Celebrating The Declining Influence of Luddism and Blogging

I will be blogging a little lot less over the coming days as two of my children will be having their graduation rites and I will be entertaining my mother who is a resident of Hong Kong and who also came to attend these ceremonies.

Nevertheless here is a quote from Professor Don Boudreaux on the declining influence of Luddism (bold emphasis mine)

This year marks the 200th anniversary of the birth of Luddism. In the early 19th century, many Brits worried that increasing mechanization of the textile industry posed an unfair disadvantage to flesh-and-blood workers. Many of these technology skeptics, known as "Luddites," destroyed machinery in an effort to protect flesh-and-blood workers from the competition of Technologia's workers.

Luddism, thankfully, is today embraced only by a small group of delirious romantics longing for imaginary pastoral bliss.

Hopefully, protectionism will soon go the way of Luddism, freeing us from the superstition that trade with foreigners is less enriching than is trade with fellow citizens.

As people get to realize and adapt more of what represents as a genuine workable way to prosperity via free trade, protectionism grounded on the fantasies of Luddism will hopefully fade away too.

Despite The Disaster, Japan Reports Less Incidence Of Looting

Despite the horrible disaster, Professor William Easterly posits a very interesting observation and asks, why has there been no looting in Japan?

I quote Prof. Bill Easterly’s entire terse post... (bold highlight mine)

Amidst the heartbreaking devastation in Japan, many have noticed (especially this blog from the Telegraph) how much social solidarity — and little stealing — there has been. The Telegraph blogger Ed West notes vending machine owners giving out free drinks, in contrast to large-scale looting after Katrina.

Economists have been saying for a while that trust is a good candidate to be a major determinant of development. Think how much contract enforcement is critical to make trade and finance possible. Think how much easier contract enforcement is when nobody tries to cheat. This is supported by empirical studies correlating per capita income with a measure of trust, like that shown below, which is computed as …oh forget that, the current example is much more compelling.

Responding to tragedy, the Japanese have resources because they are rich, and it was their social solidarity that helped get them there.

While it may be argued that Japan’s homogenous society-a strong sense of group and national identity and little or no ethnic or racial diversity-could be attributed to such social cohesion, this idea of 'homogeneity' isn’t entirely true as such differences exists in Japan, like in all societies, as Harvard University professors Theodore Bestor (anthropology) and Helen Hardacre argues.

The economic development paradigm based on “Social solidarity that helped get them there” is perhaps what Henry Hazlitt explained in his The Foundations of Morality (quoted by Bettina Bien Greaves) as, (bold emphasis mine)

For each of us social cooperation is of course not the ultimate end but a means … But it is a means so central, so universal, so indispensable to the realization of practically all our other ends, that there is little harm in regarding it as an end in itself, and even in treating it as if it were the goal of ethics. In fact, precisely because none of us knows exactly what would give most satisfaction or happiness to others, the best test of our actions or rules of action is the extent to which they promote a social cooperation that best enables each of us to pursue his own ends.

Without social cooperation modern man could not achieve the barest fraction of the ends and satisfactions that he has achieved with it. The very subsistence of the immense majority of us depends upon it.

In short, a culture of (trust) social cooperation brought about by the interdependence of people founded on the division of labor, respect for private property and voluntary exchanges is what has mostly led to Japan's civil society that has greatly reduced the incidences of violence and theft even during bleak moments.

Video: How Wealth Is Derived From Mutually Beneficial Free Trade

Trade is human action: we do this everyday with the aim at attaining better life and live past self sufficiency which characterized the lives of our primitive ancestors.

Trade today is mostly voluntary, it is done by individuals at the community level or provincial or regional or at the national level. The difference in the trading environment depends on the degree of trade freedom, which are mostly shaped by the governing political policies.

Because trade appears as a mundane activity, its manifold benefits seem as hardly sentiently appreciated by the public. In short, the benefits of trade are frequently underappreciated.

And when trade is framed as an aggregate, i.e. substituted with statistics and accounting figures, trade becomes subject to waffling political talking points, and importantly, loses its human touch. Trade, then, becomes subject to acrimonious disputes, many of which results to perverse laws that curtails trade--and prosperity.

The following video, from LearnLiberty.org, presents Professor Art Carden who discusses the basics of free trade from the perspective of the LAW OF COMPARATIVE ADVANTAGE (also known as the law of comparative costs) and how free trade leads to prosperity.

Comparative advantage deals with achieving efficiency out of relative opportunity costs or according to wikipedia,

In economics, the law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product with the highest relative efficiency given all the other products that could be produced.

Free Trade As Unilateral Policy

A popular objection to free trade is when a nation's trading partner is perceived as having to apply mercantilist policies, then trade relations is seen as uneven. Thus the popular oversimplified political justification is to go tit-for-tat via "fair or managed trade" which is euphemism for implied protectionism.

This we say is wrong. Even under such conditions Free Trade should be a unilateral policy. Why?

As Professor Don Boudreaux lucidly explains, (bold highlights mine)

By erecting tariffs that dampen competition, mercantilism encourages home producers to become unresponsive and uncreative. By issuing subsidies paid for with higher taxes, government debt, or distortionary monetary policies, mercantilism helps exporters only by inflicting more-sizable damages on the nation’s economy writ large. By turning the national government into a bazaar for the buying and selling of monopoly privileges, mercantilism deflects entrepreneurial energies away from building better mousetraps and into building politically advantageous political connections. And by raising prices in the home market, mercantilism makes consumers poorer as well as makes producers who rely upon imported inputs less efficient.

Well said.

[update: Earlier what I thought as saving as in a draft, I mistakenly published-thus the garbled commentary]

Emerging Market Authorities Lean On Free Trade

Here seems to be more proof that emerging market authorities are more “free market” leaning today.

One of them, as shown below, has even been lecturing developed economies to adapt more liberalization.

This appears to be in stark contrast to the yesteryears where developing nations were subjected to the Washington Consensus or “an orientation towards Neoliberal policies” which refers to “economic reforms that were prescribed just for developing nations, which included advice to reduce government deficits, to liberalise and deregulate international trade and cross border investment, and to pursue export led growth.”

Brazil’s finance minister vehemently assailed the Federal Reserve for its QE,

From Wall Street Journal blog

Brazilian Finance Minister Guido Mantega on Tuesday renewed his attack on the Federal Reserve’s most recent program of quantitative easing, saying the policy had goosed global flows of hot capital and heightened the global problems of rising commodity prices and inflation.

Last year, Mr. Mantega warned that falling currencies — including the U.S. dollar, due to the Fed’s plan to buy up to $600 billion of Treasurys — had triggered a currency war. On Tuesday, the finance minister renewed his opposition to the Fed’s program — at one point correcting his interpreter to specify “quantitative easing” and not just “monetary policy.” (emphasis added)

And he equally slams entrenched protectionist policies...

More from the same article.

The finance minister also blamed the U.S. — and other developed markets — for playing a role in rising commodity prices. The problem, Mr. Mantega said, isn’t solely due to increased demand, unfavorable weather and natural disasters, such as last summer’s drought in Russia. Agricultural subsidies in the developed world, and higher prices for fertilizer made by advanced economies also are factors, he said. One solution Mr. Mantega offered: encouraging production of agricultural commodities in developing, low-income countries. And one sure way to make the situation worse: any type of price controls or restrictions, which the finance minister characterized as the equivalent of shooting one’s self in the foot.

Developed countries should remove subsidies and lift trade barriers to products of emerging countries,” he said. “Also, developed countries should provide new investment opportunities to prevent capital supplies from increasing commodity prices.

Looks like the table has been turned.

We Are All Africans: Exposing the Falsity of Nationalism

This 2007 article says that all human origin is from Africa.

From Reuters, (bold emphasis mine)

An analysis of thousands of skulls shows modern humans originated from a single point in Africa and finally lays to rest the idea of multiple origins, British scientists said on Wednesday.

Most researchers agree that mankind spread out of Africa starting about 50,000 years ago, quickly establishing Stone Age cultures throughout Europe, Asia and Australia.

But a minority have argued, using skull data, that divergent populations evolved independently in different areas.

The genetic evidence has always strongly supported the single origin theory, and now results from a study of more than 6,000 skulls held around the world in academic collections supports this case.

I am asking forgiveness in advance to those Christians who might think that this may seem as heresy: But I just can’t help deduce, based on these findings, that our version of genesis or Adam and Eve could have their roots as Africans.

But this is beside the point.

Regardless if we all came from Africa or not, the scientific finding only reveals what has been obvious—that we are all human beings.

This means that the conceptualization of “anti-foreign bias” or “nationalism” practiced and preached by many have all been premised on falsehoods, whether applied to trade, migration, investment, culture or etc…

Instead, nationalism or a form of groupthink (me against them mentality) has actually accounted for as mainly a political scarecrow meant to manipulate the ignorant and to advance the vested interests of certain political classes mostly by imposing controls which ultimately inhibits people’s freedom to act and produce.

As Ludwig von Mises wrote,

Interventionism generates economic nationalism, and economic nationalism generates bellicosity. If men and commodities are prevented from crossing the borderlines, why should not the armies try to pave the way for them?

Nationalism has been a pivotal force that has led to many devastating wars like the World war I with estimated deaths at 15-65 million and World War II (40-70 million)

And given that we are all one, there simply is no justification (science, philosophical, economic or political) to raise barriers to advance social civility based on voluntary cooperation from free trade.

Ludwig von Mises and Bettina Bien Greaves explains,

The market is that state of affairs under which I am giving something to you in order to receive something from you. I don't know how many of you have some inkling, or idea, of the Latin language, but in a Latin pronouncement 2,000 years ago already, there was the best description of the market — do ut des — I give in order that you should give. I contribute something in order that you should contribute something else. Out of this there developed human society, the market, peaceful cooperation of individuals. Social cooperation means the division of labor.

Some Democrats Recognize The Value Of Free Trade

The following data and analysis comes from the website of US Democratic Party [the political party where one would hear a mouthful of anti free trade sentiment], the Democratic Leadership Council.

The article referred herein is about Russia as the largest country outside the WTO, and the prospects of increasing trade relations with her and the US through a membership in the WTO.

Here is the kicker from the DLC.org (bold emphasis mine)

Altogether this would mark the largest burst of economic reforms and liberalizations certainly since Russia's independence in 1991, and likely rival only the perestroika era of the late 1980s as Russia's most ambitious attempt to rejoin the world economy since the First World War and the Revolution.

For the other new WTO members, this has meant big jumps in imports -- America's own export growth to these countries has been double the pace of export growth to new FTA partners and four times the rate to the rest of the world.

Res ipsa loquitor

Will Falling Population (Demographic Time Bomb) Lead To A Reversal Of Globalization?

Lately I have encountered several commentaries suggesting that the “demographic time bomb” (falling population) will pose a risk to globalization by creating imbalances that would lead to political upheavals.

Here are two:

From Neil Howe and Richard Jackson in Global Aging And The Crisis Of The 2020's (bold emphasis mine)

“Rising pension and health care costs will place intense pressure on government budgets, potentially crowding out spending on other priorities, including national defense and foreign assistance. Economic performance may suffer as workforces gray and rates of savings and investment decline. As societies and electorates age, growing risk aversion and shorter time horizons may weaken not just the ability of the developed countries to play a major geopolitical role, but also their will.”

From Morgan Stanley’s Spyros Andreopoulos and Manoj Pradhan in ‘Ten for the Teens’(bold emphasis mine)

“The increase in macro instability comes at a time of major demographic transition in most DM and many EM economies. As populations become older, the demand for economic security - stable jobs, pensions - increases. This tension between higher instability and increased demand for security is likely to find its political expression in a backlash against globalisation. So far, the benefits of globalisation - higher income levels for most, i.e., the large middle class - have outweighed its drawbacks - increased competition and job instability. This has kept the globalisation show on the road until now. As this balance tips because the preferences of the middle class shift towards more security/stability, globalisation is likely to stall or reverse.”

There seems to be two separate issues here: unsustainable welfare states and globalization.

However the comments above attempt to make a connection which, for me, looks tenuous and confusingly premised on the fallacious ‘aggregate demand’.

Protectionism Equals Security?

Here is how I understand this: stripped out of the spending capacity due to old age, and with a government hobbled by fiscal straitjacket, the lack of demand (from both the private and the public) means slower economic growth which likewise would extrapolate to a political milieu that shifts from risk appetite (globalization) towards demand for ‘security and stability’ (protectionism), or in short, political stress.

For instance the Morgan Stanley tandem does an incredible turnaround, ``So far, the benefits of globalisation - higher income levels for most, i.e., the large middle class - have outweighed its drawbacks - increased competition and job instability. This has kept the globalisation show on the road until now.”

Are they suggesting that people who benefited from globalization will eventually bite the proverbial hand that feeds them? Are they suggesting too that people will see “security and stability” from lower incomes?

Will protectionism or restricting market activities make goods and services needed by the ageing society abundant and affordable? To the contrary, protectionism will only highlight on the shortages and the exorbitance of these economic goods that should lead to even more instability.

Murray N. Rothbard refuted this age old fallacy, he explained, (bold highlights mine)

It is difficult to see how a decline in population growth can adversely affect investment. Population growth does not provide an independent source of investment opportunity. A fall in the rate of population growth can only affect investment adversely if

-All the wants of existing consumers are completely satisfied. In that case, population growth would be the only additional source of consumer demand. This situation clearly does not exist; there are an infinite number of unsatisfied wants.

-The decline would lead to reduced consumer demand. There is no reason why this should be the case. Will not families use the money that they otherwise would have spent on their children for other types of expenditures?

Thus the problem of declining population can be helped by accepting immigrants or adopting to greater social mobility or the globalization of labor and by even more free trade.

We shouldn’t underestimate how people adjust to the new realities from the current underlying conditions. Importantly, we shouldn’t write off productivity of the senior citizens too (why? see below).

Illusion Or Reality?

Next would be the issue of welfare states. Once society realizes that the welfare state has been unsustainable, will people fight violently to retain the status quo (even if this is recognized as not possible) or will they cope up with the new reality?

The former would fall as part of the entitlement mentality engendered by excessive dependency or the moral hazard from political distribution while the latter will likely result from the realization that there’s no free lunch.

And perhaps in the realization that bellicosity won’t further society’s interests, they may opt for the latter (accepting harsh reality) than the former (live in a charade). And any political tensions from the succeeding reforms would signify as symptoms of ‘resistance to change’ than from a key reversal of political sentiment.

In the context of abrupt political-economic transitions from a crisis, Iceland’s violent riots from her financial crash of 2008 didn’t mechanically translate to close door ‘security’ based policies, as Iceland remains “moderately” economic free (44^th), according to Heritage Foundation, even as the crisis did have some negative impact on her economic freedom ratings (due to higher taxes and government spending).

From Heritage Foundation

The point is that the notion that crisis will instigate a radical reversal of people’s sentiment from openness to protectionism seems likely misguided.

Today, Iceland has shown signs economic recovery and has even applied to join the European Union (aimed at achieving more financial and trade openness, aside from social mobility)!

Protectionism likewise did not spread like wildfire in 2008, as earlier discussed.

Ignoring Technology

Another factor would be technology.

While it may true that fertility rates may be going down (upper window), it is often ignored how the advances in technology has continually enhanced people’s living conditions.

From Google Public Data

Global Life expectancy (lower window) has lengthened from 50 years to 68.95 years over the past 50 years. Japan reportedly has some 41,000 centenarians (over 100 years old)! [But I won’t be lucky to live this long, because of my love affair with beer]

And if futurist Ray Kurzweil is correct, people’s life span may extend to 120 years (by 2030) or even more (180 years) as rate of technology advances accelerates.

Again Murray Rothbard on the importance of technological advancement

“technological progress, is certainly an important one; it is one of the main dynamic features of a free economy. Technological progress, however, is a decidedly favorable factor. It is proceeding now at a faster rate than ever before, with industries spending unprecedented sums on research and development of new techniques. New industries loom on the horizon. Certainly there is every reason to be exuberant rather than gloomy about the possibilities of technological progress.”

In short, should these advances occur then all demographic projections should be thrown to the garbage bin, as they are falsely premised and would be rendered irrelevant.

The basic problem with mainstream insights is that people are treated like unthinking automatons. And because of this they’re most likely wrong.

The ultimate threat to globalization is inflationism and not demographic trends.

Video Interview Of Milton Friedman: In Defense of Free Trade

Here is a great video of the late Milton Friedman debunking protectionism which the US steel industry had wanted to impose against the Japanese in the 70s. (Hat tip Professor Mark Perry)

The premises are fundamentally the same today except that the economic actor at the receiving end of protectionism involves China instead of the Japan.

Some notes:

Import dollars eventually find their way back.

There are invisible and visible effects from policies (ala Bastiat). What makes the protectionist advocacy attractive to the public is the visibility of the effects (loss of jobs of steelworkers), while ignoring the invisible benefits (expansion of jobs in the other industries and importantly lower consumer prices).

As for Japanese mercantilism or a policy of unilateral free trade: “Why should we object to the Japanese giving us foreign aid?”

10 Economic Reasons Why Trade Is Beneficial

Cato’s Dan Ikenson improves on U.S. Chamber of Commerce John Murphy’s list of the top 10 reasons why trade is good trade for America.

Below is John Murphy’s list along with Mr. Ikenson’s enhancements (bold highlights original) [from Cato.org Blog]

1. The United States is the number one manufacturing nation in the world, and that success depends on exports. And since over half of the total value of U.S. imports consists of “intermediate goods” (products that are used as inputs for further value-added activity), manufacturing success also depends on imports.

2. The United States is the world’s number one services exporter and has been since services trade data have been tracked. And one of the reasons that foreigners are able to purchase American services is because they have been able to earn dollars by selling goods to American businesses and consumers.

3. U.S. agricultural exports support nearly a million jobs in the United States. And, agricultural and manufactured imports have made life’s necessities and conveniences more affordable to hundreds of millions of Americans.

4. 95 percent of the world’s consumers lives outside the United States…as do 95 percent of the world’s workers, who produce many of the goods Americans consume as imports less expensively than Americans can, freeing up U.S. resources for investment, innovation, and consumption of the higher value products and services that Americans produce.

5. FTA countries purchased more than 40 percent of U.S. exports in 2009. And imports from those countries have helped extend families’ budgets and reduced the costs of production for U.S. business relying on inputs from those countries.

6. Since the creation of the WTO in 1994, U.S. exports of goods and services have doubled to more than $1.5 trillion. And real U.S. GDP has increased by 50 percent.

7. Imports support millions of U.S. jobs in retail, research, design, sourcing, transportation, warehousing, marketing and sales…and in manufacturing.

8. U.S. exports to China have quadrupled over the past 15 years, and China is now the 3rd largest market for U.S. exports. And U.S. imports from China, too often wrongly portrayed as evidence of U.S. profligacy or decline, have enabled U.S. industries that require access to lower-cost labor for economic viability to be born, to blossom, and to spark the advent of new products and industries.

9. U.S. companies with overseas investments account for 45 percent of all U.S. exports. And foreign companies operating in the United States employ 5.6 million Americans, support a payroll of $408.5 billion, provide compensation that is 33% higher than the U.S. average, account for 18% of U.S. exports, pay U.S. taxes, support local charities, and act as investment magnets in communities across the country.

10. Trade supports 38 million jobs in the United States–more than one in five American jobs. And most Americans enjoy the fruits of international trade and globalization every day: driving to work in vehicles containing at least some foreign content; talking on foreign-made mobile telephones; having extra disposable income because retailers like Wal-Mart, Best Buy, and Home Depot are able to pass on cost savings made possible by their own access to thousands of foreign producers; eating healthier because they now can enjoy fresh imported produce that was once unavailable out-of-season, etc.

Additional comments:

Of course trade IS NOT only good for the US, but FOR THE WORLD. Note that 95% of the world’s consumers and workers reside outside America!

In addition, foreign trade SHOULD NOT be seen or interpreted in isolation.

Instead, what must be understood is that the market represents a process where consumers and producers (and service providers) are vastly interdependent with each other and whose activities are coordinated through the price mechanism.

The great Professor Ludwig von Mises calls this connexity. He wrote, (all bold highlights mine)

What links together in our actual world the various fields of want-satisfaction is the existence of a great many nonspecific factors, suitable to be employed for the attainment of various ends and to be substituted in some degree for one another. The fact that one factor, labor, is on the one hand required for every kind of production and on the other hand is, within the limits defined, nonspecific, brings about the general connexity of all human activities. It integrates the pricing process into a whole in which all gears work on one another. It makes the market a concatenation of mutually interdependent phenomena.

It would be absurd to look upon a definite price as if it were an isolated object in itself. A price is expressive of the position which acting men attach to a thing under the present state of their efforts to remove uneasiness. It does not indicate a relationship to something unchanging, but merely the instantaneous position in a kaleidoscopically changing assemblage. In this collection of things considered valuable by the value judgments of acting men each particle's place is interrelated with those of all other particles. What is called a price is always a relationship within an integrated system which is the composite effect of human valuations.

This means that foreign trade is highly interrelated with domestic trading activities.

Thus, trade data shouldn’t be seen only in the light of either foreign or local but should account for both.

Looking at trade in different prisms would only stimulate the misimpression that trade operates on a closed framework, a false fodder for anti-trade exponents or the protectionists.

BBC’s Hans Rosling: 200 Years of Remarkable Progress and a Converging World

Great video from BBC's Hans Rosling on 200 years of human progress. (hat tip Professor Don Boudreaux)

Is Social Cooperation A Product of Evolution?

Some people mistakenly think that social cooperation is merely a product of evolution.

They seem to forget that if evolution is about the “survival of the fittest” then men would always be at war perennially with each other. And societal advancement at current conditions would not have occurred as people would have lived off from each other through violence (war and plunder).

Yet there is no compelling reason for people to simply co-opt outside free trade. Altruism and or political submission (Social Darwinism) cannot be held as sustainable conditions for progress.

Murray Rothbard has seen through such Social Darwinist nonsense. He writes,

``For the Social Darwinist erroneously saw history and society through the peaceful, rose-colored glasses of infinitely slow, infinitely gradual social evolution. Ignoring the prime fact that no ruling caste in history has ever voluntarily surrendered its power, and that therefore Liberalism had to break through by means of a series of revolutions, the Social Darwinists looked forward peacefully and cheerfully to thousands of years of infinitely gradual evolution to the next supposedly inevitable stage of individualism.”

The only sustainable way for people to attain lasting social cooperation is via division of labor and specialization through voluntary exchange.

To quote Henry George, (bold emphasis mine)

Civilized nations, however, do not use their armies and fleets to open one another's ports to trade. What they use their armies and fleets for, is, when they quarrel, to close one another's ports. And their effort then is to prevent the carrying in of things even more than the bringing out of things—importing rather than exporting. For a people can be more quickly injured by preventing them from getting things than by preventing them from sending things away. Trade does not require force. Free trade consists simply in letting people buy and sell as they want to buy and sell. It is protection that requires force, for it consists in preventing people from doing what they want to do. Protective tariffs are as much applications of force as are blockading squadrons, and their object is the same—to prevent trade. The difference between the two is that blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.

And obviously deepening free trade around the world has caused greater access to more products at more affordable prices, which has led to longer lifespan (see above chart), more conveniences, diffusion of knowledge, advancement in technology that has increased connectivity and productivity.

Of course perhaps one of the unseen benefit has been the reduced scale of international wars.

In other words, free trade has raised the world’s standard of living (even if measured in per capita GDP).

Evolution cannot be the principal driver of societal advancement because man emerged from a hostile (predator-prey) environment.

And the nasty and belligerent experiences by our forebears seem to have been hardwired into people’s intuitive aversion to free exchange.

As Paul Rubin eloquently explains,

There are two aspects of our evolved psychology that help explain beliefs about trade. First, humans tend towards zero-sum thinking. That is, we do not intuitively understand the possibilities of economic growth or the benefits of trade in achieving it.

Our ancestors lived in a static world with little intertribal trade and virtually no technological advance. That is the world our minds understand. This doesn't mean that we can't grasp the crucial concept that trade benefits both parties to a transaction--but it does mean that we must learn it.

Positive-sum thinking doesn't come naturally. By analogy, we learn to speak with no teaching, but we must be taught to read. Understanding the mutual benefits of exchange is like reading, not speech.

Second, we evolved in a hostile world. Our ancestors engaged in constant conflict with neighbors, much like present-day chimpanzees. We developed strong in-group and out-group instincts, and for many aspects of behavior we still have such feelings.

These feelings are benign when applied to something like rooting for local sports teams, but are more harmful when applied to international trade. They are most harmful when they generate actual warfare. Yet the metaphor of a "trade war" shows how close to the surface harmful instincts are.

These two sets of beliefs interact to explain our natural (mis)understanding of trade. We believe that the number of jobs is fixed (a result of zero-sum thinking) and that as a result of trade these jobs go to foreigners, whom in a deep sense we view as enemies. Both beliefs are incorrect, but both are natural. And in many cases politicians are only too eager to capitalize on these beliefs to be re-elected.

In short, the anti-trade sentiment is rooted fundamentally from archaic or primitive martial instincts than from rational arguments based on people’s growing acceptance of trade as means to achieve social cooperation.

Awhile back, I recall a socialist colleague mentioned a popular axiom—that “money makes the world go around”.

I said that this misleads, because money isn’t wealth, but only a medium of exchange. And what makes wealth truly go around is trade. Without trade money is useless.

Aside from wealth, the deepening of trade also means people are learning to get past our evolutionary instincts of bellicosity, aggression and hostility.

Thus, free trade not only enriches society but also is the principal way to achieve lasting peace and order.

Globalization And World Hunger

One very important positive development is that despite the global boom bust cycles, global hunger has been falling.

According to the Economist, (bold highlights mine)

“TWENTY-NINE countries suffer from “alarming” levels of hunger, most of which are in sub-Saharan Africa, according to a report published on Monday October 11th. The “Global Hunger Index” (GHI) gives developing countries scores based on three indicators: the proportion of people who are undernourished, the proportion of children under five who are underweight, and the child mortality rate. The worst possible score is 100, but in practice, anything over 25 is considered “alarming”. Scores under five, meanwhile, are indicative of “low hunger”. Since 1990 the overall level of the index has fallen by almost a quarter (though the data do not cover the period of the global recession beginning in 2008). Two-thirds of the 99 countries counted in 1990 have reduced their populations' hunger levels. Kuwait, Malaysia, Turkey and Mexico have been the most successful, cutting their scores by over 60%. Those where hunger has increased include North Korea, Comoros and Congo. Congo's GHI score fell by over 60%, the worst of any country.”

Since 1990, after China and India opened her doors to embrace capitalism, world trade has exploded.

And this has been one of the main reasons for the vast improvement in poverty levels as measured by the hungry index.

Besides, the best performing countries, as noted by the Economist, can be observed as in the higher strata of economic freedom based on the Heritage Foundation’s Index (2010), specifically, South Korea ranked 31st, Mexico 41^st, Kuwait 42^nd and Turkey 67^th, while the worst performers in terms of the hunger index are those least free or at the tailend of economic freedom index—Comoros 165^th, Republic of Congo 169^th, Democratic Republic of Congo 172^nd and North Korea 179^th.

This goes to show how free trade and economic freedom democratises wealth.

Quote of The Day: Principles of Free Trade

A fantastic quote from Professor Don Boudreaux,

The principles of free trade demand that no government punish its own citizens with trade restrictions. Ever. Even if another government, such as China’s, harms its citizens by forcing them to pay tariffs or subsidies, the principles of free trade demand that our government nevertheless refrain from inflicting like harm on us.

Free trade is the principle that people should be free to spend and to invest their money as they see fit. Period. That principle is in no way contingent upon its acceptance or rejection by other governments.

Exactly.

Another way to say it is that TWO wrongs DO NOT make a right. And this the most common logical fallacy employed by superficial thinking naive protectionists.

Does Importation Drain The Wealth Of A Nation?

This has long been a fallacy used by mercantilists to advance protectionism which had been demolished by classical economics led by Adam Smith.

In short, the answer is NO.

First, accounting equations does NOT replace the essence of human actions.

Where GDP=private consumption + gross investment + government spending + (exports-imports), the impression derived from exports minus imports is that imports signify a drag to the economy.

This is plain nonsense. Exports and imports are activities of individuals who engage in voluntary exchange. And no one would willingly undertake trade if there are no perceived benefits from it.

And this also applies to people trading with one another from different countries. To quote Professor Don Boudreaux, “Consumers’ nationalities are economically irrelevant.”

Second, trade is NOT a zero sum game.

It is not what Michel de Montaigne (1533–1592) calls as “no profit can possibly be made but at the expense of another” from which Professor Ludwig von Mises calls as the Montaigne fallacy.

Trade is voluntary exchange via division of labour. We trade for the purpose of attaining things or services which we cannot provide to oneself, and in exchange, provide things or services that we have which the others want.

Trade isn’t mechanistic. It arises from individual choices and preferences.

Third, money should NEVER be confused with wealth.

As Adam Smith in the Wealth of Nations wrote, (bold emphasis mine)

Some of the best English writers upon commerce set out with observing that the wealth of a country consists, not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds. In the course of their reasonings, however, the lands, houses, and consumable goods seem to slip out of their memory, and the strain of their argument frequently supposes that all wealth consists in gold and silver, and that to multiply those metals is the great object of national industry and commerce.

Exactly. This especially for people who argue from the basis of their political religion.

And the principal aim of trade isn’t to accumulate money, but to benefit from the exchange of goods and services.

Again Adam Smith,

The importation of gold and silver is not the principal, much less the sole benefit which a nation derives from its foreign trade. Between whatever places foreign trade is carried on, they all of them derive two distinct benefits from it. It carries out that surplus part of the produce of their land and labour for which there is no demand among them, and brings back in return for it something else for which there is a demand. It gives a value to their superfluities, by exchanging them for something else, which may satisfy a part of their wants, and increase their enjoyments.

Fourth, money in a free market is self-regulating and that interventionism will NOT prevent outflows...

Again Adam Smith,

The quantity of every commodity which human industry can either purchase or produce naturally regulates itself in every country according to the effectual demand, or according to the demand of those who are willing to pay the whole rent, labour, and profits which must be paid in order to prepare and bring it to market. But no commodities regulate themselves more easily or more exactly according to this effectual demand than gold and silver; because, on account of the small bulk and great value of those metals, no commodities can be more easily transported from one place to another, from the places where they are cheap to those where they are dear, from the places where they exceed to those where they fall short of this effectual demand...

When the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance of government can prevent their exportation.

Finally those who preach mercantilism DO NOT argue for the benefit of the entire society but argue for the interest of a select few.

According to Jacob Viner in the Studies in the Theory of International Trade [1937]

The mercantilist literature, on the other hand, consisted in the main of writings by or on behalf of “merchants” or businessmen, who had the usual capacity for identifying their own with the national welfare. Disinterested exposition of trade doctrine was by no means totally absent from the mercantilist literature, and in the eighteenth century many of the tracts were written to serve party rather than self. But the great bulk of the mercantilist literature consisted of tracts which were partly or wholly, frankly or disguisedly, special pleas for special economic interests. Freedom for themselves, restrictions for others, such was the essence of the usual program of legislation of the mercantilist tracts of merchant authorship.

Restricting trade is a way to impoverishment.

The Power of Slow Change: Leadership Changes In International Ports

The power of slow change is ubiquitous.

This from the Economist, (all bold emphasis mine)

THE changes in distribution and cargo-handling capabilities of the world's biggest container ports show the shifts that the world economy has undergone over the past two decades. The volume of cargo traded through the world’s biggest container ports has increased nearly sixfold in the past 20 years as globalisation has taken hold. Singapore has now nabbed the top spot and every other big port in 1989 has moved down the list. Twenty years ago more than half of the top 20 container ports were in America or Europe reflecting imports into both regions from around the globe. Now, Asia's strength as an exporter is more in evidence. Fourteen of the top 20 container ports are in that region, with eight in China.

This is obviously has NOT been about cheap labor (otherwise Africa should have been at the top of the list), but about trade openness.

As Asia (led by China) begun to embrace economic freedom, given the inherent economies of scale emanating the largest population combined with a start from low base, volume accrued over the years and displaced the former leaders.

From US Global Funds

The Philippines which used to be in the top 20, considering our “cheap labor” relative to our ASEAN neighbours seems to have been booted out by high labor cost economies as Malaysia (has 2 in the top 20 2009 ranking) and Thailand (1 in 2009 ranking).

Besides as we always say there are many other factors that make up operational “competitive” advantages of a country. For instance in China, low taxes and a small welfare state may have been an important contributor.

As Cato’s Alan Reynolds observed,

``Lacking the equivalent of Social Security or Medicare/Medicaid, China has no payroll taxes at all, no capital gains tax, and only a 15-25% tax on corporate profits.”

Therefore, people who argue based on specious analysis from “single aggregate variable” such as cheap labor will always be wrong.

How Free Trade Saved The World From Depression

This from the Economist, (all bold highlights mine)

DURING the Great Depression, America’s protectionist Smoot-Hawley Act of 1930 raised tariffs on more than 900 goods. A series of retaliatory actions by other countries followed. The effect on global commerce was devastating. In the three years to June 1932, the volume of world trade shrank by over a quarter. No wonder, then, that the spectre of the worst recession since the Depression led many to fear another descent into protectionism and a similar decline in trade.

At first, the recession did hit trade hard. Global GDP fell by 0.6% in 2009 while the volume of world exports dropped by 12.2%. But whereas the Depression saw trade decline for at least four years, this time the rebound has been quick, and sharp. By May this year, emerging-economy members of the G20 were importing and exporting around 10% more than their pre-crisis peaks (see chart). Rich-world trade has recovered from the trough too, though it has not yet made up all the ground lost since the credit crunch began.

Trade has not been devastated by the raft of protectionist actions taken during the downturn. According to the World Bank, the rise in tariffs and anti-dumping duties explains less than one-fiftieth of the collapse in world trade during the recession. For the most part, the fall in trade reflected a drop in demand.

There is even some evidence that activity has rebalanced from the lopsided trade pattern that existed just before the crisis. Then, the share of emerging-world imports that came from rich countries had been on a steadily declining path. But now demand from emerging economies is helping to prop up rich-world exports to a larger degree than is commonly realised. According to IMF figures, of nine emerging markets in the G20, seven got a higher share of their imports from rich countries in 2009 than they did a year earlier. Just 59% of China’s imports came from rich countries in 2008, but this rose sharply to 66% in 2009. India obtained 42% of its imports from rich countries in 2008, but last year this rose to 47%.

That mutually beneficial pattern points to the importance of both rich and poor countries keeping their markets open, so that growth in one part of the world can help stimulate a recovery elsewhere.

Some observations:

People have learned from history (perhaps heeded George Santayana’s admonitions?)

Having sentiently benefited from the experience of trade, most of the world appear to embrace free-trade globalization as means of generating wealth. And as shown above, this is noteworthy especially in the emerging markets.

The proof of the pudding is in the eating. The best test of the conceptual assimilation of free trade is through a crisis, and free trade seems to have passed with flying colors.

The Economist doesn’t mention it, but the world’s growing acceptance of free trade, in my opinion, is largely aided by the shift to the information age. This seismic transition allows for real time communication, thereby reduce the instances of conflicts by open dialogue.

Like always, mercantilists have it wrong anew.

And with this we quote Mr. Ludwig von Mises in Liberalism,

To this question Ricardo's doctrine provided the answer. The branches of production distribute themselves among the individual countries in such a way that each country devotes its resources to those industries in which it possesses the greatest superiority over other countries. The mercantilists had feared that a country with unfavorable conditions for production would import more than it would export, so that it would ultimately find itself without any money; and they demanded that protective tariffs and prohibitions on imports be decreed in time to prevent such a deplorable situation from arising. The classical doctrine shows that these mercantilist fears were groundless. For even a country in which the conditions of production in every branch of industry are less favorable than they are in other countries need not fear that it will export less than it will import. The classical doctrine demonstrated, in a brilliant and incontrovertible way that has never been contested by anybody, that even countries with relatively favorable conditions of production must find it advantageous to import from countries with comparatively unfavorable conditions of production those commodities that they would, to be sure, be better fitted to produce, but not so much better fitted as they are to produce other commodities in whose production they then specialize.

How Philippine Capital Markets Will Benefit From Free Trade

In this issue:

How Philippine Capital Markets Will Benefit From Free Trade

-Will Lady Luck Probably Smile On The Aquino Regime?

-Explaining Free Trade

-Anti-Free Trade: Political Dynasties and The Maguindanao Massacre

-The Invisible Hand

-How Free Trade Should Benefit The Philippine Capital Markets

At a recent speaking engagement, I was asked of what I thought of the new Aquino administration and his economic policies. My reply, first that I was apolitical, and second, that there are major forces such as globalization, regionalization and the technological revolution that has been and will be driving global policymaking and this includes the Philippines.

Obviously far from being a populist answer, such reply would seem stoic since it didn’t whet the sensationalist craving of the audience.

Will Lady Luck Probably Smile On The Aquino Regime?

As any regular reader would know, in my opinion, the new administration is NO more than representative of the status quo[1], which for me would seem better, compared to activist ‘messianic’ left-leaning leaders, such as Venezuela’s Chavez or even the US president Obama.

And yes, most signs have been validating my perspective, be it on the pronounced policies on jueteng[2], cabinet appointments[3] packed with representatives from big business and even to populist sound bite (or what Mark Twain would refer to as "a minimum of sound to a maximum of sense" or simply “attention generating”) policies such as the “Wang Wang”[4] or the recent administrative action: the censure of PAG-ASA[5] (government weather forecasting) personnel in the wake of the recent widespread brownouts caused by typhoon Basyang.

And based on my analysis I predict that the administration’s performance (success or failure) will likely be aligned with the patterns of “global” if not regional political economic trends.

As previously stated[6], ``the direction of political winds in the Philippines is likely to get influenced more by our deepening interactions with external forces-particularly, the new free trade zone (with ASEAN and China), China's growing role as a major political force as regionalism deepens, a deeper impact from globalization buttressed by technology and OFWs (or migration flows) and deepening financial globalization which includes transmission effects of inflationism, steep yield curves, bubble policies and etc.”

In short, luck or the lack of it, will dominate the Aquino regime.

Well it didn’t take long for more signs to surface which would seem to validate my prognosis.

This from yesterday’s article from the Inquirer.net[7], (all bold emphasis mine)

``In a speech before members of the Philippine Chamber of Commerce and Industry Wednesday evening, Trade Secretary Gregory Domingo said it was now common practice among economies to participate in multilateral trade pacts.

“You have to be part of every trade agreement because to be excluded is a disadvantage for you. We’re not yet part of [the TPP], but at some point, I think it is our desire to join as well,” he said.”

It is unfortunate enough for the Aquino administration’s trade secretary to seem to have little appreciation of the essence of free trade agreements. For Mr. Domingo, and if this should represent the insights of the administration, free trade agreements are simply a fad, take note of “common practice”.

So while I applaud the Aquino administration for supposedly espousing free trade, the essence of the administration’s policymaking, as stated before, is because “everybody else is doing it”. It’s definitely not out of principle, but out of the socio-economic signalling known as “Keeping up with the Joneses”.

This again lends credence to our projection of: one—popularity based policies (in this case globalization) and two—the deepening influence of global political trends which has been influencing local policymaking.

Let me add that while the practice of free trade seem to get more ingrained globally, this remains a virtually unpopular or severely misunderstood concept in the eyes of the domestic populace.

Take for example, this free trade agreement definition from the media; from the same article

``The aim of the free trade agreement is to bring all tariffs down to zero by 2015. The coverage of the deal spans trade in goods and services, rules of origin, trade remedies, sanitary and phytosanitary measures, technical barriers, intellectual property, government procurement and competition policy.”

True, these are mostly technically “legal” definitions, but this hardly dwells on the kernel or the cost-benefits tradeoffs from the said policy.

And in evincing more proof of miscomprehension of free trade, but this time from the officialdom; the same article quotes the incumbent trade secretary anew, (bold highlights mine)

“We will be very vigilant in joining various trade agreements. We’ll try to join as many trade agreements as possible, but still keeping in mind that our interest is really to protect the interest of Philippine businesses and Philippine consumers,” Domingo said.”

But free trade is of the interest of the Filipino consumers and businesses!

Free trade is VOLUNTARY exchange! It allows people to conduct exchanges to satisfy personal and commercial needs.

When we go to a store to ‘freely’ purchase things or services which we deem to need, don’t we achieve immediate satisfaction from the activity?

If people, on their unfettered disposition, buy from me, do I not use the proceeds from the exchange to subsequently also buy from the marketplace, either to fulfil my consumption goals or expand or replenish my business needs or even make contribution to social projects for the betterment of our community/society? Because producers are themselves consumers, then trade is a benefit to all parties involved.

Hence, the fundamental role of the marketplace is to satisfy our sundry needs by means of voluntary, and NOT coercive, exchange. So why does Mr. Domingo express scepticism with “protect the interest of Philippine businesses and Philippine consumers”?

Explaining Free Trade

There are two way to acquire wealth. German sociologist Franz Oppenheimer[8] once said that there is the ‘economic means’ via work and exchange and there is the ‘political means’ by forcible exploitative means either by plunder or by redistribution.

Acquiring wealth through work and exchange is NET beneficial to the society since it fosters the creation of value added products or services.

Figure 1: World Bank[9]: Explosion In Global Mobile Subscribers (left window) and Internet Use (right window)

Think the internet and the mobile phones. Twenty years ago these were non-existent. Yet competition in the marketplace cultivated a sweeping technological innovation, which the introduction of these highly efficient revolutionary tools exponentially expanded access to communication and greatly reduced transaction costs.

Today, I can talk with my mom in Hong Kong everyday at the minimal cost of the bandwith, compared with costly occasional long distance phone calls 20 years back.

Of course there will always be losers anywhere. Creative destruction from free market innovation led to the phasing out or the obsolescence of the pager and the telegraph, the reduced usage of the fax machine, postal mail and even a decline in the newspaper industry[10]. However the gains from innovation have virtually eclipsed the selective losers. In short, by large, society benefited from the new technology.

Moreover, because of the immensely lowered transaction cost, global trade blossomed.

Meanwhile, the obverse side of acquiring wealth from economic means is the political means.

‘Political means’ essentially is parasitic which lives off the work of others. This involves taxation and forcible redistribution, war and corruption. The benefits only accrue to the parties involved in conducting such affairs, primarily government. And such actions signify a ZERO SUM game- where one benefits, as the others losses, which in general do NOT add wealth to the society—since resources is just taken away from someone else.

Furthermore, by allowing people to exchange voluntarily, this furthers the division of labor that creates jobs, and importantly, accumulates capital or wealth.

And increased global trade or globalization, as noted above, has definitely been the prime engine of wealth accumulation (see figure 2).

Figure 2: Google: Deepening Free Trade And Exploding Global Wealth

The correlation of the growth of global merchandise trade relative to the explosion of global per capita income may not be perfect, but it has been strong and rigorously supported by theory and empirical micro evidences as the rapid diffusion of the mobile phone and the web around the world.

Anti-Free Trade: Political Dynasties and The Maguindanao Massacre

In addition, free trade greatly reduces pressures from political redistribution which frequently leads to internecine political conflicts.

Take for instance the Maguindanao massacre[11]. The fundamental reason why such atrocious and barbaric act had been committed was allegedly due to the political insecurity by the incumbent local leadership over the preservation of his regime.

The horrid Maguindanao incident appears to be symptomatic of the latent inherent defects of the Philippine political ‘democratic’ framework, which has cultivated a brood of political dynasties (estimated at about 250) that has used politics to arrogate upon themselves economic opportunities and thus the imperative to remain in power at nearly all cost.

Even this New York Times article of 2007[12] presciently noted of the violent nature from this political arrangement, ``For generations, political dynasties have dominated elections and governments in the Philippines...As these clans protect their reign, they often resort to violence to frustrate any attempt by rivals to unseat them.”

And how do you sustain political dynasties? By systematic redistribution. The above board taxes generated from the local economy are used to pay off voters indirectly by virtue of massive welfare programs [e.g. free movies, free health care, senior citizens discount and etc...] or directly (vote buying) during elections. For instance, local authorities discreetly allow people to squat on empty government and private lands and are given protection from doing so in exchange for votes.

Yet this form of squatting has been provided with a legal cover in the face of the Lina Law (RA 7279)[13], where relocation is required for squatters evicted from their domicile. In short, the law rewards the violation of property rights.

Of course there is also the issue of the undeclared tax payments, which usually ends up in the pockets of the politicians.

Hence, the violence in Maguindanao has been representative of the state of economic deprivation from the operative highly skewed political-legal environment.

According to the Focus on the Global South, Maguindanao remains as one of the poorest provinces in the country. With a population of more than 1 million in 2006, six out of ten people are considered poor in the province, which is almost three times higher than the national average. Maguindanao is also a “mainstay” in the list of ten provinces with the biggest income gap, poverty gap, and severity of poverty[14]

In other words, where politics has been substituted for trade, we get violence as a result of the exploitative grab for resources by the use of political means, as Franz Oppenheimer has postulated.

And this also validates the great Frédéric Bastiat who once said that, “When goods do not cross borders, soldiers will.”

Apparently, in Maguindanao, the order of private armies determined past economic fortunes which had largely been held and distributed by the entrenched political class and which appears as modern day vestiges of a medieval age political structure known as feudalism.

Likewise, history has revealed that the same political means to attain wealth in favour of vested interest groups had been responsible for the mass slaughter of humanity seen in the two horrendous world wars of the 20^th century, where the casualties as estimated by the Wikipedia.org[15] for World War I is anywhere in the range of 10-64 million people while World War II at 40-72 million people.

As historian Michael A. Heilperin poignantly observed[16], Economic nationalism was the real victor of World War I, just as collectivism was to be the real victor of World War II.

So why does the new trade secretary remain fearful of free trade?

The answer is simply because the entrenched political and economic class are concerned and apprehensive that their current economic privileges, which on the other hand signify as economic inefficiencies, brought about by protective walls of legal and political barriers, might not cope with the onslaught of market based competition.

In short, free trade means putting to risks inefficient and uncompetitive firms which has operated on the premises of political concessions such as monopolies, cartels, subsidies, liberal access to state financing, tax shields, various licensing or other state based privileges which has been an enduring trait for Southeast Asian economies, as journalist and author Joe Studwell rightly notes[17], “The lesson of the past decade has been that the relationship between political and economic elites in Southeast Asia is more enduring than almost anyone imagined.”

Thus, by reading in between the lines, the trade secretary appear to signal the administration’s possible intent to enforce gradual change on a regime that thrives on the status quo.

The Invisible Hand

It is likewise foolhardy and mendacious to assert that free trade works to harm consumers as free trade primarily benefits consumers through manifold choices.

Free trade allows consumers to benefit from the various offerings from the producers or service providers, all in competition to satisfy their needs. And the thrust to market products to satisfy consumers comes in many facets such as pricing, quality, utility, aesthetics, self-esteem and etc...

In short, for the consumers, the essence of free trade is choice, the more the array of choices, the greater the value of the exchange.

On the other hand, for the producers, the essence of trade is profits,

As Ludwig von Mises wrote[18],

Profits are the driving force of the market economy. The greater the profits, the better the needs of the consumers are supplied. For profits can only be reaped by removing discrepancies between the demands of the consumers and the previous state of production activities. He who serves the public best, makes the highest profits. In fighting profits governments deliberately sabotage the operation of the market economy.

Thus in connecting the two, free trade gives the consumers the best possible alternative while for producers, the profit incentive from doing so. In short, free trade signifies as the best possible arrangement for achieving satisfaction and profits.

Yet sometimes media gives the illusion that consumers are too dumb that they can’t distinguish between what’s good enough for them and what’s not, and thus require the nanny state via various regulatory interdictions.

Ironically, the same media would pontificate on the virtues of democracy where people get to vote on political leaders, as if people have been bequeathed with intelligence only when they vote for leaders and the lack of it when they spend their own money.

In reality, it works the opposite way.

When people spend for goods and services they expect to get direct benefits from an exchange and thus always exercise the option to choose based on perceived order of needs and of the accompanying value from the available choices.

Isn’t it commonsensical for consumers not to further patronize on what they feel as inferior, inadequate, substandard, or a product or service that is perceived as worth less than the price which they had earlier paid for?

By the pattern of spending, consumers, thus, impose market discipline on producers without the need for state intervention.

The father of modern economics, Adam Smith called this as the Invisible Hand.

In contrast, in elections when people vote for political leaders, what you vote for isn’t what you exactly get. Whether it is Philippine President Joseph Estrada of 1998, Japanese PM Yukio Hatoyama[19] or US President Obama, the point is—populist politics usually ends up with the opposite expectations from which they had been ushered into office.

Of course in any field, one can’t discount that there will always be unscrupulous agents. But such devious entities are likely to fool people ONCE and will be refused further patronage. Thus, any gains will be temporary and by deceiving consumers, they will be penalized by the virtue of monetary and reputational losses, if not lawsuits.

Yet, in the case where physical harm that should emanate from the use of their products or services, then this should also be subjected to legal remediation.

How Free Trade Should Benefit The Philippine Capital Markets

So if the Aquino regime will truly usher the Philippines more as an active participant in free trade engagements this should augur very well for the Philippine economy.

Of course, the Philippines has been a signatory of many free trade[20] accord, even prior to the Aquino regime, which includes including the Asean Trade in Goods Agreement, Asean-Australia-New Zealand Free Trade Agreement, and the Japan Philippines Economic Partnership Agreement, but sustaining and more importantly (and hopefully) expanding the ‘gradualist’ momentum will be a very crucial dynamic.

However, given the administration’s faddish perception of globalization, the consistency of this policy is yet unclear.

Theoretically, increased free trade and/or economic freedom should bode well for the local capital markets, since more investments should translate to the increased access to domestic and global savings which should get intermediated via the banking system or through the capital markets.

Figure 3: McKinsey Global Institute[21]: Share of Financial Assets By Region 2008

In developed economies, except for Japan, bank deposits make up a smaller share of the capital markets as shown by figure 3. The greater part of the distribution of financial assets has been into the private sector debt securities and in the equity markets.

Thus while there are cultural and domestic regulatory dynamics that could also shape the divergences in the distribution of financial assets, we should expect a larger share of private bond and equity markets for mature market economies. This implies Emerging Asia could likely be headed on that path.

Considering that the Philippines, whose primary line of financing has been channelled through the banking sector, where banking penetration level is only 35% of the population, according to McKinsey Quarterly[22] estimates, this means there is a huge amount of unaccounted capital afloat in the system.

And this squares with the estimated 40% share of the informal economy[23] and with 4 of the top 11 largest malls[24] in the world, according to the Forbes Magazine, housed in the Philippines.

In other words, free trade and or economic freedom will compel enterprises and institutions to deal with this enormous untapped savings which should translate to a huge boom for the domestic capital markets.

Part of the early move on this has been the advent of mobile banking.

In terms of bond markets the Philippines accounts for one of the smallest in Asia (see figure 4)

Figure 4: IMF[25]-Size of Corporate Bond Market, ADB[26]-Local Currency Bonds Outstanding

Aside from the untapped savings, which is most likely sourced from the informal economy, the existing bank deposit base is likely to tap into both the bonds and the equity markets.

The factors that are likely to drive these would be amplified relative returns, reforms that would enable the lowering of transaction costs, introduction of derivatives and other more sophisticated financial instruments that allows the public to hedge. Incidentally, if I’m not mistaken only the Philippines among the ASEAN-4 have yet to introduce derivatives in the stock exchanges.

Figure 5: Reuters[27]: Market Capitalization of Emerging Asia

I’d also like to further point out that the Philippine Phisix accounts for as one of the smallest bourse in Asia (not included in Figure 5).

As of Thursday’s close the Phisix free float market cap is estimated at US $66.5 billion (exchange rate of Php 46.5 to a US dollar) compared to $188 billion of Thailand last January 12^th or possibly at $212 billion today adjusted for the 12.7% advance from the aforementioned period.

And it is of no surprise to us that the ASEAN-4, which comprises as the smallest bourses of the region, has accounted for the biggest gains.

The trend of the ASEAN-4 towards freer markets, aided by technological revolution, is just one of the major positive structural long-term factors at play.

Nevertheless, the other major and more influential medium term dynamic is the risks of blowing asset bubbles originating from the current concerted global central banks’ bubble policies, which is likely responsible for today’s buoyant asset markets.

Since the risk for Asia and the ASEAN seem to be a brewing boom-bust cycle, where a boom is a positive and bust is a negative, the larger net effect of a bust which constitutes as capital consumption signifies as a NET NEGATIVE. So we have major two forces counteracting on each other.

But this is a story we have long been talking about.

Anyway, in closing, speaking of bubbles, this news report is just too compelling for me to exclude from this week’s report.

From Bloomberg[28],

``South Korea will ‘soon’ announce plans to stimulate the nation’s property market, Yonhap News reported… The nation’s land ministry is drawing up measures to boost real-estate prices, and the ruling Grand National Party may begin discussions on easing debt-to-income restrictions on homeowners…”

People never seem to learn.

---

[1] See Philippine Election Aftermath: Goodbye Illusion, Welcome Reality!

[2] See Plus Ca Change: President Aquino's Policy On Jueteng

[3] See President Aquino’s Cabinet Appointments: The More Things Change, The More They Remain The Same

[4] See Why The Sell-Offs In Global Markets Are Unlikely Signs Of A Double Dip Recession

[5] See Privatize Pag-Asa or Open Weather Forecasting To Competition

[6] See Philippine Election Myth: New President Will Determine Direction of Economy And Markets

[7] Inquirer.net, RP eyes participation in free trade deal, July 23, 2010

[8] Oppenheimer Franz, The State

[9] World Bank, States and Markets, World Development Index 2009

[10] See Is The Newspaper Industry Dead? Probably Not If It Is For Free

[11] Wikipedia.org, Maguindanao massacre

[12] SFGate.com, Philippine political dynasties stifle democracy, nurture violence / Powerful clans have a stranglehold on system, experts say, New York Times, March 13, 2007

[13] Answers.com, What is the Lina Law?

[14] Manahan, Mary Ann Maguindanao in Focus Focusweb.org

[15] Wikipedia.org, List of wars and disasters by death toll

[16] Heilperin, Michael A. Heilperin Economic Nationalism: From Mercantilism to World War II

[17] Studwell, Joe, Ties That Bind, July 22, 2007

[18] Mises, Ludwig von Confiscatory Taxation, Chapter 32, Section 3

[19] See How Populist Leadership Goes Kaput: Japan Edition

[20] Inquirer.net, loc. cit.

[21] McKinsey Global Institute Global capital markets: Entering a new era, September 2009

[22] See How Free Markets In The Telecom Industry Aids Economic Development

[23] See Does The Government Deserve Credit Over Philippine Economic Growth?

[24] See A Nation Of Shoppers??!!

[25] IMF Regional Economic Outlook Leading the Global Recovery Rebalancing for the Medium Term

[26] Asian Bond Monitor, Asian Development Bank, March 2010

[27] Reuters ANALYSIS-For Singapore bourse, IPOs remain the Achilles heel, January 13, 2010

[28] Prudentbear.com, Trichet Challenges Inflationism, Bloomberg July 19, 2010