Topic: International Economics and Development

Offer Free Trade, Not Foreign Aid to Egypt

Egypt is racing toward dictatorship.  But Washington always has been more interested in maintaining influence than encouraging democracy or promoting development in Egypt.  That’s why the U.S. provided more than $75 billion in “aid” over the years. 

In fact, the cash bought little leverage.  Hosni Mubarak spent decades oppressing Egyptian citizens and persecuting Coptic Christians despite Washington’s contrary advice.  Israel’s military superiority, not America’s money, bought peace. 

Unfortunately, as elsewhere in the Third World, foreign “assistance” hindered economic development by effectively subsidizing Cairo’s inefficient dirigiste policies.  A decade ago the government finally decided to open the economy. 

Reforms including lower tariffs, enterprise privatizations, and regulation reductions.  Meredith Broadbent of the Center for Strategic and International Studies also cited corporate tax reductions and insurance regulation modernization. 

However, Egypt soon began to fall behind other reformers.  For instance, Broadbent pointed to the survival of “significant elements of a heavy-handed statist bureaucracy.”  The banking system was opaque, monopolistic, and inaccessible.  A joint report by the Carnegie Endowment and Legatum Institute cited the need to give poor Egyptians clear title to their property, reform the bankruptcy law, and reduce costs of opening, operating, and closing businesses.

Corruption was pervasive, with commerce dominated by cronyism and privilege.  The military controlled anywhere between 15 percent and 40 percent of the economy. 

The most serious economic hindrance was expensive consumer subsidies, particularly for food and fuel.  Most of the benefits did not go to those in most need.  Moreover, the cost today accounts for roughly a third of the government’s budget and 14 percent of Egypt’s GDP. 

Thus, even after the Mubarak reforms unemployment and inflation remained high while Cairo ran large deficits.  The situation worsened after the 2011 revolution.  Uncertainty and insecurity discouraged investment and the public deficit increased to 11 percent of GDP. 

The coup was another step backwards.  The government is focused on suppressing the Muslim Brotherhood and reconstituting old political and economic relationships.  Reported the Washington Post:  “now some businessmen and officials implicated in post-uprising corruption probes are again in positions of power and influence, including in the cabinet appointed last summer by the military.” 

The prime minister said the government plans to “rationalize” the subsidy, but economic reform appears to be a low priority.  In September the regime launched a “$4.2 billion program for “economic development and social justice,” the sort of big spending initiative which has not worked elsewhere.   

As I point out in my new National Interest article:

Military rule could offer a form of stability.  However, Gen. al-Sisi’s brutality, including the slaughter of Brotherhood protesters in Cairo in August, has encouraged increasingly violent opposition.  Policemen are regularly being killed, and both auto and suicide bombings are on the rise.

Such violence could frighten off investors and tourists. 

In this environment American financial assistance would be even more harmful than before.  The massive aid coming from Saudi Arabia and other Gulf states—given purely for the political purpose of combating the Brotherhood—reduces any financial pressure on the regime to streamline economic policy. 

In contrast, freer trade would be a positive good.  Meredith Broadbent proposed negotiating a free trade agreement—previous talks left off in 2005—and updating the bilateral investment treaty.  The Institute for International Economics once projected that an FTA would increase Egypt’s GDP by three percent annually.

A new accord also would benefit U.S. firms which have been left at a disadvantage by the EU-Egyptian FTA.  Such agreements, Broadbent argued, “can serve as systemic tools to help pry open closed government regulatory processes.”

Absent an inclusive political process, Egypt likely faces an unstable and violent future.  However, economic reform also is necessary.  That is unlikely to come from lectures and money from foreign governments.  But the prospect of increased participation in international commerce would offer a far more powerful and direct incentive for action.  Washington should propose that the two governments free up investment and trade.

Thailand Votes as Thai Democracy Totters

Thailand has voted for the third time since the military staged a coup in 2006. The crony populists won again. The establishment thugs didn’t even compete.  The country is headed toward more and more dangerous political turmoil.

As I explain in my latest Forbes online column:

Thailand’s latest poll was triggered by PDRC mobs in Bangkok which sought to drive Prime Minister Yingluck Shinawatra from office.  Although the protestors wear yellow, associated with the Thai monarchy, they are the modern equivalent of Benito Mussolini’s Black Shirts, who seized power through the infamous 1922 march on Rome.

The misnamed Democrat Party and its ally, the People’s Democratic Reform Committee (PDRC), led by former DP deputy prime minister Suthep Thaugsuban, then attempted to block Sunday’s vote. 

The Thai political system is nominally democratic.  But the state typically was controlled by an elitist establishment, essentially a military-royalist-civil service-business-urban/upper class axis. 

That was overturned by the 2001 victory of telecommunications executive Thaksin Shinawatra, who followed the traditional political strategy of tax, tax, spend, spend, elect, elect.  Thaksin won another big victory in 2005, but the following year the so-called People’s Alliance for Democracy launched demonstrations to bring down his government.  The military then ousted him in a coup. 

The next election in 2007 was won by Thaksin’s successor party (though he remained in exile abroad).  But PAD soon launched a series of protests to shut down the government.  After the coalition collapsed, angry Thaksin supporters, called “Red Shirts”—dominated by the rural poor and middle-class—flooded into Bangkok.  The security agencies then killed scores of protestors and wounded thousands of others. 

However, Yingluck, Thaksin’s sister, won the 2011 election.  Last fall PAD relaunched itself as the PDRC and employed storm trooper tactics against her government, even threatening to seize the prime minister. 

Yingluck responded by calling an election, but that was the last thing the protestors wanted.  So the Thai Black Shirts proceeded to block candidate registrations and early voting and halt polling in several areas.

Thaksin embodies the worst of irresponsible populism, and Yingluck is widely viewed as Thaksin’s stand-in.  Worse, however, is Suthep, whose crowds evoke memories of fascist bullies which on election day even attacked Thais seeking to vote.  He called for a “people’s revolution” with an unelected “people’s council,” which he would get to fill, to “reform” election rules, which would guarantee his victory, before the next poll is held. 

Nevertheless, Prime Minister Yingluck was reelected.  But Suthep is determined to take power irrespective of his lack of popular support and the Black Shirts want to make the country ungovernable. 

Yingluck’s opponents may file charges of alleged electoral violations and urge the Election Commission to nullify the vote.  That could trigger violent demonstrations from the Red Shirts.  By blocking candidate registrations the Black Shirts prevented the poll from filling the required 95 percent of parliament’s seats, requiring by-elections before the body can open.

The opposition also may turn to the courts, which are hearing a number of highly political charges.  However, Red Shirt activists are unlikely to peacefully accept a judicial coup.

If all else fails, the Black Shirts are likely to take more radical steps to overthrow the new government.  Chaos in Bangkok might cause the military to stage another coup.  But the 2006 coup leader, Sonthi Boonyaratglin, warned that the military likely would face violent resistance from not just the Red Shirts but the “mass” of people.

In short, Thailand’s political future looks at best uncertain and at worst disastrous.  The only hope may be constitutional reform reducing central government power.  If Bangkok was less dominant and regions could chart their own course, the Red Shirts and Yellow Shirts would have less incentive to battle to the political death.

Thaksin may be a blight upon Thai politics, but Suthep and his allies are a cancer.  Unfortunately, in Thailand democracy does not guarantee good government.  However, authoritarian, undemocratic rule would be far worse.  Suthep’s Black Shirts will bear the primary blame if their nation descends further into violence and disorder.

Socialism in Venezuela, like Socialism Everywhere, Means Shortages

After 15 years, Hugo Chavez’s socialist revolution is finally reaching socialism’s signature achievement: shortages of toilet paper. The Washington Post reports:

CARACAS, Venezuela — On aisle seven, among the diapers and fabric softener, the socialist dreams of the late Venezuelan president Hugo Chávez looked as ragged as the toilet paper display.

Employees at the Excelsior Gama supermarket had set out a load of extra-soft six-roll packs so large that it nearly blocked the aisle. To stock the shelves with it would have been pointless. Soon word spread that the long-awaited rolls had arrived, and despite a government-imposed limit of one package per person, the checkout lines stretched all the way to the decimated dairy case in the back of the store.

“This is so depressing,” said Maria Plaza, 30, a lawyer, an hour and a half into her wait….

Why is it always toilet paper? I understand why a poorly coordinated economy isn’t likely to produce complicated goods like cars (see the Soviet Lada, the East German Trabant, or the gleaming 1950s American cars still in use on the streets of Havana) or computers. But how hard is it to produce toilet paper? Not that toilet paper is the only thing in short supply:

Each day the arrival of a new item at Excelsior Gama brought Venezuelans flooding into the store: for flour, beef, sugar. Store employees and security guards helped themselves to the goods first, clogging the checkout lines, and then had to barricade the doors to hold back the surge at the entrance.

Meanwhile, as long as you can blame the Americans, the capitalists, Snowball, or Emmanuel Goldstein, you can retain the support of at least some of the people:

“The store owners are doing this on purpose, to increase sales,” said Marjorie Urdaneta, a government supporter who said she believes Maduro when he accuses businesses of colluding with foreign powers to wage “economic war” against him.

“He should tell the stores: Make these items available — or else,” she said.

The regime takes credit for what it can, making sure that

products sold by recently nationalized companies carried little heart symbols and the phrase “Made in Socialism.”

The queues in front of the stores should carry the same symbol.

Argentina Graph of the Day

The graph below is from an op-ed I wrote on Argentina’s 15% devaluation last week, which looks like the beginning of a wider economic crisis. It shows how total government spending as a percent of GDP has doubled to an estimated 44% in the era of populist politics that began with Argentina’s massive debt default in 2002. The country has been spending beyond its means and paying for it by printing money. The government shows no signs of wanting to tame inflation or reduce spending. The bottom line is this: as the government draws down its reserves, and with few other sources of finance, we can expect people to continue to lose confidence in the currency and the economy to deteriorate further and faster.

Source: Luis Secco

Tax Reform: The First Step Is Simple

New leadership is coming to the congressional tax-writing committees. Ron Wyden will be taking the helm of Senate Finance and Paul Ryan will be likely taking the helm of Ways and Means. This is good news, as both gentlemen are serious legislators and very interested in major tax reform.

One thing they should tackle is the personal income tax, which is a complex and high-rate mess. It should be restructured into a simple flat tax.

However, the most urgent needed reform is to slash the corporate income tax rate. Policymakers should put aside changes to deductions, credits, and loopholes for now. Those tax base issues are a diversion and policy quagmire, as the R&D credit illustrates. It is far more important to just cut the statutory corporate rate, which would automatically reduce the effects of tax-base distortions and make it politically easier to reform the tax base later on.

Our current high-rate policy is harming the U.S. economy, reducing job growth, and stifling wages—for no good reason. Abolition is a good long-term goal for corporate income tax reform, but we can start with at least chopping our federal-state rate of 40 percent down to the global average of 24 percent.

The charts show KPMG data for top statutory corporate income tax rates in 2013. KPMG shows UAE with the highest rate in the world at 55 percent. However, that rate just applies to foreign banks and foreign oil companies. So I don’t show UAE since the reported rate is not the general corporate rate.

That leaves the United States with the highest general corporate tax rate in the world, and that makes no sense in today’s competitive global economy.

Costa Rica’s Growth Paradox

Can a country enjoy a relatively high growth rate for a quarter of a century and still be unable to reduce its poverty rate? That’s the case of my homeland, Costa Rica, which happens to have a critical presidential election on February 2.

For over 25 years Costa Rica’s growth rate has averaged 4.7 percent a year – one of the highest in Latin America – and yet the country’s poverty rate has been stuck at around 20 percent since 1994. Even worse, Costa Rica is one out of only three Latin American countries where inequality has risen since 2000.

Today, I’ve published a study looking at some of the causes. Even though Costa Rica has undergone a substantial liberalization process since the mid-eighties, the country’s economic model is still in significant ways based on a mercantilist system that is biased in favor of certain sectors of the economy at the expense of the poor. You can read the paper here.

Mirror, Mirror, on the Wall, Which Nation Has Increased Welfare Spending the Fastest of All?

There’s an old joke about two guys camping in the woods, when suddenly they see a hungry bear charging over a hill in their direction. One of the guys starts lacing up his sneakers and his friend says, “What are you doing? You can’t outrun a bear.” The other guys says, I don’t have to outrun the bear, I just need to outrun you.”

That’s reasonably amusing, but it also provides some insight into national competitiveness. In the battle for jobs and investments, nations can change policy to impact their attractiveness, but they also can gain ground or lose ground because of what happens in other nations.

The corporate tax rate in the United States hasn’t been changed in decades, for instance, but the United States has fallen further and further behind the rest of the world because other nations have lowered their rates.

Courtesy of a report in the UK-based Telegraph, here’s another example of how relative policy changes can impact growth and competitiveness.