Topic: International Economics and Development

Africa: the Good, the Bad and the Ugly

Last week, President Obama hosted the U.S.-Africa Leaders Summit in Washington, D.C. He welcomed over 40 African heads of state and their outsized entourages to what was a festive affair. Indeed, even the Ebola virus in West Africa failed to dampen spirits in the nation’s capital. Perhaps it was the billions of dollars in African investment, announced by America’s great private companies, that was so uplifting.

Good cheer was also observed in the advertising departments of major newspapers. Yes, many of the guest countries paid for lengthy advertisements–page turners–in the newspapers of record. That said, the substantive coverage of this gathering was thin. Neither the good, the bad, nor the ugly, received much ink.

What about the good? Private business creates prosperity, and prosperity is literally good for your health. My friend, the late Peter T. Bauer, documented the benefits of private trade in his classic 1954 book West African Trade. In many subsequent studies, Lord Bauer refuted conventional wisdom with detailed case studies and sharp economic reasoning. He concluded that the only precondition for private trade and prosperity to flourish was individual freedom reinforced by security for person and property.

More recently, Ann Bernstein, a South African, makes clear that the establishment and operation of private businesses does a lot of economic good (see: The Case for Business in Developing Countries, 2010). Yes, businesses create jobs, supply goods and services, spread knowledge, pay taxes, and so forth. Alas, in the Leaders Summit reportage that covered the multi-billion dollar investments by the likes of Coca-Cola, General Electric, and Ford Motor Co., the benefits of the humdrum activity of business and trade were nowhere to be found. But, as they say, “that’s not the president’s thing.”

Let’s move from the good to the bad and the ugly, and focus on the profound misery in Sub-Saharan Africa. I measure misery with a misery index. It is the simple sum of inflation, unemployment, and the bank lending interest rate, minus year on year GDP per capita growth. Using this metric, the countries for Sub-Saharan Africa are ranked in the accompanying table for 2012.

Russia Imposes Embargo on Itself

The American economist Henry George wrote, “What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.” In Russia, Vladimir Putin started a war and then, in response to mild American and European sanctions, retaliated by imposing greater sanctions—on his own people.

Even American journalists, whose economic acumen I have been known to question, have noted the likely effects of Putin’s sanctions. See Michael Birnbaum in the Washington Post:

Russia on Thursday banned most imports of Western food products, a sweeping escalation in an economic war that will deal a multibillion-dollar hit to affected nations but will also unreel wide-ranging consequences at home.

The measures were a signal that Russia is not backing down from a confrontation that has sent Western-Russian tensions to heights not seen since the Cold War—and that it is willing to risk barer shelves and higher food prices at home in the name of striking a blow against countries that have tried to punish it over its role in the Ukraine conflict.

Russia has suspended imports of meat, fish, fruit, vegetables and milk products from the United States, the 28-nation European Union, Norway, Canada and Australia for a year. The move came in retaliation for sanctions those countries imposed on Russia….

In Russia, the food measures promised to hit not just city centers, where the urban middle class has grown accustomed to visiting supermarkets overflowing with high-quality imported European cheeses, fish and sausages. Analysts warned that food prices also would increase and that a wide range of Russian industries, including food processing plants, shippers and retailers, would be affected….

“It will be quite sensitive,” said Yevsey Gurvich, the head of the Economic Expert Group. “Not only rich people will feel it, but literally every family will be affected.” He said he estimated that Russian consumer prices would go up 2 percent this year because of the measures.

“Alternatives to imported foods will be more costly, and, anyway, I believe they will be insufficient, and our supplies will diminish. And, hence, prices will go up,” he said.

Americans who wished for more painful sanctions on Russia than President Obama has imposed are getting their wish—thanks to Putin. 

US-Africa Summit Will Not Solve Africa’s Problems

As the U.S. President Barack Obama prepares to meet 50 African leaders on Wednesday, August 6, it is worth reflecting on the factors behind the recent progress occurring in countries of Sub-Saharan Africa. As we write in our new paper,

The real gross domestic product [in Sub-Saharan Africa] rose at an average annual rate of 4.9 percent between 2000 and 2008 — twice as fast as that in the 1990s. […] As a result, between 1990 and 2010, the share of Africans living at $1.25 per day or less fell from 56 percent to 48 percent, while the continent’s population almost doubled in size. If the current trends continue, Africa’s poverty rate will fall to 24 percent by 2030.4 Since 1990 the per-capita caloric intake in Africa increased from 2,150 kcal to 2,430 kcal in 2013.5 Between 1990 and 2012, the proportion of the population of African countries with access to clean drinking water increased from 48 percent to 64 percent.

Although Sub-Saharan Africa is also becoming more democratic and better governed, a large gap between the quality of its institutions and those in the West persists. The continent remains, for example, economically unfree and heavily protectionist, not just vis-à-vis the outside world but also within the continent. For 25 African countries, the tariff costs of exporting or importing manufactured goods are higher within Africa than with the rest of world.

While international summits cannot not solve Africa’s internal problems, our paper argues that the upcoming meeting is a good opportunity for the U.S. administration to eliminate the existing trade barriers facing African exporters – regardless of whether they come in the form of explicit tariff barriers or implicit ones, such as agricultural subsidies:

[T]he elimination of the existing barriers to trade should be at the forefront of the efforts to help. Such barriers include tariffs, particularly on agricultural exports, which make it difficult for African economies to fully exploit their comparative advantage. As Brookings Institution researchers Emmanuel Asmah and Brandon Routman note, the structure of the tariff protection in the United States — but also in the European Union — is a significant part of the problem. The tariffs imposed up to a certain amount of imports may be low, yet the tariffs imposed for imports above the permitted quota might be very steep, in some cases up to 350 percent. Furthermore, agricultural subsidies in rich countries cause surplus production, which is often dumped on the world markets, depressing prices and undermining the livelihood of farmers in poor countries.

We Shouldn’t Follow Germany on Minimum Wage

President Obama included a much discussed proposal to increase the national minimum wage to $10.10, from its current level of $7.25.  To date, the proposal has gone nowhere in Congress. In the meantime, some cities and states have introduced or approved increases in their minimum wage rates. Ten states and the District of Columbia have enacted increases in the 2014 session so far. In June, the Seattle City Council unanimously voted to increase their minimum wage to $15. In San Francisco, Mayor Ed Lee followed suit and has introduced a ballot measure to increase their minimum wage to $15 an hour.

Germany is currently grappling with the ramifications of imposing a national minimum wage, and the lessons we can learn from their experience should deter calls for raising the minimum wage here.

Earlier this month, the German parliament’s lower house adopted a new national minimum wage of €8.50 ($11.61) an hour, beginning in 2015. Before this, there had been no national minimum wage in the country, with trade unions and employers negotiating wages by sector. Just as the Congressional Budget Office estimated that raising the minimum wage here could reduce employment by 500,000 workers by 2016, one of Germany’s most respected economic institutes warned that Germany could lose the equivalent of 340,000 full-time jobs. While there are some factors, such as a high proportion of apprenticeships, which could dilute the harmful effects of such a minimum wage in Germany, this adoption is a step backwards for the country that is often an economic leader in the EU.

Young workers are disproportionately affected by the minimum wage as they are more likely to have jobs that pay below the new statutory minimum.

Currently, Germany’s youth unemployment rate is roughly a third of the euro area average, and Germany outperforms every other country in the EU on this metric. In fact, since 2007, Germany is the only country in the euro area to see a decrease in youth unemployment.

Source: European Commission, “Euro area unemployment rate at 11.8%,” Eurostat, May 2, 2014.

There is thus some concern that their new minimum wage could increase unemployment and limit opportunities for young people. As Cato’s Steve H. Hanke has pointed out, in “the twenty-one E.U. countries where there are minimum wage laws, 27.7% of the youth … was unemployed in 2012. This is considerably higher than the youth unemployment rate in the seven E.U. countries without minimum wage laws — 19.5% in 2012.”

This week the International Monetary Fund (IMF) released its latest report on the German economy, in which the authors raised numerous concerns about the imposition of a new national minimum wage (strange that they did not give voice to  these concerns when advocating that the US raise its minimum wage in an earlier report this year).

As previous work by the Cato Institute has shown, the benefits of a minimum wage increase are poorly targeted to households in poverty. The IMF report notes that the “effects of the minimum wage on income redistribution toward the working poor may be limited, as the population of minimum wage earners and that of the working poor overlap only partially.”

The IMF authors also seem to recognize that the imposition of the minimum wage could have outsized adverse effects in some regions of Germany because a higher proportion of affected low wage workers live in East Germany (27 percent in the East compared to 15 percent in the West). While the variation between U.S. states is not as clear cut as the difference between East and West Germany, the employment outcome would be the same were a higher national minimum wage implemented here: in poorer states, where many workers would be affected by the increase, there would likely be significant job loss.

Local minimum wage increases, like the one in Seattle, are not as affected by this last mechanism, but they face the added danger of losing jobs to nearby jurisdictions that have not raised the minimum wage, as it is easier to outsource jobs to a neighboring city than it is to another state or country in many cases.

The new minimum wage in Germany will prove ineffective in improving the lot of low-income workers, and will likely lead to some job loss for the very people it is trying to help. Both countries would be better served exploring other means to improve outcomes for low-income workers. There are other, potentially more effective policy options to explore such as expanding apprenticeships (as Germany has already done) or  introducing a lower provisional minimum wage for teens and the long-term employed.  One thing is certain: in Germany, and the United States, a blunt policy instrument like the minimum wage is not the answer.

Inventions to Eagerly Await

Humans are progress seekers. Those with an entrepreneurial drive use their intellect to invent novel solutions to our problems. Sometimes, their solutions alleviate widespread suffering and let us live better than kings of centuries past. Thomson Reuters released just such a list of welfare-enhancing inventions to expect by 2025:

Dementia, Alzheimer’s, cancer drug-induced deaths, and Type I diabetes should afflict far fewer individuals by 2025. See below that cancer–one of the most common causes of death in several countries–is already on the decline (with a graph made on HumanProgress.org):

Life in Britain on the Eve of the First World War

The Telegraph has an interesting series of short articles about life in Britain at the start of WWI. While all of the articles are worth reading, here are the best parts for those who like to compare standard of living then and now.

Work and leisure

Most Edwardians worked in dark, noisy factories, cut hay in fields, toiled down dirty and dangerous mines; had bones bent by rickets and lungs racked by tuberculosis. Life expectancy then was 49 years for a man and 53 years for a woman, compared with 79 and 82 years today. They lived in back to back tenements or jerry-built terraces, wore cloth caps or bonnets (rather than boaters, bowlers and toppers) and they had never taken a holiday - beyond a day trip to Brighton or Blackpool - in their entire lives.

Transport

Mrs Patrick Campbell was invoked in court on the eve of the war to prove that a driver charged with ‘exceeding the motor-car speed limit’ (20mph) was really driving ‘very carefully.’

In the last full year before the war, 2,099 people died on the road (compared with 1,754 in 2012).

In 1910 of the 500 pilots active, 29 died, in half a million miles of flying. Much safer were the 5,800 pilots of 1912, of whom 140 died in 12.5 million miles… present-day aviation fatalities run at one every 1.24 billion miles.

Diet

Beyond the average purse, 5lbs for 1s and 2d – they [Jersey potatoes] are a luxury as are fresh peas. To have them you are going to have to economise on other articles of diet.

Entertainment

Alongside reels from Charlie Chaplin and Mary Pickford which delighted the masses came more artistically ambitious fare: from Italy, according to a review published on 11 March, came The Passions of the Renaissance, ‘a masterpiece of cinematography’ which ‘simply enthralls the spectator’, and a ‘startling’ documentary about the British army which featured ‘some very wonderful pictures of bursting shrapnel.’

Women’s rights

[One] of the abiding images of the women’s suffragette movement is the arrest of its militant leader Mrs Emmeline Pankhurst as she tried to present a petition to the King at Buckingham Palace in May 1914. She was lifted off her feet in a bear hug by Chief Inspector Rolfe… The day after the Buckingham Palace protest some 60 women appeared at Bow Street and there was utter chaos as they shouted, sang the Marseillaise, threw newspapers and launched a shoe at the magistrate which he neatly caught and passed to an attendant. The Telegraph coverage was headlined ‘Suffragette Orgie [sic], Pandemonium in Court.’

Foreign Policy Hawks Ignore Data

As 2016 presidential contender Rand Paul catches flack for his so-called foreign policy “isolationism,” the neocons go on frightening the public. According to the hawks, the world is getting more dangerous.

In a Politico interview last Monday, Dick Cheney said, “The world’s not getting safer, it’s getting far more dangerous.” On the same day, Newt Gingrich said on CNN:

After 9/11, the United States is not safer … in an increasingly dangerous world… If you look at what’s happening around the world today, it’s almost impossible to say that we’re safer… The worldwide scene is not a very safe scene.”

Senator John McCain also said on CNN that the world is “in greater turmoil than at any time in my lifetime.”

While 2014 may in some ways be less safe than 2013, foreign policy hawks ignore long-term trends that show an increasingly safer world. Consider the following evidence from HumanProgress.org. First, all types of wars, from civil to interstate, are less deadly:

Pages