Bailout Denial

September 29, 2008

Every individual 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 original intention. By pursuing his own interest he frequently promotes that of society more effectively than when he really intends to promote it
~Adam Smith, (1776)

Most of us say, ‘I want this thing to pass, but I want you to vote for it — not me’
~Paul Ryan, Republican Congressman for Wisconsin

Today’s WSJ first page reads
Historic Bailout Vote Fails in the House by Narrow Margin; Industrials Drop 700 Points Amid Broad Stock-Market Swoon

By preventing the very visible hand of the goverment to act, the US Congress will allow the Invisible hand of the markets clear up the mess of the Barons of Wall Street, but the cleaning up is going to hurt.

A real pure capitalist should be glad: One of the most important attributes of Capitalism is letting failing companies disappear. No help is received by inefficient companies the same way that pop ‘n mom stores do not receive any help when a Walmart gets in town.

A Pure socialist should be sad: The WSJ is predicting one million houses foreclosures in the next six months. A lot of hard working people are going to pay the price of not being rich. They will pay for the greed of the CEOs of the US Financial Industry.

Interesting enough, the true is the exact opposite: The bailout sought by G. Bush is widely unpopular, no congressman wanted to vote for it so close to the elections; nobody wants to help the greedy big fish of Wall Street. The capitalist are panicking since the lost in the Dow Jones are going to be huge, as I am writing, the DJCI is down 700 points, about 8%.

The true is that in this case realpolitiks should prevail. Everybody is going to pay if the huge barons of Wall Street lose. All the manufacturing industry, badly beaten now, will get worse. A credit crunch is surely to follow, and a lot of unemployment will be salted with hose foreclosures. The US Government should help the companies that are struggling now, so its representatives, the US People, can dodge a huge economic crisis. That does not mean bailing out the culprits. The CEOs that took the risky bets should be charged and go to trial for misdemeanor. Conrad Black deserves a lot of company, but I think he will remain alone.

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Globalisation Blues

September 25, 2007

Free markets, free people
~Wall Street Journal’s editorial motto

In economy, it is widely believed that market forces will correct any economic mischiefing. Adam Smith called it the invisible hand: “a free competitive market ensures that those goods and services perceived as most beneficial, efficient, or of highest quality will naturally be those that are most profitable. Thus, self-interest striving for profit has the side-effect of benefiting everyone by increasing standards” (The Wealth of Nations, 1776).

This same assumption is taken by Globalisation’s promoters as the way the open economy benefits all countries today: In the long run, they argue, everybody will be better. In the other hand, globaliphobics insist that the rich countries are getting richer on the back of poor nations.

Indur M. Goklany points out, correctly, it is a myth that the advent of globalisation has been accompanied by a rise in poverty and inequality. Revision of UN, World Bank, and IMF data about GDP per capita, paired with distribution curves, shows that the percentage of the world’s population that is poor has actually fallen over the past two decades and inequality has declined at some extent. “The surprisingly persistent picture of globalisation as a process whereby the developed world exploits and immiserates the developing one is just wrong”(James Surowiecki).

However, the number of countries that had improved their standards of living is surprisingly small, and they are mainly in Asia. Economic growth is the base for improving the state of the world, but globalisation has not done a very good job of figuring out how to spread the benefits of that growth around the globe. The economies of sub-Saharan Africa and the former Soviet Union have not just stopped growing but shrunk over the past 15 years. Most of Latin America has seen only marginal economic growth since 1980, and even Asia’s little tigers (Indonesia, Malaysia, and Thailand) have spent much of the present century recovering from the damage wrought by the 1990s Asian financial crisis.

Most of these countries have seen their human development indicators improve, thanks to the diffusion of technology and health care. But outside of Asia (and a few places such as Botswana and Chile), the economic benefits of globalization have been hard to find, which is why there has been such a backlash against what has come to be known as the Washington consensus. It makes makes sense to attack globalization if there is evidence that rich countries are getting richer on the backs of the poor, but it should not surprising that people are made unhappy by the sight of others getting richer while they stay the same or actually get poorer.

Goklany suggests one response: “the problem is that there has been too little globalisation, not too much, and that what governments need to do is step out of the way and let the market be free. There is no doubting the virtue of the free market as a wealth-creation machine, and it is certainly the case that in many countries bad policies (often designed to protect established interests) have discouraged entrepreneurship and scared away capital. Nonetheless, here, too, the evidence is far more ambiguous than The Improving State of the World implies”.

China and India, which together are responsible for almost all of the reduction in poverty in the world in the past two decades are great success stories, but when it comes to understanding what they say about how to attain economic growth, they are complicated rather than simple stories. China is a long way from a true free-market economy, and it has followed almost none of the rules that the Washington consensus set down:

  • A huge number of its enterprises remain state-owned
  • the allocation of capital in the country remains largely determined by politics
  • the country’s capital markets are not truly open
  • there are limitations on foreign ownership
  • the currency is not convertible

In the case of India:

  • has got massive tariffs
  • strict legal restrictions on foreign ownership and on new businesses
  • it is an aggressive regulatory state

The point is not to return to the old days of protectionism and import-substitution industrialization but rather that we know a lot less than we thought we did, for example Chile and Botswana are two of the only non-Asian developing countries to enjoy meaningful, sustained economic growth since 1990. Chile, under the dictator Augusto Pinochet, implemented many free-market reforms, and the privatization of its social security system has made it the daring boy of free marketeers. But a good part of Chile’s richness comes from its copper holdings, which even Pinochet did not privatize. And Chile also limited the flow of volatile capital into its markets.

Is it the following of free markets rules or the deviations from them that it is the cause for Chile’s success? or is it the combination of the two? No one is sure. Botswana, similarly, has followed orthodox economic policies and has a limited state and low levels of corruption, all of which surely have something to do with its success. But Botswana also happens to have huge diamond supplies, which account for around 40 percent of its annual output. Botswana’s efficient economic policies have helped it to receive greater benefits from this, but this is hardly a model that other nations, unless they can back up their growth plans with massive diamond supplies, too.

So, until we can define better the factors that are helping countries to reap the benefits of globalisation or planetary economic growth, and then apply them to the countries that are being left behind, we will keep hearing about anti-globalisation, protectionism movements, and no truly be able to respond to them.