Monday, December 18, 2006
The Rise and Decline of Mexico
In the Logic of Collective Action, Olson explains how collectivities, or groups, are not as able to define and pursue an interest as individuals are. He presents a 'book-long' explanation of why collective action is a difficult objective, but one simplistic way to sumarize it would be to say that individuals assume the full costs and benefits of their actions, on the other hand, groups of individuals can not assign costs and benefits within their membership in the same 'automatic' manner. As a result, when said groups pursue collective action, their objectives, their costs, and their benefits are not shared equally by all individual members. The term "collective action" is misguiding because such action can not and does not represent the intentions and/or interests of the entire collectivity, but only those of one or a few members. That is why individuals play such an important role in the general prosperity of a collective economy. Collectivities are not 'well-equiped' to manage resources because only the interests of some of its fractions will be considered in doing so. From this logic one can conclude that allowing and protecting individual property rights is a very good way to ensure that economic resources will be administered properly and that they will be as productive as possible. Individuals must be the protagonists of the economy, not the government, not any other collectivity. Olson's theories conclude that a nation in which individual ownership of assets is fostered and protected and there is no 'predation' on the economic 'efforts' of individuals, productivity will be closer to optimal and prosperity can occur. Vargas applies this concept to the case of the Latin American economies and proposes that the State's dominant position as the central character and main conductor of the economy is the reason why no 'antidote' for economic retardation has worked in the subcontinent.
As I found out by reading Liberty for Latin America, practically every Latin American nation can be used to support Olson's (and Vargas's) thoughts on the recipe for prosperity, although these cases would be found in the section listing the 'bad' examples, those instances in which the prescription is not followed and 'undesirable' things happen. I think the case of Mexico is probably the one of most interest for people in the United States, so I decided to take a quick look at the economic/political model in Mexico and try to identify a few of the symptoms diagnosed by Vargas and that would go against Olson's optimal model of prosperity.
In a previous posting I discussed the post-colonial legacy imprinted on the political culture of Nigeria. The case in Latin America is very similar. The Spanish and Portugese monarchies also utilized very centralized and authoritarian units of government in order to mantain a stable regime that incorporated different corporate groups into one, universal, mission to extract wealth and chanel it back to the royalty back in Europe. This culture of authoritarian central government has proven hard to ellude for a country like Mexico.
After independence, the southern nation struggled to create a unifying national identity and 36 different heads of state attempted to take possesion of power until Porfirio Diaz came to power in the 1870s. Diaz established a very powerful dictatorship that lasted more than three decades. One of his most important goals was to develop the Mexican economy and Diaz's autocracy was characterized by an incredibly interventionist state. He saw foreign investment as a vehicle for development and also as a very effective way to enrich his personal coffers. Foreign penetration of the economy and ownership of land and other resources was a great source of discontent and eventually became one of the driving themes of the revolution that ousted Diaz in 1910. The Mexican revolution is known as the first great social revolution of the twentieth century, approximately 2 million Mexicans died as a result of the violence and the economic devastation. This revolution is the single most important shaping force of the modern Mexican State.
In addition to many other significant transformations that the revolution caused and that would not be very useful to mention right now, a constitutional democracy was established in Mexico in 1917. However, the emerging system did not overcome the nation's legacy of authoritarian and corporatist political culture. In fact, in order to appease the different factions that had carried out the revolution, an even more sophisticated and rigid corporatist structured was designed and implemented in Mexico: The PRI, the Institutional Revolutionary Party, which came to dominate Mexican politics and held a power hegemony that lasted 70 years. The Mexican government, and more specifically the PRI, was succesful in creating a system of groups' representation that ensured submission to a very authoritarian regime that, as mentione previously, ruled Mexico for seven decades. Just like in many other Latin American nations at the time, the emerging "democracy" of the early 1900s relied on appeals to nationalism and as a concequence, to economic nationalism. Mexico adopted a model of development consistent with Import Substitution Industrialization (ISI) which yielded very impressive growth rates and development. However, the Mexican industry eventually reached the inevitable 'bottlenecks' that characterize this type of model and the Oil bust and ensuing debt crisis of the 1980s forced the State to redesign their approach to economic development and prosperity. Liberalization and privatization have since replaced the ISI strategy. In 1994 Mexico signed the North American Free Trade Agreement with the U.S. and Canada and in the last decade the government has privatized more than 1000 enterprises. However, the last ten years have also been marked by very low rates of growth.
Throughout its history of development, Mexico's powerful and interventionist State has mantained its status. All attempts to create a new economic path are not only designed, but also controlled and dominated by the 'all-mighty' Mexican state. According to the Constitution of 1917 (still standing), the Mexican state reserves 'discretion' with regards to all property rights. This document was used, in fact, to nationalize the oil industry in 1938 and the national banks in 1992, just to mention the two most famous cases. As long as the government mantains its postion as main administrator of the economy and the State's institutions do not function in relation to individuals, fostering and protecting their property rights, Mexico is not likely to overcome its longstanding affiliation with economic underdevelopment.
Friday, December 15, 2006
The Saudi oil minister reports they are doing this in order to aid the market for oil by keeping it 'in balance'. “I hope the market appreciates we are working so diligently to bring supply and demand in balance, to have inventories at a reasonable level so that we do not have gyrations.” This is not going to help the oil market, the only thing this will do is raise prices, and since the cartel holds a virtual monopoly on oil, consumers are forced to pay those prices or not drive- for most that is not a feasible alternative. The market on its own will set price and quantity and for the most part it should not be messed with unless there is a market failure. Oil producers are tying to make more money by supplying less product which they have the power to do because they are a cartel.
OPEC accounts for "40 percent of the world’s oil exports" and it has a new member to add to its 11 member group. Angola will be added next year which is the "first new member since 1975."
Angola is "Africa’s fastest-growing oil exporter" which pumps "1.4 million barrels a day, ranking it above Qatar and Indonesia within OPEC." This is a surprising addition considering OPEC is worried about current levels of output because of the subsequent decrease in price. The chief energy economist at Lehman Brothers, Edward Morse says "this makes an incredibly tight market even tighter... It’s a very aggressive, assertive move. Clearly, some OPEC members want to keep a $60 floor.”
“They are jawboning the market and trying to show they are being aggressive,” said Roger Diwan who is a managing director at PFC Energy. OPEC explains its reasoning as “market fundamentals clearly indicate that there is more than ample crude supply, high stock levels and increasing spare capacity.”
Another issue with the price floor created by this Cartel is the problems with enforcement. It is very difficult if not impossible to discern the difference in oil between countries in the middle east. Given the Nash equilibrium, there is incintive for these countries to cheat. If Saudi Arabia decided to ramp up production, it would be very difficult for the other members of OPEC to know who was doing it. If Saudi Arabia did cheat, their output would increase and they would sell more units for the same price as everyone else; therefore their profits would sky-rocket. It has been estimated that "OPEC countries have actually pared production by only 700,000 barrels a day, instead of 1.2 million barrels, since the October meeting." This is a result of the difficulties in enforcement, every country wants to make the highest amount of profit that they can. Not only is there incintive to cheat but it is almost counter-productive to a country's profit margins not to.
Since OPEC has a virtuall monopoly on oil, when they set a price floor, consumers have little choice but to pay the higher price. They only way they could avoid it would be if they didn't consume gasoline and for most this is an unrealistic assumption. Consumers will be forced to pay this price until the price reaches the point where it is more cost effective to turn to energy alternatives. "Analysts at the energy agency, which represents consumers, have warned OPEC not to cut its production further as higher energy prices could erode economic growth."
It is a cautionary tale, decreasing output will raise oil prices but if OPEC goes to far they can end up shooting themslves in the foot. The president of the Petroleum Industry Research Foundation in New York said "OPEC ministers should be careful how they manage the market in coming months." He also suggested that "high energy costs could reduce consumption." If consumers start turning to energy alternatives, there will be a sharp decline in demand and prices would plumit. OPec would be stuck wondering where did everybody go? “That’s a trend OPEC and the Saudis should not be ignoring because at the end of the day they want to sell, and if you want to sell, you need a vibrant economy particularly in the United States.”
Wednesday, December 13, 2006
Developing countries never explicitly took one approach over the other, there seems to be noticeable differences between poverty reduction and wealth creation. In paved reduction focused countries, such as Madagascar, or Mali, systems tend to operate under a culture of control, monitoring, and bureaucratic procedures. Concern is put on socially oriented cost centers and manageable checks and balances to monitor those cost centers. This may look good interms of consumer confidence, but it is inefficient in terms of market responsiveness and competitiveness. Little effort is channeled towards income generating business activities, and managerial time and focus is on securing grants, rather than crating wealth. Very few companies survive on purely market driven business models, and when they try to , basic government services are not there to support them. In wealth creation focused countries such as Singapore or Mauritius, we see a tighter relationship between business and government. Leaders from both aids have a clear sense of the ir respective roles in the wealth creation process, and leaders on both sides are rewarded accordingly. As a result, organizations in such countries tend to directly or indirectly focus on supporting business. Public sector managers are asked to express clear and measurable wealth creation support objectives, and to claim the resources they need to achieve these objectives. Agencies in charge of critical income generating sectors become important agencies that work closely with the private sector and get priority support from other government departments. Where does this leave a country like Rwanda? It might help Rwandan public and private organizations be more conscious of the choices they inherently make every day. Aid-funded organizations that directly provide relief to the poor are necessary and will be needed in Rwanda for many years to come. However, it will be critical that Rwanda finds more sustainable ways to finance them. In the meantime, it is imperative for most other organizations to examine how their activities directly or indirectly contribute to the wealth of the nation. there are huge potential economic benefits from income-generating sectors like coffee and tourism. It is estimated that investments of $80 million and $100 million could, coffee and tourism could generate around $580 million in badly needed export receipts. Not to mention the thousands of jobs these high economic impact industries would create in the Rwandan economy. If these targets were achieved they would fundamentally transform the economy. Rwanda's path towards more competitive coffee and tourism industries will not be an easy ride, and the Rwandan public and private sector coffee and tourism leaders who have developed precise action plans for those industries all know that. Both they also fell that the risks and investments required are will worth the risk. The prospect of slowly crating prosperous coffee and tourism businesses in Rwanda is becoming more and more obvious and the country's stated goal to reduce reliance on foreign aid could eventually become a reality.
In wealth creation focused countries such as Singapore or Mauritius, we see a tighter relationship between business and government. Leaders from both aids have a clear sense of the ir respective roles in the wealth creation process, and leaders on both sides are rewarded accordingly. As a result, organizations in such countries tend to directly or indirectly focus on supporting business. Public sector managers are asked to express clear and measurable wealth creation support objectives, and to claim the resources they need to achieve these objectives. Agencies in charge of critical income generating sectors become important agencies that work closely with the private sector and get priority support from other government departments.
Where does this leave a country like Rwanda? It might help Rwandan public and private organizations be more conscious of the choices they inherently make every day. Aid-funded organizations that directly provide relief to the poor are necessary and will be needed in Rwanda for many years to come. However, it will be critical that Rwanda finds more sustainable ways to finance them. In the meantime, it is imperative for most other organizations to examine how their activities directly or indirectly contribute to the wealth of the nation.
there are huge potential economic benefits from income-generating sectors like coffee and tourism. It is estimated that investments of $80 million and $100 million could, coffee and tourism could generate around $580 million in badly needed export receipts. Not to mention the thousands of jobs these high economic impact industries would create in the Rwandan economy. If these targets were achieved they would fundamentally transform the economy.
Rwanda's path towards more competitive coffee and tourism industries will not be an easy ride, and the Rwandan public and private sector coffee and tourism leaders who have developed precise action plans for those industries all know that. Both they also fell that the risks and investments required are will worth the risk. The prospect of slowly crating prosperous coffee and tourism businesses in Rwanda is becoming more and more obvious and the country's stated goal to reduce reliance on foreign aid could eventually become a reality.
Thursday, December 07, 2006
In accordance with Shariah (Islamic Law), Muslims cannot charge interest. This is a very detrimental law or rule to Islamic Banking systems and Islamic countries. Markets are everywhere, and there is no doubt that Islamic countries benefit from transactions in a market. But, I don’t think an Islamic country can come close to benefiting from the full potential of the market without allowing interest rates. In Mancur Olson’s book, Power and Prosperity, Olson suggests that a country needs a full range of markets that will allow the society to capture the most gains from all types of transactions. Olson gives an example: Suppose there is a young man that is interested in starting some type of business and he is fully willing and capable to make the business prosper, but he has no money. Now suppose there is an older man that has the money, but is not enthusiastic enough or willing to start his own business. Both men, the economy, and the country have a potential to become better off if the older man loans the younger man the money. But, the older man will not do this unless he is sure that the young man will not just keep all the money for himself. An enforceable contract (with interest added in) will allow this type of transaction to take place. I think there is a lot of room for more advantageous transactions and economic growth in many Islamic countries, if they are willing to take advantage of it.
Wednesday, December 06, 2006
Nigeria: Case Study
With a population of 130 million people and a total area of almost 360 thousand square miles, Nigeria is the most populous nation in Africa and ranks amongst the ten largest in the World. Nigeria's population in West Africa, its size, and its oil-producing status have made it the hub of regional economic activity. Demographically, it dwarfs the other fifteen countries in West Africa with a population that is about 60 percent of the region's total. Also, Nigeria's gross domestic product (GDP) represents more than half the total for the entire subregion.
Nigeria was a British colony until 1960 and the colonial experience left a powerful imprint on the design of the African nation. Darren Kew and Peter Lewis summarize the comparative significance of Nigeria:
Nigeria offers, within a single case, characteristics that identify Africa.
These opposing forces are rooted in the constant struggle in Nigeria
between authoritarian and democratic governance, the push for develop-
ment and the persistence of underdevelopment, the burden of public
corruption and the pressure for accountability (Kesselman 515).
The reality of modern Nigeria represents a very common case in Africa; its boundaries have little to do with the borders of precolonial African nations, instead, these boundaries merely mark the point where British influence ended and France's began. The geographic design of the African colonies corresponded to the interests and convenience of their ruling powers and not according to any cohesive concept of race, ethnicity, demographics or natural geographic divisions. In addition, the British played off ethnic and social divisions to keep Nigerians from developing organized political resistance to colonial rule, and where resistance did develop, the colonizers did not hesitate to emply repressive tactics. The British ensured that ethnicity would be the primary element in political identification, mobilization, and competition. In the words of Kew and Lewis, "Nigeria, like all other African countries, has sought to create a viable nation-state out of the social incoherence created by its colonial borders" (Kesselman 516).
As a result of its colonial legacy, Nigerians have been unable to form a true national identity around which the citizenry could rally around and develop stable political and economic institutions. Since their independence in 1960, Nigerians have witnessed six succesful military coups, one violent Civil war, and the design of nine different constitutions. The modern republic of Nigeria has supposedly adopted a model of "federal democracy" as a strategy to ensure national unity; however, as a concequence of many years of colonial and military rule, a unitary system emerged: a system with an all-powerful central government surrounded by weak and economically insolvent states.
Political instability and undervelopment has been accompanied by economic instability and underdevelopment. Despite being endowed with vast amounts of natural resources (including huge oil reserves), the World Bank lists Nigeria among the poorest 20 percent of countries in the world and according to Kew and Lewis, "instead of independent growth, today Nigeria depends on unpredictable oil revenues" (Kesselman 525). It is a sort of 'old paradox' amongst oil producers in the developing world: rich endowments on oil reserves provide a potential solution to economic struggles, but they also allow for nations to become overdependent on the exports of a very volatile product. In addition to the overdependence, the large revenues from oil production allow States to increase their involvement in domestic production and in the economy in general. Nigeria is a case and point of these downfalls and the "State plays the central role in making decisions about the extraction, deployment and allocation of scarce economic resources." Because the central government controls access to most resources and economic opportunities, the state has become the major focus of competition among all groups in society (Kesselman 535).
As it would be expected. and predicted by Olson's theories, the government's role in the economy naturally leads to the many groups to engage in rent-seeking behavior. The ability to accumulate wealth is determined by the success that individuals can have in the arena of political competition. Gaining the favor of the State, or getting the government's coercive power on 'your side,' is more important than being a productive member of the economy. Individulas, following their competitive instincts and their rational self-interest, learn to operate in an economic context that awards political connivance, and often flat out trickery, and not productivity.
The authors previously mentioned elaborate in their article:
Nigeria exemplifies the harsh reality of authoritarian and unaccountable
governance. Corruption, fraud, mismanagement, and the restriction of
political liberties were tolerated in the past by populations numbed into
complacency by political repression and the daily struggles for economic
survival (Kesselman 567).
One crucial lesson Nigeria provides is that rich endowment of resources is not enough to ensure economic development. In the book Power and Prosperity, Mancur Olson theorizes that a nation must comform to two "general conditions" in order to reach a prosperous development. The first of the conditions is "the paradoxical condition of secure and well-defined individual rights." The second one is that there is no "predation of any kind" (Olson 195-196). However, the political and economic model of Nigeria makes it very hard for these conditions to be met. All property rights, in said nation, emanate and revolve around the State. The property rights of individuals are trumped by the supremacy of the government, which can appropiate or nationalize any number of resources at any time. Also, because a small group (without an encompassing interest in the economy's welfare) can gain access to government and manipulate to its benefit, the State is generally a predative force on the economy. It is no coincidence that despite a constant struggle to meet the basic needs of its citizens, many of the heads of state of the Nigerian nation have ended up in the lists of the wealthiest men in Africa.
Once a diagnosis is proposed for the possible causes of underdevelopment in Nigeria, a much more complicated question arises. How can the post-colonial African nations escape their persistant and seemingly inescapable retardation? If lack of development is a result of the models of governance and economic production imposed by 'alien' colonizing cultures, would the path to development have to be derived from a purely domestic process? In other words, can the nations and peoples from the developed world lend a helping hand in finding a new way for the African economies, or should they learn from the pitfalls of imposing a foreign system on nations that have not undergone their own progression of development? Should nations like Nigeria be left alone to work out their internal conflicts in hope that they can develop a better suited framework of political and economic interaction and then forge their way out of poverty?
Kesselman, Mark. et all. Introduction to Comparative Politics. Houghton Mifflin Company:
Olson, Mancur. Power and Prosperity. Basic Books: New York 2000.
Sunday, December 03, 2006
We all know that in the recent November election the Democrats won control of the House of Representatives. This transition of power was due to a change in voters’ ideals about how the war in Iraq is going. Author Llewellyn H. Rockwell, Jr. states in the article Ideology Still Matters that “elections come down to contests between two groups,” Republicans and Democrats. Each party promises to meet the interests of those groups to which they think will get them elected to office. Usually the party that does a better job of promising to protect interest groups will win. Groups benefit on behalf of all of the people of the country. It is believed that for this election voters’ interests were broader rather than that of the usual self-interested beliefs. I am not sure if more of the votes were for the Democrats or against the way Republicans were running the government. Either way, a transition in power has occurred. The author talks about the thought of ideology and how we should see the recent transition as a sign of hope. The change that occurred should be seen as a win for liberty. The ideas that people have for themselves and the government that oversees them should determine the future of the country, not special interests.
Saturday, December 02, 2006
The group, which is called Cuba Democracy Advocates, was formed by a group of business men. This makes me think of Olson's theory for two reasons. The first, which I have always felt was tacitly implied throughout Olson's work, is that there is some specialization required in organizing action, and that this sort of know how is commonly found within the private sector. Essentially, I believe that Olson comments time and again about the effectiveness of leaders from the private sector in organizing lobbying groups. Additionally, within the Cuban lobbying group scenario, there may be a more sinister role in play, which Olson would characterize as a Baptist and Bootlegger situation. It seems that it is certainly possible (probable?) that these business men perhaps have an ulterior motive in increasing sanctions. I merely point it out as a possible outcome, and one which I think Olson's theory points towards.
The Cuba Democracy Advocates also use lobbying of both political parties suggesting a broader agenda of the group, despite the fact that the right is typically more favorable of such sanctions. I think, however, that the story itself truly proves an interesting point of Olson's. Within this story, the anti-Castro group broke a procedural rule involving funding their organization, and this is the third such complaint brought against them by an ethics watchdog group (this is why I suspect the possibility of bootleggers). The Cuba Democracy Advocates claimed that the ethics watchdog group was heavily funded by an opposition group. Regardless of the actual facts, I can't help but take notice of all the resources being used in this conflict which could surely have had a more productive use. Sanctions are a dubious tool at best from an efficiency standpoint, when we add the resources needed to purchase favorable legislation, and run an organization, then take into account the rival groups and all the groups meant to ensure ethical behavior, and THEN all the resources likely used in purchasing the ethics watchdogs, the amount of wasted resources is truly staggering. I never before considered that the ethics watchdogs are less likely to be part of the solution, but rather worsen the situation by adding one more layer of corruption and paperwork.