Showing posts with label political theory. Show all posts
Showing posts with label political theory. Show all posts

Wednesday, August 13, 2014

More War for Oil? President Obama dispatches troops to Iraq—and has to listen to the old canards all over again

More War for Oil? By Holman W. Jenkins, Jr.
President Obama dispatches troops to Iraq—and has to listen to the old canards all over again.Wall Street Journal, Aug 12, 2014 7:00 p.m. ET
http://online.wsj.com/articles/holman-jenkins-more-war-for-oil-1407884431

The "no blood for oil" crowd has piped up with surprising speed and noisiness in the short hours since President Obama recommitted U.S. forces to the fight in Iraq.

Steve Coll, a writer for the New Yorker, suggests in a piece posted on the magazine's website that "Kurdish oil greed," whose partner Mr. Obama now becomes, has been a primary factor in making Iraq a failed state. That's apparently because of the Kurds' unwillingness to reach a revenue-sharing deal with Baghdad. For good measure, he refers readers to a Rachel Maddow video, featuring Steve Coll, that argues that the U.S. invaded Iraq to gets its oil in the first place.

John B. Judis, a veteran editor of the New Republic, in contrast is relatively sane under the headline "The U.S. Airstrikes in Northern Iraq Are All About Oil." While nodding toward Mr. Obama's stated humanitarian justifications, he insists oil "lies near the center of American motives for intervention."
There are a few problems with this argument. Oil exists in the hinterland of Erbil, all right, the capital of a stable, prosperous and relatively free Kurdistan that President Obama now is trying to protect from the Islamic murderers of ISIS.

But oil also exists in northwestern Iraq—in fact, vast amounts of oil around Mosul, whose fall did not trigger Obama intervention. Oil is in Libya, where the U.S. quickly took a hike after the fall of Gadhafi. Oil is in Canada, where Mr. Obama, who just fatally risked his legacy with his core admirers by dispatching forces to the Mideast, can't bring himself to choose between his labor and greenie constituents by deciding to approve or veto the Keystone pipeline.

Oil apparently explains nothing except when it explains everything.
Another problem is that Americans are both consumers and producers of oil. So does the U.S. want high or low prices? A bigger producer in recent years, America presumably has seen its interest shifting steadily in the direction of higher prices. Yet acting to protect Kurdish production would have the opposite effect.

But then Mr. Coll especially is ritualizing, not thinking—and what he's ritualizing is a certain leftist hymn about the origins of the 2003 Iraq war. Never mind that if the U.S. had wanted Iraq's oil, it would have been vastly cheaper to buy it— Saddam was certainly eager to sell. Never mind that the Bush administration, after overthrowing Saddam, stood idly by while Baghdad awarded the biggest contracts to India, China and Angola.

It was not a Bushie but Madeleine Albright, in her maiden speech as Bill Clinton's secretary of state, who first laid out the case for regime change in Iraq.

In the same 1997 speech, she explained, "Last August, Iraqi forces took advantage of intra-Kurdish tensions and attacked the city of Irbil, in northern Iraq. President Clinton responded by expanding the no-fly zone to the southern suburbs of Baghdad. . . . Contrary to some expectations, the attack on Irbil has not restored Saddam Hussein's authority in the north. We are firmly engaged alongside Turkey and the United Kingdom in helping the inhabitants of the region find stability and work towards a unified and pluralistic Iraq."

Madame Secretary did not mention oil any more than President Obama did last week. Of course, the catechism holds that, when politicians aren't freely voicing their obsession with oil as Bush and Cheney supposedly did while cooking up the Iraq War, politicians are concealing their obsession with oil. In fact, oil was not yet produced in significant quantities in Erbil at the time. It was the peace and stability that Presidents Bush, Clinton and Bush provided, and that President Obama is trying to restore, that allowed the flowering of Iraqi Kurdistan, including its oil industry.

By now, America has invested 23 years in shielding northern Iraq from the suppurating chaos that seems to flow endlessly from Baghdad and its Sunni-dominated Western suburbs. It's one of our few conspicuous successes in Iraq. Politics, in the best and worst senses of the word, drives every political decision. Despite his palpable lack of enthusiasm, President Obama knows surrender in northern Iraq would be an intolerable disgrace for his administration and U.S. policy. So he sends in the troops.

We come to an irony. The liberal habit of assuming everyone else's motives are corrupt is, of course, an oldie-moldie, if a tad free-floating in this case. But the critics in question don't actually oppose Mr. Obama's intervention, the latest in our costly and thankless efforts in Iraq. They don't exactly endorse it either. The New Yorker's Mr. Coll especially seems out to avoid committing himself while striking a knowing, superior tone about the alleged centrality of oil, which is perhaps the most ignoble reason to pick up a pen on this subject right now.

Sunday, July 7, 2013

Lord Morris of Borth-y-Gest Memorial Lecture. By Michael Howard, MP. July 6, 2006

Lord Morris of Borth-y-Gest Memorial Lecture. By Michael Howard, MP
http://web.archive.org/web/20070505062753/http://www.michaelhowardmp.com/speeches/lampeter060706.htm
July 6, 2006


It is a great privilege to have been invited to give this lecture.

Lord Morris of Borth-y-Gest – or John Willie as I recall him being almost universally referred to – was one of the giants of the law when I studied it at Cambridge and during the years when I was making my way as a Junior Member of the Bar.

Superficially we had quite a few things in common. We were, of course, both Welsh. We were both members of the Inner Temple. We had both been Presidents of the Cambridge Union. And we both, and this may be particularly encouraging to some, took second-class degrees in law.

But there, I fear, the similarities come to an end. I could not hope, even to begin to match the distinction of John Willie’s attainments at the Bar, on the Bench and as one of our great appeal judges. Nor, let’s be frank about this, could I aspire to his hallmarks of gentleness, patience and universal popularity.

He was a legend in the land. And not just, of course, for what he achieved in his legal career. At the outbreak of war in 1914, at the age of 17 he joined the Royal Welsh Fusiliers, saw service in France, reached the rank of Captain and was awarded the Military Cross. And it is said that, after being appointed a Law Lord in 1960 he walked down Whitehall to the House of Lords every day, lifting his hat as he passed the cenotaph.

Sadly I never had the honour of appearing before him. But I did meet him. When I was an undergraduate at Cambridge he came to see us to encourage us to go to the Bar.

I cannot pretend that this was a decisive influence on my own career because I had already made up my mind that that was what I wanted to do. So none of the blame for my subsequent career can be laid at John Willie’s door.

The Dictionary of National Biography, in describing his judicial characteristics, says that he was 'vigilant in protecting the freedom of the individual when threatened by the executive' and adds that 'he exhibited judicial valour consistently and in full measure.'

These statements are justified. But they must be interpreted in the spirit and context of their time. Thirty years ago judges were also conscious of the constraints which were imposed on their role.

Since then, that role has been greatly expanded, first as a consequence of the enlargement of judicial review, more recently as a result of the Human Rights Act. It is to that trend, its implications and its consequences that I intend to devote the rest of my remarks this evening.

Over thirty years ago, on a visit to Philadelphia, I fell into conversation with a woman who had recently been given a parking ticket. She had been incensed, so incensed that she decided to go to Court to challenge it.

When she appeared in Court she was rather surprised when the magistrate called all the defendants who were due to appear that day to the bar of the Court. He told them his name and asked them to remember it. Then he said, “All cases dismissed.”

The astonishment of my acquaintance at this development was tempered somewhat when she discovered that a few days later the regular election of magistrates in the city was due to take place. The magistrate before whom she had appeared, albeit rather briefly, was re-elected with the biggest majority in the history of the Philadelphia magistracy.

When I was told that story I reacted, I am sorry to say, with a rather superior disdain. “What can you expect” I asked, “if you elect magistrates and judges? We in Britain would never contemplate any such step.”

Thirty years on I am much less sure. The truth is that during that time the power of judges in this country was increased, is increasing and will increase further, if nothing is done to change things.

For the most part this increase in power has been at the expense of elected Governments and elected Parliaments. Our judges, of course, are unelected. They are unaccountable. They cannot be dismissed, save in the most extreme circumstances, and in practice never are.

Moreover they are appointed without regard to their political background and views are without any public scrutiny, parliamentary or otherwise. I believe that this has, in the past, been one of the great strengths of our judiciary. But as they move, increasingly, to the centre of the political stage how long can this state of affairs continue?

It would be wrong to suggest that this shift in power is entirely new or that it is entirely due to the coming into force of the Human Rights Act.

The Courts have traditionally had the power to curb the illegal, arbitrary or irrational exercise of power by the Executive. But, traditionally this power was exercised with restraint.

The Courts would be careful not to quash decisions because they disagreed on the merits with the decisions under challenge.

There is common consent that during the last 50 years this restraint has been eroded. As the previous Lord Chancellor, Lord Irvine put it, in his 1995 Address to the Administrative Law Bar Association:
“The range of circumstances in which decisions may be struck down has been extended beyond recognition.”

That address was essentially a plea for judicial restraint. Indeed in it the future Lord Chancellor referred to what he described as the “constitutional imperative of judicial self-restraint.”

He gave three reasons for it. First he referred to the constitutional imperative – the fact that Parliament gives powers to various authorities, including Ministers, for good reasons and in reliance on the level of knowledge and experience which such authorities possess. Secondly, he referred to the lack of judicial expertise which, he said, made the Courts ill-equipped to take decisions in place of the designated authority. Thirdly, and most pertinently, he referred to what he called the democratic imperative – the fact that elected public authorities derive their authority in part from their electoral mandate.

It is worth quoting his words in full: “The electoral system,” he said, “also operates as an important safeguard against the unreasonable exercise of public powers, since elected authorities have to submit themselves, and their decision-making records, to the verdict of the electorate at regular intervals.”

With respect to Lord Irvine, I couldn’t have put it better myself.

Remarkably enough he even prayed in aid, as one of his arguments against judicial intervention, the fact that it would strengthen objections to the incorporation of the European Convention on Human Rights into our law – the very Human Rights Act which he did so much to introduce.

Rightly describing it as a step which would hugely enhance the role and significance of the judiciary in our society he said this:- “The traditional objection to incorporation has been that it would confer on unelected judges powers which naturally belong to Parliament. That objection, entertained by many across the political spectrum, can only be strengthened by fears of judicial supremacism.”

Lord Irvine was right. My essential objection to the Human Rights Act is that it does involve a very significant shift in power from elected representatives of the people to unelected judges. Members of Parliament, and Ministers are, except for Ministers in the House of Lords like the Lord Chancellor, answerable to their electorates. As I know only too well they can be summarily dismissed by the electorate. They are directly accountable. Judges, as I have already pointed out, are unelected, unaccountable and cannot be dismissed.

The reason why this difficulty arisesin such acute form as a result of the Human Rights Act is because so many of the decisions which our judges now have to make under it are, essentially, political in nature.

Just this week, Charles Clarke, the former Home Secretary, complained that, and I quote:- “One of the consequences of the Human Rights Act is that our most senior judiciary are taking decisions of deep concern to the security of our society without any responsibility for that security.”

What on earth did he expect?

Of course that is one of the consequences of the Human Rights Act. It is an inevitable consequence. It is what the Human Rights Act obliges the senior judiciary to do. It is not the fault of the judges if they perform, as conscientiously as they can, duties which the Government has placed on them.

And it is not as though the Government were not warned.

To select a quote almost at random Appeal Court Judge Sir Henry Brooke predicted that judges would be drawn into making “much more obviously political decisions.” He pointed out that under the Act “for the first time judges would have to decide whether government interference with a human right was 'necessary in a democratic society.’ – and that, of course, is clearly a political value judgement.

How does this arise? In a nutshell the Act requires our courts to apply the European Convention on Human Rights in every decision they make. The rights which the Convention seeks to protect are framed in very wide terms. The Convention was drawn up in the aftermath of the Second World War. Its authors saw it as a safeguard against any revival of Nazism or any other form of totalitarian tyranny. I suspect that many of them would turn in their graves if they were able to see the kind of cases which are being brought in reliance on it today.

None of these rights can be exercised in isolation. Any decision to uphold one right may well infringe someone else’s right. Or it may conflict with the rights of the community at large.

The example that has most recently hit the headlines well illustrates the difficulties that arise.

As David Cameron pointed out in his recent speech on this subject life in the globalised twenty first century world presents two great challenges to governments. The first is to protect our security. The second is protecting our liberty.

We would, I suspect, all agree with his view that 'it is vital that free societies do all they can to maintain people’s human rights and civil liberties, not least because a free society is, in the long term, one of the best protections against terrorism and crime.”

As he said, “The fundamental challenge is to strike the right balance between security and liberty.”

The fundamental question is who is ultimately responsible for striking that balance: elected members of Parliament or unelected judges?

In the cases on terrorism, Parliament twice, after much anxious consideration by both Houses, reached its view. It was not always a view with which I agreed. But it was the view of Parliament.

Yet twice the Judges have held that Parliament got the balance wrong. They thought the balance should be struck differently.

And in doing so they were not deliberately seeking to challenge the supremacy of Parliament. They were simply doing what Parliament has asked them to do.

There are countless other examples. In his recent speech on the subject David Cameron discussed the way in which the Human Rights Act has made the fight against crime harder.

He cited the example of the Assets Recovery Agency, which was set up to seize the assets of major criminals.

The agency has been forced to spend millions of pounds fighting legal challenges brought by criminals under the Human Rights Act.

This has had bogged down cases for years, and the backlog in the courts has grown to 146 uncompleted claims.

The Director of the Agency has directly blamed the human rights “bandwagon” for thwarting its efforts.

He referred to the case of the convicted rapist, Anthony Rice, who was wrongly released on licence and then murdered Naomi Bryant.

The bridges Report set up to investigate the case makes clear that one of the factors that influenced the thinking of officials in dealing with Rice was a concern that he might sue them under the Human Rights Act.

As David Cameron acknowledged there were other elements in the case that had no connection to human rights.

And it is true that any legal challenge by Rice might well have failed.

But it remains the case that officials sought to protect themselves rather than risk defeat in the courts.

The Rice case illustrates a wider trend.

Even without actual litigation, some public bodies are now so frightened of being sued under the Human Rights Act that they try to protect themselves by making decisions that are often absurd and occasionally dangerous.

We saw this recently when the police tried to recapture foreign ex-prisoners who should have been deported and had instead gone on the run.

The obvious thing to do would have been to issue “Wanted” posters but police forces across the country refused to do so on the grounds that it would breach the HRA.

The Association of Chief Police officers says in its guidance to forces: “Article 8 of the Human Rights Act gives everyone the right to respect for their private and family life.....and publication of photographs could be a breach of that.”

According to ACPO, photographs should be released only in “exceptional circumstances”, where public safety needs to override the case for privacy.

These were criminals who had been convicted of very serious offences and who shouldn’t even have been in the UK.

Yet the Metropolitan Police said, “We will use all the tools in our tool box to try and find them without printing their identity – that’s the last recourse.”

Perhaps the most ludicrous recent example occurred a few weeks ago when a suspected car thief clambered onto the roof tops after a high speed chase and began pelting the police who had tried to follow him with roof tiles.

It ended with a siege that would waste the time of 50 police officers, close the street until 9.40pm and culminate in the spectacle of the suspect being handed a bucket of KFC chicken, a two litre bottle of Pepsi and a packet of cigarettes at tax payers expense – all apparently to preserve his “human rights.”

Of course there are examples of cases where the Act has led to results most of us would applaud. But we have to ask whether those results could not have been achieved by effective lobbying of our elected Parliament or a change of Government following an Election.

The Human Rights Act requires the Courts to interpret legislation so that it complies with the Convention if that is at all possible. If in the Court’s view any secondary legislation – passed after due consideration by both Houses of Parliament – is incompatible with the Convention that legislation can be struck down by the Court.

If any primary legislation is held to be incompatible there is a fast-track procedure which would enable the Government to short-circuit the normal processes of parliamentary scrutiny in order to amend or repeal any such legislation.

This surely a direct threat to the very democratic imperative on which the then Lord Chancellor waxed so eloquent 5 years ago.

One of the consequences of this is likely to be the increasing politicisation of judges.

How long, if the Act remains in force, will our present system of selection of judges survive? How long before the political backgrounds of candidates for judicial office become subject to Parliamentary scrutiny? How long before we see demands that these judges submit themselves for election?

The most common argument in favour of the Act is that it 'brings rights home.’ By that its supporters mean that since the Act could in any event be relied upon in an appeal from the English Courts to the European Court of Human Rights it is much better to allow English judges to apply it themselves. Indeed in presenting this argument the impression is sometimes given that the new jurisdiction of the English Courts will in some way replace the jurisdiction of the European Court of Human Rights. This is of course quite untrue. The right to appeal to the ECHR will remain.

I would concede that the previous situation was not ideal.

The ECHR does sometimes reach decisions which are very difficult to understand and sometimes cause considerable frustration.

But there is a remedy for this which the last Government was pursuing. The ECHR recognises the existence of what it calls a 'margin of appreciation.’ By that it means that will make some allowance, in applying the Convention, for the local circumstances and traditions of the country from which the appeal is brought. The last Government had embarked on a campaign to increase this margin of appreciation so that the Court would give greater leeway to countries to decide things for themselves.

Now the very future of the margin of appreciation is uncertain. Academic controversy rages on to whether our courts will apply it. And the ECHR is much less likely to apply it to decisions of our Courts than to decisions of administrative bodies.

It is in this context that David Cameron’s proposal for a British Bill of Rights should be considered.

As Mr Cameron expressly said the existence of a clear and codified British Bill of Rights will tend to lead the European Court of Human Rights to apply, and I would add to enhance, the “margin of appreciation.”

This seems to me to be the key to the continuing application and acceptance of the European Convention. It was intended to be a backstop to ensure that there was no repetition in Western European of Nazi atrocities and to minimise, as far as possible, the danger of future totalitarian outrages. It was not intended to strike down carefully considered judgements by democratically elected authorities of where the balance should be struck between legitimate but competing interests.

The route to this more limited role for the Convention and the Court which adjudicates on it lies through an enhanced margin of appreciation. A British Bill of Rights may well help us to reach this very desirable destination.

It is of course true, as Mr Cameron himself acknowledged, that the drafting of such a Bill would represent a formidable challenge. But this is true of all charters of this kind. If it helps us to achieve a workable solution to our relationship with the European Convention the effort will be well worth while.

And if it also enables us to scrap the discredited Human Rights Act it would be doubly welcome.

As the distinguished Scottish judge, Lord McCluskey predicted, the Act has become:- “A field day for crackpots, a pain in the neck for judges and a goldmine for lawyers.”

It is an experiment that has failed. It should go.

Monday, June 17, 2013

Finance and Poverty: Evidence from India. By Meghana Ayyagari & Thorsten Beck

Finance and Poverty: Evidence from India. By Meghana Ayyagari & Thorsten Beck
World Bank Blogs
Mon, Jul 17, 2013
http://blogs.worldbank.org/allaboutfinance/finance-and-poverty-evidence-india

The relationship between finance, inequality and poverty is a controversial one. While some observers attribute not only the crisis but also rising inequality in many Western countries to the rise of the financial system (e.g. Krugman, 2009), others see an important role of the financial sector on the poverty alleviation agenda (World Bank, 2008). But financial sector policies are not only controversial on the macro, but also micro-level. While increasing access to credit services through microfinance had for a long time a positive connotation, this has also been questioned after recent events in Andhra Pradesh, with critics charging that excessive interest rates hold the poor back in poverty. In recent work with Meghana Ayyagari and Mohammad Hoseini, we find strong evidence for financial sector deepening having contributed to the reduction of rural poverty rates across India by enabling more entrepreneurship in the rural areas and by enticing inter-state migration into the tertiary sector.

Cross-country evidence has linked financial development both to lower levels and faster reductions in income inequality and poverty rates (Beck, Demirguc-Kunt and Levine, 2007; Clarke, Xu and Zhou, 2006). As is often the case with cross-country work, endogeneity concerns are manifold, exacerbated by measurement problems inherent to survey-based inequality and poverty measures.  In addition, cross-country comparisons face limitations in identifying the channel through which financial deepening helps reduce poverty rates. Researchers have therefore turned to country-level studies, which allow better to control for omitted variable and measurement biases.  Richer data on the country level also allow for a better exploration of channels through which finance affects inequality and poverty.

India is close to an ideal testing ground to ask these questions given not only its large sub-national variation in socio-economic and institutional development, but also significant policy changes it has experienced over the sample period (Besley, Boswell and Esteve-Vollart, 2007). We use two of these policy changes as identification strategies in our work. Specifically, we follow Burgess and Pande (2005) and exploit the policy driven nature of rural bank branch expansion across Indian states as an instrument for branch penetration and thus financial breadth. According to the Indian Central Bank’s 1:4 licensing policy instituted between 1977 and 1990, commercial banks in India had to open four branches in rural unbanked locations for every branch opening in an already banked location. Thus between 1977 and 1990, rural bank branch expansion was higher in financially less developed states while after 1990, the reverse was true (financially developed states offered more profitable locations and so attracted more branches outside of the program), as illustrated by Figure 1.

Figure 1: Bank branch penetration as function
of initial financial development

Figure 1: Bank branch penetration as function of initial financial development

As an instrument for financial depth, we use the cross-state variation of per-capita circulation of English-language newspapers in 1991 multiplied by a time trend to capture the differential impact of the media across time after liberalization in 1991. With the relatively free and independent press in India (Besley and Burgess, 2002), a more informed public is better able to compare different financial services, resulting in more transparency and a higher degree of competition leading to greater financial sector development. Figure 2 shows the differential development of Credit to SDP in states with English language newspaper penetration above and below the median.

Figure 2: Bank Credit and English newspaper circulation

Figure 2: Bank Credit and English newspaper circulation
 
Our main findings

Relating annual state-level variation in poverty to variation in financial development, we find strong evidence that financial depth, as measured by Credit to SDP, has a negative and significant impact on rural poverty in India over the period 1983-2005. On the other hand, we find no effect of financial depth on urban poverty rates.  The effect of financial depth on rural poverty reduction is also economically meaningful. One within-state, within-year standard deviation in Credit to SDP explains 18 percent of demeaned variation in the Headcount and 30 percent of demeaned variation in the Poverty Gap over our sample period.  We also find that over the time period 1983-2005, financial depth has a more significant impact on poverty reduction than financial outreach. Our measure of financial breadth, rural branches per capita, has a negative but insignificant effect on rural poverty over this period, though a strong and negative effect over the longer period of 1965 to 2005, which includes the complete period of the social banking policy.
 
The channels

The household data also allow us to dig deeper into the channels through which financial deepening affected poverty rates across rural India. First, we find evidence for the entrepreneurship channel, as the poverty-reducing impact of financial deepening falls primarily on self-employed in rural areas. Second, we find that financial sector development is associated with inter-state migration of workers towards financially more developed states. The migration induced by financial deepening is motivated by search for employment, suggesting that poorer population segments in rural areas migrated to urban areas. The rural primary and tertiary urban sectors benefitted most from this migration, consistent with evidence showing that the Indian growth experience has been led by the services sector rather than labor intensive manufacturing (Bosworth, Collins and Virmani, 2007)
This last finding is also consistent with the finding that it is specifically the increase in bank credit to the tertiary sector that accounts for financial deepening post-1991 and its poverty-reducing effect.


Conclusions

Our findings suggest that financial deepening can have important structural effects, including through structural reallocation and migration, with consequences for poverty reduction. Our findings also have important policy repercussions. The pro-poor effects of financial deepening do not necessarily come just through more inclusive financial systems, but can also come through more efficient and deeper financial systems. Critical, the poorest of the poor not only benefit from financial deepening by directly accessing financial services, but also through indirect structural effects of financial deepening. This is consistent with evidence from Thailand (Gine and Townsend, 2004) and for the U.S. (Beck, Levine and Levkov, 2010) who document important labor market and migration effects of financial liberalization and deepening.
 

References

  • Ayyagari, M., T. Beck and M. Hoseini (2013) “Finance and Poverty: Evidence from India”, CEPR Discussion Paper 9497.
  • Beck, T., A. Demirgüç-Kunt and R. Levine, (2007) “Finance, Inequality and the Poor”, Journal of Economic Growth, 12(1), 27-49.
  • Beck, T., R. Levine and A. Levkov (2010), “Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States”, Journal of Finance, vol. 65(5), pages 1637-1667.
  • Besley, T., and R. Burgess, (2002) “The Political Economy Of Government Responsiveness: Theory And Evidence From India”, Quarterly Journal of Economics 117(4), pages 1415-1451.
  • Besley, T., R. Burgess, and B. Esteve-Volart (2007) “The Policy Origins of Poverty and Growth in India,”  Chapter 3 in Delivering on the Promise of Pro-Poor Growth: Insights and Lessons from Country Experiences, edited with Timothy Besley and Louise J. Cord, Palgrave MacMillan for the World Bank.
  • Bosworth, B., Collins, S. and Virmani, A. (2007), “Sources of Growth in the Indian Economy”, in Bery, S., Bosworth, B. and Panagariya, A. (eds.), India Policy Forum, 2006-07, Washington, DC: Brookings Institution Press.
  • Burgess, R., and R. Pande (2005), “Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment”, American Economic Review, vol. 95(3), pages 780-795.
  • Clarke, G., L. C. Xu and H. Zhou, (2006) “Finance and Income Inequality: What Do the Data Tell Us?”, Southern Economic Journal vol. 72(3), pages 578-596.
  • Gine, X. and R. Townsend (2004) “Evaluation of financial liberalization: a general equilibrium model with constrained occupation choice”, Journal of Development Economics 74, 269-307.
  • Krugman, Paul, (2009), The financial factor.
  • World Bank (2008): Finance for All?  Policies and Pitfalls in Expanding Access. Washington DC.

Thursday, June 6, 2013

South Korea: National Security or National Pride Regarding Japan?, by Krista E. Wiegand

South Korea: National Security or National Pride Regarding Japan?, by Krista E. Wiegand
Asia Pacific Bulletin, No. 214
Washington, D.C.: East-West Center
May 22, 2013
http://www.eastwestcenter.org/publications/south-korea-national-security-or-national-pride-regarding-japan

Krista E. Wiegand is Associate Professor of Political Science at Georgia Southern University and a recent POSCO Visiting Fellow at the East-West Center. She explains in this bulletin that "The South Korean government will not be able to deal with the larger issue of security relations with Japan until disputed issues symbolized by Dokdo/Takeshima are sufficiently resolved—and the likelihood of this happening anytime soon is fairly low."

Excerpts:
The first official state function of newly inaugurated President Park Geun-hye was a ceremony on March 1 commemorating Independence Movement Day—celebrating Korean resistance in 1919 to Japanese occupation—where she appealed: “It is incumbent on Japan to have a correct understanding of history and take on an attitude of responsibility in order to partner with us in playing a leading role in East Asia in the 21st century.” Her speech outlined a hard line stance regarding ROK-Japan relations. It also did not help that at the end of March, the Korean Foreign Ministry summoned a high ranking Japanese official in Seoul to strongly protest the inclusion of the islets as being called Takeshima in newly released Japanese school books. Japanese cabinet members then went to Yasakuni Shrine in April which further exasperated matters, resulting in South Korean Foreign Minister Yun Byung-se cancelling a proposed visit to Japan.

If Park wants to maintain high approval ratings and not lose credibility regarding her tough position towards Japan, she will have to take into account domestic public opinion on any future security plans with Japan, even under US pressure. Yet, taking this tough approach causes unconstructive tensions in the ROK-Japan-US security relationship, and at a time of recent unprecedented heightened tensions on the Korean Peninsula. Moreover, Korea’s role as an increasingly important actor in regional security indicates that Japan and South Korea will have to cooperate more in the future.  They are both democracies, have shared values and interests, and each looks to the United States as the preferred security partner. Park will have to balance Korea’s security interests with domestic opposition to closer ties with Japan, an extremely difficult challenge under current circumstances.

Even if Korean officials are not as supportive of the GSOMIA as their counterparts in Japan and the United States, moving forward on security relations with Japan is critical. Yet, domestic opposition to issues related to Japan has effectively prevented such cooperation. The South Korean government will not be able to deal with the larger issue of security relations with Japan until disputed issues symbolized by Dokdo/ Takeshima are sufficiently resolved—and the likelihood of this happening anytime soon is fairly low. The United States has encouraged better bilateral relations between its two closest allies in East Asia, yet at the same time, the US government has been hesitant to take sides in a dispute that the United States itself inadvertently created as a result of its ambiguity in its role as mediator of the 1951 San Francisco Treaty. President Park and future Korean presidents will have a tough time successfully pursuing any plans of security engagement with Japan as long as the Dokdo/Takeshima dispute and related issues flare up. The United States is in a unique position to influence both Korea and Japan and it should continue to pressure both states to work toward reconciliation.

Sunday, January 20, 2013

Are there clear affinities of Communism with Fascism?

Political philosopher John N. Gray on liberals' totalitarian temptation
Times Literary Supplement, Jan 02, 2013:

One of the features that distinguished Bolshevism from Tsarism was the insistence of Lenin and his followers on the need for a complete overhaul of society. Old-fashioned despots may modernize in piecemeal fashion if doing so seems necessary to maintain their power, but they do not aim at remaking society on a new model, still less at fashioning a new type of humanity. Communist regimes engaged in mass killing in order to achieve these transformations, and paradoxically it is this essentially totalitarian ambition that has appealed to liberals. Here as elsewhere, the commonplace distinction between utopianism and meliorism is less than fundamental. In its predominant forms, liberalism has been in recent times a version of the religion of humanity, and with rare exceptions— [Bertrand] Russell is one of the few that come to mind—liberals have seen the Communist experiment as a hyperbolic expression of their own project of improvement; if the experiment failed, its casualties were incurred for the sake of a progressive cause. To think otherwise—to admit the possibility that the millions who were judged to be less than fully human suffered and died for nothing—would be to question the idea that history is a story of continuing human advance, which for liberals today is an article of faith. That is why, despite all evidence to the contrary, so many of them continue to deny Communism's clear affinities with Fascism. Blindness to the true nature of Communism is an inability to accept that radical evil can come from the pursuit of progress.

John Gray is professor emeritus at the London School of Economics

Saturday, January 5, 2013

We, Too, Are Violent Animals. By Jane Goodall, Richard Wrangham, and Dale Peterson

We, Too, Are Violent Animals. By Jane Goodall, Richard Wrangham, and Dale Peterson
Those who doubt that human aggression is an evolved trait should spend more time with chimpanzees and wolvesThe Wall Street Journal,January 5, 2013, on page C3
http://online.wsj.com/article/SB10001424127887323874204578220002834225378.html

Where does human savagery come from? The animal behaviorist Marc Bekoff, writing in Psychology Today after last month's awful events in Newtown, Conn., echoed a common view: It can't possibly come from nature or evolution. Harsh aggression, he wrote, is "extremely rare" in nonhuman animals, while violence is merely an odd feature of our own species, produced by a few wicked people. If only we could "rewild our hearts," he concluded, we might harness our "inborn goodness and optimism" and thereby return to our "nice, kind, compassionate, empathic" original selves.

If only if it were that simple. Calm and cooperative behavior indeed predominates in most species, but the idea that human aggression is qualitatively different from that of every other species is wrong.

The latest report from the research site that one of us (Jane Goodall) directs in Tanzania gives a quick sense of what a scientist who studies chimpanzees actually sees: "Ferdinand [the alpha male] is rather a brutal ruler, in that he tends to use his teeth rather a lot…a number of the males now have scars on their backs from being nicked or gashed by his canines…The politics in Mitumba [a second chimpanzee community] have also been bad. If we recall that: they all killed alpha-male Vincent when he reappeared injured; then Rudi as his successor probably killed up-and-coming young Ebony to stop him helping his older brother Edgar in challenging him…but to no avail, as Edgar eventually toppled him anyway."

A 2006 paper reviewed evidence from five separate chimpanzee populations in Africa, groups that have all been scientifically monitored for many years. The average "conservatively estimated risk of violent death" was 271 per 100,000 individuals per year. If that seems like a low rate, consider that a chimpanzee's social circle is limited to about 50 friends and close acquaintances. This means that chimpanzees can expect a member of their circle to be murdered once every seven years. Such a rate of violence would be intolerable in human society.

The violence among chimpanzees is impressively humanlike in several ways. Consider primitive human warfare, which has been well documented around the world. Groups of hunter-gatherers who come into contact with militarily superior groups of farmers rapidly abandon war, but where power is more equal, the hostility between societies that speak different languages is almost endless. Under those conditions, hunter-gatherers are remarkably similar to chimpanzees: Killings are mostly carried out by males, the killers tend to act in small gangs attacking vulnerable individuals, and every adult male in the society readily participates. Moreover, with hunter-gatherers as with chimpanzees, the ordinary response to encountering strangers who are vulnerable is to attack them.

Most animals do not exhibit this striking constellation of behaviors, but chimpanzees and humans are not the only species that form coalitions for killing. Other animals that use this strategy to kill their own species include group-living carnivores such as lions, spotted hyenas and wolves. The resulting mortality rate can be high: Among wolves, up to 40% of adults die from attacks by other packs.

Killing among these carnivores shows that ape-sized brains and grasping hands do not account for this unusual violent behavior. Two other features appear to be critical: variable group size and group-held territory. Variable group size means that lone individuals sometimes encounter small, vulnerable parties of neighbors. Having group territory means that by killing neighbors, the group can expand its territory to find extra resources that promote better breeding. In these circumstances, killing makes evolutionary sense—in humans as in chimpanzees and some carnivores.

What makes humans special is not our occasional propensity to kill strangers when we think we can do so safely. Our unique capacity is our skill at engineering peace. Within societies of hunter-gatherers (though only rarely between them), neighboring groups use peacemaking ceremonies to ensure that most of their interactions are friendly. In state-level societies, the state works to maintain a monopoly on violence. Though easily misused in the service of those who govern, the effect is benign when used to quell violence among the governed.

Under everyday conditions, humans are a delightfully peaceful and friendly species. But when tensions mount between groups of ordinary people or in the mind of an unstable individual, emotion can lead to deadly events. There but for the grace of fortune, circumstance and effective social institutions go you and I. Instead of constructing a feel-good fantasy about the innate goodness of most people and all animals, we should strive to better understand ourselves, the good parts along with the bad.

—Ms. Goodall has directed the scientific study of chimpanzee behavior at Gombe Stream National Park in Tanzania since 1960. Mr. Wrangham is the Ruth Moore Professor of Biological Anthropology at Harvard University. Mr. Peterson is the author of "Jane Goodall: The Woman Who Redefined Man."

Monday, December 24, 2012

A case study in the dangers of the Law of the Sea Treaty

Lawless at Sea. WSJ Editorial
A case study in the dangers of the Law of the Sea Treaty.
The Wall Street Journal, December 24, 2012, on page A12
http://online.wsj.com/article/SB10001424127887324407504578187523862827016.html

The curious case of the U.S. hedge fund, the Argentine ship and Ghana is getting curiouser, and now it has taken a turn against national sovereignty. That's the only reasonable conclusion after a bizarre ruling this month from the International Tribunal for the Law of the Sea in Hamburg.

The tribunal—who knew it existed?—ordered the Republic of Ghana to overrule a decision of its own judiciary that had enforced a U.S. court judgment. The Hamburg court is the misbegotten child of the 1982 United Nations Convention on the Law of the Sea. Sold as a treaty to ensure the free movement of people and goods on the high seas, it was rejected by Ronald Reagan as an effort to control and redistribute the resources of the world's oceans.

The U.S. never has ratified the treaty, despite a push by President Obama, and now the solons of Hamburg have demonstrated the wisdom of that decision. While debates on the treaty have centered around the powers a country might enjoy hundreds of miles off its coast, many analysts have simply assumed that nations would still exercise control over the waters just offshore.

Now the Hamburg court has trampled local law in a case involving a ship sitting in port, and every country is now on notice that a Hamburg court is claiming authority over its internal waters.

Specifically, Hamburg ordered Ghana to release a sailing ship owned by the Argentine navy. On October 2, a subsidiary of U.S. investment fund Elliott Management persuaded a Ghanaian judge to order the seizure of the vessel. The old-fashioned schooner, used to train cadets, was on a tour of West Africa.

U.S. hedge funds don't normally seize naval ships, but in this case Elliott and the Ghanaian court are on solid ground. Elliott owns Argentine bonds on which Buenos Aires has been refusing to pay since its 2001 default. Elliott argues that a contract is a contract, and a federal court in New York agrees. Argentina had freely decided to issue its debt in U.S. capital markets and had agreed in its bond contracts to waive the sovereign immunity that would normally prevent lenders from seizing things like three-masted frigates.

To his credit, Judge Richard Adjei-Frimpong of Ghana's commercial court noted that Argentina had specifically waived its immunity when borrowing the money and that under Ghanaian law the ship could therefore be attached by creditors with a valid U.S. judgment registered in Ghana. He ordered the ship held at port until Buenos Aires starts following the orders of the U.S. court.

But in its recent ruling, which ordered Ghana to release the ship by December 22, the Hamburg court claimed that international law requires immunity for the Argentine "warship," as if Argentina never waived immunity and as if this is an actual warship. On Wednesday, Ghana released the vessel, and the ship set sail from the port of Tema for its trans-Atlantic voyage.

So here we have a case in which a small African nation admirably tried to adhere to the rule of law. Yet it was bullied by a global tribunal serving the ends of Argentina, which has brazenly violated the law in refusing to pay its debts and defying Ghana's court order. The next time the Senate moves to ratify the Law of the Sea Treaty, Ghana should be exhibit A for opponents.

Tuesday, December 18, 2012

The rise of the older worker

The rise of the older worker, by Jim Hillage, research director
Institute for Employment Studies
December 12, 2012
http://www.employment-studies.co.uk/press/26_12.php

There are more people working in the UK today than at anytime in our history. Today's labour market statistics show another increase in the numbers employed taking the total to 29,600,000, up 40,000 on the previous quarter and 500,000 on a year ago.

Almost half of the rise has been among people aged 50 or over, with the fastest rate of increase occurring among those 65 or over, particularly among older women.

There are now almost a million people aged 65 or over in jobs, double the number ten years ago and up 13 per cent over the past year. Although these older workers comprise only three percent of the working population, they account for 20 per cent of the recent growth in employment. However this group has a very different labour market profile to the rest of the working population, particularly younger people, and there is no evidence to suggest older workers are gaining employment at the expense of the young generation. For example:
  • 30 per cent of older workers (ie aged 65+) work in managerial and professional jobs, compared with only nine per cent of younger workers (aged 16 to 24). Conversely 34 per cent of young people work in sales, care and leisure jobs, compared with only 14 of their older counterparts.
  • Nearly four in ten older workers are self-employed, compared with five per cent of younger workers.
  • Most (69 per cent) of 65 plus year olds work part-time, compared with 39 per cent of young workers (and 27 per cent of all those in work).
Jim Hillage, Director of Research at the Institute for Employment Studies, explains that:

‘There are a number of reasons why older workers are staying on in work. In some cases employers want to retain their skills and experience and encourage them to stay on, albeit on a part-time basis, and most older employees have been working for their employer for at least ten years and often in smaller workplaces. Conversely, some older people have to stay in work as their pensions are inadequate and it is interesting to note that employment of older workers is highest in London and the South East, where living costs are highest. Finally, there is also a growing group of self-employed who still want to retain their work connections and interests.’

2012 © Institute for Employment Studies


---
Update: Long-Term Jobless Begin to Find Work. By Ben Casselman
The Wall Street Journal, January 11, 2013, on page A2
http://online.wsj.com/article/SB10001424127887323442804578233390580359994.html

The epidemic of long-term unemployment, one of the most pernicious and persistent challenges bedeviling the U.S. economy, is finally showing signs of easing.

The long-term unemployed—those out of work more than six months—made up 39.1% of all job seekers in December, according to the Labor Department, the first time that figure has dropped below 40% in more than three years.

[http://si.wsj.net/public/resources/images/P1-BJ893_ECONOM_NS_20130110190005.jpg]

The problem is far from solved. Nearly 4.8 million Americans have been out of work for more than six months, down from a peak of more than 6.5 million in 2010 but still a level without precedent since World War II.

The recent signs of progress mark a reversal from earlier in the recovery, when long-term unemployment proved resistant to improvement elsewhere in the labor market.

Total unemployment peaked in late 2009 and has dropped relatively steadily since then, while the number of long-term unemployed continued to rise into 2010 and then fell only slowly through much of 2011.

More recently, however, unemployment has fallen more quickly among the long-term jobless than among the broader population. In the past year, the number of long-term unemployed workers has dropped by 830,000, accounting for nearly the entire 843,000-person drop in overall joblessness.

When Michael Leahy lost his job as a manager at a Connecticut bank in 2010, the state had already shed about 10,000 financial-sector jobs in the previous two years and he had difficulty even landing an interview. By the time banks started hiring again, Mr. Leahy, now 59, had been out of work for more than a year and found himself getting passed over for candidates with jobs or ones who had been laid off more recently.

In July, however, Mr. Leahy was accepted into a program for the long-term unemployed run by the Work Place, a local workforce development agency. The program helped Mr. Leahy improve his resume and interviewing skills, and ultimately connected him with a local bank that was hiring.

Mr. Leahy began a new job in December. The chance to work again in his chosen field, he said, was more than worth the roughly 15% pay cut from his previous job.

"The thing that surprised me is this positive feeling I have every day of getting up in the morning and knowing I have a place to go to and a place where people are waiting for me," Mr. Leahy said.

[http://si.wsj.net/public/resources/images/NA-BU523B_ECONO_D_20130110211902.jpg]

The decline in long-term unemployment is good news for the broader economy. Many economists, including Federal Reserve Chairman Ben Bernanke, feared that many long-term unemployed workers would become permanently unemployable, creating a "structural" unemployment problem akin to what Europe suffered in the 1980s. But those fears are beginning to recede along with the ranks of the long-term unemployed.

"I don't think it's the case that the long-term unemployed are no longer employable," said Omair Sharif, an economist for RBS Securities Inc. "In fact, they've been the ones getting the jobs."

Not all the drop in long-term joblessness can be attributed to workers finding positions. In recent years, millions of Americans have given up looking for work, at which point they no longer count as "unemployed" in official statistics.

The recent drop in long-term unemployment, however, doesn't appear to be due to such dropouts. The number of people who aren't in the labor force but say they want a job has risen by only about 400,000 in the past year, while the number of Americans with jobs has risen by 2.4 million. That suggests at least much of the improvement is due to people finding jobs, not dropping out, Mr. Sharif said.

The average unemployed worker has now been looking for 38 weeks, down from a peak of nearly 41 weeks and the lowest level since early 2011.

The long-term unemployed still face grim odds of finding work. About 10% of long-term job seekers found work in April, the most recent month for which a detailed breakdown is available, compared with about a quarter of more recently laid-off workers. The ranks of the short-term jobless are more quickly refreshed by newly laid-off workers, however. As a result, the total number of short-term unemployed has fallen more slowly in recent months, even though individual workers still stand a far better chance of finding work early in their search.

And when the long-term unemployed do find work, their new jobs generally pay less than their old ones—often much less. A recent study from economists at Boston University, Columbia University and the Institute for Employment Research found that every additional year out of work reduces workers' wages when they do find a job by 11%.

Moreover, the recent gains have yet to reach the longest of the long-term unemployed: While the number of people unemployed for between six months and two years has fallen by 12% in the past year, the ranks of those jobless for three years or longer has barely budged at all.

Patricia Soprych, a 51-year-old widow in Skokie, Ill., recently got a job as a grocery-store cashier after more than a year of looking for work. But the job is part-time and pays the minimum wage, which she finds barely enough to make ends meet.

"You say the job market's getting better. Yeah, for these $8.25-an-hour jobs," Ms. Soprych said.

Economists cite several reasons for the drop in long-term unemployment. Most significant is the gradual healing of the broader labor market, which has seen the unemployment rate drop to 7.8% in December from a high of 10% in 2009. After initially benefiting mostly the more recently laid-off, that progress is now being felt among the longer-term jobless as well.

The gradual strengthening in the housing market could lead to more improvement. Many of the long-term unemployed are former construction workers who lost jobs when the housing bubble burst. Rising home building has yet to lead to a surge in construction employment, but many experts expect hiring to pick up in 2013.

Another possible factor behind the recent progress: the gradual reduction in emergency unemployment benefits available to laid-off workers. During the recession, Congress extended unemployment benefits to as long as 99 weeks in some states. Today, benefits last 73 weeks at most, and less time in many states. Research suggests that unemployment payments lead some recipients not to look as hard for jobs, and the loss of benefits may have pushed some job seekers to accept work they might otherwise have rejected, said Gary Burtless, an economist at the Brookings Institution. 

Sunday, December 9, 2012

Mobilizing Resources, Building Coalitions: Local Power in Indonesia

Mobilizing Resources, Building Coalitions: Local Power in Indonesia, by Ryan Tans
Honolulu: East-West Center, 2012
Policy Studies, No. 64
ISBN: 978-0-86638-220-5
http://www.eastwestcenter.org/publications/mobilizing-resources-building-coalitions-local-power-in-indonesia

What have been the local political consequences of Indonesia's decentralization and electoral reforms? Some recent scholarship has emphasized continuity with Suharto's New Order, arguing that under the new rules, old elites have used money and intimidation to capture elected office. Studies detail the widespread practice of "money politics," in which candidates exchange patronage for support from voters and parties. Yet significant variation characterizes Indonesia's local politics, which suggests the need for an approach that differentiates contrasting power arrangements.

This study of three districts in North Sumatra province compares local politicians according to their institutional resource bases and coalitional strategies. Even if all practice money politics, they form different coalition types that depend on diverse institutions for political resources. The three ideal types of coalitions are political mafias, party machines, and mobilizing coalitions. Political mafias have a resource base limited to local state institutions and businesses; party machines bridge local and supra-local institutions; and mobilizing coalitions incorporate social organizations and groups of voters. Due to contrasting resource bases, the coalitions have different strategic option "menus," and they may experiment with various political tactics.

The framework developed here plausibly applies in other Indonesian districts to the extent that similar resource bases--namely local state institutions, party networks, and strong social and business organizations--are available to elites in other places.

About the Author: Ryan Tans is a doctoral student in political science at Emory University. Previously, he received a Master of Arts in Southeast Asian Studies from the National University of Singapore.

Saturday, December 1, 2012

The Coming World Disorder - The Decline of American Power and the Westphalian World Order

World Order in the Age of Obama. By Charles Hill
November 30, 2012 | 2:30 am
http://www.advancingafreesociety.org/the-caravan/world-order-in-the-age-of-obama

Excerpts:

[...]

What ominous factors caused Kepler to shiver? Disturbances, uphealvals and conflicts. Merchants moaned about untrustworthy bankers. Diplomats strutted even as they wavered. The masses sullenly made deals they needed to survive when the gathering storm broke. Varieties of religious fervor caused many to prepare to be slain rather than submit to rule by others.

The 1648 settlement at Westphalia, though setbacks were many and vicious, enabled procedures fostering what eventually would be called “the international community,” a term that curled many a lip in the midst of twentieth-century world wars. Those wars were attempts to overthrow the established world order. Those wars failed, but in recent decades have become seemingly interminable, and have required the stewards of world order to confront what George Shultz labels “asymmetrical” warfare in which professional standards have been turned into self-imposed liabilities by enemies who reject civilized international conduct.


No international order has proved immortal. Kepler today might note that the world order shaped by the war he predicted, might now fail to survive to celebrate its 375th anniversary. As President Obama ponders his Second Inaugural Address, what Keplerian factors are now “prepared” for war?
The causes of war as discerned ever since Thucydides’ time are three: wars of ideology, of fear, and of gain.

The ideology of Islamism has been on the rise for generations and now aims to expropriate the Arab Spring. The ambitions of the1979 Iranian Revolution and Sunni fanaticism are transmogrifying into the kind of major religious war that the Treaty of Westphalia sought to forestall.

Thucydides traced the war that ruined ancient Greece to Sparta’s fear that Athens’ growing power was crossing the line where it would be impossible to contain. Israel faces that threat from Iran, as today’s international structures for the maintenance of international security have failed to halt Iran’s drive, propelled by religious ideology, to possess nuclear weapons. Israel, bereft of its traditional sense of American support, is making ready to act against Iran’s menace to its existence. President Obama’s priority must repair relations with Israel by visiting the Jewish state and convincing its leaders that the U.S. understands Israel’s uniquely dangerous position.

And there now grows a deepening appetite for gain. America, perceived as eager to shed the burdens of world order in order to be “fundamentally transformed” through European-style social commitments, talks of engagement even when Iran’s “diplomacy” is a form of protracted warfare. The enemies of world order translate the American election results into the lexicon of abdication, telling themselves that their time has come: there is a world to be gained.

Only America’s return to world leadership can halt this deterioration. “Sequestration” will relegate the U.S. to a second rate power and must be reversed to enable American strength and diplomacy to be employed in tandem. Without this the prediction of a Kepler for today must be grim. As the biographer of Augustus Caesar wrote in the years just before the Second World War, “Once again the crust of civilization has worn thin, and beneath can be heard the muttering of primeval fires. Once again many accepted principles of government have been overthrown, and the world has become a laboratory where immature and feverish minds experiment with unknown forces. Once again problems cannot be comfortably limited, for science has brought the nations into an uneasy bondage to each other.”

In this maelstrom lie opportunities not for idealism but for the cold, austere use of power, soft and hard, in order to, as Augustus was advised, teach the arts of peace to all. The old platforms for the region, including the “peace process,” are gone. New structures must be built and only the US can lead the construction job. Peace is not at hand, but statesmen can see the possibility of laying foundations for a new Middle East in Syria-Lebanon, Egypt-Gaza, Saudi Arabia and the Gulf, and even, should we finally get serious, in Iran.

Charles Hill is the Brady-Johnson Distinguished Fellow in Grand Strategy at Yale University and co chair of the Herb and Jane Dwight Working Group on Islamism and the International Order, Hoover Institution.

These excerpts are from a post that is part of The Caravan, a periodic discussion on the contemporary dilemmas of the Greater Middle East. Other commentary in this symposium on Obama’s Second Term – Middle Eastern Memos is provided by Russell Berman, Itamar Rabinovich, Robert Satloff, Asli Aydintasbas, Habib Malik, Reuel Gerecht, Leon Wieseltier, Tammy Frisby, Abbas Milani, and Fouad Ajami.

Tuesday, October 30, 2012

U2's Bono realizes the importance of capitalism

Notable & Quotable: U2 frontman and anti-poverty activist Bono realizes the importance of capitalism
The Wall Street Journal, October 30, 2012, on page A23
http://online.wsj.com/article/SB10001424052970203922804578080453358300198.html

Staff writer Parmy Olson writing at forbes.com, Oct. 22

Bono has learned much about music over more than three decades with U2. But alongside that has been a lifelong lesson in campaigning—the activist for poverty reduction in Africa spoke frankly on Friday about how his views about philanthropy had now stretched to include an appreciation for capitalism.

The Irish singer and co-founder of ONE, a campaigning group that fights poverty and disease in Africa, said it had been "a humbling thing for me" to realize the importance of capitalism and entrepreneurialism in philanthropy, particularly as someone who "got into this as a righteous anger activist with all the cliches."

"Job creators and innovators are just the key, and aid is just a bridge," he told an audience of 200 leading technology entrepreneurs and investors at the F.ounders tech conference in Dublin. "We see it as startup money, investment in new countries. A humbling thing was to learn the role of commerce."

Tuesday, October 23, 2012

Globalization and Corporate Taxation. By Manmohan Kumar, and Dennis Quinn

Globalization and Corporate Taxation. By Manmohan Kumar, and Dennis Quinn
IMF Working Paper No. 12/252
October 22, 2012
http://www.imfbookstore.org/IMFORG/9781557754752

Summary: This paper analyzes the extent to which the degree of international economic integration, both financial and trade, affects corporate tax rates. It explores this issue in the context of strategic behavior by countries, taking into account other global and domestic political economy factors. Tax rates are analyzed using a unique tax dataset for advanced and developing economies extending over five decades. We report a number of novel results: there is no general negative relationship between financial globalization and corporate tax rates and revenues—results vary according to country grouping with OECD countries showing a positive relationship; the United States exhibits a “Stackelberg” type of leadership on other countries; trade integration is inversely correlated with tax rates; and public sentiment and ideology affect tax rates. The policy implications of these findings, particularly given budgetary pressures in the aftermath of the global crisis, are noted.

http://www.imf.org/external/pubs/cat/longres.aspx?sk=40059.0

Wednesday, October 17, 2012

Bipartisan Agreement On Single-Sex Education

A Right to Choose Single-Sex Education. By Kay Bailey Hutchison and Barbara Mikulski
For some children, learning in girls-only or boys-only classes pays off. Opponents of the idea are irresponsible.October 16, 2012, 7:11 p.m. ET
http://online.wsj.com/article/SB10000872396390443768804578038191947302764.html

Education proponents across the political spectrum were dismayed by recent attempts to eradicate the single-gender options in public schools in Virginia, West Virginia, Alabama, Mississippi, Maine and Florida. We were particularly troubled at efforts to thwart education choice for American students and their families because it is a cause we have worked hard to advance.

Studies have shown that some students learn better in a single-gender environment, particularly in math and science. But federal regulations used to prevent public schools from offering that option. So in 2001 we joined with then-Sen. Hillary Clinton and Sen. Susan Collins to author legislation that allowed public schools to offer single-sex education. It was an epic bipartisan battle against entrenched bureaucracy, but well worth the fight.

Since our amendment passed, thousands of American children have benefited. Now, though, some civil libertarians are claiming that single-sex public-school programs are discriminatory and thus illegal.

To be clear: The 2001 law did not require that children be educated in single-gender programs or schools. It simply allowed schools and districts to offer the choice of single-sex schools or classrooms, as long as opportunities were equally available to boys and girls. In the vast and growing realm of education research, one central tenet has been confirmed repeatedly: Children learn in different ways. For some, single-sex classrooms make all the difference.

Critics argue that these programs promote harmful gender stereotypes. Ironically, it is exactly these stereotypes that the single-sex programs seek to eradicate.

As studies have confirmed—and as any parent can tell you—negative gender roles are often sharpened in coeducational environments. Boys are more likely, for instance, to buy into the notion that reading isn't masculine when they're surrounded by (and showing off for) girls.

Girls, meanwhile, have made so much progress in educational achievement that women are overrepresented in postgraduate education. But they still lag in the acquisition of bachelor's and graduate degrees in math and the sciences. It has been demonstrated time and again that young girls are more willing to ask and answer questions in classrooms without boys.

A 2008 Department of Education study found that "both principals and teachers believed that the main benefits of single-sex schooling are decreasing distractions to learning and improving student achievement." The gender slant—the math-is-for-boys, home-EC-is-for-girls trope—is eliminated.

In a three-year study in the mid-2000s, researchers at Florida's Stetson University compared the performance of single-gender and mixed-gender classes at an elementary school, controlling for the likes of class sizes, demographics and teacher training. When the children took the Florida Comprehensive Assessment Test (which measures achievement in math and literacy, for instance), the results were striking: Only 59% of girls in mixed classes were scored as proficient, while 75% of girls in single-sex ones achieved proficiency. Similarly, 37% of boys in coeducational classes scored proficient, compared with 86% of boys in the all-boys classes.

Booker T. Washington High School in Memphis, Tenn., the winner of the 2011 Race to the Top High School Commencement Challenge, went to a 81.6% graduation rate in 2010 from a graduation rate of 55% in 2007. Among the changes at the school? Implementing all-girls and all-boys freshman academies.

In Dallas, the all-boys Barack Obama Leadership Academy opened its doors last year. There is every reason to believe it will follow the success of the first all-girls public school, Irma Rangel Young Women's Leadership School, which started in 2004. Irma Rangel, which has been a Texas Education Agency Exemplary School since 2006, also took sixth place at the Dallas Independent School District's 30th Annual Mathematics Olympiad that year.

No one is arguing that single-sex education is the best option for every student. But it is preferable for some students and families, and no one has the right to deny them an option that may work best for a particular child. Attempts to eliminate single-sex education are equivalent to taking away students' and parents' choice about one of the most fundamentally important aspects of childhood and future indicators of success—a child's education.

America once dominated educational attainment among developed countries, but we have fallen disastrously in international rankings. As we seek ways to offer the best education for all our children, in ways that are better tailored to their needs, it seems not just counterproductive but damaging to reduce the options. single-sex education in public schools will continue to be a voluntary choice for students and their families. To limit or eliminate single-sex education is irresponsible. To take single-sex education away from students who stand to benefit is unforgivable.

Ms. Hutchison, a Republican, is the senior senator from Texas. Ms. Mikulski, a Democrat, is the senior senator from Maryland.

Friday, September 28, 2012

Current economic policies: pro and con

Today’s Economic Data. By Alan Krueger
The White House, September 27, 2012 11:57 AM EDT

http://www.whitehouse.gov/blog/2012/09/27/today-s-economic-data

More than the usual amount of economic statistics were released this morning. As a whole, today’s economic news shows that while we are still fighting back from the worst economic crisis since the Great Depression, we are making progress. We lost more than 8 million jobs and GDP contracted by almost 5 percent as a result of the Great Recession. We have more work to do, but incorporating today’s preliminary benchmark revision to the employment figures released by the Bureau of Labor Statistics with their earlier data indicates that the economy has added nearly 5.1 million private sector jobs, on net, over the past 30 months. BLS announced that total employment likely grew by 386,000 more jobs than previously announced during the 12 months from March 2011 to March 2012, and by 453,000 more private sector jobs in that same time period. In the past decade, the absolute difference between the preliminary and final benchmark revision has averaged 37,000 jobs.

We also saw revised data released today showing that real GDP grew in the second quarter of 2012 by 1.3 percent at an annual rate. Real GDP growth in the second quarter was revised down due, in part, to a downward revision to agriculture inventories as a result of the devastating drought our nation faced this summer. The Obama Administration continues to take all available steps to mitigate the impacts of the drought, and has called on Congress to pass a farm bill that would spur growth and provide rural Americans with the certainty they deserve. We also learned today that the advance report of durable goods orders declined in August, largely as a result of a decline in orders for transportation equipment. Excluding the volatile transportation category, durable goods orders fell by 1.6 percent.

Today’s news shows that we must do more to strengthen our economy and promote job creation. Over a year ago, President Obama proposed the American Jobs Act – a plan that independent economists have said would create up to 2 million jobs. The President will continue to push policies that will continue this progress we have made, including incentives to strengthen the American manufacturing industry, investments in our nation’s infrastructure, and the extension of the tax cuts for 98 percent of Americans and 97 percent of small businesses.

While we are still rebuilding our economy and working to recover from the worst crisis since the Great Depression, we are making progress and the last thing we should do is return to the economic policies that failed us in the past. The revisions announced in today’s reports are a reminder that economic data are subject to large revisions. As a whole the pattern of revisions suggest that the recession that began at the end of 2007 was deeper than initially reported, and the jobs recovery over the last 2.5 years has been a bit stronger than initially reported, although much work remains to be done to return to full employment.


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As Good As It Gets? WSJ Editorial
Growth of 1.7% isn't what Team Obama promised four years ago.The Wall Street Journal, September 28, 2012, page A16
http://online.wsj.com/article/SB10000872396390444813104578016873186217796.html



Excerpts:

Bob Schieffer: "The fact is, unemployment is up. It is higher than when [President Obama] came to office, the economy is still in the dump. Some people say that is reason enough to make a change."

Bill Clinton: "It is if you believe that we could have been fully healed in four years. I don't know a single serious economist who believes that as much damage as we had could have been healed."

CBS's "Face the Nation," September 23, 2012

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[Growth Gap: http://si.wsj.net/public/resources/images/ED-AP847A_1obam_D_20120927170003.jpg]

Well, let's see. We can think of several serious people who said we could heal the economy in four years. There's Joe Biden, Nancy Pelosi, Harry Reid, Christina Romer, Jared Bernstein, Mark Zandi, and, most importantly, President Obama himself.

Mr. Obama told Americans in 2009 that if he did not turn around the economy in three years his Presidency would be "a one-term proposition." Joe Biden said three years ago that the $830 billion economic stimulus was working beyond his "wildest dreams" and he famously promised several months after the Obama stimulus was enacted that Americans would enjoy a "summer of recovery." That was more than three years ago.

In early 2009 soon-to-be White House economists Ms. Romer and Mr. Bernstein promised Congress that the stimulus would hold the unemployment rate below 7% and that by now it would be 5.6%. Instead the rate is 8.1%. The latest Census Bureau report says there are nearly seven million fewer full-time, year-round workers today than in 2007. The labor participation rate is the lowest since 1981.

So it has gone with nearly every prediction the President has made about where the economy would be today. Mr. Obama promised that the deficit would be cut in half in four years, but the fiscal 2012 deficit (estimated to be above $1 trillion) will be twice the 2008 deficit ($458 billion).

Mr. Obama said that his health-care plan would "cut the cost of a typical family's premium by up to $2,500 a year," but premiums for employer-sponsored family coverage have gone up $2,370 since 2009, according to the Kaiser Family Foundation.

He said that the linchpin for a growing economy would be renewable energy investment, and he promised to "create five million new jobs in solar, wind, geothermal" energy. Mr. Obama did invest some $9 billion in green energy, but his job estimate was off by at least a factor of 10 and today many solar and wind industry firms are fighting bankruptcy. The growth in domestic U.S. energy production that he now takes credit for has come almost entirely from the fossil fuels his Administration has done so much to obstruct.

There's nothing unusual about candidates making grandiose promises that don't come true. And it's a White House tradition to blame one's predecessor when things don't get better. (Usually these Presidents end up one-termers.)

The bad faith wasn't then. It's now. Mr. Obama really believed that government spending would unleash a robust recovery in employment and housing—an "economy built to last." Now that this hasn't happened and with the Congressional Budget Office predicting a possible recession for 2013, Team Obama claims these woeful results were the best that could have been expected.

The problem with this line is that every President who has inherited a recession in modern times has done better. (See nearby table.) Under Mr. Obama, measured on the basis of jobs, GDP growth and incomes, this has been by far the meekest recovery from the past 10 recessions.

When George W. Bush was elected, he inherited a mild recession from Mr. Clinton amid the bursting of the dot-com bubble, some $7 trillion of wealth eviscerated. Nine months later came the 9/11 terrorist attacks. Yet by 2003 the economy was growing by more than 3% and eight million jobs were created over the next four years.

The Administration and its acolytes claim that the nature of the 2008 financial collapse was different from past recessions, and that it can take up to a decade to restore growth after such a financial crisis. Economist Michael Bordo [http://online.wsj.com/article/SB10000872396390444506004577613122591922992.html] rebuts that claim with historical economic evidence nearby.

In reality, the biggest difference between this recovery and others hasn't been the nature of the crisis, but the nature of the policy prescriptions. Mr. Obama's chief anti-recession idea was a near trillion-dollar leap of faith in the Keynesian "multiplier" effect of government spending. It was the same approach that didn't work in the 1930s, didn't work in the 1970s, didn't work in 2008, and didn't work in such other nations as Japan. It didn't work again in 2009.

Ronald Reagan also inherited an economy loaded with problems. The stock market had been flat for 12 years, inflation rates neared 14%, and mortgage rates almost 20%. The recession he endured in 1981-82 to cure inflation sent unemployment to 10.8%, higher than Mr. Obama's peak of 10%. But the business and jobs recovery by early 1983 was rapid and lasted seven years.

Reagan used tax-rate cuts, disinflationary monetary policy and deregulation to reignite growth—more or less the opposite of the Obama policy mix. Liberals tried to explain the Reagan boom that they said would never happen by arguing that there was nothing unusual about the growth spurt after such a deep recession. So why didn't that happen this time?

When campaigning to be President in 1960, John F. Kennedy denounced slow growth under Eisenhower and Nixon and said "We can do bettah." Growth was 7.2% in 1959 and 2.5% in 1960. Since the recession ended under Mr. Obama, growth has been 2.4% in 2010, 1.8% in 2011 and, after Thursday's downward revision for the second quarter, 1.7% in 2012.

[...]

Wednesday, September 26, 2012

Dodd-Frank's 'Orderly Liquidation' Is Out of Order. By Scott Pruitt and Alan Wilson

Dodd-Frank's 'Orderly Liquidation' Is Out of Order. By Scott Pruitt and Alan Wilson
South Carolina, Oklahoma and Michigan join a federal lawsuit to uphold property rights and checks and balances.The Wall Street Journal, September 25, 2012, 7:14 p.m. ET
http://online.wsj.com/article/SB10000872396390444180004578016953529778498.html?mod=WSJ_Opinion_LEFTTopOpinion

'The tendency of the law must always be to narrow the field of uncertainty." Justice Oliver Wendell Holmes wrote that more than a century ago, but the sentiment runs all the way to our nation's roots. Under our Constitution, the rule of law provides the certainty and transparency necessary to protect individual liberty and support economic growth.

But the 2010 federal financial-reform law known as Dodd-Frank continues to undermine economic growth and the rule of law by injecting immense uncertainty into our economy. As law professor David Skeel demonstrated recently in these pages, the law's Title II gives the Treasury secretary and the Federal Deposit Insurance Corp. unprecedented authority to "liquidate" financial companies. This grants immense power to a handful of unelected federal bureaucrats, empowering them to pick winners and losers among a liquidated company's investors. This arrangement destroys rights long protected by bankruptcy law.

For that reason and others, the attorneys general of South Carolina, Oklahoma and Michigan last week joined a federal lawsuit challenging Dodd-Frank's unconstitutional "orderly liquidation" provisions. Dodd-Frank's elimination of investors' rights directly harms our states because state pension funds are partly invested in financial companies. We must raise these constitutional objections now because once a company is liquidated, it will be too late.

Title II eliminates all meaningful judicial review and due process. Once the Treasury secretary orders the liquidation of a financial company, the company has only 24 hours to convince a federal court to overturn that order. Unless the court somehow manages to decide the entire case in the company's favor before the clock expires, the government wins by default and can begin to liquidate the company even as appeals are pending. Dodd-Frank further limits the authority of the courts by prohibiting them from reviewing whether the Treasury secretary's decision was constitutional, or whether the liquidation is actually necessary to protect financial stability.

The Treasury secretary's largely unaccountable decisions in these cases will put investments at risk, and creditors won't know until it is too late. Dodd-Frank prohibits the company from disclosing the liquidation threat before the district court decides the case. Once the liquidation goes forward, the creditors' only recourse will be to plead their case before the FDIC, with minimal judicial review—meaning that creditors' recoveries are "likely to be close to zero," as bankruptcy scholars Douglas Baird and Edward Morrison have put it.

Even more disturbing is the possibility that a company might agree to be "liquidated" and rebuilt under a new banner—like "New Chrysler" replacing "Old Chrysler"—leaving its creditors no right to block the reorganization. Instead, creditors not favored by federal bureaucrats will have little choice but to accept the deal offered to them by the government in a black-box process.

When the federal government replaced "Old Chrysler" with "New Chrysler" in 2009, it told one set of Chrysler's creditors (Indiana's state pension funds) to swallow $6 million in losses. Indiana attempted to defend its employees' pensions in court, but the government shuttered "Old Chrysler" before the Supreme Court could hear Indiana State Police Pension Trust v. Chrysler. Our states face the same threat because they have invested in the debt of financial companies that can be liquidated under Dodd-Frank.

We have taken an oath to uphold the rule of law and defend the Constitution. We are determined to uphold that oath, including defending the Constitution against the overarching power of the federal government.

Our lawsuit attempts to defend the very heart of our Constitution's structure: By committing such broad power to federal bureaucrats and nullifying critical checks and balances, Dodd-Frank's "orderly liquidation" authority violates the Constitution's separation of powers, the Fifth Amendment's guarantee of due process, and the guarantee of "uniform" bankruptcy laws.

The president and Congress can easily repair these constitutional violations by amending Dodd-Frank, restoring the rights long protected by federal bankruptcy law and reaffirming the Constitution's checks and balances. Until then, we will vigorously defend the rule of law through this litigation. The hard-earned pension contributions and tax payments of our citizens deserve nothing less.

Mr. Pruitt is attorney general of Oklahoma. Mr. Wilson is attorney general of South Carolina.

Friday, August 24, 2012

Regulators Captured - WSJ Editorial about the SEC and money-market funds

Regulators Captured
The Wall Street Journal, August 24, 2012, on page A10
http://online.wsj.com/article/SB10000872396390444812704577607421541441692.html


Economist George Stigler described the process of "regulatory capture," in which government agencies end up serving the industries they are supposed to regulate. This week lobbyists for money-market mutual funds provided still more evidence that Stigler deserved his Nobel. At the Securities and Exchange Commission, three of the five commissioners blocked a critical reform to help prevent a taxpayer bailout like the one the industry received in 2008.

Assistant editorial page editor James Freeman on the SEC's nixing a proposed rule that would hold money market funds more accountable.

SEC rules have long allowed money-fund operators to employ an accounting fiction that makes their funds appear safer than they are. Instead of share prices that fluctuate, like other kinds of securities, money funds are allowed to report to customers a fixed net asset value (NAV) of $1 per share—even if that's not exactly true.

As long as the value of a fund's underlying assets doesn't stray too far from that magical figure, fund sponsors can present a picture of stability to customers. Money funds are often seen as competitors to bank accounts and now hold $1.6 trillion in assets.

But during times of crisis, as in 2008, investors are reminded how different money funds are from insured deposits. When one fund "broke the buck"—its asset value fell below $1 per share—it triggered an institutional run on all money funds. The Treasury responded by slapping a taxpayer guarantee on the whole industry.

SEC Chairman Mary Schapiro has been trying to eliminate this systemic risk by taking away the accounting fiction that was created when previous generations of lobbyists captured the SEC. She made the sensible case that money-fund prices should float like the securities they are.

But industry lobbyists are still holding hostages. Commissioners Luis Aguilar, Dan Gallagher and Troy Paredes refused to support reform, so taxpayers can expect someday a replay of 2008. True to the Stigler thesis, the debate has focused on how to maintain the current money-fund business model while preventing customers from leaving in a crisis. The SEC goal should be to craft rules so that when customers leave a fund, it is a problem for fund managers, not taxpayers.

The industry shrewdly lobbied Beltway conservatives, who bought the line that this was a defense against costly regulation, even though regulation more or less created the money-fund industry. Free-market think tanks have been taken for a ride, some of them all too willingly.

The big winners include dodgy European banks, which can continue to attract U.S. money funds chasing higher yields knowing the American taxpayer continues to offer an implicit guarantee.

The industry shouldn't celebrate too much, though, because regulation may now be imposed by the new Financial Stability Oversight Council. Federal Reserve and Treasury officials want to do something, and their preference will probably be more supervision and capital positions that will raise costs that the industry can pass along to consumers. By protecting the $1 fixed NAV, free-marketeers may have guaranteed more of the Dodd-Frank-style regulation they claim to abhor.

The losers include the efficiency and fairness of the U.S. economy, as another financial industry gets government to guarantee its business model. Congratulations.

Tuesday, July 10, 2012

Quality of Government and Living Standards: Adjusting for the Efficiency of Public Spending

Quality of Government and Living Standards: Adjusting for the Efficiency of Public Spending. By Grigoli, Francesco; Ley, Eduardo
IMF Working Paper No. 12/182
Jul 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=26052.0

Summary: It is generally acknowledged that the government’s output is difficult to define and its value is hard to measure. The practical solution, adopted by national accounts systems, is to equate output to input costs. However, several studies estimate significant inefficiencies in government activities (i.e., same output could be achieved with less inputs), implying that inputs are not a good approximation for outputs. If taken seriously, the next logical step is to purge from GDP the fraction of government inputs that is wasted. As differences in the quality of the public sector have a direct impact on citizens’ effective consumption of public and private goods and services, we must take them into account when computing a measure of living standards. We illustrate such a correction computing corrected per capita GDPs on the basis of two studies that estimate efficiency scores for several dimensions of government activities. We show that the correction could be significant, and rankings of living standards could be re-ordered as a result.

Excerpts:

Despite its acknowledged shortcomings, GDP per capita is still the most commonly used summary indicator of living standards. Much of the policy advice provided by international organizations is based on macroeconomic magnitudes as shares of GDP, and framed on cross-country comparisons of per capita GDP. However, what GDP does actually measure may differ significantly across countries for several reasons. We focus here on a particular source for this heterogeneity: the quality of public spending. Broadly speaking, the ‘quality of public spending’ refers to the government’s effectiveness in transforming resources into socially valuable outputs. The opening quote highlights the disconnect between spending and value when the discipline of market transactions is missing.

Everywhere around the world, non-market government accounts for a big share of GDP and yet it is poorly measured—namely the value to users is assumed to equal the producer’s cost.  Such a framework is deficient because it does not allow for changes in the amount of output produced per unit of input, that is, changes in productivity (for a recent review of this issue, see Atkinson and others, 2005). It also assumes that these inputs are fully used. To put it another way, standard national accounting assumes that government activities are on the best practice frontier. When this is not the case, there is an overstatement of national production.  This, in turn, could result in misleading conclusions, particularly in cross-country comparisons, given that the size, scope, and performance of public sectors vary so widely.

Moreover, in the national accounts, this attributed non-market (government and non-profit sectors) “value added” is further allocated to the household sector as “actual consumption.” As Deaton and Heston (2008) put it: “[...] there are many countries around the world where government-provided health and education is inefficient, sometimes involving mass absenteeism by teachers and health workers [...] so that such ‘actual’ consumption is anything but actual. To count the salaries of AWOL government employees as ‘actual’ benefits to consumers adds statistical insult to original injury.” This “statistical insult” logically follows from the United Nations System of National Accounts (SNA) framework once ‘waste’ is classified as income—since national income must be either consumed or saved. Absent teachers and health care workers are all too common in many low-income countries (Chaudhury and Hammer, 2004; Kremer and others, 2005; Chaudhury and others, 2006; and World Bank, 2004). Beyond straight absenteeism, which is an extreme case, generally there are significant cross-country differences in the quality of public sector services. World Bank (2011) reports that in India, even though most children of primaryschool age are enrolled in school, 35 percent of them cannot read a simple paragraph and 41 percent cannot do a simple subtraction.

It must be acknowledged, nonetheless, that for many of government’s non-market services, the output is difficult to define, and without market prices the value of output is hard to measure. It is because of this that the practical solution adopted in the SNA is to equate output to input costs. This choice may be more adequate when using GDP to measure economic activity or factor employment than when using GDP to measure living standards.

Moving beyond this state of affairs, there are two alternative approaches. One is to try to find indicators for both output quantities and prices for direct measurement of some public outputs, as recommended in SNA 93 (but yet to be broadly implemented). The other is to correct the input costs to account for productive inefficiency, namely to purge from GDP the fraction of these inputs that is wasted. We focus here on the nature of this correction. As the differences in the quality of the public sector have a direct impact on citizens’ effective consumption of public and private goods and services, it seems natural to take them into account when computing a measure of living standards.

To illustrate, in a recent study, Afonso and others (2010) compute public sector efficiency scores for a group of countries and conclude that “[...] the highest-ranking country uses onethird of the inputs as the bottom ranking one to attain a certain public sector performance score. The average input scores suggest that countries could use around 45 per cent less resources to attain the same outcomes if they were fully efficient.” In this paper, we take such a statement to its logical conclusion. Once we acknowledge that the same output could be achieved with less inputs, output value cannot be equated to input costs. In other words, waste should not belong in the living-standards indicator—it still remains a cost of government but it must be purged from the value of government services. As noted, this adjustment is especially relevant for cross-country comparisons.

...

In this context, as noted, the standard practice is to equate the value of government outputs to its cost, notwithstanding the SNA 93 proposal to estimate government outputs directly. The value added that, say, public education contributes to GDP is based on the wage bill and other costs of providing education, such as outlays for utilities and school supplies. Similarly for public health, the wage bill of doctors, nurses and other medical staff and medical supplies measures largely comprises its value added. Thus, in the (pre-93) SNA used almost everywhere, non-market output, by definition, equals total costs. Yet the same costs support widely different levels of public output, depending on the quality of the public sector.

Note that value added is defined as payments to factors (labor and capital) and profits. Profits are assumed to be zero in the non-commercial public sector. As for the return to capital, in the current SNA used by most countries, public capital is attributed a net return of zero—i.e., the return from public capital is equated to its depreciation rate. This lack of a net return measure in the SNA is not due to a belief that the net return is actually zero, but to the difficulties of estimating the return.

Atkinson and others (2005, page 12) state some of the reasons behind current SNA practice: “Wide use of the convention that (output = input) reflects the difficulties in making alternative estimates. Simply stated, there are two major problems: (a) in the case of collective services such as defense or public administration, it is hard to identify the exact nature of the output, and (b) in the case of services supplied to individuals, such as health or education, it is hard to place a value on these services, as there is no market transaction.”

Murray (2010) also observes that studies of the government’s production activities, and their implications for the measurement of living standards, have long been ignored. He writes: “Looking back it is depressing that progress in understanding the production of public services has been so slow. In the market sector there is a long tradition of studying production functions, demand for inputs, average and marginal cost functions, elasticities of supply, productivity, and technical progress. The non-market sector has gone largely
unnoticed. In part this can be explained by general difficulties in measuring the output of services, whether public or private. But in part it must be explained by a completely different perspective on public and private services. Resource use for the production of public services has not been regarded as inputs into a production process, but as an end in itself, in the form of public consumption. Consequently, the production activity in the government sector has not been recognized.” (Our italics.)

The simple point that we make in this paper is that once it is recognized that the effectiveness of the government’s ‘production function’ varies significantly across countries, the simple convention of equating output value to input cost must be revisited. Thus, if we learn that the same output could be achieved with less inputs, it is more appropriate to credit GDP or GNI with the required inputs rather than with the actual inputs that include waste. While perceptions of government effectiveness vary widely among countries as, e.g., the World Bank’s Governance indicators attests (Kaufmann and others 2009), getting reliable measures of government actual effectiveness is a challenging task as we shall discuss below.

In physics, efficiency is defined as the ratio of useful work done to total energy expended, and the same general idea is associated with the term when discussing production. Economists simply replace ‘useful work’ by ‘outputs’ and ‘energy’ by ‘inputs.’ Technical efficiency means the adequate use of the available resources in order to obtain the maximum product. Why focus on technical efficiency and not other concepts of efficiency, such as price or allocative efficiency? Do we have enough evidence on public sector inefficiency to make the appropriate corrections?

The reason why we focus on technical efficiency in this preliminary inquiry is twofold. First, it corresponds to the concept of waste. Productive inefficiency implies that some inputs are wasted as more could have been produced with available inputs. In the case of allocative inefficiency, there could be a different allocation of resources that would make everyone better off but we cannot say that necessarily some resources are unused—although they are certainly not aligned with social preferences. Second, measuring technical inefficiency is easier and less controversial than measuring allocative inefficiency. To measure technical inefficiency, there are parametric and non-parametric methods allowing for construction of a best practice frontier. Inefficiency is then measured by the distance between this frontier and the actual input-output combination being assessed.

Indicators (or rather ranges of indicators) of inefficiency exist for the overall public sector and for specific activities such as education, healthcare, transportation, and other sectors. However, they are far from being uncontroversial. Sources of controversy include: omission of inputs and/or outputs, temporal lags needed to observe variations in the output indicators, choice of measures of outputs, and mixing outputs with outcomes. For example, many social and macroeconomic indicators impact health status beyond government spending (Spinks and Hollingsworth, 2009, and Joumard and others, 2010) and they should be taken into account. Most of the output indicators available show autocorrelation and changes in inputs typically take time to materialize into outputs’ variations. Also, there is a trend towards using outcome rather than output indicators for measuring the performance of the public sector. In health and education, efficiency studies have moved away from outputs (e.g., number of prenatal interventions) to outcomes (e.g., infant mortality rates). When cross-country analyses are involved, however, it must be acknowledged that differences in outcomes are explained not only by differences in public sector outputs but also differences in other environmental factors outside the public sector (e.g., culture, nutrition habits).

Empirical efficiency measurement methods first construct a reference technology based on observed input-output combinations, using econometric or linear programming methods. Next, they assess the distance of actual input-output combinations from the best-practice frontier. These distances, properly scaled, are called efficiency measures or scores. An inputbased efficiency measure informs us on the extent it is possible to reduce the amount of the inputs without reducing the level of output. Thus, an efficiency score, say, of 0.8 means that using best practices observed elsewhere, 80 percent of the inputs would suffice to produce the same output.

We base our corrections to GDP on the efficiency scores estimated in two papers: Afonso and others (2010) for several indicators referred to a set of 24 countries, and Evans and others (2000) focusing on health, for 191 countries based on WHO data. These studies employ techniques similar to those used in other studies, such as Gupta and Verhoeven (2001), Clements (2002), Carcillo and others (2007), and Joumard and others (2010).

? Afonso and others (2010) compute public sector performance and efficiency indicators (as performance weighted by the relevant expenditure needed to achieve it) for 24 EU and emerging economies. Using DEA, they conclude that on average countries could use 45 percent less resources to attain the same outcomes, and deliver an additional third of the fully efficient output if they were on the efficiency frontier. The study included an analysis of the efficiency of education and health spending that we use here.

? Evans and others (2000) estimate health efficiency scores for the 1993–1997 period for 191 countries, based on WHO data, using stochastic frontier methods. Two health outcomes measures are identified: the disability adjusted life expectancy (DALE) and a composite index of DALE, dispersion of child survival rate, responsiveness of the health care system, inequities in responsiveness, and fairness of financial contribution. The input measures are health expenditure and years of schooling with the addition of country fixed effects. Because of its large country coverage, this study is useful for illustrating the impact of the type of correction that we are discussing
here.

We must note that ideally, we would like to base our corrections on input-based technical efficiency studies that deal exclusively with inputs and outputs, and do not bring outcomes into the analysis. The reason is that public sector outputs interact with other factors to produce outcomes, and here cross-country hetereogenity can play an important role driving cross-country differences in outcomes. Unfortunately, we have found no technical-efficiency studies covering a broad sample of countries that restrict themselves to input-output analysis.  In particular, these two studies deal with a mix of outputs and outcomes. The results reported here should thus be seen as illustrative. Furthermore, it should be underscored that the level of “waste” that is identified for each particular country varies significantly across studies, which implies that any associated measures of GDP adjusting for this waste will also differ.

...

We have argued here that the current practice of estimating the value of the government’s non-market output by its input costs is not only unsatisfactory but also misleading in crosscountry comparisons of living standards. Since differences in the quality of the public sector have an impact on the population’s effective consumption and welfare, they must be taken into account in comparisons of living standards. We have performed illustrative corrections of the input costs to account for productive inefficiency, thus purging from GDP the fraction of these inputs that is wasted.

Our results suggest that the magnitude of the correction could be significant. When correcting for inefficiencies in the health and education sectors, the average loss for a set of 24 EU member states and emerging economies amounts to 4.1 percentage points of GDP.  Sector-specific averages for education and health are 1.5 and 2.6 percentage points of GDP, implying that 32.6 and 65.0 percent of the inputs are wasted in the respective sectors. These corrections are reflected in the GDP-per-capita ranking, which gets reshuffled in 9 cases out of 24. In a hypothetical scenario where the inefficiency of the health sector is assumed to be representative of the public sector as a whole, the rank reordering would affect about 50 percent of the 93 countries in the sample, with 70 percent of it happening in the lower half of the original ranking. These results, however, should be interpreted with caution, as the purpose of this paper is to call attention to the issue, rather than to provide fine-tuned waste estimates.

A natural way forward involves finding indicators for both output quantities and prices for direct measurement of some public outputs. This is recommended in SNA 93 but has yet to be implemented in most countries. Moreover, in recent times there has been an increased interest in outcomes-based performance monitoring and evaluation of government activities (see Stiglitz and others, 2010). As argued also in Atkinson (2005), it will be important to measure not only public sector outputs but also outcomes, as the latter are what ultimately affect welfare. A step in this direction is suggested by Abraham and Mackie (2006) for the US, with the creation of “satellite” accounts in specific areas as education and health. These extend the accounting of the nation’s productive inputs and outputs, thereby taking into account specific aspects of non-market activities.