Topic: International Economics and Development

Disagreement over Chile’s National School Choice Program

A week ago, the Atlanta Journal Constitution published an on-line op-ed critiquing Chile’s nationwide public-and-private school choice program. In a letter to the editor, I objected to several of the op-ed’s central claims. The authors responded, and the AJC has now published the entire exchange. A follow-up is warranted, which I offer here:

Comment on the Gaete, Jones response to my critique:

Their response consists chiefly of “moving the goalposts”—changing the issue under debate rather than responding to the critique of the original point. The first claim in their original op-ed to which I objected was that “there is no clear evidence that [Chilean] students have significantly improved their performance on standardized tests.” In contradiction of this claim I cited the study “Achievement Growth” by top education economists and political scientists from Harvard and Stanford Universities. That study discovered that Chile is one of the fastest-improving nations in the world on international tests such as PISA and TIMSS—which were specifically designed to allow the observation of national trends over time. It is hard to conceive of clearer evidence that Chilean students “have significantly improved their performance”, contrary to the claim of Gaete and Jones.

Even the IMF Agrees that Spending Caps Are Effective

It’s not very often that I applaud research from the International Monetary Fund.

That international bureaucracy has a bad track record of pushing for tax hikes and other policies to augment the size and power of government (which shouldn’t surprise us since the IMF’s lavishly compensated bureaucrats owe their sinecures to government and it wouldn’t make sense for them to bite the hands that feed them).

But every so often a blind squirrel finds an acorn. And that’s a good analogy to keep in mind as we review a new IMF report on the efficacy of “expenditure rules.”

The study is very neutral in its language. It describes expenditure rules and then looks at their impact. But the conclusions, at least for those of us who want to constrain government, show that these policies are very valuable.

In effect, this study confirms the desirability of my Golden Rule! Which is not why I expect from IMF research, to put it mildly.

The Dollar, Oil Prices and Exports: Lessons of Recent History

Business news pages are suddenly full of hand-wringing about how the rising dollar threatens to slash U.S. exports and economic growth.  “The strong dollar is the biggest threat to economic recovery,” warns one reporter.  Others quote White House chief economist Jason Furman saying “the strong dollar is undoubtedly a headwind” for the U.S. economy.

It’s not that simple.

dollar and exports

The graph above compares real U.S. exports with the trade-weighted exchange rate.  The dollar was rising much faster in 1995-2000, when both exports and the economy were growing at an impressive pace.  Exports eventually fell with recession, as always.  But it is much harder to blame the recession on exchange rates than on interest rates – the Fed pushed the fed funds rate 4.7 percentage points above core inflation.   

From 2001 to 2007, the dollar fell and exports rose.  That pattern might appear to justify recent lobbying for a lower dollar were it not for the familiar connection between oil prices and the dollar.  As the dollar fell, the price of West Texas crude soared from $19 a barrel in December 2001 to over $133 in June-July 2008.  Every postwar recession except 1960 was preceded by a spike in oil prices, and the Great Recession turned out to be no exception.

The dollar weakened at the start of this recovery, but related inflation cut average real wages by 1.5% in 2011 and 0.6% in 2012.   As the dollar firmed up, by contrast, real wages rose by 0.7 % in 2013 and 0.8% in 2014.

The recent rise in the dollar has merely brought it back to about where it was in 1998 or 2006, which were not bad years.  The latest exchange rate gyrations are dominated by self-inflicted wounds to the euro and yen, but U.S. exports to the EU are only 1.3% of GDP, and exports to Japan are 0.4% of GDP.

U.S. multinationals have complained about “translation losses” – the fact that profits of subsidiaries in Europe or Japan will be less valuable when translated into dollars.  But that is equally true for earnings of European and Japanese firms too (and for their stock prices when translated into dollars). And multinationals often leave foreign earnings abroad, due to the uniquely foolish U.S. tax if offshore earnings are brought home.  

The weakened euro and yen will raise the cost of living and cost of production for citizens of the afflicted countries (including the price of oil and other commodities).  It is true that such expertly planned impoverishment of such large economies can scarcely benefit the global economy. If other countries want to make their money less trustworthy and less desirable, however, there is not much we can do about that.  

Will the Venezuelan Opposition Fall into UNASUR’s Trap?

A new political crisis is brewing in Venezuela as the economy continues its free fall, social unrest grows, and the government escalates its crackdown of the opposition. Two weeks ago, the mayor of Caracas, Antonio Ledezma, was arbitrarily arrested under spurious changes of planning a coup. Other leading figures of the opposition are being targeted by Nicolás Maduro’s regime and could be detained at any time.

Once again, the Venezuelan opposition, as well as international human rights organizations and former presidents from other Latin American countries, have demanded that the Union of South American Nations (UNASUR), an intergovernmental organization of South American countries, take a stand on the situation in Venezuela. Well, it has. On several occasions, either the secretary general of UNASUR, Ernesto Samper, or the ministers of foreign relations who have been tasked with mediating the conflict, have unequivocally sided with Maduro’s regime.

After meeting with Maduro a few days ago, Samper said that “All the countries of UNASUR reject any attempt, domestic or external, to destabilize the stability and democratic tranquility of Venezuela. We have received evidence (of the attempts).” Ten days after Ledezma’s arrest, Ricardo Patiño, foreign minister of Ecuador and one of UNASUR “mediators” in Venezuela held a “solidarity event” for the Maduro regime, saying that “We are willing to travel to Venezuela as many times as necessary to collaborate with the elected government’s revolutionary authorities on behalf of Venezuelans, and contribute to stopping what presents itself as a new coup that we deem unacceptable.”

It’s pretty evident that UNASUR’ mission in Venezuela is to boost the government. Why is it then that some leaders of the Venezuelan opposition as well as other international actors still expect this organization to play a constructive role in the crisis?

MENA’s Misery Indices, a Story of Economic Failure

In my misery index, I calculate a ranking for all countries where suitable data exist. The misery index — a simple sum of inflation, lending rates, and unemployment rates, minus year-on-year per capita GDP growth — is used to construct a ranking for 108 countries. The table below is a sub-index of all Middle East and North African (MENA) countries presented in the world misery index.

A higher score in the misery index means that the country, and its constituents, are more miserable. Indeed, this is a table where you do not want to be first.

Syria and Iran were the most miserable in the region. War and sanctions have taken their toll. Bahrain and Kuwait are at the other end of the spectrum, with low (read: good) misery index scores.

Two points worth noting are somewhat related. First, the majority of countries in MENA have elevated misery index scores – scores above twenty. These poor scores indicate structural problems that require serious economic reforms. The second point, as indicated in the notes to the table, is that the governments in eight MENA countries were not even capable of producing the basic data required to calculate a misery index score. This represents government failure and suggests a lack of capacity to implement structural economic reforms.

If You Want Good Fiscal Policy, Forget the Balanced Budget Amendment and Pursue Spending Caps

Back in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have suffered $1 trillion-plus deficits during Obama’s first term if lawmakers had simply exercised a modest bit of spending restraint beginning back in 1998.

And the IBD research didn’t assume anything onerous. Indeed, the author specifically showed what would have happened if spending grew by an average of 3.3 percent, equal to the combined growth of inflation plus population.

Remarkably, we would now have a budget surplus of about $300 billion if that level of spending restraint continued to the current fiscal year.

This is a great argument for some sort of spending cap, such as the Swiss Debt Brake or Colorado’s Taxpayer Bill of Rights.

But let’s look beyond the headlines to understand precisely why a spending cap is so valuable.

U.S. Aid Empowering Organized Crime in Mexico

Two weeks ago I had an article in The National Interest where I made the case against the Obama administration’s proposal to deliver hundreds of millions of dollars in aid to Central American governments to help them fight organized crime, promote security and foster economic development. In my piece, I wrote that “…giving $1 billion to governments with dubious records on transparency and human rights will empower corrupt officials to the detriment of ordinary Central Americans.”

Last week, Jesse Franzblau had a revealing exposé in The Nation that proves how counterproductive this sort of aid can be. In his article, Franzblau publishes unclassified documents that show how U.S. authorities continued to deliver millions of dollars in aid to Mexican security agencies despite knowing that those same forces were infiltrated by drug cartels. This money came under the auspices of the Plan Mérida, a $2.6 billion program aimed at helping Mexico fight drug cartels. In some instances, the documents seem to show efforts by U.S. officials to cover up or downplay serious human rights abuses committed by Mexican security forces so it wouldn’t affect the continuity of Plan Mérida.

As Franzblau points out:

While US laws explicitly prohibit the delivery of aid to foreign individuals and units implicated in systematic human rights violations, internal reporting on the implementation of Mérida programs reveals that institutional connections to organized crime are consistently overlooked, ignored or kept hidden from public scrutiny as counter-drug money continues to flow.

This is serious stuff. Instead of helping the fight against drug cartels, U.S. aid might be empowering them. As I mentioned in my article, there is well-documented evidence about how the security agencies and judicial systems of Central American countries have been infiltrated by powerful criminal organizations, from drug cartels to youth gangs.

Franzblau’s article also shows a well-documented phenomenon regarding aid: once it starts flowing, the bureaucracy in charge of delivering it has an incentive to disregard the evidence of whether it is accomplishing its goals or being counterproductive since discontinuing the aid would compromise the bureaucracy’s own existence. In this particular case, Franzblau mentions that “US officials were well aware of the effect that reports of abuse could have on Mérida assistance.”

There is no reason to believe that the Obama administration’s massive aid plan for Central American governments won’t suffer from the same flaws that Jesse Franzblau exposes in his article.