Who gains from anti-imperialism and opposition to foreign investment?
21 May 2014 Leave a comment
in applied price theory, David Friedman, development economics, Public Choice Tags: bootleggers and baptists, expressive voting, foreign investment, imperialism, marxist fallacies
Much more commonly, [economic imperialism] is used by Marxists to describe–and attack–foreign investment in “developing” (i.e., poor) nations.
The implication of the term is that such investment is only a subtler equivalent of military imperialism–a way by which capitalists in rich and powerful countries control and exploit the inhabitants of poor and weak countries.
There is one interesting feature of such “economic imperialism” that seems to have escaped the notice of most of those who use the term.
Developing countries are generally labour rich and capital poor; developed countries are, relatively, capital rich and labour poor. One result is that in developing countries, the return on labour is low and the return on capital is high–wages are low and profits high. That is why they are attractive to foreign investors.
To the extent that foreign investment occurs, it raises the amount of capital in the country, driving wages up and profits down.
The effect is exactly analogous to the effect of free migration. If people move from labour-rich countries to labour-poor ones, they drive wages down and rents and profits up in the countries they go to, while having the opposite effect in the countries they come from.
If capital moves from capital-rich countries to capital-poor ones, it drives profits down and wages up in the countries it goes to and has the opposite effect in the countries it comes from.
The people who attack “economic imperialism” generally regard themselves as champions of the poor and oppressed.
To the extent that they succeed in preventing foreign investment in poor countries, they are benefiting the capitalists of those countries by holding up profits and injuring the workers by holding down wages.
It would be interesting to know how much of the clamour against foreign investment in such countries is due to Marxist ideologues who do not understand this and how much is financed by local capitalists who do.
David D. Friedman
Opposition to immigration might protect the wages of local workers. Opposition to foreign investment might increase the profits of local capitalists.
How does more competition help the local capitalists? The foreign investment is in response to the high returns in the local market and that inflow of foreign capital will continue until local rates of return match those in other countries.
Equalisation of risk-adjusted rate of returns is central to the operation of capital markets.
Stopping this process of equalisation through regulation only benefits the capitalists inside the country. It reduces the wages of workers because they have less capital and fewer modern technologies to work with.
26 Years of Growth: Shanghai Then and Now – In Focus – The Atlantic
18 May 2014 Leave a comment
in development economics Tags: China
Gary Becker on crony capitalism in Latin America
13 May 2014 Leave a comment
in development economics, Gary Becker, politics, Public Choice Tags: crony capitalism, Latin America
One legitimate reason for the opposition to capitalism in Latin America is that it frequently has been "crony capitalism" as opposed to the competitive capitalism that produces desirable social outcomes.
Crony capitalism is a system where companies with close connections to the government gain economic power not by competing better, but by using the government to get favoured and protected positions.
These favours include monopolies over telecommunications, exclusive licenses to import different goods, and other sizeable economic advantages. Some cronyism is found in all countries, but Mexico and other Latin countries have often taken the influence of political connections to extremes.
…The excesses of cronyism have provided ammunition to parties of the left that are openly hostile to capitalism and neo-liberal policies. Yet when these parties come to power they usually do not reduce the importance of political influence but shift power to groups that support them.
…Leftist ideologies take advantage of the discontent this causes among intellectuals and the poor, and promise a redistribution of assets and better education opportunities for the poor.
Promises of redistribution have figured prominently in the speeches of Chavez, Lula, Morales, Peronists in Argentina, and Andres Manuel Lopez Obrador, former mayor of Mexico City and a leading candidate to be Mexico’s next president.
When it is discovered that left wing governments usually do not end up helping the poor very much, they tend to be voted out of office.
… The overall trend during the past several decades in practically all countries of this region has been toward more open economies with greater competition within industries, with much more reliance on private enterprise, and with a reduced role for government mandates, government-run enterprises, and cronyism.
Since these policies have provided greater benefits to all classes than the socialist policies of a Fidel Castro or a Hugo Chavez, the vast majority of people that live under such leaders will be, or in Cuba have been, disappointed by the unfulfilled promises. They are likely to come back to parties that support more market policies as long as free elections are preserved.
Gary Becker 2006
Why Does 1% of History Have 99% of the Wealth? | Learn Liberty – YouTube
04 May 2014 Leave a comment
in constitutional political economy, development economics, entrepreneurship, liberalism, market efficiency, technological progress Tags: Deirdre McCloskey, industrial revolution, Rise of the Western World, rule of law, The Bourgeois Virtues, The Great Fact
Throughout the history of the world, the average person on earth has been extremely poor: subsisting on the modern equivalent of $3 per day.
This was true until 1800, at which point average wages—and standards of living—began to rise dramatically.
Prof. Deirdre McCloskey explains how this tremendous increase in wealth came about.
In the past 30 years alone, the number of people in the world living on less than $3 per day has been halved.
The cause of the economic growth we have witnessed in the past 200 years may surprise you.
It’s not exploitation, or investment. Innovation—new ideas, new inventions, materials, machinery, organizational structures—has fueled this economic boom.
Prof. McCloskey explains how changes in Holland and England in the 1600s and 1700s opened the door for innovation to take off—starting the growth that continues to benefit us today.
via Why Does 1% of History Have 99% of the Wealth? | Learn Liberty – YouTube.
India, Pakistan, and Growth – Part I | House of Debt
01 May 2014 Leave a comment
in development economics, growth miracles Tags: India, Pakistan
The graph below plots real exports per capita for India and Pakistan starting in 1980. We index the two lines to 100 in 1992 for ease of comparison.
Up until 1992, both India and Pakistan were on a similar trajectory with low growth in their exports per capita.
However, the trajectories diverge strongly in 1992 with India’s export growth taking off while Pakistan continued to trudge along at mediocre pace…
Within a span of just two decades, Indian exports per capita have grown to be almost six times those of Pakistan.
9 Wonderful French Expressions That Have No Good English Equivalent | Business Insider
29 Apr 2014 Leave a comment
in development economics, entrepreneurship Tags: language differences
Saloperie
The act of a jack-arse.
Mise en abyme
This is the word for when you’re standing between two mirrors and you see an infinite regression of yourself. It’s also commonly used to describe self-referential works in a novel or play.
Trouvaille
Something awesome that was discovered by chance or stumbled upon.
Décomplexé
Pure, sure of oneself, lacking neurotic hangups or socio-cultural pressures.
Droit a l’oubli
“Right to oblivion.” There are now guidelines, signed in 2010, applying to search engines that automatically cache pages on social media — basically, they’re not really allowed to. “We don’t hate what the Internet stands for — there’s a lot of material online that should be kept. But in certain cases, we’d prefer to have the ability to erase them,” Nathalie Kosciusko-Morizet, who put together the guidelines (and who just lost hte race for mayor in Paris), said upon signing the guidelines.
Diaboliser
To impugn with bad intentions — to suggest that someone or something is inherently bad. Often used in discussing politics.
Dépayser
To feel displaced from one’s native land or familiar routine.
Déontologie
An informal but widely set of rules for a profession. Also a philosophical concept denoting a set of actions taken out of duty, rather than consequence.
Laïcité
France’s aggressive form of separation between church and state. The country would never allow a voting booth to be placed in a church, for instance, even if it would be the most expedient means of holding an election in a small town.
via 9 Wonderful French Expressions That Have No Good English Equivalent | Business Insider.
Robert Lucas on Ideas and Growth – Brazil, December 2013
28 Apr 2014 Leave a comment
in development economics, growth miracles Tags: Robert E. Lucas
Policy Consistency and the Growth of Nations Finn Kydland
20 Apr 2014 Leave a comment
in development economics, global financial crisis (GFC), growth miracles, macroeconomics
John Cowperthwaite, Hong Kong and the dangers of collecting statistics
15 Apr 2014 Leave a comment
in development economics, growth miracles, Milton Friedman, Murray Rothbard Tags: action bias, Hong Kong, illusion of competence, John Cowperthwaite, Milton Friedman
The Colonial Office sent John Cowperthwaite to Hong Kong in 1945 to serve eventually as its financial secretary from 1961.
This Scotsman was very much a disciple of Adam Smith. In his first budget speech, in 1961, he said:
In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government, and certainly the harm is likely to be counteracted faster.
In his decade as financial secretary, real wages rose by 50 % and the share of the population in acute poverty fell from 50% to 15%. Milton Friedman met Cowperthwaite in 1963 and asked about the lack of economic statistics. Cowperthwaite answered:
“If I let them compute those statistics, they’ll want to use them for planning.” Friedman thought “How wise”.
Murray Rothbard got into a debate with George Stigler in the early 1960s about the dangers of collecting statistics. Rothbard argued that:
The individual consumer, in his daily rounds, has little need of statistics; through advertising, through the information of friends, and through his own experience, he finds out what is going on in the markets around him. The same is true of the business firm.
The businessman must also size up his particular market, determine the prices he has to pay for what he buys and charge for what he sells, engage in cost accounting to estimate his costs, and so on.
But none of this activity is really dependent upon the omnium gatherum of statistical facts about the economy ingested by the federal government. The businessman, like the consumer, knows and learns about his particular market through his daily experience.
… Statistics are the eyes and ears of the bureaucrat, the politician, the socialistic reformer. Only by statistics can they know, or at least have any idea about, what is going on in the economy.
… Cut off those eyes and ears, destroy those crucial guidelines to knowledge, and the whole threat of government intervention is almost completely eliminated
Cowperthwaite refused to collect economic statistics
for fear that I might be forced to do something about them
This action bias is a common bias of bureaucracies. Peter Lilley in the UK said:
…when there is a problem – a perceived political problem – officials come up with a range of options which excludes one option. I observed this when I was a humble PPS at the Department of Environment and suggested that we always ought to include this option on the list and it became known as “Lilley’s option” and that was do nothing.
Other psychological biases of bureaucracies are motivated reasoning, the focusing illusion, the affect heuristic and the illusion of competence. When Friedman asked him in 1963 to explain the mechanism which kept the Hong Kong dollar pegged to the pound, Cowperthwaite said that the Hong Kong & Shanghai Bank (through which the currency peg was operated) did not understand it:
Better they shouldn’t. They would mess it up.
His 2008 Guardian obituary noted that when asked what was the key thing that poor countries should do, Cowperthwaite once remarked:
They should abolish the office of national statistics.
The ideal faceless bureaucrat, Cowperthwaite said of his record:
I did very little. All I did was to try to prevent some of the things that might undo it.
.
What Have We Learned from the Collapse of Communism? by Peter Boettke
13 Apr 2014 Leave a comment
in Austrian economics, constitutional political economy, development economics, entrepreneurship, law and economics, liberalism, Public Choice Tags: collapse of communism
the collapse of Communism has taught political economists several things:
first, that economic policy is always nested within a set of institutions—that there are economic/financial, political/legal, and social/cultural issues, which all must be taken into account;
second, that leadership matters throughout the transition process;
and third, that historical contingency can either work in your favour or cut against the successful transition.
And I would add a fourth one: that political power corrupts even the most informed and idealistic of individuals, such that you cannot count on ideological alignment to win the day. You have instead a small window of opportunity in which ideological alignment can be utilized to establish institutions that make it difficult for even bad men to do much harm.
In other words, the goal of our political/legal institutions should not be to ensure that the best and the brightest can govern, but instead that if the worst get in power, they can do little damage. This is the idea of a “robust political economy”.
Hayek’s spotty record as a prophet in the Road to Serfdom – part 2: what about the post-colonial Third World?
13 Apr 2014 Leave a comment
in constitutional political economy, development economics, economics, F.A. Hayek, politics, Public Choice Tags: Daron Acemoglu, Hayek, Road to Serfdom
Gordon Tullock used Sweden to argue that the problem with The Road to Serfdom was:
“that it offered predictions which turned out to be false. The steady advance of government in places such as Sweden did not lead to any loss of non-economic freedoms.”
But was socialism good for democratic consolidations in the post-colonial third world? Was that not a better hunting ground for Hayek’s fears?
The people and parties, very often with a socialist hew, who won the election after the colonial government left town are not always all that keen to give up the reins of power.
Remember Huntington’s Two Turnover Test: when a nation moves from an emergent to a stable democracy, it must undergo two democratic and peaceful turnovers of ruling parties.
After an emerging democracy’s first turnover, the new administration often reverts to authoritarian rule. Russia under Yeltsin and Putin are examples.
Would Singapore be an example of central planning and state ownership leading to serfdom and a one-party state?
The state controls and owns firms that comprise at least 60% of the GDP through government entities. The vast majority (more than 80%) of Singaporeans live in public housing;
Although initially styling itself an anti-Communist and Social Democratic, the People Action Party (PAP) was expelled from the Socialist International in 1976 because it suppressed dissent and jailed opposition leaders. Hayek would be vindicated?!
The Index of Economic Freedom says that Singapore is a nominally democratic state ruled by the PAP since the country became independent in 1965, and that certain rights, such as freedom of assembly and freedom of speech, remain restricted
The Freedom House 2010 country report notes that Singapore is not an electoral democracy despite elections free of irregularities and mentions that all domestic newspapers, radio stations, and television channels are owned by government-linked companies, which limits free speech. The PAP has used the Government’s extensive powers to place formidable obstacles in the path of political opponents.
Daron Acemoglu has written on the role of institutions on post-colonial development in his why nations fail research agenda.
- In Africa, Central America, the Caribbean and South Asia, European powers set up extractive states. These institutions did not introduce much protection for private property nor did they provide checks and balances against government expropriation. The explicit goal of the Europeans, in one form or another, was the extraction of resources from these colonies.
- This colonization strategy contrasts with the institutions that the Europeans set up in colonies in which they settled in large numbers, e.g., the United States, Canada, Australia and New Zealand. In these colonies, life was modelled after that in the home country; the emphasis was on the enforcement of property rights for a broad cross-section of society, especially smallholders, merchants and entrepreneurs.
The same British colonists established different institutions in very different parts of the world:
- If Europeans settled in a colony, institutions were developed for their own future benefits.
- If Europeans did not settle in a colony, they set up a highly centralized state apparatus and other similar institutions to oppress the native population and to facilitate the extraction of resources in the short run
Acemoglu has written on Singapore as a stable non-democracy that can persist without significant repression.
Singapore was able through industrialization in the post-colonial period to ease social tensions and thus eliminate the need for democratic consolidation and also the need for repression. China’s ruling elite has the same current goal.
Why has Singapore not democratized? Acemoglu suggests is it is because Singapore is a very equal society. There is no traditional wealthy landed elite and the economy relies on external capital and businesses.
Most people appear to be relatively happy with the status-quo, at least not so unhappy that they want to engage in serious, and potentially costly, collective action to induce a major change in political institutions.
All and all, political economy has come on in leaps and bounds since 1944. Hayek should be judged against the other predictions of his times. Few socialist countries in the post-colonial Third World stayed democratic for long.
The Rhino’s Horn and exactly why Australia was colonised-updated
12 Apr 2014 Leave a comment
in development economics, law and economics, property rights Tags: Australia, colonisation, property rights, rhino
Doug Allen in The Rhino’s Horn explains why owners sometimes reduce the value of certain attributes of their property because this reduces the incentives for others to steal it. These attributes may be of little value to you but of much greater value to those seeking to steal it.
The rhino’s horn is cut off to stop poaching. The horn is a mass of hair so removing it is painless. This is much cheaper than hiring bodyguards for every Rhino.
My garage door was tagged last year. I do not have this small tag cleaned-off because it would just invite another tagger to have a go.
Allen argued that it is cheaper to reduce the value of that part of the asset that others want to steal than spend a fortune defending it against potential theft. With regard to Australia, he said:
The country had, ironically, been discovered and claimed first by the Dutch, who at the time were a significant force in the region.
Starting in 1772, the French began their first claim to the territory. Although ignored by the British, the French sent expeditions in 1785 and 1792, making significant explorations of southern Australia and Tasmania. The French did not cease these efforts until the 1820s.
Australia was first colonised in 1788 as a penal colony. Very expensive to do, but it did fill-up the only valuable part – Sydney harbour – with 60,000 mainly riffraff and low life. This penal colony for a number of decades made the only valuable part of Australia more unattractive to other European powers to conquer. Allen explains:
In the case of Australia, the hypothesis might appear silly.
How much reduction in the first-best value to a continent can come from 60,000 convicts?
However, one must keep in mind that the only value of Australia at the end of the eighteenth century was from Sydney Harbour, Norfolk Island, and a few other strategic locations.
On these margins, the convicts could lower the value considerably
… After the War of 1812 Britain realized the strategic significance of Bermuda and subsequently established a penal colony there.
A prosperous colony is an attractive colony to conquer so imperial army and navy resources would have deployed to defending it. Prosperous locals and locally recruited troops can switch loyalties.
An empire full of prosperous colonies makes you an attractive target for other European powers to gang up on and divide the spoils. This may explain why some colonial powers had mixed feelings about developing their colonies. Robert Lucas observed that:
Stagnation at income levels slightly above subsistence is the state of traditional agricultural societies anywhere and any time. But neither did the modern imperialisms—the British included—alter or improve incomes for more than small elites and some European settlers and administrators.
France lost its once vast North American colonies through wars. Many colonies changed hands after the countless European wars as part of peace settlements.
Milton Friedman on the power of greed
06 Apr 2014 Leave a comment
So that the record of history is absolutely crystal clear. That there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.
Utopia, you are standing in it! 
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