Tag: economic freedom

Emigrants Transform Institutions - For the Better

The potential negative impact of immigrants on American political and economic institutions is the best argument against liberalized immigration and the economic, social, national security, and criminal objections are not convincing.  Michael Clemens and Lant Pritchett dig into this argument, which they call the “Epidemiological Case for efficient migration restrictions,” and find it mostly wanting (their paper is the best I’ve read in a long while).  I’ve co-written an academic journal article, Cato policy paper, and other work about how immigration could affect institutions.  There is more evidence that immigration improves institutions than that it worsens them although there is still much work to be done on this issue and questions remain.

But there is evidence that emigration improves a source country’s institutions.  Fredrik Segerfeldt summarizes some of the evidence in his new book for the Adam Smith Institute in the UK.  In Chapter 6 of his book, Segerfeldt observes:

Mexican migrants play an important role in shaping political atti­tudes in the country, both through social remittances and after returning home. Political participation increases, democratic com­petition intensifies, it becomes more difficult for leading members of the party in power to enrich themselves and the chance that the rul­ing coalition will retain power decreases. In short, Mexico’s exodus makes it more democratic.

Although much of the research above deals with Mexico, there are other results indicating that emigration can strengthen democracy. In a macro study of a large number of poor countries, economists find that emigration increases both democracy and economic freedom in the sending country.

How does emigration improve Mexican economic and political institutions?  By breaking up cronyist and interventionist political arrangements:

Emigration can also help to break up or at least weaken governance based on patronage. In such countries voters tend to vote for the rul­ing party, because otherwise they risk losing the benefits that the power distributes. Entire communities will be dependent on the rul­ing party, which impairs democracy. But when people in a commu­nity receive income that is not from the state or the ruling party, citi­zens become more independent and can therefore vote for the oppo­sition if they want to. In Mexico, remittances reduce the support for the PRI, the party which, with the help of patron-client methods, managed to retain control of the country during most of the 20th cen­tury (between 1929 and 2000).

Migration and remittances may also be a way to break up old hierar­chies based on class and ethnicity. In San Pedro Pinula in Guatemala, for example, residents of the Mayan people, with the help of both returning migrants and remittances, have slowly but surely been able to challenge the ethnic underclass role they had for five centu­ries. In the oases of southern Morocco, the Haratin, poor black, land­less workers, have enhanced their status thanks to remittances from abroad.

Segerfeldt’s summary of that research can help explain the important finding by Joshua C. Hall that the ability to emigrate is correlated with improvements in source country economic freedom: 

Exitability, a variable created by Brown (2014) to capture how easy it is for citizens to “vote with their feet” is related to the change in economic freedom from 1980 to 2010 in a statistically significant manner across all specifications. This provides some indirect evidence to the importance of “exit” versus “voice” with respect to the question of institutional reform.

Emigration benefits governance in sending countries, increasing the returns from liberalized immigration policies in the developed world.  This is an exciting time to be working on how immigrants affect economic and political institutions.   

In Africa, Institutions Matter More than Infrastructure

Washington Post article recently highlighted the impressive but uneven progress that Africa has made in its struggle against poverty. The article looked at questions pertaining to material wellbeing, including “the number of times that an average family had to go without basic necessities.” On that measure, Cape Verde saw the most rapid improvement. And so the article asks, “What did Cape Verde do right?” 

Cape Verde’s superior infrastructure, the Washington Post explains, is partly responsible for that country’s economic progress. Surely that cannot be the full answer. The United States did not have an interstate road network till the Eisenhower Administration – decades after the United States became the richest and most powerful country in the world. Similarly, Germany was the most powerful and richest country in Europe a long time before constructing its famous autobahns. 
  
In fact, it is Cape Verde’s policies and institutions that we should look to as reasons for that country’s superior performance relative to, say, Liberia, where poverty increased the most – according to the Washington Post. According to the Center for Systemic Peace, Cape Verde is a democracy. Liberia, in contrast, is far behind.

Poverty’s Decline and Its Causes

It is always refreshing to see journalists draw attention to the incredible decline in world poverty. An article that did just that appeared yesterday in the Christian Science Monitor. The piece shines a spotlight on three heartening facts in particular. 

First, poverty is decreasing. Not only have poverty rates fallen, but the total number of people in poverty has decreased. This is incredible when one considers population growth—there are more people alive today who aren’t in poverty than ever before. The Brookings Institution projects poverty will be practically eliminated by 2030. 

Second, average incomes are rising. World per capita GDP, adjusted for inflation and differences in the cost of living, has never been higher. And average income growth is not limited to developing countries: the average American has more disposable income left after basic expenses

Finally, humanity is healthier. Globally, average life expectancy is at an all-time high, largely due to plummeting infant mortality rates. More people have enough to eat and enjoy access to clean drinking water and improved sanitation facilities. The developed world has also seen health gains, with cancer death rates falling for both men and women in the OECD countries. 

The article attributes improvements in well-being to three main factors: the fall of communism, the rise of trade and globalization, and the courage of those who stood up against tyranny. 

While the CSM article gives some credit to international aid programs, it is important to recognize that aid is not a good driver of economic development. Even vocal aid-proponent Bono acknowledges that international aid and charity pale in comparison to the prosperity-creating power of people engaging in market exchange. 

When given the freedom to do so, it is truly remarkable what ordinary people can achieve. Consider the utter transformation of Singapore from poverty to riches – that is the power of economic freedom!

Two Lessons from the Tunisian Election

The victory of the secular party Call of Tunisia (Nidaa Tounes) in the parliamentary election on Sunday carries two lessons for observers of transitions in the Middle East and North Africa (MENA). The first one is broadly optimistic, but the second one should be a cause for concern, heralding economic, social, and political troubles ahead.

1. The Arab Spring was not a one-way street to religious fundamentalism.

In spite of the unexpected and often violent turns that political events have taken in countries such as Syria or Libya, the revolutions across the MENA countries were not just thinly disguised attempts to impose theocratic rule on Arab societies. While Islam is an important cultural and social force, most people in the region have little appetite for a government by Islamist extremists. In fact, much of the headway that Islamist politicians made shortly after the fall of authoritarian regimes in the region can be explained by their track records as community organizers or providers of public services.

Tunisia is a case in point. Already in 2011, the country’s leading Islamic party, Ennahda, featured numerous women candidates in the election, and following a political crisis last year it negotiated a peaceful handover to a caretaker government that led the country to yesterday’s election.

Tunisia’s new leading political force, Nidaa Tounes, may have gained as many as 80 seats in the 217-seat parliament. It describes itself as a ‘modernist’ party. It unites secular politicians of various stripes, including labor union members, or former officials of the regime of president Zine el-Abidine Ben Ali. The leader of the party, the 87-year old Beji Caid el-Sebsi (who served as interim prime minister in 2011) had a long political career prior to the revolution, including an ambassadorship in Berlin after Ben Ali’s ascent to power.

2. Don’t expect radical economic reforms.

For those who feared that democratization in the MENA region could bring about theocracy and extremism, the status-quo nature of Nidaa Tounes is probably good news. At the same time, however, it seems unlikely that the party, whose sympathizers largely overlap with those of the country’s influential labor unions, will bring about the deep institutional and economic changes that Tunisia needs in order to extend access to economic opportunity to ordinary Tunisians by dismantling Byzantine red tape and corruption and freeing up its economy.

For example, while it is certainly praiseworthy that the party has promised to improve the economic situation of women, one should worry that it plans to do so by what are likely to be popular yet ineffective measures: creating a new government bureau fighting discrimination, investing in social housing for young female workers, and extending statutory maternity leave.

More importantly, in many areas the exact economic platform of Nidaa Tounes remains blurry. The party promises to foster consensus among the government, civil society, labor unions, and employers. It also promised to cut public spending – in part by reforming the system of fuel subsidies – increase industrial exports and promote industries with high value added, most notably hi-tech and renewable energy, and to subsidize economic development in poorer regions by an amount of 50 billion dinars ($28 billion) over the next five years, 30 billion of which would be coming from the public budget.

Heavy on clichés and light on specifics, these promises are reminiscent of electoral manifestos of social democratic parties of Europe. Regardless of whether that would be a good thing under normal circumstances, what Tunisia needs now is a bold agenda of economic liberalization, as well as a Leszek Balcerowicz-like figure to implement it. With a mushy economic program and Mahmoud Ben Romdhane – former deputy head of Tunisia’s ex-communist party, Ettajdid –as the key economic policy figure on the party, Nidaa Tounes offers neither.

Fragility of Tunisia’s Transition

The upcoming parliamentary election in Tunisia comes at a critical time. For a while, Tunisia was seen as a poster child for a successful transition away from authoritarianism. In Egypt, a widespread disappointment with an Islamic government resulted in a military coup last year. In contrast, when Tunisia could not get through a political impasse, the Islamic Ennahda party negotiated a handover to a caretaker government earlier this year, which has led the country to an early election.

Regardless of whether Ennahda can repeat its electoral success from three years ago or whether secular forces take over, the new Tunisian government will be in an unenviable position: it will have to address a growing security crisis in the country. In the past two years, the country has seen the emergence of political violence and terrorism perpetrated mostly by radical Salafist groups. Those violent efforts include the killings of two opposition politicians, Chokri Belaid and Mohammed Brahmi, as well as a car bomb plot foiled just last week.

Tunisia has also become a fertile ground for the recruitment of fighters of the Islamic State (ISIS). Some estimate that over 2,400 ISIS fighters are from Tunisia, which would make Tunisians the most numerous nationality fighting for ISIS. Restoring basic security, order, and rule of law—and preventing the country from descending into a full-fledged internal conflict—will have to be a priority for the new government.

The political violence may have multiple roots, but Tunisia’s poor economic performance is clearly one of them. In recent years, many strikes and protests over economic conditions have taken a violent turn and led to attacks on local police stations, for example.

While the West is confronted with problems posed by aging populations, Tunisia, like other countries in the region, faces the challenge (and opportunity) of harnessing the economic potential of an extremely young workforce. Practically half of Tunisians are under the age of 30, and many of them are struggling. Although unemployment is slowly falling, the unemployment rate among university-educated young Tunisians is over 30 percent, making their situation precarious.

The U.S. Fall in Economic Freedom and the Rule of Law

The United States is the 12th  freest economy in the world according to the new Economic Freedom of the World report. Co-published today by Cato and the Fraser Institute, it finds a strong relationship between economic freedom and human well-being.

The U.S. ranking is part of a worrisome decline in economic freedom that began more than a decade ago. For decades, the United States ranked in second or third place on the index. In 2000 it was #2, yet by 2005 it ranked 8 and it continued its precipitous fall until recently. On a 0-10 scale, the U.S. rating is now 7.81 compared to 7.74 last year, a slight improvement. The level of economic freedom in the United States is lower today than it was in 1980. Since 2005, Canada has ranked higher than the United States.

The authors of the report note that the United States has fallen in all five areas that they measure: size of government; legal system and property rights; sound money; freedom to trade; and regulation. But the rule-of-law indicator (legal system and property rights) has seen the biggest decline and, as the graph shows, it has been enormous.

The U.S. Decline

The measured deterioration in the rule of law is consistent with scholarship in that field and, according to the report, is a result of “increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs,” and other property rights violations. Because the rule of law is of course a cornerstone not just of economic freedom but of all freedoms, and because there is a strong relationship between economic freedom and other liberties (civil and political), all Americans should be concerned with the findings of the report.

A deterioration in the rule of law should also be of special concern to Hong Kong, the top ranked territory in the index, where recent protests highlight the danger that Beijing’s interference in its legal system, including the perception of such, poses to the overall freedoms and economic success of Hong Kong.

Why Did Western Nations Continue to Prosper in the 20th Century even though Fiscal Burdens Increased?

In the pre-World War I era, the fiscal burden of government was very modest in North America and Western Europe. Total government spending consumed only about 10 percent of economic output, most nations were free from the plague of the income tax, and the value-added tax hadn’t even been invented.

Today, by contrast, every major nation has an onerous income tax and the VAT is ubiquitous. Those punitive tax systems exist largely because—on average—the burden of government spending now consumes more than 40 percent of GDP.

historical-size-of-govt

To be blunt, fiscal policy has moved dramatically in the wrong direction over the past 100-plus years. And thanks to demographic change and poorly designed entitlement programs, things are going to get much worse, according to Bank of International Settlements, Organization for Economic Cooperation and Development, and International Monetary Fund projections.

While those numbers, both past and future, are a bit depressing, they also present a challenge to advocates of small government. If taxes and spending are bad for growth, why did the United States (and other nations in the Western world) enjoy considerable prosperity all through the 20th century? I sometimes get asked that question after speeches or panel discussions on fiscal policy. In some cases, the person making the inquiry is genuinely curious. In other cases, it’s a leftist asking a “gotcha” question.

Long-Run GDP

I’ve generally had two responses.

Pages