Topic: International Economics and Development

Europe’s Hard Choice

In Monday’s Financial Times, columnist Gideon Rachman presented a grim outlook for Greece and the European Union. He argues there are no good outcomes. There are three options. First, the EU can make concessions to Greece. Second, the EU can stand firm and allow Greece to leave the Euro. Third, the Greek government can accept the EU’s terms.

The first option represents a near-term victory for the Greek government. It also creates moral hazard within the broader EU. Governments in other countries implementing austerity measures would come under pressure. Populist parties would make further electoral gains across Europe. Consensus rule within the EU would become impossible.

It is feared the second route would put pressure on other countries, e.g., Spain and Italy, viewed as being vulnerable to the economic woes besetting the Greeks. That is an argument for “contagion.”

The third outcome may offer no long-term solution. Even were the Greek government largely to accept what the EU, the ECB and the IMF want to impose on it, that would likely not solve the Greek problem in the long run. Greece’s debt level would still likely be unsustainable. It is not clear that any government can implement the far-reaching economic reforms needed to put the Greek economy on a sustainable growth trajectory.

Richman’s analysis is cogent, if bleak.

In Calling on Government, the Pope Underestimates Power of the Market

Pope Francis’ new encyclical, Laudato Si, advocates a new “ecological spirituality.” Yet this challenging call is diminished by the document’s tendency to devolve into leftish policy positions. The encyclical underestimates the power of market forces to promote environmental ends.

There are serious environmental problems but Laudato Si presumes rather than proves crisis is the norm. Moreover, nothing in Scripture or nature tells us how much to spend to clean up the air.

Drawing environmental lines requires balancing such interests as ecology, liberty, and prosperity. One cannot merely assume that the correct outcome in every case is more of the first.

Indeed, the Pontiff’s own goals conflict. He speaks movingly of the dignity of work and its importance for the poor. But the more expensive and extensive the government controls, the fewer and less remunerative the jobs.

Perhaps most disappointing is how the Pope seemingly views capitalism, and especially property rights, as enemies of a better, cleaner world. Yet most environmental problems reflect the absence of markets and property rights, the “externalities,” in economist-speak, which impact others.

The New Papal Encyclical Has Good Intentions but Bad Effects

The Vatican has released a new papal encyclical on the environment. Based on the version of Laudato Sii leaked ahead of time, the document is a highly political discussion of the theology of the environment.

Pope Francis mixes heartfelt concern for ecology with an often limited or confused understanding of the problem of pollution and meaning of markets. Humanity’s obligation for the environment is complex and the Pope discusses ecological values in the context of economic development and care for the poor.

Unfortunately, the document’s policy prescriptions sound like they were written by an advocate. The resulting factual and philosophical shortcomings undercut the larger and more profound theological discussion.

For instance, the encyclical complains much of capitalism as well as property rights, which, in the Pope’s view, allow selfish individuals to act against the public interest. Yet capitalism provides the resources and technology to improve environmental protection. Indeed, he acknowledges that “science and technology are a wonderful product of human creativity that is a gift from God.”

Market prices operate as signals. Laudato Sii complains that disproportionate consumption steals from “future generations.” Yet rising resource prices encourage people to use less, producers to find more, manufacturers to operate more efficiently, and entrepreneurs to create substitutes. Claims that humanity was running out of resources and destroying the ecology go back centuries and so far have been proved wrong.

Markets also compare the costs and benefits of different means to achieve a common end. In fact, markets and property rights are the most important means to provide people with what the Pontiff calls “a dignified life through work.” However, jobs are not created, like the earth, ex nihilio. The more regulatory dictates and higher energy prices, the fewer the jobs and lower the salaries.

The Pontiff asserts the “social function of any form of private property.” Property rights may not be absolute, but the legal right to land is most important for those who lack wealth and influence. Property rights also create incentives for environmental stewardship. Ownership vests both costs and benefits with a sole decision-maker who can be held responsible.

Most environmental problems occur because of what economists call externalities—costs and benefits that fall on others. Without an appropriate legal regime, industry can spew emissions far and wide. Drawing the line requires balancing complex interests: prosperity, liberty, ecology.

The encyclical lacks much sense of the flawed nature of government. The Pope is disappointed that environmental efforts “are often frustrated not only by the refusal of the powerful, but also by the lack of interest of the other.” However, public choice economists diagnosed this problem decades ago: concentrated benefits, diffuse costs.

Laudato Sii also argues for redefining progress. The Pontiff should encourage people to ask, “How much is enough?” But it is important that those living in comfort in the industrialized West not try to answer for those living in the impoverished Third World.

Red Coats: A Different Look at the Battle of Waterloo

Thursday will mark 200 years since the Battle of Waterloo and the British press is, understandably, eager to remind the world of the singular service the Anglo-Prussian alliance provided to humanity by finally ending the bloody career of the French megalomaniac dictator, Napoleon Bonaparte. Tucked in one of the articles was a sentence that caught my attention. Following the battle in which 55,000 men were either killed or wounded, the “dead… were hastily stripped and buried.”

 Why would anyone bother stripping the dead, when every hour increased the danger of putrefaction and disease?

The most likely reason was that prior to Industrial Revolution, clothing was extremely expensive. As such, the uniforms were, presumably, washed, patched up and reused. Consider that in 1760, Britain imported only 2.5 million pounds of raw cotton. By the 1830s, it imported 366 million pounds of cotton and the price of yarn fell to one-twentieth of what it had been. This was revolutionary!

Ukraine: The World’s Second-Highest Inflation

I estimate the current annual implied inflation rate in Ukraine to be 92%. This is the world’s second-highest inflation rate, far lower than Venezuela’s 480% but slightly higher than Syria’s 75%.

Ukraine's Annual Inflation Rates

I regularly estimate the annual inflation rates for Ukraine. To calculate those inflation rates, I use dynamic purchasing power parity (PPP) theory. I computed the 92% rate by using black-market exchange rate data that the Johns Hopkins-Cato Institute Troubled Currencies Project has collected over the past year.

A recent front-page feature article in the New York Times attests to the severity of Ukraine’s inflation problem. Danny Hakim’s reportage contains many anecdotes that are consistent with my inflation estimates based on PPP. For example, chocolate that used to cost 80 Ukrainian hryvnia per kilogram has dramatically increased to 203 Ukrainian hryvnia per kilogram over the past 17 months – a 154% increase. On an annualized basis, this amounts to an inflation rate of 93% – almost exactly the same number I obtained when applying the scientific PPP methodology.

As evidence of the Alice in Wonderland nature of Ukraine’s current state of affairs, President Petro Poroshenko penned an op-ed in the Wall Street Journal on June 11. The title of his unguarded, gushing piece perfectly reflects the sentiments contained in his article: We’re Making Steady Progress in Ukraine, Despite Putin.

The President failed to even allude to Ukraine’s inflation problem. He is apparently unaware of the harsh realities facing the citizens of his country. He is also apparently unaware that his finance minister, Natalie Jaresko, whom he praises to high heaven, was recently in Washington, D.C., where she used a new Ukrainian law as cover to threaten a sovereign debt default. The reportage on these threats appeared in London’s Financial Times on June 11, the same day the Wall Street Journal published President Poroshenko’s op-ed.

It is time for Ukraine to get real.

The Miracle of Air-Conditioning

With the temperature in Washington, D.C. in the mid-90s, it is perhaps worthwhile to recall what life was like before the arrival of air-conditioning. Below are a few excerpts from a New Yorker essay about air conditioning penned by the great Arthur Miller in 1998:

Exactly what year it was I can no longer recall—probably 1927 or ’28—there was an extraordinarily hot September, which hung on even after school had started and we were back from our Rockaway Beach bungalow. Every window in New York was open, and on the streets venders manning little carts chopped ice and sprinkled colored sugar over mounds of it for a couple of pennies. We kids would jump onto the back steps of the slow-moving, horse-drawn ice wagons and steal a chip or two; the ice smelled vaguely of manure but cooled palm and tongue…

Even through the nights, the pall of heat never broke. With a couple of other kids, I would go across 110th to the Park and walk among the hundreds of people, singles and families, who slept on the grass, next to their big alarm clocks, which set up a mild cacophony of the seconds passing, one clock’s ticks syncopating with another’s. Babies cried in the darkness, men’s deep voices murmured, and a woman let out an occasional high laugh beside the lake…

Given the heat, people smelled, of course, but some smelled a lot worse than others. One cutter in my father’s shop was a horse in this respect, and my father, who normally had no sense of smell—no one understood why—claimed that he could smell this man and would address him only from a distance…

There were still elevated trains then, along Second, Third, Sixth, and Ninth Avenues, and many of the cars were wooden, with windows that opened. Broadway had open trolleys with no side walls, in which you at least caught the breeze, hot though it was, so that desperate people, unable to endure their apartments, would simply pay a nickel and ride around aimlessly for a couple of hours to cool off. …

African Free Trade Zone Is Good News - If Properly Implemented

According to the South African newspaper Mail and Guardian, “African leaders on Wednesday signed a potentially historic, 26-nation free-trade pact to create a common market spanning half the continent, from Cairo to Cape Town. The deal on the Tripartite Free Trade Area (TFTA) is the culmination of five years of negotiations to set up a framework for preferential tariffs easing the movement of goods in an area that is home to 625-million people…. The deal will integrate three existing trade blocs – the East African Community, the Southern African Development Community and the Common Market for Eastern and Southern Africa (Comesa) – whose countries have a combined gross domestic product (GDP) of more than $1-trillion.”

“Potentially historic” is the right term for what could be a greatly beneficial agreement. African parliaments will have two years to ratify the agreement – and that is the easy part. Proper implementation and enforcement will be much more difficult in countries with deeply underdeveloped institutions of rule of law and protection of private property. Still, the TFTA is a step in the right direction, for it signals an important ideological shift on the part of the African elite. Historically, African governments have been deeply skeptical of free trade and capitalism. Instead, they preferred protectionism and state-led development. To the extent that they were interested in trade, the African governments emphasized access to Western markets, while eschewing liberalization of their own. The consequences were catastrophic. As I wrote in a 2005 Cato paper,  

[T]rade liberalization in the developed world as a cure for world poverty is often overemphasized. Simply abandoning developed-world protectionism would not substantially change the lives of the people in the poorest parts of the developing world. That is particularly true of sub-Saharan Africa (SSA), where the main causes of impoverishment are internal. SSA is not poor because of lack of access to world markets. SSA is poor because of political instability and because of a lack of policies and institutions, such as private property rights, that are necessary for the market economy to flourish.

Despite substantial declines in applied and bound tariffs throughout the world, protectionism [in SSA] is still very much alive. Developing countries’ average tariff rates are more than three times higher than those of developed countries… According to the WTO, only 10 percent of African (including sub-Saharan African) exports were intraregional (i.e.: traded to other African countries). In contrast, 68 percent of exports from countries in Western Europe were exported to other Western European countries. Similarly, 40 percent of North American exports were to other countries in North America.

It is hypocritical for African leaders to call for greater access to global markets while rejecting trade openness at home. It is also self-defeating, because domestic protectionism contributes to perpetuating African poverty. Research shows that countries with the greatest freedom to trade tend to grow faster than countries that restrict trading. SSA governments have complete control over the reduction of their own trade barriers. If they are truly serious about the benefits of trade liberalization, they can immediately free trade relations among SSA countries and with the rest of the world. They should do so regardless of what the developed world does.