Market-Driven Growth and the Asian Tigers

I’m currently in Tanzania as part of a speaking tour in Africa. My remarks today largely repeated the message I gave to an audience last week in Nigeria.

So I won’t bother sharing anything from my presentation. Instead, I want to highlight some numbers from a presentation by Professor Ken Schoolland.

He shared some data showing how the “Asian Tigers” grew far faster than major Latin American nations between 1950 and 2000.

These are very impressive examples of convergence (as the Asian Tigers caught up with Latin America) followed by divergence (as the Tigers then continued to grow much faster).

I’ll be adding this data to my “anti-convergence club.”

But I also noticed that Professor Schoolland was sharing some old data from 1995.

So I went to the Maddison website and created some new charts based on the latest-available data.

As you can see, the Latin American nations were richer in 1950, but they have not enjoyed fast growth in the past 70 years.

By contrast, the Asian Tigers have enjoyed spectacular growth since 1950.

So not only are these nations much more prosperous than nations in Latin America, in most cases they have even surpassed European countries and Singapore is now richer than the United States.

Since I’m writing about the success of the Asian Tigers, let’s address the myth that they became rich because of industrial policy.

Sam Gregg of the Acton Institute examined this controversy in an article for Law & Liberty.

…what about some of the East Asian Tiger countries? Aren’t they proof that, when devised and implemented by wise governments guided by even cleverer experts, industrial policy can work? …There is, however, a wealth of evidence indicating that these policies produced similarly pedestrian outcomes in these countries. As for the Tigers, what primarily took them from the status of economic backwaters to first-world economies was economic liberalization and especially trade openness… Even the most devoted industrial policy advocates hesitate to present two of the Tigers, Singapore and Hong Kong, as industrial policy successes. They do nevertheless regard South Korea and Taiwan’s postwar histories as demonstrating why industrial policy should play a major role.

Gregg takes a close look at what actually happened in South Korea.

Beginning in 1954 and until about 1963, Korea’s government focused upon import-substitution industrialization policies… however,…economic growth in Korea only began taking off between 1963 and 1973 following a decisive shift towards export-orientated development and trade openness. …Industrial policy assumed a larger place in Korea’s economy in the mid-1970s. …Korea’s turn towards industrial policy in this period does not appear to have produced spectacular results. Economic growth during this period—whether in terms of GDP, trade, employment, manufacturing output, or exports in goods and services—was actually lower than what had been realized in the 1960s. …These results may help explain why Korea’s drift towards industrial policy was reversed, beginning in the late-1970s. …The overall result was a return to high growth throughout Korea’s economy.

And here’s his analysis of what happened in Taiwan.

…the Kuomintang government adopted an import-substitution approach to trade characterized by high tariffs and import quotas. The Taiwan Production Board oversaw the extensive use of industrial policy, especially through preferential loan-treatment… In the mid-1950s, key Taiwanese officials and their American advisors recognized that Taiwan could not keep going down this path. Hence in the late-1950s, decisions were made that re-orientated Taiwan’s economy towards competition and trade openness by, among other things, liberalizing imports and foreign investment rules as well as beginning a process of steadily removing export controls and gradually giving more and more exporters what amounted to a free trade status. As in Korea’s case, growth in Taiwan took off. …the general direction of Taiwan’s economy from 1958 onwards was away from industrial policy and tariffs and towards increasing integration into global markets. Like Korea, Taiwan underwent a limited return to interventionist policies in the mid-1970s, but, again, like Korea, this did not last.

The bottom line is that South Korea and Taiwan are not as rich as Hong Kong and Singapore and one reason they are lagging is that their governments tried to pick winners and losers.

But both those nations largely have abandoned industrial policy, so at least they recognized their mistakes.

P.S. A big issue at the conference is whether the “China Model” should be emulated. I shared some data showing why that would be a big mistake.

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The OECD’s Preposterous Fiscal Advice for Mexico

I’ve been writing a series of columns about the failure of Bidenomics (see here, here, and here), but let’s switch gears today and focus on some remarkably bad behavior by the bureaucrats at the Organization for Economic Cooperation and Development (OECD).

Regular readers know that I’m not a big fan of this Paris-based international bureaucracy. Yes, there are some economists at the OECD who do solid research, but the organization routinely advocates for higher taxes and bigger government, often by using dishonest data.

But even I was surprised to receive this email from the OECD, which explicitly urged a giant tax increase on the relatively impoverished people of Mexico.

And “giant” is not a throwaway adjective.

Joe Biden wants a massive tax increase for the United States, but his proposal to increases tax revenue by 1.3 percent of GDP makes him seem like a rabid libertarian compared to the OECD’s plan to increase taxes by nearly three times as much in Mexico.

What’s especially amazing is that the OECD is urging this huge tax increase in a report that supposedly shares “recommendations for improving medium-term growth prospects.”

While I’m shocked by the size of the OECD’s proposed tax increase, I’m not surprised that the bureaucrats are claiming that higher taxes and bigger government are good for growth.

They’ve done it before and I’m sure they’ll do it again.

In China. In Africa. Everywhere.

So at least they are consistent, albeit in a very bad way.

I’ll close by noting that Mexico actually is in desperate need of “recommendations for improving medium-term growth prospects.”

But if you peruse the data for Mexico in the most-recent edition of the Fraser Institute’s Economic Freedom of the World, you’ll see that the country’s economy is being hampered by bad scores for rule of law, monetary policy, trade, and regulation.

So it’s baffling that the OECD’s bureaucrats somehow decided to focus on pushing for bad fiscal policy.

P.S. For those who want more information, you can click here to access the OECD’s report, along with other accompanying materials.

P.P.S. Incidentally, OECD bureaucrats are exempt from paying tax on the very lavish salaries they receive.

P.P.P.S. Adding insult to injury, American taxpayers finance the largest share of the OECD’s budget.

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From New Hampshire to Mexico City, Ranking Economic Freedom in North America

If you want to understand why some nations enjoy much stronger economic growth than other nations, the best place to start is the Fraser Institute’s Economic Freedom of the World.

And if you want to understand why some states have more vibrant economies than other states, you should check out the latest edition of the Fraser Institute’s Economic Freedom of North America.

Since most readers are from the United States, I’ll start with a look at the publication’s sub-national index, which shows how American states rank in terms of economic liberty. Unsurprisingly, a bunch of jurisdictions with no income tax are at the top of the list and California and New York are at the bottom.

By the way, the authors (Dean Stansel, José Torra, and Fred McMahon) specifically note that the rankings are based on 2019 data (the latest-available data) and thus “do not capture the effect on economic freedom of COVID-19 and government responses to it.“

With that caveat out of the way, here are some of the findings for the sub-national index (which is where Figure 1.2b from above can be found).

Since the Fraser Institute is based in Canada, they understandably start by looking at Canadian provinces, but you can then read about results for the rest of North America.

For the purpose of comparing jurisdictions within the same country, the subnational indices are the appropriate choice. There is a separate subnational index for each country. In Canada, the most economically free province in 2019 was again Alberta with 6.17, followed by British Columbia with 5.44, and Ontario at 5.31. However, the gap between Alberta and second-place British Columbia continues to shrink, down from 2.30 points in 2014 to 0.73 in 2019. The least free by far was Quebec at 2.83, following New Brunswick at 4.09, and Prince Edward Island and Nova Scotia at 4.20. In the United States, the most economically free state was New Hampshire at 7.83, followed closely by Tennessee at 7.82, Florida at 7.78, Texas at 7.75, and Virginia at 7.59. …In Mexico, the most economically free state was Baja California at 6.01.

Here are the provincial rankings from Canada.

Alberta is the best place for economic growth and Quebec is the worst (by a significant margin).

Here are the some of the findings for the all-government index (which uses a different methodology than the sub-national index mentioned above).

The good news, from the perspective of folks in the U.S., is that most states rank above every other jurisdiction in North America (and the Mexican state all rank at the bottom).

The top jurisdiction is New Hampshire at 8.23, followed by Florida (8.17), Idaho (8.16), and then South Carolina, Utah, and Wyoming tied for fourth (8.15). Alberta is the highest ranking Canadian province, tied for 33rd place with a score of 8.00. The next highest Canadian province is British Columbia in 47th at 7.91. Alberta had spent seven years at the top of the index but fell out of the top spot in the 2018 report (reflecting 2016 data). The highest-ranked Mexican state is Baja California with 6.65, followed by Nayarit (6.62)… Seven of the Canadian provinces are ranked behind all 50 US states.

By the way, here’s some historical context showing that all three nations had their best scores back in the early 2000s (when the “Washington Consensus” for pro-market policy still had some impact.

Historically, average economic freedom in all three countries peaked in 2004 at 7.74 then fell steadily to 7.24 in 2011. Canadian provinces saw the smallest decline, only 0.19, whereas the decline in the United States was 0.51 and, in Mexico, 0.58. Since then average economic freedom in North America has risen slowly to 7.43 but still remains below that peak in 2004. However, economic freedom has increased in the United States and Mexico since 2013. In contrast, in Canada, after an increase in 2014, it has fallen back below its 2013 level.

P.S. If you want some additional historical context, Alberta’s fall from the top (mentioned in the first excerpt) can be partly blamed on the provincial government’s fiscal profligacy when it was collecting a lot of energy-related tax revenue.

P.P.S. I first wrote about Economic Freedom of North America in 2013 and more recently shared commentary about the 2019 and 2020 versions.

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The Most Economically Free State Is…

According to the Fraser Institute’s Economic Freedom of North America, the most economically free jurisdiction in North America used to be the Canadian province of Alberta.

But Alberta then slipped and New Hampshire claimed the top position. And, according to the the 2020 edition of Economic Freedom of North America, the Granite State is still the best place to live.

But since most of my readers are from the United States, let’s focus just on American states, and specifically look at how they rank based on the policies they control.

On this basis, you can see that New Hampshire is in first place, followed by Florida, Virginia, Texas, and Tennessee (if you’re looking for a common thread, four of the five have no state income tax).

Here are some highlights from the Fraser Institute’s summary.

Economic Freedom of North America 2020…measures the extent to which…individual provinces and states were supportive of economic freedom… There are two indices: one that examines provincial/state and municipal/local governments only and another that includes federal governments as well. …The all-government index includes data from Economic Freedom of the World… The top jurisdiction is New Hampshire at 8.16, followed by Florida and Idaho at 8.10 , then Wyoming (8.09) and Utah (8.08). Alberta is the highest ranking Canadian province, tied for 9th place with a score of 8.06. The next highest Canadian province is British Columbia in 27th at 7.98. …The highest-ranked Mexican state is Jalisco with 6.70… The lowest-ranked states in the United States are Delaware at 7.72 in 56th place, following Rhode Island (7.76 in 54th) and New York (7.77 in 53rd).

As I noted above, I think it’s especially instructive to see how jurisdictions compare when looking at the policies they control.

Here’s what the study says about the subnational index.

For the subnational index, Economic Freedom of North America employs 10 variables for the 92 provincial/state governments in Canada, the United States, and Mexico in three areas: 1. Government Spending; 2. Taxes; and 3. Labor Market Freedom. …There is a separate subnational index for each country. In Canada, the most economically free province in 2018 was again Alberta with 6.61, followed by British Columbia with 5.98… The least free by far was Quebec at 2.84… In the United States, the most economically free state was New Hampshire at 7.84, followed by Florida at 7.73. …(Note that since the indexes were calculated separately for each country, the numeric scores on the subnational indices are not directly comparable across countries.) The least-free state was New York at 4.25… In Mexico, the most economically free state was Jalisco at 6.57.

One obvious takeaway is to avoid Quebec and New York.

And almost all of Mexico as well.

One of the many great things about the Fraser Institute is that they are very good at sharing their data.

And, because I was curious to know what states are moving in the right direction and wrong direction, I downloaded the excel file so I could make the relevant calculations.

Here are the numbers, showing the both the overall shift since 1981 as well as the data for 1981-2000 and 2000-2018.

The good news is that every single state has more economic freedom today that it had in 1981. Michigan and Massachusetts enjoyed the biggest increases over the past four decades, though both of them still plenty of room for upward improvement.

Looking at the 1981-2000 and 2000-2018 periods, there was much more reform at the end of last century than there has been at the beginning of this century. So maybe the “Washington Consensus” influenced American states as well as foreign nations.

I realize I’m a dork about such things, but I was especially interested to see that some states (Delaware, Illinois, Maryland, New Jersey, New York, and Colorado) were very good performers in 1981-2000, but fell to the bottom group in 2000-2018.

By contrast, other states (Montana, North Dakota, Washington, and New Mexico) jumped from the bottom 10 to the top 10.

P.S. Texas ranked #1 in 1981, and by a comfortable margin, so even though it was among the bottom-10 performers for 1981-2018, it still ranks #4 overall for good economic policy.

P.P.S. Colorado dropped from #8 in 1981 to #23 in 2018, which may be a sign that the pro-growth impact of TABOR is more than offset the anti-growth impact of all the Californians that have moved to the state.

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Ranking Economic Liberty in America States, Canadian Provinces, and Mexican States

My favorite publication from the Canada-based Fraser Institute is Economic Freedom of the World, which ranks nations based on economic liberty.

I religiously write about each year’s report (starting back in 2011), and I also cite the data dozens of time each year when analyzing policy in various nations.

The second-best report from the Fraser Institute is Economic Freedom of North America, which ranks economic liberty in all American states, Canadian provinces, and Mexican states. Here’s the headline data from the most-recent edition, with Canadian provinces highlighted in brown and Mexican states highlighted in green.

I’m not surprised to see New Hampshire in first place, and I’m not surprised to see Florida in second place.

Both states rank near the top in various measures of economic liberty in the United States.

I’m also not surprised to see Mexican states clustered at the bottom.

What’s particularly interesting is to see how rankings have changed for the United States and Canada.

…economic freedom had been declining in all three countries until recently. From 2004 to 2013, the average score for all 92 jurisdictions fell from 7.64 to 7.09. Canadian provinces saw the smallest decline, only 0.08, whereas the decline in the United States was 0.59 and in Mexico, 0.63. However, economic freedom has increased in the United States and Mexico since 2013. In contrast, in Canada, after an increase in 2014, it has fallen back below its 2013 level. …on the all-government index the highest ranked jurisdiction is New Hampshire with a score of 8.13. After six straight years in first, Alberta fell to a tie for 6th last year, and fell further to a tie for 24th place at 7.94 in this year’s report. Florida is in 2nd with 8.07… The highest-rated Mexican state is Guanajuato at 61st with 6.49, behind all 50 US states and 10 Canadian provinces, and below 60th place by more than one full point.

Here’s a look at the biennial numbers for the three nations.

I’ve highlighted in green the two recent times Canada ranked about the United States (gee, thanks Obama) and highlighted in red the two recent times Canada ranked below the United States (gee, thanks Trudeau).

In my humble opinion, a key takeaway in the report is what happened to Alberta.

Here are some relevant excerpts.

Alberta, for seven years in a row up to 2015, was the top jurisdiction among the 92 jurisdictions in the index in the all-government index, as it was among Canadian prov-inces in the subnational index. However, in 2015, Alberta elected new political leaders who made changes in taxation, spending, and regulation that have had a significant negative effect on economic freedom. …Since 2015, Alberta has fallen from 1st to a tie for 24th place in the 2017 all-government index. It scored 8.31 in 2014 in this index, falling by 0.37 points in the 2017 index, the largest fall over that period of the 92 jurisdictions in the all-government index. Alberta’s decline in the subnational index, where of course provincial leader-ship has its greatest impact, was much larger, 1.42 points, between 2014 and 2017.

And here’s a table that shows what has happened over the past few years.

I actually warned about Alberta’s fiscal deterioration back in 2015, so I’ll be interested to see if the province can restore some budgetary sanity.

To be sure, Alberta is still the top-ranked province, but that’s more a reflection of bad policy elsewhere in Canada.

P.S. In general, Canada is a sensible, market-oriented nation. Indeed, the United States should copy its northern neighbor on issues such as spending restraint, welfare reform, corporate tax reform, bank bailouts, regulatory budgeting, the tax treatment of saving, school choice, and privatization of air traffic control.

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The Best Part of USMCA Is that Most of NAFTA Is Preserved

One of my big 2018 worries was that Trump would wreck NAFTA.

We dodged that bullet, but my two cents is that the new deal is underwhelming.

The bottom line is that his revisions to the pact – which is now called USMCA – create some new barriers to trade.

But there also are a few good parts of the deal.

And at least a source of economic uncertainty is now in the past. Indeed, that’s the real victory. There’s now presumably no risk that Trump will cause a meltdown of North American trade.

The Wall Street Journal‘s editorial hits the nail on the head.

Donald Trump is the most protectionist American President since Herbert Hoover, so one of our trade-policy goals of the last three years has been damage control. That’s the best case now for supporting Mr. Trump’s revisions to the North American Free Trade Agreement…  the new U.S.-Mexico-Canada trade deal puts to rest Mr. Trump’s threats to abandon the 1994 agreement and blow up continental trade. The new deal preserves most of the tariff-free trade in the original Nafta. …There’s particular political value in committing both Mexico’s President Andrés Manuel López Obrador, the left-wing economic nationalist known as AMLO, and Mr. Trump, the Republican mercantilist, to open trading rules for North America.

Sadly, the Trump Administration pushed for some European-style managed trade and regulatory harmonization.

The shame is that in many respects the new deal is worse than Nafta, especially its bows to politically managed trade. …This raises the cost of manufacturing, making North American products less competitive worldwide. Also reducing North American competitiveness is a new rule mandating that 40% of an auto qualifying for tariff-free trade in the region has to be produced by workers earning $16 an hour. Mandating wage rates ignores the relationship between productivity and output and sets a bad precedent for future trade deals. …The unions battered Mexico to allow a new enforcement process that will give American unions a new way to intrude in Mexican labor disputes. …North American auto production costs will also rise thanks to a new layer of protection for U.S. steel. The new deal mandates that 70% of steel used in North American vehicles must be made on the continent… Our concern now is that the deal’s concessions to politically managed trade will become the new baseline for future negotiations. …Senators will have to consider whether these bad precedents are worse than the benefit of saving most of the original Nafta.

I mentioned in the interview that the International Monetary Fund did an analysis of USMCA.

Here’s what the IMF set out to measure.

This paper uses a global, multisector, computable-general-equilibrium model to provide an analytical assessment of five key provisions of USMCA: (1) higher vehicle and auto parts regional value content requirement, (2) new labor value content requirement for vehicles, (3) stricter rules of origin for USMCA textile and apparel trade, (4) agricultural trade liberalization that increases U.S. access to Canadian supply-managed markets and reduces U.S. barriers on Canadian dairy, sugar and sugar products, and peanuts and peanut products, and (5) trade facilitation measures. In the context of successful ratification of USMCA, the paper also examines the effect of the removal of U.S. tariffs on steel and aluminum imports from Canada and Mexico and their reciprocal withdrawal of surtax countermeasures.

And what are the results?

Mostly nothing. There are  few good provisions and a few bad provisions, so the net result is trivial.

Indeed, it’s worth emphasizing that the the most unambiguously positive result will be the removal of Trump’s anti-growth taxes on imports of steel and aluminum.

At the aggregate level, effects of the USMCA are relatively small. According to the analysis of this paper, key provisions in USMCA would lead to diminished economic integration in North America, reducing trade among the three North American partners by more than US$4 billion (0.4 percent) while offering members a combined welfare gain of US$538 million. Effects of the USMCA on real GDP are negligible. …The results show that the tighter rules of origin in the auto sector and the labor value content requirement would not achieve their desired outcomes. The new rules lead to a decline in the production of vehicles and parts in all three North-American countries, with shifts toward greater sourcing of both vehicles and parts from outside of the region. …The three countries would gain much from ending the dispute triggered by the U.S. tariffs on steel and aluminum. USMCA scenario is extended to include the removal of U.S. steel and aluminum tariffs and a reciprocal elimination of Canadian and Mexican retaliatory import surtaxes. The extension would increase the welfare gain for the Canada, Mexico and the United States by $2.5 billion.

P.S. I mentioned an ideal free trade agreement in the interview. I also should have pointed out that unilateral free trade also is a good option. Assuming, of course, one understands the benefits of trade.

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The Trump Administration’s Unfortunate Campaign to Weaken NAFTA

There’s a debate in Washington about what President Trump really thinks about trade. Is he a crude protectionist or closet free trader?

If we focus on actions rather than rhetoric, I fear Trump is in the anti-trade camp. That is certainly the case if we look at how the Administration wants to alter the North American Free Trade Agreement. I was interviewed yesterday and here’s what I said about Trump and NAFTA.

By the way, even though I’ve previously defended NAFTA, I would like to see changes to the deal. The pact, which drags on for 1700 pages, isn’t genuine free trade.

An ideal agreement would contain just one sentence: “Mexicans and Canadians are free to buy goods and services from Americans, and Americans are free to buy goods and services from Mexicans and Canadians.”

Unfortunately, the Trump Administration wants to modify NAFTA in the other direction.

Clark Packard of the R Street Institute discusses this problem in a column for National Review.

…the administration should resolve NAFTA quickly. But a toxic mix of political miscalculations and bad policy is threatening to push that goal out of reach. U.S. Trade Representative Robert Lighthizer wants to remove the investor–state dispute-settlement process (ISDS) from NAFTA 2.0. ISDS provides neutral arbitration to settle disputes between private investors and governmental parties to NAFTA. For example, if the Mexican government expropriated an oil field owned by an American firm, ISDS would permit the American firm to seek compensation from the Mexican government in an arbitration process rather than seek redress in a Mexican court. …removing the process from NAFTA 2.0 would be a political miscalculation. …Another troublesome demand the United States is making in NAFTA negotiations is the inclusion of a so-called sunset clause that would terminate the agreement after five years unless all three countries affirmatively renew it. This is an unpopular idea on Capitol Hill and is a non-starter for Mexico and Canada, with good reason. Investment thrives in predictable environments. …the United States suggested lowering the regional-content threshold to 70 percent and requiring that 40 to 45 percent of an automobile must be produced by autoworkers making at least $16 per hour. …If manufacturers complied with this proposed requirement, their costs would skyrocket and consumers would face higher prices at the dealership. …manufacturers would forgo duty-free trading under NAFTA by sourcing parts from non-NAFTA countries and paying wages below $16 an hour, and then simply paying the small U.S. tariff on automobiles.

And here’s a good explanation, from Gary Clyde Hufbauer, of why NAFTA is a big plus for the American economy.

The North American Free Trade Agreement (NAFTA) has benefited American consumers, workers and businesses since 1994. …Some 14 million US jobs depend on the agreement with our nation’s two largest export markets, Canada and Mexico. Together, these countries spend nearly $500 billion purchasing US exports annually. …The Peterson Institute’s research shows that overseas investment is an engine for American job creation. For example, case studies in Mexico show a win-win relationship from establishing research and development facilities outside the United States: Every 131 jobs added in Mexico lead to 333 jobs created here at home. …NAFTA has fostered robust growth in agricultural exports over the past 24 years.

The bottom line, as I’ve explained many times, is that Trump will be undermining the benefits of the good things he’s accomplished – such as last year’s tax plan – if he insists on imposing higher taxes on trade. Protectionism isn’t just bad for taxpayers, exporters, consumers, and manufacturers. It’s also a net job destroyer.

The process of NAFTA began under Reagan, negotiations finished under the first President Bush (one of the few good things he did), and the pact was approved under Clinton (one of the many good things that happened during his tenure).

Let’s hope it’s not wrecked under Trump.

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A Libertarian Paradise in…Mexico?

I’m sometimes accused of being too radical, though I take that as a compliment (including the time a British journalist wrote that I was “a high priest of light tax, small state libertarianism”).

In reality, I’m actually a moderate. I don’t want to eliminate all government, just the 90 percent that is ineffective or counterproductive. As a result, some of my friends accuse me of being a squish, which is probably a fair characterization since I only scored a 94 out of 160 on Professor Bryan Caplan’s Libertarian Purity Quiz.

In my defense, I say let’s get rid of all the programs and departments that clearly shouldn’t exist (such as Transportation, Housing and Urban Development, Education, Energy, and Agriculture), and then we can have a fun discussion of whether the private sector can take over things like roads, policing, and the military.

And it does seem that many so-called public goods actually can be handled by the market. I’ve written about private roads and private money, for instance, but the example that really caught my attention was the private, church-run city in Nigeria.

And the New York Times has a fascinating story about similar developments in Mexico.

Fifteen-foot stone turrets are staffed by men whose green uniforms belong to no official force. Beyond them, a statue of an avocado bears the inscription “avocado capital of the world.” And beyond the statue is Tancítaro, an island of safety and stability amid the most violent period in Mexico’s history. Local orchard owners, who export over $1 million in avocados per day, mostly to the United States, underwrite what has effectively become an independent city-state. Self-policing and self-governing, it is a sanctuary from drug cartels as well as from the Mexican state. …Tancítaro represents a quiet but telling trend in Mexico, where a handful of towns and cities are effectively seceding, partly or in whole. These are acts of desperation, revealing the degree to which Mexico’s police and politicians are seen as part of the threat.

I can’t resist commenting that the reporters should have written that police and politicians “are the threat” rather than “are seen as part of the threat.”

The Mexican government is a grim example of the “stationary bandit” in action.

Anyhow, back to our story about de facto secession and privatization.

…such enclaves…you will find a pattern. Each is a haven of relative safety amid violence, suggesting that their diagnosis of the problem was correct. …The central government has declined to reimpose control, the researchers believe, for fear of drawing attention to the town’s lesson that secession brings safety.

Tancítaro is not the only example of a quasi-private town.

Rather than ejecting institutions, Monterrey’s business elite quietly took them over… C.E.O.s would now oversee one of the most central functions of government. …they circumvented the bureaucracy and corruption that had bogged down other police reform efforts. Crime dropped citywide. Community leaders in poorer areas reported safer streets and renewed public trust… Monterrey’s experience offered still more evidence that in Mexico, violence is only a symptom; the real disease is in government. The corporate takeover worked as a sort of quarantine.

Wow, who would have imagined the New York Times would ever have a story stating that “the real disease is in government.”

Sadly, the story goes on to say traditional politicians are now regaining control in Monterrey, so the period of good governance is coming to an end.

In an ideal world, the central government would allow towns to formally secede, and those towns could then contract to have private management. But that’ll never happen since politicians wouldn’t want real-world examples showing the superiority of markets over government.

For now, we’ll have to settle for ad hoc and unofficial secession and privatization.

P.S. We can also hope that Liberland succeeds.

P.P.S. While today’s topic is de facto secession of local governments, my support for decentralization makes me sympathetic to regional secession. See, for example, Scotland, Liechtenstein, California, Italy, Belgium, and Ukraine.

P.P.P.S. I did once write about the “libertarian paradise of Argentina,” but that was mostly in jest.

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If Chile’s “Neoliberal” Experiment Is a Failure, Why Is the Nation More Prosperous than the Rest of Latin America?

One of the interesting things I’ve noticed in my world travels is that supporters of free markets and small government generally are known as “liberals” everywhere other than North America.

I think the rest of the world has the right idea. After all, folks like Adam Smith are considered “classical liberals,” so it’s bizarre that “liberal” now is used to describe anti-capitalists in America.

To muddy the waters even further, it’s not uncommon for modern supporters of capitalism to be called “neoliberals.”

Though I wonder if that’s supposed to a be a term of derision. When I’m called a neoliberal in other countries, it’s always by someone who is criticizing my support for economic liberty.

Professor Dani Rodrik of Harvard, in a column for the U.K.-based Guardian, is not a fan of neoliberalism. He acknowledges that the term is ill-defined, but recognizes that it means a less power for government.

…neoliberalism…denotes a preference for markets over government, economic incentives over cultural norms, and private entrepreneurship over collective action. …The term is used as a catchall for anything that smacks of deregulation, liberalisation, privatisation or fiscal austerity. …That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a decisive shift toward markets from the 1980s on? Or that centre-left politicians – Democrats in the US, socialists and social democrats in Europe – enthusiastically adopted some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatisation, financial liberalisation and individual enterprise?

Rodrik then proceeds with a lengthy discussion of the weaknesses and limitations of conventional economic analysis.

Much of what he writes is perfectly reasonable. The economy is not a machine and people are not robots, so mechanistic economic concepts – while useful – have limited value. Moreover, culture and institutions make a big difference, and it’s rather difficult to capture those concepts in economic models.

Moreover, he makes some interesting observations on how various nations such as China have liberalized in ways that defy easy analysis.

Which is certainly a fair point.

But then he finishes up his column with two examples that simply don’t make sense.

First, Rodrik cites Mexico as a supposed example of neoliberal reform.

Following a series of macroeconomic crises in the mid-1990s, Mexico embraced macroeconomic orthodoxy, extensively liberalised its economy, freed up the financial system, sharply reduced import restrictions and signed the North American Free Trade Agreement (Nafta). These policies did produce macroeconomic stability and a significant rise in foreign trade and internal investment. But where it counts – in overall productivity and economic growth – the experiment failed. Since undertaking the reforms, overall productivity in Mexico has stagnated, and the economy has underperformed even by the undemanding standards of Latin America.

My reaction is “huh?”

I spend a lot of time combing through international data in hopes of finding success stories to publicize and I’ve never come across anything to suggest Mexico is a good example. Instead, I found evidence a few years ago suggesting the country is a bad example.

Here’s the Mexican data from Economic Freedom of the World. You can certainly argue that Mexico did some good reforms in the late 1980s. But where’s the evidence for sweeping liberalization after the mid-1990s?

There was a very slight increase in Mexico’s score after 1995, which is better than nothing. But I’m not surprised that it didn’t yield impressive results since the rest of the world was liberalizing at a much faster rate.

Indeed, Mexico dropped from #49 to #69 between 1995 and 2000 because other nations were the ones with “extensive liberalization,” not Mexico.

Second, he takes a shot at Chile.

Chile’s neoliberal experiment eventually produced the worst economic crisis in all of Latin America.

“Huh?” would be an understatement. I was flabbergasted by this assertion.

But not the first part of that sentence. He’s correct that Chile is a poster child for market-friendly reform.

Here’s a chart from Economic Freedom of the World showing how the nation’s score dramatically improved between 1975 and 1995.

But I was shocked by the second part of the sentence. Chile had “the worst economic crisis in all of Latin America”?

Since I’ve written several times about the Chilean economic boom, I was totally baffled. What was Rodrik talking about?

So I took another look at a couple of sources to see if I had overlooked something.

Here’s the IMF data on per-capita GDP for Chile and the rest of Latin America. The numbers are only available back to 1980, but everything we see underscores my argument that Chile is a great success. It used to have living standards only slightly higher than the average for Latin America and now the people are more than twice as rich as their peers. If that’s a “worst economic crisis,” we should all be lucky enough to have similar problems.

Then I looked at the Angus Maddison dataset, which allows us to go back to 1970.

His numbers are adjusted for inflation, so the lines don’t rise as rapidly, but we see the same long-run pattern. Chile is getting richer at a much faster pace than other countries from Latin America. Once again, if this is a “crisis,” other nations should hope for a similar fate.

So what did Rodrik mean by “worst economic crisis”?

His article doesn’t provide any details, but if you look at the Maddison data for the early 1980s, there was a downturn, with per-capita output dropping in Chile from about $6,000 to about $5,000. And that reduction was noticeably larger than the average reduction for the rest of Latin America.

I’m guessing this is the supposed “crisis” that he mentions in the article.

But if that’s true, he’s guilty of an egregious example of “cherry-picking” data. Sort of like saying the record-setting 1998 Yankees were a failure because of a four-game losing streak in late August that year.

Honest analysis requires a look at the overall record, and all data sources show that Chile’s economic performance is far superior to its peers.

The bottom line is that Rodrik is on solid ground when he points out the limitations of conventional economic analysis. But when he then decides to criticize pro-market reforms, he concocts two examples that are – at best – sloppily inaccurate.

P.S. By the way, I can’t resist commenting on one additional assertion in Rodrik’s column.

The use of the term “neoliberal” exploded in the 1990s, when it became closely associated with…financial deregulation, which would culminate in the 2008 financial crash and in the still-lingering euro debacle.

This is another “huh?” moment.

The “neoliberals” were the people who opposed the policies – artificially low interest rates from the Federal Reserve and the corrupt Fannie Mae and Freddie Mac subsidies – that led to the financial crisis. And people like me were very opposed to the excessive government spending that led to the European fiscal crisis.

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