Readings Economic Development Readings (D) Econ 385 Fall, 2003
Articles marked *are required reading
*1. LATIN AMERICAN WOES
2. We're doing all right, but what about you?
Aug 14th 2003 | BRATISLAVA
From The Economist print edition
*3. Lion cubs on a wire
Aug 14th 2003
From The Economist print edition
*4. LESSONS OF CORRUPTION
*5. Take Argentina Off Life Support
FROM THE ARCHIVES: August 15, 2003
By MARY ANASTASIA O'GRADY
*6. Why Europe Sags
7. STEEL TARIFFS COST JOBS
8. AMERICAN EMPIRE
*9. TAX BURDENS AND GROWTH
10. Argentina and the IMF The talking begins Aug 7th
2003 | BUENOS AIRES From The Economist print edition
*11.Africa: A tragic continent Walter Williams
12. Idi Amin: Sadly Unexceptional
By GEORGE B.N. AYITTEY
13. Europe 'Reaches' for Disaster
By HENRY I. MILLER
14. Recipe for reform
Aug 21st 2003
From The Economist print edition
*15. MANUFACTURING IN INDIA SAVES ONLY 10-15 PERCENT
over costs in America, despite low wages, says Bruce
Bartlett....NATIONAL
CENTER FOR POLICY ANALYSIS OUTSOURCING JOBS IS NOT ALWAYS THE BEST OPTION
* 16. A place for capital controls
May 1st 2003
From The Economist print edition
17. TUNISIAN WOMEN AND ECONOMY ON THE RISE
18.At Last, a Bill for Treating
Immigrants Humanely
19. All Investors Are Liars
By JOHN ALLEN PAULOS WSJ
20. Counsel of Despair WSJ europe
21. Drugs Deal Won't Help
The World's Poor
By NICK SCHULZ
22. Global Terrorism Index
Aug 28th 2003
From The Economist print edition
*23. RUSSIA'S FLAT TAX
24. Deficits and defiance
Sep 2nd 2003
From The Economist Global Agenda
*25. Free Iraq's Market
by Gerald P. O'Driscoll and Lee Hoskins
*26. Why the WTO Fails The World's Poor
By JOHN REDWOOD WSJ Europe
27. Chile Looks to Exploit Trade Pact With U.S. By
MATT MOFFETT Staff Reporter of THE WALL STREET JOURNAL
28. Stakeholder Blues By Annette Godart-van der Kroon
29. A New Road to Serfdom? By Hans H.J. Labohm
30. Deadly Protection By Johan Norberg
31. Equality vs. Poverty
By TCS
32. Europe's 'New Deal' WSJ europe
33. Peach-Colored $20 Bills to Sprout
By JOHN D. MCKINNON
Staff Reporter of THE WALL STREET JOURNAL
34. Post-Iraq Influence of U.S. Faces Test At
New Trade Talks WTO's Clout
Is on Trial, Too; Persistent
Rich/Poor Gap Dims Hopes Raised in '01
*35. State Development Planning: Did it Create an
Asian Miracle
by Benjamin Powell
June 9, 2003
36. Rich Man, Poor Man
By ARVIND PANAGARIYA
37. Cancun's Silver Lining
38. WTO Talks Collapse in Cancun
39. Developing Countries Betrayed by EU and USA
by Johan Norberg 2002
*40. Fix or float? Sep
11th 2003
From The Economist print edition
41. The new "new economy"
Sep 11th 2003
From The Economist print edition
*42. Subsidies Subvert The Single Market
By MARIO MONTI
43. We need a job-saving law Walter Williams
9-17-03 http://www.townhall.com/columnists/walterwilliams/ww20030917.shtml
*44. A Europe More Like America
By GORDON BROWN
Mr. Brown is Britain's chancellor of the exchequer.
1. LATIN AMERICAN WOES
In the early 1990s, Latin American countries opened their
economies to world markets and sold off many state-run
industries. Leaders hoped that these reforms would
bring
prosperity. However, researchers say that these
reforms are not
bearing fruit as predicted.
Economic growth rates are still low:
o In Latin American countries,
the average annual growth
rate in gross domestic
product (GDP) in the 1990s was 3
percent.
o While this growth rate was
higher than the 1980s growth
rate of 2 percent,
it is still much lower than the growth
rate of 6 percent
in the 1970s.
o Inflation-adjusted earnings
grew slightly by 1992, but
dropped back to
their 1990 levels by 2000.
Additionally, increasing poverty is hampering economic
progress:
o The share of the population
living in poverty increased
more than 3 percentage
points over the course of two
decades.
o The number of persons in the
region living in poverty
increased approximately
5.5 percent between 1990 and 1999,
from 200 million
to 211 million people.
o Likewise the number of households
considered poor rose 5
percent, increasing
from 39 million households at the
stare of the decade
to 41 million at the end.
There are some positive signs however. Hyperinflation,
a common
epidemic in the 1980s, is no longer occurring.
Also, the poverty
growth of 6 percent is less than the population growth
of 16
percent.
Researchers say that further institutional reforms are
needed.
However, institutional reforms, like restructuring legal
codes,
are far more difficult to implement than selling off
nationalized
industries.
Source: Elizabeth McQuerry, Coordinator of the
Latin America
Research Group, "In Search of Better Reform in Latin
America,"
EconSouth, Federal Reserve Bank of Atlanta, Second Quarter
2002.
For text http://www.frbatlanta.org/invoke.cfm?objectid=21556529-B00B-4993-97E561D176AFBFE9&method=display
For more on Latin America http://www.ncpa.org/iss/int
2. We're doing all right, but what about you? Aug 14th 2003 | BRATISLAVA From The Economist print edition
They are still poor, but the EU's future members from central and eastern
Europe
are becoming givers of aid
MOST people hate to lose money. Most governments, for all their efforts
to pour the
stuff down black holes, are just as unhappy. But the citizens and rulers
of the eight
central European and Baltic countries waiting to join the European Union
next year are
more proud than sad at their loss of most foreign-aid inflows. The future
members are
still very poor, by EU standards, but the worst of the post-communist slump
is behind
them. They are becoming givers of aid, not just takers of it.
Probably the most influential private aid donor to central Europe, George
Soros, an
American financier and philanthropist, will be keeping the offices of his
Open Society
Institute in the region, but cutting spending from $32m last year to about
$10m next
year. The institute aims to promote values such as democracy, good government
and
minority rights. EU membership for these central European countries will
help safeguard
those values, leaving less need for other aid, Mr Soros says.
In the 1990s the central European and Baltic
countries received, in all, about $18 billion in
official finance from sources including the EU, the
American government, the World Bank, the IMF
and the United Nations Development Programme
(UNDP). Now they are becoming net donors to
UNDP programmes: Slovenia first, in 1997,
followed in 2001 by the Czech Republic. Only
Latvia and Lithuania owe any money to the IMF.
World Bank lending has fallen sharply, except in
Slovakia, which was late to reform. The United
States, the biggest supplier of bilateral aid in the
1990s, says the central European and Baltic
countries no longer need it.
The EU has continued pumping in money. As they
wait to join next May, the future new members
are receiving "pre-accession" aid, worth about
euro3 billion ($3.4 billion) this year alone. Once inside, they will get
farm subsidies and
development cash from the structural funds that the EU gives its poorer
regions; the EU
expects to spend about euro5 billion in the new member countries next year,
though
from May they will also be paying in to its general budget.
They will have a say too on the aid that the EU gives to other countries,
about euro5
billion this year. But, that apart, the Union will expect them to give
further aid money
from their own pockets. Last year it said that each member should try to
earmark at
least 0.39% of its GDP for development aid by 2006.
That would be a tall order for the new
members: the most generous of them, the
Czech Republic, expects to spend less than
0.1% of GDP on aid this year, others much less.
But their problem will not only be finding the
cash, but spending it effectively. They gave
guns and butter to poorer Soviet satellites in
communist times, but have little infrastructure
and expertise for managing development aid
now.
Here the UNDP says it can help. It is offering to
advise what it calls "emerging donor" countries
on designing national aid programmes, and to
let them use UN offices and experts in distant
places to run projects, so saving on
administrative costs. The Czech Republic has
covenanted money for spending through the
UNDP; Slovakia is about to do the same.
Where would the aid go? In UNDP eyes, the
central Europeans should look first at projects
in the Balkans, Ukraine and Moldova, the
Caucasus, and Central Asia. The ex-communist
countries in these areas have economic,
environmental and political problems echoing
the ones the central Europeans overcame in
the 1990s. Language also gives the central
Europeans an edge: Russian is still, just, a
lingua franca across the former Soviet block.
The central Europeans will probably see things the same way. A focus on
eastern Europe
and Central Asia matches their foreign-policy priorities. For their own
peace of mind,
they want stable and prosperous countries to their east, not poor and rackety
ones with
dodgy democracies and even dodgier nuclear power stations. They will probably
argue
for directing more of the EU's aid budget in that direction, once they
have a say in it.
3. Lion cubs on a wire Aug 14th 2003 From The Economist print edition
Some African economies are soaring, but from fragile foundations
ECONOMIC growth in Africa was dismal last year. At 3.2%, down from
4.3% in 2001, it barely kept pace with a swelling population. The
culprits, according to a new report* by the United Nations, were a
weaker global economy, drought and AIDS in southern and eastern
Africa, fresh armed conflicts in the Central African Republic, Côte
d'Ivoire and Madagascar, and yet more madness in Zimbabwe.
There were beacons in the gloom, however. Leaving aside countries
that received oil windfalls, the best performers were Mozambique, Rwanda
and Uganda,
whose economies grew by 12%, 9.9% and 6.2% respectively. This was no one-off.
In
the past decade, Mozambican incomes have nearly doubled, and 4m Ugandans
(22% of
the population) have been lifted out of poverty. The average Rwandan, meanwhile,
is
two-thirds richer than in 1994. These three lion cubs are often paraded
as proof that,
even in Africa, sound economic policies and better governance can lead
to rapid growth.
All three governments have indeed done many things right. All three are
broadly
business-friendly, and all have tried to strengthen property rights and
the rule of
law—both rare in the world's poorest continent. All three have also pursued
sensible
fiscal and monetary policies, liberalised their economies to varying degrees
and
welcomed foreign direct investment (FDI). Mozambique managed to attract
an
impressive $518m in FDI in 2001, equivalent to a seventh of GDP.
Their success is precarious, however. For a
start, they are all highly dependent on charity.
Aid accounts for more than 50% of Uganda's
national government budget, 60% of Rwanda's
and 70% of Mozambique's. Economists differ as
to whether aid tends to complement or to
displace private investment, but one thing is
certain: without donors' support, the cubs
would stumble.
Ashes can be fertile
Another reason for caution is that the lion cubs'
growth rates reflect recovery from wars. The
Rwandan genocide of 1994 cut GDP in half. In
the 1970s and 1980s, civil wars in Mozambique
and Uganda were nearly as bloody and
economically just as devastating. This makes
them awkward models for the rest of Africa.
One can hardly advocate burning a country to
cinders in order to bring about a post-war
construction boom, such as Rwanda's,
accompanied by torrents of aid from foreigners
moved by televised carnage. Despite a decade
or more of peace, none of these countries has
quite regained its pre-war level of prosperity.
A final worry—and it is a big one—is that in all three countries, high
average growth
rates disguise large pools of stagnation. In Uganda, growth has been concentrated
in
the cities and in the wet, fertile region around Lake Victoria, while the
arid north of the
country has struggled. Between 1992 and 2000, mean consumption per adult
rose by an
impressive 6.2% each year in Ugandan cities, but by a miserable 0.5% in
northern rural
areas. In Mozambique, the south (which includes the capital, Maputo) is
far richer than
the north. Maputo attracted 93% of the country's foreign direct investment
in 2001; the
most remote northern province, Niassa, attracted none at all. In Rwanda,
the divide is
ethnic. Some members of the Hutu tribe complain that the Tutsis, who dominate
the
government and the army, have grabbed too big a share of the fruits of
peace. Lack of
data makes this hard to confirm.
Regional disparities of wealth are common everywhere: contrast China's
coastal cities
with its hinterland, or New York with Mississippi. But such inequality
may matter more in
Africa than elsewhere, because the nations there are less stable. Many
Africans feel
more loyalty to their ethnic group than to the state. "Having one region
lag far behind",
says the UN of Uganda, "can engender bitterness and ultimately foster rebellion."
This has already happened. In northern Uganda, a longstanding revolt by
a vicious,
loose-knit outfit called the Lord's Resistance Army has proven impossible
to suppress.
Some young northerners have taken to pillaging because they see few other
ways of
making money. Worsening insecurity scares away investors and keeps the
region poor.
Ultimately, it could hurt the whole of Uganda. It is, for example, one
reason why the
government last year made a sudden, and huge, unbudgeted increase in military
spending. This irks donors and may aggravate the country's debt problems.
Rwanda and Mozambique are more tranquil but cannot afford to be complacent.
One
survivor of Rwanda's genocide told Gérard Prunier, a historian,
that "the people whose
children had to walk barefoot to school killed the people who could buy
shoes for theirs."
Many in Mozambique's poor north support Renamo, a formerly atrocity-prone
rebel group
which has now turned into a peaceful opposition party.
Countries that have suffered one civil war are disproportionately likely
to suffer another.
To their credit, all three governments are aware of the risk, and are trying
to do
something about it. Mozambique has introduced tax breaks for those who
invest in
marginalised areas; Uganda is considering transferring more public money
to poor
regions; and Rwanda has introduced checks to ensure that most of the money
allocated
to rural schools and clinics actually gets there. Such measures will doubtless
help, but it
will be hard to make up for the lack of rain and abundance of guns in northern
Uganda,
or for the fact that the few roads connecting northern Mozambique with
the booming
south are regularly blasted away by floods. Rwanda's ills will not heal
fast, either.
* "Economic Report on Africa 2003", UN Economic Commission for Africa,
July 2003
4. LESSONS OF CORRUPTION
Until a few decades ago, corruption-fighting programs
consisted
mainly of lamenting the human character. Academic
studies of
corruption were hindered by the reluctance of scholars
to seem
patronizing to third-world countries. When scholars
did look at
corruption, their major focus, absurdly, was the question
of
whether it was harmful.
Today, the costs of corruption are widely discussed, and
they are
stunning, says Tina Rosenberg:
o Francisco Barrio, until April
Mexico's anticorruption
czar, estimates
that graft costs his country 9.5 percent
of its Gross Domestic
Product (GDP) -- twice the education
budget -- and Mexico
ranks only in the middle of the
corruption charts.
o When the levels of graft are
high, governments spend less
on education and
health and more on public works --
projects chosen
not for their value to the nation but for
their kickback potential.
o Corruption greatly discourages
foreign investment, and
with globalization,
its effects have become borderless:
when the Bank of
Credit and Commerce International went
down in 1991, 40,000
depositors in Bangladesh lost their
life savings.
There is, however, a curious assortment of places where,
in
recent years, things have changed:
o Australia, now one of the
world's cleanest nations, was a
longtime Wild West
of lawlessness.
o Singapore is now a model of
probity, but in the 1950s it
was awash in corruption.
o Bolivia is one of the world's
most corrupt nations, but
for a time a reformist
mayor gave residents of its biggest
city, La Paz, a
reprieve.
o Ferdinand Marcos, of all people,
cleaned up the
Philippines' tax
bureau. Even in many nations where fraud
is rampant, some
agency or region stands out for
integrity.
Source: Tina Rosenberg, "The Taint of the Greased Palm,"
New York
Times, August 10, 2003.
For text
http://www.nytimes.com/2003/08/10/magazine/10CORRUPT.html
For more on Government Corruption and Growth
http://www.ncpa.org/pi/internat/intdex3.html
5. Take Argentina Off Life Support FROM THE ARCHIVES: August 15, 2003 By MARY ANASTASIA O'GRADY
The Golden State may be America's very own banana republic but
at least it doesn't have to worry that the International Monetary Fund
might come to its "rescue."
In practical terms this means Californians can rest easy that Gov.
Gray Davis won't be confiscating dollars and floating a nuevo peso
any time soon. Nor can Mr. Davis hope for a truckload of IMF
greenbacks -- a "loan" to the state that is -- delivered to Sacramento
so he can to ease the effects of his awful policies on voters.
These may seem bizarre thoughts but perhaps not to the 37 million
Argentines who have suffered just this fate and are not likely to get
relief from IMF interference any time soon.
Just last week, after a meeting in Washington with Argentine
economy minister Roberto Lavagna, U.S. Treasury Secretary John
Snow suggested that the South American basket case is looking
good for another bailout, this one in order to avoid a default to the
IMF. The deal is rumored to cover some $12.5 billion in Argentine
debt to the IMF that is due over the next three years, $3 billion of it
on Sept. 9. This may be good news for Argentine President Nestor
Kirchner but it is likely to be extremely harmful to the nation.
The Bush Treasury should be thinking about whether debt relief to
Argentina and continued IMF guidance there will accelerate or
delay reforms to produce sound money, low tax rates and freer trade
policy. All the evidence suggests that these goals are more likely to
be achieved if the IMF leaves Buenos Aires permanently and if the
U.S. instead adopts a new strategy of promoting these priorities.
By keeping the Argentine government on life support, the Bush
administration also displays disrespect for the Argentine democracy.
Serious would-be reformers already have real trouble competing
with the entrenched political elite in Argentina , especially the
powerful Peronist machine. In fact, by securing an IMF package in
early 2003, some Argentine observers believe that former President
Eduardo Duhalde may have enabled his Peronist candidate Kirchner
to squeak by outsider Ricardo Lopez Murphy in the spring elections.
Another Argentine government bailout also would be a betrayal by
George Bush, who promised to reverse the damaging international
finance policies of the Clintonistas and instead promote common
sense and American values abroad.
It's worth reviewing what got us here. In late 1998 when a recession
hit the booming Argentine economy, tax revenues fell and the fiscal
deficit widened. To address that problem policy makers employed a
series of tax hikes beginning in 2000. Tax collection was supposed to increase
and the deficit and interest
rates were supposed to fall, pulling the country out of recession. The
opposite occurred. As things got
worse, government worthies began to blame the problems on the one-to-one
convertibility of the peso to
the dollar, raising public concerns that a devaluation was in the offing.
Continual assaults on both the fiscal and monetary front undermined all
confidence. Fears of a bank run
prompted a freeze on deposits, followed by a foreign-debt default and a
devaluation. In the ensuing
weeks and months the government confiscated dollars and tore up utility
contracts, destroying Argentine
property rights.
Dollarization could have pulled the economy out of its death spiral. In
a paper first released in March
2000, economists Andrew Powell and Pablo Guidotti from Argentina's Universidad
Torcuato Di Tella
analyzed the sources and costs of peso uncertainty and the benefits of
adopting the dollar. They found
that "estimates of the potential gain of eliminating currency risk [that
is dollarizing] appeared to be
significant." The evidence was clear but the arguments in favor of sound
money were overwhelmed by
the "float" theologists in Washington.
As Congress's Joint Economic Committee reported in a June 2003 review of
the debacle, "Argentina's
problems are of its own making but the IMF has made a number of important
mistakes." The report cites
the fund's support for tax increases "to balance Argentina's budget" and
its bias toward "devaluing the
peso" while it "discouraged consideration of dollarization."
It is also true that the Bush administration could have intervened on behalf
of sound money at any time: It
could have told Argentina to dollarize. Ample Argentine forces would have
embraced the decision,
including Central Bank president Pedro Pou.
Now, you can't unfry an egg but there is such a thing as learning from
the past. It's no good beating up
the Argentines for what was, at least in part, a U.S.-sponsored calamity.
A better place to start would be
to recognize the current Argentine "recovery" for what it is: a dead cat
bounce. Low inflation, currency
stability, moderate growth and fiscal improvements have been achieved through
a collapse in imports, a
devaluation and a debt moratorium.
This is a throwback to import-substitution industrialization, a model that
has no future. Worse, the
government seems to have no intention of altering it. "The problem," Mr.
Guidotti told me in an interview
from Buenos Aires this week, "is that the government is postponing reforms
in the belief that with the
passage of time alone growth will be restored."
The real challenge is to address the fact that in the wake of the decision
to break the dollar-peso contract
investment dried up. "Investment in Argentina has fallen so low (a drop
of over 50% in relation to
1998) that it does not even compensate for the depreciation of the capital
stock," says Mr. Guidotti.
"Hence, potential output is falling at an estimated rate of over 4% per
year." This means that the rebound
cannot last unless investment recovers. "And the recovery of investment
requires the government to
provide clear indications that the rule of law will not be further undermined,
and that needed reforms will
no longer be indefinitely postponed."
Considering what they have already survived, the intelligent and resourceful
Argentine people are
certainly capable of accomplishing this. The U.S. should support them in
their struggle by removing the
impediments presented by the promise of another IMF bailout.
Updated August 15, 2003
6. Why Europe Sags
Europeans wondering why Europe is registering 0% growth and the
German economy has shrunk for three straight quarters are coming up
with the usual suspects. It's the euro, or the European Central Bank, or
the heat wave, the argument goes. Wrong all.
Let's start with the euro. There are usually two cases put forth to
explain how the euro is holding back European economies. The first,
usually made by English Tories, is that the single currency restricts the
national use of monetary policy to spur growth. In these times, so the
story goes, German interest rates should be much lower than the ECB's
2% key refinancing rate, which is applicable to all 12 nations in the
euro.
The second, more sophisticated case is that the euro's Stability Pact,
which in theory at least bars budget deficits from rising above 3%,
makes it impossible to run a "stimulative" fiscal policy. Though this is
a
better argument, it is also unsound.
Those who make these arguments are saying in effect that a country
ought to be able to devalue its currency to help exporters. Devaluation
is a tax on savers -- especially the middle class. Externally, it often
leads to rounds of competitive devaluations (beggaring they neighbor)
that bring on inflation and global monetary instability. Because it had
the
experience of Weimar doing just this, the pre-euro Bundesbank never
allowed its precious mark to be savaged. On the contrary, it defended
the coin like a lion. It is sophistry to suggest matters would be different
now if Germany still had a separate currency.
We would have a great deal more sympathy for the arguments against
the Stability Pact if Keynesian spending and supply-side tax cuts were
not mindlessly equated. Government spending usually means the
misallocation of scarce resources, and must be funded by taxes,
whether in the present or future through borrowing. We can't see how
any of this can get an economy out of recession.
But it is true that the Stability Pact has stopped tax cuts, which do stimulate
economies, especially when
they lower top marginal rates. Even borrowing to cover a deficit caused
by tax cuts often makes sense,
as the new business generated will probably pay for the financing without
the need for higher taxes. More
and more European governments are acknowledging this truth and going ahead
with tax cuts, though it is
still too early to realize the effects.
Lowering the interest rate central banks control seldom helps, as years
of 0% rates in Japan should
attest. If businesses have no confidence that things are getting better
they won't make investments, no
matter how inexpensive money is. The bank should rather aim at keeping
money supply in equilibrium
with the demand for it.
ECB President Wim Duisenberg shares this sentiment. Soon after the bank's
last rate cut, on June 6, he
declared: "We have done our part. It's now the case that governments .
. . can no longer hide behind the
ECB in order to cover up their failure to enact the structural reforms,
which are so urgently required for
Europe."
Which brings us to the real culprit for Europe's stagnation: "social policies"
that sap initiative and
creativity. These laws also make markets so sticky that they are often
unable to react to rational policies.
The welfare state has the very antisocial consequences of high structural
unemployment and no growth.
Companies hit by the current high value of the euro, or the global recession,
are prevented from laying off
workers at the same rate as their competitors overseas, to take one of
the most egregious examples. So
productivity has sagged in Europe during this recession. This makes the
recession longer and more
painful for everyone.
The euro is high for exporters in every country and it prevents all from
devaluing. And yet, we observe
that those countries that have the least rigid economies -- such as Ireland
and Spain -- have been
growing these past two years. Their economies are more susceptible to stimulus,
and less costly. The
German economy, on the other hand, has shrunk in five out of the past six
quarters.
Where Germany goes so will Europe. Chancellor Gerhard Schroeder has put
his finger to the wind and
has had to introduce some reforms this year. But he'll need to be more
courageous than he's been so far.
So will his counterparts. Hitching their wagons to the U.S. locomotive
won't do this time.
Updated August 18, 2003
7. STEEL TARIFFS COST JOBS
President Bush meets with his economic team at the Crawford
ranch
today to discuss how to help the economy create more
jobs. The
Wall Street Journal suggests repealing his own 30 percent
steel
tariffs.
Designed to help only a single industry, the tariffs have
instead
punished the far more numerous industries that use steel.
Repealing the steel tariffs would have instant benefits,
says the
Journal:
o In the wake of the tariffs,
domestic steel prices have
risen by 30 percent
or more while the price of hot-rolled
steel, a major industrial
commodity, nearly doubled from
late 2001 to July
2002.
o Shortages in specific products
abound, as foreign steel
makers have sent
their steel to suppliers in other
countries; meanwhile,
many steel consumers have struggled
to find reliable,
quality product at prices that keep them
competitive with
foreign manufacturers.
This has all cost American jobs, says the Journal:
o A study done this year for
the Consuming Industries Trade
Action Coalition
(CITAC) found higher steel prices cost
some 200,000 American
jobs and $4 billion in lost wages
from last February
to November.
o That compares to employment
in the entire domestic steel
industry of only
188,000.
No fewer than 16 states lost at least 4,500 steel consuming
jobs,
including the key Presidential election states of Pennsylvania
and Florida that each lost nearly twice that number.
Source: Editorial, "Steel of the Century," Wall Street
Journal,
August 13, 2003.
For text (WSJ subscription required)
http://online.wsj.com/article/0,,SB106073854084613300,00.html
For CITAC study text
http://www.citac.info/study/citac_2002jobstudysum_020703.pdf
For more on Tariffs and Trade Barriers
http://www.ncpa.org/iss/int/
8. AMERICAN EMPIRE
One reason the United States possessions choose to remain
territories is because it is a good deal for them.
They get far
more in aid from Washington than goes the other way.
Puerto
Ricans, for example, do not pay federal income taxes
but are
still eligible for federal welfare benefits such as food
stamps,
says Bruce Bartlett.
This illustrates an important point about colonialism
that France
and Britain also discovered -- it just doesn't pay.
Even
admirers of the British Empire, such as economic historian
Niall
Ferguson, admit this fact.
o In his recent book, "Empire"
(Basic Books), he notes that
Britain put far
more into India in the form of public
works and military
expenses than it ever took out.
o In "Mammon and the Pursuit
of Empire" (Cambridge
University Press),
economic historians Lance Davis and
Robert Huttenback
concluded that Britain lost money on all
its colonies.
That's why they were ultimately given their independence.
Iraq is further evidence that colonies are a losing proposition.
Even though that nation sits on the second largest proven
oil
reserves on earth, production is coming back on line
very slowly:
o This is forcing U.S. taxpayers
to pay for the
reconstruction of
Iraq on top of the large and growing
costs of occupation.
o And, of course, the biggest
cost is unquantifiable-the 261
American military
personnel who have lost their lives in
the Iraq conflict.
Bartlett doesn't believe anyone in the Bush Administration
consciously desires an American empire, although they
are being
urged to pursue one by some pundits like William Kristol.
But
there is still a danger the United States will back into
imperialism if it is not careful.
Source: Bruce Bartlett, "American Empire," National Center
for
Policy Analysis, August 13, 2003.
For text
http://www.ncpa.org/edo/bb/2003/bb081303.html
For more on International (Institutions and Growth)
http://www.ncpa.org/iss/int/
9. TAX BURDENS AND GROWTH
The effect of high taxes on economic growth has reduced
relative
living standards of most developed countries compared
to the
United States, according to data compiled by the Organization
for
Economic Cooperation and Development (OECD) covering
1975 to
2001.
Adjusted for purchasing power -- the amount of money it
takes to
buy the same goods in each country -- the OECD data show:
o In 1982, French per capita
income was 82 percent of
America's.
o But French taxes now absorb
46.3 percent of their gross
domestic product
(GDP) while in the United States the
number is 29.4 percent.
o The result is that French
GDP per capita is now only 71
percent of America's.
In fact, at a projected 29.2 percent of GDP in 2004,
the United
States will have the lowest tax burden of any of the
27 OECD
countries. Most OECD countries appear to have peaked
in
comparison to U.S. economic performance:
o German per capita GDP peaked
at 81 percent of U.S. per
capita GDP in 1991
and has since fallen to 74 percent, in
part due to a tax
burden of 42 percent.
o Canada reached 92 percent
of U.S. per capita GDP in 1982
but has fallen to
82 percent of our level, with a tax
burden of 37 percent.
o Japan had 90 percent of U.S.
per capita GDP in 1991, but
has fallen to only
78 percent, while government spending
increased from about
30 percent to 38 percent of GDP.
Sweden's tax burden has been a steady 54 percent for a
decade and
is the highest of the OECD countries. Its per capita
GDP fell
from 84 percent of the U.S. level in 1975 to 70 percent
in 2001.
Tax burdens in Australia, South Korea and Ireland are
only
slightly larger, and their growth rates have been relatively
high.
Source: Ronald D. Utt, "The 2001 Tax Cut Did Make a Difference,"
Backgrounder No. 1653, May 9, 2003, Heritage Foundation.
For study
http://www.heritage.org/Research/Taxes/bg1653.cfm
For more on Taxes & International Economic Growth
http://www.ncpa.org/iss/int/
10. Argentina and the IMF The talking begins Aug 7th
2003 | BUENOS AIRES From The Economist print edition
The obstacles to a crucial agreement
SINCE becoming Argentina's president in May, Néstor
Kirchner has quickly stamped his authority on his country's
politics. He has purged the army and the police, and
wants to shake up the judiciary. All of this has made him
popular, in a country still scarred by a debt default
and wrenching economic collapse in 2001. Now comes the hard
part. Last week, a team from the International Monetary
Fund turned up in Buenos Aires to start talks on an
agreement that holds the key to Argentina's prospects
over the rest of Mr Kirchner's four-year term.
Relations between the IMF and Argentina have been poisonous.
In January,
the Fund's board disregarded the opposition of its senior
staff and signed a
temporary accord rolling over Argentina's debts for seven
months. Since
then, the atmosphere has become far more cordial. Argentina
more than
met most of the macroeconomic targets in the January
agreement. The
economy is set to grow by 5% this year (see chart). Unemployment
has
fallen, though it still stands at 15.6%. But there are
signs that growth is
faltering. Sustaining it requires credit and investment—and
for these, an
IMF agreement is crucial.
Two sets of issues will dominate the new talks. The first
is Argentina's
mountain of public debt and the size of the budget surplus
the government
needs if it is to service it.
In 2001, in the largest default in financial history,
Argentina stopped
honouring debts which now total $77 billion (including
subsequent unpaid
interest). Reaching an agreement with creditors was always
going to be
tortuous, but Argentina has been slow to try. Officials
had said they would
unveil an offer to creditors at the IMF annual meeting
in Dubai next month. But that now looks unlikely. And the
creditors are unimpressed by the government's efforts
so far.
The Fund's Argentine fan club limbers up for the
kick-off
To make matters worse, the previous government issued
$28 billion in new bonds to compensate banks for a
bungled devaluation in 2002. Servicing these will cost
1.7% of GDP next year and 3.5% in 2005, according to Luis
Secco, an economic consultant. Even if the IMF agrees
to roll over Argentina's debts to the Fund for another three
years, little may be left over to offer holders of the
defaulted bonds.
In his inaugural speech, Mr Kirchner promised that his
government would not make debt repayments "at the price
of the hunger and exclusion of Argentines". Roberto Lavagna,
the economy minister, argues that Argentina cannot
afford a primary fiscal surplus (before debt payments)
of more than 3% of GDP, without compromising economic
growth. But IMF officials counter that restoring Argentina's
creditworthiness is itself essential if growth is to
continue. They have hinted that Argentina should match
Brazil, which has stabilised its debts by churning out a
primary surplus of 4.5% of GDP.
This argument might be settled by splitting the difference.
Not so a second one, over structural reforms. The IMF
wants reforms that would allow the closure of some banks,
and new regulations that would allow privatised utility
companies to raise tariffs, frozen since last year's
devaluation. Such reforms were in the January agreement with
the IMF, but not implemented. With a congressional election
due in October, the government has no appetite for
unpopular measures. Guillermo Nielsen, the finance secretary,
has anyway dismissed the need for such reforms: he
told an Argentina newspaper that they were "ideological
myths".
Fund officials will want to try and pin Argentina down
on these reforms this time. Mr Kirchner clearly hopes to
trump them with appeals to their political masters. Last
month, he visited the leaders of Britain, France, Spain and
the United States to press his case. This week, Mr Lavagna
was due to meet John Snow, his American
counterpart.
The world has some sympathy for Argentina. Even the IMF
now accepts that it has made mistakes in its handling
of the country's problems, as Horst Köhler, the
Fund's boss, recently admitted. But Argentina risks overplaying its
hand. France and Spain, which pushed for the January
agreement, are now worried about the problems of their
utility companies, whose subsidiaries in Argentina have
lost money. Argentina is due to make a $2.9 billion payment
to the IMF by September 9th. Unless an agreement is imminent
by then, the government says it will not pay. In
January, the IMF gave in to a similar threat. Will it
do so again?
11.Africa: A tragic continent Walter Williams
http://www.NewsAndOpinion.com |
Anyone who believes President Bush's Africa
initiative, including sending U.S. troops to Liberia,
will amount to more than a hill of beans is whistling
Dixie. Maybe it's overly pessimistic, but most of
Africa is a continent without much hope for its
people. Let's look at it.
According to a July 30 Wall Street Journal article,
"If Economists Are So Smart, Why Is Africa So
Poor?" written by Hoover Institution senior fellows
Douglas North, Stephen Haber and Barry
Weingast, "two-thirds of African countries have
either stagnated or shrunk in real per capita terms
since the onset of independence in the early 1960s.
... Most African nations today are poorer than they
were in 1980 -- sometimes by very wide margins."
Poverty is not a cause but a result of Africa's
problems. According to the Netherlands-based
Genocide Watch, since 1960, around the time of
independence, about 9 million black Africans have
been slaughtered through genocide, politicide and
mass murder. The Democratic Republic of the
Congo leads the way with 2,095,000, closely
followed by the Sudan with 2 million, Nigeria and
Mozambique with a million each, Ethiopia 855,000,
Rwanda 823,000, Uganda 555,000 and hundreds
of thousands more in other countries.
There are a couple of especially sad observations
one can make about this aspect of the ongoing
tragedy. The first is that if an equivalent number of
rhinos, giraffes and lions had been similarly
slaughtered, the world would be in an uproar. We'd
see demonstrations at the U.N. and African
embassies. The second is there was indeed one
African country that was the focal point of mass
demonstrations, moral outcry and economic
reprisals. It was South Africa.
But was South Africa the worst in terms of black lives
lost? It turns out
that about 5,000 South African blacks lost their lives.
Do you see
anything wrong with that picture: world silence in the
wake of millions
upon millions of black lives lost on the rest of the
continent but world
outrage in the case of South African apartheid and 5,000
lives lost?
Might it be that white Africans are held to higher standards
of civility; thus
their mistreatment of blacks is unacceptable, while blacks
and Arabs are
held to a lower standard of civility and their mistreatment
of blacks is less
offensive?
President Bush has pledged to send more foreign aid to
some African
nations. Foreign aid has historically gone to governments.
Instead of
helping the poor, foreign aid has enabled African tyrants
to buy cronies
and military equipment to stay in power, not to mention
establishing
multibillion dollar "retirement" accounts in Swiss banks,
should their
regime be toppled.
What African countries need, the West cannot give. In
a word, what
Africans need is personal liberty. That means a political
system where
there are guarantees of private property rights and rule
of law. It's almost
a no-brainer. The "2003 Index of Economic Freedom," published
by the
Heritage Foundation and The Wall Street Journal, lists
Botswana, South
Africa and Namibia as "mostly free." World Bank 2002
country per
capita GDP rankings put Botswana 89th ($2,980), South
Africa 94th
($2,600) and Namibia 111th ($1,700). Is there any mystery
why they're
well ahead of their northern neighbors, such as Mozambique
195th
($210), Liberia 201st ($150) or Ethiopia 206th ($100)?
The lack of liberty means something else: A nation loses
its best and most
mobile people first. According to the 2000 census, there
were 881,300
African-born U.S. residents. They're doing well in our
country, and many
are professionals sorely needed back home. While in attendance
at a
Washington, D.C., Nigerian affair, some years ago, I
listened while the
Nigerian ambassador admonished the mostly Nigerian audience
to come
back home. At the table where I was sitting, my Nigerian
hosts broke out
in near uncontrollable laughter.
Every weekday JewishWorldReview.com publishes what many
in Washington and in the media consider "must reading."
Sign
up for the daily JWR update. It's free. Just click here.
12. Idi Amin: Sadly Unexceptional By GEORGE B.N. AYITTEY
On the heels of President Charles Taylor's departure from Liberia has
come the death of Idi Amin Dada in Saudi Arabia. While perhaps an
event that many will celebrate in itself, Saturday's passing of the former
Ugandan dictator from kidney failure was a sad reminder that
corruption and mayhem in Africa are not new phenomena.
Amin and Taylor themselves had some common traits. They both left a
trail of death, destruction and corruption. They were also proteges of
Libya's strongman, Moammar Gadhafi. One difference perhaps is that,
whereas the United Nations practically demanded that the U.S.
overthrow Taylor, it gave Amin crucial backing that bolstered his rule.
Idi Amin, a man with only a fourth-grade education, was a product of
Uganda's chaotic internal politics after independence from Britain in
October 1962. A federal constitution was adopted and Milton Obote
became prime minister, but the new government's legitimacy was
always tenuous. In 1968, a scandal erupted over some £2.3 million
of
Ministry of Defense appropriations. An investigation was launched and
Amin came under suspicion. Facing imminent arrest, Amin, then deputy
commander of the army, struck first, seizing power on January 24,
1971.
The new leader then suspended all civil liberties and political activities.
He ordered his soldiers to arrest and shoot on sight any suspected
opponent. Hundreds of thousands were slaughtered. In 1972, Amin
nationalized British investments worth more than £250 million.
Then came one of the acts for which he's best known: the expulsion of
some 50,000 Indians who had been living in Uganda for generations.
He confiscated their assets, worth more than £500 million, which
he
distributed to his cronies. Unsurprisingly, expelling such an
economically important community had disastrous consequences. The
economy collapsed. Exports of sugar, coffee and tea slumped, as peasant
farmers resorted to smuggling
to escape confiscatory taxes from Amin's rapacious gang.
It was at this point that Amin, desperate for revenues, turned to the Arab
world. To curry favor with
Middle Eastern potentates, he expelled all Israelis and donated their embassy
to the PLO, whose
terrorists all of a sudden poured into Uganda. Amin gave speeches glorifying
Hitler's campaign to rid the
world of Jews and helped the PLO hijack an Israeli plane. Gadhafi poured
in money and arms upon
Amin's pledge to turn Uganda -- around 16% Muslim at the time of independence
-- into a full Muslim
state.
The bloodshed was accompanied with a measure of buffoonery as Amin's eccentricities
knew no
bounds. He called himself "King of Scotland" and made British residents
in Kampala carry him on their
shoulders.
The now defunct Organization of African Unity (OAU), hopelessly afflicted
with intellectual astigmatism
and rabid anti-Western bias, made Amin its chairman at its summit in Kampala
in 1975. One Ugandan
Anglican bishop, Festo Kivengere, was irate: "At the very moment the heads
of state were meeting in the
conference hall, talking about the lack of human rights in southern Africa,
three blocks away, in Amin
torture chambers, my countrymen's heads were being smashed with sledge
hammers and their legs being
chopped off with axes."
The United Nations too was seduced by Amin's antics and delusional outbursts.
As OAU chairman,
Amin addressed the U.N. General Assembly on October 1, 1975, in a speech
that denounced the
"Zionist-U.S. conspiracy" and called for the extinction of the state of
Israel. The Assembly gave him a
standing ovation when he arrived, applauded him throughout his speech,
and rose to its feet when he left.
The next day, the U.N. Secretary-General Kurt Waldheim gave a public dinner
in Amin's honor.
Emboldened, Amin returned to continue his reign of terror. But at home
discontent mounted. Numerous
coups were attempted, which Amin crushed with ruthless abandon. Thousands
fled into exile in
neighboring countries. To divert attention away from a ruined economy,
Amin constantly rattled his saber
against his neighbors. In 1976, he claimed portions of western Kenya but
backed off when Kenya
threatened a trade blockade. He then invaded Tanzania in October 1978 to
annex the region of Kagera.
The Tanzania army, aided by Ugandan exiles, drove Amin's underfed and unpaid
soldiers back to the
Ugandan capital Kampala. There the enraged army finally kicked Amin out
of office.
After some time in Iraq, Amin was given asylum in Saudi Arabia. Human-rights
activists estimated that
by the end of his reign more than 300,000 Ugandans had been butchered.
Save for the meretricious theatrics, however, Amin's villainous rule was
not the exception in post-colonial
Africa. Several African economies and states have been destroyed by a string
of what Africans call
"coconut generals" -- Liberia in 1990 by General Samuel Doe, Somalia in
1993 by General Siad Barre,
Rwanda in 1994 by General Juvenal Habryimana, Burundi in 1995 by General
Pierre Buyoya, Sierra
Leone in 1996 by General Joseph Momoh, Zaire in 1997 by General Mobutu
Sese Seko, and Ivory
Coast in 1999 by General Robert Guie. Nearly all, to some degree and at
one time or another, were
able to get the support of the OAU. Alas, its successor organization, the
African Union is even more
clueless.
At its Summit on July 11, it chose another eccentric Gadhafi protégé
-- President Robert Mugabe of
Zimbabwe -- as its new vice chairman. Zimbabwe's economy is in tatters,
regime opponents are being
brutalized, tortured and killed. More than two million Zimbabweans have
fled into exile. Famine grips the
country. To deflect attention from his economic failures, Mugabe rails
against "colonial injustices," seizing
the properties of white commercial farmers for distribution to his cronies.
Deja vu all over again.
Mr. Ayittey, a native of Ghana, is an economist at American University.
His new book, "Africa
Unchained: the Blueprint for Development," is due to be published by St.
Martin's Press next
year.
Updated August 19, 2003
13. Europe 'Reaches' for Disaster By HENRY I. MILLER
European regulatory officials have raised hostility to technological
innovation to an art form. Their current medium of choice is the
precautionary principle, which holds that as long as the evidence about
the safety of a product, technology or activity is in any way incomplete,
it should be prohibited or, at the least, heavily regulated.
Supposedly a variation on the motherly admonition of "better safe than
sorry," the "principle" is not really one at all, but is only a fig leaf
for
questionable decision-making whose basis may be ideological or
protectionist (or both).
For example, responding to pressure from radical environmental groups
that campaign relentlessly against the use of chemicals, the European
Union has proposed a program called Registration, Evaluation and
Authorization of Chemicals (Reach). Reach is far-reaching.
Its registration requirement compels manufacturers and importers to
submit information to a central database on hazard, exposure, and risk
on 30,000 new and existing substances that are produced or imported
in yearly quantities exceeding one metric ton. Evaluation requires
regulators to assess risks for 5,000 substances that are produced or
imported in yearly quantities exceeding 100 tons, and also for
substances in lower quantities if they are "of concern." The newly
established European Chemicals Agency will then determine whether
further testing is needed. Authorization, meanwhile, applies to
substances of "very high concern," for which specific permission would
be required for certain uses. An estimated 1,400, or 5%, of registered
substances will be subject to authorization.
Reach would also require extensive and hugely expensive toxicity
testing, not only of potentially nasty chemicals, but also of many that
are
innocuous. Many of the tens of thousands of targeted chemicals have
been used routinely by both industry and consumers for decades, without
any obvious harm. Reach is
also applicable not only to the 30,000 specifically referenced chemicals,
but also to the "downstream"
products that contain these chemicals. It requires downstream users to
carry out additional testing if the
exposure or use of the product exceeds that foreseen by the manufacturer.
Because chemical products are ubiquitous in automobiles, aircraft, home
construction and furnishings,
and workplaces, Reach reaches deeply and intrusively into the life of every
European. Testing chemicals
for which there is evidence or suspicion of toxicity is sensible, but testing
all chemicals -- including those
for which there is no evidence of any harm even at high exposures -- only
diverts attention and resources
from more dangerous compounds. Instead of focusing on the development of
new, innovative products,
corporate scientists will be preoccupied with gratuitous testing of chemicals
known to be safe in normal
use.
As is inevitably the case with such one-size-fits-all regulation, the expense
will be monumental: The
European Commission itself has estimated that the direct and indirect costs
of the new system will be
€18 to €32 billion, and one independent assessment predicts that
the regulation could reduce the EU's
GDP by as much as three percentage points over the next decade.
The language of the Reach proposal suggests that any adverse impact from
a chemical substance,
including alleged harm from a substance contained in a finished good or
article, is sufficient to subject the
manufacturer, importer and/or downstream user to liability. Placing the
burden of proof on those who
manufacture or use chemicals, instead of on those who claim to be injured,
will have ominous
implications for liability suits.
The imposition of such unreasonable requirements has ominous consequences
for outside companies that
wish to export to the European market. Worse still, the EU is attempting
to secure acceptance of the
precautionary principle in international agreements and treaties.
In the interest of economic growth, we need global regulatory policies
that make scientific sense and that
encourage innovative research and development. But by promoting the precautionary
principle, and by
exporting their own version of unscientific and inconsistent regulation,
EU politicians are performing a
disservice. The only winners will be the European apparatchiks who will
enjoy additional power, and the
anti-science activists who will have succeeded in erecting yet more barriers
to the use of superior
technologies and useful products.
Dr. Miller is a fellow at the Hoover Institution and the Competitive Enterprise Institute.
Updated August 26, 2003
14. Recipe for reform
Aug 21st 2003
From The Economist print edition
We grow enough food. So why do so many still go hungry?
FOR all the complaints about modern farming, agriculture is one
of the great success stories of the post-war period: the world
produces twice as much grain as it did in 1960, on only a third
more land—enough to provide 2,700 calories a day for every
person on the planet.
Yet, more than 800m people are still chronically malnourished,
most of them in the developing world. As "Ending Hunger in Our
Lifetime" argues, to say that hunger is strictly a distribution
problem is like saying that if the rain fell evenly over the earth
there would be no droughts; the origins of, and solutions to,
this mismatch between food and hungry mouths are rather more
complex.
Many of the hungry in poor places are farmers themselves.
Their failure to grow—and earn—enough stems from a variety of
reasons, from a lack of access to modern farming tools to
environmental constraints to poor roads which prevent them
from reaching markets. The book offers a clear explanation of
the agricultural problems confronting the world's hungry. But its
value lies in putting these physical challenges in a wider social
context, looking at other factors, such as women's education,
which affect household food security.
It also challenges popular misconceptions—for example, that patents on
genes held by
multinational companies are hampering farmers in developing countries;
as the book
argues, there are few patents on the current generation of high-tech crops
in most
desperately poor places. Lack of market incentives and funding, rather
than intellectual
property rights, are the real brakes on research into crops of greatest
interest to the
poor. "Ending Hunger in Our Lifetime" also provides a lucid discussion
of the problems,
and tremendous promise, of trade liberalisation and offers a robust critique
of why those
governments, in rich and poor countries alike, which aspire to self-sufficiency
in food
production, or turn to protectionism, end up hurting everyone, including
their own.
The authors offer a number of sensible remedies
to such ills, including different ways of boosting
investment in public agricultural research and
possible reforms at multilateral institutions such
as the World Bank and the Food and Agriculture
Organisation. One of the book's bolder
proposals (one also advocated by The
Economist) is the creation of a Global
Environmental Organisation, to deal with a
range of "green" issues, some of which relate
closely to farming, and which are proving
particularly tricky for the World Trade
Organisation.
As the authors acknowledge, there is little
chance of business-as-usual halving the
number of hungry by 2015, a goal
enthusiastically endorsed by world leaders in
1996. But with the right "pro-poor" policies, the
book predicts that the number of malnourished
children in the world could fall almost threefold,
to 57m by 2025; if such steps are neglected,
however, that number could rise to 178m, with
Africa bearing the brunt.
Ending Hunger in Our Lifetime: Food Security and Globalization
by C. Ford Runge, Benjamin Senauer, Philip G. Pardey, Mark
W. Rosegrant List Price:
$19.95
One entry found for dirigisme.
Main Entry: di·ri·gisme
Pronunciation: di-ri-'zhi-z&m, dE-rE-zhEs-m&
Function: noun
Etymology: French, from diriger to direct (from Latin dirigere) +
-isme -ism
Date: 1947
: economic planning and control by the state
- di·ri·giste /di-ri-'zhEst, dE-rE-/ adjective
15. MANUFACTURING IN INDIA SAVES ONLY 10-15 PERCENT
over costs in America, despite low wages, says Bruce
Bartlett....NATIONAL
CENTER FOR POLICY ANALYSIS OUTSOURCING JOBS IS NOT ALWAYS THE BEST OPTION
As manufacturing workers worry about their jobs moving
to China,
service workers now see India as a threat. With
its large pool
of educated, English-speaking workers available for wages
80
percent lower than here, many large companies, especially
banks,
have set up Indian operations or contracted with Indian
companies
to provide information technology services, says Bruce
Bartlett.
A new report from Deloitte Research projects that outsourcing
of
IT jobs to India will accelerate in coming years:
o It estimates that $356 billion
worth of global financial
services will relocate
to India in the next 5 years,
producing a cost
saving of $138 billion for the top 100
financial service
firms.
o It further estimates that
2 million jobs will move to
India -- 850,000
from the United States, 730,000 from
Europe and 400,000
from elsewhere in Asia.
However, another
report from Deloitte Consulting throws cold
water on these estimates:
o It notes that while direct
wage costs may be 80 percent
lower in India,
total labor cost savings are much more
modest-10 percent
to 15 percent for most companies.
The reason is that there are important added costs to
doing
business in India that eat up much of the saving:
o Higher costs for travel, communications,
equipment and
managerial oversight
are some of these.
o But the largest costs are for
lower productivity, cultural
differences and
incompatible systems.
The Deloitte Consulting report goes on to detail several
case
studies where companies went into India thinking that
they would
achieve significant savings only to find that it was
not worth
the effort. Other companies undoubtedly will make
the same
discovery, says Bartlett.
Source: Bruce Bartlett, "Outsourcing Jobs Is Not Always
Best
Option," is a senior fellow with the National Center
for Policy
Analysis, August 27, 2003.
For text
http://www.ncpa.org/edo/bb/2003/bb082703.html
For more on Employment
http://www.ncpa.org/iss/eco/
16. A place for capital controls
May 1st 2003
From The Economist print edition
For many developing countries, unrestricted inflows of capital are an
avoidable danger
IF ANY cause commands the unswerving
support of The Economist, it is that of liberal
trade. For as long as it has existed, this
newspaper has championed freedom of
commerce across borders. Liberal trade, we
have always argued, advances prosperity,
encourages peace among nations and is an
indispensable part of individual liberty. It
seems natural to suppose that what goes for
trade in goods must go for trade in capital, in
which case capital controls would offend us
as violently as, say, an import quota on
bananas. The issues have much in common,
but they are not the same. Untidy as it may
be, economic liberals should acknowledge that capital controls—of a certain
restricted sort, and in certain cases—have a role.
Why is trade in capital different from trade in goods? For two main reasons.
First,
international markets in capital are prone to error, whereas international
markets in
goods are not. Second, the punishment for big financial mistakes can be
draconian,
and tends to hurt innocent bystanders as much as borrowers and lenders.
Recent
decades, and the 1990s most of all, drove these points home with terrible
clarity.
Great tides of foreign capital surged into East Asia and Latin America,
and then
abruptly reversed. At a moment's notice, hitherto-successful economies
were plunged
deep into recession.
These experiences served only to underline
the lesson of previous financial debacles.
Yet it is a lesson that governments remain
decidedly reluctant to learn. Big inflows of
foreign capital present developing countries
with a nearly irresistible opportunity to
accelerate their economic development.
Where those flows are of foreign direct
investment, they are all to the good. But in
other cases, disaster beckons unless a
series of demanding preconditions are met
first (see our survey). A flood of capital
into an economy with immature and poorly
regulated financial institutions can do more
harm than good.
Unquestionably, developing countries
should strive to improve their financial
systems so that foreign capital can be
successfully absorbed. Good government,
sophisticated financial firms, and regulators
who are honest and competent cannot
eliminate the risk of financial calamity
altogether, but they can reduce it to
bearable proportions. At that point a liberal
regime for international capital makes
sense. The trouble is, many developing
countries are nowhere near that point.
Rich-country governments and, until
recently, the International Monetary Fund
have often seemed reluctant to endorse
this notion. One might say the same of The Economist. This reluctance is
defensible.
Often, indeed typically, governments have abused capital controls in ways
that
oppress their citizens and do grave economic harm. It seems safer to frown
on any
and all controls—and, in those cases where they have been used intelligently
and
successfully, to acknowledge any success very grudgingly. But this is dishonest.
It is
better to face up to the case for such rules in some circumstances, and
think hard
about how to use them sensibly, with restraint.
In from the cold
Experience suggests some rules. Refrain from blocking capital outflows
(tempting as
this might be at times of crisis). Such measures are usually oppressive,
and deter
future inflows of all kinds. Poor countries need all the foreign direct
investment they
can get: let inflows of FDI be unconfined. Other long-term inflows also
pose little
threat to stability. The chief danger lies with heavy inflows of short-term
capital,
bank lending above all. These can be difficult to stem, but many developing
countries
would do well to emulate the successful experience of Chile, which has
imposed taxes
on such inflows, with the rate of tax varying according to the holding
period.
In negotiating new free-trade arrangements with Chile (and with Singapore),
the
United States has recently sought assurances of complete capital-account
liberalisation. Bitter experience suggests that such demands are a mistake.
It is past
time to revise economic orthodoxy on this subject.
Copyright © The Economist Newspaper Limited 2003. All rights reserved.
17. TUNISIAN WOMEN AND ECONOMY ON THE RISE
The birth rate in Tunisia dropped from 7.2 in the 1960s
to 2.08
in 2000. Experts say the decline was due to a campaign
to lower
the birth rates and advocate birth control that began
in the
1950s. Consequently, Tunisia is being hailed as a model
for other
countries that want to close the wealth gap with western
nations.
o Tunisia spends the equivalent
of 18 percent of its gross
domestic product
of $21 billion on social programs,
especially family
planning and the expansion of women's
rights, either through
legislation or special projects.
o Each year, $10 million is
spent to teach citizens about
family planning
and dispense birth control.
o To inform the one-third of
Tunisians that live in rural
areas, the government
relies partly on mobile teams -- a
nurse, a social
worker, a midwife and a driver -- to
dispense reproductive
health services.
Tunisian society has changed drastically as a result
of these
social efforts:
o If births had continued at
their 1950s rate, the
population today
would be 15 million instead of 10
million.
o With fewer children to raise,
women have become a large
part of the work
force and also attend local universities
at a higher rate
than men.
o The construction of primary
schools stopped a decade ago
as the average number
of students in a class dropped from
38 in 1985 to 28
in 2000; in some schools, first grade has
been eliminated
because there aren't enough new students.
However, the drop in the birth rate also led to a population
bulge; nearly two-thirds of the population today is of
working
age, 15 to 59 years old. The World Bank puts the
unemployment
rate at 16 percent. But a rise in foreign investment
led to a 5
percent annual growth rate over the past 6 years.
Source: Gautam Naik, "Tunisia Wins Population Battle,
And Others
See a Policy Model," Wall Street Journal, August 8, 2003.
For WSJ text
http://online.wsj.com/article/0,,SB106028926761045100-search,00.html
For more on Population
http://www.ncpa.org/iss/int/
Working hours
Aug 21st 2003
From The Economist print edition
Since 1990 average working hours have dropped
sharply in Japan and in most European countries,
but have scarcely fallen in America. The gap in
work effort is now the single biggest reason why
GDP per head is lower in the European Union
than in the United States. By contrast, lower
productivity is the main reason why other OECD
countries are less prosperous than America.
18.At Last, a Bill for Treating Immigrants Humanely
By MARY ANASTASIA O'GRADY
This was a month of rare events. Mars floated by Earth closer than it
has in 60,000 years and some truly courageous and innovative thinking
emerged from inside the Beltway.
That's the best way to describe the immigration reform legislation
recently introduced in the House by Arizona Republicans Jim Kolbe
and Jeff Flake. (Arizona Sen. John McCain is sponsoring similar
legislation in the Senate.) It's a long way from bill to law, but at least
we're seeing the first indication in a very long time -- decades in fact
-- of rational thinking about the causes and effects of the U.S.'s rather
sizable illegal immigration problem.
Writing last week to John Hostettler, chairman of the House Judiciary
subcommittee on immigration, claims and border security, Messrs.
Kolbe and Flake summarized the need for action in their request for
hearings. "Deaths of illegal immigrants as they attempt to enter the
country (mostly for the purpose of finding work), a general
environment of lawlessness enveloping the southwest border, and an
illegal U.S. population of at least 7 million people are problems that
must be addressed by federal legislators."
That's the short list of disastrous unintended consequences produced
by current policy. But what's most encouraging about the Kolbe-Flake
bill is that it tries to correct the source of the problems, the serious
mismatch between high demand in the U.S. labor market for
low-skilled foreign workers and the currently unrealistic U.S.
immigration policy.
In an October 2002 paper entitled "Willing Workers," Dan T. Griswold,
associate director of the Cato Institute's Center for Trade Policy
Studies, explained the economics of the immigration problem.
"Demand for low-skilled labor continues to grow in the U.S. while the
domestic supply of suitable workers inexorably declines -- yet U.S.
immigration law contains virtually no legal channel through which
low-skilled immigrant workers can enter the country to fill the gap."
Rather than prescribe more intimidating walls, more armed border
agents or special powers to raid workplaces, the Kolbe-Flake bill
acknowledges these market forces of supply and demand. One of the
new temporary visa categories would be for foreign workers who
want to come to the U.S. The other would be for illegal aliens.
Importantly, illegal aliens who apply to become legal would not be
granted amnesty, a gift that weakens respect for law. Instead they
would have to pay a fine for breaking the law and then they would
have to get at the back of the queue for permanent resident status.
Most illegals -- an estimated half are Mexicans -- are not in the U.S.
for a free ride nor are they taking jobs from Americans. They work at
jobs that would otherwise go begging. Mr. Griswold's paper, which
focuses on Mexican migration, notes that "Hispanic men display one of
the highest labor force participation rates of any subgroup surveyed by
the Department of Labor, 80.6% vs. 74.7% for non-Hispanic white
men."
Nor is there any evidence to support the anti-immigrant fear that if more
visas were available the U.S.
would be overrun with migrants. According to Mr. Griswold's research, migration
patterns over time
suggest that migrant groups are savvy about job availability. Migrations
increase when work is available
and decrease during recessions.
Yet while the market is flexible and self-regulating, the government's
immigration policy is rigid. Times
when labor is badly needed produce a swelling illegal population. Willing
workers have to sneak into the
country to satisfy the U.S. labor demand. Even if it were possible to "seal"
the borders, except for legal
points of entry, that would not solve the problem, says Mr. Griswold. It
is likely that workers would simply
enter legally and then overstay their visas, as an estimated 40% of illegal
aliens have done.
In a perfect world, the tragic loss of life along the Mexican border alone
would be enough to change U.S.
policy. Between 1985 and 2000, there were over 4,000 deaths on the border,
according to the University of
Houston's Center for Immigration Research. The U.S. Border Patrol counted
336 fatalities in fiscal year
2001 and 320 in 2002. The Mexican embassy in Washington says that 318 Mexicans
-- it doesn't count all
deaths -- have died so far in this calendar year at the border. There is
a clear injustice in the fact that
migrants are risking life and limb and too often dying in the desert for
the privilege of serving dinner to
Americans in fancy restaurants or watering their gardens.
Yet reform need not be sold to Americans as a kindness to the victimized
Mexicans or even a moral
obligation. Enlightened self-interest should be enough. Allowing working
illegals to come out of the shadows
would enhance U.S. security, shrink the underground labor market, which
tends to undercut legal workers'
incomes and raise the hiring efficiency of honest American employers who
need low-skilled workers.
Resources now wasted on chasing migrants whose only crime is looking for
work, can then be devoted to
real law enforcement. Without reform, the problems Mr. Griswold outlines
of "smuggling, document fraud,
deaths at the border, artificially depressed wages and threats to civil
liberties" will continue.
Even cultural paranoiacs who are offended by the large Mexican immigration
could celebrate a new policy
that recognizes foreign workers with temporary visas. That's because history
suggests that a solid number
of Mexican migrants would not be likely to settle permanently in the U.S.
Before the U.S. tried to stop the migration flow with force, Mexicans circulated
in and out of the U.S. in
response to labor demand. It was only when crossing the border became so
dangerous that permanent
migration increased. Concerns about Mexicans refusing to assimilate are
overblown but making migrants
outlaws hasn't helped. If foreign workers were able to come out of the
shadows and mix more freely,
assimilation would accelerate.
It is not immigration but rather the government's policy of pushing the
migrants into the underground that
creates insecurity and disorder. The Kolbe-Flake bill would give honest
workers the legal status they
deserve, add revenue from young workers to the current Social Security
pay-as-you-go system, ease
burdens on U.S. employers and re-establish immigration as one of the greatest
strengths of the American
political economy.
Updated August 29, 2003
19. All Investors Are Liars By JOHN ALLEN PAULOS WSJ
As an author of a recently published book, I've noticed an odd inefficiency
in the book market. Online
booksellers often charge different amounts for the same book even though
a couple of clicks worth of
comparison shopping can reveal the disparity. This seems to violate the
Efficient Market Hypothesis,
which, applied to the stock market, maintains that at any given time a
stock's price reflects all relevant
information about the stock and hence is the same on every exchange. Despite
its centrality and its
exceptions, it's not widely appreciated that the hypothesis is a rather
paradoxical one.
First, let me note that the hypothesis comes in various strengths, depending
on what information is
assumed to be reflected in the stock price. The weakest form maintains
that all information about past
market prices is already reflected in the stock price. A consequence of
this is that all of the rules and
charts of technical analysis are useless. A stronger version maintains
that all publicly available information
about a company is already reflected in its stock price. A consequence
of this version is that the earnings,
interest and other elements of fundamental analysis are useless. The strongest
version maintains that all
information of all sorts is already reflected in the stock price. A consequence
of this is that even inside
information is useless.
It was probably this last version of the hypothesis that prompted the old
joke about the two efficient
market theorists walking down the street: They spot a $100 bill on the
sidewalk and pass it by, reasoning
that if it were real, it would have been picked up already. An even more
ludicrous version lay behind the
recent idea of a futures market in terrorism.
Adherents of all versions of the hypothesis tend to believe in passive
investments such as broad-gauged
index funds, which attempt to track a given market index such as the S&P
500. Opportunities, so the
story continues, to make an excess profit by utilizing arcane rules or
analyses, are at best evanescent
since, even if some strategy seems to work for a bit, other investors will
quickly jump in and arbitrage
away the advantage. Once again, it's not that subscribers to technical
charting, fundamental analysis or
tea-leaf approaches won't make money; they generally will. They just won't
make more than, say, the
S&P 500.
So to what degree is the hypothesis true? The answer is surprising. The
hypothesis, it turns out, has a
rather anomalous logical status reminiscent of Epimenides the Cretan, who
exclaimed, "All Cretans are
liars." More specifically, the Efficient Market Hypothesis is true to the
extent that a sufficient number
(sometimes relatively small) of investors believe it to be false.
Why is this? If investors believe the hypothesis to be false, they will
employ all sorts of strategies to take
advantage of suspected opportunities. They will sniff out and pounce upon
any tidbit of information even
remotely relevant to a company's stock price, quickly driving it up or
down. The result: By their exertions
these investors will ensure that the market rapidly responds to the new
information and becomes efficient.
On the other hand, if investors believe the market to be efficient, they
won't bother. They will leave their
assets in the same stocks or funds for long periods of times. The result:
By their inaction these investors
will help bring about a less responsive, less efficient market.
Thus we have an answer to the question of the market's efficiency. Since
it's likely that most investors
believe the market to be inefficient, it is, in fact, largely efficient.
However, its degree of efficiency varies
with the stock, the market and investors' beliefs.
The paradox of the Efficient Market Hypothesis is that its truth derives
from enough people disbelieving
it. How's that for a contrarian Cretan conclusion?
Mr. Paulos, a professor of mathematics at Temple University, is the author,
most recently, of
"A Mathematician Plays the Stock Market" (Basic Books, 2003).
Updated September 2, 2003
20. Counsel of Despair WSJ europe
Nobel Prize-winning economist Joseph Stiglitz has made a second
career of sorts out of criticizing what he blithely calls "free-market
fundamentalism." So his recent remarks to Czech newspaperman
Vladan Gallistl, published in Ludovky, a Czech paper, hardly come as
a surprise, even if they come as a disappointment (again).
Tax competition within the euro zone will have to be replaced by tax
unification, Mr. Stiglitz avers. What's more, attempts by the EU's
aspiring members to attract investment through tax cuts are a zero-sum
game, so they might as well not try.
Politically, Mr. Stiglitz's remarks are a euroskeptic's fantasy, since
the
specter of tax harmonization, which Mr. Stiglitz calls "inevitable," is
every euroskeptic's favorite bogeyman. But in economic terms, as so
often, Mr. Stiglitz is presenting ideology as if it were expertise. Many
Central and Eastern European countries certainly aren't heeding his
counsel. As we wrote recently, they are wisely moving toward flat
taxes.
That alarms Mr. Stiglitz, who warned that if all of Europe's accession
countries lower taxes to the same level, they will have reaped no
benefits while undermining their tax base. No benefits? Apparently, the
noted economist has never heard that letting individuals keep and invest
their own money is a reliable tonic for robust, job-creating economic
growth. In Europe alone there are good examples of countries that
have made dramatic economic progress by promoting investment with
hospitable tax regimes. Try Ireland, for starters.
It goes without saying that not all of the EU's 10 new members will
become the next Ireland. But it's equally true that there is plenty of
room to undercut Europe's highest taxers without falling prey to Mr.
Stiglitz's personal nightmare. On average, current EU members collect
close to 50% of GDP in taxes. The EU's accession countries could do
worse than to shoot for Ireland's more modest 31%. Doing so with a simple,
transparent and mostly flat
system of taxation would help them attract jobs and investment. And who
knows, the growth of those
markets might relieve some of the internal economic pressures of big taxers
to their West, like Germany.
Even if all the accession countries adopted similarly enlightened policies,
they'd still be better positioned
collectively than the average member of the EU-15.
This seems like pretty basic economics to us.
Updated September 2, 2003
21. Drugs Deal Won't Help The World's Poor By NICK SCHULZ
Geneva enjoys a rich history as a center of the Enlightenment. So it's
an ironic shame that international
trade negotiators huddled near the banks of Lac Leman have turned their
backs on science and
technology as tools to relieve human suffering.
In a desperate bid to show "progress" on an issue of supposedly vital importance
to the world's poor
ahead of this month's WTO ministerial meeting in Cancun, Mexico, those
negotiators announced over the
weekend that they'd hammered out a deal to attenuate intellectual property
protection on pharmaceutical
patents. Activists have declared the deal inadequate, while the EU sees
it as a great leap forward. Both
sides are wrong; the deal fails to address the real problems with Third
World health care, and what it
does accomplish heads mostly in the wrong direction.
A year and a half ago at the Doha Ministerial meeting of the World Trade
Organization, an agreement
was reached to allow poor countries to ignore patent protections for drugs
aimed at diseases that posed
a special burden -- an "emergency" -- on impoverished societies. This step
was designed to help health
ministers in countries like Botswana address disease epidemics, such as
AIDS or malaria.
But the Doha declaration, as it is now known, has yielded almost none of
its intended consequences and
quite a number of unintended ones. For example, it is being exploited by
some countries to undermine
patents on a huge array of drugs -- including non-emergency medicines,
such as the lifestyle drug Viagra
-- and sell them in wealthy markets.
Until last week, American trade officials had for the most part stood firm
defending intellectual property
protections -- the wellspring of technological progress. But this weekend's
agreement will allow poor
countries to import generic drugs from countries such as Brazil or India.
The U.S. also dropped its
longstanding demand that the list of diseases eligible for this treatment
be strictly limited and enumerated.
But for all the back-slapping and hearty congratulations currently going
on in Geneva, further weakening
of the international intellectual property system will prove a significant
and short-sighted mistake since
undermining the patent system will do nothing to help the poor in developing
countries. In fact, they are
the ones who will suffer most in the long run.
To understand why, it's important to note that patents aren't preventing
the poor from accessing the
drugs they need. Pharmaceutical companies often don't even file for patent
protection in places like
Zimbabwe since the vast majority of governments in sub-Saharan Africa don't
police or protect the few
patents they grant. For example, according to a paper by Drs. Amir Attaran
and Lee Gillespie White in
the Journal of the American Medical Association, patents are no obstacle
to the poor receiving AIDS
treatments.
"There is no apparent correlation between access to antiretroviral treatment,
which is uniformly poor
across Africa, and patent status, which varies extensively by country and
drug," they write. What's more,
research from Dr. Attaran to be published later this year shows the poor
in less developed countries
don't even have access to the non-patented drugs they need.
So if it's not patents, what accounts for the lack of access to drugs?
For starters, poverty, ignorance and
stigma for those with disease, especially AIDS. Third World governments
blame patents as an excuse to
deflect criticism from their own often appallingly insufficient responses
to disease epidemics. Corruption
and an absence of political backbone in many countries also play a role.
And, most critically, many
countries simply lack the basic infrastructure -- in terms of roads, refrigeration,
hospitals, clinics, even
physicians -- needed to ensure the poor get the medicines they need.
While weakening drug-patent protection is little help for the world's poor,
it is harming efforts to find new
treatments for disease. Data from the pharmaceutical-research consultancy
Pharmaprojects points to a
steep decline in the number of new AIDS drugs in development in recent
years. According to their
research, the number of antiretroviral compounds companies were studying
slipped from 250 per year in
1998 to 173 in 2001.
And that's not surprising. Since it usually takes between eight and 12
years for a chemical innovation that
is patented to become a drug on the market, drug patents are granted for
two decades. In the remainder
of the patent's life the company that patented the drug retains the exclusive
rights to make a profit to
recoup research and development costs, including money for the hundreds
of drugs researched that fail
to make it to market. The profits also feed the research and development
pipeline that will bring the
breakthrough drugs of the future.
The ongoing efforts to weaken the international IP system won't help the
poor in the Third World, but it
will make it easier for middle-income countries -- Egypt and Peru, for
example -- to make and sell cheap
pharmaceutical knock-offs, thereby damaging the research and development
pipeline to make new
drugs. The recent history with AIDS medications is telling: If the incentive
for companies to make
medicines is slowly whittled away, those companies will simply stop doing
the research and development
necessary to find tomorrow's miracle cures and treatments.
For the last 18 months, the United States had acted as a last line of defense
of the global patent system
for drugs. That American resolve cracked under international pressure this
weekend is a worrisome sign
as trade negotiators prepare for Cancun. The long-term losers in this most
recent trade agreement will be
the developed and developing world alike.
Mr. Schulz is the editor of TechCentralStation.com.
Updated September 2, 2003
22. Global Terrorism Index
Aug 28th 2003
From The Economist print edition
Colombia faces a higher risk of terrorism than any other country in
2003-04, according to an index compiled by the World Markets
Research Centre, a provider of country intelligence. Along with
Israel, Colombia is given an "extreme" risk rating. America is rated
fourth riskiest, while Britain ties for tenth place. According to the
index, North Korea is reckoned to be the least likely place for a
terrorist attack.
23. RUSSIA'S FLAT TAX
On January 1, 2001, a 13 percent flat tax on personal
income took
effect in Russia. It replaced a three-tiered system
with a 30
percent top rate on taxable income exceeding $5,000.
The old
system was complicated, and because of the high rates
evasion was
widespread. It also produced little revenue.
The new flat tax
has achieved greater compliance due to its simplicity
and low
rate. It is producing far more revenue than the
former system,
says Alvin Rabushka (Hoover Institution).
During its first two years, Russia's 13 percent flat tax
exceeded
all expectations:
o In 2001, the first year under
the flat tax, personal
income tax revenues
were 28 percent higher than in 2000,
after adjusting
for inflation, and rose another 20.7
percent in 2002
compared with 2001.
o For the period January to
June 2003, compared with the
same period last
year, personal income tax revenue
increased 31.6 percent.
o After adjusting for anticipated
inflation of about 15
percent annualized
over 2003, real rubles from the
personal flat tax
increased 16.6 percent year-over-year.
Revenue for personal income taxes also rose relative
to other
revenue sources:
o The share of tax revenue from
the personal income tax rose
from 12.1 percent
in 2000 to 12.7 percent in 2001.
o In 2002, the flat tax generated
15.3 percent of total tax
revenue.
The United States and other developed countries could
learn from
the experience of Russia and other emerging market economies,
says Rabushka.
Source: Alvin Rabushka, "The Flat Tax in Russia and the
New
Europe," Brief Analysis No. 452, September 3, 2003, National
Center for Policy Analysis.
For text
http://www.ncpa.org/pub/ba/ba452/
For more on Flat Tax
http://www.ncpa.org/iss/tax/
24. Deficits and defiance
Sep 2nd 2003
From The Economist Global Agenda
France and Germany built the euro together. Now they are demolishing the
stability pact together
GERMANY and France, so long the European
Union's head partnership, have become partners
in crime. Last Friday, Germany confessed to the
European Commission that its budget deficit for
2003 would breach the stability and growth
pact for the second year running. The pact, a
largely German creation, is meant to stop
members of the euro area undermining the single
currency through fiscal irresponsibility: countries
are permitted to run deficits of no more than
3% of GDP. Germany admitted to a deficit of
3.5% last year and expects one of 3.8% this
year. Not to be outdone, France on Monday
owned up to a projected deficit of 4% this year,
to follow a deficit of 3.1% last year. Of the two,
Germany was the more repentant sinner. Hans
Eichel, the German finance minister, insisted
that he was still hoping to abide by the pact
next year; Jean-Pierre Raffarin, the French
prime minister, has already given up on that
goal, according to Les Echos, a French
newspaper.
Both governments are likely to breach the stability pact for a third time
in 2004. Given
that he is campaigning for a €16 billion ($17.4 billion) tax cut next
year, Mr Eichel's
claims to be trying to trim the 2004 deficit may be no more than the tribute
vice pays to
virtue. Mr Raffarin, for his part, seems yet to be convinced that deficits
in a downturn
are a vice or that fiscal austerity at the expense of growth is a virtue.
He told the
European Commission that his first concern was to find jobs for his countrymen.
With
French unemployment rising to 9.6% last week, Mr Raffarin's own job probably
depends
on it. The budget he will unveil in the coming weeks is more likely to
answer calls from
his own party for tax cuts than to appease the commission's demands for
fiscal
restraint.
If France and Germany do breach the pact
again next year, the European Commission is
supposed to ask them for an interest-free
deposit of between 0.2% and 0.5% of GDP. If
they breach the pact in 2005, they lose the
deposit—a fine amounting to more than €4
billion for Germany and more than €3 billion for
France. Both Mr Raffarin and Mr Eichel know
that is not going to happen. The sticklers at
the commission may apply the laws and
pronounce the verdict, but the offenders know
that it is their fellow finance ministers on the
European Council who will mete out, or
withhold, the punishment. They have plenty of
wriggle room. If Germany and France are seen
to be making an effort to comply, and their
deficits are not too far astray, the council can
vote for a reprieve.
Both Germany and France expect leniency.
Jacques Chirac, France's president, has asked
for a "temporary softening" of the stability
pact—which amounts to saying the rules should
only be applied when they are not being
broken. Gerhard Schröder, chancellor of
Germany, has asked the commission to be
lenient and to place due emphasis on the
"growth" part of the "stability and growth"
pact. His pleas are faintly ironic given that the
pact's original German authors added the word
growth to its title only on the insistence of the
French.
Germany and France, with Italy and Britain,
constitute a powerful block arguing for reform.
The counter-reformation is led by those smaller
states, such as Austria, Ireland and the
Netherlands, whose budgets are in order and
who may feel that the leniency they are
expected to show to the big states would not
be shown to them, were they in the dock.
Countries yet to join the EU may feel the same
way. "How can I convince countries like Poland
and Hungary to meet the fiscal criteria, when
we don't meet them ourselves?" asks Ernst
Welteke, a German governor of the European
Central Bank (ECB).
The pact's defenders argue that some form of
fiscal restraint must be imposed upon euro-area
governments. They point out that the costs of
an ageing population will weigh heavily on
European budgets in the coming decades. By
2050, according to simulations by the
Organisation for Economic Co-operation and
Development (OECD), Germany's extra pensions
spending could add another 2.2% of GDP on
average to its annual budgetary burden. If
governments add to their debt burdens today,
while the baby boomers are still working, they
will have less room to borrow in the future to
smooth out the cost of the baby boomers'
retirement.
But talk of a pensions crisis only exposes the pact's longstanding failure
to distinguish
properly between cyclical and structural factors. France and Germany's
immediate deficit
problems are a result of an economic downturn that will correct itself
in time. Their
pensions problem, which they share with much of the euro area, is the result
of
long-term demographic trends that will take decades to play out and solve.
Last week,
for example, Germany's long-awaited commission on public pensions reform,
led by Bert
Rürup, unveiled its ambitious proposals for coping with Germany's
greying population.
They included postponing the retirement age and reducing pension benefits.
But none of
the recommendations, even if implemented in full, would bring savings soon
enough to
mollify the European Commission.
Besides, the pensions crisis will never be solved if the young are not
working and the
economy is not growing. It seems premature to worry about ageing workers
retiring from
the labour force, when over 400,000 French men and women under 25 cannot
find a
way into it. To solve the pensions crisis, European governments need to
get more of
their citizens into work, postpone their retirements, and raise their productivity.
Balancing the budget is only part of the solution.
The stability and growth pact was never really designed to bring about
the kind of
long-term fiscal consolidation the euro area needs. The pact's original
rationale was to
safeguard the credibility of the newborn euro as a hard currency. But the
euro's
credibility is no longer in serious doubt—if anything, the currency has
been too hard over
the past year.
Last week, Dominique de Villepin, the French foreign minister, called for
a new euro-area
council with the capacity to co-ordinate budget policies. Such a council
would give
governments more "room for manoeuvre," he said. The euro area does need
to find some
way to co-ordinate its 12 fiscal policies with the single monetary policy
set by the ECB.
Fiscal consolidation would be much less painful if it were accompanied
by monetary
easing. The problem, of course, is that the ECB must set monetary policy
for the euro
area as a whole; it cannot lower interest rates in response to one country's
unilateral
efforts to repair its finances. Only if the big euro members tighten fiscal
policy together
will the ECB respond by loosening monetary policy. That is why the euro
area needs a
pact that is better at co-ordinating budgetary policies than the flawed
arrangement in
place.
25. Free Iraq's Market by Gerald P. O'Driscoll and Lee Hoskins
Gerald P. O'Driscoll Jr. is a senior fellow at the Cato Institute. Lee
Hoskins is a
senior fellow at the Pacific Research Institute.
The Bush administration is on the brink of snatching defeat from victory
in Iraq -
for reasons wholly unrelated to the current fracas over the reasons for
America's
invasion: The administration appears committed to maintaining a Leninist-style
economic model for the Iraqi economy. Such a course will ensure the failure
of
Bush's Iraq policy.
Along with North Korea, Iraq was one of the last Soviet-style economies
left in the
world. The Ba'athist government controlled the "commanding heights" of
the
economy. The oil sector produced more than 60 percent of the country's
GDP and
95 percent of its hard currency earnings. Only small-scale industry and
agriculture were left to private entrepreneurship.
Dealing effectively with Iraq's vast oil reserves is the central challenge
for
post-Saddam Hussein reconstruction. The nation's oil reserves are second
only
to Saudi Arabia's. Saddam so mismanaged the economy, however, that the
vast
oil reserves did not translate into a decent way of life for the Iraqi
people.
Creating private property rights that cover natural resources is the key
to
unlocking the wealth otherwise hidden in such resources.
In "Property and Freedom," Richard Pipes, Harvard's distinguished Russian
historian, chronicled how private property is the source of both political
and
economic freedom.
In our Cato Institute paper, "Property Rights: Key to Economic Development,"
we
develop the connection between freedom and prosperity. The freedom and
prosperity of the Iraqi people hang in the balance.
Bush administration officials are reportedly unwilling even to discuss
privatizing
Iraq's oil. If the White House does not establish private property rights
in Iraq,
especially for its principal resource, then the United States will have
fought a war
to maintain a Soviet economy in the Middle East. Before long, one dictator
will be
replaced with another. The lives lost and money spent will have been for
naught.
Private property rights provide a peaceful means for allocating resources
where
violence would otherwise reign. By establishing title to income streams,
property
rights enable people to trade money for more titles, or vice-versa. The
absence of
private property rights in natural resources drives civil wars.
This is true whether the resources are oil or diamonds, and whether the
locus is
Angola and Nigeria, or Liberia and Sierra Leone.
Maintaining state ownership over the oil industry in Iraq will ensure a
struggle
among competing ethnic groups. Winning at the ballot box will bring the
victor
control over oil. Elections literally become life-and-death struggles.
Losers
cannot afford to accept the outcome. Again, that scenario has played out
in Africa
and the Middle East, regions that account for 70 percent of all major conflicts
in
the world.
State-ownership of natural resources, along with sharp ethnic differences,
is a
recipe for political instability and sub-par economic growth. The only
stable
political outcome is a dictatorship powerful enough to impose order and
divide
the spoils. That is precisely what happened in Iraq, and helps explain
the
longevity of Saddam's rule.
The Bush administration must dismantle Iraq's central planning system.
Implementing democracy without privatizing the oil industry could actually
make
the situation more volatile. Placing 500,000 troops in Iraq for 50 years
will not
bring peace in that circumstance. Ask the British.
There are numerous methods for privatizing state-owned enterprises in former
Soviet-style economies. In Eastern Europe, some governments distributed
tradable vouchers for shares in firms. Ariel Cohen of the Heritage Foundation
argues that Russia's privatization of its oil industry, as messy as that
process
was, holds lessons for Iraq. There is no shortage of sound ideas for bringing
private property to Iraq. There does appear to be absence of will, however,
in the
Bush administration to take on the challenge, even though nothing less
than the
success of its entire Middle East policy is at stake.
This article was published in the New York Post, Aug. 24, 2003.
26. Why the WTO Fails The World's Poor By JOHN REDWOOD WSJ Europe
The protesters who will gather at the World Trade Organization
meeting in Cancun next week have a strong sense of injustice but less
of a sense of what to do about it. They're right that the developing
world is far too poor. The world trading system hasn't done them any
favors, and there are unjustifiable rules and protections that favor the
first world. But they are wrong in thinking that the drive to freer trade
is
in itself the problem, or will make the situation worse.
The WTO was born of noble ideals. Emerging from the General
Agreement on Tariffs and Trade in 1994, the signatories sought to raise
living standards and create full employment among member states. All
signatories saw increasing international trade as the engine of
prosperity. They all recognized the need to protect and preserve the
environment. Few of the protesters would, I am sure, disagree with
these aims.
These goals have not been achieved quickly and evenly, and there are
still large imperfections in the way rich countries behave despite being
fully signed up to the WTO. The U.S. has always been ambivalent
about multinational organizations that impose requirements on America.
The EU for its part often follows policies and takes positions that make
sense to its leaders but conflict with the wider aims of the WTO.
The recent trans-Atlantic rows over farm products provide a handy
example of how the needs of the Third World are forgotten. On both
sides of the Atlantic, farm incomes and markets are strongly protected.
In the European Union, fishing and farming are effectively controlled by
Brussels. External tariffs and quotas keep out foreign produce. The EU
uniquely worries about farmers' incomes and gives huge subsidies. No
similar comprehensive combination of subsidy and tariff protects other
industries or sectors. In defending this position, the EU asserts the
principle of tit-for-tat, claiming the U.S. also protects its farmers,
which
is true if not to the same extent. The loser, inevitably, turns out to
be
developing countries whose economies, unlike those of the U.S. or
Europe, are truly dependent on agriculture. The barriers on cotton
exports to the U.S. or sugar to Europe carry a high price.
The trans-Atlantic feuding over genetically modified food also takes a
steep toll. The EU prevents the introduction of GM products, claiming
greater scientific study or trial are needed to prove they're safe. The
U.S., which pioneered GMs, says the products are patently safe.
What's more, U.S. officials argue, genetically modified crops let
farmers produce more with less as well as cope with poor climate or
pests.
The dispute is deeply rooted and the respective governments speak for
strong bodies of opinion among their citizens. Some Europeans see the
technology as a clever device that lets U.S. multinationals to patent nature
and earn a royalty from the
poor every time they grow something. Hence they seek to make it more difficult
for the U.S. to export
her grains and seeds, while questioning the morality of GM food for the
Third World.
The only way forward is to offer choice along with clear labeling and information.
If the EU believes
organic and traditional farming is better, then it must export these ideas
and offer markets for produce
grown in these ways so the Third World has a chance of prosperity without
GM. It is no good for the
EU to rubbish GM produce, while failing to offer market access to developing
countries for non-GM
foods. It shouldn't prevent the U.S. from doing the same by putting trade
restrictions on developing
countries that do buy American crops.
Similarly, the unseemly dispute over beef gives an insight into how the
poor can suffer when two giant
trading blocs squabble. Europe's hostility to American beefs stems from
the belief that too many
hormones are used to rear American cattle. The U.S. can note the irony
of the European position,
considering the BSE ("Mad Cow") and foot-and-mouth outbreaks in Europe
in recent years. With little
sympathy or understanding on either side of the Atlantic, quality information
and clear labeling offer the
best hope of agreement that might open markets more, to the benefit of
all.
The beef fight undermines consumer confidence in the EU in imported meat
generally. It makes EU
consumers less inclined to buy meat from the developing world, and gives
official in the Union more
excuse to erect non-tariff barriers to trade. While the WTO set out a vision
of "a fair and
market-oriented trading system," it's a long way from persuading the leading
members to implement one.
Another reason these fine goals are stymied is the existence of disagreements
over "animal welfare." The
Agreement on Sanitary and Phyto-Sanitary measures tried to prevent member
states from using concerns
about human or animal health and safety to block trade, but the treaty
is not always fully implemented.
I'm all in favor of high standards of animal welfare, but this must not
be used to squash the poor.
It is high time the EU and U.S. negotiators realized that people are starving
while they argue fine points
and prevaricate over opening domestic markets. It is an affront to the
conscience of the West that EU
negotiators are arguing over who closed which market first rather than
getting on with the task of
removing barriers at home to encourage others to remove them abroad.
Few of us with any conscience are happy with a world where the extremes
of riches and poverty
between countries are so great. Nor do we want to go back to a world where
the richer countries
dominate the poorer politically and militarily. Neo-colonialism might raise
the national incomes of
developing countries, but would offend our sense that people everywhere
should be free to choose their
means of government.
This poses us with a dilemma. What are we to think when the leader of an
African country such as
Zimbabwe does grave economic damage to his people? What should we do when
bad governments in
developing countries take our aid money and spend it on weapons or on creature
comforts for the
powerful in their societies?
We should understand that free trade in ideas as well as products and services
is the best solvent we can
offer to stubborn tyrannies. We should not give up trying. Unclogging trade
arteries provides contacts for
oppositions within badly run states that may offer a domestic solution.
The more we trade, communicate,
services and ideas, the more we encourage healthy opposition and better
government. If the west
retreats behind its tariff and non-tariff walls and offers little to the
struggling tyranny, we will have no
influence without military action. Strong trade and a healthy exchange
of views is a better way to
encourage benign forces in blighted countries.
Obvious faults in some developing countries should not blind us to the
serious justice in demands that the
WTO get nearer to its founding goal of greater employment and prosperity
for all through the removal of
barriers. The EU's Common Agricultural Policy is an affront to the conscience
of many of us in Europe
who want a fairer world. We should be prepared to reform it, to open our
markets to the developing
countries without seeking some quid pro quo. We owe it to the struggling
farmers of Africa to do so.
And the U.S. should open its markets as well.
The moral case is overwhelming. The WTO should be a force for good, not
an obstacle to Third World
progress. Free trade is the way to advance liberty and prosperity at the
same time.
Mr. Redwood, a Conservative member of the British Parliament, is author
of "Stars and Strife
-- The Coming Conflicts between the USA and the European Union" (Palgrave).
Updated September 4, 2003
27. Chile Looks to Exploit Trade Pact With U.S. By MATT MOFFETT Staff Reporter of THE WALL STREET JOURNAL
SANTIAGO, Chile -- Now that President Bush has signed a free-trade
agreement with Chile, the country hopes the accord will help revive its
glory days as a high-growth economy.
President Bush signed the agreement Wednesday, the first such accord
with a South American country. Chile's Congress must still approve the
deal, which would take effect in January. Following Chilean trade deals
with the European Union and South Korea, the U.S. pact promises a
boost to Chile's exporters, financial markets and national ego.
Santander Investment Chile says Chile's industrial and agricultural
sectors in particular stand to benefit from the deal. Chilean textiles
face
tariffs of as much as 32% that would immediately end under the treaty.
Chilean industry would benefit from a lower import tariff for machinery.
But overall, the U.S. deal's short-term impact on exports will be limited,
because the average U.S. tariff on Chilean products is only around 1%,
says Santander. So this country of 15 million is soul-searching about how
it can return to the early 1990s, when it boasted growth rates comparable
to those of Asia's so-called economic tigers.
"We will sell some more wine with this treaty, but the bigger issue for
Chile is finding a way to come up with a second or third phase of
development," says John Byrne, principal partner of Boyden Global
Executive Search in Santiago. "How are we going to export more
value-added?"
Part of Chile's answer is to position itself as a regional business platform
offering multinationals a well-educated work force, low crime and a
stable economy. Two years ago, Delta Air Lines consolidated its booking
and customer-service center for Latin America in Santiago. Following
Anglo-Dutch Unilever PLC's acquisition of Bestfoods, the combined
company's Unilever Bestfoods Latin America operation recently moved
to Santiago from New Jersey.
Chile has enjoyed a virtuous circle of late. Its country risk, as measured
by J.P. Morgan, hit its most positive level ever last week. The stock
market is up 35% this year. "We'd been seeing a recovery of corporate
profits, and then the market just exploded with the approach of the U.S.
trade agreement," says Juan Andres Camus, managing partner of Celfin
Capital, a Chilean brokerage firm. Employment and office-construction
numbers have strengthened. Chile's economy, despite a blip caused by
the Iraq war, is forecast to expand by between 3% and 3.5% this year,
its fastest since 2000.
But for a country that once grew an annual 7% or more thanks to
exports of copper, wine and salmon, the current success seems hollow.
Chile has been punished in recent years by problems outside its borders
-- notably Argentina's economic collapse and investor nervousness about
Brazil and its leftist president. But
some of the shocks have been self-inflicted: Chile has endured a series
of messy corruption scandals,
including one in which the central-bank governor resigned after his personal
secretary was found to have
passed confidential, market-moving information to a brokerage firm, unbeknownst
to the governor.
Moreover, some of the economic policies of leftist President Ricardo Lagos
have drawn fire from business.
While the government has maintained economic stability, many businesses
object to a recent increase in
value-added taxes.
Write to Matt Moffett at matthew.moffett@wsj.com
Updated September 4, 2003
28. Stakeholder Blues By Annette Godart-van der Kroon
How has the economic situation in Germany deteriorated
so badly? The most obvious answer is that there is no flexibility, nor
a free labor market.
Germany is in fact a "stakeholder society," and this
concept has turned out to be disastrous. Germany has historically been
a state in which the rulers were patronizing and the subjects had to obey
the king. A stakeholder society is one in which contracts are set for a
long term, in which there are block-share holdings and "co-determination."
Who are the stakeholders? Well, they are all the groups
that experience the consequences of business activity or that influence
the concern itself. They include workers, shareholders, consumers, dealers,
the government, local communities, ecologists, etc. In any big undertaking,
each of these groups provides its contribution, has expectations and/or
rights or claims to the concern. Moreover, the stock market is not strongly
developed. A shareholder society, on the other hand, is not bound by long-term
c, in which there are block-share holdings and "co-determination."
Who are the stakeholders? Well, they are all the groups
that experience the consequences of business activity or that influence
the concern itself. They include workers, shareholders, consumers, dealers,
the government, local communities, ecologists, etc. In any big undertaking,
each of these groups provides its contribution, has expectations aWho are
the stakeholders? Well, they are all the groups that experience the consequences
of business activity or that influence the concern itself. They include
workers, shareholders, consumers, dealers, the government, local communities,
ecologists, etc. In any big undertaking, each of these groups provides
its contribution, has expectations and/or rights or claims to the concern.
Moreover, the stock market is not strongly developed. A shareholder society,
on the other hand, is not bound by long-term commitments. It has a competitive
labor market, a strong stock market, a fast re-allocation of financial
or human capital and short-term flexibility. It's characterized by market-orientation
and labor mobility.
The first co-determination law was enacted in 1951 (Montan
Mittbestimmungsgesetz). Later came Betriebsverfassungsgesetz (1952) and
the Mittbestimmungsgesetz (1976). Co-determination is founded on the principle
that decisions with a distributive character, especially about wages, should
be taken far away from the entrepreneur.
If focuses more on the efficient organization of production
in the enterprise than on the question of distribution. It is more concerned
with the supervision (or control) of management. The concept of co-determination
seems now to be generally accepted, but the following objections to it
could be made:
· "If decisions are made by the vote of workers
in the factory, this will lead to under-investment in projects, whose returns
will come much later when many of the presently voting workers won't profit
enough from them to outweigh withholding money from current distribution."
· "Current workers, and therefore the factory,
will have a strong incentive to choose to maximize average profit (profits
per worker) rather than total profits."
· "The important thing is that there is a means
of realizing the worker-control scheme that can be brought about by the
voluntary actions of people in a free society."
In 1979 there was a complaint by entrepreneurs before
the Bundesverfassungsgericht that the co-determination act would be disastrous.
The court rejected it with no explanation other than "because it corresponded
with the opinion of the government"!
Of course, the same government had enacted this law.
For an efficient economy one needs property, contracts and responsibility,
but property is harmed by these (co-determination) acts.
There is also a danger that workers will become instruments
of the government. Entrepreneurs, however, have to focus on market indicators,
not government signals.
Opponents of co-determination have already argued that
participatory management is essentially a zero-sum game, since the different
goals of employers and employees lead to unnecessary bargaining. Supporters
argue that the property rights school ignores the intangible psychic benefits
that accrue in a co-determined system to owners, managers and workers.
Co-determination is now so much a part of the German
consensus that the Germans want to introduce it into European corporate
law. Only recently the European Union accepted a law for enterprises of
more than 50 employees, demanding consensus and deliberation. This is in
the framework of "approximation" (along with "harmonization" and "co-ordination").
All European leaders have to do is to see what a disaster
these policies have been in Germany.
Annette Godart-van der Kroon is president of the Ludwig
von Mises Institute-Europe
29. A New Road to Serfdom? By Hans H.J. Labohm
Senior Visiting Fellow, Nederlands Instituut voor Internationale
Betrekkingen Clingendael
Dr H.H.J. Labohm is a senior visiting fellow at the Nederlands
Instituut voor Internationale Betrekkingen Clingendael
Recently, I was invited by the Ludwig von Mises Institute
Europe to address an audience on what Friedrich von Hayek would have thought
about the enlargement of Europe. I decided to reread his classic, The Road
to Serfdom. Old hat, of course, because since Francis Fukuyama's The End
of History and the Last Man, we know that after the collapse of the Berlin
Wall, capitalist liberal democracies are the end-state of the historical
process. So there is nothing to worry about. Yet, even before finishing
the introduction (by Milton Friedman) and the (three) prefaces of Hayek's
magnum opus, I realised that I was completely wrong. The Road to Serfdom
still contains insights that today are as visionary and relevant as when
they were published for the first time in 1944.
Imagine the Zeitgeist of the thirties and forties! The
free market economy was under siege, because it was believed to generate
chaos with its business cycles and monopoly power. The planned society
envisaged under socialism was supposed to be not only more efficient than
capitalism, but socialism -- with its promise of social justice -- was
expected to be fairer. It was considered the wave of the future. Only
a reactionary, it was argued, could resist the inevitable tide of history.
In this context The Road to Serfdom appeared with a seemingly anachronistic
message.
But the message was not obsolete. It had a profound impact
on the development of our economies and societies at large. In his recently
published book European Integration, 1950 - 2003, Superstate or New Market
Economy?, the American historian John Gillingham reveals that a few years
before, in 1939, Hayek published an article on a (classical) liberal project
for the integration of Europe. That is why Gillingham ranks Hayek alongside
Jean Monnet and many others as one of the founding fathers of the new era.
Subsequently, in the seventies, because of the collapse
of the Keynesian paradigm, there was a renewed interest in Hayek's thinking.
In that period, it not only offered a major source of inspiration for political
and economic development in the West -- as it manifested itself, for instance,
in the Reagan/Thatcher revolution -- but also for developments elsewhere
in the world.
In their magnificent book, Commanding Heights, The Battle
Between Government and the Marketplace That is Remaking the Modern
World (which reads like a novel), Daniel Yergin and Joseph Stanislaw recount
the story of the prominent Chinese economist, Li Yining, who challenged
the entire premise of state control over the economy. Li had begun as a
follower of Oskar Lange, the Polish economist who had advocated market
socialism with a system of state ownership. But during the years of the
cultural revolution, Li thought back on the debates between Hayek and Lange
and concluded that he had come out on the wrong side and that Hayek had
been more correct than Lange. And everybody knows what followed. Similarly,
many leaders in Central and Eastern Europe have found a rich source of
inspiration in the works of Hayek.
So, all in all we can conclude that the battle is over
and that the "Road to Serfdom" will be blocked forever, can't we?
My answer to this question is that, unfortunately, we cannot.
Our freedom and economic well-being are still exposed
to hazards, which could be grouped as follows:
· Egalitarianism
· High taxes
· Interest groups
· Trade unionism
· The ideology of stasis
· Regulation
· Precautionary principle
· Man-made global warming and Kyoto.
I venture the thought that, taken together, these tendencies
may carry the risk of a new "Road to Serfdom."
Egalitarianism
If there is anything at all which socialism still separates
from other political currents, it is its emphasis on egalitarianism. "Hot"
socialism is old-fashioned; that is, turning the economy into a government
monopoly, either through direct state ownership of the means of production
or through complete state direction of economic life. It is not this type
of socialism that is a risk; instead, it is the type of socialism that
aims at a massive redistribution of income through taxation and subsidies
to rearrange economic outcomes in order to bring about a more egalitarian
income distribution. There is a vast political majority in all countries
in favour of some kind and some degree of income redistribution. But there
is permanent fight about the extent of it, partly because there is a trade-off
between the creation of wealth and the distribution of wealth. Overgenerous
income redistribution will undermine incentives, thus diminishing
the creation of wealth, from which we all suffer. In many countries in
Europe, critical thresholds have already been exceeded in that respect.
High Taxes
Tax reduction was part of the so-called supply side revolution.
Its aim was to improve the supply side of the economy, as opposed to the
demand side, which was the main focus of Keynesianism. The underlying philosophy
was illustrated by the so-called Laffer Curve in the seventies, named after
the American economist Arthur Laffer. He posed that, beyond a certain level,
high tax rates would stifle economic activity, thus lowering total tax
revenues for government, while lower tax rates would promote
economic activity, with increased government revenues as a result. Tax
reduction was a favourite objective of our ministers of finance but has
faded into the background over the last few years in many countries because
of the recession.
Interest Groups
But there are more risks that challenge our freedom and
economic well being. They are of a different kind and more diffuse. Take
for instance the role of interest groups in our societies. The (classical)
liberal project for an integrated Europe includes the repeal of the privileges
to minority groups at the expense of the immense majority, because they
invariably result in impairing the wealth and income of the majority. It
was the American economist Mancur Olson who first analysed the growing
ossification of national economic systems caused by the advent of special
interest groups. The latter are acting as distributional coalitions, i.e.,
to receive special favours from the government in the form of protection,
subsidies, monopolistic status, or other forms of barriers to exit and
entry in a particular industry. If successful, their actions turn market
participants into rent-seekers, thus stifling economic dynamism and growth.
The European common market (subsequently the single European
market) has fostered Europe-wide competition. In doing so it was applying
the basic tenets of Hayek's philosophy. It has indeed successfully reduced
the power of many national interest groups. At the same time it has not
been able to substantially constrain the power of the European-wide agricultural
lobby and the trade unions.
As far as agriculture is concerned, Eurocommissioner
Franz Fischler has announced reform measures to cut back on European agricultural
support. At the same time the U.S. and Europe have recently reached agreement
on a proposal to liberalise worldwide agricultural market with a view to
the Doha Trade Round. But as an observer of European agricultural policy
for many decades, I will only believe it when I see it. So far, agricultural
support has been like a bump of trapped air between the wall and the wallpaper.
When you try to remove it, it moves to somewhere else. The so-called multifunctionality
of agriculture offers a case in point. It is intended to offer support
and protection to European farmers when they make an extra effort to pay
heed to food safety, the environment, animal welfare, as well as the preservation
of rural communities and the countryside. But depending upon the way
multifunctionality will be implemented, it could easily turn into
the latest "creative" wave of protectionism.
Trade Unionism
Trade unions deserve separate treatment in the colourful
parade of interest groups. European integration and the increased competition
that it entails have not substantially weakened their political power.
In many countries trade unions are being regarded as esteemed partners
in so-called social dialogue. Their involvement has even been enshrined
in the institutional arrangements on European level in the framework of
the macroeconomic dialogue of the EMU. But the same well-respected dialogue
partners have for a long time held our societies hostage, in the sense
that they have effectively blocked all kinds of socio-economic reforms
which are long overdue, including the efforts to make labour markets more
flexible and to reform pension schemes, so that they will become sustainable.
It should not be forgotten that society as a whole pays a high price for
this kind of behaviour of a minority imposing its will on the majority.
Just by way of illustration, in Germany only 18 percent of the workers
are member of a trade union.
But there are signs that the public at large is fed up
with it. In France -- of all places -- a popular movement has emerged,
called Liberté, j'écris ton nom (Freedom, I write your name),
led by a young student Sabine Herold. The movement has publicly opposed
the strikes of civil servants and public sector employees, which have become
a favourite pastime in France. It has mounted a massive counter-demonstration
mobilizing 100,000 people. It never happened before, either in France or
anywhere else.
The Ideology of Stasis
Then there is the ideology of stasis, a notion that has
been coined by the American author Virginia Postrel. She points out that
despite the fact that today we have greater wealth, health, opportunity,
and choice than at any time in history, there is a chorus of intellectuals
and politicians who loudly lament our condition. Technology, they say,
enslaves us. Economic change makes us insecure. Popular culture coarsens
and brutalizes us. Consumerism despoils the environment. The future, they
say, is dangerously out of control, and unless we rein in these forces
of change and guide them closely, we risk disaster.
In her book, The Future and Its Enemies, Virginia Postrel
explodes this myth, embarking on a bold exploration of how progress really
occurs. In a multitude of areas of endeavour she shows how and why unplanned,
open-ended trial and error -- not conformity to one central vision -- is
the key to human betterment. Thus, the true enemies of humanity's future
are those who insist on prescribing outcomes in advance, circumventing
the process of competition and experiment in favour of their own preconceptions
and prejudices.
Postrel argues that these conflicting views of progress,
rather than the traditional left and right, increasingly define our political
and cultural debate. On one side, she identifies a collection of strange
bedfellows with different political backgrounds -- from right to left --
who all share a devotion to what she calls "stasis," a controlled, uniform
society that changes only with permission from some central authority.
On the other side is an emerging coalition in support of what Postrel calls
"dynamism": an open-ended society where creativity and enterprise, operating
under predictable rules, generate progress in unpredictable ways. Dynamists
are united not by a single political agenda but by an appreciation for
such complex evolutionary processes as scientific inquiry, market competition,
artistic development, and technological invention.
Regulation: Good, Bad, and Ugly
As far as regulation is concerned, deregulation efforts
of the eighties seem to have reversed gears and degenerated into something
what looks like a new regulation frenzy. But like Sergio Leone in his masterly
spaghetti Western "The Good, the Bad and the Ugly," we have to make a clear
distinction between different sorts of regulation. The good regulation
is supportive of free markets. This sort of regulation manifests itself
for instance in the European financial services sector. The bad regulation
stifles markets. This kind of regulation manifests itself if many markets
of goods, especially as regards overzealous safety and environmental requirements.
And the ugly regulation has a protectionist effect. In agriculture,
for instance, the de facto prohibition of the use of genetically modified
organisms (GMOs) in Europe, offers a case in point. All is all, one can
hardly escape the feeling that there is far too much regulation of the
bad and ugly types.
Precautionary Principle
Furthermore, there is the precautionary principle. Who
doesn't want to be better safe than sorry? Yet, there are limits. If pushed
to extremes, the cost of precaution could easily outweigh the benefits.
We finance the fire brigade via our taxes, but not every house has a sprinkler
installation. And at the apogee of the Cold War, there were even people
who did not possess a nuclear shelter in their backyard.
In other words, a risk-free world is unthinkable and
there are limits to the application of the precautionary principle. We
believe that some risks are too small to warrant additional expenditure.
If we would spend more on them, then we will have to forgo the satisfaction
of other needs, including the precautionary measures that will protect
us against other risks that we believe to be more likely. In short, the
application of the precautionary principle should be subject to the same
simple cost-benefit analysis, which we also apply in all other fields of
human decision-making.
But in Europe precaution is running out of control. The
most recent example is REACH, the acronym for Registration, Evaluation
and Authorization of Chemicals. It will impose a new layer of regulation
on the many layers already in existence. It is a proposal that requires
manufacturers and importers to submit information to a central database
on hazard, exposure, and risk on 30,000 new and existing substances that
are produced or imported in yearly quantities exceeding 1 metric ton. It
also covers "downstream" products, which are widely used by consumers and
business of all sorts, that contain these chemicals. Of course, this will
divert resources and attention from new, innovative products, to testing
of chemicals known to be safe in normal use.
More generally, the precautionary principle requires
scientific demonstration of absolute safety when new products or processes
are being introduced. On balance, however, overcautiousness suppresses
scientific knowledge in favour of political considerations, false beliefs
and irrational fears. Excessive application of the precautionary principle
prevents action until there is complete certainty that it will not produce
any harm. But 100 percent safety can never be guaranteed. The result is
paralysis and stagnation.
Man-Made Global Warming and Kyoto
At the same time another spectre is haunting us, if we
may believe the official position of the EU: man-made global warming! But
the putative threat of man-made global warming is probably a statistical
artefact. Surface-based temperature measurements do indeed show some increase
in worldwide temperatures, but these measurements are unreliable. They
are skewed because of several reasons; for instance, the closing down of
two-thirds of weather stations over the past three decades. The remaining
stations are often in urban regions that are exposed to the so-called urban
heat island effect, which means that cities are warming up as the population
increases, while the open countryside is not. The most accurate temperature
measurements -- those by satellites -- do not show any significant global
warming. So global warming does not pose a serious threat. But the measures
that have been proposed to counter it do! They entail an additional layer
of costly bureaucratic regulation and will stifle economic growth.
So, all in all, I believe that the tendencies that have
been covered in this overview could very well constitute the harbinger
of a new "Road to Serfdom."
Follow the Frogs
There's an old folk story that if you throw a frog into
boiling water he will quickly jump out. But if you put a frog into a pan
of cold water and slowly raise the temperature, the gradual warming will
make the frog doze happily. In fact the frog will eventually cook to death,
without ever waking up. Will this be the fate of European citizens in the
face of the hazards of a new "Road to Serfdom"?
It need not be so. Biologists have tested whether the
story of the frogs is true. And they have found out that it isn't. The
frogs will jump out long before the water becomes too hot for them.
What do we make out of all of this? The conclusion is
clear: Europeans should follow the frogs. Europe needs a change.
30. Deadly Protection By Johan Norberg
On my way back from a recent vacation, I passed by three
big sugar mills. There is nothing strange with that -- except for the fact
that I spent the vacation in southern Sweden. That's about as far north
as Alaska. Sweden has a very short summer, the soil is frozen for several
months, and the cattle have to be indoors most of the time. Not your ideal
place for agriculture, you would think.
Yet Swedish farmers -- as well as others who live within
the European Union's boundaries -- enjoy a comfortable lifestyle, at the
expense of poor countries in Eastern Europe, Africa and Latin America.
That's because of the EU's Common Agricultural Policy (CAP), which is designed
to protect European farmers from competitors in the developing world and
elsewhere. (And America plays a similar game.)
The CAP uses quotas and tariffs of several hundred percent
to effectively block the importation of foreign foodstuffs. The result
is a huge surplus of foodstuffs piling up around Europe that must be either
used or destroyed. So the EU dumps the stuff in poor countries with the
help of export subsidies, further undermining the livelihood of competitors
abroad.
To cite an example, the caddish CAP and subsidies for
domestic production make it profitable for Swedish companies to make sugar
from sugar beets. The lump in the Swedish coffee cup then costs more than
twice as much as the sweetener squeezed out of sugar cane. But we dump
it abroad for only a quarter of the real cost.
The EU's protectionism isn't unique; most rich countries
have similar systems. And the barriers to imports are especially cruel
to developing countries. Western duties (i.e., taxes) on manufactured goods
are 30 percent above the global average.
The tariffs are not uniform but rise in proportion to
how processed the product is. Partially processed products face, on average,
20 percent higher tariffs than raw resources. Finished products face almost
50 percent higher tariffs. To put it simply, developing countries can export
fruits, but not the jam they make from those fruits.
Western politicians have come to understand that high
marginal taxes are bad for their economies; when will they realize that
the same goes for developing countries?
For a long time there have been calls for change, especially
with the Cairns group of big agricultural exporters (such as Brazil, Argentina,
and Canada) and the United States pressing for free trade reforms. The
problem
is that the United States is strikingly short on credibility when America
slaps tariffs on foreign steel. All that free trade rhetoric is not taken
seriously. The EU's protectionism is the most destructive for developing
countries, but U.S. protectionism is catching up quickly, which gives the
EU an excuse not to change anything. With the U.S. Congress' passage of
the latest, multi-billion dollar protectionist farm bill and the dumping
of food aid in countries without food shortages, American agricultural
policies look a lot like the CAP.
According to the United Nations Conference on Trade and
Development, EU protectionism deprives developing countries of nearly $700
billion in export income a year. That's almost 14 times more than poor
countries receive in foreign aid. EU protectionism is a continuing tragedy,
causing unnecessary hunger and disease. The Cold War "iron curtain" between
East and West has been replaced with a customs curtain between North and
South.
EU protectionism takes a toll on Europeans, too. The
rich countries' protectionism costs their citizens almost $1 billion every
day. At that rate, you could fly all the cows in the OECD, 60 million of
them, around the world every year in business class. In addition, the cows
could be given almost $3,000 each in pocket money to spend in tax-free
shops during their stopovers.
Our protectionism may lead to greater problems in the
future. We in the West used to tell the developing countries about the
benefits of the free market. And we promised wealth and progress would
certainly come if they changed and adopted our ways. Many did, only to
find that our markets are closed to them. No wonder, then, that Western
countries are seen as hypocrites, producing resentment and a fertile ground
for anti-American and anti-liberal ideas in many regions at a time when
the West needs friends more than ever.
The recently signed American-European plan on agricultural
trade contains a lot of nice phrases, but no commitments. With no prospect
of real reforms at the WTO meeting in September, the poor countries will
refuse to take part in a fake "development round." The multilateral trade
system will face a collapse. American and European companies will face
obstacles to their exports. Many developing countries will give up on globalization.
Now is the time for bold free trade initiatives-and sincerity.
Perhaps America needs a presidential candidate like the one who in 2000,
said, "I intend to work to end barriers and tariffs everywhere so that
the entire world trades in freedom. It is the fearful who build walls.
It is the confident who tear them down." That candidate was George W. Bush.
Where did he go?
Johan Norberg's latest book, forthcoming in September,
is "In Defense of Global Capitalism" (Cato Institute, 2003).
31. Equality vs. Poverty
By TCS
Arvind Panagariya is a
Professor of Economics and
Co-Director of the Center for
International Economics at the
University of Maryland, College
Park. He is the author of
numerous articles and scholarly
papers on free trade and
globalization, including the
recent "Miracles and Debacles:
Do Free-Trade Skeptics Have a Case?" which inspired this
interview with TCS contributor Radley Balko.<?xml:namespace
prefix = o ns = "urn:schemas-microsoft-com:office:office" />
The paper looks at economic data for a variety of countries over
the last half century and concludes that while there are cases
where a country has liberalized its trade policies and failed to
show significant signs of economic growth, there are virtually no
examples of developing countries that have shown considerable
economic growth without liberalizing trade.
Panagariya also looks at developing countries that have
remained economic stagnant, or that have atrophied, what he
calls "economic debacles." His conclusions here are similar.
Countries that experienced paltry growth in income -- or no
growth at all -- inevitably also showed little growth in imports.
The following interview elaborates on some of the other issues
addressed in Panagariya's paper.
TCS: Does free trade exacerbate income inequality? One
pro-trade counterargument says that even if the gap between
"developed" and "developing" grows, free trade's a net plus, so
long as both are in fact growing. Does your research support
that premise, or that conclusion?
PANAGARIYA: First, let us consider the evidence. If we
construct the distribution of the average incomes of the nations,
treating nations as the unit of observation, inequality has gone
up during the past two decades.
But if we construct the distribution of all households in the world,
inequality has actually gone down in a big way. This should not
be surprising. India and China, which are home to more than 40
percent of the world's households at the bottom of the world
(household) income distribution, have grown at more than twice
the rate in the rich countries over the past two decades.
Recent research by economists Surjit Bhalla of New Delhi, India
and Xavier Sala-i-Martin of Columbia University establishes
beyond a shred of doubt that income inequality across
households in the world has declined markedly in the last two
decades.
But there is a deeper issue here. While we all must deeply care
about global poverty, there is something wrong about treating
global inequality with almost the same concern. Individuals are
concerned about inequality principally in the context of their
immediate social and political environments. Does an Indian
farmer really care about the change in his income relative to that
of a U.S. farmer, let alone Bill Gates? Besides, why do we
assume that inequality will only lead to envy and not inspiration?
Watching Narayan Mutrhy of Infosys become a billionaire and
rub shoulders with Bill Gates may inspire many other young
Indians to try to do the same benefiting themselves and many
others in the process!
TCS: A common criticism of free trade -- particularly on
college campuses -- is that there's virtually an endless supply
of cheap, sweatshop-style labor, and so the idea that trade will
create competition for labor in these areas is misleading,
because rather than compete in a developing market where
there's an emerging competitive labor market, a corporation
can simply choose to locate in another area where there isn't
one. Can you comment, based on your research?
PANAGARIYA: If you are concerned about poverty, you should
admire corporations that go to labor-abundant countries.
Contrary to popular perceptions, multinational corporations
actually pay wages that are significantly higher than those paid
by local firms employing similar workers. The multinational jobs
have been among the most coveted jobs in developing
countries.
Even while growing up in India, I remember looking with envy at
those employed with Pan Am, IBM and Coca-Cola. Students on
campus have their hearts in the right place when they show
concern about the exploitation of sweatshop workers in the poor
countries. But they must dig deeper. They must ask why the
workers in Calcutta are lining up for jobs with the multinationals
before they begin demanding an end to the exploitation.
A related but different issue has to do with the impact of the
international movement of capital on wages in the rich countries.
But even here, we need to remind ourselves that the United
States is the world's largest recipient of foreign capital. As such,
international capital flows have actually helped sustain higher
wages in the United States than would have been the case in the
absence of such flows. For every plant that leaves for abroad,
more are coming into the United States.
TCS: Many free traders believe the anti-globalization crowd
isn't interested in creating wealth in the developing world -- that
they're more interested [in] creating equality, and if the means
to equality is lowering the standard of living in the West, so be
it. Has that been your experience in your interaction with
anti-globalization colleagues in academia, or is this kind of
thinking limited to the anti-globalization "street"?
PANAGARIYA: I have found the concern with poverty and
creation of wealth in the poor countries among NGOs to be
generally genuine.
My disagreement is with their premises that freer trade is a
barrier to achieving these goals and a massive redistribution of
wealth within and between nations is actually possible. Targeted
poverty reduction programs can surely help reduce poverty
faster, but the centerpiece of the strategy has to be rapid
growth. To my knowledge, in the democratic societies,
significant reduction in poverty through deliberate redistribution
of income has rarely been achieved.
TCS: You mention that in order for trade openness to lead to
economic growth, a country needs to have complementary
conditions in place -- macroeconomic stability, enforcement of
contracts, and rule of law, to name three. Should the West
refrain from trading with developing countries until we're
confident these institutions are in place?
PANAGARIYA: No. The point is that without the complementary
policies, the country will fail to generate trade and growth even if
developed countries are open to trade with it. Being open is not
going to hurt, but the benefits from it will be far less than true
potential.
TCS: What does it do to the political case for trade in the future
if we forge trade agreements with countries that don't have
these sustaining institutions in place, and such agreements
then fail to spur growth?
PANAGARIYA: It is too much to expect that simply signing trade
agreements will spur growth. The countries themselves need to
do a lot more by adopting market-friendly and credible policies.
TCS: How do you think modern technology -- the Internet,
cellular phones, satellites, etc. -- will affect the correlation
between trade and economic growth in the years to come?
PANAGARIYA: Predicting the future is hazardous. To my
knowledge, no one predicted the ascendancy of the Internet 20
years ago. But the present already tells us much in this regard.
Back office services that no one thought would be traded even
15 years ago are now being traded in massive volumes, and
there's no limit to its expansion in sight, unless the rich countries
become protectionist. So we may witnessing an increasing
share of services in trade than has been the case in the past.
TCS: Your paper laments that while free trade is perhaps the
most benign component of globalization -- that even
globalization's most vocal scholarly critics accept it -- the more
pedestrian anti-globalization groups fail to differentiate it from,
for example, opening an economy to short-term capital flows,
which have produced some unfortunate results in Latin
America and East Asia. How can free trade advocates
effectively separate the unquestionably beneficial aspects of
globalization (migration, technology transfers, free trade, etc.)
from its less proven components? Is it too late?
PANAGARIYA: For countries such as India and China that have
not yet embraced short-run capital mobility, the two are
separable. The lesson is to wait longer and move gradually on
this front, giving the internal financial markets time to develop
and regulatory policies to be put in place. For countries that
have already embraced the mobility, separation is harder. But
there too we must admit the possibility of the use of price-based
capital controls. In this respect, the trend started in the recent
FTAs [free trade agreements] with Singapore and Chile to
impose restrictions on the use of such controls is regrettable.
For many developing countries, the occasional resort to capital
controls may be the necessary cost of maintaining free trade.
TCS: A common criticism from the anti-trade crowd -- and one I
happen to agree with -- conveys certain skepticism about the
real free trade commitment of the West. The U.S. still imposes
protectionist barriers on the very goods most likely to be
produced by emerging economies -- textiles and agricultural
goods, for example. The U.S. also just passed an enormous
farm subsidies bill. Europe and Japan are even more
protective of favored domestic industries than the United
States. I am of the opinion that it's still to a developing
country's benefit liberalize its trade policies. But can you give
us some evidence from your research that helps make that
case?
PANAGARIYA: Despite all the talk of rich-country protectionism,
the fact remains that on the average, barriers to trade in the poor
countries are higher than those in the rich countries. In terms of
the outcomes, I am hard-pressed to think of a single developing
country that did not achieve sustained growth without rapid
expansion of its exports to rich country markets.
Now it is true that peak tariffs in rich countries apply to
labor-intensive products such as textiles and clothing and
footwear. But this is because the poor countries had been
absent from the negotiating table prior to the Uruguay Round.
When they did come to the negotiating table, an agreement was
reached to phase out the Multi-fiber Arrangement (MFA), which
currently restricts the exports of textiles and apparel by all major
developing country exporters to the United States, EU, Australia
and Canada via a network of product-by-product, bilateral
quotas. Many critics complain today that the agreement to phase
out the quotas represents progress but it is back loaded,
meaning most of the quotas will not be abolished until January 1,
2005. But few of them seem to know that the back loading was
the result of the insistence of many developing countries. Afraid
that in the absence of quotas they may be driven out of the
market by super-competitive China, these countries lobbied for
back loading the MFA phase out.
The reason for agricultural protectionism is similar. All rich
countries protect agriculture so that until recently there was no
pro-liberalization lobby in that sector. With the developing
countries having joined the negotiations and the Cairns Group
taking the lead, this has changed. Moreover, the U.S. has
recognized that it too has a comparative advantage in
agriculture and has joined the pro-liberalization camp. So
progress will now happen.
Then again, many NGOs have joined the chorus, led by the
World Bank, that the OECD agricultural subsidies hurt the poor
countries without recognizing that the majority of the least
developed countries actually import agricultural products and, for
their exports, have access to the EU internal prices under the
Everything but Arms initiative and will therefore be hurt by the
elimination of the subsidies. Contrary to the popular rhetoric, in
which Oxfam has joined fully and loudly, the bulk of the benefits of
agricultural liberalization and elimination of the subsidies will go
to the Cairns Group, a handful of agricultural exporting
developing countries, the United States, and to some degree the
EU, which will benefit from the removal of its own protection and
subsidies.
TCS: I was wondering if you might contrast China and India to
Latin America. China is notorious for its obliviousness to
international copyright law, is questionable on its commitment
to property rights, and is tremendously bureaucratic. India
faces many of the same problems, and is known for corruption
at all levels of government. Yet each has grown tremendously
after liberalizing its respective trade policy. Latin America,
meanwhile, has struggled -- due, you say, to macroeconomic
instability resulting from short-term capital flows. Can we
conclude, then, that macroeconomic stability -- which you
argue has at least in some cases been undermined by one
component of globalization (opening economies to capital
flows) -- is a more important complementary mechanism to
economic growth than the others, or are there too many
variables between the two examples to draw such a
conclusion?
PANAGARIYA: India and China provide a counterexample to
yet another of the myths popularized by the World Bank, namely,
that corruption is a central problem of development. Corruption
must, of course, be condemned and controlled on moral and
ethical grounds alone. But the contention that it is the central
economic problem is surely not grounded in serious research.
Even the answer to the question of whether corruption helps or
hinders development depends on the counterfactual. Moreover,
if controlling corruption is truly so central to growth, how is it that
China and India have grown so rapidly while corruption has
continued to rise there?
But turning to your main question, if the internal market is not too
small, macroeconomic stability and credibility of policy may give
you a low-level sustained growth even without liberal trade
policies or without trade liberalization as illustrated by the
pre-1980 experience of both India and China. But you would be
sacrificing several percentage points of growth annually for no
good reason by being autarkic as these countries did during
three decades spanning 1950-80.
Macroeconomic instability has certainly been a key problem in
Latin America. But growth is a complex process that we do not
fully understand and there may be other structural reasons as
well in which case ensuring macroeconomic stability, while
necessary, may not prove sufficient to kick off growth in Latin
America
32. Europe's 'New Deal' WSJ europe
Perhaps Jacques Chirac and Gerhard Schroder might consider cutting
back on the number of meals they share. Their regular Franco-German engagements,
of late, only seem
to bring trouble.
Last week's lunch at Dresden's Zinger palace produced the latest zinger
when the French and German
leaders announced plans for a European "New Deal." This follows their recent
secret deals on the CAP,
the EU constitution and most memorably, the "Europe is united against America"
moment in Versailles
last January.
The details of the multibillion-euro plan to spend the EU out of recession
-- sorry, as the Franco-German
pair claimed, improve European infrastructure -- are due next week. The
French want the money to
come out of the EU budget -- naturally, considering their current domestic
fiscal troubles. The Germans
apparently think cheap credit can be drummed up to build offshore wind
parks and high-speed rail links,
which are among the ideas leaked to the German press.
The ECB has already sounded a warning that any extra spending might further
undermine the Stability
and Growth Pact, whose 3% budget deficit cap both nations are on course
to breach for a third straight
year. For once, the bank hits a good target. While the French government's
spate of tax cuts follow a
proven recipe to revive growth -- and earns the opprobrium of market-averse
bureaucrats in Brussels
and Frankfurt -- neither France nor Germany can afford to put extra pressure
on the spending side of
their budgets, which must be radically overhauled.
The two leaders are well aware of the structural problems that impair growth
(high taxes, rigid labor
markets, overregulation) since at other times they've both pledged to fix
them. So it's strange, to say the
least, to now hear them tout a spending bonanza as a cure-all. If they
think the American New Deal is a
model, they should review its history, a decade of stagnation until World
War II touched off a burst of
new private investment.
The more generous reading of the European "New Deal" is it's a political
gimmick unlikely to see the light
of day. The Italian government touted a similar €50 billion to €70
billion EU infrastructure package
(funnily enough, mostly benefiting Italy) in July that went nowhere. If
Messrs. Schroder and Chirac feel
compelled to proclaim grand initiatives each time they lunch, perhaps they
should go on a diet.
Updated September 9, 2003
33. Peach-Colored $20 Bills to Sprout By JOHN D. MCKINNON Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- A peach-colored greenback?
Expect to see a lot of the new peach-hued U.S. $20
bill starting next month.
The bill will be introduced at U.S. banks and
businesses Oct. 9, officials plan to announce
Tuesday. The Federal Reserve and Treasury will
flood the U.S. and overseas outlets with up to 900
million of the new notes next month, issuing only the
new $20 through the end of October and
withholding previously circulated $20s until
November.
The idea is to get consumers, businesses and money
handlers accustomed to the pretty new note.
Officials say adaptation of machinery, training of
retail employees and other preparations have been
under way for months, though, and there shouldn't
be any notable problems.
The bill's front features the familiar Andrew Jackson portrait, with a
new peach background and without
its old oval border. The bill also sports a new blue eagle and a green
tint near the right and left edges.
The back of the bill features a similar multihued scheme.
The government hopes several new features -- especially the watermark,
a small design in one corner
that changes color from copper to green, and a security thread -- will
make it tougher for counterfeiters
to copy the bill and easier for clerks and consumers to spot fakes.
Officials say counterfeiting has actually declined somewhat since the introduction
of the last round of new
notes in the 1990s, from $54 million in 1995 to about $44 million in 2002.
Only about one to two U.S.
notes in every 10,000 is a fake. But cheap computers and printers keep
raising new risks, officials
believe.
Write to John D. McKinnon at john.mckinnon@wsj.com
Updated September 9, 2003
34. Post-Iraq Influence of U.S. Faces Test At
New Trade Talks WTO's Clout
Is on Trial, Too; Persistent
Rich/Poor Gap Dims Hopes Raised in '01
By NEIL KING JR. and SCOTT MILLER
Staff Reporters of THE WALL STREET JOURNAL
CANCUN, Mexico -- For the first time since the
Iraq war, the Bush administration is about to see if it
can still get the world to rally around a cause -- in
this case, lowering trade barriers.
It will be tough. As delegates from 148 countries
converge here Wednesday for a World Trade
Organization meeting, they will bring with them all the
tensions between rich and poor nations that came to
a boil four years ago during a WTO meeting in
Seattle, amid tear gas and riot police. And America's
ability to bridge those gaps appears much diminished
from the last meeting two years ago, in Doha, Qatar.
Then, the U.S. tapped international sympathy after
the Sept. 11 terrorism attacks to help launch a new
round of trade-liberalization talks, the first in nearly a
decade. The new talks set an agenda that included
cutting tariffs on industrial goods, phasing out farm
subsidies, reducing barriers for foreign investment
and limiting the use of laws that bar "dumping" exported goods at low prices.
Today, U.S. negotiators are struggling to persuade poor countries, and
even some rich allies, to stay the
course. Gone is the post-Sept. 11 sympathy factor. Also gone is the accommodating
tone U.S. trade
negotiator Robert Zoellick showed in Doha, as he sought to get poor countries
on board as both trade
and war-on-terror allies.
The big WTO meetings every two years, while focused on trade, become a
forum for broader economic
and cultural tensions. These include disparities between the world's haves
and have-nots and opposition
to globalization by some in developed areas, particularly Europe. The war
in Iraq, launched over
considerable European opposition, has done nothing to calm the waters or
enhance America's ability to
exert leadership on the global stage.
Except for a breakthrough on poor countries' access to drugs, the trade
talks have floundered on nearly
all fronts. Europe continues to balk at demands that it slash its massive
agricultural export subsidies,
blamed by some for deepening poverty across much of the Third World. And
many big developing
countries, such as Brazil and China, want to maintain high protections
for their own farmers and
manufacturers while insisting that rich countries drop nearly all subsidies
and tariffs.
The five-day gathering is meant to be a midway point to an overall agreement,
by
year-end 2004, on the negotiations set in motion in Doha. But trade envoys
say
the most they can hope for are vague understandings on how to push forward
in
areas such as agriculture and lowering industrial-goods tariffs. "This
is not a
meeting that does the deal and ties the bow on the package," says Mr. Zoellick,
who isn't very upbeat about winning the "frameworks" needed to push ahead.
A deadlock at Cancun could cripple the round of trade talks launched in
Doha.
That would lend weight to fears that faith in free trade, and in the WTO
itself, is
waning in many corners of the world. Indeed, Hugo Paemen, the European
Union's chief negotiator for the "Uruguay Round" of trade talks that predated
Doha, says, "The fate of the WTO depends on Cancun."
Beneath the frictions lies the question of whether rich and poor countries
can agree on trade within such
an unwieldy body as the WTO. The member countries theoretically all have
veto power; rather than take
votes, though, the organization tries to reach consensus through long discussions.
The talks begun in
Doha, if successful, would mark the first bout of global trade liberalization
since the eight-year Uruguay
Round wrapped up in 1994. It brought a landmark agreement that created
the WTO and delved into
new trade areas, such as services and intellectual property.
But rich/poor suspicions have in many ways deepened since then, as the
developing world's muscle has
grown and as the issues have become more complex. "The truth is, nothing
has really been accomplished
since Uruguay, while the tensions between rich and poor countries have
grown stronger," says Richard
Bernal, a veteran negotiator who'll represent Caribbean countries here.
Mr. Zoellick comes to Cancun representing the ultimate prize: a U.S. economy
that imported $1.18
trillion of goods in 2001, far more than any other nation. He also comes
with arguably the toughest
negotiating stance: The U.S. wants an ambitious, overarching deal, or none
at all.
Mr. Zoellick says the U.S. is willing to slash its farm subsidies and pull
down tariffs, but only if other
countries, including poor ones, make some concessions too. And if they
don't? "Then we'll keep our
subsidies," he says, "and I'm going to go around opening markets" country-by-country
outside the WTO.
The U.S. wants poor lands to soften their demand for a complete end to
farm subsidies in Europe, the
U.S. and Japan. It says countries such as India, Brazil and China must
also show real willingness to drop
their import tariffs, which are still several times as high as those in
the West, where import duties average
around 3%. All agree that the talks will rise or fall on agriculture and
particularly on the $300 billion a
year that rich countries spend in farm subsidies.
On that score, no delegation may matter more than the Europeans to the
success of the talks begun in
Doha. Europe's farm policies -- which provide almost twice as much support
to agriculture as America's
-- are the lightning rod for poor-country discontent. The EU, meanwhile,
is making plenty of demands of
its own.
The EU says it has already made considerable
strides toward liberalizing its farming sector. Its
tariffs stand at around 10%, down considerably
from 10 years ago. Export subsidies, which a few
years ago consumed 30% of the EU's agriculture
budget, now only make up 9% of it. And they are
scheduled to fall by nearly half over the next six
years as new countries in Eastern Europe join the
EU. Domestic support, or direct payments to
farmers, might be the area on which the EU can
most easily deal, as the EU could switch its form
of aid to entice farmers not to produce. Such a
move would deflect the main criticism that farm
aid distorts the market price of basic
commodities.
But as EU Trade Commissioner Pascal Lamy is
fond of saying, "you won't have anything until you
have everything." The EU, in other words, is
linking any further agricultural cuts to a slew of
other issues. For example, the EU appears to be serious about winning protection
for wine and cheeses
named after geographic regions, a demand strongly opposed by the U.S.,
Australia and some other
countries.
The EU and Japan want to negotiate rules governing foreign direct investment,
that is, buying assets or
setting up business operations in foreign countries. Developing countries,
India in particular, oppose such
rules as infringing on their ability to protect their industries. The EU's
agriculture commissioner, Franz
Fischler, says the best he can hope for in Cancun is a broad outline of
a deal on agriculture, leaving
"numbers and lists" for later.
Though Europe's farm subsidies far outweigh America's, the U.S. also comes
in for flak. African
countries have asked the U.S. to compensate them for its cotton subsidies,
which increase the supply of
cotton. Burkina Faso, Mali and Senegal say they could build their own cotton
industries faster if world
cotton prices were higher. But cutting U.S. subsidies would hurt influential
cotton farmers and
conglomerates in the deep South, and in California, and alienate House
Ways and Means Chairman Bill
Thomas of California. Thus far, U.S. negotiators have balked at the African
proposal.
The U.S. and Europe offered a joint plan in June under which they would
cut farm supports and reduce
farm-product tariffs. Their plan also said the developed countries should
be exempted from cutting tariffs
on certain products, and it gave poor nations more time to cut what tariffs
they could. But, underscoring
the depth of divisions over agriculture, a group of developing nations
led by China, India and Brazil said
the plan didn't go far enough toward farm-trade liberalization. The three
made little mention of what they
were prepared to offer.
The outlook isn't much brighter on textiles. The source of great rich country/poor
country friction, textiles
helped spoil the Seattle WTO meeting in 1999.
The WTO had agreed nearly a decade ago that the U.S. and other textile-importing
nations would phase
out their quotas on imports over 10 years. The U.S. structured the phaseout
in such a way that many
products are still under quota, with the 2005 deadline 15 months away.
U.S. textile negotiators have
spent the intervening years negotiating certain safeguards in the textiles
accord, whereby surges from
countries could trigger prohibitive tariffs. Pakistan, India and China
recently asked the U.S. for a
two-year moratorium on such safeguards beginning in 2005. So far, the U.S.
is balking.
Even on drug patents -- portrayed as a breakthrough last week -- all isn't
sunny. The WTO agreed that
poor countries can import generic copies of patented drugs to combat ills
such as AIDS and malaria.
Drug-making nations such as India and Brazil will be able to produce drugs
patented by Western
companies if they export the copies at low prices solely to needy nations.
Activists are criticizing the agreement. One criticism is that it's worded
so vaguely nobody can be sure
how it will work. Some fear that poor countries lack the legal sophistication
to take the steps needed to
receive the drugs. The nations have to find a foreign company to make the
drugs for them and then
inform both the drug maker that holds the patent and the WTO's committee
on intellectual-property
rights. Finally, they have to be prepared to fight a challenge to their
use of the drugs at the WTO's
dispute-settlement body. Several countries, including the Philippines and
Kenya, had last-minute worries
about the deal but agreed in the face of heavy-duty U.S. arm-twisting.
Write to Neil King Jr. at neil.king@wsj.com and Scott Miller at scott.miller@wsj.com
Updated September 9, 2003
35. State Development Planning: Did it Create an Asian Miracle by Benjamin Powell June 9, 2003
found at Global Prosperity Initiative, Mercatus Center, George Mason Univhttp://www.mercatus.org/socialchange/article.php/334.html
Summary (of 44 page pdf)
East Asian countries recorded large increases in per capita GDP over the
last fifty years. This led some observers to refer to the growth as an
"East Asian
Miracle." One popular explanation attributes the source of the rapid
growth to state led industrial development planning. This paper critically
assesses the
arguments surrounding state development planning and East Asia's growth.
Whether the state can acquire the knowledge necessary to calculate which
industries it should promote and how state development planning can deal
with political incentive problems faced by planners are both examined.
When we
look at the development record of East Asian countries we find that to
the extent development planning did exist, it could not calculate which
industries would
promote development, so it instead promoted industrialization. We
also find that what rapid growth in living standards did occur can be better
explained by
free markets than state planning because, as measured in economic freedom
indexes, these countries were some of the most free market in the world.
36. Rich Man, Poor Man
By ARVIND PANAGARIYA
Mr. Panagariya is professor of economics and co-director
of the Center for International
Economics at the University of Maryland.
Just prior to the Cancun WTO Ministerial, a compromise on access to
medicines for poor countries had raised hopes that the Developed and
the Developing could resolve their differences after all -- and that the
Doha Round might actually move forward. But the talks at Cancun
have collapsed and the opportunity is lost. The collapse was in no small
measure due to the unwillingness of developing countries to make
credible market-opening concessions of their own, to match those they
demanded from the rich countries. This is tragic since such liberalization
would have only benefited them -- and helped open the markets of
their partners.
Of course, Cancun is no Seattle. At Seattle, the WTO members tried
and failed to launch a new round whereas at Cancun they have failed to
move an ongoing round forward. The more apt analogy is with the
failure in Montreal in 1988 when developed and developing countries
had failed to advance the Uruguay Round. The round was, however,
successfully completed in 1993. Ironically, differences between rich
and poor countries on agriculture, which led to the collapse of the
Cancun talks, were also at the heart of the failure at Montreal 15 years
ago.
While the Doha Round is, thus, not in danger of being buried, the costs
of the failure in Cancun are large for both developed and developing
countries. The biggest cost may turn out to be a further acceleration of
bilateral free trade areas. The EU already has so many preferential
deals in place that all but six of its trading partners have a preferential
rate that is better than the WTO rate. The U.S. has also accelerated the
move toward bilateral arrangements: this can only get worse following
the failure at Cancun.
The cost of this for some large developing countries -- China, India,
and Brazil to a degree -- could be substantial. Already, they face
discrimination in the European and U.S. markets. This will get worse.
Progress at Cancun had offered one sure-fire recipe to these countries
to put an end to the discrimination
by bringing trade barriers down on a world-wide basis, thus killing the
preferences within free trade
areas at the source. If more bilateral deals get cut now, these countries
will face increased discrimination
against their products. Brazil may escape this if the Free Trade Area of
the Americas is negotiated, but
that remains to be seen.
But the failure to keep up the momentum for liberalization hurts all developing
countries. Post-World
War II experience offers compelling evidence that the countries that have
grown rapidly are those that
have taken advantage of the world markets by being open themselves. WTO
negotiations offer them an
opportunity to open the markets of their trading partners at the same time
as they open theirs.
Rich-country protection even in industrial products today applies with
greater potency to products
exported by the poor countries. This protection can be eliminated only
through a reciprocal bargain
within the framework of WTO negotiations.
For the U.S. and EU, the failure means that agricultural subsidies and
protection will now take even
longer to phase out. While the press has often focused asymmetrically on
the cost these subsides impose
on poor countries, the truth of the matter is that the greatest burden
of these subsidies falls on
rich-country taxpayers and consumers. The removal of subsidies is politically
charged and a WTO
agreement provides the best cover for it. But this will now have to wait
longer. Rich-country farmers can,
of course, rejoice in the failure.
The events in Cancun also signify a shift in the balance of negotiating
power between rich and poor
countries. Being at relatively similar levels of income, there has been
generally a much greater harmony of
interests among rich countries. Moreover, the presence of a few large players
-- the U.S., the EU and
Japan -- has made it easier for them to develop joint positions. On the
other hand, being at very different
levels of development, poor countries have had diverse interests. As a
result, their bargaining power is
generally diluted. For the first time, in Cancun, the bigger developing
countries were able to find a
common ground. The Cairns Group, which has been pushing for agricultural
liberalization since the
Uruguay Round, found two major allies in India and China.
Cancun also points to the limits to pushing an expansive agenda in negotiations.
The inclusion of
intellectual-property rights in the WTO under the Uruguay Round at U.S.
insistence was resented by
developing countries. So, many of them opposed the inclusion of the "Singapore"
issues -- investment,
competition policy, transparency in government procurement, and trade facilitation
(meaning cutting
red-tape at the point where goods enter a country and providing information
on import/export
regulations). These issues found a qualified inclusion in the agenda at
Doha at the insistence of the EU but
turned into another stumbling block at Cancun.
The experience at Cancun also points to the danger of focusing asymmetrically
on protectionism in the
rich countries. International financial institutions and NGOs have promoted
the view that it is wrong and
hypocritical to ask poor countries to liberalize while the rich have high
protection. Not only is protection
in poor countries still higher than in rich countries in virtually all
areas, such advocacy ends up
strengthening the hand of the protectionists and weakening the ability
of leaders in developing countries
to "sell" liberalization to domestic constituencies.
Mr. Panagariya is professor of economics and co-director of the Center
for International
Economics at the University of Maryland.
Updated September 16, 2003
37. Cancun's Silver Lining
The collapse of global trade talks Sunday in Cancun,
Mexico, is giving everyone the chance to proclaim
the death of free trade, but let's make sure we
toe-tag the right corpse. What really died on Sunday
was the developed world illusion, especially in
Europe, that farm subsidies are untouchable.
The world's rich nations escaped the last successful
world trade round in the 1990s without budging on
agriculture. They'd hoped to finesse the matter in
Cancun too. But this time an alliance of poor
countries and free-market exporters (Australia)
called their bluff, and Europe in particular was
exposed as the cynic that wants freer trade for
everyone except its own pampered farmers. The
EU's failure to offer more than token reductions in its 45 billion euros-a-year
agriculture subsidies gave
India and others cause to walk away.
The Cancun collapse will yet lead to progress if this farm lesson is driven
home to those parts of the
European, American and Japanese economies that depend on expanding global
markets. Farmers
account for just 5% of the EU's population, and a mere 2% of its GDP, yet
agriculture has been wagging
EU trade policy for years.
The failure to break down Third World trade barriers in the future is only
going to hurt German
manufacturers, French bankers and American software designers. These and
other service and high-tech
providers are the big losers coming out of Cancun, and maybe they will
begin to tell their home-country
politicians just how destructive First World farm subsidies have become.
The U.S. has to shoulder some of the blame here. In the wake of the failure
yesterday, Bush
Administration officials were fingering Third World countries, and no doubt
some of them were looking
for an excuse to maintain their own trade barriers. But the task of the
world's economic leader and
largest global market is not to give them that excuse. U.S. Trade Rep.
Robert Zoellick did put a worthy
subsidy-cutting proposal on the table last year. But last year's $17-billion-a-year
farm bill left him with
too little credibility or moral authority to challenge Europe's subsidies.
He also failed to enlist the same
African allies he had at the start of this trade round in Doha in 2001.
One irony here is that Cancun really does prove how "globalization" has
become a reality. The
developing world couldn't afford to ignore agriculture in the EU and America
any longer because it has
come to understand that subsidies keep global farm prices artificially
low. Cotton subsidies in Mississippi
literally drive cotton farmers in West Africa out of business. The subsidies
also raise prices for American
consumers, but in the developing world it is a question of hope or poverty.
The World Bank estimates that a new round of market opening would raise
global output between $290
billion and $520 billion and lift some 144 million people out of poverty
by 2015. Dan Griswold of the
Cato Institute cites a May 2002 International Monetary Fund paper showing
that ending agricultural
protectionism alone would add $100 billion to global growth. Some $92 billion
of that would go to the
developed world, in the form of lower prices and better allocation of resources,
and $8 billion would go
to poor countries.
Where to go from here? Cancun doesn't yet mean this Doha trade round is
dead. The Uruguay round
took eight years before it succeeded in 1993. Mr. Zoellick, the U.S. trade
czar, has also stressed that he
will continue to pursue bilateral and regional trade pacts with willing
partners. Australian Prime Minister
John Howard said yesterday that he expects to reach such a deal with the
U.S. as early as next month.
Perhaps we also need to rethink the size of these huge multilateral trade
rounds. Once upon a time trade
liberalization concerned only the tariffs and border rules for tradable
goods, whether agricultural or
industrial. But lately the talks have become loaded down with proposals
on investment, labor law and the
environment, among other things. It's possible they've become too unwieldy.
From a free trader's view, after all, the World Trade Organization is a
protectionist device. It allows
countries to justify, on grounds of treaty reciprocity, limits on trade
that otherwise make no economic
sense. Perhaps it's time for the U.S. and other countries that benefit
from open global markets to begin
once again practicing unilateral free trade.
Such a policy kept Britain rich for decades in an earlier era, and it would
do the same for us now. And
the example for the rest of the world would do more for free trade than
all the Cancun conferences f
38. WTO Talks Collapse in Cancun
"Global trade talks collapsed abruptly Sunday afternoon
in an unprecedented uprising by
scores of the world's poorest nations against
the United States, European Union countries
and other wealthy nations," reports The Washington
Post. Johan Norberg, author of the new
Cato book, In Defense of Global Capitalism, anticipated
a possible breakdown of the
negotiations in "Developing Countries Betrayed
by EU and USA." Norberg writes that the
1999 trade meetings in Seattle collapsed because
developing countries did not get
increased market access: "If that happens in Cancun,
developing countries may drop out of
the trade talks. This would be a shock to the
multilateral trade system. And it could end the
wave of economic and political liberalization
that has made life better in many parts of the
world."
39. Developing Countries Betrayed by EU and USA by Johan Norberg 2002
Johan Norberg is a young Swedish writer and leading activist in the debate
on free trade
and globalization. His latest book, forthcoming in September, is "In Defense
of Global
Capitalism" (Cato Institute, 2003).
The good news is that the United States and the European Union recently
agreed on
agricultural trade in advance of the Sept. 10-14 World Trade Organization
meeting in
Mexico. The bad news is that the agreement is more of the same old stuff.
And, as a result,
it is viewed by developing countries as a betrayal and perhaps as reason
to give up on
globalization and the West's promises about free trade and prosperity.
The Western countries say they have agreed to reduce tariffs against foreign
farmers and
subsidies to their own. But they don't say by how much, on which goods,
or when. And
the deal contains this convenient phrase: "Without prejudging the outcome
of the
negotiations." In other words, anything goes.
That's an approach that could doom globalization, which has already brought
a better life to
much of the world. In the last two decades, more than 200 million people
have been lifted
out of absolute poverty thanks to liberal reforms and increased barrier-free
trade. A recent
World Bank report concluded that 24 developing countries with a total population
of 3 billion
are integrating into the global economy more than ever. Their per capita
growth has
increased from 1 percent in the 1960s to 5 percent in the 1990s. At the
present rate, the
average citizen in these developing countries will see his income doubled
in about 15 years.
Imagine how that will strengthen the demand for rich world exports.
But many countries have been left behind because the liberalization of
trade during the last
50 years has not included two sectors: textiles/garments and agriculture.
Those are the
labor-intensive goods poorer countries can produce and sell at competitive
prices. In
manufacturing, the volume of trade has risen 45-fold since the end of World
War II. But in
agriculture it has risen only six-fold.
In 1995, the EU and the U.S. promised to abolish all quotas that restricted
exports of textiles
and clothing from poor countries could sell. But to date, the EU and U.S.
have killed quotas
only on goods that developing countries do not export, such as parachutes
-- yes,
parachutes. Many doubt that rich countries, after 10 years of stalling,
have the courage to
abolish these quotas come January 2005. When developing countries talk
about the need to
discuss "implementation issues" in the WTO negotiations, it's their polite
way of saying: "Will
you please stick to your promises?"
Contrary to popular perception, the 1999 trade meeting in Seattle didn't
fall apart because of
protests. It collapsed because developing countries faced demands for environmental
and
labor standards without getting, in return, increased market access. If
that happens in
Cancun, developing countries may drop out of the trade talks. This would
be a shock to the
multilateral trade system. And it could end the wave of economic and political
liberalization
that has made life better in many parts of the world.
During the last century, many developing countries followed inward-looking,
anti-liberal
policies because they couldn't tap into the world market. In the early
20th century, Latin
American countries such as Argentina and Uruguay were among the richest
in the world
because of their agricultural exports. But in the 1930s, the U.S. and Europe
reintroduced
protectionism. In turn, Latin American countries turned to import substitution
and state-led
industrialisation, and to a succession of military dictatorships. Those
policies gave Latin
America a temporary economic boost after the Second World War -- but the
region ran on
outdated technology and insufficient market access. In the end, these nations
wound up
poorer. They accumulated huge debts, which still affect the world economy.
And, in Africa
and Asia, many states that weren't welcome in the Western markets fell
into communism
and all its errors.
Some of the same is happening today and many poor countries feel betrayed.
They were
promised progress if they liberalized. But when they did, they weren't
allowed access to
the world economy. We dumped our subsidized goods in their countries. But
they weren't
allowed to export their goods to us. Brazilian President Lula da Silva
has said that all his
country's efforts and exports are useless "if the rich countries continue
to preach free
trade on one side and practise protectionism on the other side." South
African President
Thabo Mbeki has said that there is a real threat of famine in Africa, because
of Western
protectionism: "It remains an inexcusable shame."
We do not make friends with these double standards. Instead, anti-American
and
anti-Western movements surface. According to polls, globalization and trade
are popular
with the world's poor, but the rich countries and their policies are unpopular.
So, in the end,
many will dismiss the free market because they never see it in practice.
40. Fix or float? Sep
11th 2003
From The Economist print edition
A developing country's economic institutions may matter more than its
exchange-rate regime
FROM Latin America to South-East Asia, emerging economies that peg
their exchange rates have suffered financial crises with alarming
frequency in the past few years. Advisers of all sorts have urged them
to let their currencies float on the foreign-exchange markets, and
instead direct their monetary policy towards an inflation target. Swayed
also by the success of inflation targeting in many developed countries,
since 1998 at least ten emerging economies have taken this advice and
have formally adopted inflation targets.
Purists point out that several of these converts do not really believe
in their new
religion, but are merely unreformed exchange-rate fiddlers in inflation
targeters' garb.
South Korea, they say, is one country that keeps its currency artificially
low by
continually stocking up on dollars. Yet such intervention may make perfect
sense, says
a recent paper by Corrinne Ho and Robert McCauley, of the Bank for International
Settlements*. Because exchange-rate fluctuations have a bigger impact on
inflation,
trade and financial systems in emerging economies than they do in developed
ones,
intervention may help those countries achieve their inflation objectives.
The authors find that the "pass-through" from
exchange rates to domestic prices is greater in
emerging markets than in developed ones,
because of poorer countries' often greater
dependence on commodity trade. For instance,
the proportion of a year's change in the
consumer-price index that can be explained by
fluctuations in the exchange rate is 41% in
Indonesia and 48% in Hungary, but only 2% in
the United States. Moreover, a lot of many
emerging economies' trade is with one big
partner, usually America or the euro area,
making them more vulnerable to bilateral
exchange-rate movements. Ms Ho and Mr
McCauley also find that pass-through is higher
in countries with a history of high inflation and
currency crises.
Financial markets, which are underdeveloped in
many emerging economies, are vulnerable to
wild exchange-rate fluctuations. Large capital
inflows that put upward pressure on real
exchange rates are usually accompanied by too much borrowing and investment,
and
steep increases in asset prices. If investors lose confidence, these flows
can go
suddenly into reverse and the exchange rate falls. This means trouble:
because
investors are unwilling to lend in emerging-market currencies, local banks
and companies
end up laden with debts denominated in dollars and euros, while their assets
are in the
cheapened national currency. Defaults follow, and economic recovery can
be slow.
Emerging countries' governments may be able to find ways of reducing their
dependence
on capricious foreign capital. One possibility is to pursue closer regional
financial
integration: the recently launched Asian Bond Fund, a scheme by 11 East
and
South-East Asian countries to facilitate the reinvestment of the region's
capital locally
rather than in America or Europe, is one such initiative. Further options
might include the
development of more intra-regional trade, in order to reduce dependence
on a single, big
trading partner, or the fostering of domestic demand, perhaps through local
consumer-credit and mortgage markets.
However, such remedies are for the long term. Until they appear, say Ms
Ho and Mr
McCauley, it is fine for monetary authorities in emerging-market economies
to manage
their exchange rates, even if these are theoretically free-floating and
there is an
inflation target. They point to tools that should permit some dabbling
in the currency
markets without compromising the fight against inflation. If necessary,
the central bank
can use "sterilised" intervention: after selling its own currency and buying
dollars to hold
the exchange rate down, it can sell bonds to mop up the extra domestic
currency,
rather than let it seep into the money supply and thus risk higher inflation.
Or, to the
dislike of some purists, governments can impose capital controls.
First, design your institution
Maybe the arguments over whether exchange rates should be fixed, free or
managed are
beside the point. According to another recent paper†, by Guillermo Calvo,
of the
Inter-American Development Bank, and Frederic Mishkin, of Columbia University,
the
choice of monetary regime matters less than the creation of good monetary,
fiscal and
financial institutions. Messrs Calvo and Mishkin argue that when governments
run up
huge debts, banks are poorly supervised and the central bank prints money
willy-nilly,
people can have no faith in the real value of money.
Governments might therefore fix the exchange rate in the hope that a tie
to a strong
currency will give them credibility and build confidence in the value of
the national
money. Then again, they might follow the advice of those who favour floating
exchange
rates, because then monetary policy should have the flexibility to deal
with domestic
economic concerns. However, none of this means much without good institutions.
For
example, central banks ought to be independent in more than name only.
In theory,
Argentina's central bank might appear more independent than Canada's; yet
Argentina,
not Canada, replaced a respected central-bank president with a government
lackey in
2001, the year the country defaulted on its debts.
Like governments, monetary-policy regimes are rarely ideal, and the best
system may
vary from one country to the next. But, claim Messrs Calvo and Mishkin,
governments
should worry first about setting up institutions on which their citizens
and investors can
rely, and only then ponder the finer points of which variables should be
the target of
their central-bank boffins.
* "Living with Flexible Exchange Rates: Issues and Recent Experience in
Inflation Targeting Emerging
Market Economies". BIS Working Paper no. 130, February 2003.
† "The Mirage of Exchange Rate Regimes for Emerging Market Countries".
NBER Working Paper no. 9808,
June 2003.
41. The new "new economy"
Sep 11th 2003
From The Economist print edition
How real and how durable are America's extraordinary gains in productivity?
IN AT least one sense, America's "new economy" is well and truly dead.
The number of
articles in financial newspapers containing the words "new economy" is
now running at
only 5% of its level in 2000. Yet in another sense the new economy is very
much alive
and kicking: its most important feature, namely America's improvement in
productivity
based on new information technology, continues to amaze.
Revised figures last week showed that output per man-hour in America's
non-farm
business sector grew at an annual rate of 6.8% in the second quarter of
this year.
Quarterly changes are notoriously volatile, but over the past year productivity
has
increased by an impressive 4.1%.
Productivity always bounces back in the early stages of an economic recovery
(as firms
produce more with their leaner workforces). But the recent spurt has been
unusually
robust, especially since this has been America's weakest recovery in modern
history.
According to J.P. Morgan Chase, over the past five years America has enjoyed
the
fastest productivity growth in any such period since the second world war.
Over the
whole period from 1995, labour productivity growth has averaged almost
3% a year,
twice the average rate over the previous two decades.
When productivity first picked up in the late
1990s, economists debated fiercely about how
much of the increase was structural and how
much of it was cyclical. Some argued that it
was exaggerated by the unsustainable boom in
output and investment, and would slow when
the economy faltered. Robert Gordon, an
economist at America's Northwestern
University, was one of the most outspoken new
economy sceptics. In a widely cited paper
published in 1999, he estimated that after
adjusting for the effects of the economic cycle,
all of the increase in labour productivity was
concentrated in the manufacturing of
computers, with no net gain in the rest of the
economy. He concluded that the economic
effects of computers and the internet were not
in the same league as those of electricity or
the motor car in the early 20th century.
To his credit, Mr Gordon has been quick to follow Keynes's dictum: "When
the facts
change, I change my mind." In a new paper*, he admits that more recent
data have
shown his original conclusion to be wrong: faster productivity growth has
proved more
durable and has spread to the wider economy. However, as he points out,
the latest
data raise many new questions about why this is so.
Unsolved puzzles
The first puzzle is that, since the peak of the economic boom in 2000,
productivity
growth has speeded up when it might have been expected to slow down. American
labour productivity has increased at an average annual rate of 3.4% since
2000, up from
an average of 2.5% during the 1995-2000 economic boom. In other words,
the latest
figures suggest that the cyclical boost in the late 1990s was negligible:
most of the
spurt in productivity represented an increase in its long-term rate of
growth.
Adjusting for the economic cycle is always tricky. In the late stages of
an expansion,
productivity growth tends to be below trend because over-optimistic firms
hire too many
people just at the time when demand is starting to slow. Productivity growth
then falls
further below trend as the economy dips into recession.
The most rapid productivity growth occurs in the
early stages of recovery. Then output begins to
perk up, but firms are still cutting costs and
laying off workers. This suggests that part of the
surge in productivity over the past two years of
recovery is likely to prove temporary. Mr Gordon
reckons that the trend growth rate has now risen
to around 2.8% (see chart 1).
A second puzzle is why productivity accelerated
over the past three years at the same time as IT
investment fell (see chart 2). After all, a host of
studies have concluded that most of the revival
in productivity growth is linked to the production
or the use of computers and software.
One explanation is that the productivity gains
from IT investment do not materialise on the day
that a computer is bought. Work by Paul David, an economist at Oxford University,
has
shown that productivity growth did not accelerate until years after the
introduction of
electric power in the late 19th century. It took time for firms to figure
out how to
reorganise their factories around the use of electricity and to reap the
full efficiency
gains.
Something similar seems to be happening with IT.
Investing in computers does not automatically
boost productivity growth; firms need to
reorganise their business practices as well. Just
as the steam age gradually moved production
from households to factories, and electricity
eventually made possible the assembly line, so
computers and the internet are triggering a
sweeping reorganisation of business, from the
online buying of inputs to the outsourcing of
operations. Yet again, though, the benefits are
arriving years after the money has been spent.
That investing in IT is necessary but not
sufficient for productivity gains is suggested by
the experience of retailers. Most of them have
introduced technologies such as bar-code readers
and electronic stock control. Yet productivity gains in retailing have
largely been
concentrated in the new, large discount stores, such as Wal-Mart, and big
supermarkets. They have not been found to anything like the same extent
in smaller
old-style shops.
Recent productivity gains have certainly been spread more widely than in
the late
1990s. IT can boost labour productivity by increasing capital per worker,
or by
increasing total factor productivity (TFP: the efficiency with which inputs
of both capital
and labour are used). Calculations by Stephen Oliner and Daniel Sichel,
both economists
at America's Federal Reserve, show that from 1995 to 1999 investment in
IT plus TFP
gains in the production of IT goods accounted for 98% of the total increase
in
productivity growth. But when the period is extended to 2002, the total
direct
contribution of IT declines to 76%, with faster TFP growth appearing in
other sectors of
the economy.
Another persuasive argument to explain why productivity has jumped as investment
has
fallen is based on work by Erik Brynjolfsson, an economist at MIT. IT investment
in the
late 1990s was accompanied by significant intangible investment in human
capital (such
as retraining) and in new business processes ("re-engineering"). This required
more
workers (consultants and IT support). However, unlike business fixed investment,
this
spending is not counted as final output but as a corporate expense. So
it depresses
measured output per hour.
Since 2000, the pay-off from that intangible investment has at last come
through,
boosting output, ironically, at the same time as many of the workers who
delivered
those gains have been laid off. This has temporarily inflated measured
productivity
growth. In other words: productivity growth was understated in the late
1990s but
overstated more recently.
The productivity debate is surrounded by a thick statistical fog. For example,
official
numbers may understate growth because they ignore improvements in the quality
of
many goods and services. Stephen Roach, the chief economist at Morgan Stanley,
has
another statistical quibble. Over the past year, productivity in services
has grown much
faster than that in manufacturing. Yet, as he points out, there are huge
problems in the
measurement of both the output of service-sector workers and their hours
worked.
According to official statistics, the average working week in financial
services in America
is (at 35.5 hours) the same as a decade earlier. Mr Roach argues that thanks
to mobile
phones, laptops and the internet, his working day has surely lengthened
over the past
decade. If so, productivity growth may be overstated.
For America's recent productivity trend to continue for another ten years,
it will need
sources of innovation that can generate an investment boom of a similar
magnitude to
that of the late 1990s. But Mr Gordon reckons that diminishing returns
are setting in:
web-enabled mobile phones, digital cameras and their ilk offer improvements
in consumer
entertainment, he says. But they do not promise fundamental changes in
business
productivity such as were provided by the invention of user-friendly business
software
or the internet.
Gains to come?
Pundits who reckon that 3-4% productivity growth is sustainable for another
5-10 years
are, in effect, making the bold claim that IT will have a far bigger economic
impact than
any previous technological revolution. During the prime years of the world's
first
industrial revolution—the steam age in the 19th century—labour productivity
growth in
Britain averaged barely 1% a year. At the peak of the electricity revolution,
during the
1920s, America's productivity growth averaged 2.3%.
Yet there are still good reasons to believe that IT will have at least
as big an economic
impact as electricity, with average annual productivity growth of perhaps
2.5% over the
coming years. One is that the cost of computers and communications has
plummeted far
more steeply than that of any previous technology, allowing it to be used
more widely
throughout the economy. Over the past three decades, the real price of
computer-processing power has fallen by 35% a year; during 1890-1920, electricity
prices fell by only 6% a year in real terms.
IT is also more pervasive than previous technologies: it can boost efficiency
in almost
everything that a firm does—from design to accounting—and in every sector
of the
economy. The gains from electricity were mainly concentrated in the manufacture
and
distribution of goods. This is the first technology that could significantly
boost
productivity in services.
Perhaps the biggest puzzle about America's
productivity gains is why Europe's IT investment
has not delivered similar increases. Since the
mid-1990s, while America's productivity growth
has quickened, that in the European Union has
slowed sharply (see chart 3).
Official statistics, however, exaggerate America's
lead. American firms' spending on software is
counted as investment, so it contributes to GDP.
In the euro area, most countries count such
software as a current business expense, and so it
is excluded from final output. This depresses
Europe's productivity growth relative to America's.
In addition, many European economies (unlike America's) do not allow fully
for gains in
computer quality over time. So official figures understate GDP growth.
Adjusting for this
undoubtedly narrows the gap between Europe and America. But it cannot alter
the fact
that productivity growth has actually fallen in Europe.
According to one study† virtually all of the difference in the growth rates
of productivity
in America and Europe in the late 1990s came from just three industries:
wholesaling,
retailing and securities trading. Just as American retailers made big efficiency
gains for
reasons not directly related to computers, European firms fell behind because
with some
exceptions, such as France's Carrefour, they were much less free to develop
"big box"
retail formats. Regulations on the use of land prevent the carving out
of greenfield sites
for big stores in suburban locations.
Angel Ubide, an economist at Tudor Investment, an American fund management
company, argues that IT investment has benefited America more than the
EU because
Europe already had a high ratio of capital to labour (the result of its
higher unit labour
costs). America started the 1990s with a low capital-to-labour ratio, so
there was much
greater scope for investment, and hence room to boost labour productivity.
In contrast,
the EU's capital-to-labour ratio has risen by much less.
A more common complaint is that Europe's inflexible labour and product
markets hinder
the shift of labour and capital that is needed to unlock productivity gains.
This is
undoubtedly true. However, recent reforms to make labour markets more flexible
may
themselves have reduced productivity growth by deliberately making growth
more
job-intensive. Arrangements such as part-time jobs and fixed-term contracts,
and cuts
in social-security contributions for the low paid, have encouraged more
hiring. The
flip-side is lower productivity growth as more low-skilled workers enter
the workforce.
It is striking that productivity growth has slowed most in those European
countries with
the strongest growth in jobs. In Germany, for example, where few new jobs
have been
created over the past decade, productivity growth has held up better than
elsewhere.
America was the first big country to embrace IT, so it is hardly surprising
that it has
been the first to benefit. Most European countries still lag behind in
their use of
computers and the internet. Thus the benefits for them may lie in the future.
Indeed,
the eventual economic pay-off could turn out to be bigger in Europe than
in the United
States. In theory, the internet, by increasing transparency and competition,
could make
deep inroads into archaic European business practices. If it is true that
European firms
are much less efficient than their American counterparts, there is greater
scope for
productivity gains.
There is also an advantage in being a follower in adopting new technology,
rather than a
trailblazer: you can wait to see what works and then pick the best bits.
As Paul Saffo of
California's Institute for the Future once said: "The early bird may catch
the worm; but
it is always the second mouse that gets the cheese."
† "ICT and productivity in Europe and the United States: Where do the differences
come from?" by B. van
Ark, R. Inklaar and R. McGuckin.
* "Five puzzles in the behaviour of productivity, investment, and innovation".
42. Subsidies Subvert The Single Market By MARIO MONTI
BRUSSELS -- Making Europe more competitive is
one of the European Union's top priorities; subsidy
control is one of the most effective ways of getting
there. Subsidy control in the EU rests on three
"pillars:" recognition that subsidies tend to distort
competition and commerce between our member
states; an obligation on the part of EU member states
to inform the European Commission -- the union's
antitrust watchdog -- of any planned subsidies; and
most importantly, the need for commission approval
before any subsidy can be paid.
Subsidies often obstruct the EU's original and abiding goal, namely, to
create a single market and
competition to increase the output and wealth of its economy. That is why
the 1957 Treaty of Rome,
from which EU competition policy originates, forbids member states from
creating a fait accompli by
paying out the planned subsidies before the commission has had a chance
to assess the impact on
competition and the single market. In fact, the commission has the power
to require that aid granted by
member states that is incompatible with the single market be repaid by
the beneficiaries to the public
authorities that granted it.
Of course not everyone agrees with this policy, especially when a company
facing difficult times is
demanding subsidies and a member state feels inclined to oblige for reasons
portrayed as being in the
broader interest. The argument sometimes made is that strict antisubsidy
rules risk destroying
employment and Europe's industrial base.
But that view is shortsighted. I prefer the treaty's choice -- recently
confirmed in the constitution for the
future Europe -- that developing a single market is a better tool than
subsidies for relaunching growth in
employment and industrial output. A single market where people, goods,
services and capital can flow
freely, gives companies the means to seek new customers and opportunities
for growth. Competition
policy ensures that public subsidies do not distort this single market
process.
To illustrate the effectiveness of subsidy control for the functioning
of Europe's single market, let me
touch on two sectors that, until quite recently, were not exposed to competition.
First, banking services. In the early 1990s there was no real single market
for banking. When a bank's
liquidity collapsed, each member state tackled the problem on a strictly
national level. The result: ad hoc
rescue and restructuring operations -- undertaken on the national level
with little regard for banks in
neighboring countries. In cases like Crédit Lyonnais the commission
enforced strict guidelines for
rescuing and restructuring banks in difficulty. This meant that the recipients
of subsidies had to make a
significant contribution to their own restructuring -- using funds they
obtained by selling assets. The need
to sell assets was also meant to reduce their presence on the market, necessary
in order to mitigate the
distortion of competition in the single market caused by the subsidies.
Similarly, the commission
prevented Italy from restructuring its banking sector with tax subsidies.
In the mid-1990s, the commission dealt with investment aid in the form
of capital injections at below
market rates. Public authorities -- using the taxpayers' money -- felt
no need to seek an adequate return
on their investment. Investments were undertaken to increase lending capacity
and market share of public
banks. In a case like Westdeutsche Landesbank, the commission intervened
and demanded adequate
remuneration because the cheap public capital available to West LB prevented
other banks from
competing effectively with it.
At the dawn of the 21st century, state guarantees awarded to public banks
in the 19th century remained
in place in several member states. These guarantees -- I call them invisible
aid -- gave public banks
preferential access to capital markets, a strategic advantage their private
sector peers did not enjoy. The
commission -- with a combination of legal action and negotiation -- has
accomplished the phase out of
these guarantees in Germany, France and Austria. The phasing out of public-sector
guarantees leveled
the playing field for all banks in the European Union -- a development
that, in the United States, has
drawn attention to corporations like Freddie Mac and Fannie Mae.
Second example: public utilities. Energy markets in Europe are now -- at
least partly -- open to
competition. A level playing field for all suppliers across the European
Union is critical for competition.
We are therefore in the process of phasing out guarantees against bankruptcy
that only certain
incumbents -- such as Electricité de France -- enjoy. Postal services
remain highly regulated but the
commission stands prepared to intervene when it finds that state subsidies
are funding postal incumbents'
below-cost pricing strategies that foreclose competition. In the case of
Deutsche Post our policy against
state-funded below-cost pricing has done much to open postal markets. When
it comes to opening up
public-utility markets, our American antitrust colleagues acknowledge that
Europe's subsidy control is on
the cutting edge.
Our antisubsidy policy has had a beneficial side effect beyond the preservation
of competition: subsidies
are on the decline. The overall level of manufacturing and services subsidies
in the European Union fell to
euro33 billion in 2001 from euro52 billion in 1997. Strict conditions on
subsidies for the rescue and
restructuring of ailing enterprises contributed to this euro19 billion
decline in aid. While the remainder is
still a lot of money, the European Union can pride itself to be the only
"country" that systematically
monitors, publishes and controls subsidies.
We should build on these successes. Open markets do more to stimulate economic
growth than the
short-term subsidization of companies that have hit on hard times. In times
of difficulty, it is easy to
sacrifice tough subsidy rules. Short-term policies put at risk the accomplishments
achieved to date in
creating a single market and opening up competition. As companies emerge
from the stock-market
bubble, they have to streamline operations and restructure debt accumulated
in better times. Some will
seek aid. But member states considering subsidies must follow the European
Union's rules. Aid is
conditional on the beneficiary divesting assets to raise much of the funds
necessary for the streamlining of
its core operations. Europe's market economy relies on enterprises that
survive and thrive on their own
merits and without state aid -- Europe cannot afford to loose its faith.
Mr. Monti is commissioner for competition. From 1995 through 1999, he was
the
commissioner responsible for the single market.
Updated September 15, 2003 2:12 a.m.
43. We need a job-saving law Walter Williams 9-17-03 http://www.townhall.com/columnists/walterwilliams/ww20030917.shtml
Recent advocacy of free trade in this column has caused
considerable reader apoplexy and anxiety, not to mention accusations of
unconcern with worker plight. Readers have protested loss of good paying
jobs to low-wage countries such as India, China and other Asian countries.
I'd like to propose a way to completely eliminate this angst, and I'm wondering
just how many of my fellow Americans would support it.
Let's call it the Level Playing Field Act, where Congress
decrees that: Neither a corporation nor an individual shall be permitted
to employ a cheaper method of producing a good or service.
The Level Playing Field Act would be a blessing for all
those highly paid workers in the high-tech, auto, steel and other industries
who see their jobs going to overseas workers earning far less than half
their wages. To produce the most successful outcome, Congress would have
to complement this law with a similar decree on the consumer side of things,
namely: Neither a corporation nor an individual shall be permitted to purchase
a cheaper good or service.
This job-saving measure wouldn't only apply to jobs lost
to low-wage countries, but it would also apply to automation caused by
job-destroying machines. England's 19th century Luddites understood this
very well, but they took matters into their own hands and went about destroying
job-destroying machinery.
I can sympathize with the Luddites. After all, it's no
less painful to a worker who loses his job because the corporation has
moved his job overseas than to a worker who loses his job to a cost-saving
machine. Either way, he's out of a job
Being 67 years old, I've witnessed a lot of job destruction.
As a young man, I enjoyed watching road construction. At that time, road
construction required enormous teams of men doing everything from using
jackhammers and pickaxes to dig up cracked pavement to using long two-by-fours
to even out and finish the concrete.
We just don't see much of this now. These good-paying
jobs have been destroyed by huge machines operated by a few men who do
the work that took hundreds of men to do yesteryear. Had the Level Playing
Field Act been on the books, we'd still have those jobs.
Job-destroying machines haven't spared women. Yesteryear,
thousands of women had good-paying jobs as telephone switchboard operators.
Switching machines and later computers destroyed those jobs. Five and dime
stores had one or two ladies behind every counter to help customers. Checkout
stands and packaging have destroyed all of those jobs. The Level Playing
Field Act would have saved those jobs.
Then there's the consumer side of things. Years ago,
there were loads of corner grocery and hardware stores. Because of selfish
consumers, motivated only by getting something cheap and not caring about
what happens to small businessmen and their employees, these stores are
mostly gone. They've been replaced by huge, impersonal supermarket chains
and super hardware stores like Home Depot and Lowes. Had my proposed law
been on the books, small grocery and hardware stores would not have gone
the way of the dinosaur.
Some people might argue that what I'm proposing is too
extreme. They might say, "We're just talking about saving all of our high-tech
and manufacturing jobs going overseas." Such a position seems selfish and
self-serving in the least. After all, one of the overriding values of a
free society is equality before the law. That means if Congress takes a
measure to save the job of one American, it's obliged to save the jobs
of all Americans. No worker is more deserving than another. That means
there can't be job-saving discrimination
44. A Europe More Like America By GORDON BROWN Mr. Brown is Britain's chancellor of the exchequer.
Updated September 18, 2003
With proactive monetary and fiscal policies -- 13 interest rate cuts in
the
U.S., nine in the U.K. -- growth in America and the United Kingdom is
now strengthening. Britain is on track for stronger growth with low
inflation.
But at the IMF and World Bank meetings in Dubai this weekend each
major power -- Japan, America and Europe -- will be asked what
contribution their continent can make not just to restore world growth
now but to create the conditions for sustained long-term prosperity. So
there will, rightly, be a debate on interest rates, fiscal policy, exchange
rates, and how fiscal and monetary policy working together can help
maintain the conditions for stability and growth. And we must not allow
the disappointing outcome of the World Trade Organization talks at
Cancun to derail the urgent need to tackle world poverty.
But because we must sustain growth, structural reform -- reforms each
continent must make to boost productivity, make markets more flexible
and improve the climate for enterprise, innovation and wealth-creation
--
is also emphatically on the agenda.
In fact, for the major industrial economies, this must be the "structural
reform summit." The U.S. will have to show that its corporate standards
reforms will restore long-term confidence. Japan must step up its
financial sector reform.
But it is the European Union that faces the biggest challenge of all.
When people complain about the U.S. "double deficit" -- the budget and
current account deficits -- they risk confusing the short-term symptoms
of unbalanced growth and a faltering recovery with the underlying
longer-term cause. This latter is the lack of sustainable, robust
productivity growth in every continent of the developed world.
That is why -- if we are to achieve more balanced global growth in the
future -- Europe must push ahead with the necessary structural reforms
that have held back our continent for too long. And having created a
single market in theory, we should make it work in reality -- and help
it
spread competition, cut prices, increase consumer choice, and deliver higher
productivity.
So for the first time, European ministers should together embrace flexibility
for labor markets, liberalization
in capital and product markets, and tax competition in place of tax harmonization
-- in truth, a new growth
agenda for Europe. Most of all we should recognize that it is only by encouraging
enterprise -- and
rewarding it properly, that we will create the growth, productivity and
employment we need. This enterprise
agenda will be at the heart of driving forward Britain's reforms in our
pre-budget report.
So what does this new growth agenda for Europe look like?
• First, Europe -- both within the euro area and outside it -- must reject
old models that failed and embrace
labor market flexibility combined with policies that equip people with
the skills they need for work. Because
just 5% of Americans out of work experience unemployment for more than
a year -- in contrast to 50% of
Germany's, 30% per cent in France, and 60% in Italy -- we should reject
any new directives that damage
employment and growth. No proposal should be agreed which puts at risk
our ability to create jobs and
meet the targets the EU set for itself at Lisbon three years ago. And Europe
should look at new incentives
to make work pay, such as the U.S.'s earned income tax credit. In the U.K.,
our pre-budget report later
this year will outline the next steps we intend to take to get more people
into work.
• Second, Europe must embrace liberalization in product and capital markets.
The opening up of electricity
utilities, telecommunications and financial services markets must proceed
with speed. And building on U.S.
experience, we must do more, including through tax incentives, to promote
a venture-capital industry.
• Third, Europe must adopt a new approach to opening markets. Instead of
politically driven compromises,
we should encourage a new competition policy with independent investigations
into the market abuses and
competition bottlenecks that prevent the single market delivering lower
prices and greater productivity. We
should abolish wasteful state aids but facilitate those that help markets
work better -- like tax credits to
raise R&D investment toward the aspiration for the EU of 3% of GDP.
• Fourth, as I said earlier, Europe must favor tax competition and reject
tax harmonization. As long as
Europe clings to the outdated view that the single currency will be followed
by tax harmonization and then a
federal state, confidence about future economic growth will remain low.
The British government won the
argument for tax competition in place of the harmonizing savings directive.
Now Europe must accept that in
other areas too -- e.g. corporate tax -- the issue is not tax harmonization
but the efficient functioning of the
single market through tax competition.
• Fifh, we must regulate only where necessary and deregulate where possible.
Every proposed regulation
should be put to the costs test, then the jobs test and then the "is it
really necessary" test. Existing
regulations should be put to the same tests.
The last decade has been one of missed opportunity for reform. Dubai offers
a window of opportunity. The
credibility of Europe is at stake. Reform is not just desirable it is an
urgent necessity. We should seize the
moment.
Mr. Brown is Britain's chancellor of the exchequer.
Updated September 18, 2003