Archive for the 'Politics' Category

Nov 17 2008

A call FOR protectionism!

FT.com | The Economists’ Forum | The case for forward-looking protectionism in the US

Free trade is an ideal. This is a theme of my IB Economics class which I emphasize repeatedly during year two of the course. Free trade, defined as the exchange of goods, services, resources, and financial assets based on the principle of comparative advantage, results in a more efficient allocation of the world’s resources, an increase in total world output and welfare, and increases the opportunity for growth and development for all countries that prescribe to its principles. This is the ideal, at least.

In the real world, free trade is rarely practiced. Free trade agreements between nations represent managed trade; the selected removal of protections such as tariffs, quotas and subsidies on the exchange of particular goods does not represent free trade, rather managed trade. The problem with free trade in the real world is simply that it has never been truly practiced, therefore the adjustments that both developed and developing countries would have to undergo to adopt widespread free trade would be extremely disruptive both economically and socially. Entire industries would disappear from the developed countries as manufacturing resources were reallocated to low cost countries. Poor countries trying to build their manufacturing industries would lose any competitive advantage offered by protectionism, forcing their “infant industries” to wither and die in the face of global competition from countries that long ago achieved economies of scale in manufacturing. Farmers used to heavy subsidies would see their livelihoods disappear as the world’s food would be sourced from the countries with true comparative advantages in agriculture. Simply stated, the social costs of the widespread adoption of free trade are not politically palatable, thus leaders have only hesitantly pursued this ideal on the world stage.

For decades, America has stood for the ideal of free trade, proselytizing its advantages and urging developing countries to reduce or remove their barriers to the free flow of resources and goods from nation to nation. Today, however, the United States faces the very fate free trade prophesized as its own automobile industries teeters on the edge of collapse. As many as 3 million American jobs stand to be lost if the auto industry goes under. Today, America faces the ultimate test of its will to stand for and defend free trade in the world. Should America erect new barriers to trade, bail out its auto industry, and save this dying sector from collapse to avoid the political hardships its death would incur? Or should America stand for the ideal of market liberalization and allow the auto industry to disolve as the principle of comparative advantage indicates it should?

The question is dire, and it’s one that Barack Obama will be forced to address early in his term as president. Cambridge economcis professor Ha-Joon Chang argues the case for protectionism by America in this time of economic turmoil:

Mr Obama’s trade policy… is already causing controversy. He has vowed to protect American jobs and even argued for re-negotiating the NAFTA. There is already some hand wringing among free-trade economists, worrying that his protectionist policies may destroy the world trading system in the same way the infamous Smoot-Hawley Tariffs of 1930 did after the Great Depression. They counsel that the US should maintain its historical commitment to free trade.

However, contrary to what most people think, the US is the true home of protectionism. Between the 1830s and the 1940s, against superior European competition, the US developed its industries behind literally the highest tariff wall in the world, with the average industrial tariff rate ranging between 35% and 55%. Even the Smoot-Hawley Tariffs were not an aberration – the average US industrial tariff in 1931 was, at 48%, well within the historical range.

Moreover, the theory that justified such protectionism, namely, the ‘infant industry’ argument, had been first developed by none other than the first Treasury Secretary of the US – Alexander Hamilton (that’s the guy you see on the $10 bill). Hamilton argued that producers in relatively backward economies needed to be protected and nurtured through tariffs, subsidies, and other government policies before they mature and can compete with producers from more economically developed countries.

Of course, the protectionism that Mr Obama is advocating is protection to ease the adjustment of mature industries, rather than to promote infant industries. The case for such protectionism is not as overwhelming as that of infant industry protection. However, well-designed and time-bound protection of mature industries can facilitate, rather than hinder, trade adjustment and industrial upgrading. Japan and some European countries in the aftermath of the 1970s Oil Shocks come to mind.

Mr Obama should use protectionism in a similarly forward-looking way. Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection, but only if they fulfill certain conditions regarding investment and training. Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy.

…Keeping its market open is not enough for the US to play a genuinely positive role in the world trading system. The US should also stop pushing for trade liberalization in developing countries and give them the chance to use (intelligently-designed, of course) infant industry protection, which it invented and benefited so much from. Mr Obama should take a lead in creating a world trading system that allows asymmetric protectionism between the rich countries and the poor countries, with the latter protecting their markets more and gradually opening up in line with their economic development.

All these call for a much more activist role for the US government than it has been the norm. Providing protectionism to facilitate structural changes, and not just to protect existing jobs, would require a much closer coordination between trade policy and those policies to upgrade American industries, such as R&D support and worker training. Redesigning the welfare state as a vehicle to promote skills upgrading and labor mobility would push the US government into an uncharted territory.

These are big challenges. However, the US cannot continue its peculiar mixture of free-trade mythology and uncoordinated, ‘reactive’ protectionism that has served ordinary Americans and the developing nations so poorly.

Mr Obama has turned a new chapter in US history by becoming the country’s first Afro-American president. He will turn a new chapter in world history if he can come up with a forward-looking protectionist strategy that that both protects American jobs better in the long run and help developing countries develop faster.

Discussion Questions:

  1. What is the difference between the protectionism America needs today and the protectionism it used in the late 19th and early 20th centuries?
  2. How could protectionism be used responsibly by developing countries to promote economic growth and development?
  3. Professor Chang argues that responsible protectionism should allow industries with no future to be phased out “through orderly liquidation and redundancy”. What does he mean by this and why is such a policy so hard to accomplish politically?

113 responses so far

Nov 03 2008

In case you needed another reason: The Economist endorses Obama

Published by under Politics

An endorsement of Barack Obama | It’s time | The Economist
The Economist print cover
From this week’s Economist:

For all the shortcomings of the campaign, both John McCain and Barack Obama offer hope of national redemption. Now America has to choose between them. The Economist does not have a vote, but if it did, it would cast it for Mr Obama. We do so wholeheartedly: the Democratic candidate has clearly shown that he offers the better chance of restoring America’s self-confidence. But we acknowledge it is a gamble. Given Mr Obama’s inexperience, the lack of clarity about some of his beliefs and the prospect of a stridently Democratic Congress, voting for him is a risk. Yet it is one America should take, given the steep road ahead.

Follow the link above to read about the reasons why the usually right-leaning publication has thrown its endorsement towards the Democratic candidate.

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Oct 01 2008

“If bs were currency, Sarah Palin could bail out Wall Street by herself”

Published by under Politics

With three television interviews under her belt, there is much concern about Republican vice presidential candidate Sarah Palin’s ability to understand, much less help resolve, America’s dire economic situation.

Jack Cafferty Loves Sarah Palin, Part II

Think Cafferty and other Palin critics are over-reacting? Judge her econ-cred for yourself. See if you can keep up with her stream of conciousness, covering every economic issue she can think of in under one minute.

Sarah Palin Talks Bailout Proposal

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Sep 07 2008

The importance of incentives in achieving poverty alleviation: Venezuela vs. Brazil

Managing Globalization: To reduce poverty, money isn’t everything – International Herald Tribune

Two developing countries: Venezuela and Brazil. Two ideologies underpinning economic growth and development: command in Venezuela versus free market in Brazil. Which system has worked better for the people of these two large South American countries?

How much can governments do to fight poverty? In South America, a couple of answers are emerging in the growing economies of Venezuela and Brazil. Both governments have publicly pledged billions of dollars to raise living standards – but have they succeeded?

Overall income is moving upward in both countries, if for different reasons. Venezuela is riding the black tide of high-priced oil, while Brazil’s relatively firm economic policies have built confidence in its business prospects among both locals and foreigners.

The president of Venezuela, Hugo Chávez, has portrayed himself as an ardent socialist and a disciple of Fidel Castro. Reducing inequality is fundamental to his agenda, whether by dividing up Venezuela’s oil wealth or, as he has obliquely suggested this month, through land reform. His consolidation of executive power has brought Venezuela closer to a centrally planned economy and, as such, has given him the opportunity to invest heavily in social programs.

But identifying the results isn’t easy. The poverty rate in Venezuela was about 50 percent when Chávez’s presidency began in 1999, according to the government’s own figures. Since then, roughly equal numbers of people have fallen into and out of poverty at various times, with a spike to more than 60 percent in 2003 and a drop below 40 percent in 2005…

Rodríguez also questioned whether Chávez’s programs could be completely effective because of the way they were managed. Some of the world’s most successful initiatives for improving the well-being of the poor, he said, linked families’ benefit payments to useful actions like their children’s attendance in school or visits to the doctor. In Venezuela, he said, the link is to political loyalty instead.

“The level of political polarization has become so high that not only is loyalty to the regime the key determinant of your access to benefits, it is also the key determinant of your capacity to be involved in the administration of those benefits to others,” Rodríguez said.

One example of this problem was a program intended to improve literacy. “The government had no system of accountability to monitor performance other than the reports of its own administrators,” Rodríguez said. “When program administrators learned that it was more important to show loyalty to the regime than to effectively run the program, any incentives that they had to administer resources efficiently, from a social point of view, disappeared.”

In Venezuela, president Chavez’s socialist inspired, command policies, paid for by the sale of expensive oil to the rest of the world have led to benefits primarily for those citizens willing to show political loyalty to Chavez and his party. Hard work and productivity is not rewarded as much as loyalty and support for the government. This system of incentives leads to some poor outcomes. The result? Only mediocre improvements in poverty rates, literacy, employment and health of the people.

In Brazil, where free market principles underlie much of the economic development policies, monetary benefits for development workers and the families they serve are linked not to political affiliation but to actual behavior of households and government employees. The result, not surprisingly, has been real improvements in education, health, and poverty levels amongst Brazilians.

Meanwhile, in Brazil, progress appears to have been more widespread. Figures compiled last year by Rômulo Paes de Sousa of the Ministry of Social Development and Fight Against Hunger, covering the period from 1999 through 2004, painted a rosy picture: School attendance was up, while illiteracy was down. Life expectancy was up, but hospital visits were down. Employment was up, and child labor was down.

Again, however, it’s difficult to say with certainty where the credit should go… [perhaps] to the simple fact that Brazil’s monetary benefits for families are indeed linked to actions like attendance in school, prenatal care and childhood vaccinations?

The lesson here? In a command economy like Venezuela’s, in which the government decides how resources are to be allocated, it appears that real improvements in people’s lives are not as important as political loyalty. Because most people involved in economic development work for the government, they focus on making themselves appear more dedicated and loyal to president Chavez, in order to make sure they get paid more and promoted up the ladder.

In Brazil’s free market economy, on the other hand, rewards are based on performance, not political loyalty. Brazilians have enjoyed access to a wider variety of efficiently run development programs than Venezuelans, despite Hugo Chavez’s pledge to alleviate poverty. Correct incentives explain why the market system is more efficient and effective than a command system, and the examples of Venezuela and Brazil illustrate this observation quite nicely

Discussion Questions:

  1. Why do command economies fail efficiently allocate resources to where they are needed the most?
  2. What does Brazil do that Venezuela does not that has led to real improvements in people’s lives?

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16 responses so far

Sep 04 2008

Big government, small government? What, exactly, do the Republicans stand for?

Published by under Politics

Palin’s Intellectual Bipolar Disorder – Mises Economics Blog

Jeffrey Tucker at the Mises Economics Blog wonders what’s up with the conflicting statements coming from Republican vice presidential candidate Sarah Palin:

One the one hand, she assails Obama as favoring big government, more taxes, more control from Washington, and everyone goes nuts denouncing government. Then only a few sentences later, she is blasting Obama for not favoring war enough, for wanting to give people too many rights, for not wanting military victory over the entire planet. People cheer that too.

Do these people not realize that the same government that controls from Washington is also the institution that she is proposing have a world empire? Do these people not realize that global military occupation costs money that comes out of the pockets of American citizens? Do they not realize that a government that cares nothing about the rights of foreigners is not going to have much respect for the rights of its citizens either?

Sarah Palin – VP acceptance speech – Sep 3, 2008 pt1

Palin makes it sound so simple: Obama wants to take money out of Americans’ pockets and make us all poorer. Here’s his plan from Obama’s own website:

4 responses so far

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