Topic: International Economics and Development

Putin’s Animal Farm

In today’s Washington Post, Pamela Constable describes the scene in Crimea, and it reminds me of George Orwell’s Animal Farm.

Vladimir Putin is playing the starring role of Napoleon the pig. To consolidate his power, Putin is employing menacing dogs, just as Napoleon did. Constable writes:

As the referendum approached, the capital was calm, but the streets were filled with a swelling number of stocky security men on corners and outside government facilities … For the most part, they stood around looking tough, but their mere presence was intimidating …

As on Orwell’s farm, Crimea has a few skeptical donkeys, but most people are apparently gullible sheep:

Occasionally, I met someone who questioned the official line … One was a stocky former soldier in his 50s named Volodya who was downing shots of vodka between bites of potato salad at a working-class cafe. “They say my pension will go up, but so will this meal,” he said. “People in a crowd tend to hear slogans and get excited.”

In Orwell’s book, the animals are propagandized with “four legs good, two legs bad.” In Crimea, people are being told that the folks in Kiev have two legs. Constable talked to one person who: “confided that his parents had been won over by the barrage of pro-Russian propaganda warning of fascist threats from Kiev. ‘They told me to be careful and not to associate with people there,’ he said with chagrin. ‘It is like a demon that possesses people and they are no longer able to think.’” 

Finally, the Russian national anthem is stirring the nationalist sole in Crimea, just as “Beasts of England” did on Animal Farm. Constable says:

Even if you don’t know the lyrics, the state anthem of the Russian Federation is one of the most stirring national anthems ever written. This week, on assignment in Crimea, I heard it in full rousing splendor, sung by a chorus of uniformed young men standing at attention, and I had to catch myself from being swept up in the moment.

Another Defective IMF study on Inequality and Redistribution

IMF Warns on the Dangers of Inequality,” screams the headline of a story by Ian Talley in the Wall Street Journal. The IMF – which Talley dubs “the world’s top economic institution”– is said to be “warning that rising income inequality is weighing on global economic growth and fueling political instability.” 

This has been a familiar chorus from the White House/IMF songbook since late 2011, when President Obama’s Special Assistant David Lipton became Deputy Managing Director of the IMF.  It echoes a December 2012 New York Times piece, “Income Inequality May Take Toll on Growth,” and a January 14, Financial Times feature, “IMF warns on threat of income inequality.”  This isn’t news.

Talley writes, “The IMF … says advanced and developing economies need to raise more revenues through taxes, focusing on progressive taxation that moves more of the burden for social security, health care and other state benefits to the high-income earners.” That isn’t news either.  The IMF has an ugly history of advising countries to raise tax rates, with disastrous results.  The inequality crusade is just a new pretext for old mistakes.

North Korea: Dealing with a Human Rights Scourge and Security Threat

The Democratic People’s Republic of Korea long has been recognized as one of the globe’s most difficult challenges.  For two decades concern over Pyongyang’s nuclear program has dominated international attention toward the Korean peninsula. 

What to do about The North Korea Problem has troubled three successive U.S. administrations.  The result is a tentative nuclear state seemingly ruled by an immature third-generation dictator willing to terrorize even his own family. 

Particularly unlucky are the residents of North Korea.  There never has been any question about the extraordinary nature of DPRK tyranny.  But the United Nations just released its own gruesome analysis. 

The finding is simple: “systematic, widespread and gross human rights violations have been and are being committed” by the DPRK.  “In many instances, the violations found entailed crimes against humanity based on State policies.” 

As I point out in my latest article in National Interest:

Yet the challenge facing the U.S. and other nations regarding human rights in the North is a lot like the security problem:  what to do?  The Kim dynasty has demonstrated no interest in disarming.  Nor has it ever hinted at the slightest interest in treating the North Korean people better.  Arguing that human rights should be an international priority doesn’t change matters.

Trying to convince the isolated and militaristic regime that a more pacific policy is in its interest so far hasn’t worked.  Trying to convince the same leadership that it also should dismantle the political system that it dominates is even less likely to succeed. 

However, the human rights report might be more effectively directed at another nation, the People’s Republic of China.  The PRC is North Korea’s chief enabler.  (For a time South Korea shared that title, with its bountiful subsidies as part of the Sunshine Policy.)  

The reasons are understandable if not necessarily laudable.  Washington’s push for Beijing to press the DPRK more seriously, repeated during Secretary of State John Kerry’s recent China visit, founders on the PRC’s perception of its interests. 

The North is unpredictable, except for always being ever unreasonable and difficult.  Nevertheless, Beijing fears destabilizing the peninsula more than it fears North Korea nuclearizing the peninsula.

To change China’s position requires addressing that government’s concerns, particularly regarding the impact of a united Korea allied with America at a time when the U.S. appears committed to a policy of soft containment.  The DPRK’s growing reputation as a human rights outlaw might help.

Beijing obviously is sensitive to the issue, given its own human rights failings.  Nevertheless, there is no comparison between the two nations.  China also has much at stake in the global order, including its reputation, which will be tarnished if it continues to be widely seen as the only reason the Kim regime survives.

Simply bashing Pyongyang won’t be enough.  Washington needs to develop a positive package for a reform North Korean leadership: peace treaty, trade, aid, and integration.  The U.S. also should involve South Korea and Japan.

This approach should directed as much at the PRC as North Korea.  Even Chinese officials frustrated with the DPRK tend to blame the U.S. for creating the hostile threat environment which led the North to develop nuclear weapons.

The PRC still might decide the price of cooperating with America is too high.  But the allies have no better alternative approach.  The DPRK has spent recent years alternating whispers of sweet nothings with screams of blood-curdling threats, tossing in occasional missile and nuclear tests for good measure.  Nothing suggests that the younger Kim has abandoned brinkmanship as Pyongyang’s preferred policy and decided to negotiate away his nation’s most important weapon.

Some day monarchical communism will disappear from the Korean peninsula.  It will do so sooner if China uses its considerable influence—and threatens to withdraw its even more important aid—to press Pyongyang to reform.  The UN’s scathing report on DPRK human rights practices might help win Beijing’s cooperation.

Sweden, Spending Restraint, and the Benefits of Obeying Fiscal Policy’s Golden Rule

When I first started working on fiscal policy in the 1980s, I never thought I would consider Sweden any sort of role model.

It was the quintessential cradle-to-grave welfare state, much loved on the left as an example for America to follow.

But Sweden suffered a severe economic shock in the early 1990s and policy makers were forced to rethink big government.

They’ve since implemented some positive reforms in the area of fiscal policy, along with other changes to liberalize the economy.

I’m particularly impressed that Swedish leaders imposed some genuine fiscal restraint.

Here’s a chart, based on IMF data, showing that the country enjoyed a nine-year period where the burden of government spending grew by an average of 1.9 percent per year.

Swedish Fiscal Restraint

From a libertarian perspective, that’s obviously not very impressive, particularly since the public sector was consuming about two-thirds of economic output at the start of the period.

But by the standards of European politicians, 1.9 percent annual growth was relatively frugal.

And since Mitchell’s Golden Rule merely requires that government grow slower than the private sector, Sweden did make progress.

Real progress. It turns out that a little bit of spending discipline can pay big dividends if it can be sustained for a few years.

This second chart shows that the overall burden of the public sector (left axis) fell dramatically, dropping from more than 67 percent of GDP to 52 percent of economic output.

Swedish Spending+Deficit as % of GDP

By the way, the biggest amount of progress occurred between 1994 and 1998, when spending grew by just 0.27 percent per year. That’s almost as good as what Germany achieved over a four-year period last decade.

Let’s Try Anti-Sanctions

As U.S. policymakers develop their response to the Russian incursion into Ukraine, it seems quite likely that some form of sanctions will be employed.  But sanctions are always harmful to innocents and never particularly effective.  It’s worth considering, then, whether there are policy options that would have a positive impact on the geopolitical situation in Ukraine while directly improving human lives and increasing liberty.  We could call them “anti-sanctions.”

One possibility would be to liberalize U.S. exports of natural gas.  John Boehner and others in Congress have argued that doing so would reduce Russia’s influence in the region by providing countries like Ukraine a non-Russian source of energy.  Even if the geopolitical benefits are slow to materialize, allowing more oil and gas exports would have tremendous economic benefits for the United States.

A much simpler anti-sanction response would be to drop U.S. tariffs on imports from Ukraine.  Normally, many products from Ukraine would be allowed to enter the United States duty free under the Generalized System of Preferences.  But that program, meant to aid development in poor countries, expired last summer.  Renewing GSP would reduce Ukraine’s economic dependence on Russia while directly helping Ukrainians and the Americans they do (or would do) business with.  

Perhaps I am hopelessly naïve, but exploring avenues for peaceful interaction seems to me like a much friendlier and more constructive way to approach international problems.  I suspect there are a great number of pro-liberty “anti-sanctions” that the U.S. government could employ as a response to the crisis in Ukraine that might actually make a positive difference in the lives of Ukrainian people.

A Bumpy — but Hopeful — Road Ahead for Ukraine

Even when one tries to ignore the current developments in the East of the country, Ukraine is in a pickle. With one of the lowest incomes per capita among the transitional economies of Eastern Europe, rampant corruption, and quickly depleting foreign reserves, the country is overdue for a reform package in many areas, including fiscal and monetary policy, the judiciary system, bankruptcy law, energy policy, state ownership, to name just a few.

While there is no shortage of foreign experts offering their views on what policies Ukraine needs or does not need, the future of Ukraine is for Ukrainians to decide. Still, the outside world can help. The Cato Institute, for example, is teaming up with the Atlas Network and the Kyiv-based European Business Association this week, hosting an emergency conference on Ukrainian economy.

Instead of policy wonks from Washington, the conference convenes a stellar group of policymakers from the region, who have direct experience with reforms enhancing economic freedom. The speakers include Einars Repse, the former Prime Minister of Latvia, Ivan Miklos, author of Slovakia’s flat tax revolution, Kakha Bendukidze, who as Minister of the Economy was the driving force behind economic reforms in Georgia, Sven Otto Littorin, the former Minister for Employment of Sweden, who assisted with the liberalization of the country’s labor markets, Jan Vincent-Rostowski, until recently the Minister of Finance of Poland, as well as Cato’s very own Andrei Illarionov.

The conference website is here, and you can follow my live twitter feed at this link. Notwithstanding the pessimism of the daily news coming from that part of the world, the recent events in Ukraine have given its people and its leaders a unique window of opportunity to make a departure from the country’s post-Soviet legacy and to put in place institutions that will lead to economic opportunity, freedom, and shared prosperity.

A Fiscal Lesson from Germany

Germany isn’t exactly a fiscal role model.

Tax rates are too onerous and government spending consumes about 44 percent of economic output.

That’s even higher than it is in the United States, where politicians at the federal, state, and local levels divert about 39 percent of GDP into the public sector.

Germany also has too much red tape and government intervention, which helps to explain why it lags other European nations such as Denmark and Estonia in the Economic Freedom of the World rankings.

But I have (sort of) defended Germany a couple of times, at least on fiscal policy, explaining that the Germans didn’t squander much money on Keynesian spending schemes during the downturn and also explaining that Paul Krugman was wrong in his column on Germany and austerity.

Today, though, I’m going to give Germany some unambiguous praise.

If you look at last decade’s fiscal data, you’ll see that our Teutonic friends actually followed my Golden Rule on fiscal policy for a four-year period.

Here’s a chart, based on IMF numbers, showing total government spending in Germany from 2003-2007. As you can see, German policy makers basically froze spending.

German Fiscal Restraint

I realize that I’m a libertarian and that I shouldn’t be happy unless the burden of spending is being dramatically reduced, but we’re talking about the performance of European politicians, so I’m grading on a curve.

By that standard, limiting spending so it grows by an average of 0.18 percent is rather impressive. Interestingly, this period of fiscal discipline began when the Social Democrats were in power.

And because the economy’s productive sector was growing at a faster rate during this time, a bit more than 2 percent annually, the relative burden of government spending did fall.

The red line in this next chart shows that the public sector, measured as a share of economic output, fell from almost 49 percent of GDP to less than 44 percent of GDP.

German Spending+Deficit as % of GDP

It’s also worth noting that this four-year period of spending restraint also led to a balanced budget, as shown by the blue line.

In other words, by addressing the underlying problem of too much government, the German government automatically dealt with the symptom of red ink.

That’s the good news.

The bad news is that the German government wasn’t willing to sustain this modest degree of fiscal discipline. The Christian Democrats, who took office in mid-2005, allowed faster spending growth beginning in 2008. As I noted above, the budget increases haven’t been huge, but there’s been enough additional spending that Germany no longer is complying with the Golden Rule and the burden of the public sector is stuck at about 44 percent of GDP.

The moral of the story is that Germany shows that good things happen when spending is restrained, but long-run good performance requires long-run spending discipline.

That’s why I’m a fan of Switzerland’s spending cap. It’s called the “debt brake,” but it basically requires politicians to limit spending so that the budget doesn’t grow much faster than inflation plus population.

And that’s why Switzerland has enjoyed more than a decade of good policy.

To see other examples of nations that have enjoyed fiscal success with period of spending restrain, watch this video.

The Canadian example is particularly impressive.