1. Econ journal watch from peter boettkes page http://www.econjournalwatch.org/main/index.php
2. The market retreats have been limited to a few countries and a small segment of the overall population. BY WILLIAM C. GRUBEN AND RICHARD ALM
*3. A THEORY OF AFFLUENCE
4. Mexico's Job-Creation Problem By JOEL KURTZMAN WSJ August 3, 2007; Page A9
5. The Best Economy Ever By DAVID HALE WSJ July 31, 2007; Page A15
6. The East Is Flat WSJ July 23, 2007; Page A14
7. Forward-Thinking Cultures harvard business review online 7-19-07 by Mansour Javidan
8. Mugabenomics Arnold Kling  http://econlog.econlib.org/   July 17, 2007
9. Can Europe's recovery last? Jul 12th 2007 From The Economist print edition
*10. Is economic inequality bad for growth? Tyler Cowen
11. AMERICAN PRODUCTIVITY
*12. Due North   Font Size: By Arnold Kling : BIO| 13 Jun 2007
13. England Becoming a Top-Flight Tax Haven.
*14. The Global Flat Tax Revolution.
15. Lazy Europe? By DANIEL SCHWAMMENTHAL  WSJ April 25, 2007; Page A14
16. What's Left for the IMF? By ADAM LERRICK April 13, 2007; Page A13 Developing countries are increasingly eschewing the Fund's "help."
17. Morally Taxing By SAMUEL GREGG   WSJ March 12, 2007
*18. World Poverty By Walter E. Williams Wednesday, February 7, 2007
*19. Competition among Cantons boosting Swiss competitiveness
20. The global shift to better tax policy  Flat and Flatter Taxes Continue to Spread Around the Globe January 16, 2007 By Alvin Rabushka
*21. October 24, 2006 The P-I-E Model Arnold Kling
22. Reaganomics 2.0 By STEPHEN MOORE WSJ August 31, 2007; Page A8
23. Union: Mexican Trucks Begin Crossing Border Saturday, Union Asks Court To Block Mexican Truck
*24. COMEBACK TRAIL For Philippine Economy, Harsh Remedies Pay Off President's Tax Hikes Lure Foreign Investors; Risk of Global Crunch
25. Tax Havens and Prosperity. The Central Intelligence Agency ranks 229 nations a
26. EU Commissioner Defends Ireland's Fiscal Sovereignty. T
*27. France: The ethic of work has vanished By George Will  WSJ Thursday, August 30, 2007
28. LABOR DUMPING
29. Report: U.S. Workers Are Most Productive
*30. The Transformation of the Kibbutz and the Rejection of Socialism-Becker
31. Fear of Supermarkets  The liberalization of India's retail sector isn't going to be easy. WSJ September 4, 2007
32. Gas Attack    Why is Burma such an economic basket case? By SEAN TURNELL WSJ September 4, 2007
*33. Is Democracy the Best Setting For Strong Economic Growth? WSJ debate March 13, 2007
34. Developing Nations Win Concession On Global Warming at APEC Associated Press
35. Economics and Property By Walter E. Williams
36. Productivity Gains Revised Higher By BRIAN BLACKSTONE
37.  Taxes By Walter Williams
*38. ECONOMIC FREEDOM OF THE WORLD
39. "FEEL GOOD" VS. "DO GOOD" ON CLIMATE
*40. How to Control China's "Export" of Air Pollution--Posner
 
 
 
 

1. Econ journal watch from peter boettkes page http://www.econjournalwatch.org/main/index.php

In This Issue:

Welcome to the January 2006 issue of Econ Journal Watch. EJW is a triannual peer-reviewed journal for scholarly commentary on academic economics.

Our articles are organized into thematic Sections. Each Section can be accessed by clicking on the links running across the top of the page: Comments, Do Economists Reach a Conclusion? etc. Each Section contains articles in Adobe pdf format, which can be viewed individually. Or, click on the link at the bottom of this page to download and print the entire document as a single pdf file (211 pp).

Table of Contents with links to articles (pdf)

Comments: Miscounting Money of Colonial America: Ronald W. Michener and Robert E. Wright argue that Farley Grubb, writing in Explorations in Economic History, has mistaken the unit of account for the medium of exchange and grossly misestimated the money supply of colonial America. Farley Grubb responds vigorously to them, and not for the first time.

The Intellectual Tyranny of the Status Quo: Previously, Richard Timberlake criticized the “golden fetters” interpretation of the Great Contraction, and argued that the failing stemmed, rather, from the Fed’s adherence to the Real Bills Doctrine. While endorsing Timberlake’s vindication of the gold standard, Per Hortlund argues that Timberlake and others misfire with respect to the Real Bills Doctrine.

Also in the previous issue, Kurt Schuler’s Argentina article indicted more than 90 economists for mistakes in understanding and description—among them, David Altig and Brad Setser, who here criticize Schuler’s charges. Schuler responds.

Do Economists Reach a Conclusion on pressing policy issues? Adrian T. Moore and Ted Balaker exam the case of taxi policy.

Economics in Practice: William J. Baumol explains why modern textbook theory is entrepreneurless.

Character Issues: In 1981, as the Thatcher government got its legs, 364 economists signed a letter protesting the direction of monetary and fiscal policy in Britain. Geoffrey Wood examines how well the letter has stood up.

Does the American Economic Association lean Democratic? William A. McEachern investigates the 2004-election cycle campaign contributions of AEA members, committee members, officers, editors, referees, authors, and acknowledgees.

Daniel Klein explores Gunnar Myrdal’s plea for disclosure of one’s ideological sensibilities, surveys the research into the ideological character of the AEA, and reports new findings on AEA membership rates by voter category.

Correspondence: E. Roy Weintraub remarks on History of Political Economy’s being dropped from the Social Science Citation Index. How can a journal show high SSCI citation productivity when the cluster of journals that cite it are excluded from SSCI?

Note: With this issue, we shift to a schedule of publishing in January, May, and September.

Editor's Report

Download and Print Entire January 2006 Issue (211 pages, 3.9 MB)

Monday, August 13, 2007  http://www.latinbusinesschronicle.com/app/article.aspx?id=1528
Latin America: Adios to Market Reforms?
Venezuela and Argentina moved sharply away from a market orientation in 2000–04, the authors point out.  Here represented by presidents Hugo Chavez and Nestor Kirchner in Buenos Aires last week. (Photo: Argentine President's Office)
 

2. The market retreats have been limited to a few countries and a small segment of the overall population. BY WILLIAM C. GRUBEN AND RICHARD ALM

By the mid-1980s, governments' reckless spending and economic meddling had brought hyperinflation, stagnation and economic crisis to many Latin American countries. The hard times opened the door to what became known as the Washington Consensus of the 1990s, shorthand for a set of market-oriented policies that included fiscal discipline, deregulation, privatization and freer trade.

More than a decade and a half later, analysts increasingly wonder whether Latin America may abandon its free market policies and return to its socialist past. The presidential candidates who have won in the past nine years seem to signal a leftward shift in at least five countries.

Hugo Chavez, who advocates "a new socialism" for the 21st century, won Venezuela's presidency in 1998 and has since been reelected. Chavez has made good on his populist rhetoric by spending lavishly on new social programs, taking control of foreign-led oil ventures, letting squatters take wealthy farmers' land, nationalizing telephone and electric companies, and threatening to seize banks and other privately held enterprises.

Chile has had a Socialist Party president since 2000, first Ricardo Lagos and since last year, Michelle Bachelet. In Brazil, Workers Party candidate Luiz Inácio Lula da Silva took office in 2003. Cuba's Fidel Castro was among the heads of state attending the 2003 presidential inauguration of Néstor Kirchner, leader of Argentina's Peronist Party. In 2005, socialist Evo Morales, a former coca-leaf grower and union leader, became Bolivia's president.

Assessing the leftward tilt in Latin America's economic policies requires going beyond election results. The Fraser Institute's Economic Freedom of the World report provides a broad, long-term gauge of nations' commitment to market-oriented policies. In the mid-1980s, Latin America started gaining economic freedom faster than the rest of the world. In the next decade, the Washington Consensus provided added momentum, allowing the region to achieve the world average at the turn of the century. Latin America, however, has since fallen off the global pace.

Despite the recent lag, it may be too soon to write an obituary for Latin America's market reforms. A country-by-country survey leads to a less sweeping conclusion: A few leaders have steered their countries to the left, but the bulk of Latin America hasn't lost faith in markets.

ECONOMIC FREEDOM TRENDS

We can delve deeper into Latin America's economic policies by analyzing individual countries' performance on the Fraser index since 2000. In general, Fraser equates economic freedom with greater reliance on market forces and less government intervention. Countries do better to the extent they open trade, welcome foreign investment, keep taxes and regulatory burdens low on business and labor, control government spending, hold down the hidden tax of inflation and enforce property rights.

To simplify the process, we looked at the dozen nations with the largest populations and economies. Cuba has been omitted because of a lack of data.

Individual countries' most recent Fraser scores go in every direction—up, down and mostly sideways. Venezuela, Argentina and the Dominican Republic moved sharply away from a market orientation in 2000–04. Venezuela's rebound at the end of the period isn't likely to be sustained, given Chavez's subsequent actions, such as limiting foreign companies to minority stakes in oil and gas exploration projects.

Where did these three countries veer off Fraser's free market path? Venezuela lost points because it tightened limits on holding foreign currency, imposed price controls, meddled in exchange rate markets, added bureaucratic hassles and regulation, and burdened foreign investment. Argentina experienced rising inflation and imposed price controls—signs of monetary policy lapses that exposed the private sector to increased risk. The country also had problems with burdensome regulations, growing benefits to labor, and maintaining the law and order necessary for economic stability. The Dominican Republic added red tape, lost inflationary discipline and effectively drove real interest rates below zero.

While these countries curtailed economic freedom, Mexico moved in the opposite direction. Improvements came largely from policies promoting market interest rates, less restrictive minimum wages and lower tax burdens.

Elsewhere, Fraser's assessments of economic freedom changed little over 2000–04. Chile and Peru were already among Latin America's most market-oriented countries—so they remained exemplars of free market policies despite a lack of upward movement in their indexes. Colombia's slight regression and Ecuador's meager progress may be reason for greater concern because both entered the new century relatively low in the economic freedom rankings.

The Index of Economic Freedom, calculated by the Heritage Foundation and The Wall Street Journal, offers another country-by-country assessment. We've adjusted the measure to provide a sharper focus on domestic policies. Components for openness to trade and foreign capital have been deleted, leaving data on fiscal burden, government intervention in the economy, monetary policy, banking-market openness, wage and price controls, protection of property rights, regulation and prevalence of informal markets.

Like the Fraser index, the Heritage/ WSJ data show that Argentina, Venezuela and the Dominican Republic experienced marked erosion in market orientation. The 2000–05 data may also provide an early hint of an ebbing in Bolivia's index. Morales nationalized the oil and gas industry in May 2005, so the country's small decline may be a harbinger of a trend that will emerge in subsequent reports.

While Fraser indicates that Venezuela lost the most ground, Heritage/WSJ finds Argentina a bigger backslider. Argentina, however, achieves a higher overall ranking every year, signaling that it surpasses Venezuela in market orientation.

According to the Heritage/WSJ data, Argentina's domestic economic freedom faltered because authorities failed to control inflation, crimped the banking system and allowed property rights to deteriorate. The biggest contributor to Venezuela's declining score was the growing size of government, a reflection of Chavez's penchant for spending the country's oil riches. The country also did worse on measures of financial freedom and corruption. The Dominican Republic's deterioration was widespread, with lower readings for fiscal policy, size of government, monetary policy, finance and corruption.

Beyond the backsliders, Heritage/WSJ finds most Latin American nations didn't forsake market-friendly policies. However, meaningful progress toward markets is hard to find outside Ecuador, which showed eye-popping progress. Ecuador's results should be interpreted with caution, however. The small Andes nation had the region's lowest Heritage/WSJ domestic-policy score in 2000, the year it scrapped its currency in favor of the U.S. dollar, a move designed to corral runaway inflation. Dollarization brought improvements in monetary policy and the financial system, the biggest contribution to Ecuador's better showing in 2005.

The past five years' progress, however, merely restored Ecuador to its 1998 level. Perhaps more telling, the country's Heritage/WSJ ranking in 2005 puts it ahead of only Argentina, Bolivia, the Dominican Republic and Venezuela—not the best of neighbors when it comes to economic freedom.

BUSINESS BURDENS

Regimes moving to the left typically favor workers over employers and hinder companies with excessive rules and red tape. Market-friendly reforms, on the other hand, relieve the burdens on businesses. Fraser and Heritage/WSJ pick up changes in these policies, but the World Bank's Doing Business series provides additional detail on the everyday burdens companies and entrepreneurs face.

The series collects 42 indicators for 2003 through 2006, covering a time when Chavez, Kirchner, da Silva, Morales and others were in office. The data measure hurdles private enterprises encounter in a range of areas—among them, starting a business, employing workers, registering property, getting credit, enforcing contracts and closing a business. The World Bank doesn't present data for every country and every year, but we did find meaningful comparisons on 19 aspects for the 12 Latin American countries we studied.

Looking at those aspects, we found that 212 of the indicators point to the same or greater market orientation. All countries but Chile—the most market friendly—improved their scores in at least five categories. Only 16 measures indicate a retreat from markets. The Dominican Republic and Honduras had three each; Bolivia, Brazil and Venezuela had two.

From a freer market perspective, the most encouraging Doing Business trends center on new businesses, which increase competition and create jobs. Latin America's best environments for entrepreneurs can be found in Chile, Guatemala and Mexico, where starting a business takes a month or less.

The biggest improvement, however, came in Argentina, which hasn't otherwise received high marks for market-friendliness. The country reduced the number of days required to start a business from 68 in 2003 to 32 in 2006. Mexico shaved off 31 days, Ecuador 27 and Peru 26. Brazil and Venezuela remain unfriendly to entrepreneurs, but none of our 12 Latin American nations added to business start-ups' time burden.

The environment for entrepreneurs has improved in other ways. Eleven countries reduced financial barriers to starting a business, measured as the cost of opening up as a percentage of per capita income. Seven whittled down start-ups' capital requirements. Three cut the number of procedures for opening a business. All told, nearly half the 66 increases in market orientation came in World Bank measures related to getting a new enterprise off the ground.

Closing a business can be just as important as starting one. An efficient bankruptcy and foreclosure system allows creditors, tax authorities, employees and others to recover a greater portion of their claims. They fare better when proceedings take less time and money and enterprises keep operating in the interim.

The World Bank calculates the cents per dollar likely to be recovered from a business that's shutting down. Between 2003 and 2006, all countries except Chile had higher recovery rates, a signal their bankruptcy and foreclosure systems had become more market friendly. Gains were largely modest outside of Argentina and Brazil, the latter a dismal performer in 2003.

Some progress came in registering property, with 10 nations lowering the cost relative to property value. Brazil, the Dominican Republic, Honduras and Peru cut the number of days it takes to enforce a contract. Colombia did, too, but only managed to come down to an astronomic 1,346 days, making it second to Guatemala.

Scant progress was made in freeing labor markets. Indeed, 10 of the 16 instances of decreasing market orientation involved restrictions on hiring and firing. Bolivia, the Dominican Republic and Honduras reduced market orientation in two of the five Doing Business labor measures. Argentina, Brazil, Guatemala and Mexico became less market friendly in one each. Venezuela showed improvement in two workplace measures, although its labor market scores remained decidedly antimarket.

Among the 12 countries with the bulk of Latin America's population, the Fraser, Heritage/WSJ and World Bank measures—taken together—find no wholesale erosion of market-based policies outside of Argentina, the Dominican Republic and Venezuela. In particular, Mexico continues to do well. A regional leader in market orientation at the start of the decade, it subsequently gained economic freedom on the Fraser index and improved its performance on six Doing Business indicators. Among the 12 largest nations, Mexico led in fewest days to start a business and highest recovery rate in liquidations.

The leftward lurch perceived by many observers has been exaggerated. Even so, the data don't show a groundswell of support for new market-oriented policies. Progress is spotty, with few countries pursuing ambitious reforms and most of them running in place. The momentum of the Washington Consensus has flagged in the new century.

GROWTH AND REFORM

The success of previous reforms may be one reason Latin American nations aren't moving as briskly as they once did toward market-friendly policies. When they began to loosen the state's grip on their economies two decades ago, most countries had long reform agendas that included opening markets, controlling inflation, deregulating industries and privatizing government enterprises.

A lot of that heavy lifting has already been done. From 1990 to 2004, Latin America's Fraser index, weighted by population, rose 30 percent. What's left for Chile, Mexico and the other more market-oriented nations is consolidation and fine-tuning—decidedly smaller steps. Most countries have maintained the market-oriented policies put in place.

In the handful of countries where economic freedom has faltered, we can't deny the pull of populism. Bolivia, the Dominican Republic and Venezuela are relatively poor and underdeveloped, making them susceptible to the message of a Chavez or Morales. Argentina is a bit different. It ranks as one of Latin America's richest countries but has a history of populist politics dating to Juan Perón in the late 1940s.

Some analysts contend that countries adopting market-oriented policies in the 1990s grew more slowly than reformers had promised. When the reforms didn't deliver as expected, they say, it strengthened forces opposed to economic liberalization. In this political dynamic, some nations would retreat from the market ideology. Other nations may still move toward freer markets but at a slower pace than countries with more vigorous economies.

The data, however, don't support a link between sluggish economies and turning away from economic freedom. From 1997 to 2000, growth rates varied among the 12 Latin American nations: Mexico, Guatemala and the Dominican Republic gained the most, while output declined in Ecuador, Colombia, Argentina and Venezuela.

Subsequent changes in economic freedom, measured by either the Fraser or Heritage/WSJ domestic index, appear random. Guatemala made significant progress by Fraser's reckoning but regressed slightly by Heritage/WSJ's. By both indexes, the growing Dominican Republic became less market friendly and slumping Ecuador gained economic freedom. Colombia's results are mixed.

Only in Argentina and Venezuela did poor economic performance precede sharp declines in economic freedom. Fraser scores show Argentina pursued market measures with some vigor in the 1990s. When the economy again slipped into a hyperinflationary quagmire, the country could have been disillusioned with the policies' payoff. Venezuela, on the other hand, registered little overall progress toward markets in the 1990s, so it's hard to make the case that bad results from reform led to Chavez's election and skepticism about markets.

The Fraser, Heritage/WSJ and World Bank data are consistent through time and across countries, making them useful for international comparisons. The bare numbers, of course, don't fully capture the complexities of economic policy. In addition to internal political forces, nations face external pressures from markets and lenders that have at times led to sudden policy shifts. Some policies have unanticipated consequences. During the 1990s, tough stances on pegged exchange rates adopted to hold down inflation sometimes triggered an outward rush of financial capital. Evidence suggests that investors thought the stances couldn't last because they were too tough. Tactics differ. To fight inflation, some countries have adopted specific targets, which some evidence suggests helps reduce inflation and its volatility.

Is Latin America saying adios to market-friendly reforms? It doesn't look like it—left-leaning election results notwithstanding. The retreats have been limited to a few countries and a small segment of the overall population. Elsewhere, the region largely retains market reforms, while some countries continue to move forward, albeit cautiously. Economic performance shouldn't be a stumbling block. The World Bank projects healthy growth in the region—4.8 percent in 2007 and 4.3 percent in 2008. Few countries will have reason to question the effectiveness of market-oriented policies, making it less likely the contagion of a Chavez or Morales will spread.

Still largely poor by U.S. and European standards, Latin America can't escape the fact that left-leaning policies have historically been a drag on growth. Although they sometimes roil enterprises, industries and even economies, market reforms offer the region a chance to better itself, particularly in an era of globalization, when isolation leads to stagnation. The slow pace of Latin America's market reforms in recent years is cause for concern, leaving the region's market advocates looking for ways to restore the momentum of the 1990s.

William C. Gruben is a vice president and senior economist and Richard Alm is senior economics writer in the Research Department of the Federal Reserve Bank of Dallas. This column originally appeared in the bank's monthly publication, Economic Letter, Vol. 2, No. 7. Republished with permission.

3. A THEORY OF AFFLUENCE
------------------------------------------------------------------------

The Industrial Revolution in England -- the first escape from the
Malthusian trap -- occurred because of a change in the nature of the
human population, according to Dr. Gregory Clark, an economic historian
at the University of California, Davis.
Further, it seems that the rich and their progeny are responsible for
the change, says Dr. Clark:
   o   For generation after generation, the rich had more surviving
       children than the poor.
   o   That meant there must have been constant downward social
       mobility as the poor failed to reproduce themselves and the
       progeny of the rich took over their occupations.
   o   As a result, the modern population of England is largely
       descended from the economic upper classes of the Middle Ages.
Moreover, as the rich pervaded all levels of society, Dr Clark
documented that several aspects of what might now be called
middle-class values changed significantly from the days of
hunter-gatherer societies to 1800.  For example:
   o   Work hours increased, literacy and numeracy rose, and the
       level of interpersonal violence dropped.
   o   An increase occurred in people's preference for saving over
       instant consumption, which he sees reflected in the steady
       decline in interest rates from 1200 to 1800.
   o   Overall, thrift, prudence, negotiation and hard work were
       becoming values for communities that previously had been
       spendthrift, impulsive, violent and leisure loving.

If the Industrial Revolution was caused by changes in people's
behavior, then populations that have not had time to adapt to the
Malthusian constraints of agrarian economies will not be able to
achieve the same production efficiencies, Dr Clark's thesis implies.

Source: Nicholas Wade, "Habits of industry that made revolution
work," The Scotsman, August 11, 2007.
For text:
http://news.scotsman.com/scitech.cfm?id=1261002007
For more on Social Issues:

http://www.ncpa.org/sub/dpd/?Article_Category=28
 
 

4. Mexico's Job-Creation Problem By JOEL KURTZMAN WSJ August 3, 2007; Page A9

Why do so many Mexicans leave their families, friends and homes to make the arduous journey to the United States?

It's a central question to the immigration debate and is essential for setting workable policies. But it's also a question that has rarely been asked.

After looking at the numbers, what I discovered is that Mexico has a job-creation problem. During President Vicente Fox's six years in office his goal was to create six million jobs across all sectors of the economy. Mr. Fox fell far short of that goal. Between 2000 and 2006, the period when he was in office, Mexico created only 1.4 million jobs. Though accurate figures are difficult to arrive at, the Government Accountability Office estimates that during each year of Mr. Fox's presidency between 400,000 and 700,000 illegal immigrants arrived in the U.S. from Mexico. The number of illegal immigrants from Mexico was roughly equal to the number of jobs Mr. Fox did not create.
 

If one were to do a CAT scan of Mexico's economy, one would find a country with the potential to become a job creator's paradise. Mexico has far more oil than fast-growing Dubai (a net labor importer) and almost as much as Qatar, another labor importer. If Mexicans working in the U.S. are any indication, Mexico has a work force that is trained and disciplined. With thousands of miles of coastline, Mexico is a tourist haven. It shares a border with its largest trading partner. But even with these positive attributes, Mexico's job-creation engine has stalled.
Research shows that big companies -- especially big Mexican companies -- do not create many jobs. Jobs are created by entrepreneurs who start companies from scratch. To perform their job-creating function, entrepreneurs need access to capital, which is where Mexico falls short. According to the Milken Institute's 2006 Capital Access Index, Mexico ranks a dismal 43rd with regard to capital access out of 122 countries studied. To compare, the U.S., the world's top job-creating developed country, ranks No. 4, and Hong Kong, Asia's most vibrant, entrepreneurial hub, ranks No. 1.

Mexicans with drive, ambition and a willingness to take risks sneak across the border to the U.S. But they don't just come for jobs. They also come for the capital. When these immigrants arrive they don't just sell their labor, many start small businesses in the food, construction, maintenance and landscaping trades. When those businesses are launched, illegal Mexican immigrants hire other illegal Mexican immigrants. A great deal of Mexico's job creation takes place inside the U.S.

Mexico's financial and economic structures fail at providing entrepreneurs with the capital they need to create jobs. The economy is too concentrated, with nearly half of it controlled by a single family -- that of the billionaire Carlos Slim. A handful of other families own the bulk of Mexico's remaining wealth. Mexico's legal and business structures effectively fence off from competition whole sectors of the economy. In telecommunications, petroleum and much of the real-estate and tourism sectors, real competition is restricted. Mexico could jumpstart its job-creation engine by opening these sectors of its economy to real competition.

Mexico's oil wealth is another job-creator's nightmare. It is controlled by a single government-owned company, Pemex. Even with today's high oil prices, Pemex is the world's most heavily indebted oil company and one of the least efficient producers. Pemex -- whose monopoly status is protected by the Mexican constitution -- is so bogged down by bureaucracy, conflicting interests, political meddling and sweetheart union deals, that it has failed to find any new oil reserves in years. It is not that new oil reserves don't exist. Last year, Chevron found huge deposits in the U.S.-portion of the Gulf of Mexico. The problem with Pemex is that it isn't really looking for oil. If Mexico's oil industry were opened up to competition, even within the confines of its constitution, not only would more oil be found, more jobs would be created.

Mexico's financial system is to entrepreneurship what sharks are to a swimmer's beach. Banking, which is conservative and risk-averse, dominates Mexico's financial system, accounting for about 55% of all financial assets, compared with just 24% of all financial assets in the U.S. In the U.S., the capital markets and a diverse array of funds provide most of the capital. If that weren't enough, Mexico's top three banks control 60% of all banking assets. If entrepreneurs are turned down by the first bank, they really have only two more places to apply. For a country its size, Mexico's stock and bond markets are hugely underdeveloped when measured as a percentage of GDP.

Household credit is also scarce in Mexico and amounts to only about 5% of GDP, versus 65% in the U.S. Without access to credit, Mexico's consumer and retail sectors have not grown sufficiently. These sectors could be vibrant job-creation engines if Mexicans had wider access to credit.

But perhaps most strikingly, Mexico has not yet succeeded in building a robust residential mortgage market. Whereas the U.S. has $8.2 trillion outstanding in residential mortgages, Mexico, with a population a third the size of U.S., has just $47 billion outstanding. Not only that, more than half of Mexico's homes are self-built and substandard. As a result, the Federal Reserve Bank of Dallas estimates Mexico has a housing deficit of five million units. If mortgages were cheap and plentiful -- through the increased use of mortgage securitization tools, for example -- the epicenter of demand for Mexico's trade- and craftsmen would not be California, Arizona, Texas and Florida. It would be in Mexico.

Solving the immigration problem will not happen unless Mexico solves its job-creation problem. To do that, Mexico needs to modernize and open up to competition its antiquated and concentrated economic and financial systems. For decades, Mexico has argued that if it were to do so, America would take over. It's time to dispel that urban myth with a little reality. If Mexico can succeed in providing capital to risk-taking Mexicans, they will create jobs in Mexico, not just in the U.S.

Mr. Kurtzman, a senior fellow at the Milken Institute, is co-author of the forthcoming book, "Global Edge: Using the Opacity Index to Manage the Risk of Cross-border Business" (Harvard Business School Press).
 
 

5. The Best Economy Ever By DAVID HALE WSJ July 31, 2007; Page A15

The volatility of world stock markets last week should not distract attention from the fact that the world economy is currently experiencing a level of growth unsurpassed in human history. World growth has been running at close to 5% for over three years -- the highest level since the late 1960s. But the current situation is profoundly different from that era: In the 1960s, over two-thirds of the world's people were excluded from the global economy because of their political regimes. During the past 20 years, China, India, the former Soviet Union, Eastern Europe and Africa have rejoined the global economy.
[The Best Economy Ever]

Their re-entry has unleashed a tremendous burst of entrepreneurial energy and set the stage for extraordinary economic growth. China has been growing at double digit rates since 2002. India's growth rate has risen to 9% from only 2%-3% 25 years ago. High oil prices have boosted Russia's growth rate to 6%-7%. The African economy will achieve a growth rate of over 6% this year.

The growth rates of nearly 120 countries will exceed 4% this year. There are only four economies in the world likely to experience negative output growth during 2007 -- North Korea, Zimbabwe, Somalia and Fiji. All are in decline because of oppressive political regimes, coups or civil war.

There are three major factors that help to explain the current buoyancy of the world economy. First, the globalization process resulting from the end of the Cold War has encouraged a tremendous growth of world trade. Between 1990 and 2006, global imports more than tripled, rising to over $11.6 trillion from $3.5 trillion. The expansion of world trade has helped to increase competition and reduce inflation.

After having practically no foreign trade 30 years ago, China will soon displace the U.S. and Germany to become the world's leading export nation. China's industrial boom has boosted commodity prices, but China uses its commodity imports to produce low-cost manufactured goods which help to restrain inflation everywhere. Wal-Mart is China's largest single customer and has used Chinese imports to produce cost savings worth hundreds of billions of dollars for American consumers. During Alan Greenspan's tenure as Federal Reserve chairman, imports quadrupled. It was America's engagement with the global economy that helped to reduce inflation and lower interest rates during Mr. Greenspan's final years as Fed chairman.

Secondly, in many countries the globalization process has encouraged a large increase in the profit share of GDP. As a result of the competitive pressures in the world economy, corporations in North America, Europe, and Japan have been striving to maximize productivity while restraining wages. The large rise in profits has encouraged major stock-market rallies everywhere since 2002. High profits help to bolster investment and improve productivity growth.

Governments have also responded to the new competitive pressures by reducing tax rates on capital. Small countries in Eastern Europe such as Estonia started the process during the 1990s. But in recent years, traditionally high tax societies such as Germany have been slashing tax rates on corporate income. France will soon follow under its new president, Nicolas Sarkozy. In the U.S., Congress reduced the tax rates on capital income during 2003 to the lowest levels since the First World War.

The third factor making possible the current world prosperity is the increased mobility of capital. Practically all countries had capital controls 25 years ago. Most of those controls are now gone, while there has been a revolution in communications technology which has vastly reduced the cost of transferring money across national borders. Financial markets have therefore blossomed in dozens of countries. The stock market capitalization of developing countries has expanded from only a few trillion dollars 10 years ago to $15.7 trillion today -- or 26.5% of the global total. The gross value of global capital flows is now equal to 16% of world GDP, compared to 3%-6% during the mid-1990s.

The great surprise of the past decade has been the direction of capital flows. In the early 1990s, many developing countries in East Asia and Latin America ran current account deficits and imported capital. There were a series of financial crises during the late 1990s which impeded the ability of developing countries to import capital and made them far more conservative. At the current time, developing countries are running large current account surpluses, while the U.S. has emerged as a huge capital importer.

The developing countries ran a current account surplus equal to 1.6% of global GDP during 2006, compared to a deficit equal to 0.4% of world GDP during the mid-1990s. China will have a current account surplus of nearly $400 billion this year. The Middle Eastern oil exporters will have a surplus of over $200 billion. Russia has a surplus of $100 billion. The developing countries of East Asia now have over $2.3 trillion of foreign exchange reserves. The U.S., by contrast, has a current account deficit of over $700 billion. High savings rates in East Asia and other developing countries have helped to finance a great consumption and housing boom in the U.S. since 2002.

Many economists have argued that the U.S. current account deficit is unsustainable. In reality, the world has an abundance of surplus savings that needs to find a home. Global investors have been happy to purchase dollar assets because they perceive that the U.S. offers both safety and competitive returns.

The great threat to the boom is that the U.S. will lose confidence in the free market ideology which allowed the global economy to take off during the 1990s. All the Democratic presidential candidates are proposing protectionist trade policies. Congressional Democrats and Republicans are threatening China with trade sanctions if it does not revalue its currency more quickly. Other Democrats want to block the proposed free trade agreement with South Korea. If the U.S. moves in a protectionist direction, it will jeopardize both the import of low-cost manufactured goods which restrains U.S. inflation and the large flows of capital compensating for America's budget deficit and low household savings rate. Such shocks would threaten both America's prosperity and the new global economic equilibrium now sustaining high growth in the developing countries.

The U.S. trade account will improve naturally when global prosperity creates more demand for U.S. exports and the end of America's housing boom dampens domestic consumer spending. Any attempt by Washington to accelerate the process will simply set the stage for political conflict and a crisis of confidence in the financial markets.

Congress should not worry about the current account deficit so long as the global financial markets are prepared to finance it. If the markets lose confidence in the dollar, the trade account will improve quickly -- but at the cost of sharply higher interest rates and a recession.

Mr. Hale is chairman of Hale Advisers, a Chicago-based economic consultancy.
 
 

6. The East Is Flat WSJ July 23, 2007; Page A14

It wasn't too long ago that Albania was joked about as the last Communist holdout, a kind of Marxist museum. Not anymore. The small Balkan country is about to halve its personal income-tax rate, starting August 1, to a flat 10%. The corporate rate is also slated to drop to 10% in early 2008.

Albania's flat tax is the latest sally in an intramural tax competition fueling growth in the former Communist bloc. The trend began with Estonia in 1994 -- then-Prime Minister Mart Laar had read Milton Friedman's "Free to Choose" -- and now extends to a dozen nations. The Czech government says its move to a flat 15% tax next year is "a certainty." And Montenegro plans to reduce both income and corporate taxes to a flat 9% by 2010.

The Adriatic Institute for Public Policy, a think tank based in Croatia, has found that governments that adopt flat-tax regimes see either steady or increased revenues within the first year. Macedonia expected increased revenue when it reduced both its 15% corporate tax and its 15-18-25% progressive income tax to a flat 12% at the beginning of the year. But it got more than it bargained for. Finance minister Trajko Slaveski recently told the Economist that "lower taxes did not just yield higher revenue -- they yielded 20% more than we projected."

For Western Europeans, their neighbors' low, flat taxes are both an opportunity and a lesson. In the first quarter of this year, the euro zone -- dominated by France, Germany and Italy -- for the first time sold more goods to the 11 new Central and Eastern European EU members than to the U.S. Old Europe has these new customers in large part because New Europe is getting its fiscal policy right. Both would be richer if the West followed the East's example.
 
 

7. Forward-Thinking Cultures harvard business review online 7-19-07 by Mansour Javidan

It’s hard to manage any organization so that its long-term interests aren’t sacrificed to short-term expedience. But there is an added wrinkle for organizations whose operations are globally dispersed: Cultural orientation toward the future varies widely the world over.

My colleagues and I discovered this in the course of our work on the GLOBE project, a study now in its 15th year, that looks at how cultures vary in relation to a set of factors important to organizational management and leadership. By surveying over 17,000 middle managers in 61 societies, we have been able to discern clear differences in nine key areas. One of these is what we call “future orientation,” or the extent to which a culture encourages and rewards such behavior as delaying gratification, planning, and investing in the future.

Our straightforward questions asked participants both to express their own values and to describe the environment in which they worked. For example, we presented them with the statement, “More people should live for the present than for the future” and asked for a level of agreement on a seven-point scale. In a separate question, we removed the word “should” and asked them to rank how well the statement described actual behavior in their culture. We found that societies vary greatly in how oriented they actually are to the long term, but in most cultures people’s personal values and aspirations are similar and quite future oriented. What’s more, most people feel their cultures aren’t as forward thinking as they should be.

In our study, Singapore emerged as the most future oriented of cultures, followed by Switzerland, the Netherlands, and Malaysia. The least future oriented were Russia, Argentina, Poland, and Hungary. Squarely in the middle were Germany, Taiwan, Korea, and Ireland. Even more important, however, is our further finding that the greater a society’s future orientation, the higher its average GDP per capita and its levels of innovativeness, happiness, confidence, and (as the chart shows) competitiveness.

What does this mean for an executive attempting to manage or work with teams in cultures that are less future oriented than their own? First, team members will have different perceptions of the feasibility of forward thinking. Even if the indigenous workers personally value long-term planning, they may see it as futile, given prevailing practices and conditions. But second, because of those shared values, it is possible to inspire people to become more future oriented. The key is to start modestly by setting team goals for, say, a three-month horizon and then ensuring they are met. By gradually increasing time horizons, a manager can endow a team with a sense of control over outcomes that formerly may have seemed hopelessly provisional and remote.

Knowing how future orientation varies from culture to culture can help leaders shift their attitude from judgmental to understanding and focus their collaborative efforts. A true global leader doesn’t blame local teams for failing to immediately live up to their aspirations but rather helps them achieve long-term goals one step at a time.
 
 
 

8. Mugabenomics Arnold Kling  http://econlog.econlib.org/   July 17, 2007

The Guardian reports
 

    President Robert Mugabe's order that all shop prices be cut by at least half, and sometimes several times more, has forced stores to open to hordes of customers waving thick blocks of near worthless money given new value by the price cuts. The police and groups of ruling party supporters could be seen leading the charge for a bargain.
 

Read the whole thing. It's how a dictator addresses the problem of inflation. Thanks to Long and Short Capital for the pointer.

Nick Schulz, who sent me the link, suggests that some folks want to do this to American health care prices. Sad, but true.
 

Mugabe's price cuts bring cheap TVs today, new crisis tomorrow
 

Police and Zanu-PF lead bargain hunt after officials order shops to act

Chris McGreal in Harare
Monday July 16, 2007
The Guardian  http://www.guardian.co.uk/zimbabwe/article/0,,2127297,00.html

A Zimbabwean shopper walks through the empty shelves of a store in Harare
The enforced cuts means many Zimbabwean shops have run out of stock and are unable to reorder because official retail prices are below wholesale costs. Photograph: Bishop Asare/EPA
 

Zimbabweans are shopping like there's no tomorrow. With police patrolling the aisles of Harare's electrical shops to enforce massive government-ordered price cuts, the widescreen TVs were the first things to go, for as little as £20. Across the country, shoes, clothes, toiletries and different kinds of food were all swept from the shelves as a nation with the world's fastest shrinking economy gorged itself on one last spending spree.

Car dealers said officials were trying to force them to sell vehicles at the official exchange rate, effectively meaning that a car costing £15,000 could be had for £30 by changing money on the blackmarket. The owners of several dealerships have been arrested.

Article continues
President Robert Mugabe's order that all shop prices be cut by at least half, and sometimes several times more, has forced stores to open to hordes of customers waving thick blocks of near worthless money given new value by the price cuts. The police and groups of ruling party supporters could be seen leading the charge for a bargain.

Mr Mugabe has accused business interests of fuelling inflation, running at about 20,000%, to bring down his government. A hotline is in place to report "overcharging", and retailers who flinch at slashing prices are being dragged before the courts. Several thousand have been arrested for "profiteering" over the past week, including the chief executives of the biggest retailers in the country, some of them foreign-owned.

Economists say the price cuts will only deepen the national crisis, leaving many shops bare because they will not be able to afford to restock while official retail prices remain lower than the cost of buying wholesale or importing. Mr Mugabe has dismissed such warnings as "bookish economics".

Some businesses fear that Operation Reduce Prices is intended to pin the blame on the private sector for Zimbabwe's economic problems as a step towards seizing control of many companies in the way that white-owned farms were expropriated at the beginning of the decade, sparking the crisis.

Parliament is expected to pass legislation in the coming weeks that will effectively give a controlling stake in all publicly traded companies to ruling party loyalists and others chosen by the government.

The impact of the price cuts was felt almost immediately as fuel virtually disappeared from sale after garages were forced to sell petrol for 23p a litre, less than they paid the state-owned supplier.

The police and army broke the locks on petrol pumps at some garages and tanks ran dry amid panic buying. Now petrol is available only on the blackmarket, at more than seven times the official price and three times what garages had been charging. By Saturday, most minibus taxis had gone from the roads because drivers could not find petrol. Crowds of workers were left on kerbs for hours trying to get to or from their jobs.

The riot police had to be called out to the South African-owned Makro super store in Harare after thousands of people stormed the shop after it was forced to slash prices. The scenes were replicated in stores throughout Harare. The Bata shoe chain's shops were stripped bare in two days by people snapping up pairs for as little as 20p.

Food is still available, although bread, sugar, cornmeal and other staples are hard to find, and meat has all but disappeared because livestock owners say it is now uneconomic to slaughter their animals. Much of the meat that is available is goat slaughtered in backyards and sold in informal markets.

The rest of the food supply - already severely undermined by drought and lack of production on land seized from white farmers - is also under threat after Mr Mugabe threatened to take over manufacturers if they shut down their plants on the grounds that they were uneconomic. "Factories must produce. If they don't, we will take you over ... We will seize the factories," he said.

Last week, the government said it was reviving the State Trading Corporation, shut down two decades ago because of mismanagement, to take over businesses that collapse or are seized. But many factories are unable to produce goods because electricity and water are unavailable for much of the day.

The price cuts were ordered by the joint operation command, a committee of army, intelligence and police officers closely tied to the ruling Zanu-PF and chaired by Mr Mugabe.

The government despatched security personnel and party cadres, including its notorious "green bomber" thugs, to enforce the price cuts, in some cases by beating up shop managers who did not implement them quickly enough.

"Zanu-PF is at heart a military organisation and that's exactly how it's gone about this, as a military operation," said David Coltart, an opposition MP. "The benefits will only last a few weeks at most and then we're going to have to live with the consequences. They believe they can dictate price cuts and print money with gay abandon but ultimately it will rebound. Not ultimately, very soon."

Business leaders say one reason for the price cuts is to quell unrest in the security forces, which saw a dramatic increase in inflation last month wipe out a 600% pay rise in May. They also fear the campaign is a step towards doing to private companies what was done to white farmers. Mr Mugabe is pressing a law through parliament in the coming weeks that will require all businesses to be at least 51% Zimbabwean owned and managed.

Zanu-PF has dressed up the move as an affirmative action measure to help previously disadvantaged black people. But firms will not be able to choose their new partners. They will be selected by the government. The measure will be paid for by taxing the same businesses forced to hand over control.

Mr Coltart said the move was essentially a means for the ruling party and military to take over the economy. "We can't expect a rational policy to emerge. You will see the military in charge of manufacturing. We've already got the military in charge of railways and grain marketing and the electoral process. There are military men now involved in all sorts of other businesses. The militarisation of the state will continue," he said.

In a letter to the cabinet the governor of Zimbabwe's central bank, Gideon Gono - until recently considered one of Mr Mugabe's closest allies - said that price controls must be scrapped and foreign investments and property rights protected to put the country on the path to economic recovery.

He also said that the seizure of white-owned farms had been counterproductive because it cost Zimbabwe foreign currency earnings by losing tobacco exports and scaring off investors.

Many of Mr Mugabe's opponents agree with Mr Gono but they are quietly heartened by the latest upheaval. They are fond of quoting the US ambassador to Harare, Christopher Dell, who recently said that Zanu-PF was committing regime change on itself with its disastrous economic policies and that Mr Mugabe would be gone by the end of the year.
 
 

Special reports
Zimbabwe
South Africa

News guide
Zimbabwe: best news websites

From the Guardian archive
09.02.1980: Ironing the lawn in Salisbury, Rhodesia

Useful links
This is Zimbabwe blog
Zimbabwe government
Movement for Democratic Change
Commercial Farmers' Union
Zimbabwe Independent
Zimbabwe Standard
Zimbabwe Herald
Africa News: Zimbabwe
Amnesty report on Zimbabwe
 

9. Can Europe's recovery last? Jul 12th 2007 From The Economist print edition
 

Only if its governments take advantage of sunnier times to make deeper reforms

Peter Schrank
Peter Schrank
 

AS EVERY actor knows, it is easy to be typecast. The role assigned to Europe for the past decade has been that of sclerotic under-achiever: a slow-growing, work-shy and ageing continent that is destined to be left behind by the United States, China and India. Unnoticed by the audience, Europe, under new political leadership first in Germany and Italy and now in France and Britain, has changed the plot. Since the end of 2006 euro-area GDP has outpaced America's: in 2007, it should grow by 2.7%, ahead of both America and Japan. The euro is at new highs against the dollar and the yen. Unemployment has fallen to 7%, the lowest since the euro started life in 1999.

The transformation has been most remarkable in Germany, the biggest European economy, once tarred as “the sick man of Europe”. From 1995 to 2005 German GDP grew at an average of only 1.4% a year. But in the first quarter of 2007 it expanded more than twice as fast, despite a large rise in value-added tax. The 2004 reforms in labour markets and welfare made by the previous government under Gerhard Schröder are bearing fruit. On international definitions, unemployment is down to 6.4%, not much above the level in Britain. German business is doing spectacularly well: the country is again the world's biggest exporter, profits are at a record, competitiveness has improved sharply (see article).

Where Germany leads, the rest of Europe follows. In truth the picture of an entire continent in a slump was always distorted. Several countries in Europe have been doing well for some years. Britain and Spain have grown consistently. Ireland has produced the nearest thing to an economic miracle outside Asia; smaller east European economies are seeking to emulate it. Scandinavia boasts three countries that top most league tables for competitiveness. The truly troubled economies of Europe were always the core euro-area ones: Germany, France and Italy. Now that Germany has picked up speed, the other two are improving too. The new French president, Nicolas Sarkozy, is promising to boost growth. Some Europeans may be tempted to conclude that their economic problems are behind them, their structural faults have been put right—and there is no need for more painful reforms.

The turn of the cycle

Such a conclusion would be wrong on pretty much every count. Yes, there have been structural improvements in the core euro area, especially Germany. But much of the recovery is really cyclical. When the global economy is registering a fourth successive year of near-5% growth, it would be surprising if the world's biggest exporter did not benefit; indeed, growth of 3% seems rather modest. Moreover, much of Germany's renewed vigour reflects stringent control of real wages, which has secured a fall in unit labour costs when they have been rising elsewhere. Yet merely squeezing pay to gain competitiveness is not a long-term solution.

The gain also comes at the expense of other euro-area countries, such as France, Italy and Spain. This creates tensions of its own, much on display this week when the hyperactive Mr Sarkozy dropped in to a meeting of euro-area finance ministers in Brussels. He announced that France might again flout the euro-area stability pact's restrictions on budget deficits, and repeated his previous complaints about the strength of the euro and the tight monetary policy of the European Central Bank. He ran into a stony hostility, notably from the Dutch but also from the Germans (see article). The French president has similarly been to the fore in attacking European Union competition rules and talking up the causes of industrial policy and economic patriotism.

A myth, Mr Sarkozy, and you know it

The charitable explanation for this nonsense is that laying into Brussels is a way of diverting French voters from the genuine (and long overdue) reforms Mr Sarkozy is planning for the labour market, welfare and taxation. But his agenda seems also to be driven by a common belief in France (and in other parts of Europe) that the euro's macroeconomic management and the obsession in Brussels with pursuing pro-competitive reforms are to blame for the region's economic ills.

This is to get things entirely backwards. As is obvious from the divergent performance of individual countries, the euro area's troubles are not macroeconomic in nature. Rather they are microeconomic, reflecting the failure of several countries to reform rigid labour markets and overly regulated product markets. These countries have been suffering not from too much competition, but from too little: for too long, too many of their workers and producers have been sheltered from competition, fostering high costs and inefficiency.

Nor will partial reforms of the kind so far carried out be sufficient. This can best be seen in the labour market in Germany, which (like Italy's) has been only partly freed up. The result has been not just a welcome explosion of temporary and part-time jobs, but, more insidiously, the entrenchment of a two-tier labour market. Insiders have permanent, protected contracts; outsiders have short-term, unprotected ones. This will fuel resentment among outsiders (often the young or immigrants). It also threatens to introduce new rigidities into the wage-bargaining process, because insiders may feel sufficiently insulated to demand higher pay in the knowledge that any resultant job losses will fall on outsiders.

The unpalatable truth remains that Europe's economies need substantial further reform if they are to prosper in an ever more competitive, globalised environment. And the recent upturn may make it harder for political leaders to get their voters to understand this.

European countries that have introduced radical reforms have usually done so in times of serious economic crisis: Britain in 1979, the Netherlands in 1982, Ireland in 1987, Denmark, Finland and Sweden in the early 1990s. Yet as all these countries found, it is easier to change when times are good, not when they are bad. That is a lesson that Germans, French, Italians and other Europeans should ponder as they bask in today's sunshine.
 
 
 

10. Is economic inequality bad for growth? Tyler Cowen

How many times have you heard that meme?  It turns out that political inequality is possibly at fault.  Acemoglu et. al. report:

    Is inequality harmful for economic growth?  Is the underdevelopment of Latin America related to its unequal distribution of wealth?  A recently emerging consensus claims not only that economic inequality has detrimental effects on economic growth in general, but also that differences in economic inequality across the American continent during the 19th century are responsible for the radically different economic performances of the north and south of the continent.  In this paper we investigate this hypothesis using unique 19th century micro data on land ownership and political office holding in the state of Cundinamarca, Colombia.  Our results shed considerable doubt on this consensus.  Even though Cundinamarca is indeed more unequal than the Northern United States at the time, within Cundinamarca municipalities that were more unequal in the 19th century (as measured by the land gini) are more developed today.  Instead, we argue that political rather than economic inequality might be more important in understanding long-run development paths and document that municipalities with greater political inequality, as measured by political concentration, are less developed today.  We also show that during this critical period the politically powerful were able to amass greater wealth, which is consistent with one of the channels through which political inequality might affect economic allocations.  Overall our findings shed doubt on the conventional wisdom and suggest that research on long-run comparative development should investigate the implications of political inequality as well as those of economic inequality.

In other words, at least from that data set, the real problem seems to be rent-seeking behavior through the political process.  Here is the link.  Here is a non-gated version of the paper.

July 2, 2007 at 05:38 AM in Political Science | Permalink | Comments (8)

Dictatorships and Growth Standards   Font Size:
By Alvaro Vargas Llosa : BIO| 02 Jul 2007
  Discuss This Story! (0)   Email  |   Print |  Bookmark |  Save  http://www.techcentralstation.com/

Atlas Productivity Graph A group of European readers of this column recently wrote to me, arguing that from an economic point of view, dictatorships have been outperforming democracies for many years and that if the trend continues, there will be very little incentive to replace autocrats with the rule of law. This is an old discussion that resurfaces from time to time. The success enjoyed nowadays by autocracies awash in natural resources has reignited it.

A recent article in the online magazine American.com measures economic performance against the degree of political and civil freedom existing in various nations. The conclusion is that in the last 15 years, the economies of nations ruled by despots have grown at an annual rate of 6.8 percent on average -- two and a half times faster than politically free countries. Those autocracies that have opened their markets in recent decades but continued to restrict or prevent democracy -- China, Russia, Malaysia and Singapore, for example -- have done better than most of the developed or underdeveloped countries that enjoy a considerable measure of political and civil freedom.

It would be silly to deny that a dictatorship can boast sound economic results. Any political system, free or unfree, that removes some obstacles to entrepreneurship, investment and trade, and makes a credible commitment to safeguard property rights to a certain extent will trigger a virtuous economic cycle. Spain's Francisco Franco and Singapore's Lee Kuan Yew discovered that in the 1960s, as did China's Deng Xiaoping at the end of the 1970s, Chile's Augusto Pinochet in the 1980s and many others at various times.

But this is not the end of the story. Of the 15 richest countries in the world, 13 are liberal democracies. The other two are Hong Kong, a Chinese territory that enjoys far greater civil liberties than mainland China, and Qatar, where the abundance of oil and natural gas, and the tiny population, translate into a large per capita income average.
What this picture really tells us is that stability and reliability are most important when it comes to economic prosperity over the long term.

Spain, a modern success story, has seen its wealth double since 1985 and yet at no point in the last quarter-century did the Spaniards achieve annual growth figures comparable to those of China. Similarly, the U.S. economy has grown by a factor of 13 since 1940, but never experienced ``Asian'' growth figures.

When the environment in which the economy breathes depends on institutions rather than on the commitment of an autocrat or a party, stability and reliability generate the sort of long-term results that we call ``development.'' That is probably why Chile's economic performance after Pinochet compares favorably to the years when the general was in power. Not to mention the fact that dictatorships that enjoy economic success are heavily dependent on technology invented in countries where exercising a creative imagination does not land one in jail.

Another reason dictatorships are outperforming liberal democracies has to do with the fact that many of the latter countries are fully developed. Once a country starts to move forward, spare capacity and unrealized potential tend to allow it to grow faster than developed nations.

Furthermore, if we consider that China is a disproportionately big component of the group of unfree nations outperforming liberal democracies, the growth rate gap is not surprising.

In fact, liberal democracies can compete favorably with dictatorships even in the short term. India, one of the world's fastest growing economies, is a liberal democracy. So is Peru, whose economy is experiencing 7 percent annual growth. These are imperfect democracies, for sure, and in the case of Peru there has been little poverty reduction. But the recent success indicates that elections, freedom of the press and freedom of association can coexist with high economic growth.

From a moral point of view, the relative prosperity that a dictatorship can trigger is a double-edged sword -- it brings relief to people who are otherwise oppressed but also serves as an argument for the indefinite postponement of political and civil liberty.
Two things are certain, however. First, history indicates that the combination of political, civil and economic freedom is a better guarantee of ever-increasing prosperity than a capitalist dictatorship. Second, there are sufficient examples -- Portugal or the Baltic countries -- of underdeveloped countries that have generated stable and reliable environments through political freedom to invalidate the notion that a country should be kept in political and civil infancy until it reaches economic maturity.
 
 
 

11. AMERICAN PRODUCTIVITY
------------------------------------------------------------------------

The law of convergence implies that as countries get richer and more
productive, their growth rates slow.  But this hasn't held true in
the case of the United States, says Austan Goolsbee, professor of
economics at the University of Chicago, Graduate School of Business and
a research fellow at the American Bar Foundation.

To explain the experience in the United States, one would have to
believe that Americans have some better way of translating the new
technology into productivity than other countries, says Goolsbee.
 That is precisely what research by London School of Economics
Professor Van Reenen suggests:
   o   When Americans take over a business in Britain, the business
       becomes significantly better at translating technology
       spending into productivity than a comparable business taken
       over by someone else.
   o   Companies like Wal-Mart, for example, seem to be more adept
       at translating technology into productivity than anyone else.
   o   The Asda supermarket chain in Britain was a middling fourth
       in its home market before it was taken over by Wal-Mart in
       1999; Asda proceeded to grow, sharply, and has taken the No. 2
       spot.
American companies have proven remarkably adept at adjusting to new
conditions and incorporating technology.  The real question is
whether this advantage will last.  The paradox of the American
position is that we hate experiencing major adjustments and industry
transformations that force people to look for new jobs. Yet the
evidence seems to show that for all our dissatisfaction, we are the
most flexible economy around and may be best poised to take advantage
of the coming changes on a global scale precisely because we are so
good at adjusting.

Source: Austan Goolsbee, "How the U.S. Has Kept the Productivity
Playing Field Tilted to Its Advantage," New York Times, June 21,
2007.
For text:
http://www.nytimes.com/2007/06/21/business/worldbusiness/21scene.html?_r=1&oref=slogin
 For more on Economic Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=17

Economic Scene
How the U.S. Has Kept the Productivity Playing Field Tilted to Its Advantage

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By AUSTAN GOOLSBEE
Published: June 21, 2007 NYTimes

Americans’ anxiety level over competitiveness with other nations has grown in recent years. A large number of Americans appear to believe that the United States will not be able to succeed in an open world market, and they argue in favor of reducing our exposure to the outside.

Paradoxically, when many of the people in these same competitor nations look at our economy, they are rather anxious about us.

And the latest evidence coming out of the Center for Economic Performance at the London School of Economics suggests that they may be the ones with the right idea.

For all the collective hand-wringing, the United States is still home to the most productive workers of all the major economies — more than Japan, more than China, more than Germany, Britain, France or most any other nation on earth.

Granted it started from the pole position, but the United States still kept the lead in what some economists have come to call the productivity miracle of the 1990s.

Normally, because it is easier to copy someone else’s innovation than to generate new ideas, as countries get richer and more productive, their growth rates slow. Other countries may have much faster growth than the United States, but once their income gets close to ours, their growth slows substantially. This is the law of convergence.

The data has mostly backed up the notion of convergence among rich countries for decades. The United States miracle of the 1990s was that our productivity began growing faster than that of other countries, even though we were the richest to start with.

The popular explanation, of course, pointed to information technology and, specifically, to the fact that the price of semiconductors began falling at an even more rapid rate than they had been, starting in the 1990s.

Rather than a traditional drop of 20 percent a year, computer prices began falling more like 30 percent a year. This may sound subtle, but it couldn’t be more dramatic. After 10 years of such declines, the 20 percent rate would have left computer prices almost four times higher than the 30 percent rate did. Low computer prices drove mass adoption of technology and, hence, the productivity miracle was born. Or so the story goes.

The only problem is, the explanation doesn’t work, according to John Van Reenen at the London School of Economics. Professor Van Reenen (http://www.lse.ac.uk/people/j.vanreenen@lse.ac.uk/) is a leader of a new generation of economists studying the differences in economic performance across countries and businesses.

He said that the prices of information technology fell in Europe, too. And Europeans bought information technology. But they had no productivity miracle.

To explain the experience in the United States, one would have to believe that Americans have some better way of translating the new technology into productivity than other countries. And that is precisely what Professor Van Reenen’s research suggests.

His paper “Americans Do I.T. Better: U.S. Multinationals and the Productivity Miracle,” (with Nick Bloom of Stanford University and Raffaella Sadun of the London School of Economics) looked at the experience of companies in Britain that were taken over by multinational companies with headquarters in other countries. They wanted to know if there was any evidence that the American genius with information technology transfers to locations outside the United States. If American companies turn computers into productivity better than anyone else, can businesses in Britain do the same when they are taken over by Americans?

And in the huge service sectors — financial services, retail trade, wholesale trade — they found compelling evidence of exactly that. American takeovers caused a tremendous productivity advantage over a non-American alternative.

When Americans take over a business in Britain, the business becomes significantly better at translating technology spending into productivity than a comparable business taken over by someone else. It is as if the invisible hand of the American marketplace were somehow passing along a secret handshake to these firms.

Companies like Wal-Mart seem to be more adept at translating technology into productivity than anyone else. The Asda supermarket chain in Britain, for example was a middling fourth in its home market before it was taken over by Wal-Mart in 1999. Asda proceeded to grow, sharply, and has taken the No. 2 spot.

Throughout the service-based economy, American companies have proven remarkably adept at adjusting to new conditions and incorporating technology. Since these industries represent a large majority of our economy, the news is rather good.

The real question is whether this advantage will last. In an interview, Professor Van Reenen observed that there are two possible outcomes. One is that the last 10 years were an aberration, a one-time happenstance whereby the United States took advantage of the drop in computer prices to pull away from the competition. Under this theory, the United States will soon return to its normal long-term productivity growth rate as the rest of the pack catches up and copies what the American companies did — the same old convergence story.

But there is a chance that the 1990s represent a fundamental shift in the global economy. Perhaps the greater amount of uncertainty and churn in the world economy in the 1990s is the new norm. Perhaps the 21st century will continually favor those who adjust best to changes. As Professor Van Reenen put it, “If the world has become one in which everyone is trying to hit a moving target, it certainly helps to be the best at changing one’s aim.”

But that is, of course, the paradox of the American position. We hate experiencing major adjustments and industry transformations that force people to look for new jobs. That experience has made many skeptical about the future of the United States in the world economy. Yet the evidence seems to show that for all our dissatisfaction, we are the most flexible economy around and may be best poised to take advantage of the coming changes on a global scale precisely because we are so good at adjusting.

Perhaps the lesson from the research can be boiled down to something most Americans clearly understand: The world economy may be tough on your industry but look on the bright side: you could be French.

Austan Goolsbee is a professor of economics at the University of Chicago Graduate School of Business and a research fellow at the American Bar Foundation. E-mail: goolsbee@nytimes.com.
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12. Due North   Font Size: By Arnold Kling : BIO| 13 Jun 2007
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"When applied to economic history and development [mainstream economics] focused on technological development and more recently human capital investment, but ignored the incentive structure embodied in institutions that determined the extent of societal investment in those factors. In the analysis of economic performance through time it contained two erroneous assumptions: one that institutions do not matter and two that time does not matter.

...if the institutional framework rewards piracy then piratical organizations will come into existence; and if the institutional framework rewards productive activities then organizations - firms - will come into existence to engage in productive activities."
-- Douglass C. North, Economic Performance Through Time, the 1993 Economics Nobel Prize lecture

Douglass North could be the most important economist of the past fifty years. Yet, notwithstanding his Nobel Prize, North's work is little known and little recognized, even within the economics profession.

In the 1930's, when the most important economic problem was the Great Depression, a large swath of the younger part of the economics profession dropped everything in order to study, analyze, and develop the ideas proposed by John Maynard Keynes. Today, Douglass North ought to be receiving that same level of attention. The most important economic problems we face are complex systemic issues, such as underdevelopment in Africa or the financial stresses caused by health care spending in the United States. For these sorts of issues, Douglass North is as important as Keynes was to macroeconomics. However, hardly any young economists have followed North's path.

Douglass North calls attention to three factors that are ignored by mainstream economists.

-- Institutions
-- Adaptation
-- Beliefs

In textbook economics, the only external environmental factors that affect the individual are technology and prices. Social norms, habits, and rules play no role. North shows that institutions are fundamental determinants of poverty and prosperity. This essay will explain what North means by institutions and why they are so central.

Textbook economics treats the economy as an allocative mechanism. The focus is on the extent to which resources are allocated efficiently and equitably. North treats the economy as an adaptive mechanism. As an economic historian, his focus is on how an economy evolves over the long term, constrained in many ways by its past. My next essay will look at this aspect of North's approach.

Finally, textbook economics is devoid of cultural context. Mainstream economics assumes that any policy can be implemented anywhere at any time. In contrast, North sees economic behavior as anchored by institutions, which in turn are anchored by beliefs within the culture. My third essay will look at health care reform from this perspective.

I have not made an exhaustive study of North's career. I have read: Structure and Change in Economic History, published in 1981; Understanding the Process of Economic Change, published in 2005; his Nobel Prize lecture, quoted above; the recent papers cited in my essay Iraq's Natural State; and an essay from a conference volume that I discussed in a blog post. Although this hardly makes me feel like an expert, the vast majority of my colleagues in economics know even less of North's work than I do. In that sense, I may be reasonably well qualified to be the one to try to give him his due for a general audience.

New Institutional Economics

Late in 2005, Ron Bailey reported on a massive study by the World Bank on wealth in different countries. The economists who undertook the study divided national wealth into three components: natural resources; produced capital (such as steel mills or power plants); and something that they called intangible capital. They reported that for high-income countries like the United States, 80 percent of wealth is in this intangible form. Below is a table with their findings for a few countries.

Country
 

Wealth per capita
 

Natural Resources
 

Produced Capital
 

Intangible

Denmark
 

$575,138
 

2 %
 

14 %
 

84 %

United States
 

$512,612
 

3 %
 

16 %
 

82 %

Congo
 

$3,516
 

265 %
 

180 %
 

-346 %

One question that immediately jumps out from the table is this: what does it mean that the intangible share of wealth in the Congo is -346 percent? For that matter, what does it mean that the intangible share is 84 percent in Denmark and 82 percent in the U.S.?

A country's intangible wealth can be thought of as the difference between the present value of the country's future output and the value of its tangible assets, meaning natural resources and produced capital. Because it is calculated as a residual, intangible capital is sometimes just called "the residual."

In advanced countries, intangible capital, or the residual, includes skills and know-how -- what economists call human capital. But skills and know-how cannot be below zero, so the low wealth and the large negative residual for the Congo cannot be explained by human capital.

Only Douglass North and his adherents have an explanation for the enormous variation across countries in intangible capital. North focuses on institutions, including property rights, the behavior of government officials, and trading methods. Where these institutions serve to reward work, innovation, and risk-taking, the residual is positive. Where these institutions serve to reward theft and expropriation, the residual is negative. When government will expropriate any wealth that people create, the present value of future output can actually be less than the value of the country's tangible resources. The power of predatory government to destroy wealth is truly awesome.

Individual decisions are influenced by internal factors and by the external environment. In textbook economics, the external environment is greatly simplified. It presents individuals only with technologies and prices that pertain to goods, services, occupations, and investment opportunities. You choose what to buy, where to work, and how to invest based on the technologies and prices that are given. You make these choices based on your own personal tastes and endowments (wealth, abilities, skills). (More recently, the subfield of behavioral economics has studied information shortfalls, cognitive biases, and inconsistent preferences as factors that influence individual choices, but it retains a restricted view of the external environment.)

According to North, treating the external environment as nothing but a set of technologies and prices is a gross mis-specification. Instead, we have all sorts of formal and informal codes that constrain our behavior. Those are the institutions that are central to his work.

The bumper sticker for Douglass North is "the new institutional economics." Unfortunately, that bumper sticker has not worked to convey his ideas even within the economics profession. Most economists find it a challenge to incorporate the concept of institutions into their thinking, in part because they have difficulty pinning down a definition for "institution." In his Nobel lecture, North offers this:

Institutions are the humanly devised constraints that structure human interaction. They are made up of formal constraints (rules, laws, constitutions), informal constraints (norms of behavior, conventions, and self imposed codes of conduct), and their enforcement characteristics. Together they define the incentive structure of societies and specifically economies.

Later, he clarifies the difference between an organization and an institution.

It is the interaction between institutions and organizations that shapes the institutional evolution of an economy. If institutions are the rules of the game, organizations and their entrepreneurs are the players.

Textbook Assumptions vs. Institutional Economics

When you make a purchase online, textbook economics is able to relate your decision to buy to the cost of producing the item. But textbook economics says nothing about the role of an intermediary, such as Amazon or eBay, the role of a credit card company in facilitating the exchange, or the role of a package delivery service in fulfillment.

In real world economic activity, as opposed to the textbook setting, there are major complications concerning:

-- specification of property rights

-- monitoring and enforcement of behavior

For example, suppose that I order a used book that is represented as being in "very good" condition. Submitting the order creates a complex matrix of property rights involving the seller, the intermediary, the credit card company, the package delivery service, and me. In the early 1990's, these property rights were not spelled out very clearly. Getting the issues sorted out was a key hurdle in making Internet commerce possible.

This hypothetical purchase also raises issues of monitoring and enforcement. The seller might not send the book. The package service might not deliver it. I might claim that it was never received, or that it is not in good condition. A variety of monitoring devices and enforcement mechanisms are needed to make the process reliable.

The textbook story assumes the following:

-- Any problems that arise with property rights specification and with monitoring and enforcement are unusual and isolated;
-- The private sector cannot address such problems;
-- When government does step in with a solution, that takes care of the problem.

In Douglass North's economics:

-- Problems with property rights specification and with monitoring and enforcement are ubiquitous and inevitable;
-- A large share of private sector resources is devoted to addressing these problems;
-- Government involvement transforms those problems, but it does not eliminate them.

According to North, there is no ultimate solution to the problems of property rights, monitoring, and enforcement. Government may or may not make property rights less ambiguous. Monitoring and enforcement of government solutions may or may not be more effective than monitoring and enforcement of private solutions.

The Integrators

In the private sector, the functions of specifying property rights and undertaking monitoring and enforcement are performed by what I might call integrators. Integrators are people who are devoted either to the management process within firms or the process of exchange between firms. These integrators produce nothing themselves, but they help make everyone else more productive.

For example, when you make your Internet purchase, neither the seller, the credit card company, nor the package delivery service actually produces the good. Yet they play a key role in integrating the process. As North puts it,

The movement from personal to impersonal exchange always increases total transaction costs but the consequence is a drastic reduction in production costs, which more than offsets the increased resources going into transacting. (Understanding the Process of Economic Change, p. 91)

North presents a chart showing that the share of American output that represents transaction processing rose from less than 25 percent in 1870 to roughly 50 percent in 2000. He writes,

Banking, insurance, finance, wholesale and retail trade, as well as a good part of government activity are all part of the transaction sector. And then inside the firm there are ever increasing numbers of accountants, lawyers, and others devoted to facilitating exchange

The other integrators are managers within firms. North argues that the basic reason that production moved out of the home was to take advantage of the efficiency of standardization and teamwork. However, this requires management.

the impetus for the factory system was monitoring of the production process by a supervisor...the role of the monitor is to "rationalize" each step...devising means to measure the output and input of each unit and of creating more productive combinations. (Structure and Change in Economic History, p. 169)

Why do we not see more telecommuting? A reasonable hypothesis is that telecommuting raises the cost of monitoring and co-ordinating the work force. The managers responsible for integrating the work of an office can do their jobs more easily when their staffs are on site. That is not to suggest that telecommuting is a bad idea, or that it will not become increasingly important. However, as of today, the institutional alternatives to on-site monitoring and coordination are not mature.

In short, integration is the process of developing and executing solutions to the ubiquitous problems of imperfect property rights specification, monitoring, and enforcement. The more complex the economy becomes, the more important is the function of integration. Integration takes place inside the firm through supervision and management. Integration takes place across firms through standard-setting, specification, and contracting.

Integration and Market Failure

Textbook economics assumes away the problems that integrators seek to address. When mainstream economists stumble on an issue that requires integration, they pronounce this a "market failure." They treat market failures as exceptions that require government intervention.

For Douglass North, the challenges of integration are more the rule than the exception. He writes,

this [textbook] formulation appears to beg all of the interesting questions. The world with which it is concerned is a frictionless one in which institutions do not exist...the model assumes an incentive structure that will allow individuals to capture the returns to society of investment at all these margins, that is, private and social returns are equated...perfectly specified and costlessly enforced property rights (that is, zero transaction costs) are necessary...Such conditions have never obtained (Structure and Change, p. 5)

Moreover, although government can and does get involved with issues of integration, private sector alternatives also exist. In addition to supervisors and trading firms, there are standard-setting bodies and compliance certification organizations, such as Underwriters Laboratories. If you have been involved with personal computers over the past two decades, you have seen the evolution of standards for integration, including motherboard expansion slots, serial and parallel ports, USB ports, and wireless interfaces. Government was not the driver in setting these standards.

The structure of the Internet would make an interesting case study in the area of imperfect property rights. Every spam email I receive is proof that I do not own my inbox. However, government has a very difficult time intervening to stop spammers. It is difficult to define spam, in part because the same ad that irritates you is being answered by other recipients. As a joke points out, we cannot outlaw spam without causing egregious suffering to the consumers of penis-enlargement products. Even if spam were outlawed, it is difficult to enforce anti-spam laws, given the international character of the Internet, the ease of disguising identity, and the basic architectural decisions that make the Internet a stupid network, meaning one where the evaluation of the content of messages occurs at the endpoints, not in the middle.

What Behavior Gets Rewarded?

Whether an institution is grounded in private organizations or government policy, the key question is what behavior the institution rewards. In the view of Douglass North, incentives are never aligned perfectly. The challenge is to improve the alignment between incentives and desired outcomes.

For example, in a corporation, it is not uncommon for sales personnel to be paid based on volume, with another department -- say, finance -- accountable for profit margin. This puts the finance department and the sales department into conflict -- the bean-counters want high prices and the commission-hungry sales force wants lower prices. Their incentives are not aligned. The trick for senior management is to set goals for individuals that are easily measured and understood yet do not create adverse incentives. Because no compensation system solves every problem, companies tweak their bonus criteria constantly.

The incentives of producers and consumers are not automatically aligned. The institutional arrangements involved in a purchase over the Internet have evolved as various intermediaries have tried to bring about the best alignment at minimal cost. Reputation systems, where buyers rate sellers, are an interesting innovation, and the design of systems that resist manipulation still represents a challenge.

Government regulates and inspects many goods and services. In principle, government involvement serves to address a potential incentive for meatpackers to be careless of health considerations, for uneducated individuals to practice medicine, for service stations to sell diluted gasoline, and so on. On the other hand, these sorts of regulations may be used by producers to try to exclude legitimate competition.

This attempt to manipulate regulatory mechanisms exists whether regulations are administered by private organizations or by the government. There is as much incentive for colleges to try to manipulate their rankings in magazines as there is for schools to try to manipulate student performance on government-administered tests. There is no perfect, costless way to ensure that incentives work properly.

When it comes to implementing institutions, the government's main advantage is enforcement power. As the controversy over illegal immigration vividly illustrates, government is not necessarily a reliable enforcer. But in terms of the tools at its disposal, government's enforcement capability exceeds that of the private sector.

The private sector's main advantage in institution-building is in its adaptation mechanism. That is the topic for the next essay.

Arnold Kling is author of Learning Economics.
 

Monday, May 7, 2007 ~ 2:23 p.m., Dan Mitchell Wrote:
13. England Becoming a Top-Flight Tax Haven. The UK-based Guardian reports that the number of "non-doms" has nearly doubled in three years. The phrase refers primarily to foreigners who move to the UK and are allowed to dodge any taxes on the income they earn in other jurisdictions. This policy is strongly opposed by leftists in the Labour Pary, though Tony Blair obviously has chosen to leave it intact. And if the Guardian can be believed, Gordon Brown may decide to leave well enough alone when he moves into 10 Downing Street:

      The number of people claiming non-domicile tax status has nearly doubled in three years, fuelling fears that Britain is becoming the world's first onshore tax haven. ...The tax break...is now increasingly used by City tycoons and overseas billionaires who are flocking to London to take advantage of a loophole that allows them to keep their vast fortunes intact. ...Labour MP Stephen Pound has called on Sir Ronald Cohen, Gordon Brown's closest ally in the City, to come clean over whether he benefits from non-domiciled tax status. Cohen, a substantial Labour donor who founded Apax Partners, Britain's most successful private equity firm, exerts strong influence over the Chancellor. He has repeatedly refused to disclose his tax status.
      http://politics.guardian.co.uk/economics/story/0,,2073297,00.html
 
 

Tuesday, May 8, 2007 ~ 12:41 p.m., Dan Mitchell Wrote:
14. The Global Flat Tax Revolution. A column in Canada's Globe and Mail reviews the successful shift to flat tax systems and appropriately notes that tax competition is a key reason for the adoption of better tax policy:

      In one of its first acts last year as an independent country, Macedonia (population: two million) legislated radical tax reforms. On Jan. 1, 2007, the country introduced a flat-rate tax of 12 per cent on both personal and corporate income, matching the rate introduced two years ago by Georgia (population: 5.6 million). On Jan. 1, 2008, Macedonia will cut its rate to 10 per cent - and achieve one of the lowest tax rates in the world. Macedonia's tax revenues will almost certainly rise. The country's new, young (age: 36 years) free-market Prime Minister, Nikola Gruevski, cites the phenomenon of voluntary compliance that accompanies flat-tax regimes. "This reform will decrease tax evasion," he says, "and encourage people to meet their obligations to the state." As Russia (population: 144 million) vividly demonstrated when it adopted a flat tax (replacing a 40-per-cent rate on personal income with a 13-per-cent rate) in 2000, low rates are persuasive tax collectors. Russia's revenues rose 25 per cent in the first year, 25 per cent in the second year, 15 per cent in the third year. People who violently resist getting scalped will submit voluntarily for a trim. ...Around the world, tax rate competition is getting keener. Countries that resist flat-tax reform are nevertheless lowering rates. Poland (population: 37.5 million) has moved three-quarters of the way to a flat tax - with a single rate of 19 per cent for all corporate income, capital gains, dividends and self-employed individuals. Spain (population: 40 million) has introduced a flat rate of 18 per cent for all income derived from savings. Effective this year, Iceland (population: 300,000) taxes all personal income at a flat rate of 32 per cent - which appears high because it includes municipal as well as national taxes. It now taxes capital gains, dividends, interest income and rental income at a flat rate of 10 per cent.
      http://www.theglobeandmail.com/servlet/story/LAC.20070502.RREYNOLD S02/TPStory/Business

Link to this Blog Entry

Tuesday, May 8, 2007 ~ 12:11 p.m., Dan Mitchell Wrote:
Tax Competition and Corporate Tax Rates. Written by a British academic, an article at Thebanker.com shows how steeply corporate tax rates have fallen because of tax competition:

      Governments around the world are engaged in increasingly aggressive tax competition. This is most clearly seen in headline rates of corporation tax. Four years ago, in 2003, the UK had the fourth lowest rate in the EU. Today, despite an unchanged rate of 30%, it has the 21st lowest rate in the EU. This dramatic decline in the rankings has come about for two reasons. One is the accession of new EU member states in 2004 and 2007 (of the 12 new members, all but one have a tax rate lower than that of the UK). Also, six of the pre-2004 members have reduced their rates from 30% or more to less than 30%. ...Some argue that competition will halt as governments resist the pressure to give up all their revenue. Perhaps there might be a convergence at, say, 15%. Why stop at 15%, though? There will always be countries that see an advantage in undercutting their neighbours. In the early 1980s, the average Organisation for Economic Co-operation and Development corporation tax rate was about 50%. The rates now would have been scarcely believable then.
      http://www.thebanker.com/news/fullstory.php/aid/4825/Where_will_tax_com petition_end_.html
 
 

15. Lazy Europe? By DANIEL SCHWAMMENTHAL  WSJ April 25, 2007; Page A14

KOLDING, Denmark -- "Kolding prepares for German invasion," screamed the headline in Denmark's Jyllands-Posten. This time around, the "invasion" is nothing more threatening than an army of job seekers from south of the border attending a job fair.

Some drove all night; others were so desperate to find work that they sneaked in an hour before the fair started only to be expelled. When the gates finally opened, it was very hectic. About 1,500 Germans had signed up for the event but 2,000 showed up, besieging employers. The job fair in late January was the first in the region dedicated to attracting German workers, giving new meaning to the word Gastarbeiter, usually reserved for foreign workers coming to -- not from -- Germany.

The scene in southern Denmark dispels a couple of popular myths about Europe's labor market. The first is that the Continent can't change. Denmark did through innovative reforms, going from chronically high unemployment to a labor shortage. The other myth is that Western Europeans won't cross the EU's open borders to find work. From as far as Berlin, Leipzig and Frankfurt, Germans took to the road in search of employment in Denmark; hundreds were bused in by fair organizers.

One of the newly mobile is January Polewka, a 47-year-old mechanic from Wolfsburg, some 350 kilometers away. He arrived in Hamburg the night before the fair to catch one of the free buses. "Because I didn't have money for a hotel, I walked around all night until the bus left in the morning," he told me. Having been unemployed for two years, he's ready to travel for a job. "I've applied all over Germany and even in the Netherlands."

Despite recent improvements, German unemployment remains close to 10%. In Denmark it's 3.3%. In the Kolding region itself, unemployment is 2%. The event there was so successful that more fairs are scheduled for this and next month.

How did Denmark become a job Mecca? Much of the credit goes to former Prime Minister Poul Nyrup Rasmussen. No relation to the current prime minister of the same last name, Mr. Rasmussen led the government in Copenhagen between 1993-2001. He now heads the Socialist group in the European Parliament. When Mr. Rasmussen came to power, unemployment stood at 12.4%, the economy wasn't growing, and the budget deficit was spiraling out of control. "There was a terrible mood in the country, that nothing could be done," he told me at his office in Brussels.

So the left-wing prime minister fast privatized state companies and advanced Denmark's "flexicurity" system. This neologism describes the combination between the security of Scandinavian welfare with the flexibility of a modern market economy. "The Danish tradition was never focused on long dismissal notices," Mr. Rasmussen said, but under his tenure dismissal rules were further loosened. About 30% of the Danish work force now changes jobs each year. While the unemployed continue to enjoy generous benefits, his government increased the pressure on them to retrain and accept job offers or loose those benefits. "I made the people a Sicilian offer, so to speak, one they couldn't refuse," he jokes about his reform program. "It's all about rights and duties."Once unemployed, Danes have to be flexible enough to retrain and change career paths, Mr. Rasmussen says.

There is a Nixon-in-China quality to Mr. Rasmussen's reforms. Maybe only a socialist and union man from an underprivileged family of fishermen could have pulled it off. "We were so poor that you'd think it's a lie if I told you everything," he says. As the union's former chief economist before becoming prime minister, he led the Danish workers' movement to an understanding of basic economics that still eludes many European policy makers. "I had a long struggle to convince the unions that wages can't rise higher than productivity if we want to stay competitive."

But his reforms weren't easy to implement. He remembers a meeting with 400 union members where they had set up four coffins in front of the building. "When I passed by, one of the guys asked me, 'So Poul [Danes are very informal], in which one do you want to be buried in?'" he recounted with a big smile. "'Let's decide that after the meeting,' I answered." The basic bargain he struck with the unions was to give him a couple of years to show that his plans would work. "If we deliver, you deliver," he told them.

He delivered. Unemployment fell to 5% and the economy averaged annual growth rates of about 3% between 1994-2001. His successor has largely continued his polices, with similar success.

Mr. Rasmussen sees a few lessons here on how to push through politically difficult reforms. "Start at the beginning of your tenure," is the first commandment, he says. Otherwise the reforms will be hard to push through as lawmakers might balk at supporting unpopular policies close to new elections. The reforms must create jobs, he also says, otherwise they get a bad name. That was Gerhard Schröder's "big mistake," according to Mr. Rasmussen. The former German chancellor tightened unemployment benefits but failed to put people to work. "Explain, discuss and take your time to present your ideas," is another Rasmussen dictum.

Denmark's flexicurity system may not be a model that the rest of the Continent could simply adopt in whole, but the direction of the reforms and the way Mr. Rasmussen went about them, certainly are. Until his colleagues south of the border figure that out, many more Germans checking out those Danish job fairs will find his "Sicilian offer" hard to refuse.

Mr. Schwammenthal is an editorial writer for The Wall Street Journal Europe.
 
 

16. What's Left for the IMF? By ADAM LERRICK April 13, 2007; Page A13 Developing countries are increasingly eschewing the Fund's "help."
 
 
 
 

"There is life after the IMF and it is a very good life."

--Argentine President Nestor Kirchner, Munich 2005.

Members of the International Monetary Fund will meet in Washington this weekend and, almost certainly, once again go home without facing up to the facts of a new financial universe: Developing economies no longer orbit around the IMF and, in any case, the Fund doesn't command the resources necessary to control surging capital markets.

Two years ago, then new IMF Managing Director Rodrigo de Rato tried to stake out a new strategy for the Fund in the globalized 21st century. While countless committees theorized on what that strategy should be, an unwelcome answer arrived from the Fund's best customers. One after another, developing nations -- Brazil, Argentina, Uruguay, Indonesia, the Philippines -- paid off their loans early. Finance ministers across the globe, who'd trained at Harvard and the University of Chicago, had figured out that it was better to give up the Fund's subsidies than to cede control over their own economic destinies.

The institution's proud lending portfolio that had totaled $100 billion in 2003 has since collapsed. It now stands at $13 billion. Turkey could push that even lower as it dips into a full treasury to pay off a $9 billion balance. The IMF's lending accounts are shrinking and its income stream drying up.

Desk managers at the Fund once micromanaged 50 different economies. But those days are now gone. Centrifugal forces are at work and the changes are structural not cyclical. Emerging economies are opting to self-insure with massive international reserves rather than submit to IMF tutelage. Neighbors are uniting in regional monetary funds. In Asia, the Chiang Mai Initiative commits 13 central banks to pool resources should any single nation falter. Their $3 trillion combined credit is 10 times IMF capability. In Latin America, Venezuela's oil money stands behind friends in need. A new Banco del Sur will cement the region's bonding. Nations moving up the economic ladder -- China, Brazil, India and Russia -- offer new funding for other developing countries without the policy demands made by the IMF.

There was a windfall for the IMF in the decade of bailouts that began with Mexico in 1995. As its loan portfolio tripled and net income ballooned tenfold to $1.2 billion in 2004, there was money enough to pay for another big glass headquarters and a 50% increase in staff to 2,700; to more than double administrative costs to almost $1 billion; and even to poach on the World Bank's territory of development aid.

Now the Fund is bleeding $200 million to $300 million a year. But there is no talk of retrenchment. Instead, the Fund seeks to become the arbiter of global exchange rates and the arbitrator of economic disputes between nations -- grandiose positions that are not needed, wanted nor enforceable in the world economy. And the IMF seeks a new wellspring of funding to support the expansive lifestyle to which it has become accustomed.

A Committee of Eminent Persons was assembled to find the money. Central bankers, among them Alan Greenspan of the U.S. and Jean-Claude Trichet of Europe, joined private-sector leaders Andrew Crockett of JP Morgan and Mohamed El-Erian of Harvard Management. But this assembled brainpower was warned off of the real questions that need to be answered: What is the right role, the right size and the right cost of the IMF?

Instead, the Eminent Persons were shunted off to the IMF's basement where 103 million ounces in ingots had been left behind from the days of the gold standard. Each ounce, deposited by member countries at $35, is now worth $650, creating a constant temptation for Funders. Selling this resource rather than leaving it in the basement would yield a gain of $60 billion and an investment income of $3 billion a year. The Committee emerged with a proposal to use 13 million ounces, or an eighth of the gold stockpile, to establish an IMF endowment, an independent income stream for the Fund in perpetuity.

But this isn't really the IMF's gold. The bullion belongs to the U.S., Germany, Brazil, Ghana and other nations. More than one-quarter of it belongs to developing countries. If the IMF is allowed to open the door to this vault, fears of new missions and unrestrained spending will be confirmed. The gold and the gain it can bring should be returned to national treasuries. India's poor could do more with the $1.5 billion that is rightfully theirs than the IMF.

Is insolvency at the IMF proof of its ability to prevent financial crises, as the Fund claims? Perhaps. But an unsustainable business model should not be propped up with disguised transfers from taxpayers. Today the IMF only borrows from rich nations when developing governments need funding. IMF officials are now proposing to borrow from industrialized nations at below-market interest rates and then to reinvest those funds in the market at high yields and keep the profits. But is income of the old magnitude still required?

The Fund was created to safeguard the stability of the international financial system. Where should it now focus to fulfill its original mandate?

Not on crisis intervention. The $30 billion bailouts that once sufficed to stem capital flight in large emerging economies would today be wiped out in a matter of hours. Markets can now assimilate risk, provide liquidity, adjust exchange rates and, where all else fails, restructure debt.

Not on policing emerging economies. National leaders are just as skilled and know their countries infinitely better.

And not on aid to the poorest countries. Development is the province of the World Bank.

For markets, surprise is the enemy of stability. This leaves the Fund's undervalued data-gathering expertise the resource on which it should reconstitute its business. Improving the quality of information and speeding its flow, setting disclosure standards for governments and financial systems and disseminating results will do much to forestall crises before they appear and soften their impact when they do. A staff of 500 instead of 3,000 and a budget of $400 million instead of $1 billion would be easily sustained by the investment income on the Fund's $10 billion of existing reserves. The IMF role would no longer be imperial, but it would remain crucial for the global public good.

Mr. Lerrick is a professor of economics at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute.

Björn Borg, Come Home
April 11, 2007

Those on the left who have long sought economic guidance from egalitarian Sweden need a new role model. Stockholm is spouting heresy these days by talking up the benefits of lower taxes.

The latest tax to bite the dust is the 1% property tax for houses and 0.5% for apartments. The center-right coalition government announced last week that it is replacing it with a small, flat fee. That move comes amid the looming demise of the wealth tax, which the government also says it will abolish this year.

This tax on the "rich" dates back to 1947 and is imposed on assets -- the family Volvo, house, bank accounts -- above 1.5 million kronor ($215,000) for singles and three million kronor for couples. The current rate is 0.75%, down from 1.5% last year. That's on top of income taxes, which range between 29% and a top marginal rate of about 60%.

Wealth taxes used to be de rigueur in Europe, where there are only a few holdouts. France's is between 0.5% and 1.8% on assets above $1 million. In Spain, it's 0.2% to 2.5% on assets above $223,000.

But rather than transferring wealth, wealth taxes transfer the wealthy. In Sweden, tennis star Björn Borg, ABBA's Björn Ulvaeus and Ikea founder Ingvar Kamprad are among the mega-rich who have fled the country, taking their money with them.

Getting rid of the wealth tax is "a step on the way back toward making Sweden an entrepreneurial country," said Finance Minister Anders Borg. That's sound capitalist advice from the cradle of welfare socialism.
 
 
 
 
 

17. Morally Taxing By SAMUEL GREGG   WSJ March 12, 2007

By most standards, Switzerland is one of the world's most inoffensive nations. Resolutely neutral, this small landlocked country is usually associated with scenic Alpine landscapes and gentle pastimes such as watch-making.

And yet, the country has increasingly become the target of angry protests by European Union officials. The war of words was ignited when French rock star Johnny Hallyday decided in late 2006 to move to Gstaad because of France's high tax rates. Mr. Hallyday thus joined an exodus of individuals and companies from France, Germany, Italy and other European countries who have taken advantage of Switzerland's 21% average income tax rate and considerably lower company tax rates.

For corporate tax exiles in Switzerland, the situation is especially advantageous. Each canton sets its own tax rates, resulting in intense competition among regions. In January 2006, the canton of Obwalden reduced its corporate tax rate for firms that are not engaged in production and trade, such as holding companies and financial and management headquarters of multinationals, to 6.6%. That's the lowest rate in Switzerland. Including the federal tax, the overall tax burden for these types of companies in the small canton is thus a mere 13.1%, which encouraged 376 firms to move to Obwalden last year.

Some French socialists have accused Switzerland of "looting" its neighbors. But the only parties guilty of "looting" are those European governments that have set confiscatory tax rates and pushed companies and individuals to seek residence elsewhere.

Raising the stakes from mere verbal attacks, the EU has now mounted a legal challenge. Late last month, the European Commission observed that these cantonal policies create incentives for multinationals to relocate to Switzerland. Having stated the obvious, Brussels proceeded to argue that this somehow amounts to a subsidy, which supposedly violates the Swiss-EU Free Trade Agreement signed in 1972. Now how did the Commission arrive at such a spurious conclusion, linking tax policy to trade agreements? The argument seems to go something like this: The companies in question usually also have operations in the EU and that's why their Swiss activities supposedly involve the movement of goods between the EU and Switzerland. As a result, Brussels claims that the lower tax rates for these companies amount to an illegal subsidy that gives them an unfair advantage vis-à-vis their competitors.

When the Commission raised similar objections last year, Switzerland's Federal Tax Administration dryly pointed out that corporate taxation is not even subject to the 1972 FTA, which is exclusively concerned with industrial and agriculturally processed goods. And Swiss tax law makes it perfectly clear that in order to benefit from the lower tax rate, companies must engage in little-to-no trade between Switzerland and the EU. Brussels cannot simply ignore a company's structure and equate a multinational's management headquarters in Obwalden with that company's production facilities in France or Germany. The lesser tax rate is justified, the Swiss say, because a holding company or management headquarters makes far less use of public infrastructure than, say, a car production facility.

Bern also noted that the EU itself only recently began defining tax relief as a state subsidy. This hardly entitles Brussels "to impose its evolving internal regulations on Switzerland by interpreting (the FTA)...in the same way," the tax authority said. "Switzerland," it added, "did not sign any treaty with the [European Community] which, directly or indirectly, had the purpose of harmonizing corporate taxation in Switzerland and the EC."

Tax harmonization in the EU, incidentally, never means lowering tax rates. When faced with German companies moving their headquarters to Slovakia and its 19% flat tax, former German Chancellor Gerhard Schröder accused Bratislava of "un-European" behavior. To be truly European apparently means taxing away half of people's income.

Missing from this debate is any reflection about how to really think about taxation in a morally coherent manner. This is not surprising. Even low-tax-inclined economists almost always consider taxation in terms of how governments can maintain their income while diminishing the effects on economic prosperity. In other words, their focus -- rightly so for economists -- tends to be on efficiency issues.

Efficiency is not the same, however, as morality. Discussion of the morality of taxes has largely been reduced to "Social Europe's" mantra of equalizing and redistributing incomes.

We need to go back as far as 16th-century Spain to find anything like a rigorous discussion of the morality of tax rates. Spanish theologians such as Pedro de Navarra insisted that it was not enough for governments to legislate a tax for it to be considered "just." Tax laws, they argued, must meet other criteria of justice. Is there a genuine need for a new tax? Are the proposed taxes proportionate and equitable? Are they moderate or excessive? The same scholars claimed that imposing taxes to support wasteful government expenditures was tyrannical. In some cases, they added, people could rightly refuse to pay, especially when taxes were driving nations into financial ruin.

Instead of using morally charged language to attack Swiss tax policies, perhaps some EU politicians might consider applying Navarra's criteria to their own tax regimes. It is hard to imagine their high tax rates would survive such scrutiny. The irony is that the surest way for EU members to discourage tax flight -- and to encourage economic activity -- is to cut taxes. There exists thus a perfect symmetry between sound moral analysis and fiscal responsibility. Taxation need not be theft -- even in the EU.

Mr. Gregg is research director of the Acton Institute.
 

18. World Poverty By Walter E. Williams Wednesday, February 7, 2007
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If you're looking for a map of world poverty, check out the "2007 Index of Economic Freedom" jointly published by the Heritage Foundation and The Wall Street Journal. You might think that's a strangely titled source for a poverty map.

The 13th edition of the "Index of Economic Freedom" examines 10 economic characteristics of 157 countries. Among those characteristics are property rights, monetary stability, and freedom from government, trade restrictions, business regulations and government corruption. Using these measures of economic freedom, countries are ranked.

Hong Kong and Singapore, as they have for 13 years, rank as the world's two economically freest countries, with freedom scores of 89 and 86 percent free. Rounding out the top 10 most free economies are Australia (83), United States (82), New Zealand (82), United Kingdom (82), Ireland (81), Luxembourg (79), Switzerland (79) and Canada (79).

At the other end of the list are the least free countries. Ranking 157th, North Korea, with a freedom score of 3 percent, is the world's least free country. Ranking 156th is Cuba, 30 percent free, and in ascending order are: Libya (34) Zimbabwe (36), Burma (40), Turkmenistan (42), Congo (43), Iran (43), Angola (43), and Guinea-Bassau (45).

The "2007 Index of Economic Freedom" displays a color-coded map showing countries that are free, mostly free, moderately free, mostly unfree and repressed. Guess where one finds the world's most miserably poor people? If you guessed the mostly unfree and repressed countries, you guessed correctly.

Some people claim that some countries are rich because of abundant natural resources. That's nonsense! Africa and South America are probably the richest continents in natural resources, but are home to some of the world's poorest people. By contrast, countries like England, Japan and Hong Kong are poor in natural resources, but their people are among the world's wealthiest. Hong Kong even has to import its food and water. Some people use the history of colonialism as an excuse for poverty. That's also nonsense. The United States was a colony. So were Canada, Australia, New Zealand and Hong Kong, but they're rich countries.

The reason some countries are rich while others are poor is best explained by the amount of economic freedom its peoples enjoy and the extent of government control over economic matters. Don't make the mistake of equating economic freedom with democracy. After all, India, politically, is a democracy, but economically it is mostly unfree and poor, ranking 104th in economic freedom. There are countries on the economic freedom index that do not have much of a history of democracy, such as Chile, ranking 11th, and Taiwan, 26th, and yet these countries are far wealthier than some of their more democratic counterparts. Why? It's because their economic systems are free or mostly free, which is not guaranteed by a democratic political system.

The economic development lesson is clear: Have a system of economic freedom and grow rich. Extensive government control, weak property rights and government corruption almost guarantee poverty. A country's institutional infrastructure is critical to its economic growth and the well-being of its citizens. The most critical are protection of private property, enforcement of contracts and rule of law.

To help our fellow man around the world, we must convince him to create the institutional infrastructure for wealth creation. Foreign aid, International Monetary Fund bailouts and other handouts are not substitutes. They just make political survival possible for the elite whose self-serving policies keep a nation poor. Except for immediate disaster relief, foreign aid is probably the worst thing the West can do for poor countries. After all, how much foreign aid is necessary for a country to create the foundations for growth: rule of law, enforcement of contracts and private property rights protection?
 

Tuesday, January 30, 2007 ~ 10:11 a.m., Dan Mitchell Wrote:
19. Competition among Cantons boosting Swiss competitiveness. Federalism is a marvelous structure, both because it allows preferences for different policies to be satisfied and because it creates competition among units of government. While federalism has been somewhat eroded in the United States, it still exists and presumably is one of the reasons why America is relatively prosperous (thanks to a less oppressive level of government). Switzerland is an even bigger success story. The central government represents less than one-third of total government (as compared to two-thirds in the US), and the concomitant competition between cantons has helped control the size of government. And as a Swiss news report indicates, this has generated big benefits for the Swiss economy:

      Zurich is poised for a further influx of foreign firms and workers after the relocation of Kraft Foods' European headquarters and the expansion of Google this year. The moves earlier this month from the two United States giants offer further evidence that the region offers prime conditions for companies, according to the Greater Zurich Area relocation service. …"The relocation of headquarters and the nice growth of Google that we have seen in the last couple of months shows that we have very good basic conditions in the region," commented Greater Zurich Area chief executive Willi Meier. …A more controversial lure for foreign companies is the low corporate tax rates offered by many cantons in Switzerland. …The competition among cantons to set the lowest business tax was intensified at the beginning of last year when Obwalden slashed its rates to a Swiss low of just 6.6 per cent. Obwalden attracted 376 new firms in the first 11 months of 2006, three times more than in the previous year. But Meier insists the Zurich region is not afraid of the increased competition. "The tax competition among Swiss cantons makes Switzerland as a whole more competitive on an international basis. Kraft has chosen Zurich despite the fact that we don't have the lowest tax rate in Switzerland, but on an international scale its still a very competitive rate," he said.
      http://www.nzz.ch/2007/01/28/eng/article7472999.html
 

Monday, January 22, 2007 ~ 12:31 p.m., Dan Mitchell Wrote:
20. The global shift to better tax policy. Alvin Rabushka is justly famous for being the world's leading advocate of the flat tax. In a just-released commentary for the Hoover Institution, Rabushka summarizes some of the recent moves to lower tax rates and adopt flat tax systems:

      On February 1, 2006, President Kurmanbek Bakiyev of Kyrgyzstan (Kyrgyz Republic) signed into law modifications in the country's tax code that established a 10% flat tax. Kyrgyzstan's flat tax replaced its current corporate tax of 20% and individual income tax rates between 10-20%. Shortly thereafter, the president of neighboring Kazakhstan said that his country would consider a flat tax in 2007. ...On July 5, 2006, the people of Macedonia voted to establish their own country. The inaugural session of the new parliament met on July 26. President Branko Crvenkovski appointed a new prime minister, Nikola Gruevski, leader of the rightist VMRO-DPMNE, to establish a government. Gruevski announced a 100-point reform program. One of its main pillars is the flat tax. It was set at 12% beginning January 2007, and will be reduced to 10% a year in 2008. The flat tax will replace the current corporate tax of 15% and personal income tax rates between 15-24%. The government stated that the purpose of the low 10% flat tax is to make Macedonia a country with one of the lowest tax rates in Europe in order to emulate the success of Estonia, Latvia, and Lithuania, which experienced strong economic growth after the adoption of their flat taxes. ...Montenegro, which achieved independence in a referendum in May 2006, has implemented a corporate tax rate of 9%, reduced from two rates of 15% and 20%, giving it one of the lowest corporate rates in Europe. Montenegro taxes personal income at graduated rates of 16% (€780-2,616 taxable income), 20% (€2,616-4,572), and 24% (over €4,572). It is likely that Montenegro will join its neighbors with an across-the-board flat tax sometime in the near future. In Bulgaria, the standard rate of corporate income tax was set at 15% in 2006. Effective January 1, 2007, the rate was cut to 10%. Personal income is taxed at three rates of 20% ($1,440-1,500 taxable income), 22 ($1,500-4,800), and 24% (over $4,800). If it forms a government with a parliamentary majority in 2007, a center-right coalition of three parties—the Civic Democrats (ODS), the Christian Democrats (KDU-CSL), and Greens—plan to enact a flat tax of 17-19% on companies and individuals. The flat tax would replace four brackets for individuals ranging from 12-32% and the corporate 24% tax. Since January 1, 2007, Iceland taxes all personal income at a flat rate of 35.73%, which consists of the central government's 22.75% tax rate and the municipal 12.98% tax rate. The central government surtax, levied at 7% during 1998-2003, gradually reduced to 2% in 2006, has now been eliminated. Interest, dividends, capital gains, and rental income are taxed at a 10% flat rate. A wealth tax was abolished at the end of 2005. The corporate tax rate is 18%, down from 30% in 2001. The rate on partnerships is down from 38% in 2001 to 26% in 2007. On November 29, 2006, Spain promulgated significant changes in its tax laws. Income derived from savings is subject to a flat rate of 18%. Effective January 1, 2007, the company tax rate of 35% was reduced to 32.5%, and will fall further to 30% in 2008.
      http://www.hoover.org/research/russianecon/essays/5222856.html

Flat and Flatter Taxes Continue to Spread Around the Globe

January 16, 2007

By Alvin Rabushka

The flat tax continued to pick up steam in 2006, spreading beyond Central and Eastern Europe.

On February 1, 2006, President Kurmanbek Bakiyev of Kyrgyzstan (Kyrgyz Republic) signed into law modifications in the country’s tax code that established a 10% flat tax. Kyrgyzstan’s flat tax replaced its current corporate tax of 20% and individual income tax rates between 10-20%. Shortly thereafter, the president of neighboring Kazakhstan said that his country would consider a flat tax in 2007.

In late May 2006 the government of Kuwait indicated that it was studying a proposal to introduce income tax at a flat rate of 10%. The draft law is to be studied by the cabinet and, if approved, sent to the country’s parliament for consideration.

In August 2006, Uzbekistan’s parliament adopted its budget for 2007, which provides for several significant tax cuts. The corporate rate will be set at 10% in 2007, down from 12% in 2006. Personal rates will be cut from 20% and 29% to 18% and 25% respectively.

On July 5, 2006, the people of Macedonia voted to establish their own country. The inaugural session of the new parliament met on July 26. President Branko Crvenkovski appointed a new prime minister, Nikola Gruevski, leader of the rightist VMRO-DPMNE, to establish a government. Gruevski announced a 100-point reform program. One of its main pillars is the flat tax. It was set at 12% beginning January 2007, and will be reduced to 10% a year in 2008. The flat tax will replace the current corporate tax of 15% and personal income tax rates between 15-24%. The government stated that the purpose of the low 10% flat tax is to make Macedonia a country with one of the lowest tax rates in Europe in order to emulate the success of Estonia, Latvia, and Lithuania, which experienced strong economic growth after the adoption of their flat taxes.

The tiny island of Mauritius, located in the Indian Ocean about 1,500 miles off the southeast coast of Africa, approved its 2006-2007 budget in July 2006. The signal feature of the budget is the advent, on July 1, 2009, of a 15% flat tax on personal and corporate income. The flat tax will replace the current personal income tax of two rates, 15% on taxable income to 25,000 rupees (about $800) and 25% on the rest. It will eliminate much of the complexity and many of the current deductions and credits in the current system. The 15% flat tax will also replace the existing 25% rate on corporate income.

Poland has moved three-quarters of the way to a flat tax. Apart from the taxation of wages and salaries, which are taxed at three rates of 19% (up to $12,340 annual taxable income), 30% ($12,340-24,680), and 40% (over $24,680), all other income in Poland is subject to a flat 19% rate. This includes corporations, self-employed individuals, capital gains, and dividends.

Montenegro, which achieved independence in a referendum in May 2006, has implemented a corporate tax rate of 9%, reduced from two rates of 15% and 20%, giving it one of the lowest corporate rates in Europe. Montenegro taxes personal income at graduated rates of 16% (€780-2,616 taxable income), 20% (€2,616-4,572), and 24% (over €4,572). It is likely that Montenegro will join its neighbors with an across-the-board flat tax sometime in the near future.

In Bulgaria, the standard rate of corporate income tax was set at 15% in 2006. Effective January 1, 2007, the rate was cut to 10%. Personal income is taxed at three rates of 20% ($1,440-1,500 taxable income), 22 ($1,500-4,800), and 24% (over $4,800).

If it forms a government with a parliamentary majority in 2007, a center-right coalition of three parties—the Civic Democrats (ODS), the Christian Democrats (KDU-CSL), and Greens—plan to enact a flat tax of 17-19% on companies and individuals. The flat tax would replace four brackets for individuals ranging from 12-32% and the corporate 24% tax.

Since January 1, 2007, Iceland taxes all personal income at a flat rate of 35.73%, which consists of the central government’s 22.75% tax rate and the municipal 12.98% tax rate. The central government surtax, levied at 7% during 1998-2003, gradually reduced to 2% in 2006, has now been eliminated. Interest, dividends, capital gains, and rental income are taxed at a 10% flat rate. A wealth tax was abolished at the end of 2005. The corporate tax rate is 18%, down from 30% in 2001. The rate on partnerships is down from 38% in 2001 to 26% in 2007.

On November 29, 2006, Spain promulgated significant changes in its tax laws. Income derived from savings is subject to a flat rate of 18%. Effective January 1, 2007, the company tax rate of 35% was reduced to 32.5%, and will fall further to 30% in 2008. Small and medium-sized companies experienced a drop in their tax rate from 30% to 25%. Personal income is taxed at four rates, with the top bracket cut from 45% to 43%.

Two other developments warrant mention. Guernsey, a British Crown dependency in the Channel Islands off the west coast of France, has had for many years a 20% flat tax on corporate and personal income. On July 10, 2006, its parliament approved a zero corporate tax rate and capped the maximum tax on individuals at £250,000. The cap means that tax rates decline once taxable income exceeds £1,250,000, transforming the territory’s flat tax into a degressive tax.

The Isle of Man, a Crown dependency located in the Irish Sea between Great Britain and Ireland, reduced its corporate tax rate for trading companies from 10% to zero beginning April 5, 2006. Personal income will continue to be taxed at two rates, 10% and 18%, but be capped at £100,000, reducing tax rates on those with incomes exceeding £570,000 a year.

21. October 24, 2006 The P-I-E Model Arnold Kling

Jens Erik Gould reports in the New York Times,
 

    Years of rampant violent crime is not only robbing Latin America of significant private investment, but in some cases is stealing up to 8 percent from national economic growth, economists and World Bank officials say.

    ...“You have money spent on guarding stuff rather than making stuff,” said Michael Hood, Latin America economist for Barclays Capital. “There’s a large population standing around in blue blazers rather than engaged in more productive activities.”
 

As E. Frank Stephenson points out, Nobel Laureate Douglass North understood this clearly.

I call it the P-I-E model. If you have secure property rights, you are in P mode (productive). If you do not have secure property rights, because criminals and/or government threaten them, you are in I mode (insecure, or operating underground in the informal economy). If you are one of the criminals or bribe-taking officials, you are in the E mode (for expropriation). When the P mode dominates, people are less likely to enter the E mode (because crime doesn't pay) or the I mode (because it is more profitable to operate a legal business). On the other hand, when the P mode does not dominate, it is difficult to operate a legal business profitably, because you get either robbed by gangs or heavily taxes by government.

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22. Reaganomics 2.0 By STEPHEN MOORE WSJ August 31, 2007; Page A8

Earlier this year the cover of Time Magazine depicted Ronald Reagan with a tear running down his cheek -- the message being that the political class has abandoned the Reagan legacy. There's no doubt Reagan's pro-growth, tax cutting philosophy is in full-scale retreat: This Congress has proposed higher tax rates on personal income, capital gains and dividends. Ironically, the Reagan economic philosophy of lower taxes, less regulation and free trade has never been more in vogue abroad -- so much so that it has become the global economic operating system.

Let's call this phenomenon Reaganomics 2.0.

In the Pacific Rim nations, for example, Malaysia, New Zealand, Singapore, Taiwan and Vietnam all have cut taxes this year or have plans to do so. Singapore has cut taxes multiple times in recent years and it now operates with no capital gains tax.

But the remarkable attitudinal shift on taxes has been in Europe, which in the 1980s and '90s showcased their gold-plated social safety nets, boasted of their citizens' willingness to pay high tax rates to maintain them and were openly contemptuous of the Reagan tax-cutting philosophy. Now those same nations of old-Europe seem to be in a sprint to see which country can get their tax rates lowest quickest. Nicholas Vardy, the editor of "The Global Guru" economic newsletter calls the phenomenon "Europe's Reagan Revolution."

French President Nicolas Sarkozy has plans to cut his country's business income tax by at least five percentage points as part of his economic rehabilitation plan. Spain and Italy are negotiating plans to lower their corporate tax rates, and the U.K. already did so earlier this year. Sweden and Russia last year eliminated their estate taxes because they said the tax was economically counterproductive. In Germany under Chancellor Angela Merkel, the corporate tax rate has been reduced to less than 30% from 39%.

Some of this tax chopping in Old Europe is a response to the success of the U.S. tax rate reductions and the fast pace of job creation that ensued from economic growth -- though few European officials will acknowledge that reality. But a bigger factor more recently has been the impact of the flat-tax revolution in Eastern Europe. Dan Mitchell of the Cato Institute says there are now 14 nations with flat taxes, 10 of them in nations formerly behind the Iron Curtain. "The pace of tax reform in these nations is so frantic, that it's hard to keep up to date with the changes," he says. Poland hasn't yet established a flat tax, but recently cut its business tax to 19% from 27%.

Austria cut its corporate tax rate to keep pace with its neighbor, Slovakia which recently adopted an 18% flat tax. Singapore is cutting taxes to compete with its 16% flat-tax rival Hong Kong. Northern Ireland wants to cut its tax rates so that it can compete with the economic gazelle of Europe, the Republic of Ireland. In 1988 Ireland was a high-unemployment stagnant economy with a 48% corporate tax rate, today that rate is 12.5% and the rest of the world is now desperate to match its economic results. Meanwhile German Finance Minister Peer Steinbrueck sold the latest tax cuts as "an investment in Germany as a business location."

The idea that jobs, businesses and wealth follow low tax rates is widely accepted. Nguyen Van Ninh, head of the Department of Taxation in Vietnam is typical. He concedes that the corporate tax cuts may lose revenues, but "on the other side, the business environment will become more and more attractive, resulting in increased investment."

This is all very good news -- except in the U.S. Arthur Laffer, one of the architects of the Reagan tax policies, believes that one major explanation for the strength of the euro and the weakness of the dollar in recent years, is the divergent paths on tax policies on the two sides of the Atlantic. Europe is cutting levies, while the only debate among the political class in Washington is how high to jack them up.

Still, it is a testament to the Reagan economic revolution launched in 1981 that, a quarter century later, global tax rates are 25 percentage points lower on average today than in the 1970s. And those figures don't even include this latest round of chopping under Reaganomics 2.0. The enactment of supply-side policies is helping ignite one of the strongest and longest world-wide economic expansions in history. Yet few are giving Reagan or his ideas the credit. Mr. Vardy points out that there are only two official statues of Reagan in Europe. Last month the Poles unveiled one financed by an American entrepreneur. The first was erected in Budapest to commemorate Reagan's "tear down this wall" speech in Berlin. Now tax walls are being torn down.

Alas, there's only about one place on the planet where politicians hold Reaganomics in outright disrepute today -- and that is here. The Democratic leadership in Congress believes that tax rates don't matter much if at all, and that the Bush tax cuts were a giveaway to the rich. Presidential candidate John Edwards has even suggested a near doubling of the U.S. capital gains tax rate as part of his economic program, and his rivals all have schemes to soak the wealthy as well.

All of this threatens to move America from leader to laggard in the global race for job creation, capital investment and prosperity. Maybe that explains the tear rolling down the Gipper's cheek.

Mr. Moore is a member of the Journal's editorial board.
 
 

23. Union: Mexican Trucks Begin Crossing Border Saturday, Union Asks Court To Block Mexican Trucks

POSTED: 9:32 am PDT August 29, 2007
UPDATED: 11:33 am PDT August 30, 2007
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WASHINGTON -- The Teamsters Union said it has been told by officials in the Transportation Department's Federal Motor Carrier Safety Administration that the first Mexican trucks will be coming across the border on Saturday.
Watch Video
Watch Video (April 2007)
The union said Wednesday it would ask a federal appeals courts to block the Bush administration's plan to begin allowing Mexican trucks to carry cargo anywhere in the United States.

Teamsters leaders said they planned to seek an emergency injunction Wednesday from the Ninth Circuit U.S. Court of Appeals in San Francisco.

    * Prior Immigration Protests In San Diego County: Protest Closes Border Crossing (June 2007)
    * Immigration Protest Turns Unruly (May 2006)
    * Hundreds Protest New Immigration Legislation (March 2006)
 

"What a slap in the face to American workers, opening the highways to dangerous trucks on Labor Day weekend, one of the busiest driving weekends of the year," said Teamsters President Jim Hoffa.
Joining the Teamsters in seeking the emergency stay were the Sierra Club and Public Citizen.
"Before providing unconditional access throughout the country to tens of thousands of big rigs we know little to nothing about, we must insure they meet safety and environmental standards," Sierra Club executive director Carl Pope said.

The Federal Motor Carrier Safety Administration, in a statement, said it was working closely with the department's inspector general "as his office completes an additional assessment of the program and we prepare a detailed response to that report."

The Bush administration said last week it would start the cross-border program once the Transportation Department's inspector general certifies safety and inspection plans.

Leslie Miller, a Teamsters spokeswoman, said attorneys for the federal truck safety agency advised the union's lawyers that they expect to get that certification on Friday. She said the Teamsters also were told by the agency attorneys that limited authority for trucks to begin crossing the border will be approved Saturday.

Supporters of the plan say letting more Mexican trucks on U.S. highways will save American consumers hundreds of millions of dollars.

Labor and driver-owner groups have been fighting the measure -- part of the 1994 North American Free Trade Agreement -- since it was first proposed, saying the program will erode highway safety and eliminate U.S. jobs.

A one-year demonstration project would allow 100 Mexican motor carriers full access to U.S. roads. It can begin as soon as the inspector general certifies that safety and inspection plans and facilities are sufficient to ensure the Mexican trucks are as safe as U.S. trucks.

Since 1982, Mexican trucks have had to stop within a buffer border zone and transfer their loads to U.S. trucks.

According to the CHP, 18 percent of Mexican carriers were sidelined in 2006. That figure stands in contrast with the 19 percent of American companies.

Previous Stories:

    * August 18, 2007: U.S. Roads May Open To Mexican Truckers
    * August 17, 2007: Plan To Open Borders To Mexican Trucks Moving Forward
    * April 23, 2007: Mexican Trucks May Be Driving Across U.S. Soon
 
 
 
 
 

24. COMEBACK TRAIL For Philippine Economy, Harsh Remedies Pay Off President's Tax Hikes Lure Foreign Investors; Risk of Global Crunch
By JAMES HOOKWAY
WSJ August 31, 2007; Page A1

MANILA, Philippines -- The perpetual sick man of Asia is making an unexpected recovery.

Once among Asia's most prosperous nations, the Philippines had languished economically for decades while neighboring countries, big and small, raced ahead. But for the past two years -- almost lost amid the international excitement about the growth of China, India and Vietnam -- the Philippines has been rebounding.

This year, the nation's economy is expected to post its fastest growth rate since the early 1990s, despite the economic shadow cast by the global credit squeeze sparked by problems in the U.S. mortgage market. The Philippine economy grew at a 7.5% annual rate in the second quarter. The stock market has soared over the past two years, although it has faltered recently. Foreign investors are coming back, attracted by the Philippines' young population -- the average age of its 89 million people is 22 -- and the widespread use of English, a legacy of its past as an American colony. The call-center business is thriving, some of it poached from India.
[chartbook]

Not long ago, Fort Bonifacio, a sprawling old military base in the heart of Manila, was an emblem of economic malaise -- a stalled redevelopment taken over by cyclists, skateboarders and kite enthusiasts. Now, office towers, embassy buildings and shopping malls are going up there. Nike Inc., Starbucks Corp. and Nokia Corp. have opened stores, and the Manila stock exchange will be joining them soon.

"The Philippines could be the next India in terms of its ability to surprise," says Adrian Mowat, a stock strategist at J.P. Morgan Securities Ltd. in Hong Kong.

Gloria Macapagal Arroyo, the country's 60-year-old president, gets much of the credit for the turnaround. Two years ago, with thousands of street protestors threatening to oust her and the country drifting toward a financial crisis, she pushed a higher sales tax through Congress and signed it into law over the objections of her advisers. The move raised the tax to 12% from 10% and expanded it to a range of new products and services, including gasoline.

That politically risky step showed investors the nation was serious about putting its house in order after years of half-hearted attempts to cut its budget deficit, crack down on corruption, and do something about its decaying ports and power grid. A J.P. Morgan report in May predicted that the Philippines could have a balanced budget by next year and a budget surplus by 2009.

"I knew the risks, but I decided that if we had to bite the bullet, then that's what we would do," said Ms. Arroyo in a recent interview.
[Gloria Macapagal Arroyo]

The nation's economic comeback shows the kinds of remedies that struggling developing nations must consider to compete in the global economy. Following China's rise as a manufacturing power, the nations of Southeast Asia -- once one of the world's most popular manufacturing hubs -- have been trying to make themselves more attractive to foreign investors and markets.

"The whole region is going through the same process, and it's all in response to China," says Luz Lorenzo, an economist who covers the region for ATR-Kim Eng Securities Inc. in Manila. "How do these countries survive China?"

Many problems remain in the Philippines. One of the richest countries in Asia before World War II, the Philippines saw its economy deteriorate during decades of misrule, punctuated by military coups and economic mismanagement. Ms. Arroyo herself has survived two attempts by military officers to grab power. The country has called in U.S. military advisers to help tackle a persistent Islamist insurgency, and it continues to be criticized widely for human-rights abuses and corruption.

The recent economic progress could be undermined by problems that have long plagued the economy. The country has a legacy of crony capitalism that has left former business associates of late President Ferdinand Marcos in powerful positions in the business sector. Political analysts say Ms. Arroyo must avoid spending the growing tax receipts on unnecessary projects that benefit her own political supporters. And questions remain about the government's ability to collect corporate taxes.

Moreover, the Philippine economy is heavily dependent on exports, which account for around 40% of gross domestic product. A significant economic slowdown in the U.S. could harm that sector. But economists contend that domestic investment and demand has become a more important driver of the economy -- and could help buffer it from global economic problems. "The growth story here is changing from one which is export driven to one which is domestic led," says Ms. Lorenzo of ATR-Kim Eng.
[Philippines]
High-rise buildings in the financial district of Manila loom over a landscape of smaller houses.

Ms. Arroyo's current six-year term expires in 2010. It's unclear whether the next president will continue her economic policies, or will resort to past practices. Prior governments have limited the business opportunities available to foreign companies, allowing local tycoons to build lucrative monopolies.

Ms. Arroyo's father, Diosdado Macapagal, was president of the Philippines in the early 1960s. After studying economics at Georgetown University, she returned home to teach at the University of the Philippines, then entered politics.

She was elected vice president in 1998. She quickly set about distancing herself from her unpopular boss, President Joseph Estrada, a former action-movie star who became embroiled in a series of corruption scandals. In 2000, she openly began plotting his removal. In January 2001, after the armed forces joined hundreds of thousands of demonstrators in the streets of Manila to force him from office, she was sworn in as his successor.

Ms. Arroyo, whose short fuse has led her to slam cellphones on tables and publicly berate her deputies for making mistakes, has proved to be a tough political infighter. She's stood up to two failed military-coup attempts by rallying her allies in the armed forces and the powerful Roman Catholic Church, of which she is a devout member. When the business dealings of her husband began drawing political heat in 2005, she exiled him to the U.S. for several months until the fuss subsided.

Her priority after winning the 2004 presidential election was to put the nation's chronically ailing finances in order. A key problem: anemic tax revenues due to endemic corruption among tax officials and loopholes in the tax code. In 2003, tax revenues were 14.8% of GDP. That's a lower rate than in poverty-ridden countries such as Indonesia and India, and far below rates in developed countries such as the U.S., where government revenue totaled 25% of GDP in 2006.

A combination of weak state revenues and high foreign debt -- 70% of the government's budget went to paying interest in 2005 -- was spooking investors. They worried that too much of the government's budget went to service debt, and not enough to fix roads, schools and the power supply. Japan's Toshiba Corp. shut down its Philippine laptop factory in 2004 and moved the operation to China.
GROWTH STORY

• The Situation: After languishing for years, the Philippine economy is showing signs of renewal.
• The Background: President Arroyo pushed through higher taxes, which helped persuade foreign investors she was serious about economic reform.
• What's Next: Like other Southeast Asian nations, the Philippines is worried about a potential economic slowdown in the U.S.

"Our country was going through a credibility gap with the institutional and financial community globally," says Jaime Augusto Zobel de Ayala, chief executive officer of Ayala Corp., one of the companies redeveloping Fort Bonifacio. The Philippines, he says, "needed to send a signal."

Ms. Arroyo warned in 2005 that if the Philippines didn't act decisively to improve its tax-collection rate, it risked becoming the next Argentina, where economic problems led to a currency collapse. She and her advisers began looking for ways to raise new money.

She increased tobacco and alcohol taxes, but that wasn't enough. She and her economic team began working to push another unpopular measure through Congress in 2005: an expanded sales tax.

Demonstrators took to the streets to contest her tax plans. One of her advisers, former stock analyst Joey Salceda, suggested that she limit the new sales tax to soften the political backlash. Gasoline prices, he said, should be excluded because they were already spiking. She ignored the advice.

"I was determined not to sacrifice long-term gains for political expediency, even though we had to do it at the worst possible time," Ms. Arroyo says.

At first, the sales tax hike appeared to make things worse. Her opponents challenged the legality of the legislation, and the Supreme Court suspended the tax law the day it was to take effect in July 2005. Stock prices slumped at the Philippines Stock Exchange, and ratings agencies Moody's and Standard & Poor's lowered their already dim outlooks on the nation's ability to pay its debt. Ms. Arroyo's popularity took a pounding.

Eventually, the Supreme Court dismissed the objections and the tax hike took effect in early 2006. That greatly reassured business leaders and foreign investors, who were worried about the burden of the government's $54 billion in foreign debt.

"The single turning point that changed people's minds about the Philippines was that she was able to pull off the expanded tax, and at such a difficult time," says Fernando Zobel de Ayala, brother of Ayala's CEO and head of its Ayala Land unit.
[Arroyo photo]
President Gloria Macapagal Arroyo visits the Philippine Stock Exchange.

The tax take in 2006 was 22% higher than in 2005, lifting government revenue to 16.3% of GDP. To further reduce the deficit, Ms. Arroyo started privatizing the nation's debt-burdened power industry in 2005. In addition, she encouraged foreign investment in the mining sector -- which antimining activists and the Catholic Church had blocked for years.

Since then, institutional investors have been returning to the country's bond and stock markets. Since the new tax took effect in January 2006, the Philippines Stock Exchange Index has climbed 58%, outstripping most Asian markets over the same period. Net stock investment by foreign investors hit a record $870.8 million in June, according to the Philippine Stock Exchange, up from just $12.9 million in January 2004. The Philippine peso has risen 13.6% against the U.S. dollar since the tax took effect, partly due to the inflows of foreign money. The peso is the second best performing currency in Asia this year, after the Indian rupee.

Rather than borrowing overseas, local companies are once again turning to the stock market to raise funds. There were numerous initial public offerings on the Philippines Stock Exchange in 2005 and 2006, following years in which offerings were rare. Eight 2006 offerings were aimed specifically at foreign investors, raising $1.56 billion. So far this year, five IPOs have hit the market.

With business confidence on the mend, inflation and interest rates have declined.

Local and foreign businesses have begun investing again, and multinational companies are adding plants and shipyards. In May, Texas Instruments pledged $1 billion to build a new chip testing and assembly plant at the old U.S. Air Force base at Clark Field, 62 miles north of Manila, to complement a plant it already has here.

Kevin Ritchie, Texas Instrument's senior vice president for technology and manufacturing, said at the time that the country's skilled work force encouraged the company to raise its investment. Philippine officials said the company was also looking for reliable power and water, which are more available now that power privatization is under way.

One of the world's largest shipping companies, Beijing-based China Ocean Shipping Co., is studying whether to build a multibillion-dollar cargo hub near Manila, company officials say. South Korean shipbuilder Hanjin Heavy Industries & Construction Co. is investing $1.7 billion in a new shipyard at a former U.S. Navy base at Subic Bay. It was attracted by the skilled, English-speaking work force and low costs, a company official says.

Filipino expatriates -- more than 10 million work abroad -- have taken notice. They are now sending home $14 billion a year, double what they sent five years ago, government figures indicate. Economists see this as a relatively secure source of revenue. While 35% of these expatriates work in the U.S., there are also large pockets in Europe, the Middle East and East Asia. That geographical diversity could provide some insulation against a downturn in the U.S.

The remittances aren't just going to support families, but into the stock market and property investments. Ayala Land, one of the country's biggest real-estate companies, says that in 2006, 37% of revenue came from Filipinos overseas buying land and condominiums, up from 26% the year before and just 16% in 2004. The company's chief financial officer, Jaime Ysmael, told shareholders on Tuesday that if economic problems in the U.S. deepen, Ayala Land can still count on Filipinos working in Europe and the Middle East.

Norma Ravanzo, a 58-year-old retired nurse from Houston, is one such investor. An American citizen for more than 30 years, Ms. Ravanzo is planning to return to her homeland with her husband, who was also born in the Philippines. Encouraged by the economic progress and improving living conditions, Ms. Ravanzo bought property in Cebu City, Manila's financial district, and a retirement home in Subic Bay. "It's like living in a first-world community at third-world prices," she says.

Write to James Hookway at james.hookway@awsj.com
 
 
 
 
 
 
 

Wednesday, August 29, 2007 ~ 5:04 p.m., Dan Mitchell Wrote:
25. Tax Havens and Prosperity. The Central Intelligence Agency ranks 229 nations and territories based on per capita gross domestic product and a quick look at the list shows that tax havens dominate the top of the rankings. A majority of the top 20 jurisdictions are tax havens, based on the definition put forth in 2000 by the statists at the Organization for Economic Cooperation and Development. Luxembourg, Bermuda, and Jersey (the one in the Channel Islands) top the list, while places like the Cayman Islands, Andorra, Hong Kong, and Switzerland also rank among the world's richest jurisdictions. In an ideal world, other nations would emulate the so-called tax havens. Instead, high-tax nations persecute these jurisdictions as part of an effort to create an OPEC for politicians:
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.ht ml

Wednesday, August 29, 2007 ~ 4:44 p.m., Eugene Slaven Wrote:
26. EU Commissioner Defends Ireland's Fiscal Sovereignty. The EU's Internal Markets Commissioner, Charlie McCreevy, came out against a EU proposal that would undermine the competitiveness of Irish corporations. Citing national interest as his main grounds for objection, McCreevy reinforced the importance of fiscal sovereignty. Ireland is joined by Britain, Estonia, Lithuania and Slovakia in a coalition to block the onerous tax harmonization schemes long sought by the European Union.

      Charlie McCreevy was recently accused of the ultimate sin for an EU Commissioner - looking after the interests of his native country instead of those of the EU. What makes this accusation different, though, is that it comes from a fellow-Commissioner; in this case the Taxation Commissioner Laszio Kovacs. Such a public row between two Commissioners is most unusual, but then the stakes are high…The issue is changes to the corporation tax regime in the EU. …most calculations suggest Ireland could be one of the biggest losers from the proposals…The French and German governments have long been unhappy about tax competition in the EU, especially since the arrival of the eastern members, but Mr Sarkozy is likely to increase the pressure to have something done…Mr McCreevy has always made clear he prefers things to be done on a national basis, unless there is a very clear case for doing them EU-wide…In this case, a telling point is that most tax systems require constant amendment to keep the tax lawyers at bay, and this would be a nightmare to negotiate among 27 member states…All of which suggests that Ireland has little to fear and that nothing is likely to happen.
      http://www.independent.ie/business/a-taxing-matter-for-ireland-inc-in-the-euw ide-revenue-proposal-1059517.html

27. France: The ethic of work has vanished By George Will  WSJ Thursday, August 30, 2007

PARIS -- "We," the finance minister says, "have a terrible past." She also says: "In a way, we've had it too easy." Christine Lagarde is correct on both counts.

Her first "we" refers to Europe; the second, to France. Both Europe's cataclysms and France's comforts condition the context for reforms.

Lagarde, 51, has a more informed affection for America than anyone who has ever risen so high in this country's government. She was an exchange student at a Washington prep school and a Capitol Hill intern during the Nixon impeachment proceedings. As a partner in a large law firm based in Chicago, for several years she lived in, and loved, the most American city.

Today, her challenge is defined by this fact: France's welfare state, which has enabled many to have it "too easy," is incompatible with the welfare of the state, and of society. The government, preoccupied with propitiating dependent groups that it wants to proliferate, is big but weak. And the welfare state weakens its clients. "The ethic of work," Lagarde says, "has vanished."

Recently she threw the intelligentsia into a tizzy by saying: "France is a country that thinks. ... Enough thinking, already. Roll up your sleeves." Proving her point, intellectuals here theorize about why President Nicolas Sarkozy's jogging is unprogressive: It involves "individualism," "the cult of performance" and "management of the body," whereas walking is "sensitive." Rolling up one's sleeves is, however, almost illegal because of the statutory 35-hour workweek. Lagarde's response to this "stupid" (her word) law is "a law in favor of work," one implementing a slogan that helped Sarkozy get elected in May: "Working more to earn more." What a concept.

Lagarde has undertaken to subvert the 35-hour restriction, which has been enforced by government agents snooping in companies' parking lots for evidence of antisocial industriousness. Overtime work will be exempt from taxes and social insurance charges. For this, she has been abused in parliament by socialists -- their invectives are as stale as their doctrines -- who compare her to Marie Antoinette.

Why not just repeal the law? Because, Lagarde says, the left considers this "an accrued right." Think about that -- a right to be forbidden the right to chose to do something elemental (work). French intellectuals are adept at thinking themselves into such tangles. "They," Lagarde says, "want to bring people down to solidarity." And "they regard work as alienation in the old Marxist understanding."

France's problems actually derive less from a 19th-century German than from a 17th-century Frenchman. Lagarde works in an office complex with portions named for Jean Monnet and Robert Schuman, two 20th-century French pioneers of Europe's path to a single market. But another portion is named for Jean-Baptiste Colbert (1619-83). On behalf of Louis XIV, Colbert practiced mercantilism, using subsidies, tariffs, price controls and other regulations to manage the economy. The French tradition of dirigisme -- pervasive state intervention in the economy and society -- lives.

Two years ago Le Figaro newspaper inveighed against "the American ogre" Pepsi, which was interested in buying Danone, the yogurt and bottled water (Evian) company. Practicing "patriotisme economique," Sarkozy, then a Cabinet minister, urged mobilization of Danone shareholders to block the sale.

Such "patriotism" aggravates France's social sclerosis, and is inimical to Europe's project for burying its "terrible past." In 1951, war-weary Europe, groping toward transcendence of nationality and hence the furies of nationalism, created the European Coal and Steel Community, an attempt to weaken control by nations of two primary commodities for their war machineries. This was the tentative first step toward today's European Union, which limits -- although not nearly enough -- the ways states can intervene in markets.

These limitations serve Lagarde's project of prying the fingers of politics off vast swaths of the economy. She favors slashing inheritance taxes and preventing any person from paying more than 40 percent of income in total taxation. One index of her success would be decreased emigration by young college graduates, driven abroad by the fact that French unemployment has not been below 8 percent in 25 years. Since, that is, 1982, when President Francois Mitterrand, a socialist, was keeping his 1981 campaign promise to "break with the logic of profitability."

Another French citizen with deep understanding of America warned about France's "regulating, restrictive administration which seeks to anticipate everything, take charge of everything, always knowing better than those it administers what is in their interests." So wrote Alexis de Tocqueville 150 years ago, defining France's problem and Lagarde's challenge.

George F. Will, a 1976 Pulitzer Prize winner whose columns are syndicated in more than 400 magazines and newspapers worldwide, is the author of Men at Work: The Craft of Baseball.
 
 

28. LABOR DUMPING
------------------------------------------------------------------------

The flood of foreign labor pouring into the United States, the European
Union and other hospitable environs has brought political
strains.  But there is little chance of stemming migrant inflows,
as long as the countries supplying immigrants embrace policies that
effectively mandate labor dumping, says Steve H. Hanke, a professor of
applied economics at the Johns Hopkins University and a senior fellow
at the Cato Institute.

Mexico is the world's largest labor dumper and the source of much of
the contentious U.S. immigration reform debate.  The source of the
problem is Mexico's statist economy, which can't produce enough
jobs.  Rather than modernize the economy, Mexico's politicians
sweep the country's surplus labor force into the United States:
   o   Mexico's 47 consulates in the United States, more than any
       other country has, facilitate the sweeping by issuing
       passports and offering assistance when Mexican immigrants run
       into trouble.
   o   Thus 30 percent of Mexico's labor force is working in the
       United States, and in 2006 they sent home $23 billion -- 12
       percent of Mexico's exports.
Turkey has a similar story.  Burdensome laws and regulations put
Turkey's labor market 146th on the ranking from Doing Business
2007.  Adding to the labor market's regulatory burdens is the tax
system:
   o   According to the Organization for Economic Cooperation &
       Development, in Paris, the tax wedge -- the difference between
       labor costs to the employer and an employee's take home pay --
       is 42.8 percent for a family with two children and one working
       parent.
   o   This is the largest wedge in the OECD, 15.3 percentage points
       higher than the OECD average.

Turkey has swept 5.5 percent of its labor force into western
Europe.  Employment in the formal sector -- on the official labor
rolls -- of the Turkish economy accounts for only 22 percent of total
employment.
Source: Steve H. Hanke, "Labor Dumping," Forbes, September
2007.
For text:
http://www.cato.org/pub_display.php?pub_id=8646
For more on Economic Issues:
 

AP
29. Report: U.S. Workers Are Most Productive
Sunday September 2, 11:08 pm ET
By Bradley S. Klapper, Associated Press Writer
U.N. Report: U.S. Workers Most Productive in World; Each Produces $63,885 of Wealth Per Year

GENEVA (AP) -- American workers stay longer in the office, at the factory or on the farm than their counterparts in Europe and most other rich nations, and they produce more per person over the year.

They also get more done per hour than everyone but the Norwegians, according to a U.N. report released Monday, which said the United States "leads the world in labor productivity."

ADVERTISEMENT
The average U.S. worker produces $63,885 of wealth per year, more than their counterparts in all other countries, the International Labor Organization said in its report. Ireland comes in second at $55,986, followed by Luxembourg at $55,641, Belgium at $55,235 and France at $54,609.

The productivity figure is found by dividing the country's gross domestic product by the number of people employed. The U.N. report is based on 2006 figures for many countries, or the most recent available.

Only part of the U.S. productivity growth, which has outpaced that of many other developed economies, can be explained by the longer hours Americans are putting in, the ILO said.

The U.S., according to the report, also beats all 27 nations in the European Union, Japan and Switzerland in the amount of wealth created per hour of work -- a second key measure of productivity.

Norway, which is not an EU member, generates the most output per working hour, $37.99, a figure inflated by the country's billions of dollars in oil exports and high prices for goods at home. The U.S. is second at $35.63, about a half dollar ahead of third-place France.

Seven years ago, French workers produced over a dollar more on average than their American counterparts. The country led the U.S. in hourly productivity from 1994 to 2003.

The U.S. employee put in an average 1,804 hours of work in 2006, the report said. That compared with 1,407.1 hours for the Norwegian worker and 1,564.4 for the French.

It pales, however, in comparison with the annual hours worked per person in Asia, where seven economies -- South Korea, Bangladesh, Sri Lanka, Hong Kong, China, Malaysia and Thailand -- surpassed 2,200 average hours per worker. But those countries had lower productivity rates.

America's increased productivity "has to do with the ICT (information and communication technologies) revolution, with the way the U.S. organizes companies, with the high level of competition in the country, with the extension of trade and investment abroad," said Jose Manuel Salazar, the ILO's head of employment.

The ILO report warned that the widening of the gap between leaders such as the U.S. and poorer nations has been even more dramatic.

Laborers from regions such as southeast Asia, Latin America and the Middle East have the potential to create more wealth but are being held back by a lack of investment in training, equipment and technology, the agency said.

In sub-Saharan Africa, workers are only about one-twelfth as productive as those in developed countries, the report said.

"The huge gap in productivity and wealth is cause for great concern," ILO Director-General Juan Somavia said, adding that it was important to raise productivity levels of the lowest-paid workers in the world's poorest countries.

China and other East Asian countries are catching up quickest with Western countries. Productivity in the region has doubled in the past decade and is accelerating faster than anywhere else, the report said.

But they still have a long way to go: Workers in East Asia are still only about one-fifth as productive as laborers in industrialized countries.

The vast differences among China's sectors tell part of the story. Whereas a Chinese industrial worker produces $12,642 worth of output -- almost eight times more than in 1980 -- a laborer in the farm and fisheries sector contributes a paltry $910 to gross domestic product.

The difference is much less pronounced in the United States, where a manufacturing employee produced an unprecedented $104,606 of value in 2005. An American farm laborer, meanwhile, created $52,585 worth of output, down 10 percent from seven years ago, when U.S. agricultural productivity peaked.

Associated Press Writer Alexander G. Higgins contributed to this report.
 

September 02, 2007 http://www.becker-posner-blog.com/
30. The Transformation of the Kibbutz and the Rejection of Socialism-Becker
 

Much has been written about the rejection of socialism by major powers like China and the former Soviet Union. But nowhere is the failure of socialism clearer than in the radical transformation of the Israeli kibbutz.

The kibbutz movement started in the early twentieth century in what was then Palestine by Zionist émigrés from Europe who were idealistic and utopian. Capitalism, industrialization, and the conventional family repelled these émigrés. Kibbutzniks, as they were called, replaced these fundamental aspects of modern societies with collective agriculture where all property was owned by the kibbutz, where adults were treated equally regardless of productivity, and they were rotated every few months among the various tasks that had to be performed on a farm, such as milking cows, planting crops, serving meals, and so forth. They considered the close-knit family to be a creation of capitalism, and substituted for that family structure communal dining, a fair amount of promiscuity, and separate communal living for all children, who were allowed only brief visits with their parents each day.

Several decades ago I spent a few days on such a traditional kibbutz located in the Negev desert, where I was a guest of married couple with two children. The husband was unusual for a kibbutznik because he was a trained nuclear physicist. They had a two room apartment-their two children lived in dormitories with the other children of the kibbutz- I met the children briefly on a couple of their daily visits to their parents. We dined communally on good food, and we watched a movie in the large dining hall afterwards.

Although my host had much more advanced training than other residents, that only gave him the right to spend a few months each year working at a nuclear facility that used his skills. The rest of the time he rotated like everyone else among the numerous menial tasks on the kibbutz. He was well paid for his outside professional work, but he had to hand over his pay to the kibbutz, and received the same benefits as everyone else. He was not happy with this arrangement, but since he grew up on this kibbutz he lacked the resources to buy an apartment and car, and make the other outlays required to move off the kibbutz into an urban environment where he could get a well paying job. For at that time, rent controls destroyed the rental market for housing, so young couples lived with their parents until they saved enough, or their parents gave them the money, to buy their own place. However, in this case, their parents did not have their own apartments since they too lived on a kibbutz, and they lacked the financial resources to help their children.

The kibbutz movement was motivated in part by the Marxian dictum of "from each according to his abilities to each according to his needs". By abolishing capitalistic organization, the founders expected members to live in contentment and harmony, and to work for the common good. However, from what I was told and could observe during my brief visit, there was not much harmony-jealousies abounded of those who were only a little better off, including my host because he was allowed to spend some time working at his profession off the kibbutz. Anger was also felt toward those who were considered slackers since they clearly lived off the labor of others. Since everyone ate, worked, and socialized together, small differences were magnified, and became festering sores. Nor were the family arrangements any more satisfactory since parents missed their children, and visa versa.

The kibbutz movement was very important in the creation of Israel, and in its early days of independence. Many military leaders came from the Kibbutz, perhaps because they were accustomed to communal living. A disproportionate number of the early political leaders and intellectuals also had a kibbutz background. But as the New York Times recognized in an article this past week, the socialist zeal that propelled the kibbutz movement in its early days has largely now disappeared. A trend that began more than 40 years ago accelerated in the 1980's as kibbutzim lost many young members, and they failed to attract enough new members. Many of them were forced into bankruptcy, and the future of this movement was exceedingly dim if they continued with their old ways.

The vast majority of the kibbutz that remained survived because they changed their ways. They expanded into industry and even real estate, they allowed a substantial degree of private ownership and private enterprise on the kibbutz, pay is no longer equal and is now significantly related to productivity, and parents and children live and eat together privately in their own homes. These changes may have prevented the Kibbutz movement from disappearing along with the many past Utopian experiments, but they did not prevent the kibbutz from becoming of little importance in the Israeli economy as Israel shifted toward privately owned high tech industry, and also toward privately owned farms, including cooperatives, for its much less important agricultural output.

The transformation of the kibbutz movement from avowedly socialist to mainly capitalist shows clearly in microcosm what happened in socialist countries. Although even in their most extreme moments these countries were never as radical as the kibbutzim since children continued to live and eat with parents, socialist countries too tried to divorce individual productivity from individual rewards. They also believed that self-interest was a relic of capitalism, and that they could change human behavior to produce "a new socialist man" by abolishing private property and reorganizing society. Instead of the small scale of a kibbutz, countries like China and the Soviet Union tried to created socialism on an enormous scale. Moreover, and this is crucial, while members of any kibbutz voluntarily joined and could leave at will, Russians and Chinese had no choice about whether they wanted to work on collective farms or in government run enterprises, and they could leave only with extreme difficulty and at personal risk.

Utopian socialistic experiments like the kibbutz movement, and countries that tried to create large-scale efficient socialism, all failed for the same reasons. They did not realize that while the zeal of pioneers, and the result of revolutions, could sustain a collectivist and other-serving mentality for a short while, these could not be maintained as the pioneers died off or became disillusioned, and as circumstances became less revolutionary. Basically, they ignored the evidence of history that self interest and family orientation is not the product of capitalism, but is human nature due to selection from evolutionary pressure over billions of years. Sure, there is abundant altruism toward one's family, and some altruism toward others, and the latter might sustain a society for a brief time. But it shows a depressing ignorance of history to believe that a little propaganda and the enthusiasm of some leaders can organize an effective long-term society on the basis of any altruism and desires of mostl persons to help institutions, such as a kibbutz or a country, rather than themselves and those close to them.
 

Posted by becker at 08:53 PM | Comments (7) | TrackBack (0)
The Kibbutz--Posner's Comment

There have always been communes, such as the Israeli kibbutzim, but they have usually failed, mainly because of free-rider problems. If wages are uniform, shirkers flourish; also, incentives to undergo training that would increase the value of one's output are blunted. Thus we read in the New York Times article of August 27 mentioned by Becker that "Mr. Varol was born on a kibbutz in the far north, but he left at 18. He is at peace in his new home, but bitter about the past. 'My parents worked all their lives, carrying at least 10 parasites on their backs,' he said. 'If they'd worked that hard in the city for as many years, I'd have had quite an inheritance coming to me by now.'"Yet, curiously, Varol's "new home" is one of the 30 percent of Israel's 250 or so kibbutzim that, accordingly to the Times article, remain genuine communes--that is, with collective ownership and equal wages, though the collective raising of children has probably been abandoned. (Curiously, Varol's kibbutz--Ein Ha-Shofet--was named in honor of Justice Brandeis, shofet being the Hebrew word for judge.) In trying to weaken the bond between parents and children, the founders of the kibbutz movement, echoing Plato, who in his sketch of an ideal communist state in the Republic had advocated the communal rearing of children, were acknowledging that parents' instinctual desire to advance their children was inconsistent with communal equality.

The kibbutz movement is almost a century old, and it is more remarkable that 30 percent of the kibbutzim are still communist than that 70 percent are not, although the Times article does not indicate the percentage of the total kibbutz population that lives in those "classic" communist kibbutzim or how complete their commitment to the kibbutz ideal actually is. An even more durable example of voluntary collectivist living that comes to mind is found in the Catholic monasteries and convents--and notice that it is too is founded on a realization that family ties are inimical to communal ordering. A kind of private quasi-collectivism persists in poor, disordered, or anarchic societies in which tribes and clans exercise functions that governments perform in wealthy societies.

The kibbutzim were founded as collective farms in a pre-mechanized agricultural economy. Because they were small, because the skill and effort of each of the members of a kibbutz could be readily observed and evaluated, because (really the same point) there was little specialization, because the danger posed by the surrounding Arab population created a strong sense of mutual dependence among kibbutz members, because many immigrants to what is now Israel did not have good employment options, and because of the mysterious Jewish enthusiasm for communist and socialist movements, free-rider problems could be contained, and so the "classic" kibbutzim, unlike most voluntary communes, and without the religious backing of Catholic monasticism, flourished for generations. Even so, kibbutzniks were never more than 7 percent of the Jewish population of Palestine. As the extraordinarily favorable conditions for voluntary collectivism waned, it was inevitable that the classic kibbutz system would fade.

The kibbutz in its original collectivist form gives us a glimpse of pre-political human society. In a society in which there is no effective central government, as was essentially the situation of the Jewish community in Palestine until Israel gained statehood in 1948 (and even afterwards, in frontier regions exposed to Arab terrorism), smaller groups will form for self-defense and the provision of other public goods, such as social insurance. Collective ownership and wage equality are ways of protecting each member of the collective from economic and other vicissitudes; "from each according to his ability, to each according to his needs"--the communist slogan actualized in the classic kibbutz--is then a method of social insurance. The difference between the uniform wage that every worker receives and the below-average value of a particular worker's output because of age, infirmity, wounds, or sheer inability is in effect a transfer, in the nature of insurance proceeds, from the other workers. But it is less efficient than the forms of private and social insurance that arise when there is a government that can enforce property rights and thus enable industries such as the insurance industry to function, and that can provide social insurance out of tax revenues.

Probably, then, human beings have both collectivism and individualism in the genes, enabling us to adapt both to environments in which collectivism is welfare-promoting and environments in which individualism is welfare-promoting.
 
 
 
 
 
 

31. Fear of Supermarkets  The liberalization of India's retail sector isn't going to be easy. WSJ September 4, 2007

It's easy for Indian politicians to whip up scare stories about how the Wal-Marts of the world will put small shop owners out of business. But how will they explain their economic rationale when Indian companies want to offer consumers better quality products at lower prices?

We're about to find out. Late last month, the country's most populous state, Uttar Pradesh, shuttered big supermarkets in the face of protests from smaller, uncompetitive traders. Reliance Fresh, a grocery store unit of Mumbai-based Reliance Industries Ltd., responded by freezing plans to open new stores not only in Uttar Pradesh, but in the northeastern state of West Bengal too, where two of its new stores were recently vandalized.

On Sunday, more than 3,000 farmers marched in Lucknow, the capital of Uttar Pradesh, demanding that Reliance's existing stores be reopened and that the company be allowed to build new stores too. They have good reason to be angry: Supermarkets like Reliance often pay farmers more for their wares because they don't deal with expensive middlemen. They also provide a steadier stream of business, as they can sell farmers' products to a broader market.

Consumers are also miffed. Small, local markets are often dirty affairs, conducted by the roadside and in unhygienic conditions. Reliance and others are offering an air-conditioned and clean shopping environment, not to mention a reliable source of high-quality, safe food. Thanks to its sophisticated sourcing network, bigger retailers also offer more choices.

The liberalization of India's retail sector isn't going to be easy. As in Uttar Pradesh, small businesses will face extinction as larger, more efficient enterprises move in. For now, Mayawati, Uttar Pradesh's newly installed chief minister, is sticking to her decision, claiming that the supermarkets have to be temporarily shuttered for "law and order" reasons.

By doing so, she's created a much larger set of disaffected constituents -- farmers, who employ the vast majority of the state's workers. Farmers also vote. As India's economy matures, it will get harder and harder for its politicians to serve the interests of the few, at the expense of the many.
 
 
 
 
 
 
 
 
 
 

32. Gas Attack    Why is Burma such an economic basket case? By SEAN TURNELL WSJ September 4, 2007

Recent protests over gas prices in Burma raise a complex question: Why is Burma -- which sits atop a massive reserve of natural gas -- such an economic basket case? Look no further than the military government's track record of abysmal economic management.
[Gas Attack]
Protesters rally against soaring fuel prices in downtown Rangoon on Aug. 28, 2007.

Formally classified as a "least developed" country by the United Nations, Burma is mired in deep poverty. Annual per capita GDP is around $1,800 in terms of purchasing-power parity ($300 at the market exchange rate). That's considerably below the income of the next poorest members of the Association of Southeast Asian Nations, Cambodia and Laos, which boast per capita purchasing-power parity GDPs of $2,700 and $2,100, respectively. Burma's unemployment rate is officially just over 10%, but the real figure may be closer to 30%, with many people in the labor force either underemployed or engaged in activities of very low productivity, such as subsistence farming.

Add to that a moribund financial system. At a time when even Vietnam is enjoying a booming stock market, Burma boasts all of about 400 bank branches (most of which are decrepit agencies of state-owned institutions), and only 20% of the population have bank accounts. Inflation is rampant -- averaging between 30% and 40% per year over the past five years (it's currently around 50%) -- thanks to a government that for years has financed extraordinary fiscal deficits by running the printing presses.

The picture appeared to have brightened, though, with Burma's emergence as a significant regional energy supplier. Burma's natural resources would provide a more prudent government with enough cash to plug its fiscal holes, bring inflation under control, and start making infrastructure investments. Large and exploitable natural-gas fields in the Gulf of Martaban and the Bay of Bengal could deliver income of around $2 billion a year for the next 40 years. Most of that gas is exported to Thailand, but supplies about to come online are currently subject to a three-way bidding war between China, India and South Korea.

But the deal is already starting to go downhill. China thus far has not offered the highest price for the resources but is likely to win the bidding anyway. The junta apparently is prepared to sacrifice desperately needed revenue to thank China for vetoing sanctions against it this year at the U.N. Security Council.

Nor would the regime know what to do with the money if it received market price. Current inflows of resource money have been splurged on vanity projects for the generals, including construction of a new capital city called Naypyitaw (which translates as "seat of kings") and pay raises of up to 1,000% for civil servants and military personnel. In 2006, tax revenues amounted to little more than 40% of government spending, with the yawning finance gap being filled by borrowings from Burma's central bank. Such borrowings increased a further 20% in the first six months of 2007, illustrating that Burma's public finances are continuing to deteriorate.

Even when the junta tries to do the right thing, at least nominally, the results are absurd. Earlier this year, the State Peace and Development Council -- the junta's name for the country's governing body -- announced an agreement to buy a nuclear reactor from Russia for $250 million. The SPDC claims the reactor will be used to produce medical isotopes. This in a country whose current annual health budget amounts to less than $1 per capita. It is unlikely then that Burma's reactor will truly be used for medical purposes, but nor is it likely to be of much use in alleviating Burma's chronic electricity outages -- the cause of which is an electricity distribution network than cannot cope with even existing (inadequate) electricity generation. Burma is not yet a viable nuclear weapons state, but the real reason for the purchase of the reactor would seem to be strategic, stemming from a belief among the country's leaders that a nuclear reactor will confer some vague military prestige.

Beyond these extravagances, an important drain on Burma's foreign reserves also comes via its need to import processed fuels. Though a net producer of raw energy through its extraction of natural gas, Burma's worn-out and obsolete refining infrastructure means that it must import much of its usable fuel.

This shortage is especially acute in the case of diesel, the power source for the bulk of Burma's economy. About 60% of Burma's cars and -- more importantly -- buses run on diesel, and the fuel is also used heavily for electricity generation in the generators many businesses must have on hand to cope with numerous electricity outages. But Burma's domestic refineries can process only crude oil containing a limited amount of sulphur into diesel fuel. When the right kind of crude is not available, as is often the case, the country must import. And global prices have risen approximately 300% over the past five years (nearly 30% in 2007 alone).

Nothing in Burma is ever entirely clear, but the pressure from the SPDC's recent profligacy, and the drain this and rising processed-fuel imports have imposed on the country's foreign reserves, is the most likely cause of the increase in fuel prices announced last month. The Burmese people are used to the erratic and irrational decision-making of their rulers, but these latest increases in fuel prices hurt. Most people in Burma subsist on very small margins, and it takes little to imperil their basic survival. The protests on the streets of Burma last month are not primarily about abstract principle, but are the act of a people pushed to extremis.

They've been pushed before. In 1987 Burma's military leaders suddenly declared that whole denominations of the country's currency were no longer legal tender. No compensation was offered. Months later, to add insult to the original injury, the demonetized currency was replaced by a bizarre series of notes denominated in values (multiples of nine) that astrologers told Burma's then leader were auspicious. Impoverished Burmese citizens took to the streets back then too. Many were killed, some were imprisoned and countless more fled the country.

A subsequent internal coup changed some of the faces of the military regime, but Burma's disastrous trajectory continued. Last month's dramatic fuel price rises are not as bizarre as the episodes of two decades ago, but they might prove as destructive. If so, a deserving victim of all of this could well be Burma's military regime itself. And from that, at least, might return hope to Burma.

Mr. Turnell is a senior lecturer in economics at Macquarie University in Sydney.
 
 
 

33. Is Democracy the Best Setting For Strong Economic Growth? WSJ debate March 13, 2007

Hoping to counterbalance the economic populism of Venezuela President Hugo Chavez, President Bush is on a weeklong tour of Latin America, bearing a message of optimism about democracy, trade and economic prosperity.

But what exactly do we know about the relationship between democracy and economic growth? Economies of less-than-democratic nations such as China have surged in recent years. Does a country's brightening economic picture boost the chance democracy may eventually blossom? Or is it the other way around? Are democratic institutions a key component of long-term economic growth? And what's the role of education?

WSJ.com asked economists Daron Acemoglu of the Massachusetts Institute of Technology and Ed Glaeser of Harvard University to discuss the delicate relationship between economic growth and broader political freedoms.

What do you think? Share your comments on our discussion board.
* * *
[Glaeser]

Ed Glaeser writes: Rich countries are stable democracies. Poor countries tend to be political basket cases, careening between brutal dictatorships and unstable semi-republics. The relationship between democracy and wealth might suggest democracy naturally leads to prosperity. This view is comforting and also gives us another reason to enthusiastically try to export democracy globally.

While I yield to no one in my passion for liberty, the view that democracy is a critical ingredient for economic growth is untenable. There is no robust statistical relationship to back it up, and Robert Barro actually found democracy reduces growth, once he statistically controls for the rule of law.

It is, however, true that growth rates vary much more under dictatorships than under democracies. Anti-development autocrats, such as Mobutu Sese Seko or Kim Jong Il, are about the worst thing for economic growth, other than civil war. But many of the best growth experiences have been in less-than-democratic regimes that invest in physical and human capital such as Lee Kwan Yew's Singapore or post-Mao China. Some dictators are even better than democrats at restraining the growth-killing practice of expropriating private wealth. I think the relationship between democracy and wealth reflects the power of human capital -- education -- to make countries both rich and democratic. If you put enough smart people together, they'll figure out how to govern themselves and gravitate towards democracy.
* * *
[Acemoglu]

Daron Acemoglu writes: I agree with Ed on many points. In the postwar era, it's true that democracies haven't grown faster than autocratic regimes. Plus, there are clear examples of fast growth under dictatorships; see South Korea under Gen. Park Chung Hee. So, why haven't democracies been more successful? I believe the answer lies in recognizing two things. First, there are different kinds of democracies. And second, it's important to consider that economic growth and democracy have a very different relationship over the long term -- that is for periods as long as 100 years -- than over the short or medium term.

Many societies counted as "democratic" using standard measures are really "dysfunctional democracies" where traditional elites dominate politics through control of the party system, political influence, vote buying, intimidation and even assassination. Colombia, which has had regular democratic elections for the past 50 years, is a typical example. In others, democratic institutions survive, but there is significant in-fighting between ethnic groups, religious groups or social classes. The situation in Iraq would be the most extreme -- but not a unique -- example. Finally, many democracies suffer economically from populist and irresponsible macroeconomic policies, which are often adopted after transitions from repressive dictatorships and during periods when politics are turbulent and conflicts over wealth distribution are strong.

On the second point, it's true that autocratic regimes can generate growth for certain periods of time by providing secure property rights and good business conditions to firms aligned with political powers. But modern capitalist growth requires not only secure property rights, but also creative destruction, that is, the entry of new firms with new ideas and technologies that replace the successful firms of the past. Creative destruction requires a level playing field, which democracies are better at providing because they have more equal distributions of political power than autocracies or monarchies.

So, if we look beyond the past 60 years, we see that it was the U.S., with its democratic institutions, that created the environment for new businesses to enter, flourish and spur the industrial growth of the 19th century. There were many rich autocracies and repressive regimes in the 18th century, including places like Cuba, Haiti and Jamaica. But it was the U.S. that grew rapidly over the next two centuries while these autocratic regimes stagnated.The relationship between human capital and democracy that Ed raises is fascinating. But I will return to that in a little in the context of the causes of democracy.
Daron Acemoglu is the Charles P. Kindleberger Professor of Applied Economics in the Department of Economics at the Massachusetts Institute of Technology. He is also affiliated with the National Bureau Economic Research, Center for Economic Performance, and Center for Economic Policy Research, and is a fellow of the American Academy of Arts and Sciences, the Econometric Society, the European Economic Association and the Society of Labor Economists. He received his Ph.D. in economics at the London School of Economics in 1992. He was awarded the John Bates Clark Medal in 2005, given every two years to the best economist in the U.S. under the age of 40 by the American Economic Association.
Edward Glaeser is the Fred and Eleanor Glimp Professor of Economics in the Faculty of Arts and Sciences at Harvard University, where he has taught since 1992. He is Director of the Taubman Center for State and Local Government and Director of the Rappaport Institute of Greater Boston. He teaches urban and social economics and microeconomic theory. He has published dozens of papers on cities, economic growth, and law and economics. In particular, his work has focused on the determinants of city growth and the role of cities as centers of idea transmission. He also edits the Quarterly Journal of Economics. He received his Ph.D. from the University of Chicago in 1992.
* * *
[Glaeser]

Ed Glaeser writes: I strongly agree with the view that unfettered dictatorship doesn't guarantee long-run stability. But how much more stable is democracy? America worked well. The Weimar Republic didn't. Over the past 200 years, democracies have regularly fallen to military coups, communist overthrow and aggressive elected executives, like Hitler, who expanded the reach of their power to the point where democracy disappeared. Even relatively stable democracies, like post-war India, have often failed to provide a safe environment for investment, innovation and entrepreneurship.

Since democracy is always vulnerable, I think the key question is why it survived for centuries in some countries like the U.S., the United Kingdom and the Netherlands -- and died quickly in other places, such as post-colonial Africa. One answer is that human capital -- education -- is the bedrock for lasting democracy. Empirically, initial education strongly predicts the survival of democracy education and the survival of democracy in our research.

We found 95% of the democracies that ranked as "well-educated" in 1960 stayed democracies for the next 40 years. By contrast, 50% of 1960's "less well-educated" became dictatorships within a decade. The survival of democracy hinges upon capable people who have the incentives and ability to protect their rights against would-be dictators. Education produces social capital that makes it possible for people to organize and makes them think that democracy is worth fighting to protect.
* * *
[Acemoglu]

Daron Acemoglu writes: Ed argues that education is key to the democratic success. I'm a big believer in the value of human capital. Better-educated people are more productive, better citizens. But democracy is about collective choices in conflict-ridden situations, and education is not a panacea for solving these problems. Weimar Germany is an interesting example. In the interwar years, Germany was one of the most culturally advanced, educated and sophisticated societies in the world. Was the education of the German people sufficient to prevent the Nazi nightmare? No.

Looking at the data, there is no strong evidence that either education or economic growth is a major factors in creating or strengthening democracy. In fact, countries that have grown fast over the past 50 years -- or over the past 150 -- haven't shown in much greater tendency to become democratic. Consider the recent experience of Russia and Saudi Arabia. If suddenly the price of oil increases and they become much richer, do we expect them to become more democratic? The same applies to education. Countries that have boosted education levels haven't been more likely to consolidate democracy or transition from autocracy to democracy. After all, former Socialist republics had very high levels of education during the Cold War, but did not show a strong tendency to become democratic.

So what does strengthen democracy? Recent research by Benjamin Jones and Benjamin Olken finds that enlightened leadership matters, but it only in autocracies. In societies with strong institutions and established democracies, leader quality seems to have little effect on economic performance. This again makes me think that established democracies, by introducing checks and balances, create a good environment for collective decisions and resolution of conflicts. This type of environment for collective decision-making is the best guarantor of long-run economic development.
* * *
[Glaeser]

Ed Glaeser writes: The link between education and growth in democracy is pretty robust, both because more educated democracies are more likely to stay democratic and because schooling strongly predicts which dictatorial regimes will transition into democracy. Consider the states of the former Warsaw Pact. Educated countries such as Poland and the Czech Republic have become reasonably well-functioning democracies. Less-educated spots, such as Uzbekistan and Borat's homeland -- Kazakhstan -- are far less democratic. The education of Russia lies somewhere in the middle, and so does its level of democracy.

The link between education and democracy works through at least three important channels. Historically, educated people have been a mainstay of political uprisings, because of their interest in ideas and the ability to organize. Nowhere is this clearer than in the remarkable propensity of students to riot. Indeed, some of the most important of revolutions from 1848 to the deposition of the Shah had their roots in student-led upheavals.

Education is also associated with the crafting of complex constitutions, which require education to write and education to use. It's no surprise that the American constitution was the product of extremely well-educated men. James Madison learned the best ideas of the Scottish Enlightenment from his Princeton mentor, John Witherspoon.

Finally, educated people have shown a remarkable ability to fight to protect democracy. The English, American and Dutch democracies have regularly been defended by people steeped in legal and political learning. Daron is, of course, right to emphasize the failure of Germany's educated to stop Nazism. I would respond by saying that first, Germany wasn't all that well educated in 1933, and second, that while education predicts transitions to democracy, it hardly guarantees them.
* * *
[Acemoglu]

Daron Acemoglu writes: Yes more educated countries are more democratic, richer, more tolerant and more innovative. No disagreement there. But this does not mean that education is the key factor for democracy or for growth. The disagreement is over whether societies that become more educated over time are also more likely to become democratic. Here there is no correlation between changes in education and changes in democracy.

Ed also argues that "educated people have been a mainstay of political uprisings." I agree with this and I believe that the educated have an important role in defending democracy. But they can also turn against democracy. Educated people have also been big supporters of anti-democratic movements, including the Bolshevik Revolution in Russia and many revolutionary movements in Latin America. So if education is not a panacea for democracy and democracy is not a panacea for growth, how do we make sense of the big questions of long-run development? Why are democratic societies more educated and richer? The right perspective on these questions is provided by thinking of distinct development paths, that is, clusters of political and economic institutions and economic activities.

Prosperity and poverty are partly rooted in a society's history and development path. In one type of development path, democracy, growth, investment and human capital go hand-in-hand, potentially reinforcing each other. Another path involves autocratic regimes, repression, low growth and low human capital. If growth suddenly increases under such a repressive system -- or if a dictator suddenly starts a big education program -- this won't automatically lead to democracy. Societies that achieve sustained economic growth enforce property rights, respect the rule of law and create a level playing field for new firms -- and for their population at large. They develop institutions for collective decision-making that prevent power from being usurped by strongmen or narrow cliques. Fortunately, while history and historical development paths matter, change is possible. Countries can reform their political and economic institutions and start investing in new businesses, technology, and human capital, paving the way for sustainable economic growth under stable democratic regimes. Botswana and South Korea, for example, have made this transition despite having started with very adverse conditions.
* * *
[Glaeser]

Ed Glaeser writes: I have tried to articulate two views. First, democracy doesn't strongly predict economic growth. Second, education is an important factor that supports democracy. I want to turn now to the development policy implications of those views.

I like promoting education both because it leads to good political outcomes and because, as Daron writes, there are so many other good by-products associated with learning. Of course, I'd rather that education to be more than dictatorial propaganda, but even those Russians educated under the old regime fought for democracy in 1991. I also like promoting democracy. Even if rule by the people doesn't lead automatically to economic growth, there are plenty of other reasons to wish for everyone to get the chance to govern themselves. The heart of economic policy advice is the desire to give people more choices, and political liberty like wealth makes people "free to choose."

However, I do think that we need to have a little bit of realism about where democracy has a fighting chance to succeed. The president has said that "it is the practice of democracy that makes a nation ready for democracy, and every nation can start on this path." I'm not so sure. There aren't a lot of countries with the education level of Afghanistan that have ever been stable democracies. Iraq's level of human capital gives it a better shot, but the current difficulties were quite predictable. We need to recognize that exporting democracy is extremely hard in low-human-capital countries and to make sensible judgments about how we can move freedom forward despite facing enormous difficulties.
* * *
[Acemoglu]

Daron Acemoglu writes: There is a lot Ed and I agree on. Democracy doesn't strongly predict economic growth, at least not in the short run. Education is wonderful for many reasons. And democracy is not perfect as a political system, but it is the best we have. (As Winston Churchill is supposed to have said: democracy is the worst form of government except for all the others forms that have been tried from time to time.) There are indeed barriers to democracy's ability to flourish in many societies.

And finally, exporting democracy is probably neither easy nor always feasible and we should be careful in such attempts. (In fact, we should be careful and very cautious in all kinds of social engineering dreams that we have.)

However, there are still some areas where there is healthy disagreement between us. The main barrier to democracy is not low education but deep social and economic divides that create intense conflict. Democracy has failed in highly educated countries -- such as Germany before World War II or post-war Argentina. It has also been extremely successful in very low-education countries. Botswana provides a perfect example. It is the most successful democracy and the fastest growing economy in sub-Saharan Africa. When the British granted independence to this colony in 1965, there were only 22 Botswanans who had graduated from university and 100 from secondary school.

But Botswana was fortunate to have avoided the most adverse effects of colonialism and thus did not suffer from deep social divides or distributional conflicts, because the British essentially had no interest in the colony and left it alone. Botswana used the revenues from its diamonds both equitably and wisely. Botswana's democracy has not only endured and flourished, but has not even been challenged by a coup or tarnished by major electoral fraud during the past 40 years.

I would also like to emphasize -- and conclude with -- this point: Sustained economic growth requires secure property rights and a level playing field for generating new technologies and entry by new firms. Democracy is the best guarantor for such sustained economic growth. Economic growth generates various vested interests, ranging from landed elites to businessmen in declining industries to privileged workers. These vested interests will try to block the introduction of new technologies and stop the entry of new firms. Democracy is not perfect, but with its more egalitarian distribution of political power, it will have greater resistance against vested interests than autocracy.

What do you think? Share your comments on our discussion board.

Write to Matt Phillips at matt.phillips@wsj.com

34. Developing Nations Win Concession On Global Warming at APEC Associated Press
WSJ September 7, 2007 6:26 a.m.

SYDNEY, Australia -- Developing countries won a concession from Australia and the U.S. on global warming at an annual Pacific Rim economic summit, officials said Friday. Meanwhile, President Bush had a testy exchange with South Korean President Roh Moo-hyun at the summit, telling him that the U.S. would formally end the Korean War only when North Korea halts its nuclear weapons program.

A weekend deadline loomed for the 21 leaders of the Asia-Pacific Economic Cooperation summit to reach agreement on tackling climate change, the top agenda item. The U.S. and Australia, which have refused to ratify the United Nations-backed Kyoto Protocol, want APEC leaders to embrace a new approach to climate change that would require China -- one of the world's biggest polluters -- and other developing countries to commit to greenhouse-gas reduction targets.

Kyoto set targets for industrialized nations to reduce emissions of greenhouse gases but largely exempted developing ones. Specifics of the Australian proposal were sketchy but officials said they included goals to reduce "energy intensity" -- the amount of energy needed to produce economic growth. Developing nations are against targets imposed by others. At meetings on climate change, poorer countries, led by China, succeeded in getting any APEC statement on global warming to recognize the UN as the main forum to debate the problem, officials said.

"That is the general consensus, that it should be under the framework of the UN. That is also the position of China," said Philippine Foreign Secretary Alberto Romulo, who was briefed on the climate meetings by his officials. As for numerical targets, Mr. Romulo said: "Many feel that it should be voluntary and at most it should be aspirational targets but no numerical targets."

The officials and experts were rushing to finish the statement before Mr. Bush leaves the summit a day early, after Saturday's session, to return to Washington for a report on the Iraq war.

Some among about 1,000 protesters gathered for a rally at a city park surged against police lines during a sudden downpour. It wasn't clear if they were trying to seek cover under the hotel awning. Police standing shoulder-to-shoulder pushed and shoved anyone coming near the Sheraton on the Park hotel where delegates from Chile, Taiwan and Vietnam are staying. Police made two arrests Friday, and the fracas was seen as a dry-run for Saturday when protesters say they will stage their largest a demonstration -- a march through the city as Mr. Bush, China's President Hu Jintao and other leaders meet in the shell-shaped Sydney Opera House.

In a one-on-one meeting on the sidelines of the forum, Mr. Bush had an exchange in front of reporters with South Korean President Roh Moo-hyun, who pressed him to be "clearer" about his position on an official end to the 1950-1953 Korean War. The two Koreas were divided by the conflict, which ended in a truce, not a peace treaty, meaning they still remain technically at war. The U.S. also has no peace treaty with the North. The leaders' tone remained light, but Mr. Bush responded firmly: "I can't make it any more clear, Mr. President. We look forward to the day when we can end the Korean War. That will happen when Kim Jong Il verifiably gets rid of his weapons programs and his weapons."

Russian President Vladimir Putin and Australian Prime Minister John Howard signed a deal to export Australian uranium to fuel Russian nuclear power plants. While the agreement forbids Russia from selling Australian uranium to any other nation or using it for military purposes, critics of the deal worry that it could make it easier for rogue states to obtain the raw material.

At their summit, the leaders are expected to note that the Doha round of global trade talks are at "a critical juncture," according to a draft of their final statement to be released after their weekend summit. The World Trade Organization talks, bogged down for two years amid bickering between rich and poor nations over slashing barriers on farm and industrial trade, resumed this week in Geneva. The draft, obtained by the Associated Press Friday, said the APEC leaders would issue a separate statement at their summit on the trade talks "setting out the urgent need for progress and pledging our commitment to work with renewed energy to deliver an ambitious and balanced result."

Copyright © 2007 Associated Press

35. Economics and Property By Walter E. Williams
Wednesday, September 5, 2007

Strong Property Rights Encourage Better Behavior. Walter Williams explains why property rights encourage people to make wise and moral choices:

http://www.townhall.com/columnists/WalterEWilliams/2007/09/05/economics_and_property_rights

Economic theory does not operate in a vacuum. Institutions, such as the property rights structure, determine how the theory manifests itself. Similarly, the law of gravity isn't repealed when a parachutist floats gently down to earth. The parachute simply affects how the law of gravity manifests itself.

Failure to recognize the effect of different property rights structures on outcomes leads to faulty analysis. Think about several questions. Which lake will yield larger, more mature fish -- a publicly owned or a privately owned lake? Why is it that herds of cows flourished and buffalos did not? Who will care for a house better -- a renter or owner?

The answer to each question has to do with the property rights structure. In a publicly owned lake, everyone has the right to the fish. In order to assert his right, the person has to catch the fish. This leads to overfishing because the person who tosses back an immature fish doesn't benefit himself. He benefits someone else who will keep the fish. It's a different story with a privately owned lake. The owner needn't catch a fish in order to assert his rights and can let the fish mature. It's the same principle with buffalo and other wildlife that's publicly owned. Through various rules and regulations, governments, though imperfectly, attempt to solve this property rights problem with licenses, fishing and hunting seasons and setting limits on catch and size.

Private property rights force the owner to take into account the effect of his current use of the property on its future value. A homeowner has a greater stake in what a house is worth 10 or 20 years from now than a renter. An owner would more likely make sacrifices and take the kind of care that lengthens the usable life of the house. But owners have methods to make renters share some of the interests of an owner through requiring security deposits against damage.

There's a completely ignored aspect of the effect of restrictions on private property rights and that's restrictions on profits. Pretend that you're an owner of a firm. There are two equally capable secretaries that you might hire. The pretty secretary demands $300 a week while the homely secretary is willing to work for $200. If you hired the homely secretary, your profits would be $100 greater. But what if there were a 50 percent profit tax? The profit tax reduces your rights to profit and reduces your cost of discriminating against the homely secretary. Instead of foregoing $100 without the profit tax, you'd forego only $50 by hiring the pretty secretary. The more the cost of doing something goes down, predictably, the more people will do of it. Wherever private property rights to profits are attenuated, we expect more choices to be made by noneconomic factors such as race and other physical attributes. That's especially the case in nonprofit entities like government and universities.

You say, "Hold it, Williams, government and universities have preferential hiring policies in favor of racial minorities; so you're wrong." No. When it was politically expedient, government and universities were the leaders in racial discrimination against racial minorities. Now that it's politically expedient to discriminate in favor of racial minorities, government and universities are in the forefront. For example, in 1936, there were only three black Ph.D. chemists employed by all of the white universities in the U.S., whereas 300 black chemists alone were employed by private industry. In government, blacks were only 1 percent of non-Postal Civil Service workers in 1930. By the way, where did blacks make their entry into white universities? If you said in sports, the moneymaking part of the university, go to the head of the class.

There are numerous issues and problems that are otherwise inexplicable unless we take into consideration the property rights structure.

Dr. Williams serves on the faculty of George Mason University as John M. Olin Distinguished Professor of Economics and is the author of More Liberty Means Less Government: Our Founders Knew This Well.

36. Productivity Gains Revised Higher By BRIAN BLACKSTONE
WSJ September 6, 2007 10:42 a.m.

WASHINGTON -- U.S. productivity advanced at a rapid pace last quarter as economic growth accelerated, while labor cost growth slowed, according to revised data released Thursday by the Labor Department.

Meanwhile, nonmanufacturing activity in the U.S. grew at the same pace in August as the prior month, a report said Thursday, although there was a decline in several key components.

Still, the productivity rebound is unlikely to ease worries about the economy's ability to expand without inflation. Many economists, including Federal Reserve staff, think the economy's so-called growth potential has fallen in recent months.

Nonfarm business productivity rose at a 2.6% annualized rate between April and June, the Labor Department said Thursday. It was previously estimated at 1.8%.

Productivity, or output per unit of labor, advanced just 0.7% in the first quarter, which was not revised.

Last quarter's productivity gain was above Wall Street expectations of a 2.4% increase. Economists expected an increase from the previous estimate after gross domestic product growth up in the second quarter was revised up to 4%.

Unit labor costs -- a gauge of inflationary pressures -- rose 1.4% last quarter, down from a previous estimate of 2.1% and slightly below expectations. Still, they were up 4.9% from a year ago, the fastest rise since 2000.

Labor is the most important cost to production of goods and services. If not matched by productivity, higher labor costs must be either passed through by a company in the form of higher prices to its customers or absorbed in the firm's profit margins.

Last quarter's bounce notwithstanding, recent productivity data and past revisions have raised concerns about the economy's growth potential, which is generally calculated by adding annual productivity growth to labor force expansion.

Once thought to be as high as 3.5% to 4%, it has been marked down in recent months by many private-sector economists as well as Fed staff.

Recent benchmark revisions to gross domestic product "led the [Fed] staff to trim its estimates of the growth rates of structural productivity and potential GDP," the Fed said in the minutes of its Aug. 7 meeting. That's the third time in one year that Fed staff has cut its potential growth forecast, though it hasn't specified an estimate.

Some private-sector economists think the growth potential is now as low as 2.5% to 2.75%, with underlying productivity at only around 2%. If that's the case, even slower growth wouldn't open up much disinflationary slack.

Still, Fed officials are thought to be more worried about intensifying downside economic growth risks from housing and volatile financial markets than they are about long-term productivity trends.

Thus, the Fed is widely expected to lower the federal funds rate for the first time in more than four years when it meets Sept. 18, by 25 basis points to 5%.

Nonfarm business output surged 5% during the second quarter, the Labor Department said. Hours worked rose 2.3%.

Hourly compensation increased 4.1%. Real compensation, adjusted for inflation, fell 1.8%. Manufacturing productivity increased 1.8% last quarter, up slightly from the previous estimate.

Services Sector Expands

The Institute for Supply Management said its nonmanufacturing index, comprised primarily of the service-related firms that make up most of overall U.S. economic activity, had a reading of 55.8 in August, steady from the prior month. In June, it was 60.7. Economists had expected the August reading to be weaker, at 55.0.

In its report, the private research group found that the employment component fell to 47.9 from July's 51.7. Prices paid ebbed to 58.6 from 61.3.

However, there was a rise in the new orders index, to 57.0 from 52.8.

Jobless Claims Tumble

The number of U.S. workers filing new claims for jobless benefits tumbled last week, matching its biggest drop in almost seven months, easing worries about labor market conditions in the wake of recent housing and financial market woes.

Jobless claims slid 19,000 to 318,000 on a seasonally-adjusted basis in the week ended Sept. 1, the Labor Department said Thursday. The last time claims fell more was in the Feb. 17 week. They also fell 19,000 in late April. Claims for the Aug. 25 week were revised to 337,000 from 334,000.

There were no special factors in the latest week, a Labor Department analyst said.

Wall Street forecasts had called for only a 4,000 decline last week to 330,000, according to a Dow Jones Newswires survey.

Still, the four-week average -- which economists use to gauge underlying labor market trends -- rose by 500 last week to 325,750. That's the fifth-straight increase.

Investors are closely watching U.S. labor markets amid worries over credit availability triggered by problems in the mortgage market. Federal Reserve Chairman Ben Bernanke said last week that the Fed will eye the timeliest data to gauge whether financial market volatility is affecting the broader economy. Jobless claims are the most up-to-date indicator the government publishes, giving them a higher profile than usual.

Nonfarm payrolls expanded by just 92,000 in July and the unemployment rate ticked up, though it remains low by historical standards. The government releases August figures Friday. Many economists are bracing for another weak report following an estimate released Wednesday by ADP and Macroeconomic Advisers that signaled only 38,000 new private-sector jobs were created last month.

If labor markets and, in turn, consumption head lower it would intensify pressure on Federal Reserve officials to cut their main policy tool, the federal funds rate. Futures markets are pricing in multiple reductions in the fed funds rate starting this month to alleviate credit crunch worries and their potential economic effects. The Fed has already lowered the discount rate is charges banks that borrow directly from the Fed.

According to the Labor Department report Thursday, continuing claims for workers drawing unemployment benefits for more than a week rose 25,000 to 2,598,000 in the week ended Aug. 25, the latest week for which such data are available. That's the highest since mid February.

The insured unemployment rate was 2.0% in the Aug. 25 week, up 0.1 percentage point from the previous week, which was revised lower.

There were 33 states and territories reporting an increase in initial jobless claims for the Aug. 25 week, while 20 reported a decrease.

North Carolina had the biggest decrease, 2,125, thanks to fewer layoffs in trade, transportation equipment, textile and furniture industries. New York reported the sharpest increase, 3,181, due to layoffs in transportation and services industries.

--Laurence Norman contributed to this article.

Write to Brian Blackstone at brian.blackstone@dowjones.com
 

37.  Taxes By Walter Williams
Published: Aug. 29, 2007 12:21 a.m. MDT
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London's Times Online recently reported that, according to Vatican sources, Pope Benedict XVI is working on his second encyclical, a doctrinal pronouncement that will condemn tax evasion as "socially unjust." (See www.timesonline.co.uk/tol/comment/faith/article2237625.ece.) The pontiff will denounce the use of tax havens and offshore banking by wealthy individuals because it reduces tax revenues for the benefit of society as a whole.

Pope Benedict could benefit from a bit of schooling. Tax avoidance is legal conduct whereby individuals arrange their affairs so as to reduce the amount of income that is taxable. Tax avoidance can run the gamut of legal acts, such as investing in tax-free bonds, having employer-paid health plans, making charitable gifts, quitting a job and banking in another country. Tax evasion refers to the conduct by individuals to reduce their tax obligation by illegal means. Tax evasion consists of illegal acts such as falsely claiming dependents, income underreporting and padding expenses.

Pope Benedict's second encyclical puts him squarely in company with a group of thugs known as the Organization for Economic Cooperation & Development, an international bureaucracy headquartered in Paris and comprised of 30 industrial nations, mostly in Western Europe, the Pacific Rim and North America. One of its reports concluded that low-tax nations are bad for the world economy and identified 35 jurisdictions that are guilty of "harmful tax competition."

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In the OECD's view, harmful tax competition is when a nation has taxes so low that saving and investment are lured away from high-taxed OECD countries. The blacklist of countries they've identified as tax havens, having strong financial privacy laws, low taxes or zero taxes on certain activities, includes Panama, the Bahamas, Liberia, Liechtenstein, the Marshall Islands and Monaco.

The OECD demands these nations, as well as offshore financial centers in the Caribbean and the Pacific, in effect surrender their fiscal sovereignty and act as deputy tax collectors for nations like France and Germany. This would be a dream for politicians and bad news for the world's taxpayers; fortunately the hard work of the Center for Freedom and Prosperity has stymied the OECD's proposed tax cartel.

Pope Benedict shares some of the OECD's goals in their attack on low-tax jurisdictions. To support its welfare state, European nations must have high taxes. Government spending exceeds 50 percent of the GDP in France, Sweden, Germany and Italy. If Europeans, as private citizens and businessmen, relocate, invest or save in other jurisdictions, it means less money is available to be taxed to support their welfare states. The pope expresses the same concern when he says that tax havens reduce tax revenues for the benefit of society as a whole. Survival of an ever-growing welfare state requires an assault on jurisdictional tax competition.

There's a more fundamental question that I'd put to the pope: Should the Roman Catholic Church support the welfare state? Or, put more plainly, should the church support the use of the coercive powers of government to enable one person to live at the expense of another? Put even more plainly, should the church support the government's taking the property of one person and giving it to another to whom it doesn't belong? When such an act is done privately, we call it theft.

The pope might say that the welfare state reflects the will of the people. Would that mean the church interprets God's commandment to Moses "Thou shalt not steal" as not an absolute, but as "Thou shalt not steal unless you got a majority vote in parliament or congress"?

I share Pope Benedict's desire to assist our fellow man in need. But I believe that reaching into one's own pocket to do so is praiseworthy and laudable. Reaching into another's pocket to assist one's fellow man in need is despicable and worthy of condemnation.

Walter E. Williams is a professor of economics at George Mason University. Creators Syndicate Inc.
 

38. ECONOMIC FREEDOM OF THE WORLD
------------------------------------------------------------------------

Is capitalism contagious?  If so, to what extent; and how does it
spread?  Russell S. Sobel and Peter T. Leeson examine these
questions empirically in the "Economic Freedom of the World:
2007," published by the Cato Institute and in conjunction with
Canada's Fraser Institute.  The 2007 report discuss the
implications of these results for foreign policy and offers some
predictions about the future and spread of global economic freedom.

This year's report notes that economic freedom remains on the rise:
   o   The average economic freedom score rose from 5.1 (out of 10)
       in 1980 to 6.6 in the most recent year for which data are
       available.
   o   Of the 102 nations with scores in 1980 and in the most recent
       index, 90 recorded improvements in their economic freedom
       score, and just nine saw a decline.
   o   In this year's index, Hong Kong retains the highest rating
       for economic freedom, 8.9 out of 10, followed by Singapore,
       New Zealand, Switzerland, Canada, United Kingdom, and the
       United States.

The first Economic Freedom of the World Report, published in 1996, was
the result of a decade of research by a team which included several
Nobel Laureates and over 60 other leading scholars in a broad range of
fields, from economics to political science, and from law to
philosophy.  This is the 11th edition of Economic Freedom of the
World and this year's publication ranks 141 nations for 2005, the most
recent year for which data are available.

Source: James Gwartney and Robert Lawson with Russel S. Sobel and Peter
T. Leeson, "Economic Freedom of the World: 2007 Annual
Report," Cato Institute/Fraser Institute, September 4, 2007.

For text:
http://www.cato.org/pubs/efw/
For more on International Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=26
 

39. "FEEL GOOD" VS. "DO GOOD" ON CLIMATE
------------------------------------------------------------------------

The effect of the rising temperatures associated with global warming is
complicated to gauge. Hotter summer weather can indeed be fatal, but
there are a couple of confounding factors explained in a new book by
Bjorn Lomborg, professor at Copenhagen Business School. For instance:
   o   Winter can be deadlier than summer; about 7 times more deaths
       in Europe are attributed annually to cold weather than to hot
       weather -- a warmer planet would mean fewer
       temperature-related deaths in Europe and worldwide.
   o   In addition, just because there are hotter summers doesn't
       mean that more people die -- in fact, just the reverse has
       occurred -- the number of heat-related deaths in New York in
       the 1990s was only a third as high as in the 1960s.

The lesson here is not that global warming is a trivial problem.
 But the best strategy, Lomborg says, is to make the rest of the
world as rich as New York, so that people elsewhere can afford to do
things like shore up their coastlines and buy air conditioners.

Lomborg calls Kyoto-style treaties to cut greenhouse-gas emissions a
mistake because they cost too much and do too little too late. Even if
the United States were to join in the Kyoto treaty, he notes, the cuts
in emissions would merely postpone the projected rise in sea level by
four years: from 2100 to 2104.

Source: John Tierney, "'Feel Good' vs. 'Do Good' on Climate,"
New York Times, September 11, 2007.
For text:
http://www.nytimes.com/2007/09/11/science/earth/11tiern.html
For more on Global Warming Treaties:
http://eteam.ncpa.org/issues/?c=treaties
For more on Global Warming:
http://www.ncpa.org/sub/dpd/?Article_Category=32
 

40. How to Control China's "Export" of Air Pollution--Posner
http://www.becker-posner-blog.com/

Two weeks ago the New York Times published an article on pollution in China: "As China Roars, Pollution Reaches Deadly Extremes," Aug. 26, 2007, section 1, page 1. The point of interest is this: "Sulfur dioxide and nitrogen oxides spewed by China's coal-fired power plants fall as acid rain on Seoul, South Korea, and Tokyo. Much of the particulate pollution over Los Angeles originates in China" (p. 6). These effects are separate from China's growing contribution to global warming: it is possible that by the end of this year China will surpass the United States as the leading emitter of carbon dioxide into the atmosphere. Although China is making some efforts to curb pollution, its efforts are more likely to reduce the rate of growth of pollution than to reduce it from its current level, because of the continued rapid expansion of the Chinese economy, which includes a rapid growth in the number of vehicles using China's roads.

Global warming affects the entire earth, though unequally, but Chinese air pollution is "exported" mainly to a few nations, mainly Korea, Japan, and the western United States. Other differences between the carbon-emission and conventional air-pollution phenomena are that there is far more uncertainty about the magnitude of the threat posed by global warming, and far greater costs to arresting global warming, than in the case of China's external air pollution, and this enables one to see the problem of international control of air pollution in rather clearer terms than that of controlling carbon emissions.

It is a problem of externalities. The costs of Chinese air pollution to Koreans, Japanese, and Americans are not costs to China, and the benefits of abating this external pollution would not be benefits to China. But this description of the problem ignores the Coase theorem, one version of which is that if transaction costs are low, the market itself will internalize externalities and thus solve the externalities problem. We might think of the present legal regime as one in which China has a property right in the activities that give rise to pollution, or stated more precisely that its ownership of coal-fired power plants, gasoline-powered vehicles, and so forth carries with it a right to pollute. If so, then Korea, Japan, and the United States (assuming they are the only countries seriously affected by Chinese pollution) could persuade China to reduce its pollution by paying China an amount of money just slightly above what it would cost China to reduce its pollution "exports" to these countries to the level desired by the "victim" nations. This assumes that the cost of the negotiations, both among the victim nations and with China, would not be so great as to prevent a deal that made all the parties involved better off; but it is not clear why those costs should be particularly high. Nor is there a serious danger that China would increase its polluting activities in order to extort more money from the other nations, since pollution hurts the people of China far more than it hurts any other population (the pollution described in the Times article is grotesque in its magnitude and lethality).

The transaction would be efficient, but it would also bring about a transfer of wealth from what I am calling the victim nations to China. But this is a common kind of market event. A real estate developer who wanted to create a residential community on land adjacent to a funeral home, and feared that the funeral home's presence would depress house values by giving the occupants of the houses an unwelcome reminder of their mortality, could pay the funeral home to relocate.

And if buying off a polluter seems crass--"Greens" would denounce it for conveying the message that pollution is a legitimate byproduct of economic activity (a "commodity" for the victims of air pollution to buy from the polluter)--there are other means of inducing China to reduce air pollution. There are things that China wants from Korea, Japan, and the United States, and these countries can give China some of those things in barter for China's strengthening its enforcement of its existing pollution controls or adopting and enforcing newer, more stringent ones.

An alternative would be to negotiate an international agreement by which China and all other nations surrendered control over their pollution to an international environmental protection agency. But the transaction costs would be prohibitive, in part because of extreme uncertainty about the policies that the agency would adopt. Nations do not surrender their sovereignty lightly.

Posted by Richard Posner at 10:14 PM | Comments (6) | TrackBack (0)
China's Air Pollution-Becker
 

It is more or less inevitable that China's economy will spew out a lot of pollution, given its extraordinary rate of growth for over 20 years, and the abundant supplies of coal that fuel its power generation. The important question raised by Posner is what, if anything, will induce China to cut its pollution, including the pollution that spreads internationally to its eastward Asian neighbors and countries in the western hemisphere, especially Canada and the United States.

Posner emphasizes the potential for international collaboration because the harm to these affected countries will tend to exceed the cost to China from cutting its pollution. China is imposing a burden on these other nations that it does not fully incorporate into its decisions about which fuels to use, how to invest in scrubbing and sequestering technologies and equipment that reduce the amount of pollutants that its plants use, its taxation of gasoline that discourage driving and more efficient cars, and the many other ways to reduce pollution. Since greater pollution-reduction efforts would lower the growth rate of its output, the harm to other nations would not enter into its policy calculations unless forced to by threats of economic retaliation, or induced to do so by various forms of intercountry compensation and cooperation.

The New York Times article referred to by Posner indicates that opposition to pollution is also growing rapidly in China itself for reasons that have little to do with protests of other countries. When countries start developing rapidly, their first concern is greater resources for consumption and investment, for they do not believe they can afford to take extensive measures to control air pollution if that slows down their growth out of poverty. As they get richer, however, concerns about the level and growth of various types of pollutants get magnified. As economies continue to develop, their citizens exert greater pressure on governments to improve air and water quality. Governments generally respond by regulating and taxing more extensively the omission of pollutants.

The result typically is that air, water, and other kinds of pollution at first rise sharply with economic development, and then fall about equally sharply as development proceeds still further. This inverted U-shaped relation between a country's level of pollution and its level of GDP per capita is called the "Environmental Kuznets Curve" after the Nobel prize-winning economist, Simon Kuznets. He had established such an inverted U-shaped relation between income inequality within a country and its level of per capita GDP, and researchers discovered about 20 years ago that the same type of inverted U relation holds for environmental damage, such as particulates in the air. In fact, the two Kuznets relations are not independent since one way to reduce inequality in measures of full income that include environmental damage is to reduce the degree of pollution.

Prior to the discovery of this U-shaped environmental relation, the general opinion was that environments were inevitably damaged more as industrialization increased and economies developed. That is still a common view among those unfamiliar with the evidence. To be sure, the full evidence indicates that no single relation between environmental effects and economic development fits all pollutants in all countries. For example, theory predicts that domestic opposition would make governments more responsive to local pollutants of air and water, and less responsive to global pollution, such as emission of greenhouse gases. In fact, the U-shaped relation does seem to hold better for local pollutants.

These Kuznets-type relations are beginning to take hold in China, as judged from the growing complaints about various types of pollution, and discussions by scientists and government officials about steps to take to respond positively to these complaints. This reaction to internal complaints may not be sufficient to satisfy its neighbors in Asia and in the Western hemisphere since as I mentioned, different types of pollution operate within and between countries. Moreover, China's richer neighbors would be more sensitive to pollution than the poorer Chinese are. However, as China continues to develop, the complaints due to "internal" externalities will begin to interact more with the complaints due to the "external" externalities imposed on other countries. The combination of internal and external complaints should push China even faster along reductions in environmental damage than has been typical in the past when countries responded mainly only to internal complaints about pollution levels.

Posted by becker at 09:32 PM | Comments (4)