Thursday, July 04, 2013

A Tale of Two Economies

Chile and Ecuador provide an almost perfect test case of competing economic visions. Back in 1980, Ecuador had a slightly higher per capita income than Chile. In the past 33 years, Ecuador has increased its real per capita income a little more than threefold, but during the same period Chile has increased its per capita income more than sixfold. Chile now has the highest per capita income in South America, and most of its citizens are now enjoying a middle-class life style. Why has Chile done so much better than Ecuador?

Chile and Ecuador are both Spanish-speaking, South American countries located on the Pacific. They have similarly sized populations (15.4 million for Ecuador, and 17.2 million for Chile). Ecuador has substantial oil reserves, and its oil accounts for more than 50 percent of the country’s export earnings. Chile has huge copper reserves which account for about 19 percent of its export earnings. Both are now functioning democracies with largely capitalistic economies. Chile, however, went through a radical, free-market reform process more than three decades ago, while Ecuador followed the more common semistatist model.

The biggest difference between the paths the two countries took was on economic freedom and the size of government. Back in 1980, Chile ranked only No. 60 in terms of economic freedom, but now it ranks as the 10th most free economy in the entire world. In contrast, Ecuador ranked a respectable No. 33 in 1980, but now has fallen to a miserable 126 rank in terms of economic freedom. While Chile has embraced the rule of law and made property rights very secure, Ecuador is still mired in corruption and suffers from uncertain property rights. President Rafael Correa of Ecuador defaulted on the country’s debt in 2008 and then did a reverse auction in 2009 to settle most of the debt issue at a heavily discounted rate, at the expense of the bondholders. As would be expected, these actions greatly reduced foreign investment into Ecuador. The Chinese are now the biggest investors in Ecuadorean government securities.

Chile has actively pursued free trade. It now has free-trade agreements with the United States and more than 60 other countries. Ecuador, by contrast, has been increasing trade restrictions. By opening its market to the world, Chile has also gained access to the major markets across the globe. This has encouraged Chilean industry to diversify, so Chile is becoming less and less dependent on copper. Ecuador, by not pursuing a policy of openness, has made itself hostage to the world oil price. Given the new hydraulic-fracturing technologies, the price of oil may well fall in real terms, which would cause great economic pain in Ecuador.

Chile has kept the size of government relatively low as a share of gross domestic product (24 percent), while government ballooned in Ecuador to European government levels (46 percent) — again, illustrating that welfare states eventually result in more poor people rather than fewer. Chile has, as would be expected, a much lower poverty rate than Ecuador.

Both countries have maintained sound monetary policies for the past three decades after having suffered very high rates of inflation. Ecuador decided to use the U.S. dollar as its currency back in 1980, and it continues to do so. This makes sense for Ecuador since it receives substantial remittances from Ecuadorean citizens working in the United States, and because the global oil price is quoted in dollars.

Why did Chile choose the limited-government, free-market route, and how has the country managed to keep it when so many other governments drifted far to the left? In the mid-1970s, the Chilean economy was in a deep crisis due to the actions of the Marxist government of President Salvador Allende. The military dictatorship of the Pinochet government had little idea of how to right the economy. Eventually, out of desperation, it turned to a group of free-market Chilean and American economists, known as “the Chicago boys” (many having been students of Milton Friedman and his colleagues at the University of Chicago). The reforms that they instituted led to the restoration of democracy in Chile.

The reasons the reforms have persisted through governments of both the left and right in Chile is largely due to one man, Jose Pinera. As the very young labor minister in the late 1970s, Mr. Pinera devised the world’s first major, and hugely successful, privatized, social security system, which has now been adopted, at least in part, by more than 30 other countries. Mr. Pinera is considered a “Chicago boy” even though his doctorate is from Harvard. The Pinera plan gave Chilean citizens a choice: Stay with the state pension plan or move to the new system of privatized accounts. More than 97 percent of the Chilean citizens have voluntarily moved to the new system, which has now provided an average compounded rate of return of more than 10 percent for 33 years. Hence, the average Chilean now retires with more assets than the average American.

The privatized pension system provided large amounts of capital investment for Chilean businesses, enabling the economy to grow rapidly while, at the same time, giving every Chilean worker a direct, vested interest in the success of the Chilean economy. It’s a win-win.

There is no need for any country to be poor or have slow growth. The lessons of success are there for all to see.



The Mindset of the Left

Thomas Sowell

The political left has long claimed the role of protector of "the poor." It is one of their central moral claims to political power. But how valid is this claim?

Leaders of the left in many countries have promoted policies that enable the poor to be more comfortable in their poverty. But that raises a fundamental question: Just who are "the poor"?

If you use a bureaucratic definition of poverty as including all individuals or families below some arbitrary income level set by the government, then it is easy to get the kinds of statistics about "the poor" that are thrown around in the media and in politics. But do those statistics have much relationship to reality?

"Poverty" once had some concrete meaning -- not enough food to eat or not enough clothing or shelter to protect you from the elements, for example. Today it means whatever the government bureaucrats, who set up the statistical criteria, choose to make it mean. And they have every incentive to define poverty in a way that includes enough people to justify welfare state spending.

Most Americans with incomes below the official poverty level have air-conditioning, television, own a motor vehicle and, far from being hungry, are more likely than other Americans to be overweight. But an arbitrary definition of words and numbers gives them access to the taxpayers' money.

This kind of "poverty" can easily become a way of life, not only for today's "poor," but for their children and grandchildren.

Even when they have the potential to become productive members of society, the loss of welfare state benefits if they try to do so is an implicit "tax" on what they would earn that often exceeds the explicit tax on a millionaire.

If increasing your income by $10,000 would cause you to lose $15,000 in government benefits, would you do it?

In short, the political left's welfare state makes poverty more comfortable, while penalizing attempts to rise out of poverty. Unless we believe that some people are predestined to be poor, the left's agenda is a disservice to them, as well as to society. The vast amounts of money wasted are by no means the worst of it.

If our goal is for people to get out of poverty, there are plenty of heartening examples of individuals and groups who have done that, in countries around the world.

Millions of "overseas Chinese" emigrated from China destitute and often illiterate in centuries past. Whether they settled in Southeast Asian countries or in the United States, they began at the bottom, taking hard, dirty and sometimes dangerous jobs.

Even though the overseas Chinese were usually paid little, they saved out of that little, and many eventually opened tiny businesses. By working long hours and living frugally, they were able to turn tiny businesses into larger and more prosperous businesses. Then they saw to it that their children got the education that they themselves often lacked.

By 1994, the 57 million overseas Chinese created as much wealth as the one billion people living in China.

Variations on this social pattern can be found in the histories of Jewish, Armenian, Lebanese and other emigrants who settled in many countries around the world -- initially poor, but rising over the generations to prosperity. Seldom did they rely on government, and they usually avoided politics on their way up.

Such groups concentrated on developing what economists call "human capital" -- their skills, talents, knowledge and self discipline. Their success has usually been based on that one four-letter word that the left seldom uses in polite society: "work."

There are individuals in virtually every group who follow similar patterns to rise from poverty to prosperity. But how many such individuals there are in different groups makes a big difference for the prosperity or poverty of the groups as a whole.

The agenda of the left -- promoting envy and a sense of grievance, while making loud demands for "rights" to what other people have produced -- is a pattern that has been widespread in countries around the world.

This agenda has seldom lifted the poor out of poverty. But it has lifted the left to positions of power and self-aggrandizement, while they promote policies with socially counterproductive results.



Rescuing Citizenship and Civic Virtue

As we celebrate our nation's 237th birthday, a crucial facet of American life has all but vanished. We have forsaken, in a systematic and deliberate public manner, one of our most fundamental duties: fostering civic virtue in each and every one of our citizens.

What does it mean to be an American? Politicians in both parties keep pushing to create a new "path to citizenship" for millions of illegal aliens. But if sovereignty and self-preservation still matter in Washington, citizenship must be guarded ferociously against those who would exploit and devalue it at every electoral whim.

The pavers of the amnesty pathway think illusory requirements of paying piddling "fines" and back taxes will inculcate an adequate sense of responsibility and ownership in the American way. Other fair-weather friends of patriotism satisfy themselves with shallow holiday pop quizzes on American history to fulfill the "well-informed" part of the "well-informed citizenry" mandate of our Founding Fathers.

But Thomas Jefferson said it well: "No government can continue good but under the control of the people; and ... their minds are to be informed by education what is right and what wrong; to be encouraged in habits of virtue and to be deterred from those of vice... These are the inculcations necessary to render the people a sure basis for the structure and order of government."

John Adams said it better: "Liberty can no more exist without virtue ... than the body can live and move without a soul."

And Thomas Paine said it best: "When we are planning for posterity, we ought to remember that virtue is not hereditary."

Civic virtue cannot be purchased with token gestures or passed down in perfect form like a complete set of family china. A life of honor, honesty, integrity, self-improvement and self-discipline is something you strive ever to attain. Being American is a habit of mind, but also a habit of heart and soul. Abraham Lincoln spoke of the "electric cord in that Declaration that links the hearts of patriotic and liberty-loving men together, that will link those patriotic hearts as long as the love of freedom exists in the minds of men throughout the world."

Calvin Coolidge, profiled in "Why Coolidge Matters," a terrific new book by Charles C. Johnson, echoed the Founding Fathers' emphasis on virtue, restraint and work ethic. "If people can't support themselves," he concluded, "we'll have to give up self-government."

The failure of public schools to impart even rudimentary knowledge of self-government principles, natural rights theory and the rule of law is compounded by the suicidal abandonment of civic education. As Stanford University education professor William Damon notes: "Our disregard of civic and moral virtue as an educational priority is having a tangible effect on the attitudes, understanding and behavior of large portions of the youth population in the United States today."

Add militant identity politics, a cancerous welfare state, entitled dependence and tens of millions of unassimilated immigrants to the heap, and you have a toxic recipe for what Damon calls "societal decadence -- literally, a 'falling away,' from the Latin decadere." Civilizations that disdain virtue die.

Independence Day sparklers will light the skies overhead this July 4th, but George Washington's "sacred fire of liberty" belongs in the breasts of Americans every day of the year.

How to rescue citizenship and civic virtue?

Let's start by sending a message to politicians in the nation's capital who imperil our sovereignty.

Citizenship -- good citizenship -- is not just a piece of government-issued paper. It is not merely a bureaucratic "status." It's a lifelong practice and propagation of founding principles. A nation of low information is just half the problem. A nation of low character cannot long remain a free nation.



For more blog postings from me, see  TONGUE-TIED, EDUCATION WATCH INTERNATIONAL, GREENIE WATCH,  POLITICAL CORRECTNESS WATCH, FOOD & HEALTH SKEPTIC,  AUSTRALIAN POLITICS, IMMIGRATION WATCH INTERNATIONAL and Paralipomena (Occasionally updated) and Coral reef compendium. (Updated as news items come in).  GUN WATCH is now mainly put together by Dean Weingarten.

List of backup or "mirror" sites here or  here -- for when blogspot is "down" or failing to  update.  Email me  here (Hotmail address). My Home Pages are here (Academic) or  here (Pictorial) or  here  (Personal)


No comments: