EFN Asia 57, Conference 2014 in Hong Kong, part 2

Continuation of notes made by Karthik Chandra during Conference 2014. The full 25-pages notes are posted in http://efnasia.org/wp-content/uploads/2015/10/EFN-Asia-2014-Conference-Report.pdf

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Day 1, November 6, 2014

Opening Key Note Address: “Economic Growth and Income Inequality”

Dr. Razeen Sally

The National University of Singapore (NUS)

• As liberals, we always face this rather fundamental issue of why at all should we bother to address the issue of income inequality.

• Such inequality has two facets: inequality of outcomes (a “collectivist approach” of typical socialists, communists, or do-gooders) and the inequality of procedures/treatment (eg. rule of law, equality, etc.). We need to clearly distinguish between the two.

• There is also a need to go back to the basics (abstract approach) of Schumpeterian capitalism:

 * Capitalism is always dynamic. Schumpeter said that ‘capitalism is a perennial gale of creative destruction’. Enormous progress takes place due to this creative destruction. This is not just an economic cycle but the story of our civilization itself.

 * At the heart of this powerful engine of capitalism is the entrepreneur, who is not necessarily a rational, objective person. Several impulses and incentives guide him. This engine thrives on inequality.

• Capitalism and Asia & the Global Financial Crisis (GFC):

 * Originally, economic freedom and capitalism was primarily a European idea. Subsequently, it became an Atlantic idea. Later, Asia too has witnessed greater economic freedom and increase in prosperity.

 * However, after the GFC, we saw assaults on economic freedoms and increase in restrictions. Capitalism is currently under assault and therefore pessimism is back. GFC saw a shift in policies and approaches: now there is much greater state intervention in both macroeconomic policy (debt, interest rates, deficits, etc.) and microeconomic policies (in the form of governments intervening in the smaller

details of markets like car standards, energy, pollution, etc).

 * Note: we need to understand the contrasting takes of Schumpeter and Keynes on capitalism.

 * More importantly, what unites such macroeconomic and microeconomic anti-capitalist intervention is the ‘social engineering’ mindset among a small group of high-minded, smart people who think that they can intervene in the micro- and macro-economic and the institutions.

 * But such interventions are inevitably counterproductive and harmful because the assumption that these individuals are fully knowledgeable is incorrect because 100% of information is never at their fingertips (much of the real information is tacit and non-formal).

* Rarely are the individuals themselves disinterested in the outcomes. Such interventions (even if beneficial) are deeply offensive to the very concept of freedoms and individuals.

• Given the above, the classical liberal take on inequality runs somewhat like this:

 * Globalization has improved incomes but also has driven inequality upwards. Yes, there is currently greater income inequality.

 * New technologies (3D printing, automated data storage, management and analysis systems, etc.) are destroying jobs – not just the blue collar ones - but also middle class white collar jobs (accountants, analysts, etc.)

 * And, what about the solutions to inequality? The classic interventionists (typically, social democrats) talk about greater taxation, etc. to “fix this problem of greater inequality”

• However, we need to look at the issue of inequality from a different perspective:

 * Usually, when we talk about inequality, we usually talk about income inequality within a country and not between countries. While economic liberalization has increased inequality within a country (E.g.: China, city states like HK, Singapore, etc.) it has actually reduced global income inequality (see Surjit Bhalla’s article saying that global inequality is at its lowest since 1850) i.e. between countries.

 * Increase in consumption, arising from greater liberalization of economies, has depressed incomes in some areas/countries but has greatly reduced overall inequality both within a country and between countries.

 * Education (see S. Bhalla’s article/ppt) actually is a great improver of averages.

 * However, a major challenge is the lack of big innovation. Yes, innovation is taking place at a big level but in narrow sectors and benefitting a narrower group of people. The IT sector serves as a good example where companies are getting easy money from globalized markets, and are getting great profits, and therefore are not seeing incentives to invest in innovation in other sectors. For instance,

Apple spends more on lawyers than on innovation of new products. At the same time, even though some people say that innovation results in job destruction, in the long run, innovation actually creates new and better jobs.

• In summary, the current state of affairs, post GFC is as follows:

 * at a macroeconomic policy level:

 Greater state intervention

 Redistributive approach (taxes)

 Debt/deficit financing with the threat of inflation always hanging over the head

 Central banks interfering in fiscal policies

 * Similar state of affairs at a micro-economic policy level also.

 * But, such interventionist approach is wrong on a more fundamental, constitutional basis and is based on several false assumptions, etc.

• Therefore, the unfinished business and important pending items to be done to liberalize product and factor markets: Making systems inclusive. (See reformulation by Daren Acemoglu and team on inclusive vs. exclusive systems.) In exclusive systems, esp. in Asian countries, the political and economic freedoms are closely intertwined. One cannot happen without other. Even the city states of HK and Singapore are lacking in innovations. This is because their systems are still bureaucrat-dominated.

• Finally, there is good news and bad news:

 * Compared to the past century (1914 to 2014), we have a more prosperous world: we are enjoying greater incomes, better health and better lifestyle overall. While today’s interest groups are still a problem they certainly are not as big a problem as interventionists of World War I.

 * But in the short run, post GFC, the pendulum has swung in the wrong direction i.e. towards greater state intervention. However, we should have greater liberalism and lesser state interventions in both micro and macroeconomic policies.

EFN Asia 22: Dealing with Economic Nationalism, Jeju Forum

Below is the Rapporteur's Report that I submitted to the organizers of the recently concluded Jeju Forum for Peace and Prosperity 2013. This is posted in the EFN Asia website.

○ Session Outline

Title	Dealing with Economic Nationalism	Session Code	5-A
Time	15:40 – 17:00	Room	A
Moderator: Wan Saiful WAN JAN Presenter: SAM, Rainsy Discussants: CHOI, Byung-il; FENG, Xingyuan; Pham Chi LAN; LIU, Junning; Barun MITRA; Tricia YEOH

○ Key Points by the Presenter

- Economic nationalism is understandable. Early stage of development, there is a need to protect crucial new and small economies, - Cambodia case, probably the poorest of the 10 member Asean countries. There is big disparity in economic development among members. - Asean is creating a free trade zone but it raises lots of concern in Cambodia. It needs a period of time to adopt and prepare before liberalization. - To compete successfully, country needs leadership. Not a matter of ideology but leadership with vision, that promotes national interest, any ideology can promote devt. No prospect for development bec leadership only wants to survive politically. We need to put the house in order first before we face competition. Need physical and social infrastructure. - Cambodia is a banana kingdom with gang and mafia of kleptocracy. One of the world’s most corrupt and underdeveloped countries. - GDP growth of 6% or more is meaningless if the environment is destroyed, social fabric is destroyed due to prostitution and human trafficking, inequitable development. - Free trade can be disruptive and destructive. Cambodia cannot face free trade and free market yet, it must have political democracy first. - Korean ODA for Cambodia is a waste of Korean taxpayers money as human rights is not protected, the gangs and mafia are in power. - Keyword:  political democracy, free market, Cambodia corruption, human rights violation, prostitution

○ Synopsis of Discussants

1. CHOI, Byung-il: - Disagree with Mahathir that countries need protectionism. Economic nationalism is unsustainable. - Many people in Korea complain of imported fish, other food, that we should be self sufficient, but forcing self-sufficiency in food, only few countries can survive. - How to attain econ prosperity, invest in education, liberalize the economy. Good political leadership is also important. 2. Pham Chi LAN: - Protectionist measures rose recently via technical barriers to trade (TBT). Tariffs are going down but various measures like health concerns, environment restrict trade. - Vietnam been a member of the ASEAN since 1995, we experience trade deficit with Asean members plus North Asia, but trade surplus with EU. - FDI about 80 percent coming from East Asia and South East Asia. But mainly for low cost, low tech industries, plus environmental problems. - Asean initiative is good but not enough, E Asian countries need to open up their economies more for Vietnam exports. 3. LIU, Junning: - Economic nationalism is a body of policies that protect certain local interests, requires the imposition of tariffs, restrictions of free trade, Intervention in the name of protecting “national interest”. - Nationalism forces consumers to buy only local producers, trade protectionism, even nationalization of some foreign companies. - Nowadays nationalism is omnipresent especially in dictatorships, currency control. It is costly to consumers because supply of capital, consumer goods becomes higher and costly. - It appeals to national pride, suspicion, fear of foreign goods, but consumers lose. Case of high tariff on foreign made milk. Consumers endure high prices, low or bad, harmful product quality. 4. Tricia YEOH: - Recent growth of Malaysia not at par with neighbors, cost of business is high due to corruption, bureaucracies - 1971 New Economic Policy (NEP) to eradicate poverty, noble, but was meant to protect the Bumiputera, the local elites, the princess of the Earth. It engendered a culture of patronage and cronyism. - Mahathir this morning said the need to protect automotive industry. Such protectionism actually is a waste of government money to protect local industries, bail out of around 69-70 billion Ringgit were lost. - Government role has in the economy has been rising. Previously, private investments was high but since 1998 private investment was less than government investment. - Government-linked corporations(GLCs) account for “approximately 36% and 54% respectively of the market capitalisation of Bursa Malaysia and the Kuala Lumpur Composite Index”. GLCs and GLICs are the major players in the economy. - Malaysian economy is heavily dominated by government, in the areas which are privatised, select individuals are chosen to receive lucrative tenders and contracts. - Cronyism results if government is dominant, give only to friends, monopolies in electricity, telecoms. There is need to remove barriers to trade, make the economy more competitive, control corruption. 5. FENG, Xingyuan: - Trade benefits both players, allows efficient distribution of factors of production. The “infant industry” argument, we should not protect, we will only protect underdevelopment. - Open markets and protection of property rights are key. Also stable currencies to protect foreign investors. - Trade benefits even between unequal economies. President Obama was asking for “balance of trade” with China, meaning China should export less to the US. This is wrong. Trade surplus by China is used to invest and spend by citizens in the US, so deficit is compensated. - US should ask instead that China should open up market in services. - Trade ban campaign of Japanese goods last year, means banning our own development. Like manyJapanese companies are thinking of moving their investments out of China and go somewhere. - Free trade is beneficial to all sides, both buyers and sellers, not only one side. 6. Barun MITRA: - People trade, companies trade, governments don’t, but governments negotiate trade, and  negotiations take many years. - India is not known for manufacturing, more for IT. Perhaps the only country manufacturing automobiles in the 40s after Japan, yet how many Indian car brands do we hear now. - Today local car manufacturers survive only because of government support. The infant industry argument only resulted in cronyism. - India believes industrialization inside, not export orientation, cronyism resulted and it  hurts our own poor people much more than other people - IT not protected or subsidized, even completely neglected, and they prospered. About 80 percent of our IT products are for exports. - Free trade is fair trade. Two sides agree, a win win situation, benefits both buyers and sellers. Economic nationalism is used by politicians to secure themselves. Losers are the people. Sam Rainsy Reactions: - If an economy is poor, unprepared, free trade is destructive. Need for a transitional period to produce positive effects first, before we open up the economy to free trade. - Consider the social and political environment first, control corruption, farmers becoming landless under the name of trade liberalism. Questions 1: Cambodia, how to develop it? 2: What is your vision for prosperity in Cambodia? Sam Raimsy Answer: - First, good leadership and second is education. Cambodia leadership is a mafia, a gang it can destroy a country using liberalism. From communism to democracy, become worse under a mafia. - China and Vietnam, they are socialist but they have developed. They uphold national interest, they have long-term vision. Even non-democrats like Mahathir and Lee Kuan Yew but they have vision. - Education, the war and dictatorships, 3 generations were lost, only low tech investments come. We need to catch up. Barun Answer: - Free trade to be effective and powerful, it has to be unilateral, nothing to negotiate. The most protected industries are also most inefficient, like agriculture. - Pure unilateralism in trade allowed Indian IT to develop, without any government protection. Xingyuan answer. - Look also at HK, low taxes, free trade, there is economic prosperity Choi answer - Protectionism is understandable, to protect the weak, but consider the political economy. - Beneficiaries of nationalism and protectionism are incumbent players. Closing Remarks by German Ambassador to Korea, Rolf Mafael - Building an internal market for asia will build prosperity. - Germany case, global competitiveness, open economy allowed us to survive the recent global financial crisis - Services sector need more liberalization in the EU. We have the same discussion and debate in Europe as you have here on economic nationalism. - Our prosperity depends largely also to our trade with Asia. - Priority is the WTO, multilateral negotiation. - There are indeed social consequences to liberalization, like ensuring labor standards, but this was heavily opposed by many developing countries. - If you step back, 1996-97 vs today, Asia has made big progress. - When the EU-Korea FTA was negotiated, german car industry opposed, but who benefitted later? German car industry, they were able to enter Korean market better. Another beneficiary was the Korean car industry. - Ultimately, customers won in both Korea and Germany. Liberalization will lead to more prosperity

 

○ Policy Implications

- Protection of human rights, controlling corruption, are key for poor economies like Cambodia. - Economic nationalism and protectionism often results in cronyism and corruption, disadvantages the local consumers via higher prices, low quality products and services due to absence or limited competition. - Economic liberalism will benefit consumers, will lead to peace and prosperity. - Unilateral trade liberalization is one option that countries should consider to avoid cronyism, control corruption, directly benefit the people, consumers and producers alike.

○ Rapporteur

Name	Bienvenido “Nonoy” Oplas	Organization/Position	President, Minimal Government Thinkers Inc., Philippines
Mobile Phone	+63 915 8204616	e-mail	minimalgovernment@gmail.com

See also: 

Business 360 7: Jeju Forum for Peace, May 10, 2013 

EFN Asia 19: Chatib Basri as New Finance Minister of Indonesia, May 21, 2013 

Chung ho Kim, Freedom Factory Ltd., May 28, 2013

EFN Asia 20: Liberals Meet Liberals in Seoul, May 29, 2013 

EFN Asia 21: On Think Tank Independence, Jeju Forum, May 31, 2013

EFN Asia 15: Distortions of Welfare Populism

* (This is my article today in thelobbyist.)

As more countries around the world have abandoned socialism and economic central and embraced the market economy, their economies have progressed significantly and poverty has been drastically reduced. This is particularly true in socialist China and Vietnam, and the former Soviet republics and Eastern Europe.

One result of the free market economy and economic freedom though, is more inequality among the people. But this is not mainly due to “the poor being exploited and downtrodden” but rather the efficient and ambitious were without limit in economic mobility and prosperity. Consider these two situations.

Under socialism, if the average per capita income of the very poor was  $1 per day and that of communist party officials and their cronies was $100 per day, then that’s a 1:100 income gap between the two extreme income groups.

Under a free market economy, if the average per capita income of the very poor was $5 per day but that of the very efficient and lucky was $50,000 a day, then that’s a 1:10,000 income gap between the two extreme income groups.

Inequality is worse under the latter but the overall condition of the poor is better than under a socialist economy. If this is not true, those countries that abandoned socialism two to three decades ago should have gone back to economic central planning and state ownership of all businesses, land and other means of production.

Nonetheless, social morality and even the politics of envy has taken the upper hand in most public policies around the world recently. The result is the expansion of welfare populism worldwide, from the developed Europe and North America to the middle income and poorer countries mostly in the south.

By giving more power to government to intervene almost arbitrarily in many aspects of entrepreneurship and ordinary lives of the people, welfare populism has resulted in economic and social distortions.

During the Economic Freedom Network (EFN) Asia Conference held in Hong Kong last November 6-7, 2012 attended by this writer, welfare populism was extensively discussed with some country case studies. The event was jointly sponsored by the Friedrich Naumann Foundation for Freedom (FNF) and the Lion Rock Institute, a free market think tank in Hong Kong.

Among the country experiences discussed were that of Thailand, South Korea, China, Europe and Latin America. Below is a summary of presentation for these countries and continents.

1. Thailand: by Dr. Deunden Nikomborirak, Thailand Development Research Institute (TDRI), “Welfare populism in Thailand”.

Among the prominent welfarist policies were the rice pledging scheme, first car, free computer tablets for first graders , minimum salary for bachelor degree holders, and senior citizen financial support.

The economic and social distortions were not good. In the case of the  rice pledging scheme, the price tag was a hefty $35 billion benefitting three million not-so-poor farmers, it increased the public debt significantly, high corruption was suspected, many farmers did not care much about rice quality and productivity, and smaller rice traders were edged out.

For the first car program, the price tag was $1 billion and resulted in more traffic congestion as the number of new cars on the roads increased from 78,000 to 100,000 a month, the average road speed in Bangkok is only 16.7 km/hour and is declining by 1 km/hour a year. And Bangkok residents with asthma has increased from 5 percent to 10-15 percent.

The free tablets for first graders resulted in addiction to computer games by the young students, worsened by insufficient or no broadband access, and inability to write of these students.

2. South Korea: by Dr. Choi Byung-Il, Korea Economic Research Institute (KERI), “Welfare populism in Korea”.

The prominent populist policies were income support, public pension and insurance for all (health, employment, industrial accident insurance, etc.), minimum wage, free child care, universal school meal. All political parties, administration or in the opposition, promise a more welfare state if they are in power.

The results were indeed distortionary as the projected cost of these additional spending is estimated at $520 billion on top of existing welfare programs. This will require tax hike or public debt hike in the near future. These programs will spike welfare spending to reach 45 percent of GDP and public debt will reach 216 percent of GDP. Without welfare reform, Korea’s future will be similar to Greece and Argentina.

3. China: Dr. Mao Shoulong, Academy of Public Policy, Renmin University, “Welfare populism in China”.

The more recent populist programs or demands are school free lunch, free school bus, anti-chemical p-xylene. Dr. Mao discussed the policy priorities of the different China leadership.

During Mao Tse Tung period, continue global revolution and liberate other people around the world, but China degraded to poverty.

During Deng Xiaoping and Jiang Zemin period, cope with poverty, economic development through market economy.

During Hu Jintao period, from overcoming poverty to addressing inequality, from anti-poverty first to GDP first plus anti-inequality and stability.

4. Europe and Latin America: by Dr. Francisco Luis Perez Exposito, Tamkang University, Taiwan, “The surge of Neo-populism in Latin America and Europe in the XXI Century”.

Such neo-populism is characterized by being left leaning, anti-capitalist, rejection of austerity and welfare cuts, more welfare rights.

In Europe populism, they are allied with nationalism philosophy, anti-EU, anti-Islam, anti-foreign workers and anti-regional integration.

In Latin America, they are leaning towards nationalism and socialism, anti-capitalism, anti-imperialism and foreign interests, and anti-neoliberalism. These neo-populist groups in both continents have  prospered by blaming others (foreign and locals alike), looking for scapegoats and virtual vengeance.

The economic distortion of welfare populism is clear in the ever-rising public debt of many developed welfare states, below.

 

High welfare programs even financed by heavy borrowings are supposed to increase the productivity of the people so they can later repay those debts plus interest. Unfortunately, the law of unintended consequences kicked in once again. What resulted was increased dependency of the people to the state and the corruption of individual values, relegated more personal responsibility to the background and pushed more  government responsibility in many aspects of the people’s lives.

There is a need for many governments to stick to their primary function: to promulgate the rule of law and protect the citizens’ right to life, liberty and private property. Forcing social equality and promoting a culture of dependency and entitlement is not the way to encourage the people, poor and non-poor alike, to strive more to improve their own lives and that of their communities.

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See also:
EFN Asia 11: Populism vs. Economic Freedom, the HK Conference, September 11, 2012

EFN Asia 12: Day 1 of Conference 2012, November 07, 2012

EFN Asia 13: Welfare Populism and Poverty, November 13, 2012

EFN Asia 14: Conference 2012 Resolution on Populism, November 21, 2012