Saturday, January 11, 2014

Weekend Fun 54: World Map of Country Images

I gor these images from the web, especially from different facebook photos, funny.



United States of... the World.


Today, I saw this article from the Business Insider, http://www.businessinsider.com/what-countries-are-best-at-2014-1


Their larger images, North and South America...

Africa, Europe, Asia, Australia...


The Philippines, "social media use."
Happy weekend.
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See also: 

Mining 39: Taxes, SDMP and Small Scale Mines

After I posted my previous article, Canada's $7.8 B a year tax revenues vs PH's $0.3 B  last month in my fb wall, several friends commented on it. Some lively exchanges here.
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December 17-18, 2013.

Andrew. Yep, pretty sad. I note that Indophil/Xstrata's project is being delayed until 2019 thanks to an OC mining prohibition. Mind you, with that large-scale project, in this economy, it was always probably going to be delayed until then anyway. In fairness though, mining doesn't proceed so easily in populated areas like East Coast Aust. i.e. Coal mining conflicts with wineries and farming. Most mines in Australia are so far from cities...even 200km from a significant urban centre of say 20,000 people.

Jayant. Nonoy: I don't think why the national government should be ashamed. Filipinos are very muddleheaded about this matter. They don't understand mining but want to tax it to death. They get what they deserve--a muddleheaded, bad government.

What the Philippines has ended up with? The companies that are there are run by crooks, for the legal problems make it extremely difficult to make money there. So you have TVI Pacific in Mindanao, who have their own armed forces. And recently a bunch of crooked people--B2Gold--have bought a gold mine. This is what you get for making life difficult for good businessmen. 

Andrew. Mining is highly taxed in Australia. In fact, taxes are 50% (oil, gas, iron ore & coal) compared to 3-5% for Google. Its really the landowner conflicts and legal uncertainty...more than taxes. Lower taxes for other minerals. And of course wage rates are very high.

Stephen. Well it’s what the CBCP and China want. China would prefer to keep small scale miners.

Andrew. Not sure that is true Stephen, I often hear about China forcing the closure of small scale mines. I think its a regulatory nightmare, but they get away with it by paying kickbacks. Maybe you are talking of Philippines?

Nonoy Oplas Thanks Andrew, Jayant, Steve. Yes, it is anti-big business, anti-capitalism, anti-globalization, even anti-geological science sentiments, that dominate public opposition to mining. Some guys are not that anti-big business but they are socialist-leaning that they want the government and the communities to get 60%, or 80%, of the total revenues of mining firms to "fight poverty" or "fight climate change" and so on. One result is adverse selection problem in the sector. The players that people do not want to see doing mining -- those who just mine and mine with zero environmental rehabilitation afterwards, those who pay little or zero mining taxes -- are the ones who escape the various government regulations and prohibitions.

Stephen. Andrew...China is forcing the closure of small scale mines in the Philippines? How can they do that? Yes, I thought Nonoy's posting was focused on the Philippines. Sorry. In the Philippine context however, the small scale mines are reputed to sell all sorts of ore to buyers who represent China. Most sales are "off the books. "Since the LGU's are responsible for, but have not much capacity for, regulation of the small scale mines, they are essentially unregulated. Unlike the big mines.

Andrew. Stephen, I was just trying to make sense of what you said, based on the crackdowns on small, under-capitalised miners in China, who cause a lot of damage. The Philippines has them too, often with kickbacks to local mayors. I can conceive of Chinese titleholders in the Philippines, whether local Chinese or mainland/Singaporean entrepreneurs paying similar kickbacks to get mining done. But it was your assertion, and I must say your counterpoint clarifies. Thanks.

Stephen. Thanks, Andrew. One doesn't see much in the way of crackdowns and enforcement on small scale miners in the Philippines. Well...mother nature "spanks" them from time to time with landslides, but not so much from the local government people who are their "regulators." I've heard of the payments made "off the books" to those regulators. Most of the gold and other ore that is mined in the "small scale" system doesn't make it into the regulated market, so I'm told, but rather goes to a variety of buyers who represent China. Or so I'm told. But the large scale and centrally regulated mines are the focus of the "anti-mining" groups.

Andrew. Yeah, I think about 8mths I heard reported of a gun shoot-out as gold was reputedly run from Camarines Sur to Manila...the gold disappeared...if my memory serves me. It probably doesn't'. lol

Nonoy Oplas Now see this news report -- a 10% on gross revenues of mining firms, wow. 

Disadantage: this is big, whether the company makes a profit or not, govt share is already assured of its own share. 

Advantage: Govt will hopefully become less prohibitionist, less bureaucratic, in allowing more players or in allowing expansion by existing firms as govt will get sure money from them.

Friday, January 10, 2014

Free Trade 31: FTAs, EPAs and the Heckscher-Ohlin Theorem

In the new facebook group that I created and moderate, Government and Taxes, Liberty and Responsibility, a friend, Dr. Yolanda "Yolie" Robles (former Dean, UP College of Pharmacy, Director at the Philippine Pharmacists Association, PPhA), posted in early December last year. The exchanges that followed were nice. Posting the exchanges as is. I just added the diagram of the Hechscher-Ohlin Theorem (HOT) here, not part of the original exchanges.
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December 4-6, 2013

Yolanda Robles HI Nonoy. Thanks for adding me to the group. I just attended an AIM-KOICA event in Makati with the theme: Korea as a Partner of ASEAN, Furthering Cooperation for Enhanced Partnership and Common Prosperity through ODA. In this, the NEDA Representative gave a concise report on what the present government does in terms of poverty reduction and employment generation. Comments from the participants include: "the focus of employment generation is still on services, and which may require more college graduates rather than those with lower educational attainment. The greater number of poor and unemployed are those in the latter group. Why not also reinvigorate manufacturing which could employ more people of different educational attainments." Well, what's your say on this?

Nonoy Oplas Thanks Yolly. I am not sure if there is an existing Japan-ASEAN EPA (Econ. Partnership Agreement), sort of a soft Free Trade Agreement (FTA). So S. Korea should be initiating a Korea-ASEAN EPA too.

About the comment, I think it is a misconception that those in the services sector are mostly the college graduates. Not true. The services sector include (a) trading, wholesale and retail including ambulant and public market vendors; (b) Transpo, storage and communication which includes airlines, buses, jeepneys, taxi, shipping lines, pump boats for hire, etc.; (c) real estate, renting and business activities that include hotels, inns, lodging houses; (d) public administration including LGUs, and (e) other services like restos, karaoke bars, etc.

It is not good to dichotomize the economy as "manufacturing and agriculture are crucial, services are non- or less-productive". Food manufacturing will become hollow if there are no supermarkets, convenience stores, sari-sari stores (all under the service sector).

Yolanda Robles Thanks for your comment. I think the surplus college graduates take also jobs intended for high school and vocational graduates. That's why less jobs are less available to the latter group. The surplus of college graduates reflects the greater preference for white collar jobs, the mismatch between education and human resource needs, among others. As for trade agreements, there is such a thing as ASEAN + 3. The 3 refers to China, Japan and Korea which ASEAN countries have trade agreements with 

Nonoy Oplas Yes, there is an ASEAN + 3, but it is only during the annual ASEAN summit, and not an EPA or FTA. So those 3 north Asian countries China, Japan, S. Korea initiate their own EPA or FTA with ASEAN as a bloc. Thus, a China-ASEAN FTA (I think to materialize by January 2015), a Japan-ASEAN EPA, and a S. Korea-ASEAN EPA/FTA. Since dealing with ASEAN as a bloc is more bureaucratic and more time consuming, some countries strike a bilateral EPA or FTA, that is why we have a Japan-Philippines EPA (JPEPA) and so on.

Yolanda Robles Yes, you are right. It was mentioned that Japan, South Korea, and China have country-specific agreements with some ASEAN countries and the current direction is to deal with ASEAN as a block 

Nonoy Oplas Meanwhile, here is an old graph that I developed in a talk on free trade, Atlas-FNF conference in Kuala Lumpur in 2005. Trade protectionism penalizes consumers and protects local producers, that is why free trade is being pushed to remedy the price distortion caused by protectionism.


I saw Dr. Poch Macaranas of AIM this afternoon, he's the former Director of the AIM Policy Center. He said he is helping in the ASEAN FTA (AFTA), ASEAN Economic Community (AEC) and related issues, which should materialize by January 2015 (12 1/2 months from now) but has been moved to December 2015 or 2 years from now. I thanked him for that piece of info. 

Being an advocate of free trade, I can only say that once trade is politicized and bureaucratized, instead of having free, unconditional trade between and among people, it becomes "trade with permission" from government.

Bonn Juego Noy, again, your kind of economics does not know how to create a wealthy nation in the PH context, how capitalism itself can lead to productivity explosions for the benefit of the entire economy. Good that NEDA understands the qualitative differences that different economic activities - manufacturing, agriculture, services - have for economic growth and the whole socioeconomic development process. My approach, of course, combines, among others, Marx, Schumpeter, and Keynes. As I said, I find yours more like the 'libertarianism' of Ayn Rand and the Koch Brothers, than the 'liberal' economics of Smith, Ricardo, Hayek, and Friedman who at least have a sense of moral philosophy. Anyway, greetings from stormy Scandinavia!  

Thursday, January 09, 2014

Climate Tricks 24: Polar Vortex is Caused by Global Warming?

The terrible cold experienced in Canada and the US this week and last week has caused death and misery for some, but also fun and laughter for others. All images below I got from facebook photos of several friends, not one I made myself.



A Filipino friend in NYC posted, "Many are cold, but only a few are frozen" :-)
This is lifted from the original biblical verse, "Many are called, but only a few are chosen."


The "soon extinct polar bears due to anthropogenic global warming (AGW)" also have a good time.


In Lake Michigan...


Chicago River was 3/4 frozen as of last Monday.  See an article by Steve Goreham here, Bitter Cold Blasts Chicago, a City Fighting Climate Change


Hah, I went to Chicago for the 2nd time in May 2010 (1st time was April 2004). This is after I attended the 4th International Conference on Climate Change (4th ICCC) sponsored by Heartland Institute.


Sunday, January 05, 2014

Are Markets Moral?

A good friend from Malaysia, Wan Saiful Wan Jan, posted this in his fb wall today, a forum he attended in Delhi, India.

"Are Markets Moral?" My answer is Yes. No one is putting a gun on someone's head to sell or buy something. Competition, not coercion or monopolization, gives more choices, more freedom, more happiness, to people.

"In a free enterprise system, do justice and virtue win or lose?" They win. Voluntary exchange, absence of coercion, gives justice to people. The only coercion that must be maintained, is to over-penalize, over-bureaucratize, criminals like murderers, thieves, abductors, rapists, land grabbers,...

I posted the above comments in the fb group that I created and moderate, "Government and Taxes, Liberty and Responsibility". Another friend, Andrew Sheldon, commented that markets per se are not moral or immoral, that moral agency lies with market 'participants', and how they conduct themselves.

Sound comment. Market participants behave based on existing rules. If rules are in favor of suppliers of goods/services, such participants are likely to abuse it. For instance, if a particular area has been assigned as a "tricycle route monopoly" (ie, no jeepneys, no buses, no air-con vans allowed), one can expect tricycle drivers to abuse it, like packing 5-6 passengers instead of the more comfortable 3, passengers have no choice anyway.

Markets by definition imply competition, not monopolization. When government comes in, it often creates monopoly privilege to certain sectors, like the tricycle drivers and operators, and deprive the ordinary passengers freedom of choice to take air-con vans or jeepneys.

Andrew replied that “markets are not always so formalised, and everyone does not necessarily agree with the rules, which are not always clearly cut, and sometimes illegitimately stated by govts, so they breakdown, and people make their own rules, perhaps in effect, negotiating a 'sub-market' rule book. I don't think markets are necessarily competitive; it just adds to their dynamism or choice. Markets are profoundly 'voluntary'.”

I believe the "default mode" is that everything should be a "contestable market". People (sellers and buyers, producers and consumers) can go in anytime, can go out anytime. They can do business anytime, or they can pack away in losses or bankruptcy anytime.

When there are no formal rules respecting competition, some bullies can terrorize all potential competitors and declare a monopoly or cartel in a given area. So the premise of "Are markets moral?" question should refer to a contestable market, not a rigged or terrorized, government-sponsored monopolized market.

 I support natural law, or universal law, or whatever they are called. Universal because they should apply to all societies, all countries, all culture -- no killing, no stealing, no abduction, no rape, etc. Most, as in 99% of all laws enacted by the legislature are what F. Hayek calls as "commands, not laws".

So the theme, "Are (contestable) markets moral?", a Yes answer is consistent with natural laws. People can do anything they want, sell and produce anything, buy and consume anything -- so long as they do not steal, they do not harm and kill, other people.
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Last month, Wan was also invited to speak before some university students in Kuala Lumpur, "Why free market is good for the poor."

Yes, markets work for the poor because all markets are composed of individuals -- sellers and buyers, producers and consumers, men and women, old and young, rich and poor.

The first impediment to a free market economy is government. When people trade with each other across national borders, the conditionalities are very specific like quality, color, quantity, price discounts, volume, period of delivery, period of payment, etc. When government comes in, external conditionalities are imposed, like sanitary and phytosanitary measures, environmental standards (no whales or dolphins were hurt in your fish exports) come in out of nowhere, plus various taxes and fees to pay.

All monopolies and oligopolies in the country are created by the government. Initially via (a) Constitutional restriction to foreign competition, then directly via (b) legislative franchising. Then (c) other national agencies also create monopolies, like LTFRB create route monopoly for jeepneys only, aircon vans, buses are not allowed. Then (d) city or municipal governments can create monopolies for certain malls or supermarkets or gasoline stations. The local politicians can refuse giving a business permit to a new and competing mall or gas station, if there is an existing mall or gasoline station that is owned bythe family or close friends of the Mayor or some influential Councillors. 
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See also: 
Market Failure vs. Government Failure, June 07, 2006 
Limits to Free Market?, November 16, 2007 
Pol. Ideology 10: Joe Stiglitz and the Market, December 16, 2008
Pol. Ideology 27: Why do Many Intellectuals Oppose Capitalism?, March 01, 2012
Inequality 16: Inclusive Growth and Central Planning, October 21, 2013 
The Pope and Capitalism, December 03, 2013

Friday, January 03, 2014

Free Trade 30: BIPOR and APTIR

Many national and multilateral agencies are known for being Bureaucracies Instigating Protectionism, Outings and Revelries (BIPOR). For instance, to have real free trade as in freedom to trade by the people, there is little or no need for endless negotiations if economies will declare unilateral trade liberalization, like what Hong Kong has done. Just open the borders to various goods and services from many countries at zero tariff, zero regulations except the trading of guns, bombs, fake and substandard medicines and food products, poisonous substances and a few others that can harm public health and safety.

With protectionism, trade negotiations can take 20, 50, 100 years or more. There are dozens or hundreds of reasons and alibis why some government agencies want explicit protectionism via high or multiple tariff, or an implicit one through non-tariff barriers (NTBs) like health and sanitary restrictions, labor and gender regulations, environmental and ecological regulations. So for various national governments and multilateral trade negotiators, prolonged negotiation means prolonged outings, international revelries and galas. BIPOR is ugly.

This coming Tuesday afternoon, 7 January 2014, there will be a forum, the Philippine launch of the Asia-Pacific Trade and Investment Report 2013 (APTIR), at the UP School of Economics (UPSE) Auditorium, Diliman campus, Quezon City. The event will be jointly sponsored by the Center for the Advancement of Trade Integration and Facilitation (CATIF) and the Philippine Center for Economic Development (PCED).


APTIR is an annual publication of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP). This year’s report is entitled  “Turning the Tide: Towards Inclusive Trade and Investment.”

Here is the tentative program, the speakers and panelists.

As I am no fan of the UN and its various attached agencies, the report’s title, “inclusive trade” – addition to inclusive growth, inclusive development, inclusive democracy, inclusive business, inclusive environment,… -- reminds me of what governments and the UN never ever mention explicitly but is very clear and implicit in their minds, inclusive pockets. All those “inclusive ______” require more taxes and borrowings to finance.

The UN and many governments never fail to highlight income inequality rising, at the national, regional and global levels. Thus, the repeated use of "inclusive _______."

The main purpose of more international trade is to give the people more choices. Consumers and users of finished or intermediate products or capital goods like machines and trucks, are better off if they can compare prices and quality across many producers and manufacturers worldwide. And producers worldwide are forced to keep innovating and improving their products and services at more affordable prices to keep pace with innovation by their competitors.

As productivity and innovation keep rising, the income and asset share of the hardworking and efficient people rise fast relative to the income and asset share of the less industrious, less ambitious people in society, and that is how inequality rises as an inevitable phenomenon. 

I browsed through the web about APTIR and I saw this report, http://www.unescap.org/tid/projects/epti-day1.pdf


I think it is wrong to say that (trade-led) "growth is not benefiting the very poorest". Would non-growth or very slow growth benefit the very poor? Definitely not. Growth, no matter how perceived to be "very inequal" has the potential and actual effect of uplifting the condition of the poor. A rich household that has become richer because of more international trade will soon have two or more big houses. Each additional big house will require new construction workers, electricians, plumbers,carpenters, architects and other skilled laborers and professionals. When the big house is finished, it will require new house helpers, gardeners or other maintenance workers. The kids will have a driver each, possibly a nanny each and so on. Which creates new jobs for the poor, even for the unskilled ones.

More questionable statement by the UN ESCAP paper, that international trade has "little impact on employment opportunities."


At least the paper has recognized the role of information and communications technology (ICT) to reduce poverty. Until about three decades ago, only very rich people could afford to have a mobile phone. These days, even ordinary farmers, jeepney and taxi drivers, have mobile phones. The gadget helps improve their productivity in terms of getting information re their products/services' pricing and customers availability.

BIPOR and APTIR, we need free trade, as in our freedom to trade, to buy and sell with the minimum restrictions, regulations and taxation that contribute to higher prices of internationally-traded goods and services.
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See also:
Free Trade 27: Proposed EU-PH FTA and TRIPS Plus, September 24, 2012
Free Trade 28: Exports and Prosperity, March 11, 2013 

Free Trade 29: ASEAN and Education Competitiveness, November 16, 2013
Business 360 8: TPP, RCEP, SAARC and Free Trade, June 17, 2013

Thursday, January 02, 2014

Fat Free Econ 52: Optimism in 2014

* This is my article in interaksyon.com last December 31, 2013.
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Another tumultuous year has passed. 2013 can be remembered as the year of huge disasters, with Typhoon 'Yolanda' (international name: Haiyan) causing death and massive destruction across several provinces in central Philippines in early December. A month before that, a big earthquake also devastated the central provinces of Bohol and Cebu.

On top of natural calamities, the Philippines also endured a political storm in the second half of this year, with the pork barrel scandal tarnishing the image of the Legislative and Executive branches of the government.

Against that backdrop, what can we expect for the Philippine economy in the coming year? Several big global institutions have produced their own economic forecast for 2013 and 2014. In a poll of some of the world's biggest private banks and securities companies, the Economist magazine came up with the following estimates:

Table 1. GDP Growth and Unemployment


Source: The Economist, December 21, 2013

Pessimism about the economic prospects of the Euro area remains this year, with Greece, Italy, Netherlands and Spain all seen to contract. In 2014, they are projected to have modest growth.
Both developed and emerging markets of Asia are seen to grow faster than the Euro area and North America. Expected to have the fastest growth in 2013 and 2014 are China (7.7 and 7.3 percent, respectively), the Philippines (7 and 6.7 percent), India (4.9 and 6 percent), Indonesia (5.6 and 5.5 percent) and Vietnam (5.5 and 5.6 percent).

All fast-growers in Asia have big populations upward of 90 million. The banks polled recognize that a larger population means more entrepreneurs and workers, more producers and consumers.

Next, we check projections by the global vanguard of macroeconomic and external account stabilization, the International Monetary Fund (IMF). Its most recent and most comprehensive report is the World Economic Outlook (WEO) released last October. We arranged the grouping of countries to be similar as that by The Economist for easier comparison of projections.

Table 2. GDP Growth in Percent (2012-2014 are projections, with growth of less than 0.1 percent marked in red)




Belgium, Italy, Netherlands and Spain are among Europe's biggest economies, and they are either crawling or backsliding. The US and Canada are performing better than those in Europe but their expansion not fast enough to compensate for sluggish growth on the other side of the Atlantic Ocean.
Asian economies -- led by China, Japan, India and South Korea, plus the other tiger and emerging markets of the continent -- continue to hum and push the world economy to modest growth. The Philippines is projected to be second to China in pace of growth this year and next year.

Next, we check the projections of the Asian Development Bank (ADB), the continent’s biggest financial institution backed up by taxpayers of many countries worldwide. The figures for 2010-2012 are from its Asian Development Outlook (ADO) released last April, while projections for 2013-2014 are from the October update.

Table 3. GDP Growth of Developing Asia




Within six months between the regular and update reports, ADB made some drastic changes in its growth projections, generally a downgrade. For this year, the lender cut its forecast for China from 8.2 to 7.6 percent; Taiwan, from 3.5 to 2.3 percent; India, from 6 to 4.7 percent; Indonesia, from 6.4 to 5.7 percent; Malaysia, from 5.3 to 4.3 percent; and Thailand, from 4.9 to 3.8 percent.
Only two countries were given an optimistic view: Bangladesh, up from 5.7 to 6.0 percent, and the Philippines, from 6.0 to 7.0 percent.

We note the same trend of downgrades for 2014, except for the Philippines. But with the destruction in property and decline in productivity brought about by Yolanda, it is not clear if the ADB and other institutions will retain their forecasts made two or three months ago.

We now look at the Philippines’ recent growth performance. From the first to third quarters this year, GDP growth stood at 7.4 percent, higher than last year's 6.7 percent. Growth for the entire 2012 stood at 6.6 percent.

The table below describes this performance, starting with the aggregate growth, then broken down into the supply side -- agriculture, industry and services -- and finally, the demand side -- household consumption (HFCE), government consumption (GFCE), investments (construction, durable equipment, etc) and net exports (exports minus imports of goods and services).

Table 4. Philippines GDP Growth, 1st to 3rd quarters of 2013



On the demand side, the industry sector this year grew rather fast compared to last year, but growth in agriculture and services slowed from last year. On the supply side, investments -- through construction and durable equipment acquisitions -- grew very fast, but there was a slowdown in both household and government consumption.

The trend for the first three quarters of the year is often assumed to represent the full-year growth as well. In 2012, for instance, growth for the first three quarters stood at 6.7 and full-year growth at 6.6 percent. With the devastation this quarter, an allowance for modest decline is to be made. My rough estimate is between 7-7.4, for a full-year expansion of 7.2 percent.

If we average the three forecasts above and the three-quarter performance, here is how the Philippines’ growth forecasts in the short term would look like. My own projection is made using actual growth data for the first three quarters of 2013.

Table 5. Philippines Growth Forecasts, 2013 and 2014

ave

A growth rate of six percent or higher will make many countries around the world salivate with envy. Aside from having a low economic base -- which tend to allow for higher growth compared to those with a higher base -- the Philippines is doing something good recently that may have been overlooked by those who tend to self-flagellate and focus on the negative too much.

Aside from ensuring solid infrastructure like reliable and cheaper electricity, more expressways to transport people and goods, dredged rivers and lakes to minimize frequent flooding in a period of global cooling, there is also a need to focus on freeing the entrepreneurial spirit of our people. Less bureaucracy, less politics, less regulation and restrictions will greatly help our people -- from ordinary workers to micro- and big entrepreneurs -- produce more goods and services. More output means more stable prices, more jobs created, and less poverty.

Hoping for a more prosperous new year.
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See also: 
Fat Free Econ 48: Jobs, Taxes and the World Bank, September 15, 2013
Fat Free Econ 49: Growth Amid Storms, December 03, 2013 

Business 360 14: Middle Income Trap and Economic Freedom

* This is my article for the December issue of this magazine, published in Kathmandu, Nepal.
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Economic freedom is a major factor for an economy and its people to move from a low income country (LIC) to middle income country (MIC), and ultimately to a high income country (HIC).

People need to be given enough leeway to be creative and innovative in introducing new products and services to their consumers, resulting in continuous and endless process of innovation and healthy competition among the various players in the economy.

This fact is among the lessons drawn from the two-days Economic Freedom Network (EFN) Asia  conference in Bangkok, Thailand in October.

Among the prominent speakers of the conference was Dr. Razeen Sally of the European Center for International Political Economy, also a vising faculty at the National University of Singapore (NUS). He said that  a poor country or LIC must “get the basics rights” to catch up with growth. Among such “basics” are 1st generation reforms, “product market liberalization.” This includes the following:  macroeconomic stability in fiscal and monetary policy, rule of law and property rights, free international trade, and good skills and education of the people.

The next generation reforms are more structural and more complicated.  They are the “factor market liberalization” reforms.  Increasing globalization and free market does increase income inequality among the people. While this is a natural economic result, this is also a political challenge how to face this reality and find ways to address it.

Penalizing more efficient, hard working people via higher taxation, more business regulations and restrictions is not the way to do it. Rather, it is encouraging those in the lower end of society to keep working. They may feel “poor” when in fact, their economic status is already comparable to the upper middle class of a LIC or even a MIC.

In the last session, I was one of four rapporteurs for the four discussion groups on other issues raised during the conference. Among the issues raised in our group was shared by Dr. Chung-ho Kim of Freedom Factory Ltd. in Seoul, that many  people in HICs like S. Korea  feel and complain that they are poor, despite the high standard of living they enjoy compared to what the poor in low income and middle income countries experience.

I made this chart in my report on stage that day.


Middle income is broadly defined as having a per capita GDP income at purchasing power parity (PPP) valuation of between $3,000 to $16,000  per year. Thus, an economy with per capita GDP of only $3,000 or less for many years is said to be caught in a low income trap shown by growth path AB. Economies which have been stuck at $16,000 or less per capita GDP for several years is said to be caught in a middle income trap, shown by growth path AC.

There are several factors why an economy can be stuck at AB or AC path. Foremost of which are: lack of economic freedom of the people -- where a big portion of the economy is held by a few oligarchs or business cronies of high political leaders or monarchy. Another reason is the lack of the rule of law, where rules are applied differently to different people due to arbitrary powers of lawmakers.

These two factor can also contribute to a retrogression of an economy from a lower  middle income to an LIC and go back to low income country. Or for an HIC to become an MIC.

The way some member- economies of the European Union are being managed, it is possible that they might plunge into growth path A’E someday, meaning may fall back to MIC status. When entrepreneurs are shacked by too many taxes and regulations, either they will experience production shrinkage or quit altogether, migrating to another country where their economic freedom is more respected. Heavily regulated country will experience more debt and fiscal constraints as the number of net tax payers will flatline if not decline.

Whether aspiring to move a status, ensuring the economic freedom of the citizens and limiting the role of government to enforcing the rule of law and protecting property rights, are the basic ingredients of success.
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See also:
Business 360 10: Foreign Aid as Band Aid Solution, August 11, 2013 
Business 360 11: Avoiding Middle Income Trap, September 19, 2013 

Business 360 12: Optimum Size of Government, October 13, 2013 

Business 360 13: US Government Shutdown and Lessons for Asia, November 28, 2013