Wednesday, December 06, 2006

Tax Cut 3: Flat Tax Countries in the World, 2006

Below are countries which have low, flat income tax; parenthesis is year of introduction.
Note the "tax competition" sweeping eastern Europe.

Kyrgyzstan (2006) 10%
Kazakhstan (2007) 10%
Georgia (2005) 12%
Ukraine (2004) 13%
Russia (2001) 13%
Iraq (2004) 15%
Macedonia (2007) 15%; by 2008, 12%; by 2009, 10%
Romania (2005) 16%
Hong Kong (1947) max 16%
Slovakia (2004) 19%

Jersey and Guernsey (1940) 20%
Estonia (1994) 26%
by 2006 23%; by 2007 22%; by 2008 21%; by 2009 20%
Latvia (1994) 25%
Lithuania (1994) 33%
by July 2006 27%; by 2008 24%

source: World Taxpayers Association (WTA,
Thanks to Bjorn Tarras-Wahlberg, the Sec-Gen. of WTA.

If the same type of "tax competition" will happen in Asia, then it will supplement the environment of less-regulated economy, at least compared to Europe, and should result in more dynamic economies.

But many Asian governments also aspire to be like the welfare states of Europe, paying less attention to the fiscal burden of such policy and just think more of the votes they can get during elections.

Thursday, November 16, 2006

Tax Cut 2: Ireland, Turkey

Another good development in the "tax cut" and "tax competition" movement in the world -- N. Ireland planning to slash its corporate income tax from 30% to only 12%! Wow! And it looks like this tax cut can help unite further theProtestants and the Catholic Sinn Fein, which will further improve peace and order situation there.

The tax-hungry finance officers of UK are somehow panicking, naturally. More and more UK-based companies will start moving to N. Ireland and do business there. While N. Ireland's tax rate goes down, it does not necessarily lead to lower revenues as the revenue base -- the numberof companies doing business and paying taxes -- will go up*.

(* Note: Tax Revenue = tax rate x revenue base)

My country's legislators -- egged by Finance and congressionalbureaucrats -- raised corporate income tax, along with VAT hike,effective this year from 32% to 35%. This is 3x that being planned inindustrialized N. Ireland!

As I have posted in the previous blog re "flat tax countries in the world", the extent of tax competition in eastern Europe is really hot, and some economies in Western Europe, like Ireland, are simply adjusting. But EU rules and bureaucracies make their plans a little bit more difficult.

I hope the same tax competition will happen in Asia too!
A lower tax rate but plentier number of business and entrepreneurs doing businesses, expanding the production of various goods and services in the economy, should work well in creating more jobs and slashing poverty.

Below is the news report from the Financial Times:
12% business tax proposed for N Ireland

By John Murray Brown in Dublin
Published: November 13 2006 22:40

Companies in Northern Ireland would be exempt from corporation tax on the first 60 per cent of profits under a private sector plan to be put to the UK government on Wednesday in a bid to stimulate the province's economy.

The paper is published by the Economic Research Institute, a local think tank, and backed by Sir George Quigley, former chairman of Ulster Bank and head of the Northern Ireland civil service. It represents the most detailed case yet made for special tax treatment for the province, which is emerging from three decades of unrest.

Under the proposal, after the zero-rated first 60 per cent of profits, the remainder would incur tax at the prevailing UK rate of 30 percent. This would mean businesses based in the province would have a rate of 12 per cent, in effect, just less than that in the Irish Republic.

The issue has become embroiled in the political negotiations on therestoration of the assembly and power sharing executive. Both theProtestant Democratic Unionists and largely Catholic Sinn Féin arecalling for lower tax rates. Ian Paisley junior, son of the DUP leader Ian Paisley, says that without a tax deal the DUP will not agree to go into government with Sinn Féin by the deadline of the end of next week...

Meanwhile, I posted this last June 23, 2006:

Tax Cut: Turkey

Turkey will abolish (ie, drop to zero) the 15% withholding tax on income and dividends from financial instruments held by foreign investors starting January next year. While the rates applied to Turkish residents would be cut from 15 to 10 per cent.

Government though, will retain the 15 per cent withholding tax on deposits and repos held by domestic investors, while the tax exemption for derivative instruments will stay.
See FT report today, "Turkey to scrap tax for foreign investors" (

Such moves are meant to help reverse the flight of capital from risky emerging markets that started last May.

Turkey is still waiting for EU nod to be admitted as a new member of the currently 25-countries union. EU is known for heavy regulations. Previously liberalizing countries that later on became EU members went back to multiple regulations. Dominant member-countries of the EU like France and Germany do not like low corporate taxes in other member-countries because the former are afraid that they might further lose some of their corporations and move to countries with lower taxes.

So this tax cut move by Turkey might not sound good to the ears of certain EU bureaucrats who want more, more taxes and avoid any competition in tax policies (ie, bringing down taxes as low as possible).

Finally, here are the corporate income taxes for the following Asia-Pacific countries, 2006 (in %):

Japan 40.1 (40.7 in '05)
S. Korea 35
Pakistan 35
Philippines 35 (32 in '05)
India 33.7 (36.6 in '05)
China 33
New Zealand 33
Sri Lanka 32.5
Australia 30
Bangladesh 30
Indonesia 30
Thailand 30
Malaysia 28
Vietnam 28
Taiwan 25
Singapore 20
Hong Kong 17.5

Thursday, November 09, 2006

CSOs and State 2: NGOs and Government Clubs

There are plenty of world forum/meetings by statists and socialist-oriented civil society groups, as well as clubs by governments and international bureaucrats. Among these are:

1. World Social Forum (WSF) – “an annual meeting held by members of the anti-globalization movement to coordinate world campaigns, share and refine organizing strategies”, according to its main website. In the WSF India held in mid-November 2006, it describes it as a forum of “groups and movements of civil society that are opposed to neo- liberalism and to domination of the world by capital and any form of imperialism”. In short, it is the forum of anti-globalization, anti-market, anti-capitalism, anti-free trade, sort of anti-everything NGOs, media people, academics, etc. They mobilize many people in WTO Ministerial meeting, in G8 summit, in annual WB-IMF meeting, in WEF, as well as their own-initiated international meetings.

2. International People’s Forum (IPF) – it “demands for multilateral debt cancellation, transparency and participatory audits of international financial institutions (IFI) lending and policies, and an end to IFI involvement in privatization of public services and environmentally destructive projects”. It was formed in Singapore during the WB-IMF Annual Meeting held in that city-state in September 2006. Many of the IPF members or convenors are also WSF members.

3 World Economic Forum (WEF) – a private international organization that links big businessmen with political leaders around the world, with occasional participation by big NGO leaders. It’s a smaller gathering compared to WSF but more influential economically and politically.

4 WB-IMF Annual Meeting – a gathering of international bureaucrats of these 2 bodies plus finance ministers, central bank governors, other top bureaucrats of member-countries. Selected number of civil society leaders (often among WSF leaders also) are also invited by the WB-IMF guys.

5 G8 Summit – a gathering of the Presidents or Prime Ministers of 8 industrialized countries + big developing countries like China, Brazil, India, etc.

6. Organization for Economic Cooperation and Development (OECD) – a club of governments of 30 industrialized and industrializing countries around the world promoting “democratic government and the market economy”.

7. United Nations (UN) – the mother of all international bureaucracies. Somehow the name “united nations” is a misnomer; a more appropriate term should have been “United Governments”. Though a number of international “public goods” have been addressed by the UN, it has also introduced a number of international “public bads”, like the justification if not promotion of high taxation in many countries to finance more government- and UN-sponsored projects.

While many civil society groups are very critical of multilateral institutions like the WB-IMF, government clubs like the UN, G8, OECD, and private international for a like WEF, those civil society groups actually have more similarities than differences with them. That is, they are mostly statists and forced collectivists. They want the state to have bigger intervention in the citizens’ lives. They want individual’s incomes to be forcibly collectivized, and individual responsibilities be transformed to state and collective responsibilities.

The only difference between those who criticize and those being criticized, is the degree of intervention to be slapped on the citizens; ie, the level of taxation that will be confiscated from the citizens’ pockets, the level of budgetary reallocation, and level of subsidies that will be given to the poor. While the WB-IMF and government clubs can tolerate a certain level of de-governmentization through privatization and economic deregulations, the statist NGOs want socialism-type of income confiscation and welfare distribution.

Free marketers can criticize both groups because they advocate very small income confiscation, small government intervention, and bigger individual freedom and responsibility. Individuals, not just big corporations, comprise markets. Thus, to liberalize markets is to liberalize individuals.

Last March 23, 2006, I wrote this:

The Elites and the Statists

A friend, Atty. Ime Deinla, called my attention to a paper entitled "Voices from the Top of the Pile: Elite Perceptions of Poverty and the Poor in the Philippines", authored by Gerard Clarke and Marites Sison. It was in a pdf formal file, 28 pages long, no date of publication or name of paper where it was published. I skimmed through the pages and read the concluding points, and this part is a disappointment to me. The authors wrote,
The Filipino elite feel a sense of responsibility to the poor, but this responsibility is met through the provision of assistance on a patron-client or philantrophic activity, rather than more substantive commitment to redistributive action led by the state, involving for instance, elaborate social safety nets financed by higher taxes.
Ouch! We don't have enough taxes, we need to create more? And our taxes ain't high enough, we need to hike them more? Socialists, statists and interventionists really like this line. Confiscate more income and savings from the rich, from the elite, from the productive sectors of society, and give them to the poor, the downtrodden, the weak. And an elaborate maze of bureaucracies, multiple-layers of politicians, with rah-rah boys from many NGOs and civil societies as middlemen between the two.

I have said it and I will say it again: poverty is very often self-inflicted.
Recipe #1 to be poor: Just be a lazy bum, don't work hard (if at all), drink and party too often; you'd rather drink and discuss with other guys how hard life is, how govt. and the church and the rich and your relatives abandon you, while a piece of land near your house which could have been planted to vegetables or raising farm animals are full of tall cogons, other grasses and vines.

Recipe #2: Be lazy and have plenty of kids, be irresponsible; anyway, government will confiscate rich people's income and savings to educate and feed your kids.

Recipe #3: Work hard and earn big (like working abroad), but also spend hard and save nothing; when the rainy days come, nothing to dig from the pockets.

There are other natural causes (like your house and car and land were gobbled by a volcanic eruption or a big landslide, or cracked to pieces by a strong earthquake) and other people-caused miseries (like your house burned, your car stolen, your land grabbed, your family members beaten and imprisoned for unjustified reasons) to explain poverty. And my favorite, government and its underdevelopmental roles of high and multiple taxes; costly and multiple requirements, permits, licenses, registrations, inspections, accreditations, before one can even start a carinderia or vulcanizing shop, if you do not want to be labelled as "underground" economy and "tax evader".

I would also add that philantrophy should not be dismissed as if it's an insignificant and near useless act, not to be pooh-poohed as encouraging patron-client mentality. Philantrophy and charity signify 2 important things:

(1) It is a voluntary act by an individual or group of individuals in a voluntary organization (club, association, brotherhood, etc.), not mandated by the constitution or by legislation or by an executive order; and
(2) Its funding is from the individuals' savings, from hard work, not from taxes and forced contribution.

Of course, some guys and organizations or foundations use charity for tax-shield purposes. But that's primarily because taxes are high and a plenty, and it's not the taxpayers who determine where the tax money goes, but the politicians and top government bureaucrats.

Ooppss, these kind of remarks would probably alert the authors, Clarke and Sison, to call Oplas "one of the elites". Wrrooonnggg!! Este, riiiigghhhtttt pala!
I'm E-lectrifyingly L-ovable, I-nsiduous, and T-antalizingly E-lectrifying! That's ELITE! hehehe, joke.

The paper is commendable though for gathering a big number of insightful interviewees, from politicians to businessmen to academics and NGO leaders.

Wednesday, November 08, 2006

ASEAN 1: Asian regional bureaucracies

As mobility of people, goods and services, around the world hastens, so have government bureaucracies expand. Not contented with “national planning”, governments extend to “regional planning” and “global planning”.

In Asia, as many Asian economies grow fast – ie, relative to other countries and regions or continent in the world – Asian governments also create new regional bureaucracies fast. Consider the following bodies in Asia:

1. ASEAN – Association of South East Asian Nations, 10 countries (Indonesia, Singapore, Malaysia, Brunei, Philippines, Thailand, Laos, Cambodia, Vietnam, Myanmar). Presidents and/or Prime Ministers of these countries meet annually.

2. ASEAN Plus Three (APT) – composed of Asean10 + China, S. Korea, Japan. Since the late 90s, there has been no strict or exclusive “Asean summit” because they have always been APT. And more recently, it has become “Asean Plus Six”, composed of APT + India, Australia and New Zealand.

3. APEC – Asia-Pacific Economic Cooperation. This is an expanded Asean + 6, to also include the US, Canada, Russia, Mexico, Chile, Peru, other Pacific countries. They hold summit meeting every 2 years.

4. ASEM – Asia-Europe Meeting; composed of APT + EU 25. They also hold summit meeting every 2 years.

5. CSCAP – Council for Security Cooperation in the Asia Pacific

6. NPCSD – North Pacific Cooperative Security Dialogue

7. NEACD – North East Asia Cooperation Dialogue

Proposed new bodies:

1. AMF – Asian Monetary Fund; this is different from the existing Asian Development Bank (ADB).

2. CNEA – Concert of North East Asia

3. NEASD – North East Asia Security Dialogue

Not included above are the various regional free trade agreements (FTAs) like AFTA (Asean FTA), SAFTA (South Asia FTA), NEAFTA (North East Asia FTA, and so on. Also not included are dozens of bilateral FTAs (existing and proposed), or EPAs (economic partnership agreement) by Japan with selected Asean countries.

Annual or biennial summit meetings of those heads of states and their ministers are never cheap. Taxpayers of host governments spend a lot for those meetings, including preparations and post-meeting monitoring.

The main goal of those various bureaucracies and trade agreements is “more economic and security cooperation” among governments of member-countries. This sounds lofty and holy, except that they are agreements AMONG GOVERNMENTS, and not exactly among the citizens of those countries. People to people voluntary arrangement is still restricted by their own governments. For instance, despite the Japan-Philippines EPA (JPEPA), an average old and aging Japanese household who cannot find younger private Japanese caretakers and nurses, cannot hire a Filipino caretaker or health professional anytime they want because the Japanese government has restricted to only X number the entry of Filipino (and other foreign) health professionals every year.

It has been noted that the single important rule of a bureaucracy, is that once created, it does not die on its own; rather, it seeks to expand and perpetuate itself. After all, the cost of maintaining and expanding it does not come from its own bureaucrats, but from the taxpayers in the private sector.

Saturday, September 16, 2006

EFN Asia 1: From HK to Phuket to KL

Just came from Kuala Lumpur, it was the third Economic Freedom Network (EFN) Asia annual conference that I have attended. The conferences have been held a few years ago but I started attending only in 2004, thanks to Jo Kwong of the Atlas Economic Research Foundation, and the Friedrich Naumann Foundation (FNF).

Here are the past 3 conferences that I have attended.

6th Annual Conference, EFN Asia,
“The Role of Government in Asian Economies”,
September 16-18, Hong Kong
Sponsored by:
Hong Kong Center for Economic Research,
University of Hong Kong (,
Unirule Institute of Economics (, Beijing, and
National Economic Research Institute (NERI), Beijing, (

7th Annual Conference, EFN Asia,
“Securing Economic Growth: Legal Structures and Property Rights in Asia”
October 1-2, Sheraton Grande Laguna Phuket, Phuket, Thailand
Sponsored by FNF and Atlas Economic Research Foundation

The day before that, September 30, also on the same hotel, Atlas and FNF organized a one-day round-table discussion, Colloquium on “The Constitution of Liberty in Asia”

8th Annual Conference, EFN Asia,
“Preferential Trade Agreements: Local Solutions for Global Free Trade?”
September 12-13, Corus Hotel, Kuala Lumpur, Malaysia
Sponsored by Friedrich Naumann Stiftung (FNS), Malaysia Institute of Economic Research (MIER), and Atlas Economic Research Foundation, Virginia, USA

A day before that on the same hotel, Atlas and FNF also held a one-day forum, the "3rd Asian Liberty Forum". I was one of the panel speakers there, my paper was entitled "Obstacles to Free Trade: Thrashing Protectionists’ Logic".

Among the things that prodded me to start blogging in late October 2005, was after I came home from the EFN Asia conference in Phuket.

Thank you Atlas, thank you FNF, thank you Jo Kwong.

Tuesday, September 05, 2006

Free Trade 3: Protectionism PerpetuatesPoverty

An article at, Forget the World Bank, Try Wal-Mart By Michael Strong (22 Aug 2006), has this story:
Between 1990 and 2002 more than 174 million people escaped poverty in China, about 1.2 million per month. With an estimated $23 billion in Chinese exports in 2005 (out of a total of $713 billion in manufacturing exports), Wal-Mart might well be single-handedly responsible for bringing about 38,000 people out of poverty in China each month, about 460,000 per year.
There are estimates that 70 percent of Wal-Mart's products are made in China. One writer vividly suggests that "One way to think of Wal-Mart is as a vast pipeline that gives non-U.S. companies direct access to the American market." Even without considering the $263 billion in consumer savings that Wal-Mart provides for low-income Americans, or the millions lifted out of poverty by Wal-Mart in other developing nations, it is unlikely that there is any single organization on the planet that alleviates poverty so effectively for so many people. Moreover, in sofar as China's rapid manufacturing growth has been associated with a decline in its status as a global arms dealer, Wal-Mart has also done more than its share in contributing to global peace.
How can this be, given the vast and growing literature documenting Wal-Mart's faults? We have seen workers in the factories of Wal-Mart's suppliers complain on tape about being forced to work long hours under terrible conditions. Certainly no one should be forced at any workplace. And yet even articles documenting Wal-Mart's faults often mention other facts that ought to be considered before coming to too quick a judgment concerning the overall impact of the corporation...
This article further proves the beauty of free trade, of search for bargains by consumers around the world. When an average American household for instance, makes some $300 of savings per month from buying cheap commodities from China and other countries, they do not burn their savings. In one year they will make some $3,600 of savings. Some guys may use of that money to travel abroad and enjoy the beaches or mountain resorts, waterfalls, bars, of the tropics. That creates jobs and income in poorer countries, and that helps alleviate poverty there. Some guys will use the money to buy more tropical fruits and veggies, tropical marine and livestock products, which again creates more jobs in poorer countries, which helps alleviate poverty. That is why "bargain-hunting" through free trade is a perfectly rationale behavior of consumers, a behavior which many big governments and protectionist business and labor interests consider as irrational, that is why they restrict trade and their citizens' freedom (whom and where they can buy, how much quantities, etc.). In addition, such big governments are addicted to collecting large amounts of import taxes to help finance their bloated bureaucracies.

Compare this with foreign aid, which is 100% financed by high taxes. High taxes limit the people's purchasing power. Instead of buying 5 kilos per week of mangos or bananas or pineapples from poorer countries, over-taxed citizens of rich countries will buy only 4 kilos, thereby limiting trade. And limiting job creation and incomes in poorer countries, indirectly contributing to perpetuation of poverty.

The key to "fighting poverty" in the world, are (a) drastic tax cuts in all countries, especially in rich countries, to free resources from the bloated bureaucracies (and consultants) of big governments, into the pockets of households and ordinary consumers, and (b) free trade, to allow people around the world the freedom to go "bargain-hunting", which gives them lots of savings. Both moves are de-facto "pay rise" to consumers, which they can use to buy more goods and services, which contributes to more economic growth and more job creation.

What about the "exploited workers" in poorer countries just to satisfy the hunger of "bargain-hunters"? Consider that people are more "exploited" by nature if they are not hired, if they lie idle, unemployed and unproductive, because they will have no or little resources to feed themselves and their family.

A job that pays $2/day but is available is better than the same job that pays $10/day but is not available, that is not existing yet. As skills improve, output expands, and average wages move upwards. That is why in some parts of China, wages are no longer cheap, so some foreign companies put up factories in Vietnam, other emerging economies. The only people who are unhappy with this kind of capital mobility are the over-protected (and pampered) workers and the jobless people in rich countries. Slowly they see jobs slipping out of their hands. Nonetheless, they enjoy the fruits of cheaper labor elsewhere because they can buy cheap goods and services imported from poorer countries.

See also:
Free Trade 1: Estonia's Free Market, Globalization, May 09, 2006
Free Trade 2: Unilateral Trade Liberalization, May 17, 2006

Foreign Aid 6: IMF is Engineerable and Abolishable

A news report last August 29 at the IHT has this story,

U.S. urges the IMF to reflect new order
By Steven R. Weisman The New York Times
Published: August 28, 2006

Washington. The United States is seeking to increase the power of China and other countries within the International Monetary Fund to reflect their growing weight on the world economic stage, an effort that is
being resisted by some European countries whose voices could be weakened within the organization.

The Bush administration, arguing that the IMF has been "asleep" as the world economy changed, is seeking a first step that would grant more voting power immediately to four countries - China, South Korea, Turkey and Mexico - on the grounds that their economic growth entitles them to more influence.

But because the administration's proposal would mean less representation by some countries in Europe, it has run into objections and questions, especially among European countries that could lose power.

Resistance has come from Belgium, the Netherlands and Scandinavian countries, which might lose voting share to Spain, Ireland and other rapidly growing countries in Europe. In general, Europe would lose voting share to Asia and the United States. Poor countries in Africa also fear a loss of power...

Voting at the IMF is determined in part by a quota system that defines how much a country must contribute to the fund and how much it can borrow in emergencies. The United States has 30 percent of the world economy but only 17 percent share of the quotas; Europe's share of 23 percent is roughly equal to its share of the world economy.

The IMF, along with the World Bank, was created in 1944 at BrettonWoods, New Hampshire, as part of a postwar financial structure designed to avoid a repetition of the economic crises of the 1930s that preceded World War II. The fund has $28 billion in loansoutstanding to 74 of its 184 member countries, given out over the years to avert defaults, bankruptcies and other crises. In the early1990s, the fund was involved in bailing out Mexico.

Later in the decade it helped rescue Thailand, South Korea and several other Asian countries from insolvency. But since then the fund has had no major crises to deal with, and many recipients of its previous efforts have paid off their loans. Some economists joke that with little to do, board members have theluxury of squabbling among themselves for power over an organizationwith an ill- defined mission....

I think the IMF is an abolishable institute that has become more of an expensive and intrusive bureaucracy to taxpayers around the world, than any help in terms of macroeconomic stabilization function that it used to do. But since IMF abolition is next to impossible in the minds of national politicians, Finance/Treasury, and Central Bank bureaucrats around the world, "re-engineering" its quota composition is the next best alternative.

Nonetheless, even the bureaucrats in the US Treasury Department still peddle a number of misconceptions about China and other industrializing developing economies. For instance, China's "overvalued" currency (the yuan) as the bane for the US' high trade deficit ($200B from China alone out of its $800+ B total trade deficitin 2005) and growing unemployment.

Come on guys, many US consumers buy China-made products (often by US multinational companies locating there) not so much because the yuan is "cheap", but mainly because of rigid US labor laws, ala-Europe's "expensive to hire, difficult to fire" policies, and paranoid immigration policies. Many potential migrants are willing to offer their cheap labor for US companies in the US mainland, so that said US companies can produce cheap and competitive goods and services, reducing the need to import a lot from China, Korea, Mexico, and soon.

Majority if not all bureaucrats at the IMF, as well as the US TreasuryDepartment and EU Finance Ministries, look like broken records in blaming China's (and India's and Turkey's and Korea's and Mexico's and many other countries') over-valued currencies and other global inflationary pressures (like the spiralling world oil prices) for theUS' and Europe's anemic growth and high unemployment rates. Why can't they look inwards and ask their own consumers, their very own citizens, why these people prefer bargains from abroad at the expense of local jobs and slow domestic growth? Should they blame their owncountrymen and consumers why they prefer to buy cheaper clothes and shoes, cheaper food and drinks, cheaper toys and vehicles, available from industrializing poor countries, or they blame the politicians andFinance/Central Bank bureaucrats of the latter?

As many people hunt for bargains everywhere, from bargain hotels and restaurants to bargain computers and shoes, the high-taxes countries of Europe and north America should expect slower economic growth and high unemployment rate. Because demand for their hotels and restaurants is not big, and demand for computers and shoes made in their countries is not big. High and multiple taxes -- to finance expensive welfare and bureaucracies, including internationalbureaucracies like the IMF, UN and the WB -- are inflationary. They make the prices of many goods and services produced in high taxes economies very expensive, and hence, far from bargains.

A re-engineering of the quota system at the IMF maybe a 2nd best alternative. And even such alternative meets fierce opposition by Finance bureaucrats of a number of European countries. They've gotten use to over-taxing their citizens and over-extending their power in the lives of citizens of poorer economies who borrow from the IMF.

There are not much relevance for the IMF even among fiscally irresponsible governments, like the Philippine government. Every year, the Phil. government makes about $7B foreign loans and another $7-8B domestic loans (in Peso value). About 60-70% ofthose foreign loans are from private bondholders abroad, the rest are mostly from the ADB and JBIC (Japan government's ODA lender), a few others from the WB and other government's foreign aid bodies. The Philippine government's Department of Finance (DOF) and central bank(BSP), even the Office of the President (OP) are more afraid of ratings downgrade by Standard & Poors, or by Fitch, or by another ratings firm, than from any visiting IMF bureaucrats makingmacroeconomic and external account reviews.

Last June 21, 2006, I wrote this,

Why the IMF Should be Abolished

The IMF should ultimately be disbanded and abolished. I only have 2 main reasons for saying so: taxes and growing IMF irrelevance.

1) High cost to taxpayers of many international bureaucracies.
There are already so many government clubs now -- IMF, WB, UN, WTO, OECD, ADB, AfDB, APEC, G-77, EU, ASEAN, MERCUSOR, various other regional and bilateral clubs of governments. Such international and regional clubs cost money to taxpayers, and national and international bureaucrats just spend such tax money, from fat salaries and per diems to endless travels and conferences. Yes, they have various "development" projects, but for many taxpayers, the benefits of those projects are often less visible compared to their reduced welfare through high and multiple taxes removed from their pockets.

2) Growing irrelevance of the IMF.
Private bondholders, the main lenders to many fiscally-irresponsible governments, both rich and poor countries alike, do not look much to the IMF for macroeconomic scanning of governments wanting to float new bonds (ie, borrow from them), but to ratings agencies and big investment banks.

Such fiscally irresponsible governments spend more than what they can collect from taxes and privatization, so they borrow left and right and get more indebted. And irresponsible poor governments cannot borrow much from governments of rich countries either because many of them, the G7 countries's governments in particular, are themselves highly indebted.

General government gross debt as % of GDP, G7, 2005:

1) Japan 175.5%
2) Italy 106.3%
3) Canada 85.0%
4) Germany 67.5%
5) France 67.3%
6) US 62.9%
7) UK 43.3%
(source: IMF, World Economic Outlook, April 2006 database)

So, those spend-and-borrow governments, especially poor-country governments, turn to private bondholders, from individuals to corporations and banks. Bondholders would rather wait for Moody's or S&P or Fitch, whether they would downgrade or upgrade the credit ratings of a borrowing government, than look up to the IMF.

Not much relevance for IMF and many other government clubs. The money of taxpayers siphoned off by governments to sustain those international bureaucracies are better diverted as tax cuts, so taxpayers can better take care of themselves and their families, rather than be dependent on various subsidies from indebted and fiscally-irresponsible governments.

See also:
Foreign Aid 4: Easterly vs. Sachs, May 01, 2006
Foreign Aid 5: Failure in East Timor, May 31, 2006

Limits of EFW rankings

Various economic freedom index studies (Fraser Institute's "Economic Freedom of the World" {EFW}), Heritage Foundation's "Economic Freedom Index", and so on) are useful, but they are not really precise.

The WB and IFC jointly produce an annual study, "Doing Business". Results of this good study I think are not taken into account by those EFW studies. Take their definition of "economic freedom" -- (a) full property rights and protection from forcible grabbing of property, and (b) ability to exchange (sell, lease, etc.) your property. This is very limited. Consider continental Europe like France, Germany, Italy, Belgium. Their very high unemployment rates of 9-11% annually means that employers and entrepreneurs in those countries do not have much "economic freedom" to hire people. The rigid government labor regulations and very strict environmental regulations tie the hands of entrepreneurs. Some of them would rather keep their firms small than expand and hire more people because hiring more workers means more labor laws to follow, more labor insurance and fees to pay.

On the other hand, some Asian industrializing countries like China, Korea, Thailand, Malaysia, HK, Taiwan, others (the Philippines not one of them, unfortunately), the entrepreneurs there have more "economic freedom" in ever-expanding their businesses, that results in more workers hired, more economic growth. But in the EFW index ranking, many of those Asian countries (China, Thailand, etc.) rank very low.

Tuesday, August 08, 2006

Israel-Hezbollah war

First of all, I don't consider the current Israel-Hezbollah war a Middle East "crisis". There is no "crisis" situation, where, there's a 50-50 chance that Hezbollah will win in oblitaring Israel; or 50-50 chance that the whole of Lebanon will be invaded and occupied by Israel. Not a bit of that. If we have to use the term "crisis", the more appropriate term I think should be a "Hezbollah crisis" because there is a 50-50 chance, or even higher probability, that Hezbollah will be wiped out in southern Lebanon, at least temporarily. But if we refer to the whole of Mid-East, I'd prefer to call it a Middle East "conflict", one of those dozens of conflicts in the region, dating back from the creation of the state of Israel in 1948. Or if you want a longer view, dating back thousands of years ago, before Jesus Christ, where conflict among the Jews, Palestines, other groups have been on-going.

In the first 2 weeks of Israel invasion of Hezbollah territories in southern Lebanon, I noticed the absence of loud condemnation in the same level as the anti-Iraq war prior and during the invasion, even among the Arab countries. I think there is general recognition (with denial by the minority) in the world that Hezbollah has only 1 strategic goal: the destruction of Israeli state, and reclaim the land where the Israelis now settle, give the land to the Palestinians and other Arabs. The song "this land is mine" seems to be the common song of both Israelis and anti-Israeli Arabs.

I think the Hezbollah and its back-up force, Iranian government, know pretty well that they have very little chance of ever achieving their goal of "vaporizing" Israel. What they hoped perhaps, is large-scale sympathy by the Arab citizens and pressure their own governments (Saudi, Egypt, Syria, Jordan, others) to send in their own armies, fighter planes and tanks to square off with Israel's armed forces once more. But the lesson of the past wars (especially '67, '73, and early 80s wars) was still very clear: invading troops meet their deaths on Israeli lands, and Israel will have the option of further expanding its territory if it wants to. But then people are entitled to their dreams.

For the leaders of Hamas, Fatah, Hezbollah, other militants, even if their dreams will take 100 years, 200 years, even longer to materialize, they will pursue their dreams. My modest estimate is that the Mid-east conflict will be with us for at least another 100 years. What all those ceasefire talks and resolutions can achieve is only to mitigate the conflict, say instead of 10,000 possible deaths on both sides, occassional ceasefires will reduce the casualties to only 2,000 or less. But the deep-seated hatred by the militant Palestininans and Arabs against Israel will remain in their hearts, and in the hearts of their children 3 or more generations away. So is in the hearts of Israelis, of their deep-seated beliefs that the lands they currently settle is theirs, and no foreigner has the right to uproot them from their lands.

Relating the current conflict in the literature of free market and limited government movement around the world, this highlights the important function of government -- to protect lives and properties, to assert territorial rights of citizens to their lands. And all the other welfare functions (subsidies for education, health care, housing, pension, credit, farming, etc.) become secondary. Because citizens can secure for themselves those social and welfare services on their own, if they will only assume greater personal responsibility of their lives and rely less on government responsibilities. Because the bigger government responsibility, is the protection of citizens' lives, properties, and individual liberties.

Thursday, June 29, 2006

Inflation and CBs 1: Central Banks Can Be Anti-Globalists

When the price of certain goods and services is rising, the old but realiable law of supply and demand has an explanation. This means either or both of two things happen:
a) Fast growth in demand relative to their supply due to increase in consumers' income, change in their tastes and preferences, other reasons; and/or
b) Shrank or decreased supply (both local and global supply) relative to stable or increased demand due to natural disasters that wiped out harvests, big fires/terrorist attacks that destroyed the production plants, and other reasons.

These temporary "market failures" also create market solutions. A rise in the price of certain goods and services would invite entrepreneurs and businessmen to go and supply those commodities to cash in potentially high profits, even temporarily.

Now comes central banks (Federal Reserve, Bangko Sentral, etc.) and their inflation-targeting policies and philosophies. When a central bank rushes in to "control inflationary pressure" in the economy, it has lots of tools in its wings that it can manipulate: reduce money supply by raising overnight rates of commercial banks, raise their required reserves (RRs), among others. When this happens, this also squeezes short-term credits to entrepreneurs who would have otherwise put up new firms, or expand existing companies' operations, to supply certain goods and services that experience supply gap or reduction, whether temporarily or permanently.

It is possible to have hyper-inflation (very high rise in prices) in some commodities and deflation (reduction in prices) in other commodities, all happening at the same time. For instance, a hyper-inflation in school supplies (say the 2 largest manufacturing plants and suppliers were gutted by fire) and a deflation in burgers, pizza and softdrinks (say Coke, Pepsi, McDonald, Burger King, Jollibee, dozen other companies engaged in a sudden and fierce price war). In this case, there is no need for national government or central bank interventions to stabilize prices.

Recently, the Bank for International Settlements (BIS), also known as central bankers' bank (not the IMF), cautioned central banks around the world to prepare to raise interest rates due to (i) rising global inflationary pressure, and (ii) vulnerability to "bang" in market turbulence. Let's take these one by one.

The main drivers of global inflationary pressure are (a) high and volatile oil prices, and (b) still insufficient trade liberalization across countries. There aren't much the world can do on (a) partly because some poor countries have experienced fast economic growth (think of China and India alone) and their people are buying vehicles and boats and appliances left and right. Oil refineries are also not catching up fast enough (no thanks to hurricanes Katrina and others) to supply big demand. There are other reasons for the high world oil prices.

On (b), many countries, or more appropriately, politicians and trade negotiators of those countries, would only blame their counterparts in other countries, that is why they are closing off a big portion of their economies from foreign imports of certain commodities. That is, they are depriving their citizens of more options. These imported commodities (which are just surplus production in the exporting countries, are cheaply produced there) could have reduced inflation, even result in temporary deflation, for the sectors/commodities of the importing countries if only they allowed those goods to enter. Again, no need for national governments and central banks to come and intervene.

Central banks, the BIS and US Fed particularly, think they must make borrowers poorer by raising their cost of borrowing; by making the cost of money for business expansion that should help boost supply that should fight inflationary pressure, more expensive. After all, they are waging a holy war against global inflationary pressures.

Wednesday, June 28, 2006

Welfarism 5: Germany's Tax Hikes

Three weeks ago, May 12, I wrote this:

The government of Chancellor Angela Merkel found a solution to address Germany's financial needs to retain its expensive welfarism programs while avoiding budget deficit of 3 percent of GDP or higher -- by raising VAT from 16 percent to 19 percent. Taxpayers in the private sector naturally, raised howl as their money will buy less since the government will siphon off nearly 1/5 of the retail prices of the goods and services that they will consume. They protest, and rightly so, that their government has deemed it more important to raise already high taxes, than cut expenditures and pursue painful but necessary reforms in social security and the labor market.

The projected increase in government revenue from such 3 percentage point increase in VAT would be E8.1B ($10B) this year.

In addition, the government will also scrap selected tax rebates for individuals and introduce a 3 percentage-point top-up tax for high earners. In effect, this package of "tax reforms" is a double whammy of hikes in both income tax and consumption tax! Boy, if you're a politician and a high level government bureaucrat, what more can you ask? You got most of the money you want, forcibly taken away from the pockets of citizens, and spend that money on whatever programs you have in mind. From retaining if not expanding the already expensive welfare programs, to paying off large debts (principal + interest) accummulated through the years again, to finance the elaborate domestic welfarism and external military and foreign aid expenditures.

* But on the EU front, Ms. Merkel proposed slashing EU legislation by 25 percent in an effort to shrink the EU bureaucracy and encourage entrepreneurship (, May 11, 2006, "Germany proposes cutting EU laws by 25%", by Bertrand Benoit).

Ms. Merkel ran on promises of more competition, smaller bureaucracy and tax cuts. Eight months into the office and she has already hiked VAT from 16 to 19 percent, effective January next year. In the works is another tax hike, possibly in income tax.

Why the double-whammy of tax hikes? You bet it, to finance welfare hikes. The new plan is to spur birth rate, to arrest the "greying" of the population, and encourage working women to have a family then return to work. This will necessitate expanding the already expensive and bureaucratic health care system, to cover children that would cost from €16 to €25 billion, or $20 to $31 billion.

Currently, around 90 percent of German adults are insured through 250 health care insurance companies, a system that eats up money with little accountability. Patients in the public system do not receive bills. Instead, the doctor is reimbursed through the patient's public insurance company. Conversely, in the private health insurance system, patients receive a bill that meticulously records the cost of each treatment.

Again this is another kind of "social engineering" by the politicians and the dominant political parties. They did some social engineering in the past, something that discouraged people from having bigger families, or from having a family in the first place. So, this new round of social engineering is to reverse that, to encourage people to have more babies, so that those children will work someday to finance the unfunded social security and health care currently enjoyed by their grandparents, and in a few years to be enjoyed by their parents.

If falling birth rate, and expensive, bureaucratic public health care are the problems, then I think new round of tax hikes and more welfare are not the answers. Instead, the government should (a) loosen the welfare system and cut taxes, allow individuals and households to assume greater responsibility for their families, from education to housing and health care. And government should (b) relax entry of migrants from other countries when demand for them by households and the citizens increased. How would these twin moves help encourage bigger families?

When parents have bigger disposable income and immigration is relaxed, they will hire nannies and domestic workers from abroad who will help them take care of their kids and the house while the couple is working and partying sometimes.

I have a German friend, a lawyer, who married a beautiful Filipina, also a friend, and they live south of Munich. They have a handsome son with a good Euro-Asian features (white skin, black eyes, and so on). Their son is a bit sickly sometimes, and the wife can possibly work if she wants to. So I asked my German friend why they will not hire a Filipina nanny to help them with the kids and household work. After all, the wife can find someone in the Philippines whom they can trust very well, and the pay is not expensive. My German friend said, "No Nonoy, it's very expensive to hire a nanny here. I can pay for her monthly pay, but I will also have to pay for her health insurance, social security insurance, unemployment insurance, and many other government-required insurance and welfare programs." Well, not to mention the difficulty of getting a work visa in Germany.

Germany's welfare vs. tax woes is a good case to watch for those in many poor countries. Many of our politicians, NGO and labor leaders, academics and media people, some businessmen, and foreign aid staff and consultants, "envy" the extensive welfare system of Germany and many European countries. They want to replicate many of those system in their respective poor countries, to "fight poverty". And so they are all one in justifying high and multiple taxes, especially in "taxing the rich", so the poor can be given generous welfare, from free education (elementary to university) to free hospitalization, and so on.

I say to them: don't arrogate personal responsibilities to the "collective"; don't assign parental responsibilities to government responsibilities; and don't confiscate parents' incomes for government and politicians' funding.

Related story, see

* See also:
Welfarism 1: Dependence vs. Individual Responsibility, October 17, 2005
Welfarism 2: France Riots, Taxes in Welfare States, November 17, 2005
Welfarism 3: Spiraling Costs and Rent-Seeking, April 21, 2006
Welfarism 4: Italy's Fiscal Woes, Kid Glove to Criminals, May 29, 2006

Monday, June 26, 2006

Pol. Ideology 5: Have Movements for Liberty Progressed?

Prof. Tibor Machan, a faculty at Argyros School of Business & Economics, Chapman University, and a researchfellow at the Hoover Institution, Stanford University, wrote a paper, "Are we making progress?". Here's a portion of his paper:
OK, but when compared to what statists are doing, is this anywhere sufficient to advance the cause of liberty? Is it only that the pie ofintellectual activism is growing, with everyone having pretty much the same percentage of a slice of it as forty years ago or is the percentage of the slice with libertarian content growing compared to the rest?... 
I think most of those who have devoted much of their energy to studying and defending the free society, in various areas of specialty or in the mostgeneral terms, would wish to know just how the movement is faring. I am sure those who are championing opposite ideas and ideals would also like to know how well they are doing in the war of ideas. I do know that some have reached great influence, for example, with the United Nations, The World Bank, the International Monetary Fund and similar outfits. And they have no compunction about utilizing money extorted from the rest of us to promote their agenda....
From my observations in my country, as well as what I can gather from some friends abroad, my gut feel tells me that the answer to the question, "is the percentage of the slice with libertarian content growing compared with the rest?" is NO.

While it is true that the number of free market think tanks around the world is expanding, so is the number of statist think tanks and organizations. From NGOs to government think tanks and multilateral, foreign aid think tanks. In the Philippines for example, for every free-market oriented think tank that is created, there are at least a hundred NGOs, pressure groups and think tanks that advocate continued big, if not bigger, government intervention in the economy and society.

Another indicator that I consider in saying the rather pessimistic answer, is the ratio of government spending (G) as a percentage of GDP. This ratio will somehow tell you how strong is the intellectual influence of free market think tanks and individuals in shaping public policy, especially in the dollars and cents aspect of government expenditures and taxation, in each country. The more successful the the free marketers are, the G/GDP ratio should be declining through time. The less successful they are, the ratio will either remain flat if not increase through time. Below are some relevant data.

General Government* Expenditures as % of GDP, 2002 (unless year is specified)

Sweden 56.7%
Denmark 55.9%
France 52.4%
Austria 51.2%
Belgium 49.7% (2001)
Germany 48.6%
Netherlands 46.6%
Italy 46.4% (2000)
UK 40.8%
Switzerland 35.4% (2001)

Poland 42.9%
Czech Rep. 42.2%
Slovak Rep. 40.0%
Russia 37.0%

Australia 35.7%
S. Africa 32.2%
Thailand 21.1%

(source: IMF, Government Finance Statistics Yearbook, 2003)

* General government = central/national government + state/provincial & municipal governments

Data is not available for the US, Canada, Japan, China, other big economies. Only central government expenditures as % of GDP is available, but this will not make data comparison possible because general government includes expenditures by state/provincial and local government units (LGUs).

For the Philippines, expenditures of the national government is around 18% of GDP. If expenditures by LGUs (because they also raise their own taxes and revenues on top of transfers by the national government) are included, it could be around 22% of GDP.

Now, these numbers often do not include unfunded social security and medicare or health claims, both present and future claims. This is an indicator of how welfarist and nanny-statist governments are. That is, the extent of what should have been personal and parental responsibilities, have been arrogated to the "collective" as social and government responsibilities. And so, the higher the ratio, the more welfarist, the more government responsibilities, and the lesser personal responsibilities, are assigned.

Here, the numbers can be scary. For instance, it's about 200% of GDP in France. In the US, unfunded social security and medicare claims is estimated to be $36 trillion, or around 300% of GDP. When public debt and other traditional federal liabilities are included, the total U.S. federal debt is over $46 trillion, or nearly 400% of GDP!

So, if my personal assessment that the movements for liberty and free market have not progressed as fast as the movements for big government (local, national, international), does it mean that we're weak and not doing well enough? I don't think so. Maybe many of us have not yet dwelt into the harder campaigns for lesser government responsibility and lesser taxation.

About statist intellectuals and think tanks reaching far high in justifying high and multiple taxes in many countries partly to finance giant international bureaucracies like the UN, WB, IMF, ADB, and other foreign aid bodies and agencies, they are indeed successful. That is why think tanks who call themselves "free market-oriented" should not live off on funding from foreign aid money, money taken from the pockets of citizens of rich countries. Because if they should go into the hard campaign of tax cuts and smaller government, being indebted to foreign aid money will be a hindrance.

* See also:

Pol. Ideology 4: Comments to Minimal Government Manifesto,  December 05, 2005

Wednesday, June 21, 2006

Spontaneous Market 3: No Nurses' Brain Drain

There's a short but clear argument why nurses' migration from the Philippines and other poor countries to the rich countries should not be considered as "brain drain", but a positive thing for the country of the departing nurses. Mr. Michael Clemens posted (May 25, 2006) in
and argued the following:

"Nurse Drain A Problem? Think Again

The effect of nurse emigration on the countries of origin is not that simple, despite yesterday's somber New York Times piece, "U.S. Plan to Lure Nurses May Hurt Poor Nations." Yes, the Philippines has been the world's top exporter of nurses for decades, but today it has more nurses than almost any other country in its income group. According to the World Health Organization (PDF), it actually has more nurses per capita than Great Britain. Why? Because there is no such thing as a fixed quantity of nurses to be "drained" from the Philippines or Africa, like petroleum from the ground. People -- in this case mostly low-income women -- react to global markets and change their career plans accordingly. Many Filipinas wouldn't have become nurses if not for the migration opportunity, and thus are not 'lost' in any sense when they depart. Africans are starting to follow suit, opening career paths for professional women who would otherwise have few. This should not be discouraged through closed immigration policy, but rather taken advantage of -- through the establishment of for-export nurse training programs as the Philippines has done en masse. Unlike petroleum, these women are human beings. They have rights and ambitions whose fruition in the United States is a beautiful thing."

Mr. Clemens is right. In the Philippines now, many career people shift to nursing so they can easily be hired in the US, Canada and UK. Physicians and doctors, engineers and architects, lawyers and managers, teachers and civil servants, among others, have shifted career, studied nursing, passed the nursing board exams, and waited for their turn to be hired abroad.

The supply of nursing students have greatly increased, and the number of private colleges and universities, as well as private hospitals offering BS nursing, have also increased. There will be no "under-supply" in the nursing and health professionals in the Philippines as there is a steady stream of new students and other professionals shifting career to the health sector. Although admittedly, there are some short-term problems, like large-scale exodus of experienced nurses and doctors from provincial hospitals, creating an immediate "vacuum" of experienced health professionals in some parts of the country.

But there are also short-term and immediate gains, like ever-increasing remittances of overseas Filipino workers (OFWs) back to their families. Total remittances via official financial channels in 2005 was $10.7 billion, and estimated remittances via friends and other unofficial channels is at least $3 billion more. This year 2006, projected remittances will reach $12 billion, or an average of $1 billion a month, excluding several billion $ of remittances via friends and unofficial channels.

In addition, some sick and well-off people in rich countries who get impatient with protectionism of their countries by limiting the entry of foreign nurses, doctors and other health professionals, come to the Philippines' many hospitals and private clinics for medical treatment and check-ups. This phenomenon is now called "medical tourism", and there are a number of local and foreign entrepreneurs wanting to cash in on this emerging phenomenon.

There are also a number of plans and projects on-going to develop "retirement villages" in some parts of the Philippines, where retirees and old people from other countries, as well as returning Filipinos who have worked abroad for decades, can stay and retire. Health caregiving and nursing are essential components of those retirement villages.

Finally, many of those nurses and physicians who have worked abroad for many years come back home, not as nurses and physicians, but as businessmen and entrepreneurs, or at least managers, of new or expanded hospitals and clinics for medical tourism and retirement villages.

Overall, there is no such thing as "brain drain". Only short-term reallocation of human resources, and long-term gains of freeing people to seek their own fortunes, and remitting back savings and investments into their folks and families in their home countries. These are all part of spontaneous reallocation of resources and individual or household priorities.

* See also:
Spontaneous Market 1: Profit, Trade and Personal Responsibility, May 22, 2006
Spontaneous Market 2: Market Failure vs. Government Failure, June 07, 2006

Friday, June 16, 2006

CSOs and State 1: AIDS and Perversion of Welfare

There was a very disturbing news from the Wall Street Journal last April about AIDS. It was entitled,

"Dangerous DecisionIn South Africa, Poor AIDS Patients Adopt Risky Ploy"
To Get Disability Payments, Some Skip Medications, Putting Lives in Peril
Aiming to Be 'Very, Very Sick'
By MICHAEL M. PHILLIPS April 7, 2006; Page A1

The South African government gives advanced anti-AIDS drugs for free to patients. The pills, antiretroviral "cocktails", would boost one's immune system, relieve symptoms and restore his/her health. In addition, the government gives out a $130-a-month disability grant, if one is really sick.

The results were rather sickening. Some poor people who have bad AIDS situation and receive the allowance from the government stopped taking the anti-AIDS medication so they will remain sick and can continue drawing the allowance. While those who have better or improved conditions have stopped taking the medicines, find ways to be infected further, to get sick further, so they will qualify for the government allowance!

According to Mr. Phillips' report, patients who do this would rather endure terrible sickness just to get the allowance so they will have extra cash to feed their kids, or pay rentals and debts, or start a small business. There are estimated 5.3 to 6.3 million HIV carriers in South Africa.

In economics, you call that behavior of choosing to be sicker to get allowance as "moral hazards" problem. If people know that there are some form of rewards or protection (bail out, subsidies, allowances, stipends, other forms of protection) if they misbehave, then they will misbehave. Well, at least for those who are desperate enough and consider the rewards for irresponsibility better than the pain (physical, emotional, whatever) of such irresponsibility.

In the Philippines and other poorer countries, there are similar behavior.
Here for instance, we have a law that squatters cannot simply be removed from the lands they're squatting on, unless the owner/s of the land (government or private) will find a relocation site for those who will be evicted, facilitate their transfer. In some government relocation sites, government even gives the relocated squatters land titles.

Result? Squatters mushrooming in many places. They just occupy private lands, or government lands. Many private land-owners are more determined to evict the squatters and guard their lots. Government, the biggest landowner in the country, even confiscating some private lands if landowners did not pay the real property taxes plus the high penalties for delayed payment, is more tolerant of squatters. Government leaders for one (from mayors, congressmen, governors to the President) often protect the squatters from eviction so long as the latter will vote for them, and support them if they are experiencing political crisis.

There are also the so-called "professional squatters". When government gives them land titles, they sell that title to other people, get the money, then hop to another lot or location and squat the area, waiting for another round of new land titles to be given to them.

So, people really respond to incentives.
If there are incentives for irresponsibility and misbehavior, or the penalties are too light for misbehavior like stealing, then some people will abuse any government welfare and remain irresponsible.

A friend sent me also an awful news from The Washington Times (date not indicated), entitled
by Karen Palmer.

The disturbing news is that in Malawi and other parts of Africa, people who are potential victims of AIDS, if not already suffering from it, now require "allowance" fees and per diems (effectively, bribes) before they will attend AIDS meetings and seminars that will directly benefit them. The going rate, according to the report, was 1,500 kwachas, or about $10 equivalent per day. And the international NGOs, or UN agencies have started the practice of distributing money to people and local government bureaucrats to entice them to come to their seminars. The report said, "Some blame UNICEF, others blame Oxfam, but no one remembers who first offered envelopes of cash in exchange for attendance. The point, they say, is that now everyone does it. And people say, 'If you don't give us pocket money, sorry, we're not interested.'"

In addition, government officials and civil servants also require payments, "sitting fee" they call it, for them to attend meetings and seminars. Continued the report, "The result is that some HIV workers use training sessions as a lucrative source of income, floating from one workshop to another, shopping around for conferences where participants stand the greatest chance of making a bit of cash."

So if the international NGOs will not give money, no one will come to their AIDS seminars, so what? The NGOs are afraid that they will have no picture and real reports to show to their donors? Then why bother to help people who don't bother to help themselves either, why put in your money (or other people's money)? And the national or local government bureaucrats, why bother to invite them if all they need is "attendance fee"?

It's bad that tax-funded government foreign aid has corrupted the concept of "national development" of many poor country governments. It's equally bad that private-funded NGO foreign aid has corrupted the concept of "personal welfare" of many poor country citizens.

Maybe we should consider the fact that if nature is killing people (AIDS, malaria, TB, and so on) and people don't want to help themselves, then let nature take its course.

Wednesday, June 07, 2006

Spontaneous Market 2: Market Failure vs. Government Failure

"Market failure", or the failure of the market (the individuals, households and firms who supply and demand certain goods and services) to allocate resources to provide certain human needs and wants, is the single biggest reason why government intervention is justified. And government here ranges from local to national/central government to the UN and foreign aid institutions.

There are two main sources of market failure. First, "public goods" character of a commodity or service. Public goods are those that once provided, it is difficult or impossible to exclude non-paying people from enjoying and free-riding the benefits of such good or service; or the cost of excluding the free-riders is very high. Examples are traffic lights, peace and order, justice administration and rule of law, and national defense for countries with dangerous neighbors. Second are "externalities", positive or negative. Examples of negative externalities are air, water and noise pollution; examples of positive externalities are clean air and cool climate because of the presence of a huge forest or national park, good peace and order condition.

After identifying one "market failure" after another, governments began intervening in many sectors of society. And many people who demand more government intervention forget that it also means new or more taxes, fees and charges; new or more regulations, inspections, registrations, accreditations, other forms of requirements and clearances from the bureaucracy. With valid or invalid reasons to intervene, governments are into infrastructure, utilities, social services, pension, credit and banking, tourism and entertainment, media, and so on.

In fact, it is now difficult or impossible to identify any sector or industry (or sub-industries) of our social and economic lives where there is no government intervention and registration. Even those in the "informal" or "underground" economy do not exactly escape 100 percent of all those government intervention. It's more like out of 10 or 20 registrations, taxes and fees required by government, they only managed to escape 70-90 percent of them.

In public finance theory, the presence of "market failure" is only a necessary but not sufficient condition for government intervention. Because it is highly possible that government will only introduce its own inefficiencies and wastes that will only exacerbate the initial market failure that it wants or purports to correct.

The littany of reports and complaints of government corruption, bribery, plunder, other forms of waste, especially in poorer countries, indeed confirm that government intervention often results in a worse market situation than it wanted to correct. These are now called "government failure", a failure in correcting the initial market failure, a failure in providing genuine public service, which is the only valid and accepted reason for government intervention and taxation.

But instead of government withrawing from those sectors and services where abuses, red tape and corruption are repeatedly noted and reported, "government failure" is addressed by another set of government intervention, by instituting plenty of anti-corruption bodies and counter-check mechanisms and procedures. These moves are essentially pouring more public money to determine how much public money have been stolen and wasted already. The key word being sold to the public is "good governance", meaning more transparency and accountability of public institutions and government officials and personnel. But implied in this formulation is the retention of a big, expansive, and interventionist bureaucracy; only to expect them to behave more transparently.

An option to go "back to the market" and "less government intervention" is far out among the minds and demands of many groups and people, even from those very vocal sectors and individuals that regularly note government failure, like those in media, the academe, NGOs and civil society groups.

There will always be market failure in all spheres of our lives as individuals and communities become more specialized, as tastes and preferences constantly change and evolve. But market failures also create market solutions. An initial lack of supply of a certain food or clothing design that caught the attention of a big section of the public results in entrance of new players and producers of such goods and services where demand is big. Pretty soon, the problem is no longer lack of supply but over-supply. Over-supply sends a signal to various producers and suppliers in the form of declining prices. This signal will force them to innovate, to introduce new designs and formulations, or improve on existing ones, to escape bankruptcy. The market's self-correcting mechanisms guide societies, producers and consumers alike, to allocate resources where they are needed, and stop supplying resources where they are not needed.

Government failures on the other hand, almost always result in more government checks and balances, more bureaucracy, and hence, more taxes and fees to finance the expansion of the bureaucracy. Government failure is more insiduous, more damaging and more disastrous to the lives of people, of private taxpayers especially.

Related topic to government failure is “rent-seeking”. Chapter 4 of the book, "Government Failure: A Primer in Public Choice" written by Tullock, Seldon and Brady (2002, published by Cato Institute, Washington DC), is entitled “The cost of rent-seeking”, written by Prof. Gordon Tullock. Examples of rent-seeking are (a) trade protectionism, where the protected local industry benefits but the local consumers are worse off; (b) private monopolies, and (c) direct income transfers by government where A is taxed and B receives the money.

I would say that around 90 percent of all forms of government restrictions, from erecting rigid labor laws like “expensive to hire, difficult to fire” policies, to expensive welfarism financed by high and complicated taxes, are rent-seeking in nature. They are tying productive people's hands, siphoning off if not outrightly confiscating, their income and savings, and transferred to people often driven by envy and too lazy to accept personal responsibilities on things that ought to be their private domain. The huge government bureaucracy and long layers of politicians that stand in between the people whose incomes are confiscated and the beneficiaries who wait for such wealth transfer eat up precious social resources.

Citizens and taxpayers should assert their their personal liberty, to be freed from various forms of coercions exerted by big governments and their various instrumentalities, by demanding not just "good governance" but more importantly, "less government". After all, less government means less taxes, less bureaucracy, more economic growth and individual freedom.

Voluntary Exchange vs. Forced Exchange

In voluntary exchange, a person comes to another person to offer or sell his/her services like hair cut, massage, tutorial, taxi, cell phone repair, speech writing, and so on; or goods like fruits, vegetables, fish, hammer, nails, hamburger, needle, book, tv, car, bus, boat, and so on. The other guys choose from among those who offer those various goods and services, and pick the ones who offer them good value for their money. Here, no one is coerced to surrender his/her money to someone else, unless there is a corresponding exchange of a satisfying service or commodity given.

Those who offer good quality services and commodities at an affordable and competitive price naturally attracts more clients and customers; through time, those producers and suppliers become bigger, so long as they maintain the quality of their services and the competitiveness of their prices. While those who offer lousy services and bad quality commodities will lose their customers and clients; pretty soon, they will become bankrupt and be forced out of the competition, at least temporarily. Suppliers and sellers know this, so they are compelled by the circumstances, by their environment, not to become complacent producers. In this competitive and non-distorted situation, public and social welfare is served. Those who sell food are forced to sell good quality food. Those who sell their labor are forced to render good quality work. Those engaged in trading and marketing are forced not to over-price their products and services. Those who lend money are forced not to impose very high interest rates.

In forced exchange, people are coerced to surrender their money to a big and armed body or institution. Their salaries are automatically deducted of a certain percentage; their interest earnings in their bank deposits, their gains or profit from selling their house or land or other resources are automatically withheld of a certain percentage. When they consume something like medical and dental check-up, or buy something like soft drinks or gasoline, the price they pay is much higher because of surcharges imposed on the original price of those services and commodities.

Also in forced exchange, even if you do not believe that this and that services should be provided by the big institution, or you believe it should be provided but you do not like the quality of the services given to you, funded by the money that was forcibly taken away from you, you have to bear with them. Even if you do not like the personnel and people assigned to help you because they are corrupt or arrogant or lazy or whatever traits that you do not like, you have to bear with them.

Now, who are engaged in voluntary exchange? And who are engaged in forced exchange? Are they the angels and missionaries for the former, and the aliens and terminators for the latter?

The market -- private individuals, households, firms, voluntary organizations -- are engaged in the former. And government -- national and local government units; executive, legislative and judicial bodies -- are engaged in forced exchange.In the market system of voluntary exchange, the system of rewards and punishment are fast and spontaneous. Those who keep on producing good quality services and commodities at a good price continue expanding, and those who keep on producing bad services and/or selling at unreasonable prices will soon be out of business. No paper work, no bureaucracy, no litigations needed. The incentives and disincentives are very clear and transparent.

In the government system of forced exchange, the system of rewards and punishment are long, managed and bureaucratic. The corrupt and robbers can be rewarded with material wealth and undeserved attention, their shenanigans to be determined in long court proceedings, assuming there will be enough witnesses who will pin them down. Some industrious and efficient ones can be left poor and unrecognized, stuck in fixed incomes and covered by the bureaucratic maze where the ego-trippers get the media attention.

Also in forced exchange, even if you do not need certain services and government personnel assigned in your community or workplace because you think they are unnecessary and costly bureaucracies, you have to bear with them. Their offices and positions have been created already by the higher bureaucrats and politicians, and their annual operating budget have been allocated already, courtesy of the various taxes, charges and fees that were forcibly taken from you. And assuming that you need certain services from government, but you do not like the personnel assigned to perform them because they are arrogant and possibly corrupt, you have to bear with them. They are accountable to the higher officials who recruited and appointed them in their posts, not to "the people", an amorphous and anonymous body who cannot even successfully fight the forcible deduction of their incomes and savings.

Lazy and arrogant government personnel can be kicked out of office, but you have to set aside substantial time and effort, and money of course, to take short leaves from your work and stand up as witness to usually long court procedures.It is therefore important that individuals should assert their personal freedom, their right to voluntary exchange, and to oppose an ever-widening system of forced exchange. Not that people should call for zero government. We need government after all, say to punish the guys who killed your cousin, or raped your daughter, or burned your car, or stole your cellphone, or grabbed your land. Government has an important but limited function in our lives. Its expansion to so many sectors and facets of our lives however, is not only dangerous, but has already wreaked havoc to our lives. The task of asserting our individual liberty is a continuing challenge for us all.

* See also Spontaneous Market 1: Profit, Trade and Personal Responsibility, May 22, 2006

Saturday, June 03, 2006

China Watch 3: World's Largest Traders, 2004

China is now the world's 3rd largest exporter and importer of merhandise goods, next to the US and EU-25 countries.

A. World's largest merchandise exporters, 2004
(in $ billion, except %):

1) Extra-EU (25) exports, 1,203.8, 18.1%
2) United States, 818.8, 12.3%
3) China, 593.3, 8.9%
4) Japan, 565.8, 8.5%
5) Canada, 316.5, 4.8%
6) Hong Kong, 265.5, 4.0%
7) S. Korea, 253.8, 3.8%
8) Mexico, 189.1, 2.8%
9) Russian Federation, 183.5, 2.8%
10) Taiwan, 182.4, 2.7%
11) Singapore, 179.6, 2.7%
12) Malaysia, 126.5, 1.9%
13) Saudi Arabia, 126.2, 1.9%
14) Switzerland, 118.5, 1.8%
15) Thailand, 97.4, 1.5%
16) Brazil, 96.5, 1.5%
17) Australia, 86.4, 1.3%
18) UA Emirates 82.8, 1.2%
19) Norway 81.8, 1.2%
20) India, 75.6, 1.1%
21) Indonesia, 72.3, 1.1%
22) Turkey 63.1, 1.0%
23) South Africa, 46.0, 0, .7%
24) Iran, 44.4, 0.7%
25) Philippines, 39.7, 0.6%

B. World's largest merchandise importers, 2004

1) United States, 1,525.5, 21.8%
2) Extra-EU (25), 1,280.6, 18.3%
3) China, 561.2, 8.0%
4) Japan, 454.5, 6.5%
5) Canada, 279.8, 4.0%
6) Hong Kong, China, 272.9, 3.9%
7) Korea, Republic of, 224.5, 3.2%
8) Mexico, 206.4, 3.0%
9) Taiwan, 168.4, 2.4%
10) Singapore, 163.9, 2.3%
11) Switzerland, 111.6, 1.6%
12) Australia, 109.4, 1.6%
13) Malaysia, 105.3, 1.5%
14) Turkey, 97.5, 1.4%
15) India, 97.3, 1.4%
16) Russian Federation, 96.3, 1.4%
17) Thailand, 95.4, 1.4%
18) Brazil, 65.9, 0.9%
19) South Africa, 57.1, 0.8%
20) Indonesia, 54.9, 0.8%
21) Norway, 48.1, 0.7%
22) United Arab Emirates, 47.6, 0.7%
23) Saudi Arabia, 44.6, 0.6%
24) Israel, 42.9, 0.6%
25) Philippines, 42.3, 0.6%

(source: WTO,

* See also: China Watch 2: China's Tourism, May 17, 2006

Wednesday, May 31, 2006

Foreign Aid 5: Failure in East Timor

Below is an account and analysis of how billions of dollars of foreign aid in East Timor has enriched the consultants and foreign advisers, but left the country poorer than before. It seldom or never fails: foreign aid is government to government, or consultants to consultants, not people to people. When recipient governments are corrupt, and when conduit consultants are just after the money, most of the tax money from taxpayers of rich countries are simply wasted because the original mission -- economic upliftment of the poor people in recipient countries -- is not achieved.

In this news report, the main reasons why foreign aid has failed are the following:

1) More than half of foreign aid money went to salaries and consultancy fees for foreign advisers.
2) Statism, the recipeint state has become too bureaucratic, penalizing entrepreneurship.
3) Fast population growth and high child mortality rate at the same time, that foreign aid has failed to check.

Below is a truncated story, for brevity purposes. To check the full article, visit:

Ruins of nation-building
By Jane Perlez
The New York Times

...As food and fuel ran low, many of the people said they had lost confidence in the rulers who had fought for independence and then promised a glorious new world on the back of outside financial assistance and advice.

In the early going, some of the best brains at the United Nations and World Bank were sent to set up the government, the army and the police force, as well as economic structures and education and health programs.

From 1999 to 2002, when the United Nations administered East Timor, Sergio de Mello, a UN official who was later killed in Iraq, served as a kind of pro-consul, lending panache and enthusiastic support for the ambitious nation-building project.

It has not worked out as many envisioned. Seven years later, the United Nations and the World Bank acknowledge in recent studies, the people of East Timor are poorer. An economic uptick during the three years of UN rule collapsed after many of the foreign advisers left.

Little headway has been made in improving basic services, the reports say. More children go to school but only 30 percent make it to secondary school.
Very few of the 10,000 students who finish school each year find jobs, leaving an angry group of hardcore unemployed male teenagers who have formed the gangs.
Most adults work the land, which, unlike other countries in the region, is arid with poor soil. Gifts of tractors lie broken and disused because of a lack of fuel and poor maintenance.

Complicating the picture, in a wave of post-independence exuberance, more babies were born than before, boosting the population to nearly one million and giving the women of East Timor the highest fertility rate in the world - 7.8 children per woman.
In a recent assessment, the U.S. Agency for International Development... said that foreign aid for East Timor had not helped check the child mortality rate - among the highest in the world - because little provision was made for free community based health services...

The World Bank warned last year that the government was high-handed in its attitude to the people, ignored the "lack of professionalism and experience" in the security forces and adopted a "statist style."

Prime Minister Mari Alkateri, now at the center of a power struggle with President Xanana Gusmão, spent many years in exile in Mozambique when a leftist government was in power.
After returning home, he has favored state ownership over private enterprise. In a simple example, the fee for registering a business is more than the annual $370 per capita income.

Below the ministers, the country lacked people with enough experience to fill essential jobs to run things on a day-to-day basis, said Sidonio Freitas, a senior manager at the Timor Sea Designated Authority, who was educated overseas.

"We have ministers but no middle managers," Freitas said. A good deal of the responsibility for the nation's mess lies with the foreign donors, he said.

More than half the foreign assistance was spent on salaries and consultancy fees for the foreign advisers, the East Timorese government asserts.

In essence, Freitas said, the foreigners were too impatient. They came, spread their money around and left. "They all had a time frame - one year, two years, four years," he said. "You can't build a country from nothing in that amount of time."

See also: Foreign Aid 4: Easterly vs. Sachs, May 01, 2006