Monday, June 19, 2006

Where coffee first addicted man

Due to insistent public demand (?), I am taking time to post about my host country here.

Ethiopia is known for many things. It is the birthplace of coffee, as well as possibly the birthplace of humanity. Lucy is here in Addis Ababa. Ethiopia has been free of colonial rule, except for a brief occupation by Italy under Mussolini.

Unfortunately Ethiopia is also known for its poverty. It is the second biggest in Africa in terms of population (75 million), but is one of the poorest countries in the world. Life expectancy here is below 50 years.

Ethiopia also experimented with socialism when their last King Haile Selassie was deposed in 1974. However a successful uprising replaced it with a government more sympathetic to markets and free enterprise. However you can still see the iron hand of government intervention everywhere - exchange rates are tightly controlled, though I am told there is a flourishing black market. There remain many obstacles to open trade and business investment. The value-added tax rate is 15%.

As I walk the streets I have an impression, despite the large number of beggars and street children (not that Manila has already inured me to the sight), that economic activity is starting to pick up. If they can move more rapidly in terms of market reforms, it can be a great experiment to check whether a move away from a planned towards a market economy can make a big difference in terms of human development. Fingers crossed.

Thursday, June 15, 2006

Into Africa

Don't be surprised if this blog shows little activity until the end of next week. I'll be off to Addis Ababa, Ethiopia, for a workshop organized by the Poverty and Economic Policy Network. Looking forward to it, as it is my first visit to Africa.

Monday, June 12, 2006

The economics of independence

Government is essentially an instrument for the delivery of public goods (including social order. What would motivate a subset of a territory under one government to desire self-government?

The motivation arises when there is a failure in the existing government, and a reasonable hope that self-government may improve matters. In the status quo, public goods may fail to be delivered. Common pool resources may be mismanaged from the parochial perspective; minerals, forests, fisheries, and the like may be mined out to benefit the larger territory with little benefit to the local economy. Third, the local populace may find themselves on the short end of coercive resource pooling - as in the taxation system (the story of the US of A), and other levies such as wartime draft. Such failures can be attributed to deliberate design to exact surplus, or to sheer neglect due to the demands of maintaining a government bureaucracy over a large territory.

National security (a public good provided by government) implies protection of the state not only from external threat, but also internal division. Sheer exertion of force is costly, hence other means of maintaining social order are desirable. The most ubiquitous of these is the cradle-to-grave socialization into the body politic. (Iniibig ko ang Pilipinas. Ito ang aking lupang sinilangan. Ito ang tahanan ng aking lahi....)

Was the independence of the Philippines from the United States beneficial to the country? (Incidentally what Filipinos celebrated today was Independence from Spain.) I think the issue is moot: the United States would have granted independence anyway, after doing a cost-benefit analysis. Maintaining control over the country (despite its known natural treasures) would have been a net drain of American resources, for dubious benefits (on their part). I doubt whether US administration would have been able to replicate the rapid improvement of living standards of the East Asian high performers, given American niggardliness at providing subsidies, welfare, and capital outlays for backward regions.

Filipino self-rule really had a better chance at poverty reduction. Unfortunately we have so far flubbed it by remaining stuck in a blame-mongering, backward-looking, insular mentality. There's a sort of historical inertia, where earlier realities are expected to prevail until Kingdom come. So if the colonial masters were oppressing us before, heck our backwardness now is because of continued dominance by the US-IMF-WB-WTO evil imperalist neocolonial structures.

Real independence starts with critical thinking.

Wednesday, June 07, 2006

The power of positive sum thinking

A congressman attributes opposition to the proposed 125-peso wage increase to a pro-business bias. This is a classic sign of "zero-sum" thinking: that business generates a fixed income, which is divided at will by the business owner into a labor share and a profit share. Of course the greedy business owner would leave only the barest minimum for the labor share; hence such greed must be restrained by benevolent government intervention.

However the zero sum formulation is incorrect. Running a business is a positive-sum game. That means the combination of exchanges between factor owners and entrepreneur, and between entrepreneur and consumers, generates a value in excess of what existed prior to the combination. Capital acting alone, or labor acting alone, or households acting alone, would not be able to realize the total benefit realized through the market. Think of it this way: if you are just acting alone, magtanim ka na lang ng kamote (just go plant sweet potatoes).

Forcing the business owner to pay higher wages would reduce the total value generated by the whole process. Artificially higher costs mean they will cut back on production as well as hiring labor. Lower production means fewer goods for consumers and fewer jobs for workers. This brings us closer to a world where all we can do is plant kamote.

Zero sum thinking is pervasive and pernicious. Positive sum thinking on the hand allows us to see the truth behind the following equation: antibusiness = antilabor.

Monday, June 05, 2006

A wage too far

The Philippine Congress is getting itself way over its head with its latest plan to hike wages by 125 pesos. In terms of the minimum wage that's nearly a 40% increase in Metro Manila. NEDA is against it, and for good reason. I think their projections are believable. I mean for heaven's sake, take a look at this chart: the high end of the minimum wage (presumably in the capital) is a whopping US$6.30 in the Philippines, two-and-a-half times that of China (whose per capita income is above ours). It's also far in excess of Thailand (double our per capita income), Indonesia, and Vietnam (a fast-rising Asian tiger economy.) Earlier I have written about what it really takes to help the working man and woman. I have little to add to that, except to wonder in disbelief how brainlessly we approach economic policy. Can the law of the downward-sloping demand for labor be repealed? Do causes have effects? Can something be had for nothing? Is there such a thing a free lunch?

Speaking of free lunches, read this if you're interested in interpreting the latest economic figures. I also have little to add to it, except to say, more important that expertise is common sense. Precisely what is the scarcest resource in the body politic.

Saturday, June 03, 2006

Presidential versus parliamentary system

Professor Winnie Monsod reviews the academic literature comparing the presidential with the parliamentary systems. Read them here and here. Conclusion: no clear evidence in favor of one or the other system, whether in terms of corruption or economic performance. Parliamentary systems though are more readily associated with structural reform, but also with greater government spending. Professor Monsod concludes that we avoid "indecent haste" in pursuing a shift in system.

When the data is ambiguous, we need to substitute intuition and experience for number-crunching. Look at the recent history of this country. After three People Powers, and nearly a fourth, shouldn't we rethink the idea of a fixed term for the President? Lay to rest the persistent calls for "snap elections" by (con/in)stitutionalizing the "snap election"?

Parliamentary systems are of course fraught with their own risk and sources of instability. It's no magic bullet. Nothing is. But perhaps it would, overall, hasten the pace of development. What do you think?