Allister Heath

The Business Hot Air Cool Heads – 20 September 2004 Pay Heed to the Misery of Micawber, Ms Hewitt – 26 September 2004 The Squalid Politics of Squandered Aid – 16 January 2005

ALLISTER HEATH is Deputy Editor of The Business,a London-based Sunday newspaper. He also writes regularly for The Scotsman and Scotland on Sunday and The Spectator, London. Before joining The Business in 2002, he was Editor of The European Journal, a monthly public policy magazine. Allister Heath was born and raised in France. He holds a BSc in economics from the London School of Economics and an MPhil in economics from Oxford University.

had anything to do with global warming, Sadly, he refused to examine any of the HOT AIR COOL HEADS a point that even the New York Times scientific or economic evidence.“Climate 20 September 2004 acknowledges. The scientific consensus is change has happened in the past through that there are periods when there are a a variety of natural causes. But I am lot of hurricanes, and others with far persuaded that human activity is a major It should have been a great news story: fewer, and that these cycles are the result factor in the changes we see today,” he July 2004 was the coolest month in four of natural forces. The worst decade for said. and a half years and the coolest July in hurricanes was the 1940s. roughly 12 years, according to a team of Why exactly he didn’t explain. Presumably eminent and well-respected scientists. The truth is that while the earth is in the 1950s, 1960s and 1970s, when the The global temperature was 0.21°C below probably getting a little bit warmer, we earth went through a bout of global the 20-year average, satellite still don’t know whether any of this is cooling, Mr Howard would have been measurements reveal. This follows a June being caused by man-made activity, or “persuaded” by the conventional wisdom temperature about 0.02°C below average; whether it is mostly up to natural of the time (encapsulated by the famous there is plenty of evidence that August fluctuations. And even if the latter is true, Newsweek story of 28 April 1975 entitled was cooler than usual. a hard-headed economic analysis shows “A Cooling World”) that we were due for a that we would be better off doing devastating new ice age. Had the report discovered a massive nothing about global warming for the increase in global warming, its findings time being. Only one thing is clear in the Unquestionably, there has been a rise in would have made every television news debate on global warming: the science the amount of carbon dioxide in the bulletin in the world. But the report from and economics are fiendishly complex. atmosphere compared with pre-industrial the University of Alabama in Huntsville’s times: levels are up from about 280 parts Earth System Science Centre disappeared Needless to say, this view is shared by few per million by volume (ppmv) to without a trace, simply because it went leading politicians, especially in Europe. approximately 375ppmv today, with the against one of the modern Last week, Prime Minister Tony Blair and bulk of the increase occurring since 1950, establishment’s most dearly held Michael Howard, the Conservative Leader, when it was 310mmpv. prejudices: that the earth is getting called for reductions in carbon dioxide warmer and that man is to be blamed for emissions, the implementation of the Standard thermometer-based recordings it, and the consequences will be Kyoto treaty and a shift to costly and have also recorded an increase in catastrophic. unreliable renewable energy. temperature at or near the surface of the earth over the past 100 years or so. The A similar short-sightedness has plagued Mr Howard’s speech was especially rise is probably about 0.6 degrees Celsius, Europe media’s coverage of the terrible disappointing, filled with meaningless which so far is not particularly significant. tornados that have hit Florida in recent sound bites such as “no one can opt out The evidence of a close link between weeks: few serious scientists believe they of the fight against global warming”. carbon dioxide emissions and

5 2005 Frédéric Bastiat Prize for Journalism Finalists Allister Heath

temperature is weak: the bulk of the using balloon and satellite measurements 45% of its cap in the first half of the 20th increase in surface temperature took instead of ground data. At worst, satellites century, a period of natural warming. place before 1950, suggesting that it was show that the climate is currently 0.3 From 1953 to 1976, when the earth cooled, largely formed by natural phenomena. degree hotter then during the 1951 to Kilimanjaro lost another 12% - its slowest 1980 average, itself distorted given the rate of the past 100 years. This suggests In the popular imagination, the increase global cooling of the time. that the current melting could be due to in so-called greenhouse gases will be natural cycles, a theory shared by many accompanied by a proportional rise in the There is also plenty of evidence that scientists. greenhouse effect and hence a rise in changes in the intensity of the sun’s temperatures. This is not necessarily true. radiation plays a very important role in The simplistic certainty of the global Of course, carbon dioxide traps infrared changing the earth’s climate. In fact, warming crowd is inexcusable: people radiation and enhances the greenhouse leading scientists now agree that solar who have an interest in the environment effect of water vapour, thus keeping the variability has emerged as the most need to do the hard work and read up on earth form cooling down. plausible explanation for the Medieval the latest research, including that which warming of the 11th and 12th century: as goes against their prejudices. This is But after a certain concentration of well as for the little ice age of the 17th especially important if they are seeking to greenhouse gas is reached in the century. impose huge taxes on petrol and atmosphere, its effect may begin to wane traditional energy sources which will – a bit like a sponge, which ceases to suck In recent work, Gerard Bond and a change the way of life of the western up additional water after it is full. And research team at the Lamont-Doherty world. It is time for the greens to grow up: according to a study in Geophysical Earth Observatory in Palisades, New York, they must debate with sceptics, rather Research Letters, the greenhouse effect studied iceberg debris on the floor of the then insult their motives. may be weakening due to changes in North Atlantic. They found that the world cloud cover. has gone through nine global warmings, Reprinted from The Business © 2004. followed by nine global coolings in the Even more radically, Richard Lindzen of the past 12,000 years. PAY HEED TO THE MISERY OF Massachusetts Institute of Technology MICAWBER, MS HEWITT believes that cloudiness may be It now seems likely that they were all responding to climate change: high caused by a 1,500-year cycle in the 26 September 2004 altitude clouds that block outgoing intensity of the sun’s radiation. The radiation decrease as temperatures correlation between earth climate Patricia Hewitt, Britain’s trade and increase, suggesting that the earth (measured by iceberg debris) and solar industry secretary, should spend more operates a self-regulatory mechanism of activity (gauged by tree rings and ice time reading Charles Dickens – and pay astonishing complexity. Dozens of recent cores) is remarkably high. It could well be special attention to the wise words of Mr research papers have postulated related the case that the current slight increase in Micawber in David Copperfield. theories or found other problems with the global temperature is due exclusively to standard view; clearly, we remain far from more intense solar activity. Micawber, an eternal optimist and one of understanding how the atmosphere the cuddlier of Dickens’ characters, was works and retains heat. What remains unknown, however, is the nevertheless forced to learn the hard way exact mechanism the sun uses to about the laws of economics:“Annual We don’t even know if the earth is influence the climate. An earlier income twenty pounds, annual heating up: it will simply not do to rely hypothesis – that variations in North expenditure nineteen and six, result exclusively on traditional thermometer Atlantic Ocean currents were responsible happiness. Annual income twenty measurements. These are incapable of for global climate change – is now being pounds, annual expenditure twenty providing an accurate gauge of global incorporated into the more general pounds nought and six, result misery”, as temperature because they ignore large sunspot theory: currents probably amplify he famously put it before being thrown parts of the earth’s surface, especially the fluctuations in the sun’s intensity. into jail for failing to repay his debts. oceans. Even the standard claim that man-made Today, Micawber’s famous quip is more Average temperatures in places such as global warming is leading glaciers and ice valid then ever; translated into London, Paris or New York are caps to melt, threatening a huge rise in contemporary English, it is a variation on undoubtedly higher today then they were sea levels, is open to question. One study the “no such thing as a free lunch” theme 100 years ago; there has also been an found that sea ice has declined by about popularized by Milton Friedman, the undoubted significant change in the 33% over the past 135 years, but that most Nobel-prize winning economist. climate of southern England. But this is of this took place before man-made Micawber’s logic can be extended to shed hardly surprising. It doesn’t prove that the carbon dioxide emissions rose light on a whole range of issues – temperatures are warming globally: there significantly. including the latest proposal from Hewitt has been an explosion in the output of to heap yet more costly labour market heat from central heating and cars in Another mystery: Mount Kilimanjaro’s ice regulations on the British economy. modern cities, creating what scientists call cap 4,000 to 11,000 years ago was much an urban heat island effect. This fatal flaw larger then it is today, at a time when In a bid to boost the Labour Party’s in the traditional data can be remedied by Africa was much warmer. Kilimanjaro lost flagging support among female voters,

6 2005 Frédéric Bastiat Prize for Journalism Finalists Allister Heath

Hewitt is calling for a huge extension of fathers eligible take up their paternity countries are taxed to subsidise the rich in maternity and paternity leave. leave. poor countries. How right he was: since Undoubtedly, the idea will prove 1951,Western Countries have given appealing to millions of people. But her Under Hewitt’s plans, new mothers would developing countries more than $1 trillion proposals fall foul of the crucial Micawber see their paid leave doubled to 12 months, (£530bn, €750bn) in economic and test of economic rationality. while new fathers would see their humanitarian aid; instead of stimulating paternity pay increased to 90% of their economic growth and helping the needy, A worker who brings in £20 (€ 29.2, $36) salaries. They may even be granted the foreign aid has perpetuated poverty, bred an hour in revenue to his employers while right to take six months unpaid leave. In corruption and financed kletocracy. costing £19 in wages, training costs and addition, the new rights currently granted other expenses, will keep his job; but a to parents of young children to request Gordon Brown, Britain’s Chancellor, worker who brings in £20 but costs £21 flexible working patterns would also be appears to know nothing of this; he is in will be fired. In the labour market, the extended to those caring for elderly South Africa this weekend, completing a difference between happiness and misery relatives. tour of the continent to extol the virtues can be quite small – but Hewitt’s of his plan to double foreign aid to thoughtless plan will tip thousands over It goes without saying that it would be a $100bn a year over the next decade, the edge and into unemployment by wonderful thing if parents could take so grandly (albeit incorrectly) dubbed a “new increasing wage costs. much time off; unfortunately, in the real Marshall Plan”. Under his proposed world, there will be ugly consequences in International Finance Facility, which has To survive, companies must maximise terms of reduced jobs and opportunities, failed to garner US and other support and their profits at all times, which means as well as greater discrimination against will therefore likely never materalise, ruthlessly applying cost-benefit analysis anyone, man or woman, suspected of bonds will be issues using rich countries’ to their operations and, sadly, also to their wanting to have children. long-term funding commitments as staff. In today’s globalised world, where collateral. This is likely to do more for Mr even the most hi-tech western firms are While large multinational companies Brown’s ambitions to replace Tony Blair as under threat from Chinese or Indian rivals, ought to be able to cope, the impact on Prime Minister than it is to eradicate inefficiencies need to be stripped out fast. small companies will be catastrophic. poverty in Africa. Hundreds of thousands of businesses in Each time the cost of hiring people is the UK employ fewer then five workers. When it comes to scandals that is global artificially increased by the state, as it was They will not be able to cope with the poverty, Mr Brown undoubtedly has his last year when Gordon Brown hiked up disruption of loosing half or a third of heart in the right place; but he refuses to national insurance contributions by a their staff for a year; and many will go see that his old-fashioned approach to percentage point on employers and bankrupt, inflicting untold misery on helping Africa has already been tried and employees, thousands of jobs are not lost employees and owners. found disastrously wanting. That around a or created. The government fails to billion human beings must still survive on understand this: it seems to think that Last week, Hewitt hinted that the under a dollar a day in 2005 is nothing the costs of employing workers can be taxpayers would be asked to foot the bill short of an obscenity; it is a terrible blot made to rise indefinitely without any for the extra payouts – though of course on all our consciences and must be effect on employment, an absurd business would not be compensated for tackled urgently. But before they waste proposition with which not a single the intense disruption and other costs yet more time and money in feel-good reputable economist in the world would incurred. It would also make it even more schemes while doing little that actually agree. likely that taxes will have to rise yet helps the poor, Mr Brown and those who further after the next election. agree with him that more aid is the Until now, the damage to private sector solution (including, for reasons which job-creation has largely been masked by Although he misunderstood the harsh escape us, Michael Howard’s Conservative public sector recruitment binge, which reality of life, Micawber was always Party) should take a look at the facts. has seen more than 500,000 people hoping that “something would turn up” added to the state’s payrolls; eventually, to save him from financial crisis. Tragically, Zambia, a recipient of foreign aid for over however, it will become clear for all to see. for those who will lose their jobs because four decades, is a typical horror story: it of Hewitt’s misguided policies, there will has received well over $1bn in bilateral Hewitt’s latest proposals will continue to be little else to do. economic aid from the US alone and was increase labour costs, hitting small the beneficiary of 12 adjustment loans businesses hard. At present, the law in the Reprinted from The Business © 2004. from the World Bank and the IMF during UK allows new mothers to take six the 1980’s and 1990’s. Yet Zambia’s real months paid maternity leave after the THE SQUALID POLITICS OF gross domestic product (GDP) per person birth of a child. The first six weeks are has collapsed from $660 to $577 in 2002, paid at 90% of usual wages and the next SQUANDERED AID in constant terms, a 12% fall. As a result of 20 are a flat £102.80 per week. Mothers 16 January 2005 reduced income and the explosion of are also given the option of another six diseases, life expectancy in the region has months unpaid leave. After recent Peter Bauer, the late British expert on the fallen. The region’s combined annual reforms, new fathers are allowed two economics of developing countries, economic output is a mere $296bn, about weeks’ paternity leave at a maximum of famously quipped that foreign aid is a 15% of Britain’s. Many countries are poorer £102.80 a week – but only 20% or so of system by which the poor in rich today than when they first become

7 2005 Frédéric Bastiat Prize for Journalism Finalists Allister Heath

independent, despite $100bn in World taking the total channeled to Zimbabwe of the past; today’s poor countries must Bank Assistance; sub-Saharan Africa via Brussels to at least £115m. But while do the same. Africa – and the west – have routinely receives 8% of its GDP in aid. the money was meant to be spent on Aids a lot to learn from the two African Excluding Nigeria and South Africa, aid and helping the poor, an EU audit last economies that have bucked the trend reaches 13% of GDP,more than 4 times year found that 89% of the total had and enjoyed some success in recent years. greater than the Marshall plans at its ended up in the pockets of allies of Mr Botswana and Mauritius, which have both peak. There is overwhelming evidence Mugabe and his Zanu-PF Party. enjoyed average growth of 4.4% since that foreign aid has no real effect on a 1980 and which boast the freest, most country’s growth rates. Brett Schaefer, a The key drivers of economic and social market-friendly economies outside South development economist at the Heritage development are domestic policies and Africa. Foundation in Washington, has analysed institutions, not foreign aid; as the cases the 45 sub-Saharan African countries for of North and South Korea and East and For the West, the first priority must be to which detailed numbers are available West Germany proved conclusively. push for free trade and the abolition of its between 1980 and 2002. He finds that 23 Capitalist economies, with strong scandalous trade barriers and agricultural suffered negative annual growth in real attachments to property rights, the rule of subsidies. To his credit, Mr Brown supports per capita GDP; seven experienced growth law, limited government intervention in freer trade; but alone he can do nothing, between 0% and 1%; and 15 growth of the economy and low inflation generate because the UK’s trade and agricultural more than 1% a year. Of the latter cat- massive growth; socialist economies are a policies are determined in Brussels, an egory, only three achieved more than 4%. disaster and embed poverty and increasingly intolerable situation. deprivation, regardless of how much Aid’s abysmal record is not unique to foreign aid they receive. But trade liberalisation alone won’t be Africa. Of the 77 countries that received enough. The West must help African aid of at least 1% of their GDP between The fact that national income per person countries to reform their institutions and 1980 and 2001, 33 suffered decline in real in South East Asia was lower than in sub- especially revolutionise their attitude to per capita GDP; 15 saw growth of less Saharan Africa in 1960, but has since property rights and the rule of law, the than 1% a year; and 29 enjoyed growth of surged following the most remarkable single most important prerequisites for more than 1% a year. Even more and fastest economic turnaround in economic growth. Any aid or debt depressingly, out of these 29 countries, history, is a natural experiment which forgiveness must be subordinated to this only eight grew by more than 3%. demonstrates the superiority of the free- goal. Not glamorous enough for Mr Brown and other politicians who like to market development model. We are not grandstand with taxpayers’ money. One reason why aid has had so little talking only of runaway success stories Perhaps; but unlike chucking billions at effect is that much of it has ended up in such as Singapore, Hong Kong or Taiwan: the problem such as policy would actually Swiss (and London) bank accounts of even relatively unsuccessful Asian work – and allow millions of Africans to corrupt politicians. According to the World countries such as Indonesia have done far start enjoying the fruits of prosperity for Bank Institute, more than $1 trillion is paid better than their African counterparts. In the first time. in bribes each year globally, roughly 3% of 1960, Indonesia’s national income per global GDP and equivalent to the total person was a mere $249, almost the same Reprinted from The Business © 2005. value of aid ever paid to the third world. as Nigeria’s $224. Nigeria GDP has According to the institute, countries that increased by only $24 per head after reduce corruption and strengthen their adjusting for inflation, while Indonesia’s rule of law can boost incomes by as much GDP per person has soared four-fold to as four times in the long term, while over $1,000. cutting child mortality by up to 75%, a phenomenon it calls the “400% The two countries are on different governance dividend”. continents but they share many characteristics; they both enjoy oil Transparency International estimates that reserves, have multi-ethnic populations General Suharto, the former Indonesian that are large and growing, suffer from leader, stole between $15bn and $35bn extensive religious tensions, are large from his country, while Ferdinand Marcos geographically and plagued with corrupt in the Philippines, Mobutu Sese Seko in and unstable governments. The only Zaire and Sani Abacha in Nigeria difference is that Indonesia, despite many embezzled up to $5bn each. Robert problems, has embraced a freer market Mugabe, Zimbabwe’s director, is another economy. monstrous tyrant who is still being propped up with Western taxpayers’ Successful countries, such as Hong Kong, money. Even though sanctions were never relied on outside help in the first slapped on Zimbabwe four years ago, the place, aid to China and India averaged European Union (EU) has since provided only 0.4% and 0.7% of GDP during the at least €30m in aid to Zimbabwe and 1980’s and 1990’s. Their economies only Britain a further £62m, while other started to surge when they began European countries have also contributed, dumping the failed collectivist nostrums

8 George Kerevan

The Scotsman In a Flat World, the Truth is not Economical – 2 August 2004 It is Time to Mourn our Forgotten Son – 9 August 2004 Geldof is Wrong: Aid to Africa has not worked – 19 May 2005

GEORGE KEREVAN has been associate editor, main leader writer and weekly columnist at The Scotsman for five years after writing regular columns for Holyrood Magazine and the Sunday Herald. His work has also appeared in the Guardian, the New Statesman and the Independent. A professional economist by training, he contributes to books on economics and Scottish affairs. George Kerevan is also a regular broadcaster and runs a documentary film company, currently making a programme on Saddam Hussein and the rise of Arab nationalism for the History Channel. Born in Glasgow, he served as an elected member for 12 years on Edinburgh city council and has served on the board of the Edinburgh International Festival as well as founding the Edinburgh International Science Festival. George Kerevan has wide-ranging experience in business and is a former chairman of several property companies and of Edinburgh & Lothians Tourist Board.

IN A FLAT WORLD, THE TRUTH which more anon). But if successfully You’d have thought all this was common implemented, this will make you sense. But anyone who has done year-one IS NOT ECONOMICAL personally a lot richer. So why has this economics should know it stands up in 2 August 2004 taken so long? Because vested political theory as well. If every nation interest doesn’t want to be troubled by concentrates on what it is most the elegant simplicities of economic productive at doing, and trades the result, A WTO deal to cut trade barriers is sound truth. we maximise world output. If, instead, we economics and should benefit everyone - subsidise our own industries and put but don’t hold your breath waiting for The EU taxes its citizens £30 billion a year tariffs on cheaper imports, we reduce things to improve and gives it to farmers. The reasons vary, world output because everybody is diverting productive resources to Attentive readers will know that I taught but the subsidy goes on rising. Once it inefficient ends. A recent study by the dismal science of economics for years was a sop to stop French peasants voting Michigan University indicates that if the before escaping into journalism. It was communist. Then it was claimed local world traded freely, it would add instantly not a traumatic break, because I had long food production had to be encouraged about £400 billion a year to world output realised that economics is one of those lest wicked foreigners decided to starve us (that’s about £70 each for everybody on subjects folk don’t take seriously. to death. Now we are kidded into believing if we don’t pay this levy “the the planet). Worldwide, millions of students have environment” will suffer, because Mother attended worthy economics lectures, Nature is incapable of looking after the Will the deal stitched up in Geneva at the memorised incomprehensible diagrams countryside. weekend get us on the road to this and written perfectly acceptable exam common sense? In the long run, probably; answers – all the while blithely refusing All of this is absolute tosh, if you will but in the short run, don’t hold your to believe any of the stuff as scientific forgive a little Monday morning spleen. breath. Much of the flowery rhetoric truth. It’s as if we nodded comfortingly The supermarkets are groaning with food, about what transpired at Geneva is PR when the geography teacher told us the nobody in Kenya or Australia is planning spin. To understand what really happened, world is round, yet went on believing to deny us our dinner, and the countryside and why no-one believes the economic what our eyes told us – that it’s flat. has never looked trimmer (though it could textbooks, wind the clock back a little. do with a few more low-density houses). All this comes to mind with the news that The EU food tax makes us poorer, kills jobs The Second World War was the most the World Trade Organisation talks in in the industries we’d otherwise spend bloody conflict in human history. It had Geneva have resulted – theoretically – in the cash on, and impoverishes the Third lots of causes, but a major one was the an agreement to cut trade barriers, World because we subsidise EU farmers rise of trade barriers in the 1930s. particularly in agriculture. Actually, the to dump agricultural produce abroad, Shutting out imports was thought decision is wrapped in enough fine print giving native farmers little recourse but to (erroneously) to create local jobs during to keep the lawyers busy for years (of join al-Qaeda. the Great Depression. All it did was spread

9 2005 Frédéric Bastiat Prize for Journalism Finalists George Kerevan

the misery and provoke some countries to agricultural subsidies to reciprocal free increasingly by flocks of tourists asking invade others to get raw materials and trade in services. Naïve anti-globalists in directions. markets. The world got such a fright that Britain thought this was a great moral common sense broke out for a bit: to stop victory, as it was a poke in the eye for the I’m often surprised by what they are another war, the Allies set up the West. Actually, it was the Brazilian seeking. Not the elegant new palace forerunner of the WTO to negotiate oligarchs blocking any further trade gallery or even the infamous building site systematically a reduction in tariff barriers reform in their own self-interest. As it left at the bottom of the Royal Mile, but, and subsidies. This policy has been a US-EU farm subsidies intact, how did it rather fantastically, the grave of a long- resounding success, which explains why help the developing world? dead economist and son of the Scottish you are a lot better off than your Enlightenment. Some, usually earnest grandparents were. A year on, some sense has returned, young Asians, want to find the former largely because the developing countries home of this influential historical However, as the decades have gone on, have realised that if they want free trade personage. There is a discreet plaque cutting tariffs and subsidies has become in agriculture they are going to have to pointing the way: lazy Edinburgh never more difficult. One reason is that early concede free trade in services. If you have having bothered to introduce any trade reforms concentrated on millions of militant peasant farmers systematic signage to mark where its manufacturing goods. Meanwhile, demanding work, you eventually make heroes and heroines passed their days. everyone in both the developed and the deal. The fact that the citizens of poor Who are they seeking? A certain Adam underdeveloped world was busily nations might also get a better phone Smith, Esq. protecting their agriculture, which is service and banking without corruption is actually small beer in economic terms; an added bonus, though the bent Recently has come the news that some and services, which is where, in the age of politicians and their cronies might not be devoted intellectual followers of the great the internet, the bulk of global business convinced. man plan to honour him with a statue in and profits now reside. In other words, the capital’s Royal Mile (Smith is buried in reform took place because it was kept to Here is the downside. What was decided Canongate churchyard). About time, says the less important bits of the world at Geneva is a “framework package”.That I. But this begs an intriguing question. economy. jargon means they have only agreed to Why, in a city replete with statues of the agree, but the small print has to be sorted royally obscure, has the citizen who, Enter special-interest groups. These can out, which could take years. America and arguably, most influenced the world we be governments that own their local the EU have agreed to drop agricultural live in, not only been denied visible public telecommunications systems and don’t export subsidies and lower tariff barriers honours but had his entire heritage want foreign competition reducing graft on food and cotton. But expect a switch wilfully ignored, to the point where or influence. Or local private banks to “environmental” subsidies. In return, tourists can’t easily find either his grave or worried about being gobbled up by more the semi-developed and developing his house when they are standing only 30 efficient outsiders. Forget the potential nations will liberalise trade in services. In feet away? gains for the world as a whole, the practice, that will be fought inch by inch. special-interest groups are not happy If you remember the French government For the uninitiated, Smith, this new with the idea of free trade. is still stalling on the 12-year-old decision tourist attraction, was born in Kirkcaldy in to liberalise trade in services inside the 1723. Kirkcaldy was no backwater. In those In this murky world, there are no good EU, you’ll get the picture. days, Fife was rich through smuggling and guys or bad guys – though the worst of trade with the Baltic, and its merchant the lobbies are capable of using leftist, Still, lip service has been paid to economic class devoted its wealth to intellectual anti-globalisation rhetoric to protect their truth. But, like my students of yore, I pursuits as well as a little surreptitious monopolies. Yes, the French, Japanese and suspect many will not really understand hell-raising. This was a frenzied period of Swiss are defending their intrinsic right to the vast potential for human gain modernisation. Feudalism and tribalism subsidise the export of foodstuffs which inherent in this agreement, and continue were being dumped in favour of urban are ludicrously expensive to produce, to think that the economic world is flat capitalism. Thinkers such as Smith bankrupting Third World farmers in the and free trade a con. intellectualised the process – one that process. This is called protecting one’s was soon extended to the rest of the “way of life”. But the biggest culprits in Reprinted from The Scotsman © 2004. globe. If television had existed, he would the past two years have been the have had his own chat show. Brazilians. They lead an intermediate group of semi-industrialised nations IT IS TIME TO MOURN OUR At 28, Smith was an influential professor anxious to protect their home markets in FORGOTTEN SON at Glasgow University. In 1776, the year of services and advanced manufactures like the American Revolution, he moved to 9 August 2004 computers and aerospace. London (then the world’s biggest city) and published the book he is famous for, The The Brazilians effectively scuppered the The first harbingers of the Edinburgh Wealth of Nations, a manual on how to last round of WTO negotiations at Cancun Festival – people leafleting for Fringe achieve economic growth through market in Mexico by siding with the poorer productions in obscure venues – are in competition. Two years later, he retreated agricultural nations. Together, they vetoed town. And, as I walk down the High Street to Edinburgh where he died in 1790, one a US-EU proposal to link cuts in to The Scotsman offices, I am waylaid of the most influential writers of his day.

10 2005 Frédéric Bastiat Prize for Journalism Finalists George Kerevan

On a personal note, it was discovered on Gallery.Would it be churlish to think it has The museum would be another useful his death that he had devoted a large part something to do with Smith’s strong visitor attraction in the Royal Mile and of his fortune to anonymous acts of association with Glasgow University could serve as a centre for scholarly charity in his adopted home town. He (where I learned my economics in the research into Smith’s work and influence. never married and history is silent on his uncomfortable surrounding of the Adam And it would do no harm to have the sex life. Smith lecture theatre)? Surely, we are ghost of Mr Smith keeping a weather eye beyond such pettiness. on the goings-on across the way at At this point, Smith might have been Holyrood. consigned to the history books, mildly Again, the lack of recognition may be due famous for having written works no-one to a subtle left-wing bias against what he Reprinted from The Scotsman © 2004. reads any longer. I can vouch that this is is presumed to have stood for – a bias on not the case, as I was made to read The the part of Edinburgh councillors and Wealth of Nations at Glasgow University, even the Church of Scotland, where they GELDOF IS WRONG: AID TO under the frightening tutelage of his still remember Mrs Thatcher’s sermon on AFRICA HAS NOT WORKED greatest contemporary expositor, Smith at the 1988 General Assembly. Such 19 May 2005 Professor Andrew Skinner. naive prejudice misconstrues his powerful moral stance. He believed governments Smith’s intellectual longevity results from could not make men moral and that even Perhaps I’m just growing old and grumpy his prescience in two areas. He was the the most well-intentioned prince would but the sight of Bob Geldof parading his first to explain in popular language the be corrupted by power – witness Tony millionaire ego at Holyrood was more rudiments of nascent market capitalism, a Blair. Equally, he denounced commercial than I could bear. Yes, the plight of sub- form of human activity about to monopoly and the inherent desire of Saharan Africa is desperate, but it will be dominate the world, thanks in part to businessmen to cheat customers. cured by hard economic logic rather than Smith’s brilliant analysis. (In contrast, pop-star emotion. hardly anybody reads turgid Karl Marx For Smith, the state denied people the any more.) But there’s much more to him right to their own initiative. However, that Geldof thinks African poverty is our fault. than being the first pro-market vital initiative had to be channelled by law He thinks we are not giving Africa enough economist. He was an important and competition. It is the lack of these free financial aid – an extra £50 billion a intellectual brick in the Scottish vital moral ingredients – not a lack of year, or roughly the entire national income Enlightenment, and – Dr Marx, to the western aid – that condemns Africa and of Scotland, would be handy. contrary, not withstanding – ideas are other parts of the developing world to what change the world, not economic grinding poverty. Because of that, Smith’s He also wants us to forgive all debt forces. It was the Scots, especially Smith, teachings are as pertinent as ever – which interest owed by African governments – who realised a key idea: that men were, is why Edinburgh should honour its I’ve seen numerous conflicting estimates, indeed, self-interested, but that this self- famous son. but we’re in the billions-a-year category. interest could be channelled to promote And he is anxious that the G8 countries social welfare under certain conditions – open their economies to African imports Here’s how. Smith’s Edinburgh home, mainly free exchange, coupled with a without expecting the same in return. Panmure House, still exists, just up the rigorous regard for private property rights. This is called “fair trade”. The French Enlightenment also believed road from the new Scottish Parliament building. It is used by Edinburgh’s social in the power of self-interest but deemed Just for a moment, let us ask: what has work department to help young people. A it inherently bad, and thought a strong happened to the half a trillion dollars lent laudable use, but imagine if Mozart’s political state was needed to civilise to the independent African countries house was similarly used. So, why not turn mankind. since the Sixties? We are talking your Panmure House into a permanent taxes here. The whole point about museum to honour Smith, his work and You could argue, as does the historian borrowing is that you invest and end up Arthur Herman, that the Cold War was a the Scottish Enlightenment? richer than you started, even after paying confrontation between the principles of back the loan. How come most of Africa is Smith and the Scottish Enlightenment, Of course, present activities in the house now poorer than when the loans began? and those of the French Enlightenment, would have to be relocated. However, they with its collectivist inheritance. The deserve a more modern building, and The answer has nothing to do with the former was embedded in American values sponsorship funds from around the globe usurious West demanding interest and institutions bequeathed by Scots that would be attracted by a project to payments. During the Eighties alone, immigrants; the latter was passed on by create an Adam Smith Museum would there were at least 92 attempted military utopian French socialists, first to Marx in fund alternative and superior premises for takeovers in sub-Saharan Africa, affecting the 19th century, and then to the Stalinist the social work department. If the council 29 countries. Not to put too fine a point nightmare as to what human would express a willingness in principle to on it, your money was wasted in civil war improvement was about. With this transfer Panmure House to a trust set up and corruption. historical pedigree, why is Smith so to mastermind the project, subject of forgotten in Edinburgh, the capital of the course to a suitable relocation being Remember Geldof’s famous Live Aid Scottish Enlightenment? There’s not even found for the social work department, concert of 1985, to raise donations to end a likeness in the Scottish National Portrait then everything could get under way. famine in Ethiopia? Well, the Ethiopians

11 2005 Frédéric Bastiat Prize for Journalism Finalists George Kerevan

were starving not because you lent them Ghana, for instance – was better than in accept this, but then Sir Bob Geldof has money but because their utterly mad many Asian states. But these days, while never stood for elected office. dictator, the odious Mengistu Haile the African economy has actually Marium, had butchered at least 100,000 stagnated in real terms, much of south- However, why wait for the West? There is of them in imposing his Marxist east Asia has undergone an economic an instant solution in Africa’s own hands. dictatorship. Then he launched a series of revolution and is now richer than Britain The nations of sub-Saharan Africa do very external wars, with the help of Cuban was in the Fifties. And the Asian little trading with each other.Why not tanks lent by his fellow nutter, Fidel economies did this not through aid but form an African Common Market, raise a Castro. That bumped off thousands more, through wicked capitalist borrowing and universal tariff wall to outsiders, but cut while destroying the local economy. And selling us video recorders. tariffs rapidly between the African states by the way, much of the food aid paid for themselves – very much as Europe did? by Live Aid ended up being stolen by Consider the contrasting fortunes of Mengistu to feed his armies. Never mind, Malawi, which the First Minister is about Next, rather than abolish African debts, it made Geldof famous, even if it didn’t to visit, and South Korea. In the mid- why not turn them over to the African help the Ethiopians. Fifties, Korea had been devastated by war. equivalent of the European Bank for What was left of the economy of this Reconstruction and Development (owned When your loans were not funding underdeveloped ex-Japanese colony was by the African Union) to use the interest genocide, they were funding Swiss bank based on peasant cultivation of rice. GDP to fund that Marshall Plan? accounts. Western aid has corrupted per head was under $100. Meanwhile in generations of African politicians as it is Africa, when it became independent in And by creating a common and the fastest route to riches for the local 1964, Malawi could count on a decent interdependent African economy, we elite. legal and physical infrastructure, a begin the process of eliminating the tribal capable Asian business class and a frictions that underpin Africa’s recurrent By 1982, the former Belgian colony of Zaire modest but thriving economy. civil wars. (now the Democratic Republic of Congo) had accumulated a foreign debt of Today, Malawi is one of the world’s least- Finally, creating a strong, single African $5 billion. Not coincidentally, its president, developed nations. After decades of currency, issued by an independent Mobutu Sese Seko, accumulated a dictatorship from which it only recently currency board and pegged to the euro, personal fortune of $4 billion. I know the escaped, during which the Asian business would let individual African countries such as Malawi start to escape their Belgians ran Zaire in a despicable way. But class was dispossessed, the economy difficulties in raising foreign exchange. I also know that the country is one of the stagnated. GDP per head is now roughly The IMF could then lend the currency most mineral-rich on the face of the Earth £300. Meanwhile, Korea has industrialised board the necessary reserves, free in the and should be lending money itself by and increased its GDP per capita from knowledge the money would not end up now. The reason it is one of the saddest virtually nothing to around £9,000. in Zurich. countries on the planet is not because you don’t send them charity. The first thing the Koreans did was to get With that vital political and economic rid of their unproductive peasant infrastructure in place, foreign investment I’m being this provocative because I want agriculture – precisely the kind of and tourism will start to do the rest. And people to stop thinking that aid and backward economy that the “fair trade” Bob Geldof can go back to making terrible writing off debts will, on their own, have lobby wishes to entrench in Africa. pop music. any impact. The problem is how to break the perpetual cycle of charity enfeebling Of course, it is true that western countries Reprinted from The Scotsman © 2005 . sub-Saharan Africa, funding its civil wars, rig their economies to keep out cheap corrupting its politicians and making African agricultural produce. You will get Africans hate us for our patronising no argument from me against scrapping western ways (Geldof, please note). our daft western agricultural subsidies, importing cheap food from Africa and For the record, given sub-Saharan Africa’s Ukraine, and cutting my taxes into the current basket-case economies, a strictly bargain. short-term Marshall Plan may be necessary. But it has to be linked to a The developed world funnels nearly one vision that says Africa has to help itself billion dollars a day in subsidies to its own through trade, not aid. Africa needs a farmers, coincidentally enabling them to bourgeois revolution: the emergence of dump artificially cheap food in poor an entrepreneurial middle class which will countries, resulting in yet more poverty. create local jobs by making and selling The World Bank estimates that if the rich products other folk want to buy. nations would only stop their farm subsidies and tariffs, the poor nations The model is already there in Asia. In the would benefit by as much as half a trillion Fifties, Britain left its African colonies with dollars and lift 150 million people out of a solid infrastructure and legal system. poverty by 2015. Of course, there’s a little GDP per head in many African countries – matter of persuading western farmers to

12 Deroy Murdock

National Review Online Pills Don’t Grow on Trees – 29 October 2004 Losing Case – 7 June 2005 H.O.T. Tax – 17 June 2005

DEROY MURDOCK is a New York-based columnist with the Scripps Howard News Service and a Senior Fellow of the Atlas Economic Research Foundation. He also writes and lectures on political corruption, global economics, electoral politics and race relations, among other issues. He has contributed to several books, including The Race Card, Black and Right, and The Third Generation. While completing his graduation in 1986, he started writing political commentary for the Washington Times. Since then his column,“This Opinion Just In. . .” is published regularly in The Wall Street Journal, Philadelphia Inquirer, Orange County Register, Dallas Morning News, National Review, Insight and many other publications.

pastures 30 miles from Philadelphia, this with steel beams and fixtures. This PILLS DON’T GROW ON TREES 415-acre campus is home to some 10,000 $900,000 apparatus helps these 29 October 2004 scientists and support personnel, all scientists analyze novel molecules with dedicated to preventing, relieving, and computers, mathematical models, and curing disease. methods far beyond a mere journalist’s WEST POINT, PA. — Politicians of yore comprehension. All told, Bogusky works in promised voters “a chicken in every pot.” Before seeing room upon room of well- a $3 million lab, featuring $2.5 million in Today's pols pledge “cheap drugs in every scrubbed laboratories filled with cutting- instruments and $500,000 in special medicine chest.”This, oddly enough, has edge scientific gear and enthusiastic, construction. become a largely bipartisan prescription. highly skilled employees, it is easy to Democrats and Republicans alike propose wonder how some little capsule the size Bogusky’s team does this every day. And reimportation of Canadian of a pencil eraser could cost $2.67 each, as nearly all of what they produce is useless. pharmaceuticals, faster approval of does Merck’s Crixivan, a life-saving anti- Last year, of the 300 to 400 molecules generic drugs, and other policies designed AIDS drug. Who do these people think tested in this one lab, only three to reduce medication prices. they are, charging so much for that? progressed towards clinical trials, with no guarantee of commercialization. Asked The mounting financial and legal woes at Dr. Michael Bogusky helps explain why. how many compounds on which he Merck only will fuel calls to “get the drug Standing in a white lab coat beside a worked reached consumers during his 15 companies.” CEO Ray Gilmartin’s mind-numbingly complex poster of the years with Merck, Bogusky listed three: November 18 Capitol Hill testimony on HIV virus and its deadly components, he Aggrastat (an anti-coagulant), and what Merck knew about Vioxx and when says,“It’s a high-risk business and many Crixivan and Stocrin, both AIDS drugs. Too has removed the public’s focus from this things fail. But we also learn from the bad Merck cannot sell such Herculean drug giant’s ongoing quest for cures. failures, and that has an impact all around patience in pill form. Merck now faces a prescription-strength the world.” headache, thanks to a stock price that has This (rare) hit and (frequent) miss sagged 40 percent and both litigators and Time and again, Bogusky and his three- atmosphere prevails in Dr. Graham regulators who are circling overhead. man team pour mysterious fluids into Smith’s lab. It is filled with large, brown test tubes, slide them into something that glass bottles. One is marked “HPLC Nevertheless, before Congress reconvenes resembles a microbrewer’s vat, and then phosphate buffer.” A cleaned beaker air- and President Bush begins his second activate a 600-megahertz super dries on a wooden dowel above a sink. term, leaders from Capitol Hill and the conducting electromagnet. It is so strong White House should arrange to visit that the structure that houses it was The bearded Smith stands in shirtsleeves Merck’s research facility in this lovely constructed from high-strength, non- and a Turkish kilim belt in the middle of Keystone State hamlet. Set amid rolling magnetic aluminum, to prevent the his $4 million lab. He points to an LCMS hills, scenic mansions, and horse-filled damage that would befall a typical room Mass Spectrometer that smashes

13 2005 Frédéric Bastiat Prize for Journalism Finalists Deroy Murdock

molecules from test compounds and “We can grow cell cultures, bacterial actual doses for patients.“All the evaluates them for healing properties. cultures, mammalian cells, live viruses,” performance qualifications have to be “Of the 1,200 molecules tested here last Bramble adds.“There are only three or done on specific equipment,” Barr year,” Smith says,“eight went on to the four buildings in the world like this.” She explains. If the drug is approved, its price next step. And not all of those will go on points through the pristine double-pane will reflect, in part, this huge up-front to become drugs.”That means that Smith glass of one particular bioreactor suite. investment. But if the HPV vaccine fails to and his team of analytic chemists fail “This room alone is on the order of $10 secure FDA approval, Merck will be the steadily, on average, for six-and-a-half million” in value.“Universities don’t have proud owner of a gleaming, $100 million weeks before discovering something of this. The National Institutes of Health white elephant. This sunk cost will have to possible medical value. Another 32 days doesn’t have this.” be spread across the rest of Merck’s usually pass before they do so again. product line. Alternatively, this money A sign in one room reads,“Caution: could be subtracted from shareholder Consider all systems and equipment dividends, employee salaries, or new R&D. Merck is in good company when it comes energized.” Nearby, big steel tanks with These are lame long-term strategies. to throwing most of its darts straight into scores of shiny pipes flowing in and out the floor. According to Dr. John T. Kelly of of them ferment a confidential Merck already pays huge bills, even before PhRMA, the drug-industry association, concoction. facing a potentially calamitous post-Vioxx “Only five in 5,000 compounds that enter situation at the hands of brokers who are pre-clinical testing make it to human “We’re doing work on a new, important unloading its stock, federal prosecutors testing. And only one of these five tested product that women will love,” Bramble who may levy huge fines, and tort lawyers in people is approved for sale.” teases. Nearby simmers a batch of a who are salivating at payouts that could vaccine in development since 1986, now rival the huge asbestos and breast- Citing Tufts University data, Kelly adds: in Phase II clinical trials. implant jackpots. Site Facilities Director “On average, it costs a company $802 Greg Landis still calls this enormous million to get one new medicine from the Dr. Eliav Barr, Merck’s senior director for establishment “a self-contained city, in all laboratory to U.S. patients.”This process clinical research, is a cardiologist by respects.” He estimates its annual normally takes 10 to 15 years.” training. He saw patients until fairly electricity expenses alone at $50 million. Drug researchers are not just patient. recently, but now works on that same They are amazingly tidy, too. And if vaccine. It is designed to prevent the That, and more, adds up. This is why new cleanliness is next to godliness, this place Human Papillomavirus. HPV occurs with drugs cost what they do, and why price- could be the Vatican. disturbing frequency. It afflicts 50 to 75 controlled Canadian drugs, industry-led percent of sexually active adults at some product discounts, and Rep. Henry “It’s not like at home where you have a point in their lives. HPV causes genital Waxman’s (D., Calif.) comment that spot on your glass, and that’s OK,” says warts, as well as cancers of the cervix, “frankly, it doesn’t make sense to me” that Joye Bramble, a biochemical engineer and vulva, and anus. So far, tests have found innovation and high prices are connected, 14-year Merck veteran.“Here, that’s not the vaccine 100 percent effective against all will make it harder for this lab and its OK.” Building 17, Merck’s two-year-old, $180 HPV-16, one of the virus’ particularly counterparts to cover their costs. These million Biologics Pilot Plant located on menacing strains. Thanks to similar factors boost the odds that the lights in findings, the November 2002 New West Point’s Discovery Way, has glowing these miracle factories will flicker, then England Journal of Medicine predicted floors, gleaming steel fixtures, and fade to black. “the beginning of the end of cervical smudgeless glass — as if the place were cancer,” a disease that afflicts 10,000 The vaccine against this ailment is for scrubbed hourly by hyperactive Swiss American women annually and kills pharmaceutical companies to teach maids. 4,000 of them. Worldwide, cervical Americans — starting with Washington’s cancer causes 250,000 deaths each year. bipartisan political class — a simple but Giant pipes and tubes located in the vital truth: Those little pills do not invent building’s attic, nicknamed The None of this comes cheap, either. themselves. Penthouse, pump steam, chilled water, “Several hundred people are working on and purified air through laboratories this exclusively around the world for Reprinted from National Review Online ©2004. below. In some rooms, the atmosphere is Merck,” Barr says. Consequently, the refreshed 35 times each hour. In others — company has built clinics in Iceland, Peru, for example, where ampules are filled and Thailand.“Merck put equipment in, LOSING CASE with vaccines for clinical trials — the air is and we’ll leave it in,” Barr says. This will 7 June 2005 replaced 100 times hourly, or once every provide a steady stream of research data 36 seconds. Small ceiling nozzles force air for obstetricians and gynaecologists. down, rather than across the room, so Uncle Sam has a breathtaking ability to that random particles will be driven to the Merck also is responsible for building a be all things to all people at everyone’s floor, not allowed to drift into any $100 million structure specifically to expense. Look no further than U.S. District medication. Standing in the hallway, one manufacture the HPV vaccine. Indeed, Judge Gladys Kessler’s Washington, D.C. can feel a steady breeze blow through the samples the Food and Drug courtroom. That’s where Uncle Sam is cracks in the doors and across one’s skin. Administration tests for safety and busy suing the cigarette industry despite “That’s there to protect the product from effectiveness must roll off the same the hot tub full of tobacco-related you,” Bramble says. production line that would generate hypocrisy in which he soaks.

14 2005 Frédéric Bastiat Prize for Journalism Finalists Deroy Murdock

Leading the Justice Department’s civil per-pack cigarette tax yielded farms devoured by something like Dutch RICO lawsuit is Attorney General Alberto $7,778,569,117 in federal revenues, Elm Disease. Still, the tobacco sector is a Gonzalez, reputedly a sneaky right-winger according to Orzechowski and Walker, an legal industry, not a vacuum for collecting who serves the even further-right G. W. Arlington, Virginia-based tobacco tax dollars through courtrooms rather Bush administration. Gonzalez and Bush, consultancy. Moreover, federally owned than through the Internal Revenue when not plotting to torture innocent stores from Capitol Hill to Camp Service. Muslims, conspire to help their overfed Pendleton sell cigarettes, often at buddies in corporate America, or so discounted prices. In its most recent study Washington’s self-entangling, tobacco- administration critics claim. That’s what on this topic,“Economic Impact of the Use related hyperactivity is beyond tiresome. makes this lawsuit so puzzling. of Tobacco in DoD,” the Pentagon’s Office The feds should drop this foolish lawsuit This litigation commenced under of the Inspector General reported on and their perennial payments to the very Attorney General Janet Reno, a crafty December 31, 1996 that “in FY 1995, DoD industry they sue and regulate. And the liberal lawyer with little love for big retail system tobacco product sales of 40 federal prosecutors assigned to this business. So why are Gonzalez and Bush, $747 million generated gross profits and case should be given worthier duties, such putative pawns of the Fortune 500, surcharge revenues of about $103 million.” as smoking out terrorists. continuing Reno’s inquisition against Thus, Uncle Sam hooks up nicotine Brown & Williamson, Liggett, Lorrillard, addicts while tasting the action that Big Reprinted from National Review Online © 2005. Philip Morris, and R. J. Reynolds? This Tobacco relishes on a grander scale. chameleonism is one of Washington’s charms. This lawsuit originally sought to H.O.T. TAX “disgorge” $280 billion of Big Tobacco’s “ill- 17 June 2005 Reno herself changed colors regarding Big gotten gains” earned between 1971 and Tobacco. On April 30, 1997, she told the 2000. This included $75 billion in cigarette Senate Judiciary Committee:“The federal “proceeds” from the “youth-addicted If liberals want to pay higher taxes, here’s government does not have an population,” those who smoked as few as a way they can. independent cause of action” against this five cigarettes daily before age 21. Never industry. Sunshine yellow that day, Reno mind that 18-year-olds legally could President George W. Bush’s bipartisan added:“We needed to work with the purchase cigarettes in most states and, as Advisory Panel on Federal Tax Reform states,” 46 of which squeezed the smokes a February 22 tobacco-company brief should propose a measure to assist a sector for $206 billion in the 1998 Master observes,“selling tobacco products is not neglected segment of society: the Settlement Agreement (MSA). illegal under RICO.”The “additional gain” avowedly under-taxed. The H.O.T. Tax, or of $205 billion in hypothetical interest Higher-rate Optional Tax, would give But Reno then turned beet red and told payments reflects a 273 percent return on those who think their levies are too low reporters on September 22, 1999:“This investment, or a 9.4 percent annual the ability to pay the steeper tax bills they morning, the United States filed a lawsuit average across 29 years. Let’s free say they deserve. This is the truly in federal court in Washington, D.C. Americans to open personal retirement compassionate thing to do. against the major cigarette companies. In accounts managed by Big Tobacco’s stock the complaint, the United States alleges brokers! The H.O.T. Tax would offer relief to that for the past 45 years, the companies powerful Democrats and wealthy liberals that manufacture and sell tobacco have The D.C. Appellate Court chopped who cannot stand it when Republicans waged an intentional, coordinated disgorgement from the lawsuit. Now cut their taxes. Look how lowering taxes campaign of fraud and deceit.” Justice fishes for other penalties including has raised the blood pressure of these money for smoking prevention and Americans: Prosecuting these tobacco kingpins has cessation programs, which the MSA ● “I don’t need a tax cut,” Sen. Frank cost taxpayers at least $135 million so far. already funds. Justice also is weighing the Lautenberg (D., N. J.) announced last While that money trickles from the highly socialistic “remedy” of telling October 8 on the Senate floor.“It will not Treasury, over $10 billion pours through tobacco companies which senior do me any more good. I can’t buy more. I Uncle Sam’s fingers in an industry-funded, managers to fire. Bureaucrats in Beijing can’t eat any more. I can’t do more, and I government-managed, 10-year buy-out of would love such public control of private want it distributed among the ordinary farmers’ tobacco quotas. This bonanza to assets. people who work every day.” those who cultivate the crop that inspires ● “If you think it’s good policy to pay for Surgeon Generals’ warnings comes with The MSA also dissolved the industry- my tax cut with the Social Security checks few conditions. Farmers may keep funded Tobacco Institute and Council on of working men and women, and planting tobacco. Thus, Uncle Sam Tobacco Research. Nonetheless, Justice is borrowed money from China, vote for simultaneously handles tobacco with suing them even though government them [the GOP],” Pres. Bill Clinton told the litigation, regulation, and subsidies. drove them out of existence. Uncle Sam is Democratic Convention last July 26.“If Ringling Brothers should have such a frisking a pair of dead bodies for their not, John Kerry’s your man.” juggler. wallets. ● “I am a traitor to my class,” actor Paul Newman said last July 8.“I think that tax Adding to this circus, Uncle Sam As an asthmatic who hates coming home cuts for wealthy thugs like me are castigates Big Tobacco while thriving on from pub crawls reeking like an ashtray, I borderline criminal. I live very high off the its product. In fiscal 2004, the 39 cents- would be thrilled to see America’s tobacco hog.”

15 2005 Frédéric Bastiat Prize for Journalism Finalists Deroy Murdock

● “Because of Bush’s tax cuts, I saved a voluntary higher rate, adding $209,216 to million and a half in taxes last year. Does state coffers. anyone think that’s fair?” Ben Affleck asked at a July 2004 John Kerry fundraiser. Citizens for Limited Taxation in ● “Why should wealthy people such as Marblehead, Mass., persuaded friendly myself receive a tax cut?” Barbra Streisand state legislators to introduce this law in wondered on her website.“I will be the 2000. Pro-tax U.S. Rep. Barney Frank (D., first to admit that I don’t need it. What Mass.) also has spurned the higher rate. we all need is a healthy government that “No, I won’t” pay some $800 extra, Frank can provide the services (such as told Boston radio host Howie Carr in April education, health care, national and 2003.“I don’t trust the legislative homeland security) that we all depend leadership and Gov. [Mitt] Romney to on.” make the right decisions, so I’ll donate the ● “I don’t need a tax cut or tax relief,” money myself, probably to some health billionaire music impresario David Geffen clinics in New Bedford that are going to explained in the March 15, 2001 get hit hard in the new budget.” How Washington Post.“It is a privilege to be an inspiring to see a confirmed progressive American citizen. It is appropriate to pay a like Barney Frank choose private charity over public assistance.“Americans greater share of taxes.” recognize, as Congressman Frank also ● “I want no tax cuts, and want to pay MY figured out, that government doesn’t FULL SHARE of taxes to support the public spend its money wisely as is and already good,” Oregonian Harry Demarest stated takes too much of what we earn,” on the website of United for a Fair National Taxpayers Union president John Economy, an anti-tax-cut group co- Berthoud observes. founded by Chuck Collins, heir to the Oscar Meyer wiener fortune. Sen. John Kerry (D. Mass.) sailed into hot water last year when tax returns revealed The H.O.T. Tax would ease these statists’ that he also paid the Bay State’s lower tax pain. The IRS simply would add a small rate. Kerry thus enjoyed state tax cuts akin box to the 1040 tax form beside these to the federal tax reductions he words:“If you believe you should be taxed excoriated on the campaign trail. Then at a rate above that assigned to your again, perhaps he intended to pay income bracket, please indicate here the Massachusetts’ higher rate, but his higher rate you prefer. Kindly calculate calculator slid off his yacht. your tax liability, and send it in.” This idea certainly has national political With that easy step, congressional liberals value.“It gives a real, live vote,” says Grover and residents of Malibu and Martha’s Norquist, president of Americans for Tax Vineyard no longer would have to keep Reform.“Without releasing any personal the tax cuts conservatives keep throwing information, the government could report their way. Instead, they could send 50, 75, each year that only 1 percent of Americans or even 99 percent of their incomes to paid the extra amount, which gives us a Washington, so the GOP,Congress, and hard count on who thinks he is President Bush can spend it even better undertaxed.” than they can. Beneficent supply-siders should introduce While this reform would increase the H.O.T. Tax in Congress even before the taxpayer choice, it might generate little tax-reform commission’s September 30 revenue. Arkansas, Massachusetts, and reporting deadline. American liberals Virginia taxpayers already may pay above should be given the earliest opportunity and beyond their usual top rates, though to stop resisting tax relief and send the few do this. When Massachusetts cut its Treasury as much of their own money as top tax rate to 5.3 percent in 2001, it let their bleeding hearts desire. guilty liberals pay the old 5.85 percent rate if they wished. According to the Reprinted from National Review Online © 2005. Massachusetts Department of Revenue, as of June 15, only 930 taxpayers opted to do so on their 2004 returns, generating an extra $246,505. In 2002, 2,215 taxpayers paid the higher rate, yielding $341,829. Among 3,218,572 returns filed in 2003, only 1,488 (or 0.046 percent) paid the

16 Mary Anastasia O’Grady

The Wall Street Journal Economic Musings Hatched in a Latin ‘Paradise’ – 11 March 2005 Why Brazil’s Underground Economy Grows and Grows – 10 September 2004 World Bank Researchers Find Truth, But to What End? – 17 September 2004

MARY ANASTASIA O'GRADY is a senior editorial page writer at The Wall Street Journal and editor of “The Americas,” a Friday column dealing with politics, economics and business in Latin America and Canada. Before joining the paper in 1995, she worked as an options strategist, including ten years at Merrill Lynch & Co. In 1997 Ms. O'Grady won the Inter American Press Association's Daily Gleaner Award for editorial commentary and in 1999 she received an “honorable mention” in IAPA's opinion award category. Ms. O'Grady, who was born in Bryn Mawr, Pa., received a bachelor's degree in English from Assumption College and an MBA in financial management from Pace University.

If he makes it, he will join millions more equivalent to 10% of gross domestic ECONOMIC MUSINGS like him who are fueling a robust U.S. product in 2004, an increase of two HATCHED IN A LATIN economy while their own Latin percentage points over 2003. ‘PARADISE’ homelands are stripped of precious human capital. Railing at this formidable demographic 11 March 2005 impulse is a little like protesting gravity. A U.S. policy makers are racking their brains far more productive path would be to trying to figure out how to get ambitious start looking more closely at the Lake Atitlan, Guatemala – Late on a lazy young Latins to resist the mighty difference between the economic Sunday afternoon a couple of local men magnetic pull of U.S. economic growth. policy advice the U.S takes for itself and help us push off in our small boat. As we But if you spend even a little time in this what it gives its southern neighbors. power away, they stand on the dock, country the futility of that cause becomes smiling and waving goodbye. The two apparent. Opportunity is to be found Not surprisingly, what one finds is that silhouettes in the fading late day sun elsewhere, not here, and even the while the booming Bush economy is outline a national portrait. humblest Guatemalan peasant, washing ingesting large doses of Reaganomics, The older one wears the traditional calf- clothes on a rock by the water’s edge, minions of the State Department, the length skirt, a colorful woven blouse and knows it. Agency for International Development sandals, a costume completed by a wide- (USAID) and the International Monetary brimmed hat. He is the archetypical There is a certain irony in what, to borrow Fund have Latin America on a steady diet Guatemalan of centuries past. a term from Alan Greenspan, is a of Rubinomics and regulation. Is it any conundrum for the U.S. It has an wonder that the U.S. is vigorous while its His hatless, 20-something son wears a immigrant “problem” because the U.S. Latin stepchildren are frail and sickly? button-down shirt, jeans and running economy is roaring while developing Latin shoes. He would look at home in my New America is stubbornly stuck in a kind of There is wide agreement that York City neighborhood. feudal time warp. development requires sound institutions that will defend the rule of law. But that’s What first appears to be a mere Economic modernization here is creeping a political problem: It is hardly in the difference in fashion tastes symbolizes a along at too slow a pace to satisfy the interests of the ruling classes to allow or profound demographic shift hitting the aspirations of the best and brightest. facilitate the creation of institutions that Western Hemisphere. The old man is Their motivation is strong and they find will alter the status quo. Progress, then, unlikely to ever leave the volcanic shores ways to slip through even today's beefed relies heavily on the ability of parties of this legendary lake. The young man, I up border protections. A national poll last other than the country’s traditional learn, is scouting opportunities up north, year by the International Organization for powerbrokers to gain access to incomes not in the Guatemalan capital but in the Migration projected that remittances to and wealth. For this, countries need fast U.S. Guatemala from abroad would be economic growth.

17 2005 Frédéric Bastiat Prize for Journalism Finalists Mary Anastasia O'Grady

Yet rather than focus on this goal, the U.S. Rubinomics, well-heeled defenders of the Take, for example, the thorough findings policy agenda in the region obsesses status quo shout hurrah. of “The Power of Productivity,” University about deficits and condescendingly of Chicago Press, 2004. The author, lectures the neighbors on corruption, What ought to further scandalize those William Lewis, is a former McKinsey & illegal immigration, so-called social justice who pay lip service to the poor and Company partner and the founding and drug trafficking. More egregiously, jobless in these miserable economies is director of the McKinsey Global Institute. when crisis strikes a corrupt oligarchy like the arm-twisting by the U.S. to insist that His conclusions, which powerfully refute Peronist Argentina and presents an local governments impose regulations much multilateral orthodoxy, come from opportunity for profound change, the U.S. that raise the cost of labor. This has very studies conducted by the institute over sends the IMF in to rescue the status quo. little to do with serving the interests of the past 12 years. No wonder reformers can’t get any Latin workers and a lot to do with traction. American labor unions trying to reduce Of great interest is the Lewis survey of competition from lower cost producers Brazil,“one of the world’s richest low- What brought the U.S. economy out of a abroad. income countries” and, it ought to be sluggish, recessionary environment noted, an important recipient of IMF and inherited from the Clinton administration The sad truth for Latin America is that the World Bank “aid.” Sound money advocates was Reaganomics: Cuts in marginal American left has made the region its may quibble with some of Mr. Lewis’s income tax rates, dividend taxes and playground. There it takes its bad ideas monetary views but he makes an capital gains taxes, have acted like that Americans have rejected but Latin indisputable contribution to under- smelling salts for the investor class and caudillos eagerly embrace. If you want to standing Brazilian underachievement. this week the effects have been understand the immigrant flow to the dramatically apparent. The U.S. economy U.S. forget about why walls and guns Why, Mr. Lewis asks, does Brazil have such created 262,000 jobs in February and don’t hold back migrants. Look instead at an impressively high level of productivity economists are raising their estimates of where you would rather live your life. in its formal sector and yet seem 2005 U.S. economic growth. condemned to suffer the consequences of Reprinted from The Wall Street Journal ©2005 Dow a huge informal sector mired in misery. Contrast the Reaganesque optimism that Jones & Company. All rights reserved. set this recovery in motion with conventional Rubinomics, theologically Fans of the late, great development grounded in class warfare and so popular WHY BRAZIL’S economist Peter Bauer will not be with Washington’s armies of economic surprised by what Mr. Lewis finds. Like “experts” fanned out around Latin UNDERGROUND ECONOMY Lord Bauer before him, Mr. Lewis has done America. GROWS AND GROWS lots of on-the-ground research to understand how economies actually 10 September 2004 These Cassandras of dreary defeatism work. Notable among his conclusions is issue dire gloom and doom warnings his thorough rejection of the Washington daily, predicting twin deficit catastrophe It’s not going too far out on a limb to establishment’s view that the cause of in the U.S., and a widening gap between predict that when the International underdevelopment in Brazil is a lack of rich and poor. To hold back the apocalypse, Monetary Fund and the World Bank education and infrastructure the theory goes, taxes ought to be at convene their semiannual meetings in development. whatever level satisfies politicians’ Washington in three weeks, global appetite to spend. Balanced budgets and poverty will be much discussed. “Lack of education of the Brazilian that great left-wing will-o’-the-wisp, workforce is just an excuse today for poor income equality, are set as the highest And why not? Without that issue, the two economic performance,” Mr. Lewis writes. goals. organizations would find it hard to come “There are just too many examples from up with a raison d’etre. In Washington, banking to food processing and This doesn’t play well in America these sweet dear poverty offers boundless automotive where firms have been able days but retains its power in populist opportunities for bureaucratic self- to match productivity levels at the Latin America where the evils of preservation. What ought to be a disgrace economic frontier with the Brazilian “capitalism” have been preached for – the persistence of Third World poverty workforce. These findings just reinforce decades by politicians even as their own under years of IMF tutelage and World what we found in every other country we policy prescriptions generate poverty. Bank aid – will be trotted out with fanfare studied. The primary means through to make the case for support of more of which workers attain the skills to perform These “men of the people” actually are the same. at the economic frontier is through on- quite popular with the caudillos who sit the-job training.” As to the infrastructure on top of Latin economies because their Cynicism sometimes seems the only way argument, Mr. Lewis says that only in the policies guarantee that nothing will to respond to this semiannual celebration steel industry might it have some change and that free market capitalism of costly failure. The cynicism rises even relevance because of high port costs. But will not intrude on existing domains to more when one notes that an expanding even there,“it is not clear how much of inflict creative destruction. It’s no surprise body of solid empirical research aid proves the high port costs came from physical that when career bureaucrats in U.S. the shortcomings of multilateral aid for infrastructure constraints and how much embassies around the region preach development. from inefficient port operations.”

18 2005 Frédéric Bastiat Prize for Journalism Finalists Mary Anastasia O'Grady

Brazilian liberal economists have for years points out, is neither politically nor been complaining about what they call technically feasible. A better course, he Since 1945, the World Bank’s International the “Brazil cost,” that is the heavy burden recommends, would be to shrink the size Bank for Reconstruction and Development that the monstrous Brazilian government of government and shrink tax rates on has lent some $383 billion with the aim of imposes on the economy. Sure enough, the formal sector. Formal enterprises will “reduc[ing] poverty in middle-income and this is where the trail leads Mr. Lewis. become more competitive and expand, creditworthy poorer countries by “Most people don’t recognize the while the informal sector will shrink and promoting sustainable development.” destructive power of big government on overall productivity levels will rise. Since 1960, the Bank has lent another $142 economic development. Big governments billion through the International demand big taxation. When part of the “The Brazilian government spends an Development Association. The Bank says economy is informal, and untaxed, the amount equal to 39% of GDP compared that “Contributions to IDA enable the burden falls heavily on legitimate to 37% in the U.S. today and 8% in the U.S. World Bank to provide $7 billion to $8 businesses,” he explains in the book’s in 1913, when it was at the level of billion a year in highly concessional [zero prologue. development that Brazil is at today,” Mr. interest rate] financing to the world’s 81 Lewis writes. The 8% level is not the goal poorest countries.” Brazil is a case in point.“The two big but 20%, Japan’s level in the 1950s, would characteristics of Brazil’s economy that make sense, he maintains, adding that Even in government fantasyland, where stand out now are the large amount of this, of course, is ultimately a political seven-figure handouts are dismissed as informality and the large size of its matter. pocket change, $500 billion in poverty government,” Mr. Lewis notes. Lo and assistance can’t be sneezed at. Yet, what behold, the two are connected. Such conclusions underscore the futility rankles here is not so much the volume of of multilateral “development” methods. aid as its failure to make people better off, Half of all Brazil’s workers are outside the More money and intervention might be a a fact that explains why the World Bank formal economy and their low jobs generator in Washington but it is refuses to allow independent, outside productivity fuels poverty. Mr. Lewis notes counterproductive if the goal is moving auditing of its projects. that in a developing country, the problem Brazilians out of the favelas. Development “should take care of itself as more in Brazil will depend on the choices Poverty’s resistance to so much productive formal business, with lower Brazilians make about their own political international largess raises logical prices and better service overtake the economy. More worrying is the fact that questions. As development economist informal enterprises.”This raises multilateral lenders too frequently distort Lord Peter Bauer observed long ago,“Lack productivity and growth and leads to those decisions. of money is not the cause of poverty, it is development. But it hasn’t happened in poverty.”The cause is something else Brazil. In fact, the informal sector is Reprinted from The Wall Street Journal ©2004 Dow entirely. growing bigger. Jones & Company. All rights reserved. As “Doing Business in 2005” notes, a key The culprit is the voracious appetite of big cause of underdevelopment is the burden government. Despite higher productivity, that government regulation imposes on formal-sector businesses don’t have a WORLD BANK RESEARCHERS the poor who are trying to climb out of pricing advantage against informal, less- FIND TRUTH, BUT TO WHAT poverty. Successful economies, the productive businesses because they are END? researchers note, have less regulatory saddled with so many taxes – payroll drag and unsuccessful countries could do 17 September 2004 taxes, value-added taxes, sales taxes and better simply by reducing regulation. income taxes. Moreover, Brazil’s corporate tax rates are scandalously high.“Brazilian The recent World Bank research Latin America is a case in point. In 2003 corporations pay 85% of all taxes department paper titled “Doing Business the Bank made new IBRD commitments collected, compare with 41% for U.S. in 2005” details the critical nexus amounting to $5.7 billion in that region corporations.”This not only hampers between growth and smaller and disbursements of $6.5 billion. It also legal-sector businesses but it also deters government. But over in the Bank’s made new IDA commitments of $153 small, informal businesses from growing lending operations, the addiction to million and disbursements of $322 million. and moving into the legal sector. shovelling money out the door to poor- The annual report notes that for Latin country governments shows no signs of America and the Caribbean, the “portfolio As Mr. Lewis points out,“The corporate tax abating. of projects under implementation as of burden in the U.S. when it was at Brazil’s June 30, 2003, was $19.8 billion.”Yet, the state of economic development was so What happens when Bank researchers region’s informal sectors are growing, a low that informality did not hold back the conclude that Bank lending operations massive brain drain is underway and growth of the formal sector. Unfor- not only are an improbable source of politics are turning chaotic in some tunately, that’s not true for Brazil.” development but perhaps even an countries. impediment? Probably nothing, given the Happily, Mr. Lewis avoids the IMF consultants, bureaucrats and politicians “Doing Business in 2005” notes that “A prescription to this problem, which is all with a vested interest in keeping the vibrant private sector – with firms about using the force of the state to Bank’s money flowing. Nevertheless, the investing, creating jobs, and improving impose its will against evaders. That, he report is noteworthy. productivity – promotes growth and

19 2005 Frédéric Bastiat Prize for Journalism Finalists Mary Anastasia O'Grady

expands opportunities for poor people.” heavy concern for the poor but, in action, Sound macroeconomics can be part of demonstrates a preference for keeping this but as the Latin experience of the the bureaucracy fat and happy.The Bank 1990s illustrates and the report reiterates, exacerbates the problem by removing the without reform at the micro level discipline of the market. Why should “entrepreneurial activity remains limited, governments eschew the high they get poverty high, and growth stagnant.” In from anti-market populism and fact, the Bank researchers say,“Although patronage when the Bank is there to macro policies are unquestionably ensure that the dollars still flow? important, there is a growing consensus that the quality of government regulation The Bank’s Multilateral Investment of business and the institutions that Guarantee Agency throws fuel on the fire. enforce this regulation are a major MIGA issues guarantees to investors determinant of prosperity.” against such bad governance risks as expropriation and breach of contract. This Ten categories are analyzed: starting a raises moral hazards, reduces the business, hiring and firing workers, incentives for government to build registering property, getting credit, authentic credibility with respect to protecting investors, enforcing a contract contracts, and therefore leaves locals who and closing a business. A regional don’t qualify for MIGA worse off. summary of Latin America is comprised of bar charts that compare Latin nations to Finally, it’s worth mentioning the the world leader in each category.The indefensible International Finance findings are dismal. Corporation. The IFC says in lending to the private sector it “seek[s] to reach For example, in Australia it takes two businesses in regions and countries that business days to complete the regulatory otherwise have limited access to capital.” requirements for starting a business. This is a joke. If there is limited access to Brazil stands in sharp contrast to this, in capital the market is sending a signal that ought not be distorted. Moreover, why next to last place in Latin America, should the IFC’s portfolio include such draining 152 days for a business start-up. large and successful businesses as the Haiti is last, where it takes 203 days. airline company Lanchile, Mexico’s Denmark is the least expensive place in Banorte and Brazil’s Banco Itau? the world to start a business and happily, Brazil ranks third in Latin America, just It’s clear that the Bank’s need to lend has behind Chile. Haiti brings up the rear superseded the rationale for lending. again in this measurement, costing 176% Could it be that Bank lending is more of national per-capita income, or the about filling rice bowls in Washington income from almost two years of work than in the developing world? effort. In labor rigidity, Hong Kong and Singapore rank as the best worldwide and Reprinted from The Wall Street Journal ©2004 Dow show up Mexico and Brazil, which tie Jones & Company. All rights reserved. regionally at the bottom of the pile.

It can take a long time, over 500 days, to enforce a contract in Brazil, but Guatemala comes in last in this category at 1,459 days. Closing a business, which is to say going through insolvency and settling with creditors, is also a regulatory nightmare in the region. In Ireland, the world’s fastest place to go through insolvency, it takes three months. Brazil is the slowest in Latin America, taking 10 years, almost twice as long as Haiti. Creditors are likely to recover the most after a bankruptcy in Japan; in the region, they recover the least in Brazil, even less than in Haiti.

The World Bank report is an indictment of Latin America’s leadership, which spouts

20 Dinakar Sethuraman

Forbes Global Fuel for Consumption – 1 November 2004 Yes We Have No Bananas – 25 April 2005 Take Two Pills and Call the Trade Envoy – 9 May 2005

DINAKAR SETHURAMAN is a contributing editor with Forbes in India and also writes for Energy Intelligence Group (EIG), Global Water Report and Business Standard, covering economic policy, water policy and general business. Starting in journalism with The Economic Times in India, he has since contributed from Russia and Central Asia to The Wall Street Journal Europe, Business Week and The Economist Intelligence Unit (EIU) on business and technology and from Singapore writing for EIG and EIU and as bureau chief for CFO Asia, an Economist publication covering finance and technology. He holds a Masters in Foreign Affairs from Columbia University, New York.

first time. Farther down NH4 lies Reliance’s new pumps. And urban Indians, FUEL FOR CONSUMPTION Bangalore, India’s Silicon Valley, where who until recently drove outdated cars 1 November 2004 Royal Dutch/Shell is busy scouting for a and relied on word of mouth to find a site. Vikram Singh Mehta, chairman of clean pump, now drive large Fords and Shell India, is finalizing plans to situate Hondas and demand better fuel and India is opening gasoline retailing to the first few of Shell’s proposed 2,000 service. multinationals. The next step is the stations. Shell and Reliance combined are hypermarket. to invest more than $2 billion nationwide Competition is forcing Indian Oil, Bharat in the next five years. Petroleum and Hindustan Petroleum, A truck rolls into Reliance Industries’ new which together run more than 20,000 gas station on India’s national highway The wheel has turned full circle since outlets nationwide, to clean up their acts. 4–a dry and dusty road in the south India nationalized subsidiaries of Shell “Adulteration is widespread. But we are where workers are languidly setting tar to (now Bharat Petroleum) and US Esso (now changing,” says N.G. Kannan, director of earth building a sliver of India’s downsize Hindustan Petroleum) in 1974, turning marketing at $28 billion (revenues) Indian version of the U.S. interstate system. The petroleum into a state affair. Shell now Oil, which has a 55% market share, trucker mumbles about the poor quality wants to take back its share of India’s $30 making it the biggest state-owned player. and quantity of diesel at higher prices billion petroleum products market. It, Kannan is going one up on competition from other, older pumps down the road Reliance and another private domestic by housing ambulances, hospitals and run by state oil companies, as a uniformed concern, Essar Oil, are concentrating on AIDS awareness centers – working with attendant fills the tank from imported highways where 330,000 truckers guzzle the Bill and Melinda Gates Foundation – Italian dispensers. The 10-acre site is a $10 billion worth of diesel every year.“The at 113 highway outlets. Also, India’s biggest joint product of Flying J, a large diesel new entrants have no options. State oil oil company is spending up to $250 distributor in the U.S., and Minale companies crowd the cities,” says million to refurbish 2,800 of its busiest Tattersfield, a U.K. design firm. A central Devinder Chawla, executive director, outlets. server in Mumbai, India’s commercial PricewaterhouseCoopers, Mumbai. capital, keeps tabs on pumps at 200 (of a The newcomers are bringing more than proposed 5,000) Reliance service stations. The new entrants are offering choices to service stations.“We are investing well Indian motorists. Most pumps have been over $650 million in a gas import terminal Such is the change coming to Indian isolated entities, selling a cocktail of in Hazira, our first such investment in the petrol marketing, a first step to broader kerosene, a highly subsidized product, and world. We have faith in the market,” says retail liberalization. Although Reliance is gasoline. Today there are pumps every few Shell’s Mehta. The highway-building India’s biggest homegrown private-sector kilometers. Tired truckers, who earlier program should induce big increases in player, this incipient retail revolution curled up in their vehicles for a nap and Indian oil consumption, currently only a extends to foreign multinationals, which urinated by the roadside, now use motels, tenth that of the U.S. Only 7 in every 1,000 will get to sell directly to Indians for the restrooms and telephones offered by Indians owns a car, as compared with 12 in

21 2005 Frédéric Bastiat Prize for Journalism Finalists Dinakar Sethuraman

neighboring Pakistan. Surely $50-a-barrel Hong Kong’s Dairy Farm International is (pop. 6.5 million), which is replete with the oil will slow things in a largely poor currently the only foreign entity with a big old ways of the country as well as the country like India, but under normal stake in retail through a 49% ownership new. Metro is situated at the junction of a circumstances the gap with the West will in India’s Foodworld, which was acquired well-tarred main road in Yeshwantpur, a close. during a two-year liberalization window sleepy suburb northwest of Bangalore that ended in 1997. where the main commercial activity until Still, Shell rivals ExxonMobil, BP and a few years ago was the mandi – a ChevronTexaco are not exactly rushing in, At $75 million in revenues Foodworld – government-demarcated market where fearing regulatory potholes. India requires which is teaming with Indian Oil to offer wholesale traders sell spices, grains, fruits an investment of at least $450 million in pumps at supermarkets in the Chennai and vegetables. Now it is the testing the petroleum sector to gain retail rights. (Madras) metropolitan area – the ground for multinationals. Just behind the And it is tough to make your board traditional role of grocery buying by Metro outlet lies Royal Dutch/Shell’s first understand why a bureaucrat or a women is giving way to men pushing gas station in India. minister sitting in New Delhi should fix shopping carts down air-conditioned the price of your gasoline and diesel when aisles. Ved Prakash Arya, chief operating Fruit and vegetable traders, in league with you have put that kind of money into the officer at Pantaloon, a $140 million retailer small-village satraps, created a ruckus country. whose stores are modeled on Western when Metro-the first foreign retailer to hypermarkets, recalls seeing “a man test the Indian market-opened its initial India deregulated the oil sector in 2002, wearing a single cloth and no footwear” store here. Bangalore retailers took out but, as with many things in this country, enter its new Big Bazaar hypermarket in half-page ads in local newspapers the gesture was purely symbolic.“The Bhubaneswar, a small city in eastern India. comparing the German retailer to the government controls pricing through infamous East India Company, the foreign state players,” says a senior official of The convenience store is even further merchants who paved the way for Indian Oil, which itself lost $210 million in behind the supermarket in coming to Britain’s colonization of the subcontinent. April to September 2004 because of price India, thanks to the loyalty shown to curbs on diesel and gasoline. Shell will traditional small merchants, but Bharat A lawsuit-declaring that the cash-and- source gasoline and diesel from a rival. Petroleum has opened 235 In & Out carry concept was retailing disguised as Unlike Reliance, it does not own a refinery stores. Still, overall nonfuel revenues in wholesaling-made it all the way to the in India. India are close to 1% of pump revenues high court in New Delhi before it was compared with the U.S., where the figure tossed out. Metro’s first customers had to “It is uncomfortable to depend on your could be as high as 35%. cross lines of angry picketers to enter the competition for supplies. But we are in for store. the long haul. If you want your money in three years, [this market] is a no,” says The barriers to full-scale multinational The protests ceased only when vested Mehta. The industry is banking on retailing in India go beyond the country’s interests discovered a centuries-old act ultimately getting out of the squeeze first-order protectionism: Huge chains like prohibiting produce sales outside of the between controlled prices and rising Gap,Wal-Mart and Carrefour would need mandi, like the one down the road from crude costs by relief on both ends. to build domestic sourcing (which they are busy doing for export) as well as Metro. The protectionists had their legal India’s foray into freer petroleum retail is a systems as a prelude to rolling out roadblock for the moment. teaser to throwing open an estimated storefronts. Even laws dictating the $200 billion broader retail market (just working hours of women are a factor. But At the mandi, fruits and vegetables are under Wal-Mart’s total sales) to foreign now that Indians are getting a taste of strewn on footpaths used occasionally for direct investment. Supermarkets and competition and convenience at the urinating. Long lines of trucks, vans and department stores make up only 2% of roadside pump, the momentum for pushcarts jam the narrow roads where this market, with the rest coming from 12 shopper sovereignty is only likely to bare-bodied men, sweating under a hot million mom-and-pop stores, according to increase. sun, load large brown sacks. Flies hover. a Jardine Matheson report. India badly lags its modern benchmark, China, in this Reprinted from Forbes Global © 2004. Back at Metro, the store is clean, the air- aspect of consumerism – although it is conditioning is powerful, and room-size just ahead of China in opening gasoline freezers keep meats fresh. There are retailing. YES WE HAVE NO BANANAS shopping carts and broad, clear aisles-and no flies. The checkout clerks wear the 25 April 2005 China had to give retail access Indian version of Metro’s corporate commitments in order to enter the World uniform-blue-and-yellow saris-and pass Trade Organization, whereas India, a There are no mangoes or limes, either, in out receipts with every purchase. longer-standing WTO member, did not. the produce section at Metro’s store in Nonetheless, a report being prepared for Bangalore. But there are a lot of Indian “We never get proper bills at Chikpet [a the new Congress Party government – so politics on display. crowded, dusty wholesale market stocked far sympathetic to economic liberalization with fabrics, plastic goods and – has optimists expecting major steps It started when the German cash-and- electronics],” says Nicholas Roy, an air within five years, maybe much sooner if carry outlet opened its doors in late 2003 force officer and Metro customer.“How do the West horse-trades. on the outskirts of India’s Silicon Valley we explain to audit committees about

22 2005 Frédéric Bastiat Prize for Journalism Finalists Dinakar Sethuraman

prices scribbled on plain paper?” Roy is isobutylbenzene, a key ibuprofen Exide Industries, a Kolkata-based $270- wheeling out 14 Metro trolleys filled with ingredient, in Thailand. Thailand! “The million turnover battery maker also pencil boxes, plastic bottles, chocolates, Indo-Thai free-trade agreement (FTA) was seizing the outsourcing opportunity. chips and lunch boxes for the Air Force one reason,” says Chief Executive India’s growing middle class is enjoying Wives Welfare Association, a nonprofit. N.Govindarajan of the 28-year old freer and cheaper access to items such as company’s first-ever foray into foreign refrigerators and air conditioners. Metro buys directly from willing farmers manufacturing. Moreover, the FTA, which involves a and fishermen and threatens a decades- gradual reduction in import duties to nil old agricultural-marketing structure thick That eight-month-old FTA is India’s by next year, allows farmers and with middlemen, moneylenders and second of what could be a series of fishermen in India to sell mangoes, wheat politicians. With so many actors, more regional hookups. It’s part of the fitful and fish to consumers 1,500 miles away in than a quarter of India’s fruits and opening of once-insular India to a trade Bangkok. (Isobutylbenzeneand battery vegetables spoil before they even make it oriented, comparative-advantage components aren’t yet on the duty free to market, says Metro Chief Hans-Joachim economy. schedule, but additions are expected in a Körber.“If India could manage this better, year or two). it could be an exporter of produce.” The key advantage here, Shasun says, are the propylene pipelines that factories in Indo-Thai trade accounted for $1.4 billion The protracted battle is hurting Metro in Thailand, with its more modern industrial last year, a sliver of both nations’ exports India. The caterers, hoteliers and infrastructure, can use to make the drug’s and imports. But it is the next step in a shopkeepers who shop at Metro can still critical petroleum derivative. A kilogram of campaign that even India’s Communist find fish and meat there, but it is produce isobutylbenzene goes into making every backed government envisions extending that would give Metro the volumes kilo of ibuprofen. Thailand also goes easy to zero-duty trading corridors with China, necessary to keep prices low. In other on red tape and offers key tax breaks. South Korea and Japan.To the extent that countries perishables make up 60% of India opens the door as well to nations sales. Shaving even 20 cents a kilo off what the like Singapore that also have freetrade substance would cost at a new plant at pacts with the U.S. and some European Metro plans to invest $400 million over home would net a million dollars, nearly countries, this could lead effectively to five years to open outlets in Kolkata, one-sixth of last year’s post-tax profits, huge new possibilities. Chennai, Punjab, Hyderabad and New the company figures. Add to that more Delhi, but not until its shelves are well reliability.“Supply security is key,” says Before Thailand came calling, India tested stocked with local produce. Agriculture Govindarajan. The 36-year-old engineer the FTA waters with nearby Sri Lanka in rules are different in every state, and thus hopes to double Shasun’s share of 2000.“Indo-Lankan trade has risen 250% interpretation of the rules often depends the U.S. ibuprofen market to close to 30%. in four years,” says Nagesh Kumar, director on who is in office. In 2003 the federal The firm, listed on the Mumbai exchange, general of Research & Information System government began circulating a new act also makes antiulcerants ranitidine (goes for Developing Countries, a New Delhi that would scrap the ancient trading into Zantac) and nizatidine, but ibuprofen think tank. Sri Lankan exports to Indian rules. But two years later there are still no makes up almost half of the company’s industries, mostly commodities, bananas for sale at Metro’s Bangalore $60 million in total sales. quadrupled. outlets. The drug emerges from a clean, gray- For $310 million-in-sales Ceat, a Mumbai Reprinted from Forbes Global © 2005. walled plant – U.S. FDA approved – at tiremaker, the benefits went beyond raw Pondicherry, southeast along the coast. materials. It uses a Sri Lankan acquisition “Shasun’s strength lies in its ability to to export to Pakistan, something still supply to America and Europe,” says K. impossible from its Indian operations. TAKE TWO PILLS AND CALL Ravichandran, an analyst with ICRA, an Shasun may not make such an easy gain THE TRADE ENVOY associate of Moody’s Investors Service. from its planned Thai operation, but overall exports from Thailand to India rose 9 May 2005 That ability looked under siege last year nearly 75% to $480 million between last when cheaper Chinese competitors October and February (compared with the SHASUN CHEMICALS & DRUGS IS a name started creeping in and rising raw- year-earlier period). not known far from its location in a material prices crimped productivity crowded shopping district in Chennai, the gains. Shasun hiked capacity – edging out Indian automakers have more than former Madras.But Shasun is not a retail Albemarle Corp. of the U.S. as tops in doubled imports of aluminium alloy pharmacy. Most notably, it is the world’s ibuprofen production. But it could not rely molded into auto parts- from Thailand largest producer of the generic painkiller on suppliers in India and China for a since the FTA halved Indian import duties. ibuprofen, used in Advil and other steady dose of nearly 5,000 tons of Of course, trade engenders domestic overthe-counter pills. isobutylbenzene annually, says Vimal opposition from industries threatened Kumar, one of Shasun’s founders.“We with cheaper imports. And some in India What makes Shasun newsworthy, decided to go international.” make the legitimate request that pacts however, is not its exports from India but with developed countries extract what it will be importing and why. It’s Free trade across the Indian Ocean is not concessions on temporary movement of planning to build a plant to make just good news for Shasun and others like professionals to service IT contracts and

23 2005 Frédéric Bastiat Prize for Journalism Finalists Dinakar Sethuraman

provide health care, teaching, accounting and legal services.

And even some early outside investors in India fear being left out of the party now.“The FTA was pushed in unholy haste. It would have killed India’s auto sector,” says B.V.R. Subbu, pugnacious president of Hyundai Motor India.

The Korean automaker has invested $900 million to make 250,000 cars in Chennai. But Japanese rivals are using the new trade pact to source elsewhere.“The FTA[was] a disincentive to invest in India. It was 25% cheaper to shift the press line [which molds steel into auto body parts] to Thailand,” says Subbu, concerned that Honda and Toyota could squeeze margins on his midsize cars in India.

But open borders have a way of hastening reforms. For instance, Subbu’s main grouse was that Thailand had a 5% duty on steel compared with 30% in India.New Delhi reduced duties on steel to 5% to mollify Indian automakers. Hyundai responded by announcing additional investment of $500 million to build 150,000 cars in Chennai. Call it trade’s great pain reliever.

Reprinted from Forbes Global © 2005.

24 Rakesh Wadhwa

The Himalayan Times An Obstacle on Maha Shivratri – 11 April 2005 Coffee, the Grand and Government – 30 August 2004 Nepal and Occam’s Razor – 2 August 2004

RAKESH WADHWA writes every Monday for the business page of The Himalayan Times, Nepal’s leading English-language daily. He also writes for and advises The Boss, Nepal’s foremost English-language business and management monthly. He has been a passionate believer in capitalism and free markets since his school days. Mr Wadhwa is the author of “Going Abroad” and “India: the 3rd World, Why?” and co-wrote “The Joy of Gambling”. He is executive director of Nepal Recreation Centre and manages Casino Everest and Casino Royale in Kathmandu, Nepal. He received an honourable mention in the 2003 Frédéric Bastiat Prize for Journalism.

now owns a significant portion of that him would be to use his power to block AN OBSTACLE ON MAHA particular paper – ‘The Washington Post’. the progress of other people. SHIVRATRI But, that is another story. 11 April 2005 Indeed, it may mean prosperity and riches The point here is that Buffett, as a child for the government official and Minister, if growing up in America, imbibed the they can block the grant of licences, It was Maha Shivratri. My wife, Shalini and lesson,‘you make money if you can induce restrict businesses, and have the power to I were in a car and passing through Nag someone to buy what you are selling – be tax them out of existence. What about us? Pokhari in Kathmandu. Suddenly, the it your labour, service or a good’. chauffeur brought the car to a screeching For you and I, it means poverty and halt. Some 12-14 children stood with a The lesson which I had taught the kids in destitution. What enriches bureaucrats rope blocking our way.Without thinking, Nepal was,‘block, obstruct, create and politicians, impoverishes the rest of us. more as a reflex, I took out Rs.50 from my problems, stop us from going where we wallet and handed it to the leader of kids “Power corrupts and absolute power want to and we will pay you to lift the and we were on our way again. corrupts absolutely”.This is a cliché, but restrictions you put in our path’. it’s true. We can afford to pay the officers No big deal, you might think, everyone of the government to sit at home and do I asked myself what would happen if one driving a car has experienced this rather nothing. But we can’t afford them if it day one of the kids who had stopped us harmless collection effort of boys and means halting the progress of productive girls in Nepal. I started discussing with becomes a government officer? He would men and women. Shalini,“What do kids do in the US when remember that the way to riches is by they want extra pocket money?”“They blocking and stopping people from doing The vested interests of those in might run a lemonade stand, mow the things. government to maintain the status quo neighbour’s lawn, wash cars, or deliver are so strong that minor tinkering with newspapers”, said Shalini. What if that kid grew up and went on to the system just won’t do. Changing take charge of the customs department Whatever the kids might do in America, government regulations won’t be enough. of HMG? Would he stop the release of not once have we seen them holding up If we, for example, change the licencing goods until he was paid off? Would he the traffic and demanding payment. They policy into a mere registration stop the issuance of import licences until make money by selling a good or requirement, but leave the bureaucrats in he got what he wanted? providing a service. This involves a place, soon they will come up with a voluntary exchange between the buyer registration procedure which equals and seller. If another of those kids became a Minister licencing in its complexity. of Industry, would he expect a big pay-off Warren Buffett, the world’s second richest from a foreigner wanting to establish an What is required is wholesale surgery.We man, delivered newspapers as a kid. He industry in Nepal? The way to riches for have to excise major chunks of

25 2005 Frédéric Bastiat Prize for Journalism Finalists Rakesh Wadhwa

government, throw it away and not look noodle-makers have done such a them I say: let’s do a poll and find out if back. Do away with licencing. End most tremendous job that Nepal with barely 2.5 people are satisfied with the functioning taxes and whatever minimum you have percent of India’s population consumes as of the law courts and the police force. If to levy, simplify them so that much as 50 percent of the noodles and when 75 percent of the people say, interpretation by bureaucrats is dispensed consumed in India. “we are satisfied”, then and only then with. Abolish exchange controls and allow should the government venture out to do foreign investment without an approval Recently, while in Delhi, I had idlis and more. Until such time let our government process. dosas, both at The Grand hotel and at the concentrate on what it is supposed to do lowly Madras Cafe, a small, largely and leave the rest to us. Go one step further. Consider whether we unknown South Indian restaurant which really need all the ministries that we have specializes in these southern dishes. The Reprinted from The Himalayan Times © 2004. at present. Government’s job is to keep us idlis and dosas at The Grand were just secure, enforce a rule of law, administer what they are in a 5-star establishment: justice, and leave the rest to the people. dosas rather tasteless and idlis just a little too hard; Madras Cafe, served them near NEPAL AND OCCAM’S RAZOR And, yes, it is time to take a stand against perfect. 2 August 2004 those kids. Next time around, I intend to refuse to pay them off. Was there anything wrong with The Gurcharan Das, former CEO of Proctor and Grand management? Why can’t they Gamble, columnist of ‘The Times of India’, Reprinted from The Himalayan Times © 2005. serve idlis and dosas like Madras Cafe, and and author of ‘India Unbound’ was coffee like Starbucks? They cannot and in recently in Kathmandu. On June 23, 2004, their defense I might add that no other 5- he gave a talk on the opportunity star establishment can either.Why not? COFFEE, THE GRAND AND presented to Nepal in having a vibrant, Because dosas, coffees and idlis is not the growing India as its neighbour. Nepal has GOVERNMENT core product which these hotels sell. Their not one but two giant neighbours. This is 30 August 2004 competence lies in providing not a mere plus for Nepal - it is a accommodation, ambience, and style to Himalayan sized opportunity. their customers and that they do. Unbelievable as it may sound, Starbucks, specializing in serving a variety of coffees The task before the government is easy. It Starbucks would not survive with bad to its customers, has become a US $19 is so easy, in fact, that bureaucrats and coffee - that is its core product. Madras billion chain. Its shares are listed on the politicians refuse to accept it and seek Cafe would not survive if it sold the kind Nasdaq stock exchange in the US. complications where there are none. of dosas and idlis which are routinely Starbuck’s founder Howard Schultz made Government seeks to do everything: the offered at 5-star hotels. a fortune serving coffee. How is it current budget, grown to over Rs.124 possible? Doesn’t every restaurant, hotel, billions, is an indication of the direction in supermarket chain, store, home, and office This shows that irrespective of money and which the country is headed. It is going in in the US serve coffee? Yes, anyone who resources, one can’t be best in other than precisely the direction which takes us has ever been to the US knows that coffee a very few services or products. Therefore, away from prosperity. is the national drink of the Americans. the need for specialization is obvious. And Coffee is available in every establishment. this has a profound lesson for how Does the government need to tax, spend, The coffee maker is ubiquitous and more governments ought to be run. and regulate more? That is the way to a symbol of America than its flag. poverty and misery. How is it going to It is impossible for governments too to be help this country if the government The answer just lay under the eyes of all things to all people. Governments preempts a vast percentage of the everyone in the US, but only one man, must understand that trying to run country’s investable surplus, blows up a Schultz, had the vision to see the airlines, airports, hospitals, sugar substantial part on sustaining itself and, possibilities offered by this simple companies, cement companies, banks, then, if the people are lucky they get a stimulant. He recognized that though finance companies, newspapers, TV tiny percentage of it back for themselves. everyone drank and served coffee, no one stations, hotels … and simultaneously specialized in doing it. He said let me trying to manage its core task of We don’t need more government serve the finest and largest variety of providing law and order, a justice system, programmes, higher bureaucratic coffees to my customers and they will pay and a national defense is a sure recipe for expenditures, more taxes on employment me three times more than what they pay disaster. generating businesses, we need less of all other coffee vendors. Starbucks did just this. Nothing can be simpler. that and the rest as they say is history. Accept that it is impossible to do so many things, accept that people and If we want to prosper from our proximity That is the power of specialization. A businessmen can handle airlines and the to the giants, we need simple but clear legendary Japanese industrialist once like better, accept that governments thinking. We need to understand what said,‘it doesn’t matter if I just make and responsibility is to fulfil its core functions, people of India and China want and we sell noodles in a village, I will merely make and we will see the birth of a new Nepal need to give it to them. We do this and sure that I sell the very best’.This example which will prosper in no time at all. they will, in return, give us what we want. may resonate well with us in Nepal where Some people will dispute what I say.To People in Nepal know what the Indians

26 2005 Frédéric Bastiat Prize for Journalism Finalists Rakesh Wadhwa

want. Ask any shopkeeper and he will tell made West Germany great in the you about not only what the Indians want aftermath of World War II. Ludwig Erhard, but what shoppers from anywhere want. its Finance Minister, rejecting all advise Shoppers are price sensitive, they want from his occupation masters, simply cheaper goods and they want a vast removed all controls and taxes on goods, variety. Make Nepal a duty-free nation and wages, and currency.Within days the an overnight boom in shopping-tourism shops in Germany were full of goods and will result. its economy was humming away.

The German miracle had begun. Isn’t it Ask the traders, what would boost their time for the Nepalese miracle to happen? business. They will tell you the same thing. We can supply to the markets of Reprinted from The Himalayan Times © 2004. China and India, if government removes taxes and gets out of the way. As long as Nepal is a free trading state, people will find a way to take goods from here to other countries, irrespective of the laws in those countries.

Traders in Dubai and Singapore do not break any laws in their country when goods move to India. Why can’t Nepal be that trading duty free hub instead of Dubai? Nepal’s costs of trading would be much lower as a consequence of lower real estate prices and insignificant labour costs.

No one has ever given me any convincing reason as to why this would not be possible.

Open the skies and permit free flow of foreign investment for opening of shopping arcades and we can visualize a transformed Nepal with huge employment generated by these trading and retailing establishments.

If this sounds simple, too simple, let us go back to 14th century England. Then a monk from Surrey called ‘William of Occam’ laid down a philosophy which still guides modern sciences and has come to be known as ‘Occam’s Razor’. He said, ‘what can be done with fewer assumptions is done in vain with more’, and,‘entities are not to be multiplied without necessity’.That was old English. In today’s language, it means,‘keep it simple, sweetheart.’

Occam’s Razor shows that most often the simplest theory is the best. Rejecting the idea of a duty free Nepal because of its simplicity is perhaps the worst reason for doing so.

In making Nepal duty free, we would be doing not only what Singapore, Dubai, and Hong Kong have done, but, what

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