Tag Archives: Trade

How a small, poor country became the top economy in Latin America

South America Map
South America Map

One way to learn about whether specific economic policies work or not is to look at different countries that have tried them. Believe it or not, patterns do emerge about what works and what doesn’t work, as you look across different times and places. I’ve been reading a book called “Money, Greed and God” with my friend Carla, which talks about what has worked to reduce poverty.

The author basically outlined two approaches. In the first approach, the government 1) confiscates the wealth of the most productive workers, 2) nationalizes (takes control of) the businesses of the most successful entrepreneurs, 3) restricts trading between citizens and with other countries, with minimum wage, price controls and tariffs. In the second approach, the government does the opposite: 1) lowers taxes on the most productive workers, and 2) lets entrepreneurs compete to provide goods and services to consumers, and 3) lowers restrictions on internal trading and trading with other countries, e.g. – eliminating minimum wage, tariffs and price controls.

Let’s take a look at two Latin American countries that went in opposite directions. Venezuela and Chile. Then we can finally find out which policies actually achieve results for the people.

Here is how Chile started out in 1973.

PROBLEM: Price controls and tariffs:

Prices for the majority of basic goods were fixed by the government in 1973. Even though Chile was and still is a small economy, the level of protection­ism was high. By the end of 1973, the nominal average tariff for imports was 105 percent, with a maximum of 750 percent. Non-tariff barriers also impeded the import of more than 3,000 out of 5,125 registered goods. Just as economic theory predicts, large queues in front of stores were usual in Santiago and other cities in Chile as a result of the scarcity caused by price controls.

PROBLEM: Government taking over private businesses:

The decline in GDP during 1973 reflected a shrinking productive sector in which the main assets were gradually falling under government control or ownership through expropriations and other government interventions in the economy.

PROBLEM: Deficit spending and government printing money:

The fiscal situation was chaotic. The deficit reached 55 percent of expenditures and 20 percent of GDP and was the main cause of inflation because the Central Bank was issuing money to finance the government deficit.

SOLUTION: lower or eliminate restrictions on trade:

The most important economic reform in Chile was to open trade, primarily through a flat, low tar­iff on imports. Much of the credit for Chilean eco­nomic reforms in the following 30 years should be given to the decision to open our economy to the rest of the world. The strength of Chilean firms, productive sectors, and institutions grew up thanks to that fundamental change.

SOLUTION: let competing entrepreneurs in the private sector provide goods and services to consumers:

A second fundamental reform was to allow the private sector to recover, adding dynamism to the economy. In fact, important sectors such as elec­tricity generation and distribution and telecommu­nications were still managed by state companies. After we implemented a massive privatization plan that included more than 50,000 new direct share­holders and several million indirect (through pen­sion funds) shareholders, these companies were managed by private entrepreneurs that carried out important expansion plans.

SOLUTION: let people take responsibility for their own lives instead of depending on government:

The 1981 reform of the Chilean pension fund system deserves special mention. Under the leader­ship of Minister José Piñera, an individual capitali­zation account program was designed with specific contributions, administered by private institutions selected by the workers. The Chilean Administra­doras de Fondos de Pension (Pension Fund Administrators or AFP) has been replicated in more than 20 countries, and more than 100 million workers in different parts of the world use these accounts to save for retirement.

SOLUTION: allow parents to choose the school that fits their needs from competing education providers, and push school administration down from the federal government to the municipal level, where it would be more responsive to voter’s needs:

In 1981, Chile introduced a universal educational voucher system for students in both its elementary and secondary schools. At the same time, the central government transferred the administration of public schools to municipal governments…  The financial value of the voucher did not depend on family income.

RESULTS: And I was able to find a nice short, description of how all that worked out for them on the far-left Wikipedia, of all places:

The economy of Chile is a high-income economy as ranked by the World Bank, and is considered one of South America’s most stable and prosperous nations, leading Latin American nations in competitiveness, income per capita, globalization, economic freedom, and low perception of corruption.

In 2006, Chile became the country with the highest nominal GDP per capita in Latin America. In May 2010 Chile became the first South American country to join the OECD. Tax revenues, all together 20.2% of GDP in 2013, were the second lowest among the 34 OECD countries, and the lowest in 2010. In 2017, only 0.7% of the population lived on less than US$1.90 a day.

According to the Heritage Foundation, Chile is ranked as the 18th freest economy in the world. The World Bank ranked Chile as the 50th highest GDP per capita for 2018, just below Hungary and above Poland.

Now, you can contrast those results with Venezuela. I have been blogging about Venezuela for years on this blog, and documenting how they raised taxes, banned guns, nationalized private sector companies, raised tariffs, and increased regulations. They are now ranked JUST ABOVE NORTH KOREA for economic freedom – #179 out of 180 countries measured. Basically, they did the opposite of everything that Chile did – transferring power away from parents, workers, business owners, churches and municipal governments to the powerful centralized federal government.

Wikipedia explains how Hugo Chavez took over in 1999 and enacted a communist revolution.

More:

Since the Bolivarian Revolution half-dismantled its PDVSA oil giant corporation in 2002 by firing most of its 20,000-strong dissident professional human capital and imposed stringent currency controls in 2003 in an attempt to prevent capital flight, there has been a steady decline in oil production and exports. Further yet, price controls, expropriation of numerous farmlands and various industries, among other government authoritarian policies… have resulted in severe shortages in Venezuela and steep price rises of all common goods, including food, water, household products, spare parts, tools and medical supplies; forcing many manufacturers to either cut production or close down, with many ultimately abandoning the country as has been the case with several technological firms and most automobile makers.

They confiscated private property, took over private sector businesses, implemented tariffs and price controls, redistributed wealth via massive welfare programs, and pushed all decision-making out of families and municipal governments up to the federal government. By depriving the producers of their earnings, the country caused massive shortages of goods and services, to the point where people are fleeing the country, consuming zoo animals, and selling their bodies as prostitutes in order to get food and water.

Application

In the next election, we are not picking a tribe because of how they make us feel about ourselves. We are not choosing in order to see ourselves as “nice” and “not nice”. We need to look at specific policies being proposed, and see what works and what doesn’t work. The examples of Chile (rags-to-riches) and Venezuela (riches-to-rags) are helpful for voters who want to get RESULTS instead of FEELINGS.

I’ll leave you with a list of links from previous posts so you can see how communism worked out for Venezuela.

Related posts

How a small third world country became the top economy in Latin America

South America Map
South America Map

So, I’ve been watching the Democrat debates, and I’ve noticed that all of their candidates are proposing economic policies that they say will improve the lives of Americans. But have the candidates ever been able to try out these policies, and proven that they work? One way to evaluate policies is to look at other countries that have tried them, to see if those policies are proven to work.

I’ve been reading a book called “Money, Greed and God” with my friend Carla, which talks about what does and does not work to alleviate poverty. The author basically outlined two approaches. In the first approach, the government 1) confiscates the wealth of the most productive workers, 2) nationalizes (takes control of) the businesses of the most successful entrepreneurs, 3) restricts trading between citizens and with other countries, with minimum wage, price controls and tariffs. In the second approach, the government does the opposite: 1) lowers taxes on the most productive workers, and 2) lets entrepreneurs compete to provide goods and services to consumers, and 3) lowers restrictions on internal trading and trading with other countries, e.g. – eliminating minimum wage, tariffs and price controls.

Let’s take a look at two Latin American countries that went in opposite directions. Venezuela and Chile. Then we can finally find out which policies actually achieve results for the people.

Here is how Chile started out in 1973.

PROBLEM: Price controls and tariffs:

Prices for the majority of basic goods were fixed by the government in 1973. Even though Chile was and still is a small economy, the level of protection­ism was high. By the end of 1973, the nominal average tariff for imports was 105 percent, with a maximum of 750 percent. Non-tariff barriers also impeded the import of more than 3,000 out of 5,125 registered goods. Just as economic theory predicts, large queues in front of stores were usual in Santiago and other cities in Chile as a result of the scarcity caused by price controls.

PROBLEM: Government taking over private businesses:

The decline in GDP during 1973 reflected a shrinking productive sector in which the main assets were gradually falling under government control or ownership through expropriations and other government interventions in the economy.

PROBLEM: Deficit spending and government printing money:

The fiscal situation was chaotic. The deficit reached 55 percent of expenditures and 20 percent of GDP and was the main cause of inflation because the Central Bank was issuing money to finance the government deficit.

SOLUTION: lower or eliminate restrictions on trade:

The most important economic reform in Chile was to open trade, primarily through a flat, low tar­iff on imports. Much of the credit for Chilean eco­nomic reforms in the following 30 years should be given to the decision to open our economy to the rest of the world. The strength of Chilean firms, productive sectors, and institutions grew up thanks to that fundamental change.

SOLUTION: let competing entrepreneurs in the private sector provide goods and services to consumers:

A second fundamental reform was to allow the private sector to recover, adding dynamism to the economy. In fact, important sectors such as elec­tricity generation and distribution and telecommu­nications were still managed by state companies. After we implemented a massive privatization plan that included more than 50,000 new direct share­holders and several million indirect (through pen­sion funds) shareholders, these companies were managed by private entrepreneurs that carried out important expansion plans.

SOLUTION: let people take responsibility for their own lives instead of depending on government:

The 1981 reform of the Chilean pension fund system deserves special mention. Under the leader­ship of Minister José Piñera, an individual capitali­zation account program was designed with specific contributions, administered by private institutions selected by the workers. The Chilean Administra­doras de Fondos de Pension (Pension Fund Administrators or AFP) has been replicated in more than 20 countries, and more than 100 million workers in different parts of the world use these accounts to save for retirement.

SOLUTION: allow parents to choose the school that fits their needs from competing education providers, and push school administration down from the federal government to the municipal level, where it would be more responsive to voter’s needs:

In 1981, Chile introduced a universal educational voucher system for students in both its elementary and secondary schools. At the same time, the central government transferred the administration of public schools to municipal governments…  The financial value of the voucher did not depend on family income.

RESULTS: And I was able to find a nice short, description of how all that worked out for them on the far-left Wikipedia, of all places:

The economy of Chile is a high-income economy as ranked by the World Bank, and is considered one of South America’s most stable and prosperous nations, leading Latin American nations in competitiveness, income per capita, globalization, economic freedom, and low perception of corruption.

In 2006, Chile became the country with the highest nominal GDP per capita in Latin America. In May 2010 Chile became the first South American country to join the OECD. Tax revenues, all together 20.2% of GDP in 2013, were the second lowest among the 34 OECD countries, and the lowest in 2010. In 2017, only 0.7% of the population lived on less than US$1.90 a day.

According to the Heritage Foundation, Chile is ranked as the 18th freest economy in the world. The World Bank ranked Chile as the 50th highest GDP per capita for 2018, just below Hungary and above Poland.

Now, you can contrast those results with Venezuela. I have been blogging about Venezuela for years on this blog, and documenting how they raised taxes, banned guns, nationalized private sector companies, raised tariffs, and increased regulations. They are now ranked JUST ABOVE NORTH KOREA for economic freedom – #179 out of 180 countries measured. Basically, they did the opposite of everything that Chile did – transferring power away from parents, workers, business owners, churches and municipal governments to the powerful centralized federal government.

Wikipedia explains how Hugo Chavez took over in 1999 and enacted a communist revolution.

More:

Since the Bolivarian Revolution half-dismantled its PDVSA oil giant corporation in 2002 by firing most of its 20,000-strong dissident professional human capital and imposed stringent currency controls in 2003 in an attempt to prevent capital flight, there has been a steady decline in oil production and exports. Further yet, price controls, expropriation of numerous farmlands and various industries, among other government authoritarian policies… have resulted in severe shortages in Venezuela and steep price rises of all common goods, including food, water, household products, spare parts, tools and medical supplies; forcing many manufacturers to either cut production or close down, with many ultimately abandoning the country as has been the case with several technological firms and most automobile makers.

They confiscated private property, took over private sector businesses, implemented tariffs and price controls, redistributed wealth via massive welfare programs, and pushed all decision-making out of families and municipal governments up to the federal government. By depriving the producers of their earnings, the country caused massive shortages of goods and services, to the point where people are fleeing the country, consuming zoo animals, and selling their bodies as prostitutes in order to get food and water.

Application

In the next election, we are not picking a tribe because of how they make us feel about ourselves. We are not choosing in order to see ourselves as “nice” and “not nice”. We need to look at specific policies being proposed, and see what works and what doesn’t work. The examples of Chile (rags-to-riches) and Venezuela (riches-to-rags) are helpful for voters who want to get RESULTS instead of FEELINGS.

I’ll leave you with a list of links from previous posts so you can see how communism worked out for Venezuela.

Related posts

 

Dr. Jennifer Roback Morse lectures on basic economics

Dr. Jennifer Roback Morse
Dr. Jennifer Roback Morse

Here is a podcast on basic economics from Dr. Jennifer Roback Morse.

About the speaker:

Dr. Morse is the founder of the Ruth Institute, a global non-profit organization focused on keeping the family together, protecting the rights of children and helping the millions of people who have been harmed by family breakdown.

She has authored or co-authored four books and spoken around the globe on marriage, family and human sexuality. Her work has been translated into Spanish, Chinese, Korean and Polish. Her newest book is The Sexual Revolution and Its Victims.

She earned her Ph.D. at the University of Rochester and taught economics at Yale and George Mason Universities.

A bit more about her economics credentials: Dr. Morse served as a Research Fellow for Stanford University’s Hoover Institution from 1997-2005. She received her Ph.D. in economics from the University of Rochester in 1980 and spent a postdoctoral year at the University of Chicago during 1979-80. She taught economics at Yale University and George Mason University for 15 years.

The MP3 file is here. (49 minutes)

Topics:

  • The study of economics is anti-postmodern – there is objective truth independent of what people think
  • The study of economics believes in fixed principles of human nature
  • Economics studies the allocation of scarce resources that have alternative uses
  • Economics studies how people exchange resources
  • How both people who engage in a voluntary trade always believe that they will be better off
  • How both people who engage in a voluntary trade both benefit from the exchange
  • How incentives motivate people to act
  • Understanding supply and demand
  • Understanding how “free” government services are rationed
  • Understanding opportunity costs
  • How prices signal producers to produce more or less, and consumers to buy or not buy
  • Market-driven prices versus price controls
  • The role of substitution
  • The necessity of allowing failure in a free market

The requirements of economic growth:

  • private property
  • contracts
  • the profit motive
  • competition
  • free trade
  • entrepreneurship, creativity and innovation
  • the rule of law

If you want to learn more about basic economics, I recommend picking up a book or two by Thomas Sowell – the first book I usually give away is “Intellectuals and Society”, and then next “Basic Economics”. A shorter introduction is “The Politically Incorrect Guide to Capitalism” by Robert Murphy. You can find a good list of books on the website of The Institute for Faith, Work and Economics.

I think it’s important for Christians to understand basic economics, because so much of the impact we have depends not only on our personal finances, but on our ability to promote economics policies that will affect our personal finances. For example, whether you have a job or not depends on economic policy. Whether you can get food and other required resources depends on economic policy. Often, big-government regimes with poor economic policies (e.g. – North Korea) will make it impossible for you to have other liberties, like religious freedom.

Just think about how hard it would be for you to pursue a Christian life plan in a place like Venezuela, where your priorities would not be apologetics, but just finding food and avoiding death and theft at the hands of criminals. Closer to home, we are now seeing Seattle restaurant workers having their hours cut and even losing their jobs – because they decided to raise the minimum wage rate (bad economics).

Excerpt:

This latest study from the UW team looks at the effects of both the first and second jumps. The second jump, in January 2016, raised the minimum wage to $10.50 to $13. (The minimum wage has since gone up again, to the current $11 to $15. It goes up again in January to $11.50 to $15.)

The team concluded that the second jump had a far greater impact, boosting pay in low-wage jobs by about 3 percent since 2014 but also resulting in a 9 percent reduction in hours worked in such jobs. That resulted in a 6 percent drop in what employers collectively pay — and what workers earn — for those low-wage jobs.

For an average low-wage worker in Seattle, that translates into a loss of about $125 per month per job.

“If you’re a low-skilled worker with one of those jobs, $125 a month is a sizable amount of money,” said Mark Long, a UW public-policy professor and one of the authors of the report. “It can be the difference between being able to pay your rent and not being able to pay your rent.”

The report also estimated that there are about 5,000 fewer low-wage jobs in the city than there would have been without the law.

As I blogged previously, 93% of economists agree that raising the minimum wage hurts job seekers. It actually hurts young and/or minority job seekers the most, because they are the ones looking for entry-level jobs. That is why in countries that have embraced bad economic policies, the unemployment rates for young people are at or above 50%.

Youth unemployment in socialist countries
Youth unemployment in socialist countries

Look at what the far-left UK Guardian says:

In Greece, 59.2% of under-25s are out of work. In Spain, youth unemployment stands at 56.5%; in Italy, it hovers around 40%.

[…]In the words of Enrico Giovannini, Italy’s employment minister, this is a disaster all the more shocking because it is hitting Europe’s best-educated generation: in Spain, nearly 40% of people in their 20s and early 30s have degrees; in Greece it’s 30%; in Italy, more than 20%.

Having an education isn’t what gets you a job. What gets you a job are the economic policies that make it viable for an entrepreneur to risk their capital in the hope of being able to keep more of what they earn – instead of paying it to the government so that bureaucrats can spend it on social programs.

Imagine it was you who lost your job or couldn’t find work due to bad economic policy. Think of how that would affect your ability to even drive to church on Sundays, or purchase a Bible, much less being able to organize an apologetics event at the university and pay for a speaker to fly in and stay in a hotel. Economics is important for Christians to understand, because so much of our influence and effectiveness depends on it.

Donald Trump’s plan to introduce tariffs is just a tax on consumer goods

I have a key that will unlock a puzzling mystery
I have a key that will unlock a puzzling mystery

What are the consequences of adopting tariffs for all of the people who are affected? What happens next, after stage one?

Here’s a lesson in basic economics from Joe Carter, writing for the Acton Institute.

He writes:

Both Sanders and Trump propose increasing tariffs on goods imported from other countries — and increase them significantly.* This isn’t that surprising for Sanders, a socialist who, on the issue of economics, is one of the most ill-informed candidates in modern history. But Trump should (and probably does) understand the detrimental impact tariffs have on the poor. And yet he has proposed an economy-crippling, poverty-increasing tariff.

In 2012, Trump proposed a tariff on China of 25 percent. In 2016 he bumped it up to 45 percent. (He later tried to lie and say he never proposed the 45 percent increase, but there is audio of him making the proposal.) A tariff is simply a tax on imports or exports, so Trump is proposing to raise taxes on imported goods by 25 to 45 percent. (To keep this point in mind, I’ll hereafter refer to tariffs as “taxes.”)

You might be thinking, “ So what? That’s a tax the Chinese have to pay.” But that’s not the way tariffs works. China doesn’t pay the tax — you do. If a tariff on Chinese goods is increased by 25 to 45 percent then you pay 25 to 45 percent more for those goods.

Here’s a way to think about it. Imagine there are two hamburger stands in town. One is owned by the mayor’s wife, Veronica, and one is owned by a woman who lives in the next town over, Betty.

Of the two, Betty makes the tastier burger. She is also able to charge $1 a burger since she is able to buy her supplies in her own hometown for much cheaper. Veronica’s burgers aren’t quite as good and cost more to make. She has to charge $1.30 per burger.

The mayor decides to implement a new tax of 45 percent on producers (like Betty) who don’t live in the city limits. Since Betty’s profit margin is already low, she has to pass the bulk of the 45-cent tax on to her customers. Instead of $1 she now has to charge $1.35.

So who is better off in this scenario? The only winner is Veronica. Since her burgers are now cheaper, she is likely to sell more. And who is worse off? The customers who now have to pay 30 to 35 cents more for every burger. That is money they could have used to buy other products or services. Now they have to spend additional money on this new tax.

The same principle applies to taxes on goods and services imported from other countries. Customers simply have to pay more for goods and services they used to get much cheaper.

To understand how Trump’s tax increase would affect consumers, take a trip to Target or Wal-Mart and add 45 percent to almost all the prices. That’s money that comes directly out of your pocket into the hands of the federal government — all to punish you for buying goods that are cheaper to make in China.

Harvard University economist Greg Mankiw explains what most professional economists agree on. The economic benefit of free trade tied for first place, with 93% agreement:

The recent debate over the stimulus bill has lead some observers to think that economists are hopelessly divided on issues of public policy. That is true regarding business cycle theory and, specifically, the virtues or defects of Keynesian economics. But it is not true more broadly.

My favorite textbook covers business cycle theory toward the end of the book (the last four chapters) precisely because that theory is controversial. I believe it is better to introduce students to economics with topics about which there is more of a professional consensus. In chapter two of the book, I include a table of propositions to which most economists subscribe, based on various polls of the profession. Here is the list, together with the percentage of economists who agree:

  1. A ceiling on rents reduces the quantity and quality of housing available. (93%)

  2. Tariffs and import quotas usually reduce general economic welfare. (93%)

He is the author of his “favorite textbook”, which is published by Harvard University Press.

This is not controversial among professional and academic economists. Economists across the ideological spectrum understand that free trade lowers the prices of consumer goods, and allows individuals, families and businesses to get more quality for their dollars. We can do better than Donald Trump and his naive, populist economic pablum.

Related posts

Dr. Jennifer Roback Morse lectures on basic economics

Dr. Jennifer Roback Morse
Dr. Jennifer Roback Morse

Here is a podcast on basic economics from Dr. Jennifer Roback Morse.

About the speaker:

Jennifer Roback Morse, Ph.D. is the founder and President of the Ruth Institute — a project of the National Organization for Marriage — which seeks to promote life-long married love to college students by creating an intellectual and social climate favorable to marriage.

She is also the Senior Research Fellow in Economics at the Acton Institute for the Study of Religion and Liberty.

She is the author of Smart Sex: Finding Life-long Love in a Hook-up World, (2005) and Love and Economics: Why the Laissez-Faire Family Doesn’t Work (2001), recently reissued in paperback, as Love and Economics: It Takes a Family to Raise a Village.

Dr. Morse served as a Research Fellow for Stanford University’s Hoover Institution from 1997-2005. She received her Ph.D. in economics from the University of Rochester in 1980 and spent a postdoctoral year at the University of Chicago during 1979-80. She taught economics at Yale University and George Mason University for 15 years.

The MP3 file is here.

Topics:

  • The study of economics is anti-postmodern – there is objective truth independent of what people think
  • The study of economics believes in fixed principles of human nature
  • Economics studies the allocation of scarce resources that have alternative uses
  • Economics studies how people exchange resources
  • How both people who engage in a voluntary trade always believe that they will be better off
  • How both people who engage in a voluntary trade both benefit from the exchange
  • How incentives motivate people to act
  • Understanding supply and demand
  • Understanding how “free” government services are rationed
  • Understanding opportunity costs
  • How prices signal producers to produce more or less, and consumers to buy or not buy
  • Market-driven prices versus price controls
  • The role of substitution
  • The necessity of allowing failure in a free market

The requirements of economic growth:

  • private property
  • contracts
  • the profit motive
  • competition
  • free trade
  • entrepreneurship, creativity and innovation
  • the rule of law

If you want to learn more about basic economics, I recommend picking up a book or two by Thomas Sowell – the first book I usually give away is “Intellectuals and Society”, and then next “Basic Economics”.