Topic: International Economics and Development

IMF Proposes to Sabotage China’s Economy

For the people of China, there’s good news and bad news.

The good news, as illustrated by the chart below, is that economic freedom has increased dramatically since 1980. This liberalization has lifted hundreds of millions from abject poverty.

 

The bad news is that China still has a long way to go if it wants to become a rich, market-oriented nation. Notwithstanding big gains since 1980, it still ranks in the lower-third of nations for economic freedom.

Yes, there’s been impressive growth, but it started from a very low level. As a result, per-capita economic output is still just a fraction of American levels.

So let’s examine what’s needed to boost Chinese prosperity.

Earth Day’s Anti-Humanism in One Graph and Two Tables

Here, courtesy of Cato’s www.HumanProgress.org, is the quintessence of Earth Day’s anti-humanism. Botswana and Burundi started off as equally poor. In 1962, their GNI per capita was a paltry $70 per person.

By 2012, Botswana’s income per person rose by some 10,829 percent to $7,650. Burundi’s rose by mere 243 percent to $240. Botswana is an African success story, while Burundi is a failure–that is, if you judge the two countries by their income and, consequently, their standards of living.

If, however, you judge the two countries by their CO2 emissions per person, Burundi is the clear winner. Between 1972 and 2010 (the maximum number of years for which data on CO2 emissions per capita is available for both countries), CO2 emissions per person in Burundi increased only 62 percent. In Botswana it skyrocketed by 8,847 percent.

As my colleague Pat Michaels noted earlier, growing wealth necessitates higher carbon emissions in the short or medium term, but greater prosperity enables people to become both greener and more energy efficient in the long term. Denying cheap energy to the developing world will trap hundreds of millions of people in poverty and lead to more humanitarian disasters.

 

Chinese Free Trade Is No Threat to American Free Trade

I’m seeing a lot of support for the Trans Pacific Partnership (TPP) on the basis of reasoning along the lines of “we must stop China from dominating Asia.”  Here are two recent examples.

First, an analyst with the Third Way think tank says:

The Chinese economy is built on low labor standards, and they want to export these standards to the world.

This analysis of Chinese and U.S. trade deals demonstrates that, in the area of worker rights, there is an immense cost to ceding trade and commerce rules to China. And with China trying to impose those standards on the rest of the world, policymakers need to be extremely concerned with the effect on American workers.

Second, the Washington Post editorial board says:

the TPP would ensure that the Pacific Rim plays by U.S.-style rules and regulations, rather than by China’s neo-mercantilist ones

There are two arguments here: (1) China is imposing low labor standards on the rest of the world; and (2) China is spreading mercantilism through its trade agreements. Neither is true.  As I explain in this Free Trade Bulletin, China does not care what labor standards its trading partners use, and it is not trying to impose its standards on anyone through trade agreements.  In addition, Chinese trade agreements liberalize trade in goods and services, just as other countries’ trade agreements do; China is not using trade agreements to push for its trading partners to have more interventionist economic policy.

I conclude:

Chinese free-trade initiatives in Asia and the Pacific region should give the United States an incentive to get its own free-trade act together, but not for the reasons suggested by some. Chinese free trade is not a threat to American free trade. The justification for U.S. trade agreements is that free trade is good, not that China is somehow bad. Thus, the TPP should succeed or fail on its economic merits. The concerns about letting China write the rules are misguided. China’s trade rules are not a version of state-led capitalism. They are the removal of protectionist trade barriers, just as our trade rules are.

Nigerians Elect Former Dictator to Save Democracy

Nigerians have elected a new president, the first time an opposition candidate defeated an incumbent since the restoration of democracy in 1999. Muhammad Buhari, a 72-year-old former dictator and perennial presidential candidate, will take over on May 29.

Nigeria enjoys the continent’s largest GDP but trails several African nations in per capita GDP. Although possessing extensive energy resources, the nation suffers from regular power outages.

Nigerians are entrepreneurial but nearly a quarter of them are unemployed. An intrusive, exploitative state blocks economic development and steals wealth. According to the latest Economic Freedom of the World Nigeria has one of the world’s least open economies, coming in at 125 of the 152 countries rated. This discourages foreign investment in what should be the continent’s best market.

Corruption raises the cost of business and rewards economic manipulation. Last year an expatriate worker told me:  “Nigeria is not a country. It is an opportunity.”

Nigerian politics is anything but clean. Jonathan’s People’s Democratic Party ruled for 16 years, using patronage and other tools of incumbency to maintain power.

Nigeria better protects political rights and civil liberties than many African states. However, the State Department pointed to a number of human rights challenges, including “vigilante killings; prolonged pretrial detention; denial of fair public trail; executive influence on the judiciary; infringements on citizens’ privacy rights; restrictions on the freedoms of speech, press, assembly, religion, and movement.”

Insecurity is pervasive. When I visited last year my group sported a well-armed escort. The oil-rich Niger Delta is especially dangerous; executives admit to paying bribes to discourage attacks.

Worse, sectarianism divides the nation. At times violence flares.

In recent years the murderous Boko Haram extended its reach across Nigeria. The group received a blaze of publicity last year after kidnapping hundreds of school girls. Boko Haram has killed more than 20,000 Nigerians and displaced 1.5 million people in Nigeria and neighboring countries.

The Nigerian military is underfunded and ill-trained, distrusted by civilian politicians. Worse, government abuses generate support for Boko Haram.

Understandably, Nigerians desperately wanted change. But in what direction?

As dictator, Buhari lasted only 20 months before being unseated by another general. The Economist observed: “He detained thousands of opponents, silenced the press, banned political meetings and had people executed for crimes that were not capital offenses when they were committed.”

Buhari says he now recognizes democracy to be the better option. He has a reputation for probity and being a Muslim may better position him to combat Boko Haram.

However, energizing the economy may prove more difficult. Candidate Buhari promised much. While there are some free market advocates in Buhari’s coalition, more around him are not and he is thought to be an “unreconstructed statist,” according to the Financial Times. This is a prescription for economic failure.

His previous record is cause for pessimism. Noted the Economist: “He expelled 700,000 immigrants under the illusion that this would create jobs for Nigerians. His economic policies, which included the fixing of prices and bans on ‘unnecessary’ imports, were both crass and ineffective.” Nigeria cannot afford a repeat performance.

Still, in at least one important respect the election was good news. Despite some technical problems, the election went surprisingly well. Jenai Cox of Freedom House called the vote “one of the smoothest and least violent in Nigeria’s history.”

Equally important was President Jonathan’s unconditional acceptance of the results. He declared:  “I promised the country free and fair elections. I have kept my word.” And he did.

As I point out in Forbes online, “Nigeria’s success suggests that the country has developed a lusher civil society and stronger commitment to the rule of law than often thought. Moreover, this experience offers hope for other African nations struggling with democracy.”

Nigeria is a tragedy. Not so much because of the bad events which have occurred, which are many, but for its many lost opportunities and great unused potential. The future of Nigeria now rests in Muhammad Buhari’s hands.

Venezuela Reaches the Final Stage of Socialism: No Toilet Paper

In 1990 I went to a Cato Institute conference in what was then still the Soviet Union. We were told to bring our own toilet paper, which was in fact useful advice. Now, after only 16 years of Chavista rule, Venezuela has demonstrated that “Socialism of the 21st Century” is pretty much like socialism in the 20th century. Fusion reports:

Venezuela’s product shortages have become so severe that some hotels in that country are asking guests to bring their own toilet paper and soap, a local tourism industry spokesman said on Wednesday….

“It’s an extreme situation,” says Xinia Camacho, owner of a 20-room boutique hotel in the foothills of the Sierra Nevada national park. “For over a year we haven’t had toilet paper, soap, any kind of milk, coffee or sugar. So we have to tell our guests to come prepared.”…

Montilla says bigger hotels can circumvent product shortages by buying toilet paper and other basic supplies from black market smugglers who charge up to 6-times the regular price. But smaller, family-run hotels can’t always afford to pay such steep prices, which means that sometimes they have to make do without.

Camacho says she refuses to buy toilet paper from the black market on principle.

“In the black market you have to pay 110 bolivares [$0.50] for a roll of toilet paper that usually costs 17 bolivares [$ 0.08] in the supermarket,” Camacho told Fusion. “We don’t want to participate in the corruption of the black market, and I don’t have four hours a day to line up for toilet paper” at a supermarket….

Recently, Venezuelan officials have been stopping people from transporting essential goods across the country in an effort to stem the flow of contraband. So now Camacho’s guests could potentially have their toilet paper confiscated before they even make it to the hotel.

Shortages, queues, black markets, and official theft. And blaming the CIA. Yes, Venezuela has truly achieved socialism.

But what I never understood is this: Why toilet paper? How hard is it to make toilet paper? I can understand a socialist economy having trouble producing decent cars or computers. But toilet paper? And soap? And matches?

Sure, it’s been said that if you tried communism in the Sahara, you’d get a shortage of sand. Still, a shortage of paper seems like a real achievement.

Ukraine: The World’s Second-Highest Inflation

Venezuela has the dubious honor of registering the world’s highest inflation rate. According to my estimate, the annual implied inflation rate in Venezuela is 252%.

The only other country in which this rate is in triple digits is Ukraine, where the inflation rate is 111%. The only encouraging thing to say about Ukraine’s shocking figure is that it’s an improvement over my February 24th estimate of 272%—an estimate that attracted considerable attention because Matt O’Brien of the Washington Post understood my calculations and reported on them in the Post’s “Wonk blog.”

As a bailout has started to take shape in Ukraine, the dreadful inflation picture has “improved.” Since February 24th, the hryvnia has strengthened on the black market from 33.78 per U.S. dollar to 26.1 per U.S. dollar. That’s almost a 30% appreciation (see the accompanying chart). 

If Poor Nations Want Economic Convergence and Capital Accumulation, They Need Good Policy

There’s a “convergence” theory in economics that suggests, over time, that “poor nations should catch up with rich nations.”

But in the real world, that seems to be the exception rather than the rule.

There’s an interesting and informative article at the St. Louis Federal Reserve Bank which explores this theory. It asks why most low-income and middle-income nations are not “converging” with countries from the developed world.

…only a few countries have been able to catch up with the high per capita income levels of the developed world and stay there. By American living standards (as representative of the developed world), most developing countries since 1960 have remained or been “trapped” at a constant low-income level relative to the U.S. This “low- or middle-income trap” phenomenon raises concern about the validity of the neoclassical growth theory, which predicts global economic convergence. Specifically, the Solow growth model suggests that income levels in poor economies will grow relatively faster than developed nations and eventually converge or catch up to these economies through capital accumulation… But, with just a few exceptions, that is not happening.

Here’s a chart showing examples of nations that are – and aren’t – converging with the United States.