Topic: International Economics and Development

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.

OECD Scheme to Boost Taxes on Business Sector Will Hurt Global Economy and Enable Bigger Government

Citing the work of David Burton and Richard Rahn, I warned last July about the dangerous consequences of allowing governments to create a global tax cartel based on the collection and sharing of sensitive personal financial information.

I was focused on the danger to individuals, but it’s also risky to let governments obtain more data from businesses.

Remarkably, even the World Bank acknowledges the downside of giving more information to governments.

Here are some blurbs from the abstract of a new study looking at what happens when companies divulge more data.

Relying on a data set of more than 70,000 firms in 121 countries, the analysis finds that disclosure can be a double-edged sword. …The findings reveal the dark side of voluntary information disclosure: exposing firms to government expropriation.

And here are some additional details from the full report.

…disclosure has important costs in allowing exposure to government expropriation… We show that accounting information disclosure can be detrimental to firm development… Such disclosure allows corrupt bureaucrats to gain access to firm-level information and use it for endogenous harassment. …once firm information is disclosed, the threat of government expropriation is widespread. Information disclosure thus allows rent-seeking bureaucrats to gain access to the disclosed information and use it to extract bribes. …Our paper offers a vivid illustration that an important hindrance to institutional development—here in the form of adopting information disclosure—is government expropriation. …The results are thus supportive of Acemoglu and Johnson (2005) on the overwhelming importance of constraining government expropriation in facilitating economic development.

Yet this doesn’t seem to bother advocates of bigger government.

Venezuela: Not Hyperinflating—Yet

Although Venezuela’s inflation has soared (see: Up, Up, and Away), Venezuela is not experiencing a hyperinflationary episode–yet. Since the publication of Prof. Phillip Cagan’s famous 1956 study The Monetary Dynamics of Hyperinflation, the convention has been to define hyperinflation as when the monthly inflation rate exceeds 50%.

I regularly estimate the monthly inflation rates for Venezuela. To calculate those inflation rates, I use dynamic purchasing power parity (PPP) theory. While Venezuela’s monthly inflation rate has not advanced beyond the 50% per month mark on a sustained basis, it is dangerously close. Indeed, Venezuela’s inflation rate is currently 45% per month (see the accompanying chart).

If inflation moves much higher, the legacy of Hugo Chavez’s Bolivarian Revolution will be that Venezuela joins the rather select hyperinflation club as the 57th member. Yes, there have only been 56 documented hyperinflations

Venezuela's Monthly Inflation Rates

Things Are Getting Better

By nature, human beings can be pessimistic. But, depending on their political persuasion, people tend to focus on different things. Among the Progressive shibboleths in recent decades were concerns over overpopulation, exhaustion of natural resources and coming widespread famine. Data, however, tells a different story. The population growth is leveling off and food is more plentiful than before. The New York Times and the National Public Radio were forced to admit as much in two articles over the last couple of days.  

On May 31, 2015, the New York Times published a story entitled “The Unrealized Horrors of Population Explosion.” The article admits that the planet is not facing a problem of overpopulation. In fact, due to increased prosperity around the world, women have access to more information, education, and career choices. Female empowerment combined with the massive improvements in healthcare and dramatically falling infant mortality rates, have led to total fertility rate plummeting from 5 babies per woman in the 1950s to 2.5 in 2010s. 

To put it in the dry language of economics, as women’s earning potential increases, the opportunity cost of having babies increases as well. As such, more women chose to enter the labor force rather than stay at home and raise the children. The TFR of 2.5 babies per woman is still above the replacement rate of 2.1, but United Nations’ demographers predict that the world’s population will level off at 9 billion people and then start falling. That is already happening in a number of European countries. German population, for example, is predicted to decline from 80 million today to 71 million in 2060.