*1. Title Shot Barrio Study Links Land Ownership To
a Better LifeWhy Some Squatters Thrive, While Others Lose Hope In Argentine
Neighborhood Shanties Become Ranches
By MATT MOFFETT Staff Reporter of THE WALL STREET
JOURNAL November 9, 2005; Page A1
2. The Capitalist Cause November 9, 2005
*3. DDT Saves Lives November 8, 2005; Page A16
4. Europe’s Not Working
*5. Wearing of the Green Irish Subsidiary Lets Microsoft
Slash Taxes in U.S. and Europe Tech and Drug Firms Move
Key Intellectual Property To Low-Levy Island Haven
Center of Windows Licensing By GLENN R. SIMPSON
6. A Socialist Hemisphere?
7. French agro-giants scoop lion's share of EU farm
aid
8. McCreevy Takes A Stand Over EU Corporate Tax Plans,
by Ulrika Lomas, for LawAndTax-News.com, Brussels 08 November 2005
9. Clock Is Ticking on Trade Talks Doha Round of Negotiations
Gets Bogged Down in Farm Tariffs
*10. Irish Commissioner resists European tax
harmonization scheme
11. European subsidies to French farmers are even
more disgusting than U.S. farm subsidies
*12. GERMANY'S ECONOMY IN DESPERATE NEED OF CHANGE
13. Walking a Tightrope With China
14. Article in leading Australian paper slams OECD's
anti-tax competition campaign
15. Germany: Doomed by Schmollerism
16. Productivity Rises At Fastest Pace In Over a Year
*17. Pakistani Economy To Withstand Quake Rate of
GDP Growth Is Expected to Be Close To the Predisaster Forecast
**18. Naive View of Democracy in Latin America?
Mary OGrady
*19. The End of the Rainbow--Ireland
20. Old Age Tsunami
21. The War Against the Car
22. EU antitrust chief seeks more control over M&A
Bid comes after Kroes cedes to Spain authority over planned Endesa deal
23. Net Gains
24. A Rate Rise to Avoid Deflation
25. Prioritizing China at the WTO
*26. Korea Torn Over Open Markets Fear of Foreign
Influence, Competition From China Fuel Backlash
*27. A Stop on the Steppes WSJ November 21, 2005;
Page A16
*28. Mongolia's 'Third Neighbor'
29. Fuzzy Trade Math
30. China's Uphill Battle For Stronger Banks
31. China Reiterates Its CommitmentTo Flexible Yuan
*32. The Desolate Wilderness November 23, 2005; Page
A16
*33. Eastern Approaches
***34. Why Latin Nations Are Poor By MARY ANASTASIA
O'GRADY
*35. Argentina's Bank Engaged in Sterilization, 1991-2002
*36. Argentina: Land of the Incredible Shrinking Peso
By MARY ANASTASIA O'GRADY
*37. It Is Not Raining Pesos in Argentina
*38. Bush's Perilous Journey South By MARY ANASTASIA
O'GRADY
*39. Once Upon a Time in AmericaBy MICHAEL BARONE
November 25, 2005; Page A10
40. Guatemala Logs Progress Program Sustains Rain
Forests, Boosts Villagers' Incomes By BOB DAVIS
41. The continuing global shift to lower taxes.
42. Emerging-Markets Jungle Strong Three-Year Run
Reaps Big Gains for U.S. Investors; How to Get Into the Game Now
43. Pinochet Is Indicted Again On Human Rights Charges
44. The Go-Go Greenback WSJ November 28, 2005; Page
A16
45. Give Us Your Skilled MassesBy GARY S. BECKER November
30, 2005; Page A18
46. Argentina Loses A Fiscal Hawk From Key PostNew
Economic Minister Under President's Thumb, Faces Inflation Challenge
*47. The Myth of the Scandinavian Model From the desk
of Martin De Vlieghere on Fri, 2005-11-25 19:27 http://www.brusselsjournal.com/node/510
1. Title Shot Barrio Study Links Land Ownership To
a Better LifeWhy Some Squatters Thrive, While Others Lose Hope In Argentine
Neighborhood Shanties Become Ranches
By MATT MOFFETT Staff Reporter of THE WALL STREET
JOURNAL November 9, 2005; Page A1
International development experts say a provocative Latin American research project is shedding light on a key question for developing economies: Does land "titling" help lift people from poverty?
BUENOS AIRES -- Mercedes Almada and Valentín Orellana both live in San Francisco Solano, a barrio settled by squatters almost 25 years ago on the fringes of the Argentine capital. They established households on identically sized lots and worked similar blue-collar jobs for comparable wages -- she in sewing, he in a factory. They endured the same hardships, including an effort by Argentina's 1980s military government to bulldoze the settlement.
Today, Mrs. Almada lives in a neat colonial-style home with a slab roof supported by pillars as solid as oaks. The six members of the Almada household have rooms of their own. A daughter finished high school and one son finished technical school.
Mr. Orellana's house is made of rough looking cinder blocks and concrete, with thin posts supporting a corrugated zinc roof. It is so cramped that some of the eight family members have to sleep in the dining room and kitchen. None of the children have made it past seventh grade.
Why are the Almadas moving up in the world while the Orellanas remain stuck behind?
A provocative research project attributes much of the disparity to a single factor: Mrs. Almada has title to her land; Mr. Orellana does not. The San Francisco Solano study, conducted by two Argentine universities and Harvard Business School, hasn't been formally published yet. But international development experts say it is shedding light on a key question for developing economies: Does land "titling" help lift people from poverty?
Mercedes Almada, top, and Valentín Orellana, above,
stand in front of their houses in the San Francisco Solano barrio outside
Buenos Aires. Ms. Almada holds the title to her land; Mr. Orellana does
not.
In Latin America, about one-quarter of urban residents are either squatters or are living in unauthorized housing. In cities throughout the developing world, it is common for squatters to seize land, build houses on it, and then to agitate for the government to grant them titles.
The Argentine study followed 1,800 squatter families who in 1981 occupied a one-square-mile piece of what they assumed was public land. It had once served as a garbage dump. Through a quirk of the legal system, roughly half of the settlers in the heart of the neighborhood gained title to their properties, while the other half didn't. The researchers found that over the course of two decades, the title holders surpassed those without them in a host of key social indicators, ranging from quality of house construction to educational performance to rates of teenage pregnancy.
Households with titles didn't earn more money than those without them and had access to only a modest amount more credit. Nevertheless, they adopted a more entrepreneurial mindset and shucked the fatalism and fear of being tossed off their land that mark the poor throughout the region. They believed hard work would pay off for their families.
"You give people titles and they start to feel they belong to society," says Harvard-trained economist Ernesto Schargrodsky of the Torcuato Di Tella University, who studied the barrio with Sebastián Galiani of University of San Andrés and Rafael Di Tella of Harvard Business School.
Long Experiment
South America is grasping for lessons from its 20-year experiment with free-market economic policies. The region initially embraced a broad agenda of privatization, trade liberalization and fiscal austerity pushed by the U.S. Property titling was encouraged as an adjunct to these changes. But the lives of most of the region's people did not improve the way advocates had hoped.
The protests that greeted George Bush in Argentina on Friday, where he attended a failed summit of the hemisphere's presidents, signal the broad dissatisfaction over this result. When economic crises rocked Argentina and Brazil a few years ago, pragmatic leftist leaders rose as part of a backlash against the changes. Now, many Latin American leaders are taking a cafeteria-style approach to capitalism -- picking and choosing policies that suit them and rejecting those that seem too hard or controversial. Trade liberalization in the region has stalled.
But titling has retained considerable appeal. Brazil, Peru, Panama, Paraguay, El Salvador and some provinces in Argentina maintain titling programs. Such programs offer a politically popular and inexpensive way to provide opportunity for the urban poor to bootstrap themselves out of poverty.
Some skeptics say there is little hard evidence to support claims that land ownership helps the developing world's poor. They cite the economic success of China, which only recently loosened restrictions on private property, as evidence that the value of ownership has been oversold. In parts of Cambodia, titling programs have left the urban poor vulnerable to violence and harassment from speculators who sought their land. The critics argue that scarce development dollars should be invested in projects to build infrastructure and to improve the environment.
In San Francisco Solano, the difference made by land ownership is visible along the muddy streets where boys fish for frogs in the drainage ditches. On a stretch of 816th Street where residents own their lots, the Quevedo family is finishing a brick addition to their sprawling house. Florinda González boasts that her older son recently added a second floor to the house, and that her younger son completed a technical-school course to become an electrician. Felicia Cuevas talks with pride of how well her son is doing in the first grade of the private school he attends.
On a part of 893rd Street where residents don't hold titles, there is little evidence of such dynamism. Dominga Abalo has her hands full trying to ride herd over the brood of kids who live in her crumbling brick hut. Ricardo González frets about finding money to finish rebuilding his weather-beaten roof, a project that has been stalled for two years. As chickens peck the ground at her feet, Norma Olive worries about a teenage son who dropped out of school.
Interest in titling has been sparked by Peruvian economist Hernando de Soto, whose best-selling books argue that guaranteeing urban property rights is a precondition for alleviating urban poverty. Marginalized people can use land titles as collateral to obtain bank loans and to participate more fully in the economy, he says. Mr. de Soto has a host of prominent international supporters, including Bill Clinton, who a few years ago joined the Peruvian in Ghana for the launch of a titling program.
Governments throughout Latin America, as well as in countries like South Africa, Turkey and Thailand, have experimented with Mr. de Soto's ideas. Multinational organizations such as the World Bank have loaned hundreds of millions of dollars to support such projects.
The way San Francisco Solano was settled makes it a "natural experiment" for testing titling's effect. "It's a dream kind of empirical study...a treasure," says Nobel Prize-winning economist Douglass C. North, a specialist in property rights at Washington University in St. Louis.
In November 1981, a group of landless families led by a Roman Catholic priest, Raúl Berardo, marched into San Francisco Solano and erected huts of scrap wood, metal, cardboard and plastic sheeting. Eager to someday gain land titles, the squatters carefully followed zoning rules, pacing off standard 30-by-100-foot lots and leaving room for streets. "We wanted to live in a normal neighborhood, not a slum," says Emilio Gondret, an original settler.
Shortly after the squatters arrived, the repressive military government then ruling Argentine sent a bulldozer to flatten the shantytown. When a group of women and their children formed a line in front of the bulldozer, the driver, a civilian, stopped the machine and walked away. Subsequently, the military tried to block delivery of food, fresh water and building materials to the barrio.
In mid-1982, the government collapsed suddenly after it lost the war over the Falkland Islands to the United Kingdom, and official animosity toward San Francisco Solano ended. But the squatters faced another headache: The land they had seized was not public, as they had thought, but had 13 private owners.
Argentina's new civilian government wasn't free to hand out land titles until it reached compensation agreements with the owners. Eight of them accepted government buyout offers, but the five others got into battles with the government over financial terms of the offer in Argentina's slow-moving courts. Between 1989 and 1991, squatters on 419 lots in the center of the neighborhood received land titles from the government. The people on the 410 remaining plots didn't, and still haven't. "After such a hard fight, it was painful to accept that many of us would not own our land," says Raúl Salinas, a squatter who hasn't gotten a title.
For the university researchers looking to study the effect of titling, the quirk was fortuitous. "Basically the Argentine court system helped run the experiment for them," says Robert Lucas, a Nobel laureate economist at the University of Chicago.
'My Own Property'
Lidia Salvi Rojas, a resident who received a land title, said the victory motivated her to transform her hut into a decent house. She and her husband shoveled out a thick layer of muck from the lot, a mix of glass, leather and garbage, and brought in several truckloads of topsoil. Over several years, they replaced the fiberboard walls with brick and the corrugated roof with a slab. They financed the construction with money she saved working as a maid and that her husband earned in a factory.
"I didn't mind the work because it was my own property," she says. Today, she occupies a modern-looking ranch house with a satellite dish on the roof and ornate security grill-work on the doors and windows. A smooth cement sidewalk leads to the tree-shaded front yard. Mrs. Salvi and her husband laid the walk themselves because the government doesn't do that kind of work in new barrios.
After she had her house, Mrs. Salvi focused on making sure her children surpassed her own primary-school education level. Her 19-year-old son recently finished high school. Her 15-year-old daughter is taking a special high-school course in chemistry, even though it requires a long bus ride to another part of town. Her 13-year-old is still in primary school.
A few blocks away, Rosa Barbosa, one of the unlucky ones who have not received a property title, has made much less progress. After settling here, she and her husband raised enough money selling flowers and doing odd jobs to replace her fiberboard hut with a squat brick house. "I was waiting for the title before we invested more," she says. "I'm still waiting."
As the years passed, Mrs. Barbosa gave up on home improvements. Today, electrical wires droop from the living-room ceiling, the plaster is chipped, and the corrugated metal roof leaks. There is no bathroom. Instead of a sidewalk in front of the house, there is a dirt patch that turns to mud when it rains.
Most of the nine children she has raised didn't get much of an education, dropping out before high school. A daughter and a daughter-in-law both got pregnant at 15. "Maybe the grandchildren can make this a decent place to live in," she says.
Broad Differences
The study, based on more than 600 interviews conducted by Messrs. Galiani and Schargrodsky's research team, revealed broad differences between residents who own their land and those who don't. Landowning households averaged about five members, compared with six for the untitled. Only about 8% of adolescent girls in titled households got pregnant, compared with more than 20% in the untitled households. Children from 5 to 13 years old in titled households had lower rates of school absenteeism and completed about one-half year more of school than their untitled counterparts.
The researchers theorize that a title turns a house into an "insurance and savings tool" that can provide security for owners during old age or bad times. That reduces their need to rely on large households with many children and extended-family members to provide income in tight situations. It also may enable landowning households to concentrate more on educating each household member, they say.
The investigators concluded that titles improved access to credit only slightly. Banks appeared to have a deeply ingrained reluctance to lend to the poor, in part because of the cost and difficulty of foreclosing in Argentina's legal system. But even without bank loans, they said, landowning families improved their homes substantially by squirreling away cash and doing the work themselves. Architects affiliated with the study concluded that homes on titled lots had sturdier walls and sounder roofs, were more spacious and had better sidewalks.
An accompanying study, co-authored by Mr. Di Tella, detected a difference in the attitude of landowners. They were more materialistic and individualistic, and more inclined to say that money was important to happiness, and that individual initiative leads to success.
The researchers found that landownership status seemed
to make no difference in employment or income. But it did seem to affect
the way residents spent their money, and their aspirations and expectations.
The researchers figure that the children of the landowners could eventually
earn significantly more than the children of the untitled.
2. The Capitalist Cause November 9, 2005
The Treasury Secretary has made it clear that India needs
to speed up reform to realize its economic potential.
New Delhi free-market thinkers are a frustrated lot. In a country with so much economic potential, political stalemate has slowed reform. Happily, U.S. Treasury Secretary John Snow is taking up their cause. It's hardly an unselfish gesture: the treasury secretary's visit -- one in a string of recent trips by U.S. grandees -- shows the strategic importance that Washington is placing on deepening relations between the two democracies.
Mr. Snow, who kicked off his four-day visit to India on Monday, has made it clear that New Delhi needs to speed up the pace of reform if India wants to realize its economic potential. (Sound familiar? It's a strikingly similar tune to what the Treasury Department is telling China to do.) Long plagued by red tape, bureaucracy and aversion to deregulation, New Delhi has become notorious for dragging its feet.
The current political clime lends even more reason for concern. Although Prime Minister Manmohan Singh and Finance Minister P. Chidambaram are considered reformists at heart, not much appears to be getting done. Privatization plans have stalled. So, too, has retail sector liberalization, to the detriment of consumers and competition. Chalk both of those losses up to the ruling Congress-led coalition's reliance on communist parties for support.
When India does put its mind to it, though, great things can happen. Earlier this year, New Delhi raised the foreign ownership restriction on telecommunications to 74% from 49%. India now boasts one of the world's fastest growing mobile phone markets. Consumers enjoy cross-country calls for around three U.S. cents a minute. China, in contrast, hasn't attracted much interest in its mobile phone market.
It can be hoped that high-level attention from the U.S. will light a fire under New Delhi's policy-makers. Mr. Snow is hitting the right notes. He wisely touched upon the problem of infrastructure, a major Achilles heel. Mr. Snow also stresses opening India's financial services industry to foreign competition. "Bank regulators have done a good job of governance rules but they have also restricted foreign ownership," he said.
Relations between Washington and New Delhi have been rapidly improving, but there's room for even greater cooperation. Liberalizing foreign direct investment would be a good start. Despite the many advantages that India has over China, such as a larger English-speaking population, foreign direct investment was just $5 billion in 2004, compared with $55 billion in China, according to the World Bank.
Perhaps belatedly, the world is increasingly recognizing
India's potential to become a great economic powerhouse. The treasury secretary's
emphasis on a more efficient public sector, a speedier legal system and
better infrastructure is right on the mark. Mr. Snow's visit underscores
common strategic interests, too, with China beefing up its military. New
Delhi will be acting in its own best interest if it finds a way to overcome
political obstructionism and accelerate these long-awaited reforms.
3. DDT Saves Lives November 8, 2005; Page A16
It's horrifying enough that malaria -- a preventable and curable disease -- claims one million lives every year and that most victims are Africa's pregnant women and children under five. Compounding this tragedy, however, is the global lobbying effort against the most effective method of combating the mosquito-borne illness: spraying outdoors and inside houses with the insecticide DDT.
Thanks to Senator Sam Brownback, among others, that could change. The Kansas Republican has been fighting to include language in an appropriations bill that would force the U.S. Agency for International Development (AID) to spend more money on the spraying of DDT. In 2004, less than 10% of AID's budget was spent on insecticides and drugs in undeveloped countries affected by malaria.
The balance went toward so-called "technical assistance." Some of this assistance -- educating doctors, teaching government officials how to seek more aid -- is certainly legitimate. But mostly it means paying Westerners to drive around in 4x4's to conferences giving advice that's often lousy. In Zambia, a private-sector initiative used DDT spraying to cut malaria incidence in half in several villages, yet AID has been encouraging the country to use less-effective bednets instead.
Before granting the agency another $100 million or so for its 2006 malaria budget, Mr. Brownback wants assurances that AID will spend U.S. tax dollars on what works. We know DDT works because it's how Europe and North America successfully eradicated malaria in the 1940s. And it's how Greece and Sri Lanka and parts of South Africa combated the epidemic in later decades.
The perception -- going back to Rachel Carson -- that DDT spraying is dangerous has long since been debunked. An Environmental Protection Agency hearing as long ago as 1972 concluded that "DDT is not carcinogenic, mutagenic, or teratogenic to man" and that "these uses of DDT [to fight malaria] do not have a deleterious effect on fish, birds, wildlife, or estuarine organisms."
A few individuals at green outfits like the World Wildlife Fund and Greenpeace have grudgingly started to admit that there is a place for DDT in malaria control. But their organizations -- and the environmental community in general -- continue to oppose the use of insecticides. Likewise, AID pays lip service to DDT's usefulness. Earlier this year Andrew Natsios, who runs the agency, wrote that "USAID does not in any way prohibit the use of DDT in malaria programs, if warranted in a particular country setting." That is not, however, the same as saying the agency promotes its use, and the fact is that AID seldom if ever concludes that DDT's use is "warranted."
That's because the officials in charge of malaria control at AID take their cues from environmentalists, who apply the most domestic political pressure. The U.S. is the world's largest donor nation, and others will follow its lead on this issue. But since AID has not made DDT use a priority in combating malaria, neither have international aid agencies like Unicef, the World Health Organization and the Global Fund.
Mr. Brownback's efforts to correct this are meeting resistance
from other Members of Congress, particularly in the House. The relevant
appropriations bill is currently in House-Senate negotiations, and GOP
Representative Jim Kolbe of Arizona is chief among those pushing for watered-down
language. His argument is that Congress should defer to the "experts" at
AID and resist "micromanaging." But if the agency has reached a point where
it is allowing women and children to suffer and die rather than employ
methods that work, it's time for Congress to exercise some adult supervision.
4. Europe’s Not Working
By Olaf Gersemann
http://taemag.com/issues/articleid.18719/article_detail.asp
The gap between America and Europe grows even larger. A reporter for the German edition of the Financial Times notes that Americans are 40 percent richer than the French and that we will be twice as rich as the Germans in about 20 years if current trends continue. BERLIN—They call themselves “The Happy Unemployed,” and they fight “the dictatorship of wage dependency”—at a very leisurely pace.
This German group so far consists of a few amateur humorists, and seems unlikely to grow larger. For while there is persistent mass unemployment in many European countries— with jobless rates hovering near double-digit levels in Germany, France, and other parts of the continent for most of a decade now—it’s unlikely that many Europeans enjoy being unemployed. Like other people, most Europeans strive for the benefits that come with being a member of the work force: financial independence, a feeling of usefulness, self-confidence, and respect from fellow citizens.
Europeans who are unable to get work find the experience as stressful as Americans do. A German government report describes the personal afflictions that have sprung up amidst the country’s economic stagnation: “Depressive moods, general dissatisfaction with life, fear, helplessness and hopelessness, low self-esteem, resignation bordering on apathy, a low level of activity, social isolation, and loneliness.”
The inescapable reality is that the economies of the major countries on the European continent are basket cases: They produce the unemployed by the millions. Even more frightening, European economies are creating a new kind of stratified society, in which a substantial and growing minority is shut out from the labor market permanently through absurdly high minimum-wage requirements and overly strict regulations (like the employment protection laws that can make it almost impossible to fire people).
The syndrome has not blighted all European countries equally—parts of Eastern Europe, and some Western European countries, are healthier than the norm. But in the three countries with the largest economies—France, Germany, and Italy— stagnation, joblessness, and low or no growth are now facts of life. Together, these Big Three countries account for about three fifths of the Euro Zone’s economic output, and they are not healthy—and haven’t been for years.
Help on the way? Hold your cheers
Some help may be on its way. About the time this magazine reaches readers, it is likely that mid-September elections in Germany will have swept out Gerhard Schroeder’s Social Democrats and brought in a more reform-minded government. Meanwhile, handicappers suggest that when France’s damaged Jacques Chirac leaves office (perhaps as early as the spring of 2007), the man most likely to succeed him is Nicolas Sarkozy—a man who is in at least some ways more supportive of free-market reform than any recent major French politician.
And across the Channel, recently re-elected British prime minister Tony Blair has made it his mission to open an economic debate across Europe. By adopting economic policies
much closer to America’s than to those of France and Germany, Britain has thrived over the last decade. The U.K.’s unemployment rate is half the continent’s, its growth has been almost twice the level of the Euro Zone, poverty is declining in Britain, and business creativity is rising.
In a June speech to the European Parliament, before Britain took over the E.U. presidency for six months, Blair argued against French and German insistence that to trim Europe’s welfare state and unravel some of its socialist policies would be to ape an American economy that “tramples on the poor and disadvantaged.” He asked bitingly: “What type of social model is it that has 20 million unemployed in Europe? Productivity rates falling behind those of the USA? That, on any relative index of a modern economy—skills, R&D, patents, information technology, is going down, not up?”
“The issue,” Blair warned his fellow Europeans, is not ideology, but “modernization.” It is absurd, he suggested, for the European Union to spend 46 percent of its money on subsidies to farmers. He called on Europe’s political leaders to show enough nerve to “send back some of the unnecessary regulation, peel back some of the bureaucracy, and become a champion of a global, outward-looking, competitive Europe.”
For making these points, Blair was attacked by French president Jacques Chirac and other Europeans, and a June E.U. summit and budget meeting degenerated into a debacle. Similarly, a series of market-oriented reforms proposed by European Commission president Jose Manuel Barroso was dashed earlier in 2005 by a group of European countries led by Chirac and Schroeder.
In reality, there is not much hope that continental Europe will catch up economically any time soon. There are three reasons for this sad judgment: First, the economic woes of large parts of Europe are so serious that no quick fix can cure them. Second, the real reasons for the problems (suffocated domestic markets) have not been understood fully even among reform-minded Europeans, despite a quarter century of never-ending debates. Third, even if reformers managed to agree on a comprehensive platform of economic changes and pushed hard for it, they would meet overwhelming resistance from a majority of Europeans. To put it bluntly: Most French, German, and Italian voters simply refuse to accept the necessity of a Thatcher/ Reagan-style economic revolution. Things will have to get even worse before many Europeans realize the depth of their countries’ stagnation.
It’s underperformance, stupid
Adjusted for differences in price levels, per capita income in the United States now exceeds France by close to 40 percent. Germany and Italy lag even further behind.
Princeton economist Paul Krugman, when recently comparing Europe and the U.S. in the New York Times, wrote that: “The big difference is in priorities, not performance.” Krugman’s assertion is basically this: The income gap is not the result of lower efficiency in Europe. It is the result of Europeans working less than Americans. Not because they can’t find work, but because they work fewer hours, preferring to spend more time with their families and on leisure activities.
True, measured simply as GDP per hour worked, productivity is not much higher in the United States than, say, France. But what Krugman doesn’t mention is that America is close to full employment, whereas in Europe millions of poorly educated people can’t find an employer willing to pay them the artificially high minimum wage or willing to take a chance on such hires because they may be impossible to fire in the future. In other words, Europe seems to be so productive only because a large portion of its people are simply left out of the productivity statistics (and working life).
If labor productivity in Germany and in the U.S. continues on the same path as from 1996 to 2003, per capita income in Germany will grow by only 44 percent by the time American incomes double in 2026. Put differently, within a generation, Americans will enjoy twice the economic status that Germans do.
Even more ignorant is Krugman’s claim that Europeans work less because they choose to. While Europeans do love their five or six weeks of vacation per year, that’s a sideshow. The real problem in continental Europe is the involuntary unemployment of millions, because of economies that do not grow. That, not love of family or beach time, is the reason for the lower output and smaller incomes in European societies. More specifically, the U.S. labor market is much better equipped to integrate workers who may be disadvantaged— high-school dropouts, the very young, the very old, women, immigrants. Consider this: In the U.S., the employment rates for citizens and immigrants are virtually the same. In Germany, the working-age immigrant population doubled over the last 25 years, yet the number of immigrants with jobs didn’t rise at all. That failure to provide economic opportunity is one of the factors that has let Germany and other European nations become fertile soil for militant Islam.
“Eurosclerosis” misunderstood
There’s no evading it: Europeans are falling behind Americans and Asians on the economic front. There has been a debate about “Eurosclerosis” since the early 1980s. With that term, prominent German economist Herbert Giersch expressed his concerns about the “institutional rigidities and structural constraints that are an inherent part of Rhineland capitalism.”
Despite the length of this debate, the real reasons for Europe’s economic malaise are still widely misunderstood on the continent. Many politicians and businesspeople point to an alleged lack of international competitiveness in Europe’s manufacturing sector. But manufacturing is yesteryear’s frontier and hardly Europe’s biggest problem: The much more serious differences in employment growth between the United States and competitors like France, Germany, and Italy stem entirely from Europe’s failure to develop a dynamic service sector—the primary job machine in today’s economy.
International competitiveness, on the other hand, is not Europe’s deepest problem. If it were, the Euro Zone wouldn’t run a persistent trade surplus, and Germany wouldn’t be the world’s biggest exporter. Much more serious is the lack of vibrancy in continental Europe’s own domestic markets— which, by definition, represent the bulk of any modern economy. Domestic markets in Europe suffer from a misallocation of resources that lowers consumption and standards of living, wastes human talents, and leaves many potential productivity gains unrealized. Structural reforms of everything from store hours to labor regulations are desperately needed.
Marx is smiling
It is quite clear by now that “Rhineland capitalism” serves its people badly. It deprives them of technology-enabled income gains that the American system generates routinely. It creates persistent mass unemployment and huge economic injustices.
Prominent German sociologist Ulrich Beck recently argued that, “The middle class realizes nothing is stable anymore. Suddenly, very quickly, you can lose everything: the job, the apartment, your life in dignity.” He described Germany as being in a “pre-revolutionary situation: I am sure that Marx is smiling right now.”
To be sure, Beck exaggerated. It is true, however, that Europeans sense that their economic systems are failing. They have noticed that their beloved welfare and regulatory systems no longer provide the economic security they used to.
Consider a poll conducted among 11,200 Europeans earlier this year. The German market-research company GfK asked people what they considered the most important challenge facing their respective home country. In each of the Big Three countries, the largest share of respondents spontaneously named unemployment as the most pressing problem: 38 percent in Italy, 58 percent in France, and a staggering 81 percent in Germany. (In the U.K., which is much closer to the laissez-faire economic model, the share choosing unemployment as the major national problem was a minuscule four percent.)
The insecurity that Germans feel these days can also be seen in their lack of willingness to commit themselves financially. Germans have been shying away from buying houses, for instance. That is why real estate prices in Germany have been falling in recent years, while in nearly all other major industrialized countries they were booming. Germans are even reluctant to buy cars. The number of new automobile registrations fell for four years in a row before growing less than one percent last year. New car registrations are still 14 percent below the level in 1999. This is a sign of diminished economic confidence.
Compare this to Europe’s political rhetoric
Nearly every top politician in Germany is on record giving a grave, smug warning about the danger of letting “American conditions” seep into the German economy. In Germany’s economic debate, “American conditions” is code for stiff economic competition, low taxes, minimal state intrusion, and limitedduration welfare payments. Ireland and Britain have adopted many of these policies themselves, rocketing past Germany and France in living standards in the process. But for political opportunists in continental Europe, the quickest way to dismiss any talk of market freedom or reduction in the size of government is to ooze concern about American economic brutalism.
Even Kajo Neukirchen, widely considered to be Germany’s toughest business executive, has said that he does “not want American conditions, with hiring and firing being the order of the day.” And during British attempts to talk France and Germany into some economic reforms this summer, even Blair cabinet member Jack Straw made it a point to insist that his country does not have “a far-right economy” like the U.S.
While condemning American-style capitalism, Europe’s politicians continue to present their own continent as an economic beacon. During the national convention of his socialist party in 2003, German chancellor Gerhard Schroeder insisted that “a Europe formed by Social Democrats is more necessary today than ever before. Such a Europe is needed because we Europeans, based upon our unique European model of social participation and our embrace of the welfare state, have something to offer to the whole world, something in opposition to the dangerous tendency toward confrontation and unilateralism, an alternative of just development and shared wealth.”
Heidemarie Wieczorek-Zeul, Germany’s minister for economic cooperation and development, was even more direct when she said on national television in April 2005 that, “It is necessary that we fight for the survival of our model in the face of American turbo-capitalism. When the fight is won right here in Germany, then the verdict has been passed worldwide. That is why I am in favor of an international victory of our system over the American one.”
Sadly, remarks like these aren’t aberrations; politicians, union leaders, and businessmen across Europe speak this way. These blustery claims, so divorced from comparative economic realities, reflect widespread attitudes among Europe’s people.
Dancebands on the Titanic
When a majority of French voters rejected the proposed European constitution this summer, they could have been acting for any number of good reasons. Start with the fact that at over 60,000 words—touching everything from the “right to good administration” to the “right to be heard” to the promise of “a free placement service” for every worker—this is a bureaucratic monster rather than a constitution. Yet when the French said “non,” polls showed it was not out of any qualms over the megalomaniacal document itself. It was because the average Frenchman wanted to punish the European Union for its role in opening up Europe’s economies somewhat. The typical French voter was not upset because her economy is too centralized and manipulated; she said she wanted France’s economy to be more statist than even Brussels allowed.
Likewise, the backlash against Gerhard Schroeder solidified not when his socialist nostrums ran the German economy further into the ground over six years, but when he finally put forth some timid reforms—such as cautiously cutting unemployment benefits—to try to slip out of his economic mess. A majority of Germans pronounced these reform steps as going in the “wrong direction”—as if Germany could possibly survive going any further in the social democratic direction.
The attitude still most widely held in Europe is that it is the job of politicians to distribute and redistribute society’s goods—be it jobs, income, or wealth. There is a deep zero-sum mentality in Europe which starts from the idea that politics, not competition, should govern economics. Asked in April 2005 whether competition is good for economic growth and employment, only 45 percent of Germans strongly agreed. In both France and Italy, the share was only 29 percent.
Do not be surprised, then, if Angela Merkel, the leader of Germany’s Christian Democrats, and likely successor of Gerhard Schroeder as German chancellor, behaves little better in the economic realm. Consider government finances. Germany’s federal government currently taxes away about 44 percent of the nation’s output, and the Schroeder government has long insisted this is not enough. When introducing its draft for next year’s budget during this summer, the Schroeder administration complained that “with the current financial endowment, an adequate public infrastructure, a good public education systemÉ can’t be guaranteed any more.”
You might expect that Ms. Merkel, as the head of Germany’s supposed conservative party, would want to change course. Yet her fiscal platform is remarkable mainly for two things: She has proposed a reduction of payroll taxes—but only in exchange for an increase of the Value Added Tax from 16 to 18 percent on purchases. Furthermore, this year Merkel abandoned a whole host of tax-cutting proposals that her party had demanded previously in its status as the opposition. With the announcement of the special national elections on September 18, and the chance to regain power, the Christian Democrats abandoned many of the economic principles that had served to separate them from the Social Democrats. Prominent, allegedly pro-capitalist German pundits applauded, with one of them explaining that “there is simply no room for a lasting tax relief.”
Germans, in other words, are behaving like people on the sinking Titanic who insist their drinks be shaken, not stirred.
“Things are bad enough already!”
When following the economic policy debates in France or Germany, it is tempting to give up all hope that Europe will get back on track any time soon. But one can’t count out the sick men of Europe completely. For one thing, all the economic woes from which we Europeans suffer are clearly self-made. They are there because of political decisions, not because Europeans have been hit by some uncontrollable external economic shock. These errors are reversible. Once there are majorities for real, comprehensive change, the European economies can improve.
When economic performance got bad enough in a number of European countries in the recent past, majorities decided they were ready to change course. A good example is Great Britain and its “Winter of Discontent” in 1979, which swept Margaret Thatcher into Downing Street. Another is Ireland, not too long ago one of the poorest countries in Europe. After decades of struggling under socialist-influenced economic nostrums, it made a sweeping move toward the American model— cutting taxes and regulations, and inviting many U.S. corporations to set up bases under business-friendly conditions. Ireland exploded in prosperity, and today enjoys a per capita income about 20 percent higher than in France or Germany.
On the European continent, the Netherlands has made some sensible policy changes. So has Denmark. The government there has maintained fairly high unemployment benefits, but it has made it easier for employers to fire employees; and gotten tough on people who receive welfare benefits yet don’t actively look for jobs. The result is a labor market that is more Americanized than any other in continental Europe, and an unemployment rate at or below U.S. levels.
So, not all Europeans are terminally resistant to sensible economic reforms. There is no insurmountable reason why France, Germany, and Italy couldn’t move toward new policies as well.
Unfortunately, economic results on the continent may have
to get even uglier before a majority of citizens recognizes the foolishness
of the path they are now on. For the time being, most Europeans still display
the same mindset that Lord Palmerston summed up when he is to have said
to Queen Victoria: “Change? Change? Why do we need change? Things are quite
bad enough already!”
Olaf Gersemann is international news editor of the Financial
Times Deutschland, and author of Cowboy Capitalism.
5. Wearing of the Green Irish Subsidiary Lets Microsoft
Slash Taxes in U.S. and Europe Tech and Drug Firms Move
Key Intellectual Property To Low-Levy Island Haven
Center of Windows Licensing By GLENN R. SIMPSON
Staff Reporter of THE WALL STREET JOURNAL
November 7, 2005; Page A1
(See Corrections & Amplifications item below.)
DUBLIN -- A law firm's office on a quiet downtown street here houses an obscure subsidiary of Microsoft Corp. that helps the computer giant shave at least $500 million from its annual tax bill.
The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9 billion in 2004.
Ireland's citizens may not have heard of Round Island One, but they benefit greatly from its presence. Last year the unit handed the government of this small country of four million citizens more than $300 million in taxes.
The citizens of other nations where Microsoft sells its products are less fortunate. Round Island One provides a structure for Microsoft to radically reduce its corporate taxes in much of Europe, and similarly shields billions of dollars from U.S. taxation.
Giant U.S. companies whose products are heavily based on their innovations, such as technology and pharmaceutical firms, increasingly are setting up units in Ireland that route intellectual property and its financial fruits to the low-tax haven -- at the expense of the U.S. Treasury.
Much of Round Island's income is licensing fees from copyrighted software code that originates in the U.S. Some of the rights to these lucrative assets end up in Ireland via complex accounting rules on intellectual property that the Treasury is now seeking to overhaul. The Internal Revenue Service said it is also looking closely at how companies account for such transactions.
In a statement, Microsoft said its European units "report and pay significant amounts of taxes" and that Microsoft "is fully compliant with the tax laws of the United States and all other countries."
Through a key holding, dubbed Flat Island Co., Round Island licenses rights to Microsoft software throughout Europe, the Middle East and Africa. Thus, Microsoft routes the license sales through Ireland and Round Island pays a total of just under $17 million in taxes to about 20 other governments that represent more than 300 million people.
Microsoft's effective world-wide tax rate plunged to 26% in its last fiscal year from 33% the year before. Nearly half of the drop was due to "foreign earnings taxed at lower rates," Microsoft told the Securities and Exchange Commission in an August filing. Microsoft leaves much of its profit in Ireland, including $4.1 billion in cash, avoiding U.S. corporate income taxes. But it still can count this profit in its earnings.
Round Island One is a key component in a drive by Microsoft to place its intellectual property and other assets into tax havens. In the past three years, Round Island has swallowed up other Microsoft units, from Israel to India, moving much of their tax liability to Ireland. Within the U.S., the rights to many of Microsoft's products and copyrights are managed by a subsidiary in Nevada, which, unlike the company's headquarters state of Washington, doesn't tax royalty income on intellectual property. The Nevada unit, Round Island LLC, is the corporate parent of Ireland's Round Island One.
Microsoft's Irish venture is part of a historic emigration of U.S. intellectual capital, a cornerstone of the modern American economy, to an island that once sent millions of famine-wracked migrants to America. Companies built on knowledge and innovations are an ever-larger portion of the U.S. corporate tax base, displacing the old industrial concerns. But the newer firms' principal assets -- ideas, codes and formulas -- are intangible, and thus easily exported to places where the huge royalties they produce can be shielded from American taxation.
Accountants and lawyers now avidly market such relocations. Round Island's legal address is in the headquarters of a Dublin law firm, Matheson Ormsby Prentice, that advertises its expertise in helping multinational companies use Ireland to shelter income from taxes. It represents other U.S. technology companies including Google Inc., which recently set up an Irish operations center that the firm credits in its SEC filings with reducing its tax rate. A Google spokesman said the company set up in Ireland to be close to its European customers. "Because that business is done outside of the U.S. it is taxed according to international law," he said.
Microsoft's other neighbors in Ireland include Oracle Corp., which also recently set up a network of Irish subsidiaries that helped drive its taxes down sharply. "The decrease in our effective tax rate...is attributable to higher earnings in low tax rate jurisdictions," Oracle said in its July annual report to the SEC. An Oracle spokesman declined to comment.
Ireland, through a blend of deft marketing, potent financial incentives and advantageous geography, has largely beaten out its many tax-haven rivals in the heated competition for offshore investment by technology companies. The flow of U.S. know-how has helped make Ireland an economic powerhouse, dubbed the Celtic Tiger, now one of the richest countries in Europe.
In the past four years, Ireland has stepped up its effort to woo U.S. high-tech firms by piling on new tax breaks for technology transfers, leading a string of major U.S. companies to announce research facilities here. The trend poses a quandary for U.S. regulators and policy makers in the face of a skyrocketing federal deficit and widespread tax shelters.
Irish officials say U.S. companies aren't exporting their intellectual wealth to Ireland, just sharing it. "This isn't about sucking knowledge out of the U.S. This is about building up capability elsewhere," says Enda Connolly, a manager at the Industrial Development Agency of Ireland.
The IRS is fighting intellectual-property migration in court, and the Treasury Department has issued a draft of new rules to limit it. Their efforts have done little to slow the trend. A Washington panel advising the White House on tax policy is now floating a possible new strategy: Simply eliminate the taxes on overseas corporate income that motivate firms to move their intellectual property and other assets offshore. Most major U.S. trading partners have already taken this step, giving their firms a competitive edge against American companies.
Licensing fees make up about three-fourths of Microsoft's nearly $40 billion in annual revenue. Computer makers pay such a fee for every copy of Windows they pre-install in a PC. Companies pay licensing fees for using programs like Microsoft Office and to license programs that run on corporate networks.
Microsoft has just over 1,000 full-time employees in three suburban Dublin buildings, each with its own Starbucks outlet. About half of the Irish employees work on software "localization," translating and modifying for local markets the programs produced by some 29,000 employees of Microsoft in the Puget Sound region of Washington state.
"We have a very real business" in Ireland, said Michael Doyle, a Microsoft tax lawyer at its headquarters in Redmond, Wash. He said the company is using a well-accepted, widely used practice to share its intellectual property with offshore subsidiaries. "The IRS is keenly aware of this and they audit it regularly," he said.
A spokesman for the IRS said the agency doesn't comment on individual taxpayers. But he said the agency is "concerned" about how U.S. companies structure such arrangements and sometimes challenges them.
Ireland's emergence as the top overseas destination for U.S. intellectual capital culminates a long effort to attract foreign investment. For decades after Ireland gained independence in 1921, its economy was largely agricultural. In 1969 John A. Mulcahy, a wealthy American from Ireland, used his one-third holding in Pfizer Inc. to persuade the U.S. drug company to set up a citric acid plant in Cork, according to a Harvard Business School case study.
Other U.S. manufacturers followed, attracted by tax benefits, a low-wage, English-speaking work force, and Ireland's 1973 induction into the European Economic Community. Ireland grew adept at wooing U.S. businesses, dispatching teams of lobbyists to America. Young tech firms such as Apple Computer Inc. began flocking to the island in the 1980s.
Despite criticism from its neighbors, Ireland continued introducing incentives, including in 1983 a 10% tax rate on profits from software exports. The incentives spurred Microsoft in 1985 to set up its first plant in Ireland to help supply Europe. But most foreign operations remained small, and through the mid-1980s "Ireland was a basket case economically," says Mr. Connolly.
That changed with the 1990s technology boom, beginning with the 1990 arrival of an Intel Corp. microchip assembly plant in exchange for $157 million in incentives. Soon to follow were Dell Inc., Gateway Inc., Hewlett-Packard Co. and International Business Machines Corp. Pfizer's drug-industry rivals also followed its path to the green hills of County Cork. The European Union's free-trade rules let them build products in Ireland and sell them cheaply in Europe's many higher-tax countries. Spokesmen for Intel and Dell said tax incentives, the skilled work force and Ireland's location were all reasons for moving operations there.
Microsoft and others now are going further. Microsoft delivers its Windows products to European customers straight from Ireland, and the profits go straight back to Ireland. Since most of the profits from Microsoft programs are in the form of copyright licensing fees, "it is likely that low or nil taxes are payable in the other EU states," says John Ward, a tax professor at the University of Ulster in Belfast, Northern Ireland. Microsoft said it has separate units in every major jurisdiction in the region "that report and pay significant amounts of taxes," but declined to provide an example.
One critic of tax havens contends that the arrangement amounts to an accounting fiction. "You would expect there would be some profits earned in these other countries," says Richard Murphy, an Irish accountant and visiting fellow at the Centre for Global Political Economy at the University of Sussex who is affiliated with a European group called the Tax Justice Network, a coalition of left-leaning nonprofits. Microsoft's ability to avoid reporting large profits in the United Kingdom relies on its position that its U.K. sales -- $1.8 billion in fiscal 2004 -- are actually conducted from Ireland.
To avoid U.K. corporate-profits tax, a company must show it has no "permanent establishment" in Britain through which it makes sales. Microsoft has a large U.K. operation (owned by Round Island) that it calls marketing and a tiny Ireland-based sales staff. Mr. Murphy says Microsoft "is walking a fine tightrope." The software company's Mr. Doyle says its practices have been extensively vetted by tax authorities in the relevant countries.
Round Island -- the name is just a placeholder that never got changed, Microsoft says -- filed its annual report in Ireland on Oct. 27, some seven months late. When asked, Microsoft attributed the delay to the need to finish routine audits of subsidiaries. In the U.S., such a late filing would require an explanation to regulators and possibly large penalties. In Ireland, regulators don't even ask. The penalty for late filing: $3.60 a day.
Taxes paid to Ireland, though modest to giant Microsoft, are a big deal to the Irish treasury, amounting to $77 for each Irish citizen. Last year Microsoft also helped cover Ireland's costs in its six-month turn in the EU presidency, donating software and forgiving some $60,000 in royalties. Bertie Ahern, the Irish taoiseach, a title similar to prime minister, spoke at Microsoft events twice this year. "The growth and success of Microsoft Ireland has coincided with, and played an important role in, a dramatic transformation in the Irish economy," he said at an event at Dublin Castle last month.
Ireland sees intellectual property as the key to its future. Irish labor is now growing scarce, and costs higher. The development authority adopted a new strategy in 2000 of becoming "the foremost knowledge-based society in Europe." Last year, Ireland enacted a new R&D tax credit and abolished a 9% tax on sale or transfer of intellectual property.
Lucent Technologies Inc. now is building a new research center here, attracted by "access to high-caliber engineering talent and scientists," according to spokeswoman Mary Lou Ambrus. IBM is developing Lotus Workplace in Ireland, Hewlett-Packard is designing new inkjet printers here. In March, Microsoft announced it is creating a new R&D center in Ireland to help work on the flagship products currently designed primarily in Redmond, including the planned new release of Windows, called Vista. Pharmaceutical companies are also doing more research in Ireland.
"We're transitioning the nation from being a supplier and producer of other people's ideas to a place where you actually do that development," says Mr. Connolly. The development officer calls offshoring of research a natural part of globalization, and "a good thing. Is that being done at the expense of the American taxpayer? I don't think so."
The research facilities are necessary to satisfy IRS rules on moving intellectual property abroad. To do so -- and thus have profits from it be taxed abroad -- a company must be able to argue plausibly that its offshore unit is at least partly responsible for the innovations.
A common device is to take successful, patented American ideas and then develop new generations of them -- with help from an offshore research division. The ownership of the new version (and profits on licensing it) can then legally be shared between the U.S. parent company and the offshore unit.
Suppose a U.S. company develops a new, easy-to-use computerized day planner, and it's a global hit. All the royalties must go to the U.S., where it was invented, and be taxed at the U.S. corporate income tax rate of 35%. But if the company builds a new and improved version, adding features created partly by its offshore R&D team, the intellectual property rights of day planner 2.0 can be shared between the U.S. and the foreign unit -- as can the profits. Day planner 1.0, of course, disappears.
U.S. law explicitly permits this practice. The controversy comes in valuing the contribution made by the offshore unit. Did it pay a fair share of the development cost? And did it pony up a reasonable price to the parent company to be able to share the rights to the original invention, a price an arm's-length party would pay?
U.S. companies seek to meet the test by creating "cost sharing arrangements" between them and the foreign unit. "R&D cost-sharing agreements within corporate structures can minimize the tax payable in the parent country," notes Ireland's government in a development paper.
Flat Island, according to its filings, has cost-sharing agreements with a Microsoft unit in the U.S. called MELLC, which is the ultimate party controlling offshore patent licensing rights. Microsoft filings give no additional information about MELLC, nor will the company disclose details.
The IRS and Treasury say they are worried that some firms set artificially low prices for their offshore units to buy into such deals. "IRS regulations require that sales or other transfers between subsidiaries of multinational corporations meet the arm's-length standard," said Eric Smith, an IRS spokesman. "Intellectual property is a special case that may be difficult to value. The IRS is concerned that intellectual property is valued according to the arm's-length standard, and actively audits and contests transfers that do not meet this standard." The U.S. government has not questioned the legality of Microsoft's Round Island structure, which appears to be carefully constructed to meet federal regulations.
"Cost sharing is a concept in the U.S. income tax regulations that was developed many years ago to determine the amount of compensation attributable to R&D that is considered "arm's length," Microsoft noted in its statement. "Many large companies use this concept as it was originally created to help minimize disputes..."
The underlying concern is that American companies rely on the U.S. education system and other tax-supported infrastructure to produce a highly creative work force, then move the fruits of that labor abroad without due compensation to American society.
In August, the Treasury issued 188 pages of proposed new regulations on cost-sharing. The new rules are meant to prevent foreign subsidiaries from taking control of U.S. intellectual property without paying a reasonable price to the parent U.S. company for the innovation developed in America. The IRS has been trying to invalidate some cost-sharing deals through litigation, with little success to date.
The Matheson Ormsby law firm in Ireland promotes its expertise in setting up tax-sheltered structures, in a glossy booklet available at its Dublin office. As the global economy changes and technology develops, the firm notes, it is getting easier for multinationals "to unbundle the traditional value chain and locate appropriate profit generating functions in Ireland," including "ownership and exploitation of intellectual property." The law firm has an office in the heart of Silicon Valley, in Palo Alto, Calif.
The booklet sheds light on how Ireland has beat out smaller locales like Bermuda and the Cayman Islands in the competition for U.S. firms' intellectual property. The answer involves the IRS. As Matheson notes, small, sparsely populated and largely undeveloped havens like Cayman lack "the necessary economic infrastructure to which value and ultimately profits can justifiably be attributed." But Ireland has the people and physical infrastructure to permit "construction of profit-generating centres defensible by reference to functions, risks and tangible assets of the Irish operation."
Donald McAleese, the Matheson partner who set up the Microsoft and Google operations, didn't respond to requests for comment by email, telephone or a visit to his office.
Write to Glenn R. Simpson at glenn.simpson@wsj.com
6. A Socialist Hemisphere?
By Carlos A. Ball Published
11/08/2005
E-Mail Bookmark Print Save
TCS
MIAMI -- The disappearance in Aruba last June of Natalee Holloway, an American high school senior on a trip with her classmates from Alabama, received more press and television coverage in the U.S. than any other event taking place in Latin America and the Caribbean this year. I wonder if that is really a reflection of the interest of the average American towards what takes place south of the border or just another indication of media bias.
But there is little doubt that the American media reflects the apathy and lack of interest shown by the U.S. government and the Washington establishment towards Latin American affairs. For example, little attention and respect was shown to those at the State Department that knew Latin America well, like Otto Reich and Roger Noriega, who were instead pushed out.
I find it very strange that Washington considers North
Korea's communism and Iran's extremism to be eminent dangers, but not Venezuelan
President Hugo Chávez's communism and Argentinean President Nestor
Kirchner's extremism.
The fact is, U.S.-Latin American relations are at one
of their lowest historical points. The majority of Latin intellectuals
traditionally have felt a deep and secret inferiority complex toward the
U.S., blaming it for everything bad that takes place in the hemisphere.
They have taught in both public and private schools and universities for
three generations, and finally have seen their favorite students reach
the top political positions not only in Venezuela, Argentina, Brazil, Uruguay,
Ecuador, Paraguay, and Bolivia, but also again in Chile, where the highly
successful accomplishments and the good name of the "Chicago boys" are
being meticulously trashed by official lies and horrendous judicial decisions,
while Allende's followers are treated as victims and "compensated" from
the state coffers.
What took place last week in Mar del Plata, Argentina
at the so-called People's Summit would have been unthinkable at any time
in the 20th century. Yes, Castro has been attacking U.S. governments and
institutions for more than four decades, but the obscenity and insolence
of Chávez and his clique have no precedent. Undoubtedly, he was
encouraged by the lack of response when last January he said during one
of his weekly "Aló Presidente" broadcasts that Condi Rice's problem
was her lack of a sex life, something on which he offered to help her.
Such behavior is truly revolting, but also troubling is
the fact that the U.S., with little or no consideration, has been making
enemies of its traditional friends in Latin America. Since 9/11, U.S. consulates
throughout the hemisphere have been denying visas or making it extremely
difficult to get them to Latin Americans that do business in this country,
who own vacation homes here or studied or have their children attending
American schools and colleges, despite the fact that they have been coming
here as tourists or to visit family members for decades. Even though no
Latin American took part in the 9/11 terrorist attacks, there seems to
be a clear presumption of guilt once they enter the grounds of an American
embassy or are inspected by a Homeland Security officer.
Regarding U.S. policies towards Latin America, there is
a double standard everywhere you look. It is crystal clear where Lula,
Chávez, Kirchner, Vásquez, etc. want to go. Many ideas and
policies of Marx, Lenin, Stalin, Mao, Castro, and Che Guevara are being
rediscovered and openly applied by them, while U.S. foreign economic policy
continues to sail down a third way between capitalism and socialism. No
wonder such little respect is shown towards Washington. Free trade, yes,
but not regarding sugar or shrimp or steel or lumber or whatever deep pocket
lobbyists want to keep out today. Private enterprise and the right to work,
sure, as long as the interests of American unions are safeguarded by "fair
trade", which includes a "level playing field" (unaffordable wages and
working conditions) and "no child labor", even if the real alternative
for many of those youngsters is begging or prostitution, rather than going
to school.
A hundred years ago, 50% of Americans worked in agriculture
and no one in Washington dared to tell farmers that their children could
not help in the field or that going to class was more important than food
on the table. Most Latin Americans still work in agriculture. Thinking
how your great-grandparents would have reacted if Washington tried to apply
to them its current foreign economic policies will help understand how
Latin Americans see those deceitful policies, displayed as "fair trade".
Unfortunately, socialism and communism have a growing
number of advocates in Latin America, while capitalism has no clear support
coming from Washington. Instead, too many recycled civil servants enjoy
the tax-free life and great power of their current positions at the International
Monetary Fund, World Bank, Inter-American Development Bank, and all the
U.N. outposts, from where they support failed policies of big government
and higher taxes. Is it any wonder some Latin friends of the U.S. feel
betrayed?
Mr. Ball is editor of AIPE, a Spanish-language news organization
based in Florida, and adjunct scholar with the Cato Institute.
7. French agro-giants scoop lion's share of EU farm
aid
07.11.2005 - 09:55 CET | By Mark Beunderman
http://euobserver.com/?aid=20262&rk=1
Fresh figures by international NGO Oxfam show that the
biggest French farming businesses pocket the vast majority of EU agricultural
subsidies, just as Paris is sittting down in Brussels to haggle over the
common agricultural policy (CAP).
Oxfam research released on Monday (7 November) revealed that the top 15 percent of French farming companies consume 60 percent of the direct payments from the EU's coffers.
The findings are based on the European Commission’s own statistics, Oxfam said.
The charity's trade campaigner Celine Charveriat commented: "This gives the lie to the French argument that it uses EU subsidies to support its small farmers. They plainly don’t. Most small French farmers, 70percent of them, get only 17 percent of the subsidies doled out by Paris."
"The CAP is a gravy train for Europe’s biggest, richest farmers," she added.
Paris is the biggest net receiver of Brussels’ agricultural funding, scooping more than 20 percent of the CAP budget for itself.
According to UK paper the Independent, prince Albert of Monaco also received €287,000 in CAP payments last year for his farm activities in France.
Transparency campaign
A campaign for transparency on how the EU's farm subsidies
are spent is putting Paris under pressure to open its accounts books more
fully.
European commissioner Siim Kallas announced last week the commission itself will push for the publication of all information about projects and end-beneficiaries.
Several member states have already made the information available.
Following pressure from NGOs and media, Denmark, Estonia, the UK, the Netherlands, Sweden, Finland, Slovenia and some Spanish regions recently released figures.
It emerged that Dutch agriculture minister Cees Veerman last year received around €190,000 for farms in the Netherlands and France.
Slovak agriculture minister Zsolt Simon's company also allegedly trousered around €200,000 euros in national farm subsidies in 2003.
Oxfam timing provocative
The Oxfam revelations have come out just as EU foreign
ministers are meeting in Brussels on Monday to formally discuss the EU
2007-2013 budget for the first time since June.
A row over the British budget rebate and CAP, described as an "anomaly" by the UK, helped derail the previous talks.
On top of this, the EU's World Trade Organisation (WTO) partners are putting pressure on the bloc to slash farm subsidies further, with the US, Australia and New Zealand saying the EU's latest and purportedly "final" offer is far from enough.
But France is sticking to its guns on CAP so far, with
French president Jacques Chirac threatening a veto if Brussels offers further
subsidy cuts to WTO partners.
8. McCreevy Takes A Stand Over EU Corporate Tax Plans,
by Ulrika Lomas, for LawAndTax-News.com, Brussels 08 November 2005
http://www.tax-news.com/asp/story/story_open.asp?storyname=21683
Speaking on Friday at a KPMG conference in County Kildare,
Internal Market Commissioner Charlie McCreevy publicly broke rank with
the EC on the subject of corporate tax harmonisation.
Late last month, EU Tax Commissioner, Lazlo Kovacs announced that he intends to press ahead with the presentation of legislation to create a single European corporate tax base, despite strong opposition from five member states.
Mr Kovacs revealed that he plans to put forward his proposals next year, with the intention of legislating on the matter before his mandate ends in 2009. Although the UK, Ireland, the Czech Republic, Estonia and Slovakia are opposed to any move towards corporate tax harmonisation, Mr Kovacs stated that he is prepared to leave them outside the scheme, and move forward under the auspices of an 'enhanced cooperation' initiative.
"We don't think we should waste time trying to convince the other five," he explained. The Tax Commissioner went on to add, according to the FT, that: "We consider that if companies were allowed to apply a single EU-wide set of rules for company tax purposes, this would eliminate most of the problems such as double taxation they currently face when they do business across borders. It would also lead to a substantial reduction in compliance costs."
However, Mr McCreevy told the audience of accountants last week that:
"At an EU level taxation does not fall within my specific remit although there are of course many significant taxation issues that are pertinent to the operation and success of the internal market."
"There is perhaps no more controversial issue in a European context than taxation. Views on the subject diverge significantly. It is a subject which touches closely on issues of national sovereignty. But that’s just one reason why Member States, including Ireland, insist that all measures in this area be subject to unanimity and why there has been strong resistance to qualified majority voting. That situation will not change."
"This is not just a matter of the defence of national sovereignty. It goes much deeper than that. The structure and level of taxation is one of the key elements in determining the competitiveness of a country’s economy."
He went on to add:
"There are some who argue that lower taxation in one Member Sate than in another doesn’t give a level playing field. But they are dreaming if they think that by levelling up the taxation levels across Member States, they would attract more inward investment or encourage more economic activity."
"The harsh reality is that in the global economy in which we live, investment will flow to where it attracts the best return – Higher taxes across Europe would be followed by lower investment across Europe and higher investment flows out of Europe."
"Tax competition between Member States is healthy in that it keeps pressure on governments to watch their domestic spending and keep their tax regimes internationally competitive."
Mr Kovacs' proposal to harmonize the tax base doesn't
of course include harmonization of tax rates, it merely instals a common
basis for the calculation of taxable income. But the UK and its allies
see this as a first step towards harmonization of rates.
9. Clock Is Ticking on Trade Talks Doha Round of Negotiations
Gets Bogged Down in Farm Tariffs
By SCOTT MILLER
Staff Reporter of THE WALL STREET JOURNAL
November 8, 2005; Page A14
BRUSSELS -- As global trade talks threaten to grind to a near-halt, most of the blame is being placed on the European Union, and especially France, for holding on too tightly to Europe's longstanding farm protections.
EU farm tariffs are the biggest holdup in what is expected to be a watershed week in the talks, beginning with a session last night in London. But a look around the negotiating table shows several other major trading powers have yet to make ambitious offers -- or in some cases, any offer -- to lower their own most-sensitive trade barriers. That suggests the four-year-old Doha Round of negotiations is dangerously close to failing, just five weeks before a meeting in Hong Kong aimed at producing the outline of a far-ranging agreement.
At the core of the stalled talks is a spaghetti bowl of conflicting demands:
The so-called Group of 10 leading agricultural-importing nations, which includes Japan and Switzerland, have offered only shallow cuts to their highly protected farm sectors. Some members' farm tariffs, for instance, multiply prices severalfold, and the G-10's best offer so far still would leave its tariffs higher than those of the EU. Meanwhile, individual members of the G-10 have pushed for deep reductions in global tariffs on manufactured goods.
Brazil, leader of a group of richer developing countries dubbed the G-20, in turn has refused to consider cutting its tariffs on manufactured imports. Many are higher than corresponding tariffs in the U.S. or EU. Brazil is insisting the EU improve on its offer to cut farm tariffs by an average of 38% from current levels. The EU says it first needs something in return on services and finished goods -- but opposition from France may mean the bloc can't budge further in any case, hurting its leverage.
India, another G-20 member, isn't offering deep cuts in its own farm tariffs that also can run in the triple digits. But it is pushing for other countries to make better efforts to open up global trade of services, a sector where India is growing fast.
African, Caribbean and Pacific countries mostly want cuts to U.S. and EU farm tariffs -- but like the EU they fear cutting tariffs too much, because that would lessen the benefit of special trade deals they receive from the EU.
And although the U.S. has made the most ambitious proposals to cut farm tariffs of any country, it is under attack from West African countries for not offering more assistance to their cotton sectors.
To be sure, global trade talks often become most productive when things appear most desperate. Countries tend not to make concessions until they feel they have no choice. Still, a sense of foreboding is descending over negotiators, as the Doha talks have barely moved beyond agriculture issues to the economically larger areas of manufacturing and services markets.
If the standoff over agriculture "continues to keep everything else blocked at the gate," top EU negotiator Peter Mandelson said yesterday, "We won't be able to get to Hong Kong in the shape we need." On Friday, heading into what he called a "make or break" week for the talks, he said, "Without a doubt we are living on borrowed time." U.S. Trade Representative Rob Portman also said last night that the talks have to move beyond agriculture.
Following last night's meeting of five economic powers -- the U.S., the EU, Brazil, India and Japan -- 20 to 40 trade ministers are to meet in Geneva today and tomorrow to try to get talks on track. Thursday, World Trade Organization director general Pascal Lamy is to meet with the heads of WTO delegations to take stock of the talks and assess the prospects for the Hong Kong meeting. "For the WTO process to work, countries have to start liberalizing policies in politically sensitive sectors," said Daniel Griswold, director of the Center for Trade Policy Studies at the Cato Institute in Washington.
Although few want to talk about it publicly, many negotiators are wondering whether talks that had aimed for "substantial" cuts in farm tariffs will have to be scaled back. That in turn would lead to a less-ambitious opening of global services markets and smaller cuts in tariffs on manufactured products.
It also would raise the question of whether such complex and long-running rounds of talks are an effective way to update global trade agreements. With 148 WTO member nations, some WTO critics argue that the notion of finding consensus on sweeping trade deals is little more than an anachronistic throwback to the immediate postwar years, when only a couple of dozen like-minded nations were involved.
One possible way to scale back the current talks, trade diplomats said, would be for WTO members simply to agree to a proposal like the EU's, even though it falls well short of what other countries want. Or they could agree to try to maintain a higher level of ambition but postpone until the spring any decisions on the most contentious elements, such as farm tariffs or how to use trade to help developing countries.
But even scaling back the goals might not be an easy proposition, as countries would be forced to consider a new set of tradeoffs. With time running out, some diplomats fear the WTO won't be able to produce a draft text of the agreement that the WTO's members hope to sign at the end of the Hong Kong meeting.
Failure to agree on something this week would greatly increase the chances that the Hong Kong meeting won't produce a meaningful result.
The main scapegoat for the current state of affairs remains the French. Government officials in Paris repeatedly have called on Mr. Mandelson not to make fresh offers and have warned they may withhold approval of any agreement.
The EU's proposal to cut farm tariffs an average of 38%
was well short of the 54% its trading partners wanted. The EU also demanded
that nearly 200 of its most-sensitive products be exempt from the cuts.
10. Irish Commissioner resists European tax harmonization scheme. The Irish economy has boomed thanks to Reagan-style tax cuts. The corporate tax rate, for instance, has been reduced from 50 percent to 12.5 percent - which is one of the reasons why Ireland has gone from being the "Sick Man of Europe" to being the second-richest country in the European Union. High-tax welfare states resent Ireland's success, and politicians from places like France and Germany want to harmonize taxes in order to undercut Ireland's competitive advantage. The latest threat to good tax policy is a European Commission proposal to harmonize the corporate tax base (i.e., the definition of taxable income). But a Commissioner from Ireland just announced his opposition, noting that tax harmonization will further cripple European competitiveness. Tax-news.com reports:
Speaking on Friday at a
KPMG conference in County Kildare, Internal Market Commissioner Charlie
McCreevy publicly broke rank with the EC on the subject of corporate tax
harmonisation. ...Mr McCreevy told the audience of accountants last week
that... "There are some who argue that lower taxation in one Member Sate
than in another doesn't give a level playing field. But they are dreaming
if they think that by levelling up the taxation levels across Member States,
they would attract more inward investment or encourage more economic activity.
The harsh reality is that in the global economy in which we live, investment
will flow to where it attracts the best return - Higher taxes across Europe
would be followed by lower investment across Europe and higher investment
flows out of Europe. Tax competition between Member States is healthy in
that it keeps pressure on governments to watch their domestic spending
and keep their tax regimes internationally competitive."
http://www.tax-news.com/asp/story/story_open.asp?storyname=21683
11. European subsidies to French farmers are even more disgusting than U.S. farm subsidies. The European Union's "common agriculture policy" is a scam that mostly lines the pockets of French agri-business. But that isn't the most disturbing feature of the program. According to the EU Observer, many of the subsidies go to politically-powerful and well-connected elitists. In other words, European politicians claim that farm subsidies exist to protect small family farms, but the money really goes to big farming companies. Many of those agri-businesses then line the pockets of politicians, either directly (through ownership relationships) or indirectly (through bribes and campaign cash):
...the biggest French farming
businesses pocket the vast majority of EU agricultural subsidies ...the
top 15 percent of French farming companies consume 60 percent of the direct
payments from the EU's coffers. ...The findings are based on the European
Commission's own statistics, Oxfam said. The charity's trade campaigner
Celine Charveriat commented: "This gives the lie to the French argument
that it uses EU subsidies to support its small farmers. They plainly don't.
Most small French farmers, 70percent of them, get only 17 percent of the
subsidies doled out by Paris. The CAP is a gravy train for Europe's biggest,
richest farmers" ...According to UK paper the Independent, prince Albert
of Monaco also received EUR287,000 in CAP payments last year for his farm
activities in France. ...It emerged that Dutch agriculture minister Cees
Veerman last year received around EUR190,000 for farms in the Netherlands
and France. Slovak agriculture minister Zsolt Simon's company also allegedly
trousered around EUR200,000 euros in national farm subsidies in 2003. ...France
is sticking to its guns on CAP so far, with French president Jacques Chirac
threatening a veto if Brussels offers further subsidy cuts to WTO partners.
http://euobserver.com/?aid=20262&rk=1
12. GERMANY'S ECONOMY IN DESPERATE NEED OF CHANGE
------------------------------------------------------------------------
Germany's economy has fallen on hard times with no end
in sight. Gross
domestic product (GDP) growth for 2005 is estimated
to remain at the
paltry 1 percent rate it averaged during the entire
decade of the
1990s, while unemployment has remained consistently
above 10 percent.
The stagnant economy is due to the government's decision
to return
to a social market economy, says Bob Formaini of the
Federal Reserve
Bank of Dallas.
By contrast, after World War II, West Germany experienced
unprecedented economic growth in a free market economy:
o From 1950 to 1974,
citizens enjoyed a 5.7 percent average
growth
rate -- per capita GDP actually tripled.
o The unemployment
rate was 2.5 percent, and more than 8
million
new jobs were created.
However, in the late 1960s, German policymakers began
adopting
price controls and market regulations based on "Schmollerism"
--
social
market economic beliefs that ultimately ended Germany's
economic
success.
o "Schmollerism" is
considered to be a "third way" between
capitalism
and communism and is the same ideology
embraced
by German economic policy from 1880 to 1948.
o From 1913 to 1950,
for instance, Germany averaged only 0.3
percent
growth.
Germany's economy will not recover unless it returns
to a free
market economic model similar to that of postwar West
Germany, says
Formaini. Reforms should include removal of strict government
controls
and regulations, reducing the high tax burden and government
spending
on social programs and freeing labor markets.
Source: Bob Formaini (Federal Reserve Bank of Dallas),
"Germany:
Doomed by Schmollerism" Ludwig von Mises Institute, November
4, 2005.
For text:
http://www.mises.org/story/1932#
For more on International:
http://www.ncpa.org/pi/internat/intdex4.html
13. Walking a Tightrope With China
November 11, 2005
Economic integration is key to moving Beijing towards political liberalization.
The image of Hu Jintao being greeted by angry human-rights protestors as he rode toward Buckingham Palace this week on a trip to secure closer economic ties with Britain was a telling one. It highlights a dilemma faced by Western democracies eager to do business with Beijing. Encouraging economic integration is key to moving Beijing towards political liberalization. But it's a tightrope to walk.
With state visits, there's usually a lot of talk but little of substance to report. This time, however, while the local media recycled "Hu who?" jokes, Mr. Hu dished out over $1 billion worth of contracts for Rolls Royce and Lloyd's of London, among others. Although it's nowhere near as important as the U.S. or Japan, Britain ranks as one of China's largest European trading partners, so forging closer economic ties is important for both.
But the Chinese president's public comments, and those of Britain's heads of state, steered clear of hot button political issues, such as China's human-rights abuses, lack of democratic freedoms, and the status of the European Union arms embargo, which China dislikes intensely. A spokesman for the prime minister said that Mr. Blair wouldn't "grandstand" but rather, speak with Mr. Hu privately about these sorts of things.
Mr. Hu likes to project an image that he's moving in the right direction. In a speech to a Buckingham Palace banquet, he laid out a grand -- if fuzzy -- vision of China's progress. "We are working hard to build... a moderately prosperous society, featuring a more developed economy, improved democracy, advanced science and education, a more prosperous culture, greater social harmony and higher living standards for the entire 1.3 billion people," Agence France Presse reported.
The problem is that the protesters that Mr. Hu saw while riding up to Buckingham Palace, like Falun Gong, for example, wouldn't be tolerated back in the motherland. Journalists in particular would question how much Mr. Hu is really trying to "improve" democracy. Just look at China's increasing crackdown on Internet freedoms. And we won't even mention the number of journalists, such as the New York Times' researcher Zhao Yan, who have been arrested amid murky circumstances.
It's a tough road, to balance economic engagement with
China while encouraging its political liberalization. Chinese leaders --
as well some baguette-toting European heads of state -- have been particularly
skilled at focusing on the former, while paying only lip service, at best,
to the latter. President George W. Bush will travel to Beijing next week.
We hope he will stress the point that lip service alone won't suffice if
China wants to win the trust of the world's democracies.
14. Article in leading Australian paper slams OECD's anti-tax competition campaign. Dan Mitchell of the Heritage Foundation explains that the Organization for Economic Cooperation and Development's "harmful tax competition project" means the Paris-based bureaucracy is siding with high-tax welfare states over global economic growth. Over the next 12-days, Dan and I will be discussing this topic in detail at conferences in Melbourne, Sydney and Wellington, New Zealand (link: http://www.cis.org.au/). Here is a short excerpt from Dan's column on the OECD:
The OECD was created to
be a market-oriented think tank for 30 of the world's industrialised nations,
but the international bureaucracy is now controlled by countries such as
France and Germany and is pursuing tax-harmonisation policies designed
to stem the flight of capital from high-tax countries to low-tax countries.
…The latest chapter in this battle will take place in Melbourne next week.
…The OECD is hosting a global forum so its bureaucrats can team up with
representatives from tax authorities of member countries, including Australia
, in an effort to convince so-called tax havens to act as deputy tax collectors
for high-tax nations. (It is worth noting that this project is riddled
with hypocrisy since many OECD member nations, such as the United States,
the United Kingdom, Switzerland, Luxembourg, Austria, and Belgium, are
"tax havens", according to the OECD's own definition, yet they are not
being asked to emasculate their attractive tax and privacy laws.) …The
OECD's anti-tax competition project is fundamentally inconsistent with
good tax policy. Public finance experts almost universally recognise that
an ideal tax system is characterised by low tax rates and the absence of
a bias against saving and investment. …Tax competition has helped encourage
governments to shift policy in this direction. Simply stated, if politicians
are afraid that jobs and capital will escape across the border, they are
more likely to lower tax rates and implement tax reform.
http://www.cis.org.au/exechigh/Eh2005/EH31505.htm
15. Germany: Doomed by Schmollerism
by Robert Formaini
[Posted on Friday, November 04, 2005]
http://www.mises.org/story/1932
Germany's economic performance in the past decade or
so has been marked by slow GDP and productivity growth, weak job creation,
high unemployment and low rates of return on investment. Japan and many
of the rest of Europe's mature economies aren't doing any better — cold
comfort, perhaps — but Germany comes off as an underachiever when compared
with the developed world's most dynamic economies. They're largely the
stalwarts of the former British Empire — Britain itself, the United States,
Ireland, Australia, New Zealand and Canada.
The roots of the performance gap between Germany and the Anglo nations can be found in a largely forgotten intellectual skirmish over fine points of economic thought. The late 19th-century debate pitted the advocates of English-style laissez-faire economics, with its emphasis on the virtues of free markets, against a cadre of German theorists who thought their country should chart its own course. The latter group won in the political arena, leading to the creation of Germany's social market economy, the model for the country for most of the past 125 years.
The debate would be the musty stuff of history if it didn't echo in most important issue in Germany today — what to do about an economy that's been staggering and swooning for a generation. Germany has begun to question the social market economy, with many voices calling for sweeping reforms that would shove Germany toward the Anglo countries' free-market model. They want Germany to loosen regulation, cut spending and roll back social welfare programs. Economic restructuring got a lengthy airing as Germany marched toward its recent, inconclusive national elections. Both the Social Democratic Party of incumbent chancellor Gerhard Schröder and the opposition Christian Democratic Party are campaigning for reform, with the CDU edging out the SDP, so reform isn't very likely. It's uncertain how far the next German government, when formed, can go in overcoming the country's historical attachment to the so-called social market economy.
Menger shirt for reform: $11
The intellectual genesis of the German system traces
to the "Methodenstreit," a dispute over the best methodology for economic
theory. On one side were the Austrian economists Carl Menger and Eugene
von Böhm-Bawerk, with their allies in the British Classical School.
Challenging the Austrians and English were Gustav von Schmöller and
the "young" German Historical School. [1]
The narrow, academic question was whether economic theories could be applied in all countries, at all times. Austrian and English theorists believed in the universality of their propositions about markets maximizing social welfare. British classical doctrine gave priority to the preferences of individual citizens as consumers and capitalists. It envisioned an Invisible Hand that moved labor, capital and other resources to efficiently meet society's needs.
The German Historical School doubted the magic of the marketplace, arguing that what might have been good policy for Britain or America was not necessarily equally good policy in Germany. Schmöller and his allies contended that Germany had to create policies that were specific to its conditions, institutions and needs, rather than duplicate the generally laissez-faire conditions in 19th-century Britain. They rejected British free trade doctrine and sought to defend Germany's existing authoritarian welfare state.
To defend existing policies, the historical school recommended the careful study of sociology, history and even law. Great collectors of data, they made arguments based on statistical analyses and their perceptions about the surrounding institutional environment. By collecting country-specific facts, these economists sought to divine the preferences of society rather than individuals and then to implement them through government policy.
Schmöller convinced government planners and politicians that, regardless of their effects in other nations, any policies they favored would work in Germany despite the counter claims of British political economy. Universal economic laws didn't exist, so the classical economic doctrine's suspicion of planned, welfare state-based economies need not always apply.
German university chairs in political theory, sociology and political economy at the time were controlled, and therefore dominated, by historicists because of the historicists' close ties to the German government. Although they eventually lost the intellectual argument, their views continued to dominate German thinking about economic policy for decades.
The historical school thus gave Germany the intellectual rationale to plot a "third way" between capitalism and communism, and the result was the German welfare state inaugurated in the late 1800s by Otto von Bismarck, the country's first chancellor. This ideology dominated German economic policy between 1880 and 1948 and again since the late 1960s. The only break from the social market economy came after Germany's crushing defeat in World War II, and this relatively short period provides an interesting object lesson about the potential for the Anglo-American model in Germany.
Allied occupied, postwar Germany was in both physical and economic ruin. Economic activity was completely stagnant, the currency and infrastructure were in shambles and bartering for food became the daily chore for most Germans. What shops existed had few or no goods for sale. In 1948, the head of the Office of Economic Opportunity was an economist named Ludwig Erhard. Acting together with Wilhelm Röpke, his former economics professor at the University of Freiburg, he carried out a two-part economic reform that both men hoped would revitalize Germany's economy.
On the evening of June 20, 1948, Erhard went on the radio to announce the particulars of what came to be known as "the bonfire of controls." The first part of the Erhard-Röpke plan was monetary reform and the introduction of a new currency, the Deutschemark. One new mark was traded for 10 of the old Reichmarks. The money supply shrank by more than 90 percent, bringing postwar inflation a quick end. The second reform eliminated controls on prices and wages and reduced business and personal taxes. Within days, shops began to fill with items for sale, the food shortages began to disappear and business investment returned.
These postwar reforms created a strong, market-oriented system that allowed the West German[2] economy to perform brilliantly for several decades. Per capita GDP tripled between 1950 and 1974. Unemployment shrank to a mere 2.5 percent as the country added 8 million jobs. An economy that had grown on average between 1913 and 1950 by only 0.3 percent grew between 1950 and 1973 at 5.7 percent — nineteen times as fast, averaging over 8 percent annually during the 1950s. Germany shook off defeat and became a leading player in the world economies, outperforming Britain, France and many others. Only Japan among the major economies of the time had a faster growth rate between 1950 and 1973.
Erhard's policies brought a postwar economic boom, but their very success led to the nation's current economic malaise. Thinking that they had found a Golden Goose of endless prosperity, the German government, with the full backing of electoral majorities, began to adopt policies beginning in the 1960s that moved the country away from free markets and back towards the very controls Erhard had abolished. Tax and regulatory burdens grew. Mandates on wages and working conditions created labor-market rigidities and price controls reduced flexibility in the economy. Increasingly generous payments to unemployed workers fed a decline in Germany's labor market participation rates. As is generally the case, the effects of these policies lagged their implementation, but the effects were precisely what standard economic theory predicts when people's incentives are changed by increasing welfare state programs.
In time, the miracle faded and Germany developed an economic sclerosis — a disease that just gets worse and worse as time passes. After a decade or more of anemic growth and sometimes outright decline, most forecasters project a paltry 1 percent gain in real GDP this year. Factory orders have fallen consistently for months, dimming any hopes of a revival in the economy. Adding the "hidden unemployed" to Germany's 10 percent-plus jobless rate means that nearly 6 million can't find work. Productivity growth during the entire decade of the 1990s was a miserly 1 percent. Government expenditures for welfare are almost half the budget today, and the share of government spending as a percentage of GDP has risen from 30.4 percent in 1950 to almost 48 percent today.
Germany's economy won't revive without major changes. It's time for Germany to reinvent itself and create a second economic miracle using a blueprint from its own past. It should turn from Schmöller toward Menger. The same prescription that changed the economic realities of 1948 can effectively change those of 2005. It should include:
1. Slashing red tape to encourage entrepreneurial
activity;
2. Reducing the overall tax burden on the
economy;
3. Liberalizing labor markets by ending
wage controls and allowing the free movement of workers and the forging
of new work contracts;
4. Reducing the percentage of government
expenditure providing incentives for people to remain idle;
5. Deregulating and privatizing everywhere.
Germany's choice is clear. Stick with the Schmöller model and accept stagnation, or reap the rewards of giving Erhardt's ideas another shot. Can Germany muster the political will to change? It hasn't in the recent past, except in the dire straits of defeat in World War II. It's time again.
Robert Formaini is a Senior Economist at the Federal Reserve Bank of Dallas. The views expressed in this essay are solely those of its author. A version of this piece ran in TechCentralStation and appears here with permission. Author contact: bob.formaini@dal.frb.org Post comments on the blog.
[1] The older German Historical School was comprised of Wilhelm Roscher (1817-1894), Bruno Hildebrand (1812-1878) and Karl Knies (1821-1898). The younger version that came later in the 19th century was led by Gustav von Schmöller (1838-1917), and included Georg Knapp (1842-1926), Ludwig Brentano (1844-1931), Ernst Engel (1821-1896), Karl Bucher (1847-1930), and Adolph Wagner (1835-1917). Schmöller, writing at the height of his fame and Otto von Bismarck's government, can be said to be the intellectual father of European welfare states, a tradition that continues today in the so-called "Third Way." The first way would be capitalism, the second communism. Schmöller wanted neither.
[2] East Germany was part of the communist bloc until reunification in 1990.
16. Productivity Rises At Fastest Pace In Over a Year
By JOI PRECIPHS
Staff Reporter of THE WALL STREET JOURNAL
November 4, 2005; Page A2
U.S. productivity grew at the fastest clip in more than a year during the third quarter, signaling steady growth for the economy, and a gauge of inflationary pressure dropped, a Labor Department report showed.
Meanwhile, business activity in the nonmanufacturing sector is recovering from the hurricanes that devastated the Gulf Coast, while the number of unemployment claims filed last week fell to prehurricane levels. Also, factory orders sank in September, and a measure of future housing demand slipped.
Nonfarm business productivity surged at a 4.1% seasonally adjusted annual rate from July through September, the Labor Department said yesterday. The increase, which exceeded economists' expectations, was about twice that of the second quarter's 2.1% rise. The robust growth helped drive down unit labor costs, which fell to a 0.5% annual rate after a 1.8% rise in the second quarter.
If productivity is rising smartly, employers can boost wages without fueling inflation. But many analysts don't predict a sharp rise in wages.
"The labor pool isn't tight enough to do that," said economist Kathleen Camilli, president of Camilli Economics, a New York City economic and financial-services firm. "It's happening selectively in some areas, but by no means is it widespread as it was in the 1990s."
Some indicators offer encouraging signs that consumers are still spending. The National Association of Realtors said its index for pending sales of existing homes slipped 0.3% in September to 128.8 -- the second-highest reading on record and 3.3% higher than in September 2004. Several major retailers are reporting that October sales appear solid based on preliminary numbers.
In addition, the Institute for Supply Management reported its Nonmanufacturing Business Activity index rebounded to a reading of 60 in October from September's depressed 53.3 reading, which was attributed to the hurricanes. Eleven of 17 industries reported growth during the month, including entertainment, insurance, communication, health services, utilities, construction and wholesale trade.
Demand for manufactured goods, however, fell in September. Factory orders dropped by 1.7% after a 2.9% increase in August, the Commerce Department said. Demand for durable goods was revised downward to a 2.4% decline. The results surprised analysts who had been encouraged by an ISM report earlier this week showing growth in the manufacturing sector.
Initial claims for unemployment benefits fell by 8,000 to 323,000 last week, near the pre-Hurricane Katrina level, the Labor Department said yesterday.
17. Pakistani Economy To Withstand Quake Rate of GDP
Growth Is Expected to Be Close To the Predisaster Forecast
By PETER WONACOTT and ZAHID HUSSAIN
Staff Reporters of THE WALL STREET JOURNAL
November 14, 2005; Page A21
ISLAMABAD, Pakistan -- South Asia's catastrophic earthquake shouldn't upset Pakistan's run of solid economic growth, the nation's prime minister and top economic steward said.
Despite an official death toll of more than 73,000, Pakistan's economy is expected to slow only slightly, if it all, as the country rebuilds from the Oct. 8 earthquake, Prime Minister Shaukat Aziz said in an interview.
If that scenario pans out, it would continue a resurgence that has marked Pakistan as one of Asia's most vibrant economies -- and an important laboratory for monitoring whether popular support for religious extremism in the Islamic nation erodes as prosperity spreads.
The 56-year-old Mr. Aziz, the nation's second in command behind President Pervez Musharraf, predicted that growth in the current fiscal year, which ends next June, will expand faster than 6% and will come close to the government's pre-earthquake target of 6.4%.
In the fiscal year that ended June 30, Pakistan's gross domestic product, or the total value of goods and services produced, grew 8.4%. It was only the fifth time in the nation's 58-year history that annual growth surpassed 8%. With the recent strong growth, sales of automobiles and mobile phones -- hallmarks of a nascent middle class -- have soared along with equity prices.
The main reason last month's earthquake hasn't dealt a bigger economic blow: It struck one of Pakistan's poorest areas, where most people live as subsistence farmers and where there was little industry to destroy. Yet the quake has highlighted a challenge that Pakistan shares with other emerging economies, such as China and India, where rural incomes have lagged behind overall growth and farmers acutely feel the effects of price increases.
About a third of Pakistan lives in poverty, according to the World Bank, while inflation in the year ended June 30 surged 9% -- an effective tax on the poor. Pakistan might now have an opportunity to put down a fresh economic foundation for the quake-battered areas.
This week, Mr. Aziz will try to help raise billions of dollars in foreign aid to pump into those parts of the country. The prime minister, a former top executive at Citigroup Inc., today plans to receive a group of American chief executives, tapped by U.S. President George W. Bush, who are spearheading an earthquake-relief fund. On Saturday, the United Nations is organizing in Islamabad another donor conference to discuss Pakistan's needs. The Pakistani government estimates it will need $5.2 billion for earthquake relief and reconstruction; so far, it has received about half that.
In the first stage after the earthquake, top Pakistani officials, including Gen. Musharraf, said the level of international aid their country was receiving wasn't adequate.
"We are satisfied with the response," Mr. Aziz said in the interview. "But we want more."
Pakistan's economic turnaround of the past couple of years can be traced in part to the foreign aid flowing to the country. After the Sept. 11, 2001 attacks, the U.S. and others forgave loans and gave assistance in exchange for Pakistan's partnership in battling Islamic militants.
That battle continues. In parts of Kashmir bordering India, militants have waged an insurgency against Indian troops. The government and foreign-aid groups are now trying to reopen schools as fast as they rebuild homes -- more than 10,000 schools were destroyed in the earthquake.
Critics say the government is placing too much hope on foreign aid and that more likely it will need to borrow heavily to finance reconstruction. "Rebuilding Pakistan will fall on Pakistani shoulders," said Kaiser Bengali, a Karachi-based professor of economics at Shaheed Zulfikar Ali Bhutto Institute of Science and Technology. Mr. Bengali warned such borrowing will stoke inflation and later create budget problems because of debt repayment.
Mr. Aziz, who headed Citigroup's global private-banking arm before joining the Pakistan government in 1999 as finance minister after the military coup that brought Gen. Musharraf to power, has navigated troublesome economic waters in the past. As finance minister, he helped cut the nation's fiscal deficit and boost foreign-exchange reserves, now at about $12 billion. Mr. Aziz was appointed prime minister in August 2004.
He insisted the earthquake won't deter the government from pursuing a cornerstone of its economic-overhaul program: privatizing big state-run companies, including a messy $2.6 billion sale of Pakistan Telecommunication Co., or PTCL. Talks to sell a 26% stake in PTCL to the United Arab Emirates have dragged for months, despite an agreement in principle. Mr. Aziz said the deal was still on the table.
"The transaction is at a late stage of discussions," he
said.
18. Naive View of Democracy in Latin America? Mary OGrady
Daily Policy Digest
International Issues
http://www.ncpa.org/iss/int/pd111601d.html
Friday, November 16, 2001
Some observers of the Latin American political scene are
warning that democracies there are operating under constitutions that grant
government nearly unlimited power in the economic sphere. They say this
creates destructive incentives and has made reform and development in the
region nearly impossible.
Here is a look at their reasoning:
* As Latin America has converted from
rule by military dictatorships to democracies, the new governments were
assumed to be benign and were granted enormous control over economic resources
-- and to act as slayers of all inequalities in life.
* This means, first, that whenever
the government deems it good, it can rescind individual liberties for the
"public good" -- thereby trampling on private property rights.
* This unchecked power leads to corruption
and crony capitalism -- creating more inequality.
* Healthy institutions, which might
allow government by checks and balances, cannot develop under such conditions
because elected leaders have no interest in limiting their own power.
Thus, each "reform" of the constitution expands the power
of politicians who have their own incentives to retain their power to transfer
wealth. What develops is a "now-it's-our-turn" attitude -- and a cynical
and disillusioned populace.
Political experts advise Latin American countries to
limit their constitutions and their governments.
Source: Mary Anastasia O'Grady, "In Latin America, Too
Many Constitutional Promises Thwart Democracy," Wall Street Journal, November
16, 2001.
For text (interactive subscription required)
http://interactive.wsj.com/
archive/SB100587591720110360.htm
19. The End of the Rainbow
*
E-Mail This
* Printer-Friendly
By THOMAS L. FRIEDMAN
Published: June 29, 2005 NY times
Dublin
Here's something you probably didn't know: Ireland today is the richest country in the European Union after Luxembourg.
Yes, the country that for hundreds of years was best known
for emigration, tragic poets, famines, civil wars and leprechauns today
has a per capita G.D.P. higher than that of Germany, France and Britain.
How Ireland went from the sick man of Europe to the rich man in less than
a generation is an amazing story. It tells you a lot about Europe today:
all the innovation is happening on the periphery by those countries embracing
globalization in their own ways - Ireland, Britain, Scandinavia and Eastern
Europe - while those following the French-German social model are suffering
high unemployment and low growth.
Skip to next paragraph
Fred R. Conrad/The New York Times
More Columns by Thomas L. Friedman
Forum: Thomas L. Friedman's Columns
Ireland's turnaround began in the late 1960's when the government made secondary education free, enabling a lot more working-class kids to get a high school or technical degree. As a result, when Ireland joined the E.U. in 1973, it was able to draw on a much more educated work force.
By the mid-1980's, though, Ireland had reaped the initial benefits of E.U. membership - subsidies to build better infrastructure and a big market to sell into. But it still did not have enough competitive products to sell, because of years of protectionism and fiscal mismanagement. The country was going broke, and most college grads were emigrating.
"We went on a borrowing, spending and taxing spree, and that nearly drove us under," said Deputy Prime Minister Mary Harney. "It was because we nearly went under that we got the courage to change."
And change Ireland did. In a quite unusual development, the government, the main trade unions, farmers and industrialists came together and agreed on a program of fiscal austerity, slashing corporate taxes to 12.5 percent, far below the rest of Europe, moderating wages and prices, and aggressively courting foreign investment. In 1996, Ireland made college education basically free, creating an even more educated work force.
The results have been phenomenal. Today, 9 out of 10 of the world's top pharmaceutical companies have operations here, as do 16 of the top 20 medical device companies and 7 out of the top 10 software designers. Last year, Ireland got more foreign direct investment from America than from China. And overall government tax receipts are way up.
"We set up in Ireland in 1990," Michael Dell, founder of Dell Computer, explained to me via e-mail. "What attracted us? [A] well-educated work force - and good universities close by. [Also,] Ireland has an industrial and tax policy which is consistently very supportive of businesses, independent of which political party is in power. I believe this is because there are enough people who remember the very bad times to de-politicize economic development. [Ireland also has] very good transportation and logistics and a good location - easy to move products to major markets in Europe quickly."
Finally, added Mr. Dell, "they're competitive, want to succeed, hungry and know how to win. ... Our factory is in Limerick, but we also have several thousand sales and technical people outside of Dublin. The talent in Ireland has proven to be a wonderful resource for us. ... Fun fact: We are Ireland's largest exporter."
Intel opened its first chip factory in Ireland in 1993. James Jarrett, an Intel vice president, said Intel was attracted by Ireland's large pool of young educated men and women, low corporate taxes and other incentives that saved Intel roughly a billion dollars over 10 years. National health care didn't hurt, either. "We have 4,700 employees there now in four factories, and we are even doing some high-end chip designing in Shannon with Irish engineers," he said.
In 1990, Ireland's total work force was 1.1 million. This year it will hit two million, with no unemployment and 200,000 foreign workers (including 50,000 Chinese). Others are taking notes. Prime Minister Bertie Ahern said: "I've met the premier of China five times in the last two years."
Ireland's advice is very simple: Make high school and college education free; make your corporate taxes low, simple and transparent; actively seek out global companies; open your economy to competition; speak English; keep your fiscal house in order; and build a consensus around the whole package with labor and management - then hang in there, because there will be bumps in the road - and you, too, can become one of the richest countries in Europe.
"It wasn't a miracle, we didn't find gold," said Mary
Harney. "It was the right domestic policies and embracing globalization."
More Articles in Opinion >
Related Articles
* Insurers' Trails Lead to Dublin
(April 1, 2005) $
* CHECK IN/CHECK OUT; DUBLIN: LA STAMPA
(March 13, 2005)
* Tara Journal; Next Exit: Food, Gas
and the Burial Place of Irish Kings (January 31, 2005) $
* ADVISORY: TRAVEL NOTES; No Smoking
Inside? That's No Problem for Dubliners. (December 12, 2004)
Related Searches
* Ireland
* Dublin (Ireland)
* European Union
* Dell Inc
Inside NYTimes.com
20. Old Age Tsunami
By NICHOLAS EBERSTADT
WSJ November 15, 2005; Page A22
Over the past decade, an ocean of ink has been spilled over the problem of population aging in the world's richest societies (Western Europe, Japan and North America). Low-income regions have attracted relatively little attention: Yet over the coming decades a parallel, dramatic "graying" of much of the Third World also lies in store, and it promises to be a far uglier affair than the "aging crisis" facing affluent societies. The burdens of aging simply cannot be borne as easily by the poor; low-income societies and governments have far fewer options, and the options available are considerably less attractive.
For some poor countries, the social and economic consequences
could be harsh indeed: Graying could emerge as a factor directly constraining
long-term growth and development. In fact, rapid and pronounced population
aging may represent one of the most least appreciated long-term risks facing
many of today's developing economies.
* * *
Population aging is driven mainly by low birth rates rather than by long life spans -- and since fertility levels in poor regions continue to drop, the momentum for Third World population aging continues to build. Not, to be sure, in sub-Saharan Africa, where the median age is likely to remain a mere 20 years some two decades from now. And certainly not in those parts of the Arab/Islamic expanse where total fertility-rate levels still apparently exceed five births per woman per lifetime (viz., Yemen, Oman, Afghanistan). But in much of East Asia, South Asia, Eastern Europe and Latin America, sub-replacement fertility is already the norm.
China: Of all the impending Third World aging tsunamis, the most massive is set to strike China. Between 2005 and 2025, about two-thirds of China's total population growth will occur in the 65-plus ages -- a cohort likely to double in size to roughly 200 million people. By then, China's median age may be higher than America's. Notwithstanding the recent decades of rapid growth, China is still a poor society, with per-capita income not much more than a tenth of the present U.S. level.
Lots of Tai Chi, but not enough sons.
How will China support its burgeoning elderly population? Not through the country's existing state pension system: That patchwork, covering less than a fifth of the total Chinese workforce, already has unfunded liabilities exceeding China's current GDP.
Since the government pension system is clearly unsustainable, China's social security system in the future will mainly be the family unit. But the government's continuing antinatal population drive makes the family an ever-frailer construct for old-age support. Where in the early 1990s the average 60-year-old Chinese woman had five children, her counterpart in 2025 will have had fewer than two. No less important, China's retirees face a growing "son deficit." In Chinese tradition it is sons, rather than daughters, upon whom the first duty to care for aged parents falls. By 2025, a third or more of Chinese women approaching retirement age will likely have no living sons.
Paradoxically, despite all China's material progress, the nation's elderly will face a continuing, and quite possibly a growing, need to support themselves through their own labor. But as China's elderly workers tend to be disproportionately unschooled, farm-bound and less well-trained than the general labor force, they are, perversely, the ones who must rely most upon their muscles to earn a living.
On the current trajectory, the graying of China thus threatens many tens of millions of future senior citizens with a penurious and uncertain livelihood in an increasingly successful emerging economy. The looming fault lines for "impoverished aging" promise to magnify yet further the social inequalities with which China is already struggling.
Russia: The demographic outlook for this country may seem to read like a tale that is ordinarily European: While total population falls, median age rises well above the 40-year mark by 2025, with close to 20% of the population 65 or older. But Russia is far poorer than Western Europe today.
Russia's particular vulnerabilities pivot less on the size of nation's elderly population than on the exceptional frailties of the workforce that must support it. Russia has suffered an extraordinary long-term deterioration of public health: Life expectancy is lower today than 40 years ago, and Russia's mortality upswing is concentrated in the "working ages." For Russians between 30 and 60, for example, death rates have shot up by over 45% since 1970. Demographers have low expectations for future progress in health -- the U.S. Census Bureau, for instance, projects that Russia's male life expectancy will remain lower than India's through 2025, and beyond.
Per-capita income in Russia is now barely one fourth of the European Union. Looking forward, it is difficult to see how Russia can hope to achieve an Irish standard of living if its labor force still faces an Indian (or worse) schedule of survival. Population aging in the context of poor or even declining health poses special challenges. The aging of Russia's workforce (median age for the 15-64 group will rise about three-and-a-half years between now and 2025) means that the health situation for Russian manpower could be less favorable in the future.
The specter of a swelling population of pensioners dependent for support on an unhealthy and diminishing population of low-income workers conjures up grim political choices. Should Russian resources be channeled to capital accumulation, or to consumption for the unproductive elderly? Given Russia's population structure, that question will be impossible to finesse.
India: The overall population profile will remain relatively youthful, with a median age projected at just over 30 in 2025. But this is an arithmetic expression averaging diverse components of a vast nation. Closer examination reveals two demographically distinct Indias: a North that stays remarkably young over the next 20 years, and a South already graying rapidly due to low fertility.
It may surprise some readers to learn that sub-replacement fertility already prevails in most of India's huge urban centers -- New Delhi, Mumbai (Bombay), Kolkata (Calcutta), Chennai (Madras) among them. Even more surprising, sub-replacement fertility prevails today throughout much of rural India, especially in the rural South. There, graying now proceeds apace. By 2025, South India's population structure will be aging unmistakably. In places like Kerala, Tamil Nadu and Karnataka, median age will be approaching a level comparable to Europe's in the late 1980s -- and around 9% of population will be 65 or older (Japan's level in 1980).
A generation before Western Europe's median age reached 35 or Japan's 65-plus set accounted for 9% of national population, however, their average per-capita GDPs were $6,000-$8,000. By contrast, the exchange-rate-based GDP per capita in Kerala and Tamil Nadu today stands at under $500 per year. Even if India, like the Japan of an earlier day, could grow its GDP per capita at an annual rate of 5.5% over the coming generation, significant parts of India would be reaching the threshold of the "aged society" on income levels almost an order of magnitude lower than Japan and Western Europe in the mid-1980s.
Since 1991, India has averaged a highly respectable 4%
GDP per-capita growth rate and has become a presence in the global IT economy
through enclaves in places such as Bangalore. But Bangalore -- like the
rest of the Indian South -- is part of what may soon be known as Old India:
While its labor force is relatively skilled, it is also older, and absolute
supplies of available manpower will peak and begin to shrink. Other parts
of India, by contrast, will have abundant and growing supplies of labor,
but a disproportionate share of that manpower will be entirely unschooled
or barely literate. Educated and aging, or untutored and fertile: This
looks to be the contradiction -- and the constraint -- for India's development
in the decades immediately ahead.
* * *
The coming conjunction of an aging population in the world's developed economies and in important parts of the developing world naturally raises the question of potential global impact. Global capital markets may be efficient in allocating investment to promising countries, corporations and projects, but the availability of capital affects its cost, and thus the profitability or attractiveness of undertakings world-wide. By the same token, economic slowdowns in one major region would be expected to have spillover impacts on growth in other regions in an environment of liberalized global trade.
Will the aging of the Third World have unanticipated spillover effects for the world economy? The answer is not yet clear -- but it is none too early to begin asking the question.
Mr. Eberstadt is the Henry Wendt scholar in Political Economy at the American Enterprise Institute. This essay draws on his chapter in the World Economic Forum's forthcoming Global Competitiveness Report 2005/06.
21. The War Against the Car
WSJ November 11, 2005; Page A10
A few years ago, I made a presentation to my second-grader's social studies class, asking the kids what was the worst invention in history. I was shocked when a number of them answered "the car." When I asked why, they replied that cars destroy the environment. Distressed by the Green indoctrination already visited upon seven-year-olds, I was at least reassured in knowing that once these youngsters got their drivers' licenses, their attitudes would change.
It's one thing for second-graders to hold such childish
notions, but quite another for presumably educated adults to argue that
automobiles are economically and environmentally unsustainable "axles of
evil." But with higher gas prices, as well as Malthusian-sounding warnings
about catastrophic global warming and the planet running out of oil, the
tirade has taken on a new plausibility. Maybe Al Gore had it right all
along when he warned that the car and the combustible engine are "a mortal
threat . . . more deadly than any military enemy."
* * *
Welcome to the modern-day Luddite movement, which once raged against the machine, but now targets the automobile. Just last month, environmentalists organized a "world car-free day," celebrated in more than 40 cities in the U.S. and Europe. In the left's vision of utopia, cars have been banished -- replaced by bicycles and mass transit systems. There is no smog or road congestion. And America has been liberated from those sociopathic, gas-guzzling, greenhouse-gas-emitting SUVs and Hummers that Jesus would never drive.
It all sounds idyllic, but in real life this fairy tale has a tragic ending. As Fred Smith, president of the Competitive Enterprise Institute, reminds us, if the "no car garage" had been a reality in New Orleans in August, we wouldn't have suffered 1,000 Katrina fatalities, but 10,000 or more. The automobile, especially those dreaded all-terrain four-wheel drive SUVs (ideal for driving through floodwaters) saved more lives during the Katrina disaster than all the combined relief efforts of FEMA, local police and fire squads, churches, the Salvation Army and the Red Cross. If every poor family had had a car and not a transit token, few would have had to be warehoused in the hellhole of the Superdome.
This month we paid honor to the heroism of Rosa Parks for fighting racism through the bus boycott in Montgomery. What helped sustain that historic freedom cause was that hundreds of blacks owned cars and trucks that they used to carpool others around the city.
A strong argument could be made that the automobile is one of the two most liberating inventions of the past century, ranking only behind the microchip. The car allowed even the common working man total freedom of mobility -- the means to go anywhere, anytime, for any reason. In many ways, the automobile is the most egalitarian invention in history, dramatically bridging the quality-of-life gap between rich and poor. The car stands for individualism; mass transit for collectivism. Philosopher Waldemar Hanasz, who grew up in communist Poland, noted in his 1999 essay "Engines of Liberty" that Soviet leaders in the 1940s showed the movie "The Grapes of Wrath" all over the country as propaganda against the evils of U.S. capitalism and the oppression of farmers. The scheme backfired because "far from being appalled, the Soviet viewers were envious; in America, it seemed, even the poorest had cars and trucks."
It's not hard to imagine life in America without cars. If you travel to any Third World Country today, cars are scarce and the city streets are crammed with hundreds of thousands of bicycles, buses and scooters -- and peasant workers all sharing the aspiration of someday owning a car. But in America and other developed nations, the environmental elitists are intent on flipping economic development on its head: Progress is being measured by how many cars can be traded in for mass transit systems and bikes, not vice versa. The recently passed highway bill establishes a first-ever office of bicycle advocacy inside the Transportation Department. The bicycle enthusiasts seem to believe that no one ever has far to go, that it never rains, that families don't have three or more kids to transport, and that mom never needs to bring home three bags of groceries.
Similarly, there is now a nearly maniacal obsession among policy makers and the Greens to conserve energy rather than to produce it. Even many of the oil companies are running ad campaigns on the virtues of using less energy (do the shareholders know about this?) -- which would be like McDonald's advising Americans to eat fewer hamburgers because a cow is a terrible thing to lose. A perverse logic has taken hold among the intelligentsia that progress can be measured by how much of the earth's fuels we save, when in fact the history of human economic advancement, dating back to the invention of the wheel, has been defined by our ability to substitute technology and energy use for the planet's one truly finite resource: human energy.
It is because we have continually found inventive ways to harness the planet's energy sources at ever-declining costs -- through such sinister inventions as the car -- that the average American today produces what 200 men could before the industrial revolution began. Studies confirm that the more, not less, energy a nation uses and the more, not fewer, cars that it has, the more productive the workers, the richer the society, and the healthier the citizens as measured by life expectancy. When Albania abolished cars, it quickly became one of the very poorest nations in Europe.
The simplistic notion taught to our second-graders, that the car is an environmental doomsday machine, reveals an ignorance of history. When Henry Ford first started rolling his Black Model Ts off the assembly line at the start of the 20th century, the auto was hailed as one of the greatest environmental inventions of all time. That's because the horse, which it replaced, was a prodigious polluter, dropping 40 pounds of waste a day. Imagine what a city like St. Louis smelled like on a steamy summer afternoon when the streets were congested with horses and piled with manure.
The good news is that environmental groups and politicians aren't likely to break Americans from their love affair with cars -- big, convenient, safe cars -- no matter how guilty they try to make us feel for driving them. Instead they are using more subtle forms of coercion. The left is now pining for a $1-a-gallon gas tax to make driving unaffordable. Washington has also wasted over $60 billion of federal gas tax money on mass transit systems, yet fewer Americans ride them now than before the deluge of subsidies began. When the voters in car-crazed Los Angeles opted to fund an ill-fated subway system, most drivers who voted "yes" said they did so because they hoped it would compel other people off the crowded highways.
To be sure, if the entire membership of the Sierra Club and Greenpeace surrendered their cars, the world and the highways might very well be a better place. But for the rest of us the car is indispensable -- it is our exoskeleton. There's a perfectly good reason that the roads are crammed with tens of millions of cars and that Americans drive eight billion miles a year while spurning buses, trains, bicycles and subways. Americans are rugged individualists who don't want to cram aboard buses and subways. We want more open roads and highways, and we want energy policies that will make gas cheaper, not more expensive. We want to travel down the road from serfdom and the car is what will take us there.
Mr. Moore is a member of The Wall Street Journal's editorial
board.
22. EU antitrust chief seeks more control over M&A
Bid comes after Kroes cedes to Spain authority over planned Endesa deal
By ADAM COHEN
DOW JONES NEWSWIRES
November 16, 2005; Page A17
BRUSSELS -- Europe's top antitrust official, Neelie Kroes, Tuesday proposed expanding her powers to keep Europe's largest mergers and acquisitions under her control.
The move came after Ms. Kroes earlier in the day ceded antitrust authority to Spain in Gas Natural SDG SA's €21.6 billion ($25.3 billion) bid for Endesa SA.
Ms. Kroes said she is worried about the planned combination's impact on Europe's broader energy market, but was forced to let Madrid review the deal. Under European Union rules, a national regulator has sole antitrust authority if merging companies generate more than two-thirds of their sales in that country.
Ms. Kroes said this rule should be changed but didn't propose an alternative. Consultation with companies and other players in Europe's trillion-dollar takeover business will precede any proposal for new legislation, she said.
"Europe has changed since the two-thirds rule was adopted (in 1989)," she said. "There is an integrated, single market."
The Gas Natural-Endesa deal isn't the first case where the two-thirds rule has kept the Commission from ruling on a combination that had a substantial impact on Europe's energy markets, Ms. Kroes said.
In 2003, Germany utility E.On AG and gas company Ruhrgas AG were allowed to merge when the German government overruled a decision by Germany's antitrust authorities to block the deal.
"E.On-Ruhrgas was one of Europe's greatest industrial mistakes -- from the consumer perspective," said an official on Ms. Kroes's team currently involved in a broader investigation of the single market's energy sector.
In contrast, other deals that have qualified for Commission oversight have been thoroughly vetted, Ms. Kroes said.
Commission regulators currently are studying E.On's plan to buy gas assets from Hungary's MOL Rt. The Commission is taking a hard line on the deal, postponing a final decision twice to consider selloffs and other concessions from the company. The Commission last month also began an in-depth probe into Danish Oil and Natural Gas A/S's bid for four Danish rivals.
Ms. Kroes's office spent almost two months studying Endesa's sales figures to figure out whether it or Madrid should have antitrust powers. It found more than 75% of Endesa's sales were in Spain, giving Spanish regulators sole control. Earlier Tuesday all 25 EU Commissioners approved Kroes's recommendation to let Spain oversee the deal.
Spanish oversight increases the likelihood Gas Natural's bid will succeed. While Commission officials say they are worried about allowing a near-monopoly in Spain's energy market, Madrid is seen as having given its blessing to the combination.
Gas Natural's takeover bid already cleared one regulatory hurdle in Spain and has two more to go. The National Energy Commission last week voted to allow the combination, while Spain's competition authorities are still studying it. Ultimately, the government will have to grant clearance for the transaction to be finalized.
Endesa shares rose five European cents to €21.24 on the Spain Stock Exchange, while Gas Natural slipped 18 European cents to €22.88. The Spanish government said it was happy that Brussels decided to pass the review of Gas Natural's bid for Endesa to Madrid's antitrust watchdog.
Write to Adam Cohen at adam.cohen@dowjones.com
23. Net Gains
WSJNovember 17, 2005
The surest sign that the United Nations reached a reasonable agreement on "Internet governance" at its summit in Tunis came yesterday when Robert Mugabe denounced plans to keep the current U.S.-based technical management of the 'Net in place. If the likes of Zimbabwe's tyrant are against it, the rest of the world clearly should be for it.
The upshot of the so-called "Tunis Agenda" is that the everyday Internet user will see almost no change in how cyberspace works. That's quite an accomplishment on the part of American negotiators and allies such as Canada and Australia. Many observers had feared that this meeting would end up giving birth to an intergovernmental body that would clog the 'Net with regulation and bureaucracy.
It's true that the agreement does call for the U.N. to establish an Internet Governance Forum next year. Importantly, however, it further says that this forum "would have no oversight function and would not replace existing arrangements, mechanisms, institutions or organizations." This phrase clearly refers to the Internet Corporation for Assigned Names and Numbers, or Icann, the California-based nonprofit company that administers the Domain Name System.
In the debate leading up to the Tunis summit, Icann became a synonym for perceived U.S. "control" of the Internet -- even though its functions are purely technical and include a host of non-American workers and managers. Underscoring the recognition that tinkering with a system that has performed, in the words of none other than Kofi Annan, "fairly and admirably," the Tunis Agenda states that the new forum "would have no involvement in day-to-day or technical operations of the Internet." To cheers from business representatives, the document also solidifies the private sector's role as a leading driver of Internet management and innovation.
So what will this new forum actually do? As little as possible, one would hope. It would be most useful as a means of coordinating efforts to address such cyber crimes as email fraud (also known as "phishing") and cyber annoyances like spam.
Beyond that, it's difficult to see how the forum differs significantly from Icann's existing Governmental Advisory Committee other than operating under the U.N.'s auspices. In this, some participants -- notably, the European Union -- are inclined to see the birth of an entity that will evolve into Icann's successor. Others, led by the U.S., are confident that a forum envisioned in Tunis as "lightweight and decentralized" will remain so. Businesses and other parties interested in a red-tape-free Internet must be vigilant to prevent the scenario preferred by the Europeans from becoming reality.
Contrary to the claims of dictators like Mr. Mugabe, these principles are vital to economic development in poor nations. As U.S. Assistant Commerce Secretary Michael Gallagher pointed out, once developing nations adopt such legal reforms as stronger property rights private investment and the resulting economic growth will follow. Mr. Gallagher cited Chile, Egypt and Senegal as examples of countries that have benefited from removing obstacles to foreign direct investment in technology.
The "digital divide" is nothing more than the age-old gap between well-governed countries that value personal and economic liberty, and those that suffer under oppressive regimes. A new forum with strong powers could have closed the "divide" only by abridging free expression in the liberal democracies. The American representatives in Tunis should be congratulated for denying the new "forum" such powers and blocking the efforts of repressive states to enlist the United Nations in their efforts to suppress public discourse.
24. A Rate Rise to Avoid Deflation
By DANIEL GROS
WSJ November 17, 2005
The European Central Bank must act to avoid an asset
price bubbl
The euro-zone economy is clearly on the mend. Most recent indicators are consistent with economic growth of around 2% this year, close to potential. An acceleration in 2006 is becoming ever more likely, which would lead to a gradual reduction of the existing output gap. Inflation has also picked up but, at around 2.5%, it appears well under control given the extraordinary increase in energy prices. Stripping out energy, inflation remains clearly below the European Central Bank's ceiling of 2%. This suggests that if oil prices just stabilize at their present level, inflation should fall back toward 2% by late 2006.
What should the ECB do under these circumstances? One is tempted to say: Just relax and enjoy it. As long as there is no sign of inflationary pressures, there is no reason why a central bank committed to price stability needs to raise rates.
Since we are dealing with the dismal science, though, there is of course also an alternative view. Given that growth is close to, maybe even above, potential, and given that inflation is also running at slightly above the upper limit of what can be considered price stability, we might need a more hawkish monetary policy. The present level of short-term interest rates is clearly not neutral. It is strongly expansionary as real short-term interest rates are negative and the broader "monetary conditions index," which takes into account the exchange rate, is now at a more expansionary level than almost any time since the start of monetary union.
The counterargument (we have not yet exhausted the meandering possibilities of economic thinking) would be for a strong monetary stimulus because of the ongoing weakness of domestic demand. The economic pillar thus does not clearly signal a need to act, to use the parlance of the ECB.
Are there other reasons why the ECB should act now? The main reason to worry about potential risks is that money growth has been running clearly above the ECB's reference rate (of 4.5%) for some time now and has recently accelerated to around 8%. The counterpart to this rapid money growth has been rapid (and accelerating) credit growth to the private sector, both to enterprises and consumers, for housing loans.
But why care about money and credit growth? Money growth has continuously exceeded the reference level from the start of monetary union, while consumer price inflation has averaged only slightly above 2%. Maybe money does not matter anymore?
Such complacency would be dangerous, though. Experience shows that the lag between monetary policy and its effects can be long and variable. Money growth above the rate consistent with price stability will at some point raise prices, be they for goods, services or assets. So even if consumer price inflation has remained well behaved so far, it is too early to dismiss risks to price or financial stability from liquidity growth because excess liquidity might show up in higher asset prices.
This has apparently been the case for housing. Prices have increased substantially over the last year in a number of countries, notably Spain (17%) and France (12%). The ECB seems to draw comfort from the contained level of average price increase for housing in the euro area -- held down primarily by the lackluster real estate market in Germany. But this is not good enough.
Real estate markets are always heavily influenced by regional supply and demand conditions, and price bubbles tend to be concentrated in certain regions. At the same time, however, the deflation of regional price bubbles can have supra-regional effects if they happen in large-enough economies. For example, during the early 1990s, property prices rose strongly in eastern Germany. Construction investment and mortgage lending boomed. Initially this was justified by the dilapidated state of socialist housing. But the boom continued for too long, resulting in massive overbuilding. Given this overhang, real estate prices and construction investment have been falling for almost a decade in Germany. Although prices have now stabilized, the collapse of the building industry caused severe economic problems in Germany, aggravated by the inflexibility of the German labor market. The resulting weak domestic consumption in Germany then dragged down the entire euro zone.
Regional property-price cycles can thus have supra-regional effects. France and Spain are certainly large enough to cause euro area-wide problems should a housing price bubble suddenly deflate there.
Moreover, a fall in housing prices would impair at least part of the outstanding mortgage loans, thus forcing consumers to restrain consumption and banks to raise reserves. This would reduce their willingness to extend credit to businesses and consumers. A slump in demand in the countries suffering from housing price deflation could spill over to other euro-zone countries and, in the worst case, pull the entire euro area into recession or even deflation. Thus, excessive money and credit growth raises risks to price stability from two sides: It could stoke demand in the short to medium run, but might also cause consumer price deflation in the long run when asset prices return to their long-term equilibrium level. Given the weak state of labor markets it is likely that the short-run increase in demand induced by higher asset prices does not cause too much inflation.
Under present circumstances it is thus likely that an asset price bubble won't lead to consumer price inflation while it is building up and might even lead to deflation once it bursts. This implies that even longer-term inflation expectations might not be a good policy guide. The cost of permitting excessive asset prices increases does not come in the form of higher inflation but in the misallocation of resources (empty houses) and prolonged economic weakness. It is the latter that is the most relevant danger for the euro zone given its low degree of flexibility. The ECB should act now, not so much to prevent accelerating consumer prices inflation, but to forestall the emergence of excessive asset price increases whose long-term cost would be much higher than a temporary slowdown in the ongoing recovery.
Mr. Gros is director of the Center for European Policy
Studies, a Brussels-based think tank.
25. Prioritizing China at the WTO
By ALAN OXLEY
WSJ November 17, 2005
In recent weeks, there has been many a forecast that the future of the world trading system hangs in the balance ahead of December's World Trade Organization ministerial conference in Hong Kong. Such predictions may turn out to be correct. But not for the reason that so many are touting, the seeming collapse of efforts to reach agreement on agricultural reform. Instead it is because the WTO is in danger of losing sight of a far more important task today -- that of keeping China on the path of free-market reform.
China's 2001 accession to the WTO was one of the most important developments in world trade since the establishment of the multilateral trading system under the General Agreement on Tariffs and Trade in 1948. China is becoming a major trading partner for almost every nation, and moving toward becoming the world's largest trading economy. Its share of world trade has expanded to 6.7% last year, up from 1.2% 20 years ago. Four years ago, it was the world's ninth largest exporter and tenth largest importer. By last year, China was third in both categories -- behind only the U.S. and Germany.
But all too often, Beijing has sought to use its economic clout to pursue foreign-policy goals. Take, for instance, the hints during President Hu Jintao's current visit to Germany that Berlin should push for an end to the European Union's arms embargo if Siemens wants to win a major bullet train contract in China. That's one reason why integrating China into the global trading system is so vital. By joining the WTO, Beijing is forced to play by the rules -- and can be penalized for playing politics with trade.
Moreover, China's transition to a market economy is far from complete. The main reason why former Premier Zhu Rongji fought to hard to tie China's economic-reform program to the rules imposed by WTO membership is that he knew pressures to backtrack on free-market reforms would continue for many years to come. Although China is now a WTO member, many of its market-opening commitments -- such as in the banking sector -- have yet to be implemented, and offer scope for backsliding in how they are enforced.
Almost every week brings reports of tussles within Chinese government agencies over how far to press reforms, and how much to promote national champions. Despite substantial tariff cuts in recent years, local customs officials often continue to insist on collecting much higher levels of duty. China's patchy record of enforcing of intellectual-property rights remains a cause of concern.
WTO membership creates legally enforceable obligations that both support the efforts of economic reformers in China, and give its trading partners a means by which to insist that China sticks to its obligations. That makes the organization's authority and effectiveness in enforcing its rules crucial to China's transition toward a free-market economy.
Given the huge stakes involved -- China's trade with the rest of the world rose to $1.1 trillion last year -- that ought to be the top priority for the WTO and its member states. Instead they are battling over the smaller, and declining, share of world trade devoted to agricultural products, which amounted to $783 billion last year. The arguments over agriculture hinge on an erroneous contention. Oxfam claims developing nations won't benefit unless richer economies remove the tariff barriers that protect their farmers. Even British Prime Minister Tony Blair accepted this contention at the Gleneagles G8 Summit.
While that would be a welcome step, it is not a necessary one. According to a World Bank study, the removal of farm trade barriers in rich countries would benefit developing countries to the tune of $30 billion annually. However that is dwarfed by the $110 billion in benefits that would follow if developing countries lifted their own -- much higher -- barriers to free trade in agricultural products.
The most productive course would be for developing countries to look to their own backyards first. Instead many have swallowed Oxfam's mantra and insist rich countries reduce protection of their farm sectors, while they maintain their own trade barriers. Such double standards don't just make it difficult to reach agreement on the agricultural issue. They also weaken the WTO's authority in enforcing its rules in other areas, such as China's transition to a market economy.
Those who want the WTO to work should think carefully about whose interests the global body is meant to serve. Is it meant to be anti-globalization NGOs and developing countries in Latin America and Africa with little real interest in trade liberalization? Or the global trading community, which benefits so much from encouraging China to become a fully-fledged market economy?
Mr. Oxley is a former Australian ambassador to the GATT
and chairman of a Washington-based NGO, World Growth, which will release
a report at the Hong Kong WTO meeting titled "Getting the WTO back on Track."
26. Korea Torn Over Open Markets Fear of Foreign Influence,
Competition From China Fuel Backlash
By GORDON FAIRCLOUGH
Staff Reporter of THE WALL STREET JOURNAL
November 18, 2005; Page A14
BUSAN, South Korea -- While South Korean officials and their counterparts from other Pacific Rim nations extol the virtues of open markets here, many students across the country are getting a different message from teachers warning of globalization's downsides.
South Korea's largest teachers' union has urged members to tell their classes that the free-trade agenda espoused by the Asia-Pacific Economic Cooperation group, which is holding its annual summit here, can increase poverty and inequality and hurt the environment.
The union's views, and the chorus of criticism they have generated, are part of a larger debate in South Korea over how much economic openness is desirable and necessary. How South Korea, East Asia's third-largest economy, answers that question could have a big impact on the policies of developing countries in the region and elsewhere.
Among the most contentious issues is how quickly the country should liberalize trade in agricultural goods. Farmers have staged violent protests, and one died after setting himself on fire at trade talks in Mexico. Koreans also are worried about the role and influence of foreign capital in the economy.
South Korean President Roh Moo Hyun has said he wants APEC leaders to consider the consequences of their promarket policies when they meet today and tomorrow. "The more you emphasize a business-friendly environment, the more the social gap tends to widen," Mr. Roh told reporters earlier this month.
After decades of protectionist policies, South Korea opened its economy in desperation after the Asian financial crisis of the late 1990s drained the country's currency reserves and brought many of its biggest banks and corporations to the brink of insolvency.
Foreign capital flooded in, shoring up the economy, and trade barriers started to fall. International investors now own about 41%, by value, of the shares traded on the Korea Stock Exchange, up from 22% in 1999. Foreign ownership of Samsung Electronics Co. and some other blue chips is even higher.
Since the country's economy has recovered, however, the South Korean public is showing less enthusiasm for overseas capital. "The feeling seems to be, 'We have plenty of money in the bank. Why do we need foreign capital?' " said Kim Wan Soon, the Korean government's foreign-investment ombudsman.
Mr. Kim, whose job is to help make the country more investor-friendly, said he fears that "hostility is rising" toward foreign capital. This backlash has been fueled in part by media accounts of large profits earned by foreign investment funds that took stakes in South Korean banks at fire-sale prices during the financial crisis and recently sold them at considerable profit. At the same time, workers are feeling the pinch as more Korean businesses move jobs overseas.
South Koreans are, on the whole, skeptical about globalization and distrustful of business. In a 2003 survey of 8,000 people in 10 Asian economies by consumer-research firm TNS, just 27% of Koreans said they viewed globalization positively, compared with the Asian average of 38%.
Japanese respondents were even more unenthusiastic about globalization. Both countries are export powerhouses, but only in recent years have they opened their domestic markets in response to pressure from trading partners. David Richardson, TNS's regional director for North Asia, said the survey results show "the countries that have benefited the most from globalization now seem to feel that they have the most to lose from it."
One reason, he said, is increasing competition from China. In the case of South Korea, "so many jobs can so easily move to China," Mr. Richardson says. "I think that's what people are feeling."
A video on the Web site of the teachers' union goes further, blaming APEC for problems ranging from crime and household debt to unemployment and war. Ominous music accompanies imagery of homeless people, slums and fighting in Iraq. "This is the new capitalism," the narrator says.
Politicians echo their constituents' concerns. Some members of the National Assembly earlier this year pushed for legislation that would restrict foreign participation on bank boards. The measure was opposed by the government and stalled.
"Investment has to be long-term to bring real benefits to the country," said Lee Sang Kyeong, a member of the assembly's National Policy Committee from the liberal Uri Party. "The problem with foreign investors is that they are too short-term. That has brought many problems, because their objective is to maximize benefits in the shortest period of time."
Government technocrats, among them Finance Minister Han Duck Soo, are among the fiercest proponents of Korea's continued opening, pushing for reducing trade barriers and attracting more foreign investment. Foreign investment will "help increase the competitiveness of the Korean economy," said Cho Hwan Eik, vice minister of the Ministry of Commerce, Industry and Energy. "We're trying hard to attract more investment."
Peter Beck, head of the Northeast Asia office of the nonprofit International Crisis Group and an expert on the Korean economy, said he thinks "mainstream Korea has really embraced openness as the only path to take." He points to what appears to be a new willingness to consider opening even once-sacrosanct market sectors, such as films and rice.
Trade has been the main engine of growth for the Korean
economy in recent years, as domestic consumer spending has dried up amid
a household-debt crisis. "People know how important trade is," Mr. Beck
says.
27. A Stop on the Steppes November 21, 2005; Page A16
Who would have guessed, as the Soviet Bloc began collapsing 15 years ago, that one of the first countries to hold multiparty elections and embrace capitalism would be the Mongolian People's Republic?
When President Bush lands in Ulan Bator today, the first
U.S. President to do so, he will be acknowledging Mongolia's continuing
commitment to democracy and a market economy. Although America's National
Endowment for Democracy, through its International Republican Institute,
offered advice during the transition from communism, credit largely goes
to the Mongolians themselves, who have endured some hard times in recent
years but remain determined to stay the course.
RELATED COMMENTARY
Mongolia's 'Third Neighbor'
Christopher P. Atwood
11/21/05
Mr. Bush also wants to thank Mongolia for supporting the war on terror, by keeping some 150 troops in Iraq and Afghanistan. This is no small thing, in that it reflects a wider goal in Ulan Bator that includes contributing to stability in Asia. With U.S. aid, Mongolia is retraining its military in modern methods of international peacekeeping. But its strategic location between China and Russia makes it an important partner for Washington.
Not that Mongolia's 2.7 million people (and 10 times as many herd animals) want to do anything but be good neighbors. China remains a major buyer of the country's raw materials, including copper. As Beijing's ability to project military and political power grows, however, Mongolia's commitment to freedom and independence can only strengthen the circle of like-minded regional friends that includes the U.S., Japan, and South Korea.
When Donald Rumsfeld stopped in Ulan Bator last month, he was given a horse but had to leave it behind as there was no room on the official plane home. Yet it is Mr. Rumsfeld's all the same, a Mongolian official said, and until the horse is claimed by its new owner, "only the wind of the steppes will be on his back." What's not to admire about a country where they make promises like that?
28. Mongolia's 'Third Neighbor'
By CHRISTOPHER P. ATWOOD
November 21, 2005
ULAN BATOR -- What is it about Mongolia that makes it such a popular destination for American leaders visiting Asia? President George W. Bush and Secretary of State Condoleezza Rice arrive in Ulan Bator today, barely a month after a similar trip by Defense Secretary Donald Rumsfeld.
Of course, visiting Mongolia is more fun than the more usual trips to Beijing or Tokyo. Mr. Rumsfeld visited a yurt and was given a horse as a gift, which he promptly named Montana. And the romance of the Mongolian steppe and the legacy of Genghis Khan all but ensures plenty of colorful press coverage.
But even fun needs justification and Mongolia has earned its place on so many crowded itineraries because it combines the big geo-strategic issues preoccupying Washington at present. For one thing it's a textbook example of the global trend toward democracy that the administration is promoting -- Mongolia earned kudos in the 1990s as Asia's only successful transition from Communism to a market economy. In addition, the country is on the front line in dealing with the rise of China, and has been a faithful ally in the war on terror.
Perhaps no other people in the world has spent so many centuries thinking how to handle the Chinese as the Mongolians. Chinese efforts to assimilate the Mongolians in the early 20th century left a legacy of bitterness and suspicions which pushed Mongolia into the Russian orbit, where it remained until the collapse of the Soviet bloc in the mid-1980s.
In the last five years, Mongolia has become a supplier of choice for China's ravenous appetite for copper, zinc, iron, and even petroleum, fueling a booming mining economy. But Mongolians still retain their East European-style consumer tastes and turn up their noses at China's supposedly shoddy imports. Optimists see their country as playing Canada to a Chinese U.S.: a supplier of raw materials and a northern wilderness vacation spot. However many more Mongolians worry about being so dependent on their giant southern neighbor. And as China continues to rise, Mongolia looks set to become one of the first test cases of whether small countries can continue to thrive next to Asia's emerging giant.
When it comes to the war on terror, Mongolia's steady support is a welcome contrast to street demonstrations that senior members of the Bush administration often face during overseas visits. Mongolia's small army is being reconfigured as a peace-keeping force and five teams of Mongolian soldiers, 130 men each, have done tours in southern Iraq, thus far without casualties and without any talk of an early withdrawal. Mongolian troops are also helping to keep the peace in Afghanistan.
What's in this for Mongolia? Since winning freedom for the stifling Soviet embrace, Mongolia's foreign policy has focused on cultivating good relations with a "third neighbor" to balance ties with China and Russia. Economically and politically, that means cultivating closer ties with the rest of the world. But militarily and strategically, Mongolia is increasingly leaning very much toward a geographically distant "third neighbor" -- the U.S.
The challenge for both sides is to overcome the geographic hurdles that risk limiting the U.S.-Mongolian relationship to romantic images and high-level visits. Ironically, it is unplanned initiatives that may be doing this most effectively. Due to a loophole in American trade regulations, the U.S. looms surprisingly large in the Mongolian economy. Under the old multi-fiber agreement that governed international textile trade, Mongolia was exempt from any quota for imports into the U.S., so Chinese and Hong Kong traders and businessmen set up assembly plants in Mongolia to do final assembly of clothes destined for the American market. As a result, Mongolia's exports to the U.S., negligible in 1995, hit 20% of Mongolia's total exports in 2000.
By 2004, Mongolia's exports to the U.S. had doubled in value again. But the end of these quotas at the start of this year knocked Mongolia's exports to the U.S. back to 2001 levels. So far, most of Mongolia's more than 30,000 textile workers have retained their jobs, as investors bet that trade spats between China and the U.S. will continue, but their future is uncertain.
People to people ties with America are also increasing, particularly in that most unplanned of ways: illegal immigration. Mongolian communities of up to several thousand strong now exist in Washington, Denver, and Chicago, with smaller concentrations elsewhere. Several Mongolian language weeklies are already published in the U.S., filled with articles on immigration procedures and advertisements for Mongolian real estate brokers -- one-time nomads now selling tract homes in the suburbs.
For almost a century, Mongolia has been searching for independence, first and foremost from the limitation of her geography. Since 1990, successive U.S. administrations have played an active role in helping this people in the heart of Asia embrace market democracy. But while both governments further their common interests and values, trade and immigration are bringing ordinary Mongolians and Americans together as never before.
Mr. Atwood is a professor of Central Eurasian Studies
at Indiana University and author of "Encyclopedia of Mongolia and the Mongol
Empire" (Facts on File, 2004).
Weak-kneed financial services association comments on OECD hypocrisy. The Organization for Economic Cooperation and Development is a Paris-based bureaucracy that is trying to hinder tax competition. But the OECD is having a hard time achieving its tax harmonization goals because many of its own member nations are "tax havens." Tax-news.com reports that the Society for Trust and Estate Professionals is complaining that countries such as Austria and Luxembourg, and states such as Delaware and Wyoming, have refused to make any sort of commitment to the OECD. This means there is no "level playing field" and low-tax jurisdictions persecuted by the OECD therefore do not have to surrender their fiscal sovereignty. It does appear, though, that STEP officials "drank the kool-aid" since they are suggesting that the so-called level playing field is a good idea. This is terrible economic policy. A level playing field based on high tax rates and no privacy would cripple tax competition and lead to bigger government. No nation has the right to tax income earned outside its borders, and low-tax jurisdictions certainly have no obligation to help high-tax nations track - and tax - flight capital. High-tax nations should reduce tax rates and reform their tax systems if they want to stop the exodus of jobs and capital. Thankfully, most of the low-tax jurisdictions targeted by the OECD know that the "level playing field" issue is merely a tactic to preserve fiscal sovereignty. Too bad STEP has an appeasement mentality. If STEP officials were in charge of the negotiations, they would pre-emptively surrender faster than the French army:
Commenting on the outcomes
of the Melbourne Global Forum, Keith Johnston, Head of Policy and Communications
at STEP Worldwide, said: "...it is worrying that a large number of the
other jurisdictions that attended the Forum for the first time, such as
Austria, which is a member of both the OECD and the European Union, continue
to refuse to offer this endorsement. Other major finance centres, including
Luxembourg and Belgium, also both OECD and EU members, refused even to
attend the Forum, let alone commit to the principles of exchange and information
and transparency. There has also been no attempt to bring US states, such
as Delaware and Wyoming, into the process, despite these being in competition
with major finance centres across the world."
http://www.tax-news.com/asp/story/story_open.asp?storyname=21829
29. Fuzzy Trade Math
By ARVIND PANAGARIYA
November 21, 2005; Page A16
Trade talks at Cancun broke down principally because the G-20 group of mainly larger developing countries rejected U.S. and EU offers on reducing their agricultural protection. Two years later, as the Hong Kong Ministerial approaches, agriculture remains the make-or-break issue in the Doha negotiations. But the impasse can be broken once we clear up the misinformation on (a) the magnitude of EU and U.S. subsidies and (b) the level of protection through trade barriers in developed and developing countries in agriculture.
The New York Times has editorialized that the "developed world funnels nearly $1 billion a day in subsidies," which "encourages overproduction" and drives down prices. The World Bank's president, Paul Wolfowitz, similarly referred to developed countries expending "$280 billion on support to agricultural producers" in an op-ed in the Financial Times. Oxfam routinely accuses rich countries of giving more than $300 billion annually in subsidies to agribusiness. Astonishingly, these estimates bear virtually no relationship to the subsidies actually at the heart of the Doha negotiations. Instead, they have their origins in the altogether different measure called the Producer Support Estimate (PSE), published by the OECD. The PSE includes all measures that raise the producer price above the world price, including border measures such as tariffs and quotas. All economists would find the identification of such a measure with subsidies unacceptable.
To measure the true magnitude of subsidies that drive down world prices, we need consider only those subsidies contingent on exports or output. This done, the extent of subsidies turns out to be considerably smaller than $1 billion per day. Thus, rich country export subsidies that have been so much in news have considerably declined in importance in recent years: They currently amount to less than $5 billion, at times as little as $3 billion, annually. Subsidies contingent on output are larger; but they, too, are much smaller than commonly believed: Under the commitments made in the Uruguay Round Agreement on Agriculture, WTO members have achieved substantial reductions in these subsidies. The EU has made a special effort to decouple its domestic subsidies from output as a part of the reform of its Common Agricultural Policy.
Based on the latest data available from the WTO, domestic output subsidies amounted to $44 billion in 2000 in the EU, $21 billion in 2001 in the U.S. and less than $15 billion in 1998 in Japan, Switzerland, Norway and Canada combined. Recognizing that there have been no major cases of backsliding and the EU has made further progress in decoupling its subsidies from output, we can conclude that rich country domestic subsidies that encourage production and lower world prices are substantially below $100 billion.
By focusing exclusively on subsidies, the media has distracted attention from the critical fact that the most important obstacle to agricultural trade comes from border barriers, also called market access measures. And since developing countries are not big offenders on the subsidy front, this focus has promoted the false impression that the agricultural trade barriers are also an exclusively rich country problem. In reality, when it comes to border barriers, developing countries more than match developed countries.
Among the latter, Japan and Europe exhibit high protection while U.S. barriers are relatively low. Thus, in 2001, the trade-weighted average tariff was 36% in Japan, 29% in the European Free Trade Area, 12% in the EU and 3% in the U.S. Of course, these averages mask considerable variation in protection across commodities. Among developing countries, the relatively more protected countries include South Korea with a trade-weighted average tariff of 94% in 2001, India with an average tariff of 44%, China with 39% and Pakistan with 30%. Interestingly, protection even in the developing country members of the Cairns Group, which contains countries with the greatest comparative advantage in agriculture, is not low: In 2001, the average tariff was 13% in Argentina and Brazil, and 11% in Malaysia, Thailand and Indonesia.
Once we recognize that export subsidies are minuscule and trade-distorting domestic subsidies much smaller than commonly believed, a successful Doha bargain seems within reach. The elimination of export subsidies and substantial cuts in domestic subsidies do not appear heroic. But if these concessions are to be made the EU and the U.S., they will have to be complemented by reciprocal concessions by others.
The U.S. has a comparative advantage in agriculture, so insists on within-sector reciprocity in the form of market access in return for its concessions on subsidies. The EU and larger developing countries including the Cairns Group, who have high agricultural tariffs, are in a position to offer this reciprocity. But the EU lacks comparative advantage in agriculture. Therefore, it will only be giving concessions in this sector and needs cross-sector reciprocity. Here again the larger developing countries have a crucial role to play. Industrial tariffs remain high in the Cairns Group developing countries as well as in India, China and Pakistan. They can offer the EU the necessary reciprocity.
After all, the Cairns Group in particular will clearly derive large benefits from the rich country reductions in subsidies and tariffs in agriculture and can therefore offer reciprocal concessions in industrial goods and services. Other larger developing countries such as India, China, Pakistan, Indonesia, Korea and Thailand also stand to benefit from increased access to each other's and other developing countries' markets in industrial goods. In addition, they can expect to benefit from the removal of industrial-tariff peaks in the developed countries that apply with potency to labor-intensive products such as apparel and footwear.
Thus, once we cut through the confusion created by constant references to inflated estimates of agricultural subsidies and consider the accurate picture, outlines of a successful negotiation do emerge. Those who consider the barriers to a deal insurmountable need to be reminded that unlike the Uruguay Round, which dealt with win-lose bargains such as those on intellectual-property protection, this round is focused on trade liberalization that largely offers win-win bargains. Both developed and developing countries stand to reap large benefits from the removal of their own subsidies and protection.
Mr. Panagariya is professor of economics and Bhagwati Professor of Indian Political Economy at Columbia. This is adapted from an essay in a forthcoming special issue of Foreign Affairs.
30. China's Uphill Battle For Stronger Banks
By VICTOR SHIH
November 21, 2005
While the road to hell is paved with good intentions, China's road to financial reform is paved with political ambition and bureaucratic rivalry. A case in point is the China Banking Regulatory Commission, which is having positive effects on financial regulation and the monitoring of nonperforming-loan ratios. Although the CBRC continues to struggle under the shadow of its increasingly powerful elder brother, the People's Bank of China, it now seems that the decision at the end of 2002 to create a separate agency to monitor China's banks was crucially important because it created a bureaucratic voice in favor of constraining NPLs in China.
The formation of the CBRC was based as much on political considerations as economic ones. In 2002, researchers at the now-abolished Central Finance Work Committee and the State Council Development and Research Center called for the establishment of an independent agency to regulate the banking sector. The main rationale was the need for specialized regulation of an increasingly complex financial system that is soon to be enlarged by an influx of foreign financial institutions. The stock market and the insurance industry already had their own watchdog organizations by 2002, but the banking sector was still overseen by the central bank.
Although the PBOC had the organizational capacity and human capital to fulfill this mission, its incentives were not aligned with the goals of financial regulation. As one of the proponents of an independent agency, CFWC researcher Qian Xiaoan, hinted in an article at that time, financial monitoring lacked "authoritativeness" and "independence," meaning that financial regulation had to struggle for attention among the PBOC's multiple agendas.
For much of the reform era, the PBOC's missions included inflation prevention, growth maintenance, bailing out illiquid financial institutions and finally regulating depository institutions. Time and again, the last task took a back seat to inflation prevention and growth promotion.
By contrast, an independent regulatory agency could single-mindedly carry out regulatory functions and-perhaps more importantly-lobby the central leadership on the importance of regulating financial institutions. With a clear mission, this agency would also defend banks' rights to resist political pressure to provide loans and lobby on their behalf in the central government. In some ways, the most important contribution of an independent ministerial-level financial regulator is the creation of a powerful political lobby for financial prudence.
Although the birth of the CBRC was colored by bureaucratic politics and quite possibly elite politics, the CBRC has taken a much more hard-line stance with respect to lowering banks' NPL ratios. The newly appointed head of the CBRC, Liu Mingkang, had a reputation of being a strong proponent of banking commercialization.
Perhaps more importantly, the new agency no longer had a mixed mission. Its mission was clear: lower the NPL ratios of Chinese banks. If Mr. Liu failed to do so, his career would suffer. This kind of transparent assignment of responsibility has been the key to the CCP's ability to achieve momentous outcomes in the past, and it once again served the regime.
In classic central-planning fashion, the first thing that Mr. Liu did as the head of the CBRC was to impose a hard NPL reduction target on the Big Four banks, in addition to liquidity and capital adequacy targets on all banks. Although these targets were imposed via administrative decrees, they did have the effect of changing bankers' incentives.
Nearly three years after the agency's creation, the NPL ratio in China has dropped to just above 10% from more than 25%. Although the lowering of the NPL ratio is due primarily to recapitalization from the foreign-exchange reserves and the off-loading of NPLs to the asset management companies, the fact that NPL creation did not speed up to a significant degree in the midst of an investment boom probably had something to do with the CBRC's vigilance.
Whereas the PBOC had been ambivalent about banks bending to local political pressure to lend, the CBRC unambiguously chastised local politicians for intervening in bank decisions. From CBRC head Mr. Liu down to the local CBRC chiefs, if the NPL ratio rises, their jobs will be jeopardized.
Despite a focused mission and improved incentives to regulate banks, the CBRC's regulatory capacity suffers from both internal problems and external intervention. Internally, the hard targets imposed by Mr. Liu on banks and on CBRC branches forced many bankers and local CBRC officials to submit false NPL figures to the headquarters. This is a perennial problem of the command economy, and the CBRC is no exception. Externally, although the CBRC in theory takes the helm in banking regulation, in reality it contends with a host of agencies for regulatory supremacy in the banking sector.
The CBRC's regulatory authority is further diluted by the existence of disciplinary committees and supervision committees in all major financial institutions. Because these institutions are either wholly or partially state-owned, they have Communist Party committees with propaganda, organization, and discipline and inspection sub-committees.
To make matters worse for the CBRC, the PBOC under Zhou Xiaochuan by no means gave up the fight to regain regulatory power from the CBRC. After taking the helm at the central bank, Mr. Zhou successfully argued that money laundering and counterfeiting are monetary phenomena that should fall under PBOC supervision. This is significant because the antimoney-laundering portfolio affords the PBOC and the State Administration of Foreign Exchange great latitude with which to examine the books in all financial institutions, not just in banks.
Finally, the CBRC's regulatory power has been threatened by the PBOC's assertion of its role as "investor" in an increasing number of financial institutions through the Central Huijin Company. By serving as an investor, the Huijin board of directors-dominated by PBOC officials- has a large say in the appointment of senior bankers, and Huijin has exercised that power a few times since its formation.
Thus the prospects for a truly independent financial regulator in China remain dim. The Party is unlikely to relinquish its hold on vital financial and regulatory institutions. And the central leadership repeatedly has found ways to bail out China's ailing financial sector instead of fixing it. The problem with easy fixes is that they give agencies with access to ample funding, including the PBOC, MOF and NDRC, more power over cash-deprived regulatory bodies. Despite its well-aligned incentive structure, the CBRC faces an uphill battle to create a more robust financial system.
Mr. Shih is an assistant professor of political science at Northwestern University. Excerpted from the November issue of the Far Eastern Economic Review. Futher information is available at www.feer.com.
31. China Reiterates Its CommitmentTo Flexible Yuan
DOW JONES NEWSWIRES
November 21, 2005; Page A14
BEIJING – Chinese officials Friday reiterated plans to keep moving toward a more flexible yuan, but didn't indicate any new policy is imminent.
Observers said the comments, which came ahead of President George W. Bush's visit to Beijing, won't change the market's view that China will stand pat on its currency policy for now.
People's Bank of China Gov. Zhou Xiaochuan said in an essay that China will try to realize yuan convertibility on its capital account as the central bank helps carry out the nation's economic blueprint for the next five years.
The essay appeared as the central bank said through the official Xinhua news agency Friday that it will continue to pursue a more flexible yuan and is open to suggestions on its exchange-rate policy.
In a separate interview published in the Beijing Youth Daily on Friday, Chinese Foreign Minister Li Zhaoxing said: "We will consider the issue [of yuan reform] from a stance that is conducive to China's economic development."
"In the short term, this news will not impact the market, but it means that in the medium [term] China is moving toward the same economic principles as the U.S. and Europe," a Shanghai-based dealer said.
The dollar closed at its session low Friday of 8.0832 yuan, down from Thursday's 8.0845 yuan.
But even after the capital account is opened, China will maintain curbs on speculators and short-term foreign debt, said Mr. Zhou, the central-bank governor whose essay reiterated known aims of policy makers for China's financial-sector overhaul.
Along with China's financial reform, "the yuan-exchange rate will come to more sensibly reflect changes in market demand and supply and be more flexible," the central bank said in response to the International Monetary Fund's annual report on China. "We consider the principles of the Chinese government's exchange-rate reform to not only be in the interest of China, but also in the interests of the other countries of the world."
32. The Desolate Wilderness November 23, 2005; Page A16
Here beginneth the chronicle of those memorable circumstances of the year 1620, as recorded by Nathaniel Morton, keeper of the records of Plymouth Colony, based on the account of William Bradford, sometime governor thereof:
So they left that goodly and pleasant city of Leyden, which had been their resting-place for above eleven years, but they knew that they were pilgrims and strangers here below, and looked not much on these things, but lifted up their eyes to Heaven, their dearest country, where God hath prepared for them a city (Heb. XI, 16), and therein quieted their spirits.
When they came to Delfs-Haven they found the ship and all things ready, and such of their friends as could not come with them followed after them, and sundry came from Amsterdam to see them shipt, and to take their leaves of them. One night was spent with little sleep with the most, but with friendly entertainment and Christian discourse, and other real expressions of true Christian love.
The next day they went on board, and their friends with them, where truly doleful was the sight of that sad and mournful parting, to hear what sighs and sobs and prayers did sound amongst them; what tears did gush from every eye, and pithy speeches pierced each other's heart, that sundry of the Dutch strangers that stood on the Key as spectators could not refrain from tears. But the tide (which stays for no man) calling them away, that were thus loath to depart, their Reverend Pastor, falling down on his knees, and they all with him, with watery cheeks commended them with the most fervent prayers unto the Lord and His blessing; and then with mutual embraces and many tears they took their leaves one of another, which proved to be the last leave to many of them.
Being now passed the vast ocean, and a sea of troubles before them in expectations, they had now no friends to welcome them, no inns to entertain or refresh them, no houses, or much less towns, to repair unto to seek for succour; and for the season it was winter, and they that know the winters of the country know them to be sharp and violent, subject to cruel and fierce storms, dangerous to travel to known places, much more to search unknown coasts.
Besides, what could they see but a hideous and desolate wilderness, full of wilde beasts and wilde men? and what multitudes of them there were, they then knew not: for which way soever they turned their eyes (save upward to Heaven) they could have but little solace or content in respect of any outward object; for summer being ended, all things stand in appearance with a weatherbeaten face, and the whole country, full of woods and thickets, represented a wild and savage hew.
If they looked behind them, there was a mighty ocean which they had passed, and was now as a main bar or gulph to separate them from all the civil parts of the world.
This editorial has appeared annually since 1961.
33. Eastern Approaches
By STEVEN FRIES and PRADEEP MITRA
WSJ November 23, 2005
Managers spend twice as much time bribing officials in the old Soviet bloc as in the West.
Perceptions can be slow to change. Often when people think of the ex-communist countries of Eastern Europe and the former Soviet Union they recall the deep and protracted slump of the 1990s. So it may come as a surprise for many to learn that the economic news coming out of this part of the world in recent years has been remarkably good.
Growth in these countries in transition from planned to market economies is higher than in any other region of the global economy apart from developing Asia. We expect the transition region to grow by 5.3% in 2005, well above euro-zone growth of 2.4% but below the 7.8% forecast for developing Asia. Foreign direct investment in Eastern Europe is at an all-time high and many countries in the region have been singled out as the world's leading reformers.
And as more and more investors know first hand, doing business in this region is getting easier. We know this because we asked more than 20,000 managers of firms in 26 countries over six years.
Since 1999, our two institutions have been conducting large-scale surveys of firms in the region. The latest round of our Business Environment and Enterprise Performance Survey (BEEPS) was conducted in spring 2005 and some of its key results are reported in the "EBRD Transition Report," which was published earlier this month.
For the region as a whole, the latest BEEPS results indicate that the business environment has been steadily improving, with each survey showing better results than the one before. Macro-economic instability is viewed as less of an obstacle to doing business. Firms complain less about red tape and needless bureaucracy. Managers see infrastructure and taxation as less constraining and they report that it is easier to receive financing from banks. Most but not all report that corruption is less of a problem than three years earlier. This is all very welcome news.
Not surprisingly, the business environment is viewed most favorably in the new EU member states in central Europe and the Baltic region (the EU-8) that are furthest along in their transition. But improvements are evident in countries further east and south as well. In fact more dramatic progress was seen in the less-advanced regions of southeastern Europe and the Commonwealth of Independent States than in the EU-8. Ukraine and Georgia saw some of the most significant improvements, while Albania, Bulgaria and Croatia advanced the most in southeastern Europe.
While these trends are all positive, managers are hardly euphoric. Some aspects of the business environment appear to have worsened from the perspective of firms. In nearly all countries companies see labor regulations as more problematic than before. This is most pronounced in the eight new EU member states where they have had to align their regulations with those in Western Europe. They also report that they would significantly increase their employment if these regulations didn't exist. And notwithstanding the better overall business environment, our surveys conducted last year in several West European countries show that business obstacles such as levels of corruption, red tape and arbitrary state intervention into business affairs are much lower there than in countries in the transition region.
For example, managers in the transition countries spend more than twice as much time dealing with public officials on regulatory issues -- what we call the "time tax" -- than managers in Western Europe. In Albania the "time tax" amounted to over 11%" of senior managers' time, while in Estonia it was just over 2% -- virtually the same as in western Europe. They also spend more than twice as much on "unofficial payments" to get things done -- what we call the "bribe tax" -- than firms in West Europe. The grabbing hand of the state has not yet turned into the invisible hand of the market for many transition countries.
What is true for the whole, of course, is not necessarily true of the parts. The business environments in some countries in the region are going from strength to strength, while in others firms continue to report more stifling conditions. Optimism in the momentum of reforms is quickly tempered by a glance at the divergent business environments in countries united at the start of transition. For example, Slovakia's reforms, lauded by many observers, have also delivered much more favorable assessments of the business environment than in the neighboring Czech Republic. Results are also patchy across the former Soviet Union: reforms following the "color revolutions" in Georgia and Ukraine have begun to pay dividends for domestic enterprises, while managers in the Kyrgyz Republic, which had its own "Tulip Revolution" at the time the survey was undertaken, have become more critical of their business environment than three years before.
One finding of the most recent BEEPS should cause policymakers across the region to sit up and take notice: The survey shows that the most dynamic firms -- those most likely to create jobs and generate growth -- are the most constrained. Private companies, small and micro enterprises, companies that export, and those that re-invest profits are, on average, experiencing greater difficulties doing business. By contrast, state-owned firms, which are typically less efficient, less transparent and less dynamic than private ones, continue to receive advantages in terms of lower taxes, easier access to credit and lighter regulation. Also, firms outside the capital are finding the business environment to be more difficult, suggesting that the benefits of transition are not yet widely shared within countries.
Still, the reform momentum evident in many countries, and the positive effects of reforms as evidenced in the BEEPS, are encouraging. Firms in the region are improving in terms of annual sales growth and productivity, and many dynamic firms are invigorating their economies. But we mustn't delude ourselves into thinking the job is done.
As the transition economies continue to integrate into the global economy they will need to continue strengthening their business environments if they are to remain competitive and maintain their strong recent performance. The international community for its part must continue its vigorous engagement with both governments and businesses in the countries of eastern Europe and the former Soviet Union to help them meet the challenges still to come.
Mr. Fries is acting chief economist at the European Bank
for Reconstruction and Development. Mr. Mitra is the World Bank's chief
economist for Europe and Central Asia.
34. Why Latin Nations Are Poor By MARY ANASTASIA O'GRADY
WSJ November 25, 2005; Page A11
With hysteria mounting about the political shift leftward in Latin America and 11 presidential races in the region over the next 13 months, the World Bank's "Doing Business in 2006" survey merits a read. We mentioned it two weeks ago but a fuller airing is in order.
The annual report, by the research side of the bank, measures the regulatory burden and property rights in 155 countries. This year's results demonstrate clearly that despite persistent claims that the region has tried the "free-market" model and found it wanting, Latin America is stubbornly stuck in a statist time warp.
When it comes to burdensome government and weak property rights, Latins don't fare as badly as Africans but their freedoms lag behind those in much of Asia and the former Soviet satellites of Europe.
It's been 20 years since Hernando de Soto's Lima-based Institute for Liberty and Democracy published "The Other Path," documenting the burdens that the Peruvian state was heaping on the backs of the struggling underclass. But in two decades little has changed in a region mostly known for caudillo government and its capacity to disappoint. More than ever, the Latin predatory state is driving entrepreneurs underground and forcing the most industrious citizens to emigrate, mostly to the U.S.
Take for example Mexico, which has enormous oil reserves and open trade with North America. Its economy is sadly underperforming. Mexican Finance Minister Francisco Gil Diaz has managed the macro side of things exceedingly well. But on the micro side, Mexican businesses face crippling regulation and inadequate legal protections, weakening the potential for market competition, investment and productivity gains.
In the category of the World Bank report that deals with "hiring and firing," Mexico ranks 125th out of the 155 countries surveyed, not least because it costs a firm almost 75 weeks of wages to fire a worker. Mexico also ranks 125th in "protecting investors" against fraud, self-dealing and other corporate abuses. Correspondingly, it ranks 100th in the "enforcing contracts" category, meaning that when two parties strike a deal, neither knows whether it will hold up.
Peru gets a better overall rating than Mexico, but it can hardly be said to encourage entrepreneurship. In "starting a business," Peru ranks a low 106th because of the red tape Mr. de Soto wrote about so long ago. Firing a worker costs almost 56 weeks of wages, discouraging employers from hiring and risking huge costs if business takes a turn for the worse. A medium-sized business in Peru can expect a tax burden reaching almost 51% of gross profits, which is part of the reason Peru has the 133rd worst tax burden. "Enforcing contracts" takes 381 days on average, leaving Peru in 114th place in this category.
Argentina, still saddled with Peronist labor laws, has an even less flexible labor market than Peru, at 132nd in "hiring and firing." Moreover, a medium-sized company must theoretically pay almost 98% of its gross profit to the tax man, which explains a high rate of tax evasion.
In 25th place globally, Chile has the best business climate in the region but is inexcusably behind Malaysia, Estonia and Lithuania. It badly needs to advance reforms undertaken in the 1980s, but instead the Socialist government of Ricardo Lagos has yielded to union activists by increasing labor law burdens.
Colombia -- at 66th -- has dreadful ratings in "hiring and firing" (130th) and in "paying taxes," where a medium-sized business has a total payable tax of 75% of gross profits. Venezuela doesn't enforce contracts (129th), doesn't protect investors (142nd) and makes paying taxes a bureaucratic nightmare (145th). There are some notable improvements among small countries. Honduras gets better marks for making property registration more efficient. El Salvador has quickened "business entry" but still ranks far down the list in this category due to the cost of starting a business.
The correlation between economic freedom and prosperity is clear from reading the World Bank ratings. As one would expect, overtaxing and overregulating economic activity stunts growth, as do weak property rights. Much of the region's stagnation is attributable to burdens inflicted by government.
Why hasn't democracy in Latin America produced change? The answer can be found in public-choice theory -- a school of economics made famous by Nobel Prize winner James Buchanan. Public choice views politics as a market, where the highest bidders have the power to "purchase" what they want. Deregulation may be best for the majority, but politicians don't have an incentive to do it when their most powerful, best-organized constituents -- the ones who put them in office -- prefer the status quo. That includes not only labor unions but rich, established oligarchs and government bureaucrats. Most Latin countries don't have large enough middle classes to counter these oppressive forces, thanks to the twin curses of overregulation and weak property rights.
At the cost of a civil war, El Salvador has had some success in awakening the power elite to the need for change. But most of the region is more like Mexico, where labor unions and a handful of wealthy individuals -- like telecom mogul Carlos Slim and media giant Ricardo Salinas Pleigo -- see no need to reform a system that serves them so well.
On reviewing the World Bank study, it is worth noting that external forces also militate against reform. The International Monetary Fund, the U.S. Agency for International Development, World Bank loan officers and the United Nations provide easy money -- "aid" -- to support failed governments and an entrenched ruling class. "Conditionality" has been a dismal failure. IMF assistance to Argentina worked against challengers to Peronism in the 2003 election and ensured victory for the present anti-market government.
Rich-country bureaucrats also often tie their handouts to objectives favored by rich-country pressure groups, such as environmental and labor "protections" that in the name of "social justice" add more red tape and further destroy individual initiative. All the while, Godzilla government is leaving Latin America's underclass living in the shantytowns and favelas with little opportunity or hope.
35. Argentina's Bank Engaged in Sterilization, 1991-2002
November 2, 2005; Page A15
In response to Martin Redrado's Oct. 26 Letter to the Editor criticizing Mary O'Grady's Oct. 21 Americas column "Argentina: Land of the Incredible Shrinking Peso":
Mr. Redrado, governor of the Central Bank of Argentina, repeats a great monetary canard. The third item in his eight-point critique states: "as opposed to what happened in the 1990s when money supply was determined by capital flows, sterilization is currently used as a mechanism to meet the targets to coincide with the local demand for pesos."
From April 1991 until early January 2002, the Central Bank was governed, in part, by the Convertibility Law. Contrary to Mr. Redrado's assertion, the Central Bank engaged in very active sterilization during this period. Accordingly, the bank was not operating as a currency board.
After a thorough examination of the Central Bank's balance sheets, I determined that the bank sterilized changes in its foreign reserves in virtually every month of the convertibility system's existence. As I reported in "On Dollarization and Currency Boards: Error and Deception," The Journal of Policy Reform, 2002, 59% of the changes in foreign reserves were sterilized, on average, during the April 1991-December 2001 period.
Due to the Central Bank's hyperactive monetary policies during the convertibility period, the money supply (base money) was not solely determined by changes in the bank's foreign reserves, as would be the case under a currency board regime. In fact, only 41% (on average) of the changes in the bank's foreign reserves resulted in changes in the money supply.
If the governor of the Central Bank of Argentina cannot correctly characterize the bank's past, we are left to question the accuracy of his claims about its current operations.
Steve H. Hanke
Professor of Applied Economics
Johns Hopkins University
Baltimore
36. Argentina: Land of the Incredible Shrinking Peso
By MARY ANASTASIA O'GRADY
October 21, 2005; Page A15
Plus ça change, plus c'est la même chose, French journalist Jean-Baptiste Alphonse Karr observed in 1849. And when Argentina's consumer prices jumped 1.2% last month -- the largest monthly increase in two years -- those words resonated. A lot of change has occurred in Argentina since the hyperinflation of the 1980s, but as the developing economic story unfolds, much remains remarkably the same.
Inflation for 2005 is on track to top 10% and some Argentine forecasters are bracing for an annualized rate as high as 12%. Peronist President Nestor Kirchner, gearing up for this Sunday's mid-term elections, has blamed greedy supermarkets and threatens action if they don't stop taking "advantage of the fact that there is more demand to increase their profitability."
No wonder analysts are eyeing the pick-up in inflation, and the central bank's passive attitude toward it, like Floridians watching Wilma swirling about in the Caribbean. We already know what happens when this baby makes landfall. Batten down the hatches.
After a decade of monetary calm under the "convertibility law," which required dollar reserves to back up newly minted pesos and pegged the rate at one-to-one, Argentina pulled the plug on price stability in January 2002 and reverted to what it called a "float." The decision to "float," following a massive debt default, was cheered in ivory towers and by no small number of the world's supposedly sophisticated financial writers.
But the monetary strait-jacket was removed from Argentina's legendary machine politics, and any first-year political science student could have predicted the outcome: The Peronists have indulged in money mischief (to borrow a 1992 Milton Friedman title) and the inflation rate has gone up. The fact that the country's top central banker today is known more for his transparent political ambitions than his economic acumen is no confidence builder.
In 2001 and 2002, like revelers on a drunken tear the Argentine government seized bank accounts and dollar holdings, stiff-armed creditors, devalued the peso and tore up contracts. Argentine wealth was wiped out and the economy contracted 10.9% in 2002. In the two years after this debacle, the economy bounced off the bottom, turning in 8.8% growth in 2003 and 9% in 2004.
The trouble is that most of the take from this great heist has been spent now and the high is wearing off. To keep the party going the government is maintaining an artificially weak peso to ensure "export competitiveness" and, in the government's mind, continued prosperity. This, of course, is what is fueling the inflation.
One school of thought holds that the central bank was instructed by the government to shower the country with pesos to help the Kirchner claque win seats on Sunday. With GDP growth forecast close to 8% this year, the prospects for Mr. Kirchner's wing of the Peronist party are good. Had the bank pulled the punch bowl earlier this year, his supporters in Congress could well have faced more difficult contests.
Yet there is little in the government's rhetoric to support the theory that the bank -- which is clearly not independent -- will tighten the money spigots after Sunday. Indeed, the government's budget for next year forecasts double-digit inflation of 10%, sending a worrying signal of tolerance. Moreover, the 2005 inflation number has been held down by the government's refusal to adjust wages and by price controls in some sectors. During the crisis, workers were happy to keep their jobs. But labor seems unlikely to remain placid while inflation erodes purchasing power. Strikes are hitting across the board.
Economists I talked to in Argentina are worried that the bank will only take action when annualized inflation gets near 15%. But as experience teaches, by then momentum could make putting the inflation genie back in the bottle very difficult. As inflation expectations take hold, people flee from the currency, particularly in places like Argentina where politicians have destroyed the currency before.
The country's return to 1998 GDP levels this year occurred in a climate of hostility toward the market and amid a growing role for the public sector. Going forward, the divergence between investors concerns about property rights and a government ideologically opposed to respecting those rights will become a source of trouble.
This anti-market bias has damaged investment, which is now running (in constant dollars) at only 20% of GDP. Economists estimate that to achieve a long-term annual GDP growth rate of 3.5%-4%, a minimum investment rate of 23% of GDP is needed. To reach the 5% GDP-growth-rate that could meaningfully impact poverty and unemployment, the investment rate should reach 25% of GDP.
The strong growth of the past three years has occurred in an environment of underutilization of productive capacity, mainly in the tradable sector where investment is not so crucial and where the devalued peso helps rack up large exports. But infrastructure improvement is inadequate, which discourages ventures that need communications, transportation and other services. A high degree of uncertainty in the energy sector, again driven by the state's punishing attitude toward ownership and profits, has been most harmful.
Other problems are on the horizon. This week, Argentina magnanimously suggested that it might forgive the International Monetary Fund its sins and begin loan negotiations again. Could that have anything to do with $7 billion in total payments due the fund between now and the end of 2007? Meanwhile, the heavily taxed export sector is being squeezed as costs rise even while the government seeks a nominally weak exchange rate.
No one expects Argentina to return to the hyperinflationary
terror of the early 1980s, when the central bank humiliated itself to the
point of issuing one-million peso notes. But that is little comfort to
Argentines who, in a nation of much promise, have experienced lots of change
but little progress.
37. It Is Not Raining Pesos in Argentina
October 26, 2005; Page A19
In response to Mary O'Grady's Oct. 21 Americas column "Argentina: Land of the Incredible Shrinking Peso":
Ms. O'Grady states that the Central Bank of Argentina has a passive attitude and showers the economy with pesos. That's wrong; it is not how monetary policy is handled in Argentina.
First, the Central Bank has direct control of the monetary aggregates with monetary policy targets contained in a self-imposed program. The Central Bank monitors the evolution of the monetary base, which is the main variable to consider when assessing compliance. Moreover, the Central Bank remains vigilant on the broader monetary aggregates, including both means of payment (M1 and M2) and M3. Average targets are estimated on a quarterly basis, and they must be met at the end of each quarter.
The Central Bank has been accomplishing the program -- with an anticipated restriction in monetary stimulus for 2005 -- for nine consecutive quarters. The shift in the stance of monetary policy in early 2005 aims at eliminating any stimulus, in an attempt to maintain a prudent and predictable policy. For that purpose, for the first time since 2002, the monetary base reflected a shrinkage of 3.5% in real terms during the first nine months of the year. As a result, there was an increase of 300 basis points of interest rates on Central Bank notes, which is the key absorption instrument to sterilize excess pesos. This cannot be characterized as a policy that showers the country with pesos.
Second, the Central Bank has continued the process of building up a short-term reference rate that started with the development of a repo market a year ago. The monetary policy is on a stage of transition from a control scheme based on quantitative (monetary aggregate) intermediate targets to a benchmark interest rate approach.
Third, as opposed to what happened in the 1990s when money supply was determined by capital flows, sterilization is currently used as a mechanism to meet the targets to coincide with the local demand for pesos.
Fourth, the Central Bank, as in many other emerging countries, is taking advantage of a favorable international context to carry out an anticyclical policy of foreign reserves accumulation for prudential reasons. This strategy aims at mitigating vulnerability to minimize the impact of negative external shocks on domestic variables.
Fifth, the payback of rediscount lines by commercial banks has grown in importance because many financial institutions decided to anticipate payments from liquidity assistance provided by the Central Bank during the crisis. These payments amounted to $8.1 billion in 2005, reflecting the upturn of the banking sector. The payback also represents another tool for monetary absorption. The recovery of these loans also indicates that the commitment of the Central Bank to keep the value of its assets and the quality of its balance sheet.
Sixth, the Central Bank issued regulations that limited credit to public sector and currency mismatches, which were two key sins of the past. As a consequence, the financial system's exposure to the public sector diminished to 32% of the assets, after reaching levels of 40% right after the crisis.
Seventh, the Central Bank is actively restructuring the financial system. Along with economic growth, this process has yielded sustained growth of deposits and credit, as well as significant improvements in solvency, liquidity and quality-of-assets ratios.
Eighth, concerning the institutional role of the Central Bank, independence is guaranteed by law and the bank follows information procedures more transparent than the Bank of International Settlements (BIS) recommends on this matter.
It is clear that Argentina is correctly administering the recovery from its economic crisis and is making progress toward high and sustainable long-term growth. This process has implied a logical adjustment in relative prices as well. It is important to remember that many other emerging countries that suffered economic crises less profound than Argentina's -- including Chile, Mexico and Brazil -- showed double-digit inflation for several years after the collapse. However, the Central Bank of Argentina -- rather than what happened in the 1980s -- clearly conducts a prudent and predictable monetary policy fully consistent with price stability.
Martin Redrado
Governor
Central Bank of Argentina
Buenos Aires
38. Bush's Perilous Journey South By MARY ANASTASIA
O'GRADY
November 4, 2005; Page A15
Security preparations for the "IV Summit of the Americas" in the Argentine city of Mar del Plata left little to the imagination about what was in store for George W. Bush, when he arrived for the opening.
All week long, riot police were drilling on the streets of the seaside resort of 600,000, huge wire-mesh barricades were being slotted into place, frogmen were scouring the ocean waters and jets were practicing flyovers.
The protestors too, were getting ready, decorating their anti-Bush placards with blood-red paint and talking trash in the media. One leader of the demonstrations told the Financial Times on Monday that the expected-100,000-strong protest had the approval of President Néstor Kirchner's government. "A march of that magnitude does not take place without an OK from above," he told the paper. "The idea is to show the victims of imperialism. We want to put a stop to Bush's military build-up and his persistent threats of invasion around the world."
It isn't only the street protestors who are lying in wait for the U.S. president. Rumors are circulating that a draft communiqué celebrates more intrusive government and weaker private property rights. Planners seem to be trying to turn the two-day summit into a love-fest for Venezuela's Bolivarian Revolution meant to embarrass the Americans.
Surely Mr. Bush didn't need to fly 11 hours to hear lectures from politicians hell-bent on turning back the clock to the kinds of policies that have consigned huge numbers of Latinos to a permanent state of poverty. He would have been better off going to Baghdad: It's safer and the leadership there is actually interested in democracy and development.
As an Argentine friend wrote to me: "I really don't know why President Bush has accepted to come to this show of political clowns where all of them will blame him for all the maladies that we so cleverly produced in our countries. Americans have to learn that they will never be loved but they have the responsibility for being respected."
To the long list of really dumb foreign policy decisions that Bill Clinton made during eight years in office let's add the 1994 establishment of this "Summit of the Americas." Since the Miami inaugural, the region has grown poorer and more unstable with every passing year. Organizers don't even pretend to have new ideas. This year Argentina chose the theme: "Creating jobs to fight poverty and strengthen democratic governance." Coming from a government that admires the Cuban Revolution, that doesn't pass the laugh test.
It's hardly a secret that to overcome poverty and create jobs, presidents need to do hard political work at home, confronting monopolies (state and private), labor-union obstructionism, trade protectionists, bureaucratic over-regulation, oppressive taxes and corrupted judiciaries. Their wish to avoid such difficult challenges explains why they're all at the beach in Mar del Plata getting ready to cheer a keynote speech from Venezuela's Hugo Chávez. Back home, there's the thorny issue of delivering on their election promises to make folks better off.
Take Brazil for example: An industrial giant perpetually described as the land of the future, it has the human capital to become an international powerhouse. Brazil has a sophisticated business community and is flush with natural resources. The Brazilian population just voted down a proposed gun ban, demonstrating that despite being preyed upon by a monster government for generations, the society remains vibrant and intent on preserving what is left of individual rights. Its large underground economy reveals a thriving entrepreneurial spirit.
During the second term of President Fernando Henrique Cardoso (1999-2002), Brazil made important strides in confronting economic instability. As head of the Central Bank of Brazil the highly reputable Arminio Fraga did much to increase the bank's transparency. On the fiscal side, Brazil is beginning to build the record of a mature country.
But real problems are holding Brazilians back from realizing their potential. This week Bear Stearns Global Emerging Markets released a report on the country's weak foreign direct investment trends -- "External Accounts, FDI Disappoints" -- and placed the blame squarely on regulatory and tax policies that act as barriers to attracting sufficient capital for more rapid growth.
The Bear Stearns diagnosis echoes the World Bank's analysis in its "Doing Business" report for 2006. The report ranks Brazil 119 out of 150 countries on the cost of doing business, noting that, for example, "entrepreneurs can expect to go through 17 steps to launch a business over 152 days on average, at a cost equal to 10.1% of gross national income (GNI) per capita." On tax policy it says, "Entrepreneurs there must make 23 payments, spend 2,600 hours, and pay 147.9% of gross profit in taxes." It is hardly surprising that in the category of "paying taxes" Brazil ranks among the worst at 140th.
Brazil is also developing a bad reputation in the area of intellectual-property rights by threatening to confiscate patents from pharmaceutical companies if pricing terms aren't in line with the government's demands. This has raised uncertainty for investors and badly damaged commitments to a sector that might otherwise blossom in Brazil.
After the summit Mr. Bush travels to Brazil to see President Luiz Inácio "Lula" da Silva, a meeting that might be valuable if pledges to free trade and property rights could be reestablished. On the U.S. side there has been too much double-talk; a damaging credibility problem has developed. This is the kind of meeting that matters for democracy and development, a serious conversation, one not likely to occur at a summit designed for populist grandstanding packaged for the evening news back home.
Allegations arose this week that Lula's Workers' Party took $3 million from Cuba for its campaign in the 2002 elections. If true, it's not surprising. Indeed, what we may end up watching this weekend in Argentina is the big payoff on such Castro and Chávez "investments" over the last few years. It's a shame that W. has agreed to waste his time in the treacherous venue that was prepared for him.
39. Once Upon a Time in AmericaBy MICHAEL BARONE November 25, 2005; Page A10
The end, or the beginning of the end, of a familiar and comfortable world: That's how General Motors' announcement this week of massive layoffs and plant closings, following the bankruptcy of Delphi last month, strikes one who grew up in the Detroit area in the two decades immediately after World War II. In that world, it was easy to imagine you were at the center of the economy. Detroit was then the fifth-largest metropolitan area, the home of the Big Three auto companies and the United Auto Workers -- national institutions of the greatest importance. The news media followed the negotiations between the UAW and the Big Three company it picked as a target every few years, and it was assumed that the wages and benefits agreed to would set a pattern for the whole economy.
And a very good economy it seemed to be. Left behind were
the Depression and the anxious years of World War II. The UAW was able
to negotiate big hourly pay increases and generous medical and pension
benefits as well. With no effective competition, the Big Three could pass
along the cost of UAW contracts to consumers who seemed willing to pay
more for dramatically restyled and heavily advertised cars. General Motors'
president, Harlow Curtice, was Time's Man of the Year for 1955. This was
a recognition not just of an individual (I wonder how able an executive
Curtice was) but of a system; Time might have honored UAW's longtime president,
Walter Reuther.
* * *
The success of the Big Three and the UAW seemed a fit symbol of America's postwar economic dynamism. In fact, this was an economy characterized not by dynamism but by stasis, to use Virginia Postrel's term in "The Future and Its Enemies." New Deal legislation had been designed not for economic growth but for protection from the downward spiral of deflation. Those laws, not least by encouraging unions, strove to prop up wages and prices and to provide security to workers and existing firms. Keynesian economics was employed to flatten out the business cycle as much as possible and to reduce unemployment.
By the mid-1960s, it was generally agreed that this system worked and would continue indefinitely. The Big Three could always make money by rolling out the big cars families needed to go up north each summer. As John Kenneth Galbraith then argued, auto makers could induce consumers to buy as many cars as they wanted to sell by clever advertising. UAW workers could always look forward to ever-increasing wages and benefits. The big demand in the 1970 contract negotiations was retirement for auto workers in their early 50s. The confrontational labor-management politics of the 1940s and 1950s was replaced by consensus, as Henry Ford II joined Reuther in endorsing LBJ in 1964.
Reuther, a man of great energy and ability, wanted to use the UAW as an entering wedge to transform America into a Scandinavian-style welfare state. His contracts would set the pattern for national wages; the union movement would expand into new industries and unionize most of the economy; growth would enable workers to enjoy not only high wages, but job security, medical benefits, generous pensions. They would be protected against competition by large corporations. Reuther employed a Scandinavian architect to build Solidarity House, the union's HQ on the Detroit River, and Black Lake, its educational center in northern Michigan. Reuther, like Marx, and like so many other social democrats, envisioned workers devoting their increasing leisure hours to pursuing the culture that seemed so inaccessible to workers earlier in the century.
The problem was that the default character of the economy, after the shocks of Depression and war, turned out to be not stasis but dynamism. Private sector unionization peaked in the mid-1950s; employment in unionized firms grew less than in nonunion firms. Union leaders believed that Section 14(b) of the Taft-Hartley Act, which allowed state right-to-work laws, was preventing unionization in the South, the Great Plains and much of the West. But the attempt to repeal 14(b) was one of the few defeats for LBJ's Democrats in the 1965-66 Congress.
The Big Three auto firms -- and the UAW -- would soon face competition from foreign firms and an unforeseen demand for cars not large enough to take the family up north every summer. Attempts to wall themselves off from foreign competition either failed legislatively or produced perverse results. Faced with domestic content laws, Japanese and European firms built large plants in the U.S. with nonunion work forces. That has left the Big Three and their spinoffs, like Delphi, with redundant work forces and huge legacy costs in the form of generous pensions and open-ended retiree health benefits.
Union-driven legacy costs have already forced many steel companies and airlines into bankruptcy, with pension obligations fobbed off on the Pension Benefit Guaranty Corporation: The Big Three auto companies might as well do the same. At least there aren't that many big unionized private industries left to fall. Besides, taxpayers and politicians angry at costs imposed by unions -- particularly in the public sector -- can always change the rules and reduce unions' bargaining leverage. Just as the economic marketplace eventually reduced the power of the old industrial unions, the political marketplace could, in time, reduce the power of the "post-industrial" unions.
The attempt to protect workers from all risk has turned out to be very risky indeed, since in a dynamic economy large corporations are subject to competition from firms with lower costs. In the auto industry the result is significant pain for those who relied on the Big Three and the UAW; but the result is also a vastly faster growing economy and many more opportunities than provided by the European welfare states.
A broader result has also been the consolidation of a more demotic, market-based culture. On the Michigan freeways going up north, the big attractions are not the UAW's cultural haven of Black Lake but Indian casinos and outlet malls, places where people throng to win sudden riches or to take advantage of low prices on brand-name goods. The attempt, made when the economy seemed static, to promise security and leisure and restrained good taste, has failed. We remain, as we have been in most of our history, a nation of hustlers (as historian Walter A. McDougall so strikingly put it) -- a people who strive mightily to get ahead and advance their interests, enjoying the sometimes vulgar opportunities a dynamic economy provides.
Mr. Barone is a senior writer at U.S. News & World Report and a contributor to the Fox News Channel.
40. Guatemala Logs Progress Program Sustains Rain Forests,
Boosts Villagers' Incomes By BOB DAVIS
Staff Reporter of THE WALL STREET JOURNAL
November 25, 2005; Page A9
CARMELITA, Guatemala -- This remote jungle hamlet has started in the last few years to provide scholarships for local kids to go to junior high school in a town 40 miles away, where they live during the school year. The village also paid to improve the rutted dirt road that is its only link to the outside, and now is even thinking of buying a bus.
An unusual program that blends environmental protection and economic development is responsible for the gains. Essentially, the Guatemalan government gives 20 forest communities the right to log wide swaths of the rain forest, as long as they limit the harvest to a level at which the forest can regenerate itself. Workers get a boost in income by logging in what is deemed a sustainable fashion.
At a time of growing concern about deforestation and its effect on global climate change, the Guatemalan model is being hailed as a model for tropical-forest management. But its success has depended heavily on U.S. subsidies and advice, and training by international environmental groups, which are being scaled back. Now, the forest communities are being pushed to become more business savvy and to log more types of trees and plants, even though that could undermine efforts to preserve the forest. If the program can't exist without heavy subsidies, it won't catch on elsewhere in the developing world, where cash and expertise are in short supply.
"There's a Catch-22," says Roan Balas McNab, who advises another town with logging rights, Uaxactún, for the Wildlife Conservation Society, whose headquarters are at New York's Bronx Zoo. Although increased logging could boost living standards for local workers, facilitating access to these areas draws people who have an interest in clearing swaths of land by setting fires. "You have to make a decision: are you logging for ecological goals or for timber?"
The timber program dates to the end of Guatemala's 30-year civil war in 1996. The outlook was bleak for preserving the rain forest in the northern Petén region. Cattle ranchers and drug dealers both had an interest in burning down the forest and turning it into pasture land where cows could graze and cocaine-packed planes could land, an informal alliance dubbed "narco-ranching."
As an alternative, Guatemala divided about 1.2 million acres of forest land into 13 logging concessions, where the concession managers have the right to log timber as long as they do it in a sustainable manner. Two of the concessions went to logging companies. The other 11 were given to local communities, with a total of about 11,000 people, few of whom had much education or experience running a business -- let alone one that meets tough environmental standards.
Many of the residents scratched out a living tapping trees for the chicle used by the few chewing-gum makers that haven't turned to synthetic alternatives, or gathering plants to sell to florists. A nonprofit conservation group was assigned to advise each community concession; the U.S. Agency for International Development bankrolled the effort.
It was a novel experiment in giving local communities an economic incentive to become forest guardians. Mexico long has had cooperatively owned land, but the communities control much smaller parcels than in Guatemala and few commit to log in a sustainable way. In Brazil, community groups have been awarded concessions, but usually to tap rubber trees or collect Brazil nuts, not to log. Guatemala provided each concession with tens of thousands of acres each because valuable trees -- cedar and mahogany especially -- grow sparsely and take decades to regenerate. Communities needed vast acreages to turn a profit with low-intensity logging.
The concessions began in 1997, and some failed quickly. In one, community members divvied up the land among themselves, even though that was forbidden by Guatemalan law. In others, wealthy cattle ranchers grabbed land and the government didn't force them out.
But overall, the concessions can point to successes. Since 1997, the woods controlled by concessions have lost about 1% of their forest cover, about one-fifth the rate of deforestation of nearby Laguna del Tigre national park, according to surveys by the Wildlife Conservation Society. There are also fewer forest fires in the concessions than elsewhere in the Petén.
And while concession members remain poor, their incomes are inching up, as is their sense of what they can accomplish. Concessions pay about $10 a day to laborers, about twice the going rate in the Petén for agricultural workers, and sometimes provide life insurance and loans. In Carmelita, the concession also bought a sawmill, so it can sell wood boards, not just raw timber, and has set up an experimental furniture-making facility.
"The next step is to add value," says Carlos Alberto Cersborn, the 23-year-old president of the concession, who serves a two-year term. "The co-op has to do integrated work, not just cut timber." The gains, though, have required heavy subsidies. Since 1997, USAID has spent about $8 million on the concessions, training the workers and helping them meet environmental standards. In some years, the U.S. subsidies have equaled about half of concessions' logging revenue. Currently, the concessions produce about $4 million of wood.
Now, the U.S. is trying to winnow its support and push the concessions to survive as businesses. One USAID contractor, Chemonics International Inc., a U.S. development consultant, has been surveying the region for 17 different species of trees, so the concessions don't rely on mahogany and cedar. Chemonics is urging the concessions to figure out ways to use discarded wood, and to learn to produce more-profitable finished products.
It's tough going. The concessions are used to outside help and are suspicious that profits from new ventures will wind up in others' pockets. A U.S. plan to have the concessions sell timber through a single jointly owned company to boost efficiency has met stiff resistance.
Conservation International, a large U.S. environmental group that helped set up forest concessions, now rejects the idea. Sustainable logging never works, says the group's chief economist, Richard Rice, because logging more intensively is more profitable. Now, he says, the U.S. "wants to save the rain forest by cutting down more trees. That won't work."
Write to Bob Davis at bob.davis@wsj.com
Thursday, November 24, 2005 ~ 1:45 p.m., Dan Mitchell
Wrote:
41. The continuing global shift to lower taxes. Only
Americans celebrate Thanksgiving, but the rest of the world should pause
for a moment and give thanks to tax competition. Thanks to globalization,
it is increasingly easy for labor and capital to cross national borders
in order to avoid punitive taxes. This process is forcing governments around
the globe to lower tax rates and reform oppressive tax systems. In recent
days, Spain's socialist government has announced a cut in its corporate
tax rate, Ireland's government has announced that it intends to preserve
its low 12.5 percent corporate tax, Colombia has announced that it will
lower its corporate tax rate by more than 8 percentage points, and Russia
has announced it will continue its tax-cutting crusade by reducing a number
of levies - including a possible reduction of the corporate tax rate to
20 percent so that it is closer to the 13 percent flat tax that exists
for individuals:
Spanish Prime Minister
José Luis Rodríguez Zapatero has announced that his government
is seeking to steer through cuts in taxation for both small and large companies
which could go into effect from next year. In an attempt to bring Spanish
company taxes more into line with international rates, Mr Zapatero stated
at an event organised by The Economist magazine in Madrid on Monday that
taxation on small companies will be reduced to 25% and for large businesses
to 30%. ...Mr Zapatero also announced that the government intends to reform
the personal income tax system to "reduce fiscal pressure on earnings"
and to make taxation "simpler and fairer".
http://www.tax-news.com/asp/story/story_open.asp?storyname=21857
With Ireland's company
tax policy seemingly under attack from various quarters, Minister for Enterprise,
Trade and Employment Míchéal Martin told a conference in
Australia this week that the government has no intention of increasing
its flagship 12.5% rate of corporate tax. "To be quite clear about this,
the Irish corporate tax rate has been a key cornerstone of our economic
policy - getting that tax rate down to 12.5pc and keeping it there...,"
Mr Martin stated during an Enterprise Ireland mission to Australia. ...As
if the Irish government needed reminding that an increase in corporate
tax is unlikely to be well received by the large number of multinationals
which have established operations in Ireland, Dell chief executive, Kevin
Rollins warned in an interview with the Sunday Business Post at the weekend
that the computer giant would consider relocating if corporate taxes in
the Republic increase. "Any time a cost goes up, we will reassess our position,
particularly with tax," he said.
http://www.tax-news.com/asp/story/story_open.asp?storyname=21859
Colombia last week said
it is planning to cut corporate tax from 38.4% to under 30% by the end
of the year in order to spur investment. Finance Minister Alberto Carrasquilla
said the government will ask Congress to reduce the tax rate, which is
currently one of the highest rates of corporate tax in the region. Businesses
have repeatedly begged the government to reduce the tax rate to encourage
both local and foreign investment in the country."In Colombia, the rate
is the highest in Latin America and it dissuades the investment's growth
to be as high as in other countries in the region," said Eugenio Marulanda,
head of the Confecamaras, a business grouping. Carrasquilla said the government
agrees with the business community.
http://www.tax-news.com/asp/story/story.asp?storyname=21846
Russian President Vladimir
Putin has stated that the government remains committed both to simplifying
tax legislation and reducing the tax burden... "All our plans in this sphere
have one aim - to reduce the tax burden," Mr Putin told business leaders
during his recent visit to Japan. According to the President, taxation
as a share of the Russian economy, at 34% to 35% of GDP, is lower than
in Western Europe where the average is about 40%. However, he went on to
add that the government still plans to "reduce this yet further"... Since
2002, the Putin administration has reduced and abolished a number of taxes,
including turnover tax, payroll taxes, sales tax, and value added tax,
which was recently cut to 18% from 20% and could be reduced to as low as
13% in the coming years. Deputy Finance Minister Sergei Shatalov told reporters
on Wednesday that a proposal to cut profit tax to 20% from 24% will also
be put on the table within the next two years.
http://www.tax-news.com/asp/story/story_open.asp?storyname=21865
42. Emerging-Markets Jungle Strong Three-Year Run Reaps
Big Gains for U.S. Investors; How to Get Into the Game Now
By CRAIG KARMIN
Staff Reporter of THE WALL STREET JOURNAL
November 26, 2005; Page B1
Investing in emerging markets has had a reputation for being something like plunking coins into a slot machine: There may be the occasional payout, but the odds are stacked against you.
In recent years, however, the rules have improved in several significant ways, making the chances of winning over the long run considerably better.
After the dark days of 1997 and '98 -- when many Asian economies were plunged into financial crisis -- a host of developing countries world-wide began taking serious steps toward economic overhauls. They have reduced their debt, turned trade deficits into surpluses, increased their foreign reserves and lowered their borrowing costs. Most of the bigger developing countries have also allowed their currencies to trade more freely, giving their economies more flexibility to adjust to setbacks without tumbling into a crisis.
Indeed, while only about 10% of emerging-market bonds in the benchmark J.P. Morgan Emerging Market Bond Index were rated investment grade in 1998, around half of those bonds are ranked in that category today.
For investors with an appetite for risk, the changes have contributed to some sizable jackpots lately. Since the end of 2002, the Morgan Stanley Capital International Emerging Markets stock index has surged 128% -- the most powerful three-year rally that stocks of developing countries have seen. That compares with a 31% rise in the Dow Jones Industrial Average in the same period.
Share prices have surged in former crisis flash points such as Russia and Argentina and in once-ignored markets that include Pakistan and Egypt. Some have even benefited from European politics: Turkey's stock market has surged 46% this year in dollar terms, helped by the start of talks that might lead to the country's joining the European Union; those talks may promote sounder economic policies.
Interest in emerging markets has never been higher. These stock funds world-wide have received $15.5 billion in net inflows so far this year, already surpassing last year's record, according to EmergingPortfolio.com Fund Research.
All of this highlights the need for investors to be particularly careful when looking abroad for big gains. After such a big run-up, many of these stocks may be vulnerable to a pullback if there is a significant change to the global economy, such as a sharp rise in interest rates or a large increase in oil prices.
Still, for investors seeking diversification and looking to increase their long-term exposure to some of the world's fastest-growing economies, a few opportunities remain. Some of the better-performing diversified emerging-market mutual funds have proven they can produce gains even in tough times.
Since they first gained widespread recognition in the late 1980s, emerging markets have been mostly about timing. For instance, Morgan Stanley's emerging-markets index was essentially flat from 1992 to 2002, and investors had to predict the boom-and-bust cycle correctly to make any real money.
That situation now appears to be improving amid the reforms of recent years in many markets. Those changes have contributed to the perception among investors that markets such as these are increasingly seen as long-term investments, not just short-term trading opportunities for those looking to ride a boom and hopefully escape with some profit.
When investing overseas, one of the crucial added risks is currency fluctuations. As exchange rates fluctuate, they can goose your returns overseas -- or just as easily trigger losses.
This year, for instance, Americans investing in emerging markets abroad have done well despite the fact that the dollar has gained strength against many foreign currencies: A stronger dollar eats away at foreign-market returns -- or makes losses even worse -- when those overseas gains are converted back to the U.S. currency. By contrast, a weaker dollar means returns on foreign stocks will be higher when these gains are translated back to dollars.
The reason emerging-markets investments have held up well this year: Although the dollar has enjoyed a broad rally this year, currencies for many of the developing countries have weakened less than major currencies.
For instance, the MSCI Emerging Markets Index is ahead 25% this year, when calculated in local-currency terms, and just a bit lower at 23% when calculated in dollar terms. Still, for a few individual emerging markets, the currency movements have made a difference. In Brazil, for instance, the Bovespa Index is up 22% when measured in the Brazilian currency, the real -- but it is up 45% in dollars.
While dozens of emerging-market stocks can be bought as American depositary receipts in New York -- or even in the overseas markets through brokerage firms such as Charles Schwab Corp. or Merrill Lynch & Co. -- most financial planners still recommend investments in these markets through a diversified emerging-market fund. Investors with a significantly greater risk appetite might consider country funds for markets such as South Korea and Brazil.
Although the long-term structural changes have helped to improve the prospects for emerging markets, some cyclical factors have contributed to the run-up in Africa, Asia, Eastern Europe and Latin America in the past three years.
Strong commodity prices have helped producing nations from Indonesia to Brazil. A long period of relatively low interest rates world-wide has encouraged investors to seek higher-yielding securities. The emerging-markets winning streak might continue in 2006, says George Hoguet, an emerging-markets strategist at State Street Global Advisors. He says that he expects interest rates to rise gradually and that further declines in oil prices might help offset higher rates by acting as a sort of tax cut for consumers.
Others are turning more cautious. "There is tension between emerging markets' good fundamentals and their valuations, which are getting high," says Ray Mills, an international-fund manager at T. Rowe Price Group Inc. He has pared his portfolio's holdings in emerging-market shares to 3.6% from 6% a year ago.
Financial planners typically recommend keeping around 5% of a portfolio in emerging-market stocks, and fund tracker Morningstar Inc. lists 74 mutual funds devoted to stocks in developing countries. Arijit Dutta, a Morningstar analyst, says finding a fund group with a large research team is important because emerging markets span the globe and include thousands of companies.
Trading small emerging-market stocks can be tricky, so Mr. Dutta also recommends finding a fund with an experienced trading desk -- it can be worth a phone call to a fund company to ask how long its traders have specialized in developing markets. This strategy might steer you toward some of the larger fund companies, such as T. Rowe Price, which has people in Europe, Asia and Latin America running regional funds. Their best stock ideas usually end up in the company's diversified emerging-market funds.
Some smaller, boutique firms also are appealing, Mr. Dutta adds. He points to Matthews International Capital Management, based in San Francisco, which focuses on Asian stocks and offers regional and single-country funds.
Fees for emerging-market funds also tend to run high: The mean is 2% of assets, according to Morningstar. Mr. Dutta warns against paying more than that, because many of the best-performing funds in the category charge significantly less. American Funds New World, for example, has a fee of 1.22% of assets.
China and India get attention, but here are three countries from different corners of the globe that many emerging-market specialists favor for next year:
South Korea
Although Seoul's Kospi Index is up 43% this year in dollar terms, Korean stocks are trading at cheaper prices than most other emerging markets. Investors blame Korea's reputation for poor shareholder treatment, though some say the improving companies get punished along with the bad, creating opportunities. Korea boasts widely known global brands, including Samsung Electronics Co. and Hyundai Motor Co., but some investors say the better deals are in domestic, demand-oriented companies that can capitalize on the strengthening economy, such as Shinsegae Co., a department-store operator.
Brazil
As with Seoul, the big rally isn't necessarily frightening away many investors, who continue to view stocks as relatively cheap. Analysts say Brazil is in a period when inflation and interest rates are falling, and demand for its commodities -- especially from China -- is rising. One company that might benefit from China's hunger for iron ore is mining giant Companhia Vale do Rio Doce, also known as CVRD. Lojas Renner SA, a department-store operator, is expected to be a potential beneficiary if the domestic economy improves.
South Africa
This country is another commodity producer that has enjoyed big gains in 2005, up 19% in dollar terms. Stocks in Johannesburg still trade at cheaper levels than those in other developing countries. After decades of political strife, some investors see a black middle class evolving. MTN Group Ltd., Africa's largest mobile-phone provider, has benefited.
Write to Craig Karmin at craig.karmin@wsj.com
43. Pinochet Is Indicted Again On Human Rights Charges
Associated Press
November 24, 2005 8:08 p.m.
SANTIAGO, Chile -- Former Chilean dictator Gen. Augusto Pinochet was indicted on human rights charges Thursday and placed under house arrest, hours after he made bail on unrelated corruption charges filed only a day earlier.
In a widely expected decision, Judge Victor Montiglio charged Mr. Pinochet in connection with the kidnapping and disappearance of six dissidents in the early years of his 1973-90 dictatorship, his office said.
Judge Montiglio sent a court secretary to Mr. Pinochet's Santiago mansion to inform the general of the charges, which will force him to spend his 90th birthday Friday under arrest. The judge did not grant Mr. Pinochet bail.
There was no immediate comment from Mr. Pinochet's lawyer, Pablo Rodriguez.
The new indictment involves the disappearance of six dissidents arrested by Mr. Pinochet's security services in late 1974. They were among 119 people, some of whose bodies were later found in Argentina, who disappeared in a case known as Operation Colombo.
The Pinochet government claimed at the time that the dissidents were killed in clashes involving rival armed groups opposed to him.
Friends and relatives had planned a luncheon at Mr. Pinochet's house to celebrate his birthday but were canceling the event. "I doubt the boss will be in a mood to attend," Mr. Pinochet's spokesman, retired Gen. Guillermo Garin, told The Associated Press.
Mr. Pinochet was indicted and put under house arrest on Wednesday by another judge, Carlos Cerda, on charges of tax evasion and corruption. Early Thursday, the Santiago Court of Appeals granted Mr. Pinochet freedom on an $11,500 bond.
A government lawyer had asked the court to increase the bail substantially, saying Mr. Pinochet was not a poor man and continued to have access to some funds. But defense lawyers said the retired general has no money because his accounts have been frozen.
The judge who preceded Judge Cerda in the case, Sergio Munoz, estimated Mr. Pinochet's overseas fortune at $23 million.
The overseas accounts were first reported in a U.S. Senate investigation of Riggs Bank in Washington, where Mr. Pinochet kept $8 million. Other accounts have since been discovered in Britain and other countries. Mr. Pinochet's lawyers say the money consists of legitimate donations, savings and investments proceeds.
Mr. Pinochet had previously been placed under house arrest twice on human rights charges, but courts blocked both trials because of his poor health.
Mr. Rodriguez has said he would appeal the corruption indictment. He insists that Mr. Pinochet, who suffers from mild dementia, arthritis and diabetes, remains too ill to be tried. But a team of doctors who recently examined Mr. Pinochet said he is fit to stand trial.
According to the civilian government that succeeded Pinochet in 1990, 3,190 people were killed for political reasons during his regime. More than 1,000 others remain unaccounted for after being arrested and tens of thousands fled their homeland.
44. The Go-Go Greenback WSJ November 28, 2005; Page A16
Foreign-exchange traders, like star-struck lovers, are easily blindsided. So when most economists predicted the decline of the U.S. dollar this year, pointing to expanding trade deficits, Wall Street expected doom and gloom for the world's most handsome currency and hailed Asia's hot contenders. The problem is, foreign-exchange rates often have little to do with trade figures, and the dollar rose. All hail the go-go greenback, we say, for at least a while longer.
It's been a big year for the buck. So far this year, the dollar has risen roughly 13% versus the euro and the Japanese yen. As for the biggest tease in 2005 -- that the dollar would tumble 5% to 10% versus China's domestic currency, the yuan -- well, that hasn't materialized either. Preferring stability for its fledgling domestic industries, Beijing has let the yuan rise less than 1% versus the dollar since it tinkered with its exchange-rate regime in July. But that's another story.
The dollar remains attractive to investors for a few reasons, starting with interest rates. The Federal Reserve has raised the price of credit for 12 consecutive meetings, cranking up short rates to 4%. Meanwhile, the European Central Bank, supplying euros to a sluggish Continent, is only now thinking of budging from its historic low of 2%, set in June 2003. If the dollar yields twice as much as the euro, that's an easy suitor to pick from the crowd.
That explanation has currency in Asia, too, if you'll excuse our pun. Take the recent, dramatic greenback appreciation versus the Japanese yen. At first glance, that's a bit counterintuitive, given that Japan Inc. seems (finally) to be getting on its feet again. Corporate profits are healthy, household incomes are rising, and banks' bad loans are down to manageable levels. Equity investors are plowing in; the Nikkei has been hitting five-year highs.
This resembles what happened in the U.S. last year. The difference is that the Bank of Japan has made noises that it will keep short-term interest rates at "extremely low levels." Rates already lag the Fed by a wide margin, and that's set to continue for a while. What's more, unlike most of Asia, domestic Japanese investors can put their money wherever they like -- and they're mostly buying foreign bonds. That's helping to depress the yen, too.
This will have knock-on effects around Asia and help to keep the dollar strong. Japan is a big exporting nation. If the yen doesn't rise, other export-dependent countries around the region won't want to disadvantage their local industries by letting their currencies rise. Consider what's happened in little Singapore, where the value of exports is an incredible 150% of its domestic output. The Singapore dollar, heavily managed by the Monetary Authority in the city-state, has risen only 3% this year. Guess why.
This brings us to a simple point that's usually lost on Wall Street: At the end of the day, a currency isn't a true commodity, like gold or wheat. It is a store of value. Its supply is determined by a central bank, which has a monopoly on its creation. Foreign-exchange markets are dominated by a cartel of central banks, and currency rates are a function of those central banks' monetary policies.
Nowhere is this truer than in Asia, where central banks happily attempt to manipulate foreign-exchange rates. China, Malaysia, and Indonesia have all intervened heavily in the foreign-exchange market this year. (A notable exception has been South Korea. The won has responded by holding steady against the greenback this year, helping to contain inflation.)
The relative economic health of nations of course also influences currency demand. The U.S. economy has continued to power along while most of Asia is gradually slowing and Europe bumps along. Most economists expect America to expand at around a 3.5% rate in the fourth quarter and into next year -- nothing to sniff at. Employment is rising. So far consumer spending remains strong, despite the slowdown in housing. This isn't a picture of a country in distress.
Contrary to popular wisdom, all this has happened while the U.S. current account, a measure of commercial trade in the balance of payments, hit a record $66.10 billion in September. The U.S.-Sino trade deficit to October alone was $80.4 billion. Some economists are now predicting deflationary pressure on the yuan. That's right: Wall Street was predicting the Chinese currency would rise only a few months ago, and now an opposite trend may be emerging. That shows how fickle foreign-exchange markets can be.
It also shows how politicians venture into this area at their peril when they get excited about the effects of shifting exchange rates on national "competitiveness." The overall economic causes and effects that derive from a currency's relative value are by no means as easily discerned as protectionists like to pretend, as witness the number of countries that have benefited from muscular currencies. That seems to be happening right now as the U.S. prospers with a dollar that has surprised the markets with its relative strength
45. Give Us Your Skilled MassesBy GARY S. BECKER November 30, 2005; Page A18
With border security and proposals for a guest-worker program back on the front page, it is vital that the U.S. -- in its effort to cope with undocumented workers -- does not overlook legal immigration. The number of people allowed in is far too small, posing a significant problem for the economy in the years ahead. Only 140,000 green cards are issued annually, with the result that scientists, engineers and other highly skilled workers often must wait years before receiving the ticket allowing them to stay permanently in the U.S.
An alternate route for highly skilled professionals -- especially information technology workers -- has been temporary H-1B visas, good for specific jobs for three years with the possibility of one renewal. But Congress foolishly cut the annual quota of H-1B visas in 2003 from almost 200,000 to well under 100,000. The small quota of 65,000 for the current fiscal year that began on Oct. 1 is already exhausted!
This is mistaken policy. The right approach would be to greatly increase the number of entry permits to highly skilled professionals and eliminate the H-1B program, so that all such visas became permanent. Skilled immigrants such as engineers and scientists are in fields not attracting many Americans, and they work in IT industries, such as computers and biotech, which have become the backbone of the economy. Many of the entrepreneurs and higher-level employees in Silicon Valley were born overseas. These immigrants create jobs and opportunities for native-born Americans of all types and levels of skills.
So it seems like a win-win situation. Permanent rather than temporary admissions of the H-1B type have many advantages. Foreign professionals would make a greater commitment to becoming part of American culture and to eventually becoming citizens, rather than forming separate enclaves in the expectation they are here only temporarily. They would also be more concerned with advancing in the American economy and less likely to abscond with the intellectual property of American companies -- property that could help them advance in their countries of origin.
Basically, I am proposing that H-1B visas be folded into
a much larger, employment-based green card program with the emphasis on
skilled workers. The annual quota should be multiplied many times beyond
present limits, and there should be no upper bound on the numbers from
any single country. Such upper bounds place large countries like India
and China, with many highly qualified professionals, at a considerable
and unfair disadvantage -- at no gain to the U.S.
* * *
To be sure, the annual admission of a million or more highly skilled workers such as engineers and scientists would lower the earnings of the American workers they compete against. The opposition from competing American workers is probably the main reason for the sharp restrictions on the number of immigrant workers admitted today. That opposition is understandable, but does not make it good for the country as a whole.
Doesn't the U.S. clearly benefit if, for example, India's government spends a lot on the highly esteemed Indian Institutes of Technology to train scientists and engineers who leave to work in America? It certainly appears that way to the sending countries, many of which protest against this emigration by calling it a "brain drain."
Yet the migration of workers, like free trade in goods, is not a zero sum game, but one that usually benefits the sending and the receiving country. Even if many immigrants do not return home to the nations that trained them, they send back remittances that are often sizeable; and some do return to start businesses.
Experience shows that countries providing a good economic and political environment can attract back many of the skilled men and women who have previously left. Whether they return or not, they gain knowledge about modern technologies that becomes more easily incorporated into the production of their native countries.
Experience also shows that if America does not accept greatly increased numbers of highly skilled professionals, they might go elsewhere: Canada and Australia, to take two examples, are actively recruiting IT professionals.
Since earnings are much higher in the U.S., many skilled
immigrants would prefer to come here. But if they cannot, they may compete
against us through outsourcing and similar forms of international trade
in services. The U.S. would be much better off by having such skilled workers
become residents and citizens -- thus contributing to our productivity,
culture, tax revenues and education rather than to the productivity and
tax revenues of other countries.
* * *
I do, however, advocate that we be careful about admitting students and skilled workers from countries that have produced many terrorists, such as Saudi Arabia and Pakistan. My attitude may be dismissed as religious "profiling," but intelligent and fact-based profiling is essential in the war against terror. And terrorists come from a relatively small number of countries and backgrounds, unfortunately mainly of the Islamic faith. But the legitimate concern about admitting terrorists should not be allowed, as it is now doing, to deny or discourage the admission of skilled immigrants who pose little terrorist threat.
Nothing in my discussion should be interpreted as arguing against the admission of unskilled immigrants. Many of these individuals also turn out to be ambitious and hard-working and make fine contributions to American life. But if the number to be admitted is subject to political and other limits, there is a strong case for giving preference to skilled immigrants for the reasons I have indicated.
Other countries, too, should liberalize their policies toward the immigration of skilled workers. I particularly think of Japan and Germany, both countries that have rapidly aging, and soon to be declining, populations that are not sympathetic (especially Japan) to absorbing many immigrants. These are decisions they have to make. But America still has a major advantage in attracting skilled workers, because this is the preferred destination of the vast majority of them. So why not take advantage of their preference to come here, rather than force them to look elsewhere?
Mr. Becker, the 1992 Nobel laureate in economics, is University Professor of Economics and Sociology at the University of Chicago and the Rose-Marie and Jack R. Anderson Senior Fellow at Stanford's Hoover Institution.
46. Argentina Loses A Fiscal Hawk From Key PostNew
Economic Minister Under President's Thumb, Faces Inflation Challenge
By MICHAEL CASEY in Buenos Aires and MATT MOFFETT in
Rio de Janeiro
Staff Reporters of THE WALL STREET JOURNAL
November 29, 2005; Page A16
The ouster of Argentine economic minister Roberto Lavagna is likely to push Latin America's third largest economy toward greater government intervention, as leftist President Nestor Kirchner assumes a more direct policymaking role.
Mr. Lavagna, who left amid a dispute with Mr. Kirchner over public works spending and inflation policy, was succeeded by the low-profile president of a government run bank, sparking a sell-off in Argentine stocks and bonds.
Although Mr. Lavagna's ouster shouldn't derail Argentina's brisk economic recovery, it does decrease the likelihood that Argentina will resolve some key issues that threaten the economy down the road, economists say.
With Mr. Kirchner expected to exert greater authority over the economy, Argentina is less likely to reach agreements with the International Monetary Fund on a new economic program and with foreign utility companies that have been fighting for years for rate increases. The absence of Mr. Lavagna, a fiscal hawk, also means that Argentina will probably continue to endure higher inflation, as well as interventionist anti-inflation remedies like wage-price agreements.
Mr. Lavagna had been a restraining influence on the Kirchner government's populist politics. By contrast, the new economy minister, Felisa Miceli, who had been president of the state-owned Banco de la Nacion, is little known in financial markets and expected to be largely subordinate to President Kirchner.
"In our view, Lavagna's departure and Miceli's appointment mark a clear deterioration in Argentina's policy stand, with President Kirchner reasserting himself in his perceived role as de-facto finance minister," wrote Barclays economist Jose Barrionuevo in a research note.
Many analysts also believe Lavagna's departure will accelerate the deterioration in the Kirchner government's relationships with the local business community, foreign investors and Washington. Mr. Lavagna was "much less distant than the presidency from the U.S. and from the International Monetary Fund, while the presidency believes this is the moment to deepen its ties with [Venezuelan President] Hugo Chavez," said Buenos Aires economist José Luis Espert.
For Mr. Kirchner, doing business with Mr. Chavez offers the attraction of financing without the cost of painful economic changes that the IMF imposes. Over the past year, Mr. Kirchner has tapped the leftist Mr. Chavez's deep pool of petrodollars and sold Venezuela almost $1 billion in Argentine bonds. Mr. Chavez last week agreed to expand those purchases.
Nonetheless, the new economic team will face a big challenge controlling galloping inflation. After almost three years of mostly inflation-free growth in excess of 9% per year, consumer prices have suddenly tripled. They were up 10.7% year-on-year in October, marking the highest inflation level of any major Latin American country after Venezuela.
Mr. Lavagna took office in April 2002 in the grim months after Argentina had broken its one-to-one peg between the peso and the dollar. Amid a withering contraction in the economy, Mr. Lavagna managed to stabilize the peso and slowly undo restrictions on bank withdrawals that had been imposed by an earlier government. He also spearheaded Argentina's hardball, and highly successful, negotiations with foreign bond holders, winning the country a debt reduction of around 70 cents on the dollar.
Write to Michael Casey at michael.j.casey@dowjones.com and Matt Moffett at matthew.moffett@wsj.com
47. The Myth of the Scandinavian Model From the desk of Martin De Vlieghere on Fri, 2005-11-25 19:27 http://www.brusselsjournal.com/node/510
This article was written by Martin De Vlieghere, Paul Vreymans and Willy De Wit of the Flemish think tank Work for All.
“America’s social model is flawed, but so is France’s,” the Parisian newspaper Le Monde recently wrote. According to Le Monde Europe should adopt the “Scandinavian model,” which is said to combine the economic efficiency of the Anglo-Saxon social model with the welfare state benefits of the continental European ones. On the eve of the EU’s Hampton Court Summit (October 27), one could even read that “Britain might be forced to discuss the advantages of Scandinavian models, which rely on more social security.”
The praise for the Nordic model comes from Bruegel, a new Brussels-based think tank, “whose aim is to contribute to the quality of economic policymaking in Europe.” The think tank is a Franco-German government initiative and is heavily funded by EU governments and corporations. In October Bruegel published a study “Globalisation and the Reform of European Social Models” [pdf] propagating the Nordic model.
A paper [pdf] from the economics department of Ghent University does the same. This paper, Fiscal Policy Employment and Growth: Why is the Euro Area Lagging Behind, was also subsidized by the government. In the selection of data comparing the performance of EU economies, the authors arbitrarily eliminated Ireland, Spain and Portugal (three of the four best performing EU economies) from their research and added oil-producing non-EU member Norway (which has a GDP more than 20% of which is based on income from oil). It is hardly imaginable that professors of one of Belgium’s major universities would not be aware of how this arbitrary selection must distort the results. Hence one must read their text as an ideological pamphlet rather than a scientific study.
However, despite Bruegel, distorted academic studies and the European media’s praise, the efficiency of the major Scandinavian economies is a myth. The Swedish and Finnish welfare states have been going through a long period of decline. In the early 1990s they were virtually bankrupt. Between 1990 and 1995 unemployment increased five-fold. The Scandinavian countries have not been able to recover.
The implosion of the welfare state
In 1970, Sweden’s level of prosperity was one quarter above Belgium’s. By 2003 Sweden had fallen to 14th place from 5th in the prosperity index, two places behind Belgium. According to OECD figures, Denmark was the 3rd most prosperous economy in the world in 1970, immediately behind Switzerland and the United States. In 2003, Denmark was 7th. Finland did badly as well. From 1989 to 2003, while Ireland rose from 21st to 4th place, Finland fell from 9th to 15th place.
Together with Italy, these three Scandinavian countries are the worst performing economies in the entire European Union. Rather than taking them as an example, Europe’s politicians should shun the Scandinavian recipes.
Jobs
While a poorly performing economy such as Belgium’s was able to create 8% new jobs between 1981 and 2003, Sweden and Finland were unable to create any jobs at all in over two decades. Denmark did a little better because it “activated” its labour market by making it more “flexible.” It became easier for employers to fire people. For workers in the construction industry the term of notice was reduced to five days. Unemployment benefits were restricted in time, while those who had been unemployed for a long time, and young people could lose benefits if they refuse to accept jobs, including low-productivity jobs below their level of training or education. The result is that productivity growth in Denmark is lower than in Sweden and Finland.
These draconian measures reduced the unemployment rate, but did not eliminate the cause of unemployment, namely the total lack of motivation on the part of employees and employers resulting from the extremely high taxation level. Despite the painful measures, the growth of Danish productivity and prosperity has been substandard. Disappointment in Danish politicians is one of the reasons for the rise of the far right.
Weak government, bad government
Why are the Scandinavian countries doing such a bad job,
despite their Protestant work ethic and devotion to duty? The main cause
is the essence of the nanny state: its very high tax level. Between 1990
and 2005 the average overall tax burden was 55% in Finland, 58% in Denmark
and 61% in Sweden. This is almost one and a half times the OECD average.
In his research into the causes of growth differences between OECD economies the American economist James Gwartney showed that there was a direct correlation between economic growth and tax burden. The higher the level of taxation, the lower the growth rate. The explanation for this phenomenon is as logical as it is simple. The higher the tax level, the lower the incentive for people to make a productive contribution to society. The higher the fiscal burden, the more resources flow from the productive sector to the ever more inefficient government apparatus.
Ireland: the efficient alternative
Ireland has proved that a substantial lowering of the taxation level can become the motor for launching even the most slackish economy into full gear. A drastic reduction of the Irish tax rate, from 53% in 1986 to its current 35% , has led to a continuous boom of wealth creation at an average rate of 5.6% during the past two decades, while the number of jobs has grown by over 50%. In barely 18 years Ireland jumped from the 22nd to the 4th place in the OECD prosperity ranking. Ireland did not reduce its social welfare benefits. On the contrary. The unprecedented growth led to an increase of fiscal revenue and social expenditure. It was sufficient to improve the productivity of the government.
One crucial element of the Irish model is its “fair tax” system, in which there is less emphasis on taxing labour and profit and slightly more on taxing consumption. This balance between direct and indirect taxation motivates labourers and entrepreneurs to make productive contributions. It stimulates new initiatives and guarantees a high degree of participation.
Such a fiscal system does not put the entire burden of financing social security on domestic production. Indeed, a consumption tax ensures that foreign production also contributes evenly.
The Irish model combines the so-called “active welfare state” of continental Europe with the Anglo-Saxon liberal economy in a balanced fashion. The model is efficient. Ireland surpasses all other EU members in prosperity, job creation, social expenditure and productivity per working hour.
Investing in the future
The difference between the wealth destructive Scandinavian model and the booming Irish alternative is obvious for all to see. Strangely enough, however, the French and German governments do not seem to notice. Those in Belgium do not, either. The Belgian government recently proposed a new policy plan inspired by the Danish model. The tax level is not reduced, the fiscal burden is not being shifted from production to consumption, but instead from one production factor (labour) to another (capital) which is already overburdened.
Saving is discouraged, too. After deducting inflation and the witholding tax, which under the European savings taxation directive will soon amount to 35%, the real net interest rate will be –2%. This means that every person in his thirties who is saving 1.00 euro today, will only have the equivalent of 0.54 euro when he turns 60. In barely six years the Belgian savings rate has already dropped by more than a quarter: from 12.4% in 1998 to 9.1% in 2004. The savings rate will drop even further, thereby drying up all reserves for investment. Like work, saving and investing, too, must be profitable if people are to engage in these activities.
Excessive taxation
2004 witnessed a record world economic growth of 5%. China and India are booming, the US and Japan are recovering. Gwartney’s findings explain why continental West European countries, such as Belgium, did not see their economies grow. The Belgian tax burden is 9% higher than the OECD average and 15% higher than the tax level in the US and Japan. If continental Western Europe does not change its policies, its relative impoverishment today will soon turn into absolute pauperization.
Its tax structure is not adapted to the challenges of globalization. Taxes on production are the opposite of import taxes. They double Europe’s production costs and, in doing so, halve its productivity. Like protectionism they lead to distortions in world trade, but they do so in the opposite direction. Ever more rapidly, continental Western Europe is losing its semi labour-intensive sectors to countries where productivity is even lower than in Western Europe. This move from high productivity to low productivity countries is a waste. It is not only a catastrophe for Western Europe’s employment. It is also bad for the world at large because the highly productive production apparatus and infrastructure of Western Europe is not used to its full capacity. This leads to less than optimal global labour division and wealth creation.
Politicians must realize that economic growth is not brought
about by fiscally punishing productive citizens, nor by collective impoverishment
and social welfare cuts, but by cutting taxes and bureaucracy. Ireland
has shown that it can be done and how to do it.
Trackback URL for this post:
http://www.brusselsjournal.com/trackback/510