VOLUME 13 ISSUE 2 | SPRING 2019

inFOCUSQUARTERLY Money Makes the World Go ‘Round

Marian L. Tupy on Our Pessimistic Outlook | Adam Reuter on Israel’s Economic Development | Daniel Ikenson on North America’s New Trade Agreement | Anders Åslund on Russian Economic Stagnation | Steve H. Hanke on Venezuela’s Hyperinflation | Casey Pifer on Aid and Open Markets in Africa | Aaron Friedberg on the Challenging China | Dan Mitchell on Chile’s Privatized Retirement Program | Jeffrey Dorfman on the Nordic Economic Model | Shoshana Bryen reviews I Love Capitalism

Featuring an Interview with Peter G. Morici LETTER FROM THE PUBLISHER

hen I was a child, my mother high-tech prosperity is the purview of told me to eat my vegetables Adam Reuter. If you think the Nordic inFOCUS VOLUME 13 | ISSUE 2 because children were starv- countries have something on us, Jeffrey ing in India. Or was it China? Dorfman reminds us – and Democrat Publisher W Matthew Brooks Either way, I couldn’t figure out how candidates for office – that they are not eating my broccoli helped, but I under- socialist. Property rights are the key Editor stood that there were children literally to prosperity in Africa, writes Casey Shoshana Bryen Associate Editors dying in other places for lack of food. Pfifer. Dan Ikenson explains why free Michael Johnson And I wasn’t. trade with Canada and Mexico are in Eric Rozenman The introduction of America’s interest. Copy Editor capitalism and markets Some countries are Shari Hillman to China, India and else- gloomy – with cause. Ven- where has proven to be the ezuela, Russia, and China Published by: Jewish Policy Center biggest lever in the history are stuck and likely to 50 F Street NW, Suite 100 of mankind for prying remain so, according to Washington, DC 20001. people out of the morass of Steve Hanke, Anders Ås- poverty and into a safer, healthier, better lund and Aaron Friedberg. (202) 638-2411 educated, and more self-fulfilling way of Ken Langone positively sings his life. Certainly not everyone has every- ode to markets and risk-taking capital- Follow us on JewishPolicyCenter @theJPC thing, but a lot more people have some- ists in I Love Capitalism, reviewed by thing today than during my childhood. Shoshana Bryen. The opinions expressed in inFOCUS do not This issue of inFOCUS is a cheer for If you appreciate what you’ve read, necessarily reflect those of the Jewish Policy capitalist economics. I encourage you to make a contribution Center, its board, or its officers. Start with our interview with Pro- to the Jewish Policy Center. As always, To begin or renew your subscription, please fessor Emeritus Peter Morici to under- you can use our secure site: http://www. contact us: [email protected] stand where capitalism is taking us, our jewishpolicycenter.org/donate. friends, and some of our competitors. Essayist Marian Tupy points out, Sincerely, © 2019 Jewish Policy Center “Things are getting better – so why are we so gloomy?” Chile’s successful priva- www.JewishPolicyCenter.org tization of Social Security is addressed by Dan Mitchell, and Israel’s dizzy- Matthew Brooks, ing climb from socialist stagnation to Publisher

MARIAN L. TUPY, Ph.D., is senior policy analyst at the Cato PETER G. MORICI, Ph.D., is Professor Emeritus of eco- Institute’s Center for Global Liberty and Prosperity. (3) nomics at University of Maryland. (20) ADAM REUTER is chairman of Financial Immunities and CASEY PIFER is Director of Institute Relations for Featuring co-author of Israel - Island of Success. (5) Atlas Network. (25) DANIEL IKENSON is director of the Cato Institute’s AARON FRIEDBERG, Ph.D., is Professor of Politics and Herbert A. Stiefel Center for Trade Policy Studies. (9) International Affairs at Princeton University. (28) ANDERS ÅSLUND, Ph.D., is a senior fellow at the Atlan- DAN MITCHELL is co-founder of the Center for Freedom tic Council and author of the forthcoming book Russia’s and Prosperity and chairman of the board. (32) Crony Capitalism: The Path from Market Economy to Kleptocracy. (12) JEFFREY DORFMAN, Ph.D., is a professor of economics at The University of Georgia and author of Ending the Era STEVE H. HANKE, Ph.D., is Professor of Applied Econom- of the Free Lunch. (35) ics at the Johns Hopkins University and is a Senior Fellow and Director of the Troubled Currencies Project at the Cato SHOSHANA BRYEN is Editor of inFOCUS Quarterly and Institute. (16) Senior Director of the Jewish Policy Center. (41) Things Are Getting Better – So Why Are We So Gloomy? by MARIAN L. TUPY

t the end of last year, I docu- impending water wars, inevitable oil scenarios that virtually never materialise? mented the constant stream of exhaustion, mineral shortages, fall- The chairman of the X Prize Foun- technological, scientific and ing sperm counts, thinning ozone, dation, Peter H. Diamandis, offers one Amedical breakthroughs that are acidifying rain, nuclear winters, plausible explanation. Human beings improving the lives of billions of ordi- mad-cow epidemics, Y2K computer are constantly bombarded with infor- nary people. Given all this good news, bugs, killer bees, sex-change fish, mation. Because our brains have a lim- the real question is why people are so global warming, ocean acidifica- ited computing power, they have to sep- unbelievably pessimistic. tion and even asteroid impacts that arate what is important, such as a lion Judging by a 2016 poll of close to would presently bring this happy in- running toward us, from what is mun- 20,000 people in some of the world’s terlude to a terrible end. I cannot re- dane, such as a bed of flowers. Because richest countries, you could barely call a time when one or other of these survival is more important than all overstate the extent of the gloominess. scares was not solemnly espoused other considerations, most information In response to the question “All things by sober, distinguished and serious enters our brains through the amygdala considered, do you think the world is elites and hysterically echoed by the – a part of the brain that is “responsible getting better or worse, or neither get- media. I cannot recall a time when for primal emotions like rage, hate and ting better nor worse?” just 10 percent I was not being urged by somebody fear.” Information relating to those pri- in Sweden, six percent in the United that the world could only survive if mal emotions gets our attention first States, four percent in Germany and it abandoned the foolish goal of eco- because the amygdala “is always look- three percent in France thought things nomic growth. The fashionable rea- ing for something to fear.” Our species, were getting better. Why? Because, it son for pessimism changed, but the in other words, has evolved to prioritise turns out, we are pessimists by nature. pessimism was constant. In the 1960s bad news. Over the last 200 years or so, the world has experienced previously un- imaginable improvements in standards of living. The process of rapid economic The negativity bias is deeply ingrained in our brains. growth started in Europe and America, The best that we can do is to realise that we are but today some of the world’s fastest growing countries can be found in Asia suffering from it. and Africa – lifting billions of people from absolute poverty. Historical evi- dence, therefore, makes a potent case for optimism. Yet, pessimism is everywhere. the population explosion and global The Harvard University psycholo- As the British author Matt Ridley noted famine were top of the charts, in the gist Steven Pinker has noted that the in The Rational Optimist: 1970s the exhaustion of resources, in nature of cognition and nature of news the 1980s acid rain, in the 1990s pan- interact in ways that make us think that The bookshops are groaning under demics, in the 2000s global warming. the world is worse than it really is. News, ziggurats of pessimism. The airwaves One by one these scares came and after all, is about things that happen. are crammed with doom. In my own (all but the last) went. Things that did not happen go unreport- adult lifetime, I have listened to the ed. As Pinker points out, we “never see a implacable predictions of growing Ridley raises a more specific point reporter saying to the camera, ‘Here we poverty, coming famines, expand- than general pessimism: Why are we as a are, live from a country where a war has ing deserts, imminent plagues, species so willing to believe in doomsday not broken out.’” Newspapers and other

Money Makes the World Go ‘Round | inFOCUS 3 how much more miserable can you imagine yourself to feel? The answer to the latter question is: infinitely. Psycho- logical literature shows that people fear losses more than they look forward to gains; dwell on setbacks more than rel- ishing successes; resent criticism more than being encouraged by praise. Bad, in other words, is stronger than good. Finally, good and bad things tend to happen on different timelines. Bad things, such as plane crashes, can hap- pen quickly. Good things, such as the strides humanity has made in the fight against HIV/AIDS, tend to happen in- crementally and over a long period of time. As Kevin Kelly from Wired has put it, “Ever since the Enlightenment and the invention of Science, we’ve managed to create a tiny bit more than we’ve de- stroyed each year. But that few percent positive difference is compounded over decades in to what we might call civili- zation … [Progress] is a self-cloaking ac- tion seen only in retrospect.” In other words, humanity suffers from a negativity bias or “vigilance for bad things around us.” Consequently, there is a market for purveyors of bad news, be they doomsayers who claim that media, in other words, tend to focus on their rate of recurrence. When an event overpopulation will cause mass starva- the negative. As the old journalistic ad- turns up because it is traumatic, the hu- tion, or scaremongers who claim that we age goes, “If it bleeds, it leads.” man brain will overestimate how likely are running out of natural resources. To make matters worse, the arrival it is to reoccur. Politicians, too, have realized that of social media makes bad news imme- Consider our fear of terror. Accord- banging on about “crises” increases diate and more intimate. Until relatively ing to John Mueller, a political scientist their power and can get them re-elected. recently, most people knew very little from Ohio State University, “In the years It may also lead to prestigious prizes and about the countless wars, plagues, fam- since 9/11, Islamist terrorists have man- lucrative speaking engagements. Thus ines and natural catastrophes happening aged to kill about seven people a year politicians on both Left and Right play in distant parts of the world. Contrast within the United States. All those deaths on our fears – whether it is a worry that that with the 2011 Japanese tsunami are tragic of course, but some compari- crime is caused by playing violent com- disaster, which people throughout the sons are warranted: lightning kills about puter games or that health maladies sup- world watched unfold in real time on 46 people a year, accident-causing deer posedly are caused by the consumption their smart phones. another 150, and drownings in bathtubs of genetically modified foods. The human brain also tends to around 300.” Yet, Americans continue to The negativity bias is deeply in- overestimate danger due to what psy- fear terror much more than drowning in grained in our brains. It cannot be chologists call “the availability heuris- a bathtub. wished away. The best that we can do is tic” or a process of estimating the prob- Moreover, as Pinker also points out, to realise that we are suffering from it. ability of an event based on the ease the psychological effects of bad things with which relevant instances come to tend to outweigh those of the good ones. MARIAN L. TUPY, Ph.D., is senior mind. Unfortunately, human memory Ask yourself, how much happier can you policy analyst at the Cato Institute’s Cen- recalls events for reasons other than imagine yourself feeling? And again, ter for Global Liberty and Prosperity.

4 inFOCUS | Spring 2019 Israel: From Kibbutz to a High Tech Nation by ADAM REUTER

srael’s kibbutz movement was cer- is how the “Economic Stabilization Pro- deficit and the debt-to-GDP ratio. The tainly important – and more than gram” was born and the government program was exceptionally successful that, prominent – but, contrary to began a process of self-reduction. Thir- and became a model for other countries. conventional wisdom, it was never a ty-four years later, Israel’s government I ❚❚ central force in the Israeli economy. involvement in the economy is one of the Privatization and lowest in the Organization for Economic Immigration ❚❚The 1980s in Israel Cooperation and Development (34 de- At the same time, as part of the plan, The roots of economic change in the mocracies with market economies). and in order to generate additional rev- kibbutz movement can be traced to the enues for the State, a very broad privatiza- mid-1980s. Israel had a major problem. ❚❚Economic Stabilization tion of government companies took place. There was dangerous deterioration in all Behind the stabilization plan was a The process was intensified following a economic parameters, and it reached the national unity government that took of- global wave of privatization led at the time second most difficult economic crisis in fice in July 1985– representing parties by Great Britain and other countries. its history. (The first came with the es- from the left to the right – and managed However, efforts to revive economic tablishment of the State.) to deal with various pressure groups. growth failed. Israel remained in an eco- The seriousness of the situation The main points of the plan were a deep nomic depression, exacerbated by the lack could be understood from the rate of cut in the state budget, a wage freeze, a of continuity and reluctance to further inflation, which reached 445 percent freeze on prices of goods, cuts in subsi- reduce public expenditures, and by a sig- in 1984. The difficult situation of the economy further exacerbated a crisis that erupted in 1983 with the collapse Renewed growth came only in 1989 when the of Israeli bank shares. The government Israeli economy grew by some 20 percent in a short undertook to cover a large part of the expected losses. To this end, it trans- time, following the massive wave of immigration ferred to itself the ownership of most of from the Soviet Union. the commercial banks and became the guarantor of a large part of the public’s investments in their shares. dies and fixing the dollar exchange rate. nificant increase in interest rates to ensure The unsurprising result was an in- In addition, Israel received gener- that inflation did not return. Renewed crease in the government’s internal debt. ous aid from the United States, some of growth came only in 1989 when the Israe- Israel’s government already was involved whose senior economists were sent to li economy grew by some 20 percent in a in every aspect of the economy. Public Israel by the Reagan administration to short time, following the massive wave of expenditure reached a peak of 76 percent accompany and help formulate the plan, immigration from the Soviet Union. of GDP, and most of the large companies as well as pressure the heads of govern- The program was a turning point in were owned by the government as well. ment to take the painful steps to ensure Israel’s economic system, which gradu- The high inflation resulted in a very that such a crisis did not recur. ally shifted from a clearly social-demo- large deficit in the state budget and the The program took advantage of one cratic policy to a policy characterized by balance of payments accounts. Debts the main characteristics displayed by Is- a more liberal and capitalist focus. rose to such a level that there was a fear rael since its inception—the ability to act There were casualties. In particular, of national bankruptcy. In June 1985, in situations of no choice. The results of the Histadrut was hurt. It was Israel’s the politicians decided that the direc- the plan were primarily containing infla- largest and most powerful labor union, tion must be changed dramatically. That tion, improving the government’s budget which at the time included most public

Money Makes the World Go ‘Round | inFOCUS 5 Members of the Kibbutz Ein Harod dance the Hora in 1936. (Photo: Israel Goverment Press Office) sector workers. Cancellation of various was justified. Many of them sacrificed collective, both in social and legislative government subsidies granted to it ex- greatly for the people and the homeland. terms, caused a loss of public prestige for posed the Histadrut factories’ inability However, in many ways a kibbutz func- the kibbutz idea. As a result, the status to compete in a free market and its failed tioned as an economic mechanism along and political power of the kibbutz move- management, the product of years of reg- the lines proposed by many communes: ment weakened. The change of political ulated economic certainty. Histadrut fac- “From each according to his or her abilities power in 1977 with the election of Is- tories were forced to take loans and went and to each according to his needs.” Such a rael’s first right-of-center government into a whirl of debt. A cut in Histadrut’s power and a dramatic cut in the defense budget were probably the most important The increasing importance of professional structural changes in the long term. knowledge and technology in economic Another important sector that was hurt was that of the kibbutzim. development ... caused a loss of public prestige for the kibbutz idea. ❚❚The Kibbutz Movement Changes Kibbutzim (originally collective ag- mechanism works when all members par- strengthened this trend. Nevertheless, ricultural and industrial settlements), ticipate as self-sacrificing idealists, but col- few kibbutzim made a real effort to whose members helped so much in the lapses when participants seize openings to adapt themselves to the changing reality. establishment and defense of the coun- function as exploiters or parasites or grow Over the years, many kibbutzim try, were always a small fraction of Israeli frustrated at the denial of individual op- had accumulated large debts and found economy and population, never exceed- portunity and reward. it difficult to pay them. Political con- ing a few percent. Nevertheless, their in- The increasing importance of pro- trol by the socialist Labor movement fluence had always been significant. fessional knowledge and technology in (HaAvoda), which had roots reaching The movement began long before the economic development, and the fact that to the establishment of the State, had establishment of the State and the aura in Israeli society the status of the indi- given them assurance that the govern- surrounding the builders of the kibbutzim vidual became more important than the ment would be the guarantor of those

6 inFOCUS | Spring 2019 ADAM REUTER: Israel: From Kibbutz to a High Tech Nation debts and would take care, in one way 1985 2018 Change % or another, of their repayment. Consid- ering this understanding, many mutual Number of residents (in millions) 4.4 8.95 103% guarantees were signed, in which each kibbutz was the guarantor of debts of all The tax burden 45% 30% -33% others. This gave the financial system the feeling that it would be possible to over- come any future crisis for the kibbutzim. GDP (in $ billions) 35 358 923% Yet many kibbutzim became insol- vent and in 1989 and 1996, the Israeli GDP per capita (in $ thousands) 8 40 400% government, the banks and the kibbutz movements signed two debt arrange- Foreign Currency Reserves (in $ 4 115 2775% ments designed to solve the crisis. This billions) became a major catalyst for the process Government debt as percent of of change that many kibbutzim have un- 155% 59% -62% GDP dergone since the 1990s. Defense expenditure as percent At first these arrangements created a 17% 5% -71% rigid economic system and led to a long of GDP period of stagnation in the members’ per- sonal standard of living. But the debt ar- US aid as a percentage of GDP 7% 1% -86% rangements, accompanied by control and supervision by the banks, eventually led to Total exports (in $ billions) 10 110 1000% economic reforms that enabled kibbutzim to improve their business performance. Energy from independent sources 4% 73% 1725% Many of the kibbutzim that held industri- al plants under the exclusive management of kibbutz members now recruited private Water from desalinated sources 3% 52% 1633% capitalists as partners and hired profes- sional managers. Decision-making began Employment of Women 36% 60% 67% to shift to representative and technocratic bodies with the personal involvement of Number of students (in 70 316 351% kibbutz members greatly reduced. Some thousands) members were asked to go to work outside Table 1. Israel has since made an almost unbelievable leap, evident from the above sta- the kibbutz and some were given the op- tistics. Moreover, many of these parameters are currently among the best in the OECD. portunity to develop business initiatives. the troubles of the kibbutzim. designed to encourage the growth of the ❚❚Immigration from the for- The vast majority of immigrants high-tech industry with money invested mer Soviet Union quickly integrated into the work force, from venture capital funds. The govern- Economic studies have found that and within a few years, participation in ment directly invested $100 million in highly educated immigrants are a net the labor force by recent immigrants was 10 venture capital funds. Then the funds positive for many countries, helping higher than that of veteran residents. could choose to turn the government into them to high rates of growth. This has New civilian engineers staffed large parts a partner or return to the government the happened in the United States, Canada, of Israel’s construction industry. Many amount it invested plus interest. The gov- Australia, and in Israel as well. other new immigrants with scientific ernment initially held 40 percent of each A huge wave of olim (immigrants) or technological backgrounds greatly fund, but allowed the private partners began coming from Russia and Ukraine helped develop the high-tech industry. to buy its share on favorable terms after with the breakup of the Soviet Union in five years. Although the investment was 1989. This changed the face of the coun- ❚❚Encouraging Private not large, it was an encouraging signal, try, and in some ways was like the arrival Investment which gave a significant boost to Israel’s of the cavalry rescuing a besieged Wild Another measure that greatly venture capital industry and created a West outpost. This phenomenon was helped was the government’s Yozma pro- climate that encouraged investments in quick to make the general public forget gram. Implemented in 1993-1998, it was Israeli high-tech.

Money Makes the World Go ‘Round | inFOCUS 7 growth rates of the Israeli economy; al- most double that of the OECD countries, since the beginning of the century: It’s not all high-tech. In our book, Is- rael - Island of Success, published by Ama- zon in 2018, Noga Kainan and I found, after a long-term study, four great advan- tages and three revolutions in the making. • Technological and Scientific Ad- vantages that are quite clear. • Entrepreneurial Advantage—the second largest number of entrepreneurs in the world relative to the size of population. • Global Advantage—ties in other countries, understanding of many cul- tures and languages, and the connection among Jews around the world—all of these are very helpful for Israeli exports. Graph 1. The cumulative growth rates of the Israeli economy; almost double that of the OECD countries, since the beginning of the century: • Demographic Advantage—the youngest population in the OECD, Within seven years, the population venture capital—which later became which is most important for continued grew by about 25 percent from 4.4 to 5.5 private—along with immigration from economic growth and high consumer million, with 80 percent of this growth the former Soviet Union that brought in demand, the third-most educated popu- due to the arrival of olim. In the mod- a large pool of talented engineers. Global lation in the world, and waves of highly ern era, no other country absorbed such shifts from hardware to software opened educated immigrants. a large percentage of immigrants in such chances for thousands of Israeli compa- We also have marked three revolu- a short period of time. In this, too, eco- nies to break out and show a significant tions of great importance: nomic aid from the United States greatly comparative advantage in the global • Gas Revolution – the discovery of supported this success. technology market. huge natural gas reservoirs will trans- Yet the relative suddenness of this It should be noted that Israel always form Israel from an importer to an ener- wave and its widespread scope soon led placed emphasis on scientific research gy exporter and generate high revenues. to a severe shortage of housing and a and human development, in part as a • Water Revolution—Israel operates drastic rise in house prices. That, in turn, response to its lack of natural resources some of the largest desalination plants led to social protest that subsided only and in response to the long-standing in the world and almost all urban water slowly. Arab League economic boycott. consumption comes from these facilities. Israel is the world leader in research Israel’s also the world champion in the ❚❚Four advantages and three and development as a percentage of GDP, return of treated wastewater; this helps revolutions also ranking first in the world in the prevent the phenomenon of desertifica- Since the beginning of the 21st cen- number of start-up companies (about tion. tury, Israel’s economy has been very dif- 7,500), fifth in the world in patents per • Transportation Infrastructure Rev- ferent from what came before, based more capita, and ranked third in the world by olution derived from massive investments. than any other country on high-tech. the number of engineers per capita. More From its modern start in the socialist The high-tech industry grew out of than 300 major international companies labor movement of the 19th century, Isra- the universities and military research operate R&D centers in Israel. These in- el has the assets and the infrastructure to laboratories that helped create an ex- clud Facebook, Microsoft, IBM, Intel, continue to grow faster than other OECD cellent human and technological infra- Google, Apple, Cisco, Motorola, Philips, countries well into the 21st century. structure that served as a springboard. Applied Materials, Johnson & Johnson, Success stemmed from a unique com- Siemens, Citibank, HP and EMC. More ADAM REUTER is chairman of bination of the maturation of educa- than 90 Israeli companies are listed on Financial Immunities and co-au- tional and technological products, civil the NASDAQ stock exchange, most of thor of Israel - Island of Success. applications of the defense industry, them high-tech. and government assistance in raising Graph 1 shows the cumulative

8 inFOCUS | Spring 2019 USMCA: A Marginal NAFTA Upgrade at a High Cost by DANIEL IKENSON

n the campaign trail, Donald the U.S. International Trade Commission the scoreboard. To Trump, perennial Trump vowed to strengthen on or around April 19, remained an open U.S. trade deficits mean that the United enforcement of existing trade question at press time. But considering States has been losing at trade for de- Orules and negotiate better trade the controversial substance of the agree- cades, and it has been losing because it deals than his predecessors had. With ment, the vitriolic nature of America’s has negotiated bad trade deals. his national security tariffs on steel partisan politics, and the fact that the It is in that context that the presi- and aluminum, his safeguard tariffs on presidential primary election season is dent deemed NAFTA a failure and set washing machines and solar compo- rapidly approaching, prospects for pas- out to revise its provisions to tilt the nents, his broad trade war with China, sage before the November 2020 elections playing field in favor of U.S. produc- and the looming specter of new barri- are no better than 50-50, and fading. ers. But that is an ahistorical view. After ers for automobile imports, President Why did the president choose to NAFTA came into effect in 1994, nearly Trump has delivered—for better or renegotiate NAFTA? How does the all tariffs among the three countries worse—on the first promise. On the USMCA compare to the original NAF- were eliminated, many non-tariff barri- second, he has little to show. TA? How does it compare to other impor- ers were reduced, and trade and invest- On Sept. 30, 2018, American, Mexi- tant benchmarks? Why are its prospects ment flourished. can, and Canadian negotiators reached for congressional approval so uncertain? Between 1993 (the last year before a deal to replace the North American And what will happen if it doesn’t pass? NAFTA went into force) and 2016, to- Free Trade Agreement (NAFTA), which tal U.S. trade in goods and services with President Trump had described as “the ❚❚Have We been Losing at Trade? Canada and Mexico increased more than worst trade deal ever negotiated.” Two American presidents of both ma- 125 percent in real terms, reaching over $1 months later, Trump and his Mexican jor parties from Franklin D. Roosevelt trillion in 2016. During the same period, and Canadian counterparts signed the through Ronald Reagan to Barack foreign direct investment in the United States from Canada and Mexico increased from $41.6 billion to $285.6 billion. ... USMCA [has] the distinction of being the first NAFTA certainly enabled more U.S. trade agreement that doesn’t include any cross-border final goods trade, but it also facilitated the development of a globally significant new U.S. market-opening provisions. competitive North American produc- That’s a notable missed opportunity. tion platform, most consequentially in the auto sector. Today, 40 cents of every dollar of goods imported from Mexico “United States-Mexico-Canada Agree- Obama considered trade a mutually and 25 cents of every dollar of goods im- ment” (USMCA), which modernizes— beneficial endeavor, essential to global ported from Canada can be attributed to and revises in ways both good and bad— economic growth and prosperity, and U.S. inputs of labor and material—U.S. the 25-year old NAFTA. But before the integral to promoting peace among na- value added. USMCA can enter into force, it must be tions. President Donald Trump doesn’t Much has been made over the years approved by the legislatures of all three share this perspective. He sees trade as since Ross Perot’s 1992 description of a countries. This will be a heavy lift. a zero-sum competition between Team “giant sucking sound” of jobs and in- Whether the U.S. Congress passes America and foreign teams—a win-lose vestment being drawn south of the bor- the implementing legislation, which will proposition—where exports are Amer- der from the United States. But like the be introduced by the administration after ica’s points, imports are the foreign trade and investment data, the employ- an assessment of the deal is published by teams’ points, and the trade account is ment figures don’t support that claim

Money Makes the World Go ‘Round | inFOCUS 9 Although the USMCA does not raise tariffs over the rates effective -un der NAFTA, it does have the distinction of being the first U.S. trade agreement that doesn’t include any significant new U.S. market-opening provisions. That’s a notable missed opportunity. In 2017, U.S. consumers spent $4.1 trillion on goods with imports totaling $2.3 trillion (57 percent). In contrast, U.S. consum- ers spent $9.2 trillion on services, only $550 billion (six percent) of which were imported. What this wide disparity in import penetration—six percent for ser- vices versus 57 percent for goods—sug- gests is that the United States maintains significant barriers to trade in services. The USMCA does nothing to reduce Mexican President Enrique Peña Nieto, U.S. President Donald Trump and Canadian barriers to services trade. Instead, it re- President Justin Trudeau sign the U.S.-Mexico-Canada trade agreement during a cer- emony in Buenos Aires, on the sidelines of the G-20 Leaders’ Summit on November 30, affirms bans on foreign competition in 2018. (Photo: U.S. Department of State) maritime shipping, commercial air ser- vices, and trucking services. Transpor- either. U.S. manufacturing employment For both autos and apparel, those tation costs comprise a significant share peaked in the United States in 1979 at thresholds were increased in the of the prices Americans pay for goods 19.43 million workers. Between 1979 USMCA. There is even a requirement purchased on Amazon and at brick and and 1993 (the last year before NAFTA that a minimum of 40 percent of the mortar establishments. Meanwhile, took effect), manufacturing employment value of auto production be produced commercial air travel is a significant shrunk by 2.66 million jobs. In the next by workers earning at least $16 per hour. cost of doing business for companies 14-year period (between 1993 and 2007), These production restrictions likely across all industries, and it accounts for when NAFTA was in effect, employment will hurt more than they help. The re- an important share of consumer spend- in the manufacturing sector decreased by duced capacity for automakers in North ing. The absence of foreign competition 2.89 million—effectively, no significant America to make use of the most effi- across our transportation services in- change in the trajectory. And over the cient supply chains, using inputs from dustries—as well as in our education, first six years of NAFTA, the U.S. econ- within and outside of North America as health care, professional services indus- omy added 540,000 manufacturing jobs. requirements and economic conditions tries—suggests that the USMCA could This is not to suggest that NAFTA should would dictate, is likely to make regional have been much more liberalizing. be credited with creating those jobs, but producers less competitive relative to that those who blame NAFTA for manu- producers in countries where there are ❚❚Opening the Market facturing job decline need to account for fewer restrictions on sourcing. The more The U.S. market is generally open these countervailing facts. rigid rules of origin translate into higher to foreign investment already, but in- regional production costs, which will vestment restrictions persist in certain ❚❚Changing the Rules encourage automakers, apparel produc- industries, including financial services, As a “Perot-ist” on NAFTA, Presi- ers, and other manufacturers to forego commercial air services, communica- dent Trump aimed to change the so- the costs of complying with these rules tions, and mining. The USMCA pro- called “rules of origin” in a way that in favor of using non-qualifying inputs vides no significant new access to for- would strongly encourage manufactur- or producing outside the region alto- eign investors in the United States. ers to invest more, produce more, and gether, and paying the non-preferential Likewise, the USMCA does close create more jobs in the United States. A tariff rates upon entry into the United to nothing to open any wider U.S. gov- trade agreement’s rules of origin estab- States. That would mean less investment ernment procurement spending to bids lish the minimum level of regional value and more divestment from the region, from Canadian and Mexican compa- a product must contain to qualify for the which is what happens when origin rules nies. That’s a huge missed opportu- agreement’s preferential terms. are too onerous. nity because under the various “Buy

10 inFOCUS | Spring 2019 DANIEL IKENSON: A Marginal NAFTA USMCA: Upgrade at a High Cost American” provisions, foreign firms and the USMCA is better than a U.S. NAFTA as a wedge issue for 25 years and foreign products are limited in compet- withdrawal from NAFTA without are unlikely to know how to position them- ing for the estimated $1.7 trillion of an- a replacement agreement. But that selves on the trade question if they join Re- nual U.S. federal and state government couldn’t happen, right? publicans in support of the USMCA. Even procurement spending. This, of course, though a majority of voters who affiliate drives up the cost of every government ❚❚Congress’s Battle with the Democratic Party support trade project and ensures that taxpayers get The Democratic takeover of the and free trade agreements, Democratic the smallest bang for their buck. In light House of Representatives raises doubts leadership in Washington is wary of ced- of the president’s interest in advancing a about the feasibility of passing the ing its capacity to showcase the party’s op- major infrastructure bill—maybe in the USMCA implementing legislation. The position to trade agreements when wooing neighborhood of $1 trillion—this is a irony in all of this is that U.S. Trade voters in the Rust Belt. problem that should concern us all. Representative Robert Lighthizer was Meanwhile, Democrats may not Despite backsliding in some areas explicit about his intention to make the want to give Trump something that and missed opportunities in others, the agreement one that would have bipar- could amount to a political victory. Aversion to that outcome will only in- crease as pressure builds for House in- vestigations and possibly impeachment The agreement establishes needed new rules in the proceedings, and as the calendar closes realm of digital trade, including prohibitions of data in on 2020. transmission taxes and data localization requirements. In the final analysis, if USMCA doesn’t pass and the existing NAFTA remains in force, the downside won’t be all that substantial because the new USMCA isn’t all bad. Most goods trade tisan appeal. He went out of his way to deal is only slightly better than the ex- will continue to be tariff-free (the NAF- incorporate provisions Democrats have isting one. However, NAFTA remaining TA status quo) under the new agree- long sought in trade agreements, includ- in force is an uncertainty, as Trump has ment, and barriers to certain agricultur- ing more rigorous labor and environ- been threatening to issue the USMCA al products will be reduced, as well. The mental provisions, and other measures implementing legislation and the NAF- agreement establishes needed new rules presumed to dissuade outsourcing. But TA withdrawal notification on the same in the realm of digital trade, including Democrats have some substantive con- day to compel Congress to act quickly. prohibitions of data transmission taxes cerns over the question of whether those It’s not clear why Trump thinks and data localization requirements. beefed-up labor and environmental pro- that his provoking a crisis would com- The USMCA is a marginal improve- visions will be enforced. They may insist pel Democrats to act on the USMCA. It’s ment over NAFTA—better in some ar- on having the agreement reopened to in- more likely that Trump would bear the eas, worse in others, about the same in clude more rigorous language in this re- brunt of the blame for the dissolution of most. Relative to the existing NAFTA, gard or they may seek concessions from the integrated North American economy. there are pros and cons. Though there Trump in other policy areas. The USMCA is far from the ideal is greater liberalization in goods trade, House Speaker Nancy Pelosi could free trade agreement, but an agreement it is marginally to imperceptibly so. also exercise her prerogative to take the pursued with trade deficit reduction and Taking into consideration the negative agreement off the fast track (as she did supply chain repatriation as its main ob- changes, especially to the rules of origin, with the U.S.-Colombia FTA in 2007), if jectives was never going to be an exem- it’s not obvious that USMCA is much of she asserts that the administration devi- plar of trade liberalization. For the sake an upgrade from NAFTA. But it’s pos- ated from its statutory obligations under of restoring some predictability to the sible—even probable—that some of the the Trade Promotion Authority legisla- North American business environment, less directly liberalizing, technical and tion. That would essentially foreclose it would be wise of policymakers to find procedural provisions, such as those consideration of the deal until she’s no a way to implement the agreement as governing “Digital Trade,” “Customs longer speaker or until negotiations with quickly as possible. and Trade Facilitation,” “State-Owned Canada and Mexico are re-opened. Enterprises” and others, utilized in ways But substantive opposition to the DANIEL IKENSON is director of not completely apparent now, could lead USMCA’s provisions from the House ma- the Cato Institute’s Herbert A. Sti- to lower trade costs down the road. jority party is only one part of the prob- efel Center for Trade Policy Studies. The only real certainty is that lem. Another is that Democrats have used

Money Makes the World Go ‘Round | inFOCUS 11 Russian Stagnation: Kleptocracy and Sanctions by ANDERS ÅSLUND

fficial Russia boasts about eco- a year. Former Finance Minister Alexei replaced the long-time head of Rosstat, nomic progress, although the Kudrin talks realistically about a more the respected professional Alexander Russian economy has been near- likely growth rate of one percent a year. Surinov, with a department head from Oly stagnant for the last decade as the Kremlin focuses on solid macroeco- nomic stability. But people do not eat Russia’s fundamental problem is that the country macroeconomic stability. Far more im- portant is the real income of the popula- has no real property rights… This is by design. tion, which has fallen for five years with- Weak property rights enable the rulers to take what out signs of improvement. How long will the Russian people accept their govern- they want through corporate raiding... ment’s underperformance? President Vladimir Putin gives three big public performances each year ❚❚Rosstat’s Numbers the ministry. Little surprise that statis- – his State of Russia address, a call-in The situation for the Russian popu- tics from previous years reflecting out- program for the Russian people in the lation looks far worse. According to the put, consumption, and real income have spring, and a big international press most recent official statistics, Russians’ quickly improved. conference in December. His latest press real disposable incomes have fallen by A growth rate of 1.5 percent might conference took place on December 20, a total of 11 percent during the last five not appear bad in the context slow- 2018. As he has for years, Putin empha- years. While that appears shocking, the growing European countries, but the sized the stability and sustainability of numbers were far worse a year ago, when Western European economies have a the Russian economy. Inflation was just the real incomes had fallen by 17 percent GDP (gross domestic product) per cap- 4.3 percent in 2018. Unemployment has during the four preceding years. ita that is four times higher than Russia’s fallen below 5 percent for the first time This revision is noteworthy. In measured in current U.S. dollars. After a in modern Russia. Foreign trade offers 2018, the Russian Federal Service of growth spurt of an average of seven per- steady and large surpluses, adding to the State Statistics (Rosstat) claimed that cent a year from 1999-2008, Russia has impressive international currency re- construction had increased by a measly gotten stuck in a middle-income trap serves of $469 billion at the end of 2018. 0.5 percent after 11 months, but for the with an average growth of merely half a Also, the government budget is in sur- year as a whole, the Economic Ministry percent per year – and it seems unable to plus and Russia’s public debt is impres- claimed implausibly that it had grown by get out of it. Russia used to be far wealth- sively low at 12 percent of GDP. 5.3 percent, which explains the higher ier than China in per capita terms, but Honestly, Putin did mention the than expected growth rate. For years, now China has caught up. Russia is also growth rate, which was only 1.7 per- the Russian government had been dis- diverging economically from the West. cent during the first 10 months, but he satisfied with the statistics from Rosstat, There are basically four reasons for presented it as progress. Allegedly, the which has a good international reputa- Russia’s low growth rate: crony capital- growth rate surged to 2.0 percent for the tion. The government called for a change ism, war, oil prices, and demography. year as a whole. Since 2009, Russia has in methodology. When Rosstat refused, had an average annual growth rate of 0.9 in 2017 the government reduced its inde- ❚❚Crony Capitalism and percent with three years of contraction. pendence, placing it directly under the Capital Outflow In the medium term, virtually all fore- Economic Ministry. When that did not Russia’s fundamental problem is that casters predict a growth of 1.5-2 percent help, in December 2018 the government the country has no real property rights

12 inFOCUS | Spring 2019 ANDERS ÅSLUND: Russian Stagnation: Kleptocracy and Sanctions ANDERS ÅSLUND:

Vladimir Putin at the “Russia is a Country of Opportunities” conference in March 2018. (Photo: Press Service of the Russian President) because the Kremlin maintains politi- negligible $2 billion in 2018, while four billion a year or 0.3 percent of GDP. cal control over its judicial system. In a percent of GDP would be normal. This Among the sanctions that the Unit- fine recent book, Property Rights in Post- means that Russian investment is eight ed States and European Union imposed Soviet Russia: Violence, Corruption, and percent of GDP less than it would be if on Russia in response to the Russian the Demand for Law, Jordan Gans-Morse Russia had normal property rights. military incursion in Ukraine begin- documents how property rights have ning in 2014, the most economically been weakened since the Yukos confisca- ❚❚War and Sanctions important are the financial sanctions tion in 2003-6. Any entrepreneur in Rus- Add to this the cost of war and West- that started in July of that year. The In- sia risks a year or so in pretrial detention ern economic sanctions. Russia started ternational Monetary Fund (IMF) has if he offends the government. its rearmament program in 2008, when assessed their cost at 1-1.5 percent of This is not by accident but by de- its military expenditures as assessed by Russia’s GDP each year. Putin down- sign. Weak property rights enable the the Stockholm International Peace Re- plays the cost of the Western sanctions, rulers to take what they want through search Institute (SIPRI) amounted to 3.3 claiming that they are ineffective, but at corporate raiding with the assistance of percent of GDP. By 2016, it had increased the same time he complains about them lawless law enforcement agencies. There- to 5.5 percent of GDP, which implies that and wants them abolished. fore, Russia has steady and large private Russia’s rearmament cost society an addi- Russia has nearly been cut off from capital outflows that reached $68 bil- tional 2.2 percent of GDP every year. The international financing. As a conse- lion in 2018, or four percent of the $1.6 official Russian state subsidy to Crimea is quence, Russia’s foreign debt has shrunk trillion economy. Foreigners see what is $2 billion a year. If we presume that the from $730 billion at the beginning of going on. If the locals dare not invest in subsidy to the occupied Donbas region 2014 to $454 billion at the start of 2019. Russia, foreign investors will stay away of Ukraine, with a larger population, is Unlike the Rosstat statistics, the Cen- as well. Foreign direct investment was a equally large, this would be a cost of $4 tral Bank statistics are provided in such

Money Makes the World Go ‘Round | inFOCUS 13 detail and so frequently that they appear a year. Now, on the contrary, Russia is Soviet fashion, it set 12 national proj- quite reliable. That is, Russia paid back expecting a decline in its labor force of ects on which public expenditures were $276 billion that it otherwise could have one percent a year until 2030, which ex- supposed to be concentrated without deployed for investment in the national plains two percentage points of the lower clarifying what should be done or why it economy during years of very low in- growth in recent years. Moscow could would be helpful. ternational interest rates. Under normal expand its work force through a more Putin appears sincere in one single circumstances Russia would have in- liberal immigration policy, attracting reform area, the World Bank’s Ease of creased its foreign indebtedness as most more workers from poorer former Soviet Doing Business index. Russia had risen other countries did. republics, but it has failed to do so. Cen- from ranking number 120 in 2011 to number 31 in 2018. This illustrates that Putin – like most other authoritarian Putin and his cronies have engineered capital rulers in the former Soviet Union – as- pires to be more effectively obeyed, while outflows in the order of $15-25 billion since they caring little about economic growth. By got their machinery of looting going around 2006. contrast, Putin has shown no interest in reducing corruption, because Russia is a captive state. Corruption benefits him and his cronies and he rules through a kleptocracy. In the Corruption Percep- Adding the negative costs of war tral Asian immigrants are not popular tion Index of Transparency Internation- and financial sanctions to the Russian in Russia. While emigration is not large al, Russia ranked number 138 in 2018. economy, we find that they reduce Rus- in numbers, many wealthy Russians and sia’s economy by about 3.5-4 percent of members of the entrepreneurial elite ❚❚The Irony of Kleptocracy GDP each year, which is a large number. emigrate. It might appear curious that the Thus, the Russian economy is unlikely to So, what is Putin going to do about Kremlin has not done anything to im- grow significantly again until the Krem- this? The answer is nothing. pede the massive and steady currency lin decides to cut its military expendi- outflow, but the obvious explanation is tures and to leave eastern Ukraine so the ❚❚Managing the Problem that it is Putin and his cronies who ben- West lifts its sanctions. During Dmitri Medvedev’s presi- efit. The irony is that having formed an dency, 2008-12, he made some humble authoritarian kleptocracy, not only their ❚❚Oil and Gas Exports attempts at reform, but however small enemies, but also the rulers, cannot se- Great fluctuations in the global oil they were, Putin reversed them all cure their property rights in Russia. If price strain the Russian economy, but when he returned to the presidency in they were to lose power, their sensible the Central Bank has successfully neu- May 2012. At that time, Putin issued 11 expectation is that all their loot would tralized their impact on the current ac- substantial and rather detailed policy be confiscated by the new regime. count and the government budget by letting the exchange rate float with the oil price. Still, the international assets available to Russia vary greatly because Russians’ real disposable incomes have fallen by a in good years oil and gas comprise two- thirds of Russia’s exports and Russia has total of 11 percent during the last five years. no alternative exports of note. Russia’s total exports of goods and services fell from $527 billion in 2012 when the oil price was high to $282 billion in 2016, decrees but, as was widely expected, My assessment is that Putin and his while recovering to $509 billion in 2018 hardly anything was accomplished. This cronies have engineered capital outflows as the oil price rose. was not a time of opening up but of in- in the order of $15-25 billion since they creased repression. In May 2018, when got their machinery of looting going ❚❚Demographics starting his new term, Putin issued around 2006. These funds are extracted During the good years – the early one single policy decree, which was so primarily from Gazprom but also from 2000s – Russia benefited from an annual vague with a minimum of numbers that other state companies and state agencies. increase in its labor force of one percent it hardly meant anything. In a rather Meanwhile, the market capitalization of

14 inFOCUS | Spring 2019 ANDERS ÅSLUND: Russian Stagnation: Kleptocracy and Sanctions ANDERS ÅSLUND: Gazprom has slumped from a peak of Putin leaves unpopular measures to the regularly detained, but the protests have $369 billion in May 2008 to currently hapless prime minister Medvedev, but not had any further effects as yet. $55 billion. In spite of having lost more untypically he took ownership of the The regime continues to organize than $300 billion, Gazprom’s CEO Alex- pension reform by making a special tele- highly restrictive elections. In the fall, ei Miller, a Putin loyalist, stays in place, vision address in August to explain it to four of the Kremlin’s candidates lost to indicating that this is what Putin desires. the Russian people. While most econo- nominal candidates amidst low turnout. Putin appears oblivious to the mists approve of the pension reform, Putin’s popularity has fallen to a new need for reforms to speed up economic Putin is effectively demanding popular low. The Kremlin-supported polling or- growth. In his annual press conference, sacrifices for his aggressive foreign pol- ganization, the Foundation for Popular he avoided the word “reform,” while “So- icy and kleptocracy. Opinion, records that the share of Rus- viet” was stated 15 times. In a very Soviet So far, relatively mild repression has sians who say that they would vote for way, Putin believes in the concentration kept the population at bay. The leading Putin if there were prompt elections has of state resources in two critical sectors. opposition activist Alexei Navalny has fallen from 74 percent in 2015 to 46 per- The one reform that Putin has pursued is skillfully produced well-documented cent in January 2019. Only 33 percent pension reform, which means the grad- and entertaining videos about the cor- of the population expressed full con- ual increase in the retirement age by five ruption of Russia’s top officials. His vid- fidence in him. As many as 60 percent years to save public funds. Furthermore, eo about the corruption of Prime Minis- stated that they did not have confidence Putin has increased the value-added tax ter Medvedev to the tune of $1.2 billion in Medvedev and only 27 percent ex- from 18 to 20 percent. was seen by more than 28 million people pressed confidence. While Russia’s economic situation appears predictably stable and stagnant, Putin appears oblivious to the need for reforms to the question is rather how long the Rus- sian population will tolerate a regime speed up economic growth. that performs so poorly.

ANDERS ÅSLUND, Ph.D., is a se- Together, these two measures will on YouTube. Navalny has organized nior fellow at the Atlantic Council and increase public revenues by about 1.5 mass protests against corruption in up author of the forthcoming book Rus- percent of GDP, but this is from the to 100 cities with slogans such as “Putin sia’s Crony Capitalism: The Path from people and not for the people. Usually is a Thief.” Hundreds of protesters are Market Economy to Kleptocracy.

Chairman: Richard Fox Board of Fellows: The Jewish Richard Baehr, William J. Bennett, Honorary Chairman: Mona Charen, Midge Decter, Policy Center Sheldon B. Kamins David Frum, David Horowitz, Rabbi Daniel Lapin, Michael A. Board Vice Chairmen: Ledeen, Michael Medved, David Marshall J. Breger Novak, Daniel Pipes, John Michael David Epstein Podhoretz, Norman Podhoretz, Dennis Prager, Ilya Shapiro, Tevi General Counsel: Jeffrey P. Altman Troy, Ruth Wisse

Board of Trustees: Diana Epstein, Cheryl Halpern, Joel Hoppenstein, Eliot Lauer, J. Philip Rosen, Walter Stern

Money Makes the World Go ‘Round | inFOCUS 15 Venezuela’s Hyperinflation, 29 Months and Counting by STEVE H. HANKE

t present, Venezuela is the only as there is an active black market (read: episodes of hyperinflation is clear. Dur- country in the world that is suf- free market) for currency and the black ing those episodes, virtually all goods fering from the ravages of hyper- market data are available, changes in the and services are either priced in a stable Ainflation. Alas, the word “hyper- black market exchange rate can be reli- foreign currency (the U.S. dollar) or a lo- inflation” is thrown around carelessly ably transformed into accurate measure- cal currency (the bolivar). In Venezuela, and misused frequently in the financial ments of countrywide inflation rates. bolivar prices are determined by refer- press. Indeed, the debasement of lan- The economic principle of purchasing ring to the dollar prices of goods, and guage in the popular press has gone to power parity (PPP) allows for this trans- then converting them to local bolivar such lengths that the word “hyperinfla- formation. The application of PPP to prices after observing the black mar- tion” has almost lost its meaning. measure elevated inflation rates is both ket exchange rate. When the price level So, just what is the definition of simple and very accurate. is increasing rapidly and erratically on this oft-misused word? The convention Using evidence from Germany’s a day-by-day, hour-by-hour, or even adopted in the scientific literature is to 1920-23 hyperinflation, my long-time minute-by-minute basis, exchange rate classify an inflation as a hyperinflation friend, distinguished economist, and quotations are the only source of infor- if the monthly inflation rate exceeds 50 former Governor of the Bank of Israel mation on how fast inflation is actually percent. This definition was adopted Jacob Frenkel confirmed the accuracy proceeding. That is why PPP holds and after Phillip Cagan published his semi- of PPP during hyperinflations. In the why I can use high-frequency data to nal analysis of hyperinflation, which July 1976 issue of the Scandinavian calculate Venezuela’s inflation rate. appeared in a book, edited by Milton Journal of Economics, Frenkel plotted Friedman, Studies in the Quantity The- the Deutschmark/U.S. dollar exchange ❚❚Duration Matters ory of Money (1956). rate against both the German whole- Just how severe is Venezuela’s hy- Since I use high-frequency (daily) sale price index and the consumer price perinflation? Well, that depends on the data to measure inflation in countries index. The correlations between Ger- metrics used to measure severity. If one where inflation is elevated, I have been many’s exchange rate and the two price looks at the rate of inflation itself, Ven- able to refine Cagan’s 50 percent per indices were very close to unity through- ezuela’s hyperinflation is a bit above month hyperinflation hurdle. With im- out the episode of hyperinflation, indi- average. Of the world’s 58 episodes of proved measurement techniques, I now cating that changes in the inflation rate hyperinflation that Nick Krus and I define a hyperinflation as an inflation in which the inflation rate exceeds 50 per- cent per month for at least thirty con- secutive days. ...Venezuela ranks as the 23rd most severe ❚❚Calculating Inflation - PPP hyperinflation. Just what is Venezuela’s inflation rate? Today, the annual inflation rate is 125,862 percent annually. How do I measure elevated inflation? The most important price in an economy is the ex- mirrored changes in the exchange rate. documented in the Routledge Handbook change rate between the local currency – Beyond the theory of PPP, the in- of Major Events in Economic History in this case, the bolivar – and the world’s tuition of why PPP represents the ‘gold (2013), Venezuela ranks as the 23rd most reserve currency, the U.S. dollar. As long standard’ for measuring inflation during severe hyperinflation.

16 inFOCUS | Spring 2019 Venezuela’sSTEVE H. HANKE: Hyperinflation, 29 Months and Counting

But, if one measures severity by the Even a superficial examination of first order of business for any new gov- duration of a hyperinflation, Venezuela’s the table suggests that the IMF fore- ernment in Venezuela will be to slay the episode, which started in November of casts are problematic at best. Just look hyperinflation dragon. This can be done 2016 and has yet to end, is rather severe. at the dramatic changes in the inflation within 24 hours with the introduction of It has lasted for 29 months and counting. forecasts—all made over a short period a currency board. So much for the definition and ac- of time and for the same end date. The curate measurement of Venezuela’s hy- IMF’s absurdity comes into full view, ❚❚A Currency Board perinflation. What about forecasts for however, when we compare the final A currency board issues notes and the course and duration of Venezuela’s year-end forecast value of 2,500,000 coins convertible on demand into a for- episode? Well, even though you can percent to the real measured year-end eign anchor currency at a fixed rate of measure a hyperinflation with great ac- value of 80,000 percent annually. The exchange. As reserves, it holds low-risk, curacy, you can’t reliably forecast what IMF’s final forecast was not even in the interest-bearing bonds denominated in heights a hyperinflation will reach, or same ball park as the measured value. the anchor currency. The reserve levels when those heights will be reached. Interestingly enough, the most inaccu- (both floors and ceilings) are set by law Surprisingly, that impossibility rate forecast made by the IMF was the and are equal to 100 percent, or slightly hasn’t stopped the International Mon- one published in October 2018, just a few more, of its monetary liabilities. So, the etary Fund (IMF) from throwing eco- months before year’s end. As the IMF domestic currency issued via a currency nomic science to the winds. Yes, the moved closer to the end date, the diver- board is nothing more than a clone of IMF has regularly been reporting what gence between the forecast and the real its anchor currency. A currency board are, in fact, absurd inflation forecasts measured rate widened. generates profits (seigniorage) from the for Venezuela. As it turns out, one can accu- difference between the interest it earns The table on page 19 contains five rately measure hyperinflations, but on its reserve assets and the expense of forecasts made by the IMF at different one can’t forecast their course or du- maintaining its liabilities. dates for Venezuela’s 2018 year-end in- ration. The IMF has clearly failed to By design, a currency board, un- flation rate. The last IMF forecast was learn these lessons. like a central bank, has no discretion- made in October, shortly before the end In any case, it’s clear that Venezu- ary monetary powers and can’t engage of the year. ela’s big problem is hyperinflation. The in the fiduciary issue of money. It has

Money Makes the World Go ‘Round | inFOCUS 17 Venezuelan citizens in Houston protest against the regime of President Nicolás Maduro. (Photo: Shutterstock/E_Rojas) an exchange rate policy (the exchange Currency boards have existed in debt levels relative to the gross domes- rate is fixed) but no monetary policy. A about 70 countries, and none have failed. tic product, fewer banking crises, and currency board’s operations are passive The first one was installed in the Brit- higher real growth rates than compa- and automatic. The sole function of a ish Indian Ocean colony of Mauritius rable countries that have employed cen- currency board is to exchange the do- in 1849. By the 1930s, currency boards tral banks. mestic currency it issues for an anchor were widespread among the British colo- To smash inflation and establish currency at a fixed rate. Consequently, nies in Africa, Asia, the Caribbean, and stability, a currency board for Venezuela the quantity of domestic currency in the Pacific Islands. They have also -ex would do the trick. Indeed, that’s why I circulation is determined solely by isted in a number of independent coun- proposed a currency board to Venezuela’s market forces, namely the demand for tries and city-states, such as Danzig and President Rafael Caldera when I was his domestic currency. Singapore. One of the more interesting adviser from 1995-96. The details of what I proposed then, and now, are contained in a book I co-authored with Kurt Schuler, Juntas Monetarias para países en desarrol- Countries that have employed currency boards lo: Dinero, inflación y estabilidad económi- have delivered lower inflation rates, smaller fiscal ca, which was published in a second edi- tion in 2015 by CEDICE in Caracas. deficits, lower debt levels relative to the gross I know that currency boards work domestic product... from, among other things, a great deal of personal experience in stopping hy- perinflations—stopping them with the introduction of currency boards. One A currency board can’t issue credit. currency boards was installed in North such case was in Bulgaria, when I served Accordingly, a currency board imposes Russia on November 11, 1918, during the as President Petar Stoyanov’s adviser a hard budget constraint and discipline civil war. Its architect was none other from 1997-2002. on the government. This is an underap- than John Maynard Keynes, who was a preciated feature of currency boards. British Treasury official at the time. ❚❚Bulgaria Unlike central banks, a currency board Countries that have employed cur- After Bulgaria took the exit from can’t be used as a means to finance gov- rency boards have delivered lower infla- Communism in 1990, Bulgarians en- ernment budgets. tion rates, smaller fiscal deficits, lower countered some potholes. The economy

18 inFOCUS | Spring 2019 Venezuela’sSTEVE H. HANKE: Hyperinflation, 29 Months and Counting board system, Bulgaria would have had much more difficulty entering the North Atlantic Treaty Organization (NATO) in 2004 and the European Union in 2007. Today, Venezuela should do exactly what Bulgaria did in 1997. A currency board would make the bolivar sound—a clone of the U.S. dollar, the world’s most important currency. With that, infla- tion would be smashed within 24 hours and stability would be established. And, while stability might not be everything, everything is nothing without stability. The political forces behind the in- plunged, there were debt defaults, and that Things moved rapidly. There’s noth- troduction of a currency board would be Balkan paradise experienced an episode of ing like a crisis to move the ball down seen as credible in the eyes of Venezu- hyperinflation. This episode peaked at an the field. The currency board was -in elans. By amassing a huge stock of politi- astounding 242 percent per month in Feb- stalled on July 1, 1997, and inflation and cal capital for slaying the hyperinflation ruary 1997. Yes, that’s per month. interest rates plunged immediately. I dragon, the politicians who introduce With the expectation that a currency can recall the genuine pleasure (perhaps the currency board would be able to board would be the best system to crush relief, too) that President Stoyanov dis- then begin to clean up Venezuela’s other Bulgaria’s hyperinflation, I wrote a book played when he congratulated me on the messes. But, if the politicians fail to kill with Kurt Schuler that was translated outstanding results produced during the inflation first, there will be no successful into Bulgarian. In late 1996, it reached the first few weeks of the currency board. It reforms. That’s why a currency board is top of the best-seller list in Sofia. In Janu- was then that he confessed his hope that a vital first step for Venezuela. ary 1997, I became President Stoyanov’s the currency board would kill inflation, adviser. My primary tasks were to draft but that he had reservations, and he was STEVE H. HANKE, Ph.D., is a Profes- a currency board law for Bulgaria, and to amazed when it worked even more rap- sor of Applied Economics at the Johns explain to Bulgarian politicians and the idly than I had predicted. Much later, Hopkins University and is a Senior Fel- public how such a system would halt the President Stoyanov confided that, with- low and Director of the Troubled Cur- episode of hyperinflation. out the stability created by the currency rencies Project at the Cato Institute.

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Money Makes the World Go ‘Round | inFOCUS 19 Democracy has a Way of Sorting Out Problems An inFOCUS interview with Professor Emeritus PETER MORICI Professor Emeritus Peter G. Morici is an expert on economic policy and international economics. Prior to his tenure at the University of Maryland, he served as director of the Office of Economics at the U.S. International Trade Commission. He is published widely in leading public policy and business journals including the Harvard Business Review and Foreign Policy, and has lectured at Columbia University, the Harvard Business School and Oxford University, among others. He is also a frequent guest on television and radio. inFOCUS Editor Shoshana Bryen spoke with him recently.

inFOCUS: What is your fear for trade agreement with a non-market econ- difficult for another major economy – the American economy as you omy - you can read in that, essentially, like the United States – to comply with. look out into the future? China. It isn’t clear to me that the Euro- They like to be in a position where their peans would be willing to make a trade standard-setting bodies are setting stan- Prof. Morici: My fear is that we become deal with us that had those provisions. dards for the world as opposed to, “Well, isolated. That we fail to reach some sort I might say it’s a bit of Obama redux. we’ll accept products that met your stan- of consensus with the Chinese about Because one of the reasons for the Trans- dards if you accept products that meet how the relationship should be con- Pacific Partnership was to counterbal- our standards.” It’s really hard to nego- ducted that is beneficial to both societ- ance Chinese influence in Asia and it tiate with the Europeans on the basis of ies. That the Chinese continue to operate would have served to better isolate Chi- mutual recognition. as they do and basically get to use the na. It would have created the calculus or Another problem is that the Euro- technology that we pay for and develop and it they steal from us through various forms of technology theft. It’s very dif- We can’t buy ourselves out of this overnight, we ficult for American companies, or West- also have a budget issue, and the deficit. I think ern companies generally, to compete on that basis and that’s one of the reasons we’re at the right spot for slowly getting healthy. the Chinese are making the strides they are in cellphones, and they’re ahead of us on 5G. They have their market to them- the incentive for more trade between the peans have become technological lag- selves and they can penetrate our mar- United States and other Pacific Rim na- gards, with perhaps the exception of the kets. They can steal technology and so tions as opposed to with China. British. They like to engage in industrial forth. All of these things make it impos- Part of the problem is that the ma- policies that penalize American technol- sible for Western companies to compete jor European economies, in particular ogy companies so that they – not we – fairly and it makes Western companies the Germans, make a lot of money in succeed. I don’t know how to deal with increasing dependent on the Chinese. China and they want to be very careful. that inside a trade agreement because Another problem is that China has a lot that’s largely in the area of things like iF: Would trade blocks help us of influence in some of the former East- anti-trust. They have written some pecu- better compete? ern bloc countries that are part of the liar anti-trust practices over there which European Union. are not that amenable to negotiation. Prof. Morici: The United States, if Con- gress chooses to ratify the U.S.-Mexico- ❚❚Dealing with Europe iF: President Trump seems to Canada Agreement, essentially begins Prof. Morici: And, even if there were no think that tariffs on their that process, because the agreement dis- China, the Europeans could put condi- goods is a way to rebalance our solves for a participant if they sign a free tions on trade agreements that are very trade with Europe. Whatever

20 inFOCUS | Spring 2019 PETER MORICI: Interview they do to us, we do to them. Is that reasonable?

Prof. Morici: I don’t think so. Europe- ans have higher tariffs than we do, but they don’t have terribly high tariffs. One of the things I find humorous about Brexit is that if the British have to start paying tariffs on the products they send to Europe, they’re not going to be very high. Yes, in some cases they are. They have a higher tariff on cars than we do. But overall, Europeans tariffs, E-tariffs are not terribly high. The Europeans have a lot of pride on this issue and they’re fairly resilient. If we impose high tariffs on them, they’ll impose high tariffs on us. This is very different than China. We can rattle Chi- na with tariffs. I don’t think we can rattle the Europeans that way. Also, the Europeans are always telling us we should negotiate with the Chinese. I don’t buy that. We’ve tried ne- gotiating with the Chinese and using the WTO and so forth and the tariffs have proven useful with regard to China. But with regard to the Europeans, they have strong, diversified economies where I don’t think it would work very well. Professor Peter Morici. iF: Is our best bet with the Eu- Chinese to develop considerable influ- essentially bind, written one way or an- ropeans a series of bilateral ence in emerging economies. Econo- other, Britain to European rules. agreements? mies that aren’t as advanced as Germany They have an issue of how to deal or France. And it’s enabled by the U.S. with the Irish border because of the Prof. Morici: Our best bet with Europe trade deficit because China would not be Good Friday Agreement that ended the is to try to accomplish a bilateral agree- able to pursue Belt and Road if it didn’t terrorist problem in Northern Ireland. ment and to demonstrate, by effectively have lots of dollars to work with – which But British sovereignty is being held dealing with the Chinese, how it can be the trade deficit provides. We not only hostage to that. May has failed to come done. They do have problems with the become indebted to the Chinese, but we up with Plan B. If the Europeans won’t Chinese similar to ours. have given them the funds they need for be reasonable, we will see what a “hard” soft power. Brexit looks like. My feeling it’s possible ❚❚Belt and Road for the UK to leave the European Union iF: China’s Belt and Road pro- ❚❚Brexit and to deal reasonably with the Ireland gram appears to be a way for iF: Brexit yes or Brexit no? problem, but she hasn’t formulated a China to get into a lot of coun- program to do that. tries, create debt, and then Prof. Morici: Brexit yes. suck up their assets. Is that a My feeling is the agreements that ❚❚Sanctions and Trade Policy reasonable description? Prime Minister (Teresa) May has brought iF: Can economic sanctions on back to Parliament for ratification re- countries advance our foreign Prof. Morici: It has had that effect ally turn Britain into a European colony. policy goals? Do sanctions on in places, but it’s more a way for the They dictate the terms of the divorce and Iran or Venezuela have a sig-

Money Makes the World Go ‘Round | inFOCUS 21 nificant impact and can we get uses the dollar as the currency for trade sessment of the health of the what we want from them? – even transactions between countries American economy? that have nothing to do with the United Prof. Morici: They do if our allies partic- States. So, the U.S. economy is denomi- Prof. Morici: The overall health of the ipate and participate fully, but it depends nated in trade in dollars and the U.S. American economy is decent; it could on the regime. Sanctions have been ap- banking system provides the global be better. Part of the problem is unre- plied so many times on the North Ko- plumbing to enable that trade. It is pos- solved issues with regard to China and reans that the Koreans have become re- sible to build an alternative system of the problem the trade deficit poses to silient. They’ve learned how to live with plumbing based on the dollar outside the the U.S. economy. Part of the problem sanctions and they are very resourceful. jurisdiction of the United States – be- is unresolved issues about immigration. We need a better immigration program It is possible to build an alternative set of plumbing because U.S. birth rates are falling. Millennials and Generation Z are based on the dollar outside the jurisdiction of the marrying later and having fewer chil- United States – because there are so many dollars dren to the point where, without im- migration, we could have a decline in already abroad... population at some point. That is not a world that we want to live in. So, sanctions in case of the Trump sanc- cause there are so many dollars already Part of the problem is the stresses tions with regard to North Korea’s nu- abroad that they can literally provide the that have been imposed on young folks clear arms are going to take a long time reserves for banks that participate in the by dysfunctions in our education sys- to work and to wear them down. dollar system beyond the reach of the tem. Tuition has been rising at twice Also, if you’re dealing with a dicta- Federal Reserve. The Europeans are try- the rate of health insurance since 1999. tor who, if he relinquishes power, has an ing to lay that type of plumbing system Twice the base of the rate of inflation. uncertain future even regarding his per- to trade with Iran; so far, they’re having In turn, people borrow a great deal of sonal survival, all the sanctions in the difficulty. But if we use sanctions too money to go to school and lots of times, world aren’t going to change his mind. many times then the number and scope American universities haven’t given Because after all, he could end up in a jail of countries interested in an alternative them much value. If you’re going to tell cell at best and executed at worse. In the system gets larger, and eventually they’ll people to borrow money to go to school case, for example, of Venezuela, I don’t know how well those are going to work unless the military defects. There are a lot of dysfunctions in the educational In the case of Iran, I think they could have worked, but the deal Hill- system. It’s increasingly being run for the people that ary Clinton proposed and that Barack run it and not for the students and not for the faculty. Obama ultimately agreed to was fatally flawed and Donald Trump is correct. I don’t think sanctions on Iran are going to work now. The Europeans aren’t find a way around it. Instruments of soft then school becomes an investment. participating because they don’t agree power have limited durability and sanc- And, for many young people, school has with the American policy of abrogating tions are an instrument of soft power. proven to be a poor investment. In turn, the agreement on nuclear development that’s a drag on the economy. in Iran. Without them it’s problematic. ❚❚The American Economy: They’re going to be paying stu- Now there’s really another question Decent dent debt forever and many are in jobs here: If the United States repeatedly re- iF: Turning to the U.S., things that don’t require a college degree. And sorts to economic sanctions, do they lose are looking pretty good. Em- many don’t earn the kind of money nec- their impact? ployment is up, unemployment is essary to retire large student debt, they down, wages are rising. On the just don’t. iF: That’s a great question. other hand, the stock market There are a lot of dysfunctions in the Prof. Morici: In some measure they do. is up and down, the Federal Re- educational system. It is increasingly be- A good deal of American leverage is serve appears tentative. First ing run for the people that run it and not based on the fact the world increasingly of all, what’s your general as- for the students and not for the faculty.

22 inFOCUS | Spring 2019 PETER MORICI: Interview

The National Debt Clock in Times Square, New York City, in 2017. (Photo: iStock/400tmax)

That’s having a lot of negative conse- this article. Another thing we is uncertain because of the nature of quences for the economy broadly. talk a lot about is the deficit the Chinese government is uncertain. and the debt. Property is insecure there. If you have iF: Continue the thought. What dollars, you can buy property in New does this mean for programs ❚❚Debt and Deficits York and feel that the property is secure. like Social Security and Medi- Prof. Morici: The national debt has been If you have British pounds, you can buy care? going up by the pace of the deficits, and property in London and feel that it’s se- the deficits are close to a trillion dollars cure. The only other large economy is Prof. Morici: If we have stagnant popu- per year. The debt is financed by Trea- the European economy and the future lation, if we don’t come to a consensus sury securities, but there is a limited of the Euro is uncertain because if the on immigration, it becomes more dif- capacity for the world to absorb them. It Italians were to decide to leave the Euro ficult to finance them. If you look at has increased in recent years because the Zone (and it would serve their interest to what’s going on in Japan, people are world uses the dollar more as a means do so) and perhaps leave the European working longer and the government is of transaction and U.S. bonds are as Union in the wake of Brexit – a hard providing assistance to them to do it – good as U.S. dollars for backing up the break – that would be the end of the to overcome the physical problems that world’s banking systems. Banks around Euro. Euro-land doesn’t really exist; it people have as they age. We’ll likely have the world, not just American banks, is- doesn’t issue bonds. to do that no matter what, but we are go- sue dollar denominated deposits and So, my feeling is that the dollar is ing to be compelled to do it more quickly they use the U.S. Treasury securities for the only alternative right now, but just and more drastically if we don’t resolve reserves. It’s the same thing with coun- like the plumbing system with regard our demographic issues. tries’ central banks. to U.S. sanctions, the world will find a A society in which young people are There is an appetite for Treasury way around the Federal Reserve printing too pessimistic to have children is a soci- securities, and so we’ve gotten away currency if it needs to. ety that’s got a virus. with having bigger deficits, but it’s not infinite. The dollar is so important. The iF: Printing currency as in? iF: That could be the title of future of the Chinese yuan, for example,

Money Makes the World Go ‘Round | inFOCUS 23 Prof. Morici: Issuing dollars. If the It seems in Washington that the bu- about two-thirds as much as ours does, world decides if it no longer wants to reaucracy’s objective is to accomplish because they have meaningful price hold a very large number of Treasuries, the business objective with the greatest regulations and they seem to have a lot it will find something else to hold. It’s amount of paper. less bureaucracy. only paper. Frankly, healthcare is the kind of ❚❚Healthcare Reform service in which it is very difficult to iF: What would be an effective iF: I want to wrap up with two have competitive markets. If competi- American strategy to reduce questions. If you had to choose tion were capable of solving the problem, the deficit and therefore the a single thing that would spark as the Republicans say, then California debt? the kind of growth you’re being the 6th or 7th largest economy in looking for, what would be the world, should be quite large enough Prof. Morici: To grow more. And that the most effective thing that to have much lower healthcare prices, would be accomplished by cleaning up Washington could do? but it doesn’t. entitlements, having more adults par- So interstate competition and tort ticipate in the labor force, improving the Prof. Morici: Genuine healthcare re- reform, the usual palliatives of the right, education system, and improving the form, because healthcare costs so much is hardly going to be enough. If Ameri- healthcare system. The education system money. That’s the biggest problem. cans are not willing to regulate the price and the healthcare system absorb huge of drugs for example, then drug compa- amounts of American wealth and they iF: What would it look like – nies are going to continue to take advan- don’t run very well. The U.S. healthcare are we talking about single tage of the fact that the federal govern- system is extraordinarily expensive and payer healthcare? ment buys more than half of the drugs it’s hard to say it’s as good as, for exam- and they will charge the government ple, the German system. Prof. Morici: It depends on what Amer- whatever they want. icans want. When they say every civi- ❚❚Deregulation and Growth lized country in the world has socialized iF: One last thought for us iF: Are President Trump’s de- medicine, that’s likely true. There are all please. Overall, are you op- regulation policies a step in different kinds of government-run pro- timistic, pessimistic or some- the right direction? grams. In Germany, they have private where in insurers that look like the Blue Cross the middle? Prof. Morici: Generally, deregulation Blue Shield system we used to have. is good. The Obama folks went too far Non-profit insurers as we used to have. Prof. Morici: Overall, I’m optimistic in the other direction. This is a sort of course correction. We need regula- tions so that there are rules of the road for competition. But it doesn’t work if I’m optimistic about America because of our people are so pinned down by filling technology and the fact that democracy has a way out forms that they can’t get anything done – and it’s gotten to that point for a of sorting out problems in the long run. lot of smaller banks, for example, it just became too cumbersome to make mort- gages. Unfortunately, there’s a certain deafness in Washington to the legiti- And the Germans largely have about America because of our technolo- mate prize of the private sector and that Obamacare – everyone has to buy health gy and the fact that democracy has a way is an unfortunate situation in America. insurance unless they can post a very of sorting out problems in the long run. large bond of some kind. They show that iF: Deafness to what? they are very, very wealthy and that they iF: On that positive note, and can pay for their own medical care if on behalf of the members of Prof. Morici: Deafness to needs of busi- they have to. So, Warren Buffet wouldn’t The Jewish Policy Center, Pro- nesses; to being able to do business. If have to buy. fessor Peter Morici, thank you have a regulatory objective, the idea The rest of us would have to buy. you for a very enlightening is to accomplish it with the least burden. But the German system only costs conversation.

24 inFOCUS | Spring 2019 In Africa, Effective Aid is Local Aid by CASEY PIFER

ring up the topic of Africa to most largest database of development proj- excess maize. Transport costs to dis- Americans and their minds will ects.” The database contains outcomes tant markets were too high to be prof- race through images of slums, assessments of more than 14,000 aid itable, and the village lacked the kind Bhungry children, undrinkable projects from around the world. Disap- of storage facilities needed to preserve water, and war. For some, it’s comfort- pointingly, based on aid agencies’ self- the corn for future use. ing to know that the United States gov- assessment, this database showed that So, it rotted. As one widow and ernment invests huge sums of cash and nearly 40 percent of those projects failed. mother of nine explained, “Maize is capital in the continent, even if the goals Only a small percentage of projects everywhere! Under the beds, in the aren’t always clear. Many Americans achieved their expected results. living rooms, in the kitchens—every- even contribute to those efforts privately More troubling than this is the in- where! And the rats are everywhere, via charity or participation in “one-for- creasing concern that our humanitarian too.” What began as a hopeful, well- one” purchases which, like TOMS shoes, aid efforts are not only failing, but they funded effort by foreign experts with provide a matching donation of your are actually harming local economies by good intentions ended in disappoint- product to someone in need. disrupting existing incentives and ignor- ment and even resentment on the We care. And doing something is ing local context. Atlas Network Presi- part of those it was meant to help. better than doing nothing, right? dent Matt Warner provides a vivid ex- We all know the parable which sug- ample of this in his recent article for The Stories like this are all too common gests that we should teach a man to fish Foundation for Economic Education, in the world of economic development. rather than simply give him a fish. But in “Can Local Solutions Succeed Where And while free market advocates are the United States, where extreme pov- Foreign Aid Has Failed?” quick to criticize government aid efforts, erty and lack of access to adequate nutri- the problem is not limited to government tion, medical care, and clean water feels In Ruhiira, Uganda, an internation- projects. The trouble comes when outsid- a world away, giving a man a fish often al aid project once offered villagers ers fail to consider they might not have seems the best way to help. $300,000 to grow maize instead of all the information and, that without lo- But is giving a man a fish really the matoke, a banana-like starch. Maize, cal knowledge, their efforts could harm best we can do?

❚❚Aid as a Problem? ...outsiders fail to consider they might not have all the Africa is flooded with billions of dol- lars in humanitarian aid from the United information and, that without that local knowledge, States alone each year—so it makes sense their efforts could harm rather than help people... to assess the outcomes of that astronomi- cal sum to see if our best is doing any good. Is Africa better off as a result of this the aid experts reasoned, was bet- rather than help people in impoverished influx of cash, programs, and assistance? ter to farm because it is nutritious, communities – and that reality applies to Are its economies becoming more ma- drought-resistant, and produces high both private and government aid efforts. ture and its people less dependent on aid? yields. The experts were right. At har- Warner calls this problem “the outsider’s In recent years, more and more vest time, the villagers found them- dilemma”; the problem that arises when scholars have tackled the question of selves with a bumper crop of 3,840 outsiders are not equipped with the lo- whether our development aid efforts are tons of maize. cal knowledge and insights necessary to succeeding or failing. Just last year, Dr. What happened next, though, cut help people lift themselves out of pov- Dan Honig launched the Project Per- short any celebration. No one could erty. Warner reasons that the outsider’s formance Database (PPD), “the world’s figure out what to do with all the dilemma is the main reason traditional

Money Makes the World Go ‘Round | inFOCUS 25 aid projects are so often met with failure Pritchett, a Harvard University develop- organizations led by intellectual entrepre- and, as was the case in Ruhiira, actually ment expert who asserted that “There are neurs is growing each day, and nowhere is do harm. no poor people. There are people living that growth more energized than in Af- in poor places.” rica. That’s encouraging because, with ex- ❚❚TOMS Shoes And what makes those places poor? treme limits on economic freedom in Af- In a famous example of well-mean- rica, there is a lot of work to be done there. ing private initiative gone awry, TOMS ❚❚Economic Rights and Most of Africa’s countries perform shoes and its “One for One” effort has Institutions poorly in the Economic Freedom of the been deeply criticized as not only focus- Increasingly, research has shown World report, which annually measures ing on the wrong issue (as the Harvard that poverty stems from a lack of eco- the economic freedom environment of Review put it, “Is donating shoes an ef- nomic rights and the institutions that each country and ranks them in relation fective way of aiding impoverished com- support those rights. And that’s where to one another. The 2018 report ranks munities when an estimated 800 million Atlas Network and our associated part- 162 countries around the world, includ- people worldwide lack access to basic ners in more than 90 countries are play- ing 40 countries in Sub-Saharan Africa. nutrition?”), but also for creating aid de- ing an important role. The ranking shows that 80 percent of pendency with handouts that ultimately Atlas Network serves as the center Sub-Saharan African countries place in disenfranchise local shoe cobblers and of gravity for a worldwide effort to cre- the bottom half for economic freedom; vendors. TOMS commissioned a study ate freedom and opportunity by helping 58 percent of them are in the bottom on the “One for One” model. The results, local organizations develop and imple- quartile and categorized as “least free.” published in the World Bank Economic ment local solutions that are helping The Economic Freedom of the World Review, confirmed two major concerns: people improve their lives. Most of these report is widely used to analyze the im- There were “insignificant impacts on organizations are think tanks that use pact of economic freedom on economic overall health, foot health, and self-es- research and data to establish the need growth and poverty, and, according to its authors, “virtually without excep- tion, these studies have found that coun- Property rights have long been recognized as an tries with institutions and policies more essential key to economic development, as well- consistent with economic freedom have defined and secure property rights allow individuals higher investment rates, more rapid economic growth, higher income levels, to trade and maximize the use of their resources. and a more rapid reduction in poverty rates.” Africa’s poor performance in this ranking and others relating to economic teem” and “the overall impact of the shoe for public policy reform, and then work rights, like the World Bank’s Doing Busi- donation program appears to be negli- with local stakeholders—including leg- ness Report, begin to give us a picture of gible” in that the TOMS shoes simply islators, businesspeople, and others who why so many countries in Africa are, in replaced the shoes people had previously care about change—who become advo- the words of Lant Pritchett, “poor places.” gotten elsewhere. cates for progress. While the average American may So, what are we to do? A world Today, there are nearly 500 Atlas frown in consternation during a dis- away from the real consequences on the Network partners who operate indepen- cussion about Africa’s struggles, we ground, people in rich countries contin- dently with support from a diverse base are hopeful that the future is bright be- ue to flock to the traditional aid model of voluntary supporters, meet a mini- cause our partners in Africa are creating because doing something has to be better mum budget requirement, have a profes- meaningful and lasting change to secure than doing nothing at all. sional online presence, and are working economic rights and freedoms. But economies, cultures, and com- toward a shared vision of a free, prosper- munities are infinitely complex, and what ous, and peaceful world where limited ❚❚Rights and Freedom works for one country might not work governments defend rule of law, private It’s happening in Burundi. for another. At Atlas Network, we believe property and free markets. We are ca- A few years ago, a young intellectual there is a better way to help—a way that pacity builders, and our unique model, entrepreneur named Aimable Maniraki- is grounded in locally-grown solutions known as “Coach, Compete, Celebrate!” za asked if we could share books about that call for local knowledge, local lead- helps our partners create a stronger, more the principles of liberty. Armed with ership, and local empowerment. effective foundation for lasting change. material, he has done tremendous work Our team often quotes Lant This network of extraordinary with thousands of students in Burundi,

26 inFOCUS | Spring 2019 CASEY PIFER: In Africa, Effective Aid is Local Rwanda, and the Democratic Republic of the land you live on doesn’t belong to you. and support their ambitions for greater Congo, hosting events and teaching stu- Free Market Foundation’s Khaya Lam impact while staying deferential to their dents about the virtues of a free society. project addressed this problem by help- vision of what makes the most sense on Last year, Manirakiza officially ing hundreds of black South Africans ac- the ground. launched Center for Development Enter- cess fully tradable titles to their property. The “Coach, Compete, Celebrate!” prises Great Lakes (CDE), raising $8,000 Through their efforts, tenants living in model that Atlas Network has pioneered from local and international donors— poverty have been able to unlock nearly has proven to be an excellent way to in- which is, incidentally, 26 times the GDP $4.5 million in dead capital and create spire, engage, and elevate our partners’ per capita of Burundi. With Manirakiza new opportunities for trade and sale. achievements. The power of network ef- at the helm, donors can rest assured that Our partner in Côte d’Ivoire, Au- fects is well documented, and we’ve seen their funds are making a difference. CDE dace Institute Afrique (AIA) also priori- it at work with our partner think tanks. Great Lakes recently played a major role tized secure property rights in a country We coach our think tank partners with in reducing the mandatory fee for reg- where only four percent of rural land world-class training that helps them set istering a business in Burundi from $78 was legally registered. Historically, the clear, achievable goals, learn how to be to $22. In a country where average yearly lack of defined property made rural vil- effective change agents, and discover income barely reaches $300, a $78 regis- lages vulnerable to disputes because it how their efforts can improve the quali- tration fee meant that many poor entre- was nearly impossible to establish who ty of life for people in their communities and countries. Our partners compete Historically, the lack of defined property made rural with one another for grants and awards, challenging each other to improve and villages vulnerable to disputes because it was nearly achieve extraordinary outcomes. And impossible to establish who owned property and as their projects result in policy reforms that make a difference for people around thus who had the right to sell it. the world, we celebrate their efforts by featuring their successes in events, pro- preneurs couldn’t scrape together enough owned property and thus who had the motional materials, and case studies that capital even to get started. But as a result right to sell it. AIA launched a project allow organizations to learn from one of CDE Great Lakes’ work, that barrier to to formalize land ownership with the another. entry has been reduced by 72 percent. Ivorian government, relying on local By interacting with peers and learn- Sometimes reform is decades in the knowledge and village customs. Using ing how others are creating substantive, making. Property rights have long been GPS and other digital technologies to set lasting change, our partners discover the recognized as an essential key to economic boundaries, AIA now publishes the re- many ways they can up their game. And development, as well-defined and secure sults digitally and physically and creates armed with new skills and energized by property rights allow individuals to trade secure contracts that can be used in land the efforts of their global peers, Atlas and maximize the use of their resources. transactions. Its work has been repli- Network’s partners are driving econom- cated in villages across the country, and ic prosperity across Africa and the rest ❚❚Property Rights new national legislation requires similar of the developing world. The Economic Freedom of the World, procedures for unregistered land. So, the next time you’re tempted to 2018 report points out that especially in give a man a fish or teach him to fish … Sub-Saharan Africa, “weakness in the ❚❚Is it Legal to Fish? remember to ask whether it’s even legal rule of law and property rights is particu- All three of these examples, and es- for him to fish there in the first place. larly pronounced.” An example of this pecially the Ivorian case, demonstrate And if not, take heart. Someone is do- was highlighted in 2015, when the Free the necessity of local knowledge in cre- ing something that is actually making Market Foundation in South Africa tack- ating lasting change that can position a difference. There is probably an Atlas led a huge local problem: between five communities and countries in Africa for Network partner out there working hard and seven million black families living economic growth. Atlas Network stands to liberate him. in apartheid-era housing had no official alongside these local experts as a cheer- titles to their homes, effectively mak- leader and supporter, all the while rec- CASEY PIFER is Director of Institute ing them squatters even if their families ognizing that our position as an outsider Relations for Atlas Network, a non- had lived for generations on that land. prevents us from calling the shots that profit organization connecting a global For people with few resources, there is lead to reform. Our goals are to increase network of more than 450 free-market no incentive to invest in improvement if our partner capabilities’ and help inspire organizations in over 90 countries.

Money Makes the World Go ‘Round | inFOCUS 27 How to Get the China Challenge Right by AARON FRIEDBERG

merican and other Western to engage China across all fronts: diplo- of the fruits of their labors, the regime observers often cast the China matically, through deepening scientific, hoped to win their loyalty, or at least their challenge in primarily material cultural, and educational ties, and above acquiescence. In addition, Beijing began Aterms, as an inevitable byprod- all through trade and investment. Suc- greatly to expand its investments in the uct of the country’s growing wealth and cessive administrations believed that tools of surveillance and repression, in- power. The basic premise here is that engagement would encourage China to cluding multiple domestic security forc- rising states naturally seek to expand become a satisfied power or a “respon- es. Finally, the CCP began to implement the sphere of their influence, and domi- sible stakeholder” in the existing inter- an intensive, nationwide program of ide- nant powers, seeking to defend their national system, accelerating the process ological indoctrination, or “patriotic edu- privileges, naturally oppose them. of market reform and promoting forces cation.” The aim of this program was to While not flatly wrong, this view is that would lead eventually to political as bolster popular support by promulgating incomplete and, insofar as it understates well as economic liberalization. It was a substitute for Marxism-Leninism-Mao- the severity and complexity of the prob- assumed that trade would fuel growth, ism in the form of a distinctive variant of lem, misleading too. China’s rise rep- growth would lead to the emergence of nationalism which, rather than empha- resents a test for the United States and a middle class, and, as had happened sizing the great achievements of Chinese other democratic countries, not solely elsewhere in both Asia and Europe, the civilization, stressed instead the “century or even primarily because of its growing middle class would act as the standard of humiliation” and the vital and as yet power, but because of the uses to which bearer for democracy. unfinished role of the Communist Party that power is being put. These, in turn, in restoring national dignity. reflect its repressive, authoritarian do- ❚❚Chinese Intentions All of these elements have remained mestic political system. The internal dy- From the start, China’s Communist in place to this day, although their rela- namics of the Chinese Communist Party Party rulers had very different ideas. The tive weights have shifted over time. As (CCP) regime and its prevailing ideology CCP leadership recognized early that en- economic growth has slowed, China’s shape how its leaders perceive threats, gaging with the outside world would pose leaders have cracked down even harder define goals, and select policies to at- risks to its continued rule. As Deng Xiaop- while stepping up their use of national- tain them. And it is these perceptions, ing famously warned: Opening the win- ist appeals. These tendencies first became policies, and objectives that put Beijing dows would let in flies as well as fresh air. evident during the second half of Hu Jin- fundamentally at odds with Washing- Deng believed that economic reform was tao’s reign, following the global financial ton, raise the stakes of their expanding essential to China’s return to great power crisis of 2008 and the 2011 “Arab Spring.” rivalry, and diminish the likelihood of a status. But he was also keenly aware that But they have been especially visible lasting, stable entente between them. subversive ideas and outside influences since Xi Jinping assumed leadership of could encourage dissent and produce un- the party-state six years ago. ❚❚American Expectations wanted pressures for political change. For the better part of three decades, In the wake of Tiananmen, those ❚❚The Expansion of Repression the ultimate aim of American policy atop the CCP who might have been will- The expanded resources available to has been to bring about a change in the ing to contemplate eventual liberalization the CCP regime have given it a widen- character of the Chinese regime. From were purged. Deng and his remaining ing array of options for crushing dissent. the end of the Cold War onward, with a colleagues then launched a three-pronged In addition to strengthening its “Great brief interlude in the early 1990s follow- program to counteract and contain the Firewall” to block unwanted Internet con- ing the 1989 Tiananmen Square mas- potentially destabilizing political effects tent, the government is moving toward sacre, U.S. policy in both Democratic of continued economic reform. By al- implementing a nationwide “social cred- and Republican administrations sought lowing the Chinese people to enjoy more it” system that will use facial recognition

28 inFOCUS | Spring 2019 AARON FRIEDBERG: How to Get the China Challenge Right AARON FRIEDBERG:

Members of a Chinese military honor guard march during a ceremony om 2017. (Photo: United States Air Force) software and big data analytics to monitor permanent one-party dictatorship: an il- but it needs enemies and an atmosphere the activities, track the movements, and liberal version of “the end of history.” of crisis to justify its tightening grip on assess the political reliability of virtually What is happening inside China political power. every man, woman, and child in China. should shock the conscience of demo- Some means of repression are more cratic citizens and their governments, ❚❚Economic Development and old-fashioned. There is growing evidence and give pause to those who continue Theft of an extensive network of “detention to believe in the transformative effects Developments in the economic sphere facilities,” or concentration camps, that of engagement. But the harmful conse- parallel and reflect those in the political may hold as many as one million mem- quences of these developments extend domain. From the early 1990s onward a bers of China’s Uighur Muslim minor- well beyond China’s borders. The sur- widespread expectation in the West was ity—nearly 10 percent of the total Uighur veillance technologies and social control that economic and political reform would population—whom the regime fears may techniques being perfected by Beijing go hand in hand, and that a greater Chi- be susceptible to Islamist radicalism. have already begun to spread, as Chi- nese reliance on markets would encour- Prisoners are reportedly subjected to in- nese companies expand telecommuni- age, and indeed require, a steady reduc- tense psychological pressure intended to cation networks around the world and tion in the power of the party-state. But “re-educate” them; many have not been provide support to like-minded regimes. this is not what has happened. Beyond a heard from since being detained. CCP China’s increasing wealth and the grow- certain point, the CCP has proven unwill- policy appears to constitute a violation of ing importance of its market have also ing to relinquish its grip. human rights on a truly massive scale; but enhanced the regime’s ability to exert Resistance to thorough-going mar- to date, Western governments, including leverage over foreigners, including both ket reforms is also a result of the in- those which profess to care most about governments and private actors, who centives embedded in the structure of human rights, have been wary about dare criticize its human rights policies or China’s opaque, hierarchical political commenting on it publicly, presumably otherwise incur its wrath. system, in which party members and because they fear damaging valuable eco- Even as they seek to silence foreign their families benefit from privileged ac- nomic relationships with China. critics, China’s leaders also have intensi- cess to power. Increasingly, too, the CCP Thirty years ago, there may have fied their use of impassioned patriotism, leadership’s determination to continue been a case for downplaying the CCP including by courting confrontations on the path of “socialism with Chinese regime’s mistreatment of its own people with other countries in an attempt to characteristics” also reflects the convic- in the belief that continued engagement rally domestic support. Beijing’s increas- tion that these policies are working. would catalyze faster political reform. It ingly forceful prosecution of long-stand- The pace of economic reform began has become increasingly apparent, how- ing disputes with its maritime neighbors to slow shortly after China’s accession to ever, that what Xi Jinping and his col- is one example of this trend; its stiffen- the World Trade Organization in 2001 leagues have in mind is not a transitional ing stance toward the United States, and, in certain respects, it has shifted phase of authoritarian rule to be followed even before the advent of President Don- into reverse under Xi Jinping. Despite by eventual liberalization, but an effi- ald Trump, is another. its WTO commitments, Beijing is con- cient, technologically empowered, and The CCP regime may not want war, tinuing to use a mix of subsidies, tariffs,

Money Makes the World Go ‘Round | inFOCUS 29 non-tariff barriers, and other measures or perhaps eliminating a longstand- enabled it to fund a wide-ranging and sus- to protect domestically-based companies ing source of strategic advantage for tained modernization of its armed forces. and to promote them in global markets. the United States. Indeed, given its Among other things, the regime has in- Its latest trade and industrial programs worldview, this is likely an even more vested heavily in so-called anti-access/ are designed to catapult it from perennial important objective for the CCP re- area denial capabilities—precision con- follower to a position of leadership across gime than simply promoting national ventional-strike systems capable of hit- an array of cutting-edge technologies. economic welfare. ting fixed and mobile targets throughout Because they continue to lag behind the Western Pacific, including U.S. bases in many of these sectors, Chinese firms, ❚❚Changing Asia’s Status Quo and aircraft carriers. Beijing has also be- at the direction and with the assistance China’s rulers have long been dis- gun to improve its intercontinental-range of the party-state, have for some time satisfied with the status quo in East Asia, nuclear strike forces in ways that could been using a variety of techniques for especially in the maritime domain off eventually call into question the credibil- acquiring the necessary technology from their eastern coasts. Among their objec- ity of America’s extended nuclear guar- the advanced industrial countries. In ad- tives are taking control of Taiwan, which antee to its allies. At the other end of the dition to buying up foreign companies the CCP regards not only as a rebellious spectrum, China has developed and put to and compelling foreign firms to transfer province but also a dangerous example use “gray zone” capabilities—coast guard, core technologies in return for access to of a successful Chinese democracy, and paramilitary, and maritime construction the Chinese market, Chinese actors have asserting dominance over virtually all of forces that it has used to build and now used cyber intrusions and other more the waters, surface features, and resourc- to fortify a set of artificial islands in the traditional methods of industrial es- es in the South China Sea, as well as por- South China Sea. pionage to steal intellectual property in tions of the East China Sea. The purpose of China’s military massive quantities Beijing also seeks an end to Ameri- buildup is not primarily to fight and win The problems with all of this are ca’s regional alliances and the removal of a war with the United States but rather, if threefold. Some of the methods just de- U.S. military bases from Japan and South possible, to “win without fighting.” scribed represent severe distortions or Korea. It regards these as temporary arti- China’s economic growth has also outright violations of existing rules and international understandings. China has China’s rise represents a test… not solely or even been gaming the system to its own ad- vantage and the disadvantage of its trad- primarily because of its growing power, but because ing partners. of the uses to which that power is being put. Aside from the means it uses, Bei- jing’s stated goals, as recorded in offi- cial planning documents like “Made in facts of historical accident, the byproduct given its leaders an expanding array of China 2025,” contribute to this sense of “unequal treaties” that followed the non-military tools with which to achieve of concern. The regime has declared its end of World War II and are now sus- their objectives. The increasing size and intention not only to promote the for- tained by what the Chinese describe as an centrality of the Chinese market and its tunes of Chinese firms in a general way, outdated “Cold War mentality.” The CCP rapidly expanding role as a provider of aid but to help them achieve a dominant leadership believes that Washington has and investment is helping Beijing draw position—including specified market long sought to encircle it from without others toward it. In addition to attracting shares—in a variety of high-tech sectors, with democratic allies, while subverting clients with the promise of profits, the re- first in its heavily protected domestic its rule from within with liberal propa- gime now has the ability to use economic market and then overseas. If successful, ganda. Weakening and ultimately break- instruments to threaten—and if necessary these efforts would jeopardize the pros- ing up America’s alliances is therefore to punish—those who would defy it. perity and future growth prospects of seen as essential to regime survival and many other advanced industrial coun- to regaining China’s rightful place as the ❚❚Pushing the U.S. Out tries, including the United States. preponderant power in East Asia. The ultimate objective of CCP strat- Finally, because virtually all of What has changed in recent years are egy appears to be the creation of a new the technologies involved have both not the CCP’s goals, but rather the means regional order in eastern Eurasia, formed commercial and military applications, available to achieve them, as well as Bei- from a group of countries joined by trade, Beijing’s policies could help it achieve jing’s willingness to exercise its growing transportation, and communication in- a meaningful edge in the development power in order to do so. Since the mid- frastructure with Beijing at the center. of future weapons systems, reducing 1990s, China’s rapid economic growth has With America’s alliances dismantled or

30 inFOCUS | Spring 2019 AARON FRIEDBERG: How to Get the China Challenge Right AARON FRIEDBERG: drained of significance, the United States “Internet sovereignty” as opposed to the openness for its own ever more clear stra- would be pushed to the margins, if not ideal of “Internet freedom” favored by tegic ends. Just as American policymak- out of the region altogether. many in the West) designed to reinforce ers set out to “make the world safe for de- Regional hegemony would also give its own efforts to block what it regards as mocracy” at the start of the 20th century, China a secure base from which it could subversive and dangerous ideas. so Chinese leaders are using every means more easily project power into areas closer at their disposal to make it safe for au- to the United States, including the West- ❚❚On Offense in the War of Ideas thoritarianism, or at least for continued ern Hemisphere. Since the start of the China’s rulers no longer see them- CCP rule, at the start of the 21st. 20th century a central objective of Ameri- selves as operating entirely on the defen- In keeping with the president’s own can grand strategy has been to forestall sive in the ongoing clash of ideas with predilections, the Trump Administra- just such a threat by preventing a hostile the West. They now feel emboldened not tion has chosen for the most part to power or coalition from dominating ei- only to attack the inequities and ineffi- eschew the language of values and be- ther end of the Eurasian landmass. ciencies of liberal democracy, but to ad- liefs, casting China not so much as an The ambitions of China’s CCP re- vance their own distinctive mix of mar- ideological rival but rather as America’s gime are no longer limited to its imme- diate neighborhood but extend to the China’s increasing wealth and the growing global stage. Chinese strategists have never ac- importance of its market have also enhanced the cepted the Western vision of a liberal or- regime’s ability to exert leverage over foreigners... der, a world made up of states that share a commitment to certain principles, in- cluding representative government, the ket-driven economics and authoritarian main opponent in a “new era of great rule of law, and protection of individual politics as, in Xi Jinping’s words, a “new power competition.” This is both inad- rights. What they say they seek instead option for other countries.” equate and unwise. What is at stake in is a “community of common destiny,” a Whatever the philosophical appeal of the emerging contest between Washing- live-and-let-live world united only by the the Chinese model, the outflow of Chinese ton and Beijing is not just the delineation shared pursuit of material prosperity, in money, most notably under the auspices of spheres of influence, or some marginal which every state can govern as it sees fit, of Xi’s signature Belt and Road Initiative, readjustment in the balance of power, but free from outside criticism or interference. is influencing the policies and shaping the the future prosperity and security of free Rather than trying to overturn the institutions of countries in many parts of societies in Asia and around the world. existing structure of global institutions, the developing world. Beijing’s largesse For all their talk of “win-win solu- Beijing thus seeks for the moment to ex- tends to strengthen the hand of the au- tions,” China’s current rulers regard the ploit those parts that can be turned to its thoritarian rulers with whom it generally escalating rivalry with the United States advantage (like the World Trade Orga- prefers to do business, but it is also fueling as a zero-sum game from which only one nization and the U.N. Security Council), corruption and weakening democratic power can emerge triumphant. ignoring those that challenge its interests practices in places where liberal norms Last and perhaps most important: (like the International Tribunal for the have yet to take firm root. Downplaying the differences between Law of the Sea), and subverting or weak- Despite China’s loudly proclaimed liberal democracies and authoritarian ening others (like the U.N. Commission commitment to “non-interference,” in regimes risks overlooking the vulnera- on Human Rights) that might threaten the past five years the CCP has stepped bility and potential frailty of CCP-ruled its legitimacy. up its use of political warfare or so-called China while underestimating the dyna- The CCP regime has also begun to United Front influence operations. These mism and resilience of the United States develop some new institutions that by- involve a combination of techniques, in- and its allies. Sun Tzu’s ancient aphorism pass those favored by the West, includ- cluding bribery and cooptation, that are is still apt: To achieve strategic success it ing mechanisms that enable cross-bor- intended to shape the perceptions and is necessary to know the enemy, but also der financial transactions beyond the attitudes of foreign business, academic, to know yourself. reach of U.S. surveillance or sanctions, media, and political elites in ways that and development banks that offer capi- reduce criticism of the CCP regime or AARON FRIEDBERG, Ph.D., is Profes- tal without Western-style conditions for opposition to its policies. sor of Politics and International Affairs good governance or transparency. Fi- Unlike Moscow, Beijing is not trying at Princeton University. A version of this nally, Beijing is attempting to win accep- to destabilize the advanced industrial de- article appeared at American Interest. tance for new norms (like the notion of mocracies, but it does seek to exploit their

Money Makes the World Go ‘Round | inFOCUS 31 The Case for Chile’s Private Social Security System by DAN MITCHELL

he United States and other west- took over, Chile had one of the high- Fidel Castro gone, Cuba exports ern nations became rich during est rates of poverty in South Ameri- communism as aggressively as it the 1800s thanks to a combina- ca. It was a basket case. Now it has once did sugar. …socialists have Ttion of rule of law and very small the continent’s strongest economy. an ally in Pope Francis, who spent government. Without Pinochet’s having heeded three days in Chile in mid-January. Sadly, very few nations – most no- the advice of economist Milton Fried- …there’s a disconnect between how tably East Asian tiger economies – have man, imposed capitalism, and hired people here feel about capitalism— become rich in the modern era. Yes, a team of free market economists, as a concept anyway—and the eco- some other countries have grown, but many trained at the University of nomic success they are experiencing. they are not on a path to converge with Chicago, the rise to First World status Pinochet is partly to blame, I suspect. rich nations. wouldn’t have happened. One of the He’s a hard man to credit, given his Chile, however, may be an excep- economists was José Piñera, brother bloody takeover. tion to that unfortunate pattern. It has enjoyed amazing levels of growth since a shift to free-market policies starting about 40 years ago. It is now the richest Chile’s system isn’t perfect, but it’s far better, by country in Latin America and if its “im- several orders of magnitude, than the debt-ridden, probable success” continues, it will soon pay-as-you-go models... be comfortably part of what used to be called the First World. The flagship reform in Chile was the creation of a funded retirement system of the new president and Harvard- Barnes’ final point is also important. based on personal accounts. Basically, educated. He created a stable, fully- universal IRAs. funded pension program that has I’ve had many people tell me that per- become a monument to the success sonal accounts are bad because they ❚❚The Chilean Model Lives of private markets. …Piñera released were implemented during Pinochet’s Writing for the Weekly Standard, a study in January that found “72 reign. But that’s a silly argument, Fred Barnes shared what he learned about percent of the capital accumulated sort of like deciding to be against free the nation’s private retirement system. in the personal retirement account of trade because the dictatorial Chinese the average Chilean worker, after 36 government opened up to the global The rags-to-riches Chile story lives years in the private pension system, economy. on as a model of what a poor country comes from the return on the invest- can achieve if it spurns socialism and ments done with their contributions.” As far as I’m concerned, tyrannical adopts free markets and democracy. That’s a long way of saying the plan is leaders are awful and should be con- Peru is now copying Chile. More a dazzling success. demned, but if they happen to grant citi- may follow. …Chile was once a Third zens a slice of economic liberty, that’s a World country headed downhill eco- Though there are opponents, mostly silver lining to an otherwise dark cloud. nomically after Salvador Allende those inspired by the communist re- Back to our main topic, Monica was elected president in 1970…bent gime in Cuba and a pope who thinks we Showalter, in a column for the American on creating a Marxist state. 1973, should worship the state. Thinker, explained what makes Chile’s the military led by General Augusto system a role model for the United States. Pinochet staged a coup. …When he But obstacles remain. …Even with

32 inFOCUS | Spring 2019 DAN The Case for Chile’s Private MITCHELL: Social Security System it, Chile’s pension system is a success story. The system has achieved con- sistently high rates of return. It offers excellent value for money and solid pensions for those who contribute regularly. … The official retirement age is not as important in Chile as it is in countries with state-run sys- tems. By and large, in that system, people retire when they have accu- mulated enough savings, not when politicians think they should retire.

Kristian also mentioned figure 2 in the text. By this important metric, Chile is firmly ensconced in the upper tier of developed countries.

❚❚The Perils of Not Saving Figure 1. In Chile 73 percent of retirement savings come from the profits on investments. Just 23 percent come from contribution. (Source: Chilean Association of Pension Fund Administrators. Now let’s address some of the critics. Under the previous leftist government, …the Chilean Model…shows some the U.K.-based Institute of Economic there were protests against the country’s spectacular new results for ordinary Affairs, Kristian Niemietz takes an in- famous private social security system citizens… the Chilean Model is work- depth look at Chiles’s approach. and attempts to undermine the model. ing, big time. Basically, you skip So- Indeed, I wrote about that battle back in cial Security taxes for starters, which Taken together, the value of the as- 2014. And I also noted that even some leaves you a lot more money to play sets accumulated by Chilean pen- academics agreed that it would be fool- around with. You then put 10 percent sion funds is equivalent to about two ish to undermine a successful approach. of your income into a government- thirds of the country’s GDP. This plac- Let’s see what’s happened since certified private pension account (and es Chile in the same league as coun- then. The Economist reported about the you have many choices among them) tries which have had private pensions complaints about a year ago. … This is mass-scale wealth creation, for over a century, and miles ahead of and it benefits workers most of all. … countries with traditional Bismarck- …tens of thousands of Chileans in Chile has no pension crisis as most of ian systems…The poverty rate among Santiago…protest against the coun- the rest of the developed world does – the elderly is lower than that of the try’s privatized pension system. Orga- no worries about a “trust fund” and population as a whole – 3.9 percent nizers—a mix of unions, pensioners’ no Social Security “cuts” to speak of. vs. 10.3 percent, or 8.4 percent vs. 14.4 associations and consumer-advocacy This is why. Thirty nations have ad- percent, depending on the poverty groups—say that… Pensions are too opted the same plan… the left hates measure used… small…benefits have not measured up this stuff. It keeps workers out of the Chile’s 1981 pension reform has giv- to people’s unrealistic expectations. clutches of unions and un-dependent en rise to a number of positive eco- The scheme’s founders told workers on government handouts. Of course nomic spillover effects: the prefunded that if they contributed continuously leftists want it gone. They tried hard system has been an active ingredient throughout their careers they would in Chile to turn workers against this in the accelerated economic develop- receive a generous 70% of their final pension idea. ment that the country has been expe- salaries upon retirement. …But most riencing since the mid-1980s. …It has workers contributed far less. Women And figure 1 is from her article show- increased employment, especially in took time off to raise children (and re- ing how investment returns have played the formal sector… It has boosted tire earlier than men). Many Chileans a big role in helping ordinary Chileans the development and sophistication spent time in informal jobs or unem- build nest eggs for their old age. of Chile’s capital markets, and thus ployed. On average, they contribute Let’s look at some additional re- raised Total Factor Productivity… for only 40% of their prime working search. In a monograph published by Despite the current backlash against years. …The system has generated

Money Makes the World Go ‘Round | inFOCUS 33 that system. In addition, pensions under the private system are ob- tained through contributions that amount to 10 percent of wages, while in the public system the contribution is 20 percent. Correcting for those distortions shows that the value of the pensions the AFPs provide is three times high- er than that of the public system. … it’s true that many Chileans do not contribute regularly to their retire- ment accounts because too many work outside the formal sector and getting work is still too precarious for many, that is a problem that affects any pension system, whether public or private, and can only be solved with labor reforms. …Chile’s private Figure 2. pension system can certainly be im- proved, but the reality is that it has high returns for pensioners, averag- economic growth – if they are sustained been extremely successful. …old-age ing 8.6 percent a year between 1981 for a long period – make a huge difference pensions no longer represent a bur- and 2013. But…high fees have bitten in terms of national prosperity. And 0.5 den on the treasury. Pension savings a huge chunk out of those returns, re- percent more growth every year is actual- have reached $168 billion, about 70 ducing them to 3-5.4 percent. ly a big boost when looking at the impact percent of GDP, which has stimulat- of just one policy. ed high growth and domestic invest- Though the article also noted all the ment, and has put Chile on the verge benefits of personal accounts: ❚❚The Attack on the System of becoming a developed country—a Last but not least, here’s Ian remarkable achievement. Rather than saddle the government Vasquez’s response to the attacks on the with an unaffordable pay-as-you-go Chilean system. Amen. Chile’s system isn’t perfect, system, in which today’s taxpayers but it’s far better, by several orders of support today’s pensioners even as Critics in Chile assert that the aver- magnitude, than the debt-ridden, pay- the population ages, Chile created age pension provided by the private as-you-go models that are wreaking one in which workers save for their pension fund companies is around havoc with the public finances of other own retirement by paying 10 percent $340 per month, which is not better countries. of their earnings into individual ac- than the public pension system. But And Chile is prospering in a way counts. These are managed by private as the Chile-based Liberty and De- unimaginable in other Latin nations. administrators (AFPs). …the system velopment institute (LyD) has shown P.S. Chile also has nationwide worked. Contributions to the AFPs that is like comparing apples to or- school choice. flowed into capital markets, which anges. To calculate the private sys- P.P.S. Bill Clinton supported good boosted growth. Annual GDP growth tem’s figures, all those affiliated with Social Security reform and was prepared from 1981 to 2001 was 0.5 percentage it are taken into account, even if they to work with congressional Republicans points higher than it would have been have only contributed to their ac- (and some Democrats) on good legisla- without the investment, according to counts once in their lifetime. The cor- tion for personal accounts, but that ef- one study. This helped lift millions of responding figure for the public pen- fort was sidetracked by the partisan im- people out of poverty. sion system, however, only takes into peachment fight. A genuine tragedy. account the pensions of those who The last couple of sentences of the have contributed for a minimum of DAN MITCHELL is co-founder of above passage are worth highlighting. 10 to 15 years, something that leaves the Center for Freedom and Pros- As I’ve noted, even small differences in out half of the people affiliated with perity and chairman of the board.

34 inFOCUS | Spring 2019 Sorry, Bernie Bros, Nordic Countries Aren’t Socialist by JEFFREY DORFMAN

s the American left embraces a First, it is worth noting that the schools, or private, for-profit schools. platform that continues to look Nordic counties were economic success- Clearly, the use of government funds to more and more like a socialist’s es before they built their welfare states. pay for private, for-profit schools is the Adream, it is common for those Those productive economies, generat- opposite of socialism. on the right to counter with the example ing good incomes for their workers, of Venezuela as the nightmare of social- allowed the governments to raise the ❚❚Economic Freedom Reigns ism in reality. A common response from tax revenue needed to pay for the so- We can also confirm these isolated the left is that socialism (or democratic cial benefits. It was not the government facts by looking at a comprehensive mea- socialism) works just fine in Sweden, benefits that created wealth, but wealth sure of capitalism relative to socialism. Norway, and Denmark. It is certainly that allowed the luxury of such gener- The Fraser Institute, a Vancouver-based, true that Sweden, Norway, Finland, and ous government programs. pro-free market think tank, compiles a Denmark are notable economic success- Second, as evidence of the lack of worldwide ranking of countries called es. What is false is that these countries government interference in business the Economic Freedom Index. Its web- are particularly socialist. affairs, there is the fact that none of site explains that its ranking “is an effort these countries have minimum wage to identify how closely the institutions ❚❚The Myth of Nordic laws. Unions are reasonably powerful and policies of a country correspond Socialism in many industries and negotiate con- with a limited government ideal, where The myth of Nordic socialism is tracts, but the government does nothing the government protects property rights partially created by a confusion be- to ensure any particular outcome from and arranges for the provision of a lim- tween socialism, meaning government those negotiations. Workers are paid ited set of ‘public goods’ such as national exerting control or ownership of busi- what they are worth, not based on gov- defense and access to money of sound nesses, and the welfare state in the form ernment’s perception of what is fair. value, but little beyond these core func- of government-provided social safety A third example of Nordic com- tions.” Clearly, a socialist country should net programs. However, the left’s em- mitment to free markets can be found perform poorly in any ranking based on brace of socialism is not merely a case in Sweden which has complete school these principles. of redefining a word. Simply look at the long-running affinity of leftists with socialist dictators in Cuba, Nicaragua, and Venezuela for proof many on the ...it is worth noting that the Nordic counties left long for real socialism. To the extent that the left wants were economic successes before they built to point to an example of successful their welfare states... socialism, not just generous welfare states, the Nordic countries are actu- ally a poor case to cite. Regardless of the perception, in reality the Nordic countries practice mostly free market choice. The government provides fami- What we find, however, is the Nor- economics paired with high taxes ex- lies with vouchers for each child. These dic countries rank quite high on this in- changed for generous government en- vouchers can be used to attend regular dex of economic freedom. In fact, while titlement programs. public schools, government-run charter Hong Kong and Singapore top the list

Money Makes the World Go ‘Round | inFOCUS 35 XXXXX

Flags of Nordic Countries.

and the United States ranks 12th, we energy, anyone?). The Nordic countries feasible. The Nordic countries are smart can find the Nordic countries in quite don’t actually do much of those things. enough not to kill the goose that lays the respectable rankings. Denmark ranks Yes, they offer government-paid health- golden egg. 15, Finland 17, Norway 25, and Sweden care, in some cases tuition-free univer- If the left insists on naming a sys- 27. In terms of numerical scores, Sweden sity educations, and rather generous tem of generous government benefits is only 5 percent lower than the U.S. For social safety nets, all financed with high combined with a free market democrat- further comparison, South Korea and taxes. However, it is possible to do these ic socialism, I cannot stop them. That Japan, both considered fairly pro-free things without interfering in the private seems unnecessarily confusing since market, rank 32 and 39, respectively. sector more than required. It is allowing the government is actually running no industries other than education (and meddling somewhat in healthcare). It certainly isn’t socialism. In fact, the only reason most such countries can af- Perhaps a better name for what the Nordic countries ford those benefits is that their market economies are so productive they can practice would be compassionate capitalism. cover the expense of the government’s generosity. Perhaps a better name for what the Nordic countries practice would be compassionate capitalism.

Socialism can take the form of gov- businesses to be productive that pro- JEFFREY DORFMAN, Ph.D. is a ernment controlling or interfering with duces the high corporate and personal professor of economics at The Uni- free markets, nationalizing industries, incomes that support the tax collec- versity of Georgia and author of and subsidizing favored ones (green tions making the government benefits Ending the Era of the Free Lunch.

36 inFOCUS | Spring 2019 “A Love Song to Capitalism” review by SHOSHANA BRYEN

conomics was dubbed “the dismal two are available. No job is beneath you, science” by historian Thomas Car- no job too dirty. Just work. And when lyle not, as some think, regarding you’re finished, work some more. EThomas Malthus’s bleak view of And get an education. a future balance of population and re- After an “iffy” high school career, sources. It was, rather, Carlyle’s belief that he managed to get into Bucknell Univer- slavery was a more moral institution than sity in Pennsylvania, where various stu- the free market for slaves and people of dents, friends and professors alternately color. He was calling John Stuart Mill’s opened doors for him, got him into trou- capitalist, free market theories “dismal.” ble, and got him out again. Bravado and There are other names for Carlyle’s a night school MBA took him through theories. Don’t take it out on economics. his early positions on Wall Street, where I Love Capitalism by Ken Langone the culture was dominated by hereditary is the happiest book going about eco- bankers and brokers. Blunt honesty took nomics, economies, or people making him farther. And really good decision- money, and people spending it. Capital- making took him farther still. ism, contrary to the rising flock of young “socialists” who refuse to look at the so- ❚❚To Wall Street and Beyond cialist hell-hole that is our sad neighbor The middle of the book is a trav- Venezuela, is the best way ever devised elogue of companies, IPOs, leveraged to let people rise, live well, spend money, buyouts, corporate finance, mergers, I Love Capitalism and give it away in large chunks. and selling stocks and bonds. You don’t By Ken Langone From the story of his poor early have to understand the mechanisms to life to his very wealthy 9th decade, Lan- enjoy the story – “You’re going to prob- gone sings what he calls a “love song” to ably pay 6 percent and it’s going to be Portfolio capitalism. Founder and chairman of for a ten-year term. I can probably get 2018 Invemed Associates LLC, and perhaps the bondholder to take no repayments best known as an early partner in Home for the first two years, and then eight Depot, Langone tells the quintessential equal payments for the last eight years, boot strap story of an outsider, poor and fully amortized.” What is important is Italian in the 1950’s WASP culture of that Langone never made a deal without Wall Street. understanding the company or product His maternal grandfather was illit- or the person at the center of it. Refrac- erate in both Italian and English, work- tories, pajamas, oil, plungers? He knew ing the sand pits of Long Island. His one about them. People? He understood luxury was Saturday afternoon spent them. Ross Perot, Bernie Marcus, Ar- with Texaco’s Metropolitan Opera on ra- thur Blank, Frank Borman, Ed Braniff? dio. [As it was for my own non-English- They knew him and trusted him. speaking, Jewish grandfather from Riga. Instinct kept him away from Bernie I’m betting his grandfather sang along, Madoff. too.] His father was a plumber and his Langone, like all good capitalists, mother a cafeteria worker – neither grad- worked for himself and his family – a uated from high school. Their legacy to wife he clearly adores and his children. Langone was love and hustle. Work every “I knew exactly what I had to do. I had day. Work at anything. Work at every- three kids to feed and educate and pro- thing. Work some more. Take two jobs if vide a home for, and all I knew was I had

Money Makes the World Go ‘Round | inFOCUS 37 Ken Langone, 82, in his New York office 22 floors above Park Avenue. (Photo: Yana Paskova/The Washington Post) to go out and kill every day to eat. So, I of money. Someone in Langone’s firm Of course it can. With all of govern- wasn’t producing for [my bosses]. I was wanted to use the information to buy up ment’s bureaucratic excesses, inefficien- producing for my family.” the stock ahead of the situation – “front cies, and meandering funding streams, a That’s the setup. running” Langone called it; “insider hospital could probably, eventually, arise The payoff is watching a craftsman trading” most of us would say. Langone where it was supposed to be – or at least at work, gently sculpting deals, moving immediately told the senior members of where congressmen and city councilmen the parts to get where he wanted to be his firm that he was leaving because he wanted it. But the story of Langone and and with whom. And then, there is the wouldn’t work in a firm in which that NYU Medical Center is the story of what super-payoff. was tolerated. The senior partners fixed happens when business, money, and the Langone’s long relationship with it and Langone was shortly elected presi- charitably inclined come together. Ross Perot almost didn’t get started. dent of the firm. NYU Medical School had merged Having been told that he had half an Into companies, out of companies, with Mt. Sinai Hospital and both were hour – to the minute – for the meeting, and the fascinating story of what didn’t in shambles. Langone was offered the and Perot having spoken for most of work at Handy Dan, and did work for its chairmanship of the medical school. As that, Langone told Perot he had no time successor, Home Depot. he did with his business ventures, he in- to make his presentation, so he would vestigated the problems, met the people, just say goodbye and leave. Perot kept ❚❚The Super Payoff made decisions about how to improve the meeting going for 13 hours. Perot ul- Aside from feeding his family – the institution, and jumped in. Then timately bought into the Langone way of which could have been done on a lot less he put $100 MILLION into it – anony- doing business, and Langone produced money than he ultimately made – what mously. Then he went to friends and so- an IPO that Fortune magazine called moved Ken Langone? This is the super licited gifts of $35 million, $150 million, “the greatest personal coup in the his- payoff and the heart and soul of I Love $100 million, and $50 million and more. tory of American finance.” Capitalism. His second gift of $100 million was pub- You don’t need to know how an IPO Langone made it to give it away. lic in hopes of encouraging others. works to get the point. Today, when capitalism and wealthy THAT, a government cannot do. He was also willing to walk away. people are under increasingly intense Capitalism is not a charitable institu- Hot on the heels of the Perot EDS deal, political attack, it is worthwhile to con- tion, but capitalism provides the means a situation arose in which people hold- sider the charitable giving of the wealthy. for charitable people to help the rest of ing the stock were about to make a lot Can the government build a hospital? us. Langone figures that “everything I

38 inFOCUS | Spring 2019 BOOK REVIEW: “A Love Song to Capitalism” own – the plane, the houses, the cars – later became chairman. In the hot and ❚❚The Philosophical Langone and even including all the yearly main- heavy late 1990s, the formula resulted in a The last chapter is more philosoph- tenance, the som comes to about one- lot of money for Grasso. A lot. But by 2003, ical than nuts and bolts. third of the total amount of money that when things were slowing, the amount • There are no “self-made men.” Ev- we’ve given away.” His charities include rankled some people – including Spitzer eryone has family, friends, employers, the Animal Medical Center, the Boys’ and N.Y. state Comptroller Alan Hevesi. employees, teachers, and students who Club of NY, Bucknell University, Harlem Under pressure, Grasso resigned. And help to form the adult we grow up to Children’s Zone, and St. Patrick’s Cathe- then Spitzer filed a law suit against him be. Langone is grateful to his. dral. His wealth allowed him to serve on boards including Ronald McDonald House NY, the Center for Strategic and Capitalism, then, is the mechanism by which people International Studies (CSIS), the Horatio can start with very little, work very hard, and end up Alger Society Foundation and more. All that from the grandson of Ital- better off. ian immigrants who came to America with nothing but the will to work. Capitalism, then, is the mechanism and Langone, calling Langone a “serial • Capitalism is better than social- by which people can start with very overpayer,” although Langone had noth- ism. His distaste for socialism is ex- little, work very hard, and end up bet- ing to do with the formula or the result. plicit and should be read by presiden- ter off. Not necessarily millionaires, and It was a bitter and nasty fight. Lan- tial wannabes and millennial college “better off” isn’t only about money, but, gone wrote: students. according to Langone, how ever many • People are different, have different rungs you climb on the ladder, you are The only thing that disappointed me skills and needs, different likes and obliged to share your success. People about that episode in my life was the ambitions. Capitalism, which allows across the book rise and Langone enjoys number of my friends who called me for maximum personal input into lives watching and helping. saying, “Why don’t you settle with this and business, is best able to account for all of those differences and reward them in the marketplace. No, it isn’t perfect. Yes, some people have less. ...“better off” isn’t only about money, but, according to Some people will have more and some Langone, how ever many rungs you climb on the ladder, of those won’t share. Langone regards you are obliged to share your success. it as an article of faith – he is a reli- gious man – that those having more have to have a conscience. • “You want my philosophy in a nut- ❚❚“I Can’t Forgive” guy?” I wasn’t offended, but I was hurt shell? I want everybody to do well. The It isn’t all sweetness, though. Some- that they didn’t understand how I’m world is a lot more fun if we’re all rich times you have to fire people – not nice, put together. My stand had nothing to instead of just some of us.” but necessary. Sometimes, you run afoul do with loyalty to Grasso. It had ev- Sometimes Langone’s language is, of the authorities whether or not you did erything to do with feeling I’d done the shall we say, “salty,” and sometimes he what they said you did. One of the most right thing. And I would do it again. characterizes people – Jews, Italians interesting sections is about how Eliot Anyone who really knew me knew and others – in words that will make Spitzer, the ambitious and conniving at- that I’d sooner jump off the Brooklyn really stiff readers cringe although it is, torney general of New York, went after Bridge than settle with that weasel. really, done with love. Never mind. This Langone and one of his partners. is a great book. The personalities, the Spitzer took the issue of compensa- He won, and couldn’t help gloating philosophy, the peek into Wall Street, tion for the president then-CEO of the just a little when Spitzer’s own sex scan- the suspense as Langone works a deal. New York Stock Exchange, David Grasso dal destroyed his reputation. “I can’t find Nothing dismal here. – who had worked his way up from union- it in my heart to forgive…And maybe it ized clerk to the top of the heap. His com- makes me a worse person not to be able SHOSHANA BRYEN is Senior Di- pensation was determined by a formula to forgive that schmuck. If that’s what I rector of The Jewish Policy Center devised by a committee of which Langone have to live with, I’ll live with it.” and Editor of inFOCUS Quarterly.

Money Makes the World Go ‘Round | inFOCUS 39 50 F Street NW, Suite 100 Washington, DC 20001

❚❚A Final Thought ...

Iran’s❚❚A Final Thought War ... in Yemen What the U.S. Senate calls the “Saudi war in Yemen,” is What are we doing there? The countries north of the actuallytk Iran’s war for control of the Red Sea. Mediterranean Sea are European, all of which except Bosnia Iran has no border on the Red Sea, so a base in the heel are NATO members. Facing them, along the North African oftk the Saudi boot, i.e., in Yemen, would put it in a perfect coast, are Sunni Muslim countries, all of which except Libya position to encircle Saudi Arabia by water, and to also un- are partners in NATO’s Mediterranean Dialogue. The ar- dermine Egypt, Jordan and Israel. It would allow access to rangement helps keep the Mediterranean stable and free for overland routes through Somalia, Eritrea and Sudan — and shipping. directly into Egypt — for the purpose of arming rebels along One way to make North Africa less stable is to make the the coast and the militias Egypt has been fighting in the Sinai row of countries underneath it less stable. Chad, Mali, So- Desert malia, Eritrea, Sudan and Niger all are targets of instability The Red Sea is the only Israeli outlet to the Gulf of Aden seekers, including Iran. The United States helps those gov- and then the Arabian Sea, the route of Israel’s burgeoning ernments more effectively control their own territory and trade with India and China. It is Jordan’s only sea outlet, and borders, reducing the likelihood of transnational jihad. the Eilat-Aqaba Free Trade Zone is a major source of trade They are, to be sure, as much targets of Sunni jihad as revenue for America’s ally, King Abdullah II. For Egypt, it is they are of Iran, but Iran seeks instability, chaos, anti-Ameri- the route to and from the Suez Canal. canism, anti-Israelism, anti-Westernism and anti-Christian- Therefore, Iran has been stoking the Houthi insurrec- ity in the region. Sunni jihadists seek them as well, so Iran is tion in Yemen, providing, among other things, long-range willing to pay. missiles that have been fired into Riyadh. In Iraq and Syria, ISIS did the destabilizing and Iran Furthermore, and directly impacting the United States, reaped the benefit. If Iran wins in the Red Sea, most Ameri- Camp Lemonnier sits directly opposite Yemen off Djibouti. can goals for the Middle East and Africa will be compro- It is home to the U.S. Combined Joint Task Force Horn of mised. Africa and USAFRICOM. It is the only permanent U.S. mili- – Shoshana Bryen tary base in Africa. Editor, inFOCUS Quarterly