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.