Aid and development

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Perhaps it is serendipity, but Dambisa Moyo is on every channel and newspaper that passes before my eyes. Her current media presence is on the back of her popular new book, Dead Aid, a sustained indictment of aid as a route to development. The fact that Dambisa Moyo was born in Zambia are perhaps giving these arguments more publicity than previous criticisms of development aid. Though previous criticisms of aid are no less true, her media skills bring a vibrancy to the defence of free markets and trade at a much needed time.

Digging out a copy of Eat the Rich by the idiosyncratic P. J. O’Rourke, and turning to the chapter on Tanzania, the futility of aid is laid bare:

Tanzania has been smothered in help. It has received loans, grants, programs. Projects, an entire railroad from the Chinese government (running 1,200 miles to nowhere in particular), and just plain cash. In 1994, by World Bank tally, foreign aid made up 29.1 percent of the Tanzanian GDP, more than the budget of the Tanzanian government.

O’Rourke was writing of a time before the government rejected the socialism of ujamaa in favour of elements of market liberalization. As a direct consequence, its GDP has grown dramatically. Dambisa Moyo in this interview on the BBC makes the point that African countries do not need to do anything special, just copy policies that have led other countries to profound economic growth. As the ASI’s President, Dr Madsen Pirie, wrote last year as part of the popular Common Error series:

The unusual condition is wealth. This is what changes things. We should ask what are the causes of wealth and try to recreate and reproduce them. When you ask the wrong question, "What causes poverty," you end up with wrong answers. People fall into the trap of thinking that the wealth of some causes the poverty in others, as if there were a fixed amount of wealth in the world and that rich people had seized too large a share of it.

Believers in free markets are fighting back

Free market theories have been under scrutiny lately, many believe it is what caused the credit crunch and thus, the recession. However, Dr Eamonn Butler, underlines that this is not the case and that the free market thinkers will not go down with out a fight.

“If you bound the arms and legs of gold-medal swimmer Michael Phelps, weighed him down with chains, threw him in a pool and he sank, you wouldn’t call it a ‘failure of swimming’. So, when markets have been weighted down by inept and excessive regulation, why call this a ‘failure of capitalism’?”

That view, expressed by the George Mason University professor Peter Boettke, found much favour among the free-market eggheads who assembled in New York this weekend to discuss the financial crisis. Up to now the Keynesians have made the running. Greed, they say, has brought down the world economy. Only massive public spending can revive it. And with the Masters of the Universe now gasping on the floor, the G20 summit in April will give them a final kick in the tax havens. That’ll teach them.

But now the believers in free markets and small government have regrouped. The meeting was called by the Mont Pelerin Society, founded in 1947 to preserve liberal ideas. Early members included Milton Friedman, F.A. Hayek and George Stigler. Their view – as expressed by The Ascent of Money author Niall Ferguson – is that capitalism isn’t dead, though the global banking regulations embodied in Basle 2 should be. It took regulators ten years to perfect Basle 2, but far from making things safer for bank customers, it pushed banks to the brink of ruin.

When the banks discovered that their “assets” were riddled with junk, everyone ran scared. Nobody knew exactly how “toxic” it all was, so the banks couldn’t unload it on to anyone. Their “assets” became worthless. Under the Basle rules, they had to stop lending. Hello, credit crunch.

“This is a balance-sheet crisis,” the billionaire and former presidential candidate Steve Forbes told the gathering. “If you had to sell your house today, you wouldn’t get much for it. That doesn’t mean it’s worthless.” Banks are largely solvent – it’s regulation that threatens to bankrupt them.

“We need to sell off, split up or close down the zombie banks,” says Bill Beach, senior policy boffin at Washington’s Heritage Foundation. Next, he says, we need to encourage business, not load it, like Michael Phelps, with burdens. That means lower taxes, particularly business taxes, and less of the regulation that discouraged firms employing people.

Occasional crises are the cost of the prosperity that entrepreneurial capitalism brings. Try to eliminate risk, and you eliminate entrepreneurship itself.

The Rotten State of Britain: A fork in the road

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On the back of the much talked about Rotten State of Britain, Dr Eamonn Butler has been inundated with media requests. It would appear the subject matter is striking a resonance with the people of this country.

For example, The Telegraph's Christopher Hope has written on Dr Butler's analysis of bureaucratic and authoritarian state. While in The Times Dr Butler writes on how the believers in free markets are fighting back.

The Rotten State of Britain will hopefully prove to be the first obituary for a type the government that we were able to stop before it was too late. Let us hope it does not turn out to be a record of the end of this country's freedom. We will see...

Either way, it can and should be purchased by clicking here.

Blog Review 893

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As we know, Gordon Brown seems most reluctant to apologise. Fortunately, the IMF seems to have done it for him.

Enough people have been arguing for drug legalisation for enough time. Could we finally start to see sense on this please?

It's actually sad to see some of the arguments rolled out in the interests of maintaining their illegality.

It's clear that recycling is a religious tenet.

Embarrassingly, we still seem not to have learnt some of the lessons of the Great Depression.

It's been said before that the issues don't change, only the way they are talked about.

And finally.

On quantitative easing

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This week the Bank of England decided to cut interest rates by another half-point to 0.5 percent, and to take 'unconventional measures', namely quantitative easing. This decision has made many deeply uneasy.

Let's start by ditching the euphemism, and call quantitative easing what it is: printing money. You might be doing it electronically, rather than with paper and ink, but ultimately it amounts to the same thing – creating money out of thin air. And obviously, that sounds very dodgy, so why is the Bank doing it?

Jon Stepak outlines their rationale as follows:

Broadly speaking, we are in a recession because there's not enough money circulating around the economy. This depends on two things: the amount of money available (the money supply), and that rate at which it is changing hands (the money multiplier).

Basically, the Bank thinks it needs to boost the money supply in order to prevent monetary contraction and consequent deflation, and to get the economy moving again. Cutting interest rates, and thus lowering the price of credit, doesn't seem to be working, so now they are going to print money too – £75bn of it, to be exact.

Purely in theory, it sounds possible. An omnipotent and omniscient central bank could perfectly replace the lost money supply, prevent deflation, and stabilize the economy. But unfortunately no such central bank exists.

The trouble is that monetary changes take time to work through the economy. It will be at least a year, for instance, before we can see the impact of the interest rate cuts. So it's really more or less impossible to get a policy like quantitative easing right. It might not have much impact (as in Japan). It might result in another inflationary boom a year or two down the line, followed by another crash like the present one. It could even result in hyperinflation, and the complete economic destruction that would entail.

Clearly, we should never have got into this mess. Central banks should not have let the money supply grow out of control in the first place, and the present monetary contraction should not have become an issue. But now it has, I'm not convinced there's really much we can do other than sit it out, and try not to do any more damage.

Immigration and the welfare state

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With Home Secretary Jacqui Smith raising the bar on immigration, the left have reverted to type in the face of competition. Of course, little has been heard in protest from Conservatives or Liberal Democrats either, which really is not surprising given the sustained concern about immigration among a large number of people in this country.

It is quite understandable that many hard-working people are worried about immigration. Their concern is less often racist or nationalist, but practical and rational: they don’t want to support more unproductive people in this country. This is why in order for libertarians to win the debate on immigration the welfare state needs first to be deconstructed.

Certainly, this will not assuage all the tensions that the movement of people brings, but at least when people see new families from across the waves moving in down the street they will know that it won’t be them that has to pay for their support.

At present, politicians are instructing bureaucrats to try to pick out individuals who will benefit the UK through a laborious and costly vetting process. From seeing friends jumping through the hoops it is clear that the tests are profoundly arbitrary and openly discriminate against migrants from certain countries for no conceivable reason.

For Britain to compete, people (excepting criminals) need to be free to move with much more ease in and out of this country. The welfare state is the biggest impediment to a reasonable immigration system and until it is radically reformed people will always be looking over their shoulder, concerned that an increasing number of people are living off their hard work.

World Statesman of the Year

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Junksmith thought he was seeing things when glancing over someone's newsapaper on the tube he saw that Gordon Brown had been voted World Statesman of the Year. However, it turns out it is true. The Appeal of Conscience Foundation even went so far as to say to him that: "your courage in defending freedom and human rights ... and also your key intellectual and compassionate leadership in these critical times, when financial upheavals raised societal tensions and international tensions". April Fools day has clearly come early for Mr Brown.

Bad idea alert

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I realise that Reform are on the side of the angels, just as we here are. However, I feel I must point out that I consider this to be a very bad idea indeed.

Democratic accountability provides the best means to hold senior civil servants to account. Democratically elected politicians should have the power to appoint senior civil servants.

Yes, I do understand the problem they're trying to solve, that the civil service is both self-selecting and has its own internal culture, one that is highly resitant to change. Any sort of change but most especially the sort of change that a newly elected government might like to bring into effect.

However, we have a real live system which works in the way Refom thinks we should move. The American one. Every new administration brings in three to four thousand of their own to staff the upper reaches of the Federal bureaucracy. Leading to things like this:

Alarm is growing that the Treasury Secretary Tim Geithner is being forced to operate virtually on his own without any of the 17 deputies his department is supposed to have representing him in important negotiations or helping to make crucial decisions.

The revolving door that shuffles people from law firms and think tanks, through a few years in the bureaucracy and back again is also the driver of the vast lobbying industry....or at least the recruiting ground for much of it.

Might I suggest that if Ministers are indeed incompetent at handling the civil service unaided then we either start to choose different ministers....or perhaps better, start to have less civil service which needs to be handled?

Blog Review 892

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Contrary to popular belief, it was the rich voting for Obama disproportionately, not the poor.

Yes it was leverage and no it wasn't. The banks weren't any more leveraged than usual: it's that the mortgages themselves were more leveraged than usual.

One fifth birthday that deserves to be celebrated.

Sad but true, Amnesty International has jumped the shark.

This isn't quite how quantitative easing works. Sadly.

Efficient, low cost health care. That's what the US is looking for, so it's odd that they make it illegal to provide efficient low cost health care.

And finally, cruel, cruel Guido.

Yes, you can be ignorant of theory and ignorant of facts

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As an economist Billy Bragg's a great singer. Commenting on the 25th anniversary of the miners' strike he asks:

Is there anybody out there willing to stand up – on this, of all days – and raise a toast to the wilful destruction of our manufacturing industry and its replacement by the financial services sector?

The first question has to be whether there has been a destruction of our manufacturing industry, whether wilful or not. Looking at the index of production, we see that it stood at 75.9 in 1984 and at 97.9 in 2008. A rise in output of some 29 % really doesn't sound like "destruction" to me. In fact, claiming that manufacturing has been destroyed would lead me to accusing you of being ignorant of the facts.

What has actually been happening is that the production process in manufacturing has been getting ever more efficient, productive, in its use of labour. Thus production can rise but the labour used to create it falls: what is really being complained about is the loss of manufacturing jobs, not the despoilation of the manufacturing sector itself.

And this is where I might accuse people of being ignorant of theory. For in reality we're absolutely delighted that we need to use less labour to get the physical goods we desire. That labour, newly freed up, can go off and do other things. Yes, work in financial services, or perhaps care for the rising number of elderly or even go and build more darn windmills.

As Paul Krugman has pointed out, productivity isn't everything but in the long run it's almost everything. Me, rather than drinking to the destruction of it, I'll raise a toast to the increasing productivity of manufacturing. It's one of the things making us all ever richer.