Topic: International Economics and Development

Scottish Independence Will Kill Socialism on Both Sides of the Border

Much has been said about the impact of Scottish independence on British politics. With the predominantly socialist parliamentarians from Scotland gone, the Conservative Party would likely come to dominate British politics for the foreseeable future. The much needed economic reforms and, perhaps, withdrawal from the European Union would become very likely. 

What about the impact of independence on Scotland? The breakup of the Czech and Slovak Federal Republic some 21 years ago provides an interesting example.

The 1992 elections produced dramatically different results in the two parts of the former Czechoslovak federation. In the Czech Republic, the election was won by the Civic Democratic Party (ODS) led by Vaclav Klaus. Klaus was a highly regarded former federal Finance Minister, who later became Prime Minister and President of the independent Czech Republic. The ODS was dominated by economic reformers whose main goal was a speedy transition of the Czech Republic from a centrally planned economy to capitalism.

In Slovakia, the election was won by the left-leaning Movement for Democratic Slovakia (HZDS) led by Vladimir Meciar. Meciar, a former communist who instinctively opposed dramatic economic reforms favored by Klaus, won by promising the increasingly nationalistic Slovaks some type of a confederal arrangement with the Czechs, but not outright independence. Since the HZDS, with support of smaller Slovak National Party, had enough votes to block all legislation in the Federal Parliament, the future of the federation would depend on an agreement between the ODS and the HZDS.

While demanding an increased autonomy for Slovakia, the Slovak leadership did not bother to find out how far the Czechs were prepared to go. The Slovak leadership seemed to believe that the Czechs, who were more emotionally attached to the continuation of the Czechoslovak federation than the Slovaks, would simply accede to whatever demands the Slovaks chose to make. That turned out to be a colossal miscalculation.

Argentina: One More Step toward Venezuela

This week the Argentine Congress is likely to pass legislation that would bring that country one step closer to suffering the economic disaster that currently besets Venezuela.

First, let’s keep in mind that when it comes to the economy, Argentina is already the country that comes closest to following Venezuela’s flawed policies (expansionary monetary policy, arbitrary expropriations and nationalizations, price controls, etc.).

High inflation remains the country’s number one problem. According to private consulting firms, year-to-year inflation in August was 40.4%. The black market exchange rate is 70% higher than the official rate, which has led to a growing shortage of dollars. We have seen this movie before in Venezuela.

President Cristina Fernández now wants to tackle inflation by having Congress pass an amendment to the “Supply Act” of 1974 that would allow her government to go after businesses that are deemed to be raising prices “unjustifiably or artificially,” or that enjoy “abusive profits.” In those cases, the bill authorizes the Secretary of Commerce to regulate and establish profit margins in each stage of production and commercialization, set price controls, and force companies to continue producing even though they are incurring losses. The bill also empowers the Secretary of Commerce to raid, fine and temporarily close businesses, and also to confiscate merchandise. (In fairness, the bill also aims to eliminate the prison sentences, massive confiscations and permanent closing of businesses that are stipulated in the original law —although they have been rarely implemented.)

The Argentine bill is very similar to Venezuela’s “Just Prices and Costs Act” passed in July, 2011. That law has greatly contributed to the country’s further decimation of the private sector and to widespread shortages of basic goods. The last time the Venezuelan Central Bank published its scarcity index in March, it reached 29.4%, meaning that over one out of four basic products is out of stock at any given time.

Since the Fernández administration enjoys a comfortable majority in the House of Deputies (the Senate already passed the bill), it’s very likely that the legislation will be approved this week. If that happens, Argentina will be one step closer to becoming the next Latin American basket case.

Prof. Krugman Snared By 364 Trap

In his New York Times column of September 15, 2014, How to Get It Wrong,Paul Krugman pleas for open-mindedness and reason. From whence did Prof. Krugman convert from his embrace of dogmatism?

Well, it’s clear that he has not converted. Indeed, the evidence resides about three quarters of the way through his column:

“The great majority of policy-oriented economists believe that increasing government spending in a depressed economy creates jobs, and that slashing it destroys jobs — but European leaders and U.S. Republicans decided to believe the handful of economists asserting the opposite. Neither theory nor history justifies panic over current levels of government debt, but politicians decided to panic anyway, citing unvetted (and, it turned out, flawed) research as justification.”

This passage brings back vivid memories of the 364. In 1981, Margaret Thatcher was prime minister and my friend and collaborator, the late Sir Alan Walters, was her economic guru. Britain’s fiscal deficit was relatively large, 5.6% of its gross domestic product, and the economy was in the middle of a nasty slump. To restart the economy, Thatcher instituted a fierce fiscal squeeze, coupled with an expansionary monetary policy. This was immediately condemned by 364 dyed-in-the-wool Keynesian economists - virtually all of the British establishment. In a letter to the Times, they wrote, “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”

Thatcher and Walters were vindicated quickly. No sooner had the 364 affixed their signatures than the economy turned around and boomed for the next five years. That result provoked disbelief among the Keynesians. After all, according to their dogma, the relationship between the direction of a fiscal impulse and economic activity is supposed to be positive, not negative.

The 364’s dogma was proven wrong. Thatcher and Walters were right.

Middle East and North Africa: A Fatal Attraction

Last week, President Obama addressed the nation to proclaim that the U.S. and an unspecified coalition were going to once again ramp up our military operations in Middle East and North Africa (MENA). This time, the target is the Islamic State, the group terrorizing Iraqi and Syrian citizens.

Just what is the economic condition of that troubled MENA region? This is a question that must be addressed by anyone who is looking over the horizon. After all, the state of an economy today will have a great influence on post-war prospects tomorrow.

My Misery Index allows us to obtain a clear picture of the current economic situation. The Index is the simple sum of the inflation rate, unemployment rate and bank lending rate, minus per capita GDP growth. I calculated a misery index for the countries in MENA where sufficient data were available.

As the chart shows, many of the countries in MENA are, well, miserable. Indeed, a score of over twenty indicates that serious structural economic problems exist. To correct these problems, thereby reducing misery, major economic reforms (read: free-market reforms) must be implemented. But, even if the respective governments approve such changes, it is unclear whether they can be implemented. To put a bit of color on that conjecture, consider that only 13 of the 21 countries in MENA reported the four pieces of economic data that are required to calculate my Misery Index. The regional governments’ inability to produce reliable economic data is a canary in a coal mine. When it comes to MENA, most of the countries have been singing for a long time. The region is, by and large, miserable.

Chile’s Proposed Education Reforms Would Kill the Goose that Lays the Golden Eggs

For the past three decades, Chile has had a nationwide voucher-like school choice program. Parents can choose among public and private schools, and the government picks up most or all of the tab. But, since the election last fall of a left-leaning government led by Michelle Bachelet, the future of the program has been in doubt. In May, President Bachelet introduced a first round of reforms aimed at dismantling aspects of the program, though these are still under debate. I’ve written about what that could mean for Chile’s educational performance and equality in today’s edition of the Santiago-based El Mercurio. Here’s the original English version:

Chile’s elementary and secondary education system has been harshly criticized in recent years for academic underperformance and for having large gaps in achievement between lower-income and higher-income students. There is significant truth to both charges. What is less widely known is that Chile has been improving substantially in both respects for at least a decade, and that president Bachelet’s proposed reforms are likely to reverse that improvement.

Though Chilean students perform in the bottom half of countries on the Programme for International Student Assessment (PISA) test, many of the nations that participate in that test are rich and fully industrialized. When compared to other Latin American countries, Chile is number one across all subjects. More importantly, Chile is one of the fastest-improving countries in the world on international tests, and so it is gradually closing the gap with rich nations.

Imperialist Tourist Spots Help Explain Chinese Aggressiveness Today

BEIJING—Modern China continues to rise.  But ancient China remains.  And bears witness to a history the West would prefer to forget.

The Summer Palace is one of Beijing’s most enchanting tourist destinations.  But some of the old buildings are in ruins—courtesy of the Western powers.

Imperial China long was a cultured and advanced civilization that eventually fell into decay.  By the 1800s the Western powers had begun to carve out concessions and colonies.

The Summer Palace first was created in the 12th century and was meant to ease the life of the royal family.  In 1860 during the Second Opium War French and British troops destroyed most of what is now called the Old Summer Palace.

In 1886 the Empress Dowager Cixi used funds planned for a navy to rebuild the royal playground.  She called the site the Garden of Peace and Harmony, an appropriate name, except for the garden’s unwanted guests.

In 1900 came the Boxer Rebellion, named for the violent xenophobic, spiritual movement named the “Righteous and Harmonious Fists.”  The Boxers targeted foreigners, especially missionaries, and Chinese Christians.  The revolt, supported by the Empress Dowager, reached Beijing, in which Western diplomats were killed and legations were besieged.  The Western nations raised an eight-nation rescue force, including American troops.

The allied forces eventually relieved the city—alas, the Boxers discovered that their training did not render them immune to bullets.  One of the casualties was the New Summer Palace. The gardens and buildings were burned by the allies, objects contained within were plundered.

The Empress Dowager had to rebuild again on her return to Beijing, which she had fled in advance of the allies.  She died in 1908 and the republican revolution occurred three years later.

This unseemly history is of more than just academic interest.  It helps explain Beijing’s behavior today.

No doubt, some Chinese, both in and out of the People’s Republic of China, have an exaggerated sense of Chinese history, civilization, and destiny.  And Imperial China, despite the fascinating esoterica surrounding it, was an unfriendly place for most of the humane values which we value today.  Nevertheless, China has been treated badly, especially by the Western powers which today are most insistent on Beijing following Western standards.

This historical experience helps explain the nationalism which afflicts even young Chinese who are liberal in many other ways.  The same students believe in a strong, even dominant China.

In fact, many ethnic Chinese living outside of the PRC cheered Hong Kong’s 1997 reversion to Beijing’s control.  For them, the issue was CHINA, not the particular regime ruling the territory known as China at this moment.

More important, those in charge feel a special responsibility as their nation gains the resources, influence, and power necessary to reverse a century or more of humiliation.  That may not justify increasing Chinese assertiveness, especially in the West’s eyes.  But it helps explain the behavior.

This doesn’t mean other nations should automatically concede the PRC’s claims.  But it suggests that Chinese assertiveness involves something other than malevolent aggression.

In which case, as I write in my new article on China-US Focus, “Washington is foolish to militarize disputes which are, at most, of only moderate geopolitical interest.  Other nations, especially those, like Japan, whose behavior has been, shall we say, less than exemplary, have a special responsibility to accommodate Beijing’s perceptions and interests.”

History helps explain Beijing’s policies and politics today.  While those in the West might have amnesia about what their ancestors did to the forebears of China’s leaders, the latter are not so likely to forget.  Policymakers in the U.S. would do well to consider that history in designing their approach to Beijing.  A peaceful and prosperous 21st century might depend on it.

Should Scotland Reclaim Its Independence?

At USA Today, I write about Scottish independence, which the Scottish people will vote on this coming Thursday. I note that the late Nobel laureate Gary Becker wrote in 2005, like Simon Lester today, that the disadvantages of small nations are much reduced in a world of free trade:

My conclusion is that developments in the global economy during the past 50 years have greatly reduced the economic disadvantages of small nations enumerated for his time by Hamilton. In fact, being small now may even have efficiency advantages…. [As trade barriers have come down over the past half-century,] small countries can now gain the advantages of large markets through trading with other nations.

I go over arguments on currency, tax rates, and the likelihood that an independent Scotland could be as socialist as some of its political leaders would like if it has to create its own prosperity. In the end, I write:

In any case, the economic arguments will go on till the vote on September 18. Scotland certainly has the elements necessary to be a successful European country. The real question is whether the Scots themselves desire, to borrow an Irish anthem, “that Scotland long a province be/A nation once again.” As a descendant of Scots who helped America secure its independence, I hope so.

I wrote previously about Scottish independence here