Topic: International Economics and Development

Are Short-Sighted Politicians (and Greedy Voters) Undermining Democracy?

Writing for, Kevin Hassett notes that politically repressive market-oriented nations are growing faster than politically free market-oriented countries. He issues the obvious caveat that - everything else being equal - we expect poorer countries to grow faster, but he wonders whether democratic regimes sow the seeds of their own destruction (or at least create for themselves a competitive disadvantage) by enabling people to seize unearned wealth through the political process:

…the countries that are economically and politically free are underper­forming the countries that are economically but not politically free. For example, unfree China had a growth rate of 9.5 percent from 2001 to 2005. But China was not the whole story—Malaysia’s GDP grew 9.5 percent from 1991 to 1995, Singapore’s GDP grew 6.4 percent from 1996 to 2000, and Russia’s grew 6.1 percent from 2001 to 2005. The unfree governments now understand that they have to provide a good economy to keep citizens happy, and they understand that free-market econ­omies work best. Also, nearly all of the unfree nations are developing countries. History shows they grow faster, at least for a while, than mature nations. But being unfree may be an economic advantage. Dictatorships are not hamstrung by the preferences of voters for, say, a pervasive welfare state.

Advocates for freedom usually - and with great justification - blame politicians for these outcomes, but a new book by Bryan Caplan says voters deserve part of the blame. Both Cafe Hayek and Marginal Revolution draw attention to Caplan’s work.

WHTI Does More Harm Than Good

The Woodrow Wilson Center’s Canada Institute is having an event May 30th entitled “People, Security and Borders: The Impact of the Western Hemisphere Travel Initiative on North America.” It looks like a good event exploring an important suite of issues.

I’ve been drawn into WHTI because of the privacy consequences of many border control efforts - RFID-chipped passport cards and such - but the trade issues are just as important. My back-of-the-envelope calculations about the costs of WHTI (exchanged for essentially no increased security) can now be augmented by not one, but two compelling anecdotes! Both have to do with Montreal … .

Anecdote #1 - The Busy, er, Dopey Traveler
A couple of weeks ago, I embarked on a quick round of travel to speaking engagements in Orlando and Montreal. Then, after a day in Chicago, I had planned a weekend in Las Vegas (to properly release a bachelor friend from the bonds of singledom).

As I headed to the Dulles airport bound for Orlando, I realized that I had not brought my passport for the Montreal portion of the journey. After burning a lot of candle-power figuring out what to do, I had a tenant of mine FedEx my passport to Orlando for arrival the next morning. ($24 + gratuity for the little feller going well out of his way = $40)

It arrived well after my scheduled flight for Montreal had departed, so I turned up at the Orlando airport around noon hoping to stand by on later flights. Informed that this was an impossibility on international flights (also, I believe, because of security), I came close to cancelling my attendance at the Computers, Freedom & Privacy conference in Montreal, but I persisted. (Who knows what rules were bent on my behalf, or what the rules actually are.) It took me about 14 hours and a good deal of stress to get to Montreal.

(N.B. This episode was not a stunt done to prove a point - I only do those when reporters agree to come along. It was a simple oversight because I don’t think of Montreal as being in a “foreign country” they way Lisbon or Hong Kong are.)

Long story short (oops, too late), the stresses of comporting myself to the passport requirement and various other security measures caused me to abandon the Vegas portion of my trip and head back to D.C. from Chicago for a quiet weekend. Careless as I am in tinsel-town, that probably kept $1,000 from circulating into the U.S. economy.

Anecdote #2 - The On-the-Ball Travelers
The Cato Institute’s own Michael Cannon was married two years ago. (Yes, there’s somebody out there for everyone.) To celebrate his recently completed graduate schooling and their second anniversary, he and his wife have been planning to go to Montreal this weekend.

The new(ish)ly renamed Mrs. Cannon has her act together - opposites attract, you see - and a few months ago, anticipating this trip, she applied for a passport in her new name. The check was cashed back in March, but the passport has yet to materialize.

At this moment, the two are in logistics hell, trying to navigate the State Department’s bureaucracy (including its downed electronic appointment scheduling system).

What will happen? Nobody knows. Will herculean efforts by Mrs. Cannon and her hubby produce a passport? Will the two cancel their trip? Will Mr. Cannon persist in the face of this heavy, security based regulation and go on his own?

Programs like WHTI are often justified as being part of a layered security system for the United States. “Layered security” is a legitimate way of thinking about things. One shouldn’t rely on a single security system, because that creates a single point of failure. However, security layering doesn’t end the inquiry. Each layer must provide security that is cost-justified. If checking the passports of Canadian-border crossers doesn’t create a substantial protection - and it doesn’t - that layer does more harm than good.

The United States is not safer because of what the Cannons are experiencing. It’s just smaller and unhappier.

Landlords Drafted into War on Illegal Immigration

A couple of weeks ago, I testified in the House Immigration Subcommittee on the difficulties with, and undesirability of, a national employment verification system. Beyond some costly and inconvenient, bleeding-edge tech solutions, there’s no way to confirm on a mass scale that people are legally entitled to work under our immigration law - not without putting a national ID in the hands of every American.

I observed that such a system, once built, wouldn’t be restricted to employment, but would naturally expand:

Were an electronic employment verification system in place, it could easily be extended to other uses. Failing to reduce the “magnet” of work, electronic employment verification could be converted to housing control. Why not require landlords and home-sellers to seek federal approval of leases and sales so as not to give shelter to illegal aliens? Electronic employment verification could create better federal control of financial services, and health care, to name two more.It need not be limited to immigration control, of course. Electronic verification could be used to find wanted murderers, and it would move quickly down the chain to enforcement of unpaid parking tickets and “use taxes.” Electronic employment verification charts a course for expanded federal surveillance and control of all Americans’ lives.

Now comes news that a suburb of Dallas has become the first in the nation to prohibit renting to illegal immigrants. It requires apartment managers to verify that renters are U.S. citizens or legal immigrants before leasing to them.

A policy like this doubles-down on the error of enlisting employers into immigration law enforcement, and it shows how immigration law creates pressure to expand domestic surveillance. “The policy that will dissipate the need for electronic verification by fostering legality is aligning immigration law with the economic interests of the American people. Legal immigration levels should be increased,” I testified.

But you knew that if you’ve been following this stuff.

All Walls Are Not Created Equal

On NPR, Daniel Schorr compares the proposed wall along the southern border of the United States to the Berlin Wall and tells us, in the words of Robert Frost, “something there is that doesn’t love a wall.”

I sympathize with him. I don’t like the idea of building a wall around the United States, either. Since the Boazes arrived in America in 1747, we have seen the country prosper as the Buchanans, the Tancredos, the Dobbses, the Maglalangs, the Brimelows, the Arpaios, and millions of others arrived on these shores and were welcomed into the country that my ancestors helped to create in 1776 and 1787.

But there’s a problem with Schorr’s analogy. The Berlin Wall was designed to keep citizens in. The wall (or fence) along our southern border is intended to keep non-citizens out. There’s a very real difference. The Berlin Wall declares that the people of East Germany are the property of the East German state and are not free to live anywhere in the world other than East Germany. The Border Fence merely says that non-U.S. citizens can’t enter the United States without permission; as far as the U.S. government is concerned, they’re free to travel or live anywhere in the world except the United States.

Daniel Schorr might ponder this: He lives in a house with four strong walls and secure locks on the door. He reserves the right to bar entry to his house to anyone, and that helps to protect his life, liberty, and property. But a building with walls and locks to keep people in is called a jail.

As I said, I too don’t want a wall around the United States. But we need better arguments against it than flawed analogies.

(Some) Developing Countries Don’t Like the “Trade” Bit in “World Trade Organization”

The Doha round of world trade talks stagger on, with the latest “deadline” for completion of a deal set at end-2007 (i.e., before the US presidential campaign season gets underway in earnest). Last week the chair of the agriculture negotiations released a paper designed to inject movement back in to the agriculture negotiations that are proving the key stumbling block to reaching a deal on the other important areas of world trade. (On why agriculture is such a big deal, considering its relatively small share in world goods trade, see here). In any event, the chairman’s paper has been roundly criticized, which means it has been a success.

Part of the skirmish, and this is true of the trade talks more broadly, is the explicit commitment to give developing countries “special and differential (S&D) treatment” in the negotiations. In other words, poorer countries have to lower their trade barriers less than do developed countries. In the wake of the disastrous meeting in Cancun in September 2003, when developing countries flexed their muscle, these sorts of concessions were deemed necessary to get the Doha round back on track.

Unfortunately, the S&D provisions have been used frequently as an excuse for developing countries to do almost nothing to lower their trade barriers. It is not quite that clear-cut, of course. Many developing countries have an interest in exporting to other developing countries, and so want to see trade barriers come down across the board. But generally, developing countries feel that this round is about developed countries lowering their barriers to developing country goods and services, while the poorer nations continue to protect their “sensitive” goods markets from competition.

Mercantalism is to some extent the basis of the World Trade Organization: it presupposes that countries will only open their markets in return for increased access for their exports, from which the benefits of trade flow. That’s economic nonsense, of course, but in the absence of political will for unilateral trade liberalization (see more about that here), the negotiated multilateral route is the best one towards freeing markets and giving consumers access to cheaper and more goods and services.

The new development focus of the WTO, however, is proving to be an obstacle in itself to reaching a deal. South Africa, for example, on behalf of a group of other developing countries, read a statement in a meeting earlier this week of the negotiating group on market access (for industrial–or manufactured–goods) that, according to an article today:

“accused rich countries of subverting the talks known as the Doha round by seeking to advance their commercial interests instead of the original “development” goal of lifting millions of people worldwide out of poverty through free trade.” (emphasis added)

Seeking to advance their commercial interests? Those shameless knaves!

The World Trade Organization is just that – a trade organization. It is not a development institution. It is true that freer markets and trade lead to economic growth, but the Doha round of trade talks is a commercial negotiation, not a donors’ conference.

Naming it the ‘Doha Development Agenda’ may have been politically necessary, but it has proven to be a big mistake.

Don’t Expect Much from Sarkozy

A Financial Times column neatly summarizes the economic views of Nicolas Sarkozy. His opposition to “fiscal dumping” really means that he opposes tax competition and wants to insulate the French welfare state from global competition:

He wants the EU to move in a French direction, offering citizens “protection” from the outside world. …During the campaign, he called on the EU to protect its citizens from unfair competition from abroad, particularly
Asia, and from fiscal, social and environmental “dumping” from poorer EU members in eastern Europe. That approach is at odds with the “open
Europe” model being promoted by most northern, central and eastern European countries.

The Global Flat Tax Revolution Continues

A column in Canada’s Globe and Mail reviews the successful shift to flat tax systems and appropriately notes that tax competition is a key reason for the adoption of better tax policy:

In one of its first acts last year as an independent country, Macedonia (population: two million) legislated radical tax reforms. On Jan. 1, 2007, the country introduced a flat-rate tax of 12 per cent on both personal and corporate income, matching the rate introduced two years ago by Georgia (population: 5.6 million). On Jan. 1, 2008, Macedonia will cut its rate to 10 per cent - and achieve one of the lowest tax rates in the world. Macedonia’s tax revenues will almost certainly rise. The country’s new, young (age: 36 years) free-market Prime Minister, Nikola Gruevski, cites the phenomenon of voluntary compliance that accompanies flat-tax regimes. “This reform will decrease tax evasion,” he says, “and encourage people to meet their obligations to the state.” As Russia (population: 144 million) vividly demonstrated when it adopted a flat tax (replacing a 40-per-cent rate on personal income with a 13-per-cent rate) in 2000, low rates are persuasive tax collectors. Russia’s revenues rose 25 per cent in the first year, 25 per cent in the second year, 15 per cent in the third year. People who violently resist getting scalped will submit voluntarily for a trim. …Around the world, tax rate competition is getting keener. Countries that resist flat-tax reform are nevertheless lowering rates. Poland (population: 37.5 million) has moved three-quarters of the way to a flat tax - with a single rate of 19 per cent for all corporate income, capital gains, dividends and self-employed individuals. Spain (population: 40 million) has introduced a flat rate of 18 per cent for all income derived from savings. Effective this year, Iceland (population: 300,000) taxes all personal income at a flat rate of 32 per cent - which appears high because it includes municipal as well as national taxes. It now taxes capital gains, dividends, interest income and rental income at a flat rate of 10 per cent.