Topic: International Economics and Development

Venezuela Arrests Human Rights Activist, Cato University Alum

Last night Venezuela’s Bolivarian Intelligence Service (SEBIN) arrested Rodrigo Diamanti, president of “Un Mundo sin Mordaza” (A World Without Gag), an NGO that promotes human rights and freedom of expression in that country. Diamanti is also a good friend of the Cato Institute and attended the Cato University that we co-hosted in Venezuela in 2009.

No charges have been filed, although reportedly he had an arrest warrant against him. Two weeks ago, while visiting Caracas to run another Cato University and speak at a conference of the pro-liberty think tank Cedice, my colleague Ian Vásquez and I got to talk to Rodrigo and other Venezuelan friends who were part of the student movement that defeated Hugo Chávez in a referendum in 2007. They told us how the government was increasingly harassing NGOs. Sadly, we noticed that many of the guys that attended that Cato University in 2009 have left Venezuela. Those who stayed and continue to fight against the increasingly authoritarian government face the consequences.

Also, early this morning the Bolivarian National Guard violently took over two camps in downtown Caracas where students had been staging a permanent protest against the government. The authorities claim they arrested 243 people. I visited both camps and met several of the students there. One of them, Maria Alejandra, 23, told me she had an arrest warrant against her and woke up every day not knowing whether she would be free –or even alive—by the end of the day. I haven’t been able to contact her today and I’m afraid she’s among those detained during today’s raid.

The crackdown comes at a time that the government is holding phony dialogue meetings with a sector of the opposition. Yesterday a poll by Datanálisis found that 78% of Venezuelans are pessimistic about the situation of the country and 59% thinks that president Nicolás Maduro is doing a bad job. The trend is clear: As the popularity of the regime dwindles, its authoritarianism increases.

Chile: If Ain’t Broken, Don’t Fix It

Nick Miroff of the Washington Post rightly credits Chile’s free-market system for the country’s stability, low unemployment and corruption, and for producing Latin America’s wealthiest society. But he also states that this economic model “has given Chile some of the highest levels of inequality in the developed world.”  Thus, he adopts the narrative of the Chilean left that blames free markets for producing social inequality and argues that the model needs fixing through higher taxation and government intervention in the economy. Four points need clarification:

First, high levels of inequality existed in Chile prior to the implementation of the free market reforms that began in 1975. A recent book by economist Claudio Sapelli of the Catholic University shows that Chile’s Gini index coefficient* was higher in 1970 than what it is today (see graph below). Inequality dropped significantly between 1970 and 1975 as everyone became poorer (the average annual inflation rate in that period was 124.2% and by 1975 over 50% of Chileans lived below the poverty line). Inequality rose again in the second half of the 1970s as the economy recovered and people’s incomes began growing at different paces. As Luis Larraín of Chile’s Libertad y Desarrollo institute points out in a recent book, “It is a well-known fact that fast-paced processes of growth, in the early stages of development, create a worse distribution of income, as the example of China shows today”.

Source: Claudio Sapelli, Chile: ¿Más Equitativo?, Ediciones Universidad Católica de Chile, 2011.

Second, inequality is decreasing in the Andean nation. Income disparity reached a zenith in the late 1980s and has decreased since then. Data from the UN Commission for Latin American and the Caribbean (ECLAC) shows that in 1990 Chile had a Gini index coefficient of 0.55 while in 2011 (latest year available) it was 0.51. In the last two decades of the free-market system, inequality has actually come down somewhat. Interestingly, Chile has less inequality than Brazil, but not many people blame the latter’s income disparities on its bloated big government development model.

Third, inequality in Chile will continue to go down since income distribution significantly improves among the young. Sapelli shows that Chile’s Gini index coefficient goes down with age (see graph below) as more Chileans, especially younger generations, have access to health care and education (which, as Miroff notes, are highly privatized). For example, the percentage of people aged 25-64 who have received high school education in Chile is 68%, lower than the OECD average of 71%. But when he looks at the generation aged 25-34, he notes that the rate goes up to 85%, not only higher than the OECD average of 80%, but also superior to the rates of the Netherlands, Norway and Australia. Today, 1.1 million students are enrolled in higher education (45% coverage) compared to just 200,000 in 1990. Over 70% of these students are the first generation in their families to receive higher education.

Source: Sapelli, 2011.

Fourth, some of the policies announced by the newly inaugurated president Michelle Bachelet, supposedly aimed at rescuing Chilean capitalism “from its excesses” (as Miroff puts it), would actually benefit the richest segments of society. A study by the Libertad y Desarrollo institute found that if higher education were “free” in Chile (and by “free” read “paid by taxpayers”), 41% of the resources would go to finance the education of the richest 20%, and only 9% would go to the poorest 20%. As Miami Herald columnist Andrés Oppenheimer has repeatedly documented, “free” higher education in Latin America disproportionately benefits the well-off (and adversely affects the quality of the education).

The reasons behind Chile’s left-turn have been explained elsewhere. But for the sake of Latin America’s most prominent success story, and the example it provides to the rest of the region, it’s important to tackle the myth propagated by the left that Chile’s free-market system is something that needs a radical fix through higher taxes and government intervention.


*In the Gini Index, zero implies perfect equality, while one represents perfect inequality.

The Growing Threat of a Wealth Tax

Allister Heath, the superb economic writer from London, recently warned that governments are undermining incentives to save.

And not just because of high tax rates and double taxation of savings. Allister says people are worried about outright confiscation resulting from possible wealth taxation.

It is clear that individuals, when at all possible, need to accumulate more financial assets. …Tragically, it won’t happen. A lack of trust in the system is one important explanation. People simply don’t believe the government – and politicians of all parties – when it comes to long-terms savings and pensions. They worry, with good reason, that the rules will keep changing; they are afraid that savers are an easy target and that they will eventually be hit by a wealth tax.

Are savers being paranoid? Is Allister being paranoid?

Well, even paranoid people have enemies, and this already has happened in countries such as Poland and Argentina. Moreover, it appears that plenty of politicians and bureaucrats elsewhere want this type of punitive levy.

Here are some passages from a Reuters report.

Germany’s Bundesbank said on Monday that countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help.

Since data from the IMF, OECD, and BIS show that almost every industrialized nation will face a fiscal crisis in the next decade or two, people with assets understandably are concerned that their necks will be on the chopping block when politicians are scavenging for more cash to prop up failed welfare states.

Though to be fair, the Bundesbank may simply be sending a signal that German taxpayers don’t want to pick up the tab for fiscal excess in nations such as France and Greece. And it also acknowledged such a tax would harm growth.

“(A capital levy) corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required,” the Bundesbank said in its monthly report. …the Bundesbank said it would not support an implementation of a recurrent wealth tax, saying it would harm growth.

Other German economists, however, openly advocate for wealth taxes on German taxpayers.

…governments should consider imposing one-off capital levies on the rich… In Germany, for example, two thirds of the national wealth belongs to the richest 10% of the adult population. …a one-time capital levy of 10% on personal net wealth exceeding 250,000 euros per taxpayer (€500,000 for couples) could raise revenue of just over 9% of GDP. …In the other Eurozone crisis countries, it would presumably be possible to generate considerable amounts of money in the same way.

The pro-tax crowd at the International Monetary Fund has a similarly favorable perspective, relying on absurdly unrealistic conditions to argue that a wealth tax wouldn’t hurt growth. Here’s some of what the IMF asserted in its Fiscal Monitor last October.

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).

Panama Dodges a Bullet

Panamanians voted on Sunday against the efforts of their president, Ricardo Martinelli, to stay in power even though he was constitutionally barred from seeking reelection. It’s not an overstatement to say that in doing so, Panama overcame the greatest challenge in it’s 25 year-old democracy.

For several years Martinelli looked for a way to get rid of the constitutional ban on reelection. He couldn’t do it through a constitutional amendment since the vote of two separate legislatures is required to change the Constitution. And given that polls consistently showed that public opinion was firmly against the idea of introducing consecutive presidential reelection, a referendum was also out of the question. Thus, Martinelli tried to pack the Supreme Court with three new justices. The idea was that a friendly Supreme Court would rule that the ban on reelection was unconstitutional (as occurred in the case of Daniel Ortega in Nicaragua). However, Panamanians took to the streets and Martinelli backtracked. Then he opted for a less overt strategy: supporting a successor and appointing his wife as his vice-presidential candidate. As Mary O’Grady of the Wall Street Journal pointed out, Martinelli moved his queen to stay in power.

Despite a legal prohibition to do so, Martinelli actively campaigned for his candidate José Domingo Arias and his wife, while viciously attacking their rivals. His government spent millions of dollars in publicity and the president toured the country giving away goodies such as digital TV boxes and inaugurating infrastructure projects (he ordered that the new metro in Panama City not charge a fee until after the election). It is ironic that while Panama has been the most outspoken critic of Venezuela in Latin America, Martinelli’s government engaged in similar electoral tactics as those of Chavismo.

Fortunately, it didn’t work. Juan Carlos Varela, who is Martinelli’s vice-president turned bitter rival, handily defeated Arias by 39.1% versus 31.7%. Panama City’s former mayor, Juan Carlos Navarro, came in third with 27.9%. Even though Martinelli accepted his candidate’s defeat, he didn’t call Varela on Sunday to congratulate him, claiming he had lost his phone number. That doesn’t bode well for a smooth transition. Martinelli is well-known for holding bitter grudges. After splitting with Varela, the National Assembly he controls voted to increase taxes on liquor sales to fund a subsidy for elderly people. As it happens, Varela’s family owns a rum-distillery.

Balcerowicz’s Polish Big Bang versus Ukraine

On May 21, 2014, Leszek Balcerowicz will receive the 2014 Milton Friedman Prize for Advancing Liberty during a dinner at the Waldorf-Astoria Hotel in New York. The prestigious annual award by the Cato Institute carries with it a well-deserved check for $250,000.

For those who might have forgotten the accomplishments of my long-time friend, allow me to suggest that, in Balcerowicz’s case, a picture is literally worth a thousand words.

But, before the picture, a little background.

In 1989, Balcerowicz became Poland’s Deputy Prime Minister and Finance Minister in Eastern Europe’s first non-communist government since World War II. Balcerowicz held these positions from 1989 through 1991, and again from 1997 through 2000. Subsequently, in 2001, he became the Chairman of the National Bank of Poland, a post he held until January 2007.

A student of the “Five P’s”: prior preparation prevents poor performance; Balcerowicz was ready when he first took office in 1989. Indeed, he pulled his comprehensive economic game plan to liberalize and transform the Polish economy out of his desk drawer and proceeded to implement what became known as the “Big Bang”. As they say, the rest is history.

The results of the “Big Bang” speak for themselves in the accompanying chart. Poland’s economy has more than doubled since the fall of the Soviet Union in 1992, growing at an average annual rate of 4.42%.

What about neighboring Ukraine? The contrast with Balcerowicz’s Poland couldn’t be starker. As Oleh Havrylyshyn, the former deputy finance minister of Ukraine, spells out in his classic book – Divergent Paths in Post-Communist Transformation: Capitalism for All or Capitalism for the Few – Ukraine rejected the Big Bang, free-market approach to reform. In consequence, it has taken a road to nowhere, remaining in the shadow of a corrupt communist system.

Unlike Poland’s prosperity, Ukraine has witnessed a post-Soviet contraction in its economy. Yes, the Ukrainian economy has been contracting at a real annual rate of almost 1% since the fall of the Soviet Union. Accordingly, it is smaller today in real terms than it was in 1992.

Many think the International Monetary Fund, which just ponied up $17 billion for Ukraine, will turn things around. Don’t hold your breath. Over the years, the IMF has dispensed its medicine and money in Ukraine with negative results.

When it comes to much-needed liberal economic reforms, one has to do something big; something that captures the public’s imagination and garners wide support. Unfortunately, Ukraine lacks a clear economic game plan – one with wide popular support.

Why We Need Guns

There are plenty of reasons to support the Second Amendment’s guarantee of our right to bear arms, but an expectation of being the victim of society-collapsing chemical warfare shouldn’t be one of them. Wayne LaPierre, CEO and executive vice president of the National Rifle Association, recently said at the organization’s annual meeting:

“We know, in the world that surrounds us, there are terrorists, home invaders, drug cartels, carjackers, “knock-out game”-ers, rapers [sic], haters, campus killers, airport killers, shopping mall killers, and killers who scheme to destroy our country with massive storms of violence against our power grids or vicious waves of chemicals or disease that could collapse the society that sustains us all.”

People tend to overestimate their vulnerability because politicians, reporters, and interested individuals like LaPierre stand to gain from such misperceptions. My colleague John Mueller reported that as recently as late 2011, 75 percent of Americans polled believe that another terrorist attack causing large numbers of American lives to be lost in the near future is somewhat or very likely. The reality is much tamer: outside of war zones, Islamist terrorism claims about 200 to 400 lives each year worldwide. And the United States is less violent now than it has been in years. In the short 35 years between 1973 and 2008, murder dropped by over 40 percent. Rape dropped by 80 percent over the same period.

The mismatch between perceived vulnerability to violence and reality is one of several public misconceptions that the website HumanProgress.org hopes to amend. This is not to say that the right to self defense is superfluous—quite to the contrary, it is fundamental and firearm ownership is an important component of securing that right. That alone is justification for the right to defensive weapons. But there is no need to exaggerate dangers such as probable and imminent threats from terrorists and psychopaths.

Taiwan Is the Success Story, not China

Which nation is richer, Belarus or Luxembourg?

If you look at total economic output, you might be tempted to say Belarus. The GDP of Belarus, after all, is almost $72 billion while Luxembourg’s GDP is less than $60 billion.

But that would be a preposterous answer since there are about 9.5 million people in Belarus compared to only about 540,000 folks in Luxembourg.

It should be obvious that what matters is per-capita GDP, and the residents of Luxembourg unambiguously enjoy far higher living standards than their cousins in Belarus.

This seems like an elementary point, but it has to be made because there have been a bunch of misleading stories about China “overtaking” the United States in economic output. Look, for instance, at these excerpts from a Bloomberg report.

China is poised to overtake the U.S. as the world’s biggest economy earlier than expected, possibly as soon as this year… The latest tally adds to the debate on how the world’s top two economic powers are progressing. Projecting growth rates from 2011 onwards suggests China’s size when measured in PPP may surpass the U.S. in 2014.

There are methodological issues with PPP data, some of which are acknowledged in the story, and there’s also the challenge of whether Chinese numbers can be trusted.

But let’s assume these are the right numbers. My response is “so what?”

I’ve previously written that the Chinese tiger is more akin to a paper tiger. But Mark Perry of the American Enterprise Institute put together a chart that is far more compelling than what I wrote. He looks at the per-capita numbers and shows that China is still way behind the United States.

To be blunt, Americans shouldn’t worry about the myth of Chinese economic supremacy.

But that’s not the main point of today’s column.

Instead, I want to call attention to Taiwan. That jurisdiction doesn’t get as much attention as Hong Kong and Singapore, but it’s one of the world’s success stories.

And if you compare Taiwan to China, as I’ve done in this chart, there’s no question which jurisdiction deserves praise.