Topic: International Economics and Development

If This Is Wrong I Don’t Want to Be Reich

Pathological liar Robert Reich offers a commentary on Wednesday morning’s “Marketplace Radio” (not posted yet) complaining that American companies are not lobbying for more spending on science and math education because they are unpatriotically opening labs and software design offices in India and China. So let’s see … he’s upset that the people of the world’s two largest countries are finally entering the modern world, and he’s upset that huge American businesses are not lobbying for more business subsidies. What a great liberal!

The Welfare Kings of Farming

There is an excellent op-ed in today’s LA Times on the special kind of corporate welfare given to farmers. David Boaz and I have both written blog entries (here and here) and done podcasts on the topic (mine on 05/30/06 and David’s on 07/25/06). As the farm bill comes up for extension/review/obliteration (okay, that last one was a bit optimistic), this topic is one to watch.

Transition in Cuba: How Would Raúl Rule?

Fidel Castro’s transfer of power to his brother Raúl is beginning to look like a test run for an eventual transition. As I wrote Tuesday (here, and in this op-ed in the Chilean newspaper La Tercera), the real question is whether the eventual permanent transfer of power will simply be a transition to new leadership or whether it will be a transition to a different kind of regime.

That’s a question to which probably nobody, even in Cuba, knows the answer. The Castro brothers have in fact been planning the transition to Raúl’s rule for some time. Given Raúl’s prominent treatment in the Cuban press recently, Cuba expert Brian Latell asked two months ago whether the transition has already begun.

Raúl has led the armed forces since the beginning of the revolution. The fall of the Soviet Union and the loss of massive subsidies to the island transformed Raúl’s role and that of the military. In the 1990s Raúl advocated policy changes that opened up the Cuban economy to foreign investment in a few sectors, such as tourism and mining, that earn foreign exchange. The Cuban economy also became dollarized. (Several years ago I asked the head of Cuba’s central bank why Cuba had become dollarized and whether he thought that was a good thing or bad thing. His response was a long one. He didn’t answer the first question, but did say they were not happy with the development and intended to dedollarize—something they began to do two years ago). As it happened, the military began running all sorts of businesses in Cuba in the 1990s including hotels, gas stations, travel services, and import-export agencies that generate hundreds of millions of dollars in revenue.

When I visited Havana four years ago, I saw how retired military officials also play a prominent role. They are the ones entrusted to run the major state-owned enterprises. They produce a certain level of revenue for the state, beyond which they engage in what appears to be quasi-private business activity, all of which amounts to a strange mixture of socialist statism with entrepreneurship.

Foreign exchange and increased economic activity have helped spread the informal economy, another factor that may affect Raúl’s rule. Thousands of Cubans now conduct business or other activities independent of the state in all manner of areas (taxis, messenger services, restaurants, libraries, etc.).

Two other observations struck me during my visit to Cuba: 1. I don’t think I met anybody who truly believed in communism. I met with high officials at ministries and top people at the University of Havana and official think tanks, some of whom were very intelligent and quite sophisticated, and all of whom left me with an impression that cynicism about the revolution was widespread. 2. Discontent with the status quo among the general population was also widespread. To this day, the economy has probably not yet bounced back to the income or consumption levels that existed in 1989 or 1990. Food rations are skimpy and clinics cannot afford to provide basic medicines or supplies (patients must finance those goods themselves). Why put up with the lack of freedom if the revolution can’t even guarantee basic necessities?

Since Venezuela began to provide massive subsidies to Cuba a few years ago, Havana has backtracked on its limited reforms. The subsidies have not significantly improved living conditions in Cuba, however, and have made doing business more cumbersome. For all of the above reasons, whoever follows Fidel, including Raúl, will have a difficult time maintaining the status quo. I believe that Raúl will be willing to compromise on socialist principles if only to benefit certain constituencies such as the military and shore up his power. Limited economic reform, not political reform, would be on the agenda. My guess is that that will be the beginning of more fundamental policy changes. My hope is that those changes will also lead to political change and (this part is most unlikely) that the transition to a more open society happens as swiftly as possible.

Hillary’s Rural Renaissance

Further to David Boaz’s post below on the Democratic Leadership Council’s recent spending plans, Senator Hillary Clinton has called for a “rural renaissance” to “restore the promise and prosperity to main streets and rural communities.” The full press release can be viewed here, but these are the main points:

  • A “national broadband strategy” to “coordinate and maximize federal resources” which would newly include a National Rural Broadband Innovation Fund and the creation of a single office run by an “administrator” that would provide a “one-stop shopping clearing house for innovators and businesses that want to expand broadband in rural areas.” Strange, but from where I’m standing, the Internet seems to have evolved pretty well without government interference so far.
  • A “Rural Regional Investment Program, which would provide equity investments to fund innovative opportunities and partnerships in rural areas” that would “provide rural communities with flexible resources to develop comprehensive, collaborative, locally-controlled planning and to foster innovative community and economic development strategies.” Senator Clinton’s proposal also includes more “help” in administering small private loans “pooling private capital and administering that capital through trusted intermediaries” (overseen by the Federal government, presumably). As the seemingly inexhaustible stream of money to ethanol production has shown, investment money to rural areas seems to flow quite nicely when investors see promising (if pork-induced) returns.
  • Speaking of ethanol, Senator Clinton would like to see the creation of a $1 billion Strategic Energy Fund to “support [the] rapid development of renewable energy, including biofuels.”
  • Then there are a host of other measures, including so-called “green” payments, a more reliable safety net that would “help manage risk” and include counter-cyclical payments (the most trade distorting and offensive kind to our trade partners), and more spending on health care and rural education.

The US Government has been lavishing subsidies on farmers since the New Deal in the 1930s, and has spent over $55 billion propping up the agricultural sector since the enactment of the 2002 Farm Bill. Far from giving away even more of taxpayers’ money, surely it is time for the government to stop giving agriculture special treatment and to allow farmers to carry the risks and reap the rewards of their investments, just like every other businessperson in America.

Where’s Fidel?

Reading major newspapers and listening to NPR this morning, I don’t hear anyone asking what seem to me to be the obvious questions about Castro’s condition: Is Castro alive? Is he incapacitated? Did he compose or approve the statement read in his name? In a secretive dictatorship, you can’t believe everything the regime says. Raul Castro and his colleagues may be trying to create the impression of a gradual transition. On the other hand, it could well be the case that Fidel is himself trying to prepare Cubans for a transition that will happen eventually. I’m just surprised that no one seems to be asking whether Fidel directed this cession of power himself – except in the streets of Miami.

Mercantilist Logic Flounders at Sea

The good news from the listing cargo ship near Alaska’s Aleutian Islands is that all 23 crew members were plucked safely from the ship by helicopter last night. (See news story.) The bad news is that the 5,000 cars aboard the ship bound from Japan to Canada may not survive the mishap.

Come to think of it, would it be such bad news if those 5,000 cars sank to the bottom of the ocean? According to the mercantilist mindset that seems to dominate Washington’s discussion of trade policy, the loss of merchandise in transit from one country to another may be the best of all possible worlds.

Mercantilism is a centuries-old approach to trade that believes that exports are the big payoff from trade and imports a burden. By definition, then, a trade surplus signals success for trade policy and a trade deficit failure.

From a mercantilist point of view, then, the loss of those 5,000 cars at sea should be a blessing to the global economy. The people of Japan would have occupied themselves producing those 5,000 cars for export, while the people of Canada would not have shoulder the “burden” of accepting them as imports. Japan can add to its trade surplus without Canada being forced to suffer a deficit.

The great French economist Frederic Bastiat exposed this fallacy more than 150 years ago in an essay, “The Balance of Trade” (Chapter 6 of his Economic Sophisms). If the mercantilists are right, we should all be praying for bad weather in the sea lanes carrying all those cars, shoes, shirts, and laptop computers to our showrooms and store shelves.

Doha Ends With a Whimper

The Doha Round of trade talks has been suspended indefinitely. What was billed as an historic opportunity to liberalize trade through multilateral negotiations has ended with no deal in sight. Now, get ready for the blame game, a kind of “press-releases-at-dawn” duel between the US and the EU, with a few comments from other players thrown in for good measure. For starters, you can see the US version of events through the USTR and the EC (link requires subscription) provided a 9 page document describing how much they had done to get a deal concluded.

Of course, none of this necessarily means the end of trade liberalization, and to this end we can expect after the finger-pointing has ended a revival of the seemingly endless debate on whether bilateral or multilateral liberalization is best. But, as my colleague Dan Ikenson argued in his recent paper on unilateral liberalization, the US can do itself a big favor, and in the process gain some much needed foreign policy credibility, by unilaterally reducing tariffs and subsidies.

Maybe now that the Doha Round is in remission, the US can focus on doing what is in its own interests, instead of seeing liberalization as a “concession” that depends on the actions of the EU and others.

Meanwhile, back at the Secretariat, discussions are turning to a more important topic: where to find more space for its ever-expanding staff. Looks like you’ll be needing fewer large conference rooms, guys.