Topic: International Economics and Development

The Continuing U.S. Decline in Economic Freedom of the World Index

Economic freedom in the United States has continued to fall even as it has increased modestly at a global level. That’s according to the Economic Freedom of the World: 2013 Annual Report co-published today by the Fraser Institute.

The United States has seen more than a decade of decline, having been ranked 2nd on the index in 2000, 8th in 2005 and 17th in the current report. The average global economic freedom score rose slightly from 6.74 out of 10 in 2010 to 6.87 in 2011, the last year for which data is available. The authors of the report note that the United States has fallen in all areas that the report measures: size of government, the legal system and security of property rights, sound money, freedom to trade, and regulation. Increased spending, a weakening rule of law, worse monetary policy, greater trade barriers, and more regulation are to blame. As the graph below shows, economic freedom in the United States is lower than it was in 1980 and is below that of Canada, New Zealand and even Chile, a developing country on its way to first-world status.

Economic Freedom Trends

The relationship between economic freedom and prosperity is strong as the graph below shows. Countries in the top quartile of the index are significantly richer than the rest. Economic freedom is also strongly associated with improvements in the whole range of indicators of human well-being including greater political and civil liberties, longer life spans, lower poverty, and so on (see pp. 21-23 of the report.). So it is especially troubling that the United States, the world’s most important economy long associated with market-liberalism, should be in decline. Authors James Gwartney, Robert Lawson and Josh Hall cite scholarly work to conclude that “unless policies undermining economic freedom are reversed, the future annual growth of the U.S. economy will be half its historic average of 3%.”

Economic Freedom and Income per Capita, 2011

Globally, Child Mortality Is Falling Rapidly

According to a UNICEF report that was released earlier today,

In 2012, approximately 6.6 million children worldwide—18,000 children per day—died before reaching their fifth birthday… This is roughly half the number of under-fives who died in 1990, when more than 12 million children died.

Some of the world’s poorest countries, including Bangladesh, Ethiopia, Liberia, Malawi and Nepal, made the greatest progress and met their Millennium Development Goal for the reduction of child deaths ahead of the 2015 deadline. 

Typically, the press quickly credited “global action” for improving health and nutrition in poor countries. This is nonsense. International organizations and aid groups have a terrible record at improving the lives of the people in developing countries. Child mortality in the developing world is declining because poor countries are getting richer. As Charles Kenny of the Center for Global Development wrote,

4.9 billion people—the considerable majority of the planet—[live] … in countries where GDP has increased more than fivefold over 50 years. Those countries include India, with an economy nearly 10 times larger than it was in 1960, Indonesia (13 times), China (17 times), and Thailand (22 times larger than in 1960). Around 5.1 billion people live in countries where we know incomes have more than doubled since 1960, and 4.1 billion—well more than half the planet—live in countries where average incomes have tripled or more….

Even Africa is becoming wealthier. According to the World Bank, between 1990 and 2010, African incomes adjusted for inflation and purchasing power parity rose by 27 percent.

If child mortality in poor countries is eventually reduced to Western levels, it will not be because of aid, but because of continued economic growth that is, in large part, facilitated by further integration of the developing world into the global economy.  

There is a Great Deal of Ruin in a State

Much of the current debate about the aftermath of the Arab Spring, and frustrations with Iraq, Afghanistan, and now in Syria, implicitly or explicitly concerns the type of states that might emerge (Democracies? Dictatorships? Friends? Foes? Stable regimes of any stripe?). Beyond these basic uncertainties, there is a general frustration with the tragedy of persistent conflict, corruption, and poor governance in many of these areas.

Alas. Building a state, building any form of political order, is hard. Rarely does it emerge without a struggle. It’s tempting to think either that democracy is the optimal form of government, or that ANY form of government is preferable to an ongoing mess. Both may be correct. But, a move towards one political order necessarily entails a move away from another. And, crucially, the interests of the current political order will be threatened by this change from the status quo. And those who stand to lose will fight to avoid that loss.

This is part of what makes statebuilding so hard for outsiders. Foreign involvement can and does shape both conflict and statebuilding. But this influence is mediated by domestic actors who have their own interests, and for whom such alliances are often strategic means to (quite rationally) pursue their own goals. Failures to understand who stands to lose or gain from which outcomes and options magnify the risk of outcomes interveners don’t like.

In part because of this dynamic, outside assistance is not necessarily a shortcut to the mess of statebuilding. There will be winners and losers. And many will try to shore up their wins by taking what they can when they can get it. And by getting rid of their enemies—in ways we find repulsive.

Statebuilding is hard. Implicit or explicit proposals to pursue it are often accused of forgetting recent lessons on these difficulties. But we forget our own history, too. America itself experienced multiple flashes of unrest before the Revolution. The United States went through two constitutions in less than a decade, experienced multiple rebellions, fiscal and monetary crises, riots by unpaid soldiers and farmers facing foreclosure, and decades of severe and persistent corruption. Unresolved international issues led to the War of 1812. Unresolved domestic issues produced a bloody civil war in the 1860s, and unrest a century later in the 1960s.

Why do we expect others to emerge more seamlessly and with such immediacy? It would be marvelous. But it seems unlikely.

Mexico’s Fiscal Reform: the Good, the Bad, and the Ugly

On Sunday, Mexican President Enrique Peña Nieto unveiled a fiscal reform bill that is an important corollary of his energy reform proposal. The legislation’s main goal is to increase the federal government’s tax intake in the face of diminished oil revenues due to the reforms that will let Petróleos de México (Pemex) keep more of its money for investments.

Approximately one third of the government’s revenues comes from oil. The fact that oil production is declining significantly (it dropped 25 percent in the last decade), adds urgency to generating new sources of tax revenue or reducing spending. Mexico’s fiscal deficit last year was 2.6 percent of its GDP, but without oil revenues it would have been close to 8 percent instead.

The good: The bill will simplify Mexico’s complex tax system. In the World Bank’s Doing Business report, Mexico ranks 107th among 185 economies on its ease of paying taxes. It takes an average Mexican businessman 337 hours every year to calculate and pay his taxes, whereas his peers in the mostly developed nations of the OECD have to spend an average 176 hours every year doing their taxes. A complex tax system constitutes a burden on the economy and can also be extremely inefficient since it encourages people to elude and evade taxes (particularly in developing countries with weak institutions). Thus, you can have a country such as Mexico with high tax rates and yet low tax revenues. This is a problem because it can lead to a slippery slope where politicians try to extract more revenue via higher taxes from a dwindling pool of taxpayers.

The current top rate on the personal income tax is 30 percent. The corporate tax rate is also 30 percent. The Value Added Tax (VAT) is 16 percent. And yet Mexico’s tax intake was only 9.7 percent of its GDP in 2012. This is not to say that Mexico should have a higher tax burden, but to point out that there is something wrong with a tax system if it has fairly high tax rates that don’t generate much revenue.

The NSA Economic Backlash

When the NSA spying revelations came out a couple months ago, one of my first thoughts, expressed here on this blog, was:  This could be bad for U.S. businesses.  If internet users have concerns about the privacy of their online activities, they may look for alternatives to Gmail, Yahoo and the rest.  I elaborated on this point here and here.

But I’m no expert on these industries, so I don’t have a sense of what the actual likelihood of this happening is.  How hard would it be to create a new email/browser/social network right now?  I’m not sure.

Perhaps this new proposal out of Brazil to create a competitor to the major U.S. email providers will provide a test:

The Brazilian government is planning to develop a national email system that is protected from the sort of espionage that the US National Security Agency carries out.

The government has already been working with the national postal agency Correios to develop the new commercial email system, providing an alternative to the likes of Gmail and Hotmail, which would guarantee the veracity of documents and offer functions such as a delivery certification showing when an email has been read by the recipient.

However, in the wake of whistleblower Edward Snowden’s revelations about the extent of US government digital surveillance, Brazil’s Communication Ministry has requested to extend the project into a national service.  The new system would include encryption and have servers based in Brazil.

American companies such as Google and Microsoft are obliged to share their users’ data with the NSA. In fact, in the last eight months of 2012, Hotmail, Google, Facebook, and Twitter provided law enforcement agencies with information on 64,000 users. The NSA can reportedly also tap into three-quarters of the data flowing through the US internet and has legal power to subpoena international communications.

This has led Germany’s Minister of the Interior to tell companies not to use services that go through American servers if they are concerned about privacy. The French government is also working to build a domestic cloud infrastructure to compete with the dominant US companies.

It will be interesting to see how this turns out, and if others pursue similar efforts.  Obviously, the governmental role in any such effort is an important consideration – other governments are capable of spying as well.

As Congress Prepares for Vote, Syria’s Inflation Hits 257%

As prospects of a U.S.-led military intervention in Syria hang in limbo, the foreign exchange black market for the Syrian pound (SYP) has become increasingly volatile. In countries with troubled currencies, such as Syria, black-market exchange rates provide a reliable gauge of economic expectations. Judging by the erratic performance of the black-market Syrian pound/U.S. dollar (USD) exchange rate, the Syrian people’s expectations have been on quite the roller coaster ride, as the U.S. Congress prepares for what will likely be a very close vote on a Use of Force resolution.

  • Following Secretary of State John Kerry’s initial call for military intervention in Syria, on August 26th, the SYP experienced a one-day drop of 24%—reflecting Syrians’ heightened fears of U.S. military conflict.  
  • On August 29th, two events occurred that reversed this slide. In Damascus, the Syrian government renewed its attempts to crack down on black-market currency trading. And, over 4,000 miles away in London, the British Parliament voted down a motion authorizing military action in Syria. In consequence, the SYP rebounded by a whopping 26% over the course of two days.
  • The U.S. Senate Foreign Relations Committee’s consideration of a use of force resolution seems to have once again raised Syrians’ expectations of a U.S. military strike, as it set the SYP on another slide. Since September 3rd, the pound has lost 10% of its value.

For some perspective on how the West’s march to war has affected Syria’s currency, and ultimately inflation, let’s take a look at how things have changed over the course of the past month: On August 6th, the black-market SYP/USD exchange rate was 205, yielding an implied annual inflation rate of 191%. As of September 6th, the black-market SYP/USD exchange rate sits at 250, yielding an implied annual inflation rate for Syria of 257%.

For more on the Syrian pound, see the Troubled Currencies Project.

The Syrian Pound Zigs and Zags

Following U.S. Secretary of State John Kerry’s saber-rattling statements on the 26th of August, the value of the Syrian pound (SYP) has zigged and zagged. Indeed, the SYP lost 24.7% of its value against the U.S. dollar in the two days following Kerry’s announcement (moving from 225 to 270 SYP/USD). Then, yesterday, we saw a sharp reversal in the course of the pound. Over the past two days, the SYP regained 25.58% of its value, bringing the black-market exchange rate back down to 215 SYP/USD. At this rate, the implied annual inflation rate is 209.85% (see the charts below the jump).

So, what caused the recent strengthening of the Syrian pound? We have to look no further than the eroding support for a U.S.-led strike against Syria. Yes, the United States has lost support from important allies, the United Kingdom, Canada, and Italy.

In addition, Syrian authorities have cracked down again on black-market currency trading. In the past week, the authorities have shut down a number of currency traders; made “friendly” reminders to the public of the penalties of trading on the black market—imprisonment of 10 years and a hefty fine; and warned Syrians to stay away from “counterfeit” dollars that have supposedly been circulating. The authorities’ “get tough” policy followed speculation that the SYP/USD rate would surpass the 300 mark.

I have established a page to track current black-market exchange-rate and implied inflation data for the Syrian pound, as well as for troubled currencies in Iran, Argentina, North Korea, and Venezuela. For more, see: The Troubled Currencies Project.