Pol. Ideology 6: Quotes from Adam Smith

I stumbled on these good quotes here from Adam Smith, the father of free market economic thinking. I got these quotes from the Adam Smith Institute website, http://www.adamsmith.org/quotes.

I chose the quotes on "the invisible hand" and "the profusion of government". The quote on butcher and baker is very down to earth. The rice farmers and fisherfolks think mainly of themselves and the profit they can generate from their efforts, but in the process, society's welfare is served.

The quote on government, especially on "The whole, or almost the whole public revenue, is in most countries employed in maintaining unproductive hands..." is damning for many state bureaucrats and politicians.

enjoy!
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(1) The invisible hand

Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

--The Wealth of Nations, Book IV Chapter II

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.

-- The Wealth of Nations, Book I Chapter II

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.

-- The Theory of Moral Sentiments, Part I Section I Chapter I


(2) The profusion of government

In the midst of all the exactions of government, capital has been silently and gradually accumulated by the private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition. It is this effort, protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has maintained the progress of England towards opulence and improvement in almost all former times...

It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense... They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.

-- The Wealth of Nations, Book II, Chapter III

The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

-- The Wealth Of Nations, Book IV, Chapter II.

Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct. The whole, or almost the whole public revenue, is in most countries employed in maintaining unproductive hands... Such people, as they themselves produce nothing, are all maintained by the produce of other men's labour... Those unproductive hands, who should be maintained by a part only of the spare revenue of the people, may consume so great a share of their whole revenue, and thereby oblige so great a number to encroach upon their capitals, upon the funds destined for the maintenance of productive labour, that all the frugality and good conduct of individuals may not be able to compensate the waste and degradation of produce occasioned by this violent and forced encroachment.

-- The Wealth of Nations, Book II, Chapter III

The man of system…is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.

-- The Theory Of Moral Sentiments, Part VI, Section II, Chapter II.invisib

* See also :

Pol. Ideology 1: Minimal Government Manifesto, October 18, 2005

Pol. Ideology 2: Evolution of Market and State, October 25, 2005

Pol. Ideology 3: Liberal vs. Libertarian, November 06, 2005

Pol. Ideology 4: Comments to Minimal Government Manifesto,  December 05, 2005
Pol. Ideology 5: Have Movements for Liberty Progressed? June 26, 2006

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

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

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

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

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

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

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

Tax Cut 2: Ireland, Turkey

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

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

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

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

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

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

Below is the news report from the Financial Times:

http://www.ft.com/cms/s/b5807d8a-7358-11db-9bac-0000779e2340.html
12% business tax proposed for N Ireland

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

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

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

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

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


Meanwhile, I posted this last June 23, 2006:

Tax Cut: Turkey

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

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

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

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

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


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

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

CSOs and State 2: NGOs and Government Clubs

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

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

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

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

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

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

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

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

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

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

Free marketers can criticize both groups because they advocate very small income confiscation, small government intervention, and bigger individual freedom and responsibility. Individuals, not just big corporations, comprise markets. Thus, to liberalize markets is to liberalize individuals.
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Last March 23, 2006, I wrote this:

The Elites and the Statists

A friend, Atty. Ime Deinla, called my attention to a paper entitled "Voices from the Top of the Pile: Elite Perceptions of Poverty and the Poor in the Philippines", authored by Gerard Clarke and Marites Sison. It was in a pdf formal file, 28 pages long, no date of publication or name of paper where it was published. I skimmed through the pages and read the concluding points, and this part is a disappointment to me. The authors wrote,

The Filipino elite feel a sense of responsibility to the poor, but this responsibility is met through the provision of assistance on a patron-client or philantrophic activity, rather than more substantive commitment to redistributive action led by the state, involving for instance, elaborate social safety nets financed by higher taxes.

Ouch! We don't have enough taxes, we need to create more? And our taxes ain't high enough, we need to hike them more? Socialists, statists and interventionists really like this line. Confiscate more income and savings from the rich, from the elite, from the productive sectors of society, and give them to the poor, the downtrodden, the weak. And an elaborate maze of bureaucracies, multiple-layers of politicians, with rah-rah boys from many NGOs and civil societies as middlemen between the two.

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

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

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

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

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

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

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

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

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

ASEAN 1: Asian regional bureaucracies

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

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

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

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

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

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

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

6. NPCSD – North Pacific Cooperative Security Dialogue

7. NEACD – North East Asia Cooperation Dialogue

Proposed new bodies:

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

2. CNEA – Concert of North East Asia

3. NEASD – North East Asia Security Dialogue

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

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

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

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

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.

2004.
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 (www.hku.hk),
Unirule Institute of Economics (www.unirule.org), Beijing, and
National Economic Research Institute (NERI), Beijing, (www.neri.org.cn)

2005
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”

2006
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.

Free Trade 3: Protectionism PerpetuatesPoverty

An article at tcsdaily.com, 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.
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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,
http://www.iht.com/articles/2006/08/28/business/trade.php

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