385readings(X) Spring 2011
- WSJ
January 7, 2011, 9:46 PM ET
Economists
Say Europe Faces Low Growth for a Decade
By Luca Di
Leo
Europe’s
currency project will probably survive, but the price paid by the euro zone area
is likely to be dismal economic growth for the next
decade.
The
verdict comes from economists gathered here from around the world for the annual
meetings of the American Economic
Association, which run Jan. 7 to Jan. 9.
“The
most probable scenario is that Europe will just muddle through,” said
Pascal
Petit, from the Centre d’Economie de Paris Nord of
the University of Paris.
With
European countries forced to take austerity measures to stem market fears about
surging public debt levels and a central bank focused more on controlling
inflation than boosting growth, economists believe the 17-country area cannot
escape continued low growth.
The
“catastrophic” scenario outlined by Petit, in which the euro disintegrates, is
unlikely because the costs would be too high for all the countries involved. An
“optimistic” outcome, in which Europe overhauls its institutions and allows for
more fiscal unity, also has a small chance of making it because better-off
countries like Germany don’t want to pay for the fiscal profligacy of countries
like Greece.
Last
year, high sovereign debt levels in Greece and a banking crisis in Ireland
forced both countries into tapping a trillion-dollar rescue fund set up by the
European Union, with help from the International Monetary Fund. Some analysts
fear Portugal and even Spain–the euro bloc’s fourth-largest economy–could
stumble soon.
Both
countries are expected to have to come to market with big bond deals. Spain’s
central and regional governments, for example, will need to raise roughly EUR200
billion in 2011 and the country’s banks an additional 90 billion euros,
according to Moody’s Investors Service.
Although
there could be renewed tensions, European leaders are expected to find ways to
ensure the common currency survives, because giving up would just be too costly.
It would undermine 60 years of political efforts to build a united and peaceful
Europe, and could cause unpredictable economic and financial disruption in a
region whose trade and banking systems have become deeply intertwined since the
euro was created in 1999.
“The
euro is more than just a currency. A united Europe is the guarantor for our
peace and our freedom. Germany needs Europe and our common currency, for our own
good, and for coping with global challenges,” German Chancellor Angela Merkel
said in her televised address to the nation marking the start of the New
Year.
A.G.
Malliaris, an
economics professor at the Loyola University Chicago, sees only a 5.0% chance
that the euro won’t make it. University of Cambridge economist John Eatwell also
believes Europe’s single currency will eventually scrape through–even though the
cost will be dismal economic growth for years to come.
Raising
the Red Flag on Red Capitalism
Scratch
the surface and China's economic model is less impressive than it
looks.
The
conventional wisdom, propagated by senior businessmen, pundits and policy
makers, holds that the 21st century is China's for the taking. The wise leaders
in Beijing, we're led to believe, sailed through the financial crisis with deft
management. They benefit from a long-term view that eludes their American and
European counterparts. Growth is steaming along at nearly 10% and the global
slowdown barely registered. The counterpoint, sometimes implicit and sometimes
explicit, is that China's rise comes at the cost of America's
decline.
So
pervasive has this view become that any effort to examine whether it's actually
true comes as a breath of fresh air. "Red Capitalism" is such a work.
Authors Carl E. Walter and Fraser J.T. Howie, both investment bankers, argue
that China isn't so different from other economies nor so immune from normal
economic laws as cheerleaders argue. An examination of the
financial system—or "how China's political elite manages money and the country's
economy," as the authors put it—offers a useful lens through which to view much
broader issues.
A
striking observation is that foreigners (and perhaps Chinese policy makers too)
have become so entranced by the large amounts of money flowing through the
economy that they often forget to follow it. Noting only that China has produced
six of the world's 15 largest initial public offerings since 2007 might create
the impression that the country is developing a capitalistic financial market
capable of intermediating its vast savings into a productive corporate sector.
Last year, IPOs by Chinese companies reached $105 billion, 37% of global IPO
volume.
What
gets forgotten is just how "public" these offerings are—for IPOs within China,
the majority of the investment capital comes from other state-owned companies
rather than the private sector. And in an environment where regulators carefully
manage the supply of new shares coming to market, it helps to be a state-owned
company if you want to secure permission to list. Hence the stock market that's
presented as evidence of China's capitalist transformation is in reality a
merry-go-round for circulating money from one state-owned enterprise to
another.
View
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Red
Capitalism
Carl
E. Walter and Fraser J.T. Howie
Wiley, 250 pages, $29.95
The
authors return again and again to the notion that while Beijing has embraced the
form of market-based reform, the substance remains elusive. This has many
implications. One relates to who's in charge of the Chinese economy. If reforms
truly were leading to a more market-based system, one would expect a growing
market for corporate control resulting from a wider dispersal of ownership.
China would be witnessing more contested board elections, hostile takeover
attempts and the like. This has not happened. Instead, the management of listed
companies continues to be selected based on political criteria by China's
Communist Party. Minority shareholders get no say, merely a ticket to
ride.
Then
there's that other crucial ingredient of a modern economy (recent financial
crisis notwithstanding), the debt market. "Like highways, new airport terminals
or CCTV's ultra-modern office building in Beijing, it exists because the Party
believes bond markets are a necessary symbol of economic
modernity," Messrs. Walter and Howie
write.
Yet
dig a little deeper and it becomes clear that this market is not allowed to
perform its traditional role of pricing risk to facilitate the efficient flow of
capital. It would be almost heretical for Chinese banks to ascribe riskiness to
other state firms' debt, so the bond market simply doesn't attempt to price
risk.
All
well and good, but then again Beijing's current claim is that it is not trying to be like the
Western capitalists—who it says failed so miserably to avert the financial
crisis. Is it possible that Beijing's model, whatever its precise nature, will
work?
It has
certainly been profitable, up to a point, for foreigners. Chinese IPOs have no
trouble attracting foreign investors keen to bet on the country's growth
story. And
Western banks, such as those that employ Messrs. Walter and Howie, have made
millions upon millions of dollars piecing together bits of Chinese ministries
into "corporations" to list.
Yet
longer-term viability is another matter. China is not "a market economy, but a
carefully balanced social mechanism built around the particular interests of the
revolutionary families who constitute the political elite," the authors
conclude. They
liken the economy to a "family-run business," both figuratively, given its
insularity, and literally, given the role of well-connected scions. As with any
family business, that can be a blessing—if the "patriarch" is an expert in the
field—or a curse—if an uninterested or unintelligent heir takes over. And the
switch from one mode to the other can happen very
suddenly.
How
well the current ruling "family" understands the business is an open question,
but there are signs it may not. "It appears the Party mistakenly believes its
own advertising about its banks being rich and strong," Messrs. Walter and Howie
write. "The absence of a strong leader is a weakness that allows the special
interest groups to take advantage." The signs are all around us, and especially
in Beijing's recent propensity for arrogance on the world economic
stage.
That
could be a ruinous mistake. The authors fret over unacknowledged
bad loans piling up within the system (which implies leaders have been rampantly
misallocating capital), and they estimate total public debt of about 76% of GDP,
a very high figure for a developing country. With a rapidly aging population
(more than 200 million people will be over the age of 65 by 2020) and weak
social safety net, China can ill afford a banking crisis any time in the next
decade. If and when one comes, Beijing could rue the many days when it resisted
creating a more resilient, genuinely capitalist
market.
Messrs.
Walter and Howie will do little to dissuade the vast majority of foreign
businessmen who are bullish on China. Nor are they likely to awaken its
financial stewards to take action on the brewing problems below the surface.
Perhaps China's cheerleaders are correct that China really is different. But
after reading "Red Capitalism," and given the long, failed history of other
claims to economic exceptionalism, is that a prudent bet to
make?
Mr.
Carew is a former Asia M&A reporter for The Wall Street
Journal.
The
$6.50 Trade War
A few
facts about China trade for the new Congress to
consider.
No
sooner has a new Congress arrived in Washington than the anti-China-trade
rhetoric has started anew. Senator Charles Schumer, whose Democrats still
control his chamber, has said he plans to re-introduce legislation to punish
China for its "currency manipulation." Tim Murphy, a Pennsylvania Republican,
may push similar legislation he co-sponsored in the past, Reuters
reports.
Legislative
efforts face an uphill climb. Republican leaders in the House, including Speaker
John Boehner, have voted against China currency bills in the past. But that
doesn't make the anti-China fervor in parts of Washington irrelevant. Quite the
opposite.
Leaders
face many decisions on how best to put the American economy back on a growth
track. To the extent that Congressional protectionists will present Chinese
exporters as a threat to American prosperity despite all the other more pressing
problems America faces, the argument over China's exchange-rate policy is a
distraction the economy can't afford.
***
How
much of a distraction is suggested by a paper out last month from the Asian
Development Bank Institute. Economists Yuqing Xing and Neal
Detert examined the supply chain of the iPhone to reach a surprising conclusion:
Technically, the iPhone contributes to America's trade deficit with
China.
The
basic explanation is that data on bilateral trade are calculated assuming that
the entire value of a traded good is created in the exporting country. If that
ever made sense, it certainly doesn't in a global economy marked by increasingly
complex supply chains.
In the
case of the iPhone, Messrs. Xing and Detert note that the device was invented in
America by an American company, Apple. The components are manufactured, either
inside or out of China, by companies based in several other countries.
The only part of the
entire process that is unambiguously "Chinese" is the final assembly—a process
that, in the estimation of Messrs. Xing and Detert, adds only $6.50 to the
$178.96 wholesale value of an iPhone.
View
Full Image
Associated
Press
Yet
that entire $178.96 value ends up attributed to China in the calculation of
trade statistics. As a consequence, the iPhone contributed nearly $1 billion to
China's bilateral trade surplus with America in 2008, and nearly $2 billion in
2009, the authors of this study conclude. If the trade data had been based
solely on the $6.50 cost of assembling each unit, the iPhone would have added
only $34 million and $73 million in those years, respectively, to China's
surplus.
The
ADBI study ought to be required reading on Capitol Hill. Most importantly, it
raises the question of how much anyone really knows about what America's trade
with China is. Critics
of trade data, including us, have long asserted that bilateral statistics are
misleading at best. As the bilateral trade deficit with China grew, deficits
with South Korea, Taiwan and Singapore declined, confirming that China's
comparative advantage lies in the assembly into finished products of components
manufactured around the region, due to its low-wage, low-skilled
labor.
The
main potential flaw in the report is that Messrs. Xing and Detert may not have
been able to account for the source of some of the inputs. While many of the
companies that supply iPhone components are American, Japanese, Korean or
German, those companies may in turn manufacture some of the components in China.
Yet
even so, those companies would have their own mix of intellectual property
developed outside China. It may be impossible ever to say precisely how much
value China adds to the iPhone, or to any other product. Lawmakers should think
twice about basing important policy decisions on such incomplete
data.
Crucially, the trade data also miss the broader
economic impact of "imports" like the iPhone. The benefits are clear and large,
though hard to quantify precisely. First there are the gains to Apple itself.
The ADBI study examines only the composition of the $178.96 manufacturing cost
of the iPhone. The handsets typically retail for as much as 50% to 100% more
than that. The difference consists of the value of Apple's intellectual property
in having invented the iPhone, and also the value of marketing in persuading
consumers to buy the hot new thing.
The
ADBI study doesn't break down that figure, but others have performed similar
research in the past. Economists at the Personal Computing Industry Center
attempted in 2007 to estimate who profits from the iPod and how. They estimated
that for an iPod retailing for $299, retailer and distributor margins account
for $75 and Apple's own margin accounted for $80. In other words, more than half
the retail price accrued to American companies—and their employees and
shareholders—in some form.
None
of these studies accounts for another huge way such imports drive growth by
spurring innovative new businesses. Telecom companies like AT&T and, now,
Verizon have profited by being able to offer data services to iPhone-toting
consumers. Countless programmers around the world are now devising applications
for the iPhone and iPad, which offer many businesses a convenient new way to
reach potential customers.
***
All
of which illustrates the basic truth that trade has
always
benefited
the American economy.
Congress can't afford to forget that, no matter how much Members would like to
scapegoat Chinese factories for Washington's own policy
mistakes.
So
rather than launching a trade war with China over $6.50, here's a better agenda
for the 112th Congress: Focus on policies that will help Americans and U.S.
companies better capitalize on a global economy. That includes better tax
policies to reward investment and entrepreneurship; environmental regulation
that does not discourage manufacturing in America when it would make business
sense; health-care policies that don't deter hiring; and free trade to let
Americans import goods like iPhones that will spur new
growth.
So
Much For Cuban Economic Reform
The
Communist Party affirms that 'central planning and not the market will be
supreme.'
With
his characteristic intellectual wit, Cuban writer Carlos Alberto Montaner
defines communism as "the time countries waste between capitalism and
capitalism."
By
this account, the Cuban government is now in its 52nd year of wasted time
waiting for prosperity.
Much
has been made of economic reforms promised by Raúl Castro, including by the
Cuban president himself. "We can either rectify the situation," Gen. Castro
recently stated, "or we will run out of time walking on the edge of the abyss,
and we will sink." But one look at the economic platform for the VI Congress of
the Communist Party of Cuba, now scheduled for April 2011, and it's clear
nothing much will change.
The
"Draft Guidelines for Economic and Social Policy"—a 32-page document that
proposes to chart Cuba's economic future—affirms that "the new economic policy
will correspond with the principle that only socialism [i.e., Cuban communism]
is capable of conquering the difficulties."
The
document persistently emphasizes Gen. Castro's militaristic themes of increased
efficiency, discipline and control. It insists, for example, on setting prices
according to the dictates of central planning. It also insists that any new
"nonstate" (private sector) economic activities not be allowed to lead to the
"concentration of property" (that is, the accumulation of
wealth). There is no
interest in introducing the market socialism of a Deng Xiaoping, who famously
told China's people in 1984 that "to get rich is glorious."
It is
not surprising that Raúl and his fellow generals are more comfortable with the
chain of command of a centrally planned economy than with the vicissitudes of a
market economy. More
baffling is their failure to understand core principles of economic
development.
View
Full Image
Associated
Press
Raul Castro,
president of Cuba, and commander of its armed forces, will affirm that "central
planning and not the market will be supreme."
After
much debate and with trepidation, the Cuban economic "reformers" have
decided to permit the 500,000 to 1,300,000 Cubans being fired from state jobs to
solicit permits to become self-employed in certain activities.
It is instructive to examine a handful of the 178 trades and professions that
are supposed to help rescue the economy.
Trade
No. 23 will be the purchase and sale of used books.
Trade 29 is an
attendant of public bathrooms (presumably for tips); 34 is a palm-tree pruner
(apparently other trees will still be pruned by the state). Trade 49 is covering
buttons with fabric; 61 is shining shoes; 62 is cleaning spark plugs; 69 is a
typist; 110 is the repair of box springs (not to be confused with 116, the
repair of mattresses). Trade 124 is umbrella repairs; 125 is refilling of
disposable cigarette lighters; 150 is fortune-telling with tarot cards; 156
is being a dandy (technical definition unknown, maybe a male escort?); 158 is
peeling natural fruit (separate from 142, selling fruit in
kiosks).
This
bizarre list of permitted private-sector activities will not drive economic
development. But it does reveal the regime's totalitarian mindset.
Here Cuban
technocrats foreshadow the degree of control they intend to impose by listing
the legal activities with specificity. These are not reforms
to unleash the market's "invisible hand" but to reaffirm the Castros' clenched
fist. One does not have to be an economist to appreciate that the refilling of
disposable cigarette lighters, for example, will not contribute in any measure
to economic development.
In his
economic dream land of surrealist juxtapositions, Raúl believes that improved
state management is the way to save the communist system. The desire for control
by the military and the Communist Party of every aspect of Cuban life is
antithetical to the individual liberty and empowerment necessary to bring about
an economic renaissance.
Mr.
Azel, a senior scholar at the Institute for Cuban and Cuban-American Studies,
University of Miami, is author of "Mañana in Cuba" (Authorhouse, 2010).
Developing
Nations Fight Inflation
Price
Jumps, Especially on Food, Threaten Growth Engines ; A Contrast With
West
Inflation
is spreading across the world's largest emerging nations, leaving a noisy rattle
in what have been the engines of global growth in recent
years.
Central
banks in Brazil, Russia, India and China, the fast-growing so-called BRIC
nations now responsible for nearly a fifth of global economic activity, have all
raised interest rates in recent weeks, and are testing more exotic measures to
stanch rising prices, especially for food: India and Russia banned exports of
onions and wheat, respectively, while China has promised price controls on items
such as cooking oil.
View
Full Image
Reuters
A farmer transports
vegetables on an improvised tricycle toward a market in Kolkata Thursday.
India's food inflation has picked up recently.
Brazil
said Friday that its 2010 inflation rate had risen to 5.9%, its fastest rate in
six years,
raising the chances the nation will push its already sky-high interest rates
even higher, potentially hampering growth.
To be
sure, Brazil's
single-digit inflation rate is a universe away from the hyperinflation it
suffered in the early 1990s. And some analysts say fears of an
emerging-market inflation spiral are overstated, with current inflation rates
still below where they were when prices peaked before the financial crisis in
2008.
Still,
the inflation trend is creating tricky policy headaches for officials from
Beijing to New Delhi, including fears that rising food prices in these mostly
poor nations may jeopardize social stability.
"Inflation
is one of the major risks for this year," says Nicholas Kwan, economist for
Standard Chartered in Hong Kong.
The
accelerating price gains in the developing world contrast sharply with low
inflation rates in Europe and the U.S. and persistent price declines in Japan.
The divergence is partly a byproduct of the stronger economic recoveries
achieved by emerging nations compared with sluggish growth in the
West.
Such
diverging economic fortunes are complicating inflation-fighting efforts in the
developing world, economists say.
Leaders
in Brazil and other countries complain that the U.S. Federal Reserve's decision
to pump $600 billion into the economy promotes commodity inflation and asset
bubbles by weakening the dollar. U.S. Federal Reserve Chairman Ben Bernanke said
Friday the stimulus measure wasn't adding to inflation.
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A
better-than-expected recovery in the U.S. could fuel inflation by sending a jolt
of demand through the global supply chain, causing economies already running at
full capacity to overheat, economists say.
"We
are arriving at a juncture where policy requirements in emerging economies will
be overwhelmed by advanced-economy policies," said Cornell University economist
Eswar Shanker Prasad a senior fellow at the Brookings
Institution.
Brazil
illustrates the case. The South American giant has set some of the world's
highest interest rates in order to keep a lid on inflation as economic growth
nears 7% and amid rising government spending to lift the poor.
The
10.75% rate has attracted a flood of speculative investment from the U.S. and
Japan, where monetary policy is loose in order to spur growth.
As a
result, the
Brazilian real has soared more than 35% since 2009 against the U.S.
dollar, making exports less competitive and making domestic
manufacturers vulnerable to less expensive imports. To avoid raising rates
further, Brazil is trying other measures such as restricting credit by raising
bank reserve requirements.
The
issue is a major test for the brand-new government of Dilma Rousseff. Though Ms.
Rousseff campaigned on expanded welfare spending, she is now contemplating
politically risky spending restraints to shrink deficits and cool the
economy.
In
developing countries, price rises, especially for food, can have a big impact.
Because incomes are lower than in the developed world, food and energy make up
substantial part of household spending—and most emerging-market inflation
measures. Food prices
globally hit an all-time high in December, according to a United Nations
index.
And
there are signs that the increase in food prices is not abating as some had
expected, and that price increases are creeping into the broader part of some
economies. China's 5.1%
consumer-price inflation rate in November was driven mostly by food prices,
which rose 11.7%. But the so-called core inflation rate, which excludes energy
and food, rose as well, up 1.9% from a year
earlier
China
has introduced a raft of measures to tamp prices, including two interest-rate
increases, a slightly stronger currency, tighter bank lending, price controls,
and efforts to clamp down on illegal speculation in food. Chinese officials have
signaled they will continue to tighten to tame inflation.
Kong
Ong, Hong Kong owner of Headquarters Industrial Ltd., which makes more than a
million hats a year on the mainland for export to the U.S. and Germany, says
rising prices material prices and wages are concerns. Cotton, which is 30-40% of his costs,
hit record highs last year. Prevailing wages have risen and he expects them to
go up again this year. And living costs are keeping migrant workers closer to
home.
"When
the inflation rate is too high, workers don't want to come to the big cities
because the big cities the living cost is too high," he says. In India, where high food prices
drove inflation for much of 2010, expectations had been that a solid harvest for
rice and other staples would ease the pressure. But the latest government data
show the food situation hasn't been resolved and food-price inflation has jumped
in India of late, reaching 18% in the week ended Dec. 25,
according to figures released this week. Economists say the Reserve Bank of
India, after raising interest rates six times in 2010, will almost certainly
tighten again when it meets Jan. 25 for a regular policy
meeting.
India's
economy is expected to grow by 8.75% in the year ending March 31, according to
an International Monetary Fund report issued Thursday. But
inflation is threatening to undermine the economic gains for hundreds of
millions of poor and less well-off Indians.The government has scrambled to take
measures to alleviate the food-price increases, for instance banning the export
of onions.
What's
more, officials across emerging markets are concerned that price increases may
erode the hard-won credibility of central banks and lead to increased inflation
expectations among locals.
Amrith
Mathur, a 36-year-old software engineer buying vegetables at a wholesale market
in New Delhi Friday morning, says the price rises have virtually canceled out
salary increases.
"I got
a paltry increment of 5% in salary after a gap of two years this year, but
thanks to the prices of essential commodities which have skyrocketed, the rise
is as good as nil," he said. "How can the government achieve their tall growth
target of 9%-10% if the people's spending power is getting lesser and lesser by
the day," he said.
In
Russia, summer droughts sent wheat prices skyrocketing and undermined the
government's goal of keeping inflation in the 6%-7% range in
2010.
Russia reported this week that consumer prices rose a faster-than-expected 1% in
December from November and 8.7% over the past year, raising expectations for
interest-rate increases in the coming months.
Other
large emerging economies also have seen prices rise faster than expected in
recent months. Peru surprised with a rate increase this week, and Mexico
reported faster-than-expected inflation of 4.4%. Thailand is expected to raise
interest rates next week. South Korea has also said it will unveil a package of
policies to tackle rising prices next week.
Indonesia's
consumer-inflation rate hit 7% in December, a 20-month high and the fourth time
in six months prices outpaced the central bank's 4%-6% target.
The
central bank has yet to raise interest rates since the recovery began in 2009,
figuring higher rates will have little effect on food
prices.
—Ira
Iosebashvili and Robb Stewart contributed to this article.
Write
to Alex
Frangos at alex.frangos@wsj.com, John
Lyons at john.lyons@wsj.com and Vibhuti
Agarwal at vibhuti.agarwal@wsj.com
«
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Hungary Joins the Flat Tax Club
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Don’t Blame Ireland’s
Mess on Low Corporate Tax Rates
November
18, 2010 by Dan Mitchell
Ireland
is in deep fiscal trouble and the Germans and the French apparently want the politicians in
Dublin to increase the nation’s 12.5 percent corporate tax rate as
the price for being bailed out. This is almost certainly the cause of
considerable smugness and joy in Europe’s high-tax nations, many of which have
been very resentful of Ireland for enjoying so much prosperity in recent decades
in part because of a low corporate tax burden.
But is
there any reason to think Ireland’s competitive corporate tax regime is
responsible for the nation’s economic crisis? The answer, not surprisingly, is
no. Here’s a chart from one of Ireland’s top economists, looking at taxes and
spending for past 27 years. You can see that revenues grew rapidly, especially
beginning in the 1990s as the lower tax rates were implemented. The problem is
that politicians spent every penny of this revenue windfall.
When
the financial crisis hit a couple of years ago, tax revenues suddenly plummeted.
Unfortunately, politicians continued to spend like drunken sailors. It’s only in
the last year that they finally stepped on the brakes and began to rein in the
burden of government spending. But that may be a case of too little, too
late.
The
second chart provides additional detail. Interestingly, the burden of government
spending actually fell as a share of GDP between 1983 and 2000. This is not
because government spending was falling, but rather because the private sector
was growing even faster than the public sector.
This
bit of good news (at least relatively speaking) stopped about 10 years ago.
Politicians began to increase government spending at roughly the same rate as
the private sector was expanding. While this was misguided, tax revenues were
booming (in part because of genuine growth and in part because of the bubble)
and it seemed like bigger government was a free lunch.
But
big government is never a free lunch. Government spending diverts resources from the productive sector of the
economy. This is now painfully apparent since there no longer is a
revenue windfall to mask the damage.
There
are lots of lessons to learn from Ireland’s fiscal/economic/financial crisis.
There was too much government spending. Ireland also had a major housing bubble.
And some people say that adopting the euro (the common currency of many European
nations) helped create the current mess.
The
one thing we can definitely say, though, is that lower tax rates did not cause
Ireland’s problems. It’s also safe to say that higher tax rates will delay
Ireland’s recovery. French and German politicians may think that’s a good idea,
but hopefully Irish lawmakers have a better perspective.
i
http://www.cato-at-liberty.org/five-lessons-from-ireland/
Posted
by Daniel J. Mitchell
The
news is going from bad to worse for Ireland. The Irish Independent is reporting that the Swiss
Central Bank no longer will accept Irish government bonds as collateral. The
story also notes that one of the world’s largest bond firms, PIMCO, is no longer
purchasing debt issued by the Irish government.
And
this is happening even though (or perhaps because?) Ireland received a big
bailout from the European Union and the International Monetary Fund (and the IMF’s involvement means American taxpayers are
picking up part of the tab).
I’ve
already commented on Ireland’s woes, and opined about similar problems afflicting the rest of
Europe, but the continuing deterioration of the Emerald Isle deserves
further analysis so that American policy makers hopefully grasp the right
lessons. Here are five things we should learn from the mess in
Ireland.
1.
Bailouts Don’t Work —
When Ireland’s government rescued depositors by bailing out the nation’s three
big banks, they made a big mistake by also bailing out creditors such as
bondholders. This dramatically increased the cost of the bank bailout and
exacerbated moral hazard since investors are more willing to make inefficient
and risky choices if they think governments will cover their losses. And because
it required the government to incur a lot of additional debt, it also had the
effect of destabilizing the nation’s finances, which then resulted in a second
mistake — the bailout of Ireland by the European Union and IMF (a classic case
of Mitchell’s Law, which occurs when one bad
government policy leads to another bad government policy).
American
policy makers already have implemented one of the two mistakes mentioned above.
The TARP bailout went way beyond protecting depositors and instead gave unnecessary handouts to wealthy and sophisticated
companies, executives, and investors. But something good may happen
if we learn from the second mistake. Greedy politicians from states such as
California and Illinois would welcome a bailout from Uncle Sam, but this would
be just as misguided as the EU/IMF bailout of Ireland. The Obama Administration
already provided an indirect short-run bailout as part of the so-called
stimulus legislation, and this encouraged states to dig themselves
deeper in a fiscal hole. Uncle Sam shouldn’t be subsidizing bad policy at the
state level, and the mess in Europe is a powerful argument that this
counter-productive approach should be stopped as soon as
possible.
By the
way, it’s worth noting that politicians and international bureaucracies behave
as if government defaults would have catastrophic consequences, but Kevin Hassett of the American Enterprise Institute
explains that there have been more than 200 sovereign defaults in the past 200
years and we somehow avoided Armageddon.
2.
Excessive Government Spending Is a Path to Fiscal Ruin — The
bailout of the banks obviously played a big role in causing Ireland’s fiscal
collapse, but the government probably could have weathered that storm if
politicians in Dublin hadn’t engaged in a 20-year spending
spree.
The
red line in the chart shows the explosive growth of government spending. Irish
politicians got away with this behavior for a long time. Indeed, government
spending as a share of GDP (the blue line) actually fell during the 1990s
because the private sector was growing even faster than the public sector. This
bit of good news (at least relatively speaking) stopped about 10 years ago.
Politicians began to increase government spending at roughly the same rate as
the private sector was expanding. While this was misguided, tax revenues were
booming (in part because of genuine growth and in part because of the bubble)
and it seemed like bigger government was a free lunch.
Eventually,
however, the house of cards collapsed. Revenues dried up and the banks failed,
but because the politicians had spent so much during the good times, there was
no reserve during the bad times.
American
politicians are repeating these mistakes. Spending has skyrocketed during the
Bush-Obama year. We also had our version of a financial system bailout, though
fortunately not as large as Ireland’s when measured as a share of economic
output, so our crisis is likely to occur when the baby boom generation has
retired and the time comes to make good on the empty promises to fund Social
Security, Medicare, and Medicaid.
3. Low
Corporate Tax Rates Are Good, but They Don’t Guarantee Economic Success if other
Policies Are Bad —
Ireland used to be a success story. They went from being the “Sick Man of
Europe” in the early 1980s to being the “Celtic Tiger” earlier this century in
large part because policy makers dramatically reformed fiscal policy. Government
spending was capped in the late 1980 and tax rates were reduced during the
1990s. The reform of the corporate income tax was especially dramatic. Irish
lawmakers reduced the tax rate from 50 percent all the way down to 12.5
percent.
This
policy was enormously successful in attracting new investment, and Ireland’s
government actually wound up collecting more corporate tax revenue at the lower
rate. This was
remarkable since it is only in very rare cases that the Laffer Curve means a tax
cut generates more revenue for government (in the vast majority of cases, the
Laffer
Curve simply means that changes in taxable income will have revenue effects that
offset only a portion of the revenue effects caused by the change in tax
rates).
Unfortunately,
good corporate tax policy does not guarantee good economic performance if the
government is making a lot of mistakes in other areas. This is an apt
description of what happened to Ireland. The silver lining to this sad story is
that Irish politicians have resisted pressure from France and Germany and are
keeping the corporate tax rate at 12.5 percent. The lesson for American policy
makers, of course, is that low corporate tax rates are a very good idea, but
don’t assume they protect the economy from other policy
mistakes.
4.
Artificially Low Interest Rates Encourage Bubbles — No
discussion of Ireland’s economic problems would be complete without looking at
the decision to join the common European currency. Adopting the euro had some
advantages, such as not having to worry about changing money when traveling to
many other European nations. But being part of Europe’s monetary union also
meant that Ireland did not have flexible interest rates.
Normally,
an economic boom drives up interest rates because the plethora of profitable
opportunities leads investors demand more credit. But Ireland’s interest rates,
for all intents and purposes, were governed by what was happening elsewhere in
Europe, where growth was generally anemic. The resulting artificially low
interest rates in Ireland helped cause a bubble, much as artificially low
interest rates in America last decade led to a bubble.
But if
America already had a bubble, what lesson can we learn from Ireland? The simple
answer is that we should learn to avoid making the same mistake over and over
again. Easy money is a recipe for inflation and/or bubbles. Simply stated,
excess money has to go someplace and the long-run results are never pleasant.
Yet Ben Bernanke and the Federal Reserve have launched
QE2, a policy explicitly designed to lower interest rates in hopes of
artificially juicing the economy.
5.
Housing Subsidies Reduce Prosperity —
Last but not least, Ireland’s bubble was worsened in part because politicians created an extensive system of preferences
that tilted the playing field in the direction of real estate. The
combination of these subsidies and the artificially low interest rates caused
widespread malinvestment and Ireland is paying the price
today.
Since
we just endured a financial crisis caused in large part by a corrupt system of
housing subsidies for Fannie Mae and Freddie Mac, American policy makers should
have learned this lesson already. But as Thomas Sowell sagely observes, politicians are
still fixated on somehow re-inflating the housing bubble. The lesson they should
have learned is that markets should determine value, not
politics.
Daniel
J. Mitchell
• January
5, 2011 @ 12:47 pm
Filed under: Finance,
Banking & Monetary Policy; Government
and Politics; International
Economics and Development; Tax
and Budget Policy
Tags: bailouts,
big
government, bubbles,
corporate
income tax, Easy
Money, Euro,
government
spending, Housing,
imf,
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curve, Malinvestment,
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policy, subsidies
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Elinor
Ostrom and Oliver Williamson win this year’s Nobel prize for economics
Economics
focus
Oct
15th 2009 | from PRINT EDITION The Economist
Illustration
by Jac Depczyk
BUILDING
economic models usually involves stripping the world down to its most essential
features. But simple theories often struggle to explain the way things really
work. Elinor Ostrom of Indiana University and Oliver Williamson of the
University of California at Berkeley, the winners of this year’s Nobel prize for
economics, have both been honoured for recognising this complexity. Their
research provides insights into economic institutions that play crucial roles in
the real world, but to which economists have not paid enough attention.
In the
case of Mr Williamson, that institution is the company. With hierarchical
decision-making processes based on rules and authority, firms ought to be less
efficient than decentralised market exchange based on relative prices, which is
how standard economic theory assumes that transactions occur. So why do
companies exist at all? This question was first addressed in 1937 by Ronald
Coase, the winner of the 1991 Nobel prize for economics and the intellectual
forefather of both of this year’s winners. Mr Coase argued that all economic
transactions are costly—even in competitive markets, there are costs associated
with figuring out the right price. The most efficient institutional arrangement
for carrying out a particular economic activity would be the one that minimised
transaction costs. This would often be the market. But using authority and rules
within a firm would sometimes prove to be more efficient.
Mr
Coase’s theory explained why companies existed but it was not specific enough to
predict the conditions under which firms, or markets, would be the superior form
of organisation. Clarifying this was Mr Williamson’s signal contribution. In a
series of papers and books written between 1971 and 1985, he argued that the
costs of completing transactions on spot markets increase with their complexity,
and if they involve assets that are worth more within a relationship between two
parties than outside it (a rear-view mirror made to the specifications of a
particular car manufacturer, for example).
Related
items
Related
topics
Both
these features make writing and enforcing contracts which take every possible
eventuality into consideration difficult, or even impossible. At some point,
therefore, it makes sense to conduct the associated transaction within a single
legal entity rather than on a market. The car company might prefer to produce
its rear-view mirrors in-house, for example, perhaps by buying the mirror
company. This would reduce the time and resources spent haggling over profits,
because decisions would simply be taken by fiat.
Mr
Williamson’s theory helpfully specified measurable attributes of transactions
that would make them more or less amenable to being conducted on markets. That
meant his thinking could be tested against decisions by companies to integrate
parts of their supply chain. It has held up remarkably well. Several studies
find, for instance, that when an electricity generator can choose between the
output of many nearby coalmines that produce coal of a particular quality, it
tends to buy its coal on an open market. But if there is only one nearby mine
that can be relied upon as a supplier, the electricity generator tends to own
it. A transaction that could be done on the market moves into the
firm.
According
to Mr Williamson, one lesson from organisational theory is the importance of
identifying common patterns of behaviour in seemingly disparate situations. That
sums up the way Elinor Ostrom has spent her working life. The first woman to win
a Nobel prize for economics, she studies the governance of “common resource
pools”—such as pastures, fisheries or forests—to which more than one person has
access. Unlike pure public goods such as the atmosphere, where one person’s use
does not reduce the amount available to others, people deplete these resources
when they use them. Standard economic models predict that in the absence of
clearly defined property rights, such common resources will be overexploited,
with individuals acting without regard for the effects of their actions on the
overall pool. Overfishing or overgrazing (the “tragedy of the commons”) will
result. Over time, stocks of the common resource will dwindle.
But in
40 years of studying how common resources—from lobster fisheries in Maine to
irrigation systems in Nepal—are actually managed by communities, Ms Ostrom found
that people often devise rather sophisticated systems of governance to ensure
that these resources are not overused. These systems involve explicit rules
about what people can use, what their responsibilities are, and how they will be
punished if they break the rules. In particular, she found that self-governance
often worked much better than an ill-informed government taking over and
imposing sometimes clumsy, and often ineffective, rules. In this, she too
shadows Mr Coase, who argued that those who advocated government ownership of
common resources ignored the transaction costs associated with collecting taxes.
Tit for tat
One
problem with the idea of the tragedy of the commons, Ms Ostrom found, was that
it did not account for the fact that people sharing a pool of resources tend to
interact repeatedly, making all sorts of clever punishments for wrongdoing
feasible. Being able to threaten credible retaliation makes co-operation
possible. This is the province of game theory, to which Ms Ostrom has
contributed, both through formal modelling of what she found in the field and
subsequent laboratory tests of her models.
Both
Mr Williamson and Ms Ostrom have built on Mr Coase’s idea that all transactions
have costs but that these costs will be minimised by different institutional
arrangements in different situations. Their work uses methods and insights from
fields that many economists are not sufficiently familiar with: detailed case
studies, in the case of Ms Ostrom, a political scientist by training, and
insights from the law in Mr Williamson’s case. Their win reminds economists that
borders between disciplines, like those between the firm and the market, can be
profitably crossed.
from
PRINT EDITION | Finance and Economics
And
more on Oliver Williamson (again, the PhD committee chair of Peter Klein, author
of the blog post linked at the top) and Elinor Ostrom, winners of the 2009 Nobel
Prize in economics:
Economics focus: Reality bites | The
Economist
In
the case of Mr Williamson, that institution is the company. With hierarchical
decision-making processes based on rules and authority, firms ought to be less
efficient than decentralised market exchange based on relative prices, which is
how standard economic theory assumes that transactions occur. So why do
companies exist at all? This question was first addressed in 1937 by Ronald
Coase, the winner of the 1991 Nobel prize for economics and the intellectual
forefather of both of this year’s winners. Mr Coase argued that all economic
transactions are costly—even in competitive markets, there are costs associated
with figuring out the right price. The most efficient institutional arrangement
for carrying out a particular economic activity would be the one that minimised
transaction costs. This would often be the market. But using authority and rules
within a firm would sometimes prove to be more
efficient.
Mr
Coase’s theory explained why companies existed but it was not specific enough to
predict the conditions under which firms, or markets, would be the superior form
of organisation. Clarifying this was Mr Williamson’s signal
contribution.
In a
series of papers and books written between 1971 and 1985, he argued that the
costs of completing transactions on spot markets increase with their complexity,
and if they involve assets that are worth more within a relationship between two
parties than outside it (a rear-view mirror made to the specifications of a
particular car manufacturer, for example).
Both
these features make writing and enforcing contracts which take every possible
eventuality into consideration difficult, or even impossible. At some point,
therefore, it makes sense to conduct the associated transaction within a single
legal entity rather than on a market. The car company might prefer to produce
its rear-view mirrors in-house, for example, perhaps by buying the mirror
company. This would reduce the time and resources spent haggling over profits,
because decisions would simply be taken by fiat.
Mr Williamson’s theory
helpfully specified measurable attributes of transactions that would make them
more or less amenable to being conducted on markets. That meant his thinking
could be tested against decisions by companies to integrate parts of their
supply chain. It has held up remarkably well. Several
studies find, for instance, that when an electricity generator can choose
between the output of many nearby coalmines that produce coal of a particular
quality, it tends to buy its coal on an open market. But if there is only one
nearby mine that can be relied upon as a supplier, the electricity generator
tends to own it. A transaction that could be done on the market moves into the
firm.
According
to Mr Williamson, one lesson from organisational theory is the importance of
identifying common patterns of behaviour in seemingly disparate situations.
That sums up the way Elinor Ostrom has spent her working
life.
The first woman to win a Nobel prize for economics, she
studies the governance of “common resource pools”—such as pastures, fisheries or
forests—to which more than one person has access. Unlike pure public goods such
as the atmosphere, where one person’s use does not reduce the amount available
to others, people deplete these resources when they use them. Standard economic
models predict that in the absence of clearly defined property rights, such
common resources will be overexploited, with individuals acting without regard
for the effects of their actions on the overall pool. Overfishing or overgrazing
(the “tragedy of the commons”) will result. Over time, stocks of the common
resource will dwindle.
But in
40 years of studying how common resources—from lobster fisheries in Maine to
irrigation systems in Nepal—are actually managed by communities, Ms Ostrom found
that people often devise rather sophisticated systems of governance to ensure
that these resources are not overused. These systems involve explicit rules
about what people can use, what their responsibilities are, and how they will be
punished if they break the rules. In particular, she found that self-governance
often worked much better than an ill-informed government taking over and
imposing sometimes clumsy, and often ineffective, rules. In this, she too
shadows Mr Coase, who argued that those who advocated government ownership of
common resources ignored the transaction costs associated with collecting
taxes.
Tit
for tat
One
problem with the idea of the tragedy of the commons, Ms Ostrom found, was that
it did not account for the fact that people sharing a pool of resources tend to
interact repeatedly, making all sorts of clever punishments for wrongdoing
feasible. Being able to threaten credible retaliation makes co-operation
possible. This is the province of game theory, to which Ms Ostrom has
contributed, both through formal modelling of what she found in the field and
subsequent laboratory tests of her models.
Both
Mr Williamson and Ms Ostrom have built on Mr Coase’s idea that all transactions
have costs but that these costs will be minimised by different institutional
arrangements in different situations.
. . .
http://www.american.com/archive/2010/december/human-nature-and-capitalism
Human
Nature and Capitalism
By
Arthur C. Brooks and Peter Wehner Saturday, December 11, 2010
Filed
under: Culture, Big Ideas, Public Square
|
The model of human nature one embraces will guide
and shape everything else, from the economic system one prefers to the
political system one supports.
At the core of every social, political,
and economic system is a picture of human nature (to paraphrase
20th-century columnist Walter Lippmann). The suppositions we begin
with—the ways in which that picture is developed—determine the lives we
lead, the institutions we build, and the civilizations we create. They are
the foundation stone.
Three Views of Human
Nature
During the 18th century—a period that saw
the advent of modern capitalism—there were several different currents of
thought about the nature of the human person. Three models were
particularly significant.
One model was that humans, while flawed,
are perfectible. A second was that we are flawed, and fatally so; we need
to accept and build our society around this unpleasant reality. A third
view was that although human beings are flawed, we are capable of virtuous
acts and self-government—that under the right circumstances, human nature
can work to the advantage of the whole.
The first school included those who
(representing the French Enlightenment) believed in man’s perfectibility
and the pre-eminence of scientific rationalism. Their plans were
grandiose, utopian, and revolutionary, aiming at “the universal
regeneration of mankind” and the creation of a “New
Man.”1
Advocates of free enterprise believe that
creativity, enterprise, and ingenuity compose essential parts of human
nature.
Such notions, espoused by Jean-Jacques
Rousseau and other Enlightenment philosophes, heavily influenced a
later generation of socialist thinkers. These theorists—Robert Owen,
Charles Fourier, and Henri de Saint-Simon among them—believed that human
nature can be as easily reshaped as hot wax. They considered human nature
plastic and malleable, to the point that no fixed human nature existed to
speak of; architects of a social system could, therefore, mold it into
anything they imagined.
These theorists dreamed of a communal
society, liberated from private property and free of human inequality.
They articulated a theory of human nature and socioeconomic organization
that eventually influenced capitalism’s most famous and bitter critic: the
German philosopher, economist, and revolutionary Karl Marx.
The second current of thought, embodied in
the writings of 17th-century Englishmen Thomas Hobbes and Bernard
Mandeville, viewed human nature as more nearly the opposite: inelastic,
brittle, and unalterable. And people were, at their core, antisocial
beings.
Hobbes, for example, worried that people
were ever in danger of lapsing into a pre-civilized state, “without a
common power to keep them all in awe,” which, in turn, would lead to a
hopeless existence, a “state of nature” characterized by “a war of every
man, against every man.” It was, Hobbes wrote, a life “solitary, poor,
nasty, brutish, and short.” To avoid this fate, one must submit to the
authority of the state, what he termed the “Leviathan” (a monstrous,
multi-headed sea creature mentioned in the Hebrew Bible). In the process,
we would gain self-preservation, but at the expense of
liberty.2
The third model of human nature is found
in the thinking of the American founders. “If men were angels,” wrote
James Madison, the father of the Constitution, in Federalist Paper No. 51,
“no government would be necessary.” But Madison and the other founders
knew men were not angels and would never become angels. They
believed instead that human nature was mixed, a combination of virtue and
vice, nobility and corruption. People were swayed by both reason and
passion, capable of self-government but not to be trusted with absolute
power. The founders’ assumption was that within every human heart, let
alone among different individuals, are competing and sometimes
contradictory moral impulses and currents.
A free market can also better our moral
condition—not dramatically and not always, but often enough. It places a
premium on thrift, savings, and investment.
This last view of human nature is
consistent with and reflective of Christian teaching. The Scriptures teach
that we are both made in the image of God and fallen creatures; in the
words of Saint Paul, we can be “instruments of wickedness” as well as
“instruments of righteousness.”3 All have sinned and fallen
short of the glory of God, the Bible declares—yet it also tells us to be
holy in all our conduct, to walk in His statutes, and not to grow weary in
doing good. Human beings are capable of acts of squalor and acts of
nobility; we can pursue vice and we can pursue virtue.
As for the matter of the state: Romans 13
makes clear that government is divinely sanctioned by God to preserve
public order, restrain evil, and make justice possible. This, too, was a
view shared by many of the founders. Government reflects human nature,
they argued, “because the passions of men will not conform to the dictates
of reason and justice without constraint.”4
The Anglo-Scottish Enlightenment
philosophies of Adam Smith, David Hume, and Francis Hutcheson both
informed and aligned with the views of the American founders and Christian
teaching. Smith was himself a professor of moral philosophy; The Theory
of Moral Sentiments5 preceded The Wealth of
Nations.6 Smith and his compatriots did not believe in the
perfectibility of human nature and thought it foolish to build any human
institution on the possibility of attaining such perfection. Neither did
they believe that human nature was irredeemably corrupt and devoid of
virtue.
Self Interest: A Positive or Negative
Human Characteristic?
The American founders believed, and
capitalism rests on the belief, that people are driven by “self-interest”
and the desire to better our condition. Self-interest is not necessarily
bad; in fact, Smith believed, and capitalism presupposes, that the general
welfare depends on allowing an individual to pursue his self-interest “as
long as he does not violate the laws of justice.” When a person acts in
his own interest, “he frequently promotes [the interest] of society more
effectually than when he really intends to promote it.
”7
Michel Guillaume Jean de Crèvecœur, among
the first writers who attempted to explain the American frontier and the
concept of the “American Dream” to a European audience, captured this view
when he wrote:
The American
ought therefore to love this country much better than that wherein either
he or his forefathers were born. Here the rewards of his industry follow
with equal steps the progress of his labour; his labour is founded on the
basis of nature, self-interest; can it want a stronger
allurement?8
Smith took for granted that people are
driven by self-interest, by the desire to better their condition. “It is
not from the benevolence of the butcher, the brewer, or the baker that we
expect our dinner,” is how he put it, “but from their regard to their own
interest. We address ourselves not to their humanity, but to their
self-love, and never talk to them of our own necessities but of their
advantages.”9
Harnessed and channeled the right way,
then, self-interest—when placed within certain rules and boundaries—can be
good, leading to a more prosperous and humane society.
Morality and
capitalism, like morality and democracy, are intimately connected and
mutually complementary.
Here it is important to distinguish
between self-interest and selfishness. Self-interest—unlike
selfishness—will often lead one to commit acts of altruism; rightly
understood, it knows that no man is an island, that we are part of a
larger community, and that what is good for others is good for us. To put
it another way: Pursuing our own good can advance the common good. Even
more, advancing the common good can advance our own good, as every
Christian knows full well.
Advocates of free enterprise believe that
creativity, enterprise, and ingenuity are essential parts of human nature.
Capitalism aims to take advantage of the self-interest of human nature,
knowing that the collateral effects will be a more decent and benevolent
society. Capitalists believe that liberty is an inherent good and should
form the cornerstone not only of our political institutions but our
economic ones as well. Free-market advocates also insist that wealth and
prosperity can mitigate envy and resentment, which have acidic effects on
human relations. Markets, precisely because they generate wealth, also end
up distributing wealth.
The Relationship between Human Nature
and Government
Why does all of this matter? Because our
“picture of human nature” determines, in large measure, the institutions
we design. For example, the architects of our government carefully studied
history and every conceivable political arrangement that had been devised
up to their time. In the course of their analysis, they made fundamental
judgments about human nature and designed a constitutional form of
government with it in mind.
What is true for creating political
institutions is also true for economic ones. They, too, proceed from
understanding human behavior.
Harnessed and channeled the right way,
self-interest—when placed within certain rules and boundaries—can be good,
leading to a more prosperous and humane
society.
It is hard to overstate the importance of
this matter. The model of human nature one embraces will guide and shape
everything else, from the economic system one embraces (free-market
capitalism versus socialism) to the political system one supports
(democracy versus the “dictatorship of the proletariat”).10
Like a ship about to begin a long voyage, a navigational mistake at the
outset can lead a crew to go badly astray, shipwreck, and run aground. To
use another metaphor, this time from the world of medicine: A physician
cannot treat an illness before diagnosing it correctly; diagnosing
incorrectly can make things far worse than they might otherwise
be.
Those who champion capitalism
embrace a truth we see played out in almost every life on almost any given
day: If you link reward to effort, you will get more effort. If you create
incentives for a particular kind of behavior, you will see more of that
behavior. The book of Thessalonians boils things down to fairly simple
terms: “If any would not work, neither should he
eat.”11
A free market can also better our moral
condition—not dramatically and not always, but often enough. It places a
premium on thrift, savings, and investment. And capitalism, when
functioning properly, penalizes certain kinds of behavior—bribery,
corruption, and lawlessness among them—because citizens in a free-market
society have a huge stake in discouraging such behavior, which is a
poison-tipped dagger aimed straight at the heart of prosperity.
The founders predicated that within every human
heart, let alone among different individuals, strive competing and
sometimes contradictory moral impulses and
currents.
In addition, capitalism can act as a
civilizing agent. The social critic Irving Kristol argued, correctly in
our view, that the early architects of democratic capitalism believed
commercial transactions “would themselves constantly refine and enlarge
the individual’s sense of his own self-interest, so that in the end the
kind of commercial society that was envisaged would be a relatively decent
community.”12
But capitalism, like American democracy
itself, is hardly perfect or sufficient by itself. It has a troubling
history, as well as a glorious one. And, like America, it is an ongoing,
never-ending experiment, neither self-sustaining nor self-executing.
Capitalism requires strong, vital, non-economic and non-political
institutions—including the family, churches and other places of worship,
civic associations, and schools—to complement it. Such institutions are
necessary to allow capitalism to advance human progress.
A capitalist society needs to produce an
educated citizenry. It needs to be buttressed by people who possess and
who teach others virtues such as sympathy, altruism, compassion,
self-discipline, perseverance, and honesty. And it needs a polity that
will abide by laws, contracts, and election results (regardless of their
outcome). Without these virtues, venality can eat capitalism from within
and use it for pernicious ends.
We need to understand that capitalism,
like democracy, is part of an intricate social web. Capitalism both
depends on this web and contributes mightily to it. Morality and
capitalism, like morality and democracy, are intimately connected and
mutually complementary.13 They reinforce one another; they need
one another; and they are terribly diminished without one another. They
are links in a golden chain.
Arthur C. Brooks is the president of
the American Enterprise Institute. Peter Wehner is a
senior fellow at the Ethics and Public Policy Center. This article was
adapted from their newly published monograph, Wealth and Justice:
The Morality of Democratic
Capitalism.
Notes
1. Jean-Jacques Rousseau, The Social Contract
and Other Later Political Writings, edited by Victor Gourevitch (New
York: Cambridge University Press, 1997).
2. Thomas Hobbes, Leviathan, ch. XIII, XVII
(Forgotten Books, 2008), 86 (originally published in 1651).
3. Romans 6:13.
4. Alexander Hamilton, The Federalist, no.
15, par. 12, available here.
5. Adam Smith, The Theory of Moral
Sentiments (Oxford University Press, 1976).
6. Adam Smith, An Inquiry into the Nature and
Causes of the Wealth of Nations, book X, edited by Edwin Cannan
(1904), available here.
7. Ibid., book IV, ch. II.
8. J. Hector St. John de Crevecoeur, Letters
From an American Farmer, letter III, par. 8, available here.
9. Smith, Wealth of Nations, book I, ch.
II.
10. Karl Marx, The Class Struggles in
France, 1848 to 1850 (New York: International Publishers,
1965).
11. 2 Thessalonians 3:10.
12. Irving Kristol, Neo-Conservatism: The
Autobiography of an Idea (Chicago: Ivan R. Dee, 1999), 282.
13. “As there is a degree of depravity in mankind
which requires a certain degree of circumspection and distrust,” Madison
wrote in Federalist No. 55, “so there are other qualities in human nature,
which justify a certain portion of esteem and confidence. Republican
government presupposes the existence of these qualities in a higher degree
than any other form.”
Image by Darren Wamboldt/Bergman
Group. |
Why
Do the Poor Stay Poor?
By John
Stossel
12/8/2010
Of the
6 billion people on Earth, 2 billion try to survive on a few dollars a
day.
They don't build
businesses, or if they do, they don't expand them. Unlike people in the United
States, Europe and Asian countries like Japan, South Korea, Hong Kong, etc.,
they don't lift themselves out of poverty. Why not? What's the difference
between them and us? Hernando de Soto taught me that the biggest
difference may be property rights.
I
first met de Soto maybe 15 years ago. It was at one of those lunches where
people sit around wondering how to end poverty. I go to these things because it
bugs me that much of the world hasn't yet figured out what gave us Americans the
power to prosper.
I go,
but I'm skeptical. There sits de Soto, president of the Institute for Liberty
and Democracy in Peru, and he starts pulling pictures out showing slum dwellings
built on top of each other. I wondered what they meant.
As de
Soto explained: "These pictures show that roughly 4 billion people in the world
actually build their homes and own their businesses outside the legal system.
... Because of the lack of rule of law (and) the definition of who owns what,
and because they don't have addresses, they can't get credit (for investment
loans)."
They
don't have addresses?
"To
get an address, somebody's got to recognize that that's where you live. That
means ... you've a got mailing address. ... When you make a deal with someone,
you can be identified.
But until property is defined by law, people can't ... specialize and create
wealth. The day they get title (is) the day that the businesses in their homes,
the sewing machines, the cotton gins, the car repair shop finally gets
recognized. They can start expanding."
That's
the road to prosperity. But first they need to be recognized by someone in local
authority who says, "This is yours." They need the rule of
law. But
many places in the developing world barely have law. So enterprising people take
a risk. They work a
deal with the guy on the first floor, and they build their house on the second
floor.
"Probably
the guy on the first floor, who had the guts to squat and make a deal with
somebody from government who decided to look the other way, has got an invisible
property right. It's not very different from when you Americans started going
west, (but) Americans at that time were absolutely conscious of what the rule of
law was about," de Soto said.
Americans
marked off property, courts recognized that property, and the people got deeds
that meant everyone knew their property was theirs. They could then buy and sell
and borrow against it as they saw fit.
This
idea of a deed protecting property seems simple, but it's
powerful.
Commerce between total strangers wouldn't happen otherwise. It applies to more
than just skyscrapers and factories. It applies to stock markets, which only
work because of deed-like paperwork that we trust because we have the rule of
law.
Is de
Soto saying that if the developing world had the rule of law they could become
as rich as we are?
"Oh,
yes. Of course. But let me tell you, bringing in the rule of law is no
easy thing."
De
Soto started his work in Peru, as an economic adviser to the president, trying
to establish property rights there. He was successful enough that leaders of 23
countries, including Russia, Libya, Egypt, Honduras and the Philippines, now pay
him to teach them about property rights. Those leaders at least get that they're
doing something wrong.
"They
get it easier than a North American," he said, "because the people who brought
the rule of law and property rights to the United States (lived) in the 18th and
19th centuries. They were your great-great-great-great-granddaddies."
De
Soto says we've forgotten what made us prosperous. "But (leaders in the
developing world) see that they're pot-poor relative to your wealth." They are
beginning to grasp the importance of private property.
Let's
hope we haven't forgotten what they are beginning to learn.
What's
Wrong With Spain?
Its crisis
is rooted in decisions to encourage regional divisions and to abandon successful
market-based policies.
Spain
faces a critical economic situation. Along with Portugal, it is now at the
center of Europe's financial turmoil.
Investors are assigning higher default risks to the Spanish government's debt
than at any point since Spain entered the euro zone.
In the
social sphere, the situation is distressing. The unemployment rate exceeds 20%.
The youth unemployment rate is above 43%.
It's
not only the financial markets that are raising doubts about the Spanish
economy. The European Commission has stated its worries about the current
government's ability to react and implement credible economic measures to
address the situation.
Wherever
I go, people ask me the same questions: What's wrong with Spain? How is it possible that in just a few
years my country went from being the "economic miracle" of Europe to the
"economic problem" of Europe? What happened to the economy that
just a few years ago grew more than 3% year after year, even when Germany,
France and Italy posted zero growth? It is now the only economy out of Europe's
five largest countries still experiencing negative growth.
All
these questions bring me great sorrow and provoke a deep sense of concern for
the present and future of my country. Just six years ago Spain was creating
six out of 10 new euro-zone jobs, its government accounts were in surplus, its
stock of public debt was decreasing swiftly, and its multinationals were
expanding across Europe, Latin America and the United States.
My
response to all the questions about Spain is clear: Spain is suffering the most
serious political crisis of its recent history. The economic woes and the lack
of confidence in Spain are the result of the government's credibility deficit.
The high price being paid now by the Spanish people is what happens when
politicians refuse to acknowledge their mistakes.
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Bloomberg
News
Six years ago, the
country was creating six out of 10 new euro-zone jobs.
The
roots of Spain's crisis lie in the political decisions made in 2004 to abandon
the modernizing process that Spanish society began more than 30 years
ago.
At that time, Spaniards
decided by consensus to consolidate our democracy and its institutions after
nearly 40 years of dictatorship. The next step was to enter the European Union
and later the euro, and converge economically and socially with the most
thriving nations of Europe.
Then
in 2004 Madrid changed direction.
The government
rejected the settlement embodied in the 1978 constitution and ruptured the
makeup of the Spanish state. Different areas of the country
were pitted against each other. The effect has been to erase much of what joins
us as Spaniards and to turn Spain into a country that is very difficult to lead.
In the
economic sphere, once Spain adopted the euro and currency devaluation ceased to
be an option, the government abandoned its commitment to budget stability and
the constant process of reforms necessary to remain competitive in global
markets.
These economic
errors can be seen in the government's arbitrary interventions in business life,
with flagrant contempt for the rules of the game—even the European
rules. We also saw unprecedented growth of government
spending and in tax hikes across the board.
Spain's
current place in the international sphere reflects its declining weight in the
world. The government has relinquished its responsibilities and has failed to
defend its national interests abroad.
Only a
new government can recover credibility, and that demands general elections.
A new
government could call on the Spanish people to undertake a great national
project for recovery, regeneration and reform of the nation. For this there are
no miracles or shortcuts—there never were in the past and there won't be now.
With a new national political project and the implementation of the appropriate
policies, Spain can recover international confidence and credibility and Spanish
people can recover confidence in themselves and in their
nation.
An
essential part of this political change will be for Spain to immediately
acknowledge that the state has to limit its economic and social role, and open
new areas of freedom and dynamism for society and private
entrepreneurship.
Spain needs to
accomplish deep reforms in its administrative structure, including eradicating
bureaucratic and public bodies and rationalizing public
expenditure. Spain cannot delay any longer in reforming its
welfare state, but must start now to restore the conditions for a thriving
society that is open to all.
Spain
is more than capable of becoming, once again, a dynamic and enterprising
country, one that generates employment and opportunity. But first it must
undertake the hard work of unwinding six years of political misdeeds. We can't
We can't wait.
Mr.
Aznar is the former prime minister of Spain (1996-2004).
Senior
Fellow
|
Alvaro Vargas
Llosa
Senior Fellow, Center on Global Prosperity
Send Email
Alvaro Vargas Llosa is a Senior
Fellow of The Center on Global Prosperity at the Independent Institute, a nationally
syndicated columnist for the Washington Post Writers Group, and the
author of the book Liberty for Latin America, which obtained the
Sir Anthony Fisher International Memorial Award for its contribution to
the cause of freedom in 2006. He was recently appointed Young Global
Leader 2007 by the World Economic Forum in Davos.
Mr. Vargas Llosa is a native of Peru and
received his B.S.C. in international history and an M. A. from the London
School of Economics. He has been a member of Board of the Miami Herald
Publishing Company and op-ed page editor and columnist at the Miami
Herald, and a contributor to the Wall Street Journal, the
New York Times, the Los Angeles Times, the BBC World
Service, Time Magazine, Granta magazine, El País, the
International Herald Tribune, and other media outlets. In addition,
Mr. Vargas Llosa has been a commentator at Univision TV, news director at
RCN radio, London Correspondent for Spain’s ABC daily newspaper,
commentator at Radio Nacional de España in Madrid, host of the weekly TV
program “Planeta 3” that aired in twelve Latin American countries for five
years, and columnist at La Nación (Argentina), El Nacional
(Venezuela), Reforma (Mexico), El Tiempo (Colombia), El País
(Uruguay), El Listín Diario (Dominican Republic).
He is the author of the books The Che
Guevara Myth, Liberty
for Latin America, The Madness of Things Peruvian, Guide to the Perfect Latin American
Idiot (with Carlos Alberto
Montaner and Plinio Apuleyo Mendoza), El Exilio Indomable, Cuando Hablaba Dormido, El
Diablo en Campaña, En el Reino del Espanto, Tiempos de Resistencia, and La Contenta Barbarie, and he is
a contributing author to How I Learned English (edited by Tom Miller).
Mr. Vargas Llosa was the press spokesman
for the presidential campaign of the Democratic Front in 1990 in his
native Peru and an Advisor on International Relations for the presidential
campaign of Perú Posible in 2001.
He is the recipient of the Sir Anthony
Fisher International Memorial Award for his book Liberty for Latin
America (2006), Juan Bautista Alberdi Award (2006) for his defense of
freedom across the western hemisphere, the A.I.R. Award for Best Current
Affairs Radio Show in Florida (1998), Puerto Rican Parliament’s Award for
the Defense of Freedom (1997), Peruvian Association of Fishermen’s Award
for the Defense of Freedom (2000), and Freedom of Expression Award given by the Association of Ibero-American
Journalists (2003).
He has lectured widely on world economic
and political issues. Among other venues, he has spoken at The World
Economic Forum, U.S. Chamber of Commerce, Council on Foreign Affairs
(U.S.), World Affairs Council (U.S.), Inter-American Dialogue (U.S.),
Florida International University (U.S.), University of New York (U.S.),
Cato Institute (U.S.), Atlas Economic Research Foundation (U.S.), Mount
Pelerin Society (Chile), Naumann Foundation (Germany), FAES Foundation
(Spain), Brazilian Institute of Business Studies, Fundación Libertad
(Argentina), the CEDICE Foundation (Venezuela), Ecuatorian Chamber of
Commerce (Ecuador), and University of San Marcos
(Peru). |
Latin
America: Pivotal Year Ahead
Latin
America's middle class made visible gains in 2010, as economic growth outpaced
that of the United States and Europe. But the region's underclass won't make
significant gains unless governments adopt economic liberalization and
meaningful political reform, according to Independent Institute Senior Fellow
Alvaro Vargas Llosa. In fact, the fate of the poor over
the next several years may depend on political developments of the next twelve
months in Brazil, Peru, Argentina, and Venezuela.
Brazil's incoming
president, Dilma Rousseff, will help set the tone by deciding whether or not to
push for liberalization and to discontinue Brazil's anti-U.S. rhetoric. Peru's
voters will decide whether to maintain the policies that helped bring about a
mighty 8 percent growth rate last year--or whether to support foes of economic
liberalization on the left or the right. Argentina's voters will decide whether
to embrace the collective legacy of Nestor and Cristina Kirchner--or to adopt
policies that would sustain the gains fostered by recent agricultural innovation
and increased trade with Asia. And Venezuela's new National Assembly will decide
whether to stand up to Hugo Chavez's intimidation and whom to select as an
opposition candidate against Chavez's party.
"These political dynamics
give Latin America a chance to make the modernization process irreversible,"
Vargas Llosa writes.
"Latin America, 2011," by Alvaro Vargas Llosa (12/29/10) Spanish Translation
Lessons from the Poor: The Triumph of the Entrepreneurial
Spirit, edited by Alvaro Vargas Llosa
Liberty for Latin America: How to Undo Five Hundred Years of State
Oppression, by Alvaro Vargas Llosa
The Che Guevara Myth and the Future of Liberty, by Alvaro
Vargas Llosa
Dec
29, 2010
4:19 PM
By
Kejal Vyas
CARACAS
— Venezuela’s rate of
inflation is the highest among the world’s top 42 emerging economies, according
to a study by the Central University of Venezuela.
Estimated
to have an inflation rate of 28% this year, the South American country is one of
only five economies to have double-digit inflation, the study said. Pakistan,
Egypt, India and Argentina were the other countries named facing high
inflation.
The
numbers underscore a major challenge for the administration of President Hugo
Chavez as he looks to combat high inflation and a struggling
economy.
Many
Wall Street analysts
expect Venezuela to be the only country in Latin America to experience an
economic contraction this year, while the inflation rate has been projected as
high as 35%. That is in stark contrast to neighboring countries such as Brazil,
whose economy is seen expanding more than 7.5% in
2010.
In
addition, the Venezuelan economy continues to struggle at a time when the price
of oil, the nation’s main export, remains at a high and stable
level.
“This suggests that high oil prices
are no longer a sufficient condition for the economy to regain its growth
path,” said Jose Guerra, director of the economics department at
Central University of Venezuela.
“High
oil prices mean higher revenue but not increased economic activity,” he said in
the report.
In
addition, Guerra said that a political climate that is perceived
as anti-business–the result of hundreds of expropriations this year–has also
resulted in little investment into the country’s petroleum
sector.
That
has contributed to a decline in production by the country’s state-run oil giant
Petroleos de Venezuela SA, or PDVSA, he added.
“If
there is no change in policy, it’s probable that in 2011 high inflation and
stagflation will persist,” Guerra said.
By Bob
Davis
In a
bid to boost economic growth in Africa, Congress passed the Africa Growth and
Opportunities Act in 2000, which eliminated many tariffs and quotas for African
goods. Imports of clothing from Africa boomed, particularly
because Congress didn’t require — as it often does in trade deals — that
exporters use fabric that is either made domestically or imported from the
U.S.
Taiwanese
and other Asian companies seized the opportunity to set up shop in the poorest
African nations, import fabric from China, hire African sewing machine operators
and ship the finished T-shirts and other goods to the U.S., duty
free. So
long as employment and development improved in Africa, the trade act was seen as
a good deal, even if Asian companies benefited
disproportionately.
Except
it wasn’t such a great deal, according to a
paper by economists Lawrence Edwards of
the University of Cape Town and Robert Lawrence of Harvard University published
by the National Bureau of Economic Research. While the trade deal did boost jobs
for poor, landlocked Lesotho, for instance, it didn’t spur broader development.
Ironically, the fabric provision — meant to give an extra boost to impoverished
African nations — actually hindered them from building a domestic industry.
Generosity backfired.
“The
slogan of ‘trade not aid,’ can be misleading,” the economists conclude. “Trade
preferences may help create the conditions for growth, but they are not
sufficient.”
On the
positive side, the trade deal provided about 50,000 jobs, mostly for Lesotho
women. But the fabric provision meant that the largely Asian manufacturers
imported relatively costly material from Asia and used Lesotho simply for cheap
labor — and tariff-free entry into the U.S.
“In
Lesotho, you make cotton T-shirts to sell in Neiman Marcus with expensive fabric
and very little sewing, and on a huge scale,” said Mr. Lawrence in an
interview.
That
worked well until 2005 when a global quota system for textiles and apparel,
called the Multi-Fiber Arrangements, expired. Largely freed of quota
restrictions, Asian exporters expanded into lower-end fabrics in addition to the
higher-end — and higher-profit — fabric they concentrated on when their exports
were restricted by MFA quotas. Combined with low cost, highly productive
workers, China and other Asian nations outmuscled Mauritius, South Africa,
Mexico and many U.S. clothing makers for low-end goods.
Lesotho,
which was still protected by tariff and quota preferences, held up better than
other nations under the Chinese advance, the economists say, but the country
didn’t advance. Lesotho’s GDP per-capita was $870 in 2000. While it improved a
total of 50% over the decade, it’s still just $1,266 in 2010, according to the
International Monetary Fund.
The
continuing impoverishment is partly because fabric provisions didn’t encourage
the development of a low-cost, domestic fabric industry that stood a chance of
competing with Asia. So now, the economists say, the African apparel industry
must rely on continued trade preferences to survive, while entrepreneurial China
prospers without them
A
Nation in Motion
The Census
reveals a people who are moving to pro-market red
states.
The
Census is in. There are
now 308.74 million Americans, an increase of 27 million, or 9.7%, since
2000. Americans are still multiplying, one of the best
indicators that the country's prospects remain strong.
About
13 million of that increase were new immigrants.
These newcomers brought energy, talent, entrepreneurial skills and a work ethic.
Their continued arrival in such large numbers validates that the rest of the
world continues to view the U.S. as a land of freedom and opportunity.
The
Census figures also confirm that America is a nation in constant motion, with
tens of millions hopping across state lines and changing residence since 2000.
And more of them are moving into conservative, market-friendly red states than
into progressive, public-sector heavy blue states.
In
order the 10 states with the greatest population gains were Nevada, Arizona,
Utah, Idaho, Texas, North Carolina, Georgia, Florida, Colorado and South
Carolina. Their average population gain was 21%. In the fast-growing states, the
average income tax rate is 4% versus 6.9% in the slowest growing states.
The
average population gain of the bottom 10 states was 2%. They include most of the
states now famous for fiscal distress: Michigan, Ohio, New York, Illinois.
Michigan was the one state that actually had a net loss of population in the
past decade.
Particularly
troubling is that three of America's traditionally high-octane
states—California, New Jersey and New York—are in the population and economic
doldrums.
More
New
York's population grew only 2%, while New Jersey grew at less than half the U.S.
average. California's population, a source of its rising economic prosperity
throughout the 20th century, grew only at the national average. For the first
time since 1920, the not-so-Golden State failed to gain a single new House seat,
an astonishing event. The place that once led the rest of the nation in
technology, innovation, venture capital and cultural trend-setting is now
reaping the whirlwind of its profligate political regime in Sacramento.
Meanwhile,
the West and South continue to gain strength, while the Northeast, a blue state
bastion, stagnates. Only New Hampshire, with the huge advantage of no income or
sales tax, is doing relatively well, with population growth twice that of the
rest of the region.
The
Census exercise is also about the rise and fall of political clout, and here the
runaway winner is Texas. It gets four new Congressional seats, followed by
Florida with two seats, and Arizona, Georgia, Nevada, South Carolina, Utah and
Washington gaining one seat. With
the exception of Washington, these are all relatively Republican
states.
The
losers are states the Democrats traditionally look to for support. New York and
Ohio lose two seats. Illinois, Iowa, Louisiana, Massachusetts, Michigan,
Missouri, New Jersey and Pennsylvania are all down one seat. When combined with
the impact of redistricting within states, Republicans could be in position to
gain more House seats in 2012 on top of their 63-seat gain this year. You'd
expect the blue states to undertake economic reform out of simple political
self-interest.
The
Census numbers are one way to judge which public policies are working in the
country and which aren't. Texas is looking like the new California. And
California, Michigan, New Jersey and New York need to look deep into themselves
to discover a more promising result 10 years from now.
Japanese
Farmers Sow Protectionism
Special
interests that are even more entrenched than in other countries leave Japan
falling behind Korea.
News
that a free-trade agreement (FTA) between the United States and South Korea is a
big step closer to taking effect is causing consternation in Japan—and
rightfully so. Korea has made FTAs with major trading partners a central plank
of its economic strategy. In addition to the American pact, Seoul has also inked
a deal with the European Union and five others, and is negotiating more. Japan,
in contrast, is falling behind. The reasons for that warrant close
study.
Japan
does have 11 Economic Partnership Agreements, or EPAs, with the likes of the
Association of South East Asian Nations and Mexico, and is negotiating with Peru
and Australia. However, Japan's EPAs include countries that
account for only 16% of its trade, compared to Korea's 36%.
Tokyo has been
consistently unable to reach pacts with big partners that are also farm
exporters, like the U.S., EU and China. Moreover, Japan's deals
tend to liberalize trade less than the high-quality FTAs Korea, the U.S. and EU
strive to sign.
Agriculture
is the most frequently cited obstacle. Such is the power of Japan's
agricultural lobby that Japanese EPAs typically liberalize only about 50% to 60%
of farm products aside from rice. Korea's FTAs with the U.S. and EU, by
contrast, liberalize 99% of its non-rice trade.
But
that raises the question: Why was Seoul able to overcome the determined
opposition of its own farm lobby while Tokyo is not? In both countries, aging
farmers toil on very small, inefficient plots. Korean farmers stand to lose more
from freer agricultural trade than their Japanese peers. In Korea, the majority of farmers
work full-time on their land and get most of their income from farming. In
Japan, 80% of farmers are part-timers and farming provides only 15% of their
incomes.
View
Full Image
Getty
Images
That flight to
Narita doesn't have foreign produce in the hold, does it?
Nor
are Japanese farmers much more successful in mobilizing public sympathy for
their obstructionism. A recent poll by the Yomiuri newspaper found that 61% of
respondents support the effort by Prime Minister Naoto Kan to join the
Trans-Pacific Partnership (TPP) trade negotiations even though any resulting
deal would likely abolish all tariffs and quotas, including on farm goods.
Asked in a 2010 Pew
Research Center poll whether increased trade is a good thing, 72% of Japanese
said yes, an overwhelming figure in light of Japan's reputation for deep-seated
protectionism, even compared to the 88% of Koreans who agreed.
Rather,
institutional
arrangements help explain Japanese intransigence on trade. Compared to Korea,
Japan's political system allows special interests such as farmers to exercise
far too great a veto power over the
majority.
One
reason is simple electoral math: In Japan, a farmer's vote has more weight than
a city dweller's. Roughly one-half of the people live in the six most urban
prefectures, but they get only 38% of the district seats in the Upper House. The
distortion in favor of rural districts is somewhat less in the Lower House, but
it takes just one house to block a pact. In Korea, by contrast, the highly urban
region around Seoul houses 48% of the voters and elects 45% of the seats in the
unicameral parliament. In addition, in recent Japanese elections the rural vote
has often been the swing factor between the Liberal Democratic Party (LDP) and
the Democratic Party of Japan (DPJ)
Japan's
method for negotiating trade deals also provides ample opportunities for
special-interest "tribes" within the Diet and ministries to influence trade
talks. Each ministry negotiates the chapters of trade deals affecting sectors
under its jurisdiction. So the Agriculture Ministry can veto an entire FTA or
EPA by refusing to concede on farm issues.
In
Korea, by contrast, the Ministry of Foreign Affairs and Trade is in charge of
the entire negotiation, and
is therefore able to make strategic tradeoffs between various sectors for the
good of the economy as a whole. Moreover, unlike in Japan, Korean ministers and
career officials see themselves not as independent actors, but as serving a
strong president elected by popular vote.
Some
Japanese politicians have attempted to address this impasse through the same
kind of political bargain achieved in Korea: income support in exchange for
trade liberalization. In Japan, as in Korea, subsidies
already provide farmers with half their total income from farming activities
(i.e., not counting income from other jobs). This compares to 23% in the EU, 10%
in the U.S. and 2.7% in Australia. When he was DPJ leader,
Ichiro Ozawa proposed that these subsidies be linked to trade liberalization.
Nowadays, Foreign Minister Seiji Maehara explicitly points to Korea in proposing
a similar bargain.
However,
unlike their Korean counterparts, most Japanese politicians have been unwilling
to force farmers to accept more liberal trade as the political cost for those
subsidies. A case in point is Mr. Ozawa, who reversed himself and now supports
the farm lobby in its effort to scuttle Japan's participation in TPP
talks. The
combination of subsidies and protection is costly for consumers, who pay 1.9
times the market price for food (compared to 1.7 times more in Korea, before it
embarks on a major wave of trade
liberalization).
Pro-trade
politicians in Seoul have been able to build a political consensus for
liberalization because trade is so manifestly vital to Korean prosperity.
The ratio of trade
to GDP was 107% in 2008, and Koreans know that they have to import in order to
export—44% of the value of Korean exports consists of imported inputs, not just
energy and raw materials, but also parts and capital goods. Hindering trade to
protect farmers, who account for only 7% of employment and 2.7% of GDP, makes
little sense to Korean voters.
Japan,
in contrast, sees trade account for only 35% of its GDP while only 22% of the
value of its exports consists of imports—and these are mostly energy and raw
materials.
Unless
Tokyo musters the political will to fix its electoral math and the veto power of
individual ministries, the Japanese economy will continue to suffer. Money that
goes to too-expensive food could be fueling other purchases; meanwhile, the farm
lobby is blocking liberalization in other sectors that would spur greater
exports, competition and prosperity.
Mr.
Katz is the editor of the semi-weekly Oriental Economist Alert.
Mexican
Demographics and the Coming Crisis
http://bigpeace.com/pmaffitt/2010/12/06/mexican-demographics-and-the-coming-crisis/
Posted
by Peter C.
Maffitt
Dec 6th 2010 at 5:39 am in Economy, Foreign Policy | Comments
(1)
What
is not understood in Washington, and by most US citizens, is that Mexico, our
closest neighbor, is our most important strategic foreign policy and economic
trade nation. Mexican demographics both in Mexico and of Mexican-Americans in
the US are key issues in understanding importance of
Mexico.
In
1956 I attended a
very memorable lunch in Mexico City during which the speaker extolled the
current progress of Mexico. He referred to the 1910 Mexican
Revolution, which this year is exactly 100 years ago, and the harsh decade after
the Revolution. The statistics are not exact, but perhaps 5% to 10% of the
Mexican population was killed, starved, or went in exile.
In the 1930s the world wide Depression again was harsh on Mexico. But during the
1940s and the first part of the 1950s Mexico prospered. There was food for the
population; there were vastly improved public health medical services; and the
nutrition had improved greatly. With improved medical services the mortality
rate had fallen dramatically. Poor peasant families were moving to the cities
for vastly increased opportunities. Especially during WWII there were jobs and
improving prosperity. Mexico in the mid 1950s was a proud, productive, growing
nation.
Then
the speaker began to talk about population. He expected the next census would
have Mexico at a population around 40 million. Then he said the current birth
rate was estimated to be 3.5%. That statistically meant Mexico could double its
population every 20 years if Mexico maintained the 3.5% growth
rate. He said in rough terms he expected
Mexico in 1960 would have a 40 million population; then in 1980 Mexico would
have 80 million; in 2000 it would be 160 million; in 2020 it would be 320
million; in 2040 it would be 640 million, and in 2060 it would be 1,280,000
billon. In other worlds with a straight line 3.5% growth rate in one century
from 1960 Mexico would have over 1 billion population. That figure caught my
attention and the attention of the entire
audience-“espantoso”.
The
next day I was told a copy of the speech was given to the President of
Mexico.
When I
got back to the States I discussed the talk with several friends. One friend who
was an accountant replied “The Rule of Seven.” The Rule of
Seven is a simple mathematical formula to determine how long it takes for a
number to double over a period of years. For example with a
population growth rate or interest rate of .035% divided into 7 would result in
the number doubling in 20 years. In other words with a growth rate of 3% the
population will double in 25 years; growth 2.5% the population will double 30
years; growth 2% the population will double in 35 years; and growth rate of 1%
will double in 70 years. My friend noted that straight line projections never
work as predicted.
Beginning
in the 1960s Mexico had a very strong family planning policy. Today fifty years
later Mexico has reduced its population growth rate substantially. Mexico in 2007 has a population
estimated to be 106 million. The current estimates are Mexico has a birth growth
rate of 1%, a miraculous birth rate reduction. One estimate is that in 2050
Mexico could have a population of 132
million.
The
3.5% population growth rate of the early 1950s has
plummeted. But
large numbers of Mexicans have moved to the cities. Today Mexico City is a
megacity with millions and millions. Today there is an increasingly large
elderly Mexican population with an increasingly smaller younger population to
support the older generation. In contrast the Mexican American population in the
US has maintained a high growth rate and have made major contributions to our
nation.
The
strategic problem will develop in the coming few years when Mexico changes from
an oil exporting nation to an oil importing nation. The federal government of Mexico
takes 91% of the national oil company PEMEX profits for 37%of the federal
budget. When, not if, that income for the federal budget disappears there will
continued upheaval. What needs to be watched is the Mexican
economic growth rate, job formation, and GNP. Even more important we must
continue to cooperate with Mexico to deal with the crime rate and the current
destabilizing drug war drug wars.
In the
coming federal election there is a probability the current PAN party will not
regain the Presidency and the once long time PRI party will take power. The
issue is will the coming economic storm, a totally predictable storm, create an
increased migration to the US, in spite of increasingly restrictive US
Immigration policies, in the short term or long term from a neighboring nation
with over a 100 million population?
Why is
New Zealand different (from Greece and
Ireland)?
Tyler
Cowen
It's
not just the Kiwi fruit. Via Eric Crampton, Matt Nolan informs us:
On the
surface there appears to be a lot in common with the Irish, Greek, and NZ
economies. All three have high net foreign liability positions,
liabilities are highly concentrated through banks who are borrowing overseas,
all three have experienced some form of housing boom and lift in consumption,
and finally all three appeared to have a relatively strong fiscal position
before the GFC before moving into fiscal deficits after the shock. And yet
(so far) while the
Irish and Greek economies and banking systems have collapsed, New Zealand’s has
been fine.
There
are two major differences that have helped reduce the implied risk on our debt,
making New Zealand much less likely to experience a bank
run:
- Our
banking system is primarily foreign owned (Eric
Crampton expands on why this is a good
thing),
- We
have a freely floating exchange rate – combined with having much of our debt
denominated in NZ$ this is useful.
Addendum: Matt
Yglesias offers relevant comment.
December
2, 2010 at 09:23 AM in Economics
| Permalink
| Comments
(20)
'Contagion'
and Other Euro Myths
Restructuring short-term debt as long-term debt—which is what default
really means—would hardly be the end of the world.
Over
the weekend, European finance ministers and the International Monetary Fund
(IMF) announced a €90 billion fund to bail out Ireland. They also promised that
no sovereign bondholder would lose a cent, at least through 2013. The amount of
fuzzy thinking behind this decision is even bigger than the heap of euros now
being shoveled upon Dublin.
The
bailout is being justified on grounds of containing "contagion." This is
nonsense. The
notion is that news of an Irish restructuring would scare investors in Spanish
bonds, who would start looking at Spain's ability to repay its debts and then
demand higher interest rates.
But
haven't investors in Spanish bonds already noticed that there's a bit of a
problem? And wouldn't news of a giant bailout make these investors question
Spanish finances as much as would news of debt restructuring?
Any
contagion is entirely self-inflicted. The only way Ireland's fate affects
Spanish investors is by changing the odds that the European Union (EU) will bail
out Spain. And Spanish interest rates are rising, suggesting investors now think
a Spanish bailout is less, not more, likely.
This
is not, in fact, an Irish bailout. It's a bailout of the European (including
British) banks that lent a lot of money to the Irish government and Irish banks.
If European governments want to bail out their banks, let them do so directly
and openly—not via the subterfuge of country bailouts. Then they should face the
music: How is it that two years after the great financial crisis, European banks
make so-called systemically dangerous sovereign bets, earn nice yields, and then
get bailed out again and again?
View
Full Image
Chad
Crowe
European
bank regulators should announce that sovereign debt is not risk-free, and that
their banks need capital against sovereign loans, or they need to buy insurance
(credit default swaps) against sovereign exposure. Will taking this step hurt
bank profits? Well, yes. Sorry. That game, at taxpayer expense, is
over.
At
least the announcement of the bailout fund breathed the possibility that some
debt-holders might have to take a haircut someday. But it will only be after
2013, and only then on a "case by case" basis.
The
middle of the bailout road—where Europe now stands—is the worst place to be. An
ironclad bailout guarantee can calm markets, if not taxpayers and currency
holders. An ironclad no-bailout position works as well: Markets adjust, banks
stop betting on sovereign debt, and regulators realize the risk and demand some
capital or credit default swap coverage.
A
vague, case-by-case threat is the worst combination. Assessing the value of
bonds becomes a guess about the intentions of EU and IMF officials. The next
crisis will be that much harder for the same officials, since so many big
financial institutions will have bet on bailout and will be lobbying them hard.
The
big culprit in all of this is short-term debt. There would be no crises if
governments had issued long-term debt to match long-term plans to repay that
debt. If investors become gloomy about long-term debt, bond prices go down
temporarily—but that's it. A crisis happens when there is bad news and
governments need to borrow new money to pay off old debts. Only in this way do
guesses about a government's solvency many years in the future translate to a
crisis today.
There
are two lessons from this insight. First, given that the Europeans will not let
governments default, they must insist on long-term financing of government debt.
Debt and deficit limits will not be enough. Second, the way to handle a
refinancing crisis is with a big forced swap of maturing short-term debt for
long-term debt. This is what "default" or "restructuring" really means, and it
is not the end of the world.
Governments
like to roll over short-term debt for exactly the same reasons Bear Stearns and
Lehman Brothers did: It looks cheaper—at least until the crisis comes. But
buying insurance is always expensive.
It's
far less expensive than bailing out everyone, which is impossible. The party has
to end somewhere. If not with Ireland, then with Spain. If not with Spain, then
with Italy. If not Italy, then Germany. If not with Germany, then with printed
euros and inflation.
Deep
misunderstandings of the euro aren't helping. A currency union does not require
a debt union. The major danger to the euro right now is that the European
Central Bank is buying weak sovereign debt—not that Ireland or Spain might
restructure. The euro as a currency is stronger if it is insulated from
sovereign default.
We in
the U.S. shouldn't indulge in schadenfreude. Bad ideas lead to bad decisions,
and we are not lacking the former. Many U.S. states remain in deep trouble, and
the federal government is still in a long-term fiscal pickle.
Our
governments have also guaranteed trillions of dollars of debt—everything from
mortgages and student loans, to say nothing of implicit guarantees to banks and
state and local governments. These guarantees don't show up anywhere on the
books, but investors could start adding them up very quickly. Remember that
Ireland got into trouble by guaranteeing bank debt. U.S. government debt is also
remarkably tilted to short maturities, with the majority being rolled over every
year. The Federal Reserve's quantitative easing will tilt us further to shorter
debt.
If,
say, states start threatening default, will we act with any more wisdom? Not if
we swallow the blarney coming out of Europe.
Mr.
Cochrane is a professor of finance at the University of Chicago Booth School of
Business.
Thread:
Why
isnt Mexico Rich?
Post:
Why
isnt Mexico Rich?
Author:
Heather
Hines
Posted
Date:
November
14, 2010 10:43 PM
Status:
Published
In
this freakonomics blog by Stephen Dubner the economy of Mexico is questioned.
Dubner discusses how Mexico has agressively tried to reform their
economic situation by opening to foreign trade and investment, achieving
fiscal discipline, and privatizing state-owned enterprises; and still has failed
to show development. Many prominent economist suggest that the
combination of poorly functioning credit markets, distortions in the supply of
non-traded inputs, and perverse incentives for informality are the reasons for
lack of growth. One external factor is that Mexico exports a lot of goods that
China sells rather than exporting goods that Chine sells. deeper investigation
is going to have to happen for this question to be anwered but personally I
believe and agree with the article that the growing drug trade based out of
Mexico might be a desorted in Mexico's GDP figures.
http://freakonomics.blogs.nytimes.com/
January 24,
2011
http://www.ncpa.org/sub/dpd/index.php?Article_ID=20255&utm_source=newsletter&utm_medium=email&utm_campaign=DPD
The Blue Food
Revolution
Meat consumption
is rising worldwide, but production involves vast amounts of energy, water and
emissions. At the same time, wild fisheries are declining, says Scientific
American.
- Fish farming already
accounts for 47 percent of the seafood people consume worldwide, up from only
9 percent in 1980.
- Experts predict the share
could rise to 62 percent of the total protein supply by 2050.
- If a blue food revolution
is to fill such an exalted plate at the dinner table, however, it must operate
in environmentally sound ways -- and make its benefits better known both to a
jaded public and to policymakers with the power to help or retard its
spread.
When modern
coastal fish farming began about 30 years ago, virtually no one was doing things
right, either for the environment or for the industry's long-term
sustainability, says Scientific American.
- Fish sewage was just one
of the issues.
- In the salmon farms of
Europe and the Americas, animals were often too densely packed, helping
disease and parasites sweep through the populations.
- Fish that escaped farms
sometimes spread their diseases to native
speci
Clearly, such ills
were not good for business, and the industry has devised innovative
solutions. Kona Blue's strategy of situating the farm within rapid
offshore currents is one example. Other farmers are beginning to raise
seaweed and filter-feeding animals such as mollusks near the fish pens to gobble
up waste. Throughout the industry, including freshwater pens, improvements
in animal husbandry and feed formulations are reducing disease and helping fish
grow faster, with less forage fish in their diets.
Source: Sarah
Simpson, "The Blue Food Revolution," Scientific American, February
2011.
For
text:
Scientific
American February 2011 issue, pages 54-61
http://www.scientificamerican.com/article.cfm?id=the-blue-food-revolution (subscription required)
Schumpeter
Jan 20th 2011 | from PRINT
EDITION Economist
Firms from the developing world are rapidly catching
up with their old-world competitors
IT IS remarkable
how soon the idea that firms from emerging economies pose a serious threat to
multinationals from the rich world has become old hat. “The novelty has become
the norm,” concludes the latest annual report on these “new challengers” by the
Boston Consulting Group (BCG). But familiarity does not make that threat any
less real.
Five years ago,
when BCG first reported on the rising stars of the developing world, the rich
world was still reeling from the shock of the purchase of IBM’s
personal-computing business by Lenovo, a Chinese company. That this acquisition
proved something of a dud may comfort those in the old guard who suspect that
the ambitions of these newcomers to enter the global stage exceed their ability
to perform. Yet it has not diminished those ambitions. After a brief fall following the financial
crisis of 2008, the number and size of cross-border acquisitions by the
challengers rebounded strongly in 2010. In the past decade 60% of the foreign
purchases by these developing-country multinationals have been of companies in
the rich world; in the past two years the proportion was
70%.
In part, this may
reflect the fact that the emerging economies recovered more quickly after the
financial crisis, allowing their corporate champions to return more quickly to
the acquisition trail. BCG has analysed 100 leading firms from emerging
economies. The BRICs dominate: BCG looks at 13 companies from Brazil, six from
Russia, 20 from India (six of which are part of the Tata empire) and 33 from
China, with the rest spread widely. The list includes the world’s largest baker
(Grupo Bimbo of Mexico), meat producer (JBS of Brazil) and aluminium
manufacturer (United Company RUSAL of Russia), as well as the second- and
fifth-biggest telecoms-equipment firms (Huawei Technologies and ZTE, both from
China).
These 100
companies are looking lively. In the past decade they have seen their revenues
grow by 18% a year on average, three times faster than non-financial firms in
the S&P 500. And they have managed to expand fast without sacrificing profit
margins, which at 18% were six percentage points higher than those of their
(non-financial) peers in the S&P 500.
BCG argues that
this is because they have managed to resolve three trade-offs that are usually
associated with corporate growth: of volume against margin; rapid expansion
against low leverage (debt); and growth against dividends. On average the
challengers have increased their sales three times faster than their established
global peers since 2005. Yet they have also reduced their debt-to-equity ratio
by three percentage points and achieved a higher ratio of dividends to share
price in every year but one. This is despite two significant exceptions: in
pharmaceuticals, where the challengers have tended to make low-margin generic
drugs; and in consumer goods, where they have focused on low-cost products,
leaving the higher-margin niches to established global brands.
All this is
impressive, but it seems implausible that these trade-offs have been “resolved”.
More likely, they have been temporarily suspended during a period of unusually
rapid growth. Indeed, having sprinted to catch up, the challengers may be about
to discover that the real race has only just begun.
BCG identifies
five trends that will determine how the tiger cubs fare against the old
tortoises in the next few years. While China continues to spend heavily on
infrastructure, its low-cost construction and heavy-equipment companies will
surely prosper. They are not only building roads and bridges in China; one firm
has won a contract to build a casino in America and more will doubtless follow.
Likewise, with demand for scarce resources soaring, the miners and other
commodity-based firms that have grown huge during the past few years—including
several from Russia—may soon be positively elephantine.
The other three
trends ought to worry the challengers a little. So far, a handful of
emerging-market firms have defied the conventional wisdom that conglomerates are
inherently inefficient. But will they continue to do so? As more and more of a
conglomerate’s activities take place far from head office, inefficiencies will
surely creep in. Still, old multinationals such as America’s GE insist that new
technology and management techniques allow them to run sprawling operations
efficiently. The challengers can surely use the same
tools.
Tigers struggle to
build brands
Building global
consumer brands may prove tricky. So far, the tiger cubs have had more luck
acquiring established brands (just as Lenovo bought IBM’s PCs, Grupo Bimbo
bought Sara Lee’s North American bakery business) than persuading rich-country
consumers to fill their baskets with the local favourites of Chinese or Egyptian
shoppers. Whether such acquisitions make sense depends on the
price.
Perhaps the most
interesting trend is the challengers’ growing reliance on partnerships. More and
more, they are hooking up not with established multinationals but with other
emerging-market firms, to share knowledge, penetrate new markets and spread the
risk of especially hair-curling investments. And when the challengers do join
forces with well-known multinationals, they increasingly do so from a position
of strength.
Yet for all that,
many established multinationals believe they can hold their own. Several are
learning from the emerging-market challengers how to be innovative and frugal at
the same time. They may not be hiring at home, but many are expanding rapidly in
the developing world. For instance, according to the Times of India,
IBM is now the country’s second-largest private-sector employer. So don’t write
off the old guard yet.
Economist.com/blogs/schumpeter
WSJ
NOVEMBER 12, 2010
Ireland
Isn't Greece
Dublin
is paying for its blanket 2008 guarantee of all bank
liabilities.
Hardly a
day goes by without another piece of bad news coming out of Dublin.
On Wednesday, 10-year
government bond yields hit 8.6%, a record spread over German
bonds. The cost of insuring against a default by the government
has also soared to record levels, and the cost to Irish taxpayers of keeping the
Irish banking system afloat keeps going up.
The
latest round of recapitalizations, announced in September, drove Ireland's budget deficit to an
astonishing 32% of GDP for the year, and nobody is convinced that's the
end. Then, this week, European Commissioner Olli Rehn went to
Dublin on a fact-finding mission and insisted that the Irish government had made
"no request for assistance"—the same words we often heard before Greece was
bailed out in the spring.
But
Ireland is not Greece. Going into the 2008 financial panic, Greece had a
sky-high debt burden, a stagnant economy and a serious structural deficit that
the government had been hiding by fudging its statistics.
Ireland,
by contrast, went into the crisis with a budget surplus, a debt-to-GDP ratio of
some 27% and a strong record of recent growth that has left it one of the
richest countries in the world.
Ireland does have a
serious problem with its banks, which are the source of its current and recent
woes. A property boom and bust have left Ireland's biggest lenders with billions
in bad loans on their books.
But more
than the property mania and subsequent crash, what really distinguishes Ireland is
the government's decision in September 2008 to guarantee all of the liabilities
of the country's main lenders. This included not just depositors, but
senior and subordinated debt holders as well. At the time,
Finance Minister Brian Lenihan famously bragged that the blanket guarantee was
"the cheapest bailout in
the world." It is turning out to be one of the most
expensive.
The
government's guarantee rested on the idea that markets were merely "dislocated"
and overreacting at the height of the panic: In other words, that the banks
faced a temporary liquidity problem, not a threat to their solvency. The bad
loans have since multiplied, and the government has been forced to inject ever
more capital into the banks to keep all the creditors whole, at a cost to
taxpayers that now exceeds €50 billion.
Still,
Ireland's underlying fiscal position is not that bad. The government has some
€20 billion in the bank (so to speak) and doesn't need to return to the debt
markets until next year. It has already laid out a fiscal retrenchment of about
€15 billion, or roughly 8% of GDP, over the next four years. And unlike Greece,
it retains an attractive tax environment for business and the prospect of a
return to growth that would help whittle down those deficits and debts. The
worst thing that could happen to Ireland would be an IMF or EU-imposed austerity
program that included a hike in the country's 12.5% corporate tax rate and other
growth-killing measures.
The
question remains whether the government in Dublin can overcome the sizeable
obstacle of those open-ended commitments to make bank creditors whole.
Mr. Lenihan has argued
in the past that under Irish law depositors are not senior to senior
bondholders, and so he's had no choice but to protect both. That seems a weak
basis on which to mortgage the country for the benefit of
bondholders.
Mr.
Lenihan tore up the rules once to extend the guarantees. He could do so again to
make clear who is, and isn't, made whole.
LBC
Thursday, September 02, 2010
|
Can Chile Recapture'Golden
Decade'? |
|
Can
Chile recapture the growth of its 'golden
decade'?
CHRONICLE
SPECIAL
Knowledge@Wharton
Chile’s economy appears to have held
up well against significant recent headwinds, and some
private-sector observers go so far as to suggest that growth rates
similar to those of the "Golden Decade" may be realized
again.
Despite the earthquake and
subsequent tsunami in February, job losses and the closing of
numerous small businesses last year because of the global financial
crisis, Chile was the top destination for foreign direct investment
in Latin America during the first quarter of 2010. During the recent
World Conference for Trade and Development, the United Nations
reported that Chile, with $5.7 billion in foreign direct investment,
had outpaced Brazil ($5.6 billion) and Mexico ($4.3 billion) among
favorite locations for investors in the first
quarter.
What’s more, the Santiago Chamber of
Commerce forecasts that Chile’s foreign capital flow this year could
reach $15 billion to $20 billion. This is reflected in the dizzying
pace in the service sector, communications, mining and retail sales
resulting from higher spending on public and private reconstruction
initiatives, and meaningful expansion in internal demand, according
to a press note from the country’s Central
Bank.
Analysts widely forecast that the
Chilean economy could grow at a rate of 6 percent in 2010, which
would be in line with the goal outlined by the government of
President Sebastian Piñera. Chile’s economy contracted last year by
1.5 percent. But market optimism has run so deep that the private
sector has voiced the possibility that Chile will return to annual
growth of 7 percent, which it achieved from 1987 to 1997, a period
known as the “Golden Decade.”
Things are different now, however,
says Juan Eduardo Coeymans, a professor of macroeconomics at the
Catholic University of Chile. During those golden years, Coeymans
notes, a combination of unique factors accelerated growth. “Chile
was emerging from a military dictatorship, and the arrival of
democracy was strengthening economic deregulation and free trade,”
he says. Those factors increased investor confidence and facilitated
the arrival of significant volumes of foreign capital. They also
encouraged a political climate of reform, leading to free-trade
agreements with the world’s principal economies. None of these
variables could recur with as much intensity, he
says.
Chile has already taken maximum
advantage of global trade liberalization. It has more than 20
free-trade agreements with countries including the United States,
China, Japan and Australia, as well as with the trade blocs Mercosur
(Argentina, Brazil, Paraguay, Uruguay; Chile is an associate member)
and the European Free Trade Association (Iceland, Lichtenstein,
Norway and Switzerland).
UNRESOLVED ISSUES IN
EDUCATION
Clearly, it is hard to replicate the
economic globalization that played such an important role during the
Golden Decade. Yet some argue that it is possible to re-create the
climate of political consensus of those years to promote significant
reform. Foremost should be reforms related to the quality of
education, says Rodrigo Fuentes, professor of economic growth at the
Institute of Economics at the Catholic University of
Chile.
“You can’t aspire to an annual
growth rate of 7 percent without accelerating productivity. In
order to do that, you need to improve human capital, which also
means incorporating initiatives for optimizing the level of
education,” Fuentes says. Such reforms should involve training
workers in the appropriate ways to adopt new technologies, to
acquire more knowledge, and to become more professional in their
respective areas, while strengthening their dependence on a base of
formal education.
That is precisely the Achilles’ heel
of the Chilean labor force, argues Andrea Repetto, professor of
economics at the School of Government of Adolfo Ibáñez University.
“The level of scholarship of our workers is low, as research
projects have revealed.” According to CASEN 2006 -- the latest
version of the main tool used by the government to evaluate
educational policy -- almost 20 percent of the Chilean labor force
have not completed eight years of primary education, while 40
percent have not finished secondary school. International
achievement tests have ranked Chilean children below international
standards over the last decade, Repetto notes.
This shows that Chile faces a
tremendous challenge, Fuentes argues. Improving the quality of
education takes time; results may be visible only over generations.
Nevertheless, Fuentes says, productivity can be increased in a short
period with changes in the labor market. Fuentes proposes making the
workday more flexible; changing the system of unemployment insurance
compensation; and devising more effective policies for adjusting
minimum salaries so “any increases in salaries are reflected in an
increase in real productivity.”
Repetto adds that it is important to
deal with the labor market’s high turnover rate; some 35
percent of the country’s formal workers have work contracts
that typically last only six months. Half of workers with indefinite
contracts don’t last 12 months on the job, according to the Chilean
government’s unemployment bureau. “As a result, it’s hard to train
workers, and you spend a lot of money without changing the turnover
rate,” Repetto says.
It will also be necessary, she
notes, to promote telecommuting and labor incentives so companies
can hire more women and young people.
THE HIGH COST
OF ENERGY
Another important issue is the
country’s dependence on high-cost energy, says Guillermo Le Fort,
professor of economics at the University of Chile, in a report
published by the Chilean economics magazine Capital. “If we don’t
manage to significantly lower the high cost of energy by using all
of our potential, it will be hard to recover our
productivity.”
From 1995 to 2003, Chile maintained
a competitive structure of energy costs, largely through imports of
Argentine natural gas at a low price. In 2004, however, Argentina
restricted its shipments of hydrocarbons, forcing Chile’s electric
utilities to operate with imported diesel fuel, which made their
costs shoot up.
Currently, two-thirds of Chile’s
electric energy is generated with its own hydropower resources. But
domestic production of petroleum, natural gas and coal are low, so
Chile must import petroleum and liquid natural gas at high prices.
Chile is counting on results from small renewable energy projects in
the north and south, based largely on wind, the sun and biomass.
However, “the cost of developing attractive energy alternatives
continues to be very high,” says Hugh Rudnick, professor at the
Institute of Electrical Engineering at the Catholic University of
Chile.
What are Chile’s best options for
lowering energy costs? Taking maximum advantage of hydroelectric
resources and coal, Rudnick says. But Chile will have to wait until
2012 to exploit new hydropower complexes and coal-fired plants
because construction of these projects has only recently
begun.
Meanwhile, Chile can make progress
in other areas. One is to improve government efficiency, Coeymans
says. “There seems to be an enormous waste of resources in the
government, when you discover that there are 70 journalists working
inside the same ministry.” A recent Ministry of Health audit
revealed that 160 lawyers and 70 journalists worked in the agency,
provoking a public outcry. Fuentes says the government should
correct these inefficiencies, which distort resource allocation and
increase production costs.
COPPER AND LOW FISCAL
DEFICIT
Despite these challenges, the
consensus among experts is that various favorable factors will
permit Chile to achieve high growth. One is the high price of copper
on world markets.
Currently, the price of copper is
above US$3.30 a pound on the London Metal Exchange. That, notes
Coeymans, “is providing incentives for the big mining companies that
operate in Chile to invest more capital in order to increase their
production levels.” According to the Santiago Chamber of Commerce,
mining was the leading sector for foreign direct investment in the
first quarter, with $1.6 billion invested.
The world’s largest copper
producer’s dependence on the extraction of the mineral “is a
double-edged sword,” warns Javier Bronfman, professor of public
policy at the School of Government at the Adolfo Ibáñez University.
“It puts us in a delicate situation with regard to international
fluctuations in that commodity.” When the global financial crisis
broke out in September 2008, it struck a hard blow against copper
prices, which dropped to US$1.14 a pound. That had a strong impact
on production costs, which led to the closing of numerous small and
midsize companies tied to the sector.
That is why Coeymans suggests that
the government apply efficient mechanisms for covering price risks
to protect not only small mining companies, but all smaller
companies, “since they are responsible for generating more than 60
percent of jobs in Chile and contributing 30% of the
GDP.”
But copper isn’t the whole story.
Chile possesses strong macroeconomic accounts, which drive growth.
“The best example is its extremely low fiscal deficit, which
represents only 5 percent of its GDP, according to the latest report
of the International Monetary Fund,” explains Dalibor Eterovic,
professor of political economics at the School of Government of the
Adolfo Ibáñez University. He is also manager of economic research
and fixed income at LarrainVial, a Chilean provider of financial
services.
In the context of the indebtedness
affecting numerous developed countries, he says, “Chile offers the
characteristics of a safe haven, which will make it easier for it to
attract foreign capital.”
In any case, Chile’s future is in
its own hands. Either it deals with the great unresolved issues and
turns its economic advantages into high, sustained growth, or it
lets these good times, which are more than satisfying to the
country’s businessmen, become a lost
opportunity.
Republished
with permission from http://www.knowledge.wharton.upenn.edu -- the online research
and business analysis journal of the Wharton School of the
University of Pennsylvania.
- SEPTEMBER
29, 2010, 10:45 A.M. ET
China's
Next Leap Forward
The jump from middle-income to rich
status is much harder to achieve than the ascent from poverty. But
there are plenty of reasons to believe China's growth prospects
remain strong.
I just spent two weeks lecturing in
China and Hong Kong, and discussing China's economic development
with many economists, businessmen and government officials. China's
progress since my first trip there in 1981 has been truly
remarkable, and I expect considerable growth during the next decade.
Nevertheless, China still faces many challenges if it is to move
beyond middle-level income status into the exclusive club of high
per capita income countries.
Related
Video
No country in the modern world has
managed persistent economic growth without considerable reliance on
private enterprise and decentralized private markets. All centrally
planned economies failed to achieve sustained development, including
the Soviet Union before its collapse, China before market reforms
began in the late 1970s, and Cuba since Castro's revolution in the
late 1950s.
China's private sector has led its
dominance in textiles, electronics, and other consumer and producer
goods. It's followed the model of the "Asian Tigers"—Hong Kong,
Singapore, South Korea and Taiwan—and relied heavily on exports
produced with cheap labor. In the process, China has accumulated
enormous reserves, as Taiwan, Japan and other rapidly growing Asian
economies did in past decades.
Poorer countries like China need not
get everything "right" to grow rapidly through exports to richer
countries. They need only have some strong sectors that use world
markets to fuel overall growth. Japan's rapid growth from the
1960s-1980s was led by a highly efficient manufacturing sector. Yet
at the same time Japan also had a large and inefficient service
sector, and an agricultural sector that was riddled with subsidies
and inefficient incentives.
Similarly, China's economy still has a glut
of state-owned enterprises (SOEs) with excessive employment and low
productivity. Their importance has fallen over time, but Chinese
economists estimate that they still control about half of
nonagricultural GDP. One crucial example is the state-controlled
financial sector that makes cheap loans to other large, inefficient
and unprofitable state enterprises. China's economy also suffers
from extensive price controls, restrictions on migration, and many
other structural barriers to efficient growth.
View Full
Image
David
Gothard
Some
democracies, like postwar Japan, have made the economic reforms
needed for sustained economic progress. India, for example,
experienced rapid growth after it began in 1991 to shed a socialist
orientation and encourage private investment and private initiative.
But economic progress has been swift under autocratic rule as well,
including in Chile under Augusto Pinochet, Singapore under Lee Kuan
Yew, and Taiwan under Chang Kai-shek. Usually, however, personal
freedom has grown along with rapid economic progress in autocratic
governments. Chile, Taiwan and South Korea, for example, all became
vibrant democracies after they'd grown rapidly for a number of
years.
Something related has happened in
China. The degree of personal freedom in China today is enormously
greater than in 1981, when the vast majority of the population had
essentially no personal freedoms. The Internet, in particular, has
given hundreds of millions of Chinese access to all kinds of
information, including what happens in democracies, and various
criticisms of their government's policies. The government actively
tries to censor the Internet, but these censors are easily bypassed.
Students and others say they readily "climb the wall" by using cheap
software (appropriately, made in America) that gives them direct
access to the Internet in Hong Kong and hence avoids the
censors.
I do not know how soon China will
evolve into a political system with competing parties, or whether
China will continue to have effective leadership under its
single-party structure. But as the economy continues to develop it
will be impossible to prevent personal freedoms from expanding,
including the freedom to criticize economic and social
policies.
Global
markets allow poor countries to grow rapidly for a while, but it is
far more difficult to grow beyond middle-income levels. Much has
been made of the fact that a month ago China's aggregate GDP
surpassed that of Japan. But all that means is China's per capita
income is about 10% of Japan's, since China's population is about 10
times that of Japan. Despite its great economic advances, China
still has a long way to go to become a rich
country.
China's
locally owned government enterprises have been more efficient than
national enterprises. This is mainly because local government
enterprises have to compete against each other, whereas national
enterprises often receive monopoly positions. But competition among
government enterprises is a partial substitute for competition among
privately owned enterprises. If China wants to continue to grow
rapidly it will have to reduce the scope of the SOEs, especially the
national ones, and greatly expand the private sector in finance,
telecommunications and many other fields.
Developing countries improve their
technological base by importing technologies and knowledge developed
in advanced countries. China has encouraged direct foreign
investment in part to get access to the technologies of Japan, the
U.S., Germany and other nations. Using technologies developed by
others is still important after countries advance to middle-income
levels, but these countries must then also develop more of their own
technologies to advance much further.
To accomplish this transition, China
has been promoting university enrollments and a growing R&D
sector. University attendance in China has grown greatly since the
late 1990s, propelled by rapid increases in the earnings of
individuals with higher education. China is innovating more, but it
is still a long way behind the U.S., Japan and other rich
countries.
As for China's currency, it's true
that the yuan is considerably undervalued due to Beijing's continued
intervention in foreign-exchange markets. But the undervalued yuan
is a gift to American and other consumers outside China because it
makes goods produced in China much cheaper.
In effect, China sells goods cheaply
to the rest of the world and receives in return U.S. and other paper
assets that pay almost no interest, and will depreciate in value
when inflation rates increase in the U.S. These are the main reasons
why China should move toward floating the
yuan.
Many Chinese officials believe that
substantial yuan appreciation will make the SOEs even less
competitive, thereby increasing unemployment and social unrest as
these enterprises contract. Yet an undervalued currency not only
leads to a further accumulation of paper assets but also weakens the
incentives of Chinese companies to cater to domestic
consumption—which is remarkably weak—and to upgrade their exports to
higher quality products.
There is tremendous pride and
enthusiasm among Chinese regarding their economic achievements, and
a growing confidence that China is returning to its great-country
status of centuries ago. This is reflected in the enormous energy of
its professionals, entrepreneurs and workers. It is also reflected
less attractively in the more aggressive stance of China toward
Japan and other neighbors.
Yet with some enlightened
leadership, along with greater faith in competition and private
markets, China's prospects for continued growth—and for rapid
improvements in the circumstances of the children and grandchildren
of the present generation—are strong.
Mr. Becker, the 1992 Nobel
economics laureate, is professor of economics at the University of
Chicago and senior fellow at the Hoover
Institution.
Guest post: only trade-fuelled
growth can help the world’s
poor
September 21, 2010 2:10
pm by beyondbrics
http://blogs.ft.com/beyond-brics/2010/09/21/guest-post-only-trade-fuelled-growth-can-help-the-worlds-poor/
32
0
By William Easterly
The Millennium Development Goals
tragically misused the world’s goodwill to support failed official
aid approaches to global poverty and gave virtually no support to
proven approaches.
Economists such as Jeffrey Sachs might argue that the system can be
improved by ditching bilateral aid and moving towards a
“multi-donor” approach modelled on the Global Fund to Fight Aids,
Tuberculosis and Malaria. But current experience and history both
speak loudly that the only real engine of growth out of poverty is
private business, and there is no evidence that aid fuels such
growth.
Of the eight goals, only the eighth
faintly recognises private investment, through its call for a
“non-discriminatory trading system”. This anodyne language refers to
the scandal of rich countries perpetuating barriers that favour a
tiny number of their businesses at the expense of impoverished
millions elsewhere. Yet the trade-related MDG received virtually no
attention from the wider campaign, has seen no action, and even its
failure has received virtually no attention in the current MDG
summit hoopla.
This is all the more misguided
because trade-fuelled growth not only decreases poverty, but also
indirectly helps all the other MDGs. Yet in the US alone, the
violations of the trade goal are legion. US consumers have long paid
about twice the world price for sugar because of import quotas
protecting about 9,000 domestic sugar producers. The European Union
is similarly guilty.
Equally egregious subsidies are
handed out to US cotton producers, which flood the world market,
depressing export prices. These hit the lowest-cost cotton producers
in the global economy, which also happen to be some of the poorest
nations on earth: Mali, Burkina Faso and Chad.
According to an Oxfam study,
eliminating US cotton subsidies would “improve the welfare of over
one million West African households – 10 million people – by
increasing their incomes from cotton by 8 to 20 per
cent”.
Brahima Outtara, a small cotton
farmer in Logokourani, Burkina Faso, described the status quo to the
aid agency a few years ago: “Cotton prices are too low to keep our
children in school, or to buy food and pay for
health.”
To be fair, the US government has
occasionally tried to promote trade with poor countries, such as
under the African Growth and Opportunity Act, a bipartisan effort
over the last three presidents to admit African exports duty free.
Sadly, however, even this demonstrates the indifference of US trade
policy towards the poor.
The biggest success story was
textile exports from Madagascar to the US – but the US kicked
Madagascar out of the AGOA at Christmas 2009. The excuse for this
tragic debacle was that Madagascar was failing to make progress on
democracy; an odd excuse given the continued AGOA eligibility of
Cameroon, where the dictator Paul Biya has been in power for 28
violent years. Angola, Chad and even the Democratic Republic of the
Congo are also still in. The Madagascan textile industry, meanwhile,
has collapsed.
In spite of all this, the great
advocacy campaign for the millennium goals still ignores private
business growth from trade, with a few occasional exceptions such as
Oxfam. The burst of advocacy in 2005 surrounding the Group of Eight
summit and the Live 8 concerts scored a success on the G8 increasing
aid, but nothing on trade.
The UN has continuously engaged US
private business on virtually every poverty-reducing MDG except the
one on trade that would reduce poverty-increasing subsidies to US
private business. And while the UN will hold a “private sector
forum” on September 22 as part of the MDG summit, the website for
this forum makes no mention of rich country trade
protection.
The US government, for its part,
announced recently its “strategy to meet the millennium development
goals”. The proportion of this report devoted to the US government’s
own subsidies, quotas and tariffs affecting the poor is: zero. News
coverage reflects all this – using Google News to search among
thousands of articles on the millennium goals over the past week,
the number that mention, say, “cotton subsidies” or “sugar quotas”
is so far: zero.
It is already clear that the goals
will not be met by their target date of 2015. One can already
predict that the ruckus accompanying this failure will be loud about
aid, but mostly silent about trade. It will also be loud about the
failure of state actions to promote development, but mostly silent
about the lost opportunities to allow poor countries’ efficient
private business people to lift themselves out of
poverty.
William Easterly is professor of
economics at New York University and co-director of its Development
Research Institute
| |
Venezuela
on the Brink
http://www.commentarymagazine.com/viewarticle.cfm/venezuela-on-the-brink-15528
James K. Glassman
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Venezuela goes to the polls on Sept. 26 in a
parliamentary election that opponents of President Hugo Chavez see as “a chance
to turn the tide,” as Reuters news service puts it. Chavez
may be taking on more authoritarian powers, but he also has to defend what the
latest data show is the worst economy in the world. And you thought the
Democrats had problems!
The Economist magazine provides
statistics weekly on 57 nations, from the United States to Estonia. Its most
recent report forecasts that gross domestic product in Venezuela will decline by
5.5 percent in 2010. Next
worst is Greece, with a 3.9 percent decline. Greece, of course, came close
to defaulting on its debt earlier this year, and analysts at Morgan Stanley
worry that Venezuela is moving in the same direction.
“Our new baseline of at least three years of
economic contraction suggests the risks to Venezuela’s ability to honor its
international financial commitments may be on the rise,” wrote Daniel Volberg
and Giuliana Pardelli in a June
report, at the same time predicting that GDP will fall by 6.2 percent in
2010. “While most of Latin America, in line with the globe, has been in recovery
mode since last year, Venezuela has seen an intensifying downturn in activity,”
they added.
So that’s GDP, the single best measure of
economic health. When it comes to inflation, no one is close to
Venezuela. Consumer prices are already up 31 percent for 2010 and are expected
to rise more by year-end. Only two of the remaining 56 nations monitored by the
Economist are suffering double-digit inflation: India and Egypt, both
with 11 percent price increases.
Venezuela’s stagflation is all the more
remarkable because, as
the No. 8 oil-producing nation in the world, the country should be benefiting
handsomely from high oil prices.
These results, however, should come as no
surprise. Venezuela is suffering from serious economic mismanagement as the
central government takes control of more and more sectors. Over the last three
years, Chavez has nationalized firms in such industries as cement, steel,
agribusiness, banking, tourism, oil, communications, and
electricity.
Chavez has another problem: violent crime.
Caracas, the capital, has nine times the homicides per 100,000 people as Bogota
and 15 times the rate of Sao Paulo. Overall, according
to Newsweek, Venezuela has “the worst murder rate in the
hemisphere,” and it has helped push “President Chávez’s approval ratings off a
cliff.”
Indeed. In a survey last month, Consultores 21
found that only 36 percent of Venezuelans approved of Chavez’s performance, a
seven-year low.
Chavez has responded to these ills by shutting
down media outlets, restricting economic freedom, blaming his critics, and
throwing political opponents and businessmen in jail.
In March, he imprisoned Oswaldo Alvarez Paz,
after the former state governor said on
Globovision TV, “The Venezuelan regime has relations with structures that serve
narco-trafficking, like the FARC [the Colombian terror group] and others which
exist in the continent and the world.” In May, a retired general, Raul Isaias
Baduel, once Chavez’s defense minister but now a critic, was sentenced to a
prison term of nearly eight years on charges of misappropriation of funds.
Those two join what Reuters calls “a list of several dozen Chavez opponents now
in jail, living in exile or facing probes.”
Earlier this summer, the government issued an
arrest warrant for Guillermo Zuloaga, the principal owner of Globovision, which
the New Republic, in a blistering editorial about Chavez, called “the
country’s last remaining major TV station with sympathy for the
opposition.”
The pattern is clear: like Gen. Baduel, the
charges against Zuloaga were economic -- in this case, that he “hoarded”
automobiles on his property, a strange claim that had been made against him
before and shelved. Zuloaga was to be held in one of the most notorious prisons
in Latin America, but he fled the country and is now in
exile.
In an interview in July with Mary O’Grady of the
Wall Street Journal, Zuloaga said the arrest warrant came because his
TV station has been reporting the dire conditions in Venezuela today. "The
quality of Venezuelan life is deteriorating considerably, at the same time one
of the biggest corruption scandals has come out with 70,000 tons of food rotting
in the ports,” he
said. “We have problems with electricity, problems with water, the highest
crime rate of any place. … The Chávez government has infringed almost every
article of the constitution."
At the time of Zuloaga’s arrest, the government
also seized control of Banco Federal, claiming that the bank was not meeting
liquidity requirements. Nelson Mezerhane, the bank’s president, is a major
investor in Globovision, and the Wall Street Journal reported that the
connection with Zuloaga was “the
actual reason the bank was seized.” Mezerhane has also fled the
country.
Unlike Zuloaga and Mezerhane, another prominent
businessman, Ricardo Fernandez Barrueco, a billionaire banker and food supplier,
is
languishing in jail. Barrueco’s case was
likened in an article on Forbes.com to that of Mikhail Khodorkovsky, the
former CEO of the energy giant Yukos and a critic of former Russian President
Vladimir Putin. Barrueco was first imprisoned in November and not charged with
alleged banking violations until
July. Barrueco’s assets, ranging from tuna boats to trucking fleets to
shares in such companies as flour maker Molinos Nacionales, have
been seized by the government.
Also targeted by Chavez is another
food-production executive, Lorenzo Mendoza. A Miami Herald article in
July reported that “Chávez is gunning for Empresas Polar, the country's giant
food and beer conglomerate. The company, owned
by the Mendoza family, is an obstacle to the government's plans for state
control of the food industry.”
Once again, Chavez is accusing someone of
“hoarding” -- in the case of Mendoza, it’s food rather than cars. The
Herald article quotes an expert, however, as saying that the government
has already mismanaged the part of the food-production sector it already
controls. If Empresas Polar is taken over, says Carlos Machado Allison of the
IESA business school in Caracas, “there would be terrible unemployment and many
producers would have nowhere to place their products.''
In an attempt to prevent Venezuelans from
learning what is happening in their country, Chavez has been dismantling
independent media. In 2007, RCTV, the popular over-the-air television station
launched more than 50 years ago, lost its broadcast license for criticism of
Chavez. RCTV then moved to cable, where it became the most popular network but
soon ran afoul of Chavez again. Dozens more stations have been shuttered.
Chavez’s latest move, in June, was the creation of what Human Rights Watch calls
an all-powerful “censorship office.”
Last month, a photo on the front page of the
newspaper El Nacional showed more than a dozen corpses of homicide
victims in the morgue. It caused outrage at the government, which responded by
ordering the paper to stop publishing any images of violence, “as if that would
quiet growing questions about why the government -- despite proclaiming a
revolution that heralds socialist values -- has been unable to close the
dangerous gap between rich and poor and make the country’s streets safer,” wrote
reporter Simon Romero in an article in the New York
Times.
But even a news blackout would not prevent
Venezuelans from knowing firsthand what is happening to their nation’s economy.
Retail sales were down 12 percent in the first half of the year; sales of food,
beverages, and tobacco in specialty stores were off 30 percent. Chavez slapped
on permanent exchange controls to prevent “the oligarchy from taking U.S.
dollars and depositing them in banks around the world.” But like most such
controls, they have only panicked investors and businesses and led to more
capital flight. Figures
from the Central Bank of Venezuela showed $9 billion in capital outflows in the
first half of the year.
As they go to the polls this month, Venezuelans
will undoubtedly be concluding that arrests, censorship, and other restrictions
on liberty are no substitute for economic and political freedom and sensible
public policy.
Cutting
the corruption tax
|
For many, corruption and political
cronyism are seen as an inevitable part of Greek politics. This column
argues that the same could have been said in the 1970s about Hong Kong,
now a beacon of low corruption. Hong Kong managed this turnaround by
appointing a non-elected governor accountable to the UK government. Greece
could achieve the same by calling on the EU and start counting the
benefits.
Many of us
take it for granted that government officials will obey the law. In the
US, news that the police department in New Orleans committed and covered
up crimes like rape and murder reminds us that this needn’t be the case.
It also reminds us that living with the lawlessness of a weak state might
be better than living under a strong state that officials can
abuse.
Many
nations live with a weak government because people fear that a strong
govern¬ment will abuse its power. This fear is particularly acute in a
country like Greece, where people can still remember the time in the late
1960s when military officers seized control of the state and brutally
sup¬pressed dissent.
Unfortunately,
the current economic crisis in Greece is too serious for its weak state to
man¬age. In New Orleans, the mayor and community leaders asked the federal
Department of Justice to intervene and reform the city’s dysfunctional
police department (Robertson 2010). Like the city government in New
Orleans, Greece needs to reach out for help.
An achingly
slow recovery from the financial crisis could threaten the foundations of
Greek society. To avoid this, the people of Greece should reach out to the
EU – not for more loans or for budget supervision but for assurance that
new efforts to root out corruption and civil service inefficiency will be
politically neutral. By working with the EU, Greece can quickly build the
kind of strong, honest, and efficient state that can lead the country out
of the crisis.
The
situation in Greece
Corruption and bureaucratic inefficiency amount to
a tax on all firms that operate in Greece’s formal
sector. The tax is
especially onerous for start-ups and foreign firms that would like to
invest there.
Here’s how one
business leader, call him John, described a recent encounter with a local
official. The official withdrew the license of one of John’s operations.
It would be reinstated only if John agreed to hire the official’s
girlfriend as a consultant and pay her via an offshore account. John’s
legal recourse was limited – any case against the official would linger in
the courts indefinitely. In the meantime, John’s firm would not be able to
operate without the license. John ended up speaking to someone higher in
the government to get the local official to back down. He did not say what
the higher-level official got in return.
This kind of
behaviour is no secret. In Transparency International’s 2009
corruption rankings, Greece tied Romania and Bulgaria for the worst score
in the EU. At this level, corruption has visible effects on the
overall efficiency of government. Daniel Kaufmann (2010) points to
a strong correlation between cor¬ruption and fiscal deficits, even in
industrialised countries like Greece. The budget position
in Greece suffers from tax evasion and the political patronage that bloats
public payrolls with un¬necessary hires. Kaufman suggests that if Greece’s
levels of corruption were comparable to Spain (hardly the gold standard),
its budget shortfalls over the preceding five years would have averaged as
little as 2.5% of GDP rather than the current
6.5%.
As Marcus
Walker points out in the Wall Street Journal, roughly one-quarter
of all taxes owed in Greece are not paid. Walker also notes Prime
Minister George Papandreou’s frustration with the many Greek politicians
who promise public administration jobs to constituents to secure votes.
The finance ministry estimates that the government added 27,000 people
to its payrolls in the run up to the fall 2009 election, even though many
of the new hires lacked an official position and an office (Walker
2010).
The costs of
patronage go far beyond the salaries for unneeded civil servants. In a
work environment where political patronage trumps merit, employee
discipline is slack, government agencies are poorly run, and graft is
widespread. One particularly important failure lies in the judicial
system, which is notoriously slow at resolving cases. As the local
official who demanded the payments to his girlfriend understood, this
dramatically broadens the opportunities for criminal
activity.
The business
official who spoke to me earns a living by collecting part of the
corruption tax. Foreign firms invest in Greece through his companies while
he manages the demands from the officials. But his efforts come at a cost.
Using data from global firm-level surveys, Kaufmann and Wei (1999)
find that the managers of firms that pay more in bribes are likely to
spend more time, rather than less, quibbling over red tape with
bureaucrats than firms that refuse to pay bribes. They also find that
bribers have a higher cost of capital.
The
benefits from eliminating the corruption tax
Corruption and bureaucratic inefficiency act like
the worst kind of tax – one that deters economy activity without raising
any revenue. In the midst of
the current crisis, cutting this tax would be a triple-win. In the long
run, it will raise potential output. In the medium run, it will narrow the
current-account deficit by reducing the cost of producing goods in Greece.
In the short run, it will encourage investment by foreign firms and
start-ups, which will bring the economy back toward full
employment.
The existing
approach, based on fiscal tightening, can reduce the budget deficit and,
by temporarily reducing imports, help balance the current account. Some
commentators suggest that a longer recession may be an unwanted side
effect. In fact, prolonged recession is an essential part of this approach
to reducing the current-account deficit. If Greece relies solely on fiscal
tightening, a long and deep recession will be the only way to drive wages
low enough to permanently change the costs of production in Greece
relative to its trading partners.
To avoid the
need for a long recession, many countries enact adjustment programmes that
combine fiscal austerity with a cut in the exchange rate. Because it is
part of the Eurozone, Greece does not have this option. In this context,
the tax from corruption and inefficiency is an opportune obstacle – by
removing it Greece can cut costs and become a more competitive place to do
business. We don’t know the exact magnitude, but this tax cut might be
large. A young person who is trying to grow a new business told me he
would happily pay a 15% increase in the VAT if he could deal with a
government that was as honest and efficient as the government in Hong
Kong.
The
experience in Hong Kong
Until
recently, Greece had five layers of government instead of the three levels
– local, state, and national – that are standard elsewhere. The extra levels of government increase
opportunities for corruption and inefficiency, so the current
administration has wisely chosen to consolidate. But even with fewer
levels of government, corruption and inefficiency will linger in those
that remain.
Some say that
corruption and political cronyism are an inevitable part of “the Greek
reality”. As long as there is government in Greece, there will be a tax
from corruption and inefficiency. In the 1970s, the same sorts of
cultural pessimists thought that Hong Kong would always be corrupt.
The actual experience there demonstrates just how wrong they were.
Feasible policies can quickly change a culture of
corruption.
As in
many places, the responsibility for fighting official corruption in Hong
Kong once rested with a special branch within the police force that was
conveniently ineffective. In 1974, the governor general of Hong Kong
vested anti-corruption responsibilities in a new elite ministry, the
Independent Commission Against Corruption (ICAC). The commission was
directly responsible to the governor general, who was himself an appointed
rather than an elected official.
The governor
general in Hong Kong was not an authoritarian leader. He answered
to the democratically elected British prime minister but his position did
not depend on local political contests. As a result, neither the governor
general nor the commissioners that answered to him had any interest in
using the substantial powers of the commission for narrow political gain.
They could be trusted with strong powers because they were
held accountable to an offshore democracy that wanted Hong Kong to
thrive.
Unsurprisingly, the ICAC’s efforts met with
considerable resistance from the police. The governor general was eventually forced to
grant amnesty for past crimes after the police went on strike and
threatened violence. Though amnesty was viewed as a setback at the
time, it meant that the commission could use all of its resources to
prosecute fresh cases involving corrupt police officers and officials.
This made it a much better deterrent against continued
corruption.
Along with the
formal prosecutions, the ICAC used education to change Hong Kong’s social
norms regarding corruption. It organised a broad campaign, adding
anti-corruption classes to the public school curriculum and creating
anti-corruption television programmes. It published surveys that
tracked changes in the amount of corruption over time. The commission
also reviewed the rules of all ministries and modified them to reduce
opportunities for corruption (Manion 2004).
So much for
Hong Kong’s intractable culture of corruption. According to the surveys,
the frequency of requests for bribes fell very quickly. Today Hong
Kong is among the least corrupt places in the world, ahead of Japan, the
UK, and the US.
Guns at
a fistfight?
If a
commission like the one in Hong Kong could eliminate the corruption tax in
Greece, and if doing that would be so beneficial in the midst of the
current crisis, why hasn’t one been established there? The problem
is as old as Greek democracy. As Plato observed, if guardians are how we
prevent lawlessness, who guards the
guardians?
Government
agencies that are strong enough to prosecute corruption cases and root out
inefficiency in the civil service will also be susceptible to abuse.
Selective prosecution and civil service dismissals could easily be used to
help one political party and hurt another. Even if these powers are used
in a neutral way, those who are caught will claim that the motivation for
their prosecution was political. Unless such repeated assertions can be
decisively rebutted, they could undermine the commission’s
legitimacy.
Political competition in Greece is like a fistfight
in a bar. Creating a powerful new commission would be like tossing a gun
into the middle of the brawl. All parties remember how strong state powers
were abused during the military takeover. Left on their own, they might
reasonably agree that new powers would be destabilising and dangerous. But
given the chance, they might still want to invite a new sheriff to
town.
Bringing
in the EU
Because of its
membership in the EU, Greece has an option that is not available to most
other countries in the world. By leveraging the credibility of the EU,
Greece can begin the same sort of transformative fight against corruption
that Hong Kong embarked on in the 1970s. If the EU can ensure that the
appointment process to an anti-corruption commission is free of political
influence, Greeks could remove the corruption tax without disrupting the
political equilibrium.
The process
could be structured in many different ways. For example, Greek political
parties and members of civil society could propose names for head
anti-corruption commissioner. The president of the EU could then make an
appointment from the list, retaining the power to remove, replace, or
reappoint the commissioner. Like a central banker, the head commissioner
could have a clear mandate and wide discretion for achieving it,
particularly in hiring and firing commission staff. The mandate could
focus on the future, following the example of Hong Kong and specifying
amnesty for past corruption.
The
involvement of the EU could expire with a sunset clause. The clause might
be based on a supra-majority vote in a referendum. The clause could also
be triggered by objective indicators of performance, such as Transparency
International’s Corruption Perceptions Index or the World Bank’s Control
of Corruption measure.
A similarly
independent commission could bring the most basic elements of management
to the Greek civil service. A civil service commission could end the
practice of hiring and promotion based on political patronage. People who
do their jobs would be rewarded. People who don’t would be advised to
change, counselled out, or fired. With this kind of approach, essential
government organisations like the courts and tax agencies could actually
perform their functions.
What’s
at stake
The fate of
the entire EU project – to improve all aspects of governance in its member
states – hinges now on how the crisis in Greece is
resolved.
Proposals for
centralised oversight of EU member-state budgets are both too hard to
implement and too narrow in their focus. The proposals outlined here,
independent commissions that promote honesty and efficiency in government,
could be implemented quickly and would be far more helpful. They can be
prototyped in a way that is specific to the situation in Greece, then
adapted to other countries as necessary.
Many
well-established democracies in the EU have solved the problem of guarding
strong guardians. Through the
institutions of the EU, they can assist people who still live without the
remarkable benefits that this can offer, just as the federal government in
the US can assist the people of New Orleans. In Greece, as in New Orleans,
all it would take is for the local government to
ask.
References
Kaufmann,
Daniel (2010), “Can Corruption Adversely Affect Public Finances in
Industrialized Countries?”, Brookings Institution.
Kaufmann,
Daniel and Shang-Jin Wei (1999), “Does Grease Money Speed Up the Wheels of
Commerce?,” World Bank Policy Research Working Paper 2254.
Manion,
Melanie (2004), Corruption by Design, Harvard University
Press.
Robertson, Campbell (2010), “Justice Department to Review New Orleans’s Troubled Police
Force”, The New York Times, 17 May.
Walker, Marcus
(2010), “Tragic Flaw: Graft Feeds Greek Crisis”, Wall Street
Journal, 15 April.
This
article may be reproduced with appropriate attribution. See Copyright
(below).
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The
Role of Culture in Economic Development |
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Francis
X. Hezel, SJ |
Micronesian
Counselor #77 (June
2009)
Adobe Acrobat PDF here |
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http://www.micsem.org/pubs/counselor/frames/culture_economic_developmentfr.htm
How Flat is
the World?
"The world is
flat," Thomas Friedman has famously declared. His claim is that in this modern
age of globalization, when capital can cross national borders so easily, when
investment funds can be pulled from one country to another instantaneously to
respond to new business opportunities, economic development is attainable in the
most surprising of places. Today, as never before in the past, economic growth
should be within the reach of any country anywhere in the
globe.
All that is
required for the golden fruit to flower, it would seem, is to have the door open
to investment and the phone at hand. Naturally, there are conditions to be met
to attract investment dollars (or yuan or yen or Euros or pesos). But given a
stable government, the assurance that the rule of law will be upheld, and an
investor-friendly climate, any country should be a position to become the new
Singapore-a nation powered by steady economic growth.
The hitch is
that not all needy nations are able to meet these conditions. In some parts of
the world, in fact, almost none are--as if some toxic substance in the soil
makes it impossible for economies to take root there. But even if most of the
primary conditions are met-in other words, the government is responsible and the
country has the official welcome mat out for foreign businessmen-there may other
factors that make investors shake their heads and walk off with the decision to
drop their money somewhere else. Perhaps the world isn't flat, after all.
Possibly there are ingredients for economic development, more far-reaching and
subtler than the conditions usually prescribed, that touch on the national ethos
and its traditions. In other words, economic development might well be affected
by those intangibles that are collectively known as
culture.
Flirtation of
Economics with Culture
Economics,
once known as "the dismal science," has come a long way since its early days.
The discipline, relying on its scientific formulas and precise metrics, has
patented a storehouse of remedies for ailing economies. Yet it doesn't seem to
know what to do with a concept as untidy as culture.
It wasn't
always this way, though. Back in its earliest days, economics had plenty of room
for the vagaries of human behavior. Adam Smith, sometimes regarded as the
founder of modern economics, argued in his classic work Wealth of the
Nations (written in 1776) that each individual, motivated by the pursuit of
his own interests, contributes to the public interest in a system that is
self-regulating. Smith was keen-sighted enough to recognize that the "pursuit of
personal interests" involved much more than just making money. Hence, his tract,
"Theory of Moral Sentiments", deals with what today we would call cultural
values. John Stuart Mill, writing 70 years later, made the same point when he
noted that cultural constraints on individuals could have a stronger impact on
them than the pursuit of personal financial gain.
Max Weber,
the German social scientist writing in the early 20th century, offered more
specific insights into how cultural or even religious values could impact on
economic output. He argued that the Protestant work ethic, supported by
Reformation teachings that the pursuit of wealth was a duty, inculcated the
virtues needed for maximum economic productivity. For this reason, Protestants
were more productive than Catholics throughout Europe-just think of Germany and
Great Britain, for instance, compared to Ireland, Spain, Portugal and Italy in
his day.
In the
meantime, the worldview of economists was radically changing. Economic progress
was now a given, as the discipline shed its grim premise, first enunciated by
Thomas Malthus in the 18th century, that population growth doomed people to a
declining standard of living. Malthus believed that total wealth was a
constant-there was only so much land and a strict limit to the resources it
could produce, after all-and that most of the world's population would
inevitably be reduced to fighting over the scraps from the table. The remarkable
growth in the economies of the United States and many European countries during
the 19th century, however, provided evidence that a different set of assumptions
was needed. Economic theory was subsequently guided by a new insight: there was
not simply a fixed amount of wealth, but an ever expanding economic pool to draw
from. This meant, for one thing, that those nations that had little
industrialization and whose people lived a largely subsistence life could join
the more highly developed nations at the table. In theory, there would be plenty
for everyone to eat.
After having
offered hope to the underdeveloped that they could join the party, economics
seems to have narrowed its field of vision since the 1930s and dedicated its
energies largely to generating ever more sophisticated formulas relating to such
things as markets, rents, income policies, price stability, and inflation
control. It has also been busy refining its set of mathematical tools to test
the theories that the discipline has been generating. Its principal interest has
been in measuring the impact of different strategies on financial and economic
crises so as to develop a dependable set of guidelines for predicting and
managing these crises.
But as it has
been doing all this, it appears that its interest in culture has been waning.
Its presupposition seems to be that Homo economicus, no matter where he
happens to be dwelling, is subject to the same ineluctable laws of supply and
demand, maximization of profit, and pricing. The apparatus it's devised to
analyze and manage economic situations are self-contained and have little room
for the vagaries of human behavior. Today, ironically enough, with the prophets
of globalization proclaiming new hope for nations struggling to pull themselves
out of poverty, economics has little to offer them on how this might be done. In
short, the discipline's abandonment of its early fascination with culture has
rendered it speechless to those who most need its help
today.
Culture Does
Seem to Matter
Why do some
countries do very well, while others fail to develop, even when all the
requisite economic factors seem to be in place? How can we explain the repeated
failure of African nations, even when aid is given in great supply, to develop
their economy? Why are countries like Indonesia and the Philippines, even with a
strong resource base and a well educated population, so resistant to
development? For that matter, what is there to explain the slow economic growth
rates of the Pacific nations?
Most
development economists might explain these inequalities by appealing to the list
of conditions that must be met for an economy to develop. Good governance is
seen as a prerequisite of development: the political system should be stable;
laws must be clearly promulgated and enforced so that contractual agreements
will be honored; and government officials should not be corrupt or inefficient.
Moreover, land should be available at a fair rate for business opportunities;
foreign investment should be encouraged; and the bureaucratic procedures for
applying for a business permit should not be too onerous.
There may be
something to be said for this list, but it still doesn't deal with the more
fundamental issue of how culture impacts on development. Why do some ethnic
groups do so well in business that they leave others in the dust, even when
these ethnic groups are minorities in other cultures? Amy Chua raises this
question in her much acclaimed book World on Fire.
In her work
we learn that ethnic Chinese in the Philippines, accounting for less than two
percent of the population, control 60% of the nation's private economy,
including the country's four major airlines and almost all the country's banks,
hotels and shopping malls. But it's not just in the Philippines that Chinese
ethnic minorities have made their mark. They have come to dominate business in
other parts of Southeast Asia as well-especially Indonesia, Thailand, Burma and
Malaysia. Even closer to home, Chinese have distinguished themselves in the
Solomons, Tonga, and in Majuro, triggering occasional reactions from the local
populations.
Chinese are
far from the only group to achieve such success. As Chua points out in her book,
no matter where we look around the world, we will find examples of what she
calls "dominant minorities"-ethnic groups that have demonstrated a remarkable
ability to succeed in business wherever they may live. The Lebanese have become
the entrepreneurs in Sierra Leone and other parts of West Africa, while Indians
have assumed the same reputation in East Africa. In Russia, six of the seven
billionaires following the privatization of public resources less than a decade
ago were Jewish. For years, Chua points out, the Croats had enjoyed a much
higher standard of living than the majority Serbs in what was formerly known as
Yugoslavia. In South America, she goes on to point out, those of European
descent have long held economic power over their darker-skinned
compatriots.
Clearly, some
ethnic groups seem to be far more successful in business than others.
Unfortunately, their financial success can incite violent retaliation against
these groups, for they are usually small minorities in their adopted countries.
During the last two decades, just as globalization was being trumpeted as the
big leveling force through the world, uprisings have occurred in one country
after another to strip the dominant business minorities of their economic power.
Many of these-in Mugabe's Zimbabwe, in post-Suharto Indonesia, in Rwanda, in
Serbia, and in Ethiopia-sought to redress the imbalance by expropriation of
holdings, expulsion of ethnic minorities, or worst of all by genocidal wars.
Apart from the enormous human suffering generated by the conflicts themselves,
further misery followed. The nations that had sought to reclaim what they felt
was justly theirs became even more impoverished when the people to whom
businesses were handed off could not make them work.
Even so, the
summons to a globalization that will offer all ethnic groups equal opportunity
continues to ring out. To the extent that it remains a hollow call and a false
hope, Chua warns us, it will spur further outbursts of ethnic violence fueled by
frustration.
Why the
Differences?
If some
cultural groups seem to do better than others, what would explain the
differences? The real intent of this question, of course, is to discover what
might be done to compensate for these differences and cancel the competitive
disadvantages that some cultures seem to bear in this age of
globalization.
The
inequality of cultures is one of the themes explored by Gregory Clark in his
recent Farewell to Alms, which he subtitles A Brief Economic History of the
World. It was no accident, he argues, that the Industrial Revolution occurred in
Great Britain and not some other nation. Although his book is more concerned
with the antecedents of the Industrial Revolution than the transforming impact
of this landmark event on subsequent history, he points out that it gave rise to
what he calls the "Great Divergence." The Industrial Revolution may have brought
about enormous changes in production technology, but it left many nations
impoverished just as it made others wealthy. After the mid-19th century, the
heyday of the Industrial Revolution, the differences in national income and
standard of living around the globe became even greater than they ever had been
before, Clark points out, and the differences continue to widen with each
passing decade.
Why was
Britain in a unique position to give birth to the Industrial Revolution? And why
did the effects of the Industrial Revolution vary so greatly from one part of
the globe to another, from one nation to another? Clark maintains that Britain's
development was not a sudden leap forward that was propelled by the invention of
a few power-driven machines. It was gradual, he maintains, taking place over the
course of several hundred years prior to the 19th century. In his way of
thinking, the Industrial Revolution would have never occurred had it not been
for the changes in values that were happening for centuries before. From the
High Middle Ages on, following the Magna Carta in the 13th century that limited
royal authority, Britain had the stable political, legal and economic
institutions so often touted as the preconditions for economic
growth.
But such
institutions of themselves do not generate economic progress, Clark maintains.
Stable political institutions, a reliable legal system, predictable land values
and functioning markets were the necessary but not sufficient conditions for the
economic take off Britain experienced when new sources of power were harnessed.
They did, however, lead to the gradual development of precisely that set of deep
cultural changes, especially a sense of competitiveness and a strong work ethic,
that was required if sudden technological breakthroughs were have to have any
real impact on the society. The data that the author presents to us offers a
picture of a society that was losing its taste for violence even as its homicide
rate was dropping, a society with high population growth among the well-to-do,
one in which people had to work hard and long to gain a competitive advantage
over their peers, a society that was increasingly literate and patient. These
traits served people so well in Britain, Clark adds, that they would have been
passed on by means of social Darwinism and possibly even by a genetic selection
process as well. This cluster of traits, usually associated with the middle
class, gave people the edge in surviving, just as quickness of reaction, strong
legs and a good aim might have in a much earlier age and in a very different
milieu.
All of this
predated the Industrial Revolution, Clark points out, so that when the steam
engines and other new means of production were developed in the early 19th
century, the British could utilize them to expand their economy many times over.
By contrast, when India was introduced to the technology later in the 19th
century, the results were far different. The power-driven cotton mills that had
spurred such a startling economic burst in Britain were introduced to India but
never offered the country the same competitive advantage. The productivity of
British mill workers, thanks to the very traits that Clark has described for us,
was so far greater than that of their Indian counterparts that even though
hourly rates for Indian employees were merely one-fourth of British labor,
British-run mills were far more cost-efficient than Indian mills. Clark notes
that to compensate for the greater per-person productivity of British employees
and to get the Indian mills operating at maximum output, Indian mills would
typically hire many more employees. But this boosted labor costs beyond what
they would be in a British mill, making the Indian-run mills non-competitive in
the end.
So, in the
end, it was people and the values they had absorbed over the years, not the
power-driven mills or any other form of advanced technology, that had made the
difference.
Values and
Attitudes
"Does Culture
Affect Economic Outcomes?" is the title of an intriguing paper written two years
ago by Luigi Guiso, Paola Sapienza and Luigi Zingales. The paper offers
tantalizing suggestions as to which values matter most when economic development
is at stake.
The first
writer to propose a cultural explanation for underdevelopment, the authors tell
us, was the political scientist Edward Banfield in his 1958 volume The Moral
Basis of a Backward Society. He attributes the slow economic growth in
southern Italy to the excessive pursuit of narrow self-interest by people who
have never learned to trust anything outside their family. Following this lead
in his own 1993 book, Robert Putnam offers evidence that those areas in Italy
that enjoyed free city states centuries earlier have a much better track record
today than those places in southern Italy that never had the benefit of such
civic institutions. When these institutions are effective, people are prepared
to invest in social capital. Development of a sense of trust is critical here,
it is suggested, and this occurs over a long period of time as people come to
believe in something beyond their own extended family. (I have to admit that
when I read this I immediately thought of Chuuk, a cultural area that
traditionally had very few civic institutions and so might have been slow in
developing the public trust these authors regard as so
important.)
In an even
more recent book, The Wealth and Poverty of Nations, David Landes
concludes that the success of national economies is driven by cultural factors
more than anything else. Thrift, hard work, tenacity, honesty and tolerance are
the cultural factors that make all the difference, he suggests. In his view, Max
Weber was right after all in suggesting that social attitudes and values have
the decisive say on what economies will succeed and which will
fail.
Guido
Tabellini, in a working paper written three years ago, makes an attempt to offer
real evidence for the impact of culture on economic development. Using as his
cultural constellation a set of four values-trust, belief in the importance of
individual effort, generalized morality and autonomy-he finds that yearly
economic growth and per capita Gross Domestic Product (GDP) are higher in those
regions throughout Europe that exhibit higher levels of these four cultural
values.
All of this
merely confirms what Amy Chua suggests and Gregory Clark tries to
document-namely, that modern technology alone will never be able to turn around
an economy and to boost the standard of living among a population. The
development of a mindset, with accompanying values and habits, is a big part of
the equation. Formal education may contribute to this, but possibly not so much
because it imparts new information and hones skills as because it inculcates a
new view of the world and concomitant values.
This
conclusion is not encouraging for less developed parts of the world. At one
time, economists felt that sufficient capital, especially through national
savings, might catapult nations into a flight path of economic growth. Lately,
it has become more fashionable to focus on the institutions, political and
economic, to ensure that the ground is prepared for the bountiful economic
harvest to come. But a number of recent authors, proponents of the cultural
dimension of economic development, are suggesting that the creation of such
political and economic institutions may have taken centuries. Even once they are
in place, there may be need for still further cultivation of attitudes and
values before a country is fertile for economic development.
Where do the
island nations of Micronesia stand in all this?
Closer to
Home
Many parts of
the world have been written off as resistant to development. We may think of
most of Africa, parts of Latin America, the Middle East, and a few of the
countries in Southeast Asia. Of course, many of these countries still lack the
reliable institutions, beginning with stable government and the rule of law,
that are a requisite for development according to today's canon. Then there is
the Pacific, which has shown disappointing economic growth rates over the past
decade or two. If the authors we have cited are on the right track in suggesting
that historical antecedents of a people produce a cluster of values and beliefs
that foster economic development, then it might be enlightening to measure
Micronesian island societies against this cluster.
- Belief in
the importance of individual effort. Island
societies have never been distinguished for individualism or the belief system
that encourages it. They have been better known for the communalism and the
subordination of the individual to group interests that this
demands.
- Trust. This may
range in societies according to how elaborate the suprafamilial institutions
were. In groups like Pohnpei, Yap and Palau, political and social institutions
were relatively well developed in traditional times. On the other hand, people
from smaller, unstratified societies like the atolls of the central Carolines
or Chuuk may not have developed trust in broader institutions, much as the
Sicilians in Italy did not.
- Generalized
morality. By this
is meant the application of ethical standards to all, not just those in one's
immediate kin group. This may have varied by locality, but was probably not
pronounced in traditional times. However, the pressure to develop such a
standard intensified everywhere following the advent of
Christianity.
- Autonomy. This has
never been especially high on the list of virtues in island society. In fact,
island life is slanted in the opposite direction-toward conformity, in keeping
with strategies needed for survival in a small isolated
community.
- Ethic of
hard work.
Persistent work done for long hours day after day and week after week was not
regarded as a value traditionally. Island life could demand feverish outbursts
of hard work, but such an outburst was almost always followed by a long period
of relaxation. This reflects the fact that work needed for survival was
limited to a few hours a day. After all, Pacific Islanders did not have to
spend all day in the fields plowing and planting as Asians and others were
required to do.
- Thrift. This was
associated with niggardliness, which was perceived as a fault rather than a
virtue in island life. Instead, the investment in social capital-in the form
of contributions to a community feast or tribute to a chief-demanded lavish
generosity.
Overall,
Micronesia, like the rest of the Pacific, probably does not rank very high in
those cultural value and attitudes that have been identified as helpful in
promoting economic development today. This is not an indictment of Micronesia or
the other Pacific Island cultures. Nor is it to suggest that these islands
suffer from corruption or political instability or some of the other problems
that plague less fortunate countries in other parts of the world. Indeed, the
traditional Micronesian value cluster was clearly well suited to survival in
small islands in the past. Yet, the same value set that allowed islanders to
maintain harmony and support one another throughout good times and hard times in
the past is not equally well suited to building a modern economy. In other
words, Micronesia simply does not enjoy the same cultural advantages that led
Britain to prosperity after the Industrial Revolution or which have given
Chinese and Lebanese entrepreneurs the competitive edge they enjoy even after
leaving their own country to settle in another.
What Would It
Take?
What would it
take to develop the set of values that a line of authors, extending from Adam
Smith to contemporary economists, see as fundamental conditions for achieving
real economic development? Must we wait centuries for this to happen, as Britain
and the US did, or can this process be accelerated?
Improved
education for the population is an almost automatic response, as Amy Chua points
out, but she admits that research on the impact of education does not support
the conclusion that this will work. She goes on to point out that much more work
needs to be done on the interplay of culture with economic success, and writes
that even if the relationship between the two were pinpointed, leveling the
playing field between ethnic groups "will be a painfully slow process, taking
generations if it is possible at all."
Gregory Clark
offers evidence to support his conviction that the path to economic development
is to increase worker output, whether in a textile mill or a computer lab. He
traces the steady rise of Japanese worker output against that of Indian mill
employees during the early years of the 20th century, showing that by the 1930s
Japan had outproduced India and had come to dominate the market. The greater
efficiency of Japanese workers during this time was a result of their strong
discipline, which in turn stemmed from their cultural
values.
A growing
number of authors seem to agree that economic growth will take more than an
infusion of investment capital, more than an import of the latest technology,
even more than dependable political and economic institutions. A constellation
of cultural values suited for modern business seems to be a critical ingredient
as well, although no one has identified these values with precision, to say
nothing of devising a strategy for inculcating these values in developing
populations. For now, we can only conclude that in the contest for economic
development the playing field is far from level. The world is not nearly as flat
as Friedman exuberantly proclaimed.
Meanwhile,
the small nations of Micronesia are not left hanging in the wind. They enjoy
substantial dollar amounts of aid from the US, access to the US for those who
can not find employment at home, and a measure of successful business in the
islands. What they do not enjoy, however, is the cultural climate that is deemed
essential in order to turn the islands into a whirlwind of economic activity and
to stimulate the level of growth that outsiders had hoped to
witness.
At present in
Micronesia, money is viewed as a means to more meaningful ends than simply
expanding one's financial wealth. In island culture strictly economic
considerations are limited by other considerations, ones that individuals often
judge to offer them greater personal advantages than multiplying their money.
These considerations fall under three headings: security, status and
solidarity.
- Security
often takes the form of land, regarded throughout the Pacific as the last
fallback and possibly the most important currency of wealth. For a person to
trade off his own land for the opportunity to make a modest killing in a
business venture could present a serious problem for many
islanders.
- Status may
be the motivation when an individual forgoes a business opportunity to make a
large contribution toward a church or community event. The payoff for the
individual is an increase in prestige, or a higher position in
society
- Solidarity,
or sense of belonging, is the purpose of remitting a portion of one's earnings
to a relative in order to strengthen the family cohesion that is so vital to
islanders.
None of this
is reprehensible, but neither does it reflect the value set that will create
millionaires and promote the rapid growth that the islands seek today. Although
entirely reasonable to island people, choices like these can be mystifying to
consultants in that they seem to flout what should be irresistible economic
incentives so as to achieve other trivial gains. But what is "trivial" from one
cultural viewpoint is not necessarily so from another. Here is where cultural
values impact on economic choices, where an island-oriented cost-benefit
analysis defies what outsiders would consider "common sense." Here, too, is
where the conversation on economic development must begin.
But what
happens when Micronesians are plucked from their own cultural soil and are
transplanted in the US? What is the effect of this relocation on the set of
cultural values that tend to inhibit economic development? The tens of thousands
of Micronesians who have emigrated to the US to find jobs and a new home there
could provide a population sample for research into the speed with which
cultural values changes. A study of these emigrants could offer insights into
the impact of their new cultural surroundings on these islanders, even as it
helps us answer the question of whether the cultural changes needed to improve
economic development can be accelerated.
Francis X.
Hezel, SJ
Why
did it take so long for humans to have the Industrial
Revolution?
Tyler
Cowen
Marginal
Revolution blog
That's a
reader request from the especially loyal Harrison Brookie. First,
you might wish to go back and read the
MR reviews and debates of Greg Clark's Farewell to
Alms,
More
generally, extended
periods of economic growth require that technologies of defense outweigh
technologies of predation. They may also require that the
successful defender, at the same time, has good enough technology to predate
someone else and accumulate a sizable surplus. Parts of Europe took a good deal from
the New World and this
may have mattered a good deal.
Building
a strong enough state to protect markets from other states is very hard to do;
at the same time the built state has to avoid crushing those markets
itself. That's a very delicate balance.
China had wonderful
technology for its time and was the richest part of the world for centuries but
never succeeded in this endeavor, not for long at
least.
England
was fortunate to be an island.
Starting in the early
seventeenth century, England had many decades of ongoing, steady growth.
Later, coal and the steam engine kicked in at just the right time.
English political institutions were "good enough" as well and steadily
improving, for the most part.
Christianity
was important for transmitting an ideology of individual rights and natural
law.
As McCloskey and Mokyr
stress, the Industrial Revolution was in part about
ideas.
There
are numerous other factors, but putting those ones together -- and no others --
already makes an Industrial Revolution very difficult to achieve. It did
happen, it probably would have happened somewhere, sooner or later, but its
occurrence was by no means easy to achieve. The Greeks had steam engines,
proto-computers, and brilliant philosophers and writers, but still they did not
come close to a breakthrough.
One
question is how long the Roman Empire would have had to last to generate an
Industrial Revolution and don't mention the Eastern Empire
smartypants.
If you
are asking why the Industrial Revolution did not occur in the Mesozoic age, or
other earlier times, genetic factors play a role as well.
-
- WSJ
JANUARY 26, 2011, 5:53 A.M. ET
Food-Price
Rise Puts Focus on Speculators
By
SAMEER MOHINDRU
SINGAPORE—The
run-up in global commodity prices is stirring debate in a number of countries
over the role of financial speculators, a prospect that could fuel a regulatory
backlash by governments keen to control food prices.
View
Full Image
European
Pressphoto Agency
An
Indian vendor taking money from customer at a market in
Mumbai.
The
prices of many commodities undoubtedly would have risen anyway in response to
recent supply disruptions and rising demand. But some political leaders are
raising questions about how much investors such as commodities traders and hedge
funds might be contributing to the run-up. That could leader to anger among
consumers and draw yet more fire from politicians on the dangers of derivatives
trading.
Already,
many developing nations, including China and India are instigating price
controls on foodstuffs to combat inflation and ward off the kind of discontent
that led to riots in 2008. France, which holds the presidency of the Group of
20, is pushing for tighter regulation and transparency in the trading of
commodities, including derivatives trading.
In
China, after cotton, sugar, rubber and corn prices hit record highs in November,
the government asked futures exchanges to raise trading margins, in some cases
to more than 10%.
"We
share the view that commodity price fluctuations have been, from time to time,
excessive, and destabilize the growth of the economy," Rintaro Tamaki, Japan's
vice minister of finance for international affairs, said last week.
Excess
speculation from "investment tourists" aggravates instability, sending signals
that aren't substantiated by fundamentals, said Abdolreza Abbassian, secretary
for the Intergovernmental Group on Foodgrains at the United Nations Food and
Agriculture Organization.
Similar
sentiments swirling around a tripling of oil prices between 2004 and 2008
contributed to limits currently being hammered out in the U.S. on the positions
financial buyers can take in a number of commodities. The recent run-up has
complicated debate on the final rules there.
On
futures exchanges in the U.S., the world's biggest grain exporter, aggregate net
long speculative positions in 14 major agricultural derivative contracts hit a
record high of 104 million metric tons in November, well above the previous peak
of 78 million tons in March 2008, an Australia & New Zealand Banking Group
report said. Long positions are bets on rising prices.
That's
a big swing from earlier last year, when speculators were net short in U.S.
agricultural futures, meaning investors were largely betting that prices would
fall.
Parsing
out the impact of speculators can be difficult.
According
to Nobuyuki Chino, president of Unipac Grain, a Tokyo-based commodities trading
company, U.S. wheat prices would be closer to $6 a bushel compared with current
prices of around $8 a bushel had there been no speculative interest in wheat.
Corn should be trading around $5 a bushel versus $6.5 a bushel now, and soybeans
around $13.20, compared with $14, he said.
Others
are skeptical of the claims. "I've seen some sort of studies [suggesting]
speculation has added 20% to 30% to market prices, but they are never
substantiated. What you can say is the futures markets at times trade at
substantial premia to the underlying cash market," said Ann Berg, a consultant
to the U.N.'s food and agriculture agency.
With
Asian derivatives exchanges gaining market share in recent years, there has been
a surge in interest from global investors who want to park their funds in
derivative products in the region, without the hassle of owning or storing
physical commodities.
In
India, for example, the cumulative value of futures trading in commodities in
the nine months to December rose 50% to 82.7 trillion rupees ($1.817 trillion),
according to data from the Forward Markets Commission, regulator of the
country's futures exchanges.
The
Indian government has selectively suspended futures trading in politically
sensitive food items in the past and authorities are still reluctant to lift
export controls despite growing domestic stocks.
THE
POOR NEED
CAPITALISM
------------------------------------------------------------------------
The
Left's version of recent economic history boils down to one
terrible fact: The distribution of income has gradually become
more
unequal. Within the United States, that fact is
incontrovertible.
It is not clear, however, that increased
inequality has been bad, says
economist Kevin A.
Hassett.
Inequality is, after all, the foundation of a capitalist
society.
When individuals work hard, or innovate,
they receive outsized rewards.
When others see those
rewards, they are motivated to work hard
and
innovate. As the lottery-ticket market has demonstrated, the
bigger the prize, the bigger the motivation, explains
Hassett.
A landmark new study by economists Maxim Pinkovskiy and
Xavier
Sala-i-Martin set out to study changes in the world
distribution of
income by gathering data from many
different countries. As a
byproduct of their work,
they are able to count the number of
individuals who live
on $1 per day or less, a key measure of
poverty.
According to their calculations:
o The number of
people living in poverty so defined has
plummeted, from 967,574,000 in
1970 to 350,436,000 in 2006, a
decrease of a whopping 64
percent.
o The biggest factor in the reduction was
the emergence of
middle classes in previously poverty stricken China and India.
o The spread of capitalism to other countries has
similarly
been
followed by prosperity; the trend is even more impressive
if one considers that the world
population skyrocketed over
that time, increasing by 3
billion.
If the trend continues for just 40 more years, poverty will have
been
essentially eradicated from the globe. And
capitalism will have
done it, says Hassett.
Socialism offers itself as an alternative
to capitalism
that is more just to the poor. To test that view,
the authors reconstruct the distribution of income for the countries
of
the former Soviet Union. Back in the Communist
days, poverty was
much, much higher in the Soviet Union
than it is today.
There are those who have argued that the current
financial crisis has
served as proof that capitalism is a
failed ideology. The work of
Pinkovskiy and
Sala-i-Martin suggests that there are about a billion
people whose lives prove otherwise, says Hassett.
Source:
Kevin A. Hassett, "The Poor Need Capitalism,"
National
Review, November 23, 2009; based upon: Maxim Pinkovskiy and
Xavier Sala-i-Martin, "Parametric Estimations of the World
Distribution of Income," National Bureau of Economic
Research,
Working Paper No. 15433, October
2009.
For text:
http://www.thefreelibrary.com/The+poor+need+capitalism.-a0211555573
For study:
http://www.nber.org/papers/w15433
For more on Economic Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=17
http://blogs.wsj.com/economics/?mod=marketbeat
Oct
8, 2009
1:22 PM
Posted
by Michael Casey
Peruvian
economist Hernando de
Soto, who campaigns for property right reform as means of
attacking poverty, is the subject of The Power of the Poor,
a documentary showing on PBS at 10:00 pm
Thursday, Oct. 8. (Local listing times may vary.) He talked recently with
Michael
Casey about the impact that the global crisis has had on the
world’s poor. Excerpts from that interview follow.
How has
the global crisis and the policy response to it played out among the poor of the
developing world?
De
Soto: Well,
in Peru, for example, the stimulus effort has meant that we have managed to get
enough credit to the cities such that they are doing all right. But in the
poorest and most populous parts of the Peruvian jungle, from January to June,
exports have gone down by 57% and production has gone down by 25% to 27%. The
effect has been huge. In these kinds of places around the world, which
includes marginalized areas of cities, or anywhere where you’ve got an informal
economy, where credit can’t go because there are no addresses, no guarantees and
no collateral, the stimulus programs can only trickle down. They can’t get in
directly because the people have no way to identify themselves vis-à-vis the
benefits that have come in.
What are
the political implications of this widening gap between those who have property
titles and those who don’t?
De
Soto: What it
means is that we’ve got huge problems coming. What happened to us in the Amazon
area of Peru [where 22 police were killed in clashes with protesting indigenous
residents] is something that is only now beginning. It could explode. All of a
sudden, everywhere, we’ll see mines being taken over, negotiations with trade
unions breaking down, and [leftist leaders like] Hugo Chavez and Evo Morales on
the move. Social cleavage – or a class cleavage if you want to use the Marixst
term – is on the rise.
Mineral
and agricultural commodity prices fell sharply last year, but monetary stimulus
and inflation fears have helped drive a rebound. What does this mean for people
who live in poorer regions that produce these commodities?
De
Soto: The
stimulus means we have twice as many dollars and twice as much of any currency
in the system as a year ago. The question is: When are those dollars, those
euros or those renmimbi going to hit the market? A lot of people are banking on
central banks doing the easiest thing and letting inflation go. So there is a
rush for commodities. And what does that mean? That there’s a mad land grab
going. As we speak, whether it’s the Chinese or big agro-industrial companies,
they are all buying up land in Africa, in Latin America. And the thing is those
poor farmers, and those hunter and gatherer tribes, they always happen to be
right where you find things. But if it’s all untitled property that belongs to
tribes or to individuals from tribes and there is no recognition of that, we are
heading into another huge class cleavage situation.
What’s
the solution?
De
Soto: Well,
the solution to that cleavage doesn’t come with more stimulus because stimulus
will only create more inflation. The solution lies in property rights. When you
are selling cocoa futures, for example, nobody comes to market with the cocoa in
their hand; they come with a piece of paper that says they have a claim to the
cocoa in the future. All markets work on this basis of property rights. You are
selling title over something, you are not really selling “it.” And if you have a
majority of the world that is still not titled in those assets that are in
greatest demand, and with twice as much money out there, we are heading for one
big storm.
BRAZIL BATTLES THE "OIL CURSE"
------------------------------------------------------------------------
Ever since the Brazilian state energy company Petrobras struck oil in
giant fields deep below the floor of the Atlantic, the mood in
Brasília has been practically euphoric. The discovery may
produce 80 billion barrels of oil for Brazil, but beating the "oil
curse" -- an affliction visited on oil-rich nations from Africa to
Asia, where a glut of petrodollars guts industries, warps politics,
fuels tyrants and leaves the poor even poorer -- remains a key
requisite to profiting from the find, says Newsweek.
There are, however, reasons for hope for Brazil, says Newsweek:
o The country has managed past discoveries well.
o The country's current regulatory model is well respected
within the oil industry.
o The model guarantees competition by auctioning concessions to
private companies.
But a new law -- now before Congress -- would replace the existing
model with "production sharing," a model favored by
autocratic governments, a model favored by Saudi Arabia and Venezuela,
says Newsweek:
o The law grants state oil company Petrobras a 30 percent stake
in all new deals.
o The government would also retain veto power over all drilling
contracts, leaving it and not the market to pick winners.
Brasilia agues that taking the reins of the accounts will help the
country avoid drilling too much oil too quickly, but the belief is
rooted on the belief that bureaucrats make good businessmen.
Brazil has been down this road before and the result was waste and
slower growth, says Newsweek.
Source: Mac Margolis, "Brazil Battles the 'Oil Curse,'
Newsweek, October 12, 2009.
For more on International Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=26
MAY
22, 2009
Bryan
Caplan
The
authors of the "U.S. Unemployment Rate Now as High as
Europe" report have turned down my bet. One of the
authors did however counter-offer a bet that Scandinavia's scores on the Human Development Index
would beat America's at the end of the Obama administration. That's funny,
because I was already planning to blog against the usefulness of the HDI today,
provoked by the CEPR report's remark that:
The
case for the superiority of the U.S. model was always exaggerated. For one
thing, it tended to ignore the relatively lower performance of the U.S. on
broader quality-of-life measures like the Human Development
Index.
Now what
exactly is the HDI?
The
one-line explanation is that it gives "equal weights" to GDP per capita, life
expectancy, and education.
But it's
more complicated than that, because scores on each of the three measures are
bounded between 0 and 1. This effectively means that a country of
immortals with infinite per-capita GDP would get a score of .666 (lower than
South Africa and Tajikistan) if its population were illiterate and never went to
school.
So what
are the main problems with the HDI?
1. I can
see giving equal weights to GDP per capita and life
expectancy.
But education? As a professor and a snob, I understand the appeal (though
a measure of opera consumption would be even better). But in terms of the
actual if not professed values of normal human beings,
televisions
and cars are a lot more important than books.
2. When
you take a closer look at the HDI's education measure, it's especially
bogus.
2/3rds of the weight comes from the literacy rate. At least that's not
ridiculous. But the
other 1/3 comes from the Gross Enrollment Index
- the fraction of the population enrolled in primary, secondary, or
tertiary education. OK, I feel a reductio ad absurdum coming
on. To max
out your education score, you have to turn 100% of your population into
students!
3. The
HDI purportedly gives equal weights to three different
outcomes,
but
bounding the results between 0 and 1 builds in a massive bias against
GDP.
GDP per
capita has grown fantastically during the last two centuries, and will continue
to do so. In reality, there's plenty of room left for further improvement
even in rich countries. But the HDI doesn't allow this. Since rich
countries are already close to the upper bound, the HDI effectively defines
their future progress on this dimension out of existence.
To a
lesser extent, the same goes for life expectancy: While it's roughly doubled
over the last two centuries, dying at 85 is not, contrary to the HDI,
approximately equal in value to immortality.
The
clear winners from this weighting scheme, of course, are the literacy and
enrollment measures, both of which have upper bounds that are imposed by logic
rather than fiat.
4.
The ultimate problem with the HDI, though, is lack of
ambition. It
effectively proclaims an "end of history" where Scandinavia is the pinnacle of
human achievement.
Admittedly, I've never visited Scandinavia. But when I see it for the
first time this August, I'm pretty sure I won't say to myself, "Wow, it
can't get any better than this!"
At this point, you might ask, "Yes, but
will you take the HDI bet, Bryan?" Nope. Scandinavia
comes out on top according to the HDI because the HDI is basically a measure of
how Scandinavian your country is.
While
Obama is moving us in that direction, I don't think he's going to be able to
take us all the way there.
CATEGORIES:
Cross-country Comparisons
FOREIGN AID KEEPS LATIN AMERICA POOR
------------------------------------------------------------------------
Latin America remains poor and backward not despite multilateral
"assistance" but, in a large part, because of it, says Wall
Street Journal columnist Mary Anastasia O'Grady. The
Inter-American Development Bank (IDB) has been going at the problem of
poverty in Latin America since 1959, but it hasn't acted alone.
In the postwar period the World Bank, the International Monetary Fund
and untold bilateral agencies have blanketed the region with aid.
World-wide foreign aid has boomed.
According to the Organization for Economic Co-operation and Development
(OECD):
o In 2008, total net official development assistance (ODA) from
members of the OECD's Development Assistance Committee (DAC)
rose by 10.2 percent in real terms to $119.8 billion.
o This is the highest dollar figure ever recorded.
Does it follow that poverty persists because the amounts have been just
too measly to do the job, asks O'Grady?
A 2006 paper titled "Foreign Aid, Income Inequality and
Poverty," from the research department of the IDB itself, looked
at the period 1971-2002 and found "some weak evidence that foreign
aid is conducive to the improvement of the distribution of income
[sic]. When the quality of institutions is taken into account,
however, this result is not robust. This finding is consistent
with recent empirical research on aid ineffectiveness in achieving
economic growth or promoting democratic institutions."
In a recent book titled "Lessons From the Poor" about
successful entrepreneurs in the developing world, researcher Alvaro
Vargas Llosa echoes these insights. "The decisive
element" in bringing a society out of poverty is "the
development of the entrepreneurial reserves that exist in its men and
women," Vargas Llosa writes. "The institutions that
grant more freedom to their citizens and more security to their
citizens' possessions are those that best facilitate the accumulation
of wealth."
It is obvious that economic liberty and property rights are the key
drivers of development, and that there is no correlation between the
volume of foreign aid a country receives and its respect for these
values, says the Journal.
Source: Mary Anastasia O'Grady, "Aid Keeps Latin America Poor; For
real progress, they need the means to accumulate wealth," Wall
Street Journal, April 6, 2009.
For text:
&
amp;
amp;
amp;
amp;
lt;
span style="FONT-SIZE: 9pt">http://online.wsj.com/article/SB123897316163590919.html
For more on International Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=26
http://blogs.law.harvard.edu/philg/2009/03/16/how-rich-coun
philg - March
16, 2009 @ 2:27 pm · Filed under Uncategorized
This is
a book report on The
Rise and Decline of Nations: Economic Growth, Stagflation, and Social
Rigidities ,
by Mancur Olson.
There isn’t a whole lot about how nations pulled themselves out of their
medieval stagnation (see A
Farewell to Alms for
that), so a better title for this still-in-print book from 1982 would be “How
Rich Countries Die.”
Table
1.1 shows annual rates of growth in per-capita GDP for each of three decades,
the 1950s, 60s, and 70s, in a range of rich countries. Contrary to our
perception of the U.S. as a growth dynamo and the Europeans as sclerotic, France
and Germany tremendously outperformed the U.S., as did most of the other
countries. If we have grown larger it is because our population has
expanded much faster than the European countries.
Chapter
2 summarizes Olson’s groundbreaking work on how interest groups work to reduce a
society’s efficiency and GDP.
Some of this work seems obvious in retrospect and indeed Adam Smith noted
that businessmen rarely met without conspiring against the public interest.
There are a handful of automobile producers and millions of automobile
consumers. It makes sense for an automobile company, acting individually,
to lobby Congress for tariffs. The company will reap 20-40 percent of the
benefits of the tariff. It doesn’t make sense for an individual consumer,
however, to lobby Congress. It will cost him millions of dollars to lobby
against Congress and preventing the tariff will save him only a few thousand
dollars on his next car purchase. The economy suffers because some
resources that would have been put to productive use are instead hanging around
Washington and because cars are more expensive than they should
be.
Labor
unions are a drag on the economy, but a labor union that represents all of the
workers in a company will be less of a drag than a union that represents only a
small percentage of workers in each of hundreds of
companies.
The
single-company labor union will have some interest in keeping its host company
alive by not bleeding it too much. A union that represents only 10 percent
of a company’s workers will recognize that it can drive up compensation to
double or triple the market-clearing wage without, by itself, killing the host
company.
Citizens
won’t bother to inform themselves about public policy, especially the
details.
Given the lack of influence of a single vote, it doesn’t make sense for a
non-specialist to invest the time. Olson says this is why we have a
progressive income tax, obvious to all voters, and a lot of obscure loopholes
that benefit the wealthy and influential. He notes that the benefits of
Medicare and Medicaid to the old and the poor are publicized, not the fact that
they are “implemented or administered in ways that resulted in large increases
in income for prosperous physicians and other providers of medical care” because
“the many smaller choices needed to implement these programs are influenced
primarily by a minority of organized providers.”
Chapter
3:It takes a long time for special interest groups to form. Olson cites
the fact that it was in 1851, a century after the start of the Industrial
Revolution, that the first modern trade union formed in Britain. The
longer that a society remains stable, the more freighted down with special
interest groups it becomes.
The
president of the U.S. would like to see greater economic efficiency in the U.S.
as a whole. Individual congressmen, however, will push for pork-barrel
legislation that benefits their district even if the cost to the overall economy
is hundreds of times greater than the benefit (their constituents will pay
1/435th of the cost and receive 100 percent of the benefit). This leads to
a perennial conflict between the president and Congress.
Unions
or cartels of businesses slow an economy’s response to change because they
require the assent of many members in order to effect a change. This makes
wages and prices much stickier than in a classical free-market economy.
Unions will negotiate agreements that favor senior workers at the expense of
junior members and young people just entering the
workforce.
Olson
would not be surprised by the current auto industry bailout: “Special-interest
groups also slow growth by reducing the rate at which resources are reallocated
from one activity or industry to another in response to new technologies or
conditions. One obvious way in which they do so is lobbying for bail-outs
of failing firms, thereby delaying or preventing the shift of resources to areas
where they would have a greater productivity.”
Special
interest groups create complexity, by getting special rules established
for their benefit, and thrive on complexity. If a tax or tariff code were
only three pages long, an average citizen would be able to spot the sweetheart
deals. If a code runs to 1000 pages, however, nobody will ever understand
all of it.
Special
interest groups may create government regulation. Prior to the Ford
Administration’s mid-1970s push to deregulate railroads, trucking, and airlines,
for example, the U.S. government was very effective at ensuring profits and
excluding new entrants to the market.
Chapter
4 compares countries in the post-World War II period. Olson says that
Germany and Japan did well because their special interest groups were shattered
by military defeat. When new labor unions formed in Germany and Japan,
they tended to be very broad-based and therefore had an incentive in the overall
welfare of their societies.
“Great
Britain, the major nation with the longest immunity from dictatorship, invasion,
and revolution, has had in this century a lower rate of growth than other large,
developed democracies. … Britain has [a] powerful network of special-interest
organizations. The number and power of its trade unions need no
description. [Olson wrote this book just as Margaret Thatcher was coming to
power.] The venerability and power of its professional associations is
also striking. … Britain also has a strong farmer’s organization and a
great many trade associations.”
“[Britain's
interest groups] are narrow rather than encompassing. For example, in a
single factory there are often many different trade unions, each with a monopoly
over a different craft or category of workers…”
Olson
notes that slow growth can’t be due to something inherent in the British
character, because the country was the world’s fastest growing from 1750 until
1850.
Olson
cites a study by Murrell testing the hypothesis that Britain’s slow growth was
due to special interest groups that took time to form. Murrell looked at
new versus old industries in Germany and Britain. The disparity in growth
rates was significantly larger in Britain than in Germany.
Britain
during the time of the Industrial Revolution had more social mobility and less
class consciousness than other European nations. Napoleon and
totalitarianism destroyed the Continent’s nobility, reversing the relationship
between Britain and the rest of Europe.
Olson
preempts the question of “How come the Swiss aren’t poor given that they’ve had
stability for so many centuries?” by looking at their constitution, which “makes
it extremely difficult to pass new legislation. This makes it difficult
for lobbies to get their way and thus greatly limits Switzerland’s losses from
special interest legislation.”
Olson
asks why the U.S., given its stable government and lack of invasions, hasn’t
done very poorly. The first answer is that the U.S. has done poorly,
growing slower than France, Germany, and Japan. The second answer is that
the U.S. is not uniform. Some parts are relatively recently settled (the
West) and/or relatively recently recovered from the Civil War (the South).
It turns out that these are precisely the regions of the U.S. that have enjoyed
the fastest rates of growth: “the longer a state has been settled and the
longer the time it has had to accumulate special interest groups, the slower its
rate of growth.”
Chapter
5 looks at medieval guilds and foreign trade. Olson finds that the
countries with the lowest tariffs had the highest growth rates. The
countries with the fewest restrictions on immigrant labor had the highest rates
of growth in per-capita income.
Chapter
6 is titled “Inequality, Discrimination and Development.” Japan’s history
is mined for evidence supporting Olson’s theory. The country was stable
until the mid-1800s. This led to “tolls, tariffs, regulations, and legal
monopolies”; the country was a basketcase economically. The nation was
opened up via gunboat diplomacy, which shattered the feudal system and high
tariffs. The country grew so quickly that it defeated Russia in 1905 and
came close to humiliating the U.S. in 1941.
Olson
quotes Nehru explaining that Muslims were able to conquer India because of the
“growing rigidity and exclusiveness of the Indian social system as represented
chiefly by the caste system.” Olson compares the caste system to the
medieval guilds. The barring of marriage outside of one’s caste is
explained by the desire of a caste to retain the fruits of its economic
exclusivity.
South
Africa is next. The mine owners wanted to hire mostly Africans because
they could be paid less than whites. The trade unions were controlled by
whites and wanted to force the mines to employ at least one white for every 3.5
black workers. Bitter strikes led ultimately to the rise of white
supremacist political parties and legislation limiting employment opportunities
for blacks. Restrictions on labor were naturally followed by restrictions
on social interaction and marriage.
Olson
notes that special-interest groups increase inequality in a society. A
union prevents companies from hiring black workers at the same wages at
whites. A caste system prevents someone from rising above the station to
which he was born. Effective lobbying turns welfare or health care
programs into cash cows for government workers or health care
providers.
Chapter
7 is very timely, being about stagflation and business cycles. Olson
points out that no standard economic theories explain how the U.S. and Britain
could have suffered high unemployment rates for the full decade of the
1930s. Keynesian economics could not explain the simultaneous high
unemployment and high inflation of the 1970s. Olson points out that no
economic theory explains why “unemployment is more common among groups of lower
skill and productivity, such as teenagers, disadvantaged racial minorities, and
so on” (classical economics would have these folks working at the same rate as
anyone else, but at lower wages).
Classical
economics does not allow for involuntary unemployment. If the labor supply
increases or the economy worsens, wages should fall until everyone is working
for a wage that clears the market and that enables employers to make a profit
despite lower prices for final products. “The main group that can have an
interest in preventing the mutually profitable transactions between the
involuntarily unemployed and employers is the workers with the same or
competitive skills.” In other words, a company would prefer to replace a
$60 per hour 50-year-old unskilled white worker with two $15 per hour black
teenagers who would get a lot more done, but the old whites will form a union
and prevent the company from hiring the young blacks. If the company does
need to hire someone it will be stuck paying $60 per hour and it might as well
hire someone with an advanced degree and a lot of skills, which explains why the
unskilled are disproportionately unemployed.
How
could the Great Depression have lasted so long? Olson suggests assuming
that a lot of prices are fixed by colluding business cartels and/or by
government regulation. The prices are fixed higher than they would be in a
free market, which imposes costs on society and guarantees supranormal profits
to cartel members. If there is inflation, the losses to the economy from
the cartel are ameliorated. The fixed price is no longer than much higher
than what would have been the market price. In the event of deflation,
however, the fixed price is now ridiculously high, demand for such an overpriced
product plummets, and production plummets. Investment in new factories
will fall to zero almost immediately.
Olson
divides the economy into a fixprice sector and a flexprice sector. The
fixed price part of the economy includes government workers, union workers,
products produced by cartels, agriculture supported by government, and imported
raw materials whose price is set on world markets. The flexprice sector
would include simple services such as cleaning houses and babysitting, In
the event of deflation, the output in the fixed price sector will collapse,
driving a flood of young and newly unemployed workers into the flexprice
sector. The schoolteacher will continue to earn $100,000 per year and
retire at 52. The laid-off manufacturing worker will find that the
market-clearing wage for cleaning houses is one third of what it was before the
economic downturn. This is in fact what happened during the Great
Depression. Folks who kept their jobs sailed through; folks tried to make
a living as street vendors could not earn enough to eat.
“The
economy that has a dense network of narrow special-interest organizations will
be susceptible during periods of deflation … to depression or
stagflation.”
Olson
looks at the tough times of 1975-76, with the world reeling from an oil price
shock, and finds that the U.S. had an unemployment rate of 8 percent compared to
Germany’s 4.5 percent and Japan’s 2 percent. Is that the only evidence
that the U.S. is plagued with special interests? No. Phillip Cagan
looked at U.S. price and output statistics since 1890 and “found that the
tendency for prices to fall during recessions has declined over time. … an
increasing proportion of the effect of any reduction in aggregate demand shows
up as a reduction in real output.” [in other words, when times get tough
in the modern U.S., we shut down our factories rather than running them with
lower wages and lower prices for finished goods; in the event of deflation
reducing collectible property taxes, a city will fire half of its schoolteachers
rather than cut any teacher's wage]
Conclusion
Olson
showed back in 1982 that modern macroeconomic theory was basically worthless in
developed stable countries. Macroeconomics posits a free market in which
wages and prices adjust dynamically. That applies to an ever-smaller
sector of the U.S. economy. We have a rapidly growing governnment that
directly or indirectly employs more than one third of our workers, many of whom
are unionized. We have a health care system that consumes 16 percent of
GDP and is staffed with doctors who restrict entry into the profession via their
licensing cartel. The financial services sector is about 10 percent of the
economy and they now tap into taxpayer money to keep their bonuses flowing in
bad times. The automotive industry kept itself profitable over the years
by successfully lobbying for import tariffs. When the profits turned to
losses, they successfully lobbied to have taxpayers pick up those losses.
A university-trained macroeconomist might be able to predict what will happen to
babysitters in a depression, but not the price of cereal, the wage of a
manufacturing worker, or the fate of those Americans who collect most of our
national income (e.g., Wall Street, medical doctors, government
workers).
A
cashflow approach is much more effective for figuring out where we’re
headed. Money flows out to the folks on Wall Street who bankrupted their
firms, to schoolteachers who’ve failed to teach their students, to government
workers who feel that simply showing up to work is a heroic achievement, to
executives and union workers in America’s oldest and least competitive
industries. If times are tough and money is tight, that means almost
nothing is left over for productive investment. What would have been a
short recession will turn into a long depression and decades of higher taxes and
slow growth to pay for all of the cash ladled out. Special interest groups
will continue to gain in power.
Practical
Value
MARCH
17, 2009
David
Henderson
Stanford
University economists Peter Blair Henry and Conrad Miller recently published an
interesting
NBER Working Paper in which they compare economic policy and economic
performance between Jamaica and Barbados.
Henry
and Miller point out that in Jamaica, the People's National Party rose to power
in the 1970s with the promise of "democratic socialism." Unfortunately, the PNP
delivered, nationalizing companies, taxing trade, and imposing exchange
controls. The PNP also distributed income through job-creation programs, schemes
for housing development, and subsidies on food.
Government spending rose
from 23 percent of GDP in 1972 to 45 percent in 1978. The
government financed much of its huge deficit by printing money, leading to 27
percent inflation by 1980.
The
government of Barbados, by contrast, avoided nationalization and opened the
country to trade. It
also kept government spending under control although, unfortunately, Henry and
Miller don't present data on government spending as a percent of GDP.
The
economic results: between 1960 and 2002, real GDP per capita grew by an annual
average of 2.2 percent in Barbados but only by 0.8 percent in
Jamaica.
Henry
and Miller pitch their study as a critique of the Douglass North
view
that institutions are crucial for economic growth. They point
out that both countries were British colonies until the 1960s and, therefore,
had a two-party political system, a free press, constitutional protection of
property rights, and the English common law. The difference in performance, they
say, was not due to different institutions but to different macro
policy. But aren't such big differences in macro
policy--nationalization and distribution of wealth in one case and not in the
other--themselves a difference in
institutions?
Update:
Correction made, thanks to Bob.
CATEGORIES:
Growth: Causal Factors , Institutional Economics , Macroeconomics
What
is Russia's GDP per capita?
Alex
Tabarrok
Andrew Gelman has a simple
question, What is Russia's GDP per capita? Fortunately this information is
easy to find on the web. As Gelman reports, the answer
is:
1.
$7,600 (World Bank 2007)
2.
$9,100 (World Bank 2007)
3.
$14,700 (PPP adjusted, World Bank
2007)
4.
$4,500 (World Bank 2006)
5.
$7600 or $14,400 (gross national
income: "Atlas method" or "purchasing power parity," World Bank 2007)
6.
$12,600 (IMF 2008), $9,100 (World Bank
2007), or $12,500 (CIA 2008)
7.
$2,637 in 2000 US dollars (World Bank
2007); that's $3,200 in 2007 dollars
8.
$2,621 (World Bank 2006) or $8,600
(IMF)
Here are
three
lectures if you want to understand why this is a harder question than it
appears!
IN DEFENSE OF TAX HAVENS
------------------------------------------------------------------------
A new form of "tax protectionism" is infecting Washington --
several serious proposals are being floated in the nation's capital
that would penalize Americans for investing in low-tax rather than
high-tax jurisdictions says Richard W. Rahn, a senior fellow with the
Cato Institute.
Proponents say the measures are needed to catch tax cheats -- but
ignore the fact that most of the low-tax jurisdictions such as the
Cayman Islands, Switzerland, etc., already have tax information
exchange (for cases of probable cause), or tax withholding, agreements
with the United States and other countries such as the United Kingdom
and France. Nevertheless, Sens. Carl Levin (D-Mich.), Bryon
Dorgan (D-N.D.), and Max Baucus (D-Mont.), as well as officials of the
Obama Treasury, want to make it more onerous and costly for American
companies to do business around the world and for Americans to invest
elsewhere. They would even make it more difficult for
non-Americans to invest in the United States, says Rahn:
o Levin's bill is a hodgepodge of tax increases, more
regulations and penalties on American taxpayers doing business
in targeted low-tax jurisdictions.
o Dorgan's bill would prevent certain American companies that
operate and are incorporated outside the United States from
being treated as nondomestic corporations, thus denying them
the right of tax deferral until their income is brought back
to the United States.
o Baucus, chairman of the Senate Finance Committee, is
circulating a draft bill that, among other things, would
extend the statute of limitations from three to six years for
tax returns reporting international transactions.
o The Treasury Department is proposing expanded regulations on
foreign financial institutions that bring needed investment
funds into the United States.
The so-called tax havens are for the most part no more than
way-stations to temporarily collect savings from around the world until
they are invested in productive projects, such as building a new
shopping center or semi-conductor plant in the United States.
This enables a better allocation of world capital, leading to higher,
not lower, global growth rates, explains Rahn.
Indeed, to the extent tax competition between jurisdictions holds down
the increase in the growth of governments, citizens of all countries
experience more job opportunities and higher standards of living.
And to the extent that businesses and individuals are discouraged by
taxes or regulations from investing outside their own jurisdictions,
they may simply choose to work and save less, period, says Rahn.
Source: Richard W. Rahn, "In Defense of Tax Havens," Wall
Street Journal, March 18, 2009.
For text:
http://online.wsj.com/article/SB123733986323064857.html
For more on Taxes:
The latest issue of the
Cato Journal
features a transcript from a
chat Milton Friedman and Thomas Sowell had about the late great Peter Bauer.
Highlights:
Sowell:
One
of the things that [Bauer] mentioned in one of his later books was that people
were saying things like: “We took all the rubber from Malaysia”; “We took all
the tea from India.” And he pointed out that this was the direct opposite of the
truth. The British brought the rubber tree to Malaysia; they brought the tea to
India—and the Indians and Malaysians benefited.
[...]
Friedman:
Many
of these approaches [to economic development in the Third World] took on the
characteristics of religion, which is believed without investigation. But yet,
they must have been plausible. Large numbers of able people believed them. Those
views were very deeply entrenched. So, it sounds simple to come along and say,
“Look, obviously, if the vicious cycle of poverty were true, no country could
have ever developed.” But, it wasn’t obvious at all and it took a good deal of
courage and stubbornness to resist that trend.
Sowell:
Because
Peter Bauer wrote in such a very plain way, and because the things that he said
now seem obvious, I fear that at some point in the future people will be looking
back and say, “What was the big deal? All of this is just stuff anybody should
have known.” But, it’s almost like saying, “So, the man traveled 10 miles in a
day—what is that?” Until you say, “Well no, he traveled 10 miles hacking his way
through a jungle,” and that’s essentially what Peter Bauer did. He had a whole
jungle of preconceptions and dogmas out there.
Peter
Bauer lived long enough to see cutting-edge development economists like Jeffrey
Sachs endorse his main views. Unfortunately, he did not live long enough to
criticize Sachs and company for their
statist relapse.
CATEGORIES:
Growth: Causal Factors
http://www.voxeu.org/index.php?q=node/5540
Does
culture affect long-run growth?
Does culture affect long-run growth?
This column argues that countries with a more individualist culture have
enjoyed higher long-run growth than countries with a more collectivist
culture. Individualist culture attaches social status rewards to
personal achievements and thus provides not only monetary incentives for
innovation but also social status rewards.
The idea that culture is a central ingredient of
economic development goes back to at least Max Weber who, in his classical work
“The Protestant Ethic and the Spirit of Capitalism” (Weber 1905), argued that
the protestant ethic of Calvinism was a very powerful force behind the
development of capitalism in its early phases. In our new research
(Gorodnichenko and Roland, 2010), we provide both a theoretical model and
empirical evidence showing that countries with a more individualist culture have
more innovation, a higher level of total factor productivity and higher long-run
growth than countries with a more collectivist culture.
Here are the main tenets of our theoretical
formulation of the idea:
- Individualism
emphasises personal freedom and achievement and therefore individualist
culture awards social status to personal accomplishments such as important
discoveries, innovations, or great artistic achievements. Collectivism
encourages conformity and discourages individuals from standing
out.
- Individualism
makes collective action more difficult than collectivism as individuals pursue
their own interest without internalising collective
interests
In short, individualism better encourages
innovation while collectivism has the advantage in coordinating production
processes and in various forms of collective action.
To formalise the argument, we put these
ingredients in an endogenous growth model to study the dynamic versus static
elements of the trade-off. In the model, collectivism increases the overall
efficiency in the economy, but these are static. Individualism meanwhile, spurs
innovation and thus faster growth. Intuitively, people in an individualist
culture have not only a monetary reward from innovation but also a social status
reward. They are therefore willing, all other things being equal, to allocate
more effort to innovative activities. The impact of this depends upon the
overall setting.
- In a
Malthusian economy, however, where all resources were devoted to survival
consumption, the collectivist economy exhibits a higher level of output per
capita.
- In a modern
growth setting, the individualist culture has lower coordination capacities
than a collectivist culture but its higher innovation rate leads to higher
long-run growth.
This contrast can explain how countries with
individualistic cultures were relatively backward before the Industrial
Revolution, but overtook collectivist cultures afterwards. The model also yields
an interesting relationship between culture and institutions. Under bad
institutions, a predatory government can expropriate the monetary returns from
innovation. However, social status and prestige cannot be
expropriated. Therefore, even in societies where institutions are relatively
predatory, there will be more innovation in an individualist culture because of
the social status reward to innovation.
How do we
bring these predictions to the data?
We use the individualism scores developed by
Dutch sociologist Hofstede (2001).
- Initially,
Hofstede surveyed IBM employees in about 30 countries in order to understand
differences in corporate culture across the world. Further surveys included
other professions and expanded the coverage to 80 countries.
- To avoid
cultural biases in the way questions are framed, the translation of the survey
into local languages was done by a team of English and local language
speakers.
- The
individualism score measures the extent to which it is believed that
individuals are supposed to take care of themselves as opposed to being
strongly integrated and loyal to a cohesive group.
Individuals in countries with a high level of
the index value personal freedom and status, while individuals in countries with
a low level of the index value harmony and conformity.
A broad array of survey questions is used to
establish cultural values in different countries. Factor analysis is used to
summarise the data and construct the individualism score. The latter is the
first component in a principal component analysis and loads positively on
valuing individual freedom, opportunity, achievement, advancement, recognition
and negatively on valuing harmony, cooperation, relations with superiors.
Hofstede’s measure of individualism has been validated in a number of studies.
For example, across various studies and measures of individualism the UK, the US
and the Netherlands are consistently among the most individualistic countries,
while Pakistan, Nigeria and Peru are among the most
collectivist.
We regress the log of GDP per worker on
Hosftede’s individualism score and find a strong and significant positive effect
of individualism (see Figure 1). The same is true if we use as dependent
variables different measures of total factor productivity or measures of
innovation (see Figure 2). According to our estimates, a one standard
deviation increase in individualism score (say from the score of Venezuela to
Greece, or from that of Brazil to Luxemburg) leads to an increase in the level
of income of between 60% and 87% – a large effect. Figures 1 and 2
illustrate these relationships.
Figure 1. Individualism vs GDP per worker
Figure 2. Individualism vs patents
per million
Ruling out
other causes
The strong positive correlation between
individualism on one hand and measures of long-run growth and innovation on the
other hand can be due to a causal effect of culture on innovation and growth.
One can also argue, however, that there might be a reverse causality at work; as
countries get richer, their culture becomes more individualistic. In order to
rule out reverse causality, we perform instrumental variable regression of
growth and innovation on culture.
The instrumental variable we use is a measure of
genetic distance between countries. In particular we employ a measure of the
Euclidian distance between the frequency of blood types in a given country and
the frequency of blood types in the US, which is the most individualistic
country in our sample. These genetic data originate from Cavalli-Sforza et al.
(1994), providing measures of genetic markers for roughly 2,000 groups of
population across the globe.
Why can blood distance be a good instrumental
variable?
- First,
genetic data indirectly measure cultural transmission since parents pass on
both culture and genes to their children.
- Second,
blood types are a neutral genetic marker not related to fitness. It would thus
be hard to argue that blood types may have a direct effect on why some
countries are richer than others. Furthermore, genetic variation was by and
large determined thousands of years ago.
- Third, our
genetic distance measure correlates strongly with our individualism score and
thus the instrument is powerful.
The instrumental variable estimates of culture’s
effect on long-run growth indicate a strong causal effect which is similar in
magnitude to the effect implied by ordinary least squares regressions. These
results are very robust to using other measures of genetic distance, blood
distance to other countries, and other instrumental variables such as linguistic
variables (e.g. languages that prohibit pronoun drops are more individualistic,
see Kashima and Kashima 1998).
If we can exclude reverse causality, it might
still be the case that blood distance affects long-run growth via other channels
than individualism and collectivism. We rule out colonisation effects by showing
that the effect of individualism on long-run growth still works when we exclude
continents as the Americas and Oceania strongly affected by settler
colonisation. The effect of individualism holds at the level of individual
continents and even if we look only at European or OECD
countries.
Other possible channels might be institutions,
human capital, other measures of culture, and geographical distance. Indeed one
can argue that these variables may be correlated with our measure of genetic
distance. Even when we control for all these variables, we find that culture
continues to have an important effect on income per capita and innovation. Other
control variables we also use are measures of ethno-linguistic
fractionalisation, legal origins, geographical controls such as distance from
the equator or being landlocked. We find that generalised trust, a measure
used in other research on culture, has no significant effect on long-run
growth. In summary, we find that none of popular alternatives can
undermine the strong causal effect of culture on economic outcomes.
Confirmation
from cross-cultural psychology
The final confirmation for a causal effect of
individualism on long run growth comes from recent advances in cross-cultural
psychology which provide some direct evidence of genes’ effects on culture. We
bring in three separate research strands.
- First of
all, it has been found that collectivism is stronger in countries where a
higher percentage of people have a short (S) allele in the polymorphism
5-HTTLPR of the serotonin transporter gene SLC6A4, putting them at greater
risk for depression when exposed to life stressors.
- Second,
collectivism is also stronger in countries with a higher frequency of the G
allele in polymorphism A118G in the mu-opoid receptor gene, leading to higher
stress in case of social rejection.
- Third,
collectivism is also stronger in countries with a historically higher pathogen
prevalence, i.e. in countries more prone to a number of important diseases.
Studies establishing these links emphasise that
collectivism provides strong psychological support networks to deal with
depression and stronger protection from social rejection. Similarly, more
collectivist values emphasising tradition and putting stronger limits on
individual behaviour, and showing less openness towards foreigners provide
protection against disease spread. Using these three variables in turn as
instruments, we find robust and significant effects of individualism on log
output per worker with magnitudes similar to our baseline estimates.
We also find that institutions, measured by
average protection against expropriation risk (the variable used in the famous
work by Acemoglu et al. 2001 on the effect of institutions on long-run growth)
can be explained by our individualism score but institutions also appear to
affect culture. Culture and institutions, together with human capital, play a
key role in explaining long-run growth.
What are the
policy implications?
Understanding the effects of culture on economic
development and economic performance is a fascinating task that the economics
profession is only beginning to understand. Yet we advise caution when drawing
policy conclusions from such analyses. Countries inherit their culture over a
long historical period. It would be vain, and probably destructive, to try to
impose cultural change on countries. On the contrary, countries need to embrace
their cultural heritage and find institutions appropriate to this heritage.
Cultural exchange is an integral part of the globalisation process and will no
doubt benefit all as countries learn from the strengths and weaknesses of other
countries’ culture in a spirit of tolerance, respect, and peace.
References
Acemoglu, D, S. Johnson, and J Robinson (2001),
“The Colonial Origins of Comparative Development: An Empirical Investigation”,
American Economic Review, 91:1369-1401.
Gorodnichenko, Y and G Roland (2010), “Culture, Institutions and the Wealth of Nations”, CEPR
Discussion Paper 8013
Kashima, E and Y Kashima (1998), “Culture and
language: The case of cultural dimensions and personal pronoun use”, Journal
of Cross-Cultural Psychology, 29: 461-486.
Weber, Max (1905) The Protestant Ethic and
the Spirit of Capitalism.
This article may be reproduced with appropriate
attribution. See Copyright (below).
The
Demographics Driving Nations' Wealth
·
By DAVID
WESSEL
Demography is not destiny. In 1300,
China was bigger than Europe and had the world's most sophisticated technology.
But China blew it. By 1850, its population was 65% larger than Europe's,
but—thanks to the Industrial Revolution—Europeans were far richer.
Yet demography does matter. "We never pay enough
attention to demography because it's so long term," says Dominique Strauss-Kahn,
head of the International Monetary Fund. So turn for a moment from angst about
the disappointing pace of the economic recovery and daunting government budget
deficits, and look over the horizon.
Capital columnist David Wessel surveys the landscape over
the next 40 years and makes some predictions about what the world's economies
will look like.
Over the next 40 years, Japan and Europe will
see working-age populations shrink by 30 million and 37 million, respectively,
according to United Nations projections. Birth rates are low and so many of
their people are already elderly.
China's working-age population will keep growing
for 15 years or so, then turn down, the result of its one-child policy and the
tendency of birth rates to fall as incomes rise. In 2050, the U.N. projects,
China will have 100 million fewer workers than it does today. India's
population, in contrast, will grow by 300 million working-age persons over the
next 40 years.
The U.S. is in between, benefiting from a higher
birth rate and younger populations than Europe and Japan and more immigration.
It is projected to add 35 million working-age persons by
2050.
So what?
History, as interpreted by modern economists
pondering the mysteries of growth, teaches that more people lead to more ideas.
And unlike land or oil, ideas can be used by more than one person
simultaneously. Before countries began sharing ideas, the biggest had the most
rapid technological progress. Now, trade, travel and the Internet speed new
ideas around the globe ever-more rapidly. So the benefits are dispersed. Belgium
is rich not because it is big or has invented a lot, but because it has the
wherewithal to employ technology invented by others, notes Michael Kremer of
Harvard University. Zaire is bigger, but lacks the
wherewithal.
"In the coming decades, because of the Internet,
because of many other changes that have shrunk the world, it's almost impossible
for an individual country to keep proprietary technology for itself," says Mr.
Strauss-Kahn. For a time, relatively small countries like Britain and France
were global heavyweights because of their technological prowess. That day is
over, he predicts. "Power equals numbers," he reasons, and that leads him to
anticipate the rising influence of China and India.
Rising populations—and growing numbers of
meat-eating, oil-burning consumers—create tension between environmental costs
and idea-generating benefits. Some worry about the costs; others see the
benefits.
"China's population is roughly equal to that of
the U.S., Europe and Japan combined," optimistic Stanford University economists
Chad Jones and Paul Romer observed recently in an academic journal. "Over the
next several decades, the continued economic development of China might
plausibly double the number of researchers throughout the world pushing forward
the technological frontier. What effect will this have on incomes in countries
that share ideas with China in the long run?" Somewhere between a lot and really
a lot, they say. In fact, they say that even if the U.S. had to bear all the
costs of mitigating the added carbon emitted by a rapidly developing China,
ideas generated by the Chinese would boost U.S. per capita income enough to more
than compensate.
Despite the Internet, multinational companies
and global financial markets, we are not—yet—one big world economy. Divergences
in demographics have national consequences.
View Full Image
ZUMApress.com
A worker checks a train wheel on a production line
Wednesday at Maanshan Iron & Steel Co. in China's Anhui
Province.
Today, one in five Japanese and Europeans is
over age 65. In 2050, it will be one in three. Rapid productivity growth—the
amount of stuff produced per hour of work—could make it easier for working-age
populations to support the old folks, but productivity trends aren't promising.
The Japanese and Europeans almost surely will have to work longer, take fewer
vacations and probably pay more taxes. Aging also threatens the Japanese
government's ability to keep borrowing so heavily. IMF economist Kiichi Tokuoka
estimates that at least half of Japanese government borrowing is now financed,
directly or indirectly, by Japanese households; unlike the U.S., Japan doesn't
borrow heavily from abroad. Japanese savers will be selling bonds in
retirement—and there aren't enough younger workers to save enough to pick up the
slack.
For China, the challenge is to build social
structures and retirement schemes to sustain a growing cadre of old folks that,
unlike previous generations, won't be able to rely so much on its children for
support. Today, 1.4% of Chinese are over age 80; in 2050, 7.2% will be, the U.N.
projects.
Related
Links
India has more time to adjust since its working
population is likely to keep growing. Its challenge is to harness the growing
number of workers in their 30s and 40s and to nurture industry and services. If
India dismantles archaic labor laws, brings more women into the work force and
invests in training and education, demographics could add four percentage points
a year to economic growth, Goldman Sachs economists estimate. But that's a big
"if."
And the U.S.? For all today's gloom, it may be
in the sweet spot. A growing population, an openness to ambitious immigrants and
trade (if not disrupted by xenophobic politics) and strong productivity growth
(if sustained) could lift living standards and bring faster growth, which would
reduce big government budget deficits far easier for the U.S. than for slower
growing Europe and Japan.
Write to David Wessel at capital@wsj.com
Does
Economic Success Require Democracy?
By
Kevin Hassett
From
the May/June 2007 Issue
Filed
under: World Watch, Economic Policy, Government and Politics
Sadly,
no. In fact, the politically unfree countries are enjoying more economic growth
than the politically free ones. Kevin Hassett tells why.
When
Kenneth Arrow was awarded the Nobel Prize in Economics in 1972, one of the
contributions the awards committee cited was his miraculous “impossibility”
theorem. Decades from now, Arrow’s theorem, originally drawn in his doctoral
dissertation, will be viewed as the 20th-century idea that best anticipated the
21st century.
While
mathematical in origin, the impossibility theorem is simple to describe in
words:
A
government is really just a mechanism that makes collective decisions for a
large number of citizens who have different preferences. I might want to
spend our tax dollars on dog parks; you might prefer more police. The
government’s job is to work it out. This job is called “aggregating
preferences.” In the U.S., we send signals with voting to help the government
aggregate preferences.
Dictatorships
now understand that they have to provide a good economy to keep citizens happy,
and they understand that free-market economies work
best.
Arrow
was able to show that no voting scheme can be devised that will create a
government that has rational preferences, where rationality is defined precisely
by Arrow as meeting a number of conditions. Democracy might be a form of
government that many prefer to live under, but there is nothing theoretically
compelling that suggests that it is the form of government that best reflects
the underlying preferences of citizens. As a result, democracies will not
necessarily outperform other types of mechanisms for preference aggregation
as a route to economic prosperity. Democracies will not always win.
In the
latter half of the 20th century, this observation seemed irrelevant. The
United States, with its free markets and democracy, defeated the Soviet Union,
with its centrally planned economy and party dictatorship.
But in
the 21st century, things look different. Dictatorships, as in China, appear to
have learned from the failure of the Soviets. While they continue to oppress
political opponents, they allow a high level of economic freedom within their
borders.
So far,
this approach is working, and in a big way—as the chart illustrates. An
organization called Freedom House rates the level of political freedom of the
world’s nations on a scale of 1 to 7, with 1 the most free. For example,
according to the 2006 survey, countries like the United States and Italy
are rated 1, while Singapore is rated 4.5, China and Saudi Arabia 6.5, and North
Korea 7. In addition, the Fraser Institute in Canada rates the economic freedom
of nations, looking at taxes, regulation, trade barriers, and the
like.
The
chart shows the economic growth of two different sets of countries. The first
set comprises nations that are both politically and economically free; the
second, those that are repressed politically (have high numbers on the Freedom
House scale) but are economically free. In each case, I looked at the average
five-year growth rate of GDP, weighted by the size of each respective
economy.
The
chart tells a striking story: the countries that are economically and
politically free are underperforming the countries that are economically
but not politically free. For example, unfree China had a growth rate of 9.5
percent from 2001 to 2005. But China was not the whole story—Malaysia’s GDP grew
9.5 percent from 1991 to 1995, Singapore’s GDP grew 6.4 percent from 1996 to
2000, and Russia’s grew 6.1 percent from 2001 to 2005.
The
unfree governments now understand that they have to provide a good economy to
keep citizens happy, and they understand that free-market economies work
best. Also, nearly all of the unfree nations are developing countries. History
shows they grow faster, at least for a while, than mature nations. But being
unfree may be an economic advantage. Dictatorships are not hamstrung by the
preferences of voters for, say, a pervasive welfare state.
So the
future may look something like the 20th century in reverse. The unfree nations
will grow so quickly that they will overwhelm free nations with their economic
might. The unfree will see no reason to transition to
democracy.
Meanwhile,
democracies may copy many of the market-friendly policies of the dictatorships,
but it seems unlikely that free citizens will choose to reduce their own
political freedoms.
Democracies
will stay in the game, but, as Arrow showed long ago, their victory is not
assured.
Kevin
Hassett is director of economic policy studies at the American Enterprise
Institute
Spain's
jobless rate surges to 20.33%
by
Katell Abiven Katell Abiven –
1 hr 23 mins ago Jan 28,2011
MADRID
(AFP) – Spain announced Friday its jobless rate surged to a 13-year record above
20 percent at the end of 2010, the highest level in the industrialized world, as
the economy struggled for air.
It
was more bad news for an economy fighting to regain the trust of financial
markets and avoid being trapped in a debt quagmire that has engulfed Greece and
Ireland and now menaces Portugal.
Another
121,900 people joined Spain's unemployment queues in the final quarter of the
year, pushing the total to 4.697 million people, said the national statistics
institute INE.
The
resulting unemployment rate was 20.33 percent for the end of the year -- easily
exceeding Prime Minister Jose Luis Rodriguez Zapatero's target of 19.4
percent.
Spain
appears to be stuck in a rut of staggeringly high levels of
unemployment.
After
posting a jobless rate of 18.83 percent in 2009 and now 20.33 percent in 2010,
the government is forecasting 19.3 percent for 2011 and 17.5 percent in
2012.
The
Spanish economy, the European Union's fifth biggest, slumped into recession
during the second half of 2008 as the global financial
meltdown compounded the collapse of a labour-intensive construction
boom
It
emerged with tepid growth of just 0.1 percent in the first quarter of 2010 and
0.2 percent in the second but then stalled with zero growth in the
third.
Zapatero
has said the fourth quarter will show positive growth which would pick up steam
in 2011 but he warned that job
creation would be "far from what we need and desire. It will be slow
and progressive."
Last
month the government announced it was scrapping a 426-euro ($568) monthly
subsidy for the long-term unemployed so as to slash the public deficit and ease fears
that it will need an EU bailout.
The
government forecasts a 0.3-percent drop in growth this year will be followed by
an expansion of 1.3 percent in 2011.
Madrid
estimates 70 percent of the two million jobs which were lost in Spain since the
start of the economic downturn were directly or indirectly related to the
construction sector.
Last
year the government introduced a hotly contested labour market reform that cut
the country's high cost of firing workers and gave companies more flexibility to
reduce working hours and staff levels in economic downturns -- changes that he
argued would boost job creation.
Spaniards
see unemployment as Spain's biggest problem and one in two, 49.8 percent, fear
the jobless situation will get worse, a poll published by the CIS research firm
this month showed.
A Two-Track Plan to Restore Growth
Our economic
wounds are self-inflicted. Changing fiscal and monetary policies could make a
difference fast.
It's been three years since the financial
crisis flared up and the recession began. Yet the unemployment rate is still
over 9%—double what it was before the recession—and it's been stuck above 9% for
20 consecutive months. Why the extraordinarily high and prolonged unemployment?
My research shows that discretionary
government interventions—deviations from sound economic principles and
policies—have been largely responsible.
Many government interventions occurred before
the panic in the fall of 2008, but in the past two years the government doubled
down. We have seen an $862 billion stimulus, an increase in federal spending to
25% from 21% of GDP, and a corresponding explosion of federal debt. We have the
Fed's unconventional "quantitative easings": purchases of $1.25 trillion of
mortgage backed securities and $900 billion of longer-term Treasury bonds. And
we have seen hundreds of new regulations in the health and financial sectors.
The one-time stimulus payments to people did
not jump-start consumption. The stimulus grants to states did not increase
infrastructure spending. Cash for clunkers merely shifted consumption a few
months forward. The Fed's purchases did not have a material impact on mortgage
interest rates once changes in risks are taken into account. At best these
actions had a small temporary effect that dissipated quickly, leaving a legacy
of higher debt, a bloated Fed balance sheet and uncertainty—all of which slow
growth and job creation.
None of this
should be surprising. Well-known
theories of consumption predict that temporary payments to households will not
increase economic growth by much. Careful empirical studies of stimulus
programs in the 1970s showed that stimulus grants to states did not increase
infrastructure spending. A vast literature and experience from the 1970s show
that discretionary monetary policy, as distinct from rules-based policy, leads
to boom-bust cycles with ultimately higher unemployment and higher inflation.
With sounder, more stable and more predictable monetary and fiscal policies in
the 1980s and '90s we had long expansions and lower
unemployment.
The
best way to reduce unemployment is to restore sound fiscal and monetary
policies. There are some welcome
signs that the policy pendulum has begun to swing back in that direction. The
recent election revealed deep concern about high debt, deficits and spending.
Three-fourths of business economists and
one-half of academic economists say that easy monetary policy exacerbated the
housing boom and bust that led to the financial crisis. Reactions to a second
round of quantitative easing have been negative at home and abroad. The very
word "stimulus" is now avoided by former proponents of spending stimulus. The
recent agreement to extend existing income tax rates represents a shift to more
predictable policies.
Unfortunately, the president's State of the
Union speech raised doubts about the return to sound policy by stressing more
government spending and criticizing further extensions of current personal
income tax rates. So it is essential for policy makers to grab the policy
pendulum, pull it back toward sound fiscal and monetary policy, and tie it in
place so it never swings back again.
They should start by laying out a credible plan
to reduce spending and stop the debt explosion. If spending as a share of GDP
can be brought to 2000 levels and held there with entitlement reforms, then the
budget can be balanced without employment-retarding tax-rate increases. A concrete goal should be to establish a
long-term budget that the Congressional Budget Office (CBO) can credibly show
would bring the debt-to-GDP ratio to 40%. If the plan is ready for this
summer's CBO long-term projections, it will give an immediate boost to economic
growth and job creation as uncertainty about debt sustainability falls. An
example of what the CBO's next projection might look like is shown in the nearby
chart of U.S. debt history along with the CBO's projections made in 2009, 2010
and, if the plan is ready, in 2011.
Some want to delay reducing government spending
because of high unemployment and the fragile recovery. But there is no
convincing evidence that a gradual and credible reduction in government
purchases will increase unemployment. The history of the past two decades shows
that lower government purchases as a share of GDP are associated with lower
unemployment rates. A much better way to reduce unemployment is to encourage
private investment. Over the past two decades, unemployment fell when investment
increased as a share of GDP. (See the other nearby chart.)
Meanwhile, the Fed should lay out a plan for
reducing its extraordinarily large balance sheet. To achieve a more
predictable rules-based policy going forward, the Fed's objectives should be
clarified. The Federal Reserve Act now
says the Fed must "promote effectively the goals of maximum employment, stable
prices, and moderate long-term interest rates." But too many goals blur
responsibility and accountability and they allow for confusing changes in
emphasis from one goal to another.
Recently the multiple objectives have been used
as a rationale for interventionist policies, such as QE2, an approach that Fed
officials avoided in the 1980s and '90s. Such interventions can have the
unintended consequence of increasing unemployment—as illustrated by the
decisions to hold interest rates very low in 2003-2005, which may have caused a
bubble and led to the high unemployment today.
It
would be better for economic growth and job creation if the Fed's objective was
simply "long-run price stability within a clear framework of economic
stability." Such a goal would provide a
foundation for strong employment growth and would not prevent the Fed from
providing liquidity, serving as lender of last resort, and cutting the interest
rate in a financial crisis or recession.
The Fed should also be required to report in
writing and in hearings its strategy for monetary policy. Such a requirement was
removed by Congress in 2000 and should be restored. But rather than reporting
only on the monetary aggregates as in the past, the renewed requirement should
focus on the strategy for setting interest rates. The Fed should establish its
own strategy and report it to Congress.
The Fed would have the discretion to deviate
from its strategy in a crisis. But if it does deviate it should be required to
report the reasons. This approach provides a degree of political control and
accountability appropriate for an independent agency without interfering in
day-to-day operations. Such reforms will reverse the short-term focus of policy
and help achieve sustained growth and job creation.
Mr. Taylor, a professor of economics at
Stanford and a senior fellow at the Hoover Institution, is the author of
"Getting Off Track: How Government Actions and Interventions Caused, Prolonged
and Worsened the Financial Crisis" (Hoover Press, 2009). This op-ed was adapted
from his testimony before the House Committee on Financial Services this
week.
A New Hanseatic League
Dutch Prime
Minister Mark Rutte is recruiting for a European free-trade
zone.
Starting from the 13th century, and continuing for some
300 years, the Hanseatic League guaranteed free trade for its merchant members
across a huge swath of Northern Europe. Now Dutch Prime Minister Mark Rutte has an idea for a
free-trade block within the EU that would revive the best features of the Hansa
of old. Europe's lagging economies could use a boost, and Mr. Rutte's
inspiration is to liberalize the services market, which accounts for more than
two-thirds of European commerce. What's more, the Dutch premier doesn't feel
like waiting for those EU members who still aren't ready.
In 2006
tales of dirt-cheap Polish plumbers helped stoke enough fear in Western Europe
to scupper the EU's Services Directive, which would have let service providers
operate freely across national borders. By 2010, employers in Austria, Germany,
Belgium, France and Poland, told Manpower Inc. that their top hiring
challenge was a shortage of skilled tradesmen—these include welders,
electricians, and, yes, plumbers.
This week Mr.
Rutte declared his intention to revive the Services Directive, even if he can
only get a few of his EU partners on board. He told Britain's Guardian that he
wants "to form a mini-single market for all the professional services, and then
obviously the hope is that all 27 countries would like to join, even if some are
currently vehemently opposed." Mr. Rutte has already discussed his plan with
British Prime Minister David Cameron, and plans to approach other self-avowed
European free marketeers, saying he is "absolutely convinced the Scandics, the
Baltics and other countries will be willing" to consider it.
View Full Image
ullstein
bild / The Granger Collection
Sixteenth century Lübeck, Germany.
The
original European common market dates back to the 13th century, when the
Hanseatic League formed in the northern German city of Lübeck and expanded
across Europe's North and Baltic Sea regions. The armed union of merchants
together tackled trade barriers from tolls to pirates to overlords, and worked
well at least for the early part of its history. Today's proposed revival would presumably refrain from
sacking jurisdictions that refuse its members monopoly rights or free passage—a
bonus for the likes of modern Germany,
which, among other hassles, requires work permits from all eastern European
workers.
A Downing Street official tells us that Mr.
Rutte's suggestion "isn't something we've taken a view on yet." Getting behind
any EU initiative is politically risky in Britain, but ultimately freer trade
with Europe would mean a pro-growth win that wouldn't cost Mr. Cameron's
cash-strapped government a penny. Of the Baltic and Scandinavian governments who
responded to our queries, Latvia was the most enthusiastic, saying that while
"in principle we do not think a two-speed Europe is desirable, we could look
into the possibility of enhanced cooperation in the services sector if
approached." The rest were more guarded, saying they wanted to avoid
"fragmenting the internal market."
Except there is no internal market to speak of today for
European services. And attractive as 27-nation unity is, the EU does allow as
few as nine countries to work on initiatives separately from the
rest. So far though, "enhanced
cooperation" has been eyed mostly by France and Germany as a means of exerting
economic control over other Europeans.
Mr. Rutte's proposal, by contrast, would
increase opportunities in all participating countries, both for individuals and
businesses. If Tallinn or London, or Stockholm or Riga or Vilnius, are nervous
that Mr. Rutte's idea would meet resistance from Paris and Berlin, they might
have a point. But Mr. Rutte's suggestion is a welcome chance for Europe's free
traders to take the lead. If the Continent's protectionists want to be left
behind, it would be their loss.
Printed
in The Wall Street Journal, page 12
Downgrading Japan
A big economy
is no protection from the consequences of bad fiscal
policies.
Speaking of fiscal
train wrecks (see above), Standard &
Poor's yesterday downgraded Japan's sovereign debt by one notch, to AA- from
AA. We're the last people to view a rating firm's diktats as definitive on
anything, nor will this one come as much of a surprise to anyone who's been
following Tokyo's spending habits. But it is still suggestive, and usefully
timed to coincide with important debates unfolding in
Washington.
The main lesson of which S&P has reminded
everyone is that no government should assume it is immune from fiscal realities
simply by virtue of sitting atop a large economy. Japan is the third-largest economy in the
world, and the second-largest among developed countries behind the U.S. Yet
thanks to two decades of sluggish growth combined with out-of-control spending,
the ratio of government debt to GDP is now, at around 200%, the highest
anywhere. The expectation of more spending and higher debt prompted S&P's
move.
View Full Image
Associated
Press
Naoto Kan
The drivers of such outlays will sound eerily
familiar: pension spending at about 30% of the budget and rising due to an aging
population; projected failure to reduce annual budget deficits (owing to
mounting social spending); and what S&P describes as the ruling Democratic
Party of Japan's "lack [of] a coherent strategy to address these negative
aspects of the country's debt dynamics."
S&P—and plenty of others—err mainly when they imply
that tax hikes such as Japan's oft-discussed increase in the consumption tax are
a viable way to fix these problems. Japan has reached this pass despite having
the highest corporate tax rates in the developed world. Tokyo would be far
better off pursuing growth-boosting reforms.
Those atwitter about an imminent debtpocalypse
will be disappointed. Japan is
fortunate to be a net external creditor (unlike, say, Greece). So there's no
obvious trigger for a Europe-style panic so long as domestic investors continue
in their willingness to buy Tokyo's bonds, which they show every sign of doing,
for now at least. S&P's analysis should be read instead as a longer-term
reminder that when it comes to dysfunctional fiscs, things can't go on forever
as they have, even in a large economy. Come to think of it, that's a message
some in Washington need to hear, too.
Printed
in The Wall Street Journal, page 9
- WSJ Econ Blog Jan 27, 2011
9:35 AM
Consumer prices are
moving unevenly across the world. Economic growth, supply and demand, currency
values and a variety of other factors drive consumer prices up — inflation — or
down — deflation. The following graphic gives a snapshot of inflation rates in
50 of 51 largest economies. (The U.A.E is excluded because it doesn’t have
consistent data for the full period.)
Asia's Bond Market Comes Alive
In the coming
decade the region will surpass Europe and rival the
U.S.
For years, East Asia's lack of viable bond markets and
its companies' consequent reliance on bank lending sparked concern about the
region's financial stability. But in the past few years bond issuance has
accelerated dramatically. From 2000-2010, Asian credit market issuance as a
share of global issuance has grown to 23% from 5%, the result of an annual
growth rate of 27%.
The benefits of growing Asian bond markets are many.
Risk is priced more transparently and efficiently, and systemic risk is reduced.
A vibrant bond market is a means of tapping into long-term savings and
maintaining high levels of liquidity while increasing capital available to
companies in a high-growth region.
In 2010, Asian
issuers raised a staggering $2.8 trillion via the bond markets—3.3 times the
amount raised in the equity markets. The largest Asian nonsovereign credit deal
was a $4.4 billion bond by Chinese electric utility State Grid. The market also
absorbed perpetual bonds by blue chip names like the Hong Kong conglomerate
Hutchison.
At the same time,
local currency markets are growing. Last month, Chinese real estate company
Evergrande raised $1.4 billion in a yuan-denominated international bond issue. In December 2010 alone, investors,
predominantly foreign funds, bought more than $1 billion of Thai debt in the
secondary markets. This means local markets are rapidly achieving critical
mass.
This is just the beginning of an explosive boom
in Asian credit. In the coming decade, the region will exceed Europe and rival
the U.S. as a credit-issuance market.
This
growth will be driven by demand- and supply-side factors. First is the strong
demand among Asian companies for more capital to fuel growth. Given the region's
demographics and higher growth rates, Asian companies will continue to look to
leverage the capital markets to fund growth, capacity expansion and mergers and
acquisitions.
The
second factor will be improving Asian sovereign credit profiles. As the ratings
agencies downgrade European sovereigns and U.S. municipal bonds, Asia is the one
bright spot for credit upgrades.
This continues a multiyear theme of Asian upgrades following the 1998 Asian
financial crisis, and one would expect countries such as Indonesia to join
India, Korea and China as investment-grade issuers. These ratings upgrades would
naturally benefit banks through greater credit lines and simultaneously enable
more global institutional investors to focus on Asian
companies.
Asian firms deleveraged dramatically after the
Asian financial crisis. Add to this that there are more than 1,000 Asian
companies with a market capitalization above $1 billion—more than in the
U.S.—and conditions are ripe for large bond issues.
Asia has also developed wider and deeper
investor pools. Asian credit is less than 2% of the holdings of most of the
large global pension funds and insurance companies. Growing numbers of U.S. and
European institutional investors are setting up Asian credit funds and opening
offices in Hong Kong and Singapore. Developed-market insurance companies are
steadily increasing their Asian allocations. Top-tier companies will benefit
from Asian central banks diversifying their growing reserves away from U.S.
Treasurys and developed-market blue chip bonds.
Moreover, as Asian
governments encourage pension-fund growth and the average Asia consumer
demographic starts to migrate from 20-year-olds entering the work force to
increased numbers of savers, demand will increase for longer-dated credit
products. Classic pension-fund success stories include NPS of Korea and EPF of
Malaysia, both of which are increasingly focusing on credit as an asset
class.
Regional banks
will play an important role in developing bond markets, and their balance sheets
are growing. Including HSBC, five of
the world's top 10 banks by market capitalization are now Asian. Asian
companies are key beneficiaries of the growing trend of Chinese banks building
offshore Asian branch networks. Other non-Asian global financial institutions
such as Bank of America Merrill Lynch and Citigroup are focused on growing their
Asian balance sheets.
The final factor is product innovation and
market reforms. Asian companies can now borrow in other Asian currencies. Investors benefit from the positive trends
of underlying Asian foreign-exchange appreciation, diversification and local
currency yields, while issuers seek lowest-cost funding bases, as well as
investor and funding-source diversification.
Perhaps
the biggest trend will be the ability of Asian and global multinational
corporations to fund in yuan as a result of the Chinese government's approach to
prudently liberalizing its currency regime, thereby providing opportunities for
companies with onshore operations to fund these in the local currency.
While there will be volatility and periods of
corrections, these forces—and others unforeseen—will combine to unleash a
revolution in Asian credit markets. Issuers and investors will benefit
alike.
Mr. Zuberi is head of Asia- Pacific global
markets distribution at Bank of America Merrill Lynch
China Starts Trial Property Tax to Cool Market
SHANGHAI—China announced details of a
long-awaited property tax in two of its largest urban centers, but the move
intended to crack down on speculation and curb rising prices that are fueling
public anger was relatively mild and analysts said it would have only a limited
impact on investment.
View Full Image
Bloomberg
News
Workers at the site of a residential development in
Chongqing, China, this week. The city is levying a tax on villas and some second
homes.
The trial tax, the closest thing yet to the
style of tax levied annually on residential property in countries like the U.S.,
will be applied differently in Chongqing and Shanghai, apparently to see which
one works best, before being rolled out across the
country.
The
tax comes after the country's cabinet on Wednesday raised the minimum down
payment on second-home purchases to 60% from 50%, and imposed limits on home
purchases as part of efforts to cool the overheated real-estate sector and rein
in inflation.
"The tax, by itself, is not very harsh," said
Remy Chan, managing director of CBD Commercial Investment Management, a 3
billion yuan ($456 billion) private-equity property fund in Shanghai. "But
together with the new limits on home purchases and higher down payment for
second homes, it shows the government is determined to rein in speculation."
The tax, which comes into effect Friday, "can
guide residents toward more rational housing consumption" and "promote social
equality," the Ministry of Finance said Thursday in a statement issued jointly
with the Ministry of Housing and Urban-Rural Development and the State
Administration of Taxation.
"Levying property tax on residential housing
can help reasonably adjust income allocation and promote social equality," the
statement added. It will be expanded to other cities "when the time is ripe" it
said, without giving a timetable.
Late last month, Premier Wen Jiabao said the
property-cooling measures announced so far hadn't been implemented well enough
and prices had yet to meet his expectations. Property prices rose 0.3% in December
from the previous month, and 6.4% from a year earlier. Property prices
slowed for the eight months to December on an annualized
basis.
Chongqing Mayor Huang Qifan said the city would levy a
real-estate tax on villas owned by individuals—usually luxury, stand-alone
homes—and on newly purchased high-end homes at three rates: 0.5%, 1%, and 1.2%,
depending on market transaction prices.
Three to five years after a purchase, the tax
may be based on the appraised value of the property, he said. In addition, the
city will levy a tax on second homes newly bought by non-Chongqing residents who
don't own companies or aren't employed by any company in the city, a move that
apparently targets speculators.
Separately, the Shanghai government said it would levy a
temporary 0.6% real-estate tax on homes and may cut the rate to 0.4% for
properties whose transaction prices are below certain—unspecified—levels.
A
statement by Shanghai's housing department said the tax would apply to second
homes newly bought by Shanghai-resident families or to first homes newly bought
by nonresident families.
"It's a mild plan overall, and the primary
impact will be psychological rather than economic," said Michael Klibaner, head
of research at Jones Lang LaSalle China,."We finally have some clarity. It's a
surprise that the tax will be in effect tomorrow, but the tax rate came in line
or slightly lower than the recent rumors," Mr. Klibaner said. He said it seemed
the aim was to support end-user demand, but it likely will have a limited impact
on investment demand, as the tax is lower than the investment yield of about 2%
in Shanghai. The progressive tax in Chongqing and flat tax in Shanghaitaxes show
that the government wants to experiment before rolling out a real-estate tax to
other cities, he said.
One of the intentions of the tax is to provide
a recurring source of income for local governments to reduce their reliance on
income from land sales, which encourages high prices.
Both cities said the tax revenue would be used
to support public-housing construction. However, Mr. Huang, the Chongqing mayor,
said the trial tax "carries more symbolic significance" in reforming people's
consumption habits and promoting better income allocation, and may not generate
much fiscal revenue in the near term.
He estimated that the tax could bring in around
150 million yuan of fiscal revenue this year, only a fraction of the 100 billion
yuan that the city needs to invest in public housing construction over the next
three years.
He also played down public expectations about
the short-term impact of the tax, saying it can only curb speculation and
property prices "to some extent".
"Maintaining a good local property-market order
isn't something that can be achieved overnight. Rather, it's a complicated
project," he said. "Nobody believes that the real-estate tax can hit the
Achilles' heel" immediately by pushing down property prices, he
said.
Analysts have said that if the tax doesn't push
down housing prices, it will lead to even more public resentment. Some also
raise the possibility of more rampant speculation in cities that have yet to be
included in the trial program.
The
government currently charges a 1.2% annual tax on 70%-90% of the value of
commercial properties. The
commercial real-estate tax is largely based on the cost of developing
properties, excluding the cost of the land, industry observers have
said.
China introduced a series of measures last year
to rein in property-price rises, including limiting home purchases, raising
down-payment requirements and twice raising interest rates. Analysts say a
real-estate tax could help stabilize the market.
—Victoria
Ruan contributed to this article.
****************r4
WSJ Econ Blog Jan 31, 2011
5:00 AM
The
Great Stagnation, Low-Hanging Fruit and America’s ‘Sputnik
Moment’
By
Kelly Evans
Few
people outside a small niche of economists and intellectuals took notice at the
time, but a potentially important event quietly took place last week: the
publication on Tuesday of Tyler
Cowen’s concise treatise — as a $4 Kindle e-book, no less — called “The
Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,
Got Sick, and Will (Eventually) Feel Better.”
Mr.
Cowen is a libertarian-leaning economist at George Mason University and a
columnist for The New York Times, but he is best-known for the sharp, thoughtful
blog called “Marginal
Revolution” that he and colleague Alex Tabarrok have been keeping
since 2003.
This
isn’t Mr. Cowen’s first book, but it is probably his most important — or at
least, his most impactful — one. It’s not that he has the final say on America’s
current economic malaise, but rather because he takes the debate in an entirely
new direction (new, at least, to most people) that gives so much value to his
work. His assessment may be bleak, but it is honest. His arguments aren’t
perfect, and “low-hanging fruit” doesn’t quite have the catchiness of “The World
is Flat,” but in terms of framing the dialogue Tyler Cowen may very well turn
out to be this decade’s Thomas Friedman.
His
essential point is that economic development and technological innovation have
reached a plateau, and unfortunately we in America are only now just realizing
it:
“Political discourse and behavior have become highly polarized, and what I like
to call the ‘honest middle’ cannot be heard above the din. People often blame
the economic policies of ‘the other side’ or they belligerently snipe at foreign
competition. But we are failing to understand why we are failing. All of these
problems have a single, little-noticed root cause: We have been living off
low-hanging fruit for at least three hundred years. We have built social and
economic institutions on the expectation of a lot of low-hanging fruit, but that
fruit is mostly gone.”
What
does he mean by low-hanging fruit? He lists three major forms — free land,
technological breakthroughs (specifically during the 1880-1940 period), and
smart, uneducated kids — and two minor ones, cheap fossil fuels and the U.S.
Constitution.
In other words, these preconditions gave rise to rapid growth and incredible
prosperity over the last couple of centuries, but we have now exhausted their
dividends. The most obvious measure
of this is the stagnation of median household wages in the U.S. for several
decades now. “If median income had continued to grow at its earlier postwar
rate, the median family income today would be over $90,000,” he notes — about
50% higher than where it currently is.
His
proposed solution, “Raise the social status of scientists,” feels a bit empty
after his elegant appraisal of our challenges, and doesn’t, for example, explain
how doing so might fix a critical problem he earlier singles out: that “A lot of
our recent innovations are ‘private goods’…that benefit some individuals but are
not public goods more generally.” (Think, for instance, of recent innovation in
the financial sector compared with past innovation that led to railroads,
highways and penicillin.)
But
again, perhaps most important is the way in which he is shifting and framing the
debate. The rest of the econoblogosphere is already abuzz with its own
observations or proscriptions for this new era of societal development, whatever
its ultimate form may be. Recent efforts to replace gross domestic product
measures with something more like Bhutan’s gross national happiness gauge
(supporting by Nobel laureate Joseph Stiglitz and French President
Nicholas Sarkozy, among others) are just one effect of this paradigm
shift. Economists are now looking for
“soft” measures that better capture wellbeing to replace or at least complement
the old, “hard” measures that only capture earnings and
output.
A
particular challenge we confront is that our progress as a society — chiefly, in
extending and improving lives — is now at a point in which it appears to be
undercutting our potential for further advancement. Part of this, Mr. Cowen observes, stems
from well-meaning efforts to do more with education, government, and health care
that instead seem to have backfired and left us with noncompetitive institutions
closer to failing us than to serving us well.
Mr.
Cowen’s book would be a more invigorating read if it weren’t so sobering. He is no Cassandra — he allows that we may
reap another harvest of low-hanging fruit from the Internet, for example, but
points out that the services it offers, however valuable, don’t generate a lot
of revenue. What is exciting, however, is to imagine students, economists,
and scientists across the country reading the book, coming to terms with the
depth of our challenge and pursuing new ways of trying to “fix” things or
generally improve our lot. President Obama, in his State of the Union address,
called for a new “Sputnik moment” in the U.S. — but offered little idea of what
he meant by that. Mr. Cowen gives us a much better sense of what we should
collectively be working towards — and what is at stake if we
fail.
WSJ Econ Blog Jan 29, 2011
5:00 AM
Number
of the Week: Banks Should Hold More Capital
By
Mark Whitehouse
Number
of the Week
52%
52%:
Optimal bank capital-to-assets ratio, according to a new
study.
Not
long ago, U.S. Treasury Secretary Timothy Geithner summed up what is
required to protect the global financial system from another disaster in three
words: “Capital, capital, capital.” Contrary to bankers’ protestations, a
growing body of research suggests that the world would be much better off if
banks had a lot more of it.
Bankers
typically present capital requirements as a sort of zero-sum game, or worse. If
banks have more capital — that is, finance their activities with more of their
own shareholders’ money, or equity, as opposed to debt — they’ll be less likely
to go bankrupt and exacerbate crises. But, the logic goes, capital is expensive:
If they can’t use as much cheap, borrowed money, banks will have to charge more
for loans, an outcome that could hobble the economy and make us all
poorer.
That
logic, though, contradicts an insight that financial economists Franco
Modigliani and Merton Miller had more than 50 years ago: Any
firm’s financing costs shouldn’t depend on the mix of debt and equity it
chooses. Shareholders demand high returns on bank equity in part because banks’
heavy borrowing subjects them to a lot of risk. Many banks typically borrow $30
or more for every $1 their shareholders put in, so a mere 3% drop in the value
of their assets can wipe out the shareholders’ investment completely. If banks
borrowed less, equity would probably be cheaper. The only reason debt remains a
better deal is that governments subsidize it through creditor bailouts and tax
breaks on interest.
More
importantly, the potential benefits of having safer banks are immense. In
a
new paper, three Bank of England economists — led by David
Miles, formerly of Morgan Stanley — conclude that the benefits far
outweigh the costs. Their work builds on an earlier Bank for International
Settlements study,
which this column touched on last year.
The
Bank of England economists estimate, for example, that a permanent
one-percentage-point reduction in the probability of banking crises is worth
more than half an entire year’s economic output. By contrast, permanently
doubling banks’ capital ratios would add only about 0.06 percentage point to
companies’ financing costs, taking a long-term bite out of the economy
equivalent to about 6% of one year’s output.
The
upshot: If one assumes that really bad crises tend to happen every few decades
or so, the most beneficial capital level would be 52% of assets, weighted
according to their riskiness. Even if
one assumes the future holds only mediocre crises, the optimal capital ratio
would be about 19%. That compares to a 7% requirement big global banks must meet
by 2019 under new rules drawn up in Basel last
year.
The Economic Roots Of the Revolt
Few countries have
been less integrated into the global economy than Egypt.
The mass movement engulfing Egypt exposes a
fact that has been hiding in plain sight: In a decade during which China has
brought more people out of poverty at a faster rate than ever in human history,
in a period of time where economic reform has been sweeping the world from
Brazil to Indonesia, Egypt has missed out.
A decade ago, IBM ran a series of commercials
featuring its global reach. One included a fisherman sailing on the Nile,
tapping into a wireless network. It was an enticing image—and almost completely
fictional. Few countries have been less
integrated into the global economy.
The
country ranks 137 in the world in per-capita income (just behind
Tonga and ahead of Kirbati), with a population in the top 20. And while GDP
growth for the past few years has been respectable, averaging 4%-5% save for
2009 (when all countries suffered), even that is at best middle of the pack in a
period where the more competitive dynamic nations have been surging
ahead.
Egypt has long been famous for crony
inefficiency. Yet Hosni Mubarak was
graced with nearly $2 billion in annual U.S. aid, another $5 billion from dues
from the Suez Canal, and $10 billion in tourism, so he could buy off a
considerable portion of the 80
million Egyptians.
In modern times,
Egypt has been a beacon of hope in the Arab world, with an independence movement
led by Gamel Abdel Nasser rising against the remnants of the British empire in
1952. That beacon was kept alive by Nasser's successor Anwar Sadat, who is
remembered in the West primarily for his bold overtures to Israel and a peace
treaty in 1981 that led to his assassination.
But
Sadat's most lasting legacy for Egypt may have been his brief attempt to
liberalize the economy (the Infitah) and open the country to the
world. While President Mubarak gave
lip service to that economic opening, for much of the subsequent three decades
Egypt's economy has been locked in a system that stifles economic activity and
innovation as surely as it does political expression.
In recent years,
Mr. Mubarak seemed to realize that the complete absence of economic reform
wasn't tenable. He watched as China surged ahead without loosening the control
of the state over political life. He made overtures to regional trade blocs. In
fact, a few days before the protests erupted, Mr. Mubarak hosted the second Arab
Economic, Development and Social Summit in the resort of Sharm al-Shaikh,
calling for more Arab economic integration, regional transportation
infrastructure and trade.
But in the past,
the changes promised far exceeded the changes effected, and there was little
reason to think this time would be different. Mr. Mubarak has resisted calls for
political opening with the warning that Muslim fundamentalism would sweep
through the land of the Nile.
The world accepted Mr. Mubarak's rationale.
Washington focused on the threat of Islamic radicalism and chose to nudge Mr.
Mubarak gently rather than risk what he warned would happen if elections were
open or expression allowed.
Meanwhile, China ignored the dialectic in the
West—which placed political opening at the top of societal imperatives—and
plunged into an experiment of hypercharged economic development without
political change. Its phenomenal success to date is impossible to refute, just
as its future course is impossible to predict.
But Egypt managed to forestall both paths, and
its lesson is simple: You can have
economic reform, or you can have political reform. You cannot have
neither.
What
allows China to thrive for now (and Brazil and India and Indonesia, among many
others) is that its citizens believe they have some control over their material
lives and a chance to turn their dreams and ambitions into reality. They have an
outlet for their passions that is not determined for them, and an increasing
degree of economic freedom.
The young in
Egypt—two-thirds of the population is under the age of 30—believe that they have
no future, and in many ways they are correct. Under Mr. Mubarak, their food and
housing is subsidized and they are placed in jobs or left in unemployed limbo,
not starving but without any hope of anything but years of numbing
sameness.
These realities alone don't cause revolution.
Many countries are poor and quiet. But Egypt has had all the marks of a
tinderbox. The future could bring worse, with radical regimes or chaos. But for
millions who have concluded that their dreams for a better life would expire
unfulfilled, nothing could be worse than the present.
Mr. Karabell, the president of River Twice
Research, is author of "Parting the Desert: The Creation of the Suez Canal
(Knopf, 2003), and "Superfusion: How China and America Became One Economy"
(Simon & Schuster, 2009).
NY
times January 12, 2011
Can
Europe Be Saved?
http://www.nytimes.com/2011/01/16/magazine/16Europe-t.html?_r=1&pagewanted=print
THERE’S
SOMETHING
peculiarly apt about the fact that the current European crisis began in Greece.
For Europe’s woes have all the aspects of a classical Greek tragedy, in which a
man of noble character is undone by the fatal flaw of hubris.
Not
long ago Europeans could, with considerable justification, say that the current
economic crisis was actually demonstrating the advantages of their economic and
social model. Like the United States, Europe suffered a severe slump in the wake
of the global financial meltdown; but the human costs of that slump seemed far
less in Europe than in America. In much of Europe, rules governing worker firing
helped limit job loss, while strong social-welfare programs ensured that even
the jobless retained their health care and received a basic income. Europe’s gross
domestic product might have fallen as much as ours, but the Europeans
weren’t suffering anything like the same amount of misery. And the truth is that
they still aren’t.
Yet
Europe is in deep crisis — because its proudest achievement, the single currency
adopted by most European nations, is now in danger. More than that, it’s looking
increasingly like a trap. Ireland, hailed as the Celtic Tiger
not so long ago, is now struggling to avoid bankruptcy. Spain, a booming economy
until recent years, now has 20 percent unemployment and faces the prospect of
years of painful, grinding deflation.
The
tragedy of the Euromess is that the creation of the
euro was supposed to be the finest moment in a grand and noble
undertaking: the generations-long effort to bring peace, democracy and shared
prosperity to a once and frequently war-torn continent. But the architects of
the euro, caught up in their project’s sweep and romance, chose to ignore the
mundane difficulties a shared currency would predictably encounter — to ignore
warnings, which were issued right from the beginning, that Europe lacked the
institutions needed to make a common currency workable. Instead, they engaged in
magical thinking, acting as if the nobility of their mission transcended such
concerns.
The
result is a tragedy not only for Europe but also for the world, for which Europe
is a crucial role model. The Europeans have shown us that peace and unity can be
brought to a region with a history of violence, and in the process they have
created perhaps the most decent societies in human history, combining democracy
and human rights with a level of individual economic security that America comes
nowhere close to matching. These achievements are now in the process of being
tarnished, as the European dream turns into a nightmare for all too many people.
How did that happen?
THE
ROAD TO THE EURO
It
all began with coal and steel. On May 9, 1950 — a date whose anniversary is now
celebrated as Europe Day — Robert Schuman, the French foreign minister, proposed
that his nation and West Germany pool their coal and steel production. That may
sound prosaic, but Schuman declared that it was much more than just a business
deal.
For
one thing, the new Coal and Steel Community would make any future war between
Germany and France “not merely unthinkable, but materially impossible.” And it
would be a first step on the road to a “federation of Europe,” to be achieved
step by step via “concrete achievements which first create a de facto
solidarity.” That is, economic measures would both serve mundane ends and
promote political unity.
The
Coal and Steel Community eventually evolved into a customs union within which
all goods were freely traded. Then, as democracy spread within Europe, so did
Europe’s unifying economic institutions. Greece, Spain and Portugal were brought
in after the fall of their dictatorships; Eastern Europe after the fall of
Communism.
In the
1980s and ’90s this “widening” was accompanied by “deepening,” as Europe set
about removing many of the remaining obstacles to full economic integration.
(Eurospeak is a distinctive dialect, sometimes hard to understand without
subtitles.) Borders were opened; freedom of personal movement was guaranteed;
and product, safety and food regulations were harmonized, a process immortalized
by the Eurosausage episode of the TV show “Yes Minister,” in which the minister
in question is told that under new European rules, the traditional British
sausage no longer qualifies as a sausage and must be renamed the Emulsified
High-Fat Offal Tube. (Just to be clear, this happened only on TV.)
The
creation of the euro was proclaimed the logical next step in this process. Once
again, economic growth would be fostered with actions that also reinforced
European unity.
The
advantages of a single European currency were obvious. No more need to change
money when you arrived in another country; no more uncertainty on the part of
importers about what a contract would actually end up costing or on the part of
exporters about what promised payment would actually be worth. Meanwhile, the
shared currency would strengthen the sense of European unity. What could go
wrong?
The
answer, unfortunately, was that currency unions have costs as well as benefits.
And the case for a single European currency was much weaker than the case for a
single European market — a fact that European leaders chose to ignore.
THE
(UNEASY) CASE FOR MONETARY UNION
International
monetary economics is, not surprisingly, an area of frequent disputes. As it
happens, however, these disputes don’t line up across the usual ideological
divide. The hard right often favors hard money — preferably a gold standard —
but left-leaning European politicians have been enthusiastic proponents of the
euro. Liberal American
economists, myself included, tend to favor freely floating national currencies
that leave more scope for activist economic policies — in particular, cutting
interest rates and increasing the money supply to fight recessions. Yet the
classic argument for flexible exchange rates was made by none other than
Milton
Friedman.
The
case for a transnational currency is, as we’ve already seen, obvious: it makes
doing business easier. Before the euro was introduced, it was really anybody’s
guess how much this ultimately mattered: there were relatively few examples of
countries using other nations’ currencies. For what it was worth, statistical
analysis suggested that adopting a common currency had big effects on trade,
which suggested in turn large economic gains. Unfortunately, this optimistic
assessment hasn’t held up very well since the euro was created: the best
estimates now indicate that trade among euro nations is only 10 or 15 percent
larger than it would have been otherwise. That’s not a trivial number, but
neither is it transformative.
Still,
there are obviously benefits from a currency union. It’s just that there’s a
downside, too: by giving up its own currency, a country also gives up economic
flexibility.
Imagine
that you’re a country that, like Spain today, recently saw wages and prices
driven up by a housing boom, which then went bust. Now you need to get those
costs back down. But getting wages and prices to fall is tough: nobody wants to
be the first to take a pay cut, especially without some assurance that prices
will come down, too. Two years of intense suffering have brought Irish wages
down to some extent, although Spain and Greece have barely begun the process.
It’s a nasty affair, and as we’ll see later, cutting wages when you’re awash in
debt creates new problems.
If you
still have your own currency, however, you wouldn’t have to go through the
protracted pain of cutting wages: you could just devalue your currency — reduce
its value in terms of other currencies — and you would effect a de facto wage
cut.
Won’t
workers reject de facto wage cuts via devaluation just as much as explicit cuts
in their paychecks? Historical experience says no. In
the current crisis, it took Ireland two years of severe unemployment to achieve
about a 5 percent reduction in average wages. But in 1993 a devaluation of the
Irish punt brought an instant 10 percent reduction in Irish wages measured in
German currency.
Why
the difference? Back
in 1953, Milton Friedman offered an analogy: daylight saving time. It makes a
lot of sense for businesses to open later during the winter months, yet it’s
hard for any individual business to change its hours: if you operate from 10 to
6 when everyone else is operating 9 to 5, you’ll be out of sync. By requiring
that everyone shift clocks back in the fall and forward in the spring, daylight
saving time obviates this coordination problem. Similarly, Friedman argued,
adjusting your currency’s value solves the coordination problem when wages and
prices are out of line, sidestepping the unwillingness of workers to be the
first to take pay cuts.
So
while there are benefits of a common currency, there are also important
potential advantages to keeping your own currency. And the terms of this
trade-off depend on underlying conditions.
On one
side, the benefits of a shared currency depend on how much business would be
affected.
I think of this as the
Iceland-Brooklyn issue. Iceland, with only 320,000 people, has its own currency
— and that fact has given it valuable room for maneuver. So why isn’t Brooklyn,
with roughly eight times Iceland’s population, an even better candidate for an
independent currency? The answer is that Brooklyn, located as it is in the
middle of metro New York rather than in the middle of the Atlantic, has an
economy deeply enmeshed with those of neighboring boroughs. And Brooklyn
residents would pay a large price if they had to change currencies every time
they did business in Manhattan or Queens.
So
countries that do a lot of business with one another may have a lot to gain from
a currency union.
On the
other hand, as Friedman pointed out, forming a currency union means sacrificing
flexibility. How serious is this loss? That depends. Let’s consider what may at
first seem like an odd comparison between two small, troubled economies.
Climate,
scenery and history aside, the nation of Ireland and the state of Nevada have
much in common. Both are small economies of a few million people highly
dependent on selling goods and services to their neighbors. (Nevada’s neighbors
are other U.S. states, Ireland’s other European nations, but the economic
implications are much the same.) Both were boom economies for most of the past
decade. Both had huge housing bubbles, which burst painfully. Both are now
suffering roughly 14 percent unemployment. And both are members of larger
currency unions: Ireland is part of the euro zone, Nevada part of the
dollar zone, otherwise known as the United States of America.
But
Nevada’s situation is much less desperate than Ireland’s.
First
of all, the fiscal side of the crisis is less serious in
Nevada. It’s
true that budgets in both Ireland and Nevada have been hit extremely hard by the
slump. But much of the spending Nevada residents depend on comes from federal,
not state, programs. In particular, retirees who moved to Nevada for the
sunshine don’t have to worry that the state’s reduced tax take will endanger
their Social
Security checks or their Medicare
coverage. In Ireland,
by contrast, both pensions and health spending are on the cutting block.
Also,
Nevada, unlike Ireland, doesn’t have to worry about the cost of bank bailouts,
not because the state has avoided large loan losses but because those losses,
for the most part, aren’t Nevada’s problem. Thus Nevada accounts for a
disproportionate share of the losses incurred by Fannie
Mae and Freddie
Mac, the government-sponsored mortgage companies — losses that, like
Social Security and Medicare payments, will be covered by Washington, not Carson
City.
And
there’s one more advantage to being a U.S. state: it’s likely that Nevada’s
unemployment problem will be greatly alleviated over the next few years by
out-migration, so that even if the lost jobs don’t come back, there will be
fewer workers chasing the jobs that remain. Ireland will, to some extent, avail
itself of the same safety valve, as Irish citizens leave in search of work
elsewhere and workers who came to Ireland during the boom years depart. But
Americans are extremely mobile; if historical patterns are any guide, emigration
will bring Nevada’s unemployment rate back in line with the U.S. average within
a few years, even if job growth in Nevada continues to lag behind growth in the
nation as a whole.
Over
all, then, even as both Ireland and Nevada have been especially hard-luck cases
within their respective currency zones, Nevada’s medium-term prospects look much
better.
What
does this have to do with the case for or against the euro? Well, when the
single European currency was first proposed, an obvious question was whether it
would work as well as the dollar does here in America. And the answer, clearly,
was no — for exactly the reasons the Ireland-Nevada comparison illustrates.
Europe isn’t fiscally integrated: German taxpayers don’t automatically pick up
part of the tab for Greek pensions or Irish bank bailouts. And while Europeans
have the legal right to move freely in search of jobs, in practice imperfect
cultural integration — above all, the lack of a common language — makes workers
less geographically mobile than their American counterparts.
And
now you see why many American (and some British) economists have always been
skeptical about the euro project. U.S.-based economists had long emphasized the
importance of certain preconditions for currency union — most famously, Robert
Mundell of Columbia stressed the importance of labor mobility, while Peter
Kenen, my colleague at Princeton, emphasized the importance of fiscal
integration. America, we know, has a currency union that works, and we know why
it works: because it coincides with a nation — a nation with a big central
government, a common language and a shared culture. Europe has none of these
things, which from the beginning made the prospects of a single currency
dubious.
These
observations aren’t new: everything I’ve just said was well known by 1992, when
the Maastricht Treaty set the euro project in motion. So why did the project
proceed? Because the idea of the euro had gripped the imagination of European
elites. Except in Britain, where Gordon
Brown persuaded Tony
Blair not to join, political leaders throughout Europe were caught up
in the romance of the project, to such an extent that anyone who expressed
skepticism was considered outside the mainstream.
Back
in the ’90s, people who were present told me that staff members at the European
Commission were initially instructed to prepare reports on the costs
and benefits of a single currency — but that after their superiors got a look at
some preliminary work, those instructions were altered: they were told to
prepare reports just on the benefits. To be fair, when I’ve told that story to
others who were senior officials at the time, they’ve disputed that — but
whoever’s version is right, the fact that some people were making such a claim
captures the spirit of the time.
The
euro, then, would proceed. And for a while, everything seemed to go well.
EUROPHORIA,
EUROCRISIS
The
euro officially came into existence on Jan. 1, 1999. At first it was a virtual
currency: bank accounts and electronic transfers were denominated in euros, but
people still had francs, marks and lira (now considered denominations of the
euro) in their wallets. Three years later, the final transition was made, and
the euro became Europe’s money.
The
transition was smooth: A.T.M.’s and cash registers were converted swiftly and
with few glitches. The euro quickly became a major international currency: the
euro bond market soon came to rival the dollar bond market; euro bank notes
began circulating around the world. And the creation of the euro instilled a new
sense of confidence, especially in those European countries that had
historically been considered investment risks. Only later did it become apparent
that this surge of confidence was bait for a dangerous trap.
Greece,
with its long history of debt defaults and bouts of high inflation, was the most
striking example. Until the late 1990s, Greece’s fiscal history was reflected in
its bond yields: investors would buy bonds issued by the Greek government only
if they paid much higher interest than bonds issued by governments perceived as
safe bets, like those by Germany. As the euro’s debut approached, however, the
risk premium on Greek bonds melted away. After all, the thinking went, Greek
debt would soon be immune from the dangers of inflation: the European
Central Bank would see to that. And it wasn’t possible to imagine any
member of the newly minted monetary union going bankrupt, was it?
Indeed,
by the middle of the 2000s just about all fear of country-specific fiscal woes
had vanished from the European scene. Greek bonds, Irish bonds, Spanish bonds,
Portuguese bonds — they all traded as if they were as safe as German bonds. The
aura of confidence extended even to countries that weren’t on the euro yet but
were expected to join in the near future: by 2005, Latvia, which at that point
hoped to adopt the euro by 2008, was able to borrow almost as cheaply as
Ireland. (Latvia’s switch to the euro has been put off for now, although
neighboring Estonia joined on Jan. 1.)
As
interest rates converged across Europe, the formerly high-interest-rate
countries went, predictably, on a borrowing spree. (This borrowing spree was,
it’s worth noting, largely financed by banks in Germany and other traditionally
low-interest-rate countries; that’s why the current debt problems of the
European periphery are also a big problem for the European banking system as a
whole.) In Greece it was largely the government that ran up big debts. But
elsewhere, private players were the big borrowers. Ireland, as I’ve already
noted, had a huge real estate boom: home prices rose 180 percent from 1998, just
before the euro was introduced, to 2007. Prices in Spain rose almost as much.
There were booms in those not-yet-euro nations, too: money flooded into Estonia,
Latvia, Lithuania, Bulgaria and Romania.
It was
a heady time, and not only for the borrowers. In the late 1990s, Germany’s
economy was depressed as a result of low demand from domestic consumers. But it
recovered in the decade that followed, thanks to an export boom driven by its
European neighbors’ spending sprees.
Everything,
in short, seemed to be going swimmingly: the euro was pronounced a great
success.
Then
the bubble burst.
You
still hear people talking about the global economic crisis of 2008 as if it were
something made in America. But Europe deserves equal billing. This was, if you
like, a North Atlantic crisis, with not much to choose between the messes of the
Old World and the New. We had our subprime borrowers, who either chose to take
on or were misled into taking on mortgages too big for their incomes; they had
their peripheral economies, which similarly borrowed much more than they could
really afford to pay back. In both cases, real estate bubbles temporarily masked
the underlying unsustainability of the borrowing: as long as housing prices kept
rising, borrowers could always pay back previous loans with more money borrowed
against their properties. Sooner or later, however, the music would stop. Both
sides of the Atlantic were accidents waiting to happen.
In
Europe, the first round of damage came from the collapse of those real estate
bubbles, which devastated employment in the peripheral economies. In 2007,
construction accounted for 13 percent of total employment in both Spain and
Ireland, more than twice as much as in the United States. So when the building
booms came to a screeching halt, employment crashed. Overall employment fell 10
percent in Spain and 14 percent in Ireland; the Irish situation would be the
equivalent of losing almost 20 million jobs here.
But
that was only the beginning. In late 2009, as much of the world was emerging
from financial crisis, the European crisis entered a new phase. First Greece,
then Ireland, then Spain and Portugal suffered drastic losses in investor
confidence and hence a significant rise in borrowing costs. Why?
In
Greece the story is straightforward: the government behaved irresponsibly, lied
about it and got caught. During the years of easy borrowing, Greece’s
conservative government ran up a lot of debt — more than it admitted. When the
government changed hands in 2009, the accounting fictions came to light;
suddenly it was revealed that Greece had both a much bigger deficit and
substantially more debt than anyone had realized. Investors, understandably,
took flight.
But
Greece is actually an unrepresentative case. Just a few years ago Spain, by far
the largest of the crisis economies, was a model European citizen, with a
balanced budget and public debt only about half as large, as a percentage of
G.D.P., as that of Germany. The same was true for Ireland. So what went wrong?
First,
there was a large direct fiscal hit from the slump. Revenue plunged in both
Spain and Ireland, in part because tax receipts depended heavily on real estate
transactions. Meanwhile, as unemployment soared, so did the cost of unemployment
benefits — remember, these are European welfare states, which have much more
extensive programs to shield their citizens from misfortune than we do. As a
result, both Spain and Ireland went from budget surpluses on the eve of the
crisis to huge budget deficits by 2009.
Then
there were the costs of financial clean-up. These have been especially crippling
in Ireland, where banks ran wild in the boom years (and were allowed to do so
thanks to close personal and financial ties with government officials). When the
bubble burst, the solvency of Irish banks was immediately suspect. In an attempt
to avert a massive run on the financial system, Ireland’s government guaranteed
all bank debts — saddling the government itself with those debts, bringing its
own solvency into question. Big Spanish banks were well regulated by comparison,
but there was and is a great deal of nervousness about the status of smaller
savings banks and concern about how much the Spanish government will have to
spend to keep these banks from collapsing.
All of
this helps explain why lenders have lost faith in peripheral European economies.
Still, there are other nations — in particular, both the United States and
Britain — that have been running deficits that, as a percentage of G.D.P., are
comparable to the deficits in Spain and Ireland. Yet they haven’t suffered a
comparable loss of lender confidence. What is different about the euro
countries?
One
possible answer is “nothing”: maybe one of these days we’ll wake up and find
that the markets are shunning America, just as they’re shunning Greece. But the
real answer is probably more systemic: it’s the euro itself that makes Spain and
Ireland so vulnerable. For membership in the euro means that these countries
have to deflate their way back to competitiveness, with all the pain that
implies.
The
trouble with deflation isn’t just the coordination problem Milton Friedman
highlighted, in which it’s hard to get wages and prices down when everyone wants
someone else to move first. Even when countries successfully drive down wages,
which is now happening in all the euro-crisis countries, they run into another
problem: incomes are falling, but debt is not.
As the
American economist Irving Fisher pointed out almost 80 years ago, the collision
between deflating incomes and unchanged debt can greatly worsen economic
downturns. Suppose the economy slumps, for whatever reason: spending falls and
so do prices and wages. But debts do not, so debtors have to meet the same
obligations with a smaller income; to do this, they have to cut spending even
more, further depressing the economy. The way to avoid this vicious circle,
Fisher said, was monetary expansion that heads off deflation. And in America and
Britain, the Federal
Reserve and the Bank
of England, respectively, are trying to do just that. But Greece,
Spain and Ireland don’t have that option — they don’t even have their own
monies, and in any case they need deflation to get their costs in line.
And so
there’s a crisis. Over the course of the past year or so, first Greece, then
Ireland, became caught up in a vicious financial circle: as potential lenders
lost confidence, the interest rates that they had to pay on the debt rose,
undermining future prospects, leading to a further loss of confidence and even
higher interest rates. Stronger European nations averted an immediate implosion
only by providing Greece and Ireland with emergency credit lines, letting them
bypass private markets for the time being. But how is this all going to work
out?
FOUR
EUROPEAN PLOTLINES
Some economists, myself included,
look at Europe’s woes and have the feeling that we’ve seen this movie before, a
decade ago on another continent — specifically, in Argentina.
Unlike
Spain or Greece, Argentina never gave up its own currency, but in 1991 it did
the next best thing: it rigidly pegged its currency to the U.S. dollar,
establishing a “currency board” in which each peso in circulation was backed by
a dollar in reserves. This was supposed to prevent any
return to Argentina’s old habit of covering its deficits by printing money. And
for much of the 1990s, Argentina was rewarded with much lower interest rates and
large inflows of foreign capital.
Eventually,
however, Argentina slid into a persistent recession and lost investor confidence.
Argentina’s government tried to restore that confidence through rigorous fiscal
orthodoxy, slashing spending and raising taxes. To buy time for austerity to
have a positive effect, Argentina sought and received large loans from the
International Monetary
Fund — in much the same way that Greece
and Ireland have sought emergency loans from their neighbors. But the persistent
decline of the Argentine economy, combined with deflation, frustrated the
government’s efforts, even as high unemployment led to growing unrest.
By
early 2002, after angry demonstrations and a run on the banks, it had all fallen
apart.
The link between the
peso and the dollar collapsed, with the peso plunging; meanwhile, Argentina
defaulted on its debts, eventually paying only about 35 cents on the dollar.
It’s
hard to avoid the suspicion that something similar may be in the cards for one
or more of Europe’s problem economies. After all, the policies now being
undertaken by the crisis countries are, qualitatively at least, very similar to
those Argentina tried in its desperate effort to save the peso-dollar link:
harsh fiscal austerity in an effort to regain the market’s confidence, backed in
Greece and Ireland by official loans intended to buy time until private lenders
regain confidence. And if an Argentine-style outcome is the end of the line, it
will be a terrible blow to the euro project. Is that what’s going to happen?
Not
necessarily. As I see it, there are four ways the European crisis could play out
(and it may play out differently in different countries). Call them toughing it
out; debt restructuring; full Argentina; and revived Europeanism.
Toughing
it out:
Troubled European economies could, conceivably, reassure creditors by showing
sufficient willingness to endure pain and thereby avoid either default or
devaluation. The role models here are the Baltic nations: Estonia, Lithuania and
Latvia. These countries are small and poor by European standards; they want very
badly to gain the long-term advantages they believe will accrue from joining the
euro and becoming part of a greater Europe. And so they have been willing to
endure very harsh fiscal austerity while wages gradually come down in the hope
of restoring competitiveness — a process known in Eurospeak as “internal
devaluation.”
Have
these policies been successful? It depends on how you define “success.” The
Baltic nations have, to some extent, succeeded in reassuring markets, which now
consider them less risky than Ireland, let alone Greece. Meanwhile, wages have
come down, declining 15 percent in Latvia and more than 10 percent in Lithuania
and Estonia. All of this has, however, come at immense cost: the Baltics have
experienced Depression-level declines in output and employment. It’s true that
they’re now growing again, but all indications are that it will be many years
before they make up the lost ground.
It
says something about the current state of Europe that many officials regard the
Baltics as a success story. I find myself quoting Tacitus: “They make a desert
and call it peace” — or, in this case, adjustment. Still, this is one way the
euro zone could survive intact.
Debt
restructuring: At
the time of writing, Irish 10-year bonds were yielding about 9 percent, while
Greek 10-years were yielding 12½ percent. At the same time, German 10-years —
which, like Irish and Greek bonds, are denominated in euros — were yielding less
than 3 percent. The message from the markets was clear:
investors don’t expect Greece and Ireland to pay their debts in full. They are,
in other words, expecting some kind of debt restructuring, like the
restructuring that reduced Argentina’s debt by two-thirds.
Such a
debt restructuring would by no means end a troubled economy’s pain. Take Greece:
even if the government were to repudiate all its debt, it would still have to
slash spending and raise taxes to balance its budget, and it would still have to
suffer the pain of deflation. But a debt restructuring could bring the vicious
circle of falling confidence and rising interest costs to an end, potentially
making internal devaluation a workable if brutal strategy.
Frankly,
I find it hard to see how Greece can avoid a debt restructuring, and Ireland
isn’t much better. The real question is whether such restructurings will spread
to Spain and — the truly frightening prospect — to Belgium and Italy, which are
heavily indebted but have so far managed to avoid a serious crisis of
confidence.
Full
Argentina:
Argentina didn’t simply default on its foreign debt; it also abandoned its link
to the dollar, allowing the peso’s value to fall by more than two-thirds. And
this devaluation worked: from 2003 onward, Argentina experienced a rapid
export-led economic rebound.
The
European country that has come closest to doing an Argentina is
Iceland,
whose bankers had run up foreign debts that were many times its national income.
Unlike Ireland, which tried to salvage its banks by guaranteeing their debts,
the Icelandic
government forced its banks’ foreign creditors to take
losses, thereby limiting its debt burden. And
by letting its banks default, the country took a lot of foreign debt off its
national books.
At the
same time, Iceland
took advantage of the fact that it had not joined the euro and still had its own
currency. It soon became more competitive by letting its
currency drop sharply against other currencies, including the
euro. Iceland’s
wages and prices quickly fell about 40 percent relative to those of its trading
partners, sparking a rise in exports and fall
in imports that helped offset the blow from the banking collapse.
The
combination of default and devaluation has helped Iceland limit the damage from
its banking disaster. In fact, in terms of employment and output, Iceland has
done somewhat better than Ireland and much better than the Baltic nations.
So
will one or more troubled European nations go down the same path? To do so, they
would have to overcome a big obstacle: the fact that, unlike Iceland, they no
longer have their own currencies. As Barry Eichengreen of Berkeley pointed out
in an influential 2007 analysis, any euro-zone country that even hinted at
leaving the currency would trigger a devastating run on its banks, as depositors
rushed to move their funds to safer locales. And Eichengreen concluded that this
“procedural” obstacle to exit made the euro irreversible.
But
Argentina’s peg to the dollar was also supposed to be irreversible, and for much
the same reason. What made devaluation possible, in the end, was the fact that
there was a run on the banks despite the government’s insistence that one peso
would always be worth one dollar. This run forced the Argentine government to
limit withdrawals, and once these limits were in place, it was possible to
change the peso’s value without setting off a second run. Nothing like that has
happened in Europe — yet. But it’s certainly within the realm of possibility,
especially as the pain of austerity and internal devaluation drags on.
Revived
Europeanism: The
preceding three scenarios were grim. Is there any hope of an outcome less grim?
To the extent that there is, it would have to involve taking further major steps
toward that “European federation” Robert Schuman wanted 60 years ago.
In
early December, Jean-Claude Juncker, the prime minister of Luxembourg, and
Giulio Tremonti, Italy’s finance minister, created a storm with a proposal to
create “E-bonds,” which would be issued by a European debt agency at the behest
of individual European countries. Since these bonds would be guaranteed by the
European
Union as a whole, they would offer a way for troubled economies to
avoid vicious circles of falling confidence and rising borrowing costs. On the
other hand, they would potentially put governments on the hook for one another’s
debts — a point that furious German officials were quick to make. The Germans
are adamant that Europe must not become a “transfer union,” in which stronger
governments and nations routinely provide aid to weaker.
Yet as
the earlier Ireland-Nevada comparison shows, the United States works as a
currency union in large part precisely because it is also a transfer union, in
which states that haven’t gone bust support those that have. And it’s hard to
see how the euro can work unless Europe finds a way to accomplish something
similar.
Nobody
is yet proposing that Europe move to anything resembling U.S. fiscal
integration; the Juncker-Tremonti plan would be at best a small step in that
direction. But Europe doesn’t seem ready to take even that modest step.
OUT OF
MANY, ONE?
For
now, the plan in Europe is to have everyone tough it out — in effect, for
Greece, Ireland, Portugal and Spain to emulate Latvia and Estonia. That was the
clear verdict of the most recent meeting of the European Council, at which Angela
Merkel, the German chancellor, essentially got everything she wanted.
Governments that can’t borrow on the private market will receive loans from the
rest of Europe — but only on stiff terms: people talk about Ireland getting a
“bailout,” but it has to pay almost 6 percent interest on that emergency loan.
There will be no E-bonds; there will be no transfer union.
Even
if this eventually works in the sense that internal devaluation has worked in
the Baltics — that is, in the narrow sense that Europe’s troubled economies
avoid default and devaluation — it will be an ugly process, leaving much of
Europe deeply depressed for years to come. There will be political repercussions
too, as the European public sees the continent’s institutions as being —
depending on where they sit — either in the business of bailing out deadbeats or
acting as agents of heartless bill collectors.
Nor
can the rest of the world look on smugly at Europe’s woes. Taken as a whole, the
European Union, not the United States, is the world’s largest economy; the
European Union is fully coequal with America in the running of the global
trading system; Europe is the world’s most important source of foreign aid; and
Europe is, whatever some Americans may think, a crucial partner in the fight
against terrorism. A troubled Europe is bad for everyone else.
In any
case, the odds are that the current tough-it-out strategy won’t work even in the
narrow sense of avoiding default and devaluation — and the fact that it won’t
work will become obvious sooner rather than later. At that point, Europe’s
stronger nations will have to make a choice.
It has
been 60 years since the Schuman declaration started Europe on the road to
greater unity. Until now the journey along that road, however slow, has always
been in the right direction. But that will no longer be true if the euro project
fails. A failed euro wouldn’t send Europe back to the days of minefields and
barbed wire — but it would represent a possibly irreversible blow to hopes of
true European federation.
So
will Europe’s strong nations let that happen? Or will they accept the
responsibility, and possibly the cost, of being their neighbors’ keepers? The
whole world is waiting for the answer.
Paul
Krugman is a Times columnist and winner of the 2008 Nobel Memorial Prize in
Economic Sciences. His latest book is “The Return of Depression Economics and
the Crisis of
2008.”
January
31, 2011
DDT
Still Critical in Fight against Insect-Borne Diseases
Through
a mix of environmental fervor, self-interest and disregard for evidence-based
policy, United Nations (UN) agencies are misleading the public about the
insecticide DDT -- mistakenly claiming it is not needed and can be eliminated
globally by 2020, says Donald Roberts, emeritus professor of tropical medicine
at Uniformed Services University of the Health Sciences, Roger Bate, the Legatum
Fellow in Global Prosperity at the American Enterprise Institute, and Richard
Tren, the executive director of Africa Fighting Malaria.
- UN
agencies are misleading the public by claiming that malaria can be controlled
without insecticides, notably DDT; the stated aim is to stop DDT use globally
by 2020.
- UN
agencies are committing scientific fraud by deliberately and incorrectly
interpreting data on malaria control using noninsecticide
methods.
While
DDT is no panacea, it is still a critical weapon in the battle against malaria
and other insect-borne diseases, say Roberts, Bate and
Tren.
Source:
Roger Bate, Donald Roberts and Richard Tren, "The United Nations' Scientific
Fraud against DDT," American Enterprise Institute, January 21,
2011.
For
text:
http://www.aei.org/outlook/101019
World Income Inequality
Alex Tabarrok
Here, courtesy of Catherine Rampell of Economix, is a remarkable chart from Branko
Milanovic's book The Haves and Have Nots. Along the horizontal axis are
within-country income percentiles running from the bottom 5% (1st ventile) to
the top 5% (20th ventile). Along the vertical axis are world income
percentiles.
The graph shows that the bottom 5% of Brazilians are among the
poorest people in the world but the top 5% are among the richest. Thus the
vertical range of the curve tells us about within-country inequality.
Comparing between countries we see that the poorest 5% of Americans are among
the richest people in the world (richer than nearly 70% of other people in the
world). The poorest 5% of Americans, for example, are richer than the richest 5%
of Indians.
January 31, 2011 at 12:21 PM in Data
Source, Economics
| Permalink
| Comments
(58)
N Y Times
January 28, 2011, 7:46 pm
The
Wal-Mart Decade
I’ve been
putting some material together for textbook revision, and found myself looking
at European versus US productivity performance over the past couple of decades.
I sort of knew the facts here, but this recent
paper by Bart van Ark (pdf) seemed to me to make the points especially
clearly, and I found myself rolling my own versions of some of his
numbers.
To get
some sense of productivity trends, van Ark uses a fairly fancy statistical
technique (Hodrick-Prescott filter). But a simple 5-year moving average, to
smooth out the business cycle, does about the same thing. Here’s productivity
growth in the US and in “Europe” defined as the average of the 4 big economies
since 1970:
Total
Economy Database
European
productivity grew faster than the US until the 1990s, mainly reflecting catchup;
but America moved ahead in the late 1990s; the data suggest that the
differential has leveled out since, so this may have been a one-time
bulge.
And what
was it about? Van Ark’s data point to a huge surge between 1995 and 2004 in US
productivity, not so much in producing goods as in distributing them. And we
know what that’s about: Wal-Mart and other big box stores.
I’m not
denigrating these productivity gains. What’s interesting, though, is that if
you’re looking for a story about the relative American revival from 1995 until
recently, it’s not so much a broad, generic economy thing as it is a story of
one particular innovation that for whatever reason — land use regulations? —
Europe was slow to imitate.
Marginal
Revolution
2-1-11
Five-year
average productivity
Tyler
Cowen
That
is from Paul Krugman. And from Krugman's source, Bart van Ark:
To
conclude, there is good reason to adjust the long-term US productivity growth
rate downwards.
January
29, 2011 at 07:07 AM in Economics
| Permalink
| Comments
(23
Innovation Is Doing
Little for Incomes
By TYLER COWEN
Published: January 29, 2011 N Y Times
MY
grandmother, who was born in 1905, spoke often about the immense changes she had
seen, including the widespread adoption of electricity, the automobile, flush
toilets, antibiotics and convenient household appliances. Since my birth in
1962, it seems to me, there have not been comparable improvements.
David
G. Klein
Of
course, the personal
computer and its cousin, the smartphone, have brought about some big changes.
And many goods and services are now more plentiful and of better quality. But
compared with what my grandmother witnessed, the basic accouterments of life
have remained broadly the same.
The
income
numbers for Americans reflect this slowdown
in growth. From 1947 to 1973 — a period of just 26 years — inflation-adjusted
median income in the United States more than doubled. But in the 31 years from
1973 to 2004, it rose only 22 percent. And, over the last decade, it
actually
declined.
Most
well-off countries have experienced income growth slowdowns since the early
1970s, so it would seem that a single cause is transcending national borders:
the reaching of a technological plateau. The
numbers suggest that for almost 40 years, we’ve had near-universal dissemination
of the major innovations stemming from the Industrial Revolution, many of which
combined efficient machines with potent fossil fuels. Today, no huge improvement
for the automobile or airplane is in sight, and the major struggle is to limit
their pollution, not to vastly improve their capabilities.
Although
America produces plenty of innovations, most are not geared toward significantly
raising the average standard of living.
It seems that we are
coming up with ideas that benefit relatively small numbers of people, compared
with the broad-based advances of earlier decades, when the modern world was put
into place. If pre-1973 growth rates had
continued, for example,
median family income in the
United States would now be more than $90,000, as opposed to its current range of
around $50,000.
Will
the Internet usher in a new economic growth explosion? Quite possibly, but it
hasn’t delivered very good macroeconomic performance over the last decade. Many
of the Internet’s gains are fun — games, chat rooms, Twitter streams — rather than vast sources
of revenue, and when there have been measurable monetary gains, they often have
been concentrated among a small number of company founders, as with, say,
Facebook. As for users, the Internet has
benefited the well-educated and the curious to a disproportionate degree, but
apparently not enough to bolster median income.
Beyond
the income slowdown, there is a further worry: an
increasing share of the economy consists of education and health
care. That trend is not necessarily bad, but in these two
areas, results are often hard to measure. If health care costs rise 6 percent in
a year, for example, that counts as higher G.D.P., but how much is our health
actually improving? It’s an open question. America spends more on health care
than other countries, but those expenditures don’t seem to produce uniformly
superior results. And while there have certainly been gains in
medical treatment, we may be overvaluing them. In education, we are spending more
each year, but test scores have stagnated for decades, graduation rates are down
and America’s worst schools are disasters.
There
is an even broader problem. When it comes to measuring national
income, we’re generally valuing expenditures at cost, rather than tracking
productivity in terms of results. In other words, our statistics may
be deceiving us — by accepting, say, our health care and educational
expenditures at face value. This theme has been emphasized by the
PayPal co-founder Peter Thiel in his public talks and by the economist Michael
Mandel in his writings. And I’ve stressed it in a recent e-book,
“The Great
Stagnation.”
Sooner
or later, new technological revolutions will occur, perhaps in the biosciences,
through genome sequencing, or in energy production, through viable solar
power, for example. But these transformations won’t come overnight, and
we’ll have to make do in the meantime. Instead of facing up to this
scarcity, politicians promote tax cuts and income redistribution policies to
benefit favored constituencies. Yet these are one-off adjustments and, over
time, they cannot undo the slower rate of growth in average living standards.
It’s
unclear whether Americans have the temperament to make a smooth transition to a
more stagnant economy. After all, we’ve long thought of our country as the land
of unlimited opportunity. In practice, this optimism has meant that we continue
to increase government spending, whether or not we can afford it.
In the
narrow sense, the solution to the stagnation of median income will not be a
political one. And one of the hardest points to
grasp about this quandary is that no one in particular is to blame. Scientific
progress has never proceeded on an even, predictable basis, even though for part
of the 20th century it seemed that it might.
Science
should be encouraged with subsidies for basic research, as well as private
charity, educational reform, a business culture geared toward commercializing
inventions, and greater public appreciation for the scientific endeavor. A
lighter legal and regulatory hand could ease the path of future innovations.
NONETHELESS,
advancing discovery is not a goal to be reached by the mere application of will.
Precisely because there is no obvious villain and no simple fix, and many
complex factors behind success, science as a general topic doesn’t play a big
role in American political discourse. When it comes to understanding our
macroeconomic predicament, we often seem to be missing the point.
Until
science has a greater impact again on average daily living standards, the
political problem will be in learning to live within our means. Because neither
major party seems to support a plausible path to fiscal balance, or to
acknowledge how little control politicians actually have over future income
growth, we unscientifically keep living in an age of denial.
Tyler
Cowen is a professor of economics at George Mason
University.
A version of this article appeared in print on January 30, 2011, on page
BU4 of the New York edition.
MR
Feb 1 2011
Median-itis
and The Great Stagnation
Tyler
Cowen
Here
is my NYT column from today, on themes relevant to The Great Stagnation. I won't rehash this entire
discussion, but I would like to focus on this one column excerpt:
From
1947 to 1973 — a period of just 26 years — inflation-adjusted median income in
the United States more than doubled. But in the 31 years from 1973 to 2004, it
rose only 22 percent. And, over the last decade, it actually
declined.
I am
noticing that some
reviews or commentaries (and here) are citing per capita income
growth as a response to my argument. It is true that per capita income
grows at a slower rate post-1973, but my argument is about the slowing down
of median income growth and that is a much
stronger shift. The productivity data also tell a glum story.
CPI
bias can change those numbers in absolute terms (see comments from Russ Roberts), but it also changes the pre-1973
median income growth numbers and arguably more so. The gap remains
and TGS refers to the living standard
for the
average person or household in the United States, not the total
amount of innovation, which remains quite high. They're just not
innovations with the same trickle-down or broad-based effects as in an earlier
era.
Kindle
eBooks are themselves a good example. It's a real improvement for a lot of
us -- especially travelers -- but even the median reader, much less the
median American, doesn't have a Kindle or buy eBooks. As I argued in
The Age
of the Infovore, the big gains of late have gone to
the extreme
information-processors.
I've
seen in the MR comments (and
elsewhere) a lot of anecdotal comparison of recent gains vs. earlier gains in
technology. Don't we now have this, don't we now have that, and so on. Of course.
Median incomes have
risen somewhat. But, when it comes to the average household, the published
numbers for median income are adding up and trying to measure those gains
and it turns out their recent rate of growth really has
declined. Most serious researchers who work in this area
use and accept these numbers as the best available (though they do not in
general advocate my causal interpretation; see for instance Mark Thoma or Jacob Hacker).
If the
numbers for median income growth are low we ought to take that seriously,
as does Scott Sumner. We are not cheerleaders per se (BC: "I'm baffled why Tyler would focus on slight declines in
American growth when the world just had the best
decade ever." Is it then wrong to focus on any other problems at
all? I also was one of the first people to make the "best decade ever"
argument, which I still accept.) Medians also matter for the political climate, even though the median
earner is not exactly the median voter. Adam Smith's welfare
economics was basically that of the median, a point which David Levy has made
repeatedly.
I'm
also being called a "pessimist" a lot. Yet in my view our current
technological plateau won't last forever.
That's probably more optimistic than the Hacker-Pierson approach, which requires
a Progressive revolution in economic policy (unlikely), although it is not more
optimistic than denying the relevance of the numbers.
I'll
soon blog some remarks on changing household size as another attempt to
avoid confronting the facts about slow median income
growth.
January 30, 2011 at
07:53 AM in Books, Data
Source, Economics
| Permalink
| Comments
(62)
The
Kitchen Test
Tyler
Cowen
Here
is Paul Krugman, noting that innovations for the kitchen have
slowed down. He cites this earlier, mid-90s piece of his on kitchens, which I would
have cited had I known about it. His conclusion:
By any
reasonable standard, the change in how America lived between 1918 and 1957 was
immensely greater than the change between 1957 and the
present.
As
Krugman did in the mid-1990s, I now cook in a 1950s kitchen and it suits me
fine. I use the microwave reluctantly and when I first met Natasha, eight
years ago, she and Yana thought it noteworthy that I did not know how to use the
device at all. I do not see that my cooking stands at a
disadvantage.
Alexander
J. Field has a long and very good piece on the evolution of kitchen
technology. He concludes:
Aside
from the automatic dishwasher in the 1930s (which achieved significant
penetration only beginning in the 1960s), the garbage disposer (introduced in
the 1950s, but low penetration until the late 1960s) and the microwave oven in
the 1970s, there have been no truly revolutionary kitchen appliances in the last
eight decades.
Field
makes good fun of the electric can opener and the electric carving
knife.
Here
is a related Krugman post on the 19th
century.
N
Y Times January
31, 2011, 9:35
am
The Haves and the
Have-Nots
By
CATHERINE
RAMPELL
12:51
p.m. | Updated Updated
with additional explanation of how the chart controls for different costs of
living around the world.
I had
a review
this weekend about “ The Haves and
the Have-Nots,” a new book by the World Bank economist Branko
Milanovic about inequality around the world. My favorite part of the
book was this graph, next to which I actually wrote “awesome chart” in the
margin:
Branko Milanovic, “The Haves and the Have-Nots,” p. 116.
The
graph shows inequality within a country, in the context of inequality around the
world. It
can take a few minutes to get your bearings with this chart, but trust me, it’s
worth it.
Here
the population of each country is divided into 20 equally-sized income groups,
ranked by their household per-capita income. These are called “ventiles,” as you
can see on the horizontal axis, and each “ventile” translates to a cluster of
five percentiles.
The
household income numbers are all converted into international
dollars adjusted for equal purchasing power, since the cost of goods varies from
country to country. In other words, the chart adjusts for the
cost of living in different countries, so we are looking at consistent living
standards worldwide.
Now on
the vertical axis, you can see where any given ventile from any country falls
when compared to the entire population of the world.
For
example, trace the line for Brazil, a country with extreme income
inequality.
Brazil’s
bottom ventile — that is, the poorest 5 percent of the Brazilian population,
shown as the left-most point on the line — is about as poor as anyone in the
entire world, registering a percentile in the single digits when compared to the
income distribution worldwide. Meanwhile, Brazil also has some of the world’s
richest, as you can see by how high up on the chart Brazil’s top ventile
reaches. In other words, this one country covers a very broad span of income
groups.
Now
take a look at America.
Notice
how the entire line for the United States resides in the top portion of the
graph? That’s because the entire country is relatively rich. In fact, America’s
bottom ventile is still richer than most of the world: That is, the typical
person in the bottom 5 percent of the American income distribution is still
richer than 68
percent of
the world’s inhabitants.
Now
check out the line for India. India’s poorest ventile corresponds with the 4th
poorest percentile worldwide. And its richest? The 68th percentile. Yes, that’s
right: America’s
poorest are, as a group, about as rich as India’s
richest.
Kind
of blows your mind, right?
Now
you might be wondering: How can there be so many people in the world who make
less than America’s poorest, many of whom make nothing each
year? Remember that
were looking at the entire bottom chunk of Americans, some of whom make
as much as
$6,700; that may be extremely poor by
American standards, but that amounts to a relatively good standard of living in
India, where about a quarter of the population lives on $1 a
day.
As Mr.
Brankovic writes:
One’s
income thus crucially depends on citizenship, which in turn means (in a world of
rather low international migration) place of birth. All people born in rich
countries thus receive a location premium or a location rent; all those born in
poor countries get a location penalty.
It is
easy to see that in such a world, most of one’s lifetime income will be
determined at birth.
Giving Workers a Union Choice
More states consider
right-to-work laws.
One of the under-appreciated fault
lines in the U.S. economy is between the 22 "right-to-work" states and the rest
of the country. The former have tended to do much better economically. Now some
non-right-to-work states such as Indiana, Wisconsin and Michigan are thinking
about joining this club that allows workers to opt-out of union membership.
Contrary to much union rhetoric, right-to-work laws don't ban or bust unions.
They simply grant individual workers the right to join or not to join, even once
a workplace is organized by a union. Workers who decline to join the union can't
be forced to have dues taken out of their paycheck and thus used to finance
union political campaigns. Most right-to-work states are in the South and West,
and only Oklahoma has adopted this freedom to choose in the last 20 years.
Right-to-work states outperform
forced-union states in almost every measurable category of worker well-being. A
new study in the Cato Journal by economist Richard Vedder finds that from 2000
to 2008 some 4.7 million Americans moved from forced-union to right-to-work
states.
The study also found that from
1977 through 2007 there was "a very strong and highly statistically significant
relationship between right-to-work laws and economic growth." Right-to-work
states experienced a 23% faster rise in per capita income over that
period. The two regions that have lost the most jobs in recent years,
the once-industrial Northeast and Midwest, are mostly forced-union states.
Indiana is a case study in the negative effects of forced unionism. Governor
Mitch Daniels recently explained why his state lost a bid for a new Colgate
factory that would have employed hundreds: "We did absolutely everything we
could do. . . . We made an offer we believe was competitive in every other
respect, but they [Colgate] want to be in a right-to-work state."
Mr. Daniels adds that the lack of a right-to-work law "does hold us back
economically. There is no doubt about it." He estimates that when competing with
Southern states for businesses, "a very large number—perhaps as many as a
quarter—of the deals we don't get a shot at are for just this reason."
This damage has motivated Indiana Republicans, who now control both
legislature chambers, to announce that they want to pass a right-to-work law.
Unions immediately went to Defcon 1, Democrats are up in arms, and Republicans
could yet buckle under this union pressure. Even Mr. Daniels, who has stood up
to union opposition in the past, seems hesitant. He told the Indianapolis Star
that right to work "may be worth a look," but he added it "is not on my agenda."
He's worried that the issue so antagonizes unions that it could derail the rest
of his legislative agenda.
We hope Republicans don't flinch. Right-to-work laws make states more
economically competitive, but the bigger issue is about individual rights.
Workers should have the right to join a union but also the right not to. Indiana
and other states with new Republican majorities have a rare opportunity to pass
a major reform that will reduce union power, help to attract new jobs, and
liberate workers from union coercion.
Europe's Emissions Trading Scams
This isn't a market;
it's merely designed to look like one.
Once again, Europe's Emissions Trading System has been beset by fraud and
theft. The spot-trading market has been closed since January 19, after
regulators discovered that hackers had broken into the system's electronic
registries and stolen roughly €30 million worth of carbon allowances.
This marks the second time in the past year that carbon trading has been shut
down. Last year, the U.N.'s carbon market halted for several days when
authorities discovered that the Hungarian government had—legally—been reselling
allowances that had already been used. In 2009 Europol reported that in certain
countries, 90% of the ETS's trading volume was taken up by value-added-tax
scams. Europe's system has also been plagued by smaller thefts since its
founding in 2005, and some companies in the Third World have spewed pollutants
simply to eliminate them and sell the carbon allowances to European companies.
So, is the ETS just unlucky? EU Climate Action Commissioner Connie Hedegaard
defended the system last week, saying that "Just because someone robs a bank,
you do not say the whole banking system doesn't work." Perhaps. But we doubt the
Deutsche Börse, London Stock Exchange or NYSE wouldn't long survive if they had
the kind of history of serial theft and fraud that has bedeviled carbon
trading.
What makes the ETS different? The simplest explanation is that it isn't a
financial exchange at all; it's merely designed to look like one. Its chief
function is to serve as a political smokescreen. The trading system was set up
to allow Europe's politicians to avoid the messy business of who was going to be
allowed to pollute what. To make matters worse, it's in no one's particular
interest that it work too well—not the businesses buying credits; not the
governments, which would rather take the credit for being green without the
economic costs of being too pure; and certainly not the fraudsters, who have
used the trading system to reap millions in profits.
To borrow Ms. Hedegaard's image, if there's one bank in the neighborhood that
keeps getting robbed, but has no alarms, locks, or note-tracking devices to keep
it secure, you wouldn't ask why it kept being ripped off. You'd wondered whether
it was really a bank at all.
Printed in The Wall Street
Journal, page 13
After the Revolution, Economic Reform
Tunisian protesters'
message was that governments stifle the younger generation's economic
aspirations at their own peril.
The street protests in Tunisia and elsewhere in the region are momentous not
just for the Arab world but have the potential to foreshadow a brighter economic
future for the globe. The protesters' basic message is not to stifle the
economic aspirations of the younger generation, especially one as well-educated
as Tunisia's. Shackle them at your own peril.
While Arab governments correctly
interpret this cry for change as predominantly driven by economic hardship,
their responses are unfortunately misdirected. Kuwait is giving its citizens
free food rations and a grant of $4,000. Other governments have announced that
they, too, plan to allocate millions of dollars to the poor; and Arab leaders
are rushing to set up a $2 billion fund to support their economies. These
measures won't save them.
The policies of more of the same, even with augmented funds, do not create
the necessary economic opportunity to meet the core challenge of the youth
bulge. The battle for prosperity in
Tunisia, Egypt, Algeria, Morocco, Jordan, Libya and Yemen will require an
economic-entrepreneurial revolution, not just a political one.This is
key not just for job creation and making the economy more dynamic. It is a
catalyst for political freedom as well.
At the same time, the prospects for any successful economic transformation
increase significantly when economic and political liberalization go hand in
hand. The fact that the Tunisian people took a decisive step toward political
freedom on their own initiative therefore matters greatly.
The
region's necessary economic transformation will require more than the oft-cited
integration into the global economy. As important as that is, it is no
panacea. As far as Tunisia is concerned, it actually has some of those
global linkages in place already, albeit in low-value-added sectors such as
tourism and contract-manufacturing facilities.
View Full Image
Associated Press
Protestors hold a Tunisian flag
as they are angry over joblessness, corruption and repression.
The real change required is a
sustained increase in average productivity. And this means leveling the playing
field for the most productive small firms in the Arab world.
In recent decades, economic gains
in Tunisia, Egypt and elsewhere stemmed mostly from large, politically connected
businesses. Such favoritism—trying to buy political support from society's
existing elites by cutting them into the deals—may have seemed politically
expedient, but it was economically destructive.
Under these circumstances, most small firms were forced to stay small. This
contributed to high unemployment,
particularly among the younger generation, estimated to be about 40% for college
graduates in Tunisia. That is
why talented young people often felt compelled to emigrate. Reversing this
brain drain by encouraging these professionals, who have sharpened their
business skills abroad, to return home, would be a tremendous boon to the
region's economies. By abandoning nepotism, favoritism and, in some cases,
outright corruption, governments would provide a healthy growth stimulus by
itself.
Another promising avenue would be to establish a mechanism to get
uncollateralized credit for those small-business owners who, by skill or by
luck, have created the most productive job opportunities. That would fuel
economic growth and undermine the corrupt old boys' comfortable monopolies. And
it would make room for a new generation of entrepreneurs in areas such as food
distribution, machining, construction, equipment and parts fabrication,
retailing, power distribution, transportation, communications—and, yes, media.
It appears that new generation is more than ready for this challenge. The
actions of the protestors in Tunisia and elsewhere exude courage, initiative,
can-do spirit, self-confidence and self-motivation—precisely the qualities that
constitute the essence of entrepreneurship.
None of this is to say that the transformation is going to be easy. After
decades of stunted political development and economic mismanagement, any
transition is by necessity messy. But if managed successfully, Tunisia could
herald the beginnings of a transformative change that would rival the events
some decades ago in Poland, when trade union strikes helped bring about the end
of communism.
The developments in Tunisia are especially intriguing from an American
perspective because they reconnect us with the revolutionary thrust of our
country's very own roots and its original promise—that advancing economic
opportunity and freedom of opinion don't just go hand in hand, but are our very
American way to spread liberty.
Mr.
Schramm is president and CEO of the Kauffman Foundation.
WSJ Econ
Blog Feb 1, 2011
4:02 PM
By Ian Talley
The International Monetary Fund warned of dangerously
elevated unemployment levels in Egypt, especially highlighting high jobless
youth rates, just two days ahead of thousands taking to the streets to protest
the ruling government.
IMF managing director Dominique Strauss-Kahn Tuesday said
such levels created a ticking “time bomb” that could politically explode in
other countries. While he declined to comment specifically on the protests, the
IMF chief said, “clearly the situation in Egypt is the kind of situation that
could have been expected not only in Egypt, when you see the problem created by
the high level of unemployment.” He was speaking at an event in Singapore.
The IMF expects nearly 10 million jobs are needed in Egypt — more than 12% of
the country’s population — and nations such as Jordan, Morocco, Syria and
Lebanon will require millions more.
“Unemployment remains too high,” and Egypt needs to “focus on labor-intensive
growth,” said regional IMF officials Ratna Sahay and
Alan MacArthur in a
Jan. 23 presentation at the Egyptian Center for
Economic Studies in Cairo. “To make major inroads into unemployment
will require tackling labor market inefficiencies,” they said.
The fund officials were in Egypt as part of an annual economic review of the
country and their conclusions will likely play a large role in informing their
report due out in coming weeks. According to the presentation, they stressed the problem of
unemployment levels in that country and other oil-importing countries in the
Middle East and North Africa, pointing to youth jobless rates topping 25% in
Egypt, 30% in Tunisia and 21% in Lebanon.
Regulations and a dearth in
skilled labor are constraining the Egyptian labor market, the IMF officials. The
cost of firing is high and top private sector jobs are often filled by relatives
or friends. Only Lebanon and Syria scored worse on the rigidity of labor markets
in the region.
The officials said that economic
restructuring of Egypt’s exchange rate policies, the financial sector,
privatization and its monetary policy were already producing positive
changes.
But the IMF team said challenges facing the country — as well as other Middle
East oil importers — centered on creating jobs, preserving economic stability
and raising competitiveness. In particular, the Egyptian government needs to
reduce public debt, better manage its tax revenue and tackle spending
inefficiencies. For example, its current distribution of petroleum subsidies
meant the country’s richest received eight times more than Egypt’s poorest.
The government also must combat inflation, with the country facing one of the
increases in large emerging countries.
Adding to its economic burdens, the
IMF officials said Egypt faces a monetary policy dilemma as inflation picks up.
Although down from June 2008 highs near 25%, the annual rise in consumer
prices has still hit over 10% in recent weeks.
Strauss-Kahn said rising food prices could have “potentially devastating
consequences,” and the IMF was ready to help Egypt.
- WSJ February 1, 2011, 10:47 AM ET
World-Wide Factory Activity, by
Country
By Phil Izzo
Global manufacturing started 2011 on a strong note with most countries in
expansionary territory and strong gains in the U.S., U.K. and euro zone.
Just Greece and Australia remained in contractionary territory in January,
according to national manufacturing purchase managers indexes compiled by
Markit, the Institute for Supply Management
and others. Asia also continued its factory-sector expansion, even as China’s
official measure posted a slowing in growth.
While the manufacturing expansion is good news for the recovery, the reports
also note inflationary pressures growing in most of the world as producers deal
with higher input costs.
Manufacturing Activity,
by Country
Click on the top of any column to resort the chart. Readings above 50 signal
expansion.
|
Country |
Jan. PMI |
Dec. PMI |
Monthly Change |
Rate of Change |
|
Austria |
60.3 |
57.7 |
2.6 |
Expanding Faster |
|
Australia |
46.7 |
46.3 |
0.4 |
Contracting
Slower |
|
Brazil |
53.1 |
52.4 |
0.7 |
Expanding Faster |
|
China |
52.9 |
53.9 |
-1 |
Expanding Slower |
|
Czech Republic |
60.5 |
58.4 |
2.1 |
Expanding Faster |
|
Euro Zone |
57.3 |
57.1 |
0.2 |
Expanding Faster |
|
France |
54.9 |
57.2 |
-2.3 |
Expanding Slower |
|
Germany |
60.5 |
60.7 |
-0.2 |
Expanding Slower |
|
Greece |
42.8 |
43.1 |
-0.3 |
Contracting
Faster |
|
Hungary |
54.7 |
54 |
0.7 |
Expanding Faster |
|
India |
56.8 |
56.7 |
0.1 |
Expanding Faster |
|
Ireland |
55.8 |
52.2 |
3.6 |
Expanding Faster |
|
Italy |
56.6 |
54.7 |
1.9 |
Expanding Faster |
|
Japan |
51.4 |
48.3 |
3.1 |
Expanding |
|
Netherlands |
57.5 |
57.5 |
0 |
Expanding at same
rate |
|
Poland |
55.6 |
56.3 |
-0.7 |
Expanding Slower |
|
Russia |
53.5 |
53.5 |
0 |
Expanding at same
rate |
|
South Africa |
54.6 |
51.7 |
2.9 |
Expanding Faster |
|
South Korea |
53.5 |
53.9 |
-0.4 |
Expanding Slower |
|
Spain |
52 |
51.5 |
0.5 |
Expanding Faster |
|
Switzerland |
60.5 |
61.2 |
-0.7 |
Expanding Slower |
|
Taiwan |
59.8 |
54.7 |
5.1 |
Expanding Faster |
|
Turkey |
57.2 |
56.4 |
0.8 |
Expanding Faster |
|
U.K. |
62 |
58.7 |
3.3 |
Expanding Faster |
|
U.S. |
60.8 |
58.5 |
2.3 |
Expanding
Faster |
Sources: WSJ Research
************R6
Some items
from Ellenor Ostrom’s CV
“What Do People Bring Into the Game?
Experiments in the Field about Cooperation in the Commons” (with
Juan-Camilo Cardenas). Agricultural Systems 82(3) (December 2004):
307-26.
“Coping with Asymmetries in the
Commons: Self-Governing Irrigation Systems Can Work” (with Roy
Gardner). Journal of Economic Perspectives 7(4) (Fall 1993):
93-112
“Design Principles and the Performance of Farmer-Managed
Irrigation Systems in Nepal” (with Paul Benjamin). In Performance Measurement
in Farmer-Managed Irrigation Systems, ed. Shaul Manor and Jorge
Chambouleyron, 53–62. Colombo, Sri Lanka: IIMI, 1993.
“Lab Experiments for the Study of
Social-Ecological Systems” (with Marco Janssen, Robert Holahan, and
Allen Lee). Science 328(5978)
(April 30, 2010): 613–17.
“Analyzing the Dynamic Complexity of
Development Interventions: Lessons from an Irrigation Experiment in
Nepal” (with Wai Fung Lam). Policy Sciences 43(1)
(March 2010): 1–25.
“Revising Theory in Light of
Experimental Findings.” Journal of Economic Behavior and
Organization 73 (2010):
68–72.
“Trust and
Reciprocity as Foundations for Cooperation” (with James Walker). In
Whom Can We Trust?: How Groups,
Networks, and Institutions Make Trust Possible, ed. Karen
Cook, Margaret Levi, and Russell Hardin, 91–124. New York: Russell Sage
Foundation, 2009.
“Trust in Private and Common Property Experiments”
(with James Cox, James Walker, Antonio Jamie Castillo, Eric Coleman, Robert
Holahan, Michael Schoon, and Brian Steed). Southern Economic Journal 75(4)
(April 2009): 957–75.
“Fifteen Years of Empirical Research on
Collective Action in Natural Resource Management: Struggling to Build Large-N
Databases Based on Qualitative Research” (with Amy Poteete). World
Development 36(1) (2008): 176–95.
"Complexity of Coupled Human and
Natural Systems” (with Jianguo Liu, Thomas Dietz, Stephen Carpenter,
Marina Alberti, Carl Folke, et al.). Science 317(5844) (2007):
1513–16.
“Insights on Linking Forests, Trees,
and People from the Air, on the Ground, and in the Laboratory” (with
Harini Nagendra). Proceedings of the National Academy of Sciences 103(51)
(2006): 19224-31. Winner of the 2006 PNAS Cozzarelli Prize for paper
of outstanding scientific excellence and originality.
N
Y Times January 28, 2011, 7:46 pm
The
Wal-Mart Decade
I’ve
been putting some material together for textbook revision, and found myself
looking at European versus US productivity performance over the past couple of
decades. I sort of knew the facts here, but this recent
paper by Bart van Ark (pdf) seemed to me to make the points especially
clearly, and I found myself rolling my own versions of some of his
numbers.
To
get some sense of productivity trends, van Ark uses a fairly fancy statistical
technique (Hodrick-Prescott filter). But a simple 5-year moving average, to
smooth out the business cycle, does about the same thing. Here’s productivity
growth in the US and in “Europe” defined as the average of the 4 big economies
since 1970:
Total
Economy Database
European
productivity grew faster than the US until the 1990s, mainly reflecting catchup;
but America moved ahead in the late 1990s; the data suggest that the
differential has leveled out since, so this may have been a one-time
bulge.
And
what was it about? Van Ark’s data point to a huge surge between 1995 and 2004 in
US productivity, not so much in producing goods as in distributing them. And we
know what that’s about: Wal-Mart and other big box stores.
I’m
not denigrating these productivity gains. What’s interesting, though, is that if
you’re looking for a story about the relative American revival from 1995 until
recently, it’s not so much a broad, generic economy thing as it is a story of
one particular innovation that for whatever reason — land use regulations? —
Europe was slow to imitate.
Marginal
Revolution
2-1-11
Five-year average
productivity
Tyler
Cowen
That
is from Paul Krugman. And from Krugman's source, Bart van Ark:
To
conclude, there is good reason to adjust the long-term US productivity growth
rate downwards.
January
29, 2011 at 07:07 AM in Economics
| Permalink
| Comments
(23
Innovation
Is Doing Little for Incomes
By TYLER
COWEN
Published:
January 29, 2011 N Y Times
MY
grandmother, who was born in 1905, spoke often about the immense changes she had
seen, including the widespread adoption of electricity, the automobile, flush
toilets, antibiotics and convenient household appliances. Since my birth in
1962, it seems to me, there have not been comparable improvements.
David G.
Klein
Of
course, the personal
computer and its cousin, the smartphone, have brought about some big changes.
And many goods and services are now more plentiful and of better quality. But
compared with what my grandmother witnessed, the basic accouterments of life
have remained broadly the same.
The
income
numbers for Americans reflect this slowdown
in growth. From 1947 to 1973 — a period of just 26 years — inflation-adjusted
median income in the United States more than doubled. But in the 31 years from
1973 to 2004, it rose only 22 percent. And, over the last decade, it
actually
declined.
Most
well-off countries have experienced income growth slowdowns since the early
1970s, so it would seem that a single cause is transcending national borders:
the reaching of a technological plateau. The
numbers suggest that for almost 40 years, we’ve had near-universal dissemination
of the major innovations stemming from the Industrial Revolution, many of which
combined efficient machines with potent fossil fuels. Today, no huge improvement
for the automobile or airplane is in sight, and the major struggle is to limit
their pollution, not to vastly improve their capabilities.
Although
America produces plenty of innovations, most are not geared toward significantly
raising the average standard of living.
It seems that we are
coming up with ideas that benefit relatively small numbers of people, compared
with the broad-based advances of earlier decades, when the modern world was put
into place. If pre-1973 growth rates had
continued, for example, median family income in the United States would now be
more than $90,000, as opposed to its current range of around $50,000.
Will
the Internet usher in a new economic growth explosion? Quite possibly, but it
hasn’t delivered very good macroeconomic performance over the last decade. Many
of the Internet’s gains are fun — games, chat rooms, Twitter streams — rather than vast sources
of revenue, and when there have been measurable monetary gains, they often have
been concentrated among a small number of company founders, as with, say,
Facebook. As for users, the Internet has
benefited the well-educated and the curious to a disproportionate degree, but
apparently not enough to bolster median income.
Beyond
the income slowdown, there is a further worry: an
increasing share of the economy consists of education and health
care. That trend is not necessarily bad, but in these two
areas, results are often hard to measure. If health care costs rise 6 percent in
a year, for example, that counts as higher G.D.P., but how much is our health
actually improving? It’s an open question. America spends more on health care
than other countries, but those expenditures don’t seem to produce uniformly
superior results. And while there have certainly been gains in
medical treatment, we may be overvaluing them. In education, we are spending more
each year, but test scores have stagnated for decades, graduation rates are down
and America’s worst schools are disasters.
There
is an even broader problem. When it comes to measuring national
income, we’re generally valuing expenditures at cost, rather than tracking
productivity in terms of results. In other words, our statistics may
be deceiving us — by accepting, say, our health care and educational
expenditures at face value. This theme has been emphasized by the
PayPal co-founder Peter Thiel in his public talks and by the economist Michael
Mandel in his writings. And I’ve stressed it in a recent e-book,
“The Great
Stagnation.”
Sooner
or later, new technological revolutions will occur, perhaps in the biosciences,
through genome sequencing, or in energy production, through viable solar
power, for example. But these transformations won’t come overnight, and
we’ll have to make do in the meantime. Instead of facing up to this
scarcity, politicians promote tax cuts and income redistribution policies to
benefit favored constituencies. Yet these are one-off adjustments and, over
time, they cannot undo the slower rate of growth in average living standards.
It’s
unclear whether Americans have the temperament to make a smooth transition to a
more stagnant economy. After all, we’ve long thought of our country as the land
of unlimited opportunity. In practice, this optimism has meant that we continue
to increase government spending, whether or not we can afford it.
In the
narrow sense, the solution to the stagnation of median income will not be a
political one. And one of the hardest points to
grasp about this quandary is that no one in particular is to blame. Scientific
progress has never proceeded on an even, predictable basis, even though for part
of the 20th century it seemed that it might.
Science
should be encouraged with subsidies for basic research, as well as private
charity, educational reform, a business culture geared toward commercializing
inventions, and greater public appreciation for the scientific endeavor. A
lighter legal and regulatory hand could ease the path of future innovations.
NONETHELESS,
advancing discovery is not a goal to be reached by the mere application of will.
Precisely because there is no obvious villain and no simple fix, and many
complex factors behind success, science as a general topic doesn’t play a big
role in American political discourse. When it comes to understanding our
macroeconomic predicament, we often seem to be missing the point.
Until
science has a greater impact again on average daily living standards, the
political problem will be in learning to live within our means. Because neither
major party seems to support a plausible path to fiscal balance, or to
acknowledge how little control politicians actually have over future income
growth, we unscientifically keep living in an age of denial.
Tyler
Cowen is a professor of economics at George Mason
University.
A version
of this article appeared in print on January 30, 2011, on page BU4 of the New
York edition.
MR Feb 1
2011
Median-itis and The
Great Stagnation
Tyler
Cowen
Here
is my NYT column from today, on themes relevant to The Great Stagnation. I won't rehash this entire
discussion, but I would like to focus on this one column excerpt:
From
1947 to 1973 — a period of just 26 years — inflation-adjusted median income in
the United States more than doubled. But in the 31 years from 1973 to 2004, it
rose only 22 percent. And, over the last decade, it actually
declined.
I am
noticing that some
reviews or commentaries (and here) are citing per capita income
growth as a response to my argument. It is true that per capita income
grows at a slower rate post-1973, but my argument is about the slowing down
of median
income growth and
that is a much stronger shift.
The productivity data also tell a glum story.
CPI
bias can change those numbers in absolute terms (see comments from Russ Roberts), but it also changes the pre-1973
median income growth numbers and arguably more so. The gap remains
and TGS refers
to the living standard for the average
person or household in the United States, not
the total amount of innovation, which remains quite high. They're just not
innovations with the same trickle-down or broad-based effects as in an earlier
era.
Kindle
eBooks are themselves a good example. It's a real improvement for a lot of
us -- especially travelers -- but even the median reader, much less the
median American, doesn't have a Kindle or buy eBooks. As I argued in
The Age of the
Infovore, the
big gains of late have gone to the extreme
information-processors.
I've
seen in the MR comments (and
elsewhere) a lot of anecdotal comparison of recent gains vs. earlier gains in
technology. Don't we now have this, don't we now have that, and so on. Of course.
Median incomes have
risen somewhat. But, when it comes to the average household, the published
numbers for median income are adding up and trying to measure those gains
and it turns out their recent rate of growth really has
declined. Most serious researchers who work in this area
use and accept these numbers as the best available (though they do not in
general advocate my causal interpretation; see for instance Mark Thoma or Jacob Hacker).
If the
numbers for median income growth are low we ought to take that seriously,
as does Scott Sumner. We are not cheerleaders per se
(BC: "I'm baffled why Tyler would focus on slight declines in
American growth when the world just had the best
decade ever." Is it then wrong to focus on any other problems at
all? I also was one of the first people to make the "best decade ever"
argument, which I still accept.) Medians also matter for the political climate, even though the median
earner is not exactly the median voter. Adam Smith's welfare
economics was basically that of the median, a point which David Levy has made
repeatedly.
I'm
also being called a "pessimist" a lot. Yet in my view our current
technological plateau won't last forever.
That's probably more optimistic than the Hacker-Pierson approach, which requires
a Progressive revolution in economic policy (unlikely), although it is not more
optimistic than denying the relevance of the numbers.
I'll
soon blog some remarks on changing household size as another attempt to
avoid confronting the facts about slow median income
growth.
January 30, 2011 at
07:53 AM in Books, Data
Source, Economics
| Permalink
| Comments
(62)
The Kitchen
Test
Tyler
Cowen
Here
is Paul Krugman, noting that innovations for the kitchen have
slowed down. He cites this earlier, mid-90s piece of his on kitchens, which I would
have cited had I known about it. His conclusion:
By any
reasonable standard, the change in how America lived between 1918 and 1957 was
immensely greater than the change between 1957 and the
present.
As
Krugman did in the mid-1990s, I now cook in a 1950s kitchen and it suits me
fine. I use the microwave reluctantly and when I first met Natasha, eight
years ago, she and Yana thought it noteworthy that I did not know how to use the
device at all. I do not see that my cooking stands at a
disadvantage.
Alexander
J. Field has a long and very good piece on the evolution of kitchen
technology. He concludes:
Aside
from the automatic dishwasher in the 1930s (which achieved significant
penetration only beginning in the 1960s), the garbage disposer (introduced in
the 1950s, but low penetration until the late 1960s) and the microwave oven in
the 1970s, there have been no truly revolutionary kitchen appliances in the last
eight decades.
Field
makes good fun of the electric can opener and the electric carving
knife.
Here
is a related Krugman post on the 19th
century.
N
Y Times January 31, 2011,
9:35
am
The
Haves and the Have-Nots
By
CATHERINE RAMPELL
12:51
p.m. | Updated Updated
with additional explanation of how the chart controls for different costs of
living around the world.
I had
a review
this weekend about “ The Haves and
the Have-Nots,” a
new book by the World Bank economist Branko
Milanovic about
inequality around the world. My favorite part of the book was this graph, next
to which I actually wrote “awesome chart” in the margin:
Branko Milanovic, “The Haves and the Have-Nots,” p. 116.
The
graph shows inequality within a country, in the context of inequality around the
world. It
can take a few minutes to get your bearings with this chart, but trust me, it’s
worth it.
Here
the population of each country is divided into 20 equally-sized income groups,
ranked by their household per-capita income. These are called “ventiles,” as you
can see on the horizontal axis, and each “ventile” translates to a cluster of
five percentiles.
The
household income numbers are all converted into international
dollars adjusted for equal purchasing power, since the cost of goods varies from
country to country. In other words, the chart adjusts for the
cost of living in different countries, so we are looking at consistent living
standards worldwide.
Now on
the vertical axis, you can see where any given ventile from any country falls
when compared to the entire population of the world.
For
example, trace the line for Brazil, a country with extreme income
inequality.
Brazil’s
bottom ventile — that is, the poorest 5 percent of the Brazilian population,
shown as the left-most point on the line — is about as poor as anyone in the
entire world, registering a percentile in the single digits when compared to the
income distribution worldwide. Meanwhile, Brazil also has some of the world’s
richest, as you can see by how high up on the chart Brazil’s top ventile
reaches. In other words, this one country covers a very broad span of income
groups.
Now
take a look at America.
Notice
how the entire line for the United States resides in the top portion of the
graph? That’s because the entire country is relatively rich. In fact, America’s
bottom ventile is still richer than most of the world: That is, the typical
person in the bottom 5 percent of the American income distribution is still
richer than 68
percent of
the world’s inhabitants.
Now
check out the line for India. India’s poorest ventile corresponds with the 4th
poorest percentile worldwide. And its richest? The 68th percentile. Yes, that’s
right: America’s
poorest are, as a group, about as rich as India’s
richest.
Kind
of blows your mind, right?
Now
you might be wondering: How can there be so many people in the world who make
less than America’s poorest, many of whom make nothing each
year? Remember that
were looking at the entire bottom chunk of Americans, some of whom make
as much as
$6,700; that may be extremely poor by
American standards, but that amounts to a relatively good standard of living in
India, where about a quarter of the population lives on $1 a
day.
As Mr.
Brankovic writes:
One’s
income thus crucially depends on citizenship, which in turn means (in a world of
rather low international migration) place of birth. All people born in rich
countries thus receive a location premium or a location rent; all those born in
poor countries get a location penalty.
It is
easy to see that in such a world, most of one’s lifetime income will be
determined at birth.
Giving Workers a
Union Choice
More states consider right-to-work laws.
One of
the under-appreciated fault lines in the U.S. economy is between the 22
"right-to-work" states and the rest of the country. The former have tended to do
much better economically. Now some non-right-to-work states such as Indiana,
Wisconsin and Michigan are thinking about joining this club that allows workers
to opt-out of union membership.
Contrary to much union rhetoric, right-to-work
laws don't ban or bust unions. They simply grant individual workers the right to
join or not to join, even once a workplace is organized by a union. Workers who
decline to join the union can't be forced to have dues taken out of their
paycheck and thus used to finance union political campaigns. Most right-to-work
states are in the South and West, and only Oklahoma has adopted this freedom to
choose in the last 20 years.
Right-to-work states outperform forced-union states in
almost every measurable category of worker well-being. A new study in the Cato
Journal by economist Richard Vedder finds that from 2000 to 2008 some 4.7
million Americans moved from forced-union to right-to-work states.
The
study also found that from 1977 through 2007 there was "a very strong and highly
statistically significant relationship between right-to-work laws and economic
growth." Right-to-work states experienced a 23% faster rise in per capita income
over that period. The two regions
that have lost the most jobs in recent years, the once-industrial Northeast and
Midwest, are mostly forced-union states.
Indiana is a case study in the negative effects
of forced unionism. Governor Mitch Daniels recently explained why his state lost
a bid for a new Colgate factory that would have employed hundreds: "We did
absolutely everything we could do. . . . We made an offer we believe was
competitive in every other respect, but they [Colgate] want to be in a
right-to-work state."
Mr. Daniels adds that the lack of a
right-to-work law "does hold us back economically. There is no doubt about it."
He estimates that when competing with Southern states for businesses, "a very
large number—perhaps as many as a quarter—of the deals we don't get a shot at
are for just this reason."
This damage has motivated Indiana Republicans,
who now control both legislature chambers, to announce that they want to pass a
right-to-work law. Unions immediately went to Defcon 1, Democrats are up in
arms, and Republicans could yet buckle under this union pressure. Even Mr.
Daniels, who has stood up to union opposition in the past, seems hesitant. He
told the Indianapolis Star that right to work "may be worth a look," but he
added it "is not on my agenda." He's worried that the issue so antagonizes
unions that it could derail the rest of his legislative agenda.
We hope Republicans don't flinch. Right-to-work
laws make states more economically competitive, but the bigger issue is about
individual rights. Workers should have the right to join a union but also the
right not to. Indiana and other states with new Republican majorities have a
rare opportunity to pass a major reform that will reduce union power, help to
attract new jobs, and liberate workers from union
coercion.
Europe's Emissions
Trading Scams
This isn't a market; it's merely designed to look like
one.
Once again, Europe's Emissions Trading System
has been beset by fraud and theft. The spot-trading market has been closed since
January 19, after regulators discovered that hackers had broken into the
system's electronic registries and stolen roughly €30 million worth of carbon
allowances.
This marks the second time in the past year
that carbon trading has been shut down. Last year, the U.N.'s carbon market
halted for several days when authorities discovered that the Hungarian
government had—legally—been reselling allowances that had already been used. In
2009 Europol reported that in certain countries, 90% of the ETS's trading volume
was taken up by value-added-tax scams. Europe's system has also been plagued by
smaller thefts since its founding in 2005, and some companies in the Third World
have spewed pollutants simply to eliminate them and sell the carbon allowances
to European companies.
So, is the ETS just unlucky? EU Climate Action
Commissioner Connie Hedegaard defended the system last week, saying that "Just
because someone robs a bank, you do not say the whole banking system doesn't
work." Perhaps. But we doubt the Deutsche Börse, London Stock Exchange or NYSE
wouldn't long survive if they had the kind of history of serial theft and fraud
that has bedeviled carbon trading.
What makes the ETS different? The simplest
explanation is that it isn't a financial exchange at all; it's merely designed
to look like one. Its chief function is to serve as a political smokescreen. The
trading system was set up to allow Europe's politicians to avoid the messy
business of who was going to be allowed to pollute what. To make matters worse,
it's in no one's particular interest that it work too well—not the businesses
buying credits; not the governments, which would rather take the credit for
being green without the economic costs of being too pure; and certainly not the
fraudsters, who have used the trading system to reap millions in
profits.
To borrow Ms. Hedegaard's image, if there's one
bank in the neighborhood that keeps getting robbed, but has no alarms, locks, or
note-tracking devices to keep it secure, you wouldn't ask why it kept being
ripped off. You'd wondered whether it was really a bank at
all.
Printed in The Wall Street Journal, page
13
After the Revolution,
Economic Reform
Tunisian protesters' message was that governments stifle the
younger generation's economic aspirations at their own
peril.
The street protests in Tunisia and elsewhere in
the region are momentous not just for the Arab world but have the potential to
foreshadow a brighter economic future for the globe. The protesters' basic
message is not to stifle the economic aspirations of the younger generation,
especially one as well-educated as Tunisia's. Shackle them at your own
peril.
While
Arab governments correctly interpret this cry for change as predominantly driven
by economic hardship, their responses are unfortunately misdirected. Kuwait is
giving its citizens free food rations and a grant of $4,000. Other governments
have announced that they, too, plan to allocate millions of dollars to the poor;
and Arab leaders are rushing to set up a $2 billion fund to support their
economies. These measures won't save them.
The policies of more of the same, even with
augmented funds, do not create the necessary economic opportunity to meet the
core challenge of the youth bulge.
The battle for prosperity in Tunisia, Egypt, Algeria, Morocco, Jordan, Libya and
Yemen will require an economic-entrepreneurial revolution, not just a political
one.This is key not just for job creation and making the economy more
dynamic. It is a catalyst for political freedom as well.
At the same time, the prospects for any
successful economic transformation increase significantly when economic and
political liberalization go hand in hand. The fact that the Tunisian people took
a decisive step toward political freedom on their own initiative therefore
matters greatly.
The region's necessary economic transformation will
require more than the oft-cited integration into the global economy. As
important as that is, it is no panacea.
As far as Tunisia is concerned, it actually has some of those global linkages in
place already, albeit in low-value-added sectors such as tourism and
contract-manufacturing facilities.
View Full Image
Associated Press
Protestors hold a Tunisian flag as they are angry over
joblessness, corruption and repression.
The
real change required is a sustained increase in average productivity. And this
means leveling the playing field for the most productive small firms in the Arab
world.
In
recent decades, economic gains in Tunisia, Egypt and elsewhere stemmed mostly
from large, politically connected businesses. Such favoritism—trying to buy
political support from society's existing elites by cutting them into the
deals—may have seemed politically expedient, but it was economically
destructive.
Under these circumstances, most small firms
were forced to stay small. This contributed to high unemployment, particularly among the
younger generation, estimated to be about 40% for college graduates in
Tunisia. That is why talented
young people often felt compelled to emigrate. Reversing this brain drain by
encouraging these professionals, who have sharpened their business skills
abroad, to return home, would be a tremendous boon to the region's economies. By
abandoning nepotism, favoritism and, in some cases, outright corruption,
governments would provide a healthy growth stimulus by itself.
Another promising avenue would be to establish
a mechanism to get uncollateralized credit for those small-business owners who,
by skill or by luck, have created the most productive job opportunities. That
would fuel economic growth and undermine the corrupt old boys' comfortable
monopolies. And it would make room for a new generation of entrepreneurs in
areas such as food distribution, machining, construction, equipment and parts
fabrication, retailing, power distribution, transportation, communications—and,
yes, media.
It appears that new generation is more than
ready for this challenge. The actions of the protestors in Tunisia and elsewhere
exude courage, initiative, can-do spirit, self-confidence and
self-motivation—precisely the qualities that constitute the essence of
entrepreneurship.
None of this is to say that the transformation
is going to be easy. After decades of stunted political development and economic
mismanagement, any transition is by necessity messy. But if managed
successfully, Tunisia could herald the beginnings of a transformative change
that would rival the events some decades ago in Poland, when trade union strikes
helped bring about the end of communism.
The developments in Tunisia are especially
intriguing from an American perspective because they reconnect us with the
revolutionary thrust of our country's very own roots and its original
promise—that advancing economic opportunity and freedom of opinion don't just go
hand in hand, but are our very American way to spread liberty.
Mr.
Schramm is president and CEO of the Kauffman Foundation.
WSJ Econ
Blog Feb 1, 2011
4:02 PM
By Ian Talley
The International Monetary
Fund warned of dangerously elevated unemployment levels in Egypt,
especially highlighting high jobless youth rates, just two days ahead of
thousands taking to the streets to protest the ruling
government.
IMF managing director Dominique
Strauss-Kahn Tuesday said such levels created a ticking “time bomb”
that could politically explode in other countries. While he declined to comment
specifically on the protests, the IMF chief said, “clearly the situation in
Egypt is the kind of situation that could have been expected not only in Egypt,
when you see the problem created by the high level of unemployment.” He was
speaking at an event in Singapore.
The IMF expects nearly 10 million jobs are
needed in Egypt — more than 12% of the country’s population — and nations such
as Jordan, Morocco, Syria and Lebanon will require millions
more.
“Unemployment remains too high,” and Egypt
needs to “focus on labor-intensive growth,” said regional IMF officials
Ratna Sahay and Alan MacArthur in a
Jan. 23 presentation at the Egyptian Center for Economic
Studies in Cairo. “To make major inroads into unemployment will require
tackling labor market inefficiencies,” they said.
The fund officials were in Egypt as part of an
annual economic review of the country and their conclusions will likely play a
large role in informing their report due out in coming weeks. According to the
presentation, they stressed the
problem of unemployment levels in that country and other oil-importing countries
in the Middle East and North Africa, pointing to youth jobless rates topping 25%
in Egypt, 30% in Tunisia and 21% in Lebanon.
Regulations and a dearth in skilled labor are
constraining the Egyptian labor market, the IMF officials. The cost of firing is
high and top private sector jobs are often filled by relatives or friends. Only
Lebanon and Syria scored worse on the rigidity of labor markets in the
region.
The
officials said that economic restructuring of Egypt’s exchange rate policies,
the financial sector, privatization and its monetary policy were already
producing positive changes.
But the IMF team said challenges facing the
country — as well as other Middle East oil importers — centered on creating
jobs, preserving economic stability and raising competitiveness. In particular,
the Egyptian government needs to reduce public debt, better manage its tax
revenue and tackle spending inefficiencies. For example, its current
distribution of petroleum subsidies meant the country’s richest received eight
times more than Egypt’s poorest.
The government also must combat inflation, with
the country facing one of the increases in large emerging
countries.
Adding
to its economic burdens, the IMF officials said Egypt faces a monetary policy
dilemma as inflation picks up. Although down from June 2008 highs near 25%,
the annual rise in consumer prices has still hit over 10% in recent
weeks.
Strauss-Kahn said rising food prices could have
“potentially devastating consequences,” and the IMF was ready to help
Egypt.
- WSJ February 1, 2011, 10:47 AM
ET
World-Wide Factory
Activity, by Country
By Phil Izzo
Global manufacturing started 2011 on a strong
note with most countries in expansionary territory and strong gains in the U.S.,
U.K. and euro zone.
Just Greece and Australia remained in
contractionary territory in January, according to national manufacturing
purchase managers indexes compiled by Markit, the
Institute for Supply Management and others. Asia also continued
its factory-sector expansion, even as China’s official measure posted a slowing
in growth.
While the manufacturing expansion is good news
for the recovery, the reports also note inflationary pressures growing in most
of the world as producers deal with higher input costs.
Manufacturing Activity, by
Country
Click on the top of any column to resort the
chart. Readings above 50 signal expansion.
|
Country |
Jan. PMI |
Dec. PMI |
Monthly
Change |
Rate of
Change |
|
Austria |
60.3 |
57.7 |
2.6 |
Expanding Faster |
|
Australia |
46.7 |
46.3 |
0.4 |
Contracting Slower |
|
Brazil |
53.1 |
52.4 |
0.7 |
Expanding Faster |
|
China |
52.9 |
53.9 |
-1 |
Expanding Slower |
|
Czech Republic |
60.5 |
58.4 |
2.1 |
Expanding Faster |
|
Euro Zone |
57.3 |
57.1 |
0.2 |
Expanding Faster |
|
France |
54.9 |
57.2 |
-2.3 |
Expanding Slower |
|
Germany |
60.5 |
60.7 |
-0.2 |
Expanding Slower |
|
Greece |
42.8 |
43.1 |
-0.3 |
Contracting Faster |
|
Hungary |
54.7 |
54 |
0.7 |
Expanding Faster |
|
India |
56.8 |
56.7 |
0.1 |
Expanding Faster |
|
Ireland |
55.8 |
52.2 |
3.6 |
Expanding Faster |
|
Italy |
56.6 |
54.7 |
1.9 |
Expanding Faster |
|
Japan |
51.4 |
48.3 |
3.1 |
Expanding |
|
Netherlands |
57.5 |
57.5 |
0 |
Expanding at same rate |
|
Poland |
55.6 |
56.3 |
-0.7 |
Expanding Slower |
|
Russia |
53.5 |
53.5 |
0 |
Expanding at same rate |
|
South Africa |
54.6 |
51.7 |
2.9 |
Expanding Faster |
|
South Korea |
53.5 |
53.9 |
-0.4 |
Expanding Slower |
|
Spain |
52 |
51.5 |
0.5 |
Expanding Faster |
|
Switzerland |
60.5 |
61.2 |
-0.7 |
Expanding Slower |
|
Taiwan |
59.8 |
54.7 |
5.1 |
Expanding Faster |
|
Turkey |
57.2 |
56.4 |
0.8 |
Expanding Faster |
|
U.K. |
62 |
58.7 |
3.3 |
Expanding Faster |
|
U.S. |
60.8 |
58.5 |
2.3 |
Expanding
Faster |
Sources: WSJ Research
A Modest $500 Billion Proposal
My spending cuts
would keep 85% of government funding and not touch Social Security or Medicare.
After Republicans swept into office in 1994,
Bill Clinton famously said in his State of the Union address that the era of big
government was over. Nearly $10 trillion of federal debt later, the era of big
government is at its zenith.
According to the Congressional Budget Office,
this will be the third consecutive year in which the federal government is
running a deficit near or greater than $1 trillion. The solution to the
government's fiscal crisis must begin by cutting spending in all areas,
particularly in those that can be better run at the state or local level. Last
month I introduced legislation to do just that. And though it seems extreme to
some—containing over $500 billion in spending cuts enacted over one year—it is a
necessary first step toward ending our fiscal crisis.
My proposal would first roll back almost all federal
spending to 2008 levels, then initiate
reductions at various levels nearly across the board. Cuts to the Departments of
Agriculture and Transportation would create over $42 billion in savings each,
while cuts to the Departments of Energy and Housing and Urban Development would
save about $50 billion each. Removing education from the federal government's
jurisdiction would create almost $80 billion in savings alone. Add to that my
proposed reductions in international aid, the Departments of Health and Human
Services, Homeland Security and other federal agencies, and we arrive at over
$500 billion.
My proposal, not surprisingly, has been greeted
skeptically in Washington, where serious spending cuts are a rarity. But it is a
modest proposal when measured against the size of our mounting debt. It would
keep 85% of our government funding in place and not touch Social Security or
Medicare. But by reducing wasteful spending and shuttering departments that are
beyond the constitutional role of the federal government, such as the Department
of Education, we can cut nearly 40% of our projected deficit and at the same
time remove thousands of big-government bureaucrats who stand in the way of
efficiency.
View Full Image
Images.com/Corbis
Examples of federal waste are more abundant
than ever. For example, the Department of Energy's nuclear-weapons activities
should be placed under the purview of the Department of Defense. Many of its
other activities amount to nothing more than corporate handouts. It provides
research grants and subsidies to energy companies for the development of new,
cleaner forms of energy. This means nearly all forms of energy development here
in the U.S. are subsidized by the federal government, from oil and coal to
nuclear, wind, solar and biofuels. These subsidies often go to research and
companies that can survive without them. This drives up the cost of energy for
all Americans, both as taxpayers and consumers.
The Commerce
Department is another prime example. Consistently labeled for elimination,
specifically by House Republicans during the 1990s, one of Commerce's main
functions is delivering corporate welfare to American firms that can compete
without it. My proposal would scale back the Commerce Department's spending by
54% and eliminate corporate welfare.
My proposal would also cut wasteful spending in
the Defense Department. Since 2001, our annual defense budget has increased
nearly 120%. Even subtracting the costs of the conflicts in Iraq and
Afghanistan, spending is up 67%. These levels of spending are unjustifiable and
unsustainable. Defense Secretary Robert Gates understands this and has called
for spending cuts, saying "We must come to realize that not every defense
program is necessary, not every defense dollar is sacred or well-spent, and more
of everything is simply not sustainable."
For those who take issue with any of the
spending cuts I have proposed, I have two requests:
First, if you believe a particular program
should be exempt from these cuts, I challenge you to find another place in the
budget where the same amount can feasibly be cut and we can replace
it.
Second, consider this: Is any particular
program, whatever its merits, worth borrowing billions of dollars from foreign
nations to finance programs that could be administered better at the state and
local level, or even taken over by the private sector?
A real discussion about the budget must begin
now—our economy cannot wait any longer. For 19 months, unemployment has hovered
over 9%. After a nearly $1 trillion government stimulus and $2 trillion in
Federal Reserve stimulus, the Washington establishment still believes that we
can solve this problem with more federal spending and the printing of more
money.
That's ridiculous, and the American people have
had enough.
Many in Washington
think that a one-year, $500 billion spending cut is too bold. But the attendees
at the newly formed Senate Tea Party Caucus say, "Bring on the cuts! And then,
bring on more!" My Republican colleagues say they want a balanced-budget
amendment. But to have any semblance of credibility we must begin to discuss
where we will cut once it passes. My proposal is a place to start.
Mr. Paul is a Republican senator from
Kentucky.
Will Cuba Be the Next Egypt?
The most striking
difference between the two countries is Internet access.
·
By MARY
ANASTASIA O'GRADY
Developments in
Egypt over the last two weeks brought Cuba to my mind. Why does a similar
rebellion against five decades of repression there still appear to be a far-off
dream? Part of the answer is in the relationship between the Castro
brothers—Fidel and Raúl—and the generals. The rest is explained by the regime's
significantly more repressive model. In the art of dictatorship, Hosni Mubarak
is a piker.
That so many Egyptians have raised their voices
in Tahrir Square is a testament to the universal human yearning for liberty. But
it is a mistake to ignore the pivotal role of the military. I'd wager that when
the history of the uprising is written, we will learn that Egypt's top brass did
not approve of the old man's succession plan to anoint his son in the next
election.
Castro has bought loyalty from the secret police and
military by giving them control of the three most profitable sectors of the
economy—retail, travel and services. Hundreds of millions of dollars flow to
them every year. If the system collapses, so does that income. Of course the
Egyptian military also owns businesses. But it doesn't depend on a purely
state-owned economy. And as a recipient of significant U.S. aid and training for
many years, the Egyptian military has cultivated a culture of professionalism
and commitment to the nation over any single individual.
View Full Image
Associated Press
Cuban President Raúl Castro
In Cuba there are no opposition political
parties or nonstate media; rapid response brigades enforce the party line.
Travel outside the country is not allowed without state approval. If peaceful
dissidents with leadership skills can't be broken, they are eventually exiled.
Or they are murdered.
The most striking difference between Cuba and Egypt is
access to the Internet. In a March 2009 Freedom House report on Internet and
digital media censorship world-wide, Egypt scored a 45 (out of 100), slightly
worse than Turkey but better than Russia. Cuba scored a 90, making it more
Net-censored than even Iran, China and Tunisia. Cellphone service is too
expensive for most Cubans.
Yet technology does somehow seep into Cuba.
When Fidel took the life of prisoner of conscience Pedro Boitel in 1972 by
denying him water during a hunger strike, the world hardly noticed. By contrast,
news of the regime's 2010 murder of prisoner of conscience Orlando Zapata Tamayo
hit the Internet almost immediately and was met with worldwide condemnation. The
military dictatorship was helpless to contain the bad publicity.
In a similar fashion, when the Ladies in White—a group of
wives, sisters and mothers of political prisoners—walking peacefully in Havana
were roughed up by state security last year, the images were captured on
cellphones and immediately showed up on the Web. It was more bad PR for the
Castro brothers and their friends like Mexican President Felipe Calderón and
Spanish President José Luis Zapatero.
Technology-induced
international pressure is making the regime increasingly reluctant to flatten
critics the old-fashioned way. In an interview in Argentina's Ambito Financiero
on Jan. 27, internationally recognized Cuban blogger Yoani Sánchez said the
"style" of state repression has shifted from aggressive arrests and long
sentences to targeted attempts at defamation and isolation. Ms. Sanchez also
said that uniformed police are "distancing themselves from the political theme,
not by orders from above, but because they no longer want to be associated with
the repression." Now, she said, the intimidation and arbitrary arrests are
largely carried out by the secret police in civilian
clothes.
The Americas in the News
Get the
latest information in Spanish from The Wall Street Journal's Americas page.
A little more space has emboldened the
population. Ms. Sánchez also said in the interview that she is "optimistic about
the slow and irreversible process of interior change in Cubans. In that the
citizen critic will grow, will have less fear, and will feel that the mask is
increasingly unnecessary and that it doesn't any longer translate into
privileges and subsidies."
Last week a leaked
video of a Cuban military seminar on how to combat technology hit the Internet.
It demonstrates the dictatorship's preoccupation with the Web. The lecturer
warns about the dangers of young people with an appealing discourse sharing
information through technology and trying to organize. Real-time chat, Twitter
and the emergence of young leaders in cyberspace—aka "a permanent
battlefield"—are perils outlined in the hour-long talk. The lecturer also shares
his concerns about U.S. government programs that try to increase Internet access
outside of officialdom on the island.
On Friday, the regime further displayed its
paranoia by charging U.S. Agency for International Development contractor Alan
Gross with spying. Mr. Gross has been in jail for 14 months for giving Cuban
Jews computer equipment so they could connect with the
diaspora.
With very limited access, Cubans are already
using the Internet to share what has until now been kept in their heads:
counterrevolutionary thoughts. If those go viral, even a well-fed military will
not be able to save the regime. But for now, Cubans can only dream about the
freedoms Egyptians enjoy as they voice their grievances.
Write to O'Grady@wsj.com
WSJ
econ blog Feb 4, 2011
1:12 PM
By
Jon Hilsenrath
The
January unemployment report was very noisy, not just because bad weather kept
people at home. The Labor Department also incorporated unusually large revisions
to its estimates of the size of the population which make it hard to offer a
clear explanation for what caused a drop in the unemployment rate to
9%.
The
Labor
Department’s bean counters recalculate the size of the
population every January. Those new counts, in turn, are used to come up with
new estimates for how many Americans are employed, unemployed or not in the
labor force. Because of the revisions, Labor Department officials are flashing
warning signs to anybody trying to infer too much in the unemployment portion of
the monthly jobs numbers.
The
Labor Department — using updated Census Bureau data —
determined that its 2010 estimates of the size of the population had been
347,000 too high, its estimates of overall employment in 2010 had been 472,000
too high and that its estimates of people who were unemployed or not in the
labor force were also off.
The
adjustment makes it hard to decipher the underlying trend in the levels of the
labor force, employment and unemployment in January. The standard table which
shows these levels in the report — table A-1 —
provides an imperfect comparison. The 2010 numbers in the table use older
population estimates but January 2011 uses the new population estimate. (Apples
to oranges.) That table implies there was a big increase in the number of people
dropping out of the labor force in January and only a small increase in
employment … not a good signal for the economy, and also not a reliable
signal.
A
supplemental table in the January jobs report which attempts to apply the new
population estimates back to 2010, Table C, shows
a big increase in employment and a small increase in people leaving the labor
force from December to January. But it doesn’t provide a clear picture of the
trend in employment and unemployment levels either, says Jim Borbely, a
Bureau of Labor
Statistics economist. That’s because it piles all of the new,
lower population and employment estimates to December 2010 rather than spreading
them out among earlier months. This makes it look like there were big swings in
these levels that might not have occurred all at once.
Mr.
Borbely says it’s better to look at rates — the unemployment rate, the labor
force participation rate, the employment-to-population ratio — for a clear
picture. These rates are less likely to be distorted by new measures of
population levels. Looking at rates, this is what you CAN say about the
report:
–The
jobless rate has fallen by 0.8 percentage points in just two months to 9%. The
drop might overstate the improvement because some people are leaving the labor
force, and thus are no longer being counted as unemployed, but it is
nevertheless a move in the right direction;
–The
employment-to-population rate, a raw measure of how many working-age Americans
have jobs, has risen to 58.4% from 58.2% in November. That’s just a small
improvement and is still lower than it was a year ago. With the population
revisions, perhaps the improvement was a tenth of a percentage point better, the
report shows.
–Americans
are not flooding back into the labor force as they used to do after a recession
ends. The labor force participation rate dropped to 64.2% in January, its lowest
point since 1984. Demographic trends like early retirements and women leaving
work are likely part of the story. In the long-run, a lower labor force
participation rate is not good news because it will hold back economic growth
(fewer people producing stuff) and it means the working population has a large
portion of non-workers to support. Moreover, if people are dropping out of the
labor force for good, it might mean there is less slack in the job market — and
thus more inflationary pressure building — than commonly
believed.
WSJ
econ blog Feb 4, 2011
2:48 PM
By
Michael Casey
The
Canadian and U.S. labor markets are currently mirror images of each other, and
that’s fostering a straightforward strategy for currency traders: Buy the dollar
of the north, sell the dollar of the south.
At 7
a.m. EST, Canada’s statistics agency announced that the country’s economy added
69,200 jobs in January. That’s almost five times the forecast of 15,000. It’s
also almost twice that of the 36,000 jobs expansion reported an hour and half
later by the U.S. Bureau of Labor
Statistics, a figure that was almost one-fourth the size of the
consensus forecast of 136,000 jobs.
Canada’s
population is one-ninth that of the United States. So its jobs gain could be
said to be the equivalent of a 622,800 result for its giant southern
neighbor. To
find anything bigger than that in the BLS’s newly revised monthly data for the
U.S. you have to go back to September 1983, when the resolution of a strike by
AT&T workers
contributed to a surge of 1,114,000 jobs in payrolls for the
month.
It was
a similarly contradictory result in the two countries’ unemployment numbers.
Whereas the U.S. rate
surprisingly fell to 9.0% from 9.4% in December, Canada’s rose to 7.8% from
7.6%. And much as the explanation for the falling U.S. jobless
rate was ascribed to the fact that the number of people who counted themselves
as part of the labor force had fallen, Canada’s increase was caused by a sharp
expansion of 106,400 in its work force.
So in
the United States, despondent job seekers are giving up the search while in
Canada they are hopefully rejoining it. Might it also be the case that Americans
are crossing the border to look for work in the north?
In
response to this stark contrast between the two countries, the Canadian dollar rallied more
than a cent to a 2 1/2-year high against its U.S. counterpart Friday. The U.S.
dollar was last quoted at C$0.9896.
With
Canadian Finance Minister Jim Flaherty and
other officials lately giving strong signals that they won’t stand in the way of
a rising Canadian dollar, buying it on Friday was a no-brainer for currency
traders.
The
jobs data raise the prospect that the Bank of Canada will at its March 1 meeting
increase its benchmark overnight rate, which it has kept at 1.00% in its past
three meetings. Compare that to the Federal Reserve, which hardly anyone expects
to raise rates from their current near-zero level until well into the second
half of the year. The carry between those rates is attractive to a currency
trader.
The
divergent job results aren’t a fluke.
Some
of it has to do with luck. Canada’s exports are heavily concentrated in
commodities whose prices are booming. As a
comparatively smaller, open economy, Canada is more tapped into the healthier
growth rates seen in Asia and the rest of the world than is the U.S., more
driven by its domestic activity.
And
some of the contrast in experiences has to do with policies that existed in the
boom years before the 2008 financial crisis.
Canada’s
stricter mortgage lending rules and tighter bank regulation kept its housing and
financial sectors in check while the United States was consumed by a destructive
real estate and credit bubble in the middle of the 2000s. This left the northern
country less burdened by an overhang of unemployed construction workers, real
estate agents and mortgage loan officers.
Still,
the irony is that one reason Canada is doing so well is that it is tapping into
a much-delayed rebound in growth in the south. The recovery in U.S.
manufacturing (albeit a more or less jobless one, according to the BLS) was
evident in strong data, such as this week’s business index from the Institute of
Supply Management. And that’s helping Canada’s exporters.
The
history of economic cycles tells us that the trajectories of the two countries’
economies should at some point converge. But for now, the gap is wide, even with
the recovering in the U.S. And that will continue to underpin the Canadian
dollar.
- WSJ
February 4, 2011, 5:46 PM ET
Sugar
Taxes Would Hit Poor, Minorities
By
Jon Hilsenrath
New
research by
the Federal Reserve Bank of Chicago says that taxes and sweetened beverages —
which many states are considering as a source of revenue — would hit the poor,
minorities and less educated Americans disproportionately. Bottom line: A sugar
tax might help reduce obesity and the health hazards that come with it, but it’s
a highly regressive approach.
Below,
is a table with key statistics.
Total
Daily Calories From Sugar Sweetened Drinks, in %, Among Different U.S.
Groups
|
All
Americans |
5.6 |
|
Black |
6.2 |
|
White |
5.6 |
|
Hispanic |
6 |
|
Less
than high school |
7.4 |
|
High
school |
7.3 |
|
Some
college |
5.8 |
|
College
graduate |
3.3 |
Listening to the Shale Revolution
Often
the only 'reform' needed is a plan to remove obstacles to
innovation.
·
By
HOLMAN W. JENKINS, JR.
With
turmoil in the Middle East comes the inevitable spike in oil prices, topping $90
this week. Look for energy security to make one of its recurrent runs to the top
of the national agenda. This time, though, we should listen to the shale gas
revolution that has put an unexpected energy bonanza at our feet in places like
New York, Pennsylvania and Ohio.
Any
energy forecast a few years ago that failed to anticipate the shale boom and
associated technological breakthroughs now mostly looks like a wasted effort.
And that's the point.
Shale
gas came painlessly into the world, though on paper the number of rich and
powerful interests it upset would be nearly endless. Every owner of an oil well
or coal mine or conventional gas well. Investors in the U.S. and Europe and
Canada who spent billions building terminals to import liquefied natural gas
(LNG). Investors in a long-planned pipeline from Alaska to the upper Midwest.
Investors in the massive Russian Shtokman field, tipped for LNG exports to the
U.S.
Just a
few years ago, Russian leaders talked up the inevitability of a natural gas
cartel more powerful than OPEC. Never mind. The U.S. last year topped Russia in
natural gas production for the first time since 2001.
In
2003, then-Fed Chairman Alan Greenspan urged a rapid expansion of LNG imports to
make up for a domestic shortfall. "We are not apt to return to earlier periods
of relative abundance and low prices anytime soon," he said. Never mind. The
U.S. is now building an LNG terminal all right, so it can export its growing gas
bounty—nearly two Saudi Arabias' worth—to Asia.
Last
month's stock-swap deal between BP and Russia's Rosneft might, a few years ago,
have caused strategic jitters in Washington. Never mind. The Putin regime
remains as odious as ever, but the balance of power already is perceptibly
shifting away from the world's petrocrats to consumers, thanks to shale
gas.
View
Full Image
Getty
Images
The
shale gas revolution has been a surprise, in a sector where surprises are still
permitted.
The
organized interests whose world is being knocked for a loop by shale gas surely
aren't happy about it. The quality on display here is freedom to
innovate, also known as freedom to disrupt the rich and powerful who would
prefer not to be disrupted. In the U.S., landowners enjoy mineral rights and are
free to sell or lease those rights to drilling companies, whatever the neighbors
might say. It wasn't the Exxons and BPs but smaller companies that figured out
how to make shale gas pay.
Under
U.S. labor law, these companies were free to take a chance on new workers
without making a lifetime commitment. Also important, back in the 1970s and
'80s, a series of deregulatory moves eliminated price and usage controls on
natural gas, without which the business would never have been interesting to
innovators and entrepreneurs. One company, Mitchell Energy, worked out how
"slickwater" fracturing combined with horizontal drilling could free gas from
dense shale rock previously uneconomical to develop. The firm's founder, George
Mitchell, last year received the Gas Technology Institute's lifetime achievement
award.
The
U.S. shale boom has ignited a search elsewhere, from China to Central Europe.
Poland alone is
estimated to hold shale gas reserves equal to half of Europe's existing
conventional reserves—a fact already altering the strategic balance between
Europe and its soon-to-be-former energy overlord,
Russia.
Europeans
have also discovered, however, they lack some of America's institutional
advantages, from private ownership of resources to flexible labor markets. In
the U.S., says the Oil & Gas Journal, "Companies generally can develop shale
plays located in the U.S. Midcontinent and East, where most land is owned
privately, with minimal political wrangling. The fact that shale developments
can cover entire counties means that royalties are spread among thousands of
individual landowners, often aligning them with
operators."
Before
we wallow in self-congratulation, let's note the impossibility of equivalent
transformations in other areas of American life. Our air traffic control system
is controlled by government and has failed miserably to keep up with traffic
growth. Our public schools are laboratories of stasis. Detroit is bound by a
monopolistic labor regime from the 1930s. To touch on an especially sore point,
federal and state regulation of health insurance has all but extinguished
innovation in health insurance, even as government policy has made us more and
more reliant on these third-party payers.
The
shale gas revolution has been a surprise, in a sector where surprises are still
permitted. Nobody "planned" it. There's a lesson here for every kind of
reformer: Often the only plan needed is a plan to remove obstacles to
innovation.
Ben Bernanke's '70s Show
Inflation
is on the horizon, and now is the time for the Fed to head it
off.
In the
1970s, despite rising inflation, members of the Federal Reserve's policy
committee repeatedly chose to lower interest rates to reduce unemployment. Their
Phillips Curve models, which charted an inverse relationship between
unemployment and inflation, told them that inflation could wait and be addressed
at a more opportune time. They were flummoxed when inflation and unemployment
rose together throughout the decade.
In
1979, shortly after becoming Fed chairman, Paul Volcker told a Sunday talk-show
audience that reducing inflation was the best way to reduce unemployment. He
abandoned the faulty Phillips Curve thinking that unemployment was the enemy of
inflation. And he told the Fed's staff that while he thought highly of their
work, he did not find their inflation forecasts useful. Instead of focusing on
near-term output and employment, he changed the Fed's policy to put more
emphasis on the longer-term reduction of inflation. That required a persistent
policy that President Reagan supported even in the severe 1982 recession.
We
know the result: Inflation came down and stayed down. The Volcker disinflation
ushered in two decades of low inflation and relatively steady growth, punctuated
by a few short, mild recessions. And as Mr. Volcker predicted, the unemployment
rate fell after the inflation rate fell. The dollar
strengthened.
That
was not unprecedented. The Phillips Curve often fails to forecast correctly.
Spanish inflation has increased in the last year while the unemployment rate
rose above 20%. Britain also has rising inflation and rising unemployment.
Brazil lowered inflation and unemployment together. There are many other
examples if only the Fed would look at them.
Throughout
its modern history, the Fed has made several of the same policy mistakes
repeatedly. Two are prominent now. It concentrates on near-term events over
which it has little influence, and neglects the longer-term consequences of its
operations. And it interprets its dual mandate as requiring it to direct all of
its efforts to reducing unemployment when the unemployment rate rises. It does
not have a credible long-term plan to reduce both current unemployment and
future inflation, so it works on one at a time. This
is an inefficient way to achieve a dual mandate. It failed totally during the
Great Inflation of the 1970s. I believe it will fail again this
time.
Commodity
and some materials prices have increased dramatically in the past year.
Countries everywhere face higher inflation. Despite the many problems in the euro
area, the dollar has depreciated against the euro, a weak currency with many
problems, suggesting that holders expect additional dollar
weakness. Imports will cost more.
I
believe it is foolhardy to expect businesses to absorb all the cost increases by
holding prices unchanged. And loan demand has started to pick up, increasing the
amount of money in circulation. It is a big mistake to expect that the U.S. will
escape the inflation that is now rising throughout the
world.
Because
the Fed focuses on the near term, it tends to ignore changes in money-supply
growth. This, too, is a mistake. Sustained inflation always follows
increases in money-supply growth. Sustaining negative real interest rates (i.e.,
adjusted for inflation), as we have now, will cause
this.
The
Fed should make three changes. First, it should increase the
short-term interest rate it controls to 1%, which would show
that it is aware of the inflation risk and will act promptly to counteract it.
Current low interest rates are an opportunity for the Fed to start reducing
excess reserves.
Second,
it should announce a specific, detailed plan that explains how it proposes to
reduce about $900 billion of the more than $1 trillion banks continue to hold in
excess of their legally required reserves.
Third,
it should end QE2, its latest round of Treasury bond
purchases. If,
last November, the Fed had waited two more months before starting QE2, it would
have known that a double-dip recession was not about to happen. Instead of
waiting, the Fed responded to the cries coming from Wall
Street.
Current
slow growth and high unemployment is not mainly a monetary
problem. The
financial system has more than ample liquidity. Uncertainty about government
policy is a much bigger problem. Businesses have had many reasons to be
uncertain, to wait for a clearer outlook that would permit them to more
accurately estimate future costs and returns to new investment. Better to hold
cash and wait.
Until
the 2010 election changed their view of the future, there was no way to know how
much tax rates would increase, what new, costly regulations would stem from the
president's health-care reforms, the Dodd-Frank financial reforms, and
elsewhere. The election
reduced these concerns by giving control of the House to a majority that does
not share President Obama's vision that a good society should be directed and
regulated from Washington. Last December, when Mr. Obama agreed
to extend the Bush tax cuts, he showed that some improvement in outlook was
justified. The economy responded.
What
we need out of Washington now is spending reduction, lower corporate tax rates,
and a three-year moratorium on new regulation. But perhaps most importantly, we
need a new Fed policy to prevent 1970s-style inflation. Inflation is coming. Now
is the time to head it off.
Mr.
Meltzer is a professor of economics at Carnegie Mellon University's Tepper
School of Business, a visiting scholar at the American Enterprise Institute, and
the author of "A History of the Federal Reserve" (University of Chicago Press,
2003 and 2010).
Arab World Built Colleges, but Not Jobs
Unemployment,
Broad Among Region's Angry Youth, Is High Among Educated
The
anger of demonstrators in Tunisia and Egypt runs, too, through 25-year-old Saleh
Barek al-Jabri.
Mr.
Jabri, the son of a Yemini bus driver, says he answered his government's call
for young people to study petroleum engineering, enrolling in a course at
Yemen's Hadhramaut University for Science and Technology. Officials visited his
school to offer encouragement. An oil minister came through to promise jobs. Mr.
Jabri excelled, finishing fifth in his class.
Days
of Rage in Tunisia
View
Slideshow
Mathias
Depardon for The Wall Street Journal
Ayman
Ghamouri, 20, is a student at Sfax University studying biotechnology. He hopes
to go into business after graduation..
But
after graduating last year, he has yet to find work. Classmates with family
connections got what few jobs existed. Mr. Jabri moved to Yemen's capital,
San'a, where he shares a single room with two other unemployed recent graduates.
"I had
dreams," Mr. Jabri says. "They've all evaporated."
Protests
erupting across the Middle East are fueled by frustrations ranging from the lack
of political freedom to police brutality. But in countries wracked by protest
and those that have remained peaceful, a common thread runs: Governments have
expanded universities and educated a swelling cohort of youth, without laying
the groundwork to employ them.
"Surprisingly,"
International Monetary Fund economists Yasser Abdih and Anjali Garg wrote
recently, "unemployment in the [Middle East and North Africa] region tends to
increase with schooling." In the U.S., the opposite is
true.
In
Egypt, where the region's protests are at their most pitched, the ranks of the
college-educated have grown steadily in the past few decades. In 1990, according to World Bank, 14% of
college-age Egyptians were enrolled; in 2008, 28.5% were. Egyptian schools
expanded, and a crop of European universities opened campuses there. The Egyptian government doubled the funding
for higher education in its 2007 five-year plan and sought international advice
on revamping the system.
But a
300-page examination of higher education in Egypt by the World Bank and
Organization for Economic Cooperation and Development, published last year,
noted "a chronic oversupply of university graduates, especially in the
humanities and social sciences," mixed with complaints from business employers
that they couldn't find workers with the skills they
needed.
View
Full Image
Chip
Cummins/The Wall Street Journal
Ahmed
Issa in Yemen
In
Egypt, it said, high-school graduates account for 42% of the work force—but 80%
of the unemployed. One in every seven college graduates in
Egypt, Jordan and Tunisia is unemployed; many more are overqualified for the
jobs they have.
The
twin forces of education and technology have interwined to create a new dynamic.
Education has raised expectations and
broadened world views. Technology—TV, the Internet, omnipresent mobile
phones—has armed the young not only with a clear sense of how the rest of the
world, particularly China, is changing, but also given them the wherewithal to
create a movement that is now reshaping their
countries.
None
of this is a surprise to students here. A 2008 World Bank report on education
reform in the region delicately noted that "the region has yet to create the
necessary conditions to maximize the economic contribution of education to
society." The consequences of that are only now becoming obvious to
all.
Trying
to provide schooling to the largest number of people, many Arab countries spent
heavily on higher education.
View
Full Image
Joel
Millman/The Wall Street Journal
Ibrahim
Taya in his apartment in West Amman, Jordan.
"The
objective was to boost economic growth, boost employment and realize equity in
society," says the World Bank's Mourad Ezzine, a former Tunisian education
expert who worked on the report. "It
didn't work out well. For two
reasons. First, the education system delivered quantity, not quality…. And,
second, on the economic side, the creation of employment to meet the profile of
those graduates didn't happen. Why? Because the reforms in these
countries did not go far enough, fast enough."
Differences
between the Middle East and other developing economies the world are
telling:
•
Fertility rates stayed higher longer in the Middle East than in East Asia or
Latin America. That
means many more workers to employ. Over the past decade, labor forces in Egypt,
Jordan, Lebanon, Morocco, Syria and Tunisia have grown by 2.7%, faster than
anywhere outside of Africa.
•
Economies haven't grown nearly fast enough to absorb these new workers. Egypt, a
country of about 80 million, would need 9.4 million jobs to employ the existing
unemployed and new entrants to the labor force, the IMF estimates. That would
take economic growth of nearly 10% a year, much faster than the 6% average of
recent years.
•
Unemployment among the young, of all education levels, is particularly
pronounced. In Egypt, according to the most recent IMF data, overall
unemployment was 8.9%—but stood at 25.4% among those under age 25, the IMF says.
In Tunisia, overall unemployment was 14.2%; youth unemployment was
30.3%.
View
Full Image
Mathias
Depardon for The Wall Street Journal
Unemployed
men play cards in a cafe in Sidi Bouzid, Tunisia. In December, a young man in
the town burned himself to protest his poor prospects.
For
decades, the safety valve for the region's jobless—including for Jordanian,
Egyptian, Yemeni, Palestinian and other college grads—was to emigrate, either to
the prosperous oil-producers of the Middle East or to Europe or the U.S. But
some rich Middle East rich countries region grew fearful in the 1990s and 2000s
that they were importing potential unrest, so they replaced Middle Eastern
immigrants with workers from Asia.
For
educated workers without jobs, the other safety value was to Europe or the U.S.
Lebanon's biggest export, it is sometimes said, is white-collar workers. Indeed, one reason to get a college
degree for many is that it was seen as ticket to a job in another
country.
Mohamed
Refaat, a 24-year-old Egyptian who followed his brother to the U.S. in 2008, is
living in Queens, N.Y., and working toward a master's degree in finance at
Brooklyn College. He is applying for jobs at Merrill Lynch & Co., Goldman
Sachs Group Inc. and the United Nations. "You don't have to be educated there," Mr.
Refaat complains about his hometown, 30 minutes outside of Cairo. "It's not
worth your skill. It's all about the
connections."
Mr.
Refaat worked as a financial analyst at the Egyptian stock market, but says he
hit a ceiling there after only one year on the job. "Every morning I would wake
up and research credit ratings," he says. "And it was all about the U.S. I dreamed of coming to
America."
View
Full Image
Philip
Montgomery for The Wall Street Journal
Mohamed
Refaat at the Egypt protests in Times Square Friday in New York.
N.Y.
But
for many of Mr. Refaat's counterparts, the global recession of the late 2000s
closed an escape valve for Egypt.
By
almost every measure, the disaffection among the young in Egypt was even greater
than in neighboring countries. In survey
of 2,000 people in the Middle East between 18 and 24 by public-relations firm
ASDA'A Burson Marsteller, released last year, two-thirds said their countries
were moving in the right direction. In Egypt, only 26%
did.
While China and other
booming economies were cultivating private sectors, Egypt clung stubbornly to a
state-dominated model. Outside of agriculture, 70% of Egyptian workers work for
the government. Few college grads sought, or even were offered, courses aimed at
landing private-sector jobs.
The
number of graduates overwhelmed the government's capacity to hire, leaving many
of them with few options. The "dominant role of the public sector as an
employer"—particularly in Egypt, but throughout the region—has inflated the
graduates' wage expectations, put a premium on diplomas over useful skills and
diverted talented workers from what might have been more dynamic private-sector
enterprises, the IMF says.
Amid
the recent unrest, governments across the region have announced measures to
create economic opportunities. Earlier this week, Yemen promised to hire more
college graduates for government work, among other
measures.
In
Yemen, Ahmed Issa majored in French at Dhamar University, near his home region
of Wasab, in the central western part of the country. He was the first in his
family to go to college. After graduating in 2005, he applied for a civil
service job.
"Until
now, no job," he says. Mr. Issa lives with distant, better-off relatives, does
occasional electronics-repair work and gets a little money from an older
brother, who after a 12-year job hunt, finally found work as an electrical
engineer earlier this year.
Mr.
Issa says he isn't uncomfortable, but is angry that he can't find work and start
a family. He says protests in Tunisia and Egypt inspired him, but he didn't
attend protests.
In
Amman, Jordan, Ibrahim Taya is the youngest of 12 born to Palestinian refugees.
Mr. Taya, 33 years old, didn't go to college, but took technical training
courses, first by correspondence in Jordan and then by going to Canada and China
to learn how to maintain pieces of equipment.
View
Full Image
Today,
he is unemployed and seething. For about a dozen years, he bounced around,
working as a technician for mobile-phone networks in Sudan, Morocco, Egypt,
Saudi Arabia and Iraq. He returned to Jordan in 2008, started a business that
collapsed, he says, when a partner absconded with company funds. He started
another last year.
The
second company grew, eventually employing 21, he said. But it got whipsawed by
the global recession and, by his account, demands for kickbacks from companies
to which he was trying to sell. After blowing through all his savings, he laid
off the workers and shut the company.
The
contrast between his life and those of his older brothers is striking. Four
received military-sponsored university scholarships. One became a internist, and
found work in Saudi Arabia; another other served as an eye doctor for the
Jordanian Army and then began his own practice. A third taught high school in
Saudi Arabia, and the fourth became a computer programmer.
Today,
Mr. Taya is on the streets of Amman with other protestors. He says he dreams of
a "miracle—like they have in Egypt."
—Joel
Millman in Amman, Jordan, and Mary Pilon in New York contributed to this
article.
Write
to David
Wessel at capital@wsj.com and Chip Cummins
at chip.cummins@wsj.com
·
Wsj FEBRUARY
7, 2011
A
License to Shampoo: Jobs Needing State Approval Rise
By STEPHANIE
SIMON
Amid calls
for shrinking government, lawmakers across the country are vowing to cut
regulations that crimp economic growth.
President Barack Obama recently said it's time to root out laws that "are just
plain dumb."
Tell that to
the cat groomers, tattoo artists, tree trimmers and about a dozen other
specialists across the country who are clamoring for more rules governing small
businesses.
Rush Jagoe
for The Wall Street Journal
Licensed
florist Monique Chauvin in Louisiana.
They're
asking to become state-licensed professionals, which would mean anyone wanting
to be, say, a music therapist or a locksmith, would have to pay fees, apply for
a license and in some cases, take classes and pass exams. The hope is that
regulation will boost the prestige of their professions, provide oversight and
protect consumers from shoddy work.
But
economists—and workers shut out of fields by educational requirements or
difficult exams—say licensing mostly serves as a form of protectionism, allowing
veterans of the trade to box out competitors who might undercut them on price or
offer new services.
"Occupations
prefer to be licensed because they can restrict competition and obtain higher
wages," said Morris Kleiner, a labor professor at the University of Minnesota.
"If you go to any statehouse, you'll see a line of occupations out the door
wanting to be licensed."
While some
states have long required licensing for workers who handle food or touch
others—caterers and hair stylists, for example—economists say such regulation is
spreading to more states for more industries. The most recent study, from 2008, found
23% of U.S. workers were required to obtain state licenses, up from just 5% in
1950, according to data from Mr. Kleiner. In the mid-1980s, about 800
professions were licensed in at least one state. Today, at least 1,100 are,
according to the Council on Licensure, Enforcement and Regulation, a trade group
for regulatory bodies. Among the professions licensed by one or more states:
florists, interior designers, private detectives, hearing-aid fitters,
conveyor-belt operators and retailers of frozen desserts.
At a time of
widespread anxiety about the growth of government, the licensing push is meeting
pockets of resistance, including a move by some legislators to require a more
rigorous cost-benefit analysis before any new licensing laws are approved. Critics say such regulation spawns huge
bureaucracies including rosters of inspectors. They also say licensing requirements—which
often include pricey educations—can prohibit low-income workers from breaking in
to entry-level trades.
Texas, for
instance, requires hair-salon "shampoo specialists" to take 150 hours of
classes, 100 of them on the "theory and practice" of shampooing, before they can
sit for a licensing exam. That
consists of a written test and a 45-minute demonstration of skills such as
draping the client with a clean cape and evenly distributing conditioner. Glass installers, or glaziers, in
Connecticut—the only state that requires such workers to be licensed—take two
exams, at $52 apiece, pay $300 in initial fees and $150 annually thereafter.
California
requires barbers to study full-time for nearly a year, a curriculum that costs
$12,000 at Arthur Borner's Barber College in Los Angeles. Mr. Borner
says his graduates earn more than enough to recoup their tuition, though he
questions the need for such a lengthy program. "Barbering is not rocket
science," he said. "I don't think it takes 1,500 hours to learn. But that's what
the state says."
Regulators
in many states say the educational requirements are developed in consultation
with industry experts and stress critical skills like sanitation and safety. A
shampoo specialist in Texas, for instance, learns about neck anatomy and must
practice skills such as regulating water temperature.
"There's a
lot of different things that go into it," says Elizabeth Perez, the state's
cosmetology program manager.
But critics
say the licensing push is restricting job growth at a time when the U.S. can
scarcely afford it. The service sector—which is the focus of many licensing
laws—accounts for three-quarters of gross domestic product and most job growth
in the U.S., according to McKinsey Global Institute, a research arm of McKinsey
& Co. In a coming report, the institute will call for an aggressive effort
to root out "unnecessary regulatory barriers that limit competition in pockets
of the economy."
View Full
Image
Mr. Kleiner,
of the University of Minnesota, looked at census data covering several
occupations that are regulated in some states but not others, including
librarians, nutritionists and respiratory therapists. He found that employment
growth in those professions was about 20% greater, on average, in the
unregulated states between 1990 and 2000.
Licensing
can also drive up costs to consumers. Licensed workers earn, on average, 15%
more than their unlicensed counterparts in other states—a premium that may
be reflected in their prices, according to a study published by the National
Bureau of Economic Research and conducted by Mr. Kleiner and Alan Krueger, an
economist at Princeton University.
Mr. Kleiner
estimates that across the U.S. economy, occupational licensing adds at least
$116 billion a year to the cost of services, which amounts to about 0.1% of
total consumer spending. In a look at dentistry, Mr. Kleiner found that the
average price of dental services rose 11% when a state made it more difficult to
get a dental license.
State
regulators say licensing is vital to protect the health and safety of citizens,
and industry experts generally agree that certain professions should be
monitored. Inept or untrained electricians or tree-trimmers, for example, could
put innocent bystanders in danger. Acupuncturists, tattoo artists and massage
therapists can potentially inflict more direct harm.
However, in
many service trades, licensure "is totally out of control," says Charles
Wheelan, a lecturer in public policy at the University of Chicago. He says the
marketplace might be a better judge than the government of whether a barber or a
yoga instructor is competent. "It's fairly easy for you to tell whether you've
gotten a bad haircut or not, and if quality turns out to be bad, it's not a big
social problem," says Mr. Wheelan.
"Who cares
if [a bouquet] is color-coordinated?" says Monique Chauvin, a licensed florist
in Louisiana, where would-be flower arrangers have to pass a written exam with
questions on plant names and complimentary colors. "If you like it, you like
it."
When a trade
group does succeed in getting a licensing law passed, it sometimes exempts
existing workers from the testing requirements. In Michigan, for instance, it
will soon be a felony to practice massage without a license. Newcomers to the
field must take 500 hours of classes and pass an exam to get that license. But a
grandfather clause exempts most current massage therapists, including those who
may never have taken a class at an accredited school.
View Full
Image
Michal
Czerwonka for The Wall Street Journal
Arthur
Borner, center, checks a student's work at Arthur Borner's Barber College in Los
Angeles.
Karen
Armstrong, a massage therapist and chair of the Michigan Board of Massage
Therapy, acknowledges that some ill-trained therapists will get licensed because
of the grandfather clause. But since new entrants to the field will be
better-educated, the standards of the profession will rise over time and
consumers will get better care, she says.
Plus, she
says, so many other trades are now licensed that massage therapists risked being
relegated to second-class status if they didn't have their own state regulatory
structure: "Not being licensed really puts our profession back behind a lot of
other professions."
But whether
licensing guarantees better-quality work is an open question. Several academic
studies in the 1970s and '80s found that licensure boosted quality in
professions such as dentistry, optometry, plumbing and real-estate sales. More
recent studies have found no evidence that licensing improves the quality of
teachers or mortgage brokers.
It's harder
to measure quality in more subjective fields such as interior design or hair
styling. But a look at consumer complaints about manicurists suggests licensing
doesn't necessarily correlate with quality.
Alabama has
perhaps the strictest licensing requirements in the nation: 750 hours of
schooling and a written and practical exam. The state
gets, on average, four public complaints a year about poor service, according to
the Alabama Board of Cosmetology.
Connecticut,
which doesn't require manicurists to get licenses, has averaged just six
complaints a year to the state over the past five years. Two-thirds of those
complaints are about gift certificates that aren't honored, according to data
from the consumer protection division of the state attorney general's
office.
Dusty
Brummitt, a locksmith in Enid, Okla., says a new state law licensing his trade
ensures the public gets quality work. Anyone who wants to be a locksmith must
now prove he's in the U.S. legally, submit to a criminal background check, pay
fees of up to $350 a year and pass a 50-question exam. Just 32% of applicants
pass the locksmith exam, state data show.
Mr. Brummitt
says the law has "gotten rid of about 90% of the scammers in our state" since it
took effect in 2007.
But it's
unclear how many scammers there were. The consumer-protection unit of the state
attorney general's office received just two complaints about locksmiths in more
than a decade—one in 2006, the year before the law took effect, and one in 2008,
the year after, according to Tom Bates, who runs the division. Three applicants
for licenses were rejected because of criminal history.
Mr. Brummitt
says licensure wasn't intended to stifle competition. But he acknowledges that
in some Oklahoma cities, the requirements have prompted immigrant entrepreneurs
and retirees who did the work as a hobby—and who often undercut traditional
locksmiths on price—to drop out of the trade. As a result, he said, some veteran
locksmiths, who didn't have to pass the exam because they were grandfathered in,
have "definitely seen an increase in business."
Cracking
down on unlicensed workers generally falls to state regulatory agencies. Texas
appropriated $151 million this fiscal year to regulate scores of occupations
though independent boards and a state agency with about 400 employees.
Colorado's Department of Regulatory Agencies oversees more than 70 occupations,
including hunting guides and kick-boxers.
In Kentucky,
the Board of Hairdressers and Cosmetologists has eight full-time inspectors who
spend much of their time responding to anonymous tips about unlicensed
manicurists. The inspectors rarely catch the alleged offenders, says Charles
Lykins, the board's administrator, because "they take off running."
Mr. Lykins
says it's in the public's interest to insist manicurists are well-trained. "Have
you ever had a nail fungus? It's terrible," he says. "That's why we're
there."
All this
enforcement doesn't necessarily cost state taxpayers. Many states require their
regulatory agencies to cover all their expenses from licensing
fees.
Some
agencies even turn a profit, which can be used to subsidize other state
services. Over the past two years, Connecticut's general fund made nearly $21
million on licensing fees, after accounting for the cost of running the state's
primary regulatory agency. California's general fund borrowed $96.5 million from
its regulatory bodies' ample reserves in fiscal year
2008-9.
Still, some
critics see a broader cost to the economy. It's tough for workers to move around
the country, for example, when each state has a different list of jobs that
require licenses—and a different set of standards to pass. More than 1,100 professions require a
license in at least one state, but only about 60 trades are licensed in every
state, according to the Council on Licensure, Enforcement and
Regulation.
Florida for
years required anyone marketing their services as "interior design" to get a
license that called for six years of education and apprenticeship and a two-day
exam. That
requirement stunned Barbara Vanderkolk Gardner, a mostly self-taught designer
who worked on luxury homes in New Jersey—no license required—and wanted to open
a practice in Florida. If clients wanted to hire her to pick out pillows, paints
and furnishings, Ms. Gardner says, she couldn't understand why the state would
object: "I view myself as an artist, and I don't think art needs to be
licensed."
Ms. Gardner
worked with the Institute for Justice, a nonprofit libertarian law firm, to sue
the Florida regulatory body in charge of interior design in U.S. District Court
in Tallahassee, claiming the law violated their First Amendment rights to call
themselves interior designers. A federal judge last year struck down the
licensing law for residential designers. But the court upheld a requirement for
commercial interior design, holding that the state had a rational basis for
protecting the public from inept design, which could create safety
hazards.
Ms. Gardner
says her residential business is now flourishing in Sarasota, Fla., but she
remains frustrated that she has to turn down jobs designing
offices.
In Ohio,
dieticians, athletic trainers and boxing promoters are among the professions
that require licenses. If Kimberly
Raisanen has anything to say about it, cat groomers might one day make it onto
the list, too. Ms. Raisanen, a groomer in Fairview Park, Ohio, helped found the
Professional Cat Groomers Association of America in 2008 to establish better
education standards for the animal specialists who trim, clip, style and fluff
felines.
The
association has established written tests and a hands-on exam that helps
determine which members of the trade are "worthy of being called a certified
master cat groomer," Ms. Raisanen says.
But the
group would like to go further. As soon as she can build up her organization,
Ms. Raisanen says she'd like to begin lobbying Ohio and other states to license
cat groomers, requiring anyone entering the trade to first prove his or her
competency. Regulation, she says, would ensure "you are educated before you put
a cat on that table."
Write to
Stephanie
Simon at stephanie.simon@wsj.com
Treasury Report Steps Up Criticism on Yuan's Level
WASHINGTON—The U.S. Treasury refrained from
labeling China a currency manipulator but took a tougher line than in past
years, saying the yuan is "substantially undervalued," warning "progress thus
far is insufficient and that more rapid progress is
needed.''
The Treasury's much-awaited report on China's
currency reform steps up the rhetorical heat from the last update in July, which
merely called the yuan "undervalued" instead of "substantially undervalued."
The Treasury is required to review twice a year
whether China and other nations are manipulating their currencies. Such a
declaration against China could have major ramifications for the international
financial system as it could set off a trade war between the U.S. and its
largest trading partner. The U.S. so far has stopped short of calling China a
currency manipulator, and instead has used speeches and diplomacy to pressure
the country to free its grip on the currency's value.
Chinese President Hu Jintao, during his
Washington visit last month, said China was committed to exchange-rate reform.
Since China announced last June that it would restart a program to make its
currency more flexible, the yuan has
appreciated around 3.7% against the dollar.
The report is likely to disappoint many U.S.
lawmakers. With U.S. manufacturers complaining their products are being outsold
by Chinese goods made at a cheaper cost, helped by an exchange rate they say is
kept unfairly low, lawmakers wanted Treasury to name Beijing a currency
manipulator and are threatening to pass punitive legislation. The Obama
administration held up publishing the report until after Mr. Hu's visit.
Legislators had called for the administration to press Mr. Hu on the exchange
rate.
"It's as plain as the nose on your face that
China manipulates its currency. It's just as plain that the only way to address
this problem is for Congress to act," said Sen. Charles Schumer, (D., N.Y.), a
lead critic of China's exchange rate policy, on Friday. Senate Finance Committee
Chairman Max Baucus (D., Mont.) also criticized the administration for not
labeling Beijing a currency manipulator. "China has been given a free pass on
its currency practices for far too long," he said, adding that Congress needed
to hold its largest trading partner to account.
Pressures on China's economy may help to drive
that change. "It is in China's interest to allow the nominal exchange rate to
appreciate more rapidly, both against the dollar and against the currencies of
its other major trading partners," the Treasury said. Without greater flexibility, Beijing risks
fueling excessively rapid growth of credit, and creating upward pressure on
property and equity prices, which could threaten growth, it
said.
Including inflation, the Treasury estimates the yuan's
move is equivalent to an annual rate of 10% a year. China has also started
relaxing restraints on the use of the yuan. The Treasury said these reforms will over time
"contribute to a more market-determined exchange rate."
The undervalued yuan is also harming other
emerging-nation economies, which could help the U.S. in its negotiations at the
Group of 20 nations conference later this month. Countries such as Brazil, which
have more open exchange rate policies, are dealing with a surge in investment
that threatens to overheat their economies, the Treasury said, leading in some
cases to over-valued exchange rates.
Despite the often-fierce rhetoric, no key
lawmaker has introduced a bill trying to punish China for how it manages the
yuan since Republicans took over the house. Big U.S. companies have warned
against sparking a trade war with China, saying it would be more productive to
protect their interests in other areas, such as defending intellectual property
rights.
Eswar Prasad, a Cornell University economist
and former China expert at the International Monetary Fund, said the Treasury's
approach is constructive and avoids bringing "things to a boil." The report,
"takes a carefully calibrated approach to Chinese currency policy, conveying a
clear message on the need for more currency flexibility but without using
language that would damage relations with China," Mr. Prasad
said
The Treasury said it would continue to closely
monitor yuan appreciation.
The report studied ten countries' exchange rate
policies that account for over three quarters of U.S.
trade.
—Luca Di Leo contributed to this
article.
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