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March 27, 2006

Zimbabwe, Pensions and Governance

Yesterday’s Times had an article on the deteriorating condition in Zimbabwe under Robert Mugabe. There are poorer countries in the world, but with GDP growth at -13.6% in 2003, -8.2% in 2004 and -4% in 2005, Zimbabwe seems a textbook example of how to reverse progress.

IN ONE hand Frank Wiggill holds his monthly pension statement and in the other a 500 gram packet of salt. It is the only thing in the supermarket that his pension will buy, unless he prefers to splash out on two eggs.

When Wiggill retired after 38 years as an engine driver on the Zimbabwean railways, he looked forward to enjoying his twilight years in comfort. Instead he and his wife Jeanette depend on monthly food parcels from well-wishers and handouts from their son in South Africa. The collapsing currency combined with the world’s highest inflation — estimated at more than 1,000% a year — has cut their pension to 13p a month.

“It’s embarrassing,” said Wiggill, 79. “I worked all my life and here I am living on food parcels of milk powder and toilet paper.” His monthly pension of Z$49,000 is less than the cost of a newspaper (Z$50,000) or a loaf of bread (Z$70,000). It would take him two months to buy a pint of milk (Z$89,000) and nine months to afford the cheapest pack of four toilet rolls (Z$440,000).

Read in full here.

In this (pdf) paper, Daniel Kaufmann of the World Bank comments on changes in the quality of governance across 209 countries between 1998 and 2004. Governance is defined by the World Bank as “the set of traditions and institutions by which authority in a country is exercised”. Zimbabwe is one of only 3 countries that have seen a significant worsening in a) the level of civilian voice and political accountability, b) regulatory quality, c) the rule of law and d) the control of corruption. It’s mismanagement on a gross scale with no sign of reversal.


March 11, 2006

Response to Twenty Years of the Trickle–down Effect

A few comments this interesting post from John Kahn.

The Myth at the heart of the dominant system – For over two decades, followers of the neo-liberal doctrine prescribed by economists such as Milton Friedman, and practised devoutly by Margaret Thatcher and Ronald Reagan have insisted that there is no need for active and progressive, redistributive measures: wealth will essentially redistribute itself. The idea is that prosperity will gradually ‘trickle down’ from the spending of the rich towards the poor, as money is spent. Yet this central tenet of the dominant economic model of our times is baseless, discredited and elitist.

The myth is a caricature of a reasonable person would say. Neither Friedman nor Thatcher would posit an inevitable drift towards equality of outcome. 'Trickle down' is not a phrase I've heard uttered in my 3 years within the economics department. Academics and textbooks state clearly the desirability of active transfers.

Advocates of tax cuts would say say excessive focus on redistribution isn’t necessarily in the long run interests of those groups deemed vulnerable. Whether or not one sees the profits and income of the wealthy as deserved, they ultimately contribute most to the welfare state in absolute terms. Hostility to wealth reduces incentives to acquire any in the first place and encourages businesses and individuals to go abroad and/or stick their money into elaborately tax shelters. There may be a better balance between welfare spending and the prosperity of businesses but let’s be explicit about what we forego by focusing on the former.

The relentless pursuit of higher profits, tax cuts for the rich, government spending cuts, deregulation, privatisation and competition has been pursued under the theory that such policies will actually benefit the entire population. Yet twenty years of neo-liberal recipes and the ‘trickle-down effect’ have only brought greater inequalities and further injustice. The gap between the rich and poor has increased wherever neo-liberal policies have been applied.

How does this alleged increase in injustice square with the UK’s experience over time? We have an education system guaranteeing universal access to primary and secondary schools, things that one upon a time were reserved for the so called elite. We have the NHS which along with the pharmaceutical industry has raised life expectancy to record levels for men, women and minorities, lowered infant mortality, reduced deaths from cancer and other life threatening ilnesses and is free at the point of use. Yet the welfare of the UK’s poor has fallen over time? I’m not a huge fan of many things our government does but the vision of wholesale exploitation and destitution you put forward makes a mockery of the progress we’ve seen; particularly when a large proportion of the world’s population wouldn’t mind coming to a country where even those classed as poor probably own a car, television and mobile phone.

I personally don’t equate inequality with injustice. I see injustice in barriers to achievement. An income differential of £30k in today’s society is certainly a barrier but I doubt it’s one inherent in every market society. Its importance is exacerbated by an education system that doesn’t perform as well as it’s more independent competitors. Another barrier would be the low thresholds at which low earners begin to pay income tax. Unfortunately there’s no consensus as to what constitutes a barrier that is worthy of correction.

By 2001, the three richest people in the world possessed a fortune greater than the sum of the Gross National Products (GNP) of the forty-eight poorest countries, a quarter of the countries in the world. In more than seventy countries, between 1979 and 2001, average income has actually decreased. Almost three billion people, half the population of the world, live on less than two Euros a day.

Is it because Bill Gates, Warren Buffet and Paul Allen have lots of money that others don’t? As mentioned earlier, you can’t decide a ‘correct’ level of societal liability on the basis of posterior observations of successful businessmen. The majority of new businesses fail. Many do OK. A minority do extremely well. Gates and Buffet are anomalies relative to the full set of businessmen and their existence doesn't indicate a flawed system; just as you couldn’t look at the millions of businesses and businessmen (all potential taxpayers) who've gone bankrupt and conclude that levels of taxation are too high.

The development of China and India thus far hasn’t led to an equal and opposite effect elsewhere. Wealth can be created. There's a huge body of literature stressing the impact of geography, quality of governance, transparency, law, property rights and ethnic/resource based internal conflict. To lay the blame for falling incomes/poverty elsewhere on any single factor is incorrect.

Bear in mind that those who’ve suffered at the hands of the IMF and World Bank loan conditionality approach these organisations because the status quo was yielding problems. It isn’t the case that all was hunky dory until the discredited Washington Consensus nor is it credible that the harm done is the sole reason for poor performance today. Even Joseph Stiglitz, former World Bank chief economist and fierce critic of past policy in this sphere, lays blame not on the inherent folly of the ideas, but on very crude mechanisms of implementation and lack of regard for individual country characteristics. This period in history and countries like Argentina are a cautionary tale. They cannot be used as proof of the folly of economic conventional wisdom without also explaining why the UK, US, France, Germany, Italy, Switzerland, Belgium, Singapore, Hong Kong etc seem to do fairly well.

Ignoring the clear majority of global public opinion, neoliberal globalisation threatens to replace the diverse cultures, landscapes and political systems of the globe with a single McWorld, or monoculture.

Cultural practices and language have never remained static. Greater connectedness has made it easier for those here to experience foreign food, music and film. The same will be true of those abroad. Globalisation increases the availability of aspects of culture previously limited to the more developed world. Lets be frank here; you’re no real evidence to suggest that all countries at all points in time will tend towards the prevailing culture in the UK or US, assuming these cultures can be well defined. It’s an assertion. It’s no less valid for me to state that globalisation will enhance diversity within countries. A branch of McDonalds in Bangalore isn’t successful by pure chance. Its success or lack thereof will be driven by the desires of consumers. Whether or not one thinks it’s desirable for fast food to be popular abroad is frankly irrelevant. It’s what has been chosen by the individuals, so be it.

As an aside, the article lined to within the post, entitled Trickle-Down Economics: Four Reasons Why It Just Doesn't Work is odd. The author arrives at the conclusion that “Bush's top-bracket tax cut is an ineffective attempt at stimulus that will not cause any growth”. It considers changes in economic, wage, and income growth together with change in job creation over time as the top rate of tax has fallen. It’s odd because its analysis is supposed to be statistical rather than verbal. If you’re going to do that, you may as well do it properly. No fancy regressions here. No attempt is made to control for, or even consider interest rates, inflation, unemployment, exchange rates, foreign shocks, productivity growth, etc. The author deduces causation on the basis of trends, and rejects causal links on the basis of corellation coefficients. Not to mention the underlying assumption that tax cut advocates mean cutting income tax solely for the rich; as opposed to corporation tax, direct taxes on the poor/middle classes and indirect taxes. The conclusion reached may be correct, but the reasoning doesn’t support it.


February 18, 2006

Employers & Employee Benefits

The Independent writes about comments made by Wal-Mart CEO to a disgruntled manager. The manager in question wanted to know why such a large company wasn’t doing more for its low-wage employees.

The manager had asked Mr Scott why "the largest company on the planet cannot offer some type of medical retirement benefits?" Mr Scott replied: "Quite honestly, this environment isn't for everybody. There are people who would say, 'You should take the risk and take billions of dollars out of earnings and put this in retiree health benefits and let's see what happens to the company'. If you feel that way, then you as a manager should look for a company where you can do those kinds of things."

Scott’s ‘take it or leave it message’ certainly won’t do anything to help the firm’s already run-down reputation. That said, Scott has a point, which is bolstered by an observation about the problems facing General Motors he makes in the full letter here.

GM has seen failing demand for its products over time and has underestimated its pension liabilities. Its future as a firm is sometimes questioned. For more, see this NYT article

"The thing that annoys me about GM is that when I retired I had a letter that said I would receive health care for life at no cost," said Chester Clum, 79, a former sales and service manager at GM who retired in 1981 after 38 years of service. "They never brought up that they could change that at will." But, in fact, the change has been long in coming. While there are exceptions in industries less subject to intense competition, GM is like many other once impregnable American corporate titans in arguing that reducing the burden of caring for retirees has become essential to compete against foreign companies with lower benefit costs and domestic rivals with younger work forces and less generous benefit packages.

With retirees living longer and accounting rules forcing companies to more honestly reflect their full costs on their books, the corporate-sponsored social contract is no longer sustainable. Something else, experts say, needs to replace it.

"It was easy to offer these things 40 years ago because they were cheap," said Paul Fronstin, director of the Health Research and Education Program at the Employee Benefit Research Institute, a nonpartisan group in Washington. "They're not cheap anymore."

Wal-Mart could certainly pay it’s staff more and contribute towards healthcare plans but it comes at the cost of a) taking on fewer people in the first instance b) being more vulnerable to competitors c) being more vulnerable to economic changes that affect all companies. The effects of the first are more immediate whereas the latter two get ignored because they’re non-tangible probabilities. None of these things are good for the groups who’re supposed to gain from higher wage/non-wage benefits. Of course the scale of the benefits granted by the ailing GM may dwarf those Wal-Mart’s employees are asking for; after all, many firms offer good packages without any problems. The main point is that one-sided accusations of greed and exploitation are unfair.


February 13, 2006

Corporate Welfare

Not too long ago, outgoing David Cameron boldly said the Conservative party wouldn’t be in the pocket of Britain’s businessmen. From the guardian

Britain's business leaders could be forgiven for being confused. David Cameron gave a rousing speech to the CBI conference in November, promising he would lead a 'campaign for capitalism'. Yet by last week, he was delivering a new year message in which he pledged to 'stand up to big business' and relegated capitalism to the same category as communism – that of outdated 'isms' he wants nothing to do with.

On those lines, here’s a great article from John Stossel about the benefits the already wealthy are able to gain from government. Stossel comments on state insurance schemes for those building on land private insurers avoid, corporate subsides in general and eminent domain. A quote –

A limo took us to Dwayne Andreas’ [Archer Daniels Midland chairman] office. Once the cameras were rolling, I brought out the questions about "corporate welfare." I foolishly thought I could get him to admit he was a rich guy milking the system. I thought he’d at least act embarrassed about it. Fuggeddaboutit. He was unfazed.

Stossel: Mother Jones [magazine] pictured you as a pig. You’re a pig feeding at the welfare trough.
Andreas: Why should I care
Stossel: It doesn’t bother you?
Andreas: Not a bit.

I still wonder why he granted the interview. I asked him about his bribes -- I mean, contributions. For example, Andreas gave the Democrats a check for $100,000. A few days later, President Clinton ordered 10 percent of the country to use ethanol.

Stossel: And the purpose of this money wasn’t to influence the president?
Andreas: Certainly not.
Stossel: So why give him the money?
Andreas: Because somebody asked for it.

Because they asked for it? Give me a break.

Read in full here.

By virtue of size, wealth and organisation certain groups can wrangle favours though the benefits accrue to a closed group rather than society as a whole. What can be done about it? People can’t be prevented from exercising free speech and asking for what they want. Nor does it seem fair to categorically prevent monetary & non-monetary contributions to policymakers. Full disclosure of links between policymakers and special interest groups doesn’t seem to make much difference either. After all, any assistance provided is professed to be in the country’s best interests and thus nothing to be ashamed of.


February 09, 2006

Worker Shortages

Lew Rockwell comments on statements from business groups and politicians about shortages of scientists, engineers and mathematicians.

Think of how jobs have changed. We have fewer people around today who know how to farm because fewer people are necessary to do the job. More kids than ever are going into computer sciences because of the perception that these fields will be lucrative in the future. In neither case was a government program necessary. People entering the job market find out quickly what is in demand and what isn't and compare that to their own capacity for doing the job.

The reason the whole math and science racket bamboozles us again and again has to do with our own limitations and our perceptions of foreign countries. We think: heck I know nothing of these subjects, so I can believe that there is a shortage! And surely math and science are the keys to just about everything.

Read in full here.

The word ‘shortage’ may be used a little loosely in the media when applied to jobs and skills. Not every instance of lack deserves to be taken seriously. It makes no sense for me to say there’s a shortage of Ferraris merely because my student budget would get me laughed out of a dealership. I’m simply not willing to pay what its worth. If I say there's a shortage of Ferraris it should be qualified with a statement of a) why I don't think they're worth what I'm willing to pay, and/or b) why it is impossible to pay the going rate. Even when the latter is the case, the harm being done must be considered before declaring a crisis or deciding active intervention is needed.

Take the issue of teachers. The DfES recognises the obvious (albeit not instant) solution to shortages, as evidenced by generous training bursaries of up to £7000 and Golden Hellos of up to £5000 for PCSE candidates hoping to teach maths and science. Given that it knows the solution, the government couldn't blame poor quality education in certain areas on a lack of staff if it refuses to go further with it’s recruitment efforts.

If there are strong financial constraints on their ability to do this (beyond obstinacy), like an unwillingness amongst the populace to pay more tax, then claims of shortages are more credible. Here we’d need to accept that teachers in state schools aren’t necessarily going to hold degrees in their teaching field. Lower expertise may be a suitable trade-off for lower wages given the difficulty of the material being taught. Perhaps the expectations of teacher expertise are too high.

That said, I doubt the constraints faced are insurmountable. Sure, you may not be able to hike taxes, but I bet there are reasonable sacrifices to be made within government. Could policymakers genuinely say that education is important, but not important enough to warrant sacrificing other schemes, and cutting salaries in other areas? Such reorganisation is difficult politically, but probably not operationally. Shifts in resource use needn’t be radical to have a beneficial impact. As long as reasonable sacrifices exist, claims that poor education is down to a shortage of skilled staff is inaccurate. Like my Ferrari, policymakers just doesn’t want to pay what good (by its own definition) teachers are worth.


February 07, 2006

Signalling & Alternatives to University

Here Bryan Caplan of Econlib, a supporter of the view that a degree is primarily for signalling desirable traits, discusses the value of a degree. Idea is, you’re valued as a graduate not so much for the knowledge you come away with but because sitting through lectures and jumping through exam/assignment hoops for three years implies you’re reasonably productive and capable of learning. That many of the firms we see on campus don’t require specific degrees suggests this is often true. What I liked was a suggestion by a later commenter

Start up a school that screens for IQ, and basically puts students through hell — difficult topics involving critical thinking, research, teamwork, and long hours, all without any grade inflation. It would be cheaper because you wouldn't necessarily need well-educated professors. That would be extremely powerful signaling. You might not even have to charge tuition — if you could run it cheaply enough.. Also, you might be able to pack four years' worth of standard signaling into two years, and people who only made it through one year would still prove something. If it failed, so does the signaling thesis.

Clearly needs refining, but the idea has some appeal. The assessment days (featuring tests, group exercises, presentations and interviews) used by large employers could be a model. University helps develop workplace skills, but for non-technical jobs I doubt the gain significant enough to warrant not considering an 18 or 19 year old, or that lessons wouldn’t be learned anyway, once in a pressured work environment.

There must be quicker ways of verifying the existence of certain traits in candidates / cheaper ways for candidates to convey their ability. That job prospects aren’t the sole concern of most people is deliberately ignored. Taking this into account together with subsidies to education, it’s understandable why such alternative schemes (run by independent firms or employers themselves) aren’t around.


February 02, 2006

George Monbiot

Just found the blog of journalist George Monibot who I’d heard of before, but didn’t know was a Guardian writer. There’s plenty to agree and disagree with but I like his writing. For something of more universal interest (and in keeping in the theme of wealth & happiness) take a look at this article on choosing a career –

How many times have I heard students about to start work for a corporation claim that they will spend just two or three years earning the money they need, then leave and pursue the career of their choice? How many times have I caught up with those people several years later, to discover that they have acquired a lifestyle, a car and a mortgage to match their salary, and that their initial ideals have faded to the haziest of memories, which they now dismiss as a post-adolescent fantasy? How many times have I watched free people give up their freedom?

So my second piece of career advice echoes the political advice offered by Benjamin Franklin: whenever you are faced with a choice between liberty and security, choose liberty. Otherwise you will end up with neither. People who sell their souls for the promise of a secure job and a secure salary are spat out as soon as they become dispensable. The more loyal to an institution you are, the more exploitable, and ultimately expendable, you become.

Read in full here.


February 01, 2006

Is £25k enough?

Yesterday’s T2 supplement contributed to the long running discussion about wealth and happiness. The general thrust is that “Once you’re earning £25 000 and upwards..money becomes increasingly irrelevant to genuine happiness”. Methodological issues relating to surveys of subjective well being suggest claims like that could be treated with caution; particularly when accompanied with suggestions for government policy. Still, it’s worth a read.

True happiness, said Bob Monkhouse, is when you marry a girl for love and later discover that she has money. We all appreciate the joke, of course, because though one side of us knows that a loving relationship provides a good chance of happiness the other thinks it would be guaranteed if that relationship made us rich as well.

Yet study after study shows that money fails to buy happiness. Incomes have increased threefold in Britain since 1950 but contentment levels have barely shifted. European research indicates that lottery winners revert to their previous levels of happiness within a year of their windfall. One look at the permanently sullen face of the multi- millionairess Victoria Beckham appears to prove the point.

Full article here.

Around the web, there has been some discussion of the role research on subjective well being should play in policy formation. See this post from Will Wilkinson on the Happiness and Public Policy blog and this from Chris at Stumbling & Mumbling. One World Week also featured a talk on the issue.


January 24, 2006

Poor Nations & Negotiations

I came across an old post from Ben Muse quoting an FT article on the practical constraints of poor nations when it comes to participation in world trade discussions. From the point of view of Zambian trade minister Dipak Patel, it highlights how lack of money/staff staff and the resultant reliance on NGOs and foreign donors makes life difficult.

Patel starts working on a speech for the launch of a new handbook about a special preference scheme for African, Caribbean and Pacific countries,... He cites a computer simulation showing that EU demands for cuts in Zambian tariffs will lose the government $15m in precious tax revenue.

But Zambia’s ability to do such research is limited. It has access to an online computer model developed by the World Bank, which allows it to do simulations. “But I don’t have the bandwidth, so I often get cut off,” Patel says. He wanted to do a simulation of the effect of possible cuts in goods tariffs on the LDCs in time for the Livingstone conference, but had to run round the donors asking them to do it for him. It arrived just a couple of days before the meeting, undermining its usefulness.

Read it in full here.


January 21, 2006

Business and Social Responsibility

Yesterday’s One World Week discussion was "Business and Social Responsibility: Do Good Values Equal Good Business?". The list of speakers is here. There was pretty much zero tension between any of the speakers and nothing to really disagree with. They stressed the gains society has seen as a result of the profit motive and that ultimately power is determined by how well they serve the customer. They were also eager to emphasise the role of law and voluntary/mandatory codes of conduct to prevent harm; like individuals not all firms seem to have a conscience. Just a couple of points:

– It wasn’t mentioned, but most people are or will be shareholders of some sort though voluntary savings and pension schemes. With luck, the increased value of such investments will help us fund spending later in life. Some shareholders are already incredibly wealthy, but many others just want some money to fund their retirement, pay for medical expenses and help their children through university. No sense in demonising them all. Beyond the provision of ipods, phones, cars and drugs, this is another helpful way in which we gain from having soundly run firms. Of course, we all have different ideas of what it means for a firm to be 'soundly run', so there's a role for ethical investment trusts, aligned with the varied preferences of individuals.

– Maybe there are conflicts in the stated desires of CSR proponents. A firm that goes beyond its legal obligations and donates all profit to various stakeholders won’t generate jobs, puts existing jobs at risk and won't develop/improve existing products and services. Charity isn't costless and extremes in either position are harmful. This uncertainty suggests that laws creating more positive obligations aren’t necessarily in society’s long term benefit.

– A recent example of a voluntary choice to become more socially responsible is the decision by US firm Whole Foods to embrace renewable energy. See here.

Natural food grocer Whole Foods Market Inc. said it will rely on wind energy for all of its electricity needs, making it the largest corporate user of renewable energy in the United States..The decision follows the publicly traded company's mission of environmental stewardship without losing sight of the bottom line, Whole Foods regional president Michael Besancon said Tuesday.

The firm is known for its commitment to stakeholders and has yet to suffer as a result. See this report on its stock performance. See here

The ability of Whole Foods to essentially establish a high-end niche market in the humdrum grocery business — where innovative ideas tend to be rare — has earned comparisons with coffee titan Starbucks. So have heady growth plans of Whole Foods — it aims for $12 billion in sales in 2010, up more than 150 percent from last year.

If efforts to be take care of stakeholders are well publicised, negative financial effects may be lessened somewhat.


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