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

Monday, May 29, 2006

Welfarism 4: Italy's Fiscal Woes, Kid Glove to Criminals

Like Germany, France and Spain, Europe's big but highly indebted economies, Italy is in a serious fiscal bind. The EU stability pact says that member-countries' budget deficit should be no more than 3 percent of their GDP. For the past few years, habitual violators include Italy, France and Germany.

This year, Italy'y deputy finance minister, Vincenzo Visco, was reported* to have said that the country's deficit could be more than 4.5 percent of GDP, much bigger than earlier forecasts.
Like many of its neighbors, the expensive cost of generous welfare system makes the expenditures bloat to sizes.

The cycle of (1) high and multiple taxes (2) to finance generous welfare system, sometimes (3) make many productive citizens and entrepreneurs reduce working if not leave the country, (4) resulting in huge budget deficit and government borrowings, (5) resulting in higher debt payments, further bloating of the expenditures, and you need (1) high and multiple taxes...

You reduce personal responsibility and assume more "collective" and government responsibility, you encourage the emergence of more subsidy- and welfare-dependent people, while discouraging more self-driven and ambitious people.

* See: "Italy warns of growing budget deficit", May 23 2006

Light Fines in a Welfare State

A teenager with no criminal record just went on a stabbing rampage in Berlin, Germany, May 26 evening. He stabbed 35 people randomly, 6 of whom needed emergency surgery. The police caught him and charged with 24 counts of attempted murder, and could face a youth sentence of up to five years in prison, according to a report in the Financial Times today,

This man from a poorer economy asks, "5 years imprisonment only?" I can't believe that after attempting to harm and kill as many people as he can, he'd get only 5 years in prison? If that thing happened here in the Philippines, that guy when caught by the public would be a mutilated body if not a dead meat before the police could get him. Stabbing and attempting to kill people randomly is the mind of a sick and deranged person; he does not deserve to live another day.

Sure, Philippine laws will also give some consideration and protection to teenage criminals. I do not know how many years imprisonment a Filipino teenage criminal would get if he did the same act as that Berlin teenager. But chances are, the public will get the boy first even the police could find him, and public anger is more spontaneous and more fierce than government laws would impose.

If I am a family member of one of those 35 people randomly stabbed, I would ask the Parliament why the fines are so light and non-intimidating to other potential criminals. Sure Germany is a welfare state, but the welfare and protection should not be extended to deranged people with clear and explicit plans of harming and killing other people.

* See also: Welfarism 3: Spiraling Costs and Rent-Seeking, April 24, 2006

Friday, May 26, 2006

Labor Econ 1: What Determines Wage?

The determinants of labor supply and demand:

1. Labor supply: mainly determined by population growth and migration; also, the skills and education level of education of the workforce.

2. Labor demand: mainly determined by the size and growth of the economy. More economic growth, more business activities, more jobs created.

3. Equilibrium wage: the level of wage where supply meets demand in a given skills level. Thus, you can have numerous and endless equilibrium wages for numerous type of labor supplied and demanded: for domestic helpers (rich, middle class, poor households), construction workers, agricultural workers, aquaculture workers, hotel and restaurant workers, transpo workers (airlines, shipping lines, bus lines, taxi lines, vans, etc.), scientists, engineers, chemists, lawyers, economists, etc.

What determines wage increase?

3 main schools of thought:

1. Wage is a function of cost of living of a family: A family of six would need Pesos xxx per month; hence, this should be the minimum wage. The minimum wage is the level that even the most unskilled worker must receive.

2. Wage is a function of increase in price of commodities (inflation rate): The consumer price index (CPI) has moved up from xx to yy points over the last nn years; hence, wages must increase by a proportionate rate, if not higher.

3. Wage is a function of productivity: Whether the worker is single or has 10 children, or inflation rate has increased by 1% or 20% per year on average, if productivity has not increased, wages cannot increase. Otherwise, the company will close shop and workers will be jobless.

The philosophy of government setting minimum wage and the succeeding legislation and tripartite contracts are supposed to protect workers from underpayment and exploitation by their employers. The goal of worker protection is good and laudable, except that the means, minimum wage-setting by government, depresses the dynamism of the labor market.

Setting a government-mandated minimum wage way above the expected productivity of unskilled people, if strictly and rigidly implemented, will result in those unskilled people being hired by no one except the charity-oriented organizations and individuals. If the number of the unskilled people are much plentier than what charity people and organizations can absorb and employ, then the rest of those unskilled people will go hungry. In short, minimum wage and related laws protect only those who already have jobs, but discriminate the unskilled who are not employed yet.

That minimum wage should be xxx $ (or Pesos or other currencies) per hour, per day, per month, because that is what a family of five members (couple + 3 children) will need to live decently, regardless of the skills of the worker, will again work against the unskilled. There will be temptation and incentives for employers to hire only unmarried people, or married but have no kids yet (or have only 1 or 2 kids) so that the “needs of family of five” argument will not apply to the workers in negotiating for wage adjustments. And those unskilled workers who have plenty of children will be condemned to perennial joblessness, perpetuating further that family’s poverty.

Indexing wages to inflation rate is also inadvisable. Inflation rate can climb fast for a hundred reasons, like high interest rates due to government over-borrowing to finance the budget deficit; damage to crops due to strong typhoons, hurricanes, floods, or volcanic eruption; supply disruption due to damage to roads and bridges from the food- and other commodities-producing provinces because of earthquake, sabotage, fire; hike in transportation cost due to world oil price increases, and so on.

If wages will be forced by government or by strong labor federations to be adjusted upwards because any or all of the above happened, and there is no corresponding increase in overall firm productivity, or increase in the firm’s revenues, then that company will be forced to either lay off some workers, or just close shop, even temporarily.

Wage is a function of, is determined by, a worker’s skills and productivity. It is not a function of the number of children that a worker has, nor is it a function of the change in consumer prices (or inflation rate). Because if this were so, then workers can have 4, 8, a dozen children, and pressure the state to pressure the businessmen and employers to increase their pay because their needs to live decently, from food to clothing to medicines, have increased. In a situation of many poor economies like the Philippines where labor supply always exceeds labor demand every year because of fast population growth, the army of the unemployed will keep increasing and poverty incidence will keep expanding.

Many people, especially ordinary employees, aspire to become start-up entrepreneurs someday. In fact, people should not aspire to become “ordinary employee forever”. Unless their company or organization keeps expanding so that they are assured of continued career mobility until they retire, workers should dream of becoming “their own boss” someday. This will put them on the same situation as their former employers, and this will temper them from making unreasonable demands that are beyond the capacity of employers to be granted. Conversely, if employers know that their current hard-working employees will leave them soon to put up their own start-up enterprises, they will be forced to give good pay and benefits to encourage said self-driven employees to stay in their companies.

Monday, May 22, 2006

Spontaneous Market 1: Profit, Trade and Personal Responsibility

Below are some of the fears and reservations that people think will happen if we shrink government to a low level and allow more markets to rule society and the economy.

1. Markets are unreliable and risky; if left to themselves would lead to monopolies and other abuses; hence, government must step in to regulate the markets.

2. Profits are bad; people’s welfare will be sacrificed by profit-hungry enterprises; hence, profits must be regulated by government.

3. Shift to parental responsibility in the provision of certain social services like basic education and health care is not possible because of skewed income distribution in many countries; this could worsen the inequality. Hence, these services should not be left to the markets; the state should regulate and provide these services, at least to the poor families.

4. Shrinking government will result to massive lay-offs, worsen the already high unemployment economy.

5. Progressive taxation – higher tax rates to the rich, lower to the poor – is needed to address or minimize the inequality in society. Individual income tax should not be abolished.

6. Further trade liberalization will gobble up many local industries, especially the small and medium-size enterprises (SMEs).

There are many more fears and reservations, even myths. But I will limit myself to those 6 at the moment. Below are some thoughts I have assembled to clarify those fears.

On #1, there are 3 inter-related fears articulated. Let me tackle each:
1a. On markets as unreliable and risky.

Very often, people think or define "markets" as those big corporations, the stocks and foreign exchange, the taipans, etc. Partly correct there. But in reality, the "markets" are us: consumers and producers, writers and readers, bus operators and passengers. Students who demand education, schools and teachers who supply education. The ordinary folks who need food, the farmers/fisherfolks/poultry growers who produce food; the carinderias or restaurant owners, ambulant vendors who cook and sell foods. Long-haired people who need hair-cut, and barbers who provide hair-cut services.

Weather and climate, technology and innovation, tastes and preferences, incomes and wealth, change through time. Hence, supply and demand of various goods (books, clothes, shoes, beer, tv, car, fish, pizza, etc.) and services (education, movies, health care, hair-cut, travel, massage, telecommunications, media programs, etc.) also change through time.

Thus, a specific clothing design will be a famous today, but will be out of style and replaced by another design a month or a year from now. There is no need for government to regulate those adjustments, both in product quality and price, because the buyers and sellers adjust with each other. The lucky sellers become rich, the unlucky sellers become poor. Until the next round of product and service innovation and changes.

Yes, markets can be unpredictable and risky. But more risky for those who do not regularly innovate because the next guy could come up with new, more modern product, at a much better and competitive price.

Suppliers should be free to compete with each other in producing a particular good or service that will be attractive to buyers. Buyers should be free to compete with each other in getting a particular good or service.

1b. If markets are left by themselves, they would lead to monopolies and abuses.

This is possible even temporarily because of product differentiation, but it seldom happens on a permanent basis. Firm A produces a regular car, will have temporary monopoly on that model and features. Firm B produces a car with a different design and bigger engine, another temporary monopoly on that model. Firm C rolls out a car with same engine power as A’s but on automatic transmission, another temporary monopoly on that car model. Firm D manufactures a car with same design and engine power as B’s but a four-wheel drive. Firm E comes up with a tiny, 2-seater, but very fast car. Firm A fights back with another small car, fast but more fuel efficient than E’s car. And so on and so forth. In the end, there is no “car monopoly and abuses” by a single car manufacturer.

Although in economic theory, the existence of natural monopolies and/or oligopolies in some but not all industries, is recognized. The main justification for the “naturalness” of such monopoly is to have economies of scale. Like a water utility firm in a densely-populated area. If there will be 2 or more water utility firms in the same area, there will be 2 or more sets of diggings on the same roads, creating bad traffic and disrupting a lot of economic activities in the affected areas. Thus, government involvement may be required but only in terms of enhancing existing and future contestability of these few markets, instead of direct participation in that market (either through production or trading). To make entry and exit of new players/producers easier and less cumbersome, often through many regulations by the Executive branch, and franchising laws by the Legislative branch. For the rest of the "healthy" markets, no "government cure" is necessary

In the real world, freer markets lead to more firms and producers, than monopoly firms. Looking around us, there is no car or bus line monopoly; no pizza or softdrink monopoly; no shoes and sandals monopoly; no beer and cigarette monopoly; no computer and banking monopoly; no real estate or mall monopoly. The only monopolies we have are those “chosen” and hand-picked by the government. Thus, it’s government intervention that created monopolies, not market mechanisms. The appropriate role for government is not to “choose and bless” favored companies as monopolies but to ensure free entry and exit for private sector players who will work for market equilibrium. To a large extent, this is happening in the Philippine oil industry with the entry of new and independent players.

1c. On government must always regulate markets.

As mentioned above, many market imperfections (monopolies, oligopolies, cartels, other variants) are state-sponsored, state-created, and state-maintained. These are done through single or limited franchises by legislation, trade protectionism, restrictions against foreign investments, cabotage law in shipping, high taxes and complicated tax rules that affect profitability, various bureaucratic red tapes and maze of regulations that distort level playing field and discourage competition. For instance, local producers like cement manufacturers which always hike their prices when competing cement imports are curtailed. Local shippers charging high rates because foreign shipping lines are prohibited from transporting local cargos in domestic routes under the cabotage law.

So, on these instance of various forms of regulation, it is governments that actually hinder the free markets and obstruct the otherwise fast and natural adjustments of market players – the producers and consumers of various goods and services. Government in these cases prevent consumers from getting better quality, good price, imported goods and services through trade protectionism as lobbied by some local producers. Governments prevent many aspiring employees to become entrepreneurs by taking a big portion of their monthly and annual income, by further taking away their savings through numerous consumption taxes (VAT, excise tax, etc.), and by giving them a maze of regulations, inspections, tax rules, harassment by revenue collectors and other bureaucrats.

2. On profits are bad.

If people cannot make profit on providing transportation, we shall have no jeepneys, buses, taxis, tricycles, airlines, shipping lines, etc. If people cannot make profit on cooking and selling food, we shall have no restaurants, carinderias, food shops, ambulant food vendors. If people cannot make profit on selling rice, chicken, meat, fish, vegetables and fruits, we shall have no farmers, fisherfolks, animal growers. If people cannot make profit on education, we shall have no private schools and universities. Government colleges and universities like UP survive only because of the taxes that the state collects from taxpayers, including private universities and their teachers and employees.

Private producers and sellers in the food chain provide everything, from food production to distribution to processing to selling in food shops and stalls. Everyone in the chain is profit-oriented, from the farmers to traders to carinderia owners. So, profit is good.

The desire for profit provides people the incentives to produce a particular good or service. If there are other producers and sellers of such good or service, newcomers will have to offer better quality, better price, better packaging, better location, to attract buyers. Competition among various sellers provide welfare to consumers because they can compare prices, quality, ease of location, warranty of service, etc.

Of course, there are profits which are abnormally high since they are the fruits of unhampered monopolies/oligopolies. Government can weaken these profits not by offering direct competition but by allowing other private producers and sellers to offer the competition. Smart and Globe telecoms companies have had a spectacular run with profits, enough to attract Sun Cellular to join the fray. There is no need for government to lift a finger yet since the intense competition among the three have yielded better services for cellphone users. When monopoly/oligopoly extra-high profits are due to state-creation and sponsorship, also known as "rent-seeking", the state can remedy the situation by backing off, by withdrawing its political intervention in granting the monopoly/oligopoly powers through economic liberalization.

3. On shifting to parental responsibility, not state responsibility, education and health care.

This is a long-term goal, to give justice to hard-working parents, and (unfortunately) penalize less hard-working (if not lazy) parents. One can argue that an initial equilibrium assumes equal endowments, so that in the absence of such utopia, we can settle for equal opportunities provided by universal education and state welfare. That future productive citizens should not be penalized for having lazy parents.

While there is some truth to this observation, there is even larger logic that parents who studied hard when they were young, worked hard after schooling, have few kids, should not be heavily taxed so that the government can subsidize less-responsible parents who are less-skilled, have big families, and are not ambitious and hard-working enough.

Admittedly, it is politically “incorrect” to say these things, and one can be branded as “heartless”, “too selfish”, for saying those things. But a break to this bad habit of artificial welfare should be made somewhere. Obviously, they were not done in the past, so the mentality remains up to these days.

On health care, one solution is to deregulate medical education. Schools which offer BS Medicine for 6 years total (vs. the current 8 years, 4 pre-med, 4 proper medicine) should be allowed. Supply of medical students and graduates is low because of the expensive and long training period. With more physicians, more private clinics and hospitals, more competition among health care professionals, there will be more affordable health care for most of the citizens.

On disasters and calamities, or social welfare in general, there is no lack of private sector initiatives in providing this service. Various civic clubs - Rotary, Jaycees, Lions, Kiwanis, Knights of Columbus, Masons, etc. -- the church, village or homeowners associations, media, etc. are often seen in these projects. Some of those financially-healthy clubs are donating and constructing whole school buildings, building clinics, in remote barangays in the provinces.

Giving charity is a natural thing to do for many people. Especially when done via voluntarily cooperation.

4. On massive lay-offs and unemployment.

This will happen if we merge many government departments or ministries in one sweep in from just one or 2 years; or if we privatize many government corporations and banks, state universities, etc. in 1 or 2 years. But that is not advisable. These sensitive measures will require transition period. Thus, the shrinking of bureaucracy should be done in stages. Say, from the current SUCs’ 85% dependence on state subsidy to 50% within 4 years, down to 25% within 8 years, down to zero subsidy within 10 years.

Besides, job creation should be the domain of the private sector, not government. When a private firm goes bankrupt, it just closes shop, and their managers and workers go looking for jobs elsewhere, or set up their own small business with their savings and some borrowings. When a government corporation keeps losing, it does not go bankrupt; government taxes the citizens more, or borrow more, just to keep that deficit-generator corporation.

When entrepreneurs and businessmen are not choked with multiple taxation and a maze of regulations, more private businesses will sprout up – from auto air-con or vulcanizing shops to computer and food shops; from carinderias to hotels; from pump boats to shipping lines. And they will create the jobs that the 1.2 million new job entrants Filipinos need every year.

5. On the need for progressive taxation.

Many governments have "progressive" taxation where the higher the income of an individual, the higher a percentage of that income that will go to government. This philosophy is largely driven by the desire to force, to coerce, equality among people. Hence, high-earners are penalized with high taxes while low- or zero-earners (like bums and lazy people) are rewarded with low or zero taxes plus plenty of subsidies and transfers.

In many countries too, governments do not stop at taxing incomes.
What was taken home by the private citizens are further taxed, among others:

* tax on corporate income, inheritance
* tax on consumption (value-added tax or VAT, import tax, excise tax, amusement tax, vehicle registration tax, travel tax,..)
* tax on savings (earnings from bank deposits, tax on holding bonds, etc.)
* tax on investments (business permit fees, franchise tax, environmental fees, documentary stamp tax, real property tax,...)

So-called progressive taxation can actually have regressive effects. You are penalizing the hard-working people by taking more of their incomes. This can encourage laziness to some people, or spur them to go into the “underground” economy where no taxes are collected.

6. On trade liberalization gobbling up SMEs.

Trade protectionism allows some firms and industries to thrive when they should have closed shop because of non-patronage by the local consumers. Government plays God by choosing the winners who are assured of the mark-ups in the amount of the tariff protection. These winners are not necessarily small since they have the resources to convince government to pick them - cement, steel, sugar, among others. Livestock and poultry producers have the numbers to make politicians listen, but the majority of these producers do not have the scale to benefit commercially from high tariffs.

In the meantime, small banana-que, barbecue and lechon manok vendors who use the output of protected industries as inputs to their products would feel the profit squeeze. Small carinderia owners and their ordinary customers will be squeezed when cheaper rice, cheaper vegetables, cheaper meat and poultry products will be deprived to them. Maybe if these products had been more affordable, many of people would not resort to eating instant noodles or plain sauces as viands and scrimp on nutrition. Continued protectionism is anti-poor. In agricultural trade, the urban poor and rural poor, the fisherfolks, the sugar workers, corn workers, banana workers, poultry workers, etc., the unemployed and underemployed, benefit when we bring down the price of rice.

Wednesday, May 17, 2006

China Watch 2: China's Tourism

China is not only the world's 2nd largest economy in terms of GDP size (by PPP valuation) today. It is also the world's 2nd largest source of foreign tourists. And in the perspective of advancing free market, this is a good development. Why?

The Chinese's increasing wealth, tourism, business travels, and even migration, will spur more private enterprise development and expansion in the rest of the world. You buy cheap products from China, you sell it elsewhere at a good margin, or you use it as raw materials or intermediate inputs in your manufacturing processes, sell at a good price, you make money. Rich Chinese engaged in exports and trading also visit your country, spend their money there, the hotels, restaurants, tourist spots, tour guides and travel agencies, airlines/shipping lines/bus lines in your country are happy.

When tens of millions of Chinese (including Chinese politicians and government bureaucrats) are able to travel abroad and see the culture and economies of other countries, more and more of them will realize the value of people mobility, the beauty of individual liberty, and the efficiency of assigning more personal responsibility, away from centralized and state responsibilities and high taxation.

See related news below.

Chinese travel is taking off
By Howard W. French
The New York Times, MAY 16, 2006

...In 1995, only 4.5 million Chinese traveled overseas. By 2005, that figure had increased to 31 million, and if expectations for future growth are met or approached, even this gargantuan growth will be quickly dwarfed. Both Chinese and international travel industry experts forecast that at least 50 million Chinese tourists will travel overseas annually by 2010 and 100 million by 2020.

In 2004, the last year for which there is complete information, 61.7 million Americans traveled abroad...

The last nation to burst on the world travel scene with similar speed and force was Japan, which was enjoying an explosion of prosperity in the 1980s. Suddenly, Japanese could be seen everywhere, especially groups of middle-aged tourists wearing caps and brandishing the latest camera gear, and led, inevitably, by a Japanese tour guide hoisting a flag so that people would not get lost... roughly 17 million overseas visits.

As recently as the late 1980s, all but the Chinese elite were expressly forbidden from traveling overseas. But by 2003, China's overseas travelers had already surpassed Japan's, placing it squarely among the world's leading travel nations....

The six most popular destinations for the Chinese are Japan, Vietnam, South Korea, Russia, Thailand and the United States. Patterns that took years to develop during the Japanese wave are already falling into place in many of these countries, with hotels, restaurants, airports and shops beginning to cater to their needs with special Chinese language services, bank ATMs and menus oriented toward Chinese tastes...

* See also: China Watch 1: World's Largest Economies, Population, 2005, April 20, 2006

Free Trade 2: Unilateral Trade Liberalization

Below is my essay that was a runner up to Tech Central Station's essay writing contest on "Do free trade agreements help Asia become globally competitive?" Posted in TCS website,

Actions Louder than Words
By Bienvenido S. Oplas, Jr.
15 May 2006

Free trade agreements and their variants (economic cooperation agreements, regional and sub-regional trade agreements) are agreements among Presidents and Trade Ministers, agreements among governments; they are not agreements among people of those countries.

Funnily enough, countries or governments do not trade with each other; people do. And when people trade with each other, they normally do not set conditions, they do not make paper agreements. For instance, a Filipino software engineer does not require that a Thai garments producer should first buy his software program before he will buy the Thai's new lines of long sleeve shirts. People simply buy certain goods or services from everywhere because they want something of value for their money.

People are happy when they find bargains -- cheap clothes, shoes, computers, food, drinks, cell phones, -- whether or not those are available in their traditional, often local, shops. People are happy when they have plenty of choices of products, and sources to find various goods and services to fill their needs. In this sense most people advocate free trade whether they know it or not.

Some groups, however, have a double standard. They want all their consumption needs and production inputs to be liberalized and to be available at bargains, but want their own products and services to be protected from competition. It doesn't work that way. Still, governments the world over so often give in to protectionist aspirations. Such is done often in the name of "nationalism" and "helping the poor", but this view is myopic.

Enabling the poor to have access to high quality but affordable food, clothing, medicines and housing or construction materials (made available by markets and competition among producers and sellers) is, itself, "helping the poor". Expanding job creation and employment opportunities as companies expand or the number of small- and medium-sized entrepreneurs grows due to lower production inputs and costs; is also "helping the poor".

If people want protectionism, then everything should be protected, no exemptions. If local farmers want their rice or bananas or pineapples to be protected from foreign competition, then they should not expect to buy cheaper, free-trade-price fertilizers, chemicals, seeds, tractors and their spare parts, and other production inputs. They should not expect to buy cheaper clothes, toys, shoes and other consumer items for their families.

Why we don't have free trade

There are a number of reasons why government trade negotiators are prone to leaving trade restrictions that sabotage free trade.

One -- protectionist lobbyists, from local farmers or manufacturers, to plain anti-globalization NGOs and ideologues, are more organized than consumers. And government officials tend to listen to noisier, more organized groups, despite the fact that everyone on this planet is a consumer.

Two -- governments want to retain high tariffs to raise revenues that finance bloated bureaucracies in their countries. Corrupt leaders benefit from high tariffs, bureaucratic paper work and other non-tariff barriers. So often, of course, importers and traders will be forced to bribe them in exchange for letting in the restricted commodities.

Three -- the "net gains in trade" is still not realized and appreciated by majority of government officials and their trade negotiators. Take rice trade liberalization. When poor households including non-rice farmers (banana farmers, aquaculture farmers, and so on) save from buying cheaper imported rice than locally-produced rice, they do not burn their savings. They will use the money saved to increase their consumption of bananas and other fruits, vegetables and fish, poultry and livestock products, or have haircut more often. This price signal will alert some rice farmers to shift to other livelihood like vegetable farming, aquaculture, poultry and livestock farming, and so on. The job displacement is temporary but the economic efficiency of labor and resource re-allocation is more long-lasting.

What to do?

Since government trade negotiators have such limitations, the WTO should not be headed and negotiated by them, but by leaders and representatives of federations of traders (exporters and importers) in each country. Now, this is easier said than done since the WTO was formed by governments, not private traders and consumers.

If full free trade among many people in Asia and the rest of the world is not possible, there are other alternatives. One is for countries whose political leadership and trade negotiators understand the benefit of full free trade, to undertake unilateral trade liberalization.

Two, allow "dumping" of surplus products and services by other countries. Dumping is good, especially if the "dumped" products are still of good quality. As discussed above, economic and job dislocation of the adversely affected sectors is short-term, but millions of consumers who realized great savings from buying "dumped" clothes from abroad will have extra money to buy other goods and services which they would not buy otherwise if said dumped products are not available.

Three, allow export subsidies by rich country governments and do not make it a hindrance to more trade liberalization. If those governments will over-tax their citizens so that their exports can be sold at a lower price to poorer countries, so what? Buy their heavily-subsidized farm products, let the citizens of recipient countries enjoy cheaper imported food and dairy products.

While free trade agreements among Asian countries can help them be more globally competitive, very often such agreements are couched in various conditionalities. That actual free trade between and among partner countries are 10 or 20 years from their signing date. Hence, what will really help Asian countries be more economically dynamic and globally competitive, is actual free trade, preferably with no more paper free trade agreements.

Bienvenido S. Oplas, Jr. is a runner up in the TCS Asia Essay Contest.

Last year, I wrote this:

On Unilateral Trade Liberalization

November 16, 2005

In less than a month, the WTO Ministerial Meeting will be held in Hong Kong. This event happens in different countries every 2 years, but one single issue keeps cropping up in every meeting: trade protectionism especially in agriculture. Representatives of countries and groups or blocs of countries accuse other countries or blocs of trade protectionism and the accused fight back. The arguments and facts presented vary, but one thing is common: all of them (with the exception perhaps of 1 or 2 small, unilaterally-liberalizing country/countries) are protectionists. There are a number of reasons why government officials who represent their countries are prone to trade restrictions, to sabotaging the spirit of free trade, whether in large or small scale.

One, protectionist lobbyists, whether local farmers, fisherfolks and manufacturers, or plain anti-globalization NGOs and ideologues, are more organized than consumers. And government officials tend to listen to the more organized, more noisy groups, despite the fact that everyone in this planet is a consumer.

Two, government officials and negotiators are under orders by their country Presidents or Prime Ministers to retain high tariffs in a number of tradeable goods for import and export tax purposes, to raise revenues, to finance the bloated bureaucracies in almost all countries. Of course, corrupt leaders benefit from high tariffs and other non-tariff barriers: importers and traders will be forced to bribe them in exchange for letting in the restricted commodities, then they become rich and powerful even if they are lazy.

Three, the "net gains in trade" outcome is still not realized and appreciated by majority of government officials and their trade negotiators. Many of them think they serve their citizens a good service by restricting trade, especially in agriculture. When poor households, jobless people, small fisherfolks, ordinary employees in the services and industrial sectors, even the non-rice farmers (banana farmers, mango farmers, aquaculture farmers, etc.), can save from buying cheaper imported rice than locally-produced rice, this is not the end of the world for the local rice farmers. Consumers will not burn the money they save from buying cheaper imported rice; they will use the money to increase their consumption of bananas and other fruits, or vegetables and fish, or poultry and livestock products, or have haircut more often. This price signal will alert some rice farmers to shift to other sub-industries like vegetable farming, aquaculture farming, poultry and livestock farming, and so on. The job displacement is temporary but the economic efficiency of labor and resource re-allocation is more long-lasting.

Since government officials have such limitations, then the WTO should not be headed and negotiated by them, but by leaders and representatives of federations of traders (exporters and importers) in each country. Now, this is easier said than done since the WTO was formed by governments, not private traders. So what traders and ordinary consumers can do is only to launch counter-lobbies to the protectionists and the anti-globalists.

I'm not hopeful that much trade liberalization will happen soon on a global scale. Liberalization will, and does happen, more via bilateral and regional cooperation. But a government with open-minded officials and trade negotiators can undertake unilateral trade liberalization. If EU governments give huge subsidies to their farmers so that the latter can sell their farm products abroad at a lower price, so what? Buy their heavily-subsidized farm products, let the citizens of your country enjoy cheaper imported food and dairy products. As discussed above, your citizens will not burn the money they save from buying cheaper imported products, they will use the money to buy other goods and services, from better construction materials for their houses to having more haircuts or more parties.

See also:  Free Trade 1: Estonia's Free Market, Globalization, May 09, 2006

Wednesday, May 10, 2006

Tax Cut 1: Australia

Australia, one of the most dynamic economies in the world, announced some tax cuts. The rates are still high compared to say, many Asian developed and emerging markets like HK, Singapore and Taiwan. Nonetheless, the cuts can further spur private and household consumption or go into private investments, either way will further enhance the economy.

Australia is attracting a lot of talented middle class Filipino households and professionals as migrants. If those talented and self-driven migrants (Filipinos, Vietnamese, Malaysians, other nationalities) will find the opportunities they need there, it won't be long that Australia will overtake many European countries in both economic dynamism and GDP size.

If this happens, many of its neighbors in Asia like the Philippines will benefit, as more trade, more tourism, more migration and people mobility will happen.
Sydney announces tax-cutting budget
By Sundeep Tucker in Sydney
May 9, 2006

In a 30-minute address to Australia’s parliament in Canberra, Mr Costello, Australia's Treasurer, announced that the country’s highest marginal rate of personal income tax would fall from 47 per cent to 45 per cent while the next highest rate would also fall by two percentage points to 40 per cent.

Tax thresholds will also rise, with only those earning above A$150,000 a year paying the highest marginal rate. Mr Costello said the changes would make Australia’s tax regime more internationally competitive, as it struggled to attract and retain key workers.

The government will also cut business tax by A$3.7bn over the next four years with reforms to the small business taxation system and higher depreciation allowances. Mr Costello further announced that super-annuation, or pension, benefits paid to over-60s from July 2007 would be tax-free, and he extended family tax benefits to more people....

Mr Costello denied the tax cuts would precipitate an increase in interest rates, as the budget would remain in surplus....

Tuesday, May 09, 2006

Free Trade 1: Estonia's Free Market, Globalization

While Hong Kong and Singapore remain the world's good examples of a generally free economy, there are other new-comers who trail these 2 small-population but dynamic Asian economies. Among those new-comers are Estonia. In a span of just 10 years (1995-2004), per capita GDP (adjusted for cost of living through PPP) has almost doubled!

An article from Cato website written by Marian Tupy featured Mart Laar and what he did to Estonia as that country's former PM. Again, for brevity purposes, I cut several paragraphs of Ms. Tupy's article. To see the whole paper, visit

Among the achievements of Mart Laar for Estonia, according to Ms. Tupy, are the following:

* According to the Economic Freedom of the World: 2005 Annual Report, which is published by the Fraser Institute in Canada, Estonia is the ninth economically freest country in the world. Today, many people find it difficult to remember the days of the Soviet Union, when the Estonian economy was completely dominated by the state and marked by endless lines and shortages. Mart Laar replaced the "dead hand" of the government with Adam Smith's "invisible hand."

* His government eliminated import tariffs (a decision that was partly reversed by Estonia's membership of the European Union) and established a flat income tax. Corporate taxes on reinvested profits fell to zero and a currency board was established to combat inflation. The government also undertook extensive privatization of state companies.

* Though Estonia experienced a sharp but short recession that was shared by all transitional economies, by 1995 the economy was roaring again. According to the World Bank, between 1995 and 2004, Estonia's per capita gross domestic product (GDP) grew at a compounded average annual rate of 6.6 percent. During that decade, Estonia's GDP per capita adjusted for purchasing power parity rose from $6,847 to $12,773 in constant 2000 dollars, an increase of 86.5 percent. Estonia's sustained, high growth rate was among the region's highest and set the country on course to join the rest of the developed world....

* Mart Laar's impact was felt beyond the influence he had on the lives of his fellow countrymen. Other post-communist countries learned from Estonia's reforms and imitated them. Estonia's successful adoption of the flat tax led the way for Russia, Slovakia, Ukraine, and others. Estonia's unilateral trade liberalization is a continued inspiration for other countries; including, most recently, Georgia. There are also those who feel that the presence of a market-liberal Estonia in the European Union will lead the EU away from her socialist policies....

A related note I wrote last April 19, 2006:

Globalization = Lower Inflation

The IMF has recently released its World Economic Outlook (WEO) 2006 ( Chapter 3 is entitled, "How has globalization affected inflation?" and among the major findings and analysis of the chapter are:

* Over the past decade, globalization has pared or reduced inflation rate; by 1/4 of a percentage point in developed economies, by 1/2 of a percentage point in the US in particular.
* Globalization is no guarantee of low inflation in the next year or two, due to forecast robust global growth and diminishing economic slack.
* For globalization to have substantial lasting impact on inflation, it must change the overarching objectives of monetary policy (like inflation-targeting near zero).
* Globalization has restrained price and wage growth in sectors more exposed to international competition like textiles and electronics.

In economic theory, globalization and free trade results in "factor price equalization"; or if certain factors of production are less or non-mobile, free trade results in "commodity price equalization". This means that countries that have surplus output (say, surplus rice in Thailand and Vietnam) will experience declining rice prices domestically, while rice prices in countries that have low rice output relative to their population's needs (like the Philippines) will be high -- if international trade in rice is restricted. Globalization and free trade reallocates resources and production from countries and places where they are abundant, to places and countries where they are scarce and needed. Such resource reallocation is reflected in commodity price (in this example, rice price) that is generally the same across many countries, adjusted for cost of living in those countries.

Graphically, the global supply curve tends to move more flat in a regime of free trade and unhampered globalization. A flatter supply curve means a flatter price range (ie, small difference from the most expensive to the cheapest price of a commodity) across a wider and bigger supply of that commodity around the world.

Thus, even in years and periods of robust global economic growth, globalization and free trade should result in modest price rise and stable single-digit inflation rate on average across the world. This is because for countries and places to further expand output, they will have to hire more workers and technology from other countries, import more production inputs (from agricultural raw materials to high-tech farm machineries) from other countries. The fast movement of inputs, intermediate goods and services, and final products around the globe will provide the momentum for such robust global growth to be sustained for several years. This is on the assumption of course that there are no adverse external interruptions like wars, large-scale terrorist attacks, and natural catastrophies.

I do not know how far the IMF will recommend in further pushing for more free trade, in further removing and ultimately abolishing various forms of export subsidies, production subsdies, and by extension, slashing taxes that help finance those trade-distorting subsidies.

Monday, May 08, 2006

US Debt 1: How Bloated is the US Govt?

The US has the largest economy in the world.
But it also is the most indebted country in the world.
And it has the biggest government spending, the biggest bureaucracy, in the world.
Just how big are the spending, and the taxes and borrowings to keep those huge expenditures?

Lucky that I checked the Mackinac website, and I saw Mr. Mark Brandly's article, "How big is Bush' big government?". For brevity purposes, I removed certain paragraphs; if interested to see the whole paper, please see

Below are the relevant numbers from Mr. Brandly's paper:

* Federal spending alone in fiscal year 2006 is expected to be over $2.7 trillion, which means the federal government spends $7.4 billion a day or $5.1 million in every minute of the year. This is 815 times the level of federal spending in 1930.

* This $2.7 trillion in federal spending breaks down to $9,000 per capita or more than $36,000 for the average family of four. If we add in all state and local spending, then total government depredations (a term Murray Rothbard used to describe the greater of government spending and government receipts) are currently over $4.4 trillion or about $14,700 per person annually.

* A significant portion of this spending is being financed with government borrowing. In 1930, the per capita debt load was $140 per person. The current federal total debt level is $8.4 trillion, which works out to around $28,000 per person. In short, the per capita debt load is 200 times larger than it was in 1930. Adjusting for inflation, the real debt per capita is still over 16 times more than it was in 1930.

* Federal government debt increased $553 billion in fiscal year 2005 alone. That's more than $1.5 billion of additional debt per day and over $1 million of borrowing per minute for every minute of the year. The interest on the debt in 2005 was $352 billion or more than $1,100 for every man, woman and child in the country. These interest payments are roughly equal to 37 percent of federal income tax revenues.

* Much of this debt is owed to the Federal Reserve. U.S. taxpayers are on the hook for $758 billion of government securities that are held by the Fed. So, on average, every person in the country owes the Fed about $2,500.

* One way to see the harm of government intervention is to realize its effects on our standard of living. The depredations of the state reduce the incentives to be productive, destroy our capital base and have a negative effect on economic growth. From 1959 to 2005, adjusting the numbers using the implicit price deflator, real Gross Domestic Product increased an average of 3.37 percent annually.

* Consider the possibility that government interventions reduced real economic growth 1 percent annually during this time. If there had been an additional 1 percent per year economic growth since 1959, then real GDP would currently be 55 percent higher than it is. The 2005 GDP of $12.5 billion would have been $19.3 billion. The median family income is estimated to be $44,389. A proportionate increase in this statistic results in a median income of $68,800.

* In this scenario, a worker with a salary of $44,389 who is losing 35 percent of his salary to taxes has a tax liability of $15,536. After paying the various types of taxes he gets to keep only $28,853 of his salary. With the extra 1 percent growth per year since 1959, if that worker represented the average, his gross salary would be $68,800 and he would get to keep all of it.

* It is conceivable that the $4.4 trillion of annual depredations could have caused more than 1 percent annual damage to our economic growth since 1959. What are the implications of a 2 percent negative impact on GDP? If the absence of interventions had added an additional 2 percent annual growth, this would have resulted in 141 percent more output today. The 2005 GDP would have been over $30 trillion and the median family income would now be $107,000. The worker described above with the $44,389 gross salary and the $28,850 of after tax pay, would have an income of $107,000. The depredations have reduced his net income by 73 percent.

* Those of us making the case for liberty have logic, history and morality on our side. Government intervention is immoral and should be stopped for that reason alone. However, the economic costs of the intervention are also important. Part of the appeal of freedom is that it leads to tremendously higher standards of living and these numbers show that government interventions that cause seemingly small amounts of harm, over time, impoverish a society.

Monday, May 01, 2006

Foreign Aid 4: Easterly vs. Sachs

What do Bono (U2 band), Jeff Sachs (Kofi Anan's chief consultant on the UN Millenium Devt. Goals, MDG), Bill and Melinda Gates (multi-billion philantrophists), former US Presidents Jimmy Carter and Bill Clinton, Make poverty history (headed by former rock star Bob Geldoff) and William Easterly (of NYU) have in common? They're either Americans or Brits?

Well, they are among the nominees in the "2006 Commitment to Development Award" sponsored by the Center for Global Development (CGD, and Foreign Policy magazine. And that's where the commonality among them ends. For these guys have varying, even opposing, ways in advancing development in the world's poorest regions and countries. For instance, while Bono, Geldoff and Sachs are campaigning hard for "more foreign aid" to Africa and other poor regions of the world (of course they cannot be as loud in campaigning as well for "more taxes please" to finance those "more foreign aid"), Easterly wrote a book, "The White Man's Burden: Why the West's Efforts to Aid the Rest HaveDone So Much Ill and So Little Good" ( ). I voted for Easterly in the CGD survey.

Dr. Easterly by the way came to my alma mater, the University of thePhilippines, School of Economics (UPSE) January 17 this year. He spoke on "Can national policies really raise growth?". His talk was based on his other book, "The elusive quest for growth: economists'adventures and misadventures in the tropics". I was in that big conference, also attended by the Philippines' 5 past economic planning secretaries and ministers! Easterly didn't talk much about foreign aid though. I spoke briefly during the open forum, and argued that "less government and less taxes can raise economic growth".

"The white man's burden" was among the recently featured articles in Tech Central Station (, below. For brevity purposes, I cut some paragraphs. If interested to see the entire article, see

Planners vs. Searchers
By Roger Bate
28 Apr 2006

The White Man's Burden is a rare book. Its author, William Easterlydistills all of his considerable knowledge and experience aboutforeign aid into it, and never pulls punches in a subject noted forstar-studded platitudes and uncritical thinking. Given how aid hasfailed so utterly in so many places to alleviate the suffering of thepoorest people, The White Man's Burden could have been a depressingread. But Easterly's natural good humor and humility -- as well as hissolid narrative abilities -- make it an inspirational work. Perhaps noone knows better than Easterly that you need a good sense of humor towork in foreign aid to begin with.

The 2005 love-fest with Africa -- G8 summit, Live8 concerts, Angelina,Bono and Brad highlighting the plight of the poor, etc. -- and theideal of making poverty history has led to an increase in aid fundingfrom private and, especially, state coffers. Easterly's conclusion,however, is that this money will not only be wasted, but it will becounterproductive.

Foreign-aid is driven by "Planners" says Easterly. Perhaps the most famous planner and a determined opponent of Easterly is Jeffrey Sachs of Columbia University and the United Nations. Planners think of development as a technical problem that can be overcome by ambitious, multi-faceted, centrally-controlled campaigns, backed up by oodles of cash. Unfortunately, planning lacks market feedback mechanisms, so cannot measure useful performance indicators. Plus, Planners are rarely held accountable for their myriad failures...

Easterly demonstrates that nearly all aid programs fail to reach individually set targets "A UN summit in 1990, for example, set a goal for the year 2000 of universal primary-school enrollment. (That is now planned for 2015). A previous summit, in 1977, set 1990 as the deadline for realizing the goal of universal access to water and sanitation. (Under theMillennium Development Goals, that target is now 2015). Nobody was held accountable for these missed goals....

While Easterly is critical of the foreign aid status quo, he cites many examples of ways in which aid has worked, such as food vouchersto poor families -- contingent upon children attending school ratherthan working in low productivity jobs. Such a scheme was pioneered inMexico and is working well there and elsewhere....

Last April 20, 2006, I wrote this:

Debt-Relievers are Themselves Indebted

The G7 countries -- US, Japan, Germany, UK, France, Italy, Canada -- are among the world's largest lender countries. They set aside billions of dollars every year in foreign aid to be lent to the world's poorest economies through the multilateral institutions like the UN, World Bank (WB), and Asian Development Bank (ADB), and their respective countries' international development agencies.

Presidents and politicians of indebted poor countries always look up to the G7 and other rich countries for "debt forgiveness/write-off", debt swaps like "debt for nature", "debt for UN MDG goals", and other forms of "debt relief". But are these rich countries, the G7 in particular, still that rich to throw in more money to the indebted poor countries? Nope, many of them are not, and they themselves are highly indebted. See table below.

General government gross debt as % of GDP, G7, 2000 and 2005 respectively:

1) Japan: 142.2%, 175.5%
2) Italy: 111.3%, 106.3%
3) Canada: 101.5%, 85.0%
4) Germany: 58.7%, 67.5%
5) France: 56.6%, 67.3%
6) US: 57.1%, 62.9%
7) UK: 41.6%, 43.3%.
(source: IMF, World Economic Outlook, April 2006 database).

So how can these countries continue their practice of throwing more money into the same problem in poor countries, when they themselves are indebted? The G7 and other indebted rich countries can help the poor countries even with less foreign aid if the former will reduce their indebtedness, reduce their borrowings, which will help push world interest rates downwards. Poor countries' debt service payment (both foreign and domestic debts) will decline if interest rates (both world and national) will go down. Then poor countries can either reallocate part of their expenditures from debt payment to social services, or cut taxes to encourage entrepreneurship and job creation among the people.

See also: Foreign Aid 3: Bob Geldoff and More Aid, November 10, 2005