be of your design and responsibility. It strikes me that
the fatal flaw in Argentina's currency board system is one you have
repeatedly dismissed, when it has been brought to your attention. Not
wishing to be disrespectful, I quickly concede that as the intellectual
architect behind the currency board, you really deserve much of the credit
for the boom that spanned the years from 1991-97. In a world where all
currencies float in real terms, though, the flaw in all currency boards
is that
they do not really "fix" the value of a currency, they just tie it to another
currency which is itself floating. You make reference to Argentina's dollar
"anchor," but since the dollar itself is not anchored to anything, the
vision
of stability conjured up by the notion of an "anchor" is misleading. Of
course, it is not the "board" part of the program that is at fault, it
is just the
"currency" part. A "gold board," for instance, or even a "currency basket
board," using all the mechanisms you already have prescribed, almost
surely would have allowed Argentina to avert its current crisis.
You are correct to argue that the wave upon wave of tax hikes that were
undertaken from 1995 to 2001 were wrong-headed. There is no question
that the administrations of Carlos Menem and Fernando de la Rua made
matters worse with a series of spectacular fiscal blunders. But I'm afraid
you've overlooked the triggering event that prompted the whole
downward spiral in the first place (including the tax hikes): deflation
of the
U.S. dollar, to which the Argentina peso is linked. As long as the dollar
held steady against gold at $350 for a number of years, it made sense to
link to it through a currency board. When it began to bounce around
wildly against gold in the last several years, the currency board was worse
than nothing. At least the countries that had informally linked to the
dollar
could cut loose and recover. Argentina could not.
Beginning in late 1996, the dollar began a sharp ascent against foreign
currencies, commodities and gold in the wake of the U.S. Congress's
approval of a major cut in the capital-gains tax. Demand for dollars rose
on the anticipation of surging economic growth, and the value of the dollar
began rose when the Federal Reserve failed to meet that demand. That is,
the dollar became scarce relative to commodities. During the following
two years, the dollar gained roughly 25% against all relevant benchmarks:
commodities, foreign currencies and gold. This was not an immediate
disaster for the U.S., which after all is a net commodity importer. But
it
was devastating for commodity-dependant countries such as Russia,
Thailand, Indonesia and Argentina.
Tax revenues began to slide in Argentina soon after the commodity-price
plunge. Sharp declines in corn, wheat, soybean, beef and industrial metals
began to negatively impact the grass-roots economy in fairly short order.
The proper monetary policy response would have been to scrap the
peso-dollar link and tie the peso to a more stable reference point such
as
gold, a commodity basket, or even a basket of foreign currencies (a la
Singapore). The proper fiscal response would have been to aggressively
pursue tax-rate reduction and deregulation. Of course, the governments
of
Menem and De la Rua did neither. Under De la Rua, things really began to
go downhill. His first finance minister, Jose Machinea, was absolutely
convinced that staggering tax hikes would close the budget deficit, cause
interest rates to fall and restore growth. He could not have been more
wrong. As we at Polyconomics anticipated (and as you surely did, too)
the tax hikes further depressed economic activity and caused tax receipts
to plunge still further.
Argentina's problems could be solved in one day with a combination of a
20% devaluation against gold, implementation of a gold-linked monetary
policy, and adoption of a 13% flat tax, along the lines of Russia's. Spreads
on sovereign debt would plunge literally by thousands of basis points as
investors clamored for Argentine debt, knowing that such a favorable
policy environment would draw in tremendous capital and usher in a
period of spectacular growth. In other words, you have had your shot at
fixing Argentina with a system that was fatally flawed from the beginning.
You made a contribution to the history of economic ideas even in failing.
Why not say so and admit that we really have no other choice now but to
link the dollar and the peso directly to gold?
*****
EVEN ENRON'S DEMISE HASN'T SIDETRACKED POWER DEREGULATION
While the collapse of Enron Corp. has muted enthusiasm
for
electric power deregulation among some in the United
States, many
other countries are moving ahead with plans to free up
their
energy markets and introduce more competition among suppliers.
o These efforts are transforming
what were once tightly
regulated, state-owned
industries in Europe and in such
developing countries
as Brazil, the Philippines and China.
o Energy specialists say governments
in Southeast Asia,
Latin America and
Africa are trying to solve their energy-
supply problems
by attracting foreign investors.
o The European Union is currently
discussing opening the
electric power market
for business users by 2003, natural
gas for business
users by 2004, and gas and electricity
for consumers by
2005.
o In Brazil, where 80 percent
of power-generating capacity
remains with state-owned
companies, a government panel is
seeking ways to
dismantle regulatory barriers so as to
encourage private
investment in new power plants.
To be sure, Enron's fate is being cited by critics of
deregulation. But free-market advocates counter
such arguments
by pointing out the undoubted advantages of privatization
and
deregulation.
Source: Anita Raghavan, Miriam Jordan and Bhushan Bahree,
"World
Moves Forward on Plans for Free-Market Energy," Wall
Street
Journal, December 6, 2001.
For WSJ text
http://interactive.wsj.com/articles/SB1007607463766251920.htm
For more on Electric Power Deregulation
http://www.ncpa.org/iss/reg/
DEFLATION AND ZERO PERCENT INTEREST RATES
The Federal Open Market Committee of the Federal Reserve
may cut
the federal funds interest rate by another 25 basis points
(0.25
percent), reducing it from 2 percent to 1.75 percent,
its lowest
level since 1961.
Lower interest rates should increase borrowing, investment
and
consumption, thereby stimulating economic growth.
However,
Japan's central bank has cut the equivalent of the fed
funds rate
virtually to zero. Yet borrowing has not been stimulated
and the
economy has been mired in recession for many years.
One explanation for the Japanese experience is that lower
interest rates have not been accompanied by an increase
in
monetary liquidity. In effect, monetary policy
remains tight
despite the low nominal interest rates, putting deflationary
pressure on the economy. With the price level falling
in Japan,
even very low market interest rates can be high in real
terms.
If the price level is falling 3 percent per year and the
nominal
interest rate is 2 percent, the real interest rate is
5 percent.
Even a zero percent market rate, as Japan has, would
still yield
a real interest rate of 3 percent -- equal to the deflation
rate.
Of course, the steeper the deflation rate, the higher
real
interest rates become. Thus deflation severely
discourages
borrowing and lending. It also discourages spending,
as
consumers wait for prices to fall further before buying.
Technically, what happens is that the velocity of money
-- the
number of times a given dollar is spent -- falls during
a
deflation (see figure).
http://www.ncpa.org/edo/bb/2001/images/bb121001.gif
o Economist David Gitlitz of
TrendMacro.com points out that
despite recent increases
the Dow Jones Spot Commodities
Index is down 12
percent so far this year, and the
Commodity Research
Bureau Futures Index is down 16
percent.
o Gold, oil and even car prices
are all falling.
o This deflationary pressure
is sharply reducing velocity,
negating the effects
of the Fed's interest rate cuts.
Although some economists are starting to predict an early
recovery next year, those who believe the U.S. economy
is
suffering from deflation are much less sanguine.
Until the Fed
adds enough liquidity to the economy to stop commodity
prices
from falling, they believe, a sustained recovery cannot
begin.
Source: Bruce Bartlett, senior fellow, National Center
for Policy
Analysis, December 10, 2001.
For text http://www.ncpa.org/edo/bb/2001/bb121001.html
For more on Monetary Policy http://www.ncpa.org/iss/eco/
There's Nothing Natural About Zimbabwe's Woes
By CLAUDIA ROSETT
NEW YORK -- In the waiting room of Zimbabwe's mission to the
United Nations, posters advertise the country's natural wonders,
including wild elephants and the splendid Victoria Falls, with the
caption "Africa's Paradise."
Yet in today's Zimbabwe what looms large is
not paradise but famine. "The situation is
deteriorating fairly rapidly," says Kevin Farrell,
country director for the U.N.'s World Food
Program, reached by phone in the Zimbabwean
capital of Harare. He says that in any village
right now, "you will see people clearly hungry."
The U.N. is appealing for $611 million worth of
emergency aid for sub-Saharan Africa. Almost
half of that is for Zimbabwe, the region's former
breadbasket, where aid workers now predict
that without massive help, hundreds of
thousands may soon starve to death. But, as
Rev. Jack Finucane of the U.S.-based Concern Worldwide, told me
after his recent visit to Zimbabwe, "There's a problem about getting
food into the country."
There is nothing natural about this. True, Zimbabwe has had a drought.
But in our modern world of swift transport and global markets --
supplemented in a crisis by eager aid agencies -- there is no way that
famine can be chalked up to natural disaster. Given any reasonable
degree of freedom, people will make mighty use of their own ingenuity
to survive. It takes a lot of work, by determined tyrants, to starve
human beings to death.
Stalin in the 1930s, Mao in the 1950s and '60s and North Korea's
totalitarian Kim Jong Il today all belong on the list of rulers who have
forced starvation on their own people in the course of consolidating
their own power. Ethiopians starved in the 1980s under the brutal Marxist
rule of Col. Mengistu Haile
Mariam, who was finally ousted in 1991 -- and retired to luxury digs in
Zimbabwe, where he still resides.
At Zimbabwe's U.N. mission hangs a portrait of the ruler who has enrolled
this once-fruitful country in
the axis of famine: "His Excellency the President of the Republic of Zimbabwe"
-- Robert Gabriel
Mugabe.
Mr. Mugabe peers out from behind big dark-rimmed spectacles, looking younger
in this official portrait
than his 78 years. He has ruled Zimbabwe since independence from Britain
in 1980, tightening his grip
over time. As some countries in Africa have begun to liberalize, Zimbabweans
have been looking more
urgently for change. Mr. Mugabe has responded with increasingly destructive
tactics for keeping power
-- imposing price controls, nationalizing enterprises and turning loose
gangs to brutalize opponents.
In March, Mr. Mugabe "won" re-election in a vote that the State Department
said was "marred by
disenfranchisement of urban voters, violent intimidation against opposition
supporters, intimidation of the
independent press and the judiciary and other irregularities."
Over the past two years, Mr. Mugabe's bid to boost his waning support has
included a land "reform" in
which his government ordered commercial farmers belonging to the 1% white
minority to quit farming
and surrender their land to be parceled out to blacks. This was done in
the name of redressing racial
injustices of colonial times. But the huge farms and their economies of
scale were the most productive
source of the country's food. Their confiscation, carried out in many cases
by violent mobs, has brought
food production to a near halt. And though the drought ended months ago
and many of the reservoirs are
now full, Mr. Mugabe's "reform" means there is now almost no effective
irrigation or new planting. The
worst hit by these ruinous tactics are huge numbers of Zimbabwe's 12 million
blacks.
Nor can people buy supplies on the open market. The government runs a Grain
Marketing Board that
has monopoly rights to import and deal in commodities such as corn -- the
staple food in Zimbabwe.
Farmers are forced to sell exclusively to the state marketing board, at
well below world price, which
further reduces incentives for large-scale planting. According to the head
of the U.S. Agency for
International Development, Andrew Natsios, the grain board "has politicized
the distribution of food,"
funneling grain toward Mugabe supporters and away from the opposition.
Mr. Mugabe's policies have also sent inflation into the triple digits,
eroding the buying power of ordinary
Zimbabweans. The official exchange rate is now about 1/16th the black-market
rate, meaning that food
prices are increasingly out of reach. The effect is a "mass destruction
of the middle class," says Mr.
Natsios. In neighboring South Africa, Archbishop Desmond Tutu has warned
that "Zimbabweans are
now suffering the brunt of policies that could soon spill over into the
entire region."
Aid donors are now trying to maneuver emergency rations through Mr. Mugabe's
horrific political maze,
which has included objections by Harare officials to the importation of
genetically modified grain. The
U.N. has issued a call for swifter relief to avert catastrophic starvation,
and nongovernmental
organizations have been petitioning officials in Harare for permission
to ship in food. Mr. Mugabe,
meanwhile, was off in Cuba last week, lauding what he calls his "fast track"
land policy and hobnobbing
with his old pal Fidel Castro -- another septuagenarian believer in the
power of rationing.
By phone from Zimbabwe last week, a relief worker described to me the scene
in village after village,
saying that though people still look healthy, they are now running through
their last resources. They are
selling off the cow or the goats, boiling roots for food, and waiting in
mile-long queues at local offices of
the state's Grain Marketing Board.
The relief worker described an old Zimbabwean woman who came with hundreds
of others to a foreign
aid center near a village school. She said that almost everyone she knows
is getting desperate: "We beg,
we borrow, we look for food." In hunger, if nothing else, she added, "we
are all equal now.'
Ms. Rosett is a member of The Wall Street Journal's editorial board.
Updated July 26, 2002
122 As Time Goes By, Argentina's Problems Deepen
By MARY ANASTASIA O'GRADY
The U.S. stock slaughter this summer has been a
beautiful, lively example of how markets clear:
quickly, ruthlessly, sans government. By the time
new legislation can be implemented, the falling knife
will have already sliced through the price/earnings
bubble, skinned scores of corporate bigwigs and
pried open the books. Paper wealth will be wiped
out, innocents will be harmed, critics will call it
savage. But markets will have imposed renewed
discipline on all players.
The only thing left to worry about are the
unintended consequences of more regulation, but
even the newly-enacted Sarbanes bill was relatively
moderate compared to what might have happened.
Before the madness of crowds and the creativity of
crooks bring new excesses, Americans are likely to
enjoy a clean stretch of rationality, motivated by
competition for capital and returns.
Compare this creative destruction to the protracted
agony of the Argentine crisis. More than seven
months after the government announced a freeze on
bank accounts, a confiscation of dollar deposits,
sovereign debt default, and a painful devaluation,
Argentine markets cannot clear. The reason is
simple. The difference between a fast, sharp
rationalization of prices in the U.S. market and the
paralysis that is Argentina is the ability to assign
costs, rapidly and efficiently, in the midst of a
debacle.
In a market, adjustment costs drop like a guillotine
across the board, swiftly, impersonally and
automatically, penalizing to varying degrees
shareholders, creditors, employees, retirees and
management. In the case of Argentina's
state-induced, state-managed crisis, the costs have
to be assigned through the political process and
politicians must bear the responsibility for imposing them.
The incentives to do otherwise are powerful. Consider the advice given
in a book called "Ricordi" by the
16th century statesman Francesco Guicciardini, a friend and contemporary
of Machiavelli: "When you
are threatened with anything that displeases you, try to put it off as
long as you can. For we see every
hour that time brings events which may free you from your troubles. And
this is the meaning of the
proverb, which the wise are said to have always on their lips, that we
are to use the benefits of time."
Sound political advice to be sure but not very productive in a modern day
financial crisis. "Time is the
enemy here," says Adam Lerrick, director of the Gailliot Center at Carnegie
Mellon, "The longer the
delay, the greater the costs."
Not surprisingly though, Argentine politicians seem to have adopted the
Guicciardini wisdom, deferring,
dodging and when need be, backtracking on every decision necessary to assign
costs and let markets
clear. A popular and special interest backlash against the political class
has undoubtedly been a major
factor in the Argentine policy freeze-up. But there is another motive too,
the expectation that the
International Monetary Fund "may free [them] from their troubles."
There can hardly be a thinking person on planet Earth who doesn't, by now,
understand that this is a
domestic political problem that must be sorted out as such. But that hasn't
stopped the IMF
bureaucracy, perpetually in search of purpose, from offering comfort and
advice to Buenos Aires,
keeping the hopes of local politicians alive. This week the IMF sent four
masterminds of money --
Canada's John Crow, Germany's Hans Tietmeyer, Spain's Luis Rojo and the
head of the Bank for
International Settlements Andrew Crockett -- to sit down with Argentina's
central bankers to try to
"help" with the problem of how to lift the freeze on banks, without a run
or hyperinflation.
Predictably, the "four wise men" as they have been dubbed in Argentina,
were unable to solve the
problem. Yesterday, Economy Minister Roberto Lavagna announced that the
freeze on the withdrawal
of bank deposits would remain through the end of the year.
"What the government has been doing for these many months is trying to
figure out who is going to pay
for the mismanagement," says Mr. Lerrick. In the early days of the sovereign
debt default, he points out,
it tried to put the squeeze on foreigners. Foreign oil companies were tagged
with confiscatory export tax
rates, utility concessions held by foreigners were drastically altered
and foreign banks were blamed for
empty vaults. The Argentine congress cheered when the government announced
that it would default on
its foreign debt. The World Bank and the IMF -- read G-7 taxpayers -- were
expected to come up with
another $20 billion.
After warnings from Spain and the U.S., threats against the oil companies
were called off and IMF funds
didn't materialize, but a lot of the rest remained. Still, nailing the
foreigners proved insufficient to make the
government solvent and liquefy the banks. The government has since tried
twice to make the public at
large pay by forcing depositors to take government bonds in lieu of liquid
bank deposits. Both times it
met with such resistance that the plan had to be pulled. A voluntary swap
of deposits-for-bonds
completed last week was pretty much a bust as fewer than 15% of total deposits
were exchanged.
Pablo Guidotti, director of the school of government at Universidad Torcuato
Di Tella in Buenos Aires,
was once a dollarization advocate. But now he says "it's hard to think
about a monetary anchor without
having solved the debt problem and the banking problem." And that, he says,
has grown increasingly
difficult as the government has yielded to political pressure.
There is a way to clear Argentine markets. It requires political risk,
private-sector involvement and an
absence of the IMF. Rather than forcing depositors to accept long-term
government debt -- an IMF
recommendation -- many market advocates prefer a solution that would have
banks settle with their
depositors directly and without government intervention. Says Allan Meltzer,
who chaired a special
congressional commission on international financial institutions in 2000,
the only role the IMF might have
is to provide a floor price below the current illiquid market for foreign-held
debt, so as to allow those
creditors to clear their books. The rest, he says, is a domestic political
matter.
"This is a transition government that has not been willing to accept the
political costs of taking decisions,"
says Martin Krause, dean of the graduate business school Eseade in Buenos
Aires. "That means the next
government will have to be a transition." And that means the suffering
will only drag on.
Updated July 26, 2002
AGRICULTURE AND DEVELOPMENT
A longstanding question in world politics is how to help
the
Third World develop. According to observers, growth
in
agricultural productivity is central to industrialization
and
development.
Industrialization is a key component of development.
However,
industrial development takes time to occur. A country
that began
to industrialize in 1950 won't achieve true industrial
stability
until roughly 100 years later. To reach economic
stability,
agricultural productivity is crucial.
Examining data for the period 1960 to 1990 for 62 countries
defined as developing by the Food and Agriculture Organization
(FAO) of the United Nations, researchers demonstrate
the
importance of agricultural productivity. The article
finds that:
o On average, the contribution
of agricultural growth
toward GDP growth
is considerable -- 54 percent.
o Increases in agricultural
productivity allow for workers
to move into other
areas of the economy, where the output
per worker is substantially
higher.
o For example, shifting a worker
from agriculture to non-
agriculture in 1960
would have tripled his output in Korea
or Malaysia and
would have increased it by a factor of 9
in Thailand.
Researchers found the sector shifts caused by increased
agriculture productivity represents 29 percent of GDP
growth. It
also explains the poverty of many nations - low agricultural
productivity.
This has clear implications for the Western world's agricultural
policy, observers say. By subsidizing their already
superior
farming system, Western governments are preventing the
Third
World a chance to lift itself out of poverty.
Source: Douglas Gollin, Stephen Parente, and Richard
Rogerson.
"The Role of Agriculture in Development," American Economic
Review. Volume 92, Number 2. May 2002.
For more on Third World Economic Growth
http://www.ncpa.org/iss/int