CIAO DATE: 08/2008
Volume: 27, Issue: 3
Fall 2007
Global Imbalances, Tanking Dollar, and the IMF's Surveillance over Exchange Rate Policies (PDF)
Sitikantha Pattanaik
The exchange rate policies of the member countries of the International Monetary Fund could come under more intrusive scrutiny because of the June 15, 2007, decision of the IMF Executive Board on bilateral surveillance. This article highlights why the IMF decision cannot help in addressing the problem of global imbalances, even if it succeeds in delivering further appreciation of the exchange rates of surplus countries against the U.S. dollar. Moreover, there could be enormous challenges for effective implementation of the decision, which may further erode the credibility of the IMF. Even though disorderly correction of global imbalances remains a concern for every country, shifting the burden of adjustment entirely to surplus countries could have potentially damaging implications for international cooperation on global economic challenges. Past experiences of international cooperation to deal with global imbalances and currency misalignments suggest that countries rarely sacrifice their domestic economic priorities. Without appropriate macroeconomic adjustment measures, neither the high and growing U.S. current account deficit nor the savings glut of several surplus countries can be corrected solely by removing exchange rate misalignments.
Can Corruption Ever Improve an Economy? (PDF)
Douglas A. Houston
Many in the world of developmental economics believe that corruption, the circumvention of the rule of law for private gain, leads to nothing but woe for any nation’s economy, under any circumstances. Transparency International makes the elimination of corruption their mission, and many large multinational firms today echo that goal by building ethical codes that prohibit employees from engaging in practices deemed corrupt, regardless of local attitudes and customs toward the practices. The World Bank makes curbing corruption a linchpin in their campaign to improve governance. Reasons given for blanket condemnation of corrupt behavior are often utilitarian: Corruption is expected to increase the economic costs of doing business by undermining the laws of the land; this, in turn, reduces productive activities and investments, with negative consequences unfolding for human development and economic growth.
Economic Freedom, Corruption, and Growth (PDF)
Mushfiq us Swaleheen, Dean Stansel
This article adds to the empirical literature on the relationship between corruption and economic growth by incorporating the impact of economic freedom. We utilize an econometric model with two improvements on the previous literature: (1) our model accounts for the fact that economic growth, corruption, and investment are jointly determined, and (2) we include economic freedom explicitly as an explanatory variable. Using a panel of 60 countries, we find that for countries with low economic freedom (where individuals have limited economic choices), corruption reduces economic growth. However, in countries with high economic freedom, corruption is found to increase economic growth. Our results contradict the generally accepted view that corruption lowers the rate of growth. We use Osterfeld’s (1992) distinction between expansive and restrictive corruption to explain our results. According to Osterfeld, corruption expands output if more bribes help the economy move toward greater free exchange. Thus, in economies where economic freedom is high, if bribing makes public officials less diligent in enforcing restrictions on firms’ activities, output will increase. However, corruption will restrict output when bribes reduce competition and increase market rigidities. This outcome is more likely in countries where economic freedom is low due to widespread state ownership of assets (e.g., in China), monopolies and high tariff barriers granted to businesses owned by ruling elites and their cronies (e.g., the Philippines under Marcos and Indonesia under Suharto), and state-run marketing boards that are often the sole purchasers of agricultural products (e.g., in several African countries). An increase in corruption in these low economic freedom countries means even less competition and free exchange and leads to a fall in output. The policy implication of our finding is straightforward: The surest way to mitigate corruption and its adverse effects is to increase economic freedom.
Government Behavior and Trust: The Case of China (PDF)
Peihong Yang
Social capital has become a critical term in the social sciences since Loury (1977) and Coleman’s (1988) seminal studies. Coleman (1990) and Putnan, Leonardi, and Nanetti (1993) focus on the positive spillover effect of social capital. Fukuyama (1997) argues that only certain shared norms and values can be regarded as social capital. Putnan (2000), Ostrom (2000), and Bowles and Gintis (2002) highlight the network effect of social capital. All these studies demonstrate that trust is central to social capital.
Fafchamps (2004) argues that trust may be understood as an optimistic expectation or belief regarding other agents’ behavior. The origin of trust, however, may vary. Durkheim (2000) argues that trust comes from family ties. Platteau (1994a, 1994b) argues that it arises from general knowledge about the population of agents, the incentives they face, and the upbringing they have received. The former can be called personalized trust and the latter generalized trust. Glaeser et al. (2000) employ economic experiments to see how attitudes and background characteristics influence the choice of strategies.
The Real Coase Theorems (PDF)
Glenn Fox
The “Coase theorem,” in one respect, is a triumph of social science scholarship. Web searches using “Coase theorem” as key words typically yield over 100,000 hits. Economists, legal scholars, environmentalists, and political scientists have written volumes on the theorem. Few ideas written by economists in the 20th century have been as widely debated. And the debating continues, 47 years after the publication of “The Problem of Social Cost” (Coase 1960), the essay recognized as the source of the ideas in question. There is only one problem: Ronald Coase maintains that the theorem that bears his name conveys an idea that is antithetical to the message that he intended.
My view is that virtually all of the criticism of the Coase theorem fails to appreciate the actual message that Coase intended with “Social Cost” and is, therefore, essentially irrelevant. Tragically, because we have focused on what he was not saying, we have not grasped what he was saying. Consequently we have been neither sufficiently appreciative nor sufficiently critical of his actual message.
Potential Gains from Trade in Dirty Industries: Revisiting Lawrence Summers' Memo (PDF)
Jay Johnson, Gary Pecquet, Leon Taylor
Lawrence Summers has a long history of controversial statements. Well before his comments in 2005 as then-president of Harvard University about the underrepresentation of women on faculties for mathematics and science, Summers was the chief economist at the World Bank. In that position, he penned a memo to his colleagues in 1991 that was leaked to the public, drawing heated criticism. In 1999, when President Bill Clinton nominated Summers as Secretary of the Treasury, the controversy over Summers’ memo was revived during his Senate confirmation hearings. Hundreds of articles were posted on the Internet at that time attempting to sway public opinion against Summers.
The controversy remains alive. Debate continues over the effect that free trade or globalization has on developing nations and on the environment, with the prevailing attitude that some trade must be prohibited. Most developed nations therefore abide by the 1994 Basel Convention, which bans exports of toxic wastes to developing countries, but the continuing shift of pollution-intensive production to poor countries effectively exports toxics to them.
Economic Liberty and the Official Law Books in Colonial Massachusetts (PDF)
Charles Edward Smith
Hernando de Soto’s The Mystery of Capital traces the essential developments of land registration and titling in 19th century U.S. history. But his chronology omits implementation of mid-17th century English legal reform initiatives in colonial Massachusetts concerning land registration, creditor-debtor law, and market regulations. Massachusetts’s legislators were pursuing a reform agenda in an agrarian, semi-literate, and pre-contract society, conditions that are similar to many developing countries today. This article expands on de Soto’s work by examining the vehicle that colonial Massachusetts utilized to communicate its ordinances and regulations: the official law books printed and distributed to colonists.
The Role of Fiscal and Political Institutions in Limiting the Size of State Government (PDF)
Robert Krol
In many states, tax and expenditure limits constrain government spending. All but one state have adopted balanced-budget rules. Some governors have the power to veto individual budget items (the so-called line-item veto). This article reviews the evidence linking fiscal and political institutions to state taxation, spending, and debt.
It appears that properly designed fiscal and political institutions are effective in containing the growth of state government. Constitutional tax and expenditure limits have been more successful than spending constraints established legislatively. Balanced-budget rules that prohibit deficit carryover to the following fiscal year are superior to rules that allow deficit carryover.
Researchers have identified two other relationships. First, there is evidence that fiscal rules reduce state borrowing costs. Second, the citizen initiative process has played a role in controlling spending: states with a citizen initiative process spend less.
Do Spillover Benefits Create A Market Inefficiency in K-12 Public Education? (PDF)
Kerry A. King
In economics there is a well-established framework for determining whether government intervention into a market is justified. If we look from the perspective of economic efficiency, government intervention has the potential to improve the market outcome when a so-called market failure exists. As Bator (1958) suggests, certain categories of market failures such as public goods, externalities, and monopoly all contain certain properties that lead to an allocation of resources that is not Pareto-efficient—that is, does not equate marginal social benefits and costs.
The use of the word potential is important to note when referring to government intervention and improved market outcomes because modern public choice theory also suggests the presence of government failures. It is conceivable that even in a case where the private market fails to reach an efficient outcome, government intervention might actually worsen, rather than improve, the situation (Sobel 2004).1 A possible explanation for this occurrence is given by Buchanan (1962), who discusses the concept of political externalities, which refer to situations where political action is carried out without unanimous consent thereby reducing the range of choices open to individuals.
The Future of the U.S. Postal Service (PDF)
Robert Carbaugh
Structural, legal, and financial constraints have brought the U.S. Postal Service (USPS) to the brink of breakdown in the past decade. Faced by declining business brought about by the e-mail revolution and competition from private express companies, the Postal Service has repeatedly requested assistance from the federal government. This culminated in December 2006 with the passage of the Postal Accountability and Enhancement Act, which introduces modest revisions in the pricing and service policies of the Postal Service so as to make it a self-sustaining government corporation. But will it?
Although the new legislation addresses some of the problems of the Postal Service, more radical changes may be necessary in the future. One possibility is the complete privatization of the Postal Service including the removal of the legal monopoly that it has on the delivery of letter mail, so as to foster competition in the mail delivery. Because these remedies are currently too controversial for Congress to implement, their chances of being enacted in the near future are dim. Instead, what is emerging is a partial approach to privatization in which the Postal Service forms worksharing agreements with private-sector firms to take advantage of their efficiencies. Whether such partial privatization will significantly improve the efficiency of mail delivery remains to be seen. This article discusses the nature and operation of the Postal Service and assesses the merits of its possible reforms.
Book Review: The Age of Turbulence: Adventures in a New World by Alan Greenspan (PDF)
William Niskanen
Alan Greenspan, for an $8 million advance, has written two books in one. The first 11 chapters are a personal memoir from his earliest childhood memories through the end of 2006. The final 14 chapters are a series of lectures about the major recent changes in the United States and the world economy. The book is written in clear English, not Greenspan’s occasional “Fedspeak,” and is a pleasure to read—the result of a productive collaboration with Peter Petre, who taught him to write in the first person as a participant rather than only as an observer of the many important events in the past several decades. This is important because Greenspan has a lot to say about the people and policies of six administrations from that of Richard Nixon to that of George W. Bush. And it is important for both economists and others to understand the major lessons from this period.
Book Review: A Farewell to Alms: A Brief History of the World by Gregory Clark (PDF)
Jason Kuznicki
The thesis of Gregory Clark's A Farewell to Alms is that, for most of human history and prehistory, there prevailed an essentially Malthusian social dynamic, one in which improvements in technology or wealth were turned almost immediately into increased population rather than increased individual wealth or technological innovation. Only calamities, such as the Black Death of the 14th century, could raise the average wealth of a society, and they did so by reducing the population.
These conditions meant that Europe (but why was it only Europe?) experienced a continual downward social mobility: The rich had more children, on average, while the poor had fewer, and all children could expect to be poorer than their parents. Downward mobility meant that something essential-let us call it breeding-was disseminated from the upper classes to the lower. This breeding, when spread sufficiently, produced the values and habits necessary for the Industrial Revolution.
Justin Logan
After the shocking intelligence failure of September 11 and the faulty estimate of Iraq’s weapons of mass destruction, many observers are asking why such egregious mistakes happened, and what can be done to prevent repeat performances. Washington has never been short on proposed intelligence reforms. Daniel Patrick Moynihan proposed shuttering the CIA altogether while Gary Schmitt advocated giving Congress more raw intelligence. These and other proposals have varied a great deal in quality and feasibility.
Richard K. Betts, professor at Columbia University and one of the best-informed pathologists of the intelligence process, has offered a book that diagnoses the enemies of intelligence: “outside enemies,” or outright adversaries who are attempting to defeat the nation’s defenses; “innocent enemies,” or feckless or incapable American bureaucrats; and, most frequently overlooked, “inherent enemies,” which Betts describes as “an amorphous and impersonal group of dysfunctions” that “grow out of the human condition and the dynamics of the intelligence function itself” (p. 12). Betts is primarily concerned with these inherent enemies.