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

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
 



Wsj 7-27-01
ENVIRONMENTAL QUANDARY: MALARIA OR DDT?

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

-------------------------------------------------------------------
BY GEORGE! is a daily market intelligence e-letter written by
Neil George, Jr. and published by KCI Communications.  As a member
of the KCI family, you are entitled to a complimentary subscription
to BY GEORGE! If you feel you have received this publication in
error or no longer wish to receive issues, simply click on the
unsubscribe link below.  You will be removed from the BY GEORGE!
subscription list immediately.
 

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