Topic: International Economics and Development

Bono: Only Capitalism Can End Poverty

This is a great day. For years, Bono has been something of a pain, banging on about the need for billions of dollars in Western foreign aid to Africa. I have criticized him for ignoring the real source of African poverty – lack of capitalism – on numerous occasions.

But, unlike many who hate capitalism without reservation, Bono is open to changing his mind. Here is Bono giving capitalism its due recognition during a recent speech at Georgetown University. As the musician put it, when it comes to poverty “free enterprise is a cure.”  

Indeed, the evidence is overwhelming.

According to the World Bank, global poverty is declining rapidly. In 1981, 70 percent of people in poor countries lived on less than $2 a day, while 42 percent survived on less than $1 a day. Today, 43 percent live on less than $2 a day, while 14 percent survive on less than $1. “Poverty reduction of this magnitude is unparalleled in history,” wrote Brookings Institution researchers Laurence Chandy and Geoffrey Gertz in a recent paper. “Never before have so many people been lifted out of poverty over such a brief period of time.”

As far as Africa goes, inflation adjusted per capita incomes rose by an astonishing 97 percent between 1999 and 2010. That is good news for Africa and for humanity. More people should recognize it.

Egypt’s Vanishing Currency Black Markets

Despite escalating tensions between Egypt’s new military-backed government and supporters of ousted president Mohammed Morsi, there is at least one positive development coming out of the Land of the Nile. Yes, at long last, some semblance of stability appears to be returning to Egypt’s economy.

After the ouster of President Hosni Mubarak in 2011, the Egyptian economy took a turn for the worse. In particular, the Egyptian pound began to slide shortly after Morsi and his Muslim Brotherhood-backed government took power, sparking the development of a black market for foreign currency. The accompanying chart tells the tale: the official and black-market EGP/USD exchange rates began to diverge sharply in late 2012. In recent weeks, however, they have converged.

Recent currency auctions by the central bank, coupled with improved expectations about the country’s economic prospects, have begun to buoy the struggling pound. Indeed, the black-market exchange rate is now 7.13 EGP/USD, very close to the official rate of 7.00 EGP/USD. So, with Morsi, the black market appeared, and with the military’s re-entry, the black market has all but vanished.

The Egyptian stock market is echoing the confident sentiments displayed by the foreign exchange markets (see the accompanying chart). But, it remains to be seen if this newfound confidence in the Egyptian economy will be sustained.

Wall Street Journal Condemns OECD Proposal to Increase Business Fiscal Burdens with Global Tax Cartel

What’s the biggest fiscal problem facing the developed world?

To an objective observer, the answer is a rising burden of government spending, which is caused by poorly designed entitlement programs, growing levels of dependency, and unfavorable demographics. The combination of these factors helps to explain why almost all industrialized nations—as confirmed by BIS, OECD, and IMF data—face a very grim fiscal future.

If lawmakers want to avert widespread Greek-style fiscal chaos and economic suffering, this suggests genuine entitlement reform and other steps to control the growth of the public sector.

But you probably won’t be surprised to learn that politicians instead are concocting new ways of extracting more money from the economy’s productive sector.

They’ve already been busy raising personal income tax rates and increasing value-added tax burdens, but that’s apparently not sufficient for our greedy overlords.

Now they want higher taxes on business. The Organization for Economic Cooperation and Development, for instance, put together a “base erosion and profit shifting” plan at the behest of the high-tax governments that dominate and control the Paris-based bureaucracy.

What is this BEPS plan? In an editorial titled “Global Revenue Grab,” The Wall Street Journal explains that it’s a scheme to raise tax burdens on the business community:

After five years of failing to spur a robust economic recovery through spending and tax hikes, the world’s richest countries have hit upon a new idea that looks a lot like the old: International coordination to raise taxes on business. The Organization for Economic Cooperation and Development on Friday presented its action plan to combat what it calls “base erosion and profit shifting,” or BEPS. This is bureaucratese for not paying as much tax as government wishes you did. The plan bemoans the danger of “double non-taxation,” whatever that is, and even raises the specter of “global tax chaos” if this bogeyman called BEPS isn’t tamed. Don’t be fooled, because this is an attempt to limit corporate global tax competition and take more cash out of the private economy.

The Journal is spot on. This is merely the latest chapter in the OECD’s anti-tax competition crusade. The bureaucracy represents the interests of
high-tax governments that are seeking to impose higher tax burdens—a goal that will be easier to achieve if they can restrict the ability of taxpayers to benefit from better tax policy in other jurisdictions.

More specifically, the OECD basically wants a radical shift in international tax rules so that multinational companies are forced to declare more income in high-tax nations even though those firms have wisely structured their operations so that much of their income is earned in low-tax jurisdictions.

US-EU Trade Talks: Don’t Forget about the Tariffs

In the context of the recently launced US-EU free trade talks (formally, the “Transatlantic Trade and Investment Partnership,” or TTIP), commentators have noted that tariffs between the US and EU are low, and thus the key part of the talks will deal with so-called regulatory barriers to trade.  An article in Inside U.S. Trade observes: “Overall, the U.S. average tariff rate is 3.5 percent, although the average tariff rate on goods that the EU actually shipped to the U.S. last year was even lower, at 1.2 percent, … .”

But these average figures mask some significant “tariff peaks.”  There are lots of individual tariff rates, so if many are low or zero, that makes the average figure fairly low; nonetheless, there are plenty of high tariffs still out there.  The same article points out some US and EU tariff rates that may come up during the negotiations.  Here is the US:

U.S. light trucks tariff of 25 percent; a tariff on wool sweaters of 16 percent; a tariff on sardines of 20 percent; a tariff on tuna of 35 percent; and a tariff on leather at 20 percent

Here is the EU:

applied tariffs on honey of 17.3 percent; carrots at 13.6 percent; potatoes at 14.4 percent; strawberries at 20.8 percent; lemons at 12.8 percent, beef at 12 percent; and lamb at 12 percent

And all of those tariffs add up:

the U.S. collected about $4.5 billion in tariffs from EU products in 2012. … [Of this amount,] $900 million comes from imported German cars; about $260 million comes from Italian clothes and shoes; and about $72 million comes from cheese imports.” 

These negotiations will be complicated in a number of ways, including how to deal with diverging regulations in the US and EU.  But hopefully negotiators won’t forget the basics of free trade: Lowering or eliminating tariffs is a simple and straightforward way to boost economic growth. 

The Leader of the Zetas Is Captured… Now What?

Miguel Ángel Treviño, the leader of the Zetas, Mexico’s most fearsome and brutal cartel, was arrested last night in Mexico near the U.S. border. This is the first major blow to organized crime in the seven month presidency of Enrique Peña Nieto.

Sylvia Longmire and Alejandro Hope [in Spanish] have good analyses on what the capture of Treviño will mean in the near and medium term to the Zetas and to the configuration of organized crime in Mexico. Overall, we should expect a spike in violence as the Zetas might splinter into several violent “cartelitos” which will fight one another for control of territory. Also, we might see a renewed effort from the Sinaloa cartel of Joaquín “Chapo” Guzmán to challenge the Zeta’s control of the lucrative Nuevo Laredo transit route.

But isn’t the ultimate goal of the war on cartels to stop the flow of drugs into the United States? Should we expect a decline in the smuggling of narcotics after the arrest of Treviño? No, according to reports from the U.S. government itself. The Office of Intelligence and Operations Coordination of the Custom and Border Protection agency looked at drug seizure data from January 2009 to January 2010 and matched it with the arrests or deaths of drug operatives (11 capos in total). It found that “there is no perceptible pattern that correlates either a decrease or increase in drug seizures due to the removal of key DTO [drug trafficking organization] personnel.”

The arrest of a nasty and blood thirsty criminal such a Treviño is good news for Mexico. But don’t expect it to tip the balance in the overall war on drugs.

Escaping the North Korean Impasse

Pyongyang urged Washington to “positively respond” to the former’s call for negotiations “without preconditions.”  The Obama administration insisted that the Democratic People’s Republic of Korea first commit to denuclearization.  Diplomacy is going no where fast.

The Korean peninsula remains dangerous for everyone.  Although America and South Korea would triumph in any conflict, the price would be extravagant.

The allies continue to focus on the North’s nuclear program.  No doubt denuclearization is the best outcome.  However, it remains the least likely.

North Korea has grown ever more determined to be accepted as a nuclear power.  There’s nothing mysterious about the North’s program.  It offers several advantages, including military deterrence.

Instead of growing more entangled in the peninsula, Washington should disengage.

The U.S. should end its Cold War alliance with the Republic of Korea.  After six decades, the “mutual” defense treaty has lost its raison d’être.  Most important, the South is capable of defending itself.  Washington should terminate the security pact and withdraw its military forces.

Moreover, as I write in my latest column on Forbes online:

American officials should set aside the nuclear issue in order to engage Pyongyang.  North Korea’s nuclear ambitions most directly affect its neighbors.  The North lacks any means to attack the U.S.—other than targeting troops which should be brought home from South Korea.  Even if the DPRK could act, confronting America would be suicidal, a quality not evident in Pyongyang.  Washington should make the one genuine threat, nuclear transfers to non-state actors, a red line.  Otherwise the U.S. should turn over the issue to the countries with the most at stake:  China, South Korea, Japan, and Russia.

Then the U.S. should indicate its willingness to sign a peace treaty and open diplomatic relations.  These long have been North Korean priorities:  the North’s ambassador in Geneva, Sin Son-ho, recently held an unprecedented press conference denouncing the U.S. for “the hostile relations between the DPRK and the United States, which can lead to another war at any moment.”

Set aside his reflexive blame of America.  Six decades surely is long enough to officially end the Korean War.  Moreover, the U.S. government would benefit from a small window into DPRK society, direct process to handle mundane diplomatic matters, and official channel for more serious communication.

Finally, Washington should make clear that it is up to the two Koreas to work out the peninsula’s future.  Abundant commercial and extensive family relationships would continue to tie America to the ROK.  However, the U.S. would not presume to dictate the ultimate inter-Korean relationship, which needs to evolve along with events on the peninsula. 

A more relaxed American approach offers numerous advantages.  But most important, current policy is broken.

Is there a genuine desire to reduce tensions hidden within the North’s endless bombast? Washington should challenge Pyongyang by accepting its latest proposal for talks.

It won’t be easy for the U.S. and DPRK to put aside fundamental differences, such as on human rights.  But both sides would benefit from reducing the possibility of conflict.  At least that’s worth holding a serious discussion.