On why Africa is poor

The economist has an interesting article linking to this paper trying to work out why it is that Africa is so poor. If you're deeply interested in why so muich of Africa is so depressingly poor then you might well read both pieces.

The general answer is institutions of course. But then the general answer to long term growth is indeed institutions so that's really no great surprise. Africa has no great shortage of the usual things that everyone says is necessary for growth. There's land, water, people, minerals, natural resources, what's missing is the structure that allows these to be melded together into the creation of ever greater value. There's some fairly dry comments in the paper on this:

The first-generation literature argued that a major source of growth failures was the intervention of African rulers in their countries’ economies for largely political purposes. Indeed, one of the main purposes of the many structural adjustment reform programmes implemented in the 1980s and 1990s was to limit the capacity of African rulers and ruling parties to interfere in their economies in order to capture rents with which to reward supporters.

They also note that at least something seems to have been working since the late 90s for the economic growth rates of the continent have risen very strongly. I would blame that neoliberalism, globalisation and the Washington Consensus for that myself.

But behind all of this, and the worrying about whether it will last, I find something immensely cheering. For they make very clear and plain that the current levels of poverty in Africa are nothing unusual in historical terms. The $750 GDP per capita levels of some of the poorer countries are roughly the same as those of the North Sea (ie, Holland and GB) in the late middle ages. The $2,500 or so of South Africa is near the same as those North Sea economies before the industrial revolution really got going around 1800. Something that I find hugely, wonderfully cheering.

For what it shows us is that we didn't become rich by stealing what they had: we were just as poor then as they are now. It means that wealth is something that is built, not taken. And further, that it having been done once is extremely good evidence that it can be done again.

We also have good evidence that it doesn't have to take 300 years. China in 1978 had GDP per capita around and about the same as England in 1600. 35 years later China's GDP is about what GB's was in 1950. It is possible to do this, for places to run through the industrial revolution at warp speed and make, by any rational historical or current world standard, people rich in just one generation.

We can even make a pretty good stab at defining what will do it too: those decent insitutions conducive to grwoth seems to be necessary. One set of which is described in that Washington Consensus. Add in the pixie dust of globalisation and neoliberalism and we do seem to be getting there.

Why cannot the British left understand markets?

Forgive me but this is going to be a bit of a rant on one of my bugbear themes: why is it that the British left simply cannot understand markets? Here we've got Martin Kettle describing one of David Sainsbury's ideas:

As a result, says Sainsbury, in opposition Labour now needs to embrace a new form of political economy – the progressive capitalism of his title – in order to govern better and better understand the future. That means embracing capitalism in two particular ways – the recognition that most assets are privately owned and the understanding that goods and income are best distributed through markets.

Neither of those two things are in fact capitalism. Capitalism does indeed describe a method by which assets (and more particularly, productive ones) are owned but it means that they are owned by hte capitalist, not simply privately. The opposite to private ownership is State ownership. It's entirely possible to have privately owned assets but which are not owned by capitalists as the various flavours of mutual ownership show us. John Lewis and Mondragon by the workers in those companies, the Co Op or building societies by the customers ofr them and so on. Private ownership of assets is not necessarily capitalism.

As to markets, this is where I start to get rather angry with the left. For markets combine nicely with capitalism, this is true, but then markets combine nicely with absolutely method of asset ownership. They are, variously, the calculating engine we must use for nothing else at all can tell us as much about the economy as the prices in markets. They're good, as noted, at the distribution of goods and incomes. But this is nothing at all to do with capitalism per se. Which is, as above, a description of who owns the assets, not how we perform the function of exchange of production.

But why should I get angry at the left for not understanding this point? Because in their hatred of capitalism, desire perhaps for some form of socialism or social democracy, they manage to throw the market baby out with the capitalist bathwater. And of the two the markets are vastly more important for our standard of living.

There is a reason why we here at the ASI generally describe ourselves as a "free market" think tank, not a capitalist one. It's because we think those markets are more important than who owns the assets. And I for one really do wish that the left in Britain could understand that that market system is essential in any form of complex economy, yes, even the more equal one they say they want to create. So, please, could they get with the program and stop railing against markets, whatever it is they want to shout about the capitalists?

There's a because missing in The Guardian's analysis of tax evasion

When different regions are compared, Europe comes out the worst in terms of the size of its black market and the total amount of tax it loses as a result. As a region though, Europe also has the highest tax rates in the world. Out of 36 countries looked at, Europeans averaged a tax rate that was 39% of their GDP, compared to a world average of 28%. The lowest rates were found among 39 African countries which had taxes that represented around 17% of their GDP.

Sigh.

That "also" needs to be replaced with a "because".

The more tax you try to squeeze out of people then the more people are going to try dodging the tax you're squeezing out of them. The higher the tax rates then the more tax evasion there will be.

There's more we can say about these figures too: here they're talking about tax evasion, not tax avoidance. Evasion is the illegal stuff and it's almost entirely the activity of individuals: large companies simply do not involve themselves in illegal shenannigans. This is about the VATless builder's non-invoice, absolutely nothing at all to do with offshore or the multinationals. Or perhaps the dole claimer working a few hours cash in hand: the sort of thing that is never going to be wiped out by any system of economic management or taxation at all. The question thus becomes well, how much of this do we want to try and wipe out?

And there we come up against the other side of the problem. Our aim isn't in fact to extract the maximal amount of tax from the economy. It is, rather, to allow, encourage even, the maximum utility of the populace. We want everyone to be as happy as they can be without bursting with joy at the sheer pleasure of it all. Which means that we've got to measure the utility of reducing tax evasion against the disutility of the methods we use to do so. For example, we could be extreme and state that paying someone may only happen when an armed agent of the State is in the room. If the correct tax is not applied at that moment then the agent will shoot everyone. Yes, absurd and extreme: but it makes the point about disutility of certain methods of reducing tax evasion. Less extreme or absurd, we could ban cash altogether and everything must be done by electronic card. The trail there being auditable and the taxman would certainly catch many more than they do now. But there's a certain disutility to that too.

In the end we come to a reasonable conclusion: that there's an acceptable level of tax evasion considering the foul things we might have to do to reduce that level. Other values, such as liberty and freedom, come into play against that desire for revenue. Whether we're at the right level now is another matter of course: but that is where we must start the debate. What will attempting to collect more revenue do to other values we hold dear?

Oh, and one more very important thing. Assume we accept these estimates of tax evasion: this does not mean that we would ever be able to collect it all. For simply by bringing all into the tax net some of that economic activity would not happen at all. Economics does happen at the margin and so it would be the marginal transactions that did not happen. Which means that we can state without fear of contradiction that reducing tax evasion might make the State richer, up to a point at least, but it will absolutely certainly make everyone in aggregate poorer. For simply to tax currently untaxed economic activity is to reduce the amount of said economic activity.

It's because of socialism you fools

This is a classic headline from The Guardian:

Venezuela food shortages: 'No one can explain why a rich country has no food'

Absolutely anyojne can tell you why a potentially rich country like Venezuela has no food: it's the socialism you fools!

Of course, given that the Guardianistas are all currently weeping with joy over the Miliboy's propsals to bring back socialism and price controls we'd perhaps not expect them to note this particular point but that just means that we'll have to do it for them.

For Oliveros, an additional cause for the shortage of basic food staples is the decrease in agricultural production resulting from seized companies and land expropriations. "More than 3m hectares were expropriated during 2004-2010. That and overvalued exchange rate destroyed agriculture. It's cheaper to import than it is to produce. That's a perverse model that kills off any productivity," he says.

Well quite, stealing the land from people who are farming it so that it then doesn't get farmed isn't going to increase food production. But there's a much more basic point that we should make as well. Governments fixing prices can have one of two effects. If prices are set too high then we get the vast wine lakes and butter mountains of the old EEC. And if prices are fixed below market rates then we get shortages. Of course it's impossible for government to get the price just right for it lacks the information to be able to do so: and even if it had it there's no point in fixing prices at what would be the market rate anyway.

And we can go a stage deeper too. Perhaps it's true that some people in Britain find electricity too expensive, perhaps some people in Venezuela are too poor to be able to afford a decent diet. If those are situations that you want to try and remedy then the solution is to give those people more money to purchase those things on the market. What you don't do is go and screw up a functioning market through price contols or any other regulatory nightmares so that no one has access to those desirable things.

A point that rather puts the kibosh on "predistribution" really.

It's not entirely obvious that the power firms are ripping consumers off

My reaction to Ed Miliband's proposal to introduce price caps on energy was not, I'm sorry to say, something that was printable in a respectable place like this. So I'll spare you that and look instead at the basic contention that is being made.

Clearly, Miliboy must believe that the energy firms are ripping off consumers if he thinks that their prices need to be capped. If they were indeed ripping off consumers then we would see it in their profits. They would be making excess returns, profits well above their cost of capital and well above the rest of the market as well.

From the FT:

Last time I looked the cost of capital to a publicly traded firm was in the 8 to 10% range. They're making around and about that return on the capital they're employing meaning that there's just no room there for  excess profits. And if there are no excess profits then they cannot be unfairly ripping off the consumer.

So the whole idea falls over for lack of evidence that there is in fact the problem originally identified.

The end of loneliness

There's a video doing the rounds by Shimi Cohen, called the "Innovation of Loneliness". The thesis is that modern, internet-based social networking results in more loneliness. Impersonal communication displaces the intimacy of conversation. This, combined with the ability to tailor those communications to promote our self-image, results in us claiming "to have many friends while actually being lonely", while technology's promise of constant interconnectedness, causes us to constantly share our experiences in a desperate bid to not feel alone.

Not all of the claims stack up. For a start, sharing is not the only function of a social networking platform, the main one being, of course, to network. Connections are powerful resources that can fulfil a wide variety of ends - not just the selfish-sounding pursuits of "career, wealth, self-image, and consumerism" that Cohen emphasises, but also the intimate pursuits of friendship and romance. You might upload a selfie to Facebook or post on Twitter about your brand new shoes, but you might also use either of those social networks to arrange a drink with friends or, if you're lucky, even a date. Even then, some modern platforms like Skype facilitate the intimate conversations that Cohen fears we are losing. Rather than eroding social and familial connections, modern communication technology allows us to keep in touch with friends and loved ones when they are half-across the globe: there is now simply no excuse to never write home.

The truth is, we're usually well aware of which are our close or intimate friendships, and which are our wider connections. The benefit of having those connections though, is that they have the potential to turn into closer relationships, on a scale that is just totally unprecedented in human history.

Many of Cohen's claims are perhaps simply facts of human nature, rather than the fault of advancing communication technology. Was the age of letter-writing that preceded email much better when it came to wasting our time and energy "pursuing the optimal order of words in our next message"? Given the lengthy delay between replies and the added time and cost of writing and posting, letters were undoubtedly more stressful and time-consuming.

The internet for many people has freed them from the millennia-old tyranny of village gossip. It allows us to forge connections that then more intimate relationships with people who we actually like and agree with, wherever they may be, almost totally freeing us from geographical constraints. It even allows us to choose to whom we cater our self-image. Some of us may well spend hours agonising over our profiles, but it's a small price to pay to also spend far less time agonising about how Bert from next door, who never liked you, could seize upon any quirks and differences from the rest of the village, and make you a social pariah. You can now choose your own 'village' without actually having to move house, and it's no accident that social liberal attitudes are most prevalent among the most interconnected generation the world has ever seen.

Humans have always been lonely at times. The internet can make that fact more obvious, as we gain a remarkably open window into the everyday experiences of more and more people around us - but it is also the technological advance that has done more than anything else in human history to put an end to loneliness.

You know that ever longer working hours thing? It's wrong

It's a common meme, a trope, that we're all working ever more hours for The Man. Further, that we should all lighten up, stop sticking our nose to the grindstone and get a work life balance. Now my normal answer to this is that looking only at paid working hours is very misleading. We nered to also include unpaid hours in household production and as those have been falling swiftly for a century or so now we are all indeed enjoying more leisure.

But as it turns out that qualification isn't even needed. Have a look at this:

Oh. We're all working shorter hours in 2012 than we were in 1990. So we are indeed doing what economists think we would be doing which is taking more of our increasing wealth in hte form of leisure rather than materials goods and or services.

The "ever longer working hours" story is simply wrong, flat out so.

Do we even have sectors of the economy any more?

I find myself rather scratching my head over this latest bright idea from a lefty think tank:

Sectoral bargaining should determine pay and conditions: The legislation relating to sectoral bargaining should make provision for the determination of pay and other working conditions, provide procedures for the resolution of disputes, and deal with skills, training and productivity;

Part of this is of course that old idea that if only the Great and the Good were to sit down around the table and really discuss things then they'd be able to put the world to rights in no time at all. An idea that Hayek rightfully exploded when he pointed out that the centre cannot have enough information to be able to plan anything in such a manner and further, even if they could gather the information they couldn't process it in time to be able to decide anything useful. We have to use markets and prices to do that calculating because that's the only calculating engine we've got that is capable of doing the, umm, calculating.

But there's something else that worries me about this. Do we really even have "sectors" in the economy any more, to any meaningful definition that is? Even defining what is a service and what a manufacture is extraordinarily difficult. Rolls Royce is defined as a manufacturer because jet engines. But most of their revenue comes from and most of their people work on a service: keeping the engines that they've sold running and serviced. And we're often told that restaurants are part of the service industry: but they manufacture meals and I've certainly been in one or two where dropping that manufacture on your feet would hurt.

If we try to become more detailed then of course we'll enter an entire nightmare. Those myriads of small racing car manufacturers and testers. Manufacturing? Well, they don't roll that many products out the doors. Research and development might make more sense: but then we might equally logically regard them as part of the entertainment industry along with F1 etc itself.

So it's not just the Hayek point that worries me over these sorts of plans. I don't really see that we can, in an economy as complex as ours, really define sectors sufficiently well so as to be able to manage them as these people seem to think we should.

Oh, and, of course, setting the prices for the same input, labour, differently for different sectors of the economy would, even if we could define it all satisfactorarily, rather destroy the abiolity of that market to do our calculating for us of the price of and demand for labour across those industry sectors. You know, that market which is the only calculating engine we've got that even has a theoretical hope of working?

Freezing energy prices could be disastrous

Having worked in the energy industry in the UK since the beginnings of market liberalisation in the 1990s, I found myself somewhat alarmed by Ed Miliband's pledge to freeze on energy prices between 2015-17 if elected. Labour's standpoint seems based on some fundamental misunderstandings about the energy market.

Many outside the industry appear to be dismissing the security of supply issue, as if this were mere scare tactics by the energy companies. But it is a very real problem. When energy demand increases during cold winters, such as those we have experienced recently, a minor supply shock such as a unscheduled gas platform or pipeline shutdown can cause prices to spike.

If energy companies are prevented from passing on these increased costs in consumer price rises, how will they stay solvent? It could come down to a choice between cutting investment, returns to investors, or staffing costs. Given that energy companies' largest shareholders include UK pension funds, none of these options are appealing.

Another area where there is a great deal of misunderstanding of the way the industry works is the way energy companies buy the gas and power they need to supply their customers. Politicians and the press are very vocal about issue of wholesale price falls not always being passed on to consumers. This ignores the fact that energy companies do not buy most of their gas or power at the wholesale spot prices quoted on any given day. It is far too risky for a company to leave themselves exposed on price until the day of delivery, so they buy tranches of their gas or power up to two years in advance.

Energy firms also use long term contracts whose prices can be fixed or floating. The spot market is often only used to balance requirements when there are changes in the portfolio of supply or demand. As such, the price paid for gas or power by energy companies will be a basket of different types of prices, not simply the wholesale spot price of the day of delivery. Therefore, an energy company may not be able to respond to a reduction in the wholesale price as its commodity costs are not based solely on this spot price.

While I agree wholeheartedly that our energy companies should be subject to close scrutiny to ensure that they are delivering fair value to UK consumers, context is important, too. In the UK, domestic consumers pay the least of all EU15 countries for gas and we are the fifth cheapest for electricity. A safer method than price fixing of cutting UK energy costs would be to reduce the levels of tax paid on North Sea gas production, which can be as high as 81%. Cutting taxes would reduce distortions in the energy market: freezing prices could make those distortions disastrous.

Why the Green New Deal won't work

I'm sure you've all heard about the Green New Deal. It's the idea that we'll just print a load more new money then spend it on lovely things like building green houses, lagging and insulating those that already exist and by doing so we'll create lots of high paid jobs and boost the economy. Plus, of course, reduce CO2 emissions.

I'm afraid it's not going to work though:

At the beginning of the year, Ian Hodgkinson's main aim was to keep his business alive. But in the last four months he has gone from ticking over to overwhelmed. His bricklaying firm has been inundated with demands as Britain's building industry has begun to boom, boosted by the government's Help to Buy scheme for first-time house buyers. The scheme, announced in April, has started a chain reaction that has seen the construction industry facing labour and materials shortages that have pushed up prices and lengthened supply delays. Bricklayers can now earn more than £40,000 a year and brick deliveries that were being fulfilled in two days can now take 10 weeks.

The reason it won't work is that we don't have the skilled labour nor the production infrastructure to make it work. Boost housebuilding/repairing beyond what it is now and all we'll end up doing is sucking in more immigrants and more imports. Not that there's anything wrong with more of either but pumping yet more stimulus into a sector already overstretched is not one of the wisest ideas around. Indeed, good Keynesian demand management would indicate that a sector so stretched should probably have a bit of fiscal austerity applied, not stimulus.