Topic: Trade and Immigration

NPR and El Salvador: Setting the Record Straight

NPR had a story this morning on “social inequalities and growing discontent in El Salvador.” Relying exclusively on anecdotal evidence, the story was full of mischaracterizations about the economic and social reality of that country.

Let’s see: Regarding the upcoming presidential election this Sunday, NPR says,

…whichever candidate wins, he faces a faltering economy, entrenched poverty, rampant crime and a population that’s still recovering from a civil war.

Granted, rampant crime is a major problem—unfortunately El Salvador is the most violent country in the world—but a faltering economy? NPR didn’t provide any evidence aside from anecdotes.

Actually, El Salvador has made enormous progress thanks to an aggressive agenda of market reforms. Once you account for revised population data due to a new census, El Salvador’s per capita GDP has grown by 3.3 percent since 1992—the third highest rate in Latin America during this period, after the Dominican Republic (3.8) and Chile (3.6). And as I point out in my new paper on El Salvador, there is ample evidence that official figures significantly underestimate the performance of the economy, mostly because the service sector—an area in which El Salvador leads the region—is grossly undervalued in the country’s estimation of GDP. The economy is probably more than 30 percent larger than indicated by the official data. Thus the average per capita growth rate since 1992 has been approximately 5.2 percent per year.

Entrenched poverty? Since the end of the civil war in 1992, the number of households below the poverty line has diminished by more than 25 percentage points. Extreme poverty has also declined by almost 18 percentage points. During the first decade of the market reforms, net enrollment in primary education increased by close to 10 percentage points, infant mortality declined by 40 percent, and the population without access to safe water was halved. Yes, almost 35 percent of Salvadoran households still live in poverty, but by any indicator, poverty is in retreat.

One of the most telling facts about how tough life is in El Salvador right now is that a quarter of its population chooses not to live here. An estimated 2 million Salvadorans out of a population of less than 7 million live and work in the United States.

It is true that approximately 2 million live outside, but the bulk of Salvadorans who immigrated to the U.S. left during the period of civil conflict. Immigration has certainly continued, but presenting it in its entirety as a sign of economic hardship, as NPR correspondent Jason Beaubien does, is misleading.

El Salvador has moved aggressively under the conservative Nationalist Republican Alliance, or ARENA party, to align its economy with the U.S. In 2001, it adopted the U.S. dollar as its sole currency, and in 2006, it ratified a free-trade deal with the United States. The trade agreement led to a modest boost in exports, but in the market, shoppers and shopkeepers say it hasn’t helped them.

How does adopting free market reforms constitute an effort to “align” the economy to the U.S.? By liberalizing their economy, Salvadorans authorities are protecting the cash value of pensions and salaries, lowering interest rates, have incentivized savings,  and provided modern and affordable public services, etc. Their goal was to make the Salvadoran economy more dynamic and competitive, not to “align” it to the U.S.

Also, the increase in exports since CAFTA was implemented three years ago has been anything but “modest.” Exports were 34 percent higher last year than in 2005, the year before CAFTA went into effect. From 1991 to 2007 El Salvador had the highest export growth rate in all Latin America.

This is not to say that there aren’t serious challenges facing El Salvador. As I said earlier, crime is the most serious of all, and the main source of popular discontent in the country. The country is feeling the consequences of the global economic downturn, as are most developing countries. But the way that NPR presents life in El Salvador demands a serious reality check.

You Don’t Say

President Obama recently indicated that he would cut the fiscally irresponsible (yet minimally market distorting) direct payments that flow to farmers regardless of their production. An outcry from farming groups has, predictably, ensued.

Just as predictably: “A source in the administration says the proposal is being reconsidered because of the opposition it has received.

House Bans ‘Driving While Mexican’

Buried in the $410 billion catch-all appropriations bill now before the U.S. Senate is a provision that would end a program that has allowed Mexican truck drivers to deliver goods to destinations inside the United States.

A provision in the original North American Free Trade Agreement of 1994 was supposed to allow U.S. and Mexican trucking companies to deliver goods in each other’s country. But opposition from the Teamsters union and old-fashioned prejudice against Mexicans has derailed implementation of the provision.

Under current restrictions, goods coming into the United States from Mexico by truck must be unloaded inside the “commercial zone” within 20 miles or so of either side of the border and transferred to U.S.-owned trucks for final delivery. U.S. goods going to Mexico face the same inefficient and unnecessary restrictions.

The Bush administration established a pilot program that allows certain Mexican trucking companies that meet U.S. safety and other standards to deliver goods directly to U.S. destinations, while the Mexican government has agreed to allow reciprocal access to its market. But the Democratic Congress and the new Democratic president have vowed to finally kill the program, and the provision inside the appropriations bill will probably deliver the final blow.

As I argued in an article in 2007, the Mexican trucks that have been allowed to operate in the United States under the pilot program have actually had a better safety record than U.S. trucks.

As I noted in the article, and it still applies today: “The real objection they have to Mexican trucks making deliveries to U.S. cities is not that they are unsafe, but that those trucks are driven by Mexicans. In the eyes of congressional leaders, ‘driving while Mexican’ remains an unacceptable public hazard.”

The Washington Times and Debunked Statistics

Yesterday, the Washington Times editorialized in favor of E-Verify, the inchoate government background check system for all American workers, saying, “[T]he system is 99.5 percent accurate, according to DHS, and it permits employers to verify work eligibility in minimal time (10 minutes or less) and at minimal cost ($419 per year for a federal contractor of 10 employees).”

Don’t be so sure. The DHS mantra of 99.5 percent accuracy was debunked long ago. The government doesn’t actually know the status of the 5.3% of workers that the system bounces out, an issue the Christian Science Monitor explored last summer.

I examined the numbers in detail here, also last summer. The 0.5% error rate that DHS acknowledges is the known error rate. Others bounced out of the system DHS assumes to be illegal aliens. This is almost certainly wrong, and the program is denying legal workers the ability to earn a living, as the Christian Science Monitor reported.

But in an op-ed published in the Washington Times last fall, lobbyist Janice Kephart argued the DHS line, as carelessly as one can be with statistics: “[T]he numbers rejected by E-Verify as not authorized to work closely parallels the estimated percentage of illegal aliens in the work force, about 5 percent.” Right, the numbers are close so the program is working. Nevermind that the livelihoods of American citizens and legal workers are in the balance.

Earlier this month, the Times printed Rep. Lamar Smith’s plea for E-Verify, which touted these (well, similar) discredited statistics.

It’s time for the Washington Times to stop shilling for the Department of Homeland Security and the anti-immigrant lobby by printing and reprinting discredited statistics about E-Verify.

The Outsourcing Canard

“We will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas.”

    -President Barack Obama, Speech before Joint Session of Congress, February 24, 2009

To further Chris Edwards’ post earlier today, demonizing multinational corporations has long been a Democratic Party mainstay on the campaign trail. But the campaign is over. And given our colossal budget and debt disasters, it is almost criminal that our political leaders continue to tilt at windmills.

Chris notes that “U.S. corporations are moving investment and profits abroad, but it is because we have the world’s second highest corporate tax rate, not because of special loopholes as the president keeps implying.”

Punitive U.S. tax policy is beyond question a strong incentive for U.S. companies to invest capital and reinvest profits abroad. But there is also the fact that 95 percent of the world’s population lives outside the U.S. border. And those people have a hankering for U.S. products and services.

The main reason U.S. companies make direct investments abroad is to serve foreign demand, plain and simple — although politicians characterize competitive efforts to win foreign market share as “shipping our jobs overseas.” In many industries, it makes more sense to serve foreign demand through production operations in those countries (or in that region) than it does to produce in the United States and then export. Likewise, foreign-owned companies like Honda, Toyota, BASF, Thyssen-Krupp, Michelin, and Anheuser-Busch InBev find that it makes more sense to serve U.S. demand by producing in the United States. (The Organization for International Investment has a lot of useful information about “Insourcing” at its website.)

But there’s no need to reinvent the wheel here. My colleague Dan Griswold recently wrote a concise, fact-filled paper, attempting to interpret President Obama’s campaign pledge (and now presidential pledge) to “stop giving tax breaks to corporations that ship jobs overseas.” Dan’s analysis addresses three distinct questions raised by Obama’s pledge:

  1. Why do U.S. multinational companies establish affiliates abroad and hire foreign workers?
  2. What kind of tax breaks are they receiving?
  3. Should the new Congress and new president change U.S. law to make it more difficult for U.S. multinational corporations to produce goods and services in foreign countries?

You should read Dan’s paper and consider sending a copy of it to the White House. But here are some statistical highlights:

  1. More than 2,500 U.S. corporations own and operate a total of 23,853 affiliates in other countries.
  2. In 2006, U.S. corporations sold $3.3 trillion in goods (and $677 billion in services) through their majority-owned affiliates abroad, which was more than 6-times the value of U.S. exports. About 60 percent more services were sold through foreign affiliates than were exported from the U.S.
  3. U.S. corporations don’t use foreign operations as an “export platform” back to the U.S. (which is the primary gripe of those who oppose U.S. corporate investment abroad):
    • Almost 90 percent of the goods and services produced by U.S.-owned affiliates abroad are sold to customers either in the host country or re-exported to consumers in third countries outside the U.S.
    • More than half of the production of U.S. affiliates in China and Mexico is consumed in those markets, while only 17 percent of that production is sold to customers in the U.S.
    • There is no evidence that expanding employment at U.S.-owned affiliates comes at the expense of overall employment by parent companies back in the U.S.; in fact, there is a positive relationship between employment in the U.S. operations and employment in the foreign affiliates
    • In fact, foreign and domestic operations tend to move in tandem
  4. U.S. corporations don’t get any tax breaks from operating overseas; income on foreign operations that is repatriated is taxed at the much-higher-than-OECD-average U.S. corporate rate.
  5. Thus, “finally ending tax breaks for corporations that ship jobs overseas” can only mean extending the long arm of the U.S. tax code to apply to earnings on foreign operations that are not repatriated.
  6. And that would mean: “less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.”

Senator Lugar: ‘Lift the Embargo and Engage Cuba’

Sen. Richard Lugar (R-IN), the highest ranking Republican in the Foreign Relations Committee, has released a minority staff draft report on U.S. policy towards Cuba. It states that Washington’s sanctions against Havana have failed to bring democracy to the island and it recommends lifting the embargo and engaging Cuba.

The report’s recommendations are very similar to those that Ian Vásquez and I wrote for Cato’s recently published Handbook for Policymakers.

The U.S. Didn’t Cause the World Recession

In the Washington Post, Ricardo Caballero of MIT has a novel and promising idea about “How to Lift a Falling Economy.”  Unfortunately, he echoes the mantra that all the world’s economic problems can be traced to the U.S. in general, and to big U.S. banks in particular.  “Already,” he says, “this illness has spread to the global economy.”

Already?  Industrial production in Japan began collapsing in November 2007, two months ahead of the U.S., and the Japanese industrial decline has been twice as fast.

Unlike the U.S., real GDP began falling in the second quarter of 2008 in Germany, France, Italy, Japan, Singapore and Hong Kong.  By no coincidence, that was when the price of oil rose as high as $145 a barrel.  Soaring oil prices raise the cost of production and distribution for many industries, and reduce real household incomes and therefore consumption.   Nine of the ten postwar U.S. recessions were preceded by a major spike in the price of oil.

In a piece for the Claremont Review of Books (written last November), I conclude , “This recession is not just a U.S. problem, not just about housing, and not just financial.”

Compare the decline in real GDP over the past 4 quarters (from The Economist):

U.S.

-0.2%

France

-1.0

Germany

-1.6

Britain

-1.8

Italy

-2.6

Japan

-4.6

Does it make sense to blame the largest declines in GDP on one country with the smallest decline?  If so, then we need some explanation of how some uniquely American “illness has spread” to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter).  If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP.  But falling exports subtracted 2.84 percentage points from fourth quarter GDP.  Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign  illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.