Oil prices, Iranian economic sanctions and the Strait of Hormuz

Just as Russia is feeling the pinch from the drop in oil prices (both leading up to and after OPEC’s decision not to cut production further), Iran is feeling the pinch too (being one of the main countries that desired a cut in production but was rebuffed by Saudi Arabia). It is hardly surprising that Russia sees incentive to engage in increasingly aggressive geopolitical posturing when oil-revenue makes up a substantial part of its income.

However, things have been eerily quiet in the Persian Gulf. Iran, being arguably probably in a far worse position, does not have the Russian luxury of nuclear power status or an extremely advanced, formidable Navy that can match the US. However, the Iranian government still has incentive to increase oil prices and it is strategically positioned next to the infamous Strait of Hormuz, one of the world’s most important oil chokepoints.

Iran threatened to shut off the Strait of Hormuz in 2011 in response to US-led economic sanctions but this did little to unnerve markets since there was confidence in the US’s ability to swiftly resolve such an eventuality. Going into 2015, oil prices are forecasted to remain low and often forecast to go even lower. Simply raising tensions around the Strait whilst not actually shutting it off (this could be accomplished by perspicuous naval manoeuvring, aggressive press statements etc.) could quickly escalate into something more if responses are miscalculated and intentions misjudged. Such tensions are really not needed in this fragile macroeconomic and shaky geopolitical climate.

Easing up on at least some of the economic sanctions on Iran (even if they are only token concessions) will enable the Iranian government to at least appear to be in a stronger negotiating position (despite suffering from a very real deterioration in bargaining power from falling oil prices) and it may, thereby, delay or even help prevent possible future aggression. It would also help ensure that cash-strapped citizens across the world enjoy the benefits of cheaper oil for longer whilst decreasing the punishment of Iranian citizens (most of whom have little to no say when it comes to their government’s nuclear program).

Free trade with Iran is unlikely for the foreseeable future but even some token easing of trade restrictions could help preserve our increasingly shaky, threatened (relative) world peace.

Dollarisation in Ecuador

Over at the free banking blog, Larry White has a very interesting post on dollarization in Ecuador. He outlines the history of the dollar in Ecuador and rehearses some of the key arguments in favour of free banking, and against its critics.

The dollarization of Ecuador was not chosen by policy-makers. It was chosen by the people. It grew from free choices people made between dollars and sucres. The people preferred a relatively sound money to a clearly unsound money. By their actions to dollarize themselves, they dislodged the rapidly depreciating sucre and spontaneously established a de facto US dollar standard.

Finally, in January 2000, Ecuador’s government stopped fighting their choice. Until that point the state tried to use legal penalties or subsidies to slow currency switching. Today the state threatens an attempt to reverse the people’s choice through legal compulsion.

He points out that the dollar was consistent with rapid economic growth and general success: between 2000 and 2013 the Ecuadorean economy grew a cumulative 75%, or an average of 4.4% annually, compared to just 36% in the previous 13 years (equivalent to 2.4% annually). And dollarisation has not just been good for output and living standards, but also the stability of banks:

Dollarization has also brought improvement to Ecuador’s banking system, according to two analysts at the Federal Reserve Bank of Atlanta. Mynam Quispe-Agnoli and Elena Whisler, in a 2006 article, noted correctly that dollarization, by ruling out an official lender of last resort able to create dollar bank reserves with the push of a button, eliminates an important source of moral hazard.

In this way dollarization has the potential to reduce risky bank behavior, and thus so “make banks runs less likely because consumers and businesses may have greater confidence in the domestic banking system.” Lacking the expectation that “the monetary authority would come to the rescue of troubled banks” whether solvent or insolvent, banks in a dollarized system “have to manage their own solvency and liquidity risks better, taking the respective precautionary measures.”

He ends by giving strong warning that a return to state compulsion in the use of currency will worsen the country’s prospects. The state seems, White suggests, to be trying to bring back state currency control on the sly, through unifying all mobile payments under one system, something he argues is completely unnecessary.

In sum, there is no plausibly efficient or honorable reason for the Ecuadoran government to go into the business of providing an exclusive medium for mobile payments. Consequently it is hard to make any sense of the project other than as fiscal maneuver that paves the way toward official de-dollarization. I gather that President Correa does not like the way that dollarization limits his government’s power to manage the economy. He has compared the limitation to “boxing with one arm.” But as I have already emphasized, retiring the government from boxing against the economy by means of money-printing is precisely dollarization’s great virtue.

Our visa system is failing international graduate entrepreneurs

The Entrepreneurs Network has just released a new report. Based on a survey of 1,599 international students, Made in the UK: Unlocking the Door to International Entrepreneurs reveals how the UK’s visa system is failing international graduate entrepreneurs who want to start a business in the UK.

Undertaken with support from the Adam Smith Institute and in partnership with the National Union of Students (NUS), we find that a significant proportion of international students – that is students coming from outside the EU – have entrepreneurial ambitions. In fact, 42% of international students intend to start their own business following graduation. However, only 33% of these students, or 14% of the total, want to do so in the UK. Clearly we are doing something wrong.

The Tier 1 (Graduate Entrepreneur) visa was set up in 2012 to encourage international graduates to start their businesses when post-study routes were taken away. However, uptake has been woeful and the results of the survey suggest this isn’t likely to change any time soon:

  • Just 2% of respondents intending to start a business following graduation applied for the UK Tier 1 (Graduate Entrepreneur) visa, with almost two thirds, 62%, saying they didn’t even consider it.
  • Nearly half, 43%, of respondents think their institution is certified to endorse them for a Tier 1 (Graduate Entrepreneur) visa.
  • Only 18% think that the UK has better post-study processes in place for international students than other countries; 32% think it is worse than other countries.

Based on these and further findings, the report puts forward nine recommendations for government, including:

  • Removing the Tier 4 ban on self-employment for those working within an institutional programme (curricular or co-curricular) or other accelerator.
  • Allowing UKTI-approved accelerators to endorse international students in their programmes under the Tier 1 (Graduate Entrepreneur) scheme.
  • De-coupling the risk for educational institutions in endorsing international graduates for Tier 1 (Graduate Entrepreneur) visas from institutions’ Tier 4 license. This should be made explicit in the official Home Office guidance and in the way the Home Office applies its audit procedures for institutions.
  • Reinstating a post-study work visa, de-coupled from the sponsor system, to allow international students to explore markets and industry before finalising their business idea for the Tier 1 (Graduate Entrepreneur) application. In fact, 81% of the respondents considering starting their own business are interested in the possibility of permanent residency under the Tier 1 (Graduate Entrepreneur) visa.

Our visa system isn’t supporting the entrepreneurial ambitions of international graduates. As things stand, we are training some of the world’s best and brightest young people at our world-class universities only to push them to set up their businesses overseas.

Philip Salter is director of The Entrepreneurs Network.

Banning Blanc from Britain stifles free speech

Sky sources have learned the so-called pick-up artist Julien Blanc will not be allowed to enter the UK.

The decision to deny Julien Blanc’s entrance into the UK has set the precedent that freedoms of speech and expression can be criminalised, if and when enough people sign a petition.

Blanc’s comments are socially reprehensible and offensive to both men and women, but if we do not respect the rights of the offensive, we start risking the safety of any minority viewpoint.

Those upset by Blanc’s remarks have the opportunity to push back in cultural and social spheres; they do not need to call on the government to ban things they find socially disturbing. Private event businesses can take after EventBrite and deny him platforms, people can boycott his events, and viewers can turn their televisions off when he is on-air voicing his opinions.

The market has ways of listening to the moral needs of its customers, and while it is not a perfect system, it can serve to bankrupt those who are morally reprehensible without criminalising them for non-criminal behaviour.

Surely, we must recognise that there is a fundamental difference between the private sphere taking away one man’s platform to be noticed, and the state taking away every person’s platform to speak freely without threat of punishment or criminalisation.

This ruling should not just be a wake-up call to public hysteria, but also a reminder of how flawed the UK immigration system is. The Home Office can legally deny anyone entrance to the country if their character or opinions are not deemed conducive to the ‘public good’.

This is Big Brother at its worst – ‘protecting’ the people from speech criminals, who are a danger to the moral good; let any who speak out be at the mercy of mob rule, and the Home Office.

Just send money!

In an extremely rude thank you letter, Horrid Henry tells his Aunt Ruby that her (admittedly terrible) birthday present is rubbish and she should, next time, send him cash. Beneficiaries of anti-poverty programmes could be forgiven for saying the same thing to welfare authorities. Their schemes are expensive to administer, involve grand ideas, social theories and detailed plans, and yet their results are substantially worse than letting people live where they want to, or just sending them cash to alleviate their bad circumstances.

A new paper from the Institute for Fiscal Studies, by authors Laura Abramovsky, Orazio Attanasio, Kai Barron, Pedro Carneiro and George Stoye and entitled “Challenges to Promoting Social Inclusion of the Extreme Poor: Evidence from a Large Scale Experiment in Colombia” only adds to this literature. We can only be glad that the Colombian authorities thought to do a randomized and controlled pilot study, although perhaps they should have waited for its results to come in before rolling it out generally!

We evaluate the large scale pilot of an innovative and major welfare intervention in Colombia, which combines homes visits by trained social workers to households in extreme poverty with preferential access to social programs. We use a randomized control trial and a very rich dataset collected as part of the evaluation to identify program impacts on the knowledge and take-up of social programs and the labor supply of targeted households.

We find no consistent impact of the program on these outcomes, possibly because the way the pilot was implemented resulted in very light treatment in terms of home visits. Importantly, administrative data indicates that the program has been rolled out nationally in a very similar fashion, suggesting that this major national program is likely to fail in making a significant contribution to reducing extreme poverty. We suggest that the program should undergo substantial reforms, which in turn should be evaluated.

Really we ought already to have known this. Anti-poverty schemes seem smart but rarely or never report successes in randomised controlled trials unless they are cash handouts or removals of restrictions that were stopping people from generating wealth themselves (e.g. immigration liberalisation). But, as slow as academic progress works, it does seem like every extra contribution helps push the debate in the correct direction.