Topic: International Economics and Development

Argentina: Down The Tubes, Again

President Christina Fernández de Kirchner has turned up her left-wing rhetoric as the economy goes down the tubes. Indeed, GDP has contracted for the past two quarters; inflation is galloping at 56%, not the official 15.01%; and the country has defaulted on its debt, again. Never mind. The President claims Argentina’s financial system is “one of the most solid in the world.” She asserts that Argentina’s woes can be laid squarely at the feet of foreign “vulture funds” and greedy capitalists who have speculated against the peso. Yes, the peso has lost 42.6% of its value against the U.S. dollar on the black market since the first of the year, and for very legitimate reasons.

But, for realists like me, a fact check is always worth a peso. Recently, Bloomberg’s Charlie Devreux and Pablo Gonzales penned some most edifying reportage on one thing that’s booming in Argentina: criminality. Bandits have put cargos of grain headed for the port of Rosario in their crosshairs. And why not – grain is traded in greenbacks, not pesos.

Property’s worst enemy is theft: theft makes property insecure. And unless property is secure, it can’t be accumulated and it is wasted. The increasing incidence of heists on grain, Argentina’s most valuable export, indicates that property rights are becoming more insecure and that the economy only has one way to go: down the tubes.

Indonesia Reform, Please

The Indonesian stock market has just hit a record high on the hope that the incoming President, Joko Widodo, will push through economic reforms. But, what path should he follow? My advice to President Widodo is the same as that I gave President Suharto, when I was his advisor in 1998: follow Singapore and Lee Kuan Yew.

When Singapore gained independence in 1965, Lee Kuan Yew developed a set of sound principles, which proved to be highly successful. Indeed, their implementation propelled Singapore to the top of the world’s competitiveness rankings. I have dubbed these principles the “Singapore Strategy.” It contains the following five elements:

  • First and foremost, stabilize the currency. Singapore achieved stability with a currency board system – a simple, transparent, rule-driven monetary regime.
  • Second, don’t pass the begging bowl. Singapore refused to accept foreign aid of any kind.
  • Third, foster first-world, competitive, private enterprises. Singapore accomplished this via light taxation, light regulation, and completely open and free trade.
  • Fourth, emphasize personal security, public order, and the protection of private property.
  • The final key to Lee Kuan Yew’s “Singapore Strategy” is the means to accomplish the previous four goals: a small, transparent government that avoids complexity and red tape. And one that is directed by first-class civil servants who are paid first-class wages.

Taxes, Tennis, and Transportation

We have an uncompetitive federal corporate tax rate of 35 percent compared to Canada’s 15 percent. Our Roth IRA is inferior to Canada’s TFSA, as Amity Shlaes and I discussed in the Wall Street Journal. And while Serena Williams still tops rising star Eugenie Bouchard, we should be paying attention to ”What Canada Can Teach Us About Tennis.”

Now we face another competitive threat from the north. This time it’s British Columbia seaports says Bloomberg:

Container ships sailing across the northern Pacific are carrying more cargo and are setting course for British Columbia to avoid delays from a possible strike by U.S. West Coast longshoremen. Traffic in Prince Rupert soared 49 percent in July from a year earlier, according to data compiled by Bloomberg Intelligence, while volume dropped 19 percent in Seattle, its nearest major U.S. rival.

Canadian ports are gaining an advantage over their U.S. rivals amid an economic recovery that’s increasing container volumes from East Asia. While U.S. West Coast ports are mired in a labor dispute and congestion hobbles local railways, Prince Rupert is winning customers with its shorter sailing times from China and efficient infrastructure that can whisk freight to the U.S. Midwest and beyond.

“If people are using the Canadian ports now out of concern for a slowdown, and they like what they see and they like the processing times and the experience, they’ll continue to funnel some of their traffic that way,” Emma Griffith, a director at Fitch Ratings in New York.

So Canadian seaports are gaining in the short-term because of our self-inflicted wound, but they may also gain in the long-term because of both natural and man-made advantages:

[Prince Rupert] lies ice-free 745 kilometers (462 miles) northwest of Vancouver, is as many as 68 hours closer to Shanghai in sailing time than is Los Angeles, according to the Prince Rupert Port Authority. Including rail times, cargo transiting from Shanghai through Prince Rupert would reach Chicago two days quicker than if the ships called at Oakland or Seattle-Tacoma, and three quicker than if they unloaded in Los Angeles…

One of Prince Rupert’s advantages is that inbound containers can be transferred directly to trains rather than trucks that head to a distribution center, which is what happens at other West Coast ports, according to Kris Schumacher, a spokesman for the port authority. This kind of traffic, which uses different modes of transportation, is known within the industry as intermodal freight, and it’s booming for Canadian National.

Meanwhile back on the United States, it’s antibusiness-as-usual:

…there’s no indication when new contracts will be signed for workers at 29 ports from Washington state to California. About 20,000 dockworkers represented by the International Longshore and Warehouse Union have been without a contract since early July. The union and the maritime association are negotiating over work rules, salaries and health-care benefits.

In 2002, the maritime association locked out U.S. West Coast port workers after contract talks broke down. The 10-day shutdown ended when then-President George W. Bush invoked the rarely used Taft-Hartley Act to reopen the ports. The dispute cost the U.S. economy $1 billion a day, according to the maritime association.

The Unintended Consequences of Environmental Policy: For the Birds

So, here is a story to make your blood boil. According to National Review, “the federal government acted with a bias, giving renewable-energy companies a pass on unlawful bird deaths while rigorously prosecuting traditional energy companies for the same infractions.” The NR article follows a string of recent stories complaining about tens of thousands of birds cut up to pieces or fried in the sky by windmills and solar plants.

Speaking of birds…

Five decades ago, Rachel Carson, of Silent Spring infamy, helped to ban a pesticide called DDT. Back then, DDT was widely used not only in agriculture, but also in malaria control. Carson argued, among other things, that the use of DDT endangered bird populations. The political left jumped on Carson’s arguments. After a massive campaign, DDT was withdrawn from agriculture and its use in malaria control was greatly restricted. Most countries followed the American example and banned DDT for use in agriculture.

Although developing countries could technically use DDT for disease control, no donor agencies (dominated by western leftists) would support its use. This amounted to a de facto ban of DDT in malaria control. Nobody knows for sure, but thousands of Africans, perhaps millions, have died of malaria since the use of DDT was prematurely discontinued, all because of a hysterical drive to save the birds in the West.

Today, tens of thousands of birds are dying to satisfy the newest progressive fetish: the drive for renewable energy. At least they are dying in an environmentally friendly way.

As the left likes to say, you cannot make an omelet without breaking some eggs!

The Future of Dollarization in Ecuador

A new “monetary and finance” law that was approved by Ecuador’s National Assembly in July, is expected to be signed into law any day now. Many suspect that this marks the beginning of the end for dollarization in Ecuador, which began in January of 2000. But the underlying threat to dollarization is the incessant growth of public spending. Losing dollarization would be a sad development, considering it is what has protected Ecuadorians from one of the worst evils of populism: high inflation.

The remarkable contribution dollarization has made to the Ecuadorian economy is worth noting. A 2010 study published by Ecuador’s central bank (BCE) analyzed the first decade of the absence of independent monetary policy and found that average GDP growth increased from -6.3 percent during the 1990s to 4.4 percent during the 2000s; annual inflation decreased from a high of 90 percent in September of 2000 to single digits within a year, and has averaged 3 percent since 2004. Additionally, interest rates went down immediately, thereby reducing the cost of capital. According to the World Bank, the percentage of Ecuadorians living on less than $2 a day (PPP) decreased from 37.7 percent in 2000 to 10.6 percent in 2009.

Of course, there are many problems dollarization cannot solve and the positive outcomes above are not solely due to it. But it probably has been one of the main factors contributing to Ecuadorian growth prior to and during our current “revolutionary” government. In fact, Ecuador owes its superior economic performance today–compared the two most prominent populist nations in the region, Argentina and Venezuela–mostly to dollarization.

Coping with the Legacy of Arab Socialism

Countries of the Arab Spring suffer from many economic, social, and political ills. At their center lies the unfortunate legacy of Arab Socialism, which established itself in the region during the 1950s and 1960s. One of its features, besides the ideology of Pan-Arabism and international ‘non-alignment,’ was an emphasis on government ownership and industrial planning. Far from generating prosperity and economic growth, these policies resulted in large, vastly inefficient government-operated sectors in several Arab economies. My new Cato Policy Analysis provides a sense of the magnitude of the problem and of its evolution over time:

In Egypt, for example, the share of government investment fell from around 85 percent in the late 1990s to below 40 percent in 2012. Over the same period of time, the share of government investment in Algeria doubled, from around 30 percent to above 60 percent. Throughout much of the same period, the average for lower-middle-income countries hovered under 30 percent.

Some Arab governments, most prominently Hosni Mubarak’s regime in Egypt, attempted to put in place large-scale privatization programs. However, these were perceived (and rightly so!) as attempts by the political elites and their cronies to simply seize publicly owned assets, without much regard for the future restructuring of the companies and their exposure to competition. My paper reviews the experience of privatization in other countries and tries to provide some practical lessons to policymakers in countries such as Egypt or Algeria.

First and foremost, privatization needs to be perceived as fair and transparent. Bidding should be competitive and open to a large spectrum of potential bidders, domestic and foreign. Second, private ownership of the financial sector is a requisite for successful privatization and restructuring of the rest of the economy–otherwise Arab countries risk creating a dangerous nexus of cronyism through which the state-owned banks and financial institutions would provide funding to newly privatized companies. Third, in order to avoid the danger of simply replacing government-run monopolies with privately-run ones, privatization should be far-reaching and accompanied by broad economic liberalization and opening up both to trade and investment.

Privatization is not very high on the agenda of Arab policymakers or foreign experts, and is typically eclipsed by the more immediate political concerns about the region. It is not, however, an issue that can be simply ignored.

It is a mistake to think that economic reforms can wait until Middle Eastern countries address their internal political and economic problems. There are not many examples of countries that have transitioned successfully to a representative constitutional government while maintaining economic rules that deny opportunity to large segments of the population. State ownership, accompanied by regulations that favor existing state-owned incumbents, are a critical part of the problem facing countries in the MENA region, most notably Egypt, Libya, Algeria, Syria, and Yemen

Africa: the Good, the Bad and the Ugly

Last week, President Obama hosted the U.S.-Africa Leaders Summit in Washington, D.C. He welcomed over 40 African heads of state and their outsized entourages to what was a festive affair. Indeed, even the Ebola virus in West Africa failed to dampen spirits in the nation’s capital. Perhaps it was the billions of dollars in African investment, announced by America’s great private companies, that was so uplifting.

Good cheer was also observed in the advertising departments of major newspapers. Yes, many of the guest countries paid for lengthy advertisements–page turners–in the newspapers of record. That said, the substantive coverage of this gathering was thin. Neither the good, the bad, nor the ugly, received much ink.

What about the good? Private business creates prosperity, and prosperity is literally good for your health. My friend, the late Peter T. Bauer, documented the benefits of private trade in his classic 1954 book West African Trade. In many subsequent studies, Lord Bauer refuted conventional wisdom with detailed case studies and sharp economic reasoning. He concluded that the only precondition for private trade and prosperity to flourish was individual freedom reinforced by security for person and property.

More recently, Ann Bernstein, a South African, makes clear that the establishment and operation of private businesses does a lot of economic good (see: The Case for Business in Developing Countries, 2010). Yes, businesses create jobs, supply goods and services, spread knowledge, pay taxes, and so forth. Alas, in the Leaders Summit reportage that covered the multi-billion dollar investments by the likes of Coca-Cola, General Electric, and Ford Motor Co., the benefits of the humdrum activity of business and trade were nowhere to be found. But, as they say, “that’s not the president’s thing.”

Let’s move from the good to the bad and the ugly, and focus on the profound misery in Sub-Saharan Africa. I measure misery with a misery index. It is the simple sum of inflation, unemployment, and the bank lending interest rate, minus year on year GDP per capita growth. Using this metric, the countries for Sub-Saharan Africa are ranked in the accompanying table for 2012.