Kenyan economist: Aid is killing Africa....

The German magazine Der Spiegel published an interview with James Shikwati, a Kenyan economist, who argues that Africa would be **much** better off if foreign governments immediately stopped providing "development assistance." Shikwati correctly notes that this aid depresses local entrepreneurship by making African goods, including agricultural products, artificially uncompetitive. Only a small clique of bureaucrats and politicians benefit from "aid" and most Africans would not notice if it immediately ceased.

A similar dynamic is at play with the US when mercantilist economies such as Denmark, Israel or South Korea, "lend" the US money at ultra-low interest rates by buying up US treasury debt. The result is US goods are artificially made uncompetitive and the US economy suffers. Americans enjoy the "benefit" of purchasing artificially cheap Samsung flat screen televisions, but in the absence of South Korean loans the US would produce its own televisions, unemployment would fall, and some of the moribund post-industrial regions would come back to life. As with Sub Saharan Africa, a small number of elites benefit from these capital inflows, but to quote Nancy Reagan, the country would be much better off if American policymakers just said no.

Here's the interview with Dr. Shikwati.

Reference:

Der Spiegel. July 4, 2005. "For God's sakes, Please stop the aid!" Interview with James Shikwati.
http://www.spiegel.de/international/spiegel/spiegel-interview-with-african-economics-expert-for-god-s-sake-please-stop-the-aid-a-363663.html

That sinking feeling....

In April of 1912, the world's "unsinkable" ship, the most luxurious ocean liner to sail the seas, crashed into an iceberg and more than 4,000 lives were lost. The United States, for all of its rich and glorious past, is unfortunately doomed. The only people with access to life boats, ironically, are the very people who caused the ship to sink in the first place.......

The US as hapless island of Free Trade

How far from the global mainstream is the United States in terms of trade policy? Very far indeed. Although US media sometimes portray mercantilist economies in East Asia and elsewhere as "liberal" or "free trade" often by juxtaposing current policy against autarkic policies from two or three generations ago, it is the United States that stands almost alone as a major economy that imposes only nominal tariffs on imported goods.

 Haiti: The Second Most Open Economy in the Western Hemisphere

The reality that the US is an island of free trade in a global sea of mercantilism is apparent when one examines the data on average industrial and agricultural tariffs produced by the World Trade Organization (WTO). Below I've listed average tariffs for one hundred thirty six WTO member states (all of the independent nation states for which data are available). As you can see, the United States is tied with the former Soviet Republic of Georgia as the sixth most open economy in the world, and is the most liberal economy in the Western Hemisphere, beating out Haiti by a hair.





The EU ranks 44th most open; Japan ranks 68th; China ranks 74th and India is 125th most open. It should be noted that some seemingly free trade economies, such as Singapore and Mauritius, in fact heavily intervene in global currency markets to maintain undervalued currencies. This acts as a defacto import tariff and export subsidy. The US in contrast, has a severely overvalued currency, which acts as a subsidy to imports and a tax on US exports. Pioneering work on currency manipulation by the economists Joseph Gagnon and Harvard's Dani Rodrik will be discussed in a future post.(Gagnon and collaborator C. Fred Bergsten on December 25th 2012 posted a plan for reducing the extreme overvaluation of the dollar. Check it out here.The eight most extreme currency manipulators Bergsten and Gagnon identify are: "China, Denmark, Hong Kong, Korea, Malaysia, Singapore, Switzerland, and Taiwan". "Extreme" is their term of choice and not my editorializing.)

Rank	Country	Average Tariffs
1	Singapore	0.1
2	Mauritius	1.2
3	Brunei	1.5
4	New Zealand	1.8
5	Australia	2.55
6	Georgia	4
7	USA	4
8	Haiti	4.1
9	Armenia	4.5
10	Kuwait	4.95
11	Mongolia	5.05
12	Saudi Arabia	5.3
13	Afghanistan	5.65
14	UAE	5.75
15	Peru	5.8
16	Kyrygz Republic	5.95
17	Chile	6
18	Albania	6.2
19	Qatar	6.3
20	Bahrain	6.6
21	Ukraine	6.75
22	Palau	6.85
23	Myanmar	6.9
24	Canada	7.1
25	Moldova	7.2
26	Croatia	7.35
27	Guatemala	7.4
28	Montenegro	7.45
29	Indonesia	7.5
30	Honduras	7.65
31	Philippines	7.8
32	Nicaragua	7.9
33	Costa Rica	8.1
34	South Africa	8.2
35	Botswana	8.25
36	Lesotho	8.25
37	Namibia	8.25
38	Swaziland	8.25
39	Bosnia	8.35
40	Oman	8.45
41	Kazakhstan	8.55
42	Yemen	8.55
43	El Salvador	8.6
44	EU	8.75
45	Comoros	8.9
46	Papua New Guinea	8.9
47	Tajikistan	9.3
48	Antigua	9.5
49	Dominican Republic	9.5
50	Panama	9.8
51	Macedonia	9.9
52	Serbia	10.25
53	Paraguay	10.3
54	Uruguay	10.35
55	Malaysia	10.55
56	Taiwan	10.55
57	Israel	10.75
58	Cuba	10.8
59	Azerbaijan	10.85
60	St. Kitts	10.9
61	Bolivia	11.2
62	Cape Verde	11.2
63	Belarus	11.3
64	Russia	11.65
65	Argentina	11.65
66	Mozambique	11.65
67	Tonga	11.7
68	Japan	11.75
69	Burundi	11.8
70	Jamaica	11.9
71	Solomon Islands	11.9
72	Trinidad	12
73	Brazil	12.15
74	China	12.15
75	DR Congo	12.35
76	Nigeria	12.5
77	Guinea	12.85
78	Madagascar	12.95
79	Benin	13
80	Burkina Faso	13
81	Cote D'Ivoire	13
82	Guinea Bissau	13
83	Mali	13
84	Senegal	13
85	Togo	13
86	Grenada	13.05
87	Nepal	13.2
88	Nigeria	13.5
89	Venezuela	13.55
90	Jordan	13.8
91	Laos	13.85
92	Ecuador	14.25
93	Viet Nam	14.3
94	Colombia	14.3
95	Malawi	14.75
96	Ghana	14.85
97	Bermuda	15
98	Pakistan	15.25
99	Thailand	15.3
100	Iceland	15.45
101	Belize	15.5
102	Guyana	15.5
103	Uganda	15.65
104	Kenya	15.7
105	Tanzania	15.7
106	Cambodia	15.85
107	Bangladesh	15.95
108	Zambia	15.95
109	Mexico	16
110	Sri Lanka	17
111	Fiji	17.05
112	Rwanda	17.15
113	Uzbekistan	17.3
114	Syria	17.75
115	Djibouti	18.05
116	Gambia	18.15
117	Switzerland	19.4
118	Ethiopia	19.45
119	Gabon	19.45
120	Maldives	19.5
121	Central African Republic	19.55
122	Chad	19.55
123	Cameroon	19.7
124	Algeria	20.55
125	India	20.95
126	Vanuatu	21.6
127	Norway	21.85
128	Turkey	23.85
129	Sudan	25.2
130	Zimbabwe	25.45
131	Iran	27.25
132	Korea	27.6
133	Morocco	28.25
134	Tunisia	29.75
135	Bahamas	30.45
136	Egypt	39.95

USA as Third World

Over the last thirty or so years the US has gone from economic preeminence to being a middle-tier third world country that has a few economic bright spots, but also many basic deficiencies.  As someone who has traveled quite a bit in Europe and Asia it seems like a fair observation, but I have found some resistance among American friends to this idea -- although East Asian and European acquaintances generally agree with the view that the US is a middling third world country. This is an important (if frequently implicit) debate because understanding how far the US has fallen, while very painful for Americans, is a necessary first step if Americans are to generate the national consensus necessary for implementing needed economic reforms.

What evidence is there that the US has fallen from first world status? Among other deficiencies (the absurd health care and higher education systems come to mind), the US has virtually no system of high speed rail, an antiquated electrical grid that frequently fails in inclement weather, and highways that are universally unlit, an oddity not found in East Asia or Europe. Almost all roads, and even most interstate highways are potholed. The subway systems in the major cities, San Franciso, New York, Washington and Chicago look grungy and old fashioned. As embarrassing as US infrastructure is today, it will continue to deteriorate into the indefinite future, given that infrastructure funding has fallen to historically low levels: as a share of GDP investment in infrastructure is about a third what the US now spends on defense. China spends more than four times as much and Europe spends more than twice as much. Buildings in US cities mostly look dilapidated and there are large populations of homeless people (at least 650,000) and large numbers of people forced to live in run down shacks and trailer parks (1.4 million US families survive on $2 or less a day).This is an admittedly grim assessment, but it is one that is shared by many foreign and American observers, and was the focus of a front page article in the German magazine Der Spiegel in November 2012. As Der Spiegel's German writers observed in the wake of Hurricane Sandy:

"The power lines in Brooklyn and Queens, on Long Island and in New Jersey, in one of the world's largest metropolitan areas, are not underground, but are still installed along a fragile and confusing above-ground network supported by utility poles, the way they are in developing countries. (emphasis added)"

Comparing Subways: Shanghai versus New York

Shanghai Subway (Left) versus New York (Right) in 2012. Notice the marble, and bright lighting in Shanghai and the plexiglass which protects passengers. This difference is a matter of life and death. In New York City, passengers may be pushed (or throw themselves) to their death on the exposed subway tracks.

Because these are just general impressions, I decided to also look for harder statistical data to see if these impressions might be justified. In terms of high speed rail, the US accounts for a little over 2% of the world total and is far, far behind its aspirational rivals in Europe and East Asia, and (surprisingly) even lags behind countries not historically viewed as US economic peers:

Kilometers of High Speed Rail
China: 6,403 (+4,234 km under construction)
Japan: 2,664 (+424 km under construction)
France: 2,407  (+757 km under construction)
Germany: 1,334 (+428 km under construction)
Saudi Arabia: 550 (under construction)
Turkey: 447 (+300 km. under construction)
Morocco: 200 (under construction)
USA: 362 (+0 km. under construction)

Source: International Union of Railways

In terms of per capita industrial production, the US also appears to be a middle-tier developing country. Though the US is vastly more industrialized than the world's poorest countries (Haiti, Guatemala, Burkina Faso) there is also an extraordinary gap between the US and the world's industrial leaders. As the graphs included in this post show, in terms of per person auto, and especially, steel, production, the advanced countries of East Asia (Japan, South Korea, Taiwan, China) and central Europe (Germany), are in a league of their own.


The US noses ahead of desperately poor developing countries such as Indonesia and India, but lags far behind upper-tier developing world countries like Iran and Mexico. Russians can take special satisfaction in besting the US in both categories by a considerable amount, even though many Americans continue to demonstrate undisguised condescension towards Russia.

An honest assessment of how far the US has fallen is a necessary (if painful) prerequisite to recognizing that US economic policies have largely failed. We should remember that the worst business failures are executives who take world champion companies and destroy them. The same can be said for economic ideologies. US economic policy can thus be viewed as a more dramatic failure than the policies pursued by countries that were poor on independence and have remained poor (most of Sub-Saharan Africa and many parts of Asia and Central America). Whatever the US has been doing over the last generation (and opinions on how to characterize US policy differ) we can agree that the policies of the last thirty or so years have transformed the US from the world's undisputed economic leader into a middling third world country.

A 180-degree course correction is needed. The sooner the better.

Not the United States.

Sources:

International Organization of Motor Vehicle Manufacturers
International Union of Railways
World Bank Development Indicators
World Steel Association

American Society of Civil Engineers. 2012. Report Card for America's Infrastructure. 
http://www.infrastructurereportcard.org/ 

Clyde Prestowitz. May 24, 2011. "First to Third World in One Lifetime." Foreign Policy  http://prestowitz.foreignpolicy.com/posts/2011/05/24/first_to_third_world_in_one_lifetime

Der Spiegel. November 5, 2012. "Divided States of America: Notes on the Decline of a Great Nation." http://www.spiegel.de/international/world/divided-states-of-america-notes-on-the-decline-of-a-great-nation-a-865295.html

Gabriel Thompson. December 13, 2012. "Could you survive on $2 a day?" Mother Jones.
http://www.motherjones.com/politics/2012/12/extreme-poverty-unemployment-recession-economy-fresno