Immigrants and institutions

It's becoming increasingly difficult to be opposed to significant immigration for economic reasons. One of the more sophisticated arguments for restricting migration–proponents include Paul Collier, in Exodus: Immigration and Multiculturalism in the 21st Century, and George J. Borjas in Immigration Economics–concerns the socio-political baggage that immigrants bring with them; institutions, characteristics, and social norms which might even have had some bearing on the poverty of their countries of origin. There’s a substantial literature to support the claim that institutions like secure property rights and the rule of law are by far the most important guarantors of long term prosperity and growth. If it were true that high levels of immigration could serve to undermine these institutions, (as Borjas hypothesises) significantly mitigating the vast welfare gains some predict immigration will bring, those who support very high levels of immigration might well reevaluate their position.

The newly updated version of a Cato Institute working paper, soon to be published in Public Choice, goes some way to looking at these claims empirically. They use data from the Economic Freedom of the World Annual Report to examine the effects of migration on the institutions such as property rights. The main finding of their analysis is that countries with a larger percentage of immigrants in their population in 1990 had a higher level of economic freedom in 2011.

Indeed, Clark et al. conclude:

Regardless of the immigration measure used or the precise regression specification, we have not found a single instance in which immigration is associated with less economic freedom. It does not appear that immigrants are bringing the poor economic freedom records of their home countries abroad with them.

and

Overall, we find some evidence that larger immigrant population shares (or inflows) yield positive impacts on institutional quality. At a minimum, our results indicate that no negative impact on economic freedom is associated with more immigration.

As the evidence around the economic case against immigration is weakened (I could have also blogged today about a recent CReAM discussion paper which concludes that low-skilled immigration to Denmark pushed up native wages, employment, and occupational mobility), we might wonder whether people have other reasons for opposing it.

It's always the same with these bureaucratic cash targets

The thing that is the same being that hitting the bureaucratic cash target becomes the priority, not actually spending the money in a reasonable or value adding manner:

More than two thirds of Britain’s aid budget is being given to organisations such as the EU and the World Bank to help meet official targets, despite billions of it going unspent for years, an investigation has concluded.

MPs found that £6.3 billion of Britain’s aid budget is being handed to major agencies to help hit the Government’s target of spending 0.7 per cent of the nation’s income on overseas aid.

Their report found that a growing proportion of the money is set aside for future spending, which means it goes unspent for an average of two years.

The amount committed to major organisations that has yet to be spent has increased from £1.5 billion in March 2010 to £3.7 billion in March 2014.

It was never sensible to adopt the target in the first place. And as we're now borrowing that money to immediately hand it off into the bank account of the international bureaucracy we really shouldn't be trying to achieve it now.

The five things you need to know about TTIP

The Transatlantic Trade and Investment Partnership (TTIP) is a free trade agreement currently being negotiated between the EU and the US. I think it's a good idea. Here's what you should know about it: 1. Abolishing tariffs is only a small part of TTIP.

Tariffs are generally low between the EU and US, but for some sectors they are very high. The EU currently imposes a 10% duty on car imports from the US, and the US imposes tariffs as high as 40% on some clothes from the EU, like shoes. Getting rid of those high sectoral tariffs will allow for greater economic specialisation, and the EU and US economies are so large that even reducing small tariffs overall would boost wealth levels a bit.

2. The biggest costs to trade are from so-called ‘non-tariff barriers’, and getting rid of these could have a big effect.

Most of TTIP is designed to harmonise regulation where there is redundant double-regulation (or ‘regulatory incoherence’) of firms operating in both the EU and the US. For instance, cars may be just as safe in the US and the EU (or not – nobody's sure yet), but have to adhere to completely different safety requirements to achieve that. Harmonising car safety regulations could make it cheaper to build cars without reducing car safety at all. Because of different rules about egg washing that don't seem to make a difference to actual safety, US eggs couldn't legally be sold in the UK and vice versa. Some regulations are simply designed to make it more expensive for foreign firms to sell goods, to protect native firms. Harmonising some of these rules should reduce costs substantially.

Different regulatory regimes might allow for more experimentation, but the feedback mechanisms involved in regulation are so fuzzy that this kind of ‘discovery process’ rarely actually takes place.

3. The economic gains from TTIP could be pretty substantial.

The CEPR estimates that a successful TTIP that removed a lot of these ‘non-tariff barriers’ as well as all existing tariffs would cause an increase to EU GDP by €120bn (0.5% of GDP) and US GDP by €95bn (0.4% of GDP) in total. That’s modest, but would translate into an extra £400 annually for British households. 90% of those GDP gains would come from non-tariff measure cuts.

4. The only regulations that TTIP will prevent in the future are ones that discriminate against foreign firms.

This will include rules that mean that US and EU governments will have to consider foreign firms for public procurement in certain areas (but not publicly-funded healthcare, social services, education or water services). In general the EU is extremely restrictive about the impact TTIP can have on public services. EU governments can organise public services so that only one monopoly provider supplies it (eg, the NHS), and they can regulate whatever they deem to be ‘public services’ at any level of government. The only exception is where an EU government has already opened up a sector to foreign firms (ie, to avoid firms that have already invested from losing their money). This is a pity, I think – I’d like to see EU states sign up to an agreement that stopped them from discriminating against foreign firms in all areas. But TTIP is not that agreement.

5. The Investor-State Dispute Settlement (ISDS) mechanisms in TTIP – the so-called ‘secret courts’ – are nothing new.

Pretty much every free trade agreement signed around the world includes an ISDS provision, which allows firms to challenge states that renege on their part of the deal. Since 1975 the UK has signed 90 ISDS treaties, and 3,400 exist around the world. In that time the UK investors have brought 43 claims against other states. Only two have ever been brought against the UK and both were unsuccessful. What’s more, ISDSes cannot compel a state to change its laws, only to pay compensation to firms if it has broken its treaty obligations. It might seem pointless to have this – the UK and the US both have strong rules of law. But TTIP also includes countries like Greece, Hungary and Romania which have much less reliable judicial systems.

In praise of Standard Chartered and their advice on African tax avoidance

The perenially enraged over at Action Aid are today enraged about the way in which Standard Chartered bank gave advice on how to avoid (legally, of course) certain corporate taxes upon investments in poorer African countries. We, in contrast, would like to congratulate Standard Chartered on their public spiritedness in advising people on how to avoid certain corporate taxes in poorer African countries. And we do so on the basis of a point made by Joe Stiglitz. The outrage is here:

One of Africa’s most high-profile banks – Standard Chartered – publicised the advice of a Mauritius-based financial company on how to avoid tax in some of the poorest countries in the world, a new ActionAid report states.

The FTSE-100 bank which operates in 15 African countries published the advice in its Standard Chartered Insights 2013/2014. The publication is aimed at company treasury departments.

The tax avoidance advice – which is entirely legal – can be used to avoid potentially hundreds of millions of dollars in tax in some of the poorest countries in Africa. It suggests structuring investments through Mauritius in order to avoid capital gains tax and withholding tax.

You can hear the frothing at the mouth as they shout in rage at this, can't you? However, this outrage is entirely misplaced, presumably as a result of their ignorance of how corporate taxation works.

The most essential thing to grasp about it is that the company itself is never bearing the economic burden of such a tax. It is always some combination of shareholders and workers. In an entirely autarkic economy it will be the shareholders, capital if you like, which will carry 100% of that burden. In a more open economy the workers pick up some of that burden. For taxing capital in an economy where capital can leave, capital decide not to enter, means that there will be less capital in that economy. Capital plus labour is what raises productivity and thus wages, meaning that less capital means lower wages. As the economy becomes ever more open, and smaller relative to the size of the global economy, then the burden on the workers increases.

It never quite reaches zero on capital as Adam Smith pointed out in his one Wealth of Nations use of "invisible hand". Even if people can invest abroad without penalty some will still prefer to invest at home and thus led, as if by that invisible hand, benefit their fellows. For us, here, this means that the impact of corporate taxation on capital will never be zero.

Which brings us to Joe Stiglitz's point. Which is that the burden of a tax can be over 100%. What people lose from the tax being levied can be greater than the amount raised from that tax. That's one of the failures of the Robin Hood Tax of course.

But now to the case at hand. As an economy becomes smaller relative to the global economy the workers carry more of the tax burden. Poor African countries have economies the size of a modest English town: they're small therefore. And given that we are talking about foreign investment here they are entirely open to the global economy. So, the burden of any capital taxation is largely going to fall upon the workers in those poor African economies. And that burden can be (and we would estimate will be) higher than the tax collected.

Meaning that, if you've advised people to dodge that corporate taxation and the investment thus goes ahead, that you've just raised the wages of some of the poorest people in the world. For note that the effect isn't upon just those workers in the investments made. It's upon all of the workers in the economy where the investment is made.

Advising people to invest in sub-Saharan Africa through Mauritius thus raises wages in sub-Saharan Africa by whatever effect on investment happens now it's free of those corporate taxes. All of which strikes us as a bloody good idea.

So why is Action Aid so spittle flecked at the very thought of it? We assume it's just because they're ignorant of how corporate taxation works. Which leaves us with only one last question. Why do they expend so much effort telling us how the tax system should work when they've no clue about how it does?

President Obama: the ultimate poverty hypocrite

Americans are experiencing buyer's remorse. Last summer CNN found that 53% of those polled would choose Mitt Romney to be president today, over the 44% who chose Barack Obama. And with Obama’s approval ratings fixed these days below 50%, I suppose it’s only human to get a bit testy with those you're compared to:

President Obama poked fun at former rival Mitt Romney and leading Republicans on Thursday, saying the GOP’s rhetoric on the economy was “starting to sound pretty Democratic.”

At the House Democratic Caucus retreat in Philadelphia, Obama noted that a "former Republican presidential candidate" was “suddenly, deeply concerned about poverty.”

“That's great! Let's go do something about it!” Obama added in a not-so-veiled jab at Romney.

What’s not particularly smart, however, is to frivolously attack someone’s track record on poverty when your own record looks abysmal:

A few ugly facts about the Obama Presidency:

• Median household income has slumped from $53,285 in 2009 to $51,017 in 2012 just up to $51,939 in 2013.

• In comparison to his three previous successors, this fall in median income looks even worse:

• Real median household income was 8.0% lower in 2013 than in 2007.
• Nearly 5.5 million more Americans have fallen into poverty since Obama took office.
• Obama oversaw the first time the poverty rate remained at or above 15% three years running since 1965.
• Home ownership fell from 67.3% in Q1 2009 to 64.8% in Q1 2014; black home ownership dropped from 46.1% to 43.3%.
• Labour force participation rate fell from 65.7% in January 2009 to 62.7% in December 2014.
• The federal debt owed to the public has more than doubled under Obama, rising by 103 percent.
• 13 million Americans have been added to the food stamp roll since Obama took office.

Obama has been very successful in painting a picture of himself and the Democrats as the 'Party of the Poor', and did an even more sensational job convincing 2012 voters that Romney's riches and successes put him out of touch with the middle-class America. But in reality, the president's policies have pushed millions more people into financial stress and poverty.

And he's still causing damage; even his latest State of the Union address called to raise taxes on university savings accounts and still cited fake unemployment numbers, as if this somehow helps the double-digit workers who have given up looking for jobs.

Perhaps the president really thinks his increased federal spending will pay off for the poor. Maybe he really believes that multi-millions more on food stamps is a saving grace instead of a tragedy. But regardless of intention, the facts speak for themselves.

Obama's talk on poverty is cheap. And his mockery of Romney cheaper.

Taxes, trade, and derivatives: stabilisers for Russia and Iran?

Both Russia and Iran are in a bind due to the oil crisis. The best thing for both countries to do is to enact some easy-to-implement, partially stabilising policy. Three measures can be taken: 1. Enhance taxpayers’ autonomy by allowing entities to pay taxes in a greater variety of currencies; 2. Let citizens and businesses trade in a greater variety of currencies; and 3. Deregulate derivatives markets in particular (and financial markets more generally).

An entirely destabilised Russia and/or Iran is in no-one’s interest. Although relations with NATO are sour, other prominent nations such as China and India have offered a helping hand (albeit a limited one). However, an alternative, mutually beneficial agreement can occur between these four nations.

First: enhancing taxpayers’ and trading autonomy. Russia should allow its taxpayers to pay taxes in the rouble, the Chinese renminbi, the Indian rupee and the Iranian rial whilst legally enabling trade in all these currencies. Similarly, Iran should allow taxes to be paid in Russian rubles, Chinese renminbi and Indian rupees as well as enabling trade in them. Since only being allowed to pay taxes in one currency artificially raises the cost of doing business in other monies, the enhanced autonomy of taxpayers will make it feasible for some exporters to sell in relatively cheaper money (thereby stimulating production and exports) and importers to buy with relatively stronger money (thereby combating inflation). It would also provide access to less volatile and less vulnerable monies. Another advantage is that tax revenues paid in different monies would allow diversified foreign exchange reserves and, therefore, the Russian and Iranian governments would be in a better position to defend their own national monies’ value in future (should they so wish to). This would enable Russians and Iranians to get on with their lives in a more normal way. Furthermore, since Russian and Iranian currencies would be accepted for trade and taxes in the other country, the mutual recognition may help bolster their value. The arrangement would also benefit China and India since the renminbi and rupee would make up a greater share of foreign exchange transactions.

For tax collection, a proportional system could be implemented; that is, if an entity earned (for example) 30% in rupees, 50% in roubles, 15% in rial and 5% in renminbi, a flat tax of 30% could be imposed such that the 30% rate is levied on each of the currencies according to proportions held (meaning 9% of the 30% comes in rupees, 15% comes in roubles, 4.5% in rial and 1.5% in renminbi).

Furthermore, extensive deregulation and liberalisation of the countries’ respective derivatives markets (especially with respect to interest rates, foreign exchange, commodities and equities) will enable domestic entities to better manage current and expected risks. Although inflows from NATO member-states may not be so forthcoming, both India and China have a vested interest in a stable Russia and a stable Iran; hence, it would not be surprising if (given the increased opportunity and ensuring a supportive climate for it) increased foreign direct investment in the Russian and Iranian derivatives markets for commodities, equities, interest rates and foreign exchange helped substantially manage expected risk of the oil crisis in these countries.

Ideas can mean the difference between wealth and poverty

Adam Smith never said that “The real tragedy of the poor is the poverty of their aspirations”, as some people who have never read him think. It is hard to think of a less Smithian view – he was the opposite of that quote's patrician and patronising voice, and had a deep compassion for people who had been unlucky in life. But there is some evidence that disadvantaged people underinvest their savings at a huge cost to themselves. This seems to be true even when there are no social constraints or market failures that might cause this to happen.

One reason for this may simply be that poor people do not realise that the investment opportunities exist, or do not really consider that they might benefit from them. Consider those bright young students from deprived backgrounds who have never even considered applying to university, just because nobody in their families ever has either. Your experience of the world shapes how you react to various opportunities that you get.

To test this hypothesis, a group of researchers at Oxford performed a controlled trial in remote Ethiopian villages, where they showed one of several one-hour documentaries about poor Ethiopian farmers who had expanded a business, improved their farming practices or broken cultural norms by, say, marrying for love. “Individuals succeeded largely through their own efforts and by drawing on assistance from community members and available resources, not through outside government or NGO intervention.”

The trial involved a placebo group (shown a comedy movie) and a control group (shown nothing at all) and it seems to have been a success. Six months after the screenings, the documentary group’s savings rate had risen significantly above the control group’s and had also begun to access credit at a higher rate. (These are some of the poorest people in the world, so the absolute amounts – a few pounds – may seem very small to our eyes.)

School enrolment was up by 15 percent in the documentary group, although it was also up by 10 percent in the placebo group so the effect is unclear, and spending on school expenses was up by 17% (compared to no change in the placebo group).

Overall, the results seem to show that showing extremely poor people examples of people like them who had made something of themselves inspired them to invest in themselves and their families.

It’s just one study, but it hints at something bigger. Incentives matter, of course, but you have to be aware of the existence of an incentive for it to work on you. Even if you’re aware of it, you might discount (or exaggerate) its significance according to your experiences. In a complex world, each of us uses a different pair of glasses to focus on what matters and filter out what doesn't. And no pair is perfect.

There is no obvious public policy lesson from any of this, except perhaps that people don’t always react predictably to incentives. Incentives matter – but so do ideas.

Russia, China, and the perils of economic warfare

Many Russians may believe that Putin’s invasion of Crimea was legitimate and justified, many may also believe that Putin’s domestic and foreign policies are at odds with their national interests. However, we shouldn’t be surprised if, in future, many Russians also remember the nations that refused to lift their economic sanctions whilst they suffered from a crippling crisis and that it was the Chinese government that offered help in those dire straits. Of course, this is limited help and there are a lot of other problems to sort out but the gesture is a strong signal of China’s stance and indicative of the possibility of further assistance in future. Warfare via economic sanctions leads to the division of the world into inefficient trading blocs and provides a natural basis from which governments can form convenient, logical military alliances. The wonder then, is whether economic sanctions are really worth risking any chance at long-term peace and stability we may have? Though sanctions are designed to put pressure on governments, regular citizens suffer immensely from them and, in future, when young Russians remember this crisis, that suffering won’t easily be forgotten.

Iran, like Russia, is also in a vulnerable situation and it is quite easy to see how these sanctions that artificially and inefficiently divide the world could also encourage the proliferation of worrying military alliances between those states that feel ‘cornered’ and this garners a sort of legitimate solidarity against their ‘oppressors’.

In the long-run, with alliance systems that lead to increased military posturing (as we had already witnessed from Russia in the Ukraine and in the EU, we are witnessing from China in the Asia-Pacific and we might conceivably further witness from Iran and North Korea) there will be increased uncertainty and genuine fear amongst peaceful peoples and, in the end, global social welfare and economic growth will be stunted in the name of ‘humanitarian’ intervention.

Of course, the wider problem is that the global system of trade restrictions are essentially sugar coated economic sanctions and, therefore, a form of subtle economic warfare that we are conditioned to ignore. Free trade is necessary in order to ensure that there is no unnecessary, state-induced hatred fostered between peoples. Perhaps we could add to the Geneva conventions by suggesting that economic sanctions be ruled out of the question? In this way, instead of providing fertile ground for fostering the animosity necessary for armed conflict, people who truly want peace would be free to go about their own business. The peaceful sentiment that free trade encourages may also help discourage these governments from acting violently in the first place!

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.