Topic: International Economics and Development

Oil Price Blues (Read: Dangers) for Some

As the price of crude oil continues its downward tumble towards $80 per barrel, I am reminded of a similar scenario from near the end of the Cold War in the 1980s. When Saudi Arabia announced in 1985 that protecting oil prices was no longer its main priority, oil production surged and prices fell off a cliff, briefly plunging below $10 per barrel, as I had correctly predicted.

Lower prices delivered a fatal blow to the Soviet economy, which ended up seeing $20 billion per year in oil revenues evaporate. The resulting fiscal shortfalls proved to be a dagger in the heart of the U.S.S.R.

On October 1st of this year, Saudi Arabia’s national oil company announced that it had abandoned a policy of price protection and would start to focus on protecting its market share. Combined with falling global demand and rising supplies elsewhere, oil prices have fallen accordingly. This has put a squeeze on eight of the world’s top oil producers. States like Iran, Venezuela, and Iraq can only balance their current budgets at oil prices ranging from $110 to $135 per barrel (so-called break-even prices).

If oil prices stay below $90 per barrel for any length of time, we will witness massive fiscal squeezes and regime changes in one or more of the following countries: Iran, Bahrain, Ecuador, Venezuela, Algeria, Nigeria, Iraq, or Libya. It will be a movie we have seen before.

The Cost of Ebola and the Misery Index

For a clear snapshot of a country’s economic performance, a look at my misery index is particularly edifying. The misery index is simply the sum of the inflation rate, unemployment rate, and bank lending rate, minus per capita GDP growth. 

The epicenter of the Ebola crisis is Liberia. As the accompanying chart shows, the level of misery, as measured by the misery index, has decreased since Charles Taylor ruled Liberia.

That said, the index was still quite elevated, at 19.4, in 2012. Yes, 2012; that was the last year in which all the data required to calculate a misery index were available. This inability to collect and report basic economic data in a timely manner is bad news. It simply reflects the government’s lack of capacity to produce. If it can’t produce economic data, we can only imagine its capacity to produce public health services.

With Ebola wreaking havoc on Liberia (and neighboring countries), the level of misery is, unfortunately set to soar.

Friedman Prize Winners in the News

Every two years, the Cato Institute awards the Milton Friedman Prize for Advancing Liberty to an individual who has made a significant contribution to advancing human freedom. More than anything, past winners have embodied the old adage that the price of liberty is eternal vigilance.

It should therefore be no surprise that Milton Friedman Prize winners continue to show up in the news, pushing for freedom and standing up to power. In recent days, three awardees have appeared in the news because of their unyielding commitment to the principles of individual liberty, limited government, free markets, and peace.

Mao Yushi

In September, the ruling Communist Party in Beijing announced that the people of Hong Kong, who have enjoyed considerable autonomy since the city’s transition from a British protectorate in 1997, could only vote for electoral candidates that were pre-approved by the Communist Party. Protesters bravely took to the streets and have faced strong-arm tactics from the police, including beatings and pepper spray. Beijing has refused to budge and this week “made its highest-level denunciation yet of the protesters,” reports the New York Times, “accusing them of pursuing a conspiracy to challenge Beijing’s power over the city.”

The authorities in Beijing aren’t satisfied with cracking down on protests in Hong Kong; they are also curtailing freedom on the mainland. Mainland supporters of the protesters are being arrested. And as the Washington Post reported this week, “books by scholars considered supporters of the demonstrations are suddenly becoming harder to find,” as Beijing imposes an apparent ban on material critical of the government.

Mao Yushi, awarded the Milton Friedman Prize in 2012, is one of those scholars. Mr. Yushi is an economist and one of China’s most outspoken activists. In response to the news that his books were being censored by Beijing, Yushi wrote, “A national government organ is daring to risk universal condemnation, in open opposition to the constitution. What is our government actually trying to do?” His internet post was then swiftly deleted by government censors.

Fortunately, Mao Yushi has overcome much worse repression. Under Mao Zedong, Yushi wrote in the Washington Post just weeks before the Hong Kong protests broke out, “I was labeled a ‘rightist’ and persecuted, along with thousands of others. We were removed from our posts and sent to the countryside for ‘re-education.’ I was reduced to the lowest human form, constantly stalked by the nightmare that I could never shake: hunger.”

Read Mao Yushi’s article in the latest issue of The Cato Journal and the corresponding Op-Ed in the Washington Post.

The Nobel Peace Prize and Child Labor

The award of the Nobel Peace Prize to the Indian activist Kailash Satyarthi is bound to attract public attention to the problem of child labor. In 1980, Satyarthi founded the Bachpan Bachao Andolan, or “Save the Childhood Movement,” focused on fighting child labor and human trafficking, as well as bonded labor.

Child labor is widespread in developing countries, concentrating often in the agricultural sector where working conditions are particularly dire. Because of the gravity of the problem, it is necessary to be extremely careful in devising solutions. As is often the case, the fix to child labor that most people would think of instinctively—namely, to ban it—could do more harm than good. As another Nobel laureate, Paul Krugman, wrote in a New York Times opinion piece in 2001,

In 1993, child workers in Bangladesh were found to be producing clothing for Wal-Mart, and Senator Tom Harkin proposed legislation banning imports from countries employing underage workers. The direct result was that Bangladeshi textile factories stopped employing children. But did the children go back to school? Did they return to happy homes? Not according to Oxfam, which found that the displaced child workers ended up in even worse jobs, or on the streets—and that a significant number were forced into prostitution.

There are no quick and easy answers to the problem of child labor, especially in poor countries where educational opportunities are limited and where bans on child labor simply displace children into less desirable, illegal, and more dangerous occupations. To end child labor, the currently underdeveloped countries must create economic opportunities that would reduce or eliminate the reliance of many, particularly poorer, families on income from the work of their children. In a recent Cato Economic Development Bulletin, the economist Benjamin Powell argues that

Promoting Democracy in Hong Kong: Combining Prudence with Idealism

Hong Kong is part of China.  But administered separately from the rest of the People’s Republic of China, the territory respects civil liberties while hosting the world’s freest economy. 

Demonstrators are pressing Beijing to make good on its promise of  democratic rule and free elections.  But the PRC will not, indeed, cannot, give residents of Hong Kong what it refuses to give the rest of its citizens.  The city’s future depends on finding a compromise that preserves Hong Kong’s freedom and peace.

The British colony grew out of imperial China’s weakness.  London seized Hong Kong Island, then the Kowloon Peninsula, and later “leased” the New Territories.  In 1997 the latter’s 99-year term ran out.  At which point Beijing was legally entitled to take back the New Territories.

Dividing Hong Kong would have been a practical nightmare.  And Beijing might not have continued to honor territorial cessions forced more than a century before.  So in 1984 London agreed to the full territory’s return.

One wonders:  What if Prime Minister Margaret Thatcher had scheduled a referendum in which the territory’s residents could freely express their decision?

At the time a still weak and isolated Beijing probably would have felt little choice but to accept an adverse vote.  However, the PRC might have chosen to bide its time, as it has done with Taiwan, and now would be demanding the territory’s return.

Returning Hong Kong meant transferring millions of people to communist China.  The PRC committed to respect Hong Kong’s uniqueness for a half century. 

However, Beijing never promised to hold fully free elections.  Rather, it stated:  “The chief executive will be appointed by the Central People’s Government on the basis of the results of elections or consultations to be held locally.” 

The Basic Law (essentially the territory’s constitution), approved six years later by Beijing, provided for “nomination by a broadly representative nominating committee in accordance with democratic procedures.”   The PRC claims that is what it is implementing. 

As of 2017 residents will be able to elect their ruler, but only from candidates vetted by Beijing.  It won’t be real democracy, but then, there never was much chance that the Chinese Communist Party would institute real democracy in any area under its control.

That’s not fair to Hong Kong’s residents.  So it’s impossible not to admire the protestors.  However, their very passion threatens their objective.  They have divided over tactics and sparked criticism from some other residents. 

The greatest risk is that the Chinese leadership might believe it must choose between repression and either chaos or democracy.  In 1989 the CCP sent in tanks to clear democracy-minded demonstrators out of Tiananmen Square.

Beijing would pay an even higher price for cracking down in Hong Kong.  Still, the Chinese regime places self-preservation above everything else.

Moreover, if China violently dispersed the protestors, it would not likely stop there.  Media freedom and judicial independence also would be at risk. 

This week tensions eased as demonstrators and government officials agreed to talks.  Democracy advocates should temper their idealism with an acute sense of pragmatism. 

Beijing might sacrifice the territory’s chief executive, Leung Chun-ying, and make other concessions, such as broadening the nomination process.  But the PRC will insist that Chinese officials, not Hong Kong residents, be in charge. 

Unfortunately, as I write in Forbes online, “Nothing the U.S. does can bring democracy to the territory.  To the contrary, the more Washington attempts to intervene, the more likely China is to perceive the demonstrators to be threats.” 

Democracy advocates have moral right on their side.  Still, raw power is likely to prevail in any showdown.  The protestors must temper idealism with prudence.  They must not allow the perfect to become the enemy of the good for their own sake—and ultimately that of Hong Kong and China as well.

The 95 Percent Rule, Bulgaria, and the New York Times

Recent reportage in the New York Times reminded me of my 95 Percent Rule: “95 percent of what you read about economics and finance is either wrong or irrelevant.” In her piece on the Bulgarian elections, Mariana Ionova wrote:

“[Bulgaria’s] economy is growing at an annual rate of about 1.6 percent, but that is the slowest pace in the union, and about half the European average.”

These alleged facts aren’t even in the ballpark (see the accompanying chart). Bulgaria is neither the slowest growing economy in the European Union, nor is it growing at half the European average. In fact, Bulgaria is growing slightly faster than the European average.

Once again, the 95 Percent Rule rules.

E.U. Austerity, You Must Be Kidding

The leading political lights in Europe – Messrs. Hollande, Valls and Macron in France and Mr. Renzi in Italy – are raising a big stink about fiscal austerity. They don’t like it. And now Greece has jumped on the anti-austerity bandwagon. The pols have plenty of company, too. Yes, they can trot out a host of economists – from Nobelist Krugman on down – to carry their water.

But, with Greece’s public expenditures at 58.5% of GDP, and Italy’s and France’s at 50.6% and 57.1% of GDP, respectively – one can only wonder where all the austerity is (see the accompanying table). Government expenditures cut to the bone? You must be kidding. Even in the Unites States, where most agree that there is plenty of government largess, the government (federal, plus state and local) only accounts for a whopping 38.1% of GDP.

As Europe sinks under the weight of the State, it’s austerity, not anti-austerity, that should be on the menu.