1.Mexico Offers a Ray of Hope Postelection Rebound
May Portend Emerging-Market Gains
*2. Foreign aid to Africa Jun 27, 2006 by Walter E.
Williams ( bio | archive | contact )
3. Don't Restrict Immigration, Tax IT
4. Gorged on Subsidies
5. FOREIGN AID HAS FLAWS
*6. WHAT UNDERMINES AID'S IMPACT ON GROWTH?
7. Islamocapitalism
8. WHAT DETROIT CAN LEARN FROM BANGALORE
*9. STOCKHOLM SYNDROME
*10. Swedish Models 6-5-06 Johan Norberg
11. EAST GERMANY REMAINS PRO-STATE
12. WHAT'S WORSE THAN BEING EXPLOITED? NOT BEING EXPLOITED.
13. Will Chile's President Flunk the Test? By MARY
ANASTASIA O'GRADY
*14. Is autocracy bad for growth? Tyler Cowen
15. Colombia's Window of Opportunity By MARY ANASTASIA
O'GRADY
16. What Single Market?
17. Undermining Mongolia
18. Democracy at Risk South of the Border By MANUEL
SUAREZ-MIER
19. Behind the Euronext Deal
20. Inflation Nation By STEVE H. HANKE WWSJMay 24,
2006; Page A14
*21.Paved With Good Intentions A crusading economist
argues that utopian foreign aid plans do little to ease world poverty.Reviewed
by David Ignatius Sunday, May 21,
2006; Page
BW06 ThE WHITE MAN'S BURDEN Why the West's Efforts to Aid the Rest
22. How To Break Open the Mexican Piñata By
MARY ANASTASIA O'GRADY WSJ May 12, 2006; Page A19
*23. Tales from Mugabeland
24. Caring vs. uncaring May 10, 2006 by Walter E.
Williams ( bio | archive | contact ) http://www.townhall.com/opinion/columns/walterwilliams/2006/05/10/196682.html
25. Costa Rican Poverty Fighter By MARY ANASTASIA
O'GRADY
*26. Baltic Tiger
27 Fed study confirms benefit of tax competition.
28. What is the optimal size of government spending
in Europe? P
*29. Women benefit from export-oriented factory job
*30. Indian Lessons By JAGDISH BHAGWATI
WSJ February 28, 2006; Page A16
31. Welcome to the Club of Losers
32. GLOBAL ECONOMY DEMANDS TAX REFORM
33. ECONOMIC EFFECTS OF MEXICAN MIGRATION
*34. Ben Friedman's, "The Moral Consequences of Economic
Growth"
*35. The flat tax depak lal WSJ December 23, 2005
36. Intangible Wealth and Institutional Economics
Arnold Kling
37. THIRD WORLD ECONOMIC DREAMS
38. Big success for Romania's flat tax. The
39. The Terms of Trade Africa Needs Freer Markets
-- and Fewer Tyrants By FRANKLIN CUDJOE WSJ December 14, 2005; Page A20
*40. WHY AMERICA GROWS FASTER THAN EUROPE
41. EMIGRATION IS AN INCENTIVE FOR EDUCATION
42. WAL-MART AS RED HERRING
43. DDT RE-EMPHASIZED IN MALARIA FIGHT
*44. Au Revoir, Les Entrepreneurs Font
Size: By Nima Sanandaji : BIO| 30 Aug 2006
45. China Revises Upward GDP Data for 2005
*46. Does the youth dependency ratio drive economic
growth?Tyler Cowen http://www.marginalrevolution.com/
47. Macedonia seeks to become the Estonia of the Balkans.
*48. Missing Children 1. By GARY S. BECKER WSJ September
1, 2006; Page A14
*49. Eyeing the Irish Tiger
50. OECD Expects Slower Growth In Euro-Zone, Pickup
in U.S., Japan By DAVID GAUTHIER-VILLARS
51. Malaysia's Tax Smarts
52. Women in Chile
53. NEW EUROPE'S BOOMTOWN
54. The Protectionist Backlash By GORDON BROWN WSJ
September 6, 2006; Page A20
1.Mexico Offers a Ray of Hope Postelection Rebound
May Portend Emerging-Market Gains
By JASON LEOW
WSJ July 5, 2006; Page C12
As the Mexican stock market takes off in postelection relief, some investors and analysts are wondering if more broadly the worst might be over for emerging-market stocks after a miserable May and June.
Over six weeks, investors redeemed $15.9 billion from emerging-market stock funds, according to the Cambridge, Mass., firm Emerging Portfolio Fund Research Inc. That represents more than 6% of all emerging-market assets, the biggest outflow in two years. But the net selling in this asset class in the final week of June totaled $487 million, much less than the $2 billion the week before. "There's been a realization that there is no widespread contagion in emerging markets," says Brad Durham, Emerging Portfolio Fund Research's managing director.
In the latest signs, Mexican stocks surged Monday on reports that the conservative presidential candidate, Felipe Calderón, the market favorite, held a lead in a close election. The benchmark IPC index was up 4.8%, or 913.65 points, to 20060.82, and up nearly 13% on the year. Yesterday the IPC index rose 268.67, or 1.3%, to close at 20329.49.
With U.S. stock markets closed because of Independence Day, trading volumes were low yesterday on many world exchanges. In London, the FTSE 100 index ended at 5883.5 points, down 0.9, or 0.02%, as a rise in property stocks on easing interest-rate fears cushioned a retreat by oil shares. In Tokyo, the Nikkei 225-stock Average rose 0.43%, or 66.88 points, to 15638.50, as Canon and other blue-chip shares gained on hopes for strong earnings ahead.
A broader boom in emerging-market stocks gave way in May to fears about global inflation and interest-rate increases. Most of these markets were up strongly in the first four months of the year. But in May and June, major indexes around the world had fallen anywhere from 3.4% in Chile to 8.8% in South Korea to 9.8% in Russia to 12% in India and a jaw-dropping 19.5% in Turkey. The outlier was China, where Shanghai's U.S. dollar-denominated B-shares gained 1.8%.
By comparison, the Standard & Poor's 500-stock index dipped 2.7% in the past two months. "If inflation fears remain contained and the growth outlook continues, we should have a pretty good second half of the year," said Christopher Smart, who manages $450 million of assets for Pioneer Emerging Markets Fund.
Inflation and rising interest rates in the developed countries could hurt emerging economies by slowing the expansion of their major export target -- the U.S. But last week, the Federal Reserve signaled that it would consider a pause in its rate-increase campaign when it next meets in August, easing some fears in world markets.
"Our portfolio is positioned to take advantage of Korea, Russia and Brazil going forward," said Christopher Palmer, who manages $3 billion of emerging-market assets for Gartmore Investment Management. "I still think there's plenty for emerging-market investors to explore and benefit from."
One reason for some optimism about emerging markets: They
look relatively inexpensive to some investors. Polish stocks on average
trade at 13.5 times their earnings of the past 12 months. That is much
lower than the price/earnings multiple for stocks in the S&P 500 index
for U.S. stocks of 16.7 times earnings.
[Results Are In?]
Multiples are lower elsewhere: 13.1 times in Mexico, 10.7 times in Singapore, 10.9 times in South Korea and 10 times in Brazil. The exception: India, where the Sensex was trading at 19 times earnings after the selloff.
Morningstar Inc., the Chicago research firm, tracks 93 emerging-market stocks, including those from Latin America, Korea, Brazil, Russia, India and China. It compared the median market price for each region's stocks with an estimate of the underlying value of the companies, based on the cash flows they are expected to produce.
By that gauge, Latin America had some of the best buys. Companies there were 10% overpriced five days after May 10, when the selloff began. By June 27, they were 5% undervalued. They compared favorably with Morningstar's valuation for U.S. stocks, which were 3% undervalued June 27.
Latin American countries are big exporters of commodities like pulp and copper. Because commodity prices have risen beyond expectations, they have helped to push up earnings-expansion forecasts for the region.
Michael Woolfolk, a senior currency strategist with the Bank of New York, says his bets are on Brazil, whose economy has expanded on the back of soybean and iron-ore exports and boasts strong foreign-direct investment.
Investors and analysts agree that if the selloff continues into the next few months, they are less likely to shake off countries with strong economic bases.
Write to Jason Leow at jason.leow@wsj.com
2. Foreign aid to Africa Jun 27, 2006 by Walter E. Williams ( bio | archive | contact )
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British Prime Minister Tony Blair, along with other G-8 leaders, have called for the doubling of foreign aid to African nations by 2010. The idea that foreign aid is a route out of poverty and political instability is not only bankrupted but a cruel and evil hoax as well.
Nearly every sub-Saharan African nation is poorer now than when they became independent during the '60s and '70s. Since that time, food production has fallen by roughly 20 percent. Since 1975, per capita GDP has fallen at a rate of half of one percent annually. Nigerian President Olusegun Obasanjo estimated, "Corrupt African leaders have stolen at least $140 billion from their people in the [four] decades since independence." The call for more aid by George Bush, Tony Blair and other G-8 leaders will produce nothing but more of the same.
Zimbabwe provides an excellent example of why foreign aid, as a way out of poverty, is a fool's errand. Salem University, Winston-Salem, N.C., professor Craig Richardson explores this further in "Learning from Failure: Property Rights, Land Reforms, and the Hidden Architecture of Capitalism," a paper written for the American Enterprise Institute's Development Policy Outlook Series (2006). Not that long ago, Zimbabwe was one of the more prosperous African countries. Professor Richardson writes, "Few countries have failed as spectacularly, or as tragically, as Zimbabwe has over the past half decade. Zimbabwe has transformed from one of Africa's rare success stories into one of its worst economic and humanitarian disasters." It has the world's highest rate of inflation, currently over 1,000 percent. To put this into perspective, in 1995, one U.S. dollar exchanged for eight Zimbabwe dollars; today, one U.S. dollar exchanges for 100,000 Zimbabwe dollars. Unemployment hovers around 80 percent. Its financial institutions are collapsing. The specter of mass starvation hangs over a country that once exported food.
What's the cause? President Robert Mugabe blames domestic and foreign enemies, particularly England and the United States for trying to bring about his downfall. Of course, according to Mugabe, and some of the world's academic elite, there's that old standby excuse, the legacy of colonialism and multi-national firms exploiting the Third World. The drought is used to "explain" the precipitous drop in agricultural output. Then there's AIDS.
Let's look at drought and AIDS. Zimbabwe's next-door neighbor is Botswana. Botswana has the world's second-highest rate of AIDS infection, and if there's drought in Zimbabwe, there's likely a drought in Botswana, whose major geographic feature is the Kalahari Desert, which covers 70 percent of its land mass. However, Botswana has one of the world's highest per capita GDP growth rates. Moody's and Standard & Poor gives Botswana an "A" credit rating, the best credit risk on the continent, a risk competitive with countries in central Europe and East Asia.
Botswana compared to her other African neighbors prospers not because of foreign aid. There's rule of law, sanctity of contracts, and in 2004, Transparency International ranked Botswana as Africa's least corrupt country, ahead of many European and Asian countries. The World Forum rates Botswana as one of Africa's two most economically competitive nations and one of the best investment opportunities in the developing world.
Botswana shares a heritage with Zimbabwe, for it, too, was a British colony. What it doesn't share with Zimbabwe explains its success: the rule of law, minimal corruption and, most of all, respect for private property rights. No amount of western foreign aid can bring about the political and socioeconomic climate necessary for economic growth. Instead, foreign aid allows vicious dictators to remain in power. It enables them to buy the allegiance of cronies and the military equipment to oppress their own people, not to mention being able to set up "retirement" accounts in Swiss banks. The best thing westerners can do for Africa is to keep their money and their economic development "experts."
Dr. Williams serves on the faculty of George Mason University
in Fairfax, VA as John M. Olin Distinguished Professor of Economi
De Soto and Karol Boudreaux http://www.enterprise-africa.org/Publications/pubID.2464,cfilter.0/pub_detail.asp
Don Boudreaux
Hernando de Soto's important work reveals the power residing in secure, transferable property rights. But to secure these rights, to make them sufficiently transferable, and to make them assignable so that they can serve as security for loans requires more than a mere formal legislative declaration that henceforth property will be titled and secure.
My wife's, Karol's, research in sub-Saharan Africa brings this point home. Here's her latest; it's a study of land-titling in South Africa's Langa Township. These passages from the executive summary are central:
To better understand the effects of land titling and property reform the researchers—Eustace Davie, Temba Nolutshungu, Jasson Urbach of FMF and Karol Boudreaux and Susan Anderson of the Mercatus Center interviewed homeowners, business owners, and public officials to learn first hand whether or not homeownership is promoting economic growth in the community.
The team found that having a secure title to property does create incentives to improve property and build communities. Secure titles also provide home owners with space for business activities—renting shacks in backyards, opening restaurants, or starting other home-based businesses. However, the study suggests that is unrealistic to assume that homeowners in the developing world will take that next crucial step and use their titles as collateral for commercial loans that are the key to promoting economic growth.
Home and business owners pointed to
the difficulty of repaying loans, the expense and complexity of formal
transfers of property, and regulatory burdens that make it costly to grow
and expand small businesses as primary reasons why they viewed using home
titles as collateral too risky.
3. Don't Restrict Immigration, Tax It
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By Nathan Smith : BIO| 20 Jun 2006
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The goal of this article is to outline an open borders policy that achieves "Pareto-improvement." Sounds boring, I know. But bear with me. Pareto-improvement, a term from economics, means that some people are made better off while no one is made worse off. In a complex world, it is impossible for a policy literally to make no one worse off. But policies can be designed that, while many benefit, no social group can be identified that is systematically harmed.
Simple freedom of migration, like simple free trade, does not satisfy the Pareto-improvement criterion. While the theory of comparative advantage proves that when Country A opens its markets to goods from Country B, Country A as a whole will be better off, within Country A there will be "winners," such as workers and capital owners in the industries which can penetrate new export markets, and "losers," such as import-competing industries.
Likewise, if Country A opens its borders to immigration from Country B, the native-born population of Country A as a whole will be better off -- by "a fraction of 1%" in Americans' case, according to one estimate -- but there will be some losers -- US high-school dropouts may be earning as much as 8% less than they would be absent immigration.
Whether this kind of policy is a good thing depends on the social welfare function, that is, on how much policymakers should value the well-being of different people. Many critiques of immigration assume that the government should emphasize the well-being of low-skilled native-born Americans, discount the well-being of American-born employers and skilled workers who benefit from complementarities with immigrants, and ignore the well-being of immigrants themselves. Stated baldly, this doesn't sound very moral. And one tactic of immigration advocates is simply to make it explicit. "Are low-skilled Americans the master race?" asks economist-blogger Bryan Caplan. (Some call this patriotism, but they are confusing love of country, a virtue, with non-love of people from other countries, a vice.)
To make the argument that underlies Caplan's rhetorical salvo, we would have to venture outside economics into moral philosophy. We might invoke Rawls' "veil of ignorance" device. If you had to design a world order from behind a veil of ignorance as to your position in it, would you (be honest now) design one in which you had a 42 percent chance of being born into a country with under $1,000 GDP per capita, and forced to stay there, not by distance or natural obstacles, but by man-made visa regimes and border controls -- all in order to protect the wages of people at least 10-20 times better off than yourself? However, it's my belief that however incontrovertible the case for it may be from the perspective of reason and justice, before advocating a course of action that one foresees is likely to harm real people, one should pause and see if there's a better way.
Fortunately there is. Economists have already solved the problem in the context of trade theory. To make free trade, or freedom of migration, Pareto-improving, it may be necessary to tax the winners and compensate the losers.
To apply this approach to migration is actually easier than with trade, because the biggest group of winners -- the immigrants themselves -- is an easily identifiable group, with distinct legal status. As for the losers, while there is no conclusive evidence about who (if anyone) is harmed by immigration, we could err on the generous side by providing immigration adjustment assistance to the American-born working poor generally.
How to Tax Immigration
The reason that open borders can lead to Pareto-improvement is because, aside from being unfair, border restrictions are also hugely inefficient. A whole lot of people who would be far more productive in America are forced to stay somewhere else. Since immigration makes the pie much bigger, everyone can get a bigger piece. Here's how.
* First, an open borders policy must be resolute in denying welfare and taxpayer-funded social services to (most) immigrants, because any social safety net provided in the US will represent a higher standard of living than what prevails in many countries.
* So, as an alternative "social safety net" for immigrants, every immigrant -- or guest worker -- should deposit at a US consulate (or at private firms authorized by the US government to administer this transaction) an amount equal to the cost of deporting them. Having made this deposit, the guest worker should be deported at his or her own pre-paid expense if he becomes unable to support him- or herself.
Second, one interest that is typically ignored in US policy discussions is the source countries. The effect of emigration on poor countries is ambiguous. Emigration may alleviate unemployment. Emigrants send home remittances. Emigrants may boost the economy when they return with skills and savings. But poor countries can also suffer from "brain drain," losing their best and brightest, including skilled workers in crucial fields such as health care. To offset possible negative effects of brain drain, we can increase the incentive of guest workers to return home through a forced savings program. When a guest worker is issued a visa, a special savings account would be created for him. When he gets a job, a certain percentage of each paycheck would automatically be deposited in this account. Guest workers will not be allowed to withdraw money from the account, except in their home countries. Or they can stay, accumulate a certain amount -- a citizenship threshold -- in their guest-worker savings account, and become citizens, at the cost of forfeiting the savings accounts. Forfeited savings accounts could be distributed equally among all US citizens, on an annual basis.
Finally, a surtax will be charged to guest workers, the proceeds of which will be paid out either to all American workers, or targeted to the working poor, ensuring that American-born workers will have a higher standard of living than guest workers who earn the same market wage.
In a recent article -- "A Right to Migrate" -- I suggested that the surtax could be set at 12.4% (i.e., the Social Security payroll tax), the mandatory savings rate at 20%, and the citizenship threshold at $50,000. But the important thing is that these are variables. By manipulating the levels of these variables, Congress could achieve a wide range of policy objectives. The policy is compatible with a moderately restrictionist approach to immigration, if the citizenship threshold, as well as the surtax and/or the mandatory savings rate, were raised to very high levels. Or, if we wanted to maximize revenue, we keep the surtax and the citizenship threshold at a moderately high level, low enough to attract a large number of immigrants and guest workers, high enough to glean substantial revenues from them. Or, if our top priority is foreign aid, we would set the citizenship threshold and the mandatory savings rate high, but the surtax very low.
Given the technical complexity of managing immigration by means of these policy instruments, Congress might be wise to delegate immigration policy to an independent agency, similar to the Federal Reserve, which would be given a broad mandate, such as: "Maximize the foreign aid effect of migration, subject to the constraint that the poorest 30% of American workers are compensated for any migration-related welfare losses, while keeping the total number of guest workers at or below 15% of the US resident population." This agency would then continuously study patterns of migration and their effect on labor markets, source countries, and the American-born working poor, and then adjust its three policy instruments periodically.
But it would never set quotas or caps. Migration taxes would monetize, and force potential migrants to internalize, the perceived negative externalities of immigration. But the government would abdicate the discretion (except on national security grounds) to admit or reject particular immigrants. The migration decision would be left where it should be, in the hands of the immigrant, who has the best information of all about just how badly he or she wants to come to America.
Who Would Use the Guest-Worker Visa?
I hasten to say -- my Pareto-improvement criterion requires it -- that current (legal) immigrants would not be affected by the new policy, nor would future immigrants coming through currently available legal channels. Our entire immigration apparatus would exist, at least for a while, while a new channel of immigration opened up alongside it. Immigrants through traditional channels would become a special set of immigrants exempted from the extra taxes other immigrants had to pay. Which raises the question: why would anyone want to use the new guest-worker visa at all?
One reason is that many people -- indeed, most people in this world -- are, in effect, permanently excluded from America by our border regime. Since immigration became a hot topic, I have been surprised to see, not only how many ordinary people, but how many leading opinion-makers don't understand this. For example, Duncan Currie in the Weekly Standard, in arguing that a US-Mexico border fence is not the moral equivalent of the Berlin Wall, wrote this:
"Despite... elite skepticism, polls show that most Americans support security fencing along the Mexican border. Unless they are all nostalgic for Walter Ulbricht and Erich Honecker's East Germany, these Americans seem to reject the 'Berlin Wall' sneers. They must appreciate the stark difference between a totalitarian regime that treated its own citizens as prisoners and a liberal democracy that merely wishes to drive illegal aliens into the proper immigration channels." (my italics)
What Currie and others fail to appreciate is that only 10,000 visas are available to unskilled immigrants on an annual basis, compared to tens of millions who would like to come. "Proper immigration channels" were never available to the vast majority of the 12 million illegals who work here on farms, in shops, offices, and homes. If they admired America, if they loved America, if they wanted to be part of America, illegality was their only option.
Politicians like to say that illegal immigrants will go to "the back of the line." This is nonsense, because it suggests that while there is a long line to get into the US, illegal immigrants could have waited and gotten to the front eventually. Our immigration system permanently shuts out most of humanity based on their place of birth.
In addition to the low-skilled laborers that our current border regime does not admit legally, the guest-worker visa outlined above would no doubt be attractive to tourists and students, who, not intending to work, would not be affected by extra taxes on earnings. But if my experience is any guide, many people who could come to the US through normal channels might nonetheless opt for the guest-worker visa.
My wife, a Russian national, recently received her Green Card. The process took two years -- a few months to get a fiancée visa to the US, which was our longest-ever separation, and then a year-and-a-half after her arrival before her permanent residency was authorized. During that time she was not allowed to work. The waiting and uncertainty, the separations, and the forced unemployment, were traumatic and depressing. And I would estimate her lost earnings and other costs associated with the process at about $50,000. It would have been more morally satisfying for us to have earned that $50,000 and paid it in taxes, knowing that it was being channeled to less fortunate Americans to help them adjust to the marginal labor-market impact of my wife's immigration.
Creating a new channel of immigration can't make guest workers worse off. If surtaxes and mandatory savings are too big a burden, they simply won't come, and they'll be in the same position as before. You can never harm a person by giving him one more option.
Hobbes, Locke and Border Enforcement
Since there's been persistent divergence between de jure and de facto US policy on immigration, any new policy proposal needs to come with a comment on enforceability. Here, too, taxing rather than restricting immigration has its advantages.
There's a widespread belief that the federal government is willfully refusing to enforce our immigration laws. I doubt it. Consider the following back-of-the-envelope calculation: "The INS inspects approximately 300 to 350 million foreign nationals each year for admission to the United States," according to the testimony of one Mark A. Mancini before the Judiciary Committee in 1999. Subtracting 24 million who actually do come, let's round that off to 300 million would-be visitors or migrants. Pew Research Center estimates that 500,000 cross the southern border each year. Another 100,000 may overstay their visas. This implies that -- if applicants for US visas are a reasonable proxy for the number who wish to come -- our border regime deters or prevents 99.8% of unauthorized would-be entrants to the United States. That's not an "open system of non-borders," as Victor Davis Hanson has described it. The US border regime must be one of the most effective systems of mass coercion in human history. Yet it still falls short.
A year ago I wrote an article called "Hobbes, Locke, and the Bush Doctrine," which began with the words: "A struggle is underway between two ideas: liberal democracy and sovereignty... It goes back to 17th-century England, where the respective proponents of the two views were John Locke and Thomas Hobbes."
I used this conceptual framework to discuss the Iraq War, but Locke and Hobbes are equally applicable to immigration. Locke believed that government is based on a social contract. A contract implies consent. When Jefferson and the Founding Fathers affirmed, in the Declaration of Independence, that "governments... derive their just powers from the consent of the governed," they were channeling Locke. Foreigners are not part of our social contract. With respect to them, we are in a state of nature. To Locke, the moral law is binding in the state of nature, so they cannot justly do, or threaten, violence to our persons or property, nor vice versa. Hence, in the Lockean framework, our government does not have the "just power" to prevent the entry of (peaceful) foreigners through coercion. Historian Paul Johnson describes immigration to America in 1815, when the American polity was closer to its Lockean roots:
"It was an astonishing moment of freedom in the world's history. An Englishman, without passport or papers, health certificate or any other documentation -- without luggage for that matter -- could plunk down £10 at a shipping counter in Liverpool and go aboard. He got nothing but water on board and had to provide for his own food. He might go down to the bottom but, if lucky, in due course he went ashore in New York, no one asking him who he was or where he was going. He then vanished into the entrails of the new society." (The Birth of the Modern, p. 204)
Hobbes believed in a social contract, too, but "consent" could be exacted by force. For Hobbes, in the absence of a social contract, the moral law is not binding. So, since illegal immigrants are not part of our social contract, we can do anything we want to them, shut them out, deport them, kill them, whatever.
Our border policies can be justified in Hobbesian terms but not in Lockean terms. Of course, we are free to be eclectic in our appropriation of 17th-century philosophers' ideas. The problem is that our polity is generally a Lockean one, and as such it is not good at enforcing Hobbesian laws. We regard illegal immigrants, in Lockean fashion, as human beings with rights and dignity. This attitude is not consistent with the creation of effective deterrents to illegal immigration. Since illegal immigrants are hard to catch, and their economic payoff is huge, punishment adequate to deter them would have to be very severe. Probably nothing short of regular pogroms would work. A Hobbesian would have no objections to that ("the Soveraigne is judge of what is necessary for the Peace and Defence of his Subjects") but we do.
Unlike immigration restrictions, immigration taxes are compatible with the principle of consent of the governed. A foreigner who comes to America with a guest-worker visa would thereby consent to pay the associated taxes. A foreigner who comes here without a visa would be guilty, not so much of illegal entry as of a form of tax evasion, and the state would respond, not by deporting him, but by confiscating his property. Enforcement would still be a challenge and require political will, but it would be possible, as it is not now, to get incentives right within the constraints of our ideas of justice.
A Paradigm Shift
In principle, since taxing rather than restricting immigration is in the interests of the median voter, a majoritarian democracy should be willing to pass it. Yet the idea of using immigration as a revenue source to offset perceived negative externalities has hardly been mentioned in the immigration debate. I don't think doubts about its feasibility are the reason. Rather, there's an ethical hang-up: people think it's discriminatory to make immigrants pay higher taxes, yet somehow it's not discriminatory to keep them out altogether, which hurts them much more.
Still, I think taxing immigration is an idea with a future, simply because it's the "rational middle ground" for which everyone is looking.
Nathan Smith is a TCS contributing writer.
4. Gorged on Subsidies
WSJ June 22, 2006
Developed countries milk their citizens to prop up farmers.
Yesterday's U.S.-EU summit did little to end the finger-pointing over which side of the Atlantic is holding up the Doha trade talks by refusing to budge on farm support. The blame game is so entrenched as the central story of the negotiations that an OECD report on rich-country agriculture policies, also released yesterday, may go largely unnoticed.
If so, that's too bad. The Paris-based outfit's study shows that many developed countries continue to milk their citizens -- both as taxpayers and consumers -- to prop up uncompetitive but coddled farmers.
The headline figure is the $280 billion, or €225 billion, that wealthy nations handed out to farmers in 2005. The, ahem, honor roll goes like this: The European Union spent the most on its farmers last year, $133.8 billion. Next was Japan at $47.4 billion, and then the U.S. at $42.7 billion. Those three account for four-fifths of the rich world's agricultural subsidies.
In relative terms Switzerland, which is not an EU member, spent the most on its farmers: Subsidies made up a whopping 68% of its farm economy. The Swiss were followed by Iceland at 67% and Norway at 64%. EU subsidies equaled 32% of the bloc's farm economy last year; in the U.S., the figure was 16%.
More than two-thirds of this support comes in the form of government payments that rise as a farmer's production rises (irrespective of market demand) or that help him buy water, seed, machinery and other "inputs" at below-market prices. In other words, they are the sort of subsidies that distort prices and trade the most. Fifty-eight percent of EU farm output is tied to production or input supports, compared with 55% in the U.S. (This doesn't include America's "counter-cyclical" payments to farmers, which are made when crop prices fall below a certain level; if included, the U.S. figure would soar to 67%.)
Unfortunately, taxpayers aren't being repaid for their involuntary generosity at the grocery store. The OECD estimates that 57% of farm subsidies were "provided through policies that raise prices in the domestic market."
Doha Round negotiators will of course point out that only
a portion of these subsidies are included in the current talks. Fair enough.
Our point is that farm liberalization shouldn't hinge on whether or how
much other trade partners lower their barriers to Western goods and services.
The people of Europe, America, Japan and elsewhere would benefit from any
move to free up agricultural trade, even a unilateral one.
5. FOREIGN AID HAS FLAWS
------------------------------------------------------------------------
Foreign aid often doesn't work very well, says William
Easterly, a
former World Bank official who is now an economics professor
at New
York University, in his provocative new book, "The White
Man's
Burden."
According to Nicholas Kristof of the New York Times, Easterly's
argument is right: helping people can be much harder
than it looks. For
example:
o When people are chronically
hungry, for example, shipping in
food can actually
make things worse, because the imported food
lowers prices and
thus discourages farmers from planting in
the next season.
That's why the United Nations, when spending
aid money, tries
to buy food in the region rather than import
it.
o International agencies are
also more successful at
maintaining SUVs
than clinics. One reason is that budgeting is
often done annually,
and one of the ways to spend a grant in a
single year is to
buy a vehicle.
It's well-known that the countries that have succeeded
best in lifting
people out of poverty (China, Singapore, Malaysia) have
received
minimal aid, while many that have been flooded with aid
(Niger, Togo,
Zambia) have ended up poorer. Thus many economists
accept that
aid doesn't generally help poor countries grow, but argue
that it does
stimulate growth in poor countries with good governance.
That was
the conclusion of a study in 2000 by Craig Burnside and
David Dollar.
Easterly repeated that study, using a larger pool of data,
and -- alas
-- found no improvement even in countries with good governance,
says
Kristof.
Saddest of all, Raghuram Rajan and Arvind Subramanian
of the
International Monetary Fund have found that "aid inflows
have
systematic adverse effects on a country's competitiveness."
Source: Nicholas Kristof, "Foreign Aid Has Flaws. So What?"
New York Times, June 13, 2006.
For text (subscription required):
http://select.nytimes.com/2006/06/13/opinion/13Kristof.html
For more on International:
http://www.ncpa.org/iss/wel/
------------------------------------------------------------------------
6. WHAT UNDERMINES AID'S IMPACT ON GROWTH?
------------------------------------------------------------------------
What long run adverse effects might foreign aid have on
a country's
competitiveness? Authors Raghuram Rajan and Arvind
Subramanian
provide evidence that it has systematic adverse effects
on the growth
of labor intensive and export sectors.
This evidence takes two forms, say the authors:
o In countries that receive more
aid, the labor-intensive and
export sectors grow
slower than capital intensive and
nonexport sectors.
This by itself does not show that the
impact of aid on
export sectors is negative. But they provide
additional evidence
that the manufacturing sector as a whole
grows slower on
account of aid.
o Aid probably causes exchange rate overvaluation.
o Remittances do not seem to
have a negative competitiveness
effect because remittances
tend to slow when a country's
exchange rate starts
becoming overvalued.
Despite the fact that, for many aid-receiving countries,
the
manufacturing sector might be immediately less important
than
agriculture, that was also true for many of the fast-growing
countries
when they first embarked upon development, say the authors.
Slower growth of labor-intensive sectors induced by aid
should be a
source of concern for those who see aid as an instrument
to reduce
inequality, because labor-intensive sectors are the ones
that can
absorb the poor and landless who leave agriculture.
The authors caution that aid has to be spent effectively
so that the
productivity or welfare improvements from increased public
investment
can offset any dampening effects from a fall in competitiveness.
Source: Les Picker, "What Undermines Aid's Impact on Growth?"
NBER Digest, April 2006; based upon: Raghuram G. Rajan
and Arvind
Subramanian, "What Undermines Aid's Impact on Growth?"
National Bureau of Economic Research, Working Paper No.
11657, October
2005.
For text:
http://www.nber.com/digest/apr06/w11657.html
For study abstract:
http://papers.nber.org/papers/w11657
For more on International:
http://www.ncpa.org/pi/internat/intdex1.html
7. Islamocapitalism Font Size:
By Mustafa Akyol : BIO| 19 Jun 2006
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Is Islam compatible with modernity? This has become a hotly debated question in the past few decades. Much of the discussion focuses on issues relating to political liberalism -- democracy, pluralism and freedom of thought. Another important dimension of modernity is, of course, economic liberalism. So we should also ask whether Islam is compatible with it, i.e. a free market economy, or, capitalism.
Most Islamists would reply to this question with a resounding "no!" Since they perceive Islam as an all-encompassing socio-political system, they regard capitalism as a rival and an enemy. The struggle against both communism and capitalism has been one of the standard themes in Islamist literature. Sayyid Qutb, the prominent ideologue of the Egyptian Muslim Brotherhood, wrote a book titled Ma'arakat al-Islam wa'l-Ra's Maliyya (The Battle Between Islam and Capitalism) in 1951. At an Islamic conference held in the Spanish city of Granada on July 2003, attended by about 2,000 Muslims, a call was made to "bring about the end of the capitalist system."
However such radical rejections of the capitalist economy don't seem well-suited to the theological attitude and the historical experience of Islam towards business and profit-making. As a religion founded by a businessman -- Prophet Muhammad was a successful merchant for the greater part of his life -- and one that has cherished trade from its very beginning, Islam can in fact be very compatible with a capitalist economy supplemented by a set of moral values that emphasize the care for the poor and the needy.
Business, Zakat and the Koran
This interesting compatibility between Islam and capitalism has been studied extensively. A classic work on this theme is Maxime Rodinson's famed book, Islam and Capitalism (1966). Rodinson, a French Marxist, by appealing to the textual analysis of Islamic sources and the economic history of the Islamic world, demonstrated that Muslims had never had any trouble with making money. "There are religions whose sacred texts discourage economic activity in general," said Rodinson, "[but] this is certainly not the case with the Koran, which looks with favor upon commercial activity, confining itself to condemning fraudulent practices and requiring abstention from trade during certain religious festivals."
It is true that the Koran has a strong emphasis on social justice and this has led some modern Muslim intellectuals to sympathize with socialism and its promise of a "classless society." A careful reading of the Koran would work against such "Islamo-socialism." The Muslim Scripture takes it as a given that there will be rich and poor people in society and, in a sense, assures that disparity by actively supporting the rights to private property and inheritance. However it persistently warns the well-off to care for the deprived. Zakat is the institutionalized form of this compassion: Every rich Muslim is obliged to give a certain amount of his wealth to his poor brethren.
Zakat is a voluntary act of charity, not a collectivization of wealth by a central authority. According to scholars John Thomas Cummings, Hossein Askari and Ahmad Mustafa -- who co-authored the academic paper, "Islam and Modern Economic Change" -- "zakat is primarily a voluntary act of piety and a far cry from what most modern-day taxpayers experience when confronted with increased income levies or complicated regulations." Moreover, they add, "there is no particular Islamic preference for [a] Marxist emphasis on economic planning over market forces."
Indeed, when Prophet Muhammad was asked to fix the prices in the market because some merchants were selling goods too dearly, he refused and said, "only Allah governs the market." It wouldn't be far-fetched to see a parallel here with Adam Smith's "invisible hand." The Prophet also has many sayings cherishing trade, profit-making, and beauties of life. "Muhammad," as Maxime Rodinson put it simply, "was not a socialist."
The conceptual openness of Islam towards business was one of the important reasons for the splendor of medieval Muslim civilization. The Islamic world was at the heart of global trade routes and Muslim traders took advantage of this quite successfully. They even laid the foundations of some aspects of modern banking: Instead of carrying heavy and easily-stolen gold, medieval Muslim traders used paper checks. This innovation in credit transfer would be emulated and transferred to Europe by the Crusaders, particularly the Knights Templar.
So central was trade to Muslim civilization that its very decline may be attributed to changes in the pattern of global trade. When Vasco de Gama rounded the Cape of Good Hope in November 1497 -- thanks in part to the astrolabe, invented by Muslims -- he opened a new chapter in world history, one in which global trade would shift from the Middle East and the Mediterranean to the oceans. Consequently the Arabic Middle East, which had been scorched by the Mongols two centuries before and could have never recovered anyway, entered deadly stagnation. The Ottoman Empire would excel for a few more centuries, but decline was inevitable. The loss of trade also meant the end of cosmopolitanism; this was followed by the rise of religious bigotry. While the early commentators of the Koran cherished trade and wealth as God's bounties, late Medieval Islamic literature began to emphasize extreme asceticism.
Muslim Calvinists?
If things had not gone wrong, the business-friendly character of Islam could have well put it into the historical place of Calvinism, which, as Max Weber persuasively argued, spearheaded the rise of capitalism. Weber himself wouldn't have agreed with this comment -- he saw Islam as a religion of conquerors and plunderers, not hard-working laborers. According to Weber, Islam was an obstacle to capitalist development because it could foster only aggressive militancy (jihad) or contemplative austerity.
But Weber, in his Confucianism and Taoism (1915), argued that China could never breed a successful economy, because its culture was too nepotistic. He was pretty pessimistic about Japan's potential for economic success, too! His analyses of these non-Christian civilizations failed because he assumed the perpetuity of their forms, and, in part, misread their histories. One of the greatest Turkish sociologists, Sabri F. Ülgener -- both a student and a critic of Weber -- wrote extensively about how he, despite his genius in analyzing the origins of capitalism in the West, misjudged Islam and overlooked its inherent compatibility with a "liberal market system."
Stuck on Usury
However this compatibility is not fully unproblematic. Among the aspects of modern capitalism, there is one particular bone of contention with Islam: interest. "Allah has permitted trade", the Koran commends, "and He has forbidden riba." And riba is generally translated as taking interest from money.
That's why modern Muslims have developed "Islamic banking" as an alternative to interest-based banking. This is, in fact, a transplantation of "venture capital" as it has been developed in the West; aspects of Islamic banking are adaptations of related services like leasing, partnership, mark-up financing and profit-sharing.
While Islamic banking allows capitalism without interest, some Muslims go further and ask whether riba really includes reasonable interest. This liberal interpretation dates to the 16th century in the Ottoman Empire. During the reign of the Suleiman the Magnificent, his Sheik-ul Islam (Head of Islamic Affairs), Ebusuud Effendi, granted permission for the collection of interest by foundations working for the betterment of the society. In modern times, there are many Muslim scholars who have reinterpreted riba. Imad-ad-Dean Ahmad of the Minaret of Freedom Institute, for example, argues that the term actually means any unconscionable overcharging, whether on an interest rate or a spot price. Charging a market rate of interest, he holds, does not constitute riba.
Whether reasonable interest is allowed or not, Islam's theological and historical attitude towards business is undoubtedly positive. "The alleged fundamental opposition of Islam to capitalism," as Maxime Rodinson put it, "is a myth."
Synthesis?
If this is so, whence comes "the battle between Islam and capitalism" as envisioned by radical Islamists like Qutb?
The answer lies both in the asceticism of late Medieval Muslim thought, which remains alive today among many ultra-conservative Muslims, and in the un-Islamic origins of Islamic radicalism. The latter was born as an anti-colonialist, reactionary movement; its main aim has been to create a socio-political system to challenge and defeat the West. Since the West was built on democratic capitalism, Islamic radicals argued that its opponents must adopt an alternative political/economic vision. That's why the founding fathers of radical Islam -- such as Qutb and Mawdudi -- borrowed heavily from what Ian Buruma and Avi Margalit call "Occidentalism" -- an ideology with its origins in Heidegger's criticism of the West, adopted by Japanese fascists, the Nazis, the Khmer Rouge and, more recently, Al Qaeda and their ilk.
Yet for those Muslims whose lives revolve not around Occidentalism but around personal religiosity and a natural human desire for the good life, democratic capitalism seems quite well-suited.
Some striking examples of this phenomenon have emerged in Turkey in the past two decades. Turkey is not the richest country the Islamic world, but it is arguably the most developed. The richest are the oil-rich Arab nations, most of which, despite their petro-dollars, remain socially pre-modern and tribal. Regrettably, oil brings wealth, but it does not modernize. Modernization comes through rationality, which can be achieved only through organization, order, exchange, and risk-taking in pursuit of goals. The late Turgut Özal, one of Turkey's wiser Presidents, once said, "we are lucky that we don't have oil; we have to work hard to make money."
Özal was a pro-Western politician and a Muslim believer. His revolutionary, Reaganesque reforms during the 1980s transformed the Turkish economy from quasi-socialism to capitalism. In this new setting the conservative Muslim masses of Anatolia have found fertile ground for a socio-economic boom. Thanks to their astounding successes in business, they have been called "Anatolian Tigers." They constitute a new class that rivals the long-established, privileged, highly secularized and utterly condescending "Istanbul bourgeoisie."
The European Stability Initiative (ESI), a Berlin-based think tank, conducted an extensive study of the "Anatolian tigers" in 2005. ESI researchers interviewed hundreds of conservative businessmen in the central Anatolian city of Kayseri. They discovered that "individualistic, pro-business currents have become prominent within Turkish Islam," and a "quiet Islamic Reformation" was taking place in the hands of Muslim entrepreneurs. The term they used to define these godly capitalists was also the title of their report: "Islamic Calvinists."
The incumbent Justice and Development Party (AKP), seems to be a political echo of this rising "Islamic Calvinism" in Turkey. Most AKP members come from business backgrounds and the party has been quite pro-business from its very first day. Its leader, Prime Minister Erdogan, has repeatedly welcomed foreign direct investment from all countries -- including Israel. Recently, in a speech given at an international Islamic conference, Mr. Erdogan called on Arab leaders to redefine the Islamic ban on interest and warned that Islamic banking could turn into a "trap" that might hinder development in the Muslim world. The more such voices are raised by Muslim leaders, scholars and intellectuals, the freer markets -- and minds -- will become in the broader Middle East.
Recalcitrance
Still, many Muslims -- in Turkey and elsewhere -- despise capitalism and perceive it as something both alien and destructive to Islam. Yet this is a misdirected disdain. When you look at anti-capitalist rhetoric in Muslim circles, you will see that it is focused on sexual laxity, prostitution, drugs, crime, or the general selfishness in Western societies. Yet these are not the inherent elements of capitalism, they would be better explained by the term "cultural materialism" -- the idea that material things are the only things that matter. Most Muslims who abhor capitalism simply confuse it with materialism.
Such worried Muslims would be quite surprised to discover that some of the most outspoken advocates of the free market in the West are also staunch defenders of religious faith, family values and the healthy role of both in public life. Unfortunately, the synthesis of democratic capitalism with Judeo-Christian values -- which is basically an American, not a European phenomenon -- is not well known in the Islamic world. The America of churches and charities is poorly represented in the global mass media. Quite the contrary, what most Muslims see as standard Americans are the unabashed hedonists of MTV and Hollywood.
In other words, not all capitalists are of the flock of Mammon. The more Muslims realize this, the less they will fear opening their societies to economic development and the more they will remember the Koranic command, "spread through the earth and seek God's bounty and remember God much so that hopefully you will be successful."
Then the world will be a much safer place -- for a morally-guided quest for capital is way more peaceful than a hate-driven "battle" against it.
Mustafa Akyol is a Turkish Muslim writer based in Istanbul,
Turkey. His website is www.thewhitepath.com
8. WHAT DETROIT CAN LEARN FROM BANGALORE
------------------------------------------------------------------------
Bangalore, India, a Third World city beginning with nothing,
has
experienced meteoric economic growth, while Detroit,
once a formidable
industrial powerhouse, can't crawl out of its economic
rut. If Detroit
wants to boom again, it could learn some lessons from
Bangalore, says
Shikha Dalmia, a senior analyst at the Reason Foundation.
The factors that made India the world's economic basket
case are
precisely what have stymied Detroit's resurgence: excessive
bureaucracy, destructive taxes, and bad labor laws. India
has attacked
regulations and taxes with a vengeance, with results
Detroit's leaders
should note:
o In 1991, India dismantled
much of its licensing regime,
eliminated
all import licensing, and slashed tariffs on
capital goods.
o The Software Technology
Parks of India (STPI) gave I.T.
companies
in Karnataka a nearly complete exemption from
central government
taxes, released businesses from the
government's
telecommunications monopoly and established
a special
liaison between I.T. companies and the central
government
for all statutory approvals.
o Lax enforcement of zoning
laws and broad STPI certification
empowered
any geek with a computer and e-mail to
write and
deliver software to anyone in the world right
from his home.
Additionally:
o In 1991, India lowered
the marginal income tax rate for
corporations
and individuals to between 30 and 35
percent, slashed
the wealth tax to 1 percent, and abolished
the estate
tax.
o Last year 21 states
ended multiple state-level sales taxes.
o Around 1999, New Delhi
declared a 10-year holiday from
corporate
income taxes for all STPI-registered
companies.
By allowing companies to access the best minds and best
resources
anywhere on the planet, globalization has enriched just
about everybody
touched by it. Detroit and other depressed cities, both
in the United
States and elsewhere, desperately need to learn this
lesson, says
Dalmia.
Source: Shikha Dalmia, "What Detroit Can Learn From Bangalore,"
Reason, June 2006.
For text:
http://www.reason.com/0606/fe.sd.what.shtml
For more on International:
http://www.ncpa.org/pi/internat/intdex1.html
9. STOCKHOLM SYNDROME
------------------------------------------------------------------------
The architects of the cradle-to-grave Swedish welfare
system said that
if it couldn't work there, it wouldn't work anywhere.
Well, it didn't
and it doesn't, says Investor's Business Daily (IBD).
Funding the welfare state is a massive strain on a free
economy.
Entitlements and the administrative bureaucracy to manage
it must be
paid for. The only way to do that, aside from printing
more currency,
is to tax and tax again the wealth-, prosperity-creating
private
sector. That's a recipe for stagnation, not growth, says
IBD:
o Sweden's slope became
most slippery from 1960 to 1980, when
public spending
increased from 31 percent of the
economy to
60 percent in order to keep the Swedes rolling
in government
payments and to fund the bloated public
sector.
o Sweden today ranks about
equal with the fifth-poorest U.S.
state in per
capita income.
o Likewise, among the
wealthy nations that make up the
Organization
for Economic Co-operation and Development
(OECD), it
slipped from fifth in income in 1970 to 15th in
2004.
There's not much optimism for a turnaround. Johan Norberg,
a
Swede himself, explains in the current issue of the National
Interest
that as "old attitudes about work and entrepreneurship"
fade and
dependence on the public sector grows, the country's
once-vibrant
economy will continue to fall behind.
Source: Editorial, "Stockholm Syndrome," Investor's Business
Daily,
June 13, 2006; and Johan Norberg, "Swedish Models," National
Interest,
Summer 2006.
For text (subscription required):
http://www.investors.com/editorial/IBDArticles.asp?artsec=20&artnum=3&issue=20060612
For Norberg text:
http://www.nationalinterest.org/ME2/dirmod.asp?sid=&nm=&type=Publishing&mod=Publications%3A%3AArticle&...
For more on International:
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10. Swedish Models 6-5-06 Johan Norberg http://www.nationalinterest.org/ME2/dirmod.asp?sid=&nm=&type=Publishing&mod=Publications%3A%3AArticle&mid=1ABA92EFCD8348688A4EBEB3D69D33EF&tier=4&id=467A023F1D434471A3996995DEA0A05B
TO BE A Swede is once again to be admired. Sweden is "the most successful society the world has ever known", declares the left-wing British newspaper the Guardian; "Swedes lead Europe in reform", claims the free-market-oriented Financial Times; only the Nordic model "combines both equity and efficiency", explains a recent report initiated by the European Commission.
In a contentious European debate marked by hostility, riots and unrest, Sweden looks like a safe bet--neutral, uncontroversial and with no natural opponents. Sweden is a Rorschach test: The Left sees a generous welfare state, and the Right sees an open economy that pushes for deregulation in the European Union. The only thing British reformists and French protectionists could agree on at the EU summit in Brussels in March was that Europe should learn from the Scandinavian model's combination of generous social provisions and a high-growth economy. Sweden is seen as the proverbial "third way", combining the openness and wealth creation of capitalism with the redistribution and safety nets of socialism. It is the best of both worlds.
But things in Sweden are not as good as the advocates would like to believe. Long the paragon of social democracy, the Swedish model is rotting from within. Ironically, the unique social and economic foundation that first allowed Sweden to construct its political edifice--and which makes it such a difficult model for other countries to emulate--has been critically weakened by the system it helped create. Far from a being a solution for the new sick men of Europe, Sweden must face serious and fundamental challenges at the heart of its social model.
The Origins of the Welfare State
TO SAY that other countries should emulate the Swedish social model is about as helpful as telling an average-looking person to look like a Swedish supermodel. There are special circumstances and a certain background that limit the ability to imitate. In the case of the supermodel, it is about genetics. In the context of economical and political models, it is about the historical and cultural background.
Gunnar and Alva Myrdal were the intellectual parents of the Swedish welfare state. In the 1930s they came to believe that Sweden was the ideal candidate for a cradle-to-grave welfare state. First of all, the Swedish population was small and homogeneous, with high levels of trust in one another and the government. Because Sweden never had a feudal period and the government always allowed some sort of popular representation, the land-owning farmers got used to seeing authorities and the government more as part of their own people and society than as external enemies. Second, the civil service was efficient and free from corruption. Third, a Protestant work-ethic--and strong social pressures from family, friends and neighbors to conform to that ethic--meant that people would work hard, even as taxes rose and social assistance expanded. Finally, that work would be very productive, given Sweden's well-educated population and strong export sector. If the welfare state couldn't work in Sweden, the Myrdals concluded, it wouldn't work anywhere.
Sweden's economic success story began in the late 19th century, after a fundamental political shift towards free markets and free trade. Swedish traders could export iron, steel and timber, and entrepreneurs created innovative industrial companies that became world leaders. Between 1860 and 1910, real wages for factory workers rose by about 25 percent per decade, and public spending in Sweden didn't surpass 10 percent of GDP.
The Social Democratic Party came to power in 1932 and has governed Sweden for 65 of the last 74 years. They realized early on that a party of class struggle wouldn't be able to hold on to power in Sweden. Instead, they became a party of the middle class by creating social security systems that gave the most pension, unemployment, paternal-leave and sick-leave benefits to those with high wages. (Most benefits were proportional to the amount paid in, so the wealthy middle class would have an interest in supporting the system.) It was a policy of socialization from the consumption side: The government would not take control of the means of production, but would instead tax workers, in the form of sales and income taxes, to provide welfare. It was markets and competition for big business, a welfare state for the people. Still, as late as 1950 the total tax burden was no more than 21 percent of GDP, lower than in the United States and Western Europe.
This meant that the Social Democrats were eager to please industry and not allow the social agenda to interfere with the economy's progress. Free trade was always the rule. Regulations that were introduced were adapted to benefit the biggest industries--for example, wages were equalized, but for the purpose of keeping wages low for the big companies, while small and less productive companies were forced out of business. The trade unions, for their part, were relatively positive to the creative destruction of capitalism, so they allowed old sectors like farming, shipping and textiles to pass away, as long as new jobs were created.
These policies, and the fact that Sweden stayed out of two world wars, meant that the economy yielded amazing results. Sweden was rich: In 1970 it had the fourth-highest per-capita income in the world, according to OECD statistics. But at this stage the Social Democrats began to radicalize, with coffers filled by big business and heads filled with ideas from an international leftist trend. Social assistance was expanded and the labor market became heavily regulated. Public spending almost doubled between 1960 and 1980, rising from 31 percent to 60 percent of GDP.
This was also the time when the model began to run into problems. From 1975 to 2000, while per-capita income grew by 72 percent in the United States and 64 percent in Western Europe, Sweden's grew by no more than 43 percent. By 2000, Sweden had fallen to 14th in the OECD's ranking of per-capita income. If Sweden were a state in the United States, it would now be the fifth poorest. As the Social Democratic Finance Minister Bosse Ringholm explained in 2002, "If Sweden would have had the same growth rates as the OECD average since 1970, our common resources would have been so much bigger that it would be the equivalent of 20,000 SEK [$2,500] more per household per month."
Too Much of a Good Thing
THE SOURCE of the problem was the fatal irony of the Swedish system: The model eroded the fundamental principles that had made the model viable in the first place.
The civil service is a powerful example of this phenomenon. The efficiency of the civil service meant that the government could expand, but this expansion began to undermine its efficiency. According to a European Central Bank study of 23 developed countries, Sweden now gets the least service per dollar spent by the government. Sweden still reports impressive results on living standards (just as it did before the introduction of the welfare state in the years following World War II), but not at all what you would expect from a country with the world's highest tax rates, currently at about 50 percent of GDP. If the public sector were as efficient as Ireland's or Britain's, for example, the expenditure could be reduced by a third for the same service. The Swedish Association of Local Authorities and Regions reports that Swedish doctors see four patients a day on average, down from nine in 1975. It is less than in any other OECD country, and less than half of the average. One reason is that a Swedish doctor spends between 50 and 80 percent of his time on administration.
On the economic side, the old Swedish system of encouraging investments in big industry worked well, as long as there was little need for innovation. Once that occurred, however, the system ran into trouble. The competitiveness of industry had to be propped up several times by depreciating the currency. Globalization and the new knowledge and service economy made it more important than ever to invest in human capital and individual creativity. High marginal tax rates on personal income, however, reduced individuals' incentives to take risks and to boost earning potential by investing in their education and skills, and made it extremely difficult to attract skilled workers from abroad.
Furthermore, the Swedish model was dependent on having a small number of large industrial companies. As these diminished in importance, or moved abroad, Sweden needed something to take their place. But the policies that benefited the biggest firms created a deficit of small- and medium-sized businesses. Those that did exist didn't grow, partly because of the risks and costs of highly burdensome employment rules that prevented the firing of workers. Indeed, the most important Swedish companies today are those that were born during the laissez faire period before the First World War; just one of the fifty biggest Swedish companies was founded after 1970. Meanwhile, services that could become new private growth sectors, like education and health care, were monopolized and financed by the government. As they grew in importance and size, a steadily growing part of the Swedish economy thus became protected from international market forces and investments that could have turned them into successful and productive enterprises.
In the early 1990s a deep recession forced Sweden to abandon a lot of the excesses from the 1970s and 1980s. Marginal tax rates were cut, the central bank was made independent, public pensions were cut and partially privatized, school vouchers were introduced, and private providers were welcomed in health care. Several markets were deregulated, like energy, the post office, transportation, television and, most importantly, telecom, which opened the way for the success of companies like Ericsson.
But Sweden retained the world's highest taxes, generous social security systems and a heavily regulated labor market, which split the economy: Sweden is very good at producing goods, but not at producing jobs. According to a recent study of 35 developed countries, only two had jobless growth: Sweden and Finland. Economic growth in Sweden in the last 25 years has had no correlation at all with labor-market participation. (In contrast, 1 percent of growth increases the number of jobs by 0.25 percent in Denmark, 0.5 percent in the United States and 0.6 percent in Spain.) Amazingly, not a single net job has been created in the private sector in Sweden since 1950.
During the recession in the early 1990s, Sweden had an unemployment rate of about 12 percent. The official rate has been halved since, but the difference has been offset by a dramatic increase in other forms of absenteeism. For example, there are 244,000 openly unemployed workers in a total population of 9 million. But this does not include 126,000 working in labor-market projects (the largely unsuccessful programs geared towards helping people acquire the skills to find employment) or the 89,000 job-seekers who are receiving some form of education. And there are another 111,000 in "latent unemployment", people who are not defined as part of the work force, but who can and would like to work. If all of these workers are included in the calculation, Sweden's true unemployment rate is still 12 percent. (Although other countries' unemployment figures, including those for the United States, also fail to reflect the real rate joblessness, Sweden's array of government-funded projects for work and education particularly distort the data. In addition, Sweden does not include in its figures students that are seeking employment, breaking with international norms.)
Moreover, the unemployment rate says nothing about another hidden labor problem: rampant absenteeism. Swedes are healthier than almost any other people in the world, but they are also out sick more often than any other people, according to available data. In 2004, sickness benefits absorbed 16 percent of the government budget, while health absenteeism has doubled since 1998. With a sickness benefit of up to 80 percent of a recipient's income (depending on his or her wage level), it is not surprising that there is an epidemic of absenteeism. Moreover, about 10 percent of the working-age population has retired with disability benefits. A researcher at the main trade union, LO, recently left his job when he was not allowed to publish his estimate that close to 20 percent of Swedes are unemployed, either openly or hidden in labor-market projects, long-term sick-leave and early retirement.
Immigration and Politics
SWEDEN HAS no official minimum wage, but trade unions with political power set de facto minimum wages through collective bargaining. That de facto minimum wage for workers in Sweden is equal to about 66 percent of the median wage in the manufacturing sector, compared to 32 percent in the United States. In economic terms, this means that if you are less than 66 percent as productive as the median Swedish manufacturing worker--perhaps because you are unskilled, have no experience or live in a remote area--you will probably not find a job. Any company that would hire you would be forced to pay you more than what you are able to produce. And if you are never successful in gaining employment, you will not gain the skills and experience to raise your abilities and productivity.
Immigrants are the hardest hit. Since the early 1980s, Sweden has received a large number of refugees from the Balkans, the Middle East, Africa and Latin America, which has ended the country's homogeneity. Today, about one-seventh of the working-age population is foreign born, but no where near that proportion is actually employed. Sweden has one of the developed world's biggest differences between the labor-market participation of natives and immigrants. Many immigrant families are discouraged by the lack of job prospects and end up in welfare dependency.
Unemployment problems in turn result in de facto segregation. Despite little history of racial conflict, the labor market is more segregated than in America, Britain, Germany, France or Denmark--countries with far more troublesome racial histories than Sweden. A report from the free-market Liberal Party ahead of the election 2002 showed that more than 5 percent of all precincts in Sweden had employment levels lower than 60 percent, with much higher crime rates and inferior school results than in other places. Most of these precincts are suburban, so outsiders rarely see them. The number of segregated precincts has continued to grow. In some neighborhoods, children grow up without ever seeing someone who goes to work in the morning. Pockets of unemployment and social exclusion form, especially in areas with many non-European immigrants. When Swedes see that so many immigrants live off the government, their interest in contributing to the system fades.
Like in other parts of western Europe, the segregation of immigrant areas leads to insularity, crime and, in some cases, radicalism. Last year, Nalin Pekgul, the Kurdish chairman of the National Federation of Social Democratic Women, explained that she was forced to move out of a suburb of Stockholm because of crime and the rise of Islamic radicalism. The announcement sent shock waves through the entire political system. "A bomb waiting to explode" is one of the most common metaphors used when social exclusion in Sweden is discussed.
Those immigrants who do keep their entrepreneurial spirit intact often take it elsewhere. Hundreds of unemployed Somalis and Iranians leave Sweden every year and move to Britain, where they are often successful in finding work. The contrast in experience can be staggering. The Swedish economic historian Benny Carlson recently compared the experiences of Somali immigrants in Sweden with those of Somali immigrants in Minneapolis, Minnesota. Only 30 percent had a job in Sweden, about half as many as in Minneapolis. And there are about 800 businesses run by Somalis in Minneapolis, compared to only 38 in Sweden. Carlson quoted two immigrants who together summed up the disparity. "There are opportunities here", said Jamal Hashi, who runs an African restaurant in Minneapolis. His friend, who migrated to Sweden instead, told a different story: "You feel like a fly trapped under a glass. Your dreams are shattered."
A Model No More
SO IF THE Myrdals were right when they said that if the welfare state couldn't work in Sweden, it wouldn't work anywhere, what will it mean if Sweden's system fails? The answer seems obvious.
The Swedish model has survived for decades, but the truth is that its success was built on the legacy of an earlier model: the period of economic growth and development preceding the adoption of the socialist system. It is difficult to see how other countries--especially the troubled systems of Western Europe so keen to adopt the Swedish approach, but which lack the unique components for a welfare state first noted by Gunnar and Alva Myrdal--could cope with a similar welfare state. Bigger and more diverse countries with a weaker faith in government and more suspicion towards other groups would likely see an even stronger tendency to exploit the system, work less and abuse social assistance. The United States and much of Western Europe face immigration challenges at least as daunting as Sweden.
The economy has rebounded since the recession of the 1990s and the reforms that followed--in contrast to the stagnant continental economies--mostly because of a small number of successful global companies. But the problem is that a growing part of the population is left out and old attitudes about work and entrepreneurship are fading. Since 1995 the number of entrepreneurs in the European Union has increased by 9 percent; in Sweden it has declined by 9 percent. Almost a quarter of the population of working age does not have a job to go to in the morning, and polls show a dramatic lack of trust in the welfare system and its rules.
The system of high taxes and generous welfare benefits worked for so long because the tradition of self-reliance was so strong. But mentalities have a tendency of changing when incentives change. The growth of taxes and benefits punished hard work and encouraged absenteeism. Immigrants and younger generations of Swedes have faced distorted incentives and have not developed the work ethic that was nurtured before the effects of the welfare state began to erode them. When others cheat the system and get away with it, suddenly you are considered a fool if you get up early every morning and work late. According to polls, about half of all Swedes now think it is acceptable to call in sick for reasons other than sickness. Almost half think that they can do it when someone in the family is not feeling well, and almost as many think that they can do it if there is too much to do at work. Our ancestors worked even when they were sick. Today, we are "off sick" even when we feel fine.
The real worry is that Sweden and other welfare states have reached a point where it is impossible to convince majorities to change the system, despite the dismal results. Obviously, if you are dependent on the government, you are hesitant to reduce its size and cost. A middle class with small economic margins is dependent on social security. This was Bismarck's plan when he introduced a system that would make those dependent on it "far more content and far easier to handle."
Sooner or later, politicians begin to identify a new, influential bloc of voters--those who live at others' expense. A former Social Democratic minister of industry recently explained what his party meetings in northern Sweden looked like: "A quarter of the participants were on sick-leave, a quarter was on disability benefits, a quarter was unemployed."
This creates a damaging cycle. With high taxes, markets and voluntary communities are crowded out, which means that every new problem has to find a government solution. If change seems too far off, a large part of the electorate becomes more interested in defending good terms for unemployment and sick-leave than in creating opportunities for growth and jobs. And that goes even if you have a job. If regulations make it difficult to find a new job, you worry more about losing the one you have and will see suggestions of labor market deregulation as a threat. OECD interviews show that well-protected workers in Sweden, France and Germany are much more afraid of losing their jobs than workers in the less regulated United States, Canada and Denmark.
In that case, sclerosis creates a public demand for policies that create even more stagnation. This might help explain the lack of reform in Europe, despite all the political ambitions. The more problems there are, the more dangerous radical reforms seem to the electorate: If things are this bad now, the logic goes, think how bad they'll be without state protection. For example, it seems like the Swedish voters are now willing to oust the Social Democratic government in September. But that is only after the center-right opposition abandoned the more radical suggestions--such as labor-market reform and reduction in social security benefits--that it used to champion.
Radical reform seems far off. On the other hand, just like the step-by-step construction of the welfare state that slowly but steadily reduced the willingness to work and the sense self-reliance, incremental reforms to expand freedom of choice and reduce the incentives to live off fellow-citizens might rejuvenate these fundamental values and increase the appetite for reform.
Johan Norberg is a Swedish writer and a senior fellow
at the Centre for the New Europe, a Brussels-based think-tank. He is the
author of several books, including In Defense of Global Capitalism (2003).
11. EAST GERMANY REMAINS PRO-STATE
------------------------------------------------------------------------
Exposure to Communism has made East Germans much more
pro-state than
West Germans, says the National Bureau of Economic Research
(NBER).
According to researchers:
o This effect could arise
due to indoctrination (such as
teaching the
virtues of Communism in the schools) or
simply due
to becoming used to an intrusive public sector.
o A second, indirect effect
of Communism is that by making
former East
Germany poorer than West Germany, it has
made the former
more dependent on redistribution and
therefore
more favorable to it.
NBER found that the effects of Communism are large and
long
lasting, and it will take one to two generations for
former East and
West Germans to look alike in terms of preferences and
attitudes
RQ: does this apply to E Ky? To urban areas of U S?
regarding the role of the government in society.
The citizens' preferences appear to go beyond self-serving
beliefs.
For example:
o About a third of the
difference can be explained by the fact
that the East
became poorer during Communism and
is now a net
beneficiary of redistribution within
Germany, rather
than to an effect of Communism on preferences.
o East Germans are simply
much more likely than West Germans
to conclude
that, "social conditions, rather than
individual
effort and initiative, determine individual
fortunes."
RQ: =to the extent that these sentiments are found in
America, are they a product of the education/information system?
The good news is that while Communist attitudes may still
linger,
they are waning and, though it may take 20 or 40 years,
the two sides
will converge, says NBER.
Source: Matthew Davis, "The Effects of Communism on Popular
Preferences," NBER Digest, April 2006; based upon: Alberto
Alesina and
Nichola Fuchs Schuendeln, "Good bye Lenin (or not?):
The Effect of
Communism on People's Preferences," National Bureau of
Economic
Research, Working Paper No. 11700.
For text:
http://www.nber.com/digest/apr06/w11700.html
For Alberto Alesina and Nichola Fuchs Schuendeln:
http://papers.nber.org/papers/w11700
For more on International:
http://www.ncpa.org/pi/internat/intdex1.html
12. WHAT'S WORSE THAN BEING EXPLOITED? NOT BEING EXPLOITED.
------------------------------------------------------------------------
Africa desperately needs Western help in the form of schools,
clinics
and sweatshops, says Nicholas Kristof of the New York
Times.
Even though many people despise sweatshops, the poor
see them as
opportunities; therefore, anyone who cares about fighting
poverty
should campaign in favor of sweatshops and demand that
companies set up
factories in Africa, says Kristof:
o Namibia was supposed
to be a pioneer in Africa's garment
industry,
because it's stable, pleasant and safe, and
its government
has tried hard to entice foreign
investors.
o But the biggest factory,
Ramatex Textile Factory -- a
Malaysian
investment -- only employs 6,000 people; owners
are losing
money and will pull out.
o The problem is that
it's costly to manufacture in Africa;
the headaches
across the much of the continent
include red
tape, corruption, political instability,
unreliable
electricity and ports and an inexperience labor
force that
leads to low productivity and quality.
Moreover:
o It already isn't profitable
to pay respectable salaries, and
so this pressure
to raise them become one more
reason to
avoid Africa altogether.
o When Western companies
do pay above-market wages, in places
like Cambodia,
local managers extort huge bribes in
exchange for
jobs; the workers never see the benefit.
RQ: does this occur in U S?
One of the best U.S. initiatives in Africa is the African
Growth
and Opportunity Act which allows duty-free imports from
Africa -- and
thus has stimulated manufacturing there; but for continued
success, one
push needs to come from Africa itself: a crack down on
corruption and
red tape, says Kristof.
Source: Nicholas D. Kristof, "In Praise of the Maligned
Sweatshop,"
New York Times, June 6, 2006.
For text (subscription required):
http://select.nytimes.com/2006/06/06/opinion/06kristof.html
For more on Trade:
http://www.ncpa.org/pd/trade/trade.html
13. Will Chile's President Flunk the Test? By MARY
ANASTASIA O'GRADY
June 9, 2006; Page A15
When Chilean President Michelle Bachelet met with George W. Bush yesterday in Washington, she appeared the picture of self-possession.
Back home, the nation is not nearly so composed. For the past three weeks a nationwide "strike" to protest inferior public schools by more than 600,000 students shut down the country's government-run secondary education system. Students laid siege to hundreds of schools and marched in the streets, throwing rocks and committing vandalism. Yesterday they returned to class but the issue is not yet resolved.
The tear gas and water cannons in the Chilean capital
were not covered much in the U.S. media but Latin America watched closely
the worst upheaval in Chile in more than three decades. The Socialist Ms.
Bachelet, who took office in March, is facing her first test, with implications
that go well beyond free school lunches and daily bus passes.
[Michelle Bachelet]
On the domestic front, Chile is coming to terms with the myth of the Socialists' "third way," the idea that a liberalized open economy can function perfectly well alongside the atavistic structures of status-quo statism, embodied here in the public schools. At some point the two were bound to clash.
On the international front, despite the weak role it has so far played in the global war on terror and in the Organization of American States, Chile is the regional model for democracy and could be a key actor in the multilateral effort to contain the ambitious Venezuelan President Hugo Chávez. Ms. Bachelet's handling of the crisis will not only affect her ability to govern Chile. It also could pull Chilean foreign policy further to the left.
Last week Ms. Bachelet tried to diffuse the strike with a nationally televised address proposing $200 million more in school funding through next year. Student leaders rejected that offer. On Monday, the violence worsened when a former communist guerrilla group, the Manuel Rodriguez Patriotic Front (FPMR), mobilized labor militants, members of the education bureaucracy and university students to join the fun. The demonstrators ransacked neighborhoods and tried to barricade a central boulevard with burning tires. On Tuesday, the students occupied a United Nations office in Santiago.
It is critical to separate the students' fundamental gripe from the radicalism of Chile's ultra left, which seeks to destabilize democracy itself. The students' central complaint -- that public schools are shoddy -- has a certain validity in the eyes of many law-abiding Chileans and even the conservative Catholic Church. Unfortunately, Ms. Bachelet's proposal to throw money at the problem doesn't inspire confidence in a solution.
In 1982, Chile introduced a voucher system that allows children to use government funds to attend either public or private schools. The voucher system seeks to improve the quality of education by creating competition for students. Among private-school students, it has worked; test scores are up. But public schools remain disappointing.
The problem is that rather than a full-fledged voucher system, Chile has a quasi-voucher program that distorts the choice and competition effects of vouchers by subsidizing public schools directly. The rationale for the subsidy is fine: Since the cost of educating a poor child is higher than a middle-class child, extra funding is needed to support poor children. But unfortunately, that extra funding does not go into the hands of the student as a tool for choice. Instead, it goes directly to the public schools that the poor children attend. If a poor student wants to go to a private school, he cannot take the subsidy with him.
Claudio Sapelli, a Chicago-trained economist at the Catholic University in Santiago, has studied the distortions of the quasi-voucher system and written a chapter in the book "What America Can Learn From School Choice In Other Countries," (Cato Institute, 2005). On the subject of the "non-portable" funding, he wrote, "schools receive it in the form of supply subsidies, which merely accentuates the dependence of poor students on public schools." In other words, in the absence of making the subsidy portable, neither choice nor competition have had a chance to emerge.
The trouble for Chilean politicians is that the government bureaucracy and teachers' unions are powerful special interests. So although a more competitive system is needed, the incentive to feed the monster bureaucracy may be greater.
Meanwhile, the dust-up could have other repercussions. To counter the charge that she caved in to violence, Ms. Bachelet has pledged that there will be no further financial concessions. But there are other ways to compensate her left flank.
That's where the international worry comes in. In October, Latin American countries will decide whether it will be Venezuela or Guatemala that wins the next opening for a non-permanent Latin America seat on the U.N. Security Council. The leftist government of Argentina, which has repeatedly used anti-Americanism to strengthen its hand at home, has already said it will vote for Venezuela. Given Hugo's close alliance with the mullahs, this is a vote for Iran.
How did Argentina, once an upstanding member of the international community, morph into a sympathizer for the axis of evil? Partly it has been influenced by the terrorist background of key members and advisers of the current government, who were involved with the Argentine equivalent of the FPMR in the 1970s. But Argentine foreign policy has also been shaped by orchestrated street violence. President Nestor Kirchner has found that to placate thugs and shore up his base at home, nothing is as gratifying as carrying water for Hugo.
No one expects Chile to sink to Argentine lows. But remember that the most terrifying violence in this "strike" occurred when union members of the education bureaucracy took to the streets with the FPMR; their modus operandi is clear.
On the U.N. vote Ms. Bachelet will feel pressure from
these Chilean extremists, along with neighboring Argentina and friends
like Fidel Castro and Mr. Chávez who know something about exporting
organized violence. Let's hope that fear or political expediency do not
drive her decision. That would be a tragedy for regional stability and
for Chile's global prestige.
14. Is autocracy bad for growth? Tyler Cowen
Gordon Tullock frequently tells me there is no good economic argument for democracy, if we adjust properly for economic variables such as the absolute state of development. After all, much of the European miracle occurred under non-democratic conditions, not to mention the golden ages of China or modern Singapore. But now Kevin Grier and Mike Munger argue from the empirics that democracy is better for economic growth. In particular:
New dictatorships grow very slowly, and very old dictatorships grow very slowly. But durable dictatorships in the middle years actually grow nearly as fast as democracies. A nonlinear specification fits almost exactly.
It is a tricky question which economic models of autocracy this is consistent with (try your hand at this in the comments). Here is part of the paper's abstract:
In this paper we study a large unbalanced annual panel of 134 countries covering the period 1950 - 2003. We show that autocracies grow almost one percentage point slower than non-autocracies, holding constant the effect of regime length on growth...
I usually tell Gordon that the costs of keeping out democracy are prohibitive for most contemporary societies; that alone should tip the balance in favor of democracy. Sources of economic power and sources of political power have to stand in some sort of equilibrium relationship if stability is to persist. Singapore is an exception because it is a) very small, b) disciplined by world markets to an extreme degree, and c) its citizens realize that its "democracy" would otherwise collapse into identity politics of the three major ethnic groups; they therefore do not demand so much democracy.
Gordon never agrees. Here is the paper and further discussion. More importantly, here is Kevin on stereo equipment and tubes.
June 2, 2006 at 03:44 AM in Political Science | Permalink | Comments (4
Democracy and Growth: Was Olson Right?
--Michael Munger http://divisionoflabour.com/
I would never have believed it.
But, in a just-completed working paper with my long-time coauthor and pal, Kevin Grier, we find some pretty interesting things:
1. Democracies grow faster. (Yeah, you might think so, but this result is controversial)
2. New dictatorships grow very slowly, and very old dictatorships grow very slowly. But durable dictatorships in the middle years actually grow nearly as fast as democracies. A nonlinear specification fits almost exactly.
3. And this is consistent with a clear prediction from
Mancur Olson. Interesting that he got it so right:
A rational autocrat with a long time horizon will not
confiscate his subjects’ assets, because this will reduce investment and
future income and, thus, his own long-run tax receipts.
Now, suppose the autocratic ruler is uncertain about
whether he will be in charge much longer. He may be uncertain about this
because he fears invasion from a yet-more-powerful domain, a coup d’etat,
a revolution, or an assassination. When uncertainty gives him a short-term
view, he has an incentive, no matter how gigantic his empire or how exalted
his lineage might be, to seize any asset whose total value exceeds the
discounted present value of its tax yield over his short-term horizon.
With a sufficiently short planning horizon, it pays any autocrat not only
to confiscate all readily seizable assets but also to repudiate his debts
and to generate inflation by printing money for his own use, no matter
how great the long-run cost….
Any autocracy must sooner or later have a short time
horizon. In addition to the external and internal enemies and accidents
that can end any autocracy, there is the fundamental problem of succession.
If an autocrat were to create a body with the power to guarantee an orderly
succession, that body would have to have more power than anyone else in
the society. But it could only have this power if it had more power than
the autocrat—and thus the capacity to overrule the autocrat—in which case
the society by definition would not be an autocracy. (pp. 47-8, Olson,
Mancur. (1997). The New Institutional Economics: The Collective Choice
Approach to Economic Development. In C. Clague (ed), Institutions and Economic
Development: Growth and Governance in Less-Developed and Post-Socialist
Countries.)
If you want to see the paper, it is here... We would love
to have comments.
15. Colombia's Window of Opportunity By MARY ANASTASIA
O'GRADY
WSJ June 2, 2006; Page A19
Liberty lovers across the Western Hemisphere are cheering Colombian President Alvaro Uribe's second-term victory on Sunday. Colombians gave their president more than 62% of the vote. His closest competitor, the hard-left Carlos Gaviria, whose platform mirrored the ideology of Venezuelan President Hugo Chávez, earned only 22%. Pro-Uribe parties also won a majority in Congress.
The Uribe win is not only an endorsement of a worldview
favoring security, the rule of law and global engagement for Colombia.
It is also evidence of a backlash against the economic isolation and hostility
toward private property preached by Mr. Gaviria and Mr. Chávez next
door. As such it casts a ray of hope on the Andean region, which has been
trending toward left-wing, authoritarian populism of late.
[Alvaro Uribe]
Now comes the hard part. To secure Colombian democracy, Mr. Uribe's second term will have to go beyond the success he managed in beating back guerrilla forces around the country and stabilizing the economy in his first term. Second-term success will require equal boldness in economic reform so that Colombia might attract more capital, bring underground economic activity into the legal sector, begin to grow at its potential and provide economic mobility.
The Colombian corporate tax regime may be the country's single most pernicious policy error. It is also easily correctable by introducing a single, low corporate rate, an idea that is spreading rapidly in Eastern Europe and has proven to stimulate growth and reduce corruption. Were Mr. Uribe to embrace it, he would score an early reform victory that would have a huge payoff. Failure to seize the moment will mean a missed opportunity that is not likely to present itself again. Just ask Mexican President Vicente Fox what happens when political capital is not spent.
A low corporate rate goes against the tired old saw that high taxes on entrepreneurs make society fair, even though this model has left Latin America in poverty. But bucking conventional wisdom is Mr. Uribe's trademark. When he was first a candidate for the 2002 elections, Colombia was overrun with guerrilla terror while the terrorists enjoyed a jungle safe-haven the size of Switzerland, courtesy of the government as an olive branch toward peace. The status quo favored this concession even though the rebels warred on, using the area to store weapons, hold hostages and organize assaults against the civilian population. Washington and Colombian "experts" counseled this perpetual "peace process," while the human carnage wrought by guerrillas was mounting weekly.
Mr. Uribe saw things differently and said so: Appeasement of terrorists was making things worse. That observation got him elected and when he took office he ended the safe-haven policy, beefed up the military and sent a message to the rebels that the Colombian people would defend themselves. Four years later, Colombia has not only regained lost territory but it has also recovered national confidence.
Now Mr. Uribe has the chance to do the same thing with the economy that he did with security: break with conventional wisdom and forge a new path. His economic team has already accomplished some microeconomic reform and Colombia was named one of the world's most-improved business environments by the World Bank two years ago. Improved security has paid off in increasing investment. Yet the massive underground economy remains, holding back the productivity gains essential for development. With GDP growth still averaging below 5% annually, much more has to be done to lower the cost of complying with the law so that entrepreneurs can afford to come out of the informal shadows.
The economic eyesore is tax policy, according to the bank's annual "Doing Business" report, which ranks Colombia at the bottom of the pile (148 out of 155 countries) in the category of "paying taxes." According to the report, full compliance for a medium-sized business involves an administrative burden of 432 hours and 54 payments annually. The survey further finds that "total tax payable" amounts to more than 75% of gross profit.
That's not nearly as bad as Brazilian or Bolivian tax policy but it's a world away from Estonia -- where compliance means 11 payments a year taking 104 hours and costing less than 40% of gross profit -- or Ireland where there are eight payments annually that take 76 hours at a cost of just over 45% of gross profit.
How can the lower costs in Ireland and Estonia be explained? Easy: Both have low, flat corporate rates. Ireland's is 12.5%; Estonia's is zero on retained profits. Compare this to Colombia's 35% rate and its mishmash of loopholes. Simplification means fewer filing headaches and less corruption. Tax revenues have soared in flat tax countries as businesses invest more and comply more readily. The economic effect is more employment and more funding for infrastructure and social programs serving the truly needy.
Ireland, which for more than a century lived one of the world's most tragic emigration stories, is now experiencing net immigration and is a richer country than the United Kingdom. Estonia has one of the most competitive business environments in Europe and from 2001-2004 its average per capita growth rate was 6.7%.
Of course, any attempt at such a free-market tax policy will meet with a lot of reasons about why it can't work. Mr. Uribe could prepare for this by listening to former Estonian Prime Minister Mart Laar who won the Cato Institute's Milton Friedman Prize in April for his role in breaking the regulatory and tax shackles on his country and making it one of the world's superstar economies.
The humble Estonian has plenty of horror stories about living under Soviet rule. But he also notes that once the reformers came to power, economic freedom faced a different enemy. "The Western experts," he says, often advised his economic team against deep and rapid liberalization.
It is likely that Mr. Uribe is also encountering naysayers. The State Department is famous for its arm-twisting bureaucrats who push steeply progressive tax schedules. But Mr. Laar has the moral authority and his counsel is clear: Do it and do it fast and don't let "experts" talk you out of it.
The battle for security will continue but as Colombian
economist Mauricio Cardenas said recently, "It's a mistake to think that
the conflict must first be resolved for the economy to grow. We need economic
growth in order to resolve the conflict." To meet that goal there may be
no single policy as powerful as the corporate flat tax.
16. What Single Market?
June 1, 2006
The European Union has been promising free movement in people, goods, capital and services ever since the 1957 Treaty of Rome. Yet a true single market remains a distant goal because Brussels continues to take one step back for each move forward.
The latest setback came this week when EU governments
backed a long-in-gestation directive on freeing up trade in services. Many
are claiming victory for having struck any deal at all after thorny negotiations.
Alas, for all the self-congratulation, the directive agreed to Monday night
yields far too much to the protectionists in France, Germany and other
parts of Old Europe to inject the hoped-for jolt of dynamism into the Continent's
economy.
[Charlie McCreevy]
The original goal was to dismantle trade barriers in Europe's vast service sector, which makes up about 70% of the economy and employs some 116 million people, from accountants to doctors to undertakers. That aim fell by the wayside once labor unions started whipping up fears about the job-stealing hordes that would invade from the east.
Allowing service providers to operate temporarily anywhere in the bloc under their home country's regulations would have increased competition and forced prices down for consumers in expensive Western Europe. That's what made the services directive attractive. With the so-called country-of-origin principle stripped out of the final version, service providers will be allowed to work abroad but governments will be able to put up almost any number of bureaucratic hurdles to keep them at bay.
The neutered directive also exempts a wide range of businesses from free trade, among them television broadcasting, gambling, social services and both public and private health care. With an aging population in much of Western Europe, demand for health care is growing. Nevertheless, a German will still not be able to hire a Polish home nurse for an ailing parent. As German MEP Alexander Graf Lambsdorff points out, "The directive is watered down to such a degree that its original purpose -- to create jobs, growth and dynamism in the sector -- cannot be achieved."
Britain, the Netherlands, Hungary and Poland all had criticized the weak law put forward by the European Parliament. When it came time to vote, however, they gave it their support. Of the EU's 25 members, only Lithuania abstained. The directive must be read again by lawmakers but will likely pass in roughly its current state.
So much for free trade in services. What about capital? Earlier this year French officials brokered the merger of energy companies Gaz de France and Suez to stave off a bid for the latter by Italy's Enel. Charlie McCreevy, the EU Commissioner charged with enforcing the single market, launched an investigation, but despite his concerns could not prove a breach of EU law.
The Commissioner now has an opportunity to redeem himself in his current investigations into protectionist laws passed recently in Spain and France. The Spanish legislation is designed to keep the German utility E.On from buying Spanish electricity generator Endesa. France's law bans foreign investment in 11 so-called "strategic sectors." Among the untouchable industries are horse racing and the lottery.
Mr. McCreevy's spokesman told us he believes that while France may be justified in imposing some protections, for reasons of public policy or national defense, in this case the bar French lawmakers have to meet to set a business off-limits is too low. He also insisted that the Commission would not back down this time around. Fingers are crossed.
Free trade in services and the free movement of capital
across Europe's borders are essential elements of a single market. Without
them, economic union -- the original reason for European integration --
cannot become a reality.
17. Undermining Mongolia
By MICHAEL KOHN
May 26, 2006
ULAN BATOR -- All it took was a few hours one recent Friday evening here for Mongolia's parliament to undo 10 years of good work in encouraging foreign investment. The decision to cash in on soaring commodities prices by passing a bill seeking to impose a 68% "windfall tax" on copper and gold exports has shaken foreign businesses and, if it ultimately becomes law, may lead some to abandon their operations in Mongolia.
Nobody even bothered to consult foreign investors before the May 12 passage of this new bill to rewrite the rules that attracted them to invest in the country. Parliamentarians simply claimed Mongolia ought to benefit from high mineral prices, citing windfall taxes on oil in other countries, such as neighboring Russia. But that ignores the fact that in a fickle trade like commodities, the mining industry relies on money earned in a bull market to keep it afloat when gold and copper prices turn south. Not to mention the damage done to Mongolia's reputation as a good place to do business, which may ultimately cost the country far more than the money it raises from the windfall tax.
Encouraged by a minerals law enacted in 1997, which offered generous tax breaks to those willing to enter this previously unknown market, foreign mining companies have flocked to Mongolia. As a result, the mining industry now accounts for half the country's industrial output. But having lured investors under such favorable terms, the country's politicians are now playing what amounts to bait-and-switch with the new bill. If signed into law by President Nambariin Enkhbayar, it will impose a 68% tax on any copper exports at $2,600 a ton or above, and any gold exports at $500 an ounce or above. Since surging commodities prices have recently seen copper reach $8,800 a ton and gold $700 an ounce, such a law could raise many hundreds of millions of dollars in additional government revenue this year.
The immediate losers are the investors who trusted Mongolia's promises. Approximately one billion dollars has already been wiped off the market valuations of foreign mining companies operating in Mongolia since parliament's infamous Friday-night session. Worst affected is Ivanhoe Mines, which is about to start a huge new mining operation at Oyu Tolgoi, in the south of the country. Considered the world's second largest copper and gold deposit, Oyu Tolgoi is expected to yield $15 billion in net profit during its 40-year life span. As a result, the Canadian company has seen its stock fall by 25% on the Toronto and New York stock exchanges since May 15.
Having already invested $370 million in Oyu Tolgoi, Ivanhoe is too deeply committed to pull out. But other, smaller foreign operations are already considering possible exit strategies. Although the new law only affects copper and gold, investors are worried that -- having rewritten the rules for one industry -- there is no telling what other sectors might be targeted later on. For instance, foreign companies also have an extensive presence in the country's cashmere and light-manufacturing industries.
Mongolia's hard-ball tactics are only the latest in a string of incidents involving third world governments attempting to pull the rug out from foreign investors risking high stakes in lawless environments. These include Ecuador's imposition of a 50% windfall tax on foreign oil companies, a decision that infuriated Washington to the point where it suspended free-trade talks with the South American country. In Bolivia, President Evo Morales sent in troops to occupy the country's foreign-owned energy fields and partially nationalized the industry this month, following in the footsteps of similar action by Venezuelan President Hugo Chavez.
The good news is that Mongolia's government is still far from such outright nationalization. Indeed investors are pinning their hopes on the bill being blocked by President Enkhbayar, who studied at a British university and is generally considered more sympathetic to foreign business interests than Mongolia's parliamentarians. The bad news is that there is considerable public pressure for greater domestic control of the country's mining resources. In April, protestors burnt effigies of President Enkhbayar and Ivanhoe founder and chairman Robert Friedland in protest at the company's allegedly favorable treatment. But far from receiving special privileges, Ivanhoe's deal with Mongolia already ensures the country will receive 46% of the profits from Oyu Tolgoi. In practice, this could rise even higher. In a statement following the passage of the windfall tax, Ivanhoe acknowledged that some concessions could be made to ensure that all sides benefit from bull markets.
Rather than taxing mining companies out of the country, level-headed politicians would be better off consulting with the mining industry before rewriting the rules. Since Mongolia's parliament failed in that task, the onus now rests with President Enkhbayar to use his veto power to start the process of restoring foreign investors' confidence in Mongolia as a safe place to do business.
Mr. Kohn is a free-lance journalist on temporary assignment
in Mongolia.
18. Democracy at Risk South of the Border By MANUEL
SUAREZ-MIER
WSJ May 26, 2006; Page A11
On July 2 Mexico will hold the most closely contested presidential election in its history. That in itself wouldn't be a problem if all the candidates were committed to the democratic process. But in recent weeks two of the three main campaigns have jointly pledged to challenge election results in the streets with massive unrest if their candidates don't win. If that happens, Mexico will be thrown into chaos and Mexicans will be the losers.
A poll by Zogby International last week gave Felipe Calderón a five percentage point lead over Andrés Manuel López Obrador and 12 points over Roberto Madrazo.
That's good news for Mexico. Mr. Calderón of the National Action Party offers the best chance to deepen the market-oriented economic reforms necessary for strong growth and job creation and to ease the exodus of Mexicans abroad. Mr. López Obrador of the hard-left Revolutionary Democratic Party, on the other hand, would return the country to nationalist populism and a closed economy. Mr. Madrazo of the Institutional Revolutionary Party is marketing a mixture of both, publicly siding with the left while privately pledging support for centrist reforms.
Yet even if Mr. Calderón can hold the lead, Mexico may be heading for trouble. The PRD and the PRI have announced that they are forming a united front to reject the election results if neither one wins. They charge that Mexico's PAN President Vicente Fox has illicitly used government resources to support Mr. Calderón. This week Manuel Camacho of the PRD signaled his party's nondemocratic intentions when he told the Financial Times that "there are going to be demonstrations on a scale rarely seen in Mexico and that will make it very hard to govern, no matter who wins."
Mexico can ill afford what Mr. Camacho has in mind. And yet, the prospect is looming as, much to the dismay of the PRI and the PRD, it appears that voter preferences have truly shifted toward the more market-minded Mr. Calderón.
The first big turnaround in this election concerns the PRI. It ran the country for 70 years until 2000 and as it enjoyed victories in state and local elections over the past three years, Mr. Madrazo appeared, six months ago, to have a good shot at winning. But he alienated so many would-be allies within the PRI, in his blind ambition to become its presidential contender, that today he appears unelectable. The Madrazo campaign is going nowhere but down.
The contrast with Mr. Calderón could not be more striking. He came from behind to beat Mr. Fox's hand-picked favorite in his party's primaries, and won the nomination. For months his candidacy appeared to stall. But in April he shook up his campaign team, focused his message and sharpened the attacks against his opponents. His cause was further advanced by winning, hands down, the first presidential debate in April in which Mr. López Obrador refused to participate.
Until Mr. Calderón's turnaround, this year's campaign phenomenon had been the PRD's Mr. López Obrador. Popularly known in the Mexican press as "AMLO," the PRD candidate has been running for president since he became Mexico City's mayor in 2000. Using savvy propaganda and generous giveaways, this populist demagogue seemed to have an unbeatable political advantage. But the lead went to his head, and he began acting as if he had already won. He rejected invitations to speak with nongovernmental organizations and private-sector groups and openly insulted Mr. Fox in alarmingly shrill tones.
As public opinion has turned against him, AMLO has resorted to accusing the pollsters, the media and the electoral authorities of plotting against him, a tactic he has employed regularly throughout his political career to boost his "victim" image and create social unrest in the streets. With his recent charges that Mr. Fox's government is illicitly helping Mr. Calderón he appears to be once again laying the groundwork for a challenge to an official ruling, this time the July 2 results. Mexicans are bracing for the protests that are now an AMLO trademark and that Mr. Camacho has threatened.
The surprising development, though, is that Mr. Madrazo -- once AMLO's arch-enemy in politics -- now seems ready to join in claims of an election swindle. This is all the more unusual because the PRI created Mexico's independent electoral authorities, which have gained widespread respect.
The PRD was formed by members of the PRI who bolted their party when it began to reform in the mid-1980s. As one of these dinosaurs, AMLO seeks to restore Mexican rule to the "true" PRI values of 1930s and to ban the "neoliberal" technocrats. If he wins, he could do this by wooing PRI legislators with perks that their losing party can no longer deliver, in exchange for changing parties. Think of it as a leveraged buyout. In this set-up the PRI, as a national party, would probably vanish.
With a congressional majority, AMLO could then change the laws that limit his power and by pledging federal money for state governors, he might also win enough votes to modify the constitution and add the ingredient that he needs to fulfill his mission: presidential reelection. He could crown his authoritarian reforms by uprooting the judicial system that has worked in recent years, for the first time in history, like the independent power intended in the original Constitutional design.
If Mr. Calderón wins and the government subdues the protests of a losing PRD and its PRI allies, the PRI might survive; Mr. Calderón is not likely to offer goodies the way AMLO would. This is what makes Mr. Madrazo's support of the PRD's electoral-fraud scheme so bizarre.
A lot is riding on this election, with repercussions far beyond Mexico's national boundaries. If Mr. Calderon wins by a wide margin, PRD and PRI claims of fraud would have little traction, although they will be tried anyway. But if the Calderón margin is narrow and his competition contests the results by creating serious unrest, it could compel the government to annul the poll's results, forcing a new election.
This situation would weaken the country's institutions, raise uncertainty and fears of anarchy, with potentially serious financial instability and economic disarray. Emigration would mushroom. The long awaited Mexican miracle of fast growth and job creation -- stemming migratory outflows -- would be lost for at least another six years, if not for much longer.
Mr. Suarez-Mier teaches economics at American University
in Washington.
19. Behind the Euronext Deal
By JAMES J. CRAMER
WSJ May 26, 2006; Page A10
When the New York Stock Exchange unveiled its $10.2 billion bid for Euronext, a handful of the most senior, astute analysts in brokerage and finance grilled the Big Board's CEO, John Thain, about the merits of the merger in a morning conference call. The seemingly well-informed participants peppered him with 25 questions about the prospective combination's technology synergies, cost savings, valuations and management responsibilities. Mr. Thain answered every one eloquently and explained everything the proposal had to offer shareholders of his newly minted NYX stock.
Everything, that is, except the reason for the deal.
No one asked; and Mr. Thain never told. But the NYSE merger with some European outfit that no one had ever heard of isn't even about saving a few bucks in overhead. It is imperative for the survival of the venerable Wall Street institution; and why it is imperative can be expressed in one word: Washington.
What the analysts should have asked is how this merger will change an unfathomable situation: that 23 of the 24 firms recently looking for more than a billion dollars in capital chose to list overseas rather in the U.S. We know that nauseating statistic because Noreen M. Culhane, an NYSE executive vice president, revealed it to the SEC at a May 10 hearing. There, she told a panel that "it's pretty irrefutable that there's been a sea change" among the world's financial entities to avoid U.S. regulation by raising capital overseas.
Put simply, we've gone, in a few short years, from being the nation most hospitable to capital formation to one most hostile to it. Our once-freewheeling capitalism has been replaced with a bizarre thicket of rules, laws and prosecutions designed to protect Americans from every conceivable financial risk, even if it means no one can get the rewards and the money goes elsewhere. We've created a tortured anti-capital market where accountants and lawyers try to stop you from saying and doing anything that's aggressive, especially if it is positive, and the government lets companies be sued when anything goes wrong, regardless of the merits. You make a big enough mistake in business judgment and they don't just bring in the SEC; they call in the Justice Department and criminalize behavior that once merited a fine or a simple reprimand. Then the Justice Department sues not only the individuals who allegedly did wrong, but the often clueless board of directors, or worse, the whole firm!
Our socialist friends in Paris, whence Euronext hails, embrace a more fluid form of capitalism. European markets allow for much less onerous regulation and much more creative finance, which is why every private equity firm seeking capital lists on outfits like Euronext. They don't put people in jail for expensing options. They don't subject companies to endless strike suits simply because they missed a quarter. And they don't make companies run a Sarbanes-Oxley accountant-protection-racket gauntlet, which adds millions of dollars in excess fees from the moment they turn public, without any obvious benefit to shareholders.
Of course, the NYX-Euronext merger doesn't just get around the federal government regulations that keep capital from being raised here. Euronext gives the NYSE a backdoor way to the fastest growing financial instruments -- the derivative markets, options and futures -- which a couple of outfits here, the Chicago Mercantile Exchange and the Chicago Board of Trade, have dominated: thanks, again, to protection from Washington.
There's a reason why the derivative tail, the Chicago Merc, has a market capitalization roughly twice that of the NYSE dog: The world is full of billionaire gamblers, and only the Chicago boys can create the new tables that attract them. Given their near-monopoly on most things derivative, the Merc, along with the Chicago Board of Trade, both have pricing power the NYSE can only dream of. Their stocks have become favorites of momentum investors because they raise fees fairly consistently every year. Contrast that with the NYSE and its fierce rival, the Nasdaq, which are constantly lowering fees to compete over new corporate listings.
Euronext gives the NYSE a way to circumvent Washington's regulatory protection of these Chicago rackets, and get into the action. With Euronext as his partner, Mr. Thain can be in the running both for the huge sums being raised in Europe, and for derivatives on worldwide indices, without much additional overhead.
After the Enron and WorldCom scandals, securities industry representatives told politicians and regulators in Washington that, unless they were careful, the money that was routinely raised in New York's capital markets would rapidly go overseas. Most politicians figured that was just a chimera created by Wall Streeters trying to protect their lucrative turf. Nope. Money is indeed fungible, and it did flow to Europe.
The New York Stock Exchange has to go with those flows, even if it means overpaying for Euronext to keep it from falling into the arms of rival Deutsche Borse. Judging by the recent cascade in the NYSE's stock, the betting here is that Mr. Thain will have to pay more than he would like. But without Euronext, he's facing a shrinking pie, lower trading fees and a regulatory environment that simply renders the U.S. uncompetitive with just about any market in the world.
In short, this merger proposal is not a move to save a few hundred million bucks in technology and labor. It is a Darwinian play to beat Washington's chokehold on capital formation and derivative regulation. Euronext may be Mr. Thain's only life raft to keep from drowning in the regulatory current that's sweeping trillions in capital from our country to the bourses of Europe.
Mr. Cramer is chief markets commentator of TheStreet.com
and host of CNBC's "Mad Money."
20. Inflation Nation By STEVE H. HANKE WWSJMay 24, 2006; Page A14
On Sunday, voters in Montenegro turned out in record numbers and gave a collective "thumbs down" to their republic's loose union with Serbia. Although the final curtain has not yet been drawn on this Balkan drama, when it is, what remains of the former Yugoslavia will disappear, and, after 88 years, Montenegro will once again be independent.
Montenegro's drive for independence is as much a story
about money as it is about Balkan politics. Unfortunately, the money side
of the story has tumbled down what George Orwell called a "memory hole."
[Bill]
Not-so-funny money
So what's the story? From 1971 through 1991, Yugoslavia's annualized inflation rate was 76%. Only Zaire and Brazil topped that dreadful performance. But things got worse -- much worse. In early 1991, the federal government of Prime Minister Ante Markovic discovered that, late in 1990, the Serbian parliament, which was controlled by Slobodan Milosevic, had secretly ordered the Serbian National Bank (a regional central bank) to issue $1.4 billion in credits to Slobo's friends. That illegal plunder equaled more than half of all the new money the National Bank of Yugoslavia had planned to create in 1991. Besides lining the pockets of a good many Serbian communists, it sabotaged the Markovic government's teetering plans for economic reform. It also fanned the flames of nationalism in Yugoslavia and hardened the resolve of the leaders in Croatia and Slovenia to break away from the Socialist Federal Republic of Yugoslavia.
Without the Croats and Slovenes to fleece, Milosevic turned on his "own" people. Starting in 1992 and lasting 24 months, what was left of Yugoslavia endured the second-highest and second-longest hyperinflation in world history, peaking in January 1994 when prices increased by 313,000,000% in one month. In all, there were 14 maxi-devaluations during the hyperinflation, with each of the final three exceeding 99.9%, completely wiping out the dinar's value in November '93, December '93 and January '94.
Only Hungary, in 1946, recorded a higher rate, and only the Soviet Union suffered hyperinflation longer, for 26 months in the early 1920s. Even Weimar Germany's much-recounted hyperinflation of 1922-23 was far less virulent than the repeated decimation of the Yugoslav dinar. For a sense of its impact on the local population, imagine the value of your bank accounts in dollars and then move the decimal point 22 places to the left. Then try to buy something.
Yugoslavia's monetary orgy finally came to an end when the Topcider mint ran out of capacity. The hyperinflation was transforming 500-billion-dinar bills into small change before the ink had dried. But Milosevic's monetary mischief was nothing new. The old Serbian kings were notorious coin-clippers. As long ago as the early 14th century, King Milutin minted imitation Venetian silver coins at Novo Brdo and Prizren, located in what is now Kosovo. These fakes contained only seven-eighths as much silver as the real things. Venice banned the fakes, and, in his "Divine Comedy," Dante denounced "the King of Rascia" as a counterfeiter.
In 1999, President Milo Djukanovic (now prime minister) decided he wanted Montenegro independent and out from under Serbia's political yoke. I counseled that he play the currency card. Over the decades, the Yugoslav dinar had been completely discredited. For most Yugoslavs, the mighty deutsche mark was the unofficial coin of the realm. That was the reality. In addition, I repeated the great Austrian economist Ludwig von Mises's argument that sound money "was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights."
Mr. Djukanovic knew that the deutsche mark was his trump card, one that would pave the way for reestablishing Montenegro's sovereignty. On Nov. 2, 1999, he boldly announced that Montenegro was dumping the Yugoslav dinar and officially adopting the deutsche mark as its national currency (the DM was subsequently replaced by the euro in January 2002). There were no International Monetary Fund bureaucrats to contend with (at the time, Yugoslavia had no formal relations with the IMF and Montenegro was part of the rump Yugoslavia). Civil servants from Washington had not yet located Podgorica, and the NGO invasions weren't even a glimmer in any planner's eye. Furthermore, the so-called experts in Brussels hadn't yet issued their bizarre 2000 edict on the euro, which stated that "it should be made clear that any unilateral adoption of the single currency by means of 'euroisation' would run counter to the underlying economic reasoning of [the European Monetary Union]." Mr. Djukanovic had room to maneuver and coolly play his card. By doing so, the die was cast for Sunday's election.
Mr. Hanke, a professor of applied economics at Johns Hopkins, served as an economic adviser to the president and state counselor of the Republic of Montenegro from 1999-2003.
21.Paved With Good Intentions A crusading economist argues that utopian foreign aid plans do little to ease world poverty.
Reviewed by David Ignatius
Sunday, May 21, 2006; Page BW06
THE WHITE MAN'S BURDEN
Why the West's Efforts to Aid the Rest
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Have Done So Much Ill and So Little Good
By William Easterly
Penguin Press. 436 pp. $27.95
This is the season for critiques of global misadventures, and William Easterly has written a valuable one. His target in his puckishly titled The White Man's Burden is the spirit of benign meddling that lies behind foreign aid, foreign military interventions and such do-gooder institutions as the World Bank, the International Monetary Fund (IMF) and the United Nations. In his account, such efforts are fatally contaminated by what the philosopher Karl Popper called "utopian social engineering." Easterly's list of well-meaning villains stretches from the economist Jeffrey Sachs to the rock singer and charity impresario Bono.
His analysis is depressing but quite readable -- thanks largely to his skill in giving lively names and conceptual handles to his explanations for why the West's charitable works in fact accomplish "so much ill and so little good." The do-gooders' fundamental flaw, he argues, is that they are "Planners," who seek to impose solutions from the top down, rather than "Searchers," who adapt to the real life and culture of foreign lands from the bottom up. The Planners believe in "the Big Push" -- an infusion of foreign aid and economic advice that will lift poor countries past the poverty trap and into prosperity. But the Planners are almost always wrong, Easterly contends, because they ignore the cultural, political and bureaucratic obstacles that impede the delivery of real assistance (as opposed to plans for such assistance) to the world's poor. "The right plan is to have no plan," he asserts, in an economist's version of a Zen koan.
Think of Easterly as a kind of anti-Thomas L. Friedman. His dyspeptic view of globalization contrasts with the optimism of the New York Times columnist, but he has written his broadside in a brisk, Friedman-esque style of aphorisms, anecdotes and witty headings. Some of his section and chapter titles convey the breezy tone in which he delivers his gloomy analysis: "Why Planners Cannot Bring Prosperity"; "The Legend of the Big Push"; "The Rich Have Markets, the Poor Have Bureaucrats." Scattered throughout the book are upbeat "Snapshots" of poor Africans and Asians whom Easterly, now an economics professor at New York University, met on his travels during more than 16 years spent working as a World Bank development economist; he also offers portraits of the "Searchers" who are helping the developing world.
I confess that I occasionally began to find all the aphorisms and snapshots annoying; there actually is such a thing as a book about development economics that is too readable. And I would have been happier if his sainted Searchers had been subject to a bit more of the same skepticism that Easterly applies to the odious Planners. Not to diminish the "social entrepreneurs" whom Easterly celebrates, but their well-publicized efforts are a bit of a racket too. I've met with and marveled at some of the same African and Asian innovators Easterly applauds, but it is a tad utopian to think that these little examples will add up to big changes, absent the fundamental reforms for which Easterly has such scorn. For instance, he praises the success of an NGO called Population Services International in finding a way for poor Africans to make a profit distributing the bed nets that can prevent malaria. But surely the challenge for development economists is to find ways to replicate such efforts on a larger scale, which involves the dreaded "P" word.
What makes this book valuable is its devastating detail. Easterly, the author of an influential previous book, The Elusive Quest for Growth , has assembled overwhelming evidence of how little has been accomplished with the hundreds of billions of dollars in aid money, the thousands of advisory missions, the millions of reports and studies. Rebutting the "Big Push" idea favored by World Bank planners, he notes that 22 African countries spent $342 billion on public investment from 1970 to 1994 and received another $187 billion in foreign aid over that period. But the productivity gain from all this investment was zero. As an example of the Planners' folly, he cites the $5 billion spent since 1979 on a publicly owned steel mill in Nigeria that has yet to produce any steel.
Easterly's critique of the World Bank and the IMF is persuasive. He argues that the IMF's structural-adjustment lending -- in which indebted countries get more money on the condition that they agree to Planners' free-market reforms -- simply hasn't worked. One big reason is that the IMF, like the World Bank, is always fudging its failures, finding excuses for why past aid and advice haven't worked, discovering reasons to pump in even more assistance. Indeed, Easterly finds a freakish correlation between IMF interventions and failed states. He notes the role corruption has played in distorting foreign aid and the growing insistence of aid donors on "good governance." But he cautions that attempting to change political cultures from afar often produces a show of good governance -- like the 2,400 reports Tanzania must produce every year for aid donors -- rather than the real thing. The absurdity of this hortatory culture emerges in his observation that among the 185 actions recommended by the 2002 Johannesburg Summit on Sustainable Development was "efficient use of cow dung."
With all of Easterly's aid-bashing, one might imagine that he is a conservative promoter of market solutions. But some of his most powerful criticism is reserved for the Planners who advocated "shock therapy" free-market reforms in Eastern Europe and the former Soviet Union. Free markets can't be imposed from outside, he insists, citing the example of the inefficient Soviet-era plants that survived their entry into the market era via their communist bosses' genius for bartering and cronyism. "The Soviet-trained plant managers at the bottom outwitted the shock therapists at the top," he writes. He finds a similar failure of free-market diktats in Latin America. The best era for Latin American growth was 1950 to 1980, the heyday of state intervention, while growth slowed in the market-reform years of the 1990s. As a result, Easterly argues, "the backlash against free markets is unfortunately now gaining strength in Latin America."
So what works? Easterly's argument is that if it's imposed from the outside, almost nothing works -- in either the economic or political sphere. It's no accident, he argues, that the great East Asian economic success stories of recent decades -- Japan, China, Taiwan, South Korea, Thailand -- all took place in countries that were never successfully colonized by the West. These nations evolved their own cultures, rules and disciplines and built an indigenous foundation for rapid economic growth. The region's laggard is the one nation that was colonized: the Philippines.
Easterly's dissection of the interventionist impulse of the Planners is powerful. His enthusiasm for the bottom-up successes of the Searchers is less so. He's looking hard for something encouraging to say, but it's a measure of the potency of his corrosive analysis that the good news isn't very convincing. ?
David Ignatius is a syndicated columnist for The Washington
Post. His new spy novel will be published next spring.
22. How To Break Open the Mexican Piñata By MARY ANASTASIA O'GRADY WSJ May 12, 2006; Page A19
On the heels of the 1994 Mexican peso devaluation, World Bank economist Sebastian Edwards likened the case for deep and rapid economic restructuring to an observation from Alice in "Through the Looking Glass": "It takes all the running you can do to keep in the same place. If you want to go somewhere else, you must run at least twice as fast as that."
Maybe if Mexico had taken that advice, real Mexican wages
would not have stagnated for more than a decade, leaving workers with the
same purchasing power today that they had in 1993. Instead, Mexico managed
only enough reform to stay in "the same place" while its global competitors
have raced ahead. The differences in gross domestic product growth over
the past five years demonstrate the point.
[The Competition Gap]
Maybe too, if Mexico's so-called reformers had been serious about moving to a fully liberalized market economy, a hard-left populist demagogue like Andres Manuel López Obrador of the Revolutionary Democratic Party wouldn't be a serious contender in the July 2 presidential election. But with the income gap between the U.S. and Mexico remaining unchanged since before the signing of the 1994 North American Free Trade Agreement, it's no wonder emigration is vibrant and that Mexicans who stay home are skeptical about promises from economic liberalizers.
For those still hopeful about the emergence of a modern Mexico there is reason this week to be cautiously optimistic. Polls continue to show that Felipe Calderon of the National Action Party (PAN) has pulled ahead of Mr. López Obrador by some five percentage points in the campaign for president. It now looks like the country might avoid a swing to the authoritarian left that four months ago seemed a certainty. Still, a Calderon victory remains far from guaranteed and a close race a real possibility.
This is a wake-up call for Mexico. World Bank economists estimate that developing countries need annual growth rates of 5% to 6% for at least a decade to begin to move people out of poverty. But Mexican GDP growth from 1997 to 2005 averaged just 3.5% a year -- and a good part of that was attributable to the post-devaluation bounce of the late 1990s. Mexico's modernizers have fair warning: Either produce better results or risk going the way of Bolivia.
The economy's anemic performance can be best observed in the export sector. Mexico's share of U.S. imports fell to 10.2% in 2005 from 11.5% in 2001 and that includes oil. Strip out oil, and the deterioration is even worse. Mexican bureaucrats like to blame this on "unfair" competition from China but the truth is that Mexico, sitting on the border of the world's largest economy, has been unable to exploit its own comparative advantages.
The reason is simple. A 21st-century economy is shackled by 20th-century monopolies, vestiges of the old Institutional Revolutionary Party (PRI), in some of the economy's most crucial sectors. Single or dominant players control pricing in telecommunications, cement, transportation, electricity and oil. Market data show that Mexicans are overpaying for all of it. This impacts living standards for consumers. But it also hurts Mexican output. Growth is damped and so are new opportunities. Capital is misallocated and excess labor persists. On the export front, producers have little choice but to pass their high costs on to their customers, which means they become less competitive in world markets.
If Mexico is to enter the global growth game it has to reduce its internal cost of production. This isn't rocket science. But it is rather inconvenient for the Mexican political class, which relies heavily on the monopolists as its clients. What is particularly discouraging is that it may have become cheaper than ever for domestic producers to buy political influence since the collapse of one-party rule under the PRI. With politicians weaker today than they used to be, they can be more dependent on special interests.
This could explain why leadership on the competition question has disappeared just at the time it is so badly needed. Three weeks ago, in a stunning rejection of economic reality, the Mexican Congress made it illegal to discount the sale of books. By legalizing price collusion among distributors, Congress has ensured that discounters can't move into the market.
Raising the cost of a fundamental learning tool ought to be an embarrassment for politicians who are perpetually whining about a shortage of education funds and insisting that it is the social responsibility of Mexico's Nafta partners to help. But Congress is serving other interests here. The beneficiaries of the new law will be established book distributors, such as Grupo Sanborns -- owned by Mexico's richest man, Carlos Slim -- which will no longer have to worry about aggressive retailers driving down prices. Losers will be poor Mexicans, the ones Mr. Slim, wearing his philanthropist hat, is always pledging to help, who will now have to overpay to read. Mr. Fox could veto the law but is not expected to.
Mr. Slim is already Mexico's national symbol of monopoly privilege through his ownership of the former government-owned telephone company Telmex. Mexican telecom was supposed to be liberalized in 1997 but over the past five years the Fox government has refused to implement the full deregulation Mexico needs to drive down prices.
Despite the success of the book sellers in Congress, a ray of hope recently peaked through the clouds with the passage of a new competition law. It's too early to tell whether the law will be effective but analysts say that it gives Mexico's anti-trust commission more power to carry out its mandate. If Mr. Slim's rumored resistance to the legislation is any guide, it may well be what Mexico needs to bring about a new era of competition.
And not a moment too soon. If policy makers don't get
serious about creating the conditions for competition so that the economy
begins to grow at meaningful rates, Mexico will remain precariously vulnerable
to the socialist ideology of Venezuelan Hugo Chávez or his home-grown
equivalent. And even running fast enough to stay in one place will be difficult.
23. Tales from Mugabeland
May 18, 2006
Those who thought that the situation in a once-thriving Zimbabwe couldn't get any worse were wrong. Under the care of 82-year-old Robert Mugabe, inflation recently topped the 1,000% mark, by far the highest in the world. Last year's estimated rate of 585% was nearly 12 times that of the country with the next-highest inflation, Iraq. Four in five Zimbabweans are out of work.
Many are close to starvation, too. The country's agricultural output has continued to plummet since Mr. Mugabe launched a drive six years ago to steal the land of thousands of white farmers and distribute it among his cronies.
In Mugabeland, in fact, even hopeful news soon enough
turns bad. Late last month, Security and Land Minister Didymus Mutasa told
several news outlets that the government might welcome white farmers back
to state-owned land on 99-year leases. It sounded like the regime had realized
the huge cost to its people, and itself, of its land-theft policies.
[Robert Mugabe]
Many white farmers from Zimbabwe were welcomed with open arms by next-door Mozambique and Zambia. Those more enlightened regimes saw it in their self interest to attract good farmers. Chased out of Zimbabwe, many of these men and women have thrived in their new homes.
Then Mr. Mutasa said Zimbabwe wanted them back. "When white farmers go back to their land," he told South Africa's Sunday Independent, "I hope they will say they were allowed to go home by President Mugabe. He let this happen."
Or maybe not. A few days later -- and after a heart-to-heart with the boss, no doubt -- Mr. Mutasa said the earlier reports were lies. "No white farmer is being invited back. And why should we offer them such long leases?"
So it's back to normal in Zimbabwe, which means that the regime's "cleanup" of the capital city Harare is kicking into higher gear. Over the past year, hundreds of thousands of residents, accused of sympathizing with the opposition party, were evicted from their homes. Monday, state media reported that some 10,000 "vagrants" and "street children" were arrested for causing a "significant proportion" of the crime in Harare.
Given Zimbabwe's government-inflicted economic woes, it's not surprising if some people have turned to crime. Mr. Mugabe has also targeted black-market vendors, quashing one of the few ways left to earn a livable wage. But 10,000 detentions in one day was de rigueur at the height of last year's "Operation Drive Out the Rubbish." Now, as then, the illicit-behavior explanation is likely a lie to excuse more repression.
Last summer, these columns applauded the harsh line U.N.
Special Envoy Anna Tibaijuka took in her report about Mr. Mugabe's demolition
derby. We also noted, "As usual, however, when it comes to the U.N. the
proof will be in the follow-up, if there is one." Nearly 10 months later,
there's been little but talk out of Turtle Bay or Zimbabwe's neighbors
in the African Union, as if talk would scare Mr. Mugabe. Both the U.N.
and the AU have promised to address the continent's problems. They're turning
out to be about as reliable as Didymus Mutasa's word.
24. Caring vs. uncaring May 10, 2006 by Walter E. Williams ( bio | archive | contact ) http://www.townhall.com/opinion/columns/walterwilliams/2006/05/10/196682.html
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George Orwell admonished, "Sometimes the first duty of intelligent men is the restatement of the obvious." That's what I want to do -- talk about the obvious, starting with the question: What human motivation leads to the most wonderful things getting done?
How about the charity and selflessness we've seen from people like Mother Teresa? What about the ceaseless and laudable work of organizations like the Red Cross, Habitat for Humanity and Salvation Army? What about the charitable donations of rich Americans, to use the silly phrase, who've given something back?
While the actions of these people and their organizations are laudable, results motivated by charity and selflessness pale in comparison to other motives behind getting good things done. Let's look at it.
In December 1999, Stephen Moore and Julian L. Simon wrote an article titled "The Greatest Century That Ever Was," published by the Washington, D.C.-based Cato Institute. In it they report: Over the course of the 20th century, life expectancy increased by 30 years; annual deaths from major killer diseases such as tuberculosis, polio, typhoid, whooping cough and pneumonia fell from 700 to fewer than 50 per 100,000 of the population; agricultural workers fell from 41 to 2.5 percent of the workforce; household auto ownership rose from one to 91 percent; household electrification rose from 8 to 99 percent; controlling for inflation, household assets rose from $6 trillion to $41 trillion between 1945 and 1998. These are but a few of the wonderful things that have occurred during the 20th century.
Returning to my initial question: What human motivation accounts for the accomplishment of these and many other wonderful things? The answer should be obvious. It was not accomplished by people's concern for others but by people's concern for themselves. In other words, it's people seeking more for themselves that has produced a better life for all Americans.
Take a minor example. I think it's wonderful that Idaho potato farmers get up early in the morning to toil in the fields, which results in Walter Williams in Pennsylvania enjoying potatoes. Does anyone think they make that sacrifice because they care about me? They might hate me, but they make sure that I enjoy potatoes because they care about and want more things for themselves.
What about all those people who've invented and marketed machines that do everything from diagnosing illnesses to controlling air flight? Were they basically motivated by a concern for others, or were they mostly concerned with their own well-being?
One of the wonderful things about free markets is that the path to greater wealth comes not from looting, plundering and enslaving one's fellow man, as it has throughout most of human history, but by serving and pleasing him. Many of the wonderful achievements of the 20th century were the result of the pursuit of profits. Unfortunately, demagoguery has led to profits becoming a dirty word. Nonprofit is seen as more righteous, particularly when people pompously stand before us and declare, "We're a nonprofit organization."
Profit is cast in a poor light because people don't understand the role of profits. Profit is a payment to entrepreneurs just as wages are payments to labor, interest to capital and rent to land. In order to earn profits in free markets, entrepreneurs must identify and satisfy human wants in a way that economizes on society's scarce resources.
Here's a little test. Which entities produce greater consumer satisfaction: for-profit enterprises such as supermarkets, computer makers and clothing stores, or nonprofit entities such as public schools, post offices and motor vehicle departments? I'm guessing you'll answer the former. Their survival depends on pleasing ordinary people, as opposed to the latter, whose survival is not so strictly tied to pleasing people.
Don't get me wrong. I'm not arguing that self-interest and the free market system produce perfect outcomes, but they're the closest we'll come to perfection here on Earth.
Since 1980, Dr. Williams has served on the faculty of George Mason University in Fairfax, VA as John M. Olin Distinguished Professor of Economics.
25. Costa Rican Poverty Fighter By MARY ANASTASIA O'GRADY
May 5, 2006; Page A17
Immediately after President-elect Oscar Arias takes office in Costa Rica on Monday, he will have an historic opportunity to help bring his country into 21st-century competitiveness. The choice? Whether to adopt a national flat tax on corporate and individual income.
Mr. Arias is a seasoned social democrat who earned an international reputation for his work on Central American peace, for which he won a Nobel Peace Prize in 1987. He has already served one term as president from 1986-1990.
Yet despite his reputation as a man of the left, Mr. Arias is also a practical socialist, blessed with common sense and not averse to leading on controversial issues. He has pledged to fight for the ratification of the Central American Free Trade Agreement even though the country's labor unions are militantly opposed to it.
On the flat tax, Mr. Arias is already sending encouraging
signals. Last week his National Liberation Party made an agreement with
the Libertarian Movement in Congress to seriously explore the idea. Together
the two parties would have enough votes to make it a reality.
[Flat Tax Models]
The concept is anathema to Costa Rica's hard left, which is crying foul on grounds that a single, low rate is unjust: Under a flat tax the rich don't pay their fair share and it leads to profits -- a dirty word to Latin socialists -- for business.
Yet the flat tax has already proved an effective way to fight poverty in a host of developing countries. (See nearby table.) For individuals, tax evasion goes down and tax collection goes up because of better compliance. Low corporate rates attract capital, spurring economic growth and job creation. That means there is more money in government coffers to help the needy. Without a laundry list of tax exemptions and loopholes, corruption is thwarted.
If anyone can sell these concepts to Costa Ricans, it's Mr. Arias. He has the confidence of many Costa Ricans who tend to distrust the private sector, thanks in part to the systematic indoctrination of young minds by the left-wing national teachers' union.
In this sense, Mr. Arias is not unlike Chile's former Socialist President Ricardo Lagos, Brazil's former President Fernando Henrique Cardoso or Britain's Labor Prime Minister Tony Blair. Like Messrs. Lagos, Cardoso and Blair, Mr. Arias seems to be actually interested in good ideas and in creating a legacy that leaves behind a better nation.
The bad news for the new president is that there is not enough money in the budget to fund his campaign promises of more social spending on education, health care and housing. With 80% of the revenues already committed to wages, pensions, debt service and higher education, the only way to offer more is to ensure that the pie gets bigger. There is also fiscal pressure to enhance law enforcement funding, which has not kept up with modern crime, and to address a national epidemic of potholes in the dilapidated highway system.
The traditional Latin American method of curing the condition known as scarce resources is to raise taxes. But one reason the budget is already strained is that Costa Rica's steeply progressive income tax rates for individuals have provoked skyrocketing evasion. Government estimates say 70% of taxes owed are not paid.
On the corporate side, the current rate of 30% already discourages investment. And Costa Rica's special tax-free zones for exporters need to be phased out by 2009 if the country is to remain compliant with World Trade Organization rules. Thus there are strong incentives to create a new flat tax for both individuals, to boost compliance, and for corporations, to regain competitiveness.
Introducing a flat tax is analogous to hanging out a sign that says: Open for business. Just ask Slovakia, which in 2004 adopted a flat tax for corporations and individuals of 19%. Since then it has been drawing in large amounts of capital from Western Europe and its economy is growing rapidly. After Russia implemented a 13% flat rate for individuals, evasion went down and revenues rose sharply.
Mr. Arias already understands the connection between lower corporate taxes, investment and rising living standards. He has mentioned Ireland, with its 12.5% corporate rate, as a model for Costa Rica. The Costa Rican daily La Nación reported last month that he was considering special corporate tax zones with rates below 10%. Referring to a 15% rate under discussion in Congress, La Nación reported that "Dr. Arias asserted that one cannot fool himself thinking that anyone can compete at that high tax."
That's a promising start for the debate but to be competitive Costa Rica will have to avoid a policy of limiting low flat rates to special economic zones since other flat-tax countries don't attach strings. Moreover, as Chris Edwards of the Cato Institute points out, "Carving out special tax rates and incentives for particular industries and regions is not only inefficient, it is an open invitation for corruption."
There is growing support for a flat tax from some of Costa Rica's opinion makers. An April 10 editorial in La Nación supported the idea and an important former central bank president has come out in favor of it. If Costa Rica introduces a flat tax now, it could get a jump on its Cafta neighbors in attracting investment. With its highly literate population, a flat-tax Costa Rica could easily become a prime destination for multinational investment.
A recent KPMG survey reported that the average corporate
rate for the Latin American region is over 28%. That means that any Latin
country that adopts a simple, low rate for the entire nation will instantaneously
grant itself a vast comparative advantage. Over to you, Mr. Arias.
26. Baltic Tiger
April 20, 2006; Page A14
What's the reward for taking over a devastated ex-Soviet economy at the tender age of 32 and rapidly turning it into one of Europe's dynamos? Some measure of personal satisfaction, no doubt. The gratitude of your countrymen. And, it turns out, a pretty substantial cash prize. The Cato Institute will announce today that former Estonian Prime Minister Mart Laar is the winner of its biennial Milton Friedman Prize for Advancing Liberty. He will receive a $500,000 check at a ceremony next month in Chicago.
Mr. Laar is the third recipient of the award -- previous winners were development economists Peter Bauer and Hernando de Soto -- and in one sense, at least, the most apt. Mr. Laar has acknowledged that Mr. Friedman's "Free to Choose" was the only economics book he had read when he took power in 1992. He had absorbed Mr. Friedman's ideas about privatization, the flat tax and free trade and moved with impressive speed to make them policy. "It seemed common sense to me and, as I thought it had already been done everywhere, I simply introduced it in Estonia," he said.
Mr. Laar soon discovered he was turning little Estonia into a reform leader not just among the ex-Soviet bloc countries, but compared with the increasingly calcified welfare states of Western Europe too. One of the prices Estonia reluctantly paid for the perceived security guarantees that came with its European Union membership in 2004 was some degree of retrogression -- the EU calls it "harmonization" -- in its free-market economic policies.
Still, Estonia ranks seventh among the world's freest economies in the annual Heritage Foundation/Wall Street Journal Index of Economic Freedom, the only ex-Soviet bloc country in the top 10. It has a flat-rate income tax, a currency board that pegs its kroon to the euro for stability, and a low external tariff rate (albeit slightly higher since joining the EU). Those policies have helped Estonia achieve 6%-plus annual economic growth in recent years.
Mr. Laar hasn't stopped championing the cause of freedom
since his premiership ended in 2002. "Central Europeans and others won't
stand French-style anti-Americanism," he told us three years ago when Estonia
joined the "Vilnius 10" in backing freedom for Iraq. His Friedman Prize
is well deserved.
Tuesday, April 18, 2006 ~ 11:19 a.m., Yesim Yilmaz
Wrote:
27 Fed study confirms benefit of tax competition.
"Racing to the Top: How Global competition disciplines Public Policy"
is the title of the 2005 annual report of the Federal Reserve Bank of Dallas-always
a good read. This year's report focuses on the impact of globalization
on the government imposed-bureaucracy, monetary policy and fiscal policy.
The analysis finds that while globalization has helped countries become
more business-friendly and has disciplined monetary policy, governments
of highly globalized countries continue to overspend even though they have
been forced to cut some tax rates:
Countries have found they
can't tax mobile factors heavily. So workers and their employers, less
able than money to move across borders, get stuck with the tab for an expanding
public sector. ... Fiscal policy shouldn't be exempt from globalization-at
least in theory. Companies and workers ought to realize that ever-growing
spending, when not covered by existing or new revenue streams, will someday
lead to budget cuts or higher taxes. Knowing this, they should seek the
safety of economies with sounder fiscal policies. ... Why aren't mobile
factors on the run from bigger government? Many businesses and workers,
of course, have language, cultural and other bonds to their home countries.
Many governments operate on debt, so the lag between receiving benefits
and paying for them may also be key. Companies, investors and even workers
may be willing to stay put for short-term advantages of government spending,
including lucrative subsidies and contracts aimed at attracting business.
Otherwise-mobile factors can pocket the money now, knowing they are free
to relocate when the bills come due and leave the debt to future generations.
http://www.dallasfed.org/fed/annual/2005/ar05f.pdf
Tuesday, April 11, 2006 ~ 8:28 a.m., Yesim Yilmaz Wrote:
28. What is the optimal size of government spending
in Europe? Primo Pevcin from the University of Ljubljana asks,
in this short paper, whether an optimal size of government spending exists.
Empirical studies almost consistently find a negative relation between
the size of government sector and the economic growth. One way to interpret
this finding is that governments have expanded beyond their "optimal" levels,
so the marginal costs associated with government spending (caused by the
misallocation of capital and labor) are higher than the benefits (the provision
of genuine "public goods" such as the rule-of-law). The corollary to this
statement is that shrinking governments to their optimal size will boost
growth in the economy. Relying on this non-linear relation between the
size of the government sector and economic growth, Pevcin calculates the
optimal size of the governments for a selected set of EU countries. He
finds that, on average, the governments exceed their optimal size by almost
19 percent, though most economists estimate that government should be even
smaller. Pevcin notes:
A substantial broadening in the scope of government activities occurred in recent decades in the majority of developed countries, primarily due to the development of modern welfare states. However, those welfare states have faced with several problems, especially in the form of efficiency losses from redistribution and disincentives of high taxation, which have obviously caused the decline of long-term GDP growth. Although negative and statistically significant relationship between government size and GDP growth has been established in this and several other studies, mainstream theory predicts that the negative effect should be expected in countries where the size of government sector exceeds a certain threshold. Consequently, optimal size of government sector from GDP growth perspective should exist. The panel data estimates of Armey Curve suggest that optimal size of government in the sample of 12 European countries is approximately between 36 and 42 percent of GDP, indicating that potential scope for reduction of government spending ratio is from approximately 19 to approximately 30 percent. However, given the fact that large differences in the size of government across countries included in the sample exist, some theoretical as well as methodological considerations about panel data estimation occurred. Consequently, separate time series data estimations are implemented, implying, on average, approximately 19 percent reduction in government spending ratio.
http://soc.kuleuven.be/io/egpa/fin/paper/slov2004/pevcin.pdf
Lin
Iraq index at Brookings Inst
Saturday, April 8, 2006 ~ 1:19 p.m., Yesim Yilmaz Wrote:
29. Women benefit from export-oriented factory jobs.
Entry-level jobs in export-oriented industries are often criticized
as sweatshop employment that prevents employees (who tend to be women)
from receiving decent schooling. A recent study by William C. Gruben and
Darryl McLeod of Federal Reserve Bank of Dallas focusing on the textile
and footwear industries in developing countries show that factory jobs
in these industries encourage rather than diminish women's education, delay
female workers' marriage and motherhood, and doesn't increase child labor.
The authors find that for the average country, a doubling of apparel and
footwear exports as a shore of GDP raises female secondary-school attendance
by 20 to 25 percent. The authors note:
These findings should help
remove the stigma attached to factory jobs and encourage nations to include
them as an integral part of development. The findings also reinforce long-held
arguments in economic development theory that the replacement of agricultural
or rural informal sector jobs with light-industry assembly firms is an
important step in raising incomes. Our research refutes claims that apparel
and footwear production leads to lower educational achievement for women.
We find that clothing and shoe production requires more education than
the average woman has attained in many developing countries. The plants
usually don't hire women without at least a junior high education. In Bangladesh
and other major apparel-exporting nations, to qualify for these jobs, more
women stay longer in school. Our study also allays concerns that the export
factories create jobs for underage workers: Female workers' commitment
to seek more education delays childbearing and lowers the incidence of
child labor. In short, the maligned suppliers of Nike, Gap and Wal-Mart
encourage governments to educate women, give women a reason to stay in
school and pay them well by local standards. Our study presents a picture
of textile and footwear plants that's far less harrowing than the sweatshop
stereotype and more compatible with surveys in dozens of countries that
find female workers feel they benefit from the factory jobs.
http://dallasfed.org/research/eclett/2006/el0603.pdf
30. Indian Lessons By JAGDISH BHAGWATI WSJ February 28, 2006; Page A16
Talking to Indian reporters on the eve of his visit to India, President Bush recalled Mahatma Gandhi as "so spiritual that he captured the imagination of the entire world." He was no doubt alluding to Gandhi's great achievement in teaching us all the virtues of nonviolence. But if he were to study India's accomplishments and failures in the years since its independence, he would also detect lessons for his current foreign policy preoccupations.
After all these years of Realism in U.S. foreign policy,
the Bush administration is appropriately interested in the spread of democracy
worldwide. Yet as the U.S. goes about its business of pressure-cooked democratization
in Iraq, we need to appreciate that Indian democracy succeeded because
her political institutions were a legacy that evolved over decades under
British rule. During those years, the rule of law, elections, the judiciary,
even NGOs, developed through the land. Iraq's difficulties illustrate,
by contrast, how hard it is to transplant functioning democratic institutions.
[Manmohan Singh]
Nehru's India -- 1947 to 1964 -- showed well how the give-and-take of democratic practice managed to hold the country together against the separatist tendencies that confronted a nation of many languages and religions, despite the massacres and population transfers that followed its partition in 1947. Nehru typically tried to impose "rational" solutions, but often gave way when confronted by continuing agitation. Given India's size, even if a tiny fraction took to the streets, you were dealing with huge mobs! Accommodation of minorities and dissenting viewpoints, rather than confrontational politics by the majority, is what Nehru practiced; and that remains a role model that the U.S. needs to study when nudging nascent democracies abroad.
But starting with Nehru, and way beyond his death, we know that India's economy took the wrong turn and embraced a "socialist" model whose pillars were near-autarky in trade based on self-fulfilling pessimism about export potential; a hugely restrictive policy on inward investment based on fear; a knee-jerk set of controls on production, investment and trade; and a lovefest with public sector enterprises that proliferated beyond utilities while making huge losses. Many of these policies began to be substantially reversed, starting particularly in 1991 when the present prime minister, Manmohan Singh, was finance minister. Overhauling the old policy framework was a gigantic task that is still ongoing. Besides, the coalition with the communists, and the return of the old, discredited socialists within the Congress Party, has created difficulties in sustaining the momentum of reforms.
But President Bush, no more than many Indians themselves, needs no lesson in the virtues of an open economy integrated into the world economy through trade and investment, and exploiting private initiatives, innovation and enterprise. These reforms have taken the Indian economy to a significantly higher growth path and, more important, have finally made a noticeable dent in poverty. After all, it is reasonable to suppose that rapid growth will produce more jobs and pull more of the poor into gainful employment. So reformers interested in reducing poverty can only rejoice; and the president should be able to tell the Doubting Thomases: Go and see for yourself in India.
Yet the last Indian election created the absurd presumption that the rejection of the ruling BJP was a rejection of economic reforms -- that these reforms had increased poverty and inequality. But the fact is that urban and rural poverty had finally declined. As long as India was mired in policies that produced little growth, the poor had seen few benefits and their numbers had increased, with the consequence that the poor kept voting in the ruling Congress Party because they regarded their poverty fatalistically -- a phenomenon I have called, on these pages, the "non-revolution of falling expectations." Once the reforms that the left likes to call "neoliberal" -- in contrast to their prescriptions which might, in riposte, be called "neanderthal" -- took root, poverty declined; and the poor, who had improved their incomes, began to ask for more, precipitating a "revolution of perceived possibilities" (or a "revolution of rising expectations").
These aspirations had little to do with inequality between rural and urban areas; it was almost entirely self-referential: If I had become less poor, then I believed that I could do even better if I elected a government that promised me more. India's democracy, with its nearly three million NGOs, opposition parties and a functioning judiciary, translated these aroused aspirations into politically effective demand, resulting in the loss of elections by nearly all incumbent state governments.
By contrast, China's greater economic success has led to increased social protests in the rural areas; we hear constantly of "land grabs" leading to disruptive demonstrations. A concerned Chinese government has translated these protests into the erroneous view that they are primarily the result of rural-urban inequality. But, this explanation is a witless repetition of the mistaken focus on inequality as the prime mover in political reaction. In China's case, it is evident that if a commissar's cronies grab your land, a phenomenon that may reflect also the fact that increased prosperity makes land more valuable to grab, there is no redress because there are hardly any NGOs, no opposition parties, no free press and no independent judiciary. So you turn to the streets. The Chinese rulers cannot face up to the fact that their antidemocratic structures are at the heart of the problem of increasing rural unrest; they cling to the self-serving view that economic inequality is the cause.
India's democracy and the institutions that go with it give her the edge in long-term stability and sustainable growth, relative to authoritarian China. Economic and political freedoms make a powerful cocktail: President Bush, who values democracy and economic freedom (in the sense of a judicious use of markets and embrace of freer trade), will find in India's experience a confirmation of the fundamental soundness of this approach to development.
Mr. Bhagwati, University Professor of Economics and Law
at Columbia and senior fellow at the Council on Foreign Relations, is author
of "In Defense of Globalization" (Oxford, 2004).
Tuesday, February 14, 2006 ~ 10:48 a.m., Sven Larson Wrote:
Big government means waste and inefficiency. Three researchers
at the European Central Bank report that smaller governments (those that
consume less than 30 percent of GDP) are much less likely to waste money.
Their innovative research shows that keeping government small has been
crucial to the success of emerging market/high growth countries like Ireland,
Chile, and the East Asian Tigers. These results reinforce what the same
authors showed in their 2003 report [http://www.ecb.int/pub/pdf/scpwps/ecbwp242.pdf],
namely that large public sectors inevitably result in an increasingly inefficient
allocation of resources:
From the analysis of composite
public sector performance (PSP) and efficiency (PSE) scores we find that
countries with lean public sectors and public expenditure ratios not far
from 30% of GDP tend to be most efficient. PSE scores of the most efficient
countries are more than twice as high as those of the poorest performers.
From the DEA results we see that a small set of countries define, or are
very close to, the theoretical production possibility frontier: Singapore,
Thailand, Cyprus, Korea, and Ireland. From an input perspective the highest
ranking country uses 1/3 of the inputs as the bottom ranking one to attain
a certain public sector performance score. The average input scores suggest
that countries could use around 45 per cent less resources to attain the
same outcomes if they were fully efficient. Average output scores suggest
that countries are only delivering around 2/3 of the output they could
deliver if they were on the efficiency frontier.
http://www.ecb.int/pub/pdf/scpwps/ecbwp581.pdf
31. Welcome to the Club of Losers
By ALEX STORY
January 20, 2006
Britain's road to economic ruin under Tony Blair and Gordon Brown is nearly complete. Next year the U.K. government will spend more as a percentage of GDP than its German counterpart for the first time in a generation -- 45.7%, according to OECD estimates. That's up from 37.5% in 2000 and surpasses Germany's figure of 45%, which has been falling. Next in Labour's sights is France. Paris spends around 53% of GDP but -- contrary to London -- is talking about cutting back in the coming years.
It is no coincidence that growth numbers for the British economy are starting to feel very Continental. While final GDP growth figures for 2005 have not been published yet, the OECD's latest projection for Britain was 1.7% -- slightly ahead of Germany's rate of 1.5% and a fraction behind France's 1.9%.
If these predictions prove correct, Britain has joined the club of the losers. By 2007, the U.K. should nearly be at the top of the Old Europe dung hill, just behind stagnant Italy in terms of growth.
Of course Mr. Brown, the chancellor of the exchequer, has blamed high oil prices and a slow housing market for Britain's sluggishness. No mention was made of explosion in public-sector employment, red tape and stealth taxes. The former has seen an increase of over 860,000 since 1997 according to the think tank Reform, bringing the total number of people employed by the state to a staggering six million, or one in 10 Britons.
Regulation, too, has cost the nation dearly. The British Chambers of Commerce estimate red tape has cost U.K. businesses almost £40 billion since Tony Blair and Mr. Brown took over in 1997. The BCC's annual Burdens Barometer, compiled by the London and Manchester business schools, put the cost of 46 separate pieces of legislation introduced over the past seven years at £15 billion a year. The biggest burdens have been imposed by the Working Time Directive, which has cost businesses more than £13 billion, and the Data Protection Act, whose cost is put at some £5 billion.
What's more, Reform says the tax burden per household has increased from around £13,000 a year in 1996-97 to nearly £18,000 by 2005-06. This is largely due to "fiscal drag," in which workers are pulled into higher brackets because the thresholds aren't increased in line with earnings. Local taxes have risen on average by 70% since 1997, and national insurance and stamp duty rose, too.
The idea that the U.K. can avoid the pitfalls of a high-tax, high-spend economy is overly optimistic, to say the least. There is no such thing as geographical exception or a magic recipe for continued economic success. Flexibility and an ability to respond to external circumstances will help. Extra spending, more borrowing and cementing privilege in public-sector employment will not.
However, with both main political parties seemingly agreeing on the flawed concepts of social justice and redistribution, and committed to ever more state interference, Britons can expect their country to decline slowly but inevitably, yet again, into an international has-been.
Why this should be so, however, has at its root two closely interlinked points. First is the political hubris and complacency of those economic liberals who mistakenly believed that the argument against socialism was won for good when the Berlin wall fell. Unfortunately, there's no such thing as a clear-cut intellectual victory. These types of battles can only be won if they are constantly fought.
This leads to the second point, which is the disappearance in Britain of a home for those people who thought themselves vindicated by the demise of corporatism, state planning and governmental encroachment in business or private lives. The current political atrophy and the acceptance of a center-left consensus by Britain's Conservative Party heralds a definitive rejection of the country's more economically liberal and successful past -- and a resumption of the country's postwar decline.
Mr. Blair has been very successful in promoting the idea of a "third way" between liberalism and socialism. Many in the media are still mesmerized by it. So much so, in fact, that intellectuals and "experts" still speak of the Labour Party's theft of the Tories' free-market clothes as if it were a serious proposition, despite the massive expansion of the state. Government spending jumped from £320 billion per annum in 1997 to £580 billion by 2005, despite benign inflation throughout this period.
For the last two general elections, the Tories also espoused a center-left agenda. They promised to spend nearly as much as Labour -- with cuts of just 0.006% overall, or £4 billion in real terms -- but more efficiently. Why the great unwashed did not flock to their banner is still a mystery.
Postwar consensus politics brought Britain to its knees by the late 1970s; there is little doubt that a 21st-century consensus will do the same.
Mr. Story, a London-based reporter for Dow Jones Newswires,
was a Conservative Party candidate for the British Parliament in the May
2005 elections.
32. GLOBAL ECONOMY DEMANDS TAX REFORM
------------------------------------------------------------------------
Rather than just consigning America to a global game of
economic
catch-up, U.S. policymakers should look to Eastern European
nations
that have adopted successful fundamental tax reforms
for answers, says
Ryan Kool of the National Taxpayers Union (NTU).
There is persuasive evidence that flat-rate income tax
systems can
place countries on a solid competitive footing, says
Kool. An analysis
of Estonia, Latvia, Lithuania and Russia -- the four
countries that
have had a flat tax in place the longest -- shows significant
economic
trends:
o Since Estonia ratified
a flat tax in 1994, annual gross
domestic product
(GDP) growth has averaged about 6
percent since
1997 and one-tenth of its domestic base
consisted
of Foreign Direct Investment (FDI) in 2003.
o Revenues have also exceeded
expectations, prompting
policymakers
to approve a cut in the 26 percent tax rate to
20 percent
by 2007.
o During the first five
years (1995-2000) of operating its
flat tax,
Lithuania's GDP jumped an average of 22
percent annually
and has trended at 7.4 percent since 2000;
similarly,
Latvia's GDP has gained over 11 percent each
year since
1997, helping to spur annual growth in
government
revenues of roughly 10.5 percent during this period.
o Despite a large "shadow
economy," Russia has experienced a
35 percent
annual increase in government revenue
since enacting
a flat tax in 2001 -- perhaps the most
convincing
case thus far that the simplicity and lower rate
of a flat
tax encourages compliance with tax laws.
The flat tax is spreading to Western Europe, into countries
with
stagnating economies and skyrocketing unemployment levels.
Indeed, the
United States, with its 6.6 billion-hour tax paperwork
burden and
dramatic decrease in FDI inflows, should be next, says
Kool.
Source: Editorial, "To Compete in a Global Economy, U.S.
Must
Discard Backward-Looking Tax Policy, Study Concludes,"
Capital Ideas,
September/October 2005; based upon: Ryan Kool, "The Flat
Tax: A Worthy
Competitor in the Global Economic Game," National Taxpayers
Union
Foundation, September 14, 2005.
For text:
http://www.ntu.org/main/press_release.php?PressID=768&org_name=NTUF
For Kool text:
http://www.ntu.org/main/press_papers.php?PressID=766&org_name=NTUF
For more on Taxes:
http://www.ncpa.org/pi/taxes/
------------------------------------------------------------------------
33. ECONOMIC EFFECTS OF MEXICAN MIGRATION
------------------------------------------------------------------------
The population of Mexican-born persons residing in the
United States
has increased at an unprecedented rate in recent decades.
According to
a paper from the National Bureau of Economic Research,
this is
contributing to a widening gap in the U.S. wage structure.
According to authors George Borjas and Lawrence Katz,
both Mexican
immigrants and native workers of Mexican descent face
wage
disadvantages:
o Mexican immigrants have
much less education than either
native-born
workers or non-Mexican immigrants.
o While the earnings of
non-Mexican immigrants converge to
approximate
those of their native-born counterparts as
the immigrants
accumulate U.S. work experience, the
convergence
has been weaker on average for Mexican
immigrants
than for other immigrant groups.
o Although native-born
workers of Mexican ancestry have levels
of human capital
and earnings that far exceed
those of Mexican
immigrants, the economic performance of
these native-born
workers lags behind that of native
workers who
are not of Mexican ancestry.
The authors also find that the large Mexican influx in
recent
decades has contributed to the widening of the U.S. wage
structure by
adversely affecting the earnings of less-educated native
workers and
improving the earnings of college graduates. These wage
effects have,
in turn, lowered the prices of non-traded goods and services
that are
low-skill labor intensive.
Source: Les Picker, "The Evolution of the Mexican Workforce
in
the United States," NBER Digest, December 2005; based
upon: George
Borjas and Lawrence Katz, "The Evolution of the Mexican-Born
Workforce
in the United States," National Bureau of Economic Research,
Working
Paper No. 11281, April 2005.
For text:
http://www.nber.org/digest/dec05/w11281.html
For abstract:
http://papers.nber.org/papers/w11281
For more on Immigration:
http://www.ncpa.org/pd/immigrat/immigrt.html
December 27, 2005
34. Ben Friedman's, "The Moral Consequences of Economic
Growth"
My review of Ben Friedman's The Moral Consequences of Economic Growth http://www.amazon.com/exec/obido/asin/0679448918/braddelong00 is up at Harvard Magazine http://www.harvardmagazine.com/:
Growth is Good: An economist's take on the moral consequences of material progress; by J. Bradfold Delong
Economists have always been very good at detailing the material consequences of modern economic growth. It makes us taller: we are perhaps seven inches taller than our preindustrial ancestors. It makes us healthier: babies today have life expectancies in the seventies, not the twenties (and more than half that improvement is not directly related to better medical technology, narrowly defined). It provides us with leisure: eight-hour workdays (rather than “Man’s work is from sun to sun, and woman’s work is never done.”) It provides us with enough clothing that we are not cold, enough shelter that we are not wet, and enough food that we are not hungry. It provides us with amusements and diversions, so that there is more to do in the evenings than huddle around the village campfire and listen yet again to that blind poet from the other side of the Aegean tell the only long story he knows—the one about Achilles and Agamemnon. As time passes, what were luxuries become, first, conveniences, and then necessities; what were utopian dreams become first luxuries and then conveniences; and what was unimagined even in wild fantasy becomes first utopian dreams and then luxuries.
Economists have been less good at detailing the moral consequences of economic growth. There are occasional apothegms: John Maynard Keynes observed that it is better for a man to tyrannize over his bank balance than his fellows (a rich society has an upper class that focuses on its wealth as power-over-nature, rather than on its power as power-over-people). Adam Smith wrote about how wealth made it attractive for the British aristocracy to abandon their feudal armies and private wars and move to London to take up positions in society and at court. Voltaire (who not even I can claim was an economist) observed that people who in other circumstances would try to kill each other for worshipping the wrong god (or the right god in the wrong way) were perfectly polite and civil when they met each other as potential trading partners on the floor of the London Exchange. Albert Hirschman (who is an economist) wrote a brilliant little book, The Passions and the Interests, about the eighteenth-century idea that commercial society made humans “sweet”: polite, courteous, and civilized, viewing one another as potential partners in mutually beneficial market exchanges, rather than as clan members to be helped, clan enemies to be killed, or strangers to be robbed. But focus on the moral consequences of economic growth has—from the economists’ side, at least—been rare.
Benjamin M. Friedman ’66, Jf ’71, Ph.D. ’71, Maier professor of political economy, now fills in this gap: he makes a powerful argument that—politically and sociologically—modern society is a bicycle, with economic growth being the forward momentum that keeps the wheels spinning. As long as the wheels of a bicycle are spinning rapidly, it is a very stable vehicle indeed. But, he argues, when the wheels stop—even as the result of economic stagnation, rather than a downturn or a depression—political democracy, individual liberty, and social tolerance are then greatly at risk even in countries where the absolute level of material prosperity remains high....
Consider just one of his examples—a calculation he picks up from his colleague Alberto Alesina, Ropes professor of political economy, and others: in an average country in the late twentieth century, real per capita income is falling by 1.4 percent in the year in which a military coup occurs; it is rising by 1.4 percent in the year in which there is a legitimate constitutional transfer of political power; and it is rising by 2.7 percent in the year in which no major transfer of political power takes place. If you want all kinds of non-economic good things, Friedman says—like openness of opportunity, tolerance, economic and social mobility, fairness, and democracy—rapid economic growth makes it much, much easier to get them; and economic stagnation makes getting and maintaining them nearly impossible.
The book is a delight to read, probing relatively deeply into individual topics and yet managing to hurry along from discussions of political order in Africa to economic growth and the environment, to growth and equality, to the Enlightenment thinkers of eighteenth-century Europe, to the twentieth-century histories of the major European countries, to a host of other subjects. Yet each topic’s relationship to the central thesis of the book is clear: the subchapters show the virtuous circles (by which economic growth and sociopolitical progress and liberty reinforce each other) and the vicious circles (by which stagnation breeds violence and dictatorship) in action. Where growth is rapid, the movement toward democracy is easier and societies become freer and more tolerant. And societies that are free and more tolerant (albeit not necessarily democratic) find it easier to attain rapid economic growth.
Friedman is not afraid to charge head-on at the major twentieth-century counterexample to his thesis: the Great Depression in the United States. Elsewhere in the world, that catastrophe offers no challenge to his point of view. Rising unemployment and declining incomes in Japan in the 1930s certainly played a role in the assassinations and silent coups by which that country went from a functioning constitutional monarchy with representative institutions in 1930 to a fascist military dictatorship in 1940—a dictatorship that, tied down in a quagmire of a land war in Asia as a result of its attack on China, thought it was a good idea to attack, and thus add to its enemies, the two superpowers of Britain and the United States. In western Europe the calculus is equally simple: no Great Depression, no Hitler. The saddest book on my shelf is a 1928 volume called Republican Germany: An Economic and Political Survey, the thesis of which is that after a decade of post-World War I political turmoil, Germany had finally become a stable, legitimate, democratic republic. And only the fact that the Great Depression came and offered Hitler his opportunity made it wrong.
In the United States, however, things were different—and not favorable to Friedman’s broad thesis. The 1930s were an extraordinarily painful economic shock to this country, but also a decade during which our nation strengthened its commitment to the liberal values that are its best nature. Admittedly, things might have gone otherwise: consider Huey Long in Louisiana, Father Coughlin over the airwaves, California’s treatment of Depression-era migrants from other states that we read about today only in The Grapes of Wrath, and the white-hot hatred for Roosevelt as a class traitor that puts today’s shrill, unbalanced critics of Bush and Clinton in the shade. (Up until his dying day six months ago, my 98-year-old grandfather would still say the country was lucky to have survived FDR.) All these examples show us signs of an America that could have gone the other way in the 1930s. Yet, as Friedman writes, “America during the Great Depression strengthened its commitment to these positive values [of openness, tolerance, and democracy], and, moreover, did so in ways that proved lasting.” The New Deal was a:
chaos of experimentation...to mobilize the effective energy of government to spread economic opportunity as widely as possible—to include those whom birth and the tide of events had left out of the distribution of America’s economic dividends. Rather than seeking scapegoats to exclude...the route America took in the 1930s was deliberately pluralist and inclusive, seeking input and participation from a more diverse collection of constituencies than ever before. And the intent of all this political activism was not just restored economic prosperity but more equal economic opportunity.
The line I use in my American economic-history lectures starts by suggesting that before the Great Depression, America’s rural, small town, and urban (and overwhelmingly Protestant) middle classes—farmers, druggists, merchants, and so forth—did not really believe that they had interests in common with the non-white rural and the not-quite-white (and Jewish and Catholic) urban-immigrant working classes. The Great Depression impoverished enough people who thought they had it made to convince enough of the middle class that they had enough interests in common with the working class to make it worthwhile to push for equality of opportunity for everyone—or at least for some people who weren’t white, northern-European Protestants. This is my best guess, but it is only a guess. Friedman does not really know why the Great Depression did not make America a less democratic, less tolerant, less free country. But he does not apologize: he concludes his chapter by quoting the noted Harvard economic historian Alexander Gerschenkron—“Historical hypotheses are not...universal....They cannot be falsified by a single exception.”
Friedman has not written his version of economic history and moral philosophy just for the sake of antiquarians like me who like to read about the strange and faraway places that are our own past. He takes historical patterns and draws from them immediate and powerful lessons for the present.
Consider China. There are those today in Washington, D.C., who look forward to a future in which China is America’s enemy: they believe it will in some way increase our “national greatness” to wage a new Cold War in Asia—albeit against an enemy weaker than Stalin’s Soviet Union was. There are those in Vice President Cheney’s office who think that trade with China is a bad idea: it creates a pro-China lobby that will stop any attempts by the United States to slow down China’s growth and acquisition of technology. Better, they think, to try to keep China as poor and barefoot as possible for as long as possible.
From Friedman’s perspective—and from mine—this is simply insane. In all likelihood, China a century from now will be a full-fledged post-industrial superpower whatever the policies of the United States. Do you want to maximize the likelihood that that superpower will have a representative government presiding over an open, free society? Then work to maximize economic growth, says Friedman. (And I would add: Does it really improve the national security of the United States for schoolchildren in China to be taught that the United States sought to keep them as poor as possible for as long as possible?)
In fact, the China policy of the Clinton administration was to do whatever we could to speed China’s growth in the expectation that rapid economic growth will introduce the political cuckoo’s egg of democracy into the nest. A rapidly growing, prosperous middle class will be interested in liberty and opportunity, and will be a much more powerful force for democratization and personal freedom in China than a battalion of lecturing neoconservative think-tanks or a host of remotely guided cruise missiles.
Consider the developing world more broadly. Friedman is—as I am—a card-carrying neoliberal. We economists do not understand very much about how knowledge of modern technologies and effective organizations and institutions diffuses from region to region around the globe. We do know that it diffuses appallingly slowly: there are still three billion people throughout the world whose lives are largely preindustrial (even if theyare far above the Malthusian poverty in which most of our preindustrial ancestors lived). We suspect that maximizing contact—economic, social, and cultural—is a powerful way to transfer ideas and practices. Hence the neoliberal imperative: do whatever you can to maximize economic growth in the developing world, and hope that rapid growth generates in its train the strong local pressures for social, environmental, cultural, and political advance that are needed if non-economic forms of progress are to be stable and durable.
There is a criticism of the neoliberal view that holds that higher material incomes cannot be the cure to poverty, for poverty is also a lack of voice in society, a lack of security in one’s position, and a lack of respect. With all this Friedman agrees. But he adds that faster material progress is the best way to generate pressures to produce voice, security, and respect.
Hence the neoliberal imperative: lower barriers to trade and contact; lower barriers of all kinds; lower barriers in the expectation that faster economic growth will itself generate countervailing pressures that will undo and cure the bad social and distributional side-effects of faster growth. Friedman’s reading of the moral consequences of economic growth provides a powerful piece of support to this neoliberal imperative. (Support so powerful, in fact, that Joseph E. Stiglitz, our Nobel Prize-winning non-neoliberal friend, has an attack on The Moral Consequences of Economic Growth in the November-December 2005 issue of Foreign Affairs.)
Consider the United States today. For a generation now, the benefits of economic growth have been concentrated in those slots in American society that are at or near the top. To the extent that any of America’s working class is richer today in inflation-adjusted terms than the nation’s workers were in the early 1970s, it is because today’s households have fewer children and a greater proportion of their members out earning money. America’s middle class today does live better than the middle class lived in 1970 (and a bunch of the children of the 1970s working class are in today’s middle class). But today the gap between America’s middle class and its upper class yawns extremely wide, at levels not seen since before the stock market crash of 1929.
Friedman is very worried that unequally distributed prosperity is not really prosperity at all. During the past generation we have seen the U.S. government place its thumb on the scales on the side of making the distribution of income and wealth in America more unequal. Some of this has been for reasons of economic efficiency: withdrawing the regulatory umbrellas that allowed some unions to turn blue-collar jobs into occupations with middle-class salaries, or reducing tax rates while eliminating loopholes. Some has been for reasons of moral purity: the replacement of the idea that being a single mother raising children was an important social task that deserved support with the idea that single mothers ought to work. Some is simply a naked wealth grab by the politically powerful.
What will the moral consequences of unequally distributed prosperity be? Friedman fears, and perhaps for good reason, that they will resemble the consequences of economic stagnation. People who feel that they are living no better, or not much better, than their parents will search for enemies: Hollywood writers, foreigners, people of “loose” morals, and Harvard graduates. And America will become a less free and less democratic society. The argument follows the lines of the argument in Thomas Frank’s What’s the Matter with Kansas? Those for whom the American market economy is not delivering increasing prosperity do not reach for the right answer: policies to strengthen the safety net, provide security through social insurance, and improve opportunity through better education. Instead, they reach for the wrong answers: closing down society and denouncing enemies—anti-Hollywoodism as the social democracy of fools, one might say.
I find myself more optimistic. This is not to say that I disagree with the political program for America today that can be drawn out of Friedman’s book: the pro-growth, pro-opportunity, pro-social-insurance policies of today’s national Democratic Party are mother’s milk to me. But I do not think we look forward to the generation of stagnation in the working and the middle classes that Friedman fears. Yes, the past generation has been a distributional disaster for America. Yes, at some point in the future the “outsourcing” of jobs made possible by modern telecommunications and computer technologies will produce enormous structural change in the American economy. But the population of the United States is growing slowly. The desirability of the United States as a place in which to locate economic activity is growing rapidly: the underlying engine of technological progress is spinning faster than it has in at least a generation. I see rising working- and middle-class incomes in America during the next generation generating what is in Friedman’s terms a virtuous, not a vicious, circle.
Posted by Brad DeLong on December 27, 2005 at 04:23 PM
in DeLong, DeLong Academic, Economic History, Economics, History, Moral
Philosophy, Political Economy | Permalink
35. The flat tax depak lal WSJ December 23, 2005
One of the most important public policy debates in many Western countries today (including the US, Germany, and the UK) concerns the introduction of a flat tax to replace their immensely complicated and highly distorted systems of taxation. This debate is best seen as part of the development of a post-Keynesian consensus on the conduct of economic policy.
In this column I want to critically examine this case in this wider context and show why it may be of relevance to India.
There seems to be widespread professional and by and large public policy consensus that activist monetary policy based on some version of Keynesianism is counter-productive. This is largely because its effects are subject to long and unpredictable lags and its potential for being misused by politicians of every hue to further their own personal interests during the political business cycle.
There is also considerable evidence that the private sector will damp any unavoidable fluctuations in economic activity and stabilise the economy if it is not disturbed by unanticipated policy impulses. So there is growing agreement that the best way to conduct monetary policy is to leave it to an independent central bank which follows rules rather than discretion.
These rules may be adaptive, not fixed, and can adjust in a predictable way to permanent changes in real growth or financial intermediation. This essentially depoliticises monetary policy. Though not formally independent, the Reserve Bank of India in its recent actions has largely followed these prescriptions.
This leaves fiscal policy. The activist case for Keynesian fiscal policy was undermined even before that for its monetary cousin, as it was shown to be an even blunter and more inflexible instrument than monetary policy. This has led to the assignment of fiscal policy to deal not with the macro but the micro economy.
As the case for using fiscal policy (of which tariff policy forms a part) to provide various incentives for 'infant industries' or correcting other purported market failures has been undermined, in part because of the politically mediated costs of 'rent seeking,' there is growing recognition that the sole aim of fiscal policy should be to provide finance for the optimal provision of public goods, at the lowest cost in terms of economic welfare.
The distributive aims of fiscal policy have been equally undermined by the overwhelming evidence from around the world that, redistributive taxation has merely served as a vast churning machine in which the redistribution (at least in democratic polities) usually ends up benefiting not the intended beneficiaries but the middle classes, as all political parties seek to placate the median voter.
The technocratic answer to the problem of financing public expenditure on public goods, at least economic cost, was given by public economics. This is the system of taxes recommended by Frank Ramsey (Keynes' young Cambridge colleague). It involves the taxing of goods with the most inelastic demand most heavily.
Any tax (which is not lump sum, like a poll tax) involves a loss of what economists call 'consumer surplus.' This loss will be greater for any given tax rate, the more elastic the demand curve (the more sensitive consumers are to price in the quantity of the good they buy). For, the rise in the price facing a consumer from the tax will lead to a larger reduction in quantity purchased than if demand were more inelastic. Hence the Ramsey Rule for optimal taxation.
But, this rule assumes that the government is benevolent. Suppose instead it is predatory, and not merely interested in raising a given revenue but in maximising it, at least cost. What taxes would it choose? As Brenann and Buchanan (in their The Power to Tax) showed, it would choose Ramsey taxes! This has led to a search for a system of taxation which limits the ubiquitous fiscal predatoriness of governments. The flat tax (first advocated by Robert Hall and Alvin Rabushka: The Flat Tax, Hoover Press) is the answer.
In its pure version a flat tax replaces multiple marginal tax rates with a single marginal tax rate, and abolishes all the complex systems of allowances and reliefs, which governments use for social engineering, or for buying votes.
A high personal tax-free allowance allows the poor to be taken out of the tax net and imparts progressivity to the system. All taxes--corporate, personal income, and commodity taxes (e.g. VAT)--are set at the same rate, amounting in effect to a consumption tax which abolishes any double taxation such as taxation of dividends.
The advantages of a flat tax are its simplicity and transparency (as Steve Forbes, the main US politician, promoting it in his Flat Tax Revolution notes, everyone needs just a postcard for their tax return), leading to faster economic growth, due to greater incentives to work, and the removal of various disincentives and distortions caused by existing tax distortions, including the creation of large black markets through tax avoidance and evasion.
These advantages have been apparent in the many East European countries (including Russia, Estonia, Latvia, Ukraine, Georgia, and Romania), which, whilst moving from the plan to the market, have adopted flat taxes, and induced consideration of flat taxes in others (Poland, the Czech Republic, and Slovenia).
But, unlike the new East European tax systems, which were replacing a defunct ancien regime, in most developed countries with mature tax systems which are the result of the past political (zero sum) redistributive game over many generations, the most likely losers from a flat tax are likely to be the past beneficiaries--the middle classes--who will use the democratic process to resist it. The back tracking on the proposal in the US, Germany and probably in the UK suggests a full-blooded flat tax, maybe infeasible in these mature tax systems.
Thus, the future of the flat tax might lie in countries which, like the East Europeans, are moving from the plan to the market. The Chinese are said to be considering its adoption. If the Kelkar Commission's recommendations were fully adopted in India, it would only be a small step to move to a full-scale system of flat taxes in India.
This would curb the traditional fiscal predation of the state and its associated ills like the black economy, and have a favourable impact on the country's growth rate.
December 19, 2005
36. Intangible Wealth and Institutional Economics
Arnold Kling
In a new book, a team of World Bank economists writes,
most of a country's wealth is captured by what we term intangible capital...Intangible assets include the skills and know-how embodied in the labor force. The category also includes social capital, that is, the trust among people in a society and their ability to work together for a common purpose. The residual also accounts for all those governance elements that boost the productivity of labor. For example, if an economy has a very efficient judicial system, clear property rights, and an effective government, the effects will result in a higher total wealth and thus a higher intangible capital residual...human capital and rule of law account for the majority of the variation
In an article about the World Bank study, Ron Bailey writes,
So if every American has $513,000 in
capital, where is it? The vast majority of it is amassed in our political
and economic institutions and our educations. The natural wealth in rich
countries like the U.S. is a tiny proportion of their overall wealth—typically
1 to 3 percent—yet they have higher amounts of natural capital than poor
countries. Cropland, pastures and forests are more valuable in rich countries
because they can be combined with other capital like machinery and strong
property rights to produce more value. Machinery, buildings, roads, and
so forth account for 17 percent of the rich countries' total wealth. And
80 percent of the wealth of rich countries consists of intangible capital.
"Rich countries are largely rich because of the skills of their populations
and the quality of the institutions supporting economic activity," argues
the World Bank study.
Development economics has changed a lot in 50 years. After World War II, economists equated economic development with physical capital. One could argue that the World Bank was founded on the basis of that belief.
Robert Solow was the first to point out the importance of the "residual" in economic growth, meaning increases in the standard of living that could not be accounted for by capital. That view has been accepted for quite some time, but textbook "growth economics" still tends to consists largely of mathematical models of capital accumulation.
Even fifteen or twenty years ago, the role of institutions received little play. The new institutional economics is still somewhat under-appreciated in the profession.
It seems to me that the new World Bank study is important.
The empirical work seems thorough and interesting. The fact that it comes
from the World Bank, of all places, seems to underline the triumph of the
new institutional economics.
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December 18, 2005
37. THIRD WORLD ECONOMIC DREAMS
------------------------------------------------------------------------
Despite a strong economy, the media continues to peddle
the myth that
President Bush created a new class of "hyperrich" that
is gobbling up
more pieces of the economic pie and leaving everyone
else crumbs, says
Investor's Business Daily (IBD).
IBD says in their rush to socially re-engineer reality,
critics
make a number of faulty assumptions:
o The economic pie does
not represent a fixed amount, whereby
gains for
some necessarily result in losses for
others; the
pie can grow -- and it does, at a 4 percent
annual average,
thanks in large part to the Bush tax cuts.
o Social classes in America
are not static; since the 1980s
anti-tax revolution,
the ranks of the poor (and
middle class)
have shrunk as the ranks of the rich have
swelled, meaning
the rich are getting richer and the poor
are also getting
richer.
o The latest Census shows
over half of poor families own two
or more color
TVs, one in four have a big-screen TV,
and nearly
three in four own a VCR or DVD player.
Class warriors also claim artificial barriers stop the
poor from
joining the ranks of the upper class. IBD says, actually,
rags-to-riches stories happen every day in America. Consider:
o Nearly 30 percent of
poor climbed into the top income
bracket between
1975 and 1991, according to a
longitudinal
study of 17,000 people by the University of Michigan.
o A separate Federal Reserve
study found that in the 1990s
more households
than ever jumped from the poorest
fifth to the
richest.
The rich are the engine of the economy that drives living
standards for all, says IBD. An economy with equal incomes
would mean
a Third World economy with Third World per-capita income
or the
institutionalized joblessness -- and mass rioting --
of "Eurosclerotic"
nations such as France.
Class warriors want to look at America as a nation of
haves and
have-nots. In reality, says IBD, we are a nation of haves
and
have-mores.
Source: Editorial, "Class Warriors March Again," Investor's
Business Daily, December 8, 2005.
For text:
http://www.investors.com/editorial/IBDArticles.asp?artsec=20&artnum=2&issue=20051208
For PSID study:
http://psidonline.isr.umich.edu/
For more on Economy:
http://www.ncpa.org/iss/eco/
Wednesday, December 14, 2005 ~ 11:14 a.m., Dan Mitchell
Wrote:
38. Big success for Romania's flat tax. The evidence
for tax reform keeps accumulating. Soon it will be so overwhelming that
even American politicians will begin to notice. The Associated Press has
a story on how Romania's flat tax is boosting revenue and lowering unemployment.
These good results are the natural consequence of a pro-growth tax system
that imposes low tax rates on productive behavior:
The introduction of a flat
tax this year has boosted budget revenues, raised people's incomes and
reduced unemployment, Prime Minister Calin Popescu Tariceanu said Sunday.
Since Jan. 1, when the government replaced the country's progressive taxation
of 18 to 40 percent for individuals with a flat tax of 16 percent, budget
revenues grew by 20 percent compared with the same period last year, Tariceanu
said. "These figures show the results are much better than our most optimistic
evaluations," he said... Unemployment fell from 6.2 percent to 5.5 percent,
while inflation also fell from 9.3 percent in 2004 to an estimated 8.5
percent this year. Average income after tax increased from about 600 lei
(US$200; euro170) last year to 740 lei (US$250; euro210) per month in September.
http://ca.us.biz.yahoo.com/ap/051211/romania_economy.html?.v=1
39. The Terms of Trade Africa Needs Freer Markets -- and Fewer Tyrants By FRANKLIN CUDJOE WSJ December 14, 2005; Page A20
Famine in Niger is no surprise -- desert wastes, locusts and decades of Marxist rule keep it second-to-last on the world poverty list. Famine in the fertile climes of southern and eastern Africa, however, seems more shocking. But there's a common thread: centralized state rule -- incompetent at best -- marked by corruption and sustained by aid. These are the shackles that keep Africans poor: It would be nice if EU and U.S. trade barriers were removed at trade talks in Hong Kong this week, but exports are a distant notion to the 75% of Africans who live off the land.
Niger is little-blessed by nature, but it has also spent its postcolonial era trying various forms of failed government, with Marxism reigning longest. A quarter of the population -- 2.5 million people -- faces starvation. Yet more temperate southern and eastern African countries are on the edge of famine, too, with 10 million affected in southern Africa alone. Again, we find the same economic profile: Zimbabwe, Malawi, Zambia, Mozambique, Swaziland and Lesotho all lack economic freedom and property rights; all have economies mismanaged by the state; all depend on aid. All these countries have a history of utopian schemes that failed to produce everlasting manna. State farms, marketing boards, land redistribution, price controls and huge regional tariffs left few incentives or opportunities for subsistence farmers to expand. Despite torrents of aid, these cruel social experiments could not turn sands verdant or prevent the granaries of southern and eastern Africa from rotting.
Ethiopia's Prime Minister Meles Zenawi believes that allowing Ethiopians to own their land would make them sell out to multinationals. He seems to have overlooked a basic market principle: It demands a willing seller and a willing buyer at an agreed price. If that price is worth selling for, the farmer might have some money to reinvest elsewhere; if that price is worth buying for, the purchaser must have plans to make the land profitable. If there is no sale, owners might have an incentive to invest in their own land and future, having, at last, the collateral of the land on which to get a loan. After decades of socialism, Ethiopia's agricultural sector -- the mainstay of the economy -- is less productive per capita than 20 years ago when Band Aid tried to defeat famine. Although 60% of the country is arable, only 10% has been cultivated. Ethiopia is entirely dependent on donations; but instead of grasping reality, Mr. Zenawi, a member of Tony Blair's "Commission for Africa," is forcing resettlement on 2.2 million people.
In Zimbabwe, the murderous kleptocrats of Robert Mugabe's regime deny that land seizure has pushed their rich and fertile country into famine: Some three million people face starvation today.
Meanwhile, Prof. Jeffrey Sachs, the U.N.'s Chief Advisor on the Millennium Development Goals, believes Africa needs more cash for an African "Green Revolution" -- a pale imitation of the very different Asian agricultural revolution of the 1960s and '70s. The equivalent of "some 40 euros per villager" (roughly $50) in aid, Prof. Sachs says, holds the key. His Green Revolution would spend that money to improve agricultural infrastructure, soil nutrients, water quality and seeds ability to survive harsh climates and insects, and better agricultural infrastructure. These, however, are precisely the benefits that come from property rights, which also inspire the motivation to invest in, improve and preserve the land -- motivation that does not come from aid, central control and state serfdom.
Prof. Sachs is right about tougher seeds but not about more aid. By his own calculation, "out of every dollar of aid given to Africa, an estimated 16% went to consultants from donor countries, 26% went into emergency aid and relief operations, and 14% went into debt servicing." He could not account for how much of the remaining 44% got siphoned off by corrupt officials, nor could he explain why $400 billion dollars of aid over the last 30 years has left the average African poorer.
Rwandan President Paul Kagame told Ugandan journalist Andrew Mwenda in April, "There are projects here worth $5 million and when I looked at their expenses, I found that $1 million was going into buying these cars, each one of them at $70,000. Another $1 million goes to buy office furniture, $1 million more for meetings and entertainment, and yet another $1 million as salaries for technical experts, leaving only $1 million for the actual expenditure on a poverty-reducing activity. Is this the way to fight poverty?"
The only way to give food security to 200 million sub-Saharan Africans is to give them the tools, not to rely on yet more aid and government mismanagement. World food production has increased with population by 90% in the last 50 years; the real price of food has declined by 75%. Yet Africa has none of the factors that made this possible: greater agricultural productivity, internal economic freedom and international trade.
The one thing that could give us drought-resistant and highly productive seeds is biotechnology. Experience shows that genetically modified (GM) crops could increase yields by 25% and cost less than Green Revolution techniques. But GM produce faces bans from rich countries, especially the EU, using unscientific "biosafety" protocols under the guise of environmental protection. This kind of hysteria made Zambia, Angola and Zimbabwe reject famine aid because U.S. or South African maize could not be certified GM-free. Africans therefore have to hope that the U.S., Canada and Argentina win their case against the EU barriers to GM crops: The World Trade Organization is due to rule early in 2006.
African leaders must be pushed to reduce economic intervention, free financial markets, remove bureaucratic obstacles to setting up businesses, establish property rights and enforce contract law. These are the forces that release entrepreneurial energy. But the ruling cliques will do none of these unless forced to do so as a condition of aid. The Sachs aid model has financed tyranny and corruption for 40 years, leaving Africans destitute. The world trade meeting in Hong Kong will hear cries for "Trade Justice" for Africa, representing more protectionism and more state-run, aid-fueled schemes. What we really need is economic freedom and the rule of law at home: We are perfectly capable of improving our own lot if only allowed to do so.
Mr. Cudjoe is director of Imani, a policy think tank in
Ghana. This is the third in a series this week on world trade.
40. WHY AMERICA GROWS FASTER THAN EUROPE
------------------------------------------------------------------------
In the past 10 years, the economies of what is now the
euro area have
grown about around 2 percent a year, while America managed
a full
percentage point more. Researchers Philippe Aghion and
Peter Howitt
find several reasons why.
First, the authors argue that Europe's institutions are
not
designed to be cutting edge; they are designed to catch
up to America's
economy. Institutions and policies best suited to countries
at the
leading edge need not be the right ones in less advanced
places. For
instance, education is much more important to a country
on the cutting
edge, but Europe underinvests in education:
o America spends around
3 percent of its gross domestic
product (GDP)
on tertiary education; the European Union
spends only
1.4 percent.
o More than a third of
Americans have degrees; fewer than
quarter of
Europeans do.
Second, economic growth is likely to be higher if markets
are
open to new entrants, which either drive less efficient
incumbents out
of business or scare others into investing, updating
their technology
and seeing off the raiders. The destructive process appears
to have a
freer reign in America than in Europe.
Finally, America has better developed capital markets,
which
allows good companies to borrow money through recessions
and survive.
This lets many good businesses to survive economic downturns
(who will
get loans), while letting poor companies fail. European
capital
markets are less developed and thus have less capability
of sparing
good companies from economic downturns, say the authors.
Source: "Closing the growth gap," Economist, October
29, 2005;
based upon: Philippe Aghion and Peter Howitt, "Appropriate
Growth
Policy: A Unifying Framework," 2005 Joseph Schumpeter
Lecture, 20th
Annual Congress of the European Economic Association,
Amsterdam, August
25, 2005.
For text (subscription required):
http://www.economist.com/finance/displaystory.cfm?story_id=5084317
For study:
http://post.economics.harvard.edu/faculty/aghion/papers/Appropriate_Growth.pdf
For more on the Economy:
http://www.ncpa.org/iss/eco/
41. EMIGRATION IS AN INCENTIVE FOR EDUCATION
------------------------------------------------------------------------
When rich countries hire the educated class from poor
countries, they
deprive those countries of the necessary talent to develop
their
country. However, the incentive of emigrating to the
United States or
Europe may encourage more education by the remaining
populace. This,
in turn, boosts the overall level of education for the
country,
allowing it to develop new industries and business opportunities.
India is an excellent example, says the Economist:
o Indian students had
little reason to learn computer coding
before there
was a software industry to employ them,
but such an
industry could not take root without
computer engineers
to man it.
o The dream of a job in
Silicon Valley was enough to lure
many of India's
bright young students into coding, and
that was enough
to hatch an indigenous software
industry where
none existed before.
o Moreover, the 1.04 million
Indian-born people living in the
30 relatively
rich countries of the Organization
for Economic
Co-operation and Development (OECD) is a
source of
know-how, money and connections into foreign
markets and
supply chains.
Still, the Indian experience may prove to be the exception
rather
than the rule, says the Economist:
o India's emigres represent
just 4.3 percent of its graduate
population.
o By contrast, almost
47 percent of Ghana's highly educated
sons live
in the developed world, while for Guyana
the figure
is 89 percent.
o This level of talented
emigration can only be crippling for
these countries.
Source: "Fruit that falls far from the tree," Economist,
November
3, 2005.
For text (subscription required):
http://www.economist.com/finance/PrinterFriendly.cfm?story_id=5108231
For more on Immigration:
http://www.ncpa.org/pd/immigrat/immigrt.html
42. WAL-MART AS RED HERRING
Wal-Mart's low prices have raised living standards...
------------------------------------------------------------------------
Pretending to nationalize Wal-Mart is a useful thought
exercise.
It shows why Wal-Mart as a government agency would actually
provide
fewer public benefits than it would as a grubby, profit-seeking
colossus. The company's incentives would shift.
Instead of
trying to lower costs, improve efficiency and raise its
profits, it
would focus on pleasing its political patrons and complying
with their
demands, says columnist Robert J. Samuelson.
Wal-Mart would deliver more political benefits to favored
constituencies -- workers, suppliers, competitors --
and fewer to the
public. Retail prices would be the biggest casualty.
Scholarly studies show Wal-Mart's price reductions to
be sizable:
o Economist Emek Basker of the
University of Missouri found
long-term reductions
of 7 to 13 percent on items such as
toothpaste, shampoo
and detergent.
o On food, Wal-Mart produces
consumer savings that average 20
percent, estimate
Jerry Hausman of the Massachusetts Institute
of Technology and
Ephraim Leibtag of the Agriculture
Department.
All told, these cuts have significantly raised living
standards.
How much is unclear, says Samuelson:
o A study by the economic consulting
firm Global Insight found
that from 1985 to
2004, Wal-Mart's expansion lowered the
consumer price index
by a cumulative 3.1 percent from what it
would have been.
o That produced savings of $263
billion in 2004, equal to
$2,329 for each
U.S. household.
o Because Wal-Mart financed
this study, its results have been
criticized as too
high, but even if price savings are only
half as much ($132
billion and $1,165 per household), they'd
dwarf the benefits
of all but the biggest government programs.
No company should be above public scrutiny. But
much of the
political criticism of Wal-Mart is shallow and, if followed,
undesirable. Wal-Mart doesn't pay high wages and benefits
mainly
because it's in an industry (retailing) where those are
rare.
Source: Robert J. Samuelson, "Wal-Mart as Red Herring,"
Washington Post, August 30, 2006.
For text (subscription required):
http://www.washingtonpost.com/wp-dyn/content/article/2006/08/29/AR2006082901043.html
For more on Economic Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=17
43. DDT RE-EMPHASIZED IN MALARIA FIGHT
------------------------------------------------------------------------
In parts of Africa ravaged by malaria, workers are spraying
one home
after another with a chemical most Americans probably
thought was long
banished from use: DDT. However, the pesticide
is now poised for
a big expansion in the developing world, says the Boston
Globe.
o The World Health Organization
(WHO) plans to promote DDT as
an inexpensive and
effective tool against malaria.
o The U.S. government has boosted
its budget twenty-fold for
malarial insecticide
spraying in Africa, to $20 million next
year.
The new push for household spraying reflects a growing
belief in some
quarters that significant progress on malaria will require
a third
major front, alongside insecticide-treated bed nets and
novel
anti-malarial drugs, says the Globe.
o Advocates of household spraying
say the comparatively minute
amounts used in
homes pose no known dangers.
o Any potential risk, they say,
is far outweighed by DDT's
potency against
malaria, as was seen in the late 1940s and
'50s when it helped
eradicate the disease in the United States
and other industrialized
nations.
WHO officials maintain that they are not minimizing the
role of
insecticide-treated nets or anti-malarial drugs.
Instead, they
are just restoring proper emphasis on spraying -- a move
some observers
see as long overdue.
Source: Scott Calvert, "DDT re-emphasized in malaria fight,"
Boston Globe, August 30, 2006
For text (subscription required):
http://www.boston.com/news/nation/articles/2006/08/30/ddt_re_emphasized_in_malaria_fight/
For more on Environment:
http://www.ncpa.org/sub/dpd/?Article_Category=31
44. Au Revoir, Les Entrepreneurs Font Size:
By Nima Sanandaji : BIO| 30 Aug 2006
Discuss This Story! (4) Email
| Print | Bookmark | Save
france-euros-economy
European media reported earlier this month that the French economy had grown by 1.1 percent in the second quarter of 2006, the biggest quarterly jump in five years for the country. Could this mean that France has become more attractive for entrepreneurs?
Perhaps. But on the other hand, there are signs that the country's traditional obstacles for growth and innovation are still in place. Recently, the Washington Post ran a story about how wealthy citizens choose to leave France due to its punishingly high taxes on the successful. The article cites a government study which concluded that on average at least one millionaire leaves France every day to settle in a more wealth-friendly country.
Denis Payre is an example of this. He built a successful high-tech company from scratch and decided to quit at the age of 34 to spend time with his family. Instead Payre was forced to leave France as the government sent him a tax bill of nearly $2.5 million on paper assets he couldn't cash in. Payre, who is now 43 years old, has started a new company in Brussels and tells the Post that he did nearly $32 million in business this year. He has little sympathy for the French system which penalizes success. "The loss in income for the government is the smallest part," he said. "The big issue is the loss of all that creative energy this country is dying for."
That high-earners and entrepreneurs choose to leave is yet another indication that France's welfare system is broken. The French economy is stagnating. Even though France, like other European welfare states, hides some of its true unemployment in various government programs, joblessness stands at around 10 percent. In 2004 only 13 percent of unemployed workers in the US could not find work within 12 months - in France the same number was 42 percent.
In 2002 the French lost more than twice as many weeks per worker due to sick leave compared to the US and a recent study by US and European researchers found that the wage and benefits returns to long-term employees in France has since 1976 been consistently lower than in the US. According to the "Global Entrepreneurship Report 2000" the percentage of those who were starting new businesses was five times higher in the US compared to France.
The problem is not only that the French economy punishes the very rich, discouraging them from working and creating businesses - but that it does the same for those with low incomes. The French welfare state creates a high "unemployment trap" for low-wage earners.
An unemployment trap is a measure of the percentage of gross earnings which is "taxed away", through social security contributions, higher tax and withdrawal of government benefits, when a person returns to employment. The calculations are based on a single person without child who earns 67 percent of the average earning of a full-time productions worker in the manufacturing industry. In France the unemployment trap corresponds to around 82 percent - creating a very small economic incentive for low income workers to actually go to work.
The French economy showed impressive growth in the second quarter of 2006, but this has not been the long term trend in the last few years, as the French economy has stagnated and fallen more and more behind more market-oriented economies such as the US and Ireland.
The long term consequence of an economic policy that punishes entrepreneurship and hard work regulates the job market while creating ample options to live off government remains the same: stagnation, high unemployment and gifted people fleeing the country.
That the French economy has its fair share of problems is no mystery for anybody with a slight understanding of economics, or just plain common since. What is more puzzling is why the American left is so eager to reform their own nations economy towards the more socialist and clearly failed model of France.
The author is the president of the Swedish free market
think tank Captus (www.captus.nu). He is also a PhD student in biochemistry
at the University of Cambridge.
45. China Revises Upward GDP Data for 2005
DOW JONES NEWSWIRES
August 30, 2006 4:17 a.m.
BEIJING -- China's gross domestic product growth rate for last year has been revised to 10.2% from an originally estimated rate of 9.9%, the National Bureau of Statistics said Wednesday.
China's GDP value was revised to 18.3085 trillion yuan ($2.262 trillion) from 18.2321 trillion yuan, the bureau said in a statement posted on its Web site. The revised 2005 GDP growth was the fastest since 1995, when GDP rose 10.9%.
The statement didn't provide a reason for the upward revision. Nor did it say how the revision would affect China's GDP data for this year. But the revision underlines the challenges Beijing faces as it tries to rein in overly rapid fixed-asset investment and credit growth, which have created overcapacity problems in certain sectors.
China's GDP surged 10.9% in the first half of this year, the fastest growth in more than a decade, which has added to government concerns about a potentially overheating economy.
The bureau also revised primary industry GDP for 2005 to 2.307 trillion yuan from 2.2718 trillion yuan. It kept the sector's growth rate unchanged at 5.2%. It revised secondary industry GDP for last year upward to 8.7047 trillion yuan, with a growth rate of 11.7%, from the previous estimate of 8.6208 trillion yuan, and a growth rate of 11.4%. It revised the tertiary industry's GDP upward to 10% from 9.6%, while the value was revised to 7.2968 trillion yuan from 7.3395 trillion yuan.
The primary industry's output accounted for 12.6% of total GDP for 2005, the secondary industry accounted for 47.5%, and the tertiary industry 39.9%, the bureau said.
The latest data are subject to a final revision, the bureau said. The bureau started to revise GDP data on a regular basis following a rule it introduced in 2003, it said.
--Victoria Ruan contributed to this article.
Write to Dow Jones Newswires editors at asknewswires@dowjones.com
46. Does the youth dependency ratio drive economic growth?Tyler Cowen http://www.marginalrevolution.com/
Jane Galt and Malcolm Gladwell have a tiff.
Gladwell, citing David Bloom and David Canning, suggested that changes in the "youth dependency ratio," account for a big chunk of Irish economic growth. The youth dependency ratio refers to how many young-uns require support, relative to the broader population. The Irish legalized contraception in 1979, birth rates continued to fall, and later the economy boomed. But is the connection a causal one?
Here is a basic argument and model that the youth dependency ratio can matter.
I can see three possible mechanisms. 1) Fewer babies mean that more women work. 2) Fewer babies mean that each baby gets more parental investment; in the long run those people are smarter. 3) Fewer babies raises the savings rate.
Which of these might have operated in Ireland?
On Mechanism #1, Irish women still work much less than the OECD average, yet Ireland is wealthier than almost anywhere else in Europe. If a theory of growth first postulates a big or dominant effect, and then predicts rates but fails when it comes to predicting levels, I worry.
If we look at "rates of growth" only, this estimate suggests that more Irish female labor accounts for 1.5 percent Irish growth a year. That hardly covers the growth gap between Ireland and the rest of Europe. One estimate of elasticities suggests that an extra kid lowers an Irish woman's chance of working full-time by 11.3 percent, but raises her chance of part-time work by 7.7 percent. How far does that get us? Bloom is a renowned labor economist but his article is far from state of the art macroeconomics. Do note that increases in "total factor productivity" -- often driven by foreign investment -- seem to be more important than "growth in labor inputs" by a three to two ratio.
It ought to be easy to show evidence that the Irish boom has been strongest in the sectors where women work the most, such as services and not manufacturing. I can't find that evidence, can my readers?
Mechanism #2 is for the long run and it cannot explain the Irish boom of recent times or the timing of its possible connection to contraception. Higher skills are a big part of the Irish story, but the trend started in about 1967.
Mechanism #3: In Ireland, since the mid 1970s, gross private savings rates have been falling, more or less. More generally, time series models for a single country, including demographic ones, don't predict savings rates very well.
These studies I am citing have their defects, but they do show that the overall question is not so simple.
Notes:
1. These graphs show that, for developing countries, the change in the youth dependency ratio has "eyeball power" for 1975-1990, but not for 1960-1975.
2. This study of Asia suggests that the youth dependency ratio matters, often through the savings rate (not the Irish scenario); the entire story is conditioned by "institutional factors."
3. Latin America has had falling birth rates but has failed to cash in. As Bloom stresses, favorable birth rates help only if the country has good policies for putting the new female workers into productive positions. In this regard Galt and Gladwell may not be so far apart.
The bottom line: How much of the Irish boom is caused by the change in the youth dependency ratio? I don't know. If I had to offer a "I'm just a poor lil' ol' blogger but I've read lots of real business cycles macroeconomics simulation papers" seat of the pants sort of estimate, I would opt for a maximum of 15 to 20 percent. That's certainly worth writing about, but it is not the major story either. I'd like to see a sectoral decomposition analysis, and I suspect that would point our attention toward FDI, education, and a favorable tax regime as bigger factors.
Addendum: Malcolm adds more.
Wednesday, August 30, 2006 ~ 7:27 a.m., Dan Mitchell Wrote:
47. Macedonia seeks to become the Estonia of the Balkans.
This
blog already has commented on plans for a flat tax in Macedonia [http://www.freedomandprosperity.
org/blog/2006-07/2006-07.shtml#283]. A tcsdaily.com writer
explains that tax reform is just one part of a comprehensive plan to reduce
the burden of government and boost the Macedonia economy:
The party, headed by the
youthful Nikola Gruevski, a former trade minister and finance minister
in the government headed by the VMRO-DPMNE in 1998-2002, emphasized economic
reform in its campaign, not Macedonian nationalism. "We believe that Macedonians
want to do more than just survive -- they want to succeed. And to succeed
we need a stronger, healthier economy -- one that delivers jobs and growth,
that frees individuals to pursue their God-given potential with a minimum
of government interference and that opens up the creative spirit in people,"
wrote Gruevski ...The VMRO-DPMNE promises to cut public expenditure by
2 percent of the GDP by 2010. It plans to cut red-tape by 2007, thereby
enabling registration of new companies to be completed within three days.
The party plans to implement a flat personal tax rate of 10 percent by
2008 - a turnaround from the current progressive income tax rates of 15,
18 and 24 percent. The tax rate on corporate profits will be reduced from
15 percent to 10 percent and, following the example of Estonia, the tax
on reinvested profits will be scrapped altogether.
http://www.tcsdaily.com/article.aspx?id=082406A
48. Missing Children 1. By GARY S. BECKER WSJ September
1, 2006; Page A14
The 20th century was the one with the greatest decline
in death rates not only in rich countries but also throughout the world.
Very low birth rates in a rapidly increasing number of countries are shaping
up as the defining demographic event of the 21st century. The total fertility
rate, which measures the number of births to the average woman over her
lifetime, must be at least 2.1 in order to prevent a country's population
from declining in the long run in the absence of enough immigration. Yet
there are now about 70 countries, which comprise almost half the world's
population, with fertility rates below 2.1, and in many nations birth rates
are far under this maintenance level. All European countries have low birth
rates, and so do many Asian ones, including Japan, China, both Koreas,
Hong Kong and Taiwan. Japan, Italy, Russia and Spain are the countries
with the lowest birth rates, with the typical woman giving birth to not
much more than one child during her lifetime. The last major census in
Hong Kong shows an even more extreme picture, for the typical woman has
less than one child over her lifetime.
When a country's birth rate is much below the replacement
level, it must receive enough immigrants to maintain a stable or growing
population. Since Japan has been especially reluctant to accept immigrants
unless they are of Japanese descent, net immigration has been negligible.
It is not surprising that Japan is among the first countries to be already
experiencing a population decline. Russia, too, has a falling population
because it not only has a very low birth rate, but also net outmigration
of its population and high death rates -- life expectancy for males is
under 60 years. The U.S., by contrast, still has a growing population because
it has birth rates at about replacement levels, and because it continues
to attract many immigrants (and these immigrants on average have higher
birth rates).
The rate of population decline in Japan and Russia will
accelerate if their low birth rates persist, and these countries do not
change either their attitude toward, or their ability to attract, immigrants.
The reason is that eventually low birth rates lead to smaller numbers of
men and women in the child-producing ages. The larger numbers at these
ages presently resulted from much higher birth rates in the past. World
Bank projections are that the Russian population will decline by more than
25% to about 100 million by the year 2050 unless present birth, death and
immigration trends are radically reversed. Japan's population is expected
to decline by a similar percentage.
* * *
Not long ago many persons were concerned, and some still
are, about the rapid growth in world population. If they were right, one
might have expected the specter of declining population to be welcomed.
Yet most countries with low birth rates are worried about the prospects
of declining population. To reverse this trend, many of them have proposed
or implemented subsidies to women who have larger families. France has
expensive systems of allowances to women with more than one child. Vladimir
Putin proposed an even more liberal system of benefits to encourage Russian
women to have additional children. Japan has been discussing greater incentives
to women there to have more children.
What is concerning people about low birth rates that
is overlooked by the many neo-Malthusians who continue to rail against
growing population? One consequence of low birth rates and extensions of
life expectancy at older ages is that fewer people are at working ages
compared to the number of retirees. As a result, financing of retirement
income and medical expenditures becomes more of a challenge with an aging
population since most countries finance retirement income and medical spending
on the elderly by social security taxes on the working population.
Fortunately, shifting away from a pay-as-you-go social
security system to an individual account system can alleviate this problem.
Under the latter, individuals accumulate assets over their working lives
in retirement and health savings accounts. They would draw down this capital
at older ages to pay for consumption and medical expenses. This system
would break the link between taxes on the working population and retirement
benefits, and reduce the negative consequences of having a smaller number
of working people relative to retirees.
Another important negative consequence of population
decline is seldom discussed, but it is not eliminated by changing the structure
of taxes and saving, or even by increasing the fraction of married women
and older men in the labor force. Smaller populations reduce the amount
of innovation partly because it leads to fewer younger persons, both absolutely
and compared to the number of older persons. This shift toward a younger
population is bad for innovation because the vast majority of important
new ideas come from inventors and scientists who are younger than age 50,
often far younger.
Innovations also require an intense initial effort on
R&D with considerable inputs of high-level personnel and capital. These
costs become worthwhile only when the demand for new products and ideas
is sufficiently great. The magnitude of demand obviously depends on per
capita incomes, but also on the number of persons who can benefit from
new consumer goods, and advances in medical and other knowledge. The number
benefiting is related to population size, and possibly also to its age
distribution. The 1983 Orphan Drug Act recognizes the importance of population
in stimulating innovations. This Act gives pharmaceutical companies special
patent protection if they produce new drugs that help persons with rare
diseases; that is, diseases that affect less than 200,000 persons.
Even some frequently cited negative effects of larger
populations, such as greater pollution, can be alleviated, if not fully
solved, by a bigger population. Larger populations, as argued, increase
incentives to innovate, which include innovations that reduce pollution
and other negative effects of more dense populations.
What does the future path of fertility look like in countries
like Japan where women are producing too few children to prevent their
populations from falling? Some commentators have expressed their belief
that fertility rates are only temporarily low, and that before long they
will increase significantly toward replacement levels. In fact, the number
of births in Japan was up by about 2% in the first six months of 2006 compared
to the same period a year ago. The Japanese Health Ministry has taken an
optimistic view that this might be a harbinger of further fertility increases
as Japan regains more rapid economic growth and lower unemployment.
I am less optimistic than this ministry about any spontaneous
large increase in birth rates. Since 1970, no country has had a large increase
in its total fertility rate after this rate had fallen much below the replacement
level. Birth rates are low for good reasons, especially the high time cost
involved in raising children, particularly the time of more educated women,
and the desire of parents in knowledge-based economies to invest more in
each child instead of having additional children. Births rates could be
raised by increasing child allowances to mothers, establishing paid leaves
to mothers, and providing subsidies to child-care facilities. However,
even generous subsidies to parents appear to have only modest effects on
fertility. Two French economists have studied the elaborate French system
of allowances to mothers who have more than one child. Their conclusion:
Even this thoroughgoing system of allowances raised the total fertility
rate by no more than 0.1, from 1.7 to 1.8.
My reading of the evidence is that fertility in countries
like Japan with birth rates that are far below the replacement level of
2.1 children per women will not rise to anywhere near that level in the
next few decades, even with generous financial and other child-care support.
If I am right, the only solution for countries that continue to be concerned
about a future with declining and aging populations is to open their gates
to immigration. Yet in most countries large-scale immigration creates political,
economic and social problems. Immigration is an especially unwelcome alternative
for Japan, given the history of Japanese reluctance to have many foreigners
settling in their country. As a result, Japan, Russia and many other countries
face a worrisome demographic and economic future.
Mr. Becker, the 1992 Nobel economics laureate, is professor
of economics at the University of Chicago and senior fellow at the Hoover
Institution.
49. Eyeing the Irish Tiger
Print this.
OVER THE PAST 15 YEARS, IRELAND'S ECONOMIC MIRACLE has
showered prosperity on a nation long known for high unemployment and emigration.
As affluence has transformed Ireland, it has brought growing pains as well
-- including a rising cost of living and infrastructure headaches. — Compiled
by Matt Phillips, March 17, 2006.
Why the Boom?
Ireland's economy essentially doubled during the 1990s, bringing job growth to a nation whose unemployment rates toppped 15% as recently as 1993. By 2000, unemployment was below 5% and per capita output had risen sharply, pushing Ireland into an elite crowd of well-to-do EU nations such as Sweden, Germany and the U.K. Its strong growth, which has moderated in recent years, means Ireland now ranks ahead of Britain and other major EU economies, with per capita GDP of $34,100. The performance earned Ireland its "Celtic Tiger" moniker -- a play on the "tiger" economies of 1990s east Asia. Among the reasons experts cite for its growth:
• Shifts away from protectionist policies of the 1960s
• Tax breaks for exporters and foreign investors
• The advent of the EU as a single market, boosting the
country's profile as an English-speaking export center
• Elastic worker supply: Labor demand could be filled
by women -- because of their previously low employment levels -- returning
emigrants and the country's young population.
Irish Multinationalism
A steady flow of foreign investment has fueled Ireland's
economic engine. Some key players' operations:
Sources: IDA Ireland, the companies
Outpacing the EU
Percent change in Ireland's annual GDP, compared to the
EU
Source: Organisation for Economic Co-operation and Development
*Projected
FOREIGN INVESTMENT
GDP GROWTH
Price Pressures
While wages and job growth have surged in Ireland in
recent decades, so have prices.
In 2003, all categories of consumer goods and services
-- except clothing -- cost more in Ireland than in the 14 other countries
that had been EU members before the community's 2004 expansion. And as
of January 2006, overall food prices were 20% higher than in the rest of
the EU 15.
Perhaps the pre-eminent price pressure in Ireland is
in housing, where costs more than tripled between January 1997 and January
2006. High prices present more than something to gripe about. Rising prices
for everything from office rents and insurance premiums to landfill costs,
could -- if left unchecked -- make the island unattractive to foreign investors,
a key component of the economy.
50. OECD Expects Slower Growth In Euro-Zone, Pickup
in U.S., Japan By DAVID GAUTHIER-VILLARS
WSJ September 5, 2006 5:36 a.m.
PARIS -- Economic growth is likely to "slow somewhat" in Europe during the second half of 2006 after a bullish first half, but could pick up in the U.S. and Japan after a weak start so far this year, the Organization for Economic Cooperation and Development said Tuesday.
"Recent data for the first half of 2006, indicating a much stronger-than-expected performance in Europe and a significantly weaker one in the United States and Japan, shouldn't be merely extrapolated going forward," the OECD said in its interim assessment of economic prospects in seven of the world's largest economies. Nonetheless, thanks to its strong first-half performance, Europe could catch up with the U.S.'s fast economy, the OECD said.
The organization raised its economic growth forecast for the euro zone to 2.7% in 2006 from a previous estimate, released in May, of 2.2%. It also raised its forecast for the United Kingdom to 2.8% from 2.4%. It kept its forecast for the U.S. at 3.6% and cut its estimate for economic growth in Japan to 2.5% from 2.8%.
The OECD said inflation poses different threats in the U.S., Japan and the euro zone, and recommended central banks in each area followed different policies. "Price stability is still some way off in the U.S. and, in the opposite direction, in Japan," the OECD said.
The OECD said the U.S. Federal Reserve may need to resort to further monetary tightening "if activity and prices do not slow down over the next few months." At the same time, the Bank of Japan should keep its interest rates steady until statistics show that the deflation of consumer prices -- excluding energy and food -- has ended. "There is a strong case for waiting before further hiking the policy rate until the new series of core inflation ... is in firmly positive territory," the OECD said.
As for the euro zone, the OECD said the recovery seems robust enough to warrant interest rate increases. It said, however, that the return towards a neutral monetary stance should be gradual because "unit labor costs remain well in check."
With robust growth, the U.S. and some euro-zone countries have extra, unexpected tax receipts in their coffers. But such windfall shouldn't be spent, the OECD said, because those countries have yet to deal with issues related to their aging populations.
The OECD raised its growth forecast for Germany to 2.2% from 1.8%, upped its forecast for France to 2.4% from 2.1% and its forecast for Italy to 1.8% from 1.4%. It cut its forecast for Canada to 2.8% from 3.1%. The organization said the main risks to growth and inflation continue to come from oil prices. "Another prominent set of risks relates to long-term interest rates and real estate, against the backdrop of cooling housing markets in North America," it said.
The OECD will publish its next set of forecasts for all of its 30 members in November
51. Malaysia's Tax Smarts
WSJ September 5, 2006
With money still pouring into Asia's bursting coffers, it's easy for governments to forget that investment can leave just as easily as it comes. That makes Malaysia's bid to lighten its corporate tax burden in order to encourage investment especially surprising and praiseworthy. If only Kuala Lumpur and the rest of the region will now do more of the same.
In most respects, Friday's budget announcement was a disappointment. Prime Minister Abdullah Ahmad Badawi introduced a 24.3% increase in development spending, generous gifts to education and "poverty eradication," and special one-off payments to politically key groups, such as pensioners. The budget echoes the big-spending theme of Mr. Badawi's recent "Third Industrial Plan," which was long on costly promises -- such as more affirmative-action programs -- and short on reform. While Mr. Badawi has often talked about liberalizing the economy, the lack of real progress has had predictable results: foreign investment nosedived, economic growth slowed, and the stock market moved sideways.
What a relief, then, to see corporate tax reduction buried in the fine print of the new budget. It's not a huge cut -- Mr. Abdullah proposes to trim the rate to 26% over a two-year period, from 28% -- but it's a start.
It's about time, too. Compared to neighboring Singapore, with corporate taxes at 20%; Taiwan, at 25%; or Hong Kong, at 17.5%, Malaysia's rate looks high. Many countries, from China to India, are instituting special economic zones stuffed with tax incentives, with an eye to attracting FDI. Even Indonesia, which isn't famously investor-friendly, is mulling cutting corporate taxes to 25%, from 30%.
Much more needs to be done. According to KPMG's 2006 corporate tax survey, investors in Asia shoulder the highest average rates in the world, at nearly 30%. Latin America's rates average around 28%. Europe, thanks to competitive tax regimes in newly-acceded European Union countries, comes in at 25%.
Asia's stifling tax regimes may seem affordable while the global economy remains buoyant and measures of competitiveness such as labor costs hold steady. But all that could change given rising wage inflation in the region and a slowing U.S. economy, upon which Asia is hugely dependent.
By proposing to lower corporate taxes, Mr. Abdullah has
taken a page out of Ronald Reagan's economic book. President Reagan sharply
reduced U.S. personal income tax and corporate tax rates to encourage work
and investment, invoked broad economic deregulation, moderated public spending
and focused on controlling inflation. Perhaps in a year's time, when Mr.
Abdullah sees the effect of his corporate tax cut, he'll try the rest of
Mr. Reagan's program, too.
52. Women in Chile
Left behind
Aug 10th 2006 | SANTIAGO
From The Economist print edition
Will Michelle Bachelet help women or hinder them?
Get article background
CHILE, which has South America's most successful economy, elected its first female president this year. But the lot of Chilean women is by many measures worse than that of their sisters elsewhere in the region. A smaller proportion of them work (see chart) and fewer achieve political power. According to a recent report by the Inter-Parliamentary Union, an association of parliaments, 15% of representatives in the lower house of Chile's Congress are women, less than half the proportion in Costa Rica and Argentina and below the level in eight other countries in the region, including Venezuela and Bolivia. Chilean women hope that Michelle Bachelet's presidency will improve their position but there are worries that she will do more harm than good.
No one is sure why Chilean women lag. The wage gap with men is relatively large. Women earned 19% less than men in 2003, according to a government survey; the gap was nearly 40% in jobs requiring high levels of education. Chile may also be more socially conservative than other South American countries. The women's affairs ministry still finds such phrases as “boys like to learn, girls like to play at tea parties” in textbooks that it vets for discrimination.
To these factors María Nieves Rico of the UN's Economic Commission for Latin America and the Caribbean adds the economy's heavy dependence on natural resources, which slows the development of service industries that typically employ women. Yet, she admits, even taken together these things do not fully explain the situation. The result is that “Chile is throwing talent out the window at a rate that is exponentially damaging to the economy,” says Kathleen Barclay, an American banker in Santiago.
Ms Bachelet began her assault on inequality by appointing women to half the cabinet posts in her centre-left government. A new labour code for the public sector forbids pregnancy tests, removes mention of a candidate's sex from job applications and requires training during normal working hours. The government is encouraging the private sector to adopt the code as well.
Ms Bachelet has started to build new day-care centres and has promised universal nursery schooling by the end of her four-year term, which will help mothers who want to work. A controversial plan to impose a quota of female candidates for Congress on political parties is being prepared. “We'd like it to be 50% but haven't decided yet,” says Laura Albornoz, the women's affairs minister. Opposition to the quota means that, if it passes at all, it will probably be lower. Activists want the government to legislate against the wage gap, but that would have even less chance of overcoming resistance from business and the right-wing opposition.
Women worry that whatever good Ms Bachelet does for them specifically will be undone if she fails generally. The early months of her presidency, which began in March, have been rocky. She handled shakily mass protests by students against the poor quality of state education. She has been accused of taking a soft line in a dispute with Argentina over the price of gas, unfairly since Chile has no choice but to import it. According to a poll released last month, 57% of Chileans think that her government has “acted weakly”.
Many of her countrymen put Ms Bachelet's problems down to her sex. “The government should put its trousers on,” is a grumble heard frequently, but by no means exclusively, from male members of the opposition.
“Being a woman was an advantage while Ms Bachelet was a candidate but stereotyped concepts of authority have now turned against her,” says Marcela Ríos of FLACSO-Chile, a research institute. Now “all the government's problems are being attributed to the fact that she's a woman.” Such attitudes probably explain those peculiar statistics.
53. NEW EUROPE'S BOOMTOWN
------------------------------------------------------------------------
Economists call Estonia the Baltic Tiger, the sequel to
the Celtic
Tiger as Europe's success story, and its policies are
more radical than
Ireland's, says columnist John Tierney. On this
year's State of
World Liberty Index, a ranking of countries by their
economic and
political freedom, Estonia is in first place, just ahead
of Ireland and
seven places ahead of the United States (North Korea
comes in last at
159th).
Estonia transformed itself from an isolated, impoverished
part of the
Soviet Union thanks to a former prime minister, Mart
Laar, a history
teacher who took office not long after Estonia was liberated.
He
was 32 years old and had read just one book on economics,
"Free to
Choose," by Milton Friedman, which he liked especially
because he
knew Friedman was despised by the Soviets. Laar
was politically
naïve enough to put the theories into practice:
o Instead of worrying about
winning trade wars, he unilaterally
disarmed by abolishing
almost all tariffs.
o He welcomed foreign investors
and privatized most government
functions (with
the help of a privatization czar who had
formerly been the
manager of the Swedish pop group Abba).
o He drastically cut taxes on
businesses and individuals,
instituting a simple
flat income tax of 26 percent.
The results:
o Wages have soared thanks to
jobs created by foreign companies
like Elcoteq of
Finland, which bought a failing electronics
factory and now
employs more than 3,000 people making phones
for Nokia and Ericsson.
o Foreign investors worked with
local software engineers to
create Skype, the
Internet telephone service, and the country
has become so Web-savvy
that it's known as E-stonia.
o The growth over the past decade
has produced so much
unanticipated revenue
that the tax rate is being gradually
reduced to 20 percent.
Source: John Tierney, "New Europe's Boomtown," New York
Times, September 5, 2006.
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http://select.nytimes.com/2006/09/05/opinion/05tierney.html
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54. The Protectionist Backlash By GORDON BROWN WSJ September 6, 2006; Page A20
When the great 19th-century British statesmen Bright and Cobden persuaded the world to equate free trade with liberty, that philosophy was held high. Today a more skeptical world is drifting into a new and dangerous protectionism. And once again the challenge for free traders is to show that we are fighting not just for narrow interests but for high ideals.
Urgently championing the benefits of free trade is all the more important because, of all the setbacks for the world economy this summer -- high oil prices, the recurrence of inflation and political instability -- perhaps the most worrying for the long term is the stalling of the Doha round of world trade talks. And this trade failure is helping to give cover to a protectionist backlash that is seeing the growth of populism in Latin America, a resort to "national champions" in Europe and protectionist calls in the U.S.
I believe this new tide of protectionism with all its worrying features -- anti-free trade sentiment in all places, and anti-American rhetoric in some -- can and must be challenged and defeated by people prepared to stand up for free trade and the values of freedom and democracy -- values that, at root, Britain, the U.S. and most of the world share. This will require bold leadership -- starting at the IMF and World Bank annual meetings later this month in Singapore. It will also require a new willingness from pro-free trade leaders in both politics and business to make the case that the world's best hope is more globalization, not less, and that for poor countries the only path out of poverty is not the isolationist route but the trade route.
The impetus for such a campaign, and for an early resumption of the Doha talks, lies in the fundamental benefits of trade growth. For, time and time again over the last 30 years, the expansion in trade has demonstrated Adam Smith's theories about the dynamics of growth.
Since 1975 world trade has grown at 6% a year, the main motor for 3% world economic growth. Far from being a zero-sum game, expansion in trade is almost entirely positive for both big, maturing economies and emerging markets hoping to escape poverty. Recent estimates by the World Bank suggest further trade liberalization could lift up to 95 million people out of extreme poverty. So in Singapore, as chairman of the International Monetary and Finance committee, I have put progress on trade and a pro-globalization agenda firmly at the heart of our meetings. Big decisions will rightly be made on international governance. A strengthened IMF will be better equipped to meet the challenges to trade and globalization.
I have also invited Pascal Lamy, who has shown great skill and leadership as head of the World Trade Organization, to address the IMF committee. IMF Managing Director Rodrigo de Rato and I will also chair a summit of global business and financial leaders, which will start with a discussion of the importance of free trade and examine how we can make globalization work better. As chancellor I have the privilege of daily contact with businesspeople of every type, and this initiative at the IMF reflects what I believe is a shared realization in the business and finance community of the damage that the stalled trade talks are doing to the very process of globalization.
Prior to the Singapore meetings it is right to discover where there is common ground among the key players, especially America, Europe, India and Brazil. These are talks that the British trade secretary, Alistair Darling, is starting in Rio this week. And I propose two further initiatives that not only break with the past but also put the pro-globalization, pro-free trade agenda to the forefront.
I will propose that the IMF consider how this year's surveillance processes could focus not just on current account imbalances -- its current work -- but also on promoting trade growth and financial stability, thereby bringing the main players to recognize that international cooperation can yield more than talk but also policy improvement. And with all countries -- rich and poor -- coming together in Singapore, the IMF and World Bank meetings are a good place to consider how we help developing countries liberalize and, by removing barriers to trade, make a trade agreement more acceptable to them.
Anyone familiar with cargo shipping rates can tell you that, with such poor infrastructure in the developing world, transport costs alone can be 10 times the costs of tariffs and thus are a far bigger barrier to trade. In Singapore, the United Kingdom will offer to do more to support infrastructure for trade, and I hope we can build on the promises to do more made by Japan, the U.S. and now by EU Trade Commissioner Peter Mandelson for Europe. In this way we will demonstrate that the social impact of globalization should be addressed not by curtailing free trade, open markets and labor flexibility, but by complementing open flexible markets and free open trade with what will help make globalization fairer to developing countries: necessary reforms and investment in infrastructure, and the education and equipping of the world's unskilled workers and poor.
But reducing infrastructure barriers alone will not be a panacea, or offset the breakdown of trade talks. Few suggest that developing-country intransigence was to blame for the collapse of the Doha talks in July. Developed-country agriculture remains the barrier, and here too we can make progress in Singapore.
The truth is that Europe could and should now go considerably beyond its initial offer of a 39% cut in agricultural tariffs. It even could go beyond the 51% now mooted. Similarly, America could and should go beyond a 53% cut in trade-distorting domestic support for its farmers. Brazil could and should go beyond its pledge to reduce tariffs on industrial goods to a maximum of 30%, with India responding on services.
I believe that, once we can regain the momentum in Singapore, any breakthrough should be followed quickly by a push by heads of government for a trade agreement before the end of the year.
It is one of the great ironies that the greatest damage to globalization today is not being inflicted by the demonstrations and running protests that have marked trade negotiations over the years. The wound is self-inflicted, caused by our failure, as the world's wealthiest countries, beneficiaries of globalization, to agree to trade liberalization. So let Singapore be a start to winning the high ground on trade and globalization -- and a victory for the power of both argument and action.
Mr. Brown is U.K. chancellor of the Exchequer.
Global taxes feed incompetent, corrupt bureaucracies. National governments are good at wasting taxpayers' money, but at least there is hope they can be held accountable. International bureaucracies, like the UN and the World Bank, however, are above and beyond accountability. Nonetheless, some suggest that they should be given the right to tax American citizens directly. Richard Rahn, writing for the Washington Times, explains that this would be a particularly bad idea. The UN has the oil-for-food scandal on its resume, and the World Bank is responsible for more failures than successes in global development:
The world's bureaucratic
elites, including the United Nations, are demanding that the rich nations
spend 0.7 percent of their gross domestic product on development aid. This
is more than $300 billion a year, or well over $3 trillion over the next
decade. The demand for such huge funds is given as the main rationale for
global taxes to be levied on the world's taxpayers, outside the control
of and accountability to national governments. ...[Even] if such funding
were available, who would administer it? Kofi Annan and other U.N. officials
claim they should do it, but the U.N. is incapable of presenting a set
of books for its own operation that can be audited and was responsible
for the largest financial scandal in the world's history -- the Iraq oil-for-food
program. The World Bank can make the argument that they are the most experienced
global aid institution -- but their "experience" is one of many more failures
than successes. The fact is that no international body with unaccountable
bureaucrats spending other people's money on projects is likely to succeed,
particularly when the conditions are not ripe for success. The taxes, whether
they are imposed, as the French already have, on international airline
fares, or international financial transactions, or on energy, are not costless.
The argument is made that these taxes will be paid by the rich but will,
in fact, be paid by workers (in terms of higher unemployment) who supply
the goods and services being taxed. The rich will merely choose to consume
less of what is heavily taxed.
http://www.washingtontimes.com/commentary/20060831-083921-2759r.htm