Those readings marked with a * are suggested current readings
for Econ 386.
Listing:Articles 1-43
*1. HOW WELFARE TO FOREIGN COUNTRIES HARMS THEM
*1. BUSH'S PROPOSAL FOR WORLD BANK GRANTS
1. Dollar Daze The world should give hommage
to the mighty greenback. by Larry Kudlow National Review
2. STATES WITH NO INCOME TAX HIT JACKPOT
3. U.N. REPORT LOOKS AT GENETICALLY MODIFIED FOODS
*4. The World Bank Is Wrong to Oppose Grants
5. WILL A NEW STRATEGY HELP POOR COUNTRIES -- FOR
A CHANGE?
*6. FLOATING CURRENCIES, OR FIXED EXCHANGE RATES?
*7. Juxtapose the history of England with that of
Russia. What emerges? The importance of private property.
Richard Pipes is Baird Research
Professor of History and former director of the Russian
Research Center at Harvard
University.
*8. WHAT IS NECESSARY FOR ECONOMIC GROWTH?
*9. Dueling Studies Square Off on Causes of
Economic Growth By:
Kevin A. Hassett, Resident Scholar, AEI
10. WSJ What Argentina Needs
*11. 7-12-01 TAX CUTS PROPELLED IRISH MIRACLE
12. CANADA'S TAX FREEDOM DAY COMES FIVE DAYS EARLIER
13. UNDERGROUND ECONOMY PREPARES FOR THE EURO
14. The Race Pitting the ECB Tortoise Against the
Fed Hare
*15. IMF Early Warning Should Start on the Web By
Steve H. Hanke.
*16. A Rule of Law Emerges In Mexico, Slowly By
Luis Rubio.
*17. RUSSIANS IN NO RUSH TO BUY PRIVATE PROPERTY
*18. VIABLE LEGAL SYSTEM CRUCIAL IN TRANSITION
FROM COMMUNISM TO CAPITALISM
*19. LIBERALIZED TRADE ALLOWS SMALL COUNTRIES TO THRIVE
*20. SUPPLY-SIDERS IN INDIA
21. Dervish Lira, Peso Mariachi
By ROBERT L. BARTLEY
22. Argentina Is No Turkey
By Steve H. Hanke.
*23. Turkey's Crisis Has a Silver Lining By Norman
Stone
24. SEVENTH EDITION OF "INDEX OF ECONOMIC FREEDOM"
APPEARS
*25. COST OF BARRIERS TO ENTRY
*26. COUNTRIES "DOLLARIZE" FORMALLY AND INFORMALLY
27. PROTECTION OF PROPERTY AND STOCK SYNCHRONICITY
*28. AFRICA NEEDS FREE TRADE, NOT FOREIGN AID
29. review of Wealth of nations Part II
byThomas Sowell "A gem of a book "
*30. Democracy and economic growth by Walter
Williams
*31. Poverty in the Midst of Plenty
by Douglass C. North
32. SLOW AND STEADY WINS THE RACE
*33. LIVING STANDARDS ROSE FASTER THAN PREVIOUSLY
THOUGHT
34. Small Loans Pay Off
35. ECONOMISTS CONVERT TO NEW ECONOMY THEORIES
36. LUMBER USERS BAND TOGETHER TO DEFEAT TRADE QUOTAS
37. Wsj 7-27-01ENVIRONMENTAL QUANDARY: MALARIA OR
DDT?
38. Japan: What Went Wrong By Michael
E. Porter
39. 3/27/01THE NEW ECONOMY IN HISTORIC PERSPECTIVE
*40. WORKING CONDITIONS OF NIKE CONTRACT WORKERS
*41. Child Labor and The British Industrial Revolution
by Lawrence W. Reed
42. IEA STUDY: HOW ICELAND CONSERVES FISHERIES
*43. EUROPEAN MEN OPT OUT OF WORK FORCE
8-101
HOW WELFARE TO FOREIGN COUNTRIES HARMS THEM
Foreign aid not only does nothing to actually help those
who
receive it, it often harms them. This is becoming
increasingly
clear to aid recipients, some of whom now actually refuse
aid.
Consider these examples from a recent report in the London
Daily
Telegraph:
o When impoverished Malawi got
its annual aid grant of 52
million pounds from
Britain recently the government's
first act was to
spend 1.7 million pounds to buy 39 brand
new S-class Mercedes
automobiles for cabinet ministers.
o Canadian aid recently paid
to build a new international
airport in remote
El Dorat, Kenya; but apparently, the
only plane that
uses it is that of President Arap Moi,
whose home town
is nearby.
o British aid to the Palestinians
was supposed to build
housing for the
poor -- instead, it built luxury
apartments for friends
of Yasser Arafat.
Where the aid is not stolen, it often does more harm than
good.
The Washington Post and Wall Street Journal reported
last year
that World Bank aid destroyed the Mozambique cashew and
sugar
industries. Now, even some aid recipients are asking
for an end
to aid.
o In a February New York Times
Magazine interview, Yousif
Kowa, leader of
a poor tribe living in the Nuba Mountains
of Sudan, rejected
foreign aid for his people because he
said it would destroy
their self-reliance, based on cases
he had seen where
productive farms were destroyed by food
aid.
o In May, the Atlantic Monthly
reported that Mogadishu,
Somalia, has boomed
since 1995, when aid was cut off due
to the breakdown
of civil government.
Foreign aid is like welfare, and reforming it may be
the best
thing for its recipients.
Source: Bruce Bartlett, senior fellow, National Center
for Policy
Analysis, August 1, 2001.
For text http://www.ncpa.org/oped/bartlett/bartlett01.html
For more on Foreign Aid
http://www.ncpa.org/pi/internat/intdex5.html
7-31-01
BUSH'S PROPOSAL FOR WORLD BANK GRANTS
President Bush has proposed that the World Bank furnish
poorer
countries outright grants tied to performance, rather
than loan
them money. The World Bank -- which critics say has a
dismal
record of collecting on its loans -- is opposed to the
idea.
The bank argues that grants will deplete its resources
unless
there is an immense infusion of new funding -- $800 million
more
each year from the U.S. alone.
o Some $500 billion in aid has
flowed through the World Bank
over the past 50
years.
o By the bank's own reckoning,
less than one in three of its
sponsored projects
in the poorest countries yields
satisfactory and
sustainable results.
o Forty-two needy countries
now carry a load of $175 billion
in official debt
they are clearly unable to repay -- and
have nothing to
show for it but a 25 percent decline in
their standards
of living since 1980.
Critics surmise that the bank harbors a well-founded
fear that,
with grants, it will have to account for the effectiveness
of
programs.
That responsibility could transform it from being an
elegant
banker dispensing large volumes of largesse to being
a gritty
development agency with a demanding workload, observers
point
out.
Source: Adam Lerrick and Allen H. Meltzer (Gailliot Center
for
Public Policy at Carnegie Mellon University), "The World
Bank Is
Wrong to Oppose Grants," Wall Street Journal, July 26,
2001.
For more on International Monetary Fund & World Bank
http://www.ncpa.org/pi/internat/intdex13.html
7-30-01
Dollar Daze
The world should give hommage to the mighty
greenback.
Larry Kudlow National Review
July 27, 2001 10:35 a.m.
Former President Ronald Reagan always
believed that a great nation needed a strong currency. So, in one of his
first
moves back in the early 1980s, he gave Fed Chairman
Paul Volcker a green light to do whatever it took to restore the
dollar's value and vanquish the hyper-inflation
that had sunk the economy during the stagflationary 1970s. To Reagan the
plunging U.S. dollar was also the mirror image
of a rising Soviet Union, another trend that had to be stopped.
The Gipper was right on the need for a strong dollar.
And with a program of tax cuts, deregulation, and military buildup, he
succeeded in restoring dollar-based peace and
prosperity around the world.
Today, the dollar is again in the news. Various
short-sighted Wall Street economists — along with a bunch of whining U.S.
manufacturing companies and a flock of European
Union central planners whose sole desire is to take America down a
peg — want to see the American currency devalued.
It's a terrible vision, one that must be devoutly opposed. Fortunately,
the Bush administration has thus far stayed with
a strong-dollar policy.
Treasury Secretary Paul O'Neill refuses to cave
into the National Association of Manufacturers or Euro commissars or
Wall Street traders. Former Clinton Treasury man
Robert Rubin, who helped revive the dollar in the mid-1990s, testified
before Congress that he agrees with Secretary
O'Neill. "A weak dollar would adversely affect inflation, interest rates,
and
capital inflow," he said.
Make no mistake, the fate of the dollar is tied
to the outlook for world economic health. Over the past two decades the
dollar has resumed its historic role as the world
currency of choice. It is used every day by literally hundreds of millions
of
people across the planet. When dollars flow in,
U.S. businesses and their technological know-how soon follow.
Therefore it's no surprise that the revival of
the dollar coincides with the world revival of economic growth and democracy
and peace over the past twenty years. As the dollar
stood tall, the Soviet Union evaporated. This too is no coincidence.
The dollar, standing atop the globe, reflects
the victory of American values — not only a free-market economy, but also
political freedom and democracy.
Toward the close of the 19th century, Otto von
Bismarck told his biographer that the most important historic event of
the
century was that the U.S. and Britain spoke the
same language. What the German autocrat foresaw, I think, was a
20th-century victory for the English-speaking
values of democracy and freedom. He was right.
A while back the New York Times ran a Sunday front-page
story on the spread of English around the world. "English is
the language of the Internet, of movies and music,
of air traffic controllers and captains at sea," the story read. "It is
essential to international business, the means
of communications between Japan and Brazil, Germany and Egypt."
Greater use of U.S. dollars will accompany the
worldwide spread of the English language. Because the Internet is an
English-speaking technology, the dollar will solidify
its role as world money in today's Internet economy. It is King dollar
that will finance global trade and transactions
in the new economy of Internet commerce.
Greenbacks already circulate heavily in Moscow
and St. Petersburg, in the Shanghai provinces of China, through the Pac
Rim, in Mexico City, throughout the Caribbean,
all the way down through the southern cone of Latin America, in Rio and
Buenos Aires.
Individual governments are in denial about this.
They continue to defend their national currencies. But pesos never float,
they sink. And ordinary people know full well
what economist Arthur Laffer coined years ago: only the U.S. dollar has
the
moneyness of money.
So it would be foolish for policymakers to attempt
dollar devaluation; there's an unstoppable historical tide of people and
markets who are voting daily for dollars. Even
a mild form of dollar tinkering turned out to be an absolute disaster in
the
late 1980s, ultimately leading to the 1987 stock-market
crash that foreshadowed a half-dozen years of stagnant growth.
Rubin and Greenspan were absolutely right to revive
the dollar in the mid-'90s. And Bush and O'Neill today would be
making a huge mistake if they change this policy.
Instead, U.S. policymakers should refocus on the
importance of preserving dollar value based on a broad market-basket
of commodities — including gold. This would stabilize
the greenback's purchasing power, rule out inflation and deflation,
and maintain a pro-growth standard of dollar stability
worldwide. Then, President Bush can take the stable dollar and
promote it throughout this hemisphere as the currency
anchor for an American free-trade zone. Dollarization would quickly
spread from Canada to Argentina. And other nations
throughout the world would be encouraged to do likewise.
Think of this: in the next ten or twenty years,
the greenback — and its values of free-market economics and democratic
human freedoms — could become the currency of
choice throughout Russia and China, both of whom are currently linked
to the dollar. This kind of dollarization would
promote world peace and prosperity in ways never envisioned by even the
greatest practitioners of statecraft. In the post-Cold
War era, as George Bush puts his imprint on American foreign policy,
this is a thought that our financial experts should
hold dear.
7-28-01
STATES WITH NO INCOME TAX HIT JACKPOT
Three states with no individual income tax experienced
the
highest gains in total tax revenue between 1990 and 2000,
according to Census Bureau figures.
The three states are New Hampshire, where tax revenues
rose 58
percent; Alaska, with a 57 percent increase; and Wyoming,
at 19
percent.
o Across the nation, state tax
revenues grew to $540 billion
in 2000 -- an increase
of 8 percent over the $500 billion
collected in 1999.
o In general, states receive
most of their tax income from
occupational and
business licenses, income taxes, and so-
called "severance
revenues" - i.e., taxes on non-renewable
resources such as
oil, gas and coal.
o Revenues from such sources
as license fees were up 16
percent, and income
tax revenues climbed 13 percent.
o Severance revenues in the
36 states that impose such taxes
were up 39 percent.
Ryan Horn of Americans for Tax Reform speculates on the
reasons
the three no-income-tax states fared so well. He points
out that
income taxes come from wages and salaries, corporate
profits and
capital gains -- sources that have been vulnerable to
the
economic slowdown. On the other hand, real estate prices
and
consumer spending -- which form the base for property
and sales
taxes -- have continued to be strong.
Source: August Gribbin, "States Experience Increase Revenue,"
Washington Times, July 27, 2001.
For text
http://www.washingtontimes.com/national/20010727-80830632.htm
For more on State & Local Taxes
http://www.ncpa.org/pi/taxes/tax5.html
U.N. REPORT LOOKS AT GENETICALLY MODIFIED FOODS
Such phrases as "sensible analysis" are being used to
describe
the United Nation's Human Development Report 2001, which
considers the promise of genetically modified (GM) foods.
The report warns that opposition to transgenic agriculture
could
endanger the ability of the poorest nations to feed their
populations.
Here are a few of the report's other observations and
conclusions:
o Opposition to GM agriculture
stems from a pervasive "anti-
technology bias,"
especially in Europe -- where some
farmers "have used
public fear of the risk from
genetically modified
organisms to protect domestic
markets" from competition.
o Rich nations must let developing
nations make their own
choices concerning
how to feed their hungry -- and that
choice must, unequivocally
in the report's view, be
biotechnology.
o Agricultural researcher and
Nobel Prize winner Norman
Borlaug predicts
that producing enough food on existing
farmlands to feed
an expected 2.3 billion more mouths by
2025 will require
an astonishing 75 percent jump in
productivity.
o The report suggests that boosting
agricultural yields
protects jungles,
rainforests and other natural areas from
the plow.
Source: Betsy McCaughey, "Agitators Against Modified
Food Miss
Its Humanitarian Benefits," Investor's Business Daily,
July 27,
2001; "Human Development Report 2001: Making Technologies
Work
for Human Development," United Nations Development Program
(New
York: Oxford University Press, 2001).
For report text http://www.undp.org/hdr2001/
For more on Biotechnology
http://www.ncpa.org/pi/enviro/envdex13a.html
July 26, 2001
Commentary
The World Bank Is
Wrong to Oppose Grants
By Adam Lerrick and Allan H. Meltzer. Messrs. Lerrick
and Meltzer are
director and chairman, respectively, of the Gailliot
Center for Public
Policy at Carnegie Mellon University. They served as
senior adviser and
chairman of the International Financial Institution Advisory
Commission
of the U.S. government, and are presently advisers to
the Joint Economic
Committee of Congress. Mr. Meltzer is a visiting scholar
at the American
Enterprise Institute.
As rich countries commit ever more resources to building
a better life for
poor nations, they must cast a more critical eye on the
World Bank's
stewardship of $500 billion in aid flows over the past
50 years. By the bank's
own reckoning, less than one in three of its sponsored
projects in the poorest
countries yields satisfactory and sustainable results.
Forty-two needy countries
now carry a load of $175 billion in official debt they
are clearly unable to repay,
and have nothing to show for it but a 25% decline in
their standard of living
since 1980. Numbers like these call for a major change
in the way aid is
delivered and administered.
Last week, President Bush put forward a plan to move from
loans that disburse
funds before results to outright grants tied to performance.
Opposition has been
orchestrated by the bank around the faulty argument that
grants will deplete its
resources, together with its ability to help the poor,
unless the grants are
accompanied by an immense infusion of new funding --
$800 million more each
year from the U.S. alone.
Superficially, this sounds logical: After all, when money
is given away, instead of
being lent, the stockpile of funds can be expected eventually
to vanish. Not so.
Grants can provide the same amount of aid, make every
dollar more effective,
provide a permanent exit from debt for the poorest countries,
protect donor
contributions from risk of loss -- all without diminishing
the funding pool or
asking for more money from the taxpayers of the industrialized
world. The
advent of sophisticated capital markets makes the difference.
The president focused on the International Development
Association (IDA), the
arm of the bank that offers $6 billion of funding per
year, at near-zero interest
rates, to 72 countries with less than $1,500 per capita
income. Grants could
have their greatest impact in the 59 neediest nations,
where people exist on less
than $2 per day.
There would be a string attached to these gifts. Unlike
the current trend toward
lending sums for indeterminate government plans, grants
would be
project-linked, monitored for results, and paid only
for performance. For the
easily quantified necessities that improve the quality
of life and are the
preconditions for economic growth -- health, primary
education, water and
sanitation -- the grant system would count and pay for
numbers of babies
vaccinated, children that can read, and water and sewer
services delivered to
villages. No results, no funds expended. And no funds
diverted to offshore
bank accounts, vanity projects or private jets.
Grants and loans have the same funding requirement when
the level of aid is the
same. Donors will not have to give more unless they wish
to give more aid. The
IDA extends 40-year loans that carry an interest rate
of 0.75%. The present
value of these payment promises is only 25 cents on the
dollar and translates
into a gift equal to 75% of their value. A loan that
has a 75% gift component
cannot cost more than an outright grant that covers 75%
of program outlays. In
both cases, countries pay the remaining 25%. How can
lending $100 and
asking for only $25 to be repaid be any different from
giving $75? There is a
hidden cost to the present system: The poorest borrowers
seldom repay loans.
In order to discredit the grant concept, confuse Western
donors, and justify
increased resources, the World Bank has swapped apples
for oranges. Their
calculations raise aid levels 33% by comparing grants
covering 100% of
program costs with traditional loans that contain only
a 75% grant element.
Again, if the same level of assistance is maintained,
grants cannot cost more
than loans.
Shrinking resources, caused by the lack of loan repayments
into a circulating
aid pool, are always advanced as a reason to block the
shift to grants. The
bank's practices give the lie to this "reflow" claim,
for many loans are never truly
collected. Most debts are simply recycled to the same
borrowers, with more
added to cover interest payments. Ultimately, many debts
must be forgiven, as
in the current relief initiative that covers 41 of the
neediest nations. Whether
recycled or forgiven, loans are simply grants in disguise.
A grant system would not rely on illusory reflows for
self-sustainability. The
pool of donor funds now used for lending, and future
contributions, would be
transformed into an endowment that invests in the capital
markets and generates
the income to supply grants. There are already $108 billion
of rich-country
contributions on the IDA's balance sheets, partly in
loans and partly in cash.
These cash balances, augmented by future loan repayments,
would be invested
for a conservative 8% return and eventually yield $8.6
billion in grants each
year, while leaving the endowment intact. This stream
will be leveraged by the
capital markets, which will provide financing because
the bank's responsibility
for the lion's share of every payment will greatly reduce
risk. Thus, an identical
$108 billion in outstanding development programs would
be sustained in
perpetuity.
As the IDA moves from lending to grants over a 40-year
transition, the volume
of development programs and the flow of financial resources
to poor countries
would match what would have been delivered by loans.
Failures to repay old
loans would reduce resources, but no more so than under
lending.
Lack of basic arithmetical skills cannot explain the bank's
continued defense of
an outdated method for delivering aid, designed at a
time when direct loans
were the only option. Capital markets are now able to
provide financing, and
willing to tolerate the risk that once deterred projects
in the developing world.
The institution does not welcome a career change from
being an elegant banker
dispensing large volumes of largesse to being a gritty
development agency with
a demanding workload. And it harbors a well-founded fear
that, with grants, it
must account for the effectiveness of programs.
The bank will soon seek replenishment funding for the
IDA, as happens every
three years. The amount of money is significant; last
time, it was $12 billion.
Giving to needy nations is a continuing obligation, but
so is the responsible use
of taxpayers' funds. Finance ministers and legislators
should insist on the use of
grants when making new contributions. The increased effectiveness
of aid might
then encourage them to give more, and with good conscience.
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB996104213569153375.djm
7-23-01
WILL A NEW STRATEGY HELP POOR COUNTRIES -- FOR A CHANGE?
Many low-income countries are developing poverty reduction
strategy papers (PRSPs) in order to qualify for further
low
interest loans from the World Bank and International
Monetary
Fund. The PRSPs are required by a new strategy by the
international government lending institutions introduced
two
years ago, after the failure of the old strategy, called
structural adjustment programs (SAP).
SAPs required currency devaluation and cutting public
spending,
coupled with structural reforms such as privatization
of state-
owned industries and trade liberalization. It has been
blamed for
rising food prices, closed schools and massive lay offs,
and for
delivering the final blow to health systems in poor countries.
o For example, rising food prices
following a 1994 currency
devaluation required
by an SAP increased malnutrition
among young children
and mothers in the Congo.
o In Tanzania, spending on health
and education fell by 40
percent in five
years, and user fees prevented poor people
in rural areas and
pregnant women from accessing health
care, even though
they were supposedly exempt.
o Despite the threat of AIDS,
attendance at sexually
transmitted disease
clinics in Kenya fell by up to 60
percent after user
fees were introduced on the advice of
the World Bank.
o A recent World Bank study
shows that economic growth under
International Monetary
Fund programs has been close to
zero and that the
poor are benefiting least from any
economic growth
that is occurring.
Poverty reduction strategies instead offer good intentions
such
as "national ownership" and "a focus on poverty." They
are
therefore crucial to the future of 78 developing countries
where
poverty is by far the most important cause of ill health.
According to Oxfam, 3.4 million children under five die
in the
highly indebted poor countries each year from easily
preventable
diseases.
Source: Ellen Verheuland (Wemos Foundation) and Mike Rowson
(Medact), "Poverty reduction strategy papers," Editorials,
British Medical Journal, July 21, 2001.
For text http://bmj.com/cgi/content/full/323/7305/120
For more on World Bank
http://www.ncpa.org/pi/internat/intdex13.html
FLOATING CURRENCIES, OR FIXED EXCHANGE RATES?
Floating exchange rates let the free market determine
the value
of a currency as compared to another. Fixed exchange
rates are
political mechanisms "freezing" the value of a currency
as
compared to another. According to the International Monetary
Fund
(IMF), only 11 percent of countries had pegged exchange
rates in
1999, down from 97 percent in 1970. While this suggests
an
increase in floating rates, a recent article argues that
governments are merely claiming to use floating rates.
The research covers 154 exchange rate arrangements in
39
countries during the 1970-99 period. The evidence is
that many
governments claim to have floating exchange rates, but
do not
actually use them:
o The United States and Japan
(two true floating countries)
fluctuated within
a 2.5 percent band of values only 60
percent of the time.
o In contrast, Bolivia and India
fluctuated within the 2.5
percent band as
high as 93 to 94 percent of the time --
indicating monetary
authorities aimed to keep the ratio of
the currencies'
values fixed.
The article breaks down the different regimes into categories
by
their different fluctuation rates within a 2.5 percent
band:
o "True floaters" fluctuated
almost 80 percent of the time
o "Managed floaters" fluctuated
88 percent of the time
o "Limited flexibility" regimes
fluctuated 92 percent of the
time
o "Fixed exchange rate regimes"
fluctuated 96 percent of the
time.
The lack of floating has serious implications in the
interest
rate market:
o Floaters and managed floaters'
interest rates have a 47 to
49 percent chance
of moving within a 0.5 percent range in
any given month.
o The United States and Japan
had an 81 to 86 percent chance
of such movement,
a significantly higher value.
The authors argue that while more regimes may claim to
be
floating regimes, they are keeping fixed regimes by limiting
the
fluctuations allowed by political mechanisms.
Source: "Fear of Floating," Economic Intuition, Winter
2001;
based on Guillermo A. Calvo and Carmen M. Reinhart. "Fear
of
Floating," National Bureau of Economic Research, Working
Paper,
No. w7993, November 2000.
For NBER abstract http://papers.nber.org/papers/W7993
For more Economic Intuition research summaries
http://www.economicintuition.com
7-19-01
Juxtapose the history of England with that of Russia.
What emerges? The importance of private property.
Richard Pipes is
Baird Research
Professor of History
and former
director of the
Russian Research
Center at Harvard
University.
http://www-hoover.stanford.edu/publications/digest/012/pipes.html
I have long wondered why the course of Russian political history differed
so profoundly
from that of the rest of Europe, with which Russia shares a common religion,
a common high
culture, and a common frontier. The periods of freedom and the rule of
law in Russia were
always brief and precarious—fleeting episodes in the long history of autocratic
government
in which the country was governed not by law but by the will of its rulers.
Some time ago, I
concluded that the difference lay primarily in the weak and late development
in Russia of
private property, especially in agricultural land, which until the last
century had provided the
overwhelming bulk of its wealth.
http://www-hoover.stanford.edu/publications/digest/012/pipes.html
Western scholars have traditionally paid scant attention to the function
of private property in
the means of production because they simply took it for granted. The advantage
of
approaching Western history from the perspective of a non-Western country,
such as Russia,
is that you cannot help but notice the enormous role that private property
has played in the
West's evolution since the earliest times.
Economic historians such as Douglass North, David Landes, and Tom Bethell
have shown
recently how critical the institution of private ownership is for the development
of the
economy. The thesis has been reinforced by Hernando de Soto's studies of
the contemporary
Third World, which demonstrate how the absence of clear property rights
in these societies
inhibits the growth of credit and, consequently, retards economic development.
You can have tyranny with private property, but you cannot have freedom
and the
rule of law without it.
However, my emphasis here is not on the economic but the political and
legal dimension of
property rights. My argument is that such rights are a necessary if insufficient
attribute of
freedom and the rule of law—that is, you can have tyranny with property,
but you cannot
have freedom and the rule of law without it.
A TALE OF TWO NATIONS
A comparison of the political evolution of England and Russia presents
as striking a contrast
as one can find in European history.
That England is the home of parliamentary democracy needs neither proof
nor elaboration.
Nor is it necessary to stress that our modern concept of civil rights derives
from the English
experience. The question that does require an answer is why these institutions
and concepts
first emerged in this relatively small island off the continental coast.
My explanation has to do with the early emergence in England of land ownership.
Recent
research has shown that already in the early Middle Ages land was freely
bought, sold, and
bequeathed in England, even during the feudal period, when nominally all
of it belonged to
the king. This fact had a profound bearing on England's political destiny.
By 1300 English
kings found that they were unable to maintain the court and administer
their realm from their
own resources, as medieval theory required. As a result, they had to convene
the House of
Commons, which alone had the power to vote the Crown the required subsidies.
For the next
400 years, as the private resources of the Crown steadily diminished through
land grants and
sales, and its income declined from inflation, the Crown's reliance on
Parliament steadily grew.
In return for granting subsidies, Parliament demanded ever new powers from
the monarchy.
By the end of the seventeenth century, the Crown had become almost entirely
dependent for
its revenues on parliamentary subsidies and royal authority had declined
to the point where
the center of power had shifted to the House of Commons. This reality was
sealed by the
Glorious Revolution of 1689 and the Bill of Rights that accompanied it—the
basis of all
modern political democracy, our own very much included. As Edmund Burke
remarked, the
"great contests for freedom [in England] were from the earliest times chiefly
upon the
question of taxing."
Law, too, is closely dependent on property. Jeremy Bentham correctly wrote
that where there
is no law there is no property, and where there is no property, there is
no law. Already in
seventeenth-century England, the courts were mainly occupied with property
disputes.
If we look at Russia, we find a very different picture. Medieval Russia
knew institutions and
procedures very similar to the English. I have in mind the great commercial
principality of
Novgorod, which in its days of glory in the fourteenth and fifteenth centuries
rivaled
Moscow. Its wealth was in private hands; its rulers were elected. On taking
office, the prince
of Novgorod had to swear an oath not to acquire property so that he would
be financially
dependent on his subjects. Legislative power rested in a popular assembly
called the veche.
Unfortunately for Russia, in the late 1400s Novgorod was conquered by its
militarily more
formidable neighbor, Moscow, which was organized on a very different principle.
The rulers of Moscow rose to preeminence among the scattered principalities
as agents of the
Mongol khans, who employed them to maintain order in their Russian realm
and collect the
tribute. In this capacity, the Moscow princes ruled ruthlessly and without
any controls by the
veche, which the Mongols had abolished throughout Russia except in Novgorod
and Pskov.
As soon as the Moscow princes had emancipated themselves from Mongol control,
toward
the end of the fifteenth century, they began first to restrict and then
to abolish property rights
in land.
In time, all Russian nobles had to serve the monarch: they held their land
in conditional
possession only as long as they served him to his satisfaction. Because
he owned all the
productive resources of his realm, the tsar had no need to convene representative
bodies—he
could tax at will. Nor did he have to concede his subjects any rights:
until late in its history,
Russia knew only duties, not rights. The ruler was both sovereign and owner
of the country, a
type of regime for which political sociologists have coined the term patrimonial.
Russia
closely resembled the ancient Oriental despotisms such as those in Mesopotamia
and
pharaonic Egypt, where the rulers were the exclusive owners of all that
lay within their
domain.
In the modern world the main enemy of freedom is not tyranny but the striving
for
equality—equality interpreted not as equality of opportunity or equal treatment
by
the law but equality of reward.
By juxtaposing the historical evolution of England and Russia, the historian
becomes aware of
the importance of private property for the emergence of political and civil
rights. The owner
becomes a co-sovereign: his assets limit the power of the state, partly
because they are
outside the reach of the ruler's authority and partly because the ruler
depends on them for
fiscal solvency.
THE MODERN ERA: TOTALITARIANISM AND THE WELFARE STATE
Now let us turn to the twentieth century and show how unfavorable it was
to both property
and freedom. Communist Russia is, of course, an obvious example. Within
two or three years
of seizing power, Lenin abolished, in favor of the state, all private property
except small
landholdings. Ten years later Stalin completed the process by "collectivizing"
agriculture (i.e.,
nationalizing all land and turning farmers into state chattel). On the
eve of World War II, some
98 percent of all the productive wealth of the Soviet Union belonged to
the government or,
more precisely, the Communist Party. The effect this had on the political
and civil rights of
Soviet citizens requires no elaboration: they were totally wiped out.
The same applies, though to a lesser degree, to fascist Italy and Nazi
Germany, which are
often erroneously depicted as "capitalist" societies. True, both Mussolini
and Hitler tolerated
private property in the means of production but only as long as it served
the state. In the
early 1920s Hitler explained to a journalist his views on the subject:
I want everyone to keep the property he has acquired for himself according
to the
principle: the common good takes precedence over self-interest. But the
state must
retain control and each property owner should consider himself an agent
of the state. .
. . The Third Reich will always retain the right to control the owners
of property.
And indeed, this right the Nazi state asserted when it came to power by
controlling dividends,
interest rates, and wages. In regard to agriculture, it reserved to itself
the authority to
expropriate any farm that did not produce foodstuffs to its satisfaction.
So what we had here
was property in a very limited sense, more like a trusteeship than ownership
in the true
meaning of the word.
Finally, let us consider the modern welfare state. The Western democratic
state, I believe,
while upholding the principle of property rights, nevertheless subtly violates
them. I am
troubled by the fact that through taxation and the pursuit of wealth distribution,
the welfare
state gains control over an ever greater share of the nation's wealth.
In the United States, the
federal, state, and local governments manage approximately one-third of
GDP. In Europe the
situation is still worse: the British government disposes of 42 percent
of GDP and the German
government more than 50 percent. By contrast, the seventeenth-century British
and French
governments controlled a mere 7 percent of their respective national products.
This growing share of the nation's wealth at the state's disposal naturally
enhances its
powers correspondingly. Through the Civil Rights Act of 1964, for example,
Washington has
been able to determine who is hired in much of industry and in nearly all
universities, violating
the contractual rights of its citizens. Through legislation such as that
affecting wetlands, it
can prevent owners of land from using it as they see fit. In fighting drug
crimes, it takes
advantage of forfeiture procedures, confiscating properties that happened
to have been
involved in drug use or trade.
In general, I argue, in the modern world the main enemy of freedom is not
tyranny but the
striving for equality—equality interpreted not as equality of opportunity
or equal treatment
by the law but equality of reward. Because people are unequal in their
talents and ambitions
and thus acquire worldly goods in unequal measure, they can be made to
share what they
have only by coercion—and this coercion not only abolishes freedom but
precludes equality
as well. For in order to enforce coercion, the state needs an appropriate
coercive
apparatus—and the people who are in charge of it quite naturally demand
privileges of all
sorts for their services.
The Soviet Union sought to institutionalize economic equality among its
citizens in the most
determined and ruthless manner ever attempted. And yet after 70 years of
unprecedented
tyranny costing the lives of millions, it produced a state that was not
only unfree and
miserably poor but socially highly lopsided, with an elite that enjoyed
a Western standard of
living and masses that lived on a Third World level.
Rather than pursue the phantom of perfect equality, we should make certain
that people are
given every chance to improve themselves, while ensuring a minimally decent
living standard
for the less fortunate. This will not stifle liberty; nor will it create
the conditions that prevailed
in every communist country: general apathy and hopelessness.
Special to the Hoover Digest. This essay is adapted from a talk given at
the
Hoover Institution on May 2, 2000.
Richard Pipes's essay "The Cold War: CNN's Version" appears in the Hoover
Press book CNN's Cold War Documentary: Issues and Controversy, edited by
Arnold Beichman. Also available from the Hoover Press is More Liberty Means
Less Government, a volume of essays by Walter E. Williams. To order, call
800-935-2882.
WHAT IS NECESSARY FOR ECONOMIC GROWTH?
The World Bank has virtually nothing to show for its 50-year
effort to alleviate poverty in the developing world.
Indeed, most
people living in poor countries have seen their living
standards
decline for decades.
When the World Bank and the International Monetary Fund
were
established after World War II, the dominant theory said
economic
growth was a function of capital, meaning goods-producing
plant
and equipment, or "machinery." All one needed to do,
it was
thought, was to increase investment and growth would
follow.
Foreign aid would provide the capital missing from underdeveloped
nations.
As economist William Easterly shows in "The Elusive Quest
for
Growth" this policy didn't work because of diminishing
returns.
Giving a seamstress with no equipment a sewing machine
will
increase her productivity a lot. But giving her another
one will
not, because she can only work on one machine at a time.
Although
some capital is necessary for growth, simply giving capital
to
those without it -- i.e., foreign aid -- is unlikely
to stimulate
growth.
It is technology and the worker's knowledge of how to
use it that
really creates the growth, as Easterly shows, not the
machinery
per se.
For example, Bangladesh became a world leader in textile
production because a Korean company invited 130 Bangladeshi
workers to learn its production methods, in return for
a
percentage of the profits in future enterprises. Almost
all of
the workers went on to establish successful textile companies
of
their own.
Foreign aid, like welfare, Easterly complains, tends to
reward
bad behavior and thus actually retards growth. A "tough
love"
solution -- cutting off nations that don't shape up,
rewarding
those that do -- would work better.
Source: Bruce Bartlett, senior fellow, National Center
for Policy
Analysis, "The Hazards of Throwing Money at the Problem,"
review
of William Easterly, "The Elusive Quest for Growth" (MIT,
2001),
Wall Street Journal, July 18, 2001.
For text http://www.ncpa.org/oped/bartlett/bartlett01.html
For more on Economic Growth & Technology
http://www.ncpa.org/pi/internat/intdex3.html
W
7-17-01
Tuesday, July 17, 2001
Dueling Studies Square Off on Causes of Economic Growth
By: Kevin A. Hassett, Resident Scholar, AEI
In my previous entry, I argued that the economic data were
beginning to suggest that the economy was turning a corner,
and that a traditional recession may well have been averted.
Since that time, jobless claims jumped up, suggesting that
some risks are still there, but other things, retail sales in
particular, lined up pretty well with the picture of the
economy that I described last time. Economic growth looks
low, but positive. Things feel so bad because they were so
astonishingly good a short time ago.
So these bad times look like they will be better than they
have ever been. Going forward, the key question is, have
good and bad times ratcheted up permanently? Or did we just
live through a boom and bust period that was a one-time-only
experience? A new study from the National Bureau of
Economic Research suggests that the arguments on the side
of better times forever are stronger than ever.
In the study, "Is Growth Exogenous? Taking Mankiw, Romer,
and Weil Seriously," Professors Ben Bernanke and Refet
Gurkaynak of Princeton contrived a very clever experiment
that may help change the way economists think about
economic growth. As you can tell by its title, there is a little
lingo involved in the debate, so here's a little background.
Robert Solow, the Nobel prize-winning economist, shocked the
profession in 1956 when he provided an elegant proof that
economic growth over long periods may well be exogenous.
An exogenous variable is one that we really have no control
over, such as weather. An endogenous variable is one we can
affect, like government spending or taxes. Solow showed that
while the economy certainly can have ups and downs, over
time these may well cancel out each other. Under Solow's
view, what drives economic growth in the long run is really
technological change and innovation. Those advances come
in such fits and starts that they may well be approximately
exogenous.
Subsequently, Paul Romer of Stanford and others developed
models within which growth was endogenous. The logic
behind their work was pretty straightforward. Innovations
occur because of investments we make. We buy computers
so we can study things faster. Once we have a computer, we
can find new things more quickly than we could before. The
investment in the computer permanently raises the growth
rate. Growth is, according to this view, endogenous.
The debate stayed mainly theoretical until 1992, when a
path-breaking paper written by N. Gregory Mankiw, Romer,
and Phillippe Weil demonstrated that Solow's growth model
described the variation in growth across countries fairly well
once one controlled for the level of skill of the workers in a
given country. Ever since I've read their paper, I have felt
strongly that the case against the endogenous growth models
is fairly strong, if not 100 percent convincing.
Enter Bernanke and Gurkaynak. They update the Mankiw,
Romer and Weil paper by extending the Solow model to also
include endogenous growth aspects. Having done that, they
then ran a horserace. Sure, the Solow model fits pretty well,
but can we improve the fit by using the endogenous growth
models to influence our specification? Solow is good, but does
he really beat Paul Romer?
To perform their test, Bernanke and Gurkaynak gathered data
from many countries and let the horses run. Their conclusion:
"…long run growth is significantly correlated with behavioral
variables…and …this correlation is not easily explained by
models in which growth is treated as the exogenous variable."
In other words, there is more than blind luck to economic
growth in the long run. The approach adopted by Bernanke
and Gurkaynak will certainly launch a thousand papers and
their conclusions may well end up being overturned. But if
they are right, here is what it means for us today.
We have been investing an enormous amount of resources in
capital and education. These investments permanently
increase the level at which we innovate, and this permanently
raises the level of growth around which our economy
fluctuates. We may have just experienced a new economy
recession with low but positive growth, but that does not
mean that the high growth of the past few years is a thing of
the past. Our investments, Bernanke and Gurkaynak's work
suggests, will help the country return to a higher growth path
quickly.
http://www.techcentralstation.com/greenbook.asp
WSJ
What Argentina Needs
By Mary Anastasia O'Grady. Ms. O'Grady edits the Americas
column.
Last week, Argentina's capital markets crashed, increasing
international fears
of an Argentine default or devaluation. The government
has responded by
promising, yet again, to cut its fiscal deficit. But
the real problem is that the
Argentine economy isn't growing -- and it isn't likely
to until there's a radical
shift in the country's economic policies.
Argentina's risk premium shot through the roof last week
when investors
demanded a 14% annualized rate of return on three-month
bills, well above the
9% return in the last auction two weeks earlier and the
12% rate that the
market had expected. Investors concluded that domestic
interest rates would
remain high, that the three-year-long economic recession
would continue and
that Argentina was rapidly moving closer to the day when
it would be unable to
service its $128 billion in public-sector debt. When
the International Monetary
Fund then announced that no new aid was planned for its
star pupil, the
statistical probability of default went up further.
Free Fall
A free fall in Argentina's capital markets ensued. By
the end of the week,
overnight Argentine interest rates had touched 400% and
the country's
benchmark floating rate bond fell 20%, to yield 35%.
Economy Minister
Domingo Cavallo had hoped to create a virtuous cycle
of confidence when he
took over in March; by Friday afternoon, all confidence
was gone.
Argentina is now promising to cut its budget by $1.4 billion,
and to erase deficit
spending by paying public-sector salaries only to the
extent that revenues are
available. But the political consensus necessary to carry
this out is still uncertain.
Some voices inside the ruling Alliance coalition -- which
had opposed wage
cuts -- now have agreed to support the measures in principal.
But many labor
leaders, congressmen and opposition party provincial
governors remain
uncommitted.
Yet even if all the players in this drama climb aboard
the austerity wagon -- and
that's a big "if" -- it is doubtful the strategy will
produce the confidence shock
needed to jump-start the economy.
For its nearly three years of recession, Argentina has
followed conventional
IMF advice, focusing on the fiscal deficit as the source
of all evil and trying to
force tax increases and spending cuts on a limping economy.
This has not only
failed to close the deficit, but has alienated investors
looking for a pro-growth,
low-tax environment for their capital.
Despite a rapid increase in government spending over the
past decade, it is
economic stagnation, not an oversized debt load, that
is the nub of the problem.
In fact, at 45% of gross domestic product, the country's
public-sector debt isn't
unreasonable. Moreover, Argentina has a relatively healthy
capital structure,
with only about $9 billion in debt to roll over in the
second half of 2001.
Compare this to Brazil, which will roll over about $29
billion by year end.
It is the languishing economy that makes the public-sector
debt a worry. To
make matters worse, some economists from up north are
now calling for a
devaluation on the grounds that printing local currency
is the policy tool needed
to stimulate the economy. (This would require an undoing
-- either legally or by
decree -- of the 1991 convertibility law anchoring the
peso to the U.S. dollar
and prohibiting the printing of pesos without dollars
to back them.)
Devaluation is a bad idea, and not only because the country's
balance sheet is
so heavily dollarized or because of Argentina's history
of hyperinflation. The
real trouble with devaluation is that it will allow the
privileged classes to once
again mask the inefficiencies of the closed and heavily
regulated economy, and
to pass the costs on to the poor through inflation, as
they did for many years
before convertibility.
Instead, Argentina should officially dollarize. This will
get rid of the uncertainty
surrounding the government's commitment to the convertibility
law, a major
variable adding to the country's high risk premium. It's
not clear why the
government is resisting this, unless of course it wants
to hold on to its option to
pull the rug out from under peso holders. Mr. Cavallo's
decision last month to
create a separate exchange rate to subsidize exporters
and punish importers
didn't help. Rather, it served as a reminder of the time-honored
Argentine
tradition of sacrificing private property rights for
the "public good."
In fact, efforts to monkey around with the stable Argentine
peso underscore the
country's most fundamental problem: There is no rule
of law, only a rule by
majority which grants government unlimited power to arbitrarily
transfer wealth
according to popular will.
The political system in Argentina has grown dysfunctional
precisely because the
government has habitually granted privilege in return
for power. French
economist Frederic Bastiat warned in his 1850 publication
"The Law" that such
practices eventually corrupt a system. "Under the pretense
of organization,
regulation, protection or encouragement, the law takes
property from one
person and gives it to another; the law takes the wealth
of all and gives it to a
few -- whether farmers, manufacturers, shipowners, artists
or comedians.
Under these circumstances, then certainly every class
will aspire to grasp the
law, and logically so."
It followed, said Bastiat, that the less privileged would
also demand to use the
law for their own profit, which would entail the right
to relief -- to "organize
Beggary on a grand scale." Bastiat rightly anticipated
how difficult it would be
to change once socialism had enshrined the taking of
property in the law.
Argentina's socialist-democracy is squarely at odds with
the convertibility law,
which since 1991 has blocked politicians from tampering
with the peso and
sneakily shifting the cost of inefficiency to the public
at large. Stripped of its
power to create money, the government has resorted to
any number of other
assaults on private property and competition -- including
aggressive and
complex tax measures and increasing economic protection
for domestic
producers -- in order to sustain its generous entitlement
system and archaic
labor laws. This warring against economic freedom has
chased away capital.
And so now international socialist retreads are back,
waving the banner of
devaluation.
Two important symbols of a broader Argentine unwillingness
to acknowledge
market forces are Banco Nacion, the state-owned bank
with a long history of
corruption scandals, and Mercosur, the highly protectionist
customs union that
has perpetuated Argentine inefficiency, discouraged investment
and made the
country especially vulnerable to Brazil's beggar-thy-neighbor
currency policy.
But despite piles of evidence that these institutions
undermine growth, they
remain stubbornly protected.
Restructuring
International market forces are pushing Argentina to control
government
spending. They are also demanding a reversal of the country's
long tradition of
hostility toward capital, private property and competition.
Advocates of a
modern economic restructuring believe that this crisis
may force the change. But
the possibility also exists that Argentina's socialist
politicians and intellectuals,
who are now blaming the crisis on globalization, might
succeed in reversing the
gains of the past decade. This would be devastating for
U.S. interests.
The current crisis calls for U.S. leadership to support
the good guys by playing
its only card: international trade. A bilateral free-trade
agreement for Argentina
could, in one fell swoop, dethrone protectionists, reaffirm
the dollarized
economy and rejuvenate confidence. The alternative is
unthinkable.
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB995331091924526914.djm
7-12-01
TAX CUTS PROPELLED IRISH MIRACLE
Unlike politicians in other European countries, Ireland's
leaders
paid serious attention to Reaganomics and have slashed
taxes over
the years in a supply-side effort to revive the nation's
economy.
They succeeded.
Fifteen years ago, Ireland was the "sick man of Europe"
-- with
15 percent unemployment and government spending that
consumed
more than 50 percent of output. Today, Ireland is known
as the
"Celtic Miracle."
o The turnaround was accomplished
in large measure by
dropping corporate
tax rates from 50 percent to 20
percent, reductions
in personal tax rates from 65 percent
to 42 percent, along
with capital gains tax rates which
fell from 60 percent
to 20 percent.
o Today, unemployment is down
by nearly 10 percentage points
and the economy
is expanding at about 9 percent annually.
o So successful has Ireland been
that it now has to import
workers -- a strange
twist for a nation that traditionally
has seem many of
its people emigrate in search of jobs.
So how does the rest of Europe feel about this? Petulant.
o High-tax nations such as France
are upset that Ireland has
lowered tax rates
-- which they call a form of "unfair"
competition.
o European bureaucrats even sputter
that low taxes are a
form of "state aid."
A few months ago, the European Union voted to condemn
Ireland's
supply-side tax policy for causing "too much" growth.
Irish
voters have responded by rejecting the EU's plan to expand
its
membership, which would have required Irish taxpayers
to
subsidize industry in those countries.
Source: Daniel Mitchell (Heritage Foundation), "Vote that
Spooked
Europe?" Washington Times, June 26, 2001.
For text
http://www.washtimes.com/commentary/20010626-20308056.htm
For more on Ireland http://www.ncpa.org/pi/internat/intdex9.html
7-11-01
CANADA'S TAX FREEDOM DAY COMES FIVE DAYS EARLIER
Canadians finally started working for themselves on June
29,
2001, according to the Fraser Institute's annual Tax
Freedom Day
calculations.
o Canadians worked until June
28 to pay the total tax bill
imposed by all levels
of government -- a five-day
improvement over
last year, when Tax Freedom Day fell on
July 4.
o While recent Tax Freedom Days
have shown a leveling off of
the tax burden and
hence a halt to the advance of Tax
Freedom Day, the
day this year is 57 days later than it
was 40 years ago.
o In 1961, the earliest year
for which the calculation has
been made, Canadian
Tax Freedom Day was May 3.
The total tax bill includes income taxes, sales taxes,
property
taxes, profit taxes, health, social security and employment
taxes, import duties, license fees, taxes on alcohol
and tobacco,
natural resource fees, fuel taxes, hospital taxes, and
a host of
other levies.
Analysts say that 1999, or possibly 2000, may have been
the
latest Tax Freedom Day in Canadian history. That is because
the
federal government and all provincial governments have
cut income
tax rates in recent years. Federal tax brackets and exemptions
are once again fully indexed to inflation. Several provinces,
most notably Alberta and Ontario, have begun to implement
corporate income tax cuts.
The study also found that the tax burden is distributed
progressively -- that is, unequally:
o In Canada, the top 30 percent
of income earners pay 65.3
percent of all taxes
and earn 58.2 percent of all
income(see figure
http://www.ncpa.org/pd/gif/pd071001a.gif ).
o The bottom 30 percent of all
income earners pay 4.4
percent of all taxes
and earn 9.2 percent of all income.
Source: Jason Clemens and Joel Emes, "2001 Tax Freedom
Day," June
26, 2001, Fraser Institute, 4th Floor - 1770 Burrard
Street,
Vancouver, B.C., V6J 3G7, (604)688-0221.
For text
http://www.fraserinstitute.ca/media/media_releases/2001/20010628.html
For more on Canada http://www.ncpa.org/pi/internat/intdex9.html
7-10-01
UNDERGROUND ECONOMY PREPARES FOR THE EURO
Over the next few months, countries in the European Union
are
withdrawing their individual currencies and coins from
circulation and replacing them with something called
the "euro."
The euro has not become as popular outside Europe as expected.
Although it was initially valued at $1.19, it has fallen
fairly
steadily to a current value of just 86 cents.
Europeans have even take steps to give euros an advantage
over
dollars, by printing large quantities of 1,000 and 500
euro notes
-- much bigger than the largest U.S. currency in circulation,
the
$100 bill.
Large denominations are preferred in the underground economy
--
which includes not only criminal activity, such as drug
dealing,
but much ordinary commerce that people simply wish to
avoid
reporting to tax collectors.
Because taxes are so much higher in Europe, the underground
economy there is about 50 percent larger than here.
U.S. dollars have been preferred in the underground economy,
which explains why the U.S. "exported" more than $22
billion of
currency in 1999.
In Europe, rather than drawing the suspicion of law enforcement
by converting their local currencies to euros, those
with large
stashes of cash have been buying real assets.
o In Spain, this has led to a
real estate boom that has
driven housing prices
up by 27 percent in the last 2
years.
o In the Netherlands, the unexpected
repatriation of
underground cash
from abroad has caused the guilder to
fall by 7.9 percent.
It would help the dollar compete if the Treasury once
again
issued $500 bills.
Source: Bruce Bartlett, senior fellow, National Center
for Policy
Analysis, June 27, 2001.
For text http://www.ncpa.org/oped/bartlett/bartlett01.html
For more on Currency Issues
http://www.ncpa.org/pi/internat/intdex2.html
WSJ May 1, 2001
Global View
The Race Pitting the ECB Tortoise Against the Fed Hare
By GEORGE MELLOAN
M ichael Mussa, chief economist for that fountain of economic
wisdom
known as the International Monetary Fund, was much annoyed
at the European
Central Bank last week. On the eve of a meeting in Washington
of the top
moneymen of the G-7 leading industrial countries, the
ECB just wasn't playing
the game. The case for a cut in the ECB's key interest
rate was "unambiguous,"
said the IMF guru. But the ECB refused to do it.
Mr. Mussa wasn't the only one raging at the ECB and its
president, Wim
Duisenberg. Stock brokers, finance ministers and politicians
of all stripes were
accusing the ECB of blocking efforts to juice up the
flagging world economy
with cheaper credit.
Mr. Duisenberg's reply: That isn't our job.
What a brazen response! Doesn't the obstinate Dutchman
know that central
bankers rule the world? Wasn't he told countless times
that it was now his turn
to follow the Alan Greenspan example and slash interest
rates? The
combination of cheap credit in both the U.S. and Europe
would surely get the
world economy humming again. How dense could the ECB
president be?
Well, maybe not quite as dense as his critics think. About
the only people who
know that central bankers are not masters of the universe
are the central
bankers themselves. They can increase or decrease liquidity
in the currencies
they manage and that's about all. That, of course, can
be useful at times,
especially when an economy suffers a loss of liquidity
as a result of some shock,
for example a stock-market bust or a big bank failure.
But that is about the limit
of their powers. They don't even have direct control
over interest rates, which
are influenced by credit demand and, most particularly,
inflation fears.
Sometimes these diverge significantly from central bank
target rates.
Mr. Greenspan took timely action last month in slashing
the Fed's target
"federal funds" rate by half a point in response to a
stock-market swoon. That
seems to have pumped some new life into the market. Successive
rate cuts
amounting to two percentage points since the beginning
of 2001 may have been
a factor as well in a better-than-expected annual economic
growth rate of 2%
in the first quarter. Mr. Greenspan is again looking
like a magician whose
wizardry may have headed off a major slump in the U.S.
and world economy.
It's no wonder that so many people are railing at Mr.
Duisenberg for not
following the Greenspan lead.
But, for better and for worse, Mr. Greenspan has discretionary
powers not
available to Mr. Duisenberg. U.S. law gives him the dual
mandate of
maintaining a sound dollar and promoting full employment.
Mr. Duisenberg has
only one mandate, ensuring that the euro, which the ECB
manages, retains its
value. The Maastricht Treaty, which created the ECB,
also explicitly insulates
the central bank from political pressure, at least in
principle. Europeans who
wrote that treaty knew from bitter history what ravages
can be worked on an
economy by inflation caused by political pressures on
central banks to monetize
government overspending.
Europe has fared well under the thus-restricted ECB. Inflation
in the 12-nation
euro zone is 2.6%. While that is above the ECB's 2% target
rate, it compares
quite well with the Fed's performance. The U.S. consumer
price index rose at a
seasonally adjusted annual rate of 4% in the first quarter.
That is beginning to
move into the discomfort zone, and the Fed was taking
a calculated risk with its
latest sharp rate cut. It no doubt assumed that if a
rate cut could generate more
domestic economic activity, economies of scale might
help suppress price
increases in some products. Of course, that can work
the other way, if added
demand puts pressure on limited supplies. At any rate,
the Fed has to keep its
eye on its mandate to finance full employment. Congress,
which in turn keeps
an eye on the Fed, is quite interested in that aspect
of the central bank's work.
Thus, you have two central banks, each creating and managing
a fiat currency
used by a large population. The ECB is more restricted
by its mandate, and that
is reflected in a lower inflation rate in the currency
it manages. Which policy
works best?
The answer may well lie in the future. Mr. Greenspan is
now the hero of the
markets and Mr. Duisenberg the villain. The dollar remains
strong in
international currency markets, which suggests that the
Fed hasn't yet gone to
excess. Indeed, one reason it is strong is that it has
become a "parallel"
currency in countries, such as Russia and Argentina,
that have unreliable
national currencies. And the U.S. still attracts both
direct and portfolio
investment from all over the world, as dollars put in
the hands of foreigners by
the huge U.S. trade deficit supply capital to the U.S.
The euro has lost 24% of its dollar value since its introduction,
no doubt in part
because the ECB chose to maintain a significantly lower
target interest rate than
the Fed. At least it did up until last week, when the
Fed came down to 4.5%
against the ECB rate of 4.75%. So European interest rates
have been less
attractive to investors than those in the U.S. But the
dollar-euro rate now seems
to have stabilized, and the euro rose a bit when the
ECB last week chose to
stand pat. Interestingly, the change in relative target
rates doesn't seem to have
had much effect on market rates. It is still cheaper,
on the whole, to borrow
long term in Germany than in the U.S.
But remember the limitations of central banks. The economies
of both the U.S.
and Europe have problems that are not susceptible to
central-bank treatment.
Germany, for example, can't make much of a dent in its
high unemployment rate
because it has some of the highest labor costs, and most
generous support for
the idle, in the world. The U.S. has a far more adaptable
economy than most in
Europe, but the politicians and environmental lobbies
of California have trashed
the electric power system through mindless regulation,
with as yet unknown
economic consequences.
The Fed can't bring sanity back to California. All it
can do is try to gauge the
demand for dollar liquidity accurately enough to prevent
that 4% inflation from
going to 5% or 8% or 10%. If it fails, the securities
markets will be the first to
feel the damaging effects. The ECB will continue to be
as conservative as it has
been in the past. That doesn't mean that it will always
get things right. But at
least it will probably do better than the IMF has done
with the advice it hands
out so freely.
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB988670063518860354.djm
WSJ May 1, 2001
Commentary
IMF Early Warning Should Start on the Web
By Steve H. Hanke. Mr. Hanke, a professor of economics
at Johns
Hopkins University, is chairman of the Friedberg Mercantile
Group, Inc.
E ver since the 1995 Mexican peso devaluation, the International
Monetary
Fund has sworn that such messy bailouts would not recur
because it was
developing an early warning system. Yet after this weekend's
G-7 meeting,
Horst Kohler, the fund's managing director, found it
necessary to pledge that
the central focus of his tenure at the IMF will be --
what else? -- the delivery of
an early warning system.
An IMF early warning system, if it worked, would be a
major breakthrough for
the fund. After all, prior to the currency crises in
Mexico, Asia, Russia, Brazil
and Turkey, the IMF's silence was deafening. And if that
isn't bad enough, the
IMF has often failed to acknowledge a crisis, even after
it has erupted, the
latest example being the Turkish lira's meltdown last
November.
One reason why the IMF has failed to anticipate crises
is that many central
banks do not produce accurate and current information.
In fact, central banks
have a history of hiding information and, yes, lying.
In the 1930s and '40s, both
Britain and Germany misstated their gold reserves to
fool the other one about
its strength. In more recent times, central banks of
emerging-market nations
have been the flimflam artists.
The National Bank of Ukraine, in 1996 and 1997, overstated
its net foreign
reserve position, allowing Ukraine to con the IMF. In
1997, the Bank of
Thailand hoodwinked the IMF by not revealing the fact
that, in off-balance
sheet transactions, it had sold $23.4 billion in foreign
exchange on the forward
markets. Consequently, before the collapse of the baht
in July, Thailand's
foreign-reserve cupboard was virtually bare.
The Bank of Indonesia illegally lent billions of dollars
to commercial banks,
which put up no collateral. I, not the IMF, uncovered
the problem when I was
advising then-President Suharto in 1998. An official
audit later found this
practice had left the bank insolvent. So much for the
IMF's early warning
prowess.
At present, there are 174 central banks in the world.
Only 124 have Web sites.
Consequently, 50, ranging from the central banks of Afghanistan
to Yugoslavia,
report no useful information. These countries may be
poor, but poverty is no
excuse for not setting up a minimal, inexpensive Web
site. Just what do they
have to hide?
The IMF, which keeps a lot of these nations afloat, demands
current and
accurate disclosure of central banks' conditions. Financial
markets operate in
real time; a month-old paper report is useless. So what
better way is there for a
central bank to open its books than on the Web?
What should central banks be required to disclose? There
is nothing more
important than a consolidated balance sheet, revealing
monetary liabilities, the
make-up of those liabilities, net domestic assets, and
net foreign reserves.
Yet even those central banks that operate Web sites fare
poorly. Only 82 post
some form of a balance sheet. Of those, only 14 display
current balance sheets
in which weekly or semi-monthly data are published within
two weeks.
But this isn't the end of the story. To find the 82 balance
sheets is nothing less
than a nightmare. Only four countries -- Argentina, Aruba,
Costa Rica and
Slovakia -- link their balance sheets directly to their
home pages. Of the
remainder, the balance sheets for 26 countries can be
obtained in two clicks of
a mouse; the rest are three to six clicks away -- if
you know where to look.
Once you find the balance sheet, it takes serious detective
work to interpret the
financials because there is no standardization there
either. Central banks need
the equivalent of the private sector's International
Accounting Standards
Committee to set rules on disclosure.
Not surprisingly, only countries that installed currency
boards in the 1990s are
exceptions to this mess. They have no monetary policies
and nothing to hide.
Consequently, their Web sites contain current balance
sheets.
One concludes from this that central banks with no Web
sites, or those that say
little, have something to conceal. The IMF should mandate
that any country
without a current balance sheet displayed in English
and in an orthodox fashion
on the Web site's home page, does not qualify for IMF
support. Before this is
accomplished, the IMF's much-vaunted early warning system
will remain
chimerical.
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB988674088825034653.djm
WSJ April 27, 2001
The Americas
A Rule of Law Emerges In Mexico, Slowly
By Luis Rubio. Mr. Rubio is director of the Center of
Research for
Development, a political and economic research institute
in Mexico City.
T en years ago, when Vicente Fox was the candidate of
the National Action
Party (PAN) for governor of the state of Guanajuato,
the country's electoral
commission was controlled by the ruling Institutional
Revolutionary Party (PRI)
and the electoral process was a black hole. That election
was marred by
irregularities, but Mr. Fox had no legal channels to
contest it. So he took to the
streets to protest and, after several days of public
unrest, new elections were
called and a PAN mayor took over as interim governor.
In the new elections,
Mr. Fox won the governorship.
Much has changed in Mexico since then. Elections are
no longer the main subject matter of political disputes in
the country. In fact, Mr. Fox was able to prevail in the
presidential contest in July 2000 precisely because
Mexico now has an independent electoral authority and
a credible Federal Electoral Tribunal. Together, they
succeeded in producing a fair, transparent election.
This is a change for the better in Mexico's rule of law.
Yet, on balance, a rule of law is still sorely lacking. Mr.
Fox has vowed to remedy the problem, but it will be a
long uphill struggle.
To support a market economy and long-term development,
Mexico needs a
rule of law based upon three elements. The first is the
political and legal
guarantee of both civil liberties and property rights.
The second is the existence
of an efficient judicial branch to cut transaction costs
and effectively limit the
predatory behavior of authorities, especially bureaucratic
agencies. The third is
legal security such that citizens can plan toward their
goals in the context of
well-known rules, certain that the authorities will not
use coercive power
arbitrarily against them. Under a rule of law, authorities
cannot affect the sphere
of individual rights unless such a prerogative is given
them by law and only if
such laws are written without reference to specific persons,
places or times.
Affected individuals must be guaranteed a hearing or
due process.
In Mexico today, citizens do not have uniform access to
a proper judicial
process. Many prosecutors enjoy the option of choosing
the judge of their
preference, with all the opportunities for corruption
one can imagine.
Arbitrariness and corruption are the rule, rather than
the exception. Justice for
most Mexicans, regardless of their status and even wealth,
is a joke.
Former President Ernesto Zedillo did make some good progress
toward the
rule of law. Besides cleaning up the electoral process,
he also introduced a
modest, but meaningful judicial reform in 1994. It produced
a more
independent supreme court, not shy about ruling against
the government. This is
important since, by nature of the system, all of the
cases the court has had to
deal with involve constitutional disputes among the states,
the federal
government, the Congress and the president. The court's
independence set an
example for the Federal Electoral Tribunal.
Yet there are still many more hurdles to clear. One of
the more difficult
challenges is the fact that independence does not go
hand in hand with justice or
even the law. After all, the same judges who used to
cater to their political
bosses might now bow to public opinion, rather than to
the facts, the evidence,
and the letter of the law. This was a key question when
the Federal Electoral
Tribunal annulled the election for governor in Tabasco
in December. Another
example concerns whether a federal judge should be able
to extradite an
Argentine citizen to Spain for crimes committed in Argentina
25 years ago and
for which the accused enjoys immunity in his own country.
A second major problem for Mexico is that much of the
current legislation on
the books contradicts the rule of law necessary for development.
In centrally
planned economies, as the late Austrian economist Friedrich
von Hayek argued
convincingly, there was no rule of law even when the
law was respected. This
was due to the fact that legislation granted arbitrary
powers to the authorities,
leaving it to them to decide whether the law should be
enforced in a particular
case by reference to what is considered "fair" or according
to "the common
good." When legislation is written in this way, it undermines
the principle of
formal equality before the law and implies that government
may, with greater
ease, grant legal privileges to its constituencies.
Curiously, the Mexican legal system is analogous to that
of the former
communist regimes. Laws and regulations are written in
discretionary terms,
making reference to what government considers the common
good at any
particular time. This makes government action unpredictable,
not only because
ambiguous law is easy to manipulate. Thanks to the formalism
of Mexican law
and the jurisprudence of the supreme court, it is very
difficult for the judicial
branch to limit or control this type of government action.
Foreign trade and the need for foreign investment can
produce a parallel legal
system, such as the one embedded in Nafta. However, while
the rules
contained in that agreement protect foreign investors
from the arbitrary powers
of the government, Mexicans are not protected by it.
Establishing a rule of law in Mexico will take time, a
lot of political pushing and
cajoling and, above all, agreements among relevant political
groups on the
actual rules of the game. Mr. Fox's idea of a new constitution
will itself not
solve the problem, since any new constitution would likely
look very much like
the previous one: an interminable series of contradictions
but no rule of law.
Mexicans do indeed need a new legal framework. The way
to get there is not
by legislating more within the existing institutional
structures, but through a series
of political agreements that commit every single relevant
political force to sign
up to the new rules. This is a fundamentally political,
as opposed to legal,
undertaking. And it is precisely what went on with the
building of electoral
institutions over the past several years. The politicians
ended up reaching a
political agreement that the president was willing to
enforce. Both sides of the
equation were key: the agreement and the enforcement.
URL for this Article:
http://interactive.wsj.com/archive/retrieve
RUSSIANS IN NO RUSH TO BUY PRIVATE PROPERTY
Perhaps it's because for seven decades Russians were forbidden
to
own private land, but -- now that they are allowed to
do so --
many are scared to make the move.
A rural area 500 miles from Moscow was the first region
to adopt
a land-ownership law after the new Russian constitution,
adopted
in 1993, guaranteed that "the right of private property
shall be
protected by law." But mere permission to buy and sell
land has
not turned out to be enough.
o Without a viable banking and
legal system, the vast
majority of Russian
farmers prefer to continue leasing
land from the government
at cheap prices -- wary that they
won't be able to
keep what they do buy.
o Their fears may be justified,
because old-school leftists
who are still in
power are resisting any changes which
could transfer land
to private hands -- which defeated
former President
Yeltsin's efforts to privatize rural
lands.
o President Vladimir Putin intends
to unveil legislation
which will reform
the federal land code by May 1.
o Then just last week, the State
Dumas passed draft
legislation explicitly
allowing land sales for the first
time -- but only
after adopting an amendment excluding
farmland sales.
Sales of urban lands are not as controversial as farm sales.
Without a workable land code, grain production has fallen
by half
since 1992.
Source: Peter Baker, "Experiment in Land Ownership Has
Few Takers
in Rural Russia," Washington Post, March 25, 2001.
For text
http://www.washingtonpost.com/wp-dyn/articles/A54218-2001Mar24.html
For more on Russia http://www.ncpa.org/pi/internat/intdex9.html
VIABLE LEGAL SYSTEM CRUCIAL IN TRANSITION FROM COMMUNISM
TO
CAPITALISM
The economic downturn in Central and Eastern European
countries
that followed the introduction of markets and privatization
in
former Soviet bloc countries took economists by surprise.
Permitting free markets to allocate goods and services
was
supposed to improve productive efficiency -- not lead
to
depressions, as it often did in those early years.
What went wrong?
Scholars say most countries moved too slowly to overhaul
legal
and regulatory institutions.
o Rather than instituting clear
protection of property
rights, many countries
adopted portions of their pre-
Communist civil
law codes.
o In the Czech Republic, for
example, until recently
borrowers had the
right to control a bank's disposition of
their collateral
if they defaulted.
o Some economists argue that
it was necessary to privatize
state assets rapidly
before beginning legal and
institutional reforms
so as to make the process
irreversible and
prevent the Communists from seizing power
again.
o But quick privatization often
led to a class of inside
managers who stripped
assets and blocked reforms.
After plunging in the early 1990s, output is recovering
in such
countries as Poland and Hungary. But in Russia, it is
still 40
percent lower than at the time of Communism's fall.
Source: Alan B. Krueger (Princeton University), "Economic
Scene:
Legal Reform Is What the Old Soviet Bloc Needs to Put
it on the
Path to Growth," New York Times, March 29, 2001.
For text
http://www.nytimes.com/2001/03/29/business/29SCEN.html?searchpv=nytToday
For more on Legal Systems & Growth
http://www.ncpa.org/pi/internat/intdex3.html
LIBERALIZED TRADE ALLOWS SMALL COUNTRIES TO THRIVE
Global trade has exploded in the last half-century.
At the same
time, many new nations have been created. While
the
proliferation of new nations might be traced to the demise
of
colonialism in a number of instances, three economists
detect a
link to greater world trade.
In a study in the American Economic Review, Harvard University's
Alberto Alesina, Enrico Spolaore of Brown University
and Romain
Wacziarg of Stanford University make these observations,
among
others:
o Nations with large linguistic
and cultural minorities face
heavy costs spawned
by infighting over resources.
o When trade barriers are high,
these costs are outweighed
by the benefits
of maintaining large internal markets and
greater resource
ability.
o But when trade between nations
is open, it becomes
increasingly possible
for small, ethnically compact
nations to thrive
via access to external markets and
suppliers.
o So as tariff rates slowly rose
between 1870 and the 1920s,
the number of nations
remained stable or decreased.
But following World War II, trade barriers began falling
dramatically. The result was an explosion in the
number of
nations -- from 74 in 1946 to 192 in 1995.
Today, over half of all nations have fewer people than
the
commonwealth of Massachusetts.
Source: Gene Koretz, " More Trade, More Nations," Economic
Trends, Business Week, March 19, 2001; Alberto Alesina,
Enrico
Spolaore and Romain Wacziarg, "Economic Integration and
Political
Disintegration," American Economic Review, December 2000.
For AER text http://www.aeaweb.org/aer/contents/dec2000.html#10
For more on Free Trade
http://www.ncpa.org/pi/internat/intdex12.html
SUPPLY-SIDERS IN INDIA
"Finance Minister Yashwant Sinha offered plans last week
to
liberate India's economy," says Investor's Business Daily.
The
plans for tax cuts, privatization and some limits on
government
spending may lay the groundwork for a supply-side revolution
in
India.
Since 1991, India has been removing the bureaucratic shackles
of
a socialist economy, and in the ensuing decade entrepreneurs
have
changed the economy and spirit of India, according to
Gurcharan
Das, author of "India Unbound."
o Under Sinha's proposal, India
would cap its high excise
tax on large items
such as cars at 32 percent, half the
dividend tax paid
by companies from 20 percent and trim
income tax surcharges
that are as high as 15 percent to as
little as 2 percent.
o Personal income tax rates would
fall from 35.1 percent to
30.6 percent; corporate
rates would fall from 39.66
percent to 35.1
percent.
o More state-owned industries
might be privatized, including
telecoms, automakers
and Air India, just as a majority
state in the state-owned
aluminum company was sold last
week.
Left-wing opposition politicians criticized the plan for
offering
scant tax relief for the poor. But in India, only 2 percent
of
the population pays income taxes, so it is impossible
to cut
taxes for most people.
Source: Editorial, "India's Supply-Side Revolution," Investor's
Business Daily, March 6, 2001.
For more on India http://www.ncpa.org/pi/internat/intdex9.html
WSJ March 5, 2001
Thinking Things Over
Dervish Lira, Peso Mariachi
By ROBERT L. BARTLEY
Treasury Secretary Paul O'Neill, I read, wants to find out who's
responsible when a big IMF bailout fails. Sorry to break the news, Mr.
Secretary, but that's you. For the finance chief of a sole superpower,
supervising the international economy comes with the job.
The point agency on this part of the secretary's responsibilities, of course,
is the International Monetary Fund. The fund just struck out again in
Turkey, following its failures in Russia in 1998, Thailand, Indonesia and
Korea in 1997 and Mexico in 1994-95. While the IMF can't always mend
the ways of local policy-makers, the length of the list suggests it may
be
prescribing the wrong medicine, like trying to close fiscal deficits with
tax
increases and carrying a bias toward devaluation.
When the IMF advised Turkey to "float," its lira of course sank, by
30-some percent. Mr. O'Neill rushed out a statement backing the
decisions, as he pretty much had to. But our news reports quote a "high
Treasury official" asking "How could we have done Turkey differently, not
yesterday, but six months ago?" The right question.
The blight on the lira so far
hasn't spread to other
currencies, though Argentina is
astir over Friday's resignation of
Economy Minister Jose Luis
Machinea. Even if no dominos
fall, instability in Turkey is itself
of no small consequence.
Turkey has been a seminal
geopolitical crossroads since
Byzantium, and remains so today. It has borders with Syria, Iraq, Iran
and
the former Soviet Caucasus. While shortchanged on oil, it is rich in the
other precious resource of the Middle East, water. Most important, it is
by
far the most passable democracy in the Muslim world, and the only secular
state. It has long been a dependable member of NATO; U.S. planes fly
out of Incirlik Air Base today to confront Saddam Hussein. For all the
European resentment of Turks at the Walls of Vienna in 1683, the world
would be a safer place if Turkey succeeded in its ambition of joining the
European Union, and if the lira were subsumed into the euro.
Such hopes will now be much delayed. With the devaluation, Turkish
inflation will be closer to triple digits than the 3% target for EU admission.
Inflation is a cruel tax, wiping out the savings and the ambitions of an
incipient middle class and paving the way for demagogues and extremists
of all stripes. The Turks are historically a patient people, and may weather
another plunge in living standards. In recent years, though, fundamentalist
Islam has been growing, to the especially acute distress of the Turkish
military, which sees itself as the guardian of Kemal Ataturk's secular
creed.
It's easy enough to envision further turmoil, further controversies over
torture and human rights. In all, Turkey is a most dangerous place for
financial and political instability -- a potential hotspot perhaps second
in
geopolitical importance only to Mexico, with its 2,000-mile border with
the United States.
As it happened, I watched the latest devaluation from the remote village
of
Alamos, Mexico, at an annual confab on what to do six months in advance
to avoid another Turkey, or more to the point, another Mexico 1994. In
the restored haciendas built by silver-mining magnates before 1800, the
Alamos Alliance has met yearly since 1993 under the direction of two
UCLA stalwarts, Clay La Force, dean emeritus of the Anderson Graduate
School of Management, and Arnold Harberger, previously of another
university and responsible for "the Chicago boys" throughout Latin
America.
It is a free-market crowd, and prescriptions for emerging economies run
to
sound money, smaller governments, free trade, deregulation and
privatization (without monopoly). But on fixed versus flexible exchange
rates, Prof. Harberger says, "it seems that we will never finish debating
this
issue."
Speaking to this year's gathering, Nobel Laureate Robert Mundell notes
that floating exchange rates are not a policy, but the lack of a policy.
The
issue is what guidepost the central bank of a developing country will use
to
set monetary policy -- if not the exchange rate of a larger neighbor, then
what? Usually direct targeting of inflation as measured by some or another
statistical index.
For the floaters, Prof. Harberger agrees that in principle fixed rates
do
have the efficiencies their advocates claim. The euro, despite its troubles
in
the foreign exchange market, clearly has made the internal economies more
efficient and turned Europe into a far more potent economic force. But
fixed rates "do not carry you through negative shocks." It's worth
sacrificing some efficiency, Mr. Harberger concludes; "purchasing an
insurance policy is a wise idea."
For the fixers, Prof. Mundell agrees that fixed rates are "a faster and
better
car, but riskier." In particular, a fixed rate is a harder constraint on
politicians; a Mexican observes, "Most of our shocks have been internally
generated."
Mexico has been served well enough by the inflation targeting it has
pursued since containing its crisis. During the Russian crisis, the, the
peso fell
below 11 to the dollar, but then recovered -- to 9.67 at the end of
January. Mexico's inflation was 8.9% last year, and is targeted at 6.5%
this year and U.S. levels by 2003.
Mr. Mundell worries, though, that Mexico could do too well, keeping the
peso too strong and inviting another collapse. That is to say, the U.S.
inflation rate may not be appropriate for Mexico as its wages converge
with the U.S. In the next stage of stabilization and integration it might
do
better to target the exchange rate and accept whatever inflation results.
If a
new crisis should emerge, Mr. Mundell suggests fixing at some rate slightly
weaker than the current one. In 1994, he says, Mexico should have fixed
at around 4.2 -- compared with 3.4 before the "float" and 7.68 reached
in
1995.
From 1954 to 1976, Mexico did maintain a fixed exchange rate (12.5, in
old pesos worth 1,000 new pesos). It now needs, Mr. Mundell observes,
"to learn its way back to stability." With better management, the impetus
of
Nafta and real democracy, Mexico certainly has come at least part of the
way. Perhaps Turkey, in its current crisis, will start learning as well.
WSJ March 2, 2001
Argentina Is No Turkey
By Steve H. Hanke. Mr. Hanke is a professor of applied
economics at Johns Hopkins and chairman of Friedberg
Mercantile Group in New York.
The collapse of Turkey's pegged exchange rate -- like similar events before
it in
Mexico, Thailand, Korea, Indonesia, Russia and Brazil -- was yet another
textbook
case of the inherent instability of pegged exchange rates. The events in
Turkey are
generating many negative comments about "convertibility," Argentina's fixed
exchange-rate system. This amounts to nothing more than guilt by false
association.
Pegged exchange-rate systems have little, if anything, to do with Argentina's
currency board-like arrangement.
Currency-board arrangements are dramatically different from pegged exchange
rates.
With currency-board rules, a monetary authority sets the exchange rate,
but has no
monetary policy -- monetary policy is on autopilot. The monetary authority
can't
increase or decrease its monetary liabilities by buying or selling government
debt.
Changes in net foreign reserve assets, which are required to back monetary
liabilities
one-for-one, exclusively drive changes in monetary liabilities.
In other words, with an exchange-rate system like Argentina's, changes
in the
monetary base are determined solely by changes in the balance of payments.
Conflicts between the exchange-rate and monetary policies can't materialize
and
balance-of-payments crises can't spin out of control because market forces
act to
automatically rebalance financial flows. This explains why currency boards
weather
storms and why Argentina's peso has continued to trade at a one-for-one
rate with
its anchor currency (the dollar) since convertibility was adopted 10 years
ago. No
other South American country can touch that record.
Pegged rates, such as the system employed in Turkey, require authorities
to manage
both the exchange rate and monetary policy. The monetary base contains
both
domestic and foreign components because both net domestic assets and foreign
reserves on the monetary authority's balance sheet can change and these
changes
cause its monetary liabilities to fluctuate.
Pegged rates invariably result in conflicts between exchange-rate and monetary
policies. For example, when capital inflows become "excessive" under a
pegged
system, a monetary authority often attempts to sterilize the effect by
reducing the
domestic component of the monetary base through the sale of government
bonds.
And when outflows become "excessive," the authority attempts to offset
the
changes with an increase in the domestic component of the monetary base
by
purchasing government bonds. Balance-of-payments crises erupt as a monetary
authority increasingly offsets the reduction in the foreign component of
the
monetary base with domestically created base money. When this occurs, it
is only a
matter of time before currency speculators spot the contradiction. This
is exactly
what happened in Turkey.
Many commentators who insist on a negative spin for Argentina also suggest
that
convertibility has failed to serve Argentina well. Not so.
In 1989 and 1990 -- the two years preceding the adoption of convertibility
on April 1,
1991 -- Argentina's annual inflation rate was 4,929% and 1,345%, respectively.
Today
Argentina's consumer price index is falling gently, at a 1.5% annual rate.
And even
though the economy is presently slumping, gross domestic product per capita
measured in dollars has registered a strong increase of 76.7% in the 10
years since
the inception of convertibility. This decade of growth puts Argentina at
the top of
the Mercosur trading bloc's growth chart, far outdistancing Brazil, which
has realized
only 8.2% growth in GDP per capita over the past decade.
But this hasn't stopped convertibility's critics. Over the past few weeks
they have
talked up the desirability of either exiting or modifying convertibility.
The chattering
classes' most popular exit strategy would allow the peso to float, a strategy
that
would no doubt produce an immediate drop in the peso value and new inflation
and
would wreak havoc in the debt and equity markets.
The cognoscenti are also toying with a modification strategy that would
switch the
peso's transparent anchor from the dollar to a basket of currencies made
up of
dollars and euros. This switch would do nothing more than provide cover
for a
devaluation. It would also invite no end of mischief because the dollar-euro
weights
in the basket could be changed at any time, producing a change in the exchange
rate.
There has been more than idle speculation. There have been calls in Buenos
Aires to
replace the governor of the central bank, Pedro Pou, with someone who might
look
more favorably on a modification of or an exit from convertibility. This
would be a
disaster because a devaluation would mean certain default for a great deal
of
Argentina's debt.
The real problem in Argentina is not convertibility. Most Argentines know
that
convertibility is the only institution that disciplines Argentina's unruly
politicians.
That's why Argentines almost universally support it. Argentina's problem
is the low
level of confidence in the government and its ability to retain sound money
and
push forward with reforms. A big bang is the only way to restore confidence.
My counsel: Dump the peso and adopt the greenback. That would eliminate,
once
and for all, any further speculation about an exit from convertibility.
It would also
bring Argentina's interest rates down to U.S. levels, a confidence-building
headline-grabber.
The second leg of the big bang is supply-side reform. The tax code should
be
simplified and tax rates reduced. Argentina's unemployment rate has been
trending
upward since the mid-1980s (it's now 15%) because the tax bite is so large
and labor
laws so rigid. Deregulate the health care system, labor markets and utilities.
This
would allow prices and the economy to become more flexible and competitive,
as in
Hong Kong.
Fiscal reforms would constitute the third leg. Government spending has
increased
by an average of 10% a year since 1991. It must be slashed, and the government
must follow New Zealand and produce an annual balance sheet and income
statement. This would provide for transparency and reduce corruption.
Foreign capital would immediately start flowing in. And with a dollarized
monetary
regime, it would cause the M3 measure of broad money to soar to an annual
growth
rate of between 20% and 30% from its current anemic 3.2%. Economic growth
would
rapidly match, or surpass, the 7% rate realized in the 1996-97 period,
when M3
growth peaked at a 28.5% rate.
March 2, 2001
Commentary
Turkey's Crisis Has a Silver Lining
By Norman Stone, a professor of international relations
at Bilkent
University in Ankara.
ANKARA, Turkey -- One of the generals looked suspiciously
at the foreign
ministry man dealing with Turkey's European desk. The
currency was being
altered, to match European norms. Would this mean, asked
the general, that the
face of the great Kemal Ataturk, founder of the state,
would vanish from the
Turkish lira? It would be an insult. No, said the official:
The greatest possible
insult to the great man was to have his face presiding
over a note that read "10
million."
True enough. In a country that produces notes worth even
100,000 you would
usually expect blood on the streets because of the terrible
instability that
inflation brings. So Turkey, with help from the International
Monetary Fund,
had been trying to do something about it.
Political Row
The program went wrong a week ago, after an absurd-sounding
political row,
and the foreign-exchange markets are still not functioning
properly. The Istanbul
stock exchange, which had boomed in 1999-2000, fell right
back. Overnight
Treasury accounts offered surreal interest rates to attract
depositors. The first
official matching price rises have been posted -- 10%
on cigarettes, gasoline
and alcohol -- 50% of respondents in a recent poll say
that they "hate" the
politicians, and a popular television show asks the question:
"Do you expect a
social explosion?"
It has been a very unhappy
episode, with only two
mitigating features. The first
is that the Turkish currency
itself, for obvious reasons,
accounted for only half of
the money stock in the
country; the rest is held in
dollars or marks. The
second is that the world's reaction shows how important
Turkey is becoming,
both strategically and economically. There was a not
dissimilar crisis in 1994.
But that crisis did not earn headlines on CNN.
Nowadays, Turkey's foreign trade turnover, at almost $100
billion annually, is
coming up to Russia's level, though the country is not
rich in raw materials. If it
were not for the sanctions against Iraq that have apparently
cost Turkey some
$30 billion, her foreign trade might even be larger than
Russia's.
For the past two years, Turkey had had, for once, a coalition
government with
a large majority and some prospect of staying in office
for a reasonable amount
of time. It had accepted that substantial reform needed
to be made, and this
was being carried out with the aim of possible accession
to the European
Union. Turkey has made very substantial progress over
the past 20 years.
Nowadays the idea of Turkish membership in the EU is
not nearly as
far-fetched as it would have seemed in, say, 1980.
It is quite wrong to class Turkey in the "Third World,"
whatever that expression
is supposed to mean. Large parts of the country now resemble
other
fast-growing regions of Mediterranean Europe, there is
very lively intellectual
and cultural life, and it is commonplace to find Turkish
businessmen investing in,
say, tile factories in Wales.
The main problem is that more than elsewhere in Europe,
Turkey is regionally
very divided, and the largely Kurdish southeast has a
GDP per head that is less
than 10% of the Istanbul region. Of course, neither the
sanctions against Iraq
nor the two-decade-long guerrilla war against the Maoist
PKK have helped.
But the southeast is poor in resources, and half of its
population has migrated to
the more prosperous west and center of Turkey. As quite
often happens, it is
the poorer parts of the country that produce the agile
politicians. (In France
they used to say, "It is the north that works and the
south that governs.")
But a good half of the urban population came from the
Balkans or the Caucasus
or the Crimea during or soon after Ottoman times; they
adapted fastest to
modern ways, and their descendants make up a large part
of the educated and
professional classes.
"Europe" became a mantra for them. They hoped it would
do for Turkey what
it has apparently done in the 1990s for Spain and in
the 1960s for Italy: impose
on the politicians a set of standards that they would
be quite incapable of finding
for themselves.
Keeping governments together has meant pork barrels, and
pork barrels mean
printing money. The deal was simple enough at bottom:
The government paid its
bills with paper, and paid interest-rates of well over
100% on overnight
Treasury bills. The banks, lazily, became fat on the
proceeds, and there are too
many banks -- 82, many owned by the state. The populace
got rid of the paper
money, changing it into dollars or marks; the middle
classes invested in the
Treasury bills.
As a final twist, the decline in the value of the lira
against the dollar was
somewhat less than the fall in its local purchasing-power.
In other words, with
reasonably astute timing of the exchanges, you could
earn an untaxed 25% per
year in hard currency.
There was even something in it all for the hard-working
lower classes: Every six
months, there was officially an index-linked wage-rise,
and (as in Italy) men
were able to retire in their early 40s on a pension and
then get another job, or
even two jobs. You see fewer beggars in Turkish cities
than in Paris or even
central Oxford, England. Instead, there is a vast proliferation
of useful services
and there is astonishingly little social crime. In the
prisons, murderers are the
aristocracy, thieves the lowest of the low.
Of course some people get into real trouble, but in Turkey
families stay together
and help each other. It all has meant that the left,
which might, on first
principles, have been the political inheritor of this
complicated picture, has
gotten nowhere in Turkey.
Enter Europe and the IMF, with their package of modernizing
reforms. An
anti-inflationary program was laid down, and quite well-judged
in its targets.
But the causes of the inflation, and its centrality to
the state-dominated system,
are far more difficult to handle.
Why, for example, deliver ultimatums to the effect that
telecommunications must
be privatized within three months? Yes, there are obese
and inefficient state
properties, and much of agriculture is effectively nationalized.
But would
privatization in Turkey be any more successful than privatization
has been in
Russia, where it so often led to asset stripping?
Besides, the politicians rely on their pork-barrels, and
though Prime Minister
Bulent Ecevit, a one-time social democrat (and Kissinger
graduate student) is
famously non-corrupt, he keeps his coalition together
by doing favors and is
resistant to reforms, however piously European, that
would deprive him of that
part of his arsenal. Yes, accession to Europe means signing
up to various
stringent tests. That Europe shows little enthusiasm
for taking in Turkey's
challenging economy and fast-growing population has not
deterred the
would-be Turkish Europeans, who say that the effort to
adapt is in itself
essential. But to tackle inflation without changing the
bloated government that
gives rise to it is a mistake, and one that the West
should have avoided.
Basic Strengths
Where does Turkey go from here? There is generally a silver
lining to these
financial vicissitudes, of which the histories of most
fast-growing countries are
full. In the present case, there will be a much-needed
rationalization of the
banking system, and a more sensible provision of credit.
There may even be a
substantial reordering of politics with, at last, a single
party of the moderate right
instead of, at present, three. The basic strengths of
the country have not been
affected by the financial troubles, and as the Middle
East shows more and more
signs of coming trouble, the West will need the Turks
at least as much as they
need the West. So there's a "crisis" perhaps, but no
reason to panic.
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB983493702624851665.djm
SEVENTH EDITION OF "INDEX OF ECONOMIC FREEDOM" APPEARS
The number of free or mostly free economies in the world
has
increased throughout the seven years the Heritage Foundation
and
Wall Street Journal have published their annual "Index
of
Economic Freedom." But unfree economies still outnumber
those
that are basically free.
o Eighty-one of the world's
economies remain mostly unfree
or repressed, compared
to 74 deemed to be free or mostly
free.
o The average man, woman or
child living in a repressed or
mostly unfree economy
subsists on about $2,800 a year --
compared to an average
per capita income of $21,200 in
countries having
free or mostly free economies.
o Twenty-four countries in North
America and Europe
improved their score
this year -- with Lithuania
catapulting to 42nd
place from 61st last year;
neighboring Estonia,
of all the former communist
countries, came
closest to realizing a fully free
economy.
o Among Latin American and Caribbean
countries, El Salvador
improved enough
to be rated "free" for the first time --
but not only did
Venezuela's score worsen last year, it
has one of the worst
records in the seven-year history of
the Index.
Other regions of the world present a more mixed picture.
o Economic freedom declined
overall in North Africa and the
Middle East, with
Syria, Iran, Iraq and Libya continuing
to fall in the "repressed"
categories.
o While Sub-Saharan Africa showed
a net improvement this
year, the region
remains the world's most economically
unfree.
o Hong Kong continues to be
ranked the freest of all the
world's economies,
with the Asia-Pacific region having
four of the world's
freest economies and six of its most
repressed -- the
latter being Vietnam, Laos, Burma,
Turkmenistan, Uzbekistan
and North Korea.
Source: Gerald P. O'Driscoll Jr. and Kim R. Holmes (both
of the
Heritage Foundation); with Melanie Kirkpatrick (Wall
Street
Journal); "Who's Free, Who's Not," Wall Street Journal;
November
1, 2000.
For text
http://interactive.wsj.com/articles/SB973044364296382638.htm
For Heritage Interactive edition http://index.heritage.org
3-2-01
COST OF BARRIERS TO ENTRY
Many governments create barriers to entry in business.
This can
be in the form of red tape, fees or simple bribery. Some
economists say these regulatory barriers prevent fly-by-night
operations from swindling people out of their money.
Others argue
that these regulations are used for political benefit
and
advantage existing firms by limiting competition. A recent
study
determines that there are no benefits to such regulatory
barriers
-- for either incumbent firms or consumers.
A major component of these costs is delay -- for instance,
it
takes an average of six months to get the necessary permits
and
licenses in Mozambique, 66 days in France and five months
in
Austria.
The study analyzed 75 different countries and their regulatory
barriers. The costs of these barriers varies, but the
greatest
burden is in poorer countries:
o The average cost of complying
with regulations in order to
legally enter a
market or start a business is equivalent
to 34 percent of
per capita income worldwide.
o This equates to 10 percent
or less of per capita income in
the richest nations,
but 65 percent or more of per capita
income in the poorest
nations.
o Setting up shop in nations
like Vietnam, Bolivia or Egypt
can cost 1 to 2
times an entrepreneur's yearly income.
These extra costs do not have tangible benefits for consumers.
The study finds that:
o Product quality does not improve, but actually decreases.
o Pollution and health levels remain the same.
o They increase corruption of
regulatory officials and
encourage black
market activity.
The authors find that the real beneficiaries are the politicians
who control the regulatory system and those who are well
connected.
Source: "A Helping or Grabbing Hand?" Economic Intuition,
Fall
2000; based on Simeon Djankov, Rafael La Porta, Florencia
Lopez-
de-Silanes and Andrei Shleifer, "The Regulation of Entry,"
Working Paper No. w7892, September 2000, National Bureau
of
Economic Research.
For NBER abstract http://www.nber.org/papers/W7892
For more on Economic Intuition research summaries
http://www.economicintuition.com
COUNTRIES "DOLLARIZE" FORMALLY AND INFORMALLY
Ecuador, El Salvador, Panama, and a few Caribbean and
Pacific
island nations now officially use U.S. currency. The
process is
called "dollarization," and there are a number of economic
benefits to countries that do so.
o Substituting the strong, stable
U.S. dollar for a weaker
domestic currency
insulates a country from economic shocks
such as currency
devaluation or runaway inflation because
the local government
can't inflate the currency.
o A stable currency makes economic
calculation less risky
for business --
and thus makes possible long-term loans at
fixed rates, such
as mortgages, which were previously
unobtainable in those
countries.
Having foreigners using dollars is nothing new -- it
is estimated
that 55 percent to 70 percent of the $480 billion in
U.S. paper
currency in circulation is circulating outside the United
States.
Many countries have semi- or unofficial ties to our currency.
o Argentina, for example, has
fixed their peso to equal one
dollar, and half
the country's bank deposits are in
dollars.
o Most of Latin America, the
former Soviet Union and even
Vietnam have heavily
dollar-dependent economies -- people
often make purchases
of big-ticket items like cars in
dollars.
o It is estimated that Russia
has more dollars in
circulation than
rubles.
When Ecuador made the switch, the country swapped $400
million in
U.S. Treasuries and other assets for cash through a Miami
bank
and had the whole caboodle flown down.
Source: Emily Yoffe "How Do You Replace the Sucre With
the
Dollar?" Explainer, Slate, February 7, 2001.
For text
http://slate.msn.com/code/explainer/explainer.asp?Show=2/7/2001&idMessage=7035
For more on Currency Issues
http://www.ncpa.org/pi/internat/intdex2.html
PROTECTION OF PROPERTY AND STOCK SYNCHRONICITY
Stock prices in developing nations move more in sync than
stock
prices in developed nations. This tends to magnify stock
market
swings, including price bubbles followed by collapses.
Economists
have suggested this is due to a lack of economic diversification,
the small size of developing markets and reliance on
a single
industry. However, a recent study claims lack of proper
governance causes this synchronicity.
The 1995 study analyzed 16,000 stocks in 40 countries.
It finds
that synchronicity can be quite large:
o In a given week, 80 percent
of stocks move in the same
direction in the
stock markets of China, Malaysia and
Poland.
o By contrast, the stocks gaining
value in Ireland, Denmark
and the United States
barely exceed decliners.
The authors argue that macroeconomic instability, country
size
and lack of economic diversity do not cause synchronicity.
Rather
a lack of strong property rights causes it. They use
Indonesia as
an example:
o In the 1990s, under the Suharto
regime, political
connections determined
ownership rights in Indonesia.
o In 1999, the mere rumor of
the deteriorating health of
Suharto shaved 25
percent off the values of companies with
political connections.
Political connections are more important in countries
with poor
protection of property, say the authors. Since the governments
of
those countries tend to be secretive and erratic, individuals
invest in politically safe industries rather than profitable
ventures. This lets capital flow into unprofitable ventures,
causing waste and limiting economic growth.
Source: "Good Government and Stock Synchronicity," Economic
Intuition, Fall 2000; based on Randall Morck, Bernard
Yeung and
Wayne Yu, "The Information Content of Stock Markets,
Why Do
Emerging Markets Have Synchronous Stock Price Movements?"
Journal of Financial Economics, January 2000.
For more on Economic Intuition research summaries
http://www.economicintuition.com
For more on Private Investment
http://www.ncpa.org/pi/internat/intdex12.html
AFRICA NEEDS FREE TRADE, NOT FOREIGN AID
European governments have given hundreds of billions of
dollars
in financial, technical and humanitarian aid to African
countries
over four decades, yet the continent's problems only
worsen.
Rather than alleviate Africa's suffering, aid has exacerbated
it,
says Jim Peron of the Institute for Liberal Values in
Johannesburg, South Africa. Much of the aid is siphoned
off by
corruption and militarism -- such as the $1 billion given
by the
Italian government to Somalia before the country collapsed.
And the incompetence of the givers results in ineffective
aid --
such as the fish-freezing plant in Northern Kenya built
by
Norwegian aid agencies that required more power to operate
than
was available in the entire region.
But two other aspects are usually overlooked: aid can
destroy
local producers and markets, and government-to-government
aid
encourages inefficient centralized economic planning.
For
instance,
o Farmers in Tanzania simply
stopped producing food because
of the availability
of donated food.
o Pharmacists in Somalia went
out of business due to donated
drugs -- which were
handed out by medically untrained
people.
o Some $10 billion in financial
aid was given to Tanzania,
propping up Julius
Nyerere's Marxist program for years,
during which Tanzania's
economy shrank 0.5 percent every
year from 1965 to
1988, according to the World Bank.
Yet European restrictions on food imports keep an estimated
$700
million in African agricultural goods from entering Europe
each
year.
Source: Jim Peron (Institute for Liberal Values), "Europe
and
Africa: Co-Dependent No More?" Wall Street Journal Europe,
February 1, 2001.
For more on Foreign Aid
http://www.ncpa.org/pi/internat/intdex5.html
________________________________________________________________
http://www.swcollege.com/bef/econ_news.html
review of Wealth of nations Part II
Thomas Sowell
A gem of a book
http://www.jewishworldreview.com --
SOME BOOKS are good, some are bad, but very
few are real gems. One of these few gems is the
recently published book "The Mystery of Capital"
by Hernando de Soto. The subtitle tells what it is
really about: "Why Capitalism Triumphs in the West
and Fails Everywhere Else."
It is not really capitalism but poverty that de Soto is
most concerned about. He finds most Third World
poverty to be both unnecessary and grossly
misunderstood.
The most amazing part of this remarkable book are
the examples it gives of tremendous wealth
generated by poor people in Third World countries.
In many Third World countries, the underground
economy is larger than the legal economy, and the
total wealth of all the poor "dramatically outweighs
the total wealth of the rich."
In his native Peru, de Soto found that the rural and
urban real estate held outside the legal system was
"five times the total valuation of the Lima Stock
Exchange" and "fourteen times the value of all
foreign direct investment in the country through its
documented history." Nor is Peru unique is this
respect.
Much the same story could be told of the
Philippines, Egypt and other Third World countries.
For the entire Third World and the former
Communist countries, de Soto's calculation is that
the total value of all the real estate held, but not
legally owned, by the poor is more than 20 times all
direct foreign investment in the Third World and
more than 90 times all the foreign aid to all Third
World countries over the past three decades.
If the poor have so much wealth, why are they still
poor? Of course, when all this wealth is divided by
hundreds of millions of people, the per capita
amount is not enough to make them prosperous, much less
wealthy. But
the larger point is this: The amount of wealth available
within Third World
countries themselves vastly exceeds anything that the
prosperous
countries have given them or are likely to give them.
The crucial theme of the book is that this vast
amount of wealth cannot be used, as it is in the
west, as investments to create still more wealth
and rising standards of living. That is because real
estate, businesses and other assets in the
underground economies of the Third World
cannot be used as collateral to raise capital to
finance industrial and commercial expansion.
Illegality also creates other economic handicaps.
Many American businesses were begun by
someone who borrowed the money to get started, using
his home as
collateral. But a home built outside the legal system
means that the owner
has no legal title and therefore nothing that a bank
can accept as
collateral. The same is true of businesses created and
run without having
jumped through all the legal hoops.
Third World peoples "have houses but not titles, crops
but not deeds,
businesses but not statutes of incorporation." Why then
do they not get
legal titles? Because it can be an unbelievable ordeal,
especially for
people with little education and in countries where red
tape is virtually
boundless.
De Soto and his team of researchers have examined the
processes in a
number of Third World countries. In Peru, the process
to get a legal title
to your home "consists of 5 stages" and the first stage
alone "involves 207
steps."
In Egypt, anyone "who wants to acquire and legally register
a lot on
state-owned desert land must wend his way through at
least 77
bureaucratic procedures at thirty-one public and private
agencies." These
procedures "can take anywhere from five to fourteen years."
In Haiti, it is
19 years.
Against this background, it is hardly surprising that
most economic
activities in most Third World and former Communist countries
take
place illegally, in the underground economy. Less than
half the people
employed in Venezuela work in legal enterprises. In Brazil,
30 years ago,
most of the housing built was legal rental housing; today
"only 3 percent
of new construction is officially listed as rental housing."
When bureaucracy and frustrating legal systems drive economic
activities
underground, the losers are not simply those engaged
in these activities.
The whole country loses when legal property rights are
not readily
available because investment is stifled.
This book should be required reading for those -- including
law
professors -- who seem to think that property rights
are just privileges for
the rich. The poor need them most of all, especially
if they want to stop
being poor.
JWR contributor Thomas Sowell, a fellow at the Hoover
Institution, is author of several books, including his
latest, A
Personal Odyssey.
Walter Williams
Democracy and economic growth
http://www.jewishworldreview.com --11-28-00
TIDJANE THIAM, writing in Newsweek's recent
special edition, says democracy is vital to economic
growth. As minister of planning and economic
development of Cote d'Ivoire, Thiam says: "Africa
has paid too little attention to political
modernization. Too many African governments pay
only lip service to democracy, which is often limited
to simply holding regular elections."
Whatever are the benefits of American-style
democracy, democracy is not a necessary condition
for economic growth and, in fact, democracy might
impede economic growth. Let's look at it. There
are several, once very impoverished countries that
experienced significant and rapid economic growth
without democratic institutions. Some examples and
their respective per capita GDPs are: Chile
($12,700), Hong Kong ($25,200), Taiwan
($12,000), Singapore ($28,000) and South Korea
($13,600). To the extent that political democracy
exists in these countries today, it has only recently
emerged.
What's true about these once-backward countries
is they all have relatively free markets -- in a word,
they're economically free. Each of these countries,
with the exception of South Korea, has either no or
very low protectionism -- tariff and quotas on
imports.
South Korea has what Gerald P. O'Driscoll, et. al.,
in their book "2000 Index of Economic Freedom"
call moderate protectionism. Governments in these
countries impose a relatively low burden on its
citizens in the forms of taxation and economic
regulation. These countries also share another
characteristic vital to economic growth: secure
property rights and rule of law.
Political democracy, and India is an excellent
example, can jeopardize economic prosperity
because people, forming interest groups and using their
political freedom,
can subvert and compromise the free market institutions
vital to economic
growth.
Thiam is quite concerned about economic growth in sub-Saharan
Africa,
but the problem isn't democracy. With but a few exceptions,
most of
black African nations fall into the category of being
either economically
"unfree" or "repressed." The same can be said about Africa
north of the
Sahara. The continent's countries falling into the category
of "mostly free"
are: South Africa, Namibia, Zambia, Botswana, Mauritius,
Benin, Mali
and Morocco. While citizens in these countries remain
poor by Western
standards, they're far better off than their repressed
neighbors.
Thiam might do well turning his attention to his own country.
Cote
d'Ivoire is typical of most African countries; it falls
into the "mostly
unfree" category. It has very high levels of protectionism
and government
economic regulation, plus corruption is rife. It also
has a very low level of
property rights protection, and rule of law is highly
compromised.
It should come as no surprise that when we're treated
to television scenes
of African famine, starvation and genocidal slaughter
of hundreds of
thousands of Africans, it tends to be in those African
nations that fall into
"mostly unfree" or "repressed" categories. This is not
uniquely African. In
Eastern Europe, where we've witnessed starvation and/or
genocide, it's
occurred in "mostly unfree" or "repressed" nations such
as Bosnia,
Croatia, Albania and Romania.
Evidence shows that no amount of IMF, World Bank and other
handout
interventions can bring prosperity to repressive nations.
Only Africans
can solve Africa's problems. Unfortunately, Africans
have been heeding
the council of socialists around the world, including
U.S. socialists. It's
instructive that Thiam is minister of planning and development
in Cote
d'Ivoire. The idea that government planning and control
are tickets to
economic growth has been thoroughly discredited.
African nations might also benefit if American black academics,
politicians and civil-rights leaders stopped laying out
the welcome mat
and heaping praise on the leaders and officials of Africa's
brutal and
repressive regimes.
Poverty in the Midst of Plenty
by Douglass C. North
Douglass C. North is a senior fellow at the Hoover
Institution and the Spencer T. Olin Professor in Arts and
Sciences at Washington University.
We live in a world where some countries enjoy a material abundance
beyond the wildest dreams of our forefathers. Such countries are rich because
they are productive. The sources of that productivity–growing markets,
technological improvement, and investment in human beings (human
capital)–all play an important part in increasing productivity. The new
growth
economics literature has formalized some of these findings, but economic
historians, development economists, and specialists in growth accounting
have
broadly understood them for some time.
By any standard of measurement much of the world's population is still
poor,
with individuals subsisting on less than two dollars a day. The disparity
between the well-being of the average person in the developed world, where
per capita annual income may exceed $20,000, and that in low-income
countries such as Haiti or most of sub-Saharan Africa, where it may be
under
$500 a year, is striking, especially when one sees up close the living
conditions associated with such poverty.
How do we account for the persistence of poverty in the midst of plenty?
If
we know the sources of plenty, why don't poor countries simply adopt
policies that make for plenty? The answer is straightforward. We just don't
know how to get there. We must create incentives for people to invest in
more efficient technology, increase their skills, and organize efficient
markets. Such incentives are embodied in institutions. Thus we must
understand the nature of institutions and how they evolve.
Institutions are the framework that humans create to structure human
interaction. They are made up of formal rules (constitutions, laws, and
regulations) and informal constraints (conventions and norms of behavior)
and
the way both are enforced. Well-specified property rights that reward
productive and creative activity, a legal system that enforces such laws
at low
cost, and internal codes of conduct that are complementary to such formal
rules are the essential underpinning to productive economies. But
well-specified property rights and an effective legal system are the creation
of
the political structure. Unfortunately, we do not know how to put such
a
political structure in place. Informal norms of behavior that make for
honesty,
integrity, and hard work are the product of long-term human interaction;
we
do not know how to create them in the short run. The result has been that
efforts to improve the performance of poor countries have been
something less than a rousing success. Sub-Saharan Africa remains a
basket case, and our efforts to transform the diverse parts of the former
Soviet Union into productive economies have so far been a dismal failure.
But
we are getting a better understanding of the process of political-economic
change. The sources of informal constraints such as norms of behavior are
a
major modern priority in the social sciences and down the road will result
in
accelerating the reduction of poverty.
Hoover Institute October 2, 2000
SLOW AND STEADY WINS THE RACE
Developed nations do better economically when their economies
exhibit small, but steady growth according to some economists.
An analysis of several developed, European nations concludes
that there is a significant negative relation between
long-term
growth and a "boom and bust" business cycle in which
rapid
growth and high employment is followed by an economic
contraction with job losses.
The study found:
o A reduction in economic fluctuations
in developed
countries by one
standard deviation (a measure of
variability) increased
growth rates by roughly 0.4 to 0.5
percent per year.
o A reduction in the instability
of the unemployment rate
by one standard
deviation increases the growth rate by
0.8 to 0.9 percent.
The study attributes the economic bonus from stability
to the
labor force. On-the-job learning rises with production,
but
workers lose skills during unemployment, thus becoming
less
productive than if they were still employed. This only
applies
to developed nations however. This is not true in developing
nations, where jobs require fewer skills.
Source: "Stability is Good For Growth," Economic Intuition,
Spring 2000. Based on: Philippe Martin and Carol Ann
Rogers,
"Long-term growth and short-term economic instability,"
European
Economic Review, February 2000.
For more on Economic Intuition research summaries
http://www.economicintuition.com
For more on International Economic Growth
http://www.ncpa.org/pi/internat/intdex3.html
LIVING STANDARDS ROSE FASTER THAN PREVIOUSLY THOUGHT
Many economists think that the old system of measuring
living
standards by real income growth per capita underestimates
increases. A new way of measuring living standards accounts
for
conditions such as health, recreation time, quality changes
and
technology revolutions that the standard system misses.
According to this alternative measuring system, standards
of
living rose faster than previous estimates. Between 1971-1991,
increases in living standards were double the official
rate.
The new system measures spending on recreation on the
assumption
that leisure goods are purchased with income left after
providing for necessities such as food, clothing and
shelter.
o For instance, in the late
1880s, 2 percent of household
income was devoted
to recreation; by the mid-1930s it was
4 percent; and by
1991 it had increased to 6 percent.
o Between 1890 and 1940, the
average work week fell by 20
hours.
o After 1940, sick days, paid
vacations, holidays and
personal leave increased.
o While the conventionally measured
standard of living
increased by 1.8
percent annually between 1972-1991, the
increasing share
of recreational expenditures imply that
it increased by
an average of 3.6 percent annually.
According to the new measuring system, lower income households
were the primary beneficiaries of the increasing standard
of
living.
Source: Dora L. Costa, "American Living Standards: Evidence
From
Recreational Expenditures," National Bureau of Economic
Research, May 1999.
For NBER Abstract: www.nber.org/digest/oct99/w7148.html
For more on Standard of Living
http://www.ncpa.org/pd/economy/econ2.html
_______
September 14, 2000
International Commentary
Small Loans Pay Off
By Robert H. Schuller and Charles L. Dokmo. The Rev.
Schuller is Founder of The Crystal Cathedral, in Garden
Grove, California, and host of "Hour of Power," the
globally syndicated inspirational television program.
Mr.
Dokmo is CEO of Opportunity International.
Nearly 30 years ago, Al Whittaker, CEO of Bristol Myers
International, quit his job to work on a dream: helping
to
end chronic poverty by providing the poorest of the working
poor with small collateral-free loans. It began with
a
microloan in Colombia, to help Carlos Moreno expand his
one-man spice and tea business. In two years, the loan
had
been repaid and Mr. Moreno had hired 11 new employees.
Now, almost 30 years later, Al's dream has translated
into a
humanitarian organization called Opportunity International,
which last year distributed $43.8 million representing
196,266 loans to 176,147 clients in 25 developing
countries, creating 276,886 jobs.
Now retired and living in Ft. Myers, Florida, Mr. Whittaker
must be beaming to have learned that earlier this month
the
Queen of England's daughter, Princess Anne, handed over
a
check for a new loan to Dolores Ramon from Santo
Domingo, representing the millionth job that will have
sprung from his original vision.
What is wonderful and astonishing about microcredit is
not
only that it works, but the degree to which it transforms
lives both economically and spiritually. A poor woman
who can suddenly feed her family, send her kids to school
and awaken to a new sense of self-esteem that comes from
running her own business, experiences a spiritual uplift.
Microcredit means for its recipients not only an end
to
hunger and material poverty, but also an end to a culture
of
poverty.
Chronic Poverty
But those who have supported microcredit enterprises with
their loans have also experienced spiritual fulfillment.
Investment in microenterprise development displays faith
in
the ability of people to lift themselves out of poverty.
With
the proper break they can create a new life for themselves
and their families. They can also fulfill a loan contract,
even though they have put down no collateral. Last year,
96% of those who received a loan repaid it, on time and
at
market-rate interest. Some 85% of these loan recipients
were women, incidentally. Once repaid, the loan can be
rolled over to the same individual, or it can help launch
a
new business for yet another fledgling entrepreneur.
These
ventures then combine the best of capitalist and
entrepreneurial principles with the highest in humanitarian
values, to show the world that poverty can be licked.
What keeps us from multiplying this success to a level
that
would drastically reduce poverty? Microcredit
organizations have come together to declare a huge goal:
to
provide working capital to 100 million poor families
by the
year 2005. That would represent a wonderful start in
the
radical reduction of poverty as we know it. The question
is,
will major banks, corporations and financial institutions
increase their support substantially if we can convince
them
that spiritual investment also translates into real profits?
Certainly, multinationals and international investors
have
much to gain by increasing the number of consumers in
the
developing countries they're building a presence in.
Microlending currently accounts for 0.2% of commercial
lending. Yet with repayment rates in microcredit
organizations like Opportunity International, Grameen
Bank,
FINCA and Accion International consistently in the 95%
to
98% range, and with lending methods that drive the costs
of
a loan down to the point where even a $50 loan can be
profitable, there is room to reap both spiritual and
monetary
rewards. Even the World Bank, which channels so much
money from wealthy nations to poorer nations (with
questionable results) ought to consider refunneling some
of
those funds through microcredit organizations that work
from the bottom up.
A Caring Hand
There is something even more exciting to consider.
Microcredit provides a vehicle for capitalism to prove,
once and for all, that the private sector can deal with
the
issue of world poverty. Combine capitalism with heart,
as
Mr. Whittaker once did, and the power of the marketplace
can help lift those places in the world that need a caring
hand.
Ultimately, the marketplace is about individuals. Take
Rosal Venzon, from the Philippines. She was a woman
living in one of the worst slums in Manila, raising her
children in a shack made of packing cases and corrugated
iron. They ate one meal a day. She joined a Trust Bank,
which brings usually between 20 and 40 members of a
community to cross-guarantee each others' loans and to
provide a mutual emotional support system for one another.
Ms. Venzon's new partners cross-guaranteed an initial
$100
loan that paid for a substantial stock of produce, a
market
stand, and a cooker. Several loans later (and much
encouragement), she was able to send all her children
to
school and to feed them three meals a day. Ms. Venzon
and
her family moved out of the shack, and are now renting
a
modest concrete-block apartment. She plans to send her
kids to college. That's the transformative power of
microcredit.
-- From The Wall Street Journal Europe
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB968883605224044540.djm
Copyright © 2000 Dow Jones & Company,
Inc. All Rights Reserved.
ECONOMISTS CONVERT TO NEW ECONOMY THEORIES
How has the U.S. economy kept growing without a sign of
serious
inflation? Traditional theories have warned that rapid
growth
will eventually produce inflation. But that hasn't happened.
Enter the New Economy theory -- which says computers and
information technology have boosted productivity, holding
wage
inflation in check and keeping prices more or less stable.
A
growing number of economists is buying that explanation.
Recently, Dale Jorgenson at Harvard University and Kevin
Stiroh
at the Federal Reserve Bank of New York set out to debunk
the
New Economy theory -- then found themselves embracing
it.
o As long as high-tech industries
keep innovating, they say,
the economy should
be able to sustain the high rate of
productivity growth
and "the virtuous cycle of an
investment-led expansion
will continue."
o They claim falling computer
prices unleashed an investment
boom which boosted
productivity not only in the high-tech
computer sector,
but in "noninformation technology"
sectors as well.
o Overall, productivity grew
by about 2.3 percent annually
from 1995 to 1998
-- more than a full percentage point
higher than the
growth rate from 1990 to 1995.
According to their analysis, "noninformation technology"
industries have contributed more to productivity gains
than the
computer sector. They estimate that about 70 percent
of the one-
percentage-point gain in productivity from technological
progress
comes from outside the sector.
Jorgenson foresees a future sustained growth rate of 3
percent to
3.5 percent, compared with the 2.5 percent rate that
many
economists had previously believed possible. Even the
Fed seems
comfortable with a growth rate of 4 percent.
Source: Steve Liesman, "Further Gains in Productivity
Are
Predicted," Wall Street Journal, August 1, 2000.
For text
http://interactive.wsj.com/archive/SB965087704604460486.htm
For more on Productivity and Technology
http://www.ncpa.org/pd/economy/econ9.html
LUMBER USERS BAND TOGETHER TO DEFEAT TRADE QUOTAS
The U.S. timber industry has successfully lobbied for
tariffs
which keep Canadian softwood lumber off American markets.
Their
efforts have fueled one of America's oldest and most
intractable
trade disputes.
o The Softwood Lumber Agreement
between the U.S. and Canada
in 1996 sets export
quotas for Canada's largest lumber-
producing provinces
and then imposes punishing surcharges
on above-quota shipments.
o A recent Cato Institute study
found that trade
restrictions have
jacked up the price of lumber 20
percent to 35 percent
-- or $50 to $80 per thousand board
feet.
o As a result, the cost of an
average new home is $800 to
$1,300 higher than
it would be if free trade prevailed.
o The Bureau of the Census estimates
that every $1,000
increase in housing
prices means that an additional
300,000 families
are unable to purchase a home.
But the agreement, which is due to expire on March
31, 2001,
might be allowed to die. That's because U.S. lumber users
--
including the National Association of Home Builders,
the
National Lumber and Building Material Dealers Association,
Home
Depot and affordable housing groups -- have banded together
to
demand that the agreement not be renewed and no new restrictions
be erected in its place.
U.S. lumber interests might claim they are "protecting
U.S.
jobs." But that claim won't hold up, since there were
only
217,000 American jobs in logging and sawmills in 1999.
That
compares to 510,000 jobs in lumber-using manufacturing
industries, 744,000 jobs in the wholesale and retail
lumber
trade, and more than 4.7 million jobs in home building.
Source: Brink Lindsey (Cato Institute), "Against the Grain:
How
Lumber Quotas Hammer Home Buyers," Wall Street Journal,
August
11, 2000.
For
texthttp://interactive.wsj.com/archive/SB965964409626035156.htm
Wsj 7-27-01
ENVIRONMENTAL QUANDARY: MALARIA OR DDT?
Malaria is making a dramatic comeback in parts of Africa.
And
that is raising a painful choice for Western governments
and
international relief agencies. Should bans on the use
of the
chemical DDT -- which was spectacularly successful in
destroying
malaria-bearing mosquitoes -- be lifted, even though
DDT carries
its own environmental risks?
o Malaria -- one of the world's
deadliest diseases -- is now
striking more than
300 million people a year, and is
killing about 1
million of them.
o Although South Africa had
used DDT for 50 years and had
all but wiped out
the malarial mosquito, it bowed to
international pressure
in 1996 and prohibited its further
use -- substituting
far less effective and more expensive
sprays.
o But two years ago, South Africa's
malaria rates suddenly
skyrocketed to 50,000
cases a year from just a few
thousand.
o Even as the developed world
has proposed to ban 12
chemicals as pollutants,
including DDT, South Africa has
gone back to using
DDT once again -- in a so far
successful effort
to control malaria.
The whole exercise has raised the question of how far
rich
nations should go in imposing their own values and risk
standards
on the scourges of poor ones.
Only China and India still produce DDT -- mostly for domestic
use. A secretive network of brokers fills most of the
rest of the
world's demand for it.
When government officials from around the world met in
Stockholm
in May, they compromised on DDT -- allowing some countries,
including South Africa, an exemption from the otherwise
global
ban.
Source: Roger Thurow, "As a Tropical Scourge Makes a Comeback,
So, Too, Does DDT," Wall Street Journal, July 26, 2001.
For text (WSJ subscribers)
http://interactive.wsj.com/articles/SB996094416815162021.htm
For more on Pesticides
http://www.ncpa.org/pi/enviro/envdex13c.html
Japan: What Went Wrong
By Michael E. Porter. Mr. Porter is a professor of competition and
strategy at
Harvard Business School and a co-author of "Can Japan Compete?" (Perseus,
2000).
A sense of gloom has settled over Japan, as once more the economy has failed
to
recover and the stock market has hit 17-year lows. With price deflation,
a public debt
that is the highest percentage of gross domestic product of any advanced
nation,
and no strong U.S. economy to absorb exports, Japan's degree of freedom
has
diminished.
Political leadership is in shambles. Prime Minister
Yoshiro Mori, who earlier this week met with President
Bush, is expected to resign within months. There are
fears that a Japanese meltdown will harm the already
fragile economic situation in the U.S. Comparisons are
being made between the collapse of the Japanese bubble,
and the decade-long malaise that followed it, and the
Internet-led meltdown in the U.S.
What went wrong in Japan? Why have the reforms of the
past several years failed? The answers to these
questions are crucial to any effort to arrive at a prognosis
for Japan, test the analogy between Japan and the U.S.,
and assess the likely effects of further Japanese
stagnation on the U.S. economy.
Going Nowhere
Since the 1980s, there was a generally accepted explanation of Japan's
postwar
success. It had two parts. One was an activist government role in economic
policy
through a variety of mechanisms, among them targeting and supporting attractive
industries, relaxing antitrust, managing competition to avoid its excesses,
and
encouraging joint research. The second part of the explanation was the
so-called
Japanese management system, characterized by continuous improvement of
cost
and quality through flexible manufacturing and reduced time to market.
The reality is that Japan's activist government policy explains Japan's
failures much
better than its successes. Government had a surprisingly small role in
many of
Japan's most impressive export successes, such as cars, robotics, cameras
and video
games. It was in uncompetitive sectors, such as chemicals, aircraft, software
and
financial services, that there was extensive government regulation and
subsidies,
legal cartels, government-sponsored collaborative activity, and sustained
protection.
Government intervention and protection not only made the cost of living
for
Japanese consumers extremely high, but drove up the cost of doing business
for
Japanese companies. Policy makers thought they could create an efficient
export
sector while at the same time protecting and subsidizing domestic industries.
Instead, inefficient local industries such as construction, agriculture,
wholesaling,
retailing and transportation exerted a tremendous drag on the entire economy.
Japanese companies moved offshore in droves in the 1980s and 1990s to escape
these high costs. Companies could prosper if left alone; the problem was
the
government-led system.
On the corporate side, Japan's style of competing on total quality and
continuous
improvement -- on doing the same thing as rivals but doing it better --
led to success
in many industries in the 1970s and well into the 1980s. But even in their
heyday,
Japanese companies were far less profitable than Western competitors. Weak
corporate governance and little pressure from shareholders led to imitation,
product
proliferation and widespread diversification. By the mid- to late 1980s,
Western
companies began to close the productivity gap by adopting Japanese practices.
Then they surged ahead, capitalizing on Japanese weaknesses in white-collar
productivity and information technology. With no distinct strategies, Japanese
companies were drawn into a zero-sum competition that eroded prices and
further
undermined profitability.
Why have reforms failed? The simple answer is that they were hardly reforms,
and
mostly targeted at the wrong problem. The cornerstone of Tokyo's response
has
been massive government spending -- intended to pump up domestic demand
and
bail out companies -- to the tune of more than $1.1 trillion. Structural
reforms have
been marginal, so that stifled competition, a regulatory morass, weak corporate
governance, and a high cost of doing business still remain. Couple this
with
increased taxes on consumption, capital gains and property transfers, and
Japanese
economic growth has gone nowhere. Companies have started to restructure,
but
most efforts have been timid in order to preserve employment. Japanese
corporate
investment continues to flow overseas.
There is little comparison between Japan's situation and that of the U.S.
A little
history is instructive: The collapse of the Japanese bubble exposed a fundamentally
flawed system, and the nation failed to respond. The U.S. faced significant
challenges, but the system is sound and adjustment has been rapid.
Consider the U.S. situation in the late 1980s, with the savings-and-loan
question,
defense downsizing, a real-estate bust, weaknesses in corporate quality
and
efficiency, and a huge budget deficit. Self-corrective mechanisms took
over, with
competition and financial-market pressure stimulating rapid and vigorous
adjustment. The U.S. entered a recession in July 1990 but was growing again
by
April 1991. The government's role was modest, and focused on facilitating
restructuring and streamlining regulation. Japan, in contrast, has delayed
or avoided
reforms, making adjustment slow and painful.
Today's U.S. situation is less troubling in most respects than the last
recession.
While stock-market excesses, the dot-com meltdown, and higher energy costs
are
near-term problems, competitiveness remains sound (the U.S. has competitiveness
issues, but they are longer-term ones). Productivity growth, the fundamental
driver
of prosperity, is high. The nation continues to be a leader in information
technology,
health care, financial services, and knowledge creation, among other things,
which
will be driving forces in the economy for years to come. With few new entrants
into
the work force, unemployment is unlikely to rise as much as in past downturns.
Demographic changes promise to continue to boost the pool of savings to
be
invested. And there is no new competitive power on the horizon.
A slowdown in information-technology investment was inevitable after the
heady
growth of recent years, but rising investment as a percentage of GDP is
a 20-year
trend. The Internet is here to stay, and there is a healthy new maturity
about how to
deploy it. More realistic stock-market valuations will lead to better corporate
decisions.
Finally, the U.S. is once again in the middle of feverish adjustment, with
a burst of
bankruptcies, restructurings, mergers, and buyouts, all of which are reshaping
the
economic landscape. Provided that government supports this adjustment with
sound monetary policy (such as the Fed's half-point interest-rate cut yesterday),
lower marginal tax rates, and continued efforts to streamline regulation,
there is
every reason to believe that economic growth will recover.
The contrast with Japan is striking. Japan, too, has fundamental competitive
strengths, including world-class companies, well-educated citizens, strong
technological capability, and high savings. The core problem is not companies,
workers, or even consumers, but the system. The system is beginning to
change,
but too slowly. No vision for a future Japan has emerged, and no political
leadership
has come forward to articulate and implement it. With only modest internal
reforms
and no plan, Japanese citizens and companies have lost the confidence to
spend
and invest. No amount of government pump-priming can overcome this.
Could Japan's difficulties hurt the U.S.? A growing Japan would certainly
help, but
Japan's malaise is unlikely to have a large negative impact. Japan has
been
depressed for a decade, and a significant decline in the appetite for critically
needed
U.S. goods and services such as information technology, pharmaceuticals
and
financial services is unlikely. Japan accounts for only about 9% of U.S.
exports, and
exports to Japan in recent years have been stable or growing. Some Japanese
portfolio capital invested in the U.S. financial markets might be withdrawn
to
strengthen domestic balance sheets, but net flows of capital from Japan
are modest
and there is no obviously better place to put it. On the corporate side,
Japanese
companies, if anything, are likely to be growing investors in the U.S.
to access
technology and diversify out of the slow-growth Japanese market.
While the threat is modest, Japan represents a large opportunity for U.S.
companies
and investors. As reform and restructuring proceed, even if slowly, acquisitions,
private-equity opportunities, and the ability to enter formerly restricted
markets
should proliferate. U.S. investors are already involved in workouts of
distressed
loan portfolios, and early results are encouraging. Overall U.S. corporate
investment
in Japan has been growing rapidly.
What should the U.S. be advising Japan to do? First and foremost, the Bush
administration should stop the pressure for pump-priming that has proven
so
disastrous. Instead, the focus should be on helping Japan facilitate restructuring,
open its markets, improve corporate governance, and eliminate barriers
to
competition. Instead of government spending, Japan needs to reduce the
tax burden
to provide incentives for consumer and corporate spending. Instead of fearing
"deflation," Japan should see the decline in domestic prices as fundamentally
healthy. As the cost of living and the cost of doing business go down,
the domestic
market will expand and Japanese companies will be less prone to invest
abroad.
A Red Herring
On Monday, Bank of Japan Governor Masaru Hayami signaled a new course,
declaring the central bank will act to ensure that a key interest rate
falls to zero and
stays there until consumer prices stop falling. But while bringing down
interest rates
may be psychologically important, I believe Japanese interest rates are
a red herring.
They have long been near zero. The real problem is to restore confidence
and find a
way to rapidly restructure bank loan portfolios so that banks and corporate
borrowers can put the past behind them and start focusing on the future.
Doing this could involve some combination of tax credits for write-downs,
establishment of an insurance fund into which banks will pay over time
to reimburse
the government for losses, and encouraging private-equity infusions and
acquisitions that do not unduly limit competition.
The greatest challenge for Japan, in many respects, is demonstrating leadership
and
developing a plan to rebuild confidence. Accelerating the reform process
and
accepting its short-term costs are the only answer. The Liberal Democratic
Party
must stand up to powerful vested interests such as farmers and the construction
industry, a move that will pay large dividends in future elections. A plan
for Japan
will involve replacing intervention with incentives, and challenging Japanese
companies and citizens to deal with their own problems. Japan can compete,
but
only if it allows competition.
3/27/01
THE NEW ECONOMY IN HISTORIC PERSPECTIVE
U.S. productivity growth has markedly accelerated since
1995,
largely due to recent innovations in Internet technology,
computers and telecommunications. How do these innovations
and
the explosion of economic growth associated with them
compare to
the "golden age" of innovation that occurred in the late
19th and
early 20th century with the advent of electricity, the
internal
combustion engine, the telephone, phonograph, motion
pictures and
air transport?
According to Robert Gordon, a researcher for the National
Bureau
of Economic Research, these productivity gains don't
measure up
to the gains of the early 20th century for the following
reasons:
o The gains of recent years
are largely confined to the
durable manufacturing
sector (including the production
of computers) which
involves only 12 percent of the
economy
o The "great inventions" --
electricity, the combustion
engine, and chemical
and pharmaceutical advances -- not
only led to dramatic
upsurges in productivity, but also
changed everyday
life by improving working conditions,
sanitation and food
safety, and even brought about the
economic development
of the southern United States (due to
air conditioning).
o Much of the activity involving
the Internet is simply a
substitution of
one form of communication for another.
Another reason for the leap in productivity during the
early 20th
century was the closing of the American labor markets
to
immigration and the goods markets to trade, which gave
a boost to
real wages and promoted productivity growth between the
1920s and
1960s. The post 1972 slowdown in productivity could also
be
attributed to a reopening of labor markets to immigration
and
foreign trade.
Source: Chris Farrell, "The New Economy in Historic Perspective,"
NBER Digest, December 2000; based on Robert Gordon, "Does
the New
Economy Measure Up to the Great Inventions of the Past",
NBER
Working Paper No. 7833, August 2000, National Bureau
of Economic
Research, 1050 Massachusetts Avenue, Cambridge, Mass.
02138.
For NBER text http://www.nber.org/digest/dec00/w7833.html
For more on Productivity and Technology
http://www.ncpa.org/pd/economy/econ9.html
WORKING CONDITIONS OF NIKE CONTRACT WORKERS
The athletic shoemaker Nike has been criticized for practices
in
its third-world factories. A new report from the nonprofit
Global
Alliance for Workers and Communities, of which Nike is
a founding
member, said it uncovered a string of problems in a survey
of
4,450 workers at nine Indonesian factories.
While a Wall Street Journal/NBC poll last year found 31
percent
of American women had experienced workplace harassment,
the
Global Alliance survey found:
o Nearly 8 percent of workers
reported receiving unwanted
sexual comments,
nearly 2.5 percent said they had received
unwanted sexual
touching on the job and 30 percent said
they had been victims
of verbal abuse, like swearing or
yelling.
o The Global Alliance survey
also found 55 percent of the
Nike contract workers
were happy with company medical
clinics, while 45
percent were unhappy.
o Some 73 percent of the workers
were satisfied with work
relationships with
their direct supervisors, and 68
percent were satisfied
with factory management.
o The only widespread complaint,
raised by 90 percent, was
that it was hard
to get sick time off.
Otherwise, the Indonesian factories appear to be models
of their
kind, providing incomes that are above minimum wage to
workers
who would be poorer in their absence.
o Nike, by contracting with
factories employing more than a
half-million workers
in 55 countries, is running one of
the world's most
extensive international development
programs.
o By hiring many women (83 percent
of workers in the
Indonesian factories)
Nike is giving them economic power
to help raise their
often-lowly social status.
Critics of Nike are weakening its brand and raising its
cost of
doing business, says Daniel Akst. Well-meaning customers,
upset
by stories of sweatshops and happy to save money, may
skip the
Nikes and buy off brands. Of course, these cheaper
no-name
sneakers were probably made under worse conditions.
Source: Daniel Akst, "Nike in Indonesia, Through a Different
Lens," On the Contrary, New York Times, March 4, 2001;
"Workers'
Voices: An Interim Report on Workers' Needs and Aspirations
in
Nine Nike Contract Factories in Indonesia," February
22, 2001,
Global Alliance for Workers and Communities, International
Youth
Foundation, 32 South Street, Suite 500, Baltimore, Md.
21202,
(410) 347-1500.
For NY Times text
http://www.nytimes.com/2001/03/04/business/04CONT.html?searchpv=site01
For survey info
http://www.theglobalalliance.com/content/feb_22_01_release.cfm
For more on Trade & Globalization
http://www.ncpa.org/pd/trade/trade3.html
Child Labor and The British
Industrial Revolution
Lawrence W. Reed
Everyone agrees that in the 100 years between 1750 and 1850 there
took place in Great Britain profound economic changes. This was the age
of the Industrial Revolution, complete with a cascade of technical
innovations, a vast increase in industrial production, a renaissance of
world trade, and rapid growth of urban populations.
Where historians and other observers clash is in the interpretation of
these
great changes. Were they "good" or "bad"? Did they represent
improvement to the citizens, or did these events set them back? Perhaps
no other issue within this realm has generated more intellectual heat than
the one concerning the labor of children. The enemies of freedom---of
capitalism-have successfully cast this matter as an irrefutable indictment
of
the capitalist system as it was emerging in 19th century Britain,
The many reports of poor working conditions and long hours of difficult
toil make harrowing reading, to be sure. William Cooke Taylor wrote at
the time about contemporary reformers who, witnessing children at work
in factories, thought to themselves, "How much more delightful would
have been the gambol of the free limbs on the hillside; the sight of the
green mead with its spangles of buttercups and daisies; the song of the
bird and the humming. of the bee. "l
Of those historians who have interpreted child labor in industrial Britain
as
a crime of capitalism, none have been more prominent than J. L. and
Barbara Hammond. Their many works, including Lord Shaftesbury
(1923), The Village Labourer (1911), The Town Labourer (1917), and
The Skilled Labourer (1919) have been widely promoted as
"authoritative" on the issue.
The Hammonds divided the factory children into two classes: "apprentice
children" and "free labour children." It is a distinction of enormous
significance, though one the authors themselves failed utterly to
appreciate. Once having made the distinction, the Hammonds proceeded
to treat the two classes as though no distinction between them existed
at
all. A deluge of false and misleading conclusions about capitalism and
child labor has poured forth for years as a consequence.
Opportunity or Oppression?
"Free-labour" children were those who lived at home but worked during
the days in factories at the insistence of their parents or guardians.
British
historian E. R Thompson, though generally critical of the factory system,
nonetheless quite properly conceded that "it is perfectly true that the
parents not only needed their children's earnings, but expected them to
work."2
Professor Ludwig von Mises, the great Austrian economist, put it well
when he noted that the generally deplorable conditions extant for centuries
before the Industrial Revolution, and the low levels of productivity which
created them, caused families to embrace the new opportunities the
factories represented: "It is a distortion of facts to say that the factories
carried off the housewives from the nurseries and the kitchens and the
children from their play. These women had nothing to cook with and to
feed their children. These children were destitute and starving. Their
only
refuge was the factory. It saved them, in the strict sense of the term,
from
death by starvation."3
Private factory owners could not forcibly subjugate "free-labour" children;
they could not compel them to work in conditions their parents found
unacceptable. The mass exodus from the socialist Continent to
increasingly capitalist, industrial Britain in the first half of the 19th
century
strongly suggests that people did indeed find the industrial order an
attractive alternative. And no credible evidence exists which argues that
parents in these early capitalist days were any less caring of their offspring
than those of pre-capitalist times.
The situation, however, was much different for "apprentice" children, and
close examination reveals that it was these children on whom the critics
were focusing when they spoke of the "evils" of capitalism's Industrial
Revolution. These youngsters, it turns out, were under the direct authority
and supervision not of their parents in a free labor market, but of
government officials. Many were orphans; a few were victims of negligent
parents or parents whose health or lack of skills kept them from earning
sufficient income to care for a family. All were in the custody of "parish
authorities." As the Hammonds wrote, ". . . the first mills were placed
on
streams, and the necessary labour was provided by the importation of
cartloads of pauper children from the workhouses in the big towns.
London was an important source, for since the passing of Hanway's Act
in 1767 the child population in the workhouses had enormously increased,
and the parish authorities were anxious to find relief from the burden
of
their maintenance.... To the parish authorities, encumbered with great
masses of unwanted children, the new cotton mills in Lancashire, Derby,
and Notts were a godsend."4
The Hammonds proceed to report the horrors of these mills with
descriptions like these: "crowded with overworked children," "hotbeds of
putrid fever," "monotonous toil in a hell of human cruelty," and so forth.
Page after page of the Hammonds' writings--as well as those of many
other anti-capitalist historians-deal in this manner with the condition
of
these parish apprentices. Though consigned to the control of a
government authority, these children are routinely held up as victims of
the
"capitalist order."
Historian Robert Hessen is one observer who has taken note of this
historiographical mischief and has urged others to acknowledge the error.
The parish apprentice children, he writes, were "sent into virtual slavery
by the parish authorities, a government body: they were deserted or
orphaned pauper children who were legally under the custody of the
poor-law officials in the parish, and who were bound by these officials
into long terms of unpaid apprenticeship in return for a bare subsistence."5
Indeed, Hessen points out, the first Act in Britain that applied to factory
children was passed to protect these very parish apprentices, not
"free-labour" children.
The Role of the State
It has not been uncommon for historians, including many who lived and
wrote in the 19th century, to report the travails of the apprentice children
without ever realizing they were effectively indicting government, not
the
economic arrangement of free exchange we call capitalism. In 1857,
Alfred Kydd published a two-volume work entitled The History of the
Factory Movement. He speaks of "living bodies caught in the iron grip of
machinery in rapid motion, and whirled in the air, bones crushed, and
blood cast copiously on the floor, because of physical exhaustion." Then,
in a most revealing statement, in which he refers to the children's
"owners," Kydd declares that "'The factory apprentices have been sold
[emphasis mine] by auction as 'bankrupt's effects.6
A surgeon by the name of Philip Gaskell made extensive observations of
the physical condition of the manufacturing population in the 1830s. He
published his findings in a book in 1836 entitled Artisans and Machinery.
The casual reader would miss the fact that, in his revelations of ghastly
conditions for children, he was referring to the parish apprentices: "That
glaring mismanagement existed in numberless instances there can be no
doubt; and that these unprotected creatures, thus thrown entirely into
the
power of the manufacturer, were overworked, often badly-fed, and
worse treated. No wonder can be felt that these glaring mischiefs
attracted observation, and finally, led to the passing of the Apprentice
Bill,
a bill intended to regulate these matters. "7
The Apprentice Bill that Gaskell mentioned was passed in 1802, the first
of the much-heralded factory legislation, the very one Hessen stresses
was aimed at the abuse by the parish officials. It remains that capitalism
is
not a system of compulsion. The lack of physical force, in fact, is what
distinguishes it from pre-capitalist, feudal times. When feudalism reigned,
men, women, and children were indeed "sold" at auction, forced to work
long hours at arduous manual labor, and compelled to toil under whatever
conditions and for whatever compensation pleased their masters. This
was the system of serfdom, and the deplorable system of parish
apprenticeship was a remnant of Britain's feudal past.
The emergence of capitalism was sparked by a desire of Englishmen to
rid themselves of coercive economic arrangements. The free laborer
increasingly supplanted the serf as capitalism blossomed. It is a gross
and
most unfortunate distortion of history for anyone to contend that
capitalism or its industrialization was to blame for the agony of the
apprentice children.
Though it is inaccurate to judge capitalism guilty of the sins of parish
apprenticeship, it would also be inaccurate to assume that free-labor
children worked under ideal conditions in the early days of the Industrial
Revolution. By today's standards, their situation was clearly bad. Such
capitalist achievements as air conditioning and high levels of productivity
would, in time, substantially ameliorate it, however. The evidence in favor
of capitalism is thus compellingly suggestive: From 1750 to 1850, when
the population of Great Britain nearly tripled, the exclusive choice of
those
flocking to the country for jobs was to work for private capitalists.
The Sadler Report
A discussion of child labor in Britain would be incomplete without some
reference to the famous Sadler Report. Written by a Member of
Parliament in 1832 and filled with stories of brutality, degradation, and
oppression against factory workers of all ages and status, it became the
bible for indignant reformers well into the 20th century.
The Hammonds described it as "one of the main sources of our
knowledge of the conditions of factory life at the time. Its pages bring
before the reader in the vivid form of dialogue the kind of life that was
led
by the victims of the new system."8 Two other historians, B. L. Hutchins
and A. Harrison, describe it as "one of the most valuable collections of
evidence on industrial conditions that we possess. "9
W. H. Hutt, in his essay, "The Factory System of the Early Nineteenth
Century," reveals that bad as things were, they were never nearly so bad
as the Sadler Report would have one believe. Sadler, it turns out, had
been agitating for passage of the Ten Hours' Bill, and in doing so he
employed every cheap political trick in the book, including the falsification
of evidence. 10 The report was part of those tactics.
Hutt quotes R. H. Greg (author of The Factory Question, 1837), who
accused Sadler of giving to the world "such a mass of ex-parte
statements, and of gross falsehoods and calumnies ... as probably never
before found their way into any public document."11
This view is shared by no less an anti-capitalist than Friedrich Engels,
partner of Karl Marx. In his book, The Condition of the Working Classes
in England, Engels says this of the Sadler Report: "This is a very partisan
document, which was drawn up entirely by enemies of the factory system
for purely political purposes. Sadler was led astray by his passionate
sympathies into making assertions of a most misleading and erroneous
kind. He asked witnesses questions in such a way as to elicit answers
which, although correct, nevertheless were stated in such a form as to
give
a wholly false impression."12
As already explained, the first of the factory legislation was an act of
mercy for the enslaved apprentice children. Successive acts between
1819 and 1846, however, placed greater and greater restrictions on the
employment of free-labor children. Were they necessary to correct
alleged "evils of industrialization"?
The evidence strongly suggests that whatever benefits the legislation may
have produced by preventing children from going to work (or raising the
cost of employing them) were marginal, and probably were outweighed
by the harm the laws actually caused. Gaskell admitted a short time after
one of them had passed that it "caused multitudesof children to be
dismissed, but it has only increased the evils it was intended to remedy,
and must of necessity be repealed."13
Hutt believes that "in the case of children's labor the effects [of restrictive
laws] went further than the mere loss of their work; they lost their training
and, consequently, their skill as adults."14
Conditions of employment and sanitation were best, as the Factory
Commission of 1833 documented, in the larger and newer factories. The
owners of these larger establishments, which were more easily and
frequently subject to visitation and scrutiny by inspectors, increasingly
chose to dismiss children from employment rather than be subjected to
elaborate, arbitrary, and ever changing rules on how they might run a
factory employing youths. The result of legislative intervention was that
these dismissed children, most of whom needed to work in order to
survive, were forced to seek jobs in smaller, older, and more out
of-the-way places where sanitation, lighting, and safety were markedly
inferior.15 Those who could not find new jobs were reduced to the status
of their counterparts a hundred years before, that is, to irregular and
grueling agricultural labor, or worse --in the words of Mises -"infested
the
country as vagabonds, beggars, tramps, robbers, and prostitutes." 16
So it is that child labor was relieved of its worst attributes not by
legislative fiat, but by the progressive march of an ever more productive,
capitalist system. Child labor was virtually eliminated when, for the first
time in history, the productivity of parents in free labor markets rose
to the
point that it was no longer economically necessary for children to work
in
order to survive. The emancipators and benefactors of children were not
legislators or factory inspectors, but factory owners and financiers. Their
efforts and investments in machinery led to a rise in real wages, to a
growing abundance of goods at lower prices, and to an incomparable
improvement in the general standard of living.
Of all the interpretations of industrial history, it would be difficult
to find
one more perverse than that which ascribes the suffering of children to
cap-italism and its Industrial Revolution. The popular critique of child
labor in industrial Britain is unwarranted, misdirected propaganda. The
Ham-monds and others should have focused on the activities of
government, not capitalists, as the source of the children's plight. It
is a
confusion which has unnecessarily taken a heavy toll on the case for
freedom and free markets. On this issue, it is long overdue for the friends
of capitalism to take the ideological and historiographical offen-sive.
At the time of the original publication, Mr. Reed was President of
The Mackinac Center, a free market public policy institute in
Midland, Michigan. An earlier version of this essay appeared as a
chapter in Ideas on Liberty: Essays in Honor of Paul L. Poirot
published by FEE.
1. William Cooke Taylor, The Factory System (London, 1844), pp.
23-24.
2. E. R Thompson, The Making of the English Working Class (New
York: Random House, 1964), p. 339.
3. Ludwig von Mises, Human Action (New Haven, Connecticut: Yale
University Press, 1949), p. 615.
4. J. L. and Barbara Hammond, The Town Labourer (London:
Longmans, Green, and Co., 1917), pp. 144-45.
5, Robert Hessen, "The Effects of the Industrial Revolution on Women
and Children," in Ayn Rand, Capitalism: The Unknown Ideal (New York:
New American Library, 1967), p. 106.
6. Alfred Kydd, The History ofthe Factory Movement (New York: Burt
Franklin, n.d.), pp. 21-22.
7. Philip Gaskell, Artisans and Machinery (New York: Augustus M.
Kelley, 1968), p. 141.
8. J. L. and Barbara Hammond, Lord Shaftesbury (London: Constable,
1923), p. 16.
9. B. L. Hutchins and A. Harrison, A History of Factory Legislation
(New York: Augustus M. Kelley, 1966), p. 34.
10. W. H. Hutt, "The Factory System of the Early Nineteenth Century," in
E A. Hayek, ed., Capitalism and the Historians (Chicago: University of
Chicago Press, 1954), pp. 156-84.
11. Ibid., p. 158.
12. Friedrich Engels, The Condition of the Working Classes in England
(New York: Macmillan, 1958), p. 192.
13. Gaskell, p. 67.
14. Hutt, p. 182.
15. Hessen, p. 106.
16. Mises, p. 614,
Repinted with permission from The Freeman, a publication of the
Foundation for Economic Education, Inc., August,1991, Vol. 41, no. 8
IEA STUDY: HOW ICELAND CONSERVES FISHERIES
Iceland has one of the most effective fisheries management
programs in the world. In the 1960s and 1970s, it had
the same
depletion problem currently facing many fisheries. In
response,
its government initially imposed restrictions on the
number of
days trawlers could put to sea to catch certain species.
This
led to fishing derbies, where fishermen competed to catch
as
many fish as possible in the limited time available.
Inevitably,
catches continued to exceed sustainable levels.
Starting in 1979, the Icelandic government gradually
introduced
a system of individual transferable share quotas (ITQs),
which
essentially give boat owners the right to catch a specific
proportion of the total allowable catch of certain species.
o If a boat owner does not wish
to use all his ITQ he can
sell part of it
to someone else, encouraging more
efficient use of
the capital invested in boats and
equipment.
o Because ITQs entitle their
owners to a specific share of
the future stock
of fish, they create incentives to
ensure that stocks
are sustainable.
o Since the introduction of
ITQs, capital invested in
Icelandic fisheries
(boats and equipment) has been
gradually falling
and catches have fallen to sustainable
levels, whilst the
value of catches has risen.
However, the success of the ITQ system has provoked political
pressure for the imposition of a "resource rent" tax.
A more
appropriate next step, says analyst Hannes Gissurarson,
would be
to introduce a cost-recovery charge and give ITQ owners
greater
say in the administration and enforcement of the system.
ITQs and other property-rights approaches (the essential
component of which is exclusive access) offer the best
hope for
effective fisheries management.
Source: Hannes H. Gissurarson, "Overfishing: The Icelandic
Solution," Studies on the Environment No. 17, September
2000,
Institute of Economic Affairs, Institute of Economic
Affairs, 2
Lord North Street, Westminster, London, SW1P 3LB, U.K.
For text http://www.iea.org.uk/books/env17.htm
For more on Marine Fisheries
http://www.ncpa.org/pi/enviro/envdex7.html
9/21
EUROPEAN MEN OPT OUT OF WORK FORCE
Both younger and older European men are staying away from
work,
experts say. Labor market regulations and dislocations
are
discouraging younger males, while older male workers
have taken
advantage of the lower retirement age of 60 instituted
in the
1980s.
The trend has offset a surge in the number of female
workers --
with the result that total labor-force participation
has hardly
risen. Such are the findings of St. Louis Federal Reserve
Bank
economist Patricia S. Pollard.
o In France, the share of 20-
to 24-year-old males in the
labor force fell
from 86 percent in 1967 to 53 percent in
1998.
o The share of 60- to 64-year-old
French males in the work
force plummeted
over the same period from 63 percent to
15 percent.
o Among comparable older men
in Germany, the participation
rate fell from 78
percent to 30 percent.
o By comparison, 77 percent
of American males ages 60 to 64
were working in
1967 -- a proportion which dropped to 55
percent by 1998.
Experts warn that Europe will have to reverse the trend
toward
late entry into and early exit from the labor force if
it
expects to thrive.
Source: Gene Koretz, "More European Men Opt Out," Business
Week,
September 25, 2000.
For more on International Unemployment and Labor Market
Regulation http://www.ncpa.org/pi/internat/intdex4.html