Readings/Sources PART O:   Economies in Transition Econ 385  Fall, 2005
Article marked by "*" are strongly recommeded reading.

1. Gasoline prices Walter E. Williams (archive)
2. Price gouging' in Florida Thomas Sowell (archive)
3. . Price Gouging Saves Lives  by David M. Brown
*4. The Property Rights Test  By EDWIN MEESE III WSJ August 31, 2005; Page A8
5. U.S. Economy's Dour Optimist
6. Four Easy Pieces  What do lumber, shrimp, steel and cement have in common?
*7. THE BROKEN COMPASS
*8. The World Bank's “Doing Business” report  Sep 15th 2005  From The Economist print edition
9. Stuck in the Middle Ages
10.Of Toilet Paper, Escalators and Hope
11. Hurricane economics Alan Reynolds (archive)
12. THE SPAM DIVIDE
*13. "FAILED STATES" FAIL BECAUSE OF TOO MUCH GOVERNMENT POWER
14. Estonia and Ireland are role models.
*15. Good Intentions, Bad Ideas By AMIT VARMA WSJ September 15, 2005
16. Don’t blame the savers Sep 16th 2005 From The Economist Global Agenda
*17. A Paradox of Interest By R. GLENN HUBBARD WSJJune 23, 2005; Page A12
*18. Running on Empty?  By DAVID MALPASS   Household savings isn't shrinking -- it's growing. WSJ March 29, 2005; Page A16
19. Guess Who's Coming to Dinar  By AMIR TAHERI WSJ September 14, 2005; Page A20
*20. Flat tax economies grow twice as fast.
21. Fun for Politicians, Legal Nightmare For Gasoline Retailers
*22. WATER FOR SALE
23. Low tax rates attract highly skilled workers and entrepreneurs.
*24. Helping the World's Poor WSJ September 13, 2005; Page A16
25. Competition Erodes Mexican Industrial Output
26. Japan Bets on Reform
27. ARE SCIENTIFIC PAPERS RELIABLE?
28. A TIDAL WAVE OF TARIFFS
29. No Tyranny of the Tiny Minority By Charles Finny   Published    09/20/2005 EW Zealand
30. Mixed tax reform news. The flat tax appears closer to reality in Poland
31. World War II's Do-Good OffspringAre Flagging George Malleon
32. LET FREE TRADE REIGN
33. The Case for Cutting Indonesia's Fuel Subsidy  How it hurts the poor.
34. U.S. CONSULATES RAISE EXPORTS
35. China Vows to Maintain Monetary Policy
36. THREE'S A CHARM
*37. The moral case for tax havens.
38. A Bumpy Passage to Indian Reform WSJ By EMILY PARKER
39. The world economy is still growing rapidly, but is also out of kilter
40. The Caribbean Living and dying on history and artificial economic sweeteners Sep 22nd 2005 | PORT OF SPAINFrom The Economist print edition
41. Mexico's sugar industry Sep 22nd 2005
*42. The Politics of Population Control By Christopher Lingle   Published    09/21/2005
43. Home Truths in Hong Kong
44. Unlikely revolutionaries Sep 22nd 2005 From The Economist print edition The World Bank cannot go where its research is leading it



 

1. Gasoline prices Walter E. Williams (archive)

August 31, 2005 | Print | Recommend to a friend

Nationally, the average per gallon price for regular gasoline is $2.50.

Are gasoline prices high? That's not the best way to ask that question. It's akin to asking, "Is Williams tall?" The average height of U.S. women is 5'4", and for men, it's 5'10". Being 6'4", I'd be tall relative to the general U.S. population. But put me on a basketball court, next to the average NBA basketball player, and I wouldn't be tall; I'd be short. So when we ask whether a price is high or low, we have to ask relative to what.

 In 1950, a gallon of regular gasoline sold for about 30 cents; today, it's $2.50. Are today's gasoline prices high compared to 1950? Before answering that question, we have to take into account inflation that has occurred since 1950. Using my trusty inflation calculator (www.westegg.com/inflation), what cost 30 cents in 1950 costs $2.33 in 2005. In real terms, that means gasoline prices today are only slightly higher, about 8 percent, than they were in 1950. Up until the recent spike, gasoline prices have been considerably lower than 1950 prices.

 Some Americans are demanding that the government do something about gasoline prices. Let's think back to 1979 when the government did do something. The Carter administration instituted price controls. What did we see? We saw long gasoline lines, and that's if the gas station hadn't run out of gas. It's estimated that Americans used about 150,000 barrels of oil per day idling their cars while waiting in line. In an effort to deal with long lines, the Carter administration introduced the harebrained scheme of odd and even days, whereby a motorist whose license tag started with an odd number could fill up on odd-numbered days, and those with an even number on even-numbered days.

 With the recent spike in gas prices, the government has chosen not to pursue stupid policies of the past. As a result, we haven't seen shortages. We haven't seen long lines. We haven't seen gasoline station fights and riots. Why? Because price has been allowed to perform its valuable function -- that of equating demand with supply.

 Our true supply problem is of our own doing. Large quantities of oil lie below the 20 million acre Arctic National Wildlife Refuge (ANWR). The amount of land proposed for oil drilling is less than 2,000 acres, less than one-half of one percent of ANWR. The U.S. Geological Survey estimates there are about 10 billion barrels of recoverable oil in ANWR. But environmentalists' hold on Congress has prevented us from drilling for it. They've also had success in restricting drilling in the Gulf of Mexico and off the shore of California. Another part of our energy problem has to do with refining capacity. Again, because of environmentalists' successful efforts, it's been 30 years since we've built a new oil refinery.

 Few people realize that the U.S. is also a major oil-producing country. After Saudi Arabia, producing 10.4 million barrels a day, then Russia with 9.4 million barrels, the U.S. with 8.7 million barrels a day is the third-largest producer of oil. But we could produce more. Why aren't we? Producers have a variety of techniques to win monopoly power and higher profits that come with that power. What's a way for OPEC to gain more power? I have a hypothesis, for which I have no evidence, but it ought to be tested. If I were an OPEC big cheese, I'd easily conclude that I could restrict output and charge higher oil prices if somehow U.S. oil drilling were restricted. I'd see U.S. environmental groups as allies, and I would make "charitable" contributions to assist their efforts to reduce U.S. output. Again, I have no evidence, but it's a hypothesis worth examination.
 

2. Price gouging' in Florida Thomas Sowell (archive)

September 14, 2004 | Print | Send

 In the wake of the hurricanes in Florida, the state's attorney general has received thousands of complaints of "price gouging" by stores, hotels, and others charging far higher prices than usual during this emergency.

 "Price gouging" is one of those emotionally powerful but economically meaningless expressions that most economists pay no attention to, because it seems too confused to bother with. But a distinguished economist named Joseph Schumpeter once pointed out that it is a mistake to dismiss some ideas as too silly to discuss, because that only allows fallacies to flourish -- and their consequences can be very serious.

 Charges of "price gouging" usually arise when prices are significantly higher than what people have been used to. Florida's laws in fact make it illegal to charge much more during an emergency than the average price over some previous 30-day period.

 This raises questions that go to the heart of economics: What are prices for? What role do they play in the economy?

 Prices are not just arbitrary numbers plucked out of the air. Nor are the price levels that you happen to be used to any more special or "fair" than other prices that are higher or lower.

 What do prices do? They not only allow sellers to recover their costs, they force buyers to restrict how much they demand. More generally, prices cause goods and the resources that produce goods to flow in one direction through the economy rather than in a different direction.

 How do "price gouging" and laws against it fit into this?

 When either supply or demand changes, prices change. When the law prevents this, as with Florida's anti-price-gouging laws, that reduces the flow of resources to where they would be most in demand. At the same time, price control reduces the need for the consumer to limit his demands on existing goods and resources.

 None of this is peculiar to Florida. For centuries, in countries around the world, laws limiting how high prices are allowed to go has led to consumers demanding more than was being supplied, while suppliers supplied less. Thus rent control has consistently led to housing shortages and price controls on food have led to hunger and even starvation.

 Among the complaints in Florida is that hotels have raised their prices. One hotel whose rooms normally cost $40 a night now charged $109 a night and another hotel whose rooms likewise normally cost $40 a night now charged $160 a night.

 Those who are long on indignation and short on economics may say that these hotels were now "charging all that the traffic will bear." But they were probably charging all that the traffic would bear when such hotels were charging $40 a night.

 The real question is: Why will the traffic bear more now? Obviously because supply and demand have both changed. Since both homes and hotels have been damaged or destroyed by the hurricanes, there are now more people seeking more rooms from fewer hotels.

 What if prices were frozen where they were before all this happened?

 Those who got to the hotel first would fill up the rooms and those who got there later would be out of luck -- and perhaps out of doors or out of the community. At higher prices, a family that might have rented one room for the parents and another for the children will now double up in just one room because of the "exorbitant" prices. That leaves another room for someone else.

 Someone whose home was damaged, but not destroyed, may decide to stay home and make do in less than ideal conditions, rather than pay the higher prices at the local hotel. That too will leave another room for someone whose home was damaged worse or destroyed.

 In short, the new prices make as much economic sense under the new conditions as the old prices made under the old conditions.

 It is essentially the same story when stores are selling ice, plywood, gasoline, or other things for prices that reflect today's supply and demand, rather than yesterday's supply and demand. Price controls will not cause new supplies to be rushed in nearly as fast as higher prices will.

 None of this is rocket science. But Justice Oliver Wendell Holmes said, "we need education in the obvious more than investigation of the obscure."

3. . Price Gouging Saves Lives  by David M. Brown Tuesday, September 07, 2004
http://www.mises.org/fullstory.aspx?control=1593

[Posted August 17, 2004]

In the evening before Hurricane Charley hit central Florida, news anchors Bob Opsahl and Martie Salt of Orlando's Channel 9 complained that we "sure don't need" vendors to take advantage of the coming storm by raising their prices for urgently needed emergency supplies.

In the days since the hurricane hit, many other reporters and public officials have voiced similar sentiments. There are laws against raising prices during a natural disaster. It's called "price gouging." The state's attorney general has assured Floridians that he's going to crack down on such. There's even a hotline you can call if you notice a store charging a higher price for an urgently needed good than you paid before demand for the good suddenly went through the roof. The penalties are stiff: up to $25,000 per day for multiple violations.

But offering goods for sale is per se "taking advantage" of customers. Customers also "take advantage" of sellers. Both sides gain from the trade. In an unhampered market, the self-interest of vendors who supply urgently needed goods meshes beautifully with the self-interest of customers who urgently need these goods. In a market, we have price mechanisms to ensure that when there is any dramatic change in the supply of a good or the demand for a good, economic actors can respond accordingly, taking into account the new information and incentives. If that's rapacity, bring on the rapacity.

Prices are how scarce goods get allocated in markets in accordance with actual conditions. When demand increases, prices go up, all other things being equal. It's not immoral. If orange groves are frozen over (or devastated by Hurricane Charley), leading to fewer oranges going to market, the price of oranges on the market is going to go up as a result of the lower supply. And if demand for a good suddenly lapses or supply of that good suddenly expands, prices will go down. Should lower prices be illegal too?

In the same newscast, Salt and Opsahl reported that a local gas station had run out of gas and that the owner was hoping to receive more gas by midnight. Other central Florida stations have also run out of gas, especially in the days since the hurricane smacked our area. Power outages persist for many homes and businesses, and roads are blocked by trees, power lines, and chunks of roofs, so it is hard to obtain new supplies. Yet it's illegal for sellers of foodstuffs, water, ice and gas to respond to the shortages and difficulty of restocking by raising their prices.

If we expect customers to be able to get what they need in an emergency, when demand zooms vendors must be allowed and encouraged to increase their prices. Supplies are then more likely to be sustained, and the people who most urgently need a particular good will more likely be able to get it. That is especially important during an emergency. Price gouging saves lives.

What would happen if prices were allowed to go up in defiance of the government?

Well, let's consider ice. Before Charley hit, few in central Florida had stocked up on ice. It had looked like the storm was going to skirt our part of the state; on the day of landfall, however, it veered eastward, thwarting all the meteorological predictions. After Charley cut his swath through central Florida, hundreds of thousands of central Florida residents were unexpectedly deprived of electrical power and therefore of refrigeration. Hence the huge increase in demand for ice.

Let us postulate that a small Orlando drug store has ten bags of ice in stock that, prior to the storm, it had been selling for $4.39 a bag. Of this stock it could normally expect to sell one or two bags a day. In the wake of Hurricane Charley, however, ten local residents show up at the store over the course of a day to buy ice. Most want to buy more than one bag.

So what happens? If the price is kept at $4.39 a bag because the drugstore owner fears the wrath of State Attorney General Charlie Crist and the finger wagging of local news anchors, the first five people who want to buy ice might obtain the entire stock. The first person buys one bag, the second person buys four bags, the third buys two bags, the fourth buys two bags, and the fifth buys one bag. The last five people get no ice. Yet one or more of the last five applicants may need the ice more desperately than any of the first five.

But suppose the store owner is operating in an unhampered market. Realizing that many more people than usual will now demand ice, and also realizing that with supply lines temporarily severed it will be difficult or impossible to bring in new supplies of ice for at least several days, he resorts to the expedient of raising the price to, say, $15.39 a bag.

Now customers will act more economically with respect to the available supply. Now, the person who has $60 in his wallet, and who had been willing to pay $17 to buy four bags of ice, may be willing to pay for only one or two bags of ice (because he needs the balance of his ready cash for other immediate needs). Some of the persons seeking ice may decide that they have a large enough reserve of canned food in their homes that they don't need to worry about preserving the one pound of ground beef in their freezer. They may forgo the purchase of ice altogether, even if they can "afford" it in the sense that they have twenty-dollar bills in their wallets. Meanwhile, the stragglers who in the first scenario lacked any opportunity to purchase ice will now be able to.

Note that even if the drug store owner guesses wrong about what the price of his ice should be, under this scenario vendors throughout central Florida would all be competing to find the right price to meet demand and maximize their profits. Thus, if the tenth person who shows up at the drugstore desperately needs ice and barely misses his chance to buy ice at the drugstore in our example, he still has a much better chance to obtain ice down the street at some other place that has a small reserve of ice.

Indeed, under this second scenario—the market scenario—vendors are scrambling to make ice available and to advertise that availability by whatever means available to them given the lack of power. Vendors who would have stayed home until power were generally restored might now go to heroic lengths to keep their stores open and make their surviving stocks available to consumers.

The "problem" of "price gouging" will not be cured by imposing rationing along with price controls, either. Rationing of price-controlled ice would still maintain an artificially low price for ice, so the day after the storm hits there would still be no economic incentive for ice vendors to scramble to keep ice available given limited supplies that cannot be immediately replenished. And while it is true that rationing might prevent the person casually purchasing four bags of ice from obtaining all four of those bags (at least from one store with a particularly diligent clerk), the rationing would also prevent the person who desperately needs four bags of ice from getting it.

Nobody knows the local circumstances and needs of buyers and sellers better than individual buyers and sellers themselves. When allowed to respond to real demand and real supply, prices and profits communicate the information and incentives that people require to meet their needs economically given all the relevant circumstances. There is no substitute for the market. And we should not be surprised that command-and-control intervention in the market cannot duplicate what economic actors accomplish on their own if allowed to act in accordance with their own self-interest and knowledge of their own case.

But we know all this already. We know that people lined up for gas in very long lines during the 1970s because the whole country was being treated as if it had been hit by a hurricane that was never going to go away. We also know that as soon as the price controls on gas were lifted, the long lines disappeared, as if a switch had been thrown restoring power to the whole economy.

One item in very short supply among the finger-wagging newscasters and public officials here in central Florida is an understanding of elementary economics. Maybe FEMA can fly in a few crates of Henry Hazlitt's Economics in One Lesson and drop them on Bob and Martie and all the other newscasters and public officials. This could be followed up with a boatload of George Reisman's Capitalism: A Treatise on Economics, which offers a wonderfully cogent and extensive explanation of prices and the effects of interference with prices. Some vintage Mises and Hayek would also be nice. But at least the Hazlitt.

"Price gouging" is nothing more than charging what the market will bear. If that's immoral, then all market adjustment to changing circumstances is "immoral," and markets per se are immoral. But that is not the case. And I don't think a store owner who makes money by satisfying the urgent needs of his customers is immoral either. It is called making a living. And, in the wake of Hurricane Charley, surviving.

---
4. The Property Rights Test  By EDWIN MEESE III WSJ August 31, 2005; Page A8

Despite current hype from Senate Democrats, the landmark cases of the next five years probably won't concern civil rights, abortion or other issues that have liberals so worked up. Current court vote-counts leave little room for major shifts, no matter what the judicial philosophy of Justice Sandra Day O'Connor's replacement. Instead, I believe some of the biggest cases will deal with property rights.

A confirmed Justice John Roberts may well find waiting on his desk one property-rights case potentially as momentous as the unfortunately decided Kelo v. City of New London. In Kelo the court gave government the right to take property from one private citizen or company and give it to another. In this anticipated case -- The Stearns Company, Ltd. v. United States -- the lower courts have overturned centuries of precedent, demonstrating that, when it comes to protecting private property, in Ronald Reagan's favorite maxim, government isn't the answer; it's the problem.

Stearns concerns one of the most ancient principles in property law, that ownership includes an absolute right of access (what the law calls an "easement") and lawful use. In 1937, a Kentucky family -- owners of the Stearns company -- sold a tract of land, now part of the Daniel Boone National Forest, to the federal government. They kept the right, subject to environmental restraints, to mine the coal underneath, and the easement.

In the late 1970s, Congress banned any mining in national forests, with two exceptions: where property rights already existed and, if they did not exist, where the secretary of the interior said mines could operate anyway. When regulations were issued, technicalities excluded Stearns from claiming so-called "valid existing [property] rights." The bureaucrats told the company to ask for permission. To protect its property rights, the company sued.

The case took two decades going through the courts. Three years ago the Court of Federal Claims ruled that the government's actions constituted a taking of private property for public purposes -- and the Constitution required the property owner to be compensated. The court said that, even if permission were granted, an Interior "sign-off" was no property right. "The fact that an act of governmental grace or benefit may have returned. . . the plaintiff's right to mine does not alter the denial of [property] rights." Last year, a three-judge panel of the Court of Appeals for the Federal Circuit in Washington, D.C. reversed the Court of Claims, a decision the full Federal Circuit Court upheld in April. In the next few weeks, the Supreme Court must decide whether or not to review that decision.

Few constitutional protections are less ambiguous than the requirement that private property must not be taken for public use "without just compensation." It is rooted in common law and is almost as ancient as common law itself. To guard against abuse, the Framers made these principles explicit, matching the government's blunt power to compel sale of private property with an equally blunt obligation to pay for it. When another branch attempts to shirk this duty, the Constitution requires the judiciary to defend property owners. If the Appeals Court's decision stands, for the first time in American history the courts will have created a giant detour around this core constitutional requirement.

For property owners, particularly owners of rights on government land, this detour has very practical consequences. Mineral rights command a market value, because of the unqualified right to access them freely, without the consent of the surface owner. Without this right, the mineral rights are worthless, and, as the law has long recognized, being able to petition a government agency for permission to access them is all but worthless. Knowing a legal route had been opened for depressing property values and acquiring land for virtually nothing may be why one Interior Department official called the Appeals panel's ruling "probably the most significant 'taking' decision ever to come out of Federal Court."

There are implications for other constitutional rights, as well. Imagine if we said newspapers were free to operate -- as long as they asked the government's permission to access their offices and printing plants from the public roads and sidewalks. Does anyone doubt that assurances that permission would be routinely granted could quiet the indignation and protest of journalists everywhere?

No one expects most papers to rise to the defense of property owners. But, now that this case has reached a policy level, why is the Department of the Interior fighting the original Court of Claims decision? Protecting economic liberty and property rights should be fundamental for this administration.

The understanding of rightful "public use" may change over time. Yet the obligation of compensation does not, and justice requires that government pay for what it takes. If the Supreme Court recognizes the profound issues at stake in Stearns and accepts it for review, Justice John Roberts and his brethren will have an opportunity in their next term to confirm one of the bedrock rights of our entire legal system. That would be a landmark decision.

Mr. Meese was U.S. attorney general from 1985 to 1988.

5. U.S. Economy's Dour Optimist

By ROBERT J. SAMUELSON
The Washington Post
September 2, 2005
 Free markets and low-inflation are Greenspan's legacy. Commenting on Alan Greenspan's 18-year career at the Federal Reserve, Robert Samuelson properly credits Greenspan for his commitment to free market policies. He also notes that Greenspan understands that the main job of a central banker is to keep inflation as low as possible to eliminate distortions:
JACKSON HOLE, Wyoming -- He is the dour optimist. Alan Greenspan, completing 18 years as chairman of the U.S. Federal Reserve Board and the world's most influential economic figure, flew here last week for a conference to celebrate and criticize his record. There wasn't much criticism.

Economists Alan Blinder (a former Fed vice chairman) and Ricardo Reis of Princeton concluded that Mr. Greenspan has a "legitimate claim to being the greatest central banker who ever lived." Economist Allan Meltzer of Carnegie Mellon University, author of an exhaustive history of the Fed, cited these figures: from 1987 -- when Mr. Greenspan arrived -- to 2004, the U.S. economy added 27 million jobs and raised per capita consumption by 44%. Over this period, there have been two brief recessions, those of 1990-91 and 2001, lasting a total of 16 months.

Of course, Mr. Greenspan didn't single-handedly expand the economy. He regards the free enterprise system -- its reliance on risk-taking, private markets and individual exertion -- as the bedrock of American prosperity. This faith feeds his optimism. And there is a second sense in which Mr. Greenspan has also disclaimed credit for good economic performance. From 1979 to 1987, inflation dropped from to 4.4% from 13.3% -- the work mainly of Mr. Greenspan's predecessor, Paul Volcker, backed by Reagan. Because high inflation is wildly destabilizing (four recessions from 1969 to 1982), this decline automatically fostered improvement.

Still, there were ample opportunities for deeper, longer slumps. Consider. Just after Mr. Greenspan's appointment, the stock market plunged 20% in one day. During the 1990-91 recession, the U.S. banking industry suffered more than at any time since the Great Depression; from 1989 to 1992, about 500 banks went out of business, recalls economist David Hale of Hale Advisers. The 1997-98 Asian financial crisis was arguably the worst threat to the global economy since World War II. One side effect -- the near bankruptcy of hedge fund Long-Term Capital Management -- caused many frightened bond buyers to stop investing. And then there was the "popping" of the stock market bubble in 2000; shareholders lost $8 trillion in paper wealth.

Yet, no potential calamity became an actual calamity -- and for this, Mr. Greenspan deserves much credit. His style is paradoxical. He rigidly embraces some principles and otherwise is hugely flexible. One principle is the significance of price stability: a condition he defines as keeping inflation so low (generally 1% to 2%) that it doesn't affect consumer and business decision-making. Price stability matters because (again) high inflation leads to stop-go cycles that weaken employment, growth and confidence. Despite the present surge in oil prices, which is not a generalized inflation, Mr. Greenspan virtually achieved his goal. From 1995 to 2004, inflation averaged 2.4%.

Mr. Greenspan is wedded to neither easy nor tight money. To pre-empt higher inflation, the Fed raised interest rates sharply in 1994. But after spotting an improvement in productivity in late 1995, he advocated lower rates even when other members of the Fed wanted them raised. (Note: higher productivity, aka efficiency, helps firms dampen price increases.)

Mr. Greenspan calls his approach "risk management." The Fed should identify the economy's greatest vulnerabilities and try to counteract them. This is much harder than it sounds, because incomplete and conflicting information often obscures those vulnerabilities. Judgments are required, and Mr. Greenspan's have been remarkably good. Still, many risks remain: oil prices; the housing boom; the huge U.S. overseas trade deficits; the budget pressures of an aging society; Americans' shrunken personal savings rate; rapid changes in the global economy.

The trouble is that the Fed's powers are modest. It sets only the overnight fed funds interest rate, which indirectly influences other rates on bonds and mortgages and, through them, the broader economy. But Mr. Greenspan has generally made the most of the limited tools and, by doing so, has inspired a broader confidence. His term ends next January, and his success leaves an ironic legacy: the illusion that the Fed has more control than it actually has

6. Four Easy Pieces  What do lumber, shrimp, steel and cement have in common?
 

September 9, 2005; Page A16

If the feds really want to help the economy post-Katrina, here are four words: lumber, cement, shrimp and steel. They all have prices higher than necessary because of U.S. anti-dumping trade law.

Start with lumber and cement, which will soon be in great demand to rebuild the tens of thousands of damaged homes. Prices are sure to rise as reconstruction begins, but thanks to U.S. tariffs as high as 27% on Canadian lumber, American home buyers already pay an extra $1,000 on average for their shelter. The same goes for U.S. duties on Mexican cement, which have averaged 55% since 1990. Now would be an ideal time for Washington to declare a truce in these trade spats and reduce the price of rebuilding.

Then there's shrimp, an increasingly popular part of the American diet whose prices may well rise sharply in Katrina's wake. Louisiana shrimpers represent the bulk of the domestic industry and were all but wiped out by the hurricane. According to the Consuming Industries Trade Action Coalition, shrimp as a share of total food consumption increased 45% among low-income families from 2000 to 2002. And while the U.S. shrimp industry employed 13,000 in 2002, shrimp-consuming industries employed 250,000.

So this is also a perfect time to review the anti-dumping duties the U.S. imposes on foreign shrimp. The U.S. International Trade Commission, which determines these things, is already scheduled to meet this month to consider relief for India and Thai shrimp after the December 2004 tsunami. But the ITC ought to do even more post-Katrina for American consumers and waive duties on all foreign shrimp.

And while we're at it, consider specialty steel, which depends on hydrogen gas produced in the Gulf. Steel Dynamics, a mini-mill in Butler, Indiana, has already said it will stop making cold-rolled, galvanized and painted sheet products until its hydrogen gas supplies are restored. Steel prices are rising fast in anticipation of tight supplies, which means higher prices for American companies making cars, appliances and many other products. So how about lifting anti-dumping tariffs on imported steel to ease any domestic shortages and help U.S. manufacturers trying to stay competitive?

The Beltway impulse is to assume that the only way to respond to a natural disaster is to spend more money. But these four easy trade pieces would help everyone without taxpayers having to spend a dime.
 

7. THE BROKEN COMPASS
------------------------------------------------------------------------

The official poverty rate not only fails to calculate trends in
impoverishment with any precision, it even gets the direction wrong,
says Nicholas Eberstadt, writing in the New York Times.

According to the latest poverty rate estimates by the Census
Bureau, the percentage of Americans living in poverty was higher in
2004 (12.7 percent) than in 1974 (11.2 percent). Eberstadt explains
that even the most basic facts on poverty alleviation rebut the
proposition that material circumstances in America are harsher for the
vulnerable today than three decades ago. Consider:
   o    Per capita income adjusted for inflation is over 60 percent
        higher today than in 1974, the unemployment rate is
        lower and the percentage of adults with high paying
        jobs is distinctly higher.
   o    In 1972-73, 42 percent of the bottom fifth of American
        households owned a car compared to almost 75 percent in
        2003.
   o    By 2001, 6 percent of poverty households lived in crowded
        homes (more than one person per room) -- down from 26
        percent in 1970; by 2003, 45 percent of poverty
        households had central air-conditioning compared to 29 percent
        of the non-poor in 1980.
Eberstadt calls the poverty rate a broken compass, out of step
with these readings about deprivation in modern America because it was
designed to measure the wrong thing. A better gauge of a household's
material deprivation is not what it earns, but what it spends:
   o    According to the Labor Department, the average reported
        income for the bottom fifth of households was $8,201,
        while reported outlays were $18,492.
   o    In the early 1970s, the poorest fifth's reported spending
        exceeded income by 40 percent.
Source: Nicholas Eberstadt, "Broken Yardstick," New York Times,
September 9, 2005.
For text (subscription required):
http://www.nytimes.com/2005/09/09/opinion/09eberstadt.html
For more on Wealth and Poverty:
http://www.ncpa.org/iss/eco/

Broken Yardstick

By NICHOLAS EBERSTADT New York Times Published: September 9, 2005

Washington

THE most widely quoted federal statistic on deprivation and need in modern America is the "poverty rate" - a measure tracking households with annual incomes below a "poverty threshold" established at the beginning of the Johnson administration's "war on poverty" in the 1960's and adjusted over time for inflation. According to the latest poverty rate estimates - released by the Census Bureau on Aug. 30 - the total percentage of Americans living in poverty was higher in 2004 (12.7 percent) than in 1974 (11.2 percent). According to that same report, poverty rates for American families and children were likewise higher last year than three decades earlier.

On its face, this momentous story should have shocked the nation. After all, it suggested (among other alarming things) that Washington's long and expensive campaign to eliminate domestic poverty has been a colossal failure. So why did that poverty rate report end up mostly buried deep inside daily papers?

Maybe because many news editors, like policymakers in Washington, know the dirty little secret about the poverty rate: it just isn't any good. Truth be told, the official poverty rate not only fails to calculate trends in impoverishment with any precision, it even gets the direction wrong.

The profound flaws in our officially calculated poverty rate are revealed by its very intimation that the poverty situation in America was "better" in 1974 than it is today. Those of us of a certain age remember the year 1974 - in all its recession-plagued, "stagflation"-burdened glory. But even the most basic facts bearing on poverty alleviation confute the proposition that material circumstances in America are harsher for the vulnerable today than three decades ago. Per capita income adjusted for inflation is over 60 percent higher today than in 1974. The unemployment rate is lower, and the percentage of adults with paying jobs is distinctly higher. Thirty years ago, the proportion of adults without a high school diploma was more than twice as high as today (39 percent versus 16 percent). And antipoverty spending is vastly higher today than in 1974, even after inflation adjustments.

In the face of such evidence, what do you call an indicator that stubbornly insists that the percentage of Americans below a fixed poverty threshold has increased? How about "a broken compass?"

The soundings from the poverty rate are further belied by information on actual living standards for low-income Americans. In 1972-73, for example, just 42 percent of the bottom fifth of American households owned a car; in 2003, almost three-quarters of "poverty households" had one. By 2001, only 6 percent of "poverty households" lived in "crowded" homes (more than one person per room) - down from 26 percent in 1970. By 2003, the fraction of poverty households with central air-conditioning (45 percent) was much higher than the 1980 level for the non-poor (29 percent).

Besides these living trends, there are what we might call the "dying trends": that is to say, America's health and mortality patterns. All strata of America - including the disadvantaged - are markedly healthier today than three decades ago. Though the officially calculated poverty rate for children was higher in 2004 than 1974 (17.8 percent versus 15.4 percent), the infant mortality rate - that most telling measure of wellbeing - fell by almost three-fifths over those same years, to 6.7 per 1,000 births from 16.7 per 1,000.

The poverty rate is out of step with all these other readings about deprivation in modern America because it was designed to measure the wrong thing. The poverty rate has always been derived from reported household income. (Exigency played a role here: at the start of the war on poverty 40 years ago, those income numbers were already available from the Census Bureau.) But a better gauge of a household's material deprivation is not what it earns, but what it spends. When we look at spending patterns, we immediately see a huge discrepancy between reported incomes and reported expenditures for low-income Americans.

In the Labor Department's latest Consumer Expenditure Survey (2003), the average reported income for the bottom fifth of households was $8,201, while reported outlays came to $18,492 - well over twice that amount. Over the past generation, that discrepancy widened significantly: back in the early 1970's, the poorest fifth's reported spending exceeded income by 40 percent.

Unfortunately, economists and statisticians have yet to come up with a clear explanation for this gap (which is not explained by in-kind payments like food stamps or other assistance). The divergence may be in part a measurement problem: partly a matter of income under-reporting, partly a consequence of increasing income variability in our more "globalized" economy. But whatever its cause, it does drive home the unreliability of using reported household income as a benchmark for poverty.

For now, however, we should recognize that America has already achieved far more success in the war against want than our sorry poverty rate can admit - and that we need much better guidance systems for the anti-poverty battles still ahead than this one, arguably the single worst measure in our government's statistical arsenal.

Nicholas Eberstadt, a researcher in political economy at the American Enterprise Institute, is the co-author of "Health and the Income Inequality Hypothesis."

8. The World Bank's “Doing Business” report  Sep 15th 2005  From The Economist print edition

Unblocking business

A helpful exercise in quantifying business regulations and their costs

SERBIA does not often come top of global economic league tables. But according to the World Bank's latest report on “Doing Business” around the globe, the country slashed more red tape last year than any of the 154 other countries in the study. This January, Serbian entrepreneurs needed 15 days and a deposit of €500 ($650) to start a business, compared with 51 days and €5,000 a year earlier. Taxes are now easier to pay, debts easier to collect and temporary workers easier to hire. As a result, start-ups have boomed: the number of registered firms leapt by 42% in 2004.

Starting a business is always a “leap of faith,” the report says. But that faith is needlessly tested by misguided regulations. In Laos, it takes 198 days to start a business, and not because the queue of budding entrepreneurs is terribly long. In Sierra Leone, a firm foolish enough to pay its taxes in full would have to part with 164% of its gross profits—ie, everything it earns and more. Those bold enough to import goods into Africa lose eight days on average to the continent's ill-equipped ports and nine to its poorly-surfaced roads; but they lose an epochal 43 days to paperwork and customs inspections.

In a free market, companies prosper by making better use of resources than their rivals. In the poorest parts of the world, where resources are scarce, this function is more vital than anywhere else. Unfortunately, African governments do more than any others to inhibit the spirit of competitive capitalism. The 16 countries of West Africa managed just two reforms between them last year. Mauritania was the only country in the world to raise its corporate income tax in 2004.

Debt and development

The World Bank and the IMF

Economics A-Z
 

Heavy strictures on business often fail even on their own terms. In poor countries, stringent building codes do not always produce safer habitation; higher tax rates do not always pull in more revenue; and the most tightly regulated labour markets do not afford the best protection to workers. Often, such burdens simply drive firms and workers into the shadow economy, beyond the reach of inspectors, trade unions and the taxman.

Furthermore, firms pushed underground are less productive: they cannot take advantage of economies of scale, because they must stay small to stay hidden. On average, the Bank reckons, formal companies produce 40% more than informal enterprises in the same industries.

Burkina Faso is one of the worst examples. The country's name means “land of honest and upright people”, but only 50,000 of its 12m population work in the formal sector. This is partly because the cost of firing someone is so high: equivalent to 57 weeks' wages. It is also needlessly difficult for Burkinabes to make an honest business out of their grey-market enterprises. The minimum capital a firm must deposit is nearly five times the country's average income per person. Burkina Faso's people may be upright, but its businesses stoop in the shadows.

*Davis Note: Statement below suggests a worthy Public Choice Paper

Thankfully, the Bank's indicators are helping to solve the problems they measure. “It is like sports,” says Simeon Djankov, an author of the report, “If you keep score, no one wants to lose.” In the past, the Bank has been coy about publishing its full league table, for fear of offending the governments at the bottom. But this year there is nowhere for the losers, such as Burkina Faso (ranked 154th), Egypt (141st) or even Italy (70th, below Kenya) to hide.

Mr Djankov reckons that 21 different reforms over the past two years were inspired by the “Doing Business” audit, which costs just $2m to carry out and disseminate. It is, in short, a promising way for the World Bank itself to do business.
 
 
 


 
 
 

9. Stuck in the Middle Ages

By TOINE MANDERS
September 16, 2005

Lately, the renaissance of economic patriotism in France has caused considerable turmoil in Europe. A list recently revealed by the French government identifies a number of strategic industrial sectors with companies that should be artificially sheltered against hostile takeover bids from foreign companies. In this manner, France uses a strategy to hide its industrial diamonds behind the counter rather than showing them in the window, where they might be exposed to full-blown competition.

Most people outside France, including the EU Competition Commissioner Neelie Kroes and Internal Market Commissioner Charlie McCreevy, have expressed their dissatisfaction about the measures. I agree with those who argue that the French are mistaken in their defiance of the challenges of competing in a global market place.

But then, how should the EU respond to a new economic reality characterized by fierce global competition with awakening giants such as China? My recent working visit to China was a true eye-opener to me. China is not only the world's factory outlet for low-cost products, but increasingly a contestant in cutting-edge research and development. Amid sky-rocketing economic dynamics with relatively little impediment by the political system, the activities of Chinese business will not be restricted to the Far East.

There are diverging opinions of how to deal with the possible invasion of the Continent by Chinese corporations -- not only by selling their wares but perhaps by also buying European companies, just as earlier this year China's Lenovo Group purchased IBM's personal computer business and Cnooc Ltd. attempted to acquire American oil company Unocal. One option would be to take the French model and apply it across the EU. History has proven that protectionism and other forms of state interventionism have yielded decline rather than progress. Moreover, this policy option may lead to retaliating measures from our economic counterparts. This would work as a boomerang adversely affecting our industries vis-à-vis their numerous corporate conquerors, thus taking us down a dead-end street.

Another avenue is boosting our competitiveness by alleviating regulatory burdens, making labor markets more flexible and creating an attractive climate in which innovation and entrepreneurship can flourish. This also may include an overhaul of our political decision-making constellation, which is currently characterized by sclerosis and indecisiveness due to over-participation and perpetual deliberations to find compromises. By setting the appropriate conditions, the market will automatically deliver European champions that perform well on the stock exchange, and thus are simply too expensive to be taken over. Such natural firewalls built by the market will be a more effective defense mechanism than legal constructions and administrative obstacles created by governments.

The aforementioned recipe for success, known as the Lisbon strategy, has been on the table for more than half a decade and so far has been implemented mainly by words and resolutions instead of acts. The European debate on how to build a sustainable competitive position for our industries shall no longer be polluted by short-term electoral sentiments entailing protectionist tendencies, but shall be driven by a long-term, global vision injected with political will and courage.

Mr. Manders is a member of the European Parliament for the Dutch liberal VVD-party in the ALDE-group.

10.Of Toilet Paper, Escalators and Hope

By TIMOTHY KENNY
September 16, 2005

BUCHAREST -- Having traveled to Romania off and on for 14 years, I was never certain change would take root here. But it's finally clear that a corner has been turned in this once-bleak Balkan country. This capital city is cleaner, wealthier and more capable than it's ever been. And the changes are here to stay.

The small signs are most telling. While here over the summer I no longer needed to carry toilet paper everywhere, as I did during my last visit in 2001. Today, escalators at metro stations in the now-privatized subway system work as well as they do in any big Western city, never the case before.

Romania's odd love affair with stray dogs continues, but there are far fewer of them roaming around now in Bucharest. Trash baskets abound and dog droppings are almost rare. Most surprising are the bright colors of the capital itself. The center of Bucharest, long a dreary, polluted city of two million people, is alive with refurbished buildings painted in bright hues. Even in a blue-collar neighborhood like Titan, some 10 miles from the center, streets are newly resurfaced, pot-hole free or being repaired.

Signs of the poor underclass remain, however. Pensioners still beg on street corners downtown and the homeless pick through garbage bins; unwashed, barefoot children roam the metro stations looking for food and handouts; Roma children and adults approach foreigners and demand money. But in all instances, there are clearly fewer of these incidents than four years ago.

I first came to Romania in September 1991 to teach at the University of Bucharest's new Journalism Faculty. I have been back a half-dozen times since, most recently in the last two weeks of June to teach reporting again.

Today's students appeared surprised to hear that their 1991 predecessors had no textbooks or computers, and that the building had so little heat in winter we wore coats in the classroom to keep warm. More of today's Romanian students seem to speak English, and speak it better. In my class of 16 summer students, all carried cell phones and were sophisticated computer users. Four owned digital cameras. All had cable or satellite TV at home and watched a wide range of programs from Europe and the U.S.

More importantly, credit cards, home mortgages and auto loans are now available and fast becoming a part of many lives. A service industry is emerging. Consumers can pay electric and water bills at cash machines. A Romanian friend called the privatized telephone company recently and corrected a billing problem in less than three minutes.

"I think the mentality of people here is changing," said Simona Miculescu, formerly chief spokeswoman for now ex-President Ion Iliescu. "The nation is changing because of exposure to international exchanges, either studying or working abroad." The days of communist-bred notions, exemplified by the cynical observation, "We pretend to work, you pretend to pay us," are gone, Ms. Miculescu said.

She made it clear, as did others, that Romania largely remains a peasant society in many ways; change will come to its villages and many small towns at a much slower pace over a longer period of time. "But the young people today are so lucky," Ms. Miculescu added. "I envy them."

Consider this:
• Inflation here -- an incredible 40.7% in 2000 -- dropped all the way to 9.3% in 2004. The Central Bank lopped four zeros off the national currency, the lei, on July 1.

• Unemployment stands at 5.5%, down from 7% in 2003. Germany, on the other hand, worries about a jobless rate hovering around 10%. Romania's GDP growth, figured by the government at 4.9% in 2002, jumped to 8.3% in 2004 and is expected to come in at about 6% this year, the Central Bank says.

• Romania's former income tax, which once ranged from 18% to 40%, has been replaced by a 16% flat tax. That, the government says, has led to the "discovery" of some 153,000 employees, unknown before on tax rosters.
 

Emil Constantinescu, president of Romania from 1996 to 2000, says the country is heading in the right direction under new President Trian Basescu as it, along with Bulgaria, prepares to enter the European Union in 2007.

"More than that," Mr. Constantinescu said in a July interview at his Bucharest home, "Romania has the possibility to become an important country among the EU countries and in NATO. Our new president...doesn't have to make radical changes. He inherited a Romania with democratic laws, rules and institutions, an economy that grows."

Recent votes in France and Holland against ratifying the EU constitution have spurred talk in Europe about slowing EU expansion. Most of those go-slow discussions, however, appear aimed at stalling Turkey's bid. Of the dozens of Romanians I talked to, no one seemed to think EU admission would not happen, though many wondered if it might be pushed back to 2008.

Mr. Constantinescu's concerns focus more on Romania's economic underbelly. He worries about the elimination of what he calls the "oligarchic structures" from the communist era, whose members he said, still carry too much power.

Ordinary citizens, however, say it's time to put the past in its place and move ahead. What they don't want to do is derail an emerging economic future that's starting to pay dividends. That future is everywhere in Bucharest, from billboards touting a new condo-style housing project -- the city's first -- to shops that sell a basic Lacoste "alligator" knit shirt for $108.

Despite overpriced luxury goods, optimism remains palpable. "I think we are reaching a state of normality here," said Ioana Avadani, executive director of the Bucharest-based Center for Independent Journalism, a nonprofit journalism training center. "I surprise myself at being amazed at things that are normal now; doing an administrative job now in two hours instead of two weeks; the attitudes of the person I am dealing with. Life is getting easier."

Romania's national character reflects its long history: 500 years of Turkish rule followed by four decades of communism. Few nations could maintain a sunny disposition in the face of such unrelenting control. Unbridled optimism is not the strongest of Romanian traits; at least it didn't used to be. But asked "Is the glass half full or half empty?" my Romanian students -- as bright-eyed, pampered and blithely expectant of adult wealth as their American counterparts -- unanimously said the glass was half full.

"It's not that the transformation of Romania is too slow," said Ms. Avadoni, "but that my life is too short."

Mr. Kenny, a former newsman, Fulbright scholar and nonprofit foundation executive, is an associate professor of journalism at the University of Connecticut.
 
 
 
 
 
 
 

A12 916-05
• North Korea Poses Aid Puzzle
• Business Group May Take On EU Over Chemicals
• Merkel Tries to Retune Her Economic Message
• Bush to Pressure Putin on Iran
• U.S. Says Bank Laundered Money for Pyongyang
• Malaysia Relaxes Investing Rules In a Sign It Can Handle Outflows
• Venezuela Uses Seized Assets As Bargaining Chip
• Argentina Shows Solid Employment Gains
• Business Group May Take On EU Over Chemicals
 
 

11. Hurricane economics Alan Reynolds (archive)

September 15, 2005 | Print | Recommend to a friend

When it comes to evaluating the economic impact of hurricane Katrina, two errors are constantly repeated. The first is the free-lunch fallacy -- believing that federally financed reconstruction and relief can be a net "stimulus" to the national economy. The second is the price-index blunder -- confusing a one-time spike in the relative price of energy with a broad and lasting change in the rate of inflation.

 The alleged "fiscal stimulus" of $62.3 billion of debt-financed federal funding in the hurricane-afflicted cities is pure illusion. The notion that replacing destroyed property will somehow boost the economy is, as economist Walter Williams reminds us, the old "broken window fallacy" exposed by Frederic Bastiat in 1848.

 Breaking windows may create work for glaziers, but property owners whose windows were broken will then have less money left over to spend on something more enjoyable. Society then has to devote scarce real resources to this unfortunate task, rather than another. Meanwhile, interest expense on the extra $62.3 billion of national debt is a burden on taxpayers, not a free lunch.

 There were about a million people potentially affected by the hurricane, so Congress plans to spend $62,300 for every man, woman and child who used to live in the affected area. In constant dollars, $62.3 billion far exceeds combined spending on the six biggest natural disasters since 1989. Yet some are talking about spending more.

 It might be appropriate to add so much to the national debt if the funds were for rebuilding public infrastructure of national importance. But the $62.3 billion seems mainly targeted at short-term rescue, recovery and repair, rather than elevating the New Orleans levee or rebuilding Gulf ports, roads, hospitals and schools.

 Most economically viable reconstruction efforts will be financed by insurance, which ensures the money is unlikely to be wasted. The congressional spending spigot, by contrast, is an open invitation to waste. Federal billions may even be used to reimburse the losses of households or firms who did not purchase the heavily subsidized flood insurance. That would set a disaster-prone precedent.

 Anyone who anticipated wisdom and foresight from any level of government was once again disappointed. Yet those most critical of bungling bureaucrats for crisis mismanagement nonetheless expect such incompetents to rebuild New Orleans. The fact is that government agencies lack the knowledge and incentives to rebuild cities in an economically sensible way. Business owners and managers, real estate investors and insurance companies know best how to allocate scarce resources because they put their own money at risk.

 The second error about Katrina's economic fallout, the price index confusion, was illustrated by Washington Post writer Nell Henderson. "The Fed's quandary," she wrote, "is that the storm sent energy costs soaring, which both slows economic growth and fuels inflation." Actually, any increase in the relative price of energy is definitely not inflationary. Yet the Fed may believe otherwise, as Henderson suggests.

 This is an old mistake. Nearly 32 years ago, on Jan. 20, 1974, I wrote "Some Preliminary Effects of a Heavy Hand" in The New York Times. "An increase in one price," I explained, "does not imply an increase in the average level of all prices (inflation). If consumers pay more for gasoline, they have less money left over to bid up the prices of other things." Higher energy costs have a deflationary effect on non-energy prices. Transportation costs may be an exception, but transportation is included in price indexes that leave out direct energy expenses.

 Aside from energy, the producer price index fell in August and was just 2.2 percent higher than a year ago. Aside from energy, the July CPI was also 2.2 percent higher than a year before (the August CPI has not been released as of my writing). Does anyone realize how low that 2.2 percent figure really is? Inflation in the non-energy CPI averaged 4.6 percent a year since 1967, and dipped below the 2004-2005 rate of 2.2 percent in only three of those 39 years -- 1998, 2000 and 2001.

 If energy is included, inflation in the CPI has been 1 percentage point higher than non-energy inflation since 2003. The only other times we have seen that wide a gap between CPI inflation and non-energy inflation were in 1974, 1979-80 and 1990-91. At those times, the Fed pushed the fed funds rate far above non-energy inflation -- 2.5 percentage points higher in 1991; 1.8 in 1981. The economy suffered high real interest rates and high energy prices simultaneously. And recessions.

 The Washington Post article says long-term interest rates "are lower than before the hurricane, providing additional stimulus." On the contrary, if long-term interest rates remain low and the Fed keeps pushing short-term rates higher, then the yield curve will become flat (as in 1991) or inverted (as in 1974 and 1981). Eliminating any spread between short-term and long-term rates makes bank lending unprofitable, and almost always ends in recession.

 The Fed has always flattened the yield curve whenever energy inflation was high relative to non-energy inflation. After the ensuing recessions, the Fed always cut short-term rates far below long-term rates, in 1975-76, 1984-85 and 2001-2003.

 Many Fed watchers believe the Fed will lift the fed funds rate to 4.25 percent by year's end -- 2 percentage points higher than non-energy inflation and about the same as the yield on 10-year bonds. That same policy proved risky during past energy price spikes. Perhaps the Fed ought to pause and reflect, wait and see.

 The U.S. economy can weather hurricanes and profligate federal spending. Whether or not the economy can weather high energy prices and rising interest rates at the same time remains to be seen. Unlike hurricanes, that risk is avoidable.

Doug Bandow is a senior fellow at the Cato Institute, a Townhall.com Gold Partner.

©2005 Creators Syndicate

12. THE SPAM DIVIDE
------------------------------------------------------------------------

In rich countries, unsolicited e-mail, or spam, is a nuisance, but in
poorer countries, it is a threat to development, says Foreign Policy
contributor Elisabeth Eaves.
According to a report by the Organization of Economic Co-operation
and Development (OECD), spam will not stop the development of
information technology, but it will severely retard it.
In developing nations, bandwidth is expensive and connection speeds
are often so slow that spammers can bring a nation's network down -- or
reduce it to a snail's pace -- by flooding inboxes. Since local
Internet service providers lack the software or a trained staff, they
can do little to fix the problem. Moreover, the impact of spam on
developing countries is difficult to determine and pin down with a
dollar figure, says Eaves.
So, how can developing nations stop the flood? They can:
   o    Implement software based on free operating systems such as
        Linux, since they can immediately stop as much as 50
        percent of poor-country spam.
   o    Create Computer Security and Incident Response Teams
        (CSIRTs) or Computer Emergency Response Teams (CERTs) and
        train personnel in security and spam handling.
   o    Develop and enforce anti-spam policies and establish
        relationships with other countries to fight spam and
        address other Internet issues.
The OECD recommends that these methods should be employed quickly,
because bridging the digital divide is useless if what lies on the
other side is a pile of junk mail.

Source: Elisabeth Eaves, "Spam Divide," Foreign Policy,
September/October 2005; based upon: Suresh Ramasubramanian, "Spam
Issues in Developing Countries," Organization for Economic Co-operation
and Development, May 26, 2005.
For text:
http://www.foreignpolicy.com/story/cms.php?story_id=3208
For OECD report:
http://www.oecd.org/dataoecd/5/47/34935342.pdf
For more on International: Growth and Technology:
http://www.ncpa.org/iss/int/

------------------------------------------------------------------------
13. "FAILED STATES" FAIL BECAUSE OF TOO MUCH GOVERNMENT POWER
------------------------------------------------------------------------

A recently published index by Foreign Policy and the Fund for Peace
ranks countries that are considered "failed states." These areas pose
a serious threat to world security, say the researchers, because of an
absence of state power. But this view is false, says Alvaro Vargas
Llosa of the Center on Global Prosperity. He contends that it is
precisely the presence of centralized power and the lack of
individual-based rights that creates insecurity in these countries.
Consider:
   o    The Ivory Coast tops the index, but its problems are not due
        to a lack of centralized power; indeed, the
        centralization of the state has created various factions
        vying for control.
   o    The Democratic Republic of Congo, which ranks second, was a
        highly-centralized dictatorship for three decades
        under Mobuto; in 1997, his replacement, Kabila, still
        retains a centralized power structure.
   o    Rwanda and Burundi, which rank 12th and 17th respectively,
        are other examples of stratification caused by too
        much state power; after the Hutus gained independence in
        Rwanda, they used government power to oppress the
        Tutsis, who eventually came to power and forced the Hutus to
        flee to the Congo.
   o    Venezuela, which ranks 21st, is another example of too much
        state power; the government owns the oil, which
        accounts for 85 percent of the country's exports.
Also among the "failed states" is Peru, where excessive government
regulation and taxation have created a black market that comprises
about 70 percent of the economy.

Foreign Policy correctly warns that "2 billion people live in
insecure states." However, it is too much government, not too little,
that accounts for such instability.
Source: Alvaro Vargas Llosa, "The Failure of States," The
Independent Institute, September 8, 2005.
For text:
http://www.independent.org/newsroom/article.asp?id=1564
For Failed States Index:
http://www.foreignpolicy.com/story/cms.php?story_id=3100
For more on International: Culture and Political Systems:
http://www.ncpa.org/iss/int/
 
 
 
 
 

14. Estonia and Ireland are role models. Countries that reduce the burden of government enjoy faster economic growth and more prosperity. As Marian Tupy of the Cato Institute explains, this is true in both Old Europe and New Europe:

      Economic freedom in the eight Central and Eastern European (CEE) members of the EU increased notably from 5.4 in 1995 to 6.8 in 2003. Their economic growth rate averaged 4.62 percent per year between 1995 and 2003. The star pupil continues to be Estonia, which rose from the 75th place in 1995 to ninth place in 2003 and retained its position as the freest country of the former Soviet bloc. Between 1995 and 2003, the new eight EU members saw their purchasing power adjusted per capita incomes rise by 44 percent. Incomes in the old 15 EU members rose by 26 percent. ...Estonia provides an excellent example of economic liberalization followed by fast economic growth and rising incomes. Estonia began to liberalize at the end of 1992. The government eliminated import tariffs and instituted a flat income tax. Corporate taxes on reinvested profits fell to zero. ...Between 1995 and 2003, Estonian GDP per capita grew at a rate of 6.6 percent. During that period, Estonian purchasing power adjusted per capita income rose by 78 percent. What is true of post-communist countries also applies to Western Europe. In 1987, the Irish government began the process of economic liberalization. Taxes and spending were reduced. The standard tax rate on income fell from 35 percent in 1989 to 22 percent in 2001. The top marginal tax rate fell from 65 percent in 1985 to 44 percent in 2001. The corporate tax rate fell from 40 percent in 1996 to 12.5 percent in 2003. In 1999, Ireland's tax revenue was 31 percent of GDP. A comparable figure in the pre-enlargement EU was 46 percent. Ireland's economic freedom ranking rose from the 22nd place in 1985 to eighth place in 2003. Its economy grew at a compounded average annual rate of 6 percent between 1987 and 2003. During that period, Irish purchasing power adjusted per capita income rose by 88 percent. In 1987, Ireland was, after Portugal, the poorest country in Western Europe. In 2003, Ireland was, after Luxembourg, the richest country in the EU.
      http://www.techcentralstation.com/091505B.html

East Meets West
By Marian L. Tupy   Published    09/15/2005
E-Mail  Bookmark  Print  Save
  TCS

Economic liberalization in post-communist Central and Eastern Europe is paying off. Per capita incomes in that region are growing faster than those in Western Europe. The fact that the new poorer EU members are catching up with the old is a tribute to the power of the market. The reforms in the new EU countries are not over, but their success should serve as an example to the moribund economies of France, Germany and Italy.

The Economic Freedom of the World: 2005 Annual Report, which is co-published by the Fraser Institute in Canada and the Cato Institute, measures economic freedom in 127 countries around the world. Countries are rated on a scale from 0 to 10, with a higher number signifying a greater degree of economic freedom. According to the just-released report, the old 15 members of the EU saw a slight increase in their economic freedom, from 7.2 in 1995 to 7.4 in 2003. Compounded average annual economic growth in the EU-15 was 2.55 percent over that period.

Economic freedom in the eight Central and Eastern European (CEE) members of the EU increased notably from 5.4 in 1995 to 6.8 in 2003. Their economic growth rate averaged 4.62 percent per year between 1995 and 2003. The star pupil continues to be Estonia, which rose from the 75th place in 1995 to ninth place in 2003 and retained its position as the freest country of the former Soviet bloc. Between 1995 and 2003, the new eight EU members saw their purchasing power adjusted per capita incomes rise by 44 percent. Incomes in the old 15 EU members rose by 26 percent. The "old" and the "new" EU members are converging.

Though economic freedom in Western Europe remains slightly higher than in CEE, rapid transition from a completely state-controlled economy to the market spurred higher economic growth in CEE, as theory would predict. The more constrained an economy, the faster it grows once constraints are removed.

Estonia provides an excellent example of economic liberalization followed by fast economic growth and rising incomes. Estonia began to liberalize at the end of 1992. The government eliminated import tariffs and instituted a flat income tax. Corporate taxes on reinvested profits fell to zero. To arrest inflation, the government established a currency board. State enterprises were privatized. As was the case with all former communist countries, initially the Estonian economy went into a recession as many inefficient firms folded. By 1995, however, the economy was growing again. Between 1995 and 2003, Estonian GDP per capita grew at a rate of 6.6 percent. During that period, Estonian purchasing power adjusted per capita income rose by 78 percent.

What is true of post-communist countries also applies to Western Europe. In 1987, the Irish government began the process of economic liberalization. Taxes and spending were reduced. The standard tax rate on income fell from 35 percent in 1989 to 22 percent in 2001. The top marginal tax rate fell from 65 percent in 1985 to 44 percent in 2001. The corporate tax rate fell from 40 percent in 1996 to 12.5 percent in 2003. In 1999, Ireland's tax revenue was 31 percent of GDP. A comparable figure in the pre-enlargement EU was 46 percent. Ireland's economic freedom ranking rose from the 22nd place in 1985 to eighth place in 2003. Its economy grew at a compounded average annual rate of 6 percent between 1987 and 2003. During that period, Irish purchasing power adjusted per capita income rose by 88 percent. In 1987, Ireland was, after Portugal, the poorest country in Western Europe. In 2003, Ireland was, after Luxembourg, the richest country in the EU.

In contrast, economic freedom in France, Germany and Italy has declined in recent years. Between 1995 and 2003, French, German and Italian growth rates were 1.7 percent, 1.2 percent and 1.6 percent respectively. Their respective per capita incomes increased only by 14 percent, 9 percent and 11 percent over that period. The French and Italians will hold their elections next year, while the people of Germany will choose their new leaders this week. As they head to the polls, Germans should recognize that growth is preconditioned by economic freedom. After all, it was Germany that under Ludwig Erhardt's leadership blazed the way to post-war economic liberalization -- an event that brought about a period of unprecedented prosperity throughout Western Europe.

Bloated government hampers India's growth. An expert from India warns that a new jobs program will be an expensive boondoggle and urges liberalization and deregulation as a better strategy:

      For more than half a century, a well-intentioned and bloated state has only perpetuated poverty with misguided policies and regulations. And New Delhi still hasn't learned from these mistakes. The Indian government is soon to embark on perhaps the grandest waste of taxpayers' money yet: the Rural Employment Guarantee Bill. The REGB, recently passed in parliament with unanimous support across political parties, is supposed to provide 100 days of work in a year to every rural household across the country that wants it. This is expected to cost around $9.1 billion, which amounts to 1.3% of GDP. And by some estimates, costs may reach four times that figure. ...The problem is that there is no evidence that the Indian Government is capable of properly implementing any social welfare plan. Former Prime Minister Rajiv Gandhi remarked in 1987 that only 15% of the money spent by the government actually reached its rightful recipient. ...These failures have much to do with the inefficiency of the vast Indian bureaucracy. ...The REGB will also have economic consequences. Labor markets could be distorted at local levels if the wages paid by the scheme are more than the local rate decided by the market. ...The key to generating employment lies in less government intervention, not more. The government needs to reform India's archaic labor laws, whose inflexibility hampers industrial growth as well as employment. In a variety of repressive ways, firms are not allowed to enter into free contracting, and cannot manage their workforces according to market conditions. In theory, labor laws are supposed to protect workers from being fired, but in practice such laws discourage industrial units from being set up, and hamper entrepreneurship and industrial expansion. The effect is that employment is far lower than it would have been in a free market.
      http://online.wsj.com/article/0,,SB112672807076840768,00.html?mod=opin ion&ojcontent=otep (subscription required)

15. Good Intentions, Bad Ideas By AMIT VARMA WSJ September 15, 2005

The road to hell is paved with good intentions -- and nobody knows that better than India's poor. For more than half a century, a well-intentioned and bloated state has only perpetuated poverty with misguided policies and regulations. And New Delhi still hasn't learned from these mistakes. The Indian government is soon to embark on perhaps the grandest waste of taxpayers' money yet: the Rural Employment Guarantee Bill.

The REGB, recently passed in parliament with unanimous support across political parties, is supposed to provide 100 days of work in a year to every rural household across the country that wants it. This is expected to cost around $9.1 billion, which amounts to 1.3% of GDP. And by some estimates, costs may reach four times that figure. The bill is in line with the rhetoric of the Congress-led coalition government, which came into power last year disdaining the liberalization policies of the preceding BJP government, and promising to introduce "reforms with a human face."

The problem is that there is no evidence that the Indian Government is capable of properly implementing any social welfare plan. Former Prime Minister Rajiv Gandhi remarked in 1987 that only 15% of the money spent by the government actually reached its rightful recipient. The rest was wastage. Similar distribution schemes -- such as the Public Distribution System that has been going on for decades and the 1976 Employment Guarantee Scheme in the state of Maharashtra -- fell victim to inefficiency and corruption, and have all failed to achieve their stated objectives.

These failures have much to do with the inefficiency of the vast Indian bureaucracy. Bimal Jalan, a former governor of India's central bank, put it succinctly recently when he pointed out that "the most important problem in governance and administration of projects or schemes launched with great hopes is the involvement of a large number of agencies and ministries in decision-making and implementation. It is also common experience that these multiple agencies do not work in unison to resolve any administrative issue."

Whatever money does make it through all the confused bureaucracy could still be siphoned away at the end of the line, where local distribution is meant to take place. The recently passed Right to Information Act, a welcome move that is supposed to increase transparency by forcing the government to make its paperwork available to anyone who wants to see it, can only be of limited help. Most of the country does not even know about it, or would not dare to use it against an oppressive local government.

The REGB will also have economic consequences. Labor markets could be distorted at local levels if the wages paid by the scheme are more than the local rate decided by the market. If the government runs short of funds, interest rates could go up. Then there's the fact that New Delhi could use the money spent on this scheme to build needed infrastructure like roads, ports and power installations.

The key to generating employment lies in less government intervention, not more. The government needs to reform India's archaic labor laws, whose inflexibility hampers industrial growth as well as employment. In a variety of repressive ways, firms are not allowed to enter into free contracting, and cannot manage their workforces according to market conditions. In theory, labor laws are supposed to protect workers from being fired, but in practice such laws discourage industrial units from being set up, and hamper entrepreneurship and industrial expansion. The effect is that employment is far lower than it would have been in a free market.

India also needs to shut down its "License Raj" -- the oppressive web of regulations that acts as a massive disincentive to entrepreneurs and businessmen. It is no coincidence that India ranks 118th on the Heritage Foundation Economic Freedom Index, and 127th on the United Nations Development Program Human Development Index. Economic freedom and development go hand in hand, and India could have done as well in manufacturing as it has in services had its entrepreneurs been given the freedom to set up businesses without having to apply for myriad licenses, bribe numerous officials, and sometimes spend years in the process. Increased entrepreneurship and industrial growth would have been far more effective than the REGB in generating long-lasting employment.

India's 58 years since independence have been ones of lost opportunity, with a waste of human capital and millions of lives lost to needless poverty. Successive Indian governments have made all the right noises about reducing poverty, and then followed all the wrong policies. Sadly, the REGB looks like more of the same.

Mr. Varma is a Bombay-based writer who writes India Uncut, a popular Indian blog (http://www.indiauncut.com).

16. Don’t blame the savers Sep 16th 2005 From The Economist Global Agenda
 

Some economists argue that the imbalances in the world economy can be blamed, in part, on a glut of savings from developing countries gushing into American assets. New reports from the IMF and the World Bank say the problem lies elsewhere
 

AMERICAN conservatives are fond of prescribing personal responsibility as a cure for the financial ills of the poor. There is a certain amount of pleasure, therefore, in seeing America’s fiscal profligacy chided for contributing to the imbalances that currently threaten the health of the world economy. That is precisely the verdict of the newly released chapter on savings and investment in the International Monetary Fund’s World Economic Outlook. The document highlights the danger posed by the world economy’s heavy dependence on ravenous American consumers to snap up exports from the rest of the world.

To be sure, it is hard to be too gloomy. Though Europe has been sluggish and the global economy hasn’t quite lived up to last year’s lively pace of growth, world GDP is still growing at an above-average clip. Even Japan, stuck in an economic quagmire for the past decade, has begun looking perky.
The Fed chairman speaks to Congress
Jul 20th 2005
Europe's and America's economies
May 26th 2005
House prices
Apr 20th 2005
The world economy
Apr 18th 2005
The economics of saving
Apr 7th 2005

See the IMF's World Economic Outlook and the World Bank's “Where is the Wealth of Nations?”. See also America's Congressional Budget Office and the European Central Bank.

The pressures on George Bush after Katrina Sep 16th 2005
Germany’s election Sep 15th 2005
United Nations reform Sep 15th 2005
America’s airlines Sep 15th 2005
Italian bank takeovers Sep 15th 2005
The Buttonwood column: oil and gold Sep 13th 2005
About Global Agenda

But dark clouds have been gathering on the horizon for some time. Emerging-market economies, particularly in Asia, are running high current-account surpluses, keeping their economic fires stoked with a steady stream of exports, especially to America. In mirror image, America’s current-account deficits have soared past 5% of GDP. Household savings have dwindled to negligible levels as Americans have run down assets and taken on debt to keep the spending binge going. Yet if the American consumer falters, as things stand now, the rest of the world will tumble too.

Moreover, economists are increasingly worried that America’s economic health (and by extension the world’s) rests on a housing market that looks decidedly bubbly. When the bubble bursts, they fear, the whole thing could come crashing down.

But if economists are agreed that America’s debt levels are dangerous, they cannot agree on whom to blame. Economists with little time for the Bush administration point the finger at the government’s profligate budget deficits—predicted to be roughly $330 billion in 2005—which run down national savings. The administration’s supporters prefer to point to spendthrift consumers and the frothy housing market, and argue that a “global savings glut” is pouring excess capital from abroad, particularly Asia, into America’s financial markets. This, they say, is why long-term interest rates have remained low even as the Federal Reserve has progressively tightened monetary policy.

America is not the only country where savings have fallen. Worldwide savings began declining in the late 1990s, hitting bottom in 2002. They have recovered only modestly since then. The drop is mainly due to industrial countries, where savings and investment have been on a downward trend since the 1970s, thanks to a sharp decline in personal savings that an increase in corporate savings failed to offset. Savings in emerging markets and oil-producing countries have risen over that period, but not enough to reverse the trend.

So why the sudden talk of a savings glut? And even if there is a surplus, why is it flowing the “wrong way”—from the developing world, where returns on capital should be higher, to more mature economies like America?

The IMF report offers an explanation. What the world is suffering from is not so much a savings glut as an investment deficit, in both rich and poor countries. In emerging markets and oil-exporting nations, still feeling the lingering effects of the Asian financial crisis of 1997-98, demand for capital has failed to keep up with supply. Scrimping consumers have instead sent their money to the West.

The IMF’s figures suggest that this is not as irrational as it seems. Though in theory returns on capital should be much higher in the developing world, where economies remain labour-intensive, in practice the story is more complicated. Emerging markets saw a return on aggregate capital of 13.3% over the 1994-2003 period, compared with 7.8% in the G7 group of industrialised nations. But investments in emerging markets are riskier, because their economies tend to be more volatile and their institutions weaker.

Moreover, the return on aggregate capital may not be a good guide to the returns that investors can actually expect. Growth could be concentrated in smaller firms that are harder to invest in, for instance, or the data could be unreliable. Indeed, the IMF’s analysis suggests that the internal rate of return on invested capital in publicly traded firms in emerging markets has been very poor over the past decade, even before currency risk is taken into account.

But investment has fallen in the rich world too: the rivers of capital have flowed not directly into businesses but into markets for consumer and government credit, where they are presumably doing little to increase the recipient economy’s ability to repay the loans in the future. That means consumer retrenchment when interest rates rise or the bills come due, which will hurt emerging markets if they do not work harder to generate domestic demand, instead of relying on exports for growth.

A better way to crunch the numbers

So what is the cure? Lower savings rates in emerging markets? That would be a disaster, according to a new report from the World Bank, “Where is the Wealth of Nations?”. Many developing countries, says the Bank, are already saving too little, if you do the figures right.

Traditionally, national saving is calculated as simply national income minus consumption. But this, the Bank argues, ignores important underlying changes in the productive capacity of the society. Should education, for example, be counted as consumption, or as an investment in human capital that will enable the nation to produce more in future years? On the flip side, every dollar earned by selling finite natural resources like oil or diamonds represents an incremental decrease in the country’s ability to generate wealth in coming years. If you account for things like this, says the Bank, a lot of developing countries, especially in Africa and the Middle East, are running down wealth at a fast pace—though in Asia, even with those adjustments, savings rates are still high.

Like the World Bank, the IMF does not think lower savings rates in developing countries are the answer. It identifies several other things that could make a difference: higher national savings in the United States, an investment recovery in Asia, and an increase in real GDP growth in Japan and Europe.

Easy to say, difficult to pull off. Raising interest rates would, the IMF concedes, have only a limited effect on America’s savings rate. Balancing the budget would do more, but there seems to be little political will to tell Americans they must pay for their government programmes. Across the Atlantic, European governments are finding it hard to make the kind of structural reforms that could boost their sluggish growth rates, and the European Central Bank has remained unwilling to provide monetary stimulus by cutting rates. Nor has Japan’s government, despite the signs of fledgling recovery, yet found a formula for boosting its long-term growth rate. It is easier to diagnose the illness than effect a cure.
 

17. A Paradox of Interest By R. GLENN HUBBARD WSJJune 23, 2005; Page A12

In this op-ed piece, economist R. Glenn Hubbard discusses the paradox
of low long-term interest rates.  Long-term interest rates have remained low
despite the recent series of tightenings by the Fed.  Hubbard suggests that the
reason for this is that the world quantity of saving has exceeded the world
demand for those funds thus pushing down interest rates.  One reason for the
increased supply of savings into the U.S. from foreign sources is that the U.S.
has a very low cost of financial intermediation and therefore its financial
markets provide foreign savers with a higher rate of return than they could
earn in their own countries.  This influx of foreign savings has allowed the
U.S. to run increasingly large current account deficits.  According to Hubbard,
the long-term solution is to encourage the development of more efficient
banking and financial intermediation in emerging countries such as China.

The increasing attention paid to growing U.S. current account deficits has bred nightmare scenarios of a sharp decline in the foreign-exchange value of the dollar and rising U.S. interest rates. Financial markets, by contrast, appear more sanguine. Inflation-indexed bonds in the U.S. are yielding only about 1.5% in real terms, and the IMF's estimate of the long-term world real interest rate is about 2%. Capital markets rightly estimate low current real rates of interest, though the outcome affords little comfort.

Alan Greenspan has termed the fall in long-term rates in the presence of a rising federal funds rate a "conundrum." The Fed chairman intuitively and correctly identified global forces at work. Interest rates on default-risk-free debt instruments such as U.S. Treasury securities are determined in an international capital market. And the international capital market determines the world real interest rate by equilibrating global desired saving and desired investment.

At the center of the saving-investment imbalance is the large U.S. current account deficit. While the U.S. is not the only economy running a current account deficit -- among industrial economies, the U.K. and Australia are as well -- the large increase in the U.S. current account deficit in recent years has mirrored large increases in current account surpluses in the rest of the world, principally in Asia. Over the same period, world real interest rates have declined.
* * *

Many economists' thinking about savings imbalances harkens back to Keynes's "paradox of thrift." In "The General Theory of Employment, Interest, and Money," he reasoned that what seems sensible for an individual may be bad for the economy as a whole. It is possible for the private sector's desired saving to exceed its desired investment. This intuitive argument has not gone out of fashion, with discussions of a "global savings glut" appearing in official and journalistic reviews of the bond market and the economy. And levels of global savings from emerging economies are, indeed, high.

Global savings as a share of world GDP have increased since the late 1990s, reflecting in part demographic considerations and increased economic uncertainty. But a closer examination of the sources of increased saving reveal another consideration. The rise in the global saving rate is more than accounted for by a higher saving rate in emerging economies, particularly in Asia. I say "more than accounted for" because the U.S., the world's largest economy, reduced its national saving over the same period. This pattern suggests more than a global savings surplus -- in particular, it is weaknesses in domestic financial systems in emerging economies that have led to excess savings.

With this additional consideration in mind, making the transition from a global savings glut to a policy prescription requires delicacy. Taken seriously, this argument can be used to justify fiscal "pump priming" of high-saving economies. Increases in public spending or temporary tax cuts, in this view, stimulate consumption and investment, absorbing excess saving while increasing aggregate demand. Recent experience suggests some skepticism -- think about the U.S. exhortation to Japan in the late 1990s to increase public spending. While Japan's fiscal deficit in 2004 soaked up about 60% of the nation's household and business saving, fiscal ease provided little kick to Japanese output growth. Korea's consumer-credit boom absorbed domestic savings, but two years ago left the economy on shaky footing.

The Japanese case illustrates a general point absent from a discussion of a savings glut. The Keynesian reasoning assumes a simple black box between desired saving and investment -- the financial system at home and abroad costlessly transforms lenders' funds between savers and borrowers. A weak financial system -- reflecting an underperforming banking system, poor investor protection and corporate governance, or fragile securities markets -- yields a high cost of financial intermediation. For any given return on an investment project, savers' net return is lowered by the high costs of intermediating funds. More broadly, regulatory restrictions in goods markets and labor markets reduce returns on domestic investment.

In a closed economy, high costs of financial intermediation increase the relative attractiveness of liquid, safe government obligations. (Again, household purchases of JGBs in Japan come to mind.) In an open economy, the international capital market offers the possibility of investing domestically generated savings in countries with a low cost of financial intermediation and/or a safe nominal anchor in government bonds -- the U.S., for example.

A decade ago, capital inflows were welcomed in emerging Asian economies, though the financial system's high cost of intermediation reduced possibilities for efficient growth. The Asian financial crisis of 1997-98 exposed significant weaknesses in domestic financial systems. Just prior to the onset of that crisis, emerging Asian economies were running current account deficits as capital flowed in from abroad. In the post-crisis period, structural reform of domestic financial systems has taken a back seat to mercantilist trade policies, with export-led growth and large accumulations of international reserves, principally in dollars.

The efficient financial system of the U.S., liquid bond markets, and a stable nominal anchor have attracted large international capital flows. These inflows have financed large U.S. current account deficits. And this arrangement has been particularly strong between emerging Asian economies and the U.S.
* * *

While the U.S. needs to raise domestic saving gradually to fund entitlement promises in Social Security and Medicare, getting America's fiscal house in order provides little short-term solution to global saving and investment imbalances. Increases in U.S. saving, with unchanged investment opportunities or financial system efficiency around the world, puts further downward pressure on the world real interest rate.

To address the global saving and investment imbalance meaningfully, domestic financial systems must be able to shift capital where it can be most profitably employed. Only then can consumers' ability to borrow and business's ability to finance result in efficient investment.

Mercantilist trade policies in emerging Asian economies have played a large role in sustaining high domestic saving in those economies. Official sector acquisition of dollar assets has contributed a substantial share of recent financing of the U.S. current account deficits. Government-led strategies to promote export growth combined with direct intervention in credit markets have limited the domestic economy's ability to absorb its own savings.

Asian economies consider the strategy a reach for safety to maintain economic growth through rising exports, while accumulating international reserves as a precaution in the event of a financial crisis. But such policies sacrifice long-term growth. Essentially, relatively poor citizens of China and other emerging Asian economies are lending funds to the more affluent U.S., where lower interest rates can facilitate a property boom. With a high cost of financial intermediation at home, this outcome may be sensible, but like Keynes's paradox of thrift, it is unsustainable.

The U.S. financial system stands as a beacon for the possibility of a virtuous relationship between capital markets and sustainable economic growth. American leadership has rightly questioned European economies' emphasis on safety, with high social spending and inefficient markets for risk-taking limiting demand growth. But the bigger immediate challenge is to address the imbalance of saving and investment in international capital markets by encouraging the development of efficient banking and securities markets.

Herb Stein was right that "if something cannot go on forever it will stop." The U.S. cannot continue indefinitely to absorb larger and larger volumes of global excess saving. And very low world real interest rates can lead to unbalanced growth. But the resolution needn't end badly. After all, financial reform in emerging Asian economies won't be done in the interest of global imbalances, but with the realization that sustainable improvements in living standards require a financial system as modern as one of the region's new airports.

Mr. Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush.
 

18. Running on Empty?  By DAVID MALPASS   Household savings isn't shrinking -- it's growing. WSJ March 29, 2005; Page A16

With each hike in interest rates, those predicting a bad ending to the 40-month U.S. expansion look expectantly for consumer spending to flag. One of their main worries is the premise that we will run out of savings, especially if foreigners pull the plug or asset prices fall. The reality is that the U.S. has the world's biggest accumulation of savings and investments. The U.S. household sector, the world's largest net creditor, is favorably positioned for higher rates due to large liquid assets and the generally fixed-rate U.S. mortgage structure.

Of course, more saving would be better especially for those who haven't been able to save, and a reduction in the tax distortions that penalize liquid savings while favoring real estate would add to our growth prospects. However, the bigger harm is not that we expose ourselves to a collapse, but that we allow ourselves and foreigners to underestimate, even mock, our economic system. We apologize for our "low savings rate" and "dependence on foreigners," turn our foreign economic policy over to the International Monetary Fund's economic gurus, and contemplate consumption tax increases, forced saving, protectionism, and a weaker dollar (with the consequent increase in inflation). Instead, while working hard to improve our system, we should encourage others to emulate its freedom, flexibility and prosperity.
* * *

Not only are we not running out of household savings, it is growing fast both in terms of the annual additions and the cumulative buildup of American-owned savings. Household net worth, one good measure of savings, reached $48.5 trillion in 2004. Time deposits and savings accounts alone total a staggering $4.3 trillion, versus slow-growing credit-card debt of $800 billion. True, the U.S. is the world's biggest debtor, but it is building assets faster than debt. Even if household assets took a hard fall, the remaining net worth would still dwarf other countries'. On a per capita basis, counting mortgages but not houses, net financial assets total $89,800 in the U.S. versus $76,900 in No. 2 saver, Japan. Of course, some households don't have nearly this average, creating risks for them and burdens on others in the event of a downturn. This is an appropriate policy concern, but the macroeconomic issue is aggregate savings, of which the U.S. has an abundance.

According to the Federal Reserve's flow of funds data, the 2004 additions to household financial assets were a net $590 billion. This was 6.8% of personal disposable income, providing a meaningful measure of the cash flow going into new financial savings. This increased the household's financial net worth to $26.1 trillion, way above any other country's savings and plenty to fund profitable domestic investments. If the 2004 appreciation in the value of homes and equities were also counted, the 2004 saving rate was 46% of disposable income. Foreign savings invested in the U.S., the counterpart of the widely criticized current account deficit, is additive to our own large store of savings. Rather than a "dependence" on foreign savings, the U.S. is an effective user of it, profiting by growing faster than the interest cost of foreign saving. The combination of large domestic and foreign savings allows heavy investment in the U.S. decade after decade, part of the explanation for our fast growth and the world's highest employment levels. Meanwhile, foreigners are actually losing ownership share in the U.S. despite the $2.6 trillion net debtor position, since U.S. assets are growing faster than foreign savings in the U.S.

How can the U.S. have so much aggregate savings when the government's "personal savings rate" statistic is low and has been falling? The personal savings rate doesn't really measure saving in the real sense. It subtracts a broad measure of consumption, $8.5 trillion in 2004, from "disposable personal income," a subset of household cash flow, and labels the difference "personal savings." It was recorded at only 1.1% of disposable income in 2004, or $101 billion. It would have been even worse if not for the $25 billion Microsoft dividend in December, which counted as income in 2004. Without it, the personal savings rate would have been only 0.9%, nowhere near enough to finance a fast-growing economy if it were a true measure of saving.

Fortunately, the personal savings rate doesn't have much connection to the actual saving taking place in the economy. Basically, the income side of the equation is understated because it doesn't measure gains or cash flows to the consumer, and the consumption side is overstated because it includes many long-lasting purchases, some of which might better be considered investments.

The Microsoft dividend illustrates one of several divergences between the personal savings rate and actual savings. Corporate profits are counted in personal savings only if a dividend is paid, not by owning an appreciating stock or selling it for a capital gain. In general, the reverse was happening in the 1980s and '90s: Companies chose to provide shareholder value through capital gains rather than dividends, depressing the household savings rate even as actual savings went up fast. Since capital gains and stock buybacks are not included in personal income yet provide cash for investment and consumption, the more gains the economy was producing, the more depressed the personal savings rate.

This applies not only to gains in direct holdings of stocks but also to the inside buildup in pension funds and 401(k) plans. While the original cash paid into these plans is counted in income, the later-and-often-much-bigger cash outflow from these plans is not part of personal disposable income even though it is available for consumption and investment. Because pension funds had big compound gains in the '80s and '90s, they caused an increase in consumption without a corresponding increase in personal income. This artificially depressed personal saving as pensions were paid and spent.

A separate problem with the concept that America is running on empty is the definition of consumption, which understates investment and household savings by making no distinction between purchases for immediate consumption and purchases with lasting value. For example, consumption includes education. Even as it has become an increasingly valuable investment in human capital, buying it has pushed the savings rate lower and lower. The absurd result: Spending less on education would raise the "personal savings rate" even though it would reduce future U.S. growth.

The broader national saving rate (household and corporate saving less government consumption) suffers from some of the same drawbacks as the 1.1% personal savings rate. Consumption is defined broadly, income narrowly. This depresses the national saving rate even though the U.S. ownership of assets net of debt is high and growing at a fast rate. For example, consumption includes personal education plus corporate and government training and R&D expenses, all of which facilitate innovation and future growth. National income doesn't include capital gains, the increasing value of U.S. real estate, or the (rather large) excess of the appreciation of U.S. assets abroad over foreign assets in the U.S. Recognizing these adjustments, the 2004 national saving rate of 13.7% of GDP and investment of 19.7% would both be even higher and the current-account deficit gap narrower (by at least the mark-to-market adjustment to the net international debtor position).

Many economists and politicians have been holding their breath for years waiting for U.S. consumption and investment growth to expire, even though household savings isn't low and is unlikely to limit the expansion. They explain each quarter's fast growth as the last gasp of a nation running on empty. Rather than worrying so much and so publicly about a shortage of savings or foreign withdrawals, we should be working hard to encourage more innovation and engineering, less regulatory, tax and structural drag, more savings for those who haven't been saving, and fewer tax distortions of market-based savings behavior.

Mr. Malpass is chief economist at Bear, Stearns.

19. Guess Who's Coming to Dinar  By AMIR TAHERI WSJ September 14, 2005; Page A20

In the Tehran moneychangers' bazaar on Manuchehri Street, traders are always on the lookout for the new sogoli. The word, which means "top flower," is used to describe anyone or anything that is popular at any given time -- a thoroughbred steed, a beauty in the harem and, on "Foreign Exchange Street," the dozens of currencies traded each day. These days the moneychangers' sogoli is a surprise newcomer: the Iraqi dinar.

Iraq's currency of change.
 
 

With the world media depicting Iraq as a ship sinking in a sea of blood, and self-styled experts predicting civil war or disintegration, it is hard to imagine why anyone would want to abandon such all-time favorites as the U.S. dollar and the euro, not to mention the oil currencies of the region, in favor of the world's newest money.

One reason, of course, is the sharp rise in the supply of dollars, a result of the dramatic increase in the price of oil. (Iran is earning something like $200 million each day from its oil exports.) Another reason is that hundreds of thousands of Iranians have registered to travel to Iraq to visit Shiite sites in Najaf, Karbala, Samarra and Kazemiah. Under a recent agreement, an average of 1,000 Iranians are allowed to perform the pilgrimage each day. (The number is to rise to 5,000 a day in two years.) To these must be added several hundred non-Iranian Shiites, mostly from the Indian subcontinent and the Persian Gulf, who travel to Iraq via Iran after visiting the Iranian holy city of Mash'had.

Yet another reason for the increased interest in the Iraqi dinar is the dramatic increase in the volume and value of unofficial exports from Iraq to Iran. Ironically, a good part of this trade consists of petroleum products, which are shipped from Iraq to four Iranian border provinces. Thanks to Iraqi government subsidies, petrol is 30 times cheaper in Iraq than in Iran. (There is also much smuggling of petroleum from Iraq to Turkey, where petrol costs 160 times more). Adventurous Iranian businessmen, often working on behalf of well-connected mullahs, are also making a killing by importing foodstuffs, medical supplies and consumer goods from Iraq, especially the Kurdish areas, at prices that defy competition inside Iran.

Iraq is also benefiting from a slow but steady transfer of Shiite religious funds from many foreign countries, notably Iran. The reverse was the case under Saddam Hussein, when the Shiite foundations were anxious to keep as little of their assets in Iraq as possible. In the past year or so, several foundations have started to withdraw their assets from Iran. The trend was accelerated last spring after the Iranian government seized assets worth some $200 million from the Khoi Foundation, named after the late Grand Ayatollah Abol-Qassem Mussavi Khoi. It is suddenly Iraq, and not Iran, that looks like the safe haven for Shiite foundations.

Angered by increasing state intervention in religious affairs, a small but growing number of Shiite mullahs are leaving Iran to settle in Iraq. There is further concern that President Mahmoud Ahmadinejad's new administration -- dominated by the Islamic Revolutionary Guard -- may order a crackdown against the clergy.

Iraq's economic attraction, however, is not solely due to the arcane calculations of mullahs and pilgrims. It is also reflected in the latest report by the International Monetary Fund, published last month. It offers a mixed picture. For example, the report estimates Iraq's annual economic growth rate at just over 4% for 2005, a sharp drop compared to last year, when the economy grew by 52%.

But a closer look shows that the Iraqi economy still performed surprisingly well. The 52% growth rate represented exceptional circumstances in the aftermath of liberation and was unsustainable. Furthermore, the current 4% growth rate is higher than the average rates for the members of the Arab League. It is also a full percentage point higher than the annual average Iran achieved during the eight years of President Muhammad Khatami's administration.

If oil prices hold, Iraq's gross domestic product per head is projected to reach $3,000 next year, making it number 12 in the Arab League; in 2003, it was number 18. The IMF report shows that Iraq absorbed only $4.2 billion in investments in the non-oil sector of the economy compared to the $5.2 billion forecast last year. That figure, however, ignores investments made by small and mid-sized businesses, as well as farmers and individuals. Anecdotal evidence shows that such schemes are acting as the engine of growth in many parts of the country.

The key reason for the strong performance of the Iraqi dinar, however, may be the sevenfold increase in the nation's foreign currency reserves -- from less than a billion dollars to $7.3 billion. And the real figure may be higher because the report, finalized last July, does not reflect the latest rise in oil prices.
* * *

Some Americans might think that Iraq owes its robust economic performance to a flood of dollars provided by the U.S. taxpayers. The IMF report shows that this is not the case. Iraq is paying 90% of its own expenditures, including the cost of economic reconstruction. Of the remaining 10%, the U.S. accounts for four-fifths, with the rest coming from other donors. The bulk of the money the U.S. spends in Iraq is allocated to military and security operations, consultancy contracts and administrative costs.

The IMF speculates that within a decade Iraq could emerge as an engine of growth in the Middle East. Theoretically, this looks plausible. Iraq owns the world's second-largest deposits of crude oil and, once it produces its full OPEC quota, could take in up to $250 million a day from exports. It is also the only country in the Middle East that could easily double its agricultural production by introducing new farming techniques and equipment.

Nevertheless, Iraq's economic model suffers from two basic weaknesses. First, it is a rentier economy designed to distribute the oil income via state subsidies. Subsidies now account for 51% of the gross domestic product; the comparable figure in Iran is 22%, and 13% in Turkey. This limits the state's ability to invest in infrastructural projects, economic development programs and social services. It is clear that the current government under Prime Minister Ibrahim al-Jaafari lacks the political courage to reduce -- let alone abolish -- the subsidies that prevent the Iraqi economy from fully taking off.

The second weakness is the foreign debt inherited from Saddam Hussein, which amounts to $190 billion, including reparations distributed through the United Nations. (It excludes Iran's claim of over $1 trillion in damages.) Even under the best case scenario, servicing that debt could consume almost half of Iraq's GDP for the next decade. The best way to help Iraq would be for its creditors to write off the debts accumulated by an unrepresentative despot.

Iraq is in the process of crafting a more durable government. Economic reform should be a major part of that important effort.

Mr. Taheri is the author of "L'Irak: Le Dessous Des Cartes" (Editions Complexe, 2002).

20. Flat tax economies grow twice as fast. A British public policy organization reports that Eastern European economies that have adopted flat tax systems are growing twice as fast as those that have retained so-called progressive tax codes:

      Estonia and Lithuania introduced a flat tax in 1994, with Latvia following in 1995. Russia (2001), Serbia and Ukraine (2003), Slovakia (2004) and Georgia and Romania (2005) have followed. Outside of east Europe, a flat tax has operated in Jersey and Guernsey since 1940 and 1960 respectively, and in Hong Kong since 1947. ...Lower marginal rates of taxation remove disincentives for work and increase disposable income among the wealth-creating sections of the economy. This stimulates investment and economic growth. Eastern European countries with a flat tax have grown twice as fast as countries without. They have had an average annual GDP growth of 5.3 per cent, compared with only 2.6 per cent among those without.
      http://www.reform.co.uk/website/pressroom/bulletinarchive.aspx?o=110

 Pro-tax OECD bureaucrats urge higher taxes in Mexico. While there are a handful of good economists working at the Organization for Economic Cooperation and Development, most of the people at the Paris-based bureaucracy are addicted to bigger government and higher taxes (which is rather ironic since they are exempt from paying any tax on their bloated salaries). The latest evidence of the OECD's love affair with taxes is a publication endorsing higher taxes in Mexico. Amazingly, the bureaucrats think that Mexico can become more prosperous by increasing the size and cost of government:

      ...the pathways to prosperity have to be both mapped out and financed by the public sector. ...But core fiscal resources are too limited for this, and oil-related revenues are too unpredictable. Tax reforms that would help ease the fiscal constraints have become snarled up in the political process. Mexico badly needs a fiscal framework that will allow its development needs to be financed in an adequate, stable and predictable fashion by the different levels of government. ...Mexico's fiscal framework leaves much to be desired: Total revenues are low relative to GDP... There is a consensus on the need for a tax reform that would broaden the base, especially for indirect taxes, and generate higher and more stable revenues.
      http://www.oecd.org/dataoecd/49/10/35312303.pdf
 
 
 
 

21. Fun for Politicians, Legal Nightmare For Gasoline Retailers
September 14, 2005; Page A21

You can learn a lot from the Web, including brushing up on your college psychology. For instance: "Pavlovian conditioning is the fundamental building block of learning. It is so basic to how animals adapt to their environment that it is shown by virtually all animals, from simple multicellular organisms such as flatworms (Planaria) to humans. There is even evidence that single-celled animals such as Paramecia are capable of Pavlovian conditioning."*

There is evidence, too, that members of Congress are capable of this form of learning, and perhaps only this form of learning. Consider their response when presented with the reality of sharply rising gasoline prices: They shout "price gouging" and, assuming they haven't slipped and hurt themselves in a puddle of their own planarian drool, rush to the TV cameras to be seen calling for legislation, investigations and crackdowns on sellers of gasoline.

When prices are falling, which they do about as frequently as they rise, Congress people do not rush to the cameras and charge consumers with "price gouging" and propose legislation to protect oil companies. Such are the fathomless mysteries of nature.

Take a particularly sophisticated organism, Sen. Byron Dorgan of North Dakota, a planarian among paramecia. Last week he proposed a windfall profits tax on oil companies. These are the same oil companies that, in response to higher oil prices, we are relying upon to increase investment in the search for oil and production of gasoline. His bill would be perverse and self-defeating. But Mr. Dorgan was quick to add he didn't plan on it actually becoming law: "Most likely Congress will do little or nothing but talk a great deal and hold hearings."

A sophisticated flatworm, indeed, is one capable of such multileveled dialogue. Advertisers are increasingly able to target consumers individually. Mr. Dorgan will one day be able to use the Internet to tailor separate and totally contradictory messages for every voter in his state, depending on whether they are clueless enough to believe that confiscating oil company profits would improve the gasoline situation.

We tease Mr. Dorgan but could substitute the names of dozens of Congressmen and women who failed to resist this hackneyed bit of political theater. Oh well, harmless fun, right?

Two weeks ago, the country survived the long weekend holiday -- one of the busiest travel periods of the year -- without the predicted shortages, thanks to gas stations putting up their prices and tamping down demand. Refiners, wholesalers and pipeline operators responded to Katrina with heroic efforts to recover and make sure gasoline could be had, even if at a higher price.

All in all, the Bobo-like resiliency of the American economy makes a striking contrast to the unutterable banality of our political class, whose stupidity and craven opportunism accomplished little except to obscure from the average American the results of this unwanted but heartening experiment in the nation's adaptability and resourcefulness.

And, no, the fun was not entirely harmless. In a moment of national challenge, not only did politicians become champions of ignorance and prejudice while other Americans were getting their hands dirty. But long after the hacks have milked all the political mileage from their theatrics, dozens or hundreds of gasoline merchants around the country will be contending with subpoenas, legal fees and plea bargains for behaving like business people.

In essence, they can expect to be ground up in the wheels of legal persecution so people like Andrew Spano can hold a press conference.

He's the elected executive of Westchester County, N.Y., which boasts 400 or more gasoline stations but yet felt it necessary to target 11 with subpoenas for the fanciful crime of price gouging. Gasoline is the most visible price in the economy, easily discernible from the roadway without even slowing down. Yet the head of the Westchester consumer protection office went on local TV and all but pronounced one station owner guilty because he raised his posted price more than the next station down the street.

Such exercises in scapegoating became epidemic last week. Solemnly, one political mahatma after another vouchsafed the economic insight that even though the price of oil in the ground may be rising, even though the price of gasoline at refineries may be rising, even though the price of gasoline futures traded on commodity exchanges may be rising, the price of gasoline in the tanks at gas stations must remain unchanged until it's all gone (which it soon will be). One Florida station owner told investigators exactly why he raised prices -- because he had too many customers. For his sensible honesty, he was named in the first lawsuit brought as part of the state's "gouging" dragnet.

In this cavalcade of ignorance and rascality, it's almost worth applauding those politicians who satisfied the urge to playact over gas prices by calling for the temporary suspension of fuel taxes. In principle, this would have no effect on the prices needed to balance supply and demand in the short term (though it might cause some shuffling of supplies from high-tax to low-tax states). But neither would it make victims out of small business owners, many of them immigrants, who operate a goodly portion of the nation's gas stations. So much of good politics is simply resisting the urge to do harm.

A word for the children, who may be shocked by this column's likening of our elected leaders to unappetizing creatures that live in weedy ponds and feed on decaying animal matter: We respect democracy; we honor the choices of voters by seating their elected representatives in legislatures and executive offices around the nation. That doesn't mean we have to admire the personal qualities of those so elected, and many of them have given us little to admire over the past week or two.

*from the Encyclopedia of Psychology, at psychology.org.

Write to Holman W. Jenkins Jr. at holman.jenkins@wsj.com
 

22. WATER FOR SALE
------------------------------------------------------------------------

More than a billion poor people in the world lack access to safe
drinking water. Privatizing water delivery could help these people
gain access to potable water, says Reason's Ronald Bailey.

Public water systems in developing countries generally supply
politically connected wealthy and middle class people, whereas the poor
are not hooked up to municipal water mains. One study of 15 of the
poorest countries found that 80 percent of the people were not hooked
up to water mains. Consequently, poor people had to purchase water
through distributors at a much higher price. According to Bailey:
   o    Water obtained by methods other than a water main costs, on
        average, 12 times more.
   o    Residents of Karachi, Pakistan, pay 28 to 83 times more,
        while in Lima, Peru, they pay 17 times more.
   o    Essentially, the rich get cheap tap water while the poor
        pay the moral equivalent of Perrier prices.
While many privatization schemes are imperfect, Bailey notes that
even flawed privatization plans have resulted in positive outcomes:
   o    Before privatization in 1989, only 20 percent of urban
        dwellers in African Guinea had access to safe drinking
        water; by 2001, 70 percent did.
   o    In Cartagena, Columbia, privatization boosted the number of
        people receiving piped water by 27 percent.
   o    In Buenos Aires, 3 million new households were connected to
        piped water -- 85 percent of which lived in the
        poor suburbs of the city.
Bailey notes that the price of piped water rose under these
policies, but argues that this is not relevant. Since most poor people
could not access piped water before, they actually experienced a price
drop.

Source: Ronald Bailey, "Water Is a Human Right," Reason.com,
August 17, 2005.
For text:
http://www.reason.com/rb/rb081705.shtml
For more on Privatization: Resource Management:
http://www.ncpa.org/pi/internat/intdex7.html
 

23. Low tax rates attract highly skilled workers and entrepreneurs. Many nations, including the United States, have preferential policies to attract the best and the brightest. A new study of Swiss data by two OECD economists confirms that this is a wise policy. Workers - particularly highly productive ones - migrate to jurisdictions that take less of their money:

      ...several countries * including Canada, Germany, Switzerland, the United States and the United Kingdom * have introduced schemes to attract highly qualified foreigners. Tax incentives have also been used to attract highly skilled migrants. In the Netherlands, for example, highly skilled foreigners may profit from an income tax allowance of 30%. Favourable tax schemes for immigrants also apply in Belgium, Denmark, Finland, Norway and Sweden. ...The regression analysis first studies internal migration within Switzerland. ...Clearly, there is a positive relation between the tax differential and the migration probability. The effect is even stronger for highly qualified people, who are apparently more attracted towards low-tax communities. ...A very robust influence of the tax burden on the share of the highly skilled among the new immigrants can be observed. Indeed, apart from the tax burden, there is little else that is statistically significant... The most important finding of this study is that the community tax burden has a significant impact on highly skilled migration. Both highly skilled natives and immigrants react to tax differences in a similar way, i.e. they are more inclined to migrate to low-tax areas. This result is very robust and holds even after several factors, including qualify-of-life measures, are controlled for.
      http://www.oecd.org/dataoecd/5/60/35239536.pdf
 
 
 

 Experts confirm that high taxes and excessive government are boosting the underground economy. Politicians complain about tax evasion, but they should look in the mirror when assigning blame. A new study by European economists confirms that high tax rates and excessive regulation are driving people underground. Among industrialized nations, the United States and Switzerland have the lowest levels of underground activity, showing yet another advantage of lower tax rates:

      In almost all studies, it has been found out, that the tax and social security contribution burdens are one of the main causes for the existence of the shadow economy. Since taxes affect labor-leisure choices, and also stimulate labor supply in the shadow economy, the distortion of the overall tax burden is a major concern of economists. ...The increase of the intensity of regulations (often measured in the number of laws and regulations, like license requirements) is another important factor, which reduces the freedom (of choice) for individuals engaged in the official economy. ...clearly demonstrates that the increase of the tax and social security contribution burdens is by far most important single influence of the increase of the shadow economy. ...The average size of the shadow economy...of these 21 OECD countries was 16.3 [percent of GDP]. ...The first conclusion from these results is that for all countries investigated the shadow economy has reached a remarkably large size... The second conclusion is...people engage in shadow economic activity for a variety of reasons, among most important of which we can count are government actions, most notable taxation and regulation.
      http://www.crema-research.ch/papers/2005-13.pdf
 
 

24. Helping the World's Poor WSJ September 13, 2005; Page A16
The so-called Millennium Development Goals for helping the planet's poorest will be among the topics of discussion at the U.N. summit that begins tomorrow in New York. In recent weeks, the Bush Administration has come under media fire for suggesting some sensible revisions, such as requiring more accountability from countries on the receiving end of international assistance (imagine that).

But according to an article by Amir Attaran in the October issue of PLoS Medicine, a public health journal, the MDG program has much more fundamental problems that the U.S. might take into account before succumbing to mounting pressure to increase aid.

The MDGs -- which target poverty, hunger, infectious disease and other problems in the developing world -- were drafted in 2000 to great fanfare. Yet five years on, writes Mr. Attaran, a professor at the University of Ottawa who specializes in population health and global development policy, "many of the most important MDGs, including those to reduce malaria, maternal mortality, or tuberculosis (TB), suffer from a worrying lack of scientifically valid data."

The article goes on to say that while progress on each of these goals is portrayed in measurable terms, "often the subject matter is so immeasurable, or the measurements are so inadequate, that one cannot know the baseline condition before the MDGs, or know if the desired trend of improvement is actually occurring."

Perhaps even more disturbing, however, is Mr. Attaran's revelation that U.N. scientists "know about these troubles" and that "the necessary corrective steps are being held up by political interference, including the organization's senior leadership, who have ordered delays to amendments that could repair the MDGs." Anticipating this week's summit, a September 2004 memo from U.N. Deputy Secretary General Louise Frechette actually instructed U.N. scientists in charge of MDG statistics to downplay the measurement problems until after the summit because "any changes at this stage would only distract from the result that we would like to achieve." That "result," of course, is more money from wealthy nations with no questions asked.

Other U.N. health outfits have demonstrated a similar inability to measure progress, or the lack thereof. The World Health Organization launched its Roll Back Malaria program in 1998 with the goal of halving the number of malaria deaths by 2010. Seven years into the effort, WHO is claiming it's "too early to tell" if they're on track to meet the goal.

Defenders of the U.N., such as Columbia University's Jeffrey Sachs, accuse the organization's critics of being stingy and irresponsible. But the U.S. government's real responsibility is to make sure tax dollars are put to wise use. U.S. development aid has increased 90% since President Bush took office, and as the world's largest donor it has every right to demand that the U.N. be held accountable for making promises that aren't objectively verifiable.

Health goals that can't be measured, said Mr. Attaran in a recent interview, should be abandoned in favor of alternative approaches. "Because serial guessing isn't helping poor people. If we set quantitative goals, then we ought to be concerned enough to actually quantitate."

If the U.N. and its supporters are serious about the Millennium Development Goals, and U.S. support in pursuing them, they should stop equating criticism of U.N. methods with criticism of its motives. U.N. reform is a better use of their energies this week. And the establishment of an auditor general or some other independent body responsible for commissioning and publishing performance reviews is a good place to start.

25. Competition Erodes Mexican Industrial Output

By DAVID LUHNOW
Staff Reporter of THE WALL STREET JOURNAL
September 14, 2005; Page A18

MEXICO CITY -- Mexico's economy is slowing faster than expected, a worrisome sign that its manufacturing exports are having a tougher time competing against rivals like China.

Mexican industrial output unexpectedly fell in July, off 1.1% from the same month a year ago, according to government data released Monday. The negative news knocked some wind out of the stock market, which had set record highs in recent days. Yesterday, stocks slipped 0.68% in reaction to the data.

Even before the July number was known, investment bank Morgan Stanley cut its forecast for Mexico's economic growth to 3.2% from 3.6%. A week earlier, Mexico's central bank said growth likely would be closer to 3%, compared with its initial forecast of between 3.5% and 4%.

While lower oil output and weak car exports in July accounted for much of the decline, Mexican industrial output has fallen short of expectations now for three consecutive months. The July data was below the 1.7% average estimate in a Dow Jones Newswires survey of seven economists.

The biggest reason to worry is that Mexican output failed to respond quickly to an uptick in U.S. growth during the past few months. Since Mexico sends the vast majority of its exports to the U.S., Mexican industrial output is normally very closely linked to U.S. growth.

While most economists believe that link is still alive and well, Mexico's ability to cash in on higher U.S. growth could weaken over time if Mexico's export-driven economy is losing competitiveness, either through a strong peso that makes its exports more expensive or through the nation's inability to improve productivity through changes to tax, energy and labor laws.

There is evidence this is happening. Since 2003, Mexican exports as a share of the U.S. import market have fallen steadily from about 11% to 9.6% in July -- the lowest since 1999.

Things may not improve any time soon Mexico. U.S. industrial activity likely will face an uphill battle in the coming months due to rising energy prices and effects of Hurricane Katrina.

The good news -- in the longterm, anyway -- is that many investors don't seem frightened by slow growth here. Mexico and Latin America have lower inflation and sounder finances than they did in years past, making them well placed to avoid financial shocks if the global economy slows down. "There are a lot of new investors right now looking at these markets. And milder growth won't be enough to stop this," says Gray Newman, chief economist for Latin America at Morgan Stanley.

Write to David Luhnow at david.luhnow@wsj.com
 

26. Japan Bets on Reform
WSJ September 13, 2005; Page A16

Fortune favors the bold, and on Sunday it smiled broadly on Junichiro Koizumi. Japan's Prime Minister won a stunning victory in snap elections because he stood on principle and called the vote after a reform dear to him, post office privatization, was blocked by the upper house of Parliament. The electorate rewarded him for trusting them.

Mr. Koizumi's governing coalition now holds more than the two-thirds majority it needs to override further upper house intransigence. The unexpectedly large victory means that Japan's voters have endorsed Mr. Koizumi's policy mix of smaller government and an activist foreign policy. The economic paternalism and diplomatic timidity of the post-World War II era are giving way to change. The Bush Administration can also be pleased by this victory for another one of its Iraq War allies. The opposition's promise to have the troops home by Christmas carried little weight with voters.

Mr. Koizumi says he wants Japan to become a "normal country," economically, militarily, culturally and in foreign policy. For decades, academics and diplomats have lauded the "Japanese Way" of minimal political debate and even more miniature returns on bank deposits, a combination that gave politicians money to throw at "champion" industries and companies.

This policy of politically directed credit was sustainable for a time, as Japan rebuilt from World War II, and in the 1980s and early 1990s some Americans actually wanted the U.S. to adopt this "industrial policy." But the system finally imploded with the real estate and stock market crashes of the 1990s, and Japan entered its long decade of stagnation. Mr. Koizumi is the first leader to propose a way back to more dynamic growth.

There's no better place for the re-elected Prime Minister to start than where he left off, by taking up again the privatization of the unwieldy post office. This government institution has 24,700 offices, 400,000 employees and $3 trillion in assets. Apart from delivering mail, the post office is the world's largest bank, its $1.9 trillion in deposits easily surpassing Citigroup's $1.5 trillion. Its insurance arm, Japan's largest insurer, contributes its assets to those owned by the bank to make up the $3 trillion in total assets.

Passing the post office work force to the private sector alone will provide savings to the government and help clean up politics by removing this source of patronage and corruption. There's also a huge benefit to be reaped from the better allocation of $3 trillion in investment throughout the economy.

The size of Sunday's victory may even persuade the government to strengthen the post office bills, which had been watered down in the unsuccessful effort to win passage before Mr. Koizumi called the election. Under the current bill, privatization won't be completed until 2017, and we hope Mr. Koizumi will use his mandate to accelerate reforms. Next on the agenda are the pension and medical systems, both important in a society where 20% of the population will soon be over the age of 60, and the civil service. Financial-sector reforms have already led to a major expansion of residential lending by private banks.

In foreign policy, Mr. Koizumi will most likely press ahead with his plan to revise Article 9 of the Constitution, which by barring use of force abroad has hamstrung foreign policy for decades. He is expected to pass a law that will give blanket approval to international intervention, rather than having to pass separate laws for each event.

China is not expected to savor Mr. Koizumi's victory or his more assertive foreign policy. Beijing has preferred the compliant, apologetic Tokyo that played political dwarf on the international stage and threw millions of yen in aid to countries that suffered from Japanese atrocities in World War II. Two days before the vote, China sent five warships to an area disputed by Tokyo and Beijing. If that move was an attempt to influence the election, Beijing has once again misjudged how a democracy responds to intimidation.

Japan, the economic giant of the 1980s, has been talking about reform for years, and its electorate has now sent a message to the politicians to make up for lost time. For the first time in 15 years, the ruling party has an overwhelming majority. Let's hope they use it to return Japan as one of the engines of global prosperity.
 

27. ARE SCIENTIFIC PAPERS RELIABLE?

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

Scientific papers are the primary source of evidence available to
doctors and lawmakers in forming their decisions. However, an article
from PLoS Medicine (an online journal) finds that majority of these
papers reach false conclusions.

The author analyzed 49 research articles printed in widely read
medical journals between 1990 and 2003 that were cited by other
scientists 1,000 times or more. Some of them were later proven
incorrect. He finds that several things can distort the accuracy of
such reports, such as small sample sizes, studies that show weak
effects, researcher bias, and poorly designed experiments.
Next, the author designed a mathematical model to predict the
accuracy of studies in general. He found:
   o    Even a large, well designed study with little research bias
        has only an 85 percent chance of being right.
   o    An underpowered, poorly performed drug trial with research
        bias has only a 17 percent chance of producing true
        conclusions.
   o    Overall, more than half of all published research is
        probably wrong.
The author does note that medical science is not the be-all and
end-all of research. The physical sciences, with more certain
theoretical foundations and well-defined methods, probably do better
than medicine.
Source: "...and statistics," Economist, September 3, 2005; based
upon: John P. A. Ioannidis, "Why Most Published Research Findings Are
False," PloS Medicine, Volume 2, Issue 8, August 2005. ]
For text (subscription required):
http://www.economist.com/science/displayStory.cfm?story_id=4342386
For study:
http://medicine.plosjournals.org/perlserv/?request=get-document&doi=10.1371/journal.pmed.0020124

For more on New Trends and Technology:

http://www.ncpa.org/iss/hea/

28. A TIDAL WAVE OF TARIFFS
------------------------------------------------------------------------

Last December's Asian tsunami produced incredible television clips and
pulled at the heartstrings of millions of people living in rich
countries. Private charities raised nearly $5 billion in aid for
tsunami victims, while governments pledged more than $6 billion, says
Foreign Policy (FP).
Yet, the tsunami is little more than a blip in the radar of
international development. Otherwise preventable deaths caused by
HIV/AIDS, childhood diarrhea and other diseases found mainly in poor
countries create a death toll equivalent to last year's tsunami every
month, says FP.
Moreover, pledges of foreign government aid should be kept in
perspective:
   o    Last year, the United States Treasury raised $1.87 billion
        in revenue from tariffs imposed on imports from the
        four major tsunami-affected countries -- Indonesia
        ($591 million), India ($522 million), Thailand ($492 million)
        and Sri Lanka ($262 million).
   o    That's twice the $908 million in aid the U.S. Congress
        approved in May.
   o    In effect, the United States will recoup its entire aid
        package to tsunami victims within six months.
If rich countries really want to commit themselves to improving
the lives of tsunami victims, they should end these taxes and
protectionist barriers as part of the current Doha Round of
international trade negotiations, says FP.

Source: Editorial, "Ranking The Rich 2005: A Tidal Wave of
Tariffs," Foreign Policy, Center for Global Development and the
Carnegie Endowment for International Peace, September/October 2005.
For text (subscription required):
http://www.foreignpolicy.com/story/cms.php?story_id=3215
For more on Federal Spending and Budget Issues:
http://www.ncpa.org/iss/bud/
 
 

29. No Tyranny of the Tiny Minority By Charles Finny   Published    09/20/2005
E-Mail  Bookmark  Print  Save
  TCS http://www.techcentralstation.com/0920053.html
Close to 90% of the New Zealand electorate supports the country's current economic policy settings.
As in 1996, New Zealand's Mixed Member Proportional electoral system (borrowed from Germany), has delivered a period of a few weeks of uncertainty. We will not know which party has achieved the highest number of votes until all the special votes (including a large number of votes from New Zealanders living overseas) are counted. We won't know the final vote count for two weeks. And once that final result is known some form of coalition or support arrangement will have to be negotiated with the smaller parties. The most probable outcome is that Helen Clark's Labour Party will form the core of the next Government, but even Helen Clark is admitting that there is still some uncertainty over this outcome.
 

Despite the uncertainty, it's essential that the two largest parties do not overlook the fact that close to 90% of the New Zealand electorate demonstrated their general support for the country's current economic policy settings. The party seeking the most radical changes to these settings -- the Green Party -- was lucky to meet the 5% threshold set as a minimum for attaining representation in the new Parliament. The Green Party stood on a platform that opposed both free trade and major increases in Government investment in essential infrastructure such as roads. These two policy areas are critical for New Zealand's future.

Two other smaller parties advocate policies that are of concern to New Zealand's economy. The New Zealand First Party voted against New Zealand's free trade agreement with Thailand in the last Parliament and is expressing concerns about the current negotiations with China, Malaysia and ASEAN. The Maori Party likewise voted against the Thailand FTA.

The mathematics of the 17 September election result means that for a stable Government to be formed to see New Zealand through the next three years, some form of coalition or accommodation is going to be needed with at least one of these three smaller parties (maybe all). It is critical in therefore that the major parties -- Labour and National -- do not compromise on trade policy and investment in roads to achieve control of the Treasury benches. Such a compromise is very unlikely from Don Brash's National Party. But it is a slight risk from Labour.

For example, the Labour Party's election policy on international trade contained a troubling omission -- reference to the possibility of a free trade agreement with the United States. Media stories late last week suggested that this reference was omitted because Labour did not want to upset their possible coalition partner -- the Greens -- by including this concept.

Among the biggest challenges facing New Zealand over the next three years is going to be that of reducing the country's enormous current account deficit -- as a proportion of GDP it is bigger even than that currently being run by Australia or the United States. The only way we are going to reduce the gap between what we export and import is to grow our exports, and in particular our exports of higher value services and niche manufactured products. We will not be able to improve our export performance through the trade policies, discredited by every serious economist, promoted by some of our smaller parties in Parliament.

A further area of concern vis-à-vis the Green Party is New Zealand's policies on climate change, the Kyoto Protocol, and carbon taxes. New Zealand policy in this area needs urgent review, particularly as New Zealand's major economic partners -- Australia, United States, Japan, China and Korea (India has not yet achieved this status in its economic relationship with New Zealand) -- are pursuing a new model, one which some of us believe has a better chance of achieving meaningful results for the environment.

There is an old saying in politics -- that in a democracy the people get the Government they deserve. Let us hope that in New Zealand 95% of the people don't end up suffering the consequences of some policies which only 5% were prepared to vote for.

 The author is CEO, Wellington Regional Chamber of Commerce.

30. Mixed tax reform news. The flat tax appears closer to reality in Poland as the Deputy Finance Minister of the country's left-wing government admitted that a flat tax was very feasible, and that the rate could be 16 percent or below. Elections later this month are supposed to sweep in a center-right coalition, which presumably will be good news, though this does not guarantee a flat tax since one of the parties favors a social engineering approach. The news from Greece is not as cheerful. After months of anticipation, the government dropped the ball and chose not to propose a flat tax. The Prime Minister's rhetoric was not bad, and he even indicated the importance of lower tax rates, but it does not appear that Greece will be the first "Old Europe" country to hop on the flat tax bandwagon:

      Plans to implement a flat rate for personal income, corporate income and value-added tax, as proposed by lead opposition party Civic Platform (PO), are feasible at a level slightly higher than the 15% proposed by the party, current deputy Finance Minister Jaroslaw Neneman told a radio audience Tuesday. "We made such estimations some time ago," Neneman said in an interview for Radio PiN. "Tax receipts levels would be sufficient with flat tax rate a little above 15%." "It could be 15.5-16%," he added. ...Poland is slated for parliamentary elections in late September which will in all probability reome the the leftist SLD-government from power and replace it with a coalition government led by PO and PiS. The latest polls have consistently shown those two parties capable of forming a solid majority. Unfortunately, PiS is bitterly opposed to the PO's flat tax plan and much debate will occur in the coming months over tax policy.
      http://209.157.64.200/focus/f-news/1476990/posts
 

31. World War II's Do-Good OffspringAre Flagging George Malleon
WSJ September 20, 2005; Page A17

With World War II raging in 1940, Republicans chose Wendell Willkie, a charismatic utility executive from Indiana, to challenge President Roosevelt's bid for a third term. The anti-New Deal Hoosier lost badly, but the president two years later sent him on a grueling tour of a war-wracked world to demonstrate American political unity. He subsequently wrote "One World," a book appealing for postwar international cooperation.

The Willkie best seller reflected a burgeoning consensus in the U.S. that multilateralism was the key to future peace. Failing to support the League of Nations after the first World War had been a historic mistake, it was held. So with broad public support, the U.S. organized a 46-member "United Nations" in June of 1945. The International Monetary Fund and World Bank had been formed the preceding July at Bretton Woods, N.H. Multilateralism, which would spawn a string of acronymic entities, was thus born out of the ashes of the most devastating war in history.

Fast forward 60 years to 2005 and you find that there is a subtle change in world opinion. A U.S. presidential election last year pitted a party inclined toward multilateralism, the Democrats, against a Republican Party increasingly skeptical of U.N. behavior. The Democrats lost. Go down the list of multilateral institutions -- the U.N., the IMF, the World Bank, the Organization for Security and Cooperation in Europe (OSCE), etc. -- and you find most aware of a need for reform.

The declining appeal of multilateralism was on display last week in New York. U.N. Secretary-General Kofi Annan had hoped to revive the body's scandal-tarnished reputation with a global summit of 170 national leaders assembled amid pomp, circumstance and limousine traffic jams. But the U.N. "reforms" they approved came out paper-thin and the event barely made the front pages of the New York Times, usually full of admiration for anything that happens at Turtle Bay.

President George W. Bush's traditional welcoming speech was mostly boilerplate, suggesting that he no longer expects much help from the U.N. in dealing with such thorny problems as the nuclear ambitions of North Korea and Iran or the establishment of law and order in Iraq. Even Mr. Annan, who listed pluses and minuses on our pages yesterday, betrayed some disappointment over what was not accomplished, especially the unwillingness of the General Assembly to grant his office more power.

What had been billed as a global testimonial bash turned out to be a chorus of faint praise. Prime Minister John Howard of Australia told Journal editors at a morning coffee that he had never had an idealistic view of the U.N., but it does have some good points. When I visited Greek Prime Minister Costas Karamanlis briefly at the St. Regis Thursday, he observed that the necessity for consensus at the U.N. is both a "strength and a weakness," hardly a ringing endorsement.

Next comes the turn of the IMF and World Bank, which will hold their joint annual meeting in Washington this weekend. Both have been in an introspective mood, brought about by publicly voiced doubts about whether either has a useful role to play in a world that has changed greatly since they were conceived to help restore international financial stability.

The IMF, set up initially as the facilitator of the Bretton Woods fixed-exchange-rate monetary system, has been reinventing itself since U.S. profligacy wiped out Bretton Woods in 1971. In the process it has moved further into the realm of the World Bank, set up to finance economic redevelopment. The problem for both institutions is that the U.S. has grown weary of writing blank checks to insolvent nations and wants to predicate foreign aid on improved economic policies by the borrowers.

Mr. Bush's "challenge grants" reflect recognition that billions in foreign-aid money has been squandered through misuse by receiving governments. A great many poor-country politicians don't like this demand for better performance and made that clear at the U.N. General Assembly by accusing Mr. Bush of stinginess. Multilateral financing agencies know that the Bush doctrine implies doubts about their usefulness as well.

Then there is the World Trade Organization, which has floundered since it was created in 1995 to take over the role of the General Agreement on Tariffs and Trade. The GATT was an agreement on trade rules that functioned well through a series of multinational trade liberalization rounds. But at the end of the Uruguay Round, GATT members decided that a formal body with a bureaucracy was needed for the next round, launched at Doha, Qatar. The Doha round has so far been a hard slog. Countries have turned to bilateral trade deals and regional arrangements out of doubts that Doha will ever come off.

At the WTO ministerial meeting in Hong Kong in December, you can bet that every group lobbying against free trade and globalization will be on hand to try to disrupt proceedings. Oh, for the good old days when there was only GATT and less visibility.

Another visitor to the Journal last week was Alain Madelin, a former finance minister of France and a longtime critic of statism and protectionism in his writings in the Journal and elsewhere. He currently is lobbying to become the next secretary-general of the Organization for Economic Cooperation and Development (OECD), successor to the organization created in 1947 to administer the successful Marshall Plan program to reconstruct Europe. The current head, Canadian Don Johnston, retires next year.

The OECD has mutated into a grouping of the world's 30 most advanced nations, 19 of whom are in Europe. Mr. Madelin would hope to turn this institution, which specializes in economic analysis and statistics, into a more active political body that would foster free trade and more enlightened policies to attract private investment. In short, it would do what larger and more important bodies like the U.N. and IMF are not doing, promote self-reliance of the type that has turned China into a paragon of economic growth.

Sounds like a good idea. If multilateralism is to be with us always, it might as well be put to some use.

Write to George Melloan at george.melloan@wsj.com
 
 

32. LET FREE TRADE REIGN
------------------------------------------------------------------------
Free trade has had a cumulative aggregate benefit on American
        consumers of about $2.3 trillion from 1992 to 2002, say
        James Lagenfeld and James Nieberding... BUSINESS ECONOMICS
Protectionists often make headlines by denouncing free trade agreements
as bad for America. But economists, dating back to David Hume in 1752,
have understood the benefits of free and open trade to society as a
whole, particularly consumers.
Economists James Lagenfeld and James Nieberding calculated the
implied effect of increased trade on U.S. consumers' income per
household and discovered:
   o    Free trade has had a cumulative aggregate benefit on
        American consumers of about $2.3 trillion from 1992 to
        2002.
   o    Free trade reduces the price of goods and services for
        consumers; between 1992 and 2002, real disposal income
        per household increased by $10,387 per year, and
        expanded trade accounted for 12 to 20 percent of the increase.
   o    Two major trade agreements of the 1990s -- NAFTA and the
        Uruguay Round -- generated annual benefits for the
        average American family of four between $1,300 and $2,000,
        measured in 1996 dollars.
Free trade benefits Americans by:
   o    Increasing the availability of imported goods to
        consumers, forcing domestic producers to lower prices and
        improve efficiency.
   o    Increasing the purchasing power of the dollar.
   o    Allowing producers of domestic goods to export their
        products to other countries, stimulating domestic
        economic growth.
Obviously, some groups will be adversely affected by free trade in
cases where other countries can produce a better and cheaper good than
a comparable domestic producer. However, this frees up resources to
produce other goods. On balance, the benefits of free trade far
outweigh the costs.

Source: James Langenfeld and James Nieberding, "The Benefits of
Free Trade to U.S. Consumers," Business Economics, vol. 40, no. 3, July
2005.
For text:
http://www.nabe.com/publib/be/0503/langenfeld.html
For more on Trade:
http://www.ncpa.org/pd/trade/trade.ht
 
 

33. The Case for Cutting Indonesia's Fuel Subsidy  How it hurts the poor.
By Christopher Lingle   Published    09/16/2005
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  TCS
http://www.techcentralstation.com/0916055.html
The Indonesian rupiah has lost more than 5% of its value against the US dollar this year and is at its lowest rate since March 2002. Perhaps the single most important cause of the weakness is the Indonesian government's subsidies on petrol prices. Pump prices are 2,400 rupiah (24 US cents) per liter. The cost of the subsidy now exceeds $14 billion and will constitute about a third of the estimated spending by the central government this year.

With international oil prices at around $65 per barrel, the primary beneficiaries in Indonesia of this largesse are likely to be fuel smugglers and corrupt officials who allow fuels to be bought at low prices locally and sold at higher prices in foreign markets.
 
 

Despite high global crude prices, the demand for domestic consumption of fuel remains high. Import costs and opportunity costs have both risen sharply. Because domestic oil output is down due to a lack of new investment, Indonesia has become a net importer of crude and the demand for dollars to fund imports further weakens the rupiah.

Subsidizing the prices of automotive diesel, industrial diesel, and kerosene for industries is a failure of political governance. It places an enormous burden on the state budget and creates opportunities for corruption. Continuing such subsidies will make it difficult for the government to maintain a healthy budget or promote sustainable economic growth. Raising fuel price is actually in the true interests of the vast majority of Indonesians. Failure to do so is a classic instance of politicians choosing political expediency over economic reality.
 

Reducing subsidies for any goods or services is always a problematic political issue (which should be a good reason for never implementing them). Faced with higher costs in the short-run, politicians inevitably avoid immediate pain even when long-run gains would be substantial. An April 2000 plan to raise fuel prices was scrapped after massive demonstrations against the proposed increases.

But governments must be determined to educate their general public on basic facts to help minimize the inevitable unrest following subsidy cuts.

In this case, the primary beneficiaries of government subsidies on the sale of refined petroleum products (BBM -- Bahan Bakar Minyak) are not the poor. Instead, many of the beneficiaries are those whose income places them well in the middle class or higher and who drive about in large cars.

Furthermore, most of the financial gains from subsidies go to industrial users. While households consume 20 percent of kerosene, the remaining 80 percent goes to industry. Since many of the companies receiving advantages from BBM are exporters, foreign buyers of their products constitute a large but undeserving group of beneficiaries.

In this form, BBM is a form of "corporate welfare" that harms the poor because public funds are diverted from programs that might offer substantially greater benefits to lower income groups, such as improved public transport systems or better schools.

From an economic point of view, there are opportunity losses due to the government not selling refined products at the current high prices. Such sales would yield more dollar earnings and assist in propping up the beleaguered rupiah and strengthening the overall economy.

And then there is the matter of smuggling. The presence of large price differentials in neighboring countries presents a lucrative temptation for smugglers to buy at low, subsidized prices in Indonesia and then sell offshore for considerable profits. These returns are high even when factoring in the bribes that are paid to corrupt officials with Pertamina, the fiscal authorities, customs officials or naval personnel. It is bad enough that smuggling benefits corrupt officials and criminals, but such operations result in Indonesian taxpayers extending a subsidy to foreigners who buy from the smugglers!

Regardless of street demonstrations and denunciations by various groups, steps must be taken to reduce BBM and eventually eliminate it. This will be important in allowing the central government to gain control of its budget by reducing a major source of deficits and mounting debt.

Meanwhile, delaying price increases means that the subsidy burden on the central government will continue to grow. As it is, BBM subsidies for refined petroleum products exceed by almost three times non-BBM subsidies on items like food, electricity, and other items.

Low prices for fuels also have environmental consequences. Much of the air pollution that plagues Jakarta and other large cities arises from low prices that encourage waste and encourage private vehicle use instead of encouraging use of public transit systems.

There is a widespread public misconception that foreign companies are exploiting most of the wealth and profits from Indonesia's oil and gas industry. However, Pertamina takes an average of 85 percent of the profits and some part of these funds disappears through corruption. Allegations have been made that Pertamina and military officials have smuggled subsidized fuels to other countries.

BBM has the perverse effect of rewarding the wealthy, damaging the environment, reducing costs for rich enterprises, and providing benefits to foreigners at the expense of locals!
 
 

Professors and students should denounce this corporate welfare and these transfers to the rich that also provide gifts to citizens of neighboring countries. Instead of manning barricades to protest against a reduction in fuel subsidies, time would be better spent finding better ways to spend scarce public funds, increasing economic production and reducing the corruption associated with the fuel subsidies.
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34. U.S. CONSULATES RAISE EXPORTS
------------------------------------------------------------------------

Improved communications and better sources of information make foreign
missions like consulates less relevant in the twenty-first century.
However, the National Bureau of Economic Research finds that these
foreign missions still perform a vital function: export promotion.

Andrew Rose notes that the State Department paid $4.2 billion for
diplomatic and consular programs, and another $1.5 billion for embassy
security, construction, and maintenance. Because of increased trade
effects, these foreign missions are well worth it. He analyzed 22
large exporting nations with 200 destination countries and found:
   o    Bilateral exports rise by about 6 to 10 percent for each
        additional consulate a nation establishes in a   customer nation.
   o    However, the effects of adding a consulate vary by the
        exporting nation.
   o    Also, the effects are non-linear -- that is, the first
        foreign mission gives a larger boost to exports than
        successive missions.
Taking into consideration a host of other factors that could
affect export levels, Rose concludes that the 6-10 percent export gain
he finds is statistically significant and economically plausible in
magnitude. Moreover, it varies by the exporting nation and is
non-linear -- that is, the first foreign mission gives a larger boost
to exports than successive missions.

Source: Linda Gorman, "U.S. Consulates Raise Exports," NBER Digest,
August 2005; based upon: Andrew Rose, "The Foreign Service and Foreign
Trade: Embassies as Export Promotion," National Bureau of Economic
Research, Working Paper, No. 11111, February 2005.

For text:
http://www.nber.org/digest/aug05/w11111.html
For abstract:
http://papers.nber.org/papers/w11111
For more on International Issues:
http://www.ncpa.org/pi/internat/intdex1.html
 

35. China Vows to Maintain Monetary Policy

By J.R. WU and AIPING CUI
DOW JONES NEWSWIRES
September 20, 2005; Page A14

BEIJING -- China's central bank said it will maintain its prudent monetary policy, noting that while the domestic economy is growing at a stable and rapid pace, problems over economic growth remain.

The People's Bank of China said after its third-quarter monetary-policy meeting that it will continue to maintain the basic stability of the yuan-exchange rate and that appreciation pressure appears to be abating.

"Overall, the present financial operations are good, the reform of the foreign-exchange rate mechanism is being implemented stably, the yuan exchange rate is moving in two directions and there are signs that the expectation of appreciation in the forwards market is narrowing," the central bank said in a statement yesterday.

This was the first quarterly monetary-policy meeting since China revalued the yuan in July.

The latest quarterly statement echoes views by central-bank officials in recent weeks that speculative pressures haven't been overly large since the revaluation.

In July, China revalued the yuan 2.1% to the U.S. dollar and began referencing its value to a basket of currencies. The move scrapped Beijing's 11-year-old effective dollar peg.

The People's Bank of China said it will continue to perfect the managed float of its foreign-exchange-rate mechanism, maintaining the basic stability of the yuan at a reasonable and balanced level.

The central bank said it will continue to speed up the development of the foreign-exchange market, promote new financial products and guide companies and individuals toward better management of foreign-exchange risk.

The central bank said that in general the economic-growth rate is slowing, but that forces remain that would pull growth higher.

Among the problems noted were high fixed-asset investments in some sectors, the tight situation in coal, power, oil and transportation, and the large trade surplus, or margin by which exports exceed imports.

The central bank said its macroeconomic policies will be aimed at expanding domestic consumption to promote continued economic growth and basic stability in prices.

In the first half, China's gross domestic product, or the total value of goods and services produced, rose 9.5% from a year earlier.

Write to J.R. Wu at jr.wu@dowjones.com and Aiping Cui at aiping.cui@dowjones.com
 

36. THREE'S A CHARM
------------------------------------------------------------------------
Amid concerns of declining birth rates, middle-class French
        women with three children could see their family allowances
        increased to $1,250 a month, say observers... LONDON DAILY
        TELEGRAPH
Middle-class French women will be offered cash incentives to have a
third child amid growing concerns that professional couples are having
too few children, says the London Daily Telegraph.

Although France's fertility rate of 1.9 is relatively high among
European countries, family lobbyists are dismayed by a fall in the
number of babies born to better-educated women. France's National
Union of Family Associations (UNAF) is playing a key role in shaping
policy and says the poor current level of compensation appeals only to
those with lower incomes.
French parents with three children already receive family
allowances of nearly $360 a month, a $360 annual contribution to
out-of-school activity costs and generous reductions on train and bus
fares. The Telegraph says increases in allowances have been widely
predicted:
   o    UNAF recommends setting the new allowance at up to $1,250 a
        month for women with three children, depending on
        the woman's salary; linking benefits to the woman's
        salary level will make it more attractive to professional
        women.
   o    There are plans to extend the "big family" advantage card
        beyond public transportation to a range of other
        services.
   o    At present, women are entitled to six months of maternity
        benefits for the first child and three years for the
        second; the new allowance will last for a year and be
        available to any French mother who elects to have a third
        baby and stay at home.
Despite the budgetary implications in a country already accused of
living extravagantly, the government agrees with the principle. The
one-year time limit would attempt to reduce pressure on social security
spending and prevent women from becoming detached from the work world
they leave to have families. The Telegraph says caps also might be
placed on spending in other areas of family support.
Source: Colin Randall, "Having a Third Baby Really Pays Off for
French Women," London Daily Telegraph/Washington Times, September 21,
2005.
For text (subscription required):
http://www.washtimes.com/world/20050920-115211-8871r.htm
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***
37. The moral case for tax havens. Places like Switzerland and the Cayman Islands serve a valuable economic role by enabling oppressed taxpayers to escape the reach of tax authorities in places like France and Germany. This pressures high-tax governments to lower tax rates and be less profligate. But tax havens also should be lauded for their role in protecting human rights. Most governments in the world are corrupt and there is still rampant persecution in many places based on ethnic, religious, economic, social, and political characteristics. Tax havens provide a refuge for victims of discrimination, enabling them to hide their assets - and thus make themselves less of a target for venal governments. For ethnic Chinese in Indonesia, businessmen in Venezuela, and Jews in North Africa, tax havens can be a genuine life-saver. Foreign Policy magazine explains some of the problems that exist in non-Western nations:

      Freedom House, an organization that studies countries' political systems, categorizes 103 of the world's 192 nations as either "not free" or "partially free," meaning that the civil liberties and basic political rights of their citizens are limited or severely curtailed. More than 3.6 billion people, or 56 percent of the world, live in such countries. Statistically, a "normal" human being in today's world is poor, lives in oppressive physical, social, and political conditions, and is ruled by unresponsive and corrupt government. ...Rich-world assumptions about what constitutes the global norm are costly illusions. Billions of dollars have been wasted by assuming that governments in poorer countries are more or less like those in rich ones, only a little less efficient. Despite constant reminders that most governments in the world are unable to perform relatively simple tasks, such as delivering the mail or collecting the garbage, most recipes for how these countries should solve their problems reflect the sophisticated capabilities taken for granted in rich countries, not the realities that exist everywhere else.
      http://www.foreignpolicy.com/story/cms.php?story_id=3212
 

DANGEROUSLY UNIQUE
------------------------------------------------------------------------

Statistically, a "normal" human being is poor, lives in oppressive
physical, social and political conditions and is ruled by an
unresponsive, corrupt government; but our definition of normalcy can be
costly, says Foreign Policy's Moises Naim.
About half of humanity lives on less than $2 a day, has no access
to social security and a third of the labor force is unemployed. But
normality can't be solely defined by statistics because the word
implies something that is usual, typical or expected; therefore, what
is normal is part statistics, part assumption, says Naim.
For example, we assume that having three meals a day, walking the
streets without fear and access to basic utilities is normal; sadly
it's not, says Naim:
   o    About 852 million people don't get three meals a day (when
        they do, their meals don't provide them with the
        required daily caloric intake), roughly 1.6 billion people
        lack access to electricity and 30 percent have never
        made a phone call.
   o    Street crime and urban violence are normal in most of the
        world; the average homicide rate in Latin America and
        the Caribbean is about 25 per 100,000 inhabitants.
   o    An estimated 246 million children - about 1 in 6 - work, and
        73 million are less than 10 years old.
   o    Childbirth is a source of death, disease and disability;
        more than half a million women die every year due to
        pregnancy-related complications in the developing world.
These assumptions are costly illusions, says Naim, since billions
of dollars have been wasted by assuming that governments in poorer
countries are more or less like those in rich ones, only a little less
efficient.
Furthermore, our ideals must not become a part of policy; it's
important to remain alert to when our advice is based on false
assumptions about normalcy, concludes Naim.
Source: Moises Naim, "Dangerously Unique," Foreign Policy,
September/October 2005.
For text (subscription required):
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38. A Bumpy Passage to Indian Reform WSJ By EMILY PARKER
September 23, 2005
Even with a reform-minded prime minister, economic reforms end up on the cutting-room floor.
NEW DELHI -- After spending some time talking to politicians and economists here, I have newfound respect for any journalist who dares to try to make sense of the Indian economy. There is no shortage of articulate and well-informed opinions, but good luck finding two people who tell you the same thing.

Of course, the penchant for endless debate here only partly explains New Delhi's current paralysis, and why even with a reform-minded prime minister and finance minister at the helm, economic reforms end up on the cutting-room floor. India's notoriously bloated bureaucracy certainly doesn't help. Nor does the fact that the Congress Party-led government is influenced by communist parties that support the government from outside the coalition -- elements that appear to be very effective at blocking reform. The Congress Party relies on support from over 60 seats held by the communists and their allies in India's 545-seat lower house of parliament.

The communist parties -- with their close ties to trade unions -- are widely blamed for setbacks to India's privatization agenda. Just last month, New Delhi confirmed that it will scrap plans to sell strategic stakes in 13 state-owned companies. My talks with Indian Finance Minister P. Chidambaram in his office here, made it obvious that in the current political environment privatization could be an uphill battle. "There are controversies at every step and every stage of the strategic sales route … at every stage the process is surrounded by controversy," Mr. Chidambaram told me.

Mr. Chidambaram is generally described by economists here as "a good man in a bad situation" -- a sharp Wall Street-style thinker who is shackled by leftist pressures within the government. Mr. Chidambaram has earned a personal reputation as a pro-market, business-friendly reformist. So what's stopping him from pushing through the kind of changes needed to take the economy forward?

"We are not dealing with a group of economists in a room," Mr. Chidambaram says plainly. "We are dealing with people from diverse backgrounds, and therefore one has to make out a political case. The BJP failed to make out a political case," he tells me, repeating the popular theory that the former Bharatiya Janata Party lost in the 2004 elections because of its pro-reform agenda.

Mr. Chidambaram may be pro-market at heart, but his words suggest that economics take a backseat to politics in New Delhi. On the issue of privatizing profit-making enterprises, he says, "One could make a strong economic argument in favor of some profit-making public-sector enterprises in some sectors, not all. But I think given the situation in India, it is virtually impossible to make out a political argument."

The finance minister's comments touch on a larger issue. Given the situation in New Delhi, it's seems pretty hard to make out an argument for just about anything. Just think of the well-documented government episode where the question of what color ink to be used on files became the subject of meetings, letters and references to other ministries -- a process that dragged on for over a year.

Congress Party Member of Parliament Jairam Ramesh makes it abundantly clear that if you're waiting for change, it's probably better not to hold your breath. I meet Mr. Ramesh at his home, where he sits at his desk listening to Indian music on a colorful i-pod mini. "Given our political system, reforms have to be the result of compromise, discussion," he says cheerfully. "It can take 3 years, 4 years, 5 years."

Others are less sanguine about the situation. Satish Chandra, former deputy national security advisor who spent close to 40 years working in the Indian bureaucracy, laments a system of committees and commissions which could lead individuals to fear putting their necks on the line. "The system must encourage greater autonomy at the levels where decisions are taken," Mr. Chandra tells me. "Levels in a bureaucracy are inevitable," he explains. But still, "in any system there should be autonomy in decision-making."

Former privatization minister Arun Shourie warns of the more immediate dangers of making concessions to the communists, who he calls "drunk with influence." "If this persists for three, four years I'm sure the consequences will be very grave," Mr. Shourie says. "Reforms are stopped, militant trade unionism is encouraged."

What's amazing is that in spite of all these obstacles, Indian business continues to thrive, at least for now. The economy has been growing at a 6% or 7% clip, and many companies post annual earnings growth of up to 40%. Foreign investment is pouring in, bank loan portfolios are growing, and the stock market has continued to reach new highs. It's almost as if businesses have become so accustomed to the government's stalled reforms that they've built up an immunity.

A further silver lining is that an inflated bureaucracy and socialist-leaning government have not managed to completely dampen the "animal spirits" and entrepreneurial energy at the heart of India's economic boom. Bangalore-based Manish Sabharwal, for example, heads a temporary-worker service -- a truly revolutionary experiment in a land of rigid labor laws. Mr. Sabharwal, who has over 20,000 employees, tells me that the communists are giving him headaches all along the way. "We're symbolic of India," he explains. "We exist, we're growing, we're doing well, but we're practically illegal."

One thing people here agree on is to disagree; for that is what makes India such a vibrant and dynamic place. The political gridlock is not a function of democracy, but inefficiency. And within the myriad opinions presented to me I find at least one common understanding: The Indian economic story of the moment is growth in spite of the state.

Now, picture what could happen if the state were to get out of the way of business, or better yet, if the people at the top were able to push through the reforms that were hoped for and expected of them. Just imagine the possibilities then!

Ms. Parker is an editorial page writer for The Asian Wall Street Journal.

Letting the Gini Out of the Bottle WSJ September 23, 2005
During high growth, some will get richer faster than others.
America isn't the only country where poverty is much discussed. China also is suddenly awash with stories about inequality. In an editorial below we discuss how post-Katrina stress in the U.S. Congress may derail economic growth in the U.S. Will a new fixation on egalitarianism in China take that country back to Maoism?

If the hand-wringing about income inequality in China translates into policies that will penalize hard work, talent and risk-taking, or get in the way of reform, the answer could be yes. If, on the contrary, the social resentments generated by Communist Party corruption and cronyism are addressed, China could have a useful debate.

So far the state-controlled media has not taken sides. Stories on the widening income gap that appeared simultaneously on Wednesday in People's Daily, the party organ, and on the state-controlled Xinhua news agency, tell us that the official media have been given their marching orders. President Hu Jintao's and Prime Minister Wen Jiabao have chosen to bring this touchy issue out into the open.

But the stories do not really say whether the blame should lie with economic reform and fast growth, or with the spreading perception that the party plays favorites. Indeed, the People's Daily story ended cryptically by saying that "it is a one-sided opinion to blame market-oriented reform for the income gap and such a view must be corrected." It did not prescribe what the corrective should be.

That the gap is widening is undisputable. The average annual GDP per capita for the peasants that make up the majority of China's 1.3 billion is a bit above $300, while that of Shanghai residents (China's most advanced city) is above $4,000.

The measure that the stories in China have been using -- one beloved of academics the world over -- is the United Nations Development Program's so-called "Gini coefficient index." In the UNDP's own words, the index measures the extent to which income distribution "deviates from a perfectly equal distribution." Zero is "perfect" egalitarianism, and the higher score you get supposedly the worse.

People's Daily reported that China's present index measure of 45 means that the country has "reached the 'yellow' alarm level. Should there be no effective measures, it will reach the dangerous 'red' level in five years."

In 2003, when China began to implement its WTO reforms, its index was at 40. In 1992, when the reforms stemming from Deng Xiaoping's southern voyage started, the index was at 37.4. And in 1980, a year after the reforms were first launched, it was at 33. This means that China's income gap has grown 36% in the last quarter century of economic reform.

But, hang on, in that time China has seen not just one of the fastest rates of economic growth in modern history, but also one of the most astonishing records of poverty reduction. By the World Bank's own estimates, the number of people living in poverty had been reduced to 29 million in 2001, from 80 million in 1993 and 250 million when the reform process got under way in 1979.

Statistics from China must always be taken with heavy doses of salt, to be sure, but whatever one can say about those above, they are not mutually contradictory. It is almost axiomatic that during periods of high growth, some will improve their lot at a higher rate than others. But the lot of those at bottom also improves, in the case of China markedly.

Simply put, in order for the whole of society to advance, talent and hard work must be rewarded. Income redistribution schemes that penalize these virtues will do the opposite.

Which bring us to what policies Messrs. Wen and Hu might put into place to correct the growing income gap before it reaches People's Daily's "red level." The leaders are panicking enough about the gap that they have already slowed down the sale of state-owned enterprises, lest more people be left unemployed. A "New Left" led intellectually by some professors such as Wang Hui of Qinghua University, are putting pressure on the leadership to reverse -- yes, you guessed it -- "neo liberalism" in China.

One can only hope that the leaders will resist these pressures, though the temptation not to will be great. The reason why the official press, some government officials and university professors have suddenly discovered a growing income gap in China isn't difficult to grasp. This expansive country is being convulsed with a wave of major and minor revolts that, taken together, are posing serious questions about the survivability of the party. One of China's two legislatures this year blamed "disharmony" on the gap.

The phenomenon is of such proportions that the leadership can no longer hide these riots, and information about them is becoming widespread. They are so generalized that the only reason one cannot speak of a revolution is that these are still discreet, isolated events.

They do have overarching causes -- the corruption that ensues when a free media isn't there to shine a light on government activity, and the absence of a political conflict resolution process that allows all to have a say; i.e. democracy. China's leaders would do better to find a political solution than to arrest the reforms that have brought so many people out of poverty.
Restoring the balance Sep 22nd 2005 From The Economist print edition
 

39. The world economy is still growing rapidly, but is also out of kilter

IS THE world economy in good or bad shape? Judged by the pace of growth, it is in rude health. Despite soaring oil prices, the IMF's latest World Economic Outlook reckons that global output will grow by 4.3% both this year and next, well above its trend rate. But by other measures, the risks are also growing. Inflation is picking up. America's current-account deficit is now above 6% of GDP, an eye-watering level. And with the saving rate of American households now negative, consumers there look ever more financially stretched. The world economy, in short, is both surprisingly buoyant and worryingly imbalanced.

As a result, the outlook is more uncertain than the healthy rate of global growth indicates. Some big sources of today's growth are ultimately unsustainable because even America's consumers cannot forever spend more than their income, nor America's foreign borrowing rise indefinitely. Eventually, global balance must be restored through slower spending-growth in America compared with that in the rest of the world. But no one is sure where the limits lie, nor how painful the ultimate adjustment will be. Will American consumers slow their spending first, or will foreigners first tire of lending America money? Will the shifts be sudden or gradual? And will spending elsewhere pick up the slack?

Eyeball to eyeball

The great thrift shift
Sep 22nd 2005
Global monetary policy
Sep 22nd 2005

United States

America's economy

Asian economies

Japan's economy

Oil

The World Bank and the IMF

The IMF publishes the “World Economic Outlook: September 2005”. The University of Michigan provides access to its survey of consumers (details required). The Federal Reserve announces an increase in interest rates. The White House publishes a transcript of Mr Bush’s speech about the Gulf coast relief effort.
 

Many people are worried that foreigners will blink first—because investors lose their appetite for American assets or because Asia's central banks stop buying dollars on such a huge scale. Either development could send the dollar crashing. Given the size of America's borrowing, these are indeed risks. But they seem smaller than the possibility that America's consumers will blink first.

The foundations underpinning American spending—especially soaring house prices—are becoming ever more shaky. And in recent weeks these shaky foundations have been jolted not only by a hurricane and sharply higher fuel costs, but by a subtle yet dangerous shift in America's macroeconomic mix towards higher inflation, higher interest rates and looser fiscal policy.

According to the University of Michigan's survey of consumers, they expect inflation rates over the next five to ten years to jump above 3% for the first time in four years (see article). The Federal Reserve raised short-term interest rates by 0.25 percentage points on September 20th, bringing the federal funds rate to 3.75%. Its accompanying statement hinted that the Fed's governors too are more worried about prices than growth, suggesting more rises to come. Fears of higher inflation could become worse if the federal government goes on a spending binge. Thanks to George Bush's promise to spend “what it takes” to rebuild the Gulf coast, America's budget deficit seems certain to grow rapidly. In the short term, government spending will boost the economy, but that effect could easily be outweighed by higher interest rates.

All these factors suggest that the growth in consumer spending is set to slow. Less clear is whether it will slow gradually (which is exactly what the world economy needs) or stall (which could send the world economy wobbling). By themselves, today's fuel prices will slow consumer spending, but will not send it tumbling. After all, Americans have shrugged off higher fuel costs for two years. But with petroleum stocks so low, fuel prices could well rise further. As The Economist went to press, Hurricane Rita was headed straight for Houston, Texas, a centre of America's already battered oil industry.

And yet a bigger worry is not just a reaction to higher fuel prices, but a broader loss of consumer confidence. There are signs that American consumers are jittery. A widely-watched index of consumer confidence plunged in September. Not only could falling confidence prick the housing bubble, but flatter house prices would themselves hurt consumer spending. In Australia and Britain, for instance, consumer confidence fell and spending slowed when house prices stopped rising. America's experience may prove different, but a slowdown in spending seems all too plausible.

Addicted to American demand

The impact of this on the world economy depends on whether foreign demand picks up the slack. America's soaring external deficits have been financed by rising surpluses elsewhere. These surpluses have sparked talk of a “global saving glut”. In fact, the appearance of a glut has more to do with a lack of investment demand abroad than a rise in saving, but there is little to suggest that the behaviour behind these surpluses will change overnight (see article).

In fact, some big economies, particularly China's and Germany's, are becoming more, not less, dependent on exports. With its domestic economy moribund, Germany's current-account surplus is likely to top 4% of GDP this year. Despite the messy outcome of its election this week, Germany's need for growth-inducing economic reforms is more urgent than ever.

China's current-account surplus, already 4.2% of GDP in 2004, has soared this year. Although China's leaders talk a lot about shifting their economy from exports towards domestic consumption, they need to do much more to make that happen. And oil exporting countries, who as a group are now the biggest counterparts to America's external deficits, are keener to build up large surpluses than to boost investment at home.

There are bright spots, notably Japan, still the country with the single biggest current-account surplus. After a decade of stagnation, its economy seems truly on the mend, with a domestically-rooted recovery and rising confidence, reinforced by this month's election result. But Japan's reviving domestic economy is an exception in a world that remains too dependent on American demand. The combination of slower consumer-spending in America and few alternative sources of demand suggest the world economy will slow. Given that it is growing above its sustainable rate, and badly out of balance, that may be no bad thing. But as with all balancing acts, the risk is that any adjustment, when it comes, goes too far.
 

 40. The Caribbean Living and dying on history and artificial economic sweeteners Sep 22nd 2005 | PORT OF SPAINFrom The Economist print edition
 
 

A future without sugar subsidies is one both the Caribbean and Mexico (see article) find hard to contemplate

FOR three centuries after 1650, the English-speaking Caribbean lived from sugar. But for the past few decades this source of sweetness and slavery has been in decline, kept alive by trade preferences. Now the drip feed of subsidy is about to diminish. With bananas, another mainstay, also under threat from changing trade rules, Caribbean political leaders are caught between crying injustice and a long overdue search for alternatives.

The underlying problem is that growing sugar or bananas on small, hilly farms on Caribbean islands is far less efficient than in large, mechanised plantations in Latin America and elsewhere (see chart). Until now, the European Union has bought most of the Caribbean's sugar—at two to three times the world price.

Under a long-standing scheme, 18 former British and French colonies in Africa, the Caribbean and Pacific (dubbed ACP countries) export a fixed quota of sugar to the EU each year at the same price per tonne as Europe pays its own sugar growers. The EU sugar regime was ruled unfair by the World Trade Organisation at the request of Brazil and Australia, the world's most efficient sugar growers. The European Commission has proposed a phased reduction of 39% in its sugar price by 2009, which would still leave it at more than 50% above today's world-market price.

Europe's farm ministers are expected to make a final decision in November. The details may change, but a big price cut looks certain. So does a row about aid. To compensate for the price cuts, Europe has offered aid of €40m ($49m) next year for the ACP countries. Not nearly enough, complain the sugar growers. Jamaica's trade minister wants compensation of $200m a year for his island alone.
Living and dying on history and artificial economic sweeteners
Sep 22nd 2005 | PORT OF SPAIN
From The Economist print edition
 
 

A future without sugar subsidies is one both the Caribbean and Mexico (see article) find hard to contemplate

FOR three centuries after 1650, the English-speaking Caribbean lived from sugar. But for the past few decades this source of sweetness and slavery has been in decline, kept alive by trade preferences. Now the drip feed of subsidy is about to diminish. With bananas, another mainstay, also under threat from changing trade rules, Caribbean political leaders are caught between crying injustice and a long overdue search for alternatives.

The underlying problem is that growing sugar or bananas on small, hilly farms on Caribbean islands is far less efficient than in large, mechanised plantations in Latin America and elsewhere (see chart). Until now, the European Union has bought most of the Caribbean's sugar—at two to three times the world price.

Under a long-standing scheme, 18 former British and French colonies in Africa, the Caribbean and Pacific (dubbed ACP countries) export a fixed quota of sugar to the EU each year at the same price per tonne as Europe pays its own sugar growers. The EU sugar regime was ruled unfair by the World Trade Organisation at the request of Brazil and Australia, the world's most efficient sugar growers. The European Commission has proposed a phased reduction of 39% in its sugar price by 2009, which would still leave it at more than 50% above today's world-market price.

Europe's farm ministers are expected to make a final decision in November. The details may change, but a big price cut looks certain. So does a row about aid. To compensate for the price cuts, Europe has offered aid of €40m ($49m) next year for the ACP countries. Not nearly enough, complain the sugar growers. Jamaica's trade minister wants compensation of $200m a year for his island alone.
 
 
 

41. Mexico's sugar industry Sep 22nd 2005

Agriculture

The World Trade Organisation

Food and drink

The European Union issued a press release in June 2005 about the reforms to the sugar sector. See also the Trinidad and Tobago Manufacturers’ Association.
 

Some Caribbean countries are well-prepared. St Lucia and Antigua stopped growing cane a generation ago. After years of dithering, St Kitts shut its state-owned sugar industry in July. Its annual losses had reached 3% of GDP. The island's former sugar railway now carries tourists. Golf courses and hotels are the most promising alternative crop. The shutdown was cushioned by redundancy payments, retraining and a buoyant labour market.

Trinidad, Jamaica and Barbados still make sugar, but lose money even at today's EU prices. Trinidad closed its state-owned sugar company two years ago; it offered land, retraining and pay-offs to its staff. Some farmers still grow sugar, but may not for much longer. Thanks to natural gas, Trinidad's economy is booming and unemployment is low. In Barbados, sugar employs less than 5% of workers, but keeps the rural landscape trim. In future, it will cost more to keep the cane fields tended for the tourists' cameras.

The biggest challenge is in Jamaica and Guyana. In Jamaica, two privately owned producers make a profit and may survive. The cash-strapped government cannot afford bigger subsidies for five state-owned and loss-making estates. But neither will it find it easy to help several thousand rural labourers gain alternative jobs.

In Guyana, the poorest nation in the English-speaking Caribbean, sugar is the backbone of the economy. Cane fields stretch for miles along the coast. Guysuco, the state sugar company, is in the midst of a $168m expansion and modernisation plan, which involves mechanisation and a new sugar factory. On paper, Guyana's sugar could still be profitable even with a lower EU price. But the margins will be tight, and the industry vulnerable to a weaker euro or natural disasters.

The sugar reform coincides with a new twist in a long-running wrangle over bananas, where ACP suppliers face competition from lower-cost Latin American producers. In 2001, at the urging of the World Trade Organisation, the EU agreed that from January 2006 it would impose tariffs, rather than quotas, on Latin American bananas. The European Commission recently proposed a tariff of €187 per tonne, but Latin American producers have rejected this. A final round of arbitration is likely to result in a lower tariff.

Until the early 1990s, when the EU began dismantling trade protection, family-run banana farms were the backbone of the economy in St Lucia, St Vincent and Dominica. Banana exports from the three islands have fallen by some 75% since then; Dominica, in particular, has suffered a gruelling decade of recession and wage cuts.

Caribbean politicians rail against freer trade, but are loathe to make sacrifices to aid their own. Guyana and Suriname complain that their partners in the Caribbean Common Market (Caricom) cheat them of rice sales by importing subsidised American rice without levying an agreed 25% tariff. Several Caricom countries agreed last month to switch from Trinidad to Venezuela as their main source of oil, in return for subsidies. The Trinidad and Tobago Manufacturers' Association wants to import sugar free of Caricom's 40% duty, rather than give Guysuco a protected market.

Four decades after independence, it is hardly surprising that colonial trade patterns are under threat. Caribbean economies do have a future, but a very different one, as service centres. As well as tourism and offshore finance, both of which could expand further, there are plenty of niches. A recent World Bank report noted that almost 70% of overseas medical graduates registered in the United States were trained in the Caribbean's 23 offshore medical schools. Some countries need help to make the switch from sugar and bananas. But the future need not be sour—provided that the Caribbean's politicians look to embrace it, rather than cling to the past.
 
 
 
 
 
 

42. The Politics of Population Control By Christopher Lingle   Published    09/21/2005
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  TCS
http://www.techcentralstation.com/0921056.html
One of the biggest casualties in the battle over democracy and demography is individual freedom. For their part, India and China fought this war using coercive policies to impose controls on population growth.

India's program of forced sterilization under Indira Gandhi in the late 1970's involved massive abuses of human dignity; China's "One Child" program was just as repressive. And both wrought perverse results representing worst-case examples of social engineering.

These policies have caused a large gender imbalance in both countries populations. Official reports in China note that as of 2000, the male-to-female ratio was between 117 to 119 boys for every 100 girls.

The United Nations Population Fund expends considerable energy on either bemoaning the fact that too many people occupy the earth or worrying about their impoverished conditions. For those that follow the UN's simplistic logic, these two are seen as related.
There are many good reasons to challenge the persistent and pervasive negative image associated with population increases, per se. Supporters of population control (voluntary and involuntary) assume there are already too many of us on Earth. And there is surprisingly little dissent to this view.

 One eloquent dissenter was the late American economist, Julian Simon, who held a remarkably non-dismal view of the world. His optimism is best expressed in his book, The Ultimate Resource. Therein, he identifies human beings as the resource capable of resolving most problems that confront us.

Ignoring thinkers like Simon, political leaders in both India and China were trapped by a negative logic that allowed abusive acts against their citizens in the name of "sound" public policy. Clearly, the forced sterilization and abortions they pursued were a violation of the most basic principles of human dignity.

Their actions reflect a disregard for the potential value-added that is inherent in each and every human being. Yet they are not alone; even conventional economic data calculation reflects a negative bias against population growth.

Consider the calculation of per capita income whereby national income is divided by the size of the population. This means that an additional person increases the denominator and decreases the material well being of a community. However, a litter of puppies born to a commercial breeder increases the numerator and improves economic conditions.
 
This computation depicts the birth of an infant as a cost and ignores the imputed present value of the future flow of benefits that can be expected from a newly-born human. Only twisted logic portrays us as better off with more puppies and worse off with more humans.

 Despite denials, there is implicit racism in the demands of population-control advocates. Most Western developed countries have shrinking populations that consist mainly of white people. It turns out that limiting population growth will inevitably restrict the numbers of black, brown and yellow peoples.

Somehow the dismal view of population growth persists despite considerable evidence to the contrary. For example, often the areas of highest population density are the most prosperous and most hospitable like Amsterdam, Hong Kong, London, Singapore and Tokyo. While Bombay and Cairo are heavily polluted, they are also much more prosperous and productive than the surrounding countryside.

Interestingly, advocates of population control face strong personal incentives to exaggerate the dangers of a growing population. Concocting horrific images of over-population allows politicians to lay claim to more resources from taxpayers (whose numbers they paradoxically wish to see increase!).

In all events, persistent and widespread poverty is mostly caused by bad government policies rather than too many fellow citizens. It is a simple fact that most able-bodied people that remain poor suffer from not having a job. Jobs are scarce since there is too little capital formation or investment in new businesses. The dearth of economic activity is usually caused by public policies that punish success with high marginal tax rates or that create bureaucratic obstructions to competition.

 

In all events, population control pressures can be offset by higher economic growth. This is because increased average income tends to lead to declining birth rates.

Another way to cope with global population growth would be to allow more open immigration. But populists invoke the fear of infiltration by terrorist organizations or the dilution of indigenous culture to mount political opposition. Such claims are eagerly supported by trade unionists seeking to limit competition from outsiders that seek to improve their lot.

 From a purely economic standpoint, migration tends to yield net benefits to receiving countries since incoming migrants are frequently younger and healthier. And their choice to move away from their home country implies a high initiative to work.

Instead of diverting resources towards population control measures, governments and NGOs should promote free immigration and policies that increase economic growth. Once perceived problems with population growth are seen as failures of governance, the debate over population size and its racialist content are exposed as being truly inhumane.

Christopher Lingle is Senior Fellow at the Centre for Civil Society in New Delhi and Professor of Economics at Universidad Francisco Marroquin in Guatemala.
 
 
 
 

43. Home Truths in Hong Kong
September 22, 2005
Time for a reality check on just how much more "democracy" is in the cards.
The Hong Kong government is feeling pretty proud of itself these days. Its popularity ratings have soared since China ousted the hapless Tung Chee-hwa as chief executive earlier this year, replacing him with Donald Tsang, a more competent British-trained civil servant.

Beijing has been quick to throw in a few olive branches to try to keep things that way. On Sunday, it will allow the pro-democracy lawmakers who have been banned from entering China for more than a decade to cross the border for a landmark visit. Although confined to a tour of food-safety facilities in the neighboring province of Guangdong -- there's still no question of letting Hong Kong's democratic camp visit Beijing -- this is being widely portrayed as another feather in Mr. Tsang's cap.

The coming weeks will also see the unveiling of proposals to introduce more democracy at the next elections in 2007-08. Or at least that is how they will be portrayed. Indeed the spin-doctors are already busy trying to portray these proposals as going further than what was advocated by Beijing and its local acolytes, many of whom distrust Mr. Tsang because of his colonial past.

So it's worth stopping here for a reality check on just how much more "democracy" is in the cards. Although the details haven't been officially released, they're almost certain to involve the next chief executive being chosen by a committee of 1,600, instead of the current 800. As for the local legislature, half of the extra 10 seats will be chosen by district councilors, many of whom are themselves appointed by the government.

That's a far cry from what should have been possible. As James Cunningham, the new U.S. Consul General in Hong Kong, pointed out in his maiden speech Tuesday, the goal of universal suffrage is enshrined in the Basic Law, Hong Kong's mini-constitution, and "could have been achieved by 2007."

Such home truths are rarely welcome, especially when a campaign is in full swing to deflect attention away from the demands for universal suffrage that brought hundreds of thousands of Hong Kong people onto the streets only last year. So it was no surprise that Mr. Tsang's administration tried to put Mr. Cunningham down with a statement asking him to "respect" the decision of a Chinese parliamentary committee last year, which banned the introduction of universal suffrage and helped provoke the huge street protest.

But Beijing, and its local administrators, cannot expect the U.S. to shut up so easily. As Mr. Cunningham pointed out, America speaks out "for democracy every day, all over the world" -- and there's no reason why Hong Kong should be any exception.

At a time when numerous Asian nations that are far less economically developed, from Afghanistan to Indonesia, have successfully completed the transition to universal suffrage, denying the same right to the people of one of Asia's most prosperous cities is even more anomalous.

However hard the spin doctors try to portray it as otherwise, allowing 1,600 people to choose the city's chief executive instead of 800, doesn't amount to a meaningful step toward democracy.
 
 
 
 

44. Unlikely revolutionaries Sep 22nd 2005 From The Economist print edition The World Bank cannot go where its research is leading it

THE cover carries a fresco by Diego Rivera, a Mexican revolutionary and artist. The text within bemoans the many ways, overt and covert, in which elites protect their interests and hold down the poor. In response, it advocates policies that will challenge the privileged and empower the disenfranchised. The World Bank's latest World Development Report (WDR), published this week, is heady stuff: more than 200 pages arguing that the Bank itself, as well as the governments it helps, should put “equity” at the forefront of their thinking.

The WDR is not quite as radical as this sounds. By “equity”, it means equality of opportunity, not equality of outcome (except that people who squander their opportunities entirely should be spared the worst of outcomes). A person's fate should be decided by effort, talent and luck, not race, caste, gender or inherited privilege. Philosophers will wonder why the talented, who did not earn their God-given abilities, deserve their rewards any more than the well-born, who did not choose their parents. Such cavils aside, there is little here to which a liberal could object.

Debt and development

Economics

The World Bank and the IMF

Economics A-Z
 

Some people prize equity for its own sake. But the WDR sees equity primarily as a means to the end of economic development. Redistribution of “access to services, assets or political influence” can be a way to make the economy as a whole more efficient. It is not an ideological imperative so much as a technical fix: a second-best response to market failure.

This claim is best illustrated in the report's chapter on inequality and investment. It shows that failures in the markets for credit, insurance, land and human capital result in underinvestment by the poor, overinvestment by the rich and a less efficient economy. To understand this, it is necessary to appreciate how markets should work in an ideal world—because if they worked as economists would like, they would deliver much of the equity the WDR would advocate.

In a perfect credit market, the WDR points out, there should be no connection between wealth and investment. A free market in capital breaks the link between the amount people own and the amount they can invest. In such a market, anyone can borrow or lend as much as they want at the going rate of interest.

In reality, the rich and poor borrow on very different terms. Much of the research cited in the WDR is several years old, but this is an area in which economic power shifts slowly. According to a 1989 study of six villages in the south of India, the rich were typically asked to pay interest rates of 33%, while the poor borrowed at rates of over 100%, when they could borrow at all. This is partly because lenders ask for collateral that only the well-off can provide.

In addition, banks and other lenders maintain a spread between the rate they pay on deposits and the rate they charge on loans. This is, of course, how they make their money. But in poor countries, this spread widens to alarming proportions. The same 1989 report found that India's informal “finance corporations”—which act much like banks, although they cannot issue cheques or transfer funds—paid 12% at most on deposits of less than a year, while charging at least 48% on loans.

This gulf between loan rates and deposit rates contributes to the misallocation of capital, the WDR points out. Whereas poorer entrepreneurs invest someone else's money, richer entrepreneurs often invest their own. For the poor, an investment is worthwhile only if its returns exceed the cost of capital, ie, the rate they must pay on money borrowed from the bank. For richer entrepreneurs who can finance themselves, on the other hand, an investment is worth doing if it exceeds the opportunity cost of capital, ie, the rate they can earn by putting their money in the bank. In a perfect credit market, the spread between these two rates, the deposit and the loan rate, would be wafer thin. But in poor countries, it is often unbelievably fat.

As a result, some firms are starved of capital, while others have more than they can usefully digest. Small Mexican firms with less than $200 invested in them had rates of return as high as 15% a month, according to one study. By contrast, rates of return for larger firms, with more than $900 invested, were often negative. Ghanaian pineapples provide another striking example. Turning to pineapple production from maize and cassava promised average returns of more than 1,200%, according to a 1999 study by Markus Goldstein and Christopher Udry of Yale University. But only 190 of the 1,070 plots studied were devoted to the juicier crop. Farmers said they could not afford to switch.

Willing the end, but not the means

The Bank's solutions to these particular inefficiencies are by now familiar: extending microfinance, for example, or giving the poor formal title to their land and property so they can offer it as collateral. But it also argues that the best policies for fighting poverty might involve “redistributions of influence, advantage or subsidies away from dominant groups”. It hastens to add that expropriating the rich might not be good for investment. But even when they are desirable, such usurpations are not necessarily feasible. A dominant group is, by definition, one that tends to guard its influence, advantage and subsidies jealously and, on the whole, successfully.

In the end, the WDR would probably disappoint the revolutionary who provided its cover image. The Bank is in no position to overturn dominant elites. These are, after all, the people with whom the bank must deal. The WDR is a report, not a manifesto, and contains the usual bureaucratic disclaimer. “It is neither the mandate nor the comparative advantage of the World Bank to engage in advice on issues of political design,” it says. The Bank cannot do much about many of the deep-seated injustices and inequities it analyses in its report. But with its charts, tables and numbers, it paints an arresting mural nonetheless.
 
 

Japanese politicians push tax hikes. The 1999 Japanese tax cuts were not very effective. Instead of lowering marginal tax rates on productive behavior, the government followed the Keynesian policy of lump-sum tax relief. Not surprisingly, the Japanese economy remained stagnant, unlike what happened in the U.S. after the supply-side tax cuts in 2003. But even foolish tax cuts are better than no tax cuts, so it is disappointing to read in Tax-news.com that Japanese politicians plan to re-seize this money from taxpayers:

      The Japanese government will complete the phasing out of an income tax cut, designed to pull the country out of recession, by 2007, although the ruling Liberal Democrat Party (LDP) is insisting that the move is line with its pledge not to raise taxes on salaried workers. Introduced in 1999 in an attempt to kickstart the languishing economy, the temporary tax cut reduced the income tax burden at the national level on workers by 20%, and at the local level by 15%. Late last year, with the economy showing signs of recovery, the coalition government decided to cut the national tax cut in half in January 2006, and the local tax in half by June 2006. According to Hiromitsu Ishi, chairman of the government's Tax Commission, the remainder of these tax cuts will be abolished completely in fiscal 2006, meaning that by March 2007, they will have been phased out in their entirety. ...Meanwhile, a senior LDP lawmaker denied last week that the party had reneged on its promise not to increase income tax. "Increasing taxes for salaried workers and scrapping the fixed-rate income tax cut are totally different matters. I don't think that putting the temporary tax cut back to its normal state can be called a tax increase," the lawmaker was quoted as observing.
      http://www.tax-news.com/asp/story/story_open.asp?storyname=21152