Quote of the Day: Why Capitalism is Awesome

But the true genius of the market economy isn’t that it produces prominent, highly publicized goods to inspire retail queues, or the medical breakthroughs that make the nightly news. No, the genius of capitalism is found in the tiny things — the things that nobody notices.

A market economy is characterized by an infinite succession of imperceptible, iterative changes and adjustments. Free market economists have long talked about the unplanned and uncoordinated nature of capitalist innovation. They’ve neglected to emphasize just how invisible it is. One exception is the great Adam Smith…

The brilliance of the market economy is found in small innovations made to polish and enhance existing products and services. Invention is a wonderful thing. But we should not pretend that it is invention that has made us rich.

We have higher living standards than our ancestors because of the little things. We ought to be more aware of the continuous, slow, and imperceptible creative destruction of the market economy, the refiners who are always imperceptibly bettering our frozen pizzas, our bookshelves, our pencils, and our crayons.

This is from a wonderful essay by Chris Berg at the Cato Institute. (hat tip: AEI’s Professor Mark Perry)

Quote of the Day: The Virtue of Market Inefficiency

an inefficiency exists when, for a given person at a given time and place, the cost of an action outweighs the benefit.  We’ve seen that to rationally calculate costs and benefits you need money prices of inputs and outputs, of steel and bridges.  So when government erodes private property rights, interferes with trade, distorts prices, and manipulates money, it doesn’t just make it harder to be efficient; it also pulls the rug from under the very ability to spot inefficiencies at all.

Using the rules of arithmetic, for example, it’s easy to see that the statement 1 + 2 = 4 is wrong, but what about  _ + _ = _ ?  What’s the solution to this “problem”?  Is there even a problem here?  Money prices fill in the blanks; they “create errors”—i.e., reveal mistakes that no one could see without them—that alert entrepreneurs might then perceive and correct. If mistakes and inefficiencies remain invisible, the search for better ways of doing things could never get off the ground.

An economy without inefficiencies is either one where knowledge is so perfect that no one ever makes a mistake, or it’s one in which government policy has effectively foreclosed the very possibility of inefficiency.  In a world of surprise and discovery, of experiment and innovation, the former is impossible; the latter sort of economy, as Mises showed almost 100 years ago, is impossible as well as intolerable.

So a living economy needs to “create” inefficiencies, and lots of them, to set the stage for greater efficiency and ongoing innovation.

This excerpt is from Professor Sandy Ikeda at the Freeman talking about the essence and or the significance of the price mechanism.  (hat tip Prof. Don Boudreaux)

Quote of the Day: Economic Calculation

Without private ownership in the means of production, there will not be a market in the means of production. Without a market for the means of production, there will not be monetary prices established on the market (which reflect the exchange ratios, or relative trade-offs people are wiling to make). And, without monetary prices, reflecting the relative scarcities of different goods and services, there will be no way for economic decision-makers to engage in rational economic calculation. Rational economic calculation is impossible in a world without private-property rights and the monetary prices that emerge within the competitive market process. By definition, socialism eliminates the basis of the market economy, i.e., private property in the means of production; the system must find some other mechanism to serve the role that economic calculation plays in the market process. Without the ability to engage in rational economic calculation, economic decision-makers will be stumbling and bumbling in the dark. As Mises puts it, without economic calculation, "all production by lengthy and roundabout processes would be so many steps in the dark”

This is from Professor Peter Boettke’s wonderful book review of Professor Ludwig von Mises’ classic Socialism at the Laissez Faire Books

North Korea’s Failed Missile Launch Reflects on Dire Economic Status

So it appears that I’ve partly been validated on my view that the much hyped threat from North Korea’s military might has been no less than media bubble that has apparently been pricked.

From USA Today

North Korea's much-touted satellite launch ended in a nearly $1 billion failure, bringing humiliation to the country's new young leader and condemnation from a host of nations. The United Nations Security Council deplored the launch but stopped short of imposing new penalties in response.

The rocket's disintegration Friday over the Yellow Sea brought a rare public acknowledgment of failure from Pyongyang, which had hailed the launch as a show of strength amid North Korea's persistent economic hardship.

For the 20-something Kim Jong Un it was to have been a highlight of the celebratory events surrounding his ascension to top political power. It was timed to coincide with the country's biggest holiday in decades, the 100th birthday of North Korean founder Kim Il Sung, the young leader's grandfather.

The United States and South Korea declared the early morning launch a failure minutes after the rocket shot out from the North's west coast. North Korea acknowledged its demise four hours later in an announcement broadcast on state TV, saying the satellite the rocket was carrying did not enter orbit.

The launch brought swift international condemnation, including the suspension of U.S. food aid, and raised concerns that the North's next move could be even more provocative — a nuclear test, the country's third

It would seem that the actions of North Korea’s political leadership deserves more the ridicule “for nearly $1 billion failure” than ‘condemnation’.

$1 billion lost on unproductive military spending from an impoverished nation is simply suicidal!

Here is what I wrote earlier,

Such totalitarian state has engendered massive poverty represented by rampant shortages of many goods and services which includes the rationing of electricity that has personified what “earth hour” truly means.

And in spite of the North Korea’s vaunted war machinery, wherein much of the misallocation of the nation’s resources had been directed, the North Korean army is in a state of dilapidation and obsolescence: they seem ostensibly good for parades and for taunting, but not for real combat.

The North Korean political economy has been so immersed in abject poverty such that the country has functioned as real life paradigm of the essence of the environmental politics of “earth hour”.

North Korea’s command and control political economy cannot even afford to provide basic lighting services to their citizenry! (satellite images from my earlier post)

And this only implies that for most of North Korea’s army—except for Presidential units—have not only been poorly equipped, but they are famished, insufficiently trained and most importantly they could be mentally or psychologically unfit for any prolonged military skirmishes.

And in case the freshly installed North Korean political leadership of Kim Jong Un becomes whacko enough to openly engage in military conflagration, the administration's downfall will be underwritten by a coup d'état or a massive defections of North Koreans (both from the army and from the citizenry) more than from foreign military interventions.

A clue from Salon.com

Yet more and more North Koreans are prepared to take such risks as they flee hunger and oppression in search of a new life in South Korea, where their newfound freedom is clouded by discrimination, mental health problems and financial hardship.

At around 12 percent, the unemployment rate among defectors is far higher than the 3.4 percent among South Koreans. Those working earn significantly less than their southern counterparts, despite government subsidies and three months of mandatory resettlement training, according to the government-affiliated North Korean Refugees Foundation.

Even so, a recent government survey showed that seven out of 10 adult defectors are satisfied with life in the South; only 4.8 percent said they were dissatisfied or very dissatisfied, according to the unification ministry poll.

About half of those questioned left the North due to food shortages, while 31 percent said they came to the South in search of freedom. Just over a quarter fled because of the North’s political system.

They are among more than 23,000 North Koreans who have defected to the South since the Korean War ended in a truce — not a peace agreement — in 1953. The trickle of defectors through the 1990s rose dramatically about 10 years ago, the result of a prolonged famine in which more than 1 million people may have died.

Last year 2,737 people — one of the highest figures on record — defected to the South.

And the botched missile launch was apparently timed with the unveilment of the statues of Kim Il Sung (left) and Kim Jong Il. (from Business Insider)

And all these attention grabbing destabilization moves are most likely representative of attempts to diversify the public’s attention from the real rapidly deteriorating state of North Korea's economy, as well as, use these events as leverage to hand wring concessions from her neighbors, allies and other patrons or the geopolitics of blackmail.

North Korea should instead follow Myanmar’s reforms of gradually adapting economic freedom. Myanmar is slated to open a stock exchange by 2015, with the help of Tokyo Stock Exchange.

And reforms towards economic liberalization by closed economies has usually been initiated with the symbolical opening of stock exchanges.

For North Korea's despotism, what is unsustainable will not last.

Shale Oil Revolution: (Laissez Faire) Capitalism Deals Peak Oil a Fatal Blow

I used to believe in peak oil. That all changed when I got immersed in Austrian school of economics. I have come to realize that we are dynamic, and not static, beings whose actions are driven by time and value scale based incentives in response to the changes in the environment and to social developments. In other words, human action is what drives economic values of goods or services.

And given the opportunity or the right environment or a society tolerant for experimentation that rewards success and penalizes failure, people will find ways and means to employ resources in a more efficient manner in order to improve on our current unsatisfactory conditions.

“Peak oil” as a social phenomenon, and not in the engineering sense, is about to be vanquished [unless socialists cloaked as environmentalists succeeds to put a political kibosh on this sunshine industry].

The phenomenal pace of advances in engineering technology has been intensifying the Shale Oil Revolution

From the New York Times Green Blog, (bold emphasis mine) [hat tip Professor Mark Perry]

The revolution in production in Texas and across the country is partly tied to the rising price of oil over much of the last decade, which propelled aggressive technological experimentation and development. (Government encouragement over the last several administrations helped as well.)

Horizontal drilling and hydraulic fracturing have been around for years, but over the last five years, engineers have fine-tuned these and other techniques, even as many environmentalists worry about their impact on water and air.

Computer programs have been developed to simulate wells before they are even drilled. Advanced fiber optics permit senior engineers at company headquarters to keep track of drillers on the well pad, telling them when necessary where to direct the drill bit and what pressure to use in injecting fracking fluids. Seismic work has become far more sophisticated, with drillers dropping microphones down adjacent wells to measure seismic events resulting from a fracking job so they can more accurately determine the porosity and permeability of rocks when they drill nearby in the future.

Just a decade ago, complete wells were fracked at the same time with millions of gallons of water, sand and chemical gels. Now the wells are fracked in stages, with various kinds of plugs and balls used to isolate the bursting of rock one section at a time, allowing for longer-reaching, more productive horizontal wells. A well that once took two days to drill can now be drilled in seven hours.

For instance, when the Apache Corporation began drilling in the 100,000-acre Deadwood field in the West Texas Permian basin in 2010, there had only been a trickle of production there. The deep shale, limestone and other hard rocks had potential, but for years they had not been considered economically viable. The rocks were so hard, they would have likely sheared off the usual diamond cutters on the blade of any drill bit attempting to cut through.

But new adhesives and harder alloys have made diamond cutters and drill bits tougher in recent years. Meanwhile, Apache experimented with powerful underground motors to rotate drilling bits at a faster rate. Now, a well that might have taken 30 days to drill can be drilled in just 10, for a savings of $500,000 a well.

“By saving that money, you can spend more on fracking, which translates into more sand and more stages and better productivity,” said John J. Christmann, the Apache vice president in charge of Permian basin operations.

All these serves as empirical evidence of how the price signaling channel sets in motion entrepreneur’s incentives to fulfill market demands through the employment of savings or capital accumulation in shaping the fantastic advances in technology (in spite of the numerous government interventions) in a market economy.

As the great Professor Ludwig von Mises wrote,

What distinguishes modern industrial conditions in the capitalistic countries from those of the precapitalistic ages as well as from those prevailing today in the so‑called underdeveloped countries is the amount of the supply of capital. No technological improvement can be put to work if the capital required has not previously been accumulated by saving.

Saving—capital accumulation—is the agency that has transformed step by step the awkward search for food on the part of savage cave dwellers into the modern ways of industry. The pacemakers of this evolution were the ideas that created the institutional framework within which capital accumula­tion was rendered safe by the principle of private ownership of the means of production. Every step forward on the way toward prosperity is the effect of saving. The most ingenious technological inventions would be practically useless if the capital goods required for their utilization had not been accumulated by saving.

The entrepreneurs employ the capital goods made available by the savers for the most economical satisfaction of the most urgent among the not-yet-satisfied wants of the consumers. Together with the technologists, intent upon perfecting the methods of processing, they play, next to the savers themselves, an active part in the course of events that is called economic progress. The rest of mankind profit from the activities of these three classes of pioneers. But whatever their own doings may be, they are only beneficiaries of changes to the emergence of which they did not contribute anything.

The characteristic feature of the market economy is the fact that it allots the greater part of the improvements brought about by the endeavors of the three progressive classes—those saving, those investing the capital goods, and those elaborating new methods for the employment of capital goods—to the nonprogressive majority of people. Capital accumulation exceeding the increase in population raises, on the one hand, the marginal productivity of labor and, on the other hand, cheapens the products. The market process provides the common man with the opportunity to enjoy the fruits of other peoples’ achievements. It forces the three progressive classes to serve the nonprogressive majority in the best possible way.

As seen from the shale oil revolution, the illustrious economist Julian Simon has been right anew, human beings have indeed been the ultimate resource.

Economic Integration is a Function of Economic Freedom, not Planned Chaos

Cato’s Marian Tupy rightly points out that the much touted benefits from European Union’s integration has been overrated.

The European politicians love to talk about the “huge” benefits of membership in the European Union. It is certainly true that the “single” market between the EU member states has brought tangible benefits, but those have been declining in importance as technological change made access to services and capital cheaper and easier, and trade liberalization progressed world-wide.

Moreover, as the Brussels-based EU bureaucracy expanded, economic liberalization gave way to regulation that helped to strangle European growth (see the graph below). Consider the latest absurdity to emerge from Brussels—a poultry regulation, which aimed to increase the comfort of the egg-laying chickens, but resulted in a drastic cut in egg production and a 100% increase in the price of eggs.

The EU bureaucracy may not appreciate the problem of unintended consequences, but ordinary Europeans are beginning to realize that the EU no longer is what it used to be—a byword for prosperity and stability. In the Czech Republic, for example, a record number of citizens do not trust the EU (63 percent) and the EU Parliament (70 percent). If the EU elite persist in killing jobs and growth, it may bring about the ultimate unintended consequence—the break up of the EU.

The EU represents a political economic entity premised on incorrigible self-contradiction.

On the one hand, the purported mission has been to economically integrate EU’s diverse national economies. On the other hand, the direction of politics has been to centralize the system. Yet political centralization and economic decentralization are fundamentally incompatible.

Professor Ludwig von Mises called this Planned Chaos.

The market economy safeguards peaceful economic co-operation because it does not use force upon the economic plans of the citizens. If one master plan is to be substituted for the plans of each citizen, endless fighting must emerge.

And this is why the ongoing EU debt and welfare crisis has been symptomatic of the friction from the clashing forces of centralization and decentralization. The result of which has been underperformance. [The declining growth in EU, in spite of the 12 year old union, is mostly a result of capital consumption from the EU's welfare state and from various distortive regulations exemplified by the above.]

In reality, EU’s economic integration serves merely a cover for covert plans to establish political fantasyland. Eventually the path towards centralization will lead to unnecessary violence and the self-implosion of an unsustainable and unviable political system

If people in Brussels hold economic integration as their primary goal, then all they should do is voluntarily drop their political ambitions and allow the individual market economies in Europe to flourish with little or no political baggage attached.

But of course, this would mean that EU bureaucrats would be out of jobs and vested interest groups would lose their politically endowed privileges.

So this is not going to happen until the cumulative effects of “planned chaos” becomes totally unwieldy. Yet they seem headed in that direction.

How Reliable is CNBC’s Rankings of the Best Countries with Long Term Growth?

CNBC recently came out with a slide show depicting that troubles in the Eurozone and in the US has been prompting investors to search for new or alternative markets to invest in. And based on their selections mainly derived from demographics, natural resources or geography they came up with the following list:

10 Algeria

9. China

8. Egypt

7. Vietnam

6. Malaysia

5. Bangladesh

4 India

3 Peru

2 Ukraine

And the winner of CNBC’s best countries for long term growth…

…is the Philippines.

Given the endowment effect or home bias I should be screaming “yehey, buy buy buy the Philippines!”

Here is what CNBC has to say on the Philippines

1. Philippines

Projected annual growth: 7%

2010: $112 billion*

2050 projected GDP: $1.688 trillion

The Philippines has one of the fastest-growing populations in Asia. The population is set to jump by almost 70 percent over the next 40 years, and HSBC believes the combination of its powerful demographics and strong fundamentals will drive the economy to become the world’s 16th largest by 2050. That would mark a jump of 27 places from its current ranking of 43.

The country is one of the world’s largest exporters of labor, with over 9 million Filipinos working abroad, according to the latest data from the Commission of Filipinos Overseas. In 2010, almost $19 billion was sent back to the Philippines as remittances from Filipinos working abroad.

More recently, the country’s fast-developing business process outsourcing (BPO) industry has helped keep some of the workforce from leaving the country. Already 350,000 Filipinos are estimated to work in call centers, compared with 330,000 Indians, according to the Contact Center Association of the Philippines. The industry is projected to provide more than 1 million jobs within two years.

The economy’s focus on the services sector and domestic consumption, as well as a lower exposure to global financial markets, helped it to escape a recession following the 2008 global financial crisis.

It would seem as reductio ad absurdum to predict on long term growth based simply on variables of natural resources, demographics and or geography.

If these variables have been instrumental in generating prosperity, then the linkages should have been evident today.

Yet in looking at the world’s top 20 wealthiest nations based on per capita income from Wikipedia.org we see limited influences of abundant natural resources, young populations (demographics) or geography.

Why?

Countries with natural resources are usually afflicted by what is known as resource curse, which according to Wikipedia.org

refers to the paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This is hypothesized to happen for many different reasons, including a decline in the competitiveness of other economic sectors (caused by appreciation of the real exchange rate as resource revenues enter an economy), volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions (possibly due to the easily diverted actual or anticipated revenue stream from extractive activities).

In reality, the biggest reason why the resource curse occurs has been due to the cartelization of resource based industries by politicians and their oligarchic cronies. These have mostly led to a political economic regime that have been anchored on anti-competition regulations which inhibits external and domestic trade.

Also it would be pretty naïve to focus on geography when vastly improving modes of transportation have been reducing the attendant costs.

Transport, Insurance and freight costs as share of import cost have been on a secular decline

Mark Dean of the Bank’s International Economic Analysis Division and Maria Sebastia-Barriel of the Bank’s Structural Economic Analysis Division notes in the following study,

One of the most obvious costs to international trade is the cost of transporting goods from one country to another. Transport technologies are continually improving and transport services are also becoming cheaper through increased competition. The goods transported are also changing; some goods are now transported electronically, such as newspapers and magazines, due to improvements in communication technology and others are becoming lighter, for example mobile phones. All this should be reflected in lower transport costs.

In short, falling transaction costs diminishes the impact of geographic vantages.

Finally while I agree that “go forth and multiply” should generally be positive for the global economy; that link may not be obvious.

Most of the nations with the fastest population growth (table from Wikipedia) have hardly been the best economic growth performers. To the contrary most have been economic bottom dwellers.

The fundamental reason is that commercial activities have been severely restrained due to lack of property rights, deficiency in the rule of law, failure to protect contractual rights and limitations to voluntary productive exchanges. Also the political economic environment by many of these economies can be characterized as having been plagued by despotism and socialism. So the positive effects of population growth have been stunted, instead large populations morphs into a social burden.

Next, based on population growth, Indonesia has far outsprinted CNBC’s top 10 (chart from Google Public Data).

Indonesia has likewise been a resource rich country, and as our neighbor has been endowed with geographic advantages. So it would be a curiosity for me that Indonesia has been glossed over by CNBC.

And in terms of debt management, (chart from tradingeconomics.com) Indonesia has thus far bested the Philippines.

While this is both good news for the Philippines and Indonesia, the bottom line is that CNBC’s coverage hardly seems objective. There must be some undeclared biases in their methodology, such that even considering the few specious variables they can be amiss of other major potential contenders for investors, as Indonesia or Thailand.

And finally too much reliance on domestic consumption is unsustainable. This has been the Keynesian mantra embraced by mainstream media.

When excess consumption (government and private) in the Philippines will get manifested in the current account balance, which has still been positive today due to remittance and portfolio flows, the country’s declining debt to gdp trend will reverse and deteriorate.

Current negative real rates policies have already been adding to consumption activities via an artificially stimulated boom from domestic monetary policies by the BSP.

Yet the obverse side of a boom is a bust. And that’s hardly a long term positive growth proposition.

[As a caveat I don’t trust government statistics considering that almost two fifth of the Philippine economy is considered informal or underground or shadow. There are yet many factors not captured by statistical aggregates.]

Finally it should be a reminder that the key to prosperity is through attaining trade competitiveness (chart from the WEForum) via economic freedom or a deepening of the market economy or capitalism. The most competitive nations have almost reflected on the same standings as with the most prosperous nations.

To quote the great Ludwig von Mises

Capitalism is essentially a system of mass production for the satisfaction of the needs of the masses. It pours a horn of plenty upon the common man. It has raised the average standard of living to a height never dreamed of in earlier ages. It has made accessible to millions of people enjoyments which a few generations ago were only within the reach of a small elite.

Apparently, that’s not in the equation of CNBC. When reality is dealt with a blackout occurs.

Will Burma Embrace a Market Economy?

Forbes Magazine’ Simon Montlake thinks so (bold highlights mine)

It usually pays to be bearish on Burma. But a flurry of initiatives by a new, semi-elected government has raised hopes of a fresh start. Since taking power in March, it has begun tackling barriers to economic growth, such as commodity import cartels and restrictive investment and labor laws. President Thein Sein, a retired general, has pledged to support local entrepreneurship and to attract foreign investors to special economic zones. He's also tapped independent thinkers as economic advisors and appointed businessmen as ministers. In much of Asia this would be mainstream politics. In Burma it's almost a Tea Party movement. Even the political standoff that has defined Burma on the world stage--the Lady versus the Generals--appears to have eased with a warm presidential reception on Aug. 19 for Aung San Suu Kyi, the opposition leader. "Things have moved surprisingly quickly," says a European diplomat. A veteran foreign aid worker concurs: "The political conversation has changed."

Burma's political history is strewn with false starts and reversals. The question on everyone's lips is whether this time is different. Skeptics say Thein Sein has yet to deliver on his reformist rhetoric and faces resistance from political hardliners and conservative bureaucrats, as well as rent-seeking tycoons who thrived under the dictatorship.

This uncertainty, as much as sanctions and boycotts, prevents many Western firms from taking the plunge, says Luc de Waegh, founder of West Indochina, a consultancy in Singapore. "The business environment isn't friendly to foreign investors yet. It's challenging to do business there," he says. Asian manufacturers have also been deterred by high costs for inputs and dilapidated infrastructure, despite a cheap labor pool. Only Burma's natural resources have attracted significant investment, led by China, though this has proven controversial.

Still, some Western executives are keen to size up a potential market of 54 million people with an estimated GDP of $43 billion. Tourist arrivals rose 23% in the first half of 2011, and not all were vacationers. "The big guys from the big companies are going there for tourism and business curiosity. It's like the last frontier," says De Waegh, who used to run British American Tobacco's Burma operations. Under political pressure at home, BAT exited in 2003.

While some will think that a seminal market economy for Burma will pose as threats to them, I think Burma’s possible conversion should be very positive, not only for Burma, but for ASEAN and for the world.

This means more business opportunities and access to a previously closed market that is not only resource rich but likewise has significant human capital and also fabulous recreational sites or vacation spots for potential tourists (like me).

A universal axiom is that de-politicization of any economy extrapolates to the empowerment of the masses through the markets, where the interests of the consumers should reign supreme than the interests of the political overlords.

As the great Ludwig von Mises once wrote,

The fundamental principle of capitalism is mass production to supply the masses. It is the patronage of the masses that makes enterprises grow into bigness. The common man is supreme in the market economy. He is the customer "who is always right

I hope Burma will indeed commence on the path of embracing a market economy.

Video: Paul Romer on how 'Charter Cities' can change the world

Stanford and New York University's Paul Romer gives a fascinating talk at the TED on how rule based Charter Cities which empowers choices for people and leaders, can significantly improve the world. (hat tip: Tom Palmer)

Mr. Romer concludes with a noteworthy quote,

The reason we can be so well off even though there are so many people on earth is because of the power of ideas. We can share ideas with other people when they discover them they share with us. It’s not like scarce objects where sharing means we each gets less, when we share ideas we get more. When we think about ideas in that way we usually think about technologies, but there is another class of ideas, the rules that govern how we interact with each other...

If we can keep innovating in our space of rules, and particularly innovate in the sense for coming up with rules for changing rules so we don’t get stuck with bad rules then we can keep moving progress forward and truly make a better place...

Quote Of The Day: Market Oriented Principles Makes The Difference

That's the key criteria in selecting emerging markets, according to Templeton's chief honcho Mark Mobius, on his latest outlook, Spotlight on Southeast Asia.

His article dwells on the situation in Vietnam.

Mr. Mobius writes, (bold emphasis and italics mine)

``The big question in Vietnam remains whether the Communist government is willing to adopt a market-oriented economic model as China’s communist government had done. Lenin’s statue is still standing in Hanoi. However, more and more leaders from the market-driven and commercially oriented southern region of the country have been joining the government and influencing economic policies. In addition, many young Vietnamese who have lived, worked and studied overseas are returning home to help build up its economy and participate in the anticipated high growth in that country.

``It is important for the Vietnamese government to focus on broadening the privatization process in the economy. In this way, they can reap the potential benefits of privatization, just like other countries that have adopted similar market-oriented principles. One of Vietnam’s strengths is her people – a hardworking and ambitious local population coupled with a large population living overseas, the “viet kieu”, who are capable of contributing know-how and capital to grow the country at a faster pace."

Emerging markets aren't equal. The difference lies in the political economic trends towards market-oriented principles or free(r) markets.

Estonia: A Resurgent Baltic Tiger In Defiance of Mainstream Antidote?

Andreas Hoffmann writing in Thinkmarkets sees Estonia as a returning Baltic Tiger.

Here is Professor Andreas Hoffmann (all bold highlights mine)

``the Estonian government reacted in a way to the current crisis that should bring tears of joy into the eyes of any free market economist: First, they did everything to hinder a devaluation of the Estonian kroon, as a relatively stable exchange rate to the euro is a prerequisite for euro introduction. Secondly, they did not overspend. Instead they cut wages heavily with the fall in per capita GDP – even in the public sector. And third, unlike most economies, Estonia did not sacrifice economic freedom for crisis management. Instead, officials wait for the crisis to heal the market. At the same time lower spending is assumed to bring inflation down. The crisis is seen as a chance to (readjust and) fulfill the Maastricht inflation criterion, which was impossible during the boom period.

``Thus, as Estonia allowed for an adjustment process, malinvestment from the previous boom should be dismantled soon. This should bring about lucrative future investment possibilities in an economy with solid macroeconomic fundamentals, a high degree of economic freedom and prospects to enter the euro zone. At the moment interest rates are much higher there than in the euro area and a credible fixed exchange rate assures against depreciation. These facts should attract new investors. Therefore it is likely that we soon see the return of at least one Baltic tiger."

What makes the Estonian account very interesting is that she appears to have taken an unorthodox (or outlier) approach in dealing with the recent crisis- market based adjustments that had been swift, drastic and painful. But instead of encountering a prolonged recession or even a depression, it now seems that Estonia have been revealing signs of an equally rapid and dramatic recovery.

This seems to contravene anew the conventional notion that markets, when left to their own devices ("officials wait for the crisis to heal the market") to deal with the recessions or a crisis, would cause a depression.

Even the IMF look equally impressed: ``Following recent budget measures and assuming continued fiscal consolidation efforts, Estonia could meet all Maastricht criteria, while the policy record to date provides assurances for continued stability-oriented policies. This is remarkable, as it is being achieved against the background of severe dislocations due to the crisis. Joining the euro zone would remove residual currency and liquidity risks, adding stability to the Estonian economy."

Here are some charts from the IMF...

Real Effective Exchange Rates

Real Wages and Monetary Aggregates

Real GDP and Inflation

Estonia's OMX Talinn Index (from Bloomberg) [up 36% year to date]

I'll leave it to this blog's Estonian readers to contribute to this outlook.

Doing Business In The Philippines

In an earlier post, we featured why the Philippines severely lags the global competitive environment, see 2009 Global Competitiveness Report And The Philippines.

In this post, the World Bank provides the details why the economy hasn't been materially improving. Yes, some (marginal) improvements, but not sizeable enough to make a dent on the real economy.

It's primarily because policies have been less friendly (my adjective-averse/hostile) to business.

Here is the partial list of the world ranking according to doingbusiness.org.


Notice that the Philippines has ranked 144th out of 183 countries. Last year we ranked 141st.

Yet notice that the same countries, which are in the highly competitive order, have a pro-market economy environment.

We'd like to avoid saying pro-business as it may create a misplaced notion of supporting "big" business.

A market economy is an economy conducive to competitive entrepreneurial class, particularly small and medium scale enterprises.

In the East Asia & Pacific, the Philippines has been placed dismally in 21st out of the 24 countries. According to the doing business ratings, we lag almost across all categories- the worst being-starting a business, paying taxes, applying for permits and employing workers. Our best has been trading across borders.

Generally we have been relegated to lowest order just in front of Cambodia, Timor-Leste and Laos.

A better graphic from Doing Business Philippines

The Philippines' overall ranking fell, this year, not because of more deterioration but because more countries have aggressively worked to improve on their business environment. As the above graph would show.

Recently the Philippines reportedly adopted reform measures aimed at ameliorated the business environment:

``The Philippines enhanced access to credit with a new credit information act that regulates the operations and services of a credit information system.

``The government also cut the corporate income tax rate from 35 percent to 30 percent and promoted company reorganization procedures by introducing prepackaged reorganizations and regulating the receiver profession."

Unfortunately while necessary and quite laudable, it hasn't been sufficient.

The Philippines remains structurally trammeled by anti-business (anti competition) pro-government (politics) policies, laws and regulations.

Unfortunately, populism and personality based politics won't solve this.

Globalization Highlights From Past To Present

The historical contribution of Globalization to world economy, from the Economist,

``GLOBALISATION, as historians of the subject like to point out, has been around for a long time. Industrialisation and technological changes—such as the invention of the steam ship, which produced cheaper means of migrating and trading between continents—spurred one period of globalisation in the 19th century. In similar fashion new inventions—jet aircraft, the internet—helped to encourage later periods of it. In a new World Trade Report published this week, the WTO compared three broad periods, looking at global growth in GDP, in population and in the trade of goods. Migration rates are shown only for four countries of the “New” world.

courtesy of the Economist

Present Trends as Indicated by the WTO 2008 World Trade Report

Accelerating world economic growth…

Rising Per Capita…

And broad based Poverty Alleviation…

This from WTO (highlight mine)…

“International trade is integral to the process of globalization. Over many years, governments in most countries have increasingly opened their economies to international trade, whether through the multilateral trading system, increased regional cooperation or as part of domestic reform programmes. Trade and globalization more generally have brought enormous benefits to many countries and citizens. Trade has allowed nations to benefit from specialization and economies to produce at a more efficient scale. It has raised productivity, supported the spread of knowledge and new technologies, and enriched the range of choices available to consumers. But deeper integration into the world economy has not always proved popular, nor have the benefits of trade and globalization necessarily reached all sections of society.”

Unfortunately globalization trends, despite its tremendous advantages, are highly unappreciated or unpopular simply because it is imperfect. But much of these has been borne out of the market distorting policies.

The message is the world needs more trade than relying too much from government.

World Bank’s Prescription for Sustained Economic Growth: Governance Committed To A Market Economy

The World Bank recently made a prescription for an ideal sustained growth; notes the Economist (highlight mine)...

“SINCE 1950 13 countries have grown at an average rate of 7% a year, or more, for 25 years or longer. Were these exceptional “economic miracles”, or models for others to follow? On Wednesday May 21st a new study on the subject, “The Growth Report: Strategies for Sustained Growth and Inclusive Development”, was published by a body of thinkers and policymakers brought together by the World Bank (one of our Delhi correspondents was involved in editing the final report). The report notes that the causes of breakneck growth varied significantly between countries, but it identifies five points of broad resemblance:

1. FULL EXPLOITATION of the world economy (importing bright ideas and technology; producing exports that others want);

2. MACROECONOMIC STABILITY;

3. HIGH RATES of saving and investment;

4. letting the MARKET ALLOCATE RESOURCES; and

5. COMMITTED, CREDIBLE, CAPABLE governments.

courtesy of the World Bank

“Given their steady years of growth, India and Vietnam may be on their way to joining this select group.

The 13 economies as listed by the World Bank…

courtesy of the Economist

The common characteristics of these high growth countries, to quote the World Bank,

``The high-growth countries benefited in two ways. One, they imported ideas, technology, and knowhow from the rest of the world. Two, they exploited global demand, which provided a deep, elastic market for their goods. The inflow of knowledge dramatically increased the economy’s productive potential; the global market provided the demand necessary to fulfill it. To put it very simply, they imported what the rest of the world knew, and exported what it wanted.”

In short, governance committed to the Market Economy which benefits from a global division of labor buttressed by exchanges of ideas, technology and optimum resource allocation as dictated by the market forces.

Private Altriusm

The markets have been charged with many forms of atrocities such as greed, materialistism and uncharitableness and many others. In short, private altruism is not possible…

chart courtesy of the Economist

From the Economist (highlights mine), ``AMERICA'S government is frequently accused of stinginess when it comes to foreign aid: the official sort is just a TINY proportion of annual GDP. But donations from INDIVIDUALS and BUSINESSES are startlingly high. American private giving to poor countries amounted to $34.8 billion in 2006, dwarfing that of other rich nations, according to the Index of Global Philanthropy published on Monday May 12th by the Hudson Institute, a think-tank. An established culture of philanthropy and charity contributes to direct aid-giving, as does a generous tax regime.”