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Posts Tagged ‘Free Markets’

International development experts often write about a “middle-income trap.”

According to this theory, it’s not that challenging for nations to climb out of poverty, but it’s difficult for them to take the next step and become rich countries.

The theory makes sense to many people because it describes much of what we see in the real world.

We even see the trap at higher levels of income. European nations were catching up with the United States after World War II, but then the convergence process stalled.

But I don’t think there’s actually a “middle-income trap.” Instead, nations don’t enjoy full convergence because they are hamstrung by bad policy.

And Hong Kong and Singapore are the best evidence for my hypothesis. These two jurisdictions have routinely ranked #1 and #2 for economic freedom.

And their solid track record of free markets and small government has paid big dividends. Here a chart, for Our World in Data, which shows how they have fully converged with the United States after starting way behind.

The performance of Hong Kong and Singapore is particularly impressive because the United States historically has been a top-10 nation for economic liberty (notwithstanding all my grousing about bad policy in America, we’ve been fairly good compared to the rest of the world).

So it takes extraordinarily good performance to catch up.

But it can happen.

P.S. By the way, one thing I noticed in the above chart is that Singapore has surpassed Hong Kong in the past couple of decades. This could just be a statistical blip, though I wonder if this is a result of the transfer of Hong Kong from British control to Chinese control. Yes, China has wisely chosen not to interfere with Hong Kong’s domestic policy, but perhaps investors and entrepreneurs don’t fully trust that this economic autonomy will continue.

P.P.S. Don’t forget that comparatively rich nations can de-converge if they adopt bad policy.

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Time for the final installment in my four-part video series on trade-related topics.

  • Part I focused on the irrelevance of trade balances.
  • Part II looked at specialization and comparative advantage.
  • Part III explained trade and creative destruction.

Here’s Part IV, which looks at the very positive role of the World Trade Organization.

My basic argument is that it is a good idea to get other nations to reduce trade barriers, but tit-for-tat protectionism is not the right approach.

As I explained when writing about Chinese mercantilism, the U.S. would have far more success by using the WTO.

Let’s look at what experts have said.

Writing for the Wall Street Journal, Greg Rushford explained why the WTO is good for the United States.

President Harry S. Truman and Secretary of State George Marshall successfully pressed America’s war allies to create the General Agreement on Tariffs and Trade more than 70 years ago. Leaders across the globe, mindful of how economic nationalism in the 1930s had contributed to the devastation of World War II, wanted to open the world up again. The agreement focused on slashing of tariffs and other barriers to trade—bringing unprecedented prosperity to hundreds of millions of people. The GATT, which evolved into the World Trade Organization in 1995, became the world’s most successful international economic experiment. …Despite Mr. Trump’s assertion that the WTO has been “a disaster” for the U.S., Washington has won 85% of the 117 WTO cases it has brought against foreign trading partners. Japan complained in 2003 that WTO jurists had stretched the law by determining that Japanese health officials used phony science to ban American apples. The real U.S. gripe is that foreign governments have won most of the 145 cases that they have brought against American protectionist policies. …Both political parties would be well-advised to consider the wisdom of Truman and Marshall. They understood that true national-security imperatives meant resisting protectionism.

And here’s some more background information from a column in the WSJ by James Bacchus, who served as both a Member of Congress and as a Chief Judge at the WTO.

…let’s say Mr. Trump managed to get his way and pull the U.S. out of the WTO. The consequences for the world and U.S. economies would be immense. Among them: diminished trade growth, costly market and supply-chain disruptions, and the destruction of jobs and profits, especially in import- and export-dependent U.S. industries. The resulting trade barriers would compel some American companies either to downsize or move offshore. The global economic spiral set in motion by Mr. Trump’s reckless trade actions on steel, aluminum, Canada, Mexico, China, and Europe would accelerate. …WTO membership provides goods and services produced in the U.S. with protection against discrimination in foreign markets. Nondiscrimination rules are the heart of the WTO trading system, which currently applies in 164 countries and to 98% of all global commerce. …Instead of waging war on the WTO, the U.S. should help modernize it by making it more effective in addressing digital trade, services, subsidies, sustainability and intellectual property. Internationally agreed rules for international trade—and a process for resolving disputes about those rules—are an indispensable pillar of national prosperity.

I agree with everything in both columns.

And I’ll add one very simple – and hopefully very powerful – point.

Here’s a chart from the WTO showing that the United States is one of the world’s most pro-trade nations, with average tariffs of only 3.48 percent. Not as good as Hong Kong (0.0 percent) or Singapore (0.1 percent), but definitely good compared to most other nations.

In other words, it would be good if we could convince other nations to lower their trade barriers to our level.

Yet that’s exactly what’s been happening thanks to the WTO (and GATT, the predecessor pact). Here’s a chart prepared by the Confederation of British Industry, which shows how trade barriers have been continuously dropping. And dropping most rapidly in other nations, which is something Trump should be happy about.

The bottom line is that the WTO unambiguously advances U.S. interests, as I noted in the conclusion of the video.

But it actually advances the interests of all nations by gradually reducing global barriers to trade.

Is it as good as unilateral free trade? No, but it is a big win-win for America and the rest of the world.

Which is why, despite my usual disdain for international bureaucracies, I’m a big fan of the WTO.

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I’m currently in Chile, enjoying the warm sun and doing research on the nation’s impressive economic performance.

I met yesterday with Jose Pinera, the former minister who created Chile’s incredibly successful system of personal retirement accounts (he’s also one of the people Gary Johnson should have mentioned when he was asked to identify an admirable foreign leader).

Back in 2013, I shared some of Jose’s data showing how the economy took off after Chile enacted pro-market reforms.

I was especially impressed by the stunning reduction in the poverty rate, which had dropped from 50 percent to 11 percent (it’s now down to 7.8 percent).

In other words, capitalism has been great news for poor Chileans. Simply stated, when given more freedom and opportunity, most of them escape poverty.

Interestingly, Reuters reports that even the IMF recognizes Chile’s superior performance.

The International Monetary Fund (IMF) hailed Chile’s strengthening economy in a report published on Friday while encouraging President Sebastian Pinera to push forward with promised structural reforms. In a statement following its annual consultation with Chile, the IMF praised Pinera’s proposed reform drive… Conservative billionaire Pinera took office in March with a strong mandate to make changes to the country’s pension system and labor laws and simplify the tax code. …The bank praised his early efforts, which it said were aimed at “re-invigorating investment and economic growth.”

Hmmm…, makes me wonder if the IMF (given its dismal track record) actually understands why Chile has become so prosperous.

Though the World Bank has praised the country’s pro-market reforms, so international bureaucracies sometimes stumble on the right answer.

But let’s not get distracted. Today, I want to share further evidence about how pro-market reforms produce big benefits for the less fortunate.

Here’s a chart from an article in the latest edition Economia y Sociedad. The article is in Spanish, but a translation of the relevant passage tells us that, “in Chile, the income of the poorest 20% of the population has risen at a rate (8.2% per year) that is 50% higher than that to which the income of the richest 20% has risen ( 5.3% per year).”

In other words, a rising tide lifts all boats (just as in the U.S.), but the bottom quintile is enjoying the biggest increases.

Sounds like great news. And it is great news. But some people put on blinders.

My left-leaning friends loudly assure me that they are motivated by a desire to help poor people. Yet if that’s true, why aren’t they falling over themselves to praise Chile? Why are they instead susceptible to waxing rhapsodic about the hellhole of Venezuela or bending over backwards to defend Cuba’s miserable regime?

And why do some anti-capitalist economists engage in absurd examples of cherry picking in failed efforts to discredit Chile’s accomplishments?

The bottom line is that Chile became the Latin Tiger thanks to economic liberty. That’s great news for the country, but especially good for the less fortunate.

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President Trump’s view of global trade is so bizarre, risky, uninformed, misguided, and self-destructive that I periodically try to maintain my sanity by reviewing the wisdom of one of America’s greatest presidents.

  • Ronald Reagan’s remarks in 1985 about the self-destructive impact of trade barriers.
  • Ronald Reagan’s remarks in 1988 about the economic benefits of trade liberalization.

Today, let’s travel back to 1982 for more wisdom from the Gipper.

What’s especially remarkable is that Reagan boldly defended free and open trade at the tail end of the 1980-82 double-dip recession that he inherited.

Many politicians, facing an unemployment rate above 10 percent, would have succumbed to the temptation for short-run barriers.

But just as Reagan did the right thing on inflation, even though it was temporarily painful, he also advocated good long-run policy on trade. He understood Bastiat’s wise insight about “seen” benefits vs “unseen” costs.

Trump, by contrast, has a very cramped and limited understanding of trade. Which is why almost all economists disagree with his approach.

…on Trump’s other point — that protectionism offers Americans the road to riches — most specialists in international trade would beg to differ. “Even by Washington standards, Trump’s tweet was profoundly wrong,” said Daniel J. Mitchell, a conservative economist. In a recent column criticizing Trump’s tweet, Mitchell wrote, “The last time the United States made a big push for protectionism was in the 1930s. At the risk of understatement, that was not an era of prosperity.” …said Lawrence White, a professor at New York University’s Stern School of Business…”tariffs, like any tax, generally introduce an inefficiency and makes the two sides of the trading relationship poorer — not richer.”

I appreciated the chance to be quoted in the story, and I also was happy that a link to one of my columns was included.

Though I gladly would have traded that bit of publicity if Politifact instead had shared my “edits” to Trump’s infamous “Tariff Man” tweet.

I’ll conclude by noting that Reagan’s record didn’t always live up to his rhetoric.

P.S. I winced when Reagan positively cited the International Monetary Fund in his remarks. Though maybe the IMF in the early 1980s wasn’t the pro-tax, anti-market, bailout-dispensing bureaucracy that it is today.

P.P.S. I noted that Reagan was one of America’s great presidents. I also include Calvin Coolidge and Grover Cleveland on that list.

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I wrote a column earlier this month about the “world’s most depressing tweet,” which came from the Census Bureau and noted that the suburbs of Washington, DC, are the richest parts of America.

To be sure, I was engaging in a bit of hyperbole since a tweet about famine, war, or genocide surely would be more depressing. Nonetheless, I think it is a very bad sign that so many undeserving people are making so much money thanks to a bloated and cronyist central government.

Today I want to share another tweet that deserves some sort of special accolade.

I thought about calling it the “world’s best-ever tweet,” but I’m going to be more restrained and simply assert that it is the best tweet about socialism and capitalism.

This is spot on.

I’ve dealt with countless leftists who claim that the failure of places such as Venezuela, Cuba, North Korea, Greece, Zimbabwe, and the Soviet Union don’t count because they weren’t “real socialism” or “real communism.”

Indeed, that’s even become a humorous theme (see here, here, and here from my collection of socialism/communism humor).

But shouldn’t we learn something from the fact that “almost socialism” invariably produces awful results?

Similarly, there has never been a society that is 100 percent capitalist. The world’s freest nations today, such as Hong Kong and Singapore, have state sectors that consume about 20 percent of economic output. Likewise, government consumed 10 percent of GDP during the height of the western world’s supposedly laissez-faire period in the 1800s.

That being said, shouldn’t we learn something from the fact that “almost capitalism” created the amazing hockey stick of human progress? Shouldn’t we learn something from the fact that “some capitalism” is capable of dramatically reducing global poverty?

P.S. If there was a prize for the most short-sighted, naive, and anti-empirical tweet, this example would win the prize.

P.P.S. And this tweet wins the prize for the best comeback. Consider it a case of tweet-on-tweet violence.

P.P.P.S. Last but not least, here’s a tweet that sums up the essential difference between libertarians and statists.

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I have a four-part video series on trade-related topics.

  • Part I focused on the irrelevance of trade balances.
  • Part II looked at specialization and comparative advantage.

Here’s Part III, which explains how trade (whether domestic or international) leads to creative destruction, which results in some painful short-run costs but also yields immense long-run benefits.

I recently argued that creative destruction is the best part and worst part of capitalism.

It’s bad if you’re a worker in a company that loses out (or if you’re an investor in that company). but it’s also what enables us to become more prosperous over time.

I’m not alone. Writing for CapX, Oliver Wiseman reviewed Capitalism in America, a new book by Alan Greenspan and Adrian Wooldridge. Here are some key observations.

…there was nothing predictable about America’s rise from colonial backwater to world-beating economy. …The fight for independence began a year before the publication of Adam Smith’s The Wealth of Nations; “the new country was conceived in a revolt against a mercantilist regime that believes a nation’s economic success was measured by the size of its stock of gold.” …The Constitution’s limits on the power of the majority set America apart from the rest of the world and “did far more than anything else to guarantee America’s future prosperity…” On top of this fortuitous start is the country’s “greatest comparative advantage”: its “talent for creative destruction”, the driving force of innovation, growth and prosperity that “disequilibriates every equilibrium and discombobulates every combobulation”. Americans realised that “destruction is more than an unfortunate side effect of creation. It is part and parcel of the same thing”. …The result is a system that has squeezed more productive energy out of its human capital than other countries, and generated unparalleled prosperity.

For those interested in economic history, Joseph Schumpeter gets most of the credit for developing the concept of creative destruction.

This Powerpoint slide is a nice summary of Schumpeter’s contribution (notwithstanding the fact that the person misspelled his name).

And here’s a Tweet showing that Schumpeter was under no illusions about the folly of socialism.

The bottom line is that creative destruction is what gives us churning, and churning is what dethrones rich and powerful incumbents. My friends on the left should be cheering for it.

Instead, they push for regulations and taxes that hinder creative destruction. And that means less long-run prosperity for all of us.

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I periodically ask my left-leaning friends to identify a nation that became rich with statist policies.

They usually point to Sweden or Denmark, but I point out that Sweden and Denmark became rich in the 1800s and early 1900s, when government was very small.

At that point, they don’t really have any other response.

That’s because, as I pointed out in this clip from a recent debate at Pomona College in California, there is no example of a poor nation becoming rich with big-government policies (though we have tragic examples of rich nations becoming poor with statism).

So if statism isn’t the right approach to achieve prosperity, how can poor nations become rich nations.

I’ve offered my recipe for growth and prosperity, but let’s look at the wise words of Professor Deirdre McCloskey in the New York Times.

The Great Enrichment began in 17th-century Holland. By the 18th century, it had moved to England, Scotland and the American colonies, and now it has spread to much of the rest of the world. Economists and historians agree on its startling magnitude: By 2010, the average daily income in a wide range of countries, including Japan, the United States, Botswana and Brazil, had soared 1,000 to 3,000 percent over the levels of 1800. People moved from tents and mud huts to split-levels and city condominiums, from waterborne diseases to 80-year life spans, from ignorance to literacy. …50 years ago, four billion out of five billion people lived in…miserable conditions. In 1800, it was 95 percent of one billion.

Deirdre then explains that classical liberalism produced this economic miracle.

What…caused this Great Enrichment? Not exploitation of the poor, …but a mere idea, which the philosopher and economist Adam Smith called “the liberal plan of equality, liberty and justice.” In a word, it was liberalism, in the free-market European sense. Give masses of ordinary people equality before the law and equality of social dignity, and leave them alone, and it turns out that they become extraordinarily creative and energetic. …we eventually need capital and institutions to embody the ideas, such as a marble building with central heating and cooling to house the Supreme Court. But the intermediate and dependent causes like capital and institutions have not been the root cause. The root cause of enrichment was and is the liberal idea, spawning the university, the railway, the high-rise, the internet and, most important, our liberties.

In other words, the right ideas are the building blocks that enable the accumulation of capital and the development of institutions.

Deirdre’s analysis is critical. She reminds us that investment doesn’t merely depend on good tax policy and rule of law doesn’t magically materialize. You need a form of societal capital as the foundation.

Anyhow, to show how good ideas changed the world, this chart show how classical liberalism is the key that unlocked modern prosperity.

You may have already seen a chart that looks just like this. It was in a video Deirdre narrated. And Don Boudreaux shared a similar chart in one of his videos.

Circling back to the point I made at the start of this column, socialism (or any other form of statism) has never produced this type of economic miracle.

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