Planet Money is making me re-think my opposition to subsidies for NPR with this episode on Peruvian Economist Hernando de Soto, who discovered that Peru was so poor due to over-regulation--it takes over a year's worth of work just to get the permits to open up a business in Peru--and the lack of respect for private property rights.
Interestingly, they uncover what I consider a scandal at the World Bank who ranks countries on the ease of doing business: in response to lobbying by labor organizations, the Bank stopped measuring the time it takes to fire a worker as an indicator of the ease of doing business.
As readers of this blog know, if you make it hard to fire a worker, you also make it less likely that they will be hired. That the World Bank changed an economic indicator suggests that they are willing to trade academic integrity for political support.
Why am I so disappointed when I discover economists behaving exactly in the way our models predict?
Enjoyed the article. Working for a localization company, it is fascinating to speak to clients around the world and hear the differences in their approaches. Conducting global business sometimes feels like a level of tact has to be waded through in order to start in earnest.
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ReplyDeleteStatistics of poverty in Europe showed an improvement in 2013-2014 compared to 2012. According to Eurostat, which is a European Institute for Statistics, there were 122.6 million Europeans who were under the poverty line, which represents about 24.5 % of the European population (28 European states). The population that is mostly at risk is in Bulgaria, at 48%. Next are countries like Romania, Greece, Latvia and Hungary, where population at risk of being poor is at close to 30%. The countries having the smallest percentage of population at poverty risk are Check Republic (15%), Netherlands, Finland, and Sweden (16 %) and in fifth position is France having 18% of its population at risk of becoming poor (Pommier, 2014). Central Europe’s poverty is due mainly to two major reasons: rural population has historically lived modestly and represents an important percentage of the national population; another more recent reason is the growing old population which is living off modest pension plans mostly subsidized by the state. Eastern European countries are faced with same social reasons as the rest of Europe, and in addition with the inheritance of an impoverished infrastructure and depletion of national resources and industrial assets after more than 40 years of Soviet domination and resource exploitation.
Anne-Hélène Pommier. 2014. Près d'un quart de la population européenne menacé de pauvreté. www.lefigaro.fr
The absence of property rights and subsides are two economic events that destroy wealth and impede the movement of assets to higher value. As the post indicates Peru was poor due to over-regulation. As recently as July 2014, in advance of hosting a major UN Climate Conference in Lima, Peru, the countries finance ministry announced changes that would un-tangle $11 million in assets by announcing policy changes that would limit jurisdiction of the Environmental Ministry. The net effect would be less stringent environmental regulations and would limit the power of the environmental ministry to control harmful substances and their impact on the air, soil and water. Changes in the law also impacts mining and drilling for fossil fuels. The actions by the Peruvian government were a clear attempt to pursue economic growth at the expense of environmental sustainability. This is an interesting dynamic tied to the government’s role creating wealth. It is parallel to the reference to the World Bank; the World Bank is ranking Peru on the ease of doing business but yet it is clear they are willing to trade politics for the integrity of their ranking system and at the same time Peruvian government is willing to de-regulate in order to achieve economic growth.
ReplyDeletehttp://thinkprogress.org/climate/2014/07/22/3462348/peru-environmental-regulations-mining-climate-conference/
In an effort to discover where poverty came from, de Soto found that entrepreneurs had to live outside the law, which kept them in poverty. After listening to NPR Episode 599: The Invisible Wall, the problem in Peru is Maoism. The business people like that the system keeps the impoverished down, which keeps competition down and the ability to demand bribes prolific. Economists see this inefficiency as a threat; however business people see opportunities to exploit the situation. Inside the legal system, de Soto followed the permitting process and paid bribes in an effort to gain the rights to open a factory.
ReplyDeleteThe World Bank has certainly traded academic integrity for political support, as you suggest. However, as the World Bank ranks countries on the ease of doing business, no one wants to be last. Leaders fear that there will be an impact on upcoming elections. Despite scandalously changing economic indicators at will, maybe this report isn’t all bad. Some countries are able to leverage their ability to move up the list and improve their economy further by attracting more businesses. “According to the World Bank 2013 study Fostering Entrepreneurship in Georgia, Georgian innovative firms create 30% more jobs and are much more competitive in the domestic and global markets than non-innovative firms” (US Fed News Service 2013). The World Bank claims that, "achieving high productivity and creating jobs are pivotal to the government's medium- to long-term goals. Fostering high-growth entrepreneurship and innovative activity is thus paramount to achieving these objectives” (US Fed News Service).
References:
NEW WORLD BANK REPORT SAYS FOSTERING HIGH-GROWTH ENTREPRENEURSHIP AND INNOVATION IS PARAMOUNT TO JOB CREATION AND SUSTAINABLE GROWTH IN GEORGIA. (2013, Sep 25). US Fed News Service, Including US State News
This is an interesting NPR segment (which almost makes me want to tune in more often). Anyways… the process by which Hernando de Soto went to get to the bottom of what makes Peru tick economically is quite amazing. The fact that Peru seems ok with how the country is currently operating (without property deeds or banks) is troublesome. “Without private property and contract enforcement, wealth-creating transactions are less likely to occur” (Froeb, 2014). It goes to show that the government was intent on keeping the small number of wealthy people in control. But why give up this opportunity? Is the Peruvian government afraid of capitalism? Peru was willing to forgo the prospect of investing in their own market and people. I would hope that it wouldn’t be as selfish as being afraid of others making wealth.
ReplyDeleteAs far as the World Bank report, I feel this list helps keep countries in check. That is for those that encourage business and individual growth. Without it, many countries would be stuck at a standstill until another economist comes along and does an experiment. Just look at how long it took to open a fake t-shirt factory in Peru! I think it should be a good indicator that this report has such a strong hold on countries, that they actually take its consideration into effect to implement changes/reform in their own systems.
Froeb, L.M., McCann, B.T., Ward, M.R. & Shor, M. (2014). Managerial Economics: A Problem Solving Approach. Mason, Ohio: Southwestern Cengage Learning.
Different economists have different views about the relative importance of the conditions and factors that make countries richer or poorer. Some countries are poorer than others because of the institutions human-made systems, rules, regulations, formal or informal that create different incentives. It’s the formal rules and laws, but also the norms and common practices of a society. Lots of countries have great constitutions but their leaders have a practice of ignoring the rules whenever they feel like it. The key difference between rich countries and poor ones is the degree to which a country has institutions that keep a small elite from grabbing all the wealth. In poor countries, the rich and powerful crush the poor and powerless.
ReplyDeleteOn the American side, average income and life expectancy are higher, crime and corruption are lower, health and roads are better, and elections are more democratic. Yet the geographic environment is identical on both sides of the fence, and the ethnic makeup of the human population is similar.
Among the good economic institutions that motivate people to become productive are the protection of their private property rights, predictable enforcement of their contracts, opportunities to invest and retain control of their money, control of inflation, and open exchange of currency. For instance, people are motivated to work hard if they have opportunities to invest their earnings profitably, but not if they have few such opportunities or if their earnings or profits are likely to be confiscated.
Poverty is not the simple result of bad geography, bad culture, and bad history. It's the result of us: of the ways that people choose to organize their societies. And, that means, we can change things.
Work Cited:
Davidson, A. (2012) Why are some countries rich and others poor? Retrieved from: http://www.npr.org/blogs/money/2012/03/16/148680705/why-are-some-countries-rich-and-others-poor
Diamond, J. (2012) What makes countries rich or poor? Retrieved from: http://www.nybooks.com/articles/archives/2012/jun/07/what-makes-countries-rich-or-poor/
The lack of economic growth is one of the contributing factors for countries being poor. When countries national saving rates started to rise, the growth will temporarily rise above the rate and the economy can shift to a new equilibrium. However, a country’s long run equilibrium growth is independent of a country saving or the population growth rate (Borro 2002). I believe that if all countries have access to the same technology, they should also have the same steady growth rate. Human capital can also be considered as another contributing factor. Human capital aid in the input of the production of national income, according to the Slow’s model equilibrium income depends on the rate of invest in education as well as the physical investment rate. With this we can see that wealth can be affected with the increase of educational investment, which can make a country richer or/and will raise the growth temporarily in the transition period to a new equilibrium.
ReplyDeleteReference:
1. Frobe, McCann, Ward and Shor (2014) Managerial Economics – A Problem Solving Approach.
2. Barro, Robert, and X. Sala-I-Martin. (2002) Journal of Political Economy - Convergence
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ReplyDeleteA recent research done by the International Labor Organization examined 3 databases used to measure labour market regulations, competitiveness and efficiency [WEF LME], the Fraser Institute Labor Market Regulations Index [Fraser LMR] and the Institute for Management Development [IMD]. The research compares the labor market regulations, in order to protect employment and improve the overall well-being of the worker.
ReplyDeleteThe 3 databases use the Employing Workers Indicator [EWI], which is used by the World Bank as a sub-indicator of doing business, but it was assessed as not suitable indicator to rank workers in other countries. The World Bank will stop using the EWI as indicator because they found problems measuring only the costs of market regulation and not the benefits. It was determined that the EWI was not capturing the measurement of workers' protection; although the EWI was a good indicator for labor market policies.
Findings on the research indicated that the 3 databases, despite their differences include the World Bank EWI as one of their main sources, however the WEF and IMD uses the Redundancy Costs, this was accredited that the World Bank does not report the Rigidity of Employment index anymore, but only the raw data. On the opposite side Fraser uses only some, not all the subcomponents of the Rigidity of Employment Index.
The research also found inconsistencies with the WB EWI data used in WEF and IMD databases. WEF and Fraser aggregate labor markets indices show a correlation of .61. WEF phrases survey question on easiness of hiring and firing and the IMD survey question on flexibility of labor market regulation show a great correlation of .78. Higher correlations show a more reassuring correctness, they also show double-counting when individually components are averaged into aggregate indices; and more weights are given to hiring and firing practices as opposed to other aspects of labor regulations. The research calls for a careful use of the databases, it also calls for the improvement of the indicators.
References
Aleksynska, M. Cazes,S (n.d.). Retrieved from comparing indictors of labour market regulations across databases: A post sciptum to the empoloying workers debate: http://www.ilo.org/group/wcmsp5/group/public/....ed
A recent research done by the International Labor Organization examined 3 databases used to measure labour market regulations, competitiveness and efficiency [WEF LME], the Fraser Institute Labor Market Regulations Index [Fraser LMR] and the Institute for Management Development [IMD]. The research compares the labor market regulations, in order to protect employment and improve the overall well-being of the worker.
ReplyDeleteThe 3 databases use the Employing Workers Indicator [EWI], which is used by the World Bank as a sub-indicator of doing business, but it was assessed as not suitable indicator to rank workers in other countries. The World Bank will stop using the EWI as indicator because they found problems measuring only the costs of market regulation and not the benefits. It was determined that the EWI was not capturing the measurement of workers' protection; although the EWI was a good indicator for labor market policies.
Findings on the research indicated that the 3 databases, despite their differences include the World Bank EWI as one of their main sources, however the WEF and IMD uses the Redundancy Costs, this was accredited that the World Bank does not report the Rigidity of Employment index anymore, but only the raw data. On the opposite side Fraser uses only some, not all the subcomponents of the Rigidity of Employment Index.
The research also found inconsistencies with the WB EWI data used in WEF and IMD databases. WEF and Fraser aggregate labor markets indices show a correlation of .61. WEF phrases survey question on easiness of hiring and firing and the IMD survey question on flexibility of labor market regulation show a great correlation of .78. Higher correlations show a more reassuring correctness, they also show double-counting when individually components are averaged into aggregate indices; and more weights are given to hiring and firing practices as opposed to other aspects of labor regulations. The research calls for a careful use of the databases, it also calls for the improvement of the indicators.
References
Aleksynska, M. Cazes,S (n.d.). Retrieved from comparing indictors of labour market regulations across databases: A post sciptum to the empoloying workers debate: http://www.ilo.org/group/wcmsp5/group/public/....ed
There are so many reasons behind this and I don’t think this can change easily or within few days, it takes decades to turn it around that too only if there is honest effort put in. I am lucky that I work in a business like Forex trading, so here it does not matter what the economic situation is, but I can always make serious money with help of my broker OctaFX, it has free demo account option for me to learn easily.
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