Africa is making itself rich, despite the West

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Sir Bob Geldof and Lord Bono can take the day off from their quest to eliminate African poverty today. A new report by the African Development Bank (PDF) shows that the African middle class is growing at a unprecedented rate, with almost 35% of Africa's population now being considered middle-class – an increase of almost 10% over the last thirty years. Measurements of living conditions are up across the board: electricity consumption has almost tripled since 1985, as has the continent's petroleum consumption. Although certain states in Africa, such as Liberia, continue to suffer from abject poverty, things are on the whole looking up.

Have the efforts of Elton John, Sting, Paul McCartney and other celebs finally started to pay off? Well, probably not – the report is distinctly lacking in references to celebrity activism. Instead, it says that the growth of this middle-class is due to social-economic opportunities provided by the private sector. Indeed, economic growth and an embryonic entrepreneurial spirit has led to formerly unheard-of levels of prosperity for many Africans who, instead of subsisting beneath the poverty line, are increasingly buying fridges, cars and televisions.

Sir Bob might argue that these changes were initially brought about by the West's aid generosity. Apparently not, as the report again states that macroeconomic policy changes are to thank for this upturn. In contract, over the last fifty years Africa gained little from $500,000,000,000 worth of poorly-structured aid that only encouraged aid-dependency.

Overwhelmingly, Africa needs trade, not aid. Trade was one of the key factors in the economic prosperity of the western world, and it can do the same in Africa. The current situation, however, denies Africa vital trading opportunities. The CAP impoverishes Africa. By having huge barriers to Europe's agricultural produce market, and therefore denying Africa the ability to trade in what they have a comparative advantage in, the CAP is plainly a raw deal. (Not to mention the fact that the CAP also costs each UK household £398 annually (PDF).)

While serious challenges no doubt lay ahead for Africa, notably HIV and its potentially devastating demographic impact, the route to Africa's long-overdue development is free trade, not another evening of banal comedy sketches, regardless of their benevolent intent. The current situation benefits only a small number of over-subsidised farmers, to the detriment of everybody else.

Tax reform is a moral issue

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Paul Johnson – the head of the Institute for Fiscal Studies, not the former New Statesman editor – gave an overview of the Mirrlees Review on the UK tax system at a working lunch in the Institute of Economic Affairs this week. It's weighty stuff. Two volumes, the first comprising thirteen specially commissioned studies, the second trying to identify the character of a good tax system and a coherent strategy for reform. Well, good luck on that one.

Johnson explained that the tax system has to be understood as, indeed, a system. You don't want biases in it which favour, say, incorporation over partnerships. Nor do you want daft things like Income Tax and National Insurance being essentially the same tax, but levied at different rates on different income bands according to different rules.

You also need a coherent narrative on progressivity. The 0% VAT rate on food and children's clothes, for example, is a very inefficient way of helping poorer families, argues Johnson. Better to have just one, simple VAT rate and use the £25bn it brings in to cut income tax and encourage benefit-dependent households into work.

Then there is the issue of neutrality. Right now, says Johnson, we have a mass of non-neutralities. Different forms of saving, for example, are treated differently; debt finance for companies is favoured over equity finance; and the taxes (and subsidies!) on different fossil fuels are just bizarre.

So Johnson's plan is to align Income Tax and National Insurance, align the taxes on companies and profits, widen the VAT base, bringing in not just food but financial services and suchlike, reform property taxes (today's Council Tax is based on property values of 20 years ago), and cut and simplify taxes on savings. There should be, he says, a high hurdle to overcome before we adopt any further complexities – like all those little Brownian tax breaks in favour of Research and Development or the UK film industry for example.

A good start, maybe. But a rather techie approach. I always say the ideal should be to have a tax form that can be written in intelligible English and fit on one sheet of paper. That would certainly concentrate minds in terms of what taxes and tax complexities we really need. And we still need more of a vision, rather than a fixation on process. Some taxes – like any income tax on people below the minimum wage – are just plain wrong. Tax is taken by coercion, and we should want to minimise coercion. So let's get some of that moral thinking into the debate.

Food fit for a prince

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Yesterday, Prince Charles gave a speech in Washington on ‘sustainable farming’. Specifically, he criticised America’s taste for beef, and promoted organic food. But Charles’ comments betray a – perhaps unsurprising – lack of free market understanding and, if put into practice, would amount to an assault on the consumer.

Firstly, the Prince claimed that, “For every pound of beef produced in the industrial system, it takes two thousand gallons of water. That is a lot of water and there is plenty of evidence that the Earth cannot keep up with the demand”. However, it is a simple law of markets that the Earth can keep up with any level of demand, for any product. If demand exceeds supply at a given price, prices will rise, until supply and demand are re-equilibrated. Increasing water prices will mean that beef is more expensive, naturally regulating the American consumption that Charles is so worried about. Water goes to beef production because steak, burgers and so forth are highly valued; if we were to ration the amount of water used in making beef, it would go to some other good which is less valued. Since water rationing would also necessarily mean beef rationing, prices would increase nonetheless. The consumer, and in particular the less well-off consumer looking for cheap food, would be hit the hardest.

Prince Charles’ next target was the building on rural land. He criticised the US for allowing such activities, saying that, "Here in the United States I am told one acre is lost to development every minute of every day, which means that since 1982 an area the size of Indiana has been built over". But what does the transforming of rural land into built up areas show? It shows that the built up areas are valued more highly by the public; people are prepared to pay more for, say, hiring an office block for a year, than they are for the food which could be produced in that land in a year. By placing restrictions on building, the land will be used for something less valued by the public, and the supply of housing will be reduced; leading to an increase in prices. Again, we see consumers, and especially poor consumers in need of housing, taking the hit for such a change.

Lastly, Charles argued for subsidies to organic farming. But all subsidies do is force people to pay towards the production of a good they don’t want. Organic food is expensive because it inefficiently uses resources. If people are prepared to pay for its possible health benefits – fine. But by subsidising organic food, all we’re doing is encouraging resource inefficiency to make food people don’t want. The land, labour and capital which would have been used to produce a large amount of non-organic food would then be used to make a small amount of organic food. Supply falls, prices goes up, and who loses out? The consumer.

The trouble with voting

The crucial issue is what activities need to be voted on? (Is it really sensible that government should decide on our behalf how policemen should ride bicycles and thus distributing a manual of 100 pages?) You know the sort of thing I mean. The problem is mission creep; full-time politicians decide on their own what their domains are to be, and with a handful of honourable exceptions these domains go forth and multiply over the years.

How many people know that in the USA neither the original Bill of Rights nor the original Constitution had the word “democracy” in them at all? What does democracy actually give us when it is simply a method of deciding which handful of people are granted the sole right of micro-managing our behaviour to the nth degree? Our only redress is to vote for a different bunch of autocrats a few years later. A topical issue in the UK is the secret and deplorable behaviour of the family courts with regard to the competence of parents to look after their own children (the alternative being the removal by force to foster parents, local authority care, and so on). Another is the explosion of “gagging orders” – court injunctions that grant privacy to the rich and famous, which has reached the point at which Lib Dem MP John Hemming argues that they contravene the Magna Carta.

In fact it is much worse than that. Untrammelled democracy is a clear example of divide and rule. Aside from a few functions such as defence of the realm (led by a Ministry of Attack!) big government lives by pitting their subjects against each other. Every decision affects us all; you can’t opt out and move from Tesco to Waitrose. Big government feeds powerful interest groups (the first of which is itself) firstly by taking money from the rest of us and secondly by ordering us how to lead our lives to the point where we need a far more intrusive phrase than micro-management. The idea that democracy is synonymous with freedom is a sick joke. At its theoretical best it is two wolves and a lamb deciding on what to have for lunch, whilst in practice we have a handful of wolves and many millions of lambs. The wolves manage this by making promises to take money from one lot of lambs and give it to another (and then gaily ignore the second part anyway).

Yet here we are with nothing better to do than mess around debating how many angels can dance on the head of a pin. What is needed is a way to guard the guardians – Quis Custodiet and all that. But that will not happen. Accordingly, as with all untrammelled democracies of this type, the dictators will eventually be defeated, and with any luck the means will be a tax-strike rather than a re-run of what we’re seeing in the Middle East. Meanwhile in the democracy of the Land of the Free, a Mr Bernard von NotHaus faces 25 years in gaol for providing what many Americans want – namely to use silver as an alternative or addition to Greenbacks as a medium of exchange. No scams, no cheating, just providing a voluntary service. 

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Amidst all the hoo-hah about the forthcoming referendum on the Alternative Vote, it is worth recalling the drawbacks of any kind of voting. Yes, Churchill famously said that democracy is the worst form of government except for all the others. To be fair to Churchill, my understanding is that he was quoting somebody else, but it was hardly a propitious remark at the time (1947) bearing in mind that some of the main enemies of the UK in World War II were democracies when their leaders came to power; Hitler and Mussolini come to mind, whilst one of the major allies of the UK was the dictator Stalin. More generally there is plenty of evidence that democracies are no better, indeed usually worse, in avoiding wars than are many other creeds.

Clearly, voting as a way of making group decisions can have advantages over the alternatives, but who decides what decisions come under the heading of group decisions? Few would argue that many entities like business corporations and other voluntary groups function better under votes (at AGM’s for example) but these groups are voluntary; those who have no interest can forget all about the governance of Tesco, say, even if they shop there every week. Furthermore the items in their trolley will be very different from other shoppers. Action beats voice every time; that way, everybody gets to choose what they want.

Any single vote has only a minuscule chance of making a difference. This means that, unlike personal decisions, be they the contents of a shopping trolley or a new motor car, there is no incentive to spend any time at all on a proper investigation into what the parties and candidates offer, even if you believed them. Thus the quality of decision-making is extremely poor. [Continue reading]

Corporatism and the market

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Liz Truss MP was our speaker at The Next Generation – the ASI's under-30s movement – last night. She is the Conservative MP for Norfolk South West, which she won over the opposition of the 'Turnip Taliban' wing of her Party, and a former deputy director of the excellent think-tank Reform. A former Liberal Democrat activist, she recently wrote a paper for the LibDem think-tank Centre Forum in which she argued that the the current, trendy education system's bias against serious academic subjects was actually trapping the poor and reducing social mobility – and that it must be reversed.

At TNG events the talk is (usually) limited strictly to ten minutes, and Truss came in on time and on message with her remarks about Corporatism and the Free Market. The theme, basically, was that there was too much of the former and not enough of the latter. She is, indeed, one of the soundest new MPs. She was particularly critical of all those quangos that exist, as she put it, in the 'twilight zone' between independence and state control – bodies such as the BBC, local authorities and health boards. By thinking of themselves as something of an independent, almost private body, they justify paying themselves salaries on the private-sector scale. And many BBC executives earn more than the Prime Minister. But, she says, these twilight-zone bodies don't face real competition, and their executives' jobs are more like civil-service appointments, and should be remunerated accordingly.

Too many quango bosses are prepared to take the upside rewards of being supposedly 'independent' and pay themselves huge amounts – while forgetting and resisting the downside risk that is common throughout the private sector, that failure means your organisation goes bust or you get fired. These corporate quangos can't really have it both ways.

The secret of Tesco's success

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I once got into a discussion with a Communist after watching the film The Edukators. For those of you who haven't seen it, it's about a trio of left-wing revolutionaries who, equating money with evil, break into the houses of rich folk, rearrange everything (e.g. leaving family treasures in the toilet bowl), and leave a note reading die fetten Jahre sind vorbei – the fat years are over. The fact that these left-wing warriors have invaded private property and are tormenting people is inconsequential to the film: they're rich people, dummy!

With his passions stirred, my comrade began to decry the sins of capitalism. At one point, he claimed he would be lucky if he survived eating the sandwich he had bought earlier that afternoon, as the capitalists who made it were concerned only with profit. Whether the customer contracted a debilitating malady from said sandwich meant nothing as the company had pocketed their £1.59.

This mindset – common as it is – confuses me. If all the sandwich makers were making their sandwiches so haphazardly, who would be left to buy them? And how often do you hear of a fatal chicken and stuffing sandwich anyway? Thankfully rarely, and this is because of the beauty of choice. If the sandwich has a strychnine garnish, you simply don't buy it after the first unlucky eater has died, and the company goes out of business. Greed ensures safe products.

Naturally, all this talk of sandwiches leads to Tesco. The supermarket chain, after attempting to open their 18th store in Bristol have ran into violent opposition, with one protester being arrested on suspicion of attempted murder.

Nobody contests the right for people to protest peacefully - it is a sign of a healthy democracy. But why bother protesting about the opening of the store at all? If the people of Bristol were so concerned about Tesco's continued expansion they wouldn't shop there. Hardly willing to subsidise an unprofitable branch, Tesco would soon close its doors: it is only through our patronage that the firm has expanded so far. This probably wouldn't happen, of course, as shops like Tesco provide food at decent prices, which enables those poorest in society to eat, and therefore live, better than formerly possible.

Furthermore, whilst Tesco appears all-powerful in Britain, it has received mixed luck overseas, with Warren Buffet raising doubts over the viability of its US operations. It will only succeed as a business venture if it can, as it has so successfully done in Britain, convince customers that it is providing the best service for them. And if British customers stop feeling like it gives them a good deal, they’ll stop going there.

The greatest power a consumer has is choice. Firms do not produce goods to maim, rob or swindle their customers, they do so because their consumers demand these goods. If you feel the need to change the world, do so with your wallet, not your Molotov cocktails. 

We can't afford not to cut taxes

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Eamonn's in Comment is Free today, giving his take on yesterday’s GDP growth figures, which said that the economy grew by 0.5% in the first quarter of 2011:

Still, if you believe the figures (which you shouldn't), the economy has been pretty well flatlining since last summer. And all those dreaded spending "cuts" (really just reductions in the rate of spending increases) have yet to come in.

This is important to remember. 0.5% is a pretty lousy growth figure, well below the government’s own estimates, but it can’t be attributed to the cuts. As Fraser Nelson pointed out in a very important post yesterday, the amount that the government plans to cut is relatively small: just 0.6% of total government expenditure over the current financial year. In fact, the government will cut less in the next four years than Denis Healy did in just one year, after the IMF came in. No, we’re not in IMF territory. But people on both sides of the debate should remember the comparison – the cuts are not the radical state-cutting that both the government’s critics and many of its supporters claim. Unfortunately.

Cutting spending will help the government’s finances, which is good, but it won’t do much for growth. And contrary to most people’s assumptions, I doubt it’ll hurt growth either, except possibly in nominal terms. The government needs to create more hospitable conditions for private enterprise to create economic growth. As Eamonn says:

We need to energise the "growth agenda". If every small business took on just one extra person, we'd wipe out unemployment. We have to slash the workplace regulation that discourages hiring. We need government to commit itself to cutting its costs and lowering taxation year on year. Only that will give people the confidence to start hiring and expanding again.

Simple things like tax cuts and regulatory reforms would make it a lot easier for businesses to operate. On the margin, making business more profitable and easier would mean that more businesses would be set up and fewer would fail. Regulatory reform is a depressing topic, because it offers a zero-cost way to help business that most governments refuse to touch for political reasons. But can we afford tax cuts? Many say no. This is curious, given their enthusiasm for debt-funded stimulus spending. And it’s wrong: as the weak growth of the last 12 months has shown, we can’t afford NOT to cut taxes. If that means cutting spending more deeply and quickly, so be it. The alternative is a lost decade of stagflation or, when the eurozone dominoes finally fall, the depression that we thought we'd avoided.

The virtues of royalty

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The estimate that two billion people – just under a third of the world's population – will see tomorrow's Royal Wedding on TV tells us two things. First, it tells us the good news that at least a third of the world's people do actually have access to a television, and indeed electricity. That was not always the case; not many decades ago, abject poverty was the normal state of the vast bulk of humanity. It is the (largely recent) spread of trade and markets across the planet that has changed this.

The second thing it tells us is that people are still interested in the Royal Family. Yes, it is partly the fairytale, the pomp and parades. But we can see all those any time in the productions of Hollywood and Bollywood. There is more to it than that.

The fascination, perhaps, is that the UK – a large and relatively important country – still has a hereditary head of state rather than an elected president. And that this actually seems to work tolerably well (as, arguably, a largely hereditary House of Lords worked).

Public Choice theorists like the Nobel economist James Buchanan tell us that heads of state have their constitutional place. A major point of them is that they somehow represent the whole population, and therefore act as a long-stop against the majority using their political power to exploit the minority. As titular head of the government, the army and the judiciary, the Queen notionally has the power to prevent these institutions being perverted by anti-democratic tyrants. It is not the power that the Queen wields, but the power that she, in theory, denies others. In fact, the present Queen has not done enough to prevent politicians over-expanding their power; but over the centuries, the system has definitely had some positive effect.

The Americans had much the same in mind when they framed their Constitution. Early presidents saw themselves as very much elder statesmen whose role was to temper the decisions of the other branches of government, on behalf of the whole nation. Quite soon, though, presidents became highly partisan, meaning that the power they hold can actually reinforce the excesses of the legislature, rather than restrain them.

As a liberal, I have intellectual problems with hereditary heads of state. But at least they are mostly, in practice, relatively benign. Elected presidents have, by contrast, become highly political and have lost touch with their role as the people's long-stop. It's the elected system that needs the most urgent reform, curiously, not the hereditary system.

A confession

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I don't know where it started to go wrong for my family. We didn't have any money, but property prices were spiralling up and up, and getting a mortgage to buy a bigger place for ourselves just seemed the sensible thing to do. You couldn't lose. So out family got ourselves mortgaged up to the hilt, and deep in debt on credit cards as we bought new furniture and electronic gadgets. We spent even more money employing painters, gardeners, child minders and cleaners.

It's easy to look back today and blame the bank for enticing us into debt with all those mortgage and credit-card offers. Perhaps we should have been aware that when a deal looks too good to be true, it probably is. We found ourselves deep in debt, but we still had lots of financial commitments we couldn't get out of, like the hugely expensive medical care plan we promised ourselves in the good times. And lots of the people that we took on for one thing and another still depended on us for all or some of their livelihood.

Desperate, I took to robbing the company. I thought they would not notice if I dipped in and helped myself to a little bit of cash on a regular basis. But as our problems mounted, I started to take out bigger and bigger amounts. Before long the company itself started to stutter and have financial problems, then I found it just wasn't making enough to satisfy our need for cash.

Things got even worse. I started up a Ponzi scheme, promising customers wonderful benefits today – but using the investments of customers tomorrow to pay for them. But even that wasn't enough to support my family's lifestyle. Eventually I robbed a couple of banks. I even resorted to forging currency, trying to print my way out of my debt hole.

Now I'm facing charges of fraud and embezzlement, but I still can't admit my guilt. I was just trying to provide a good life for myself and my family. And the large amounts I spent helped create jobs for other people in our community, who had debt problems of their own. Everyone tells me that, if only I had lived within my means, my life would be very different and my family would not be in this awful position. But they just don't understand how overwhelming was the pressure on me to spend and spend, so as to maintain the pretence that everything was going well. Or how big my needs were. After all, mine is a big family, some 61m strong.

Dictated by the accused G Brown at Cannon Row Police Station, April 2011.

Chile's pensions system: a model for the world

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I'm at the Mont Pelerin Society meeting in Buenos Aires, where I have been learning about the issues facing the future of freedom in South America. One interesting case is that of Chile, whose military government of the 1980s, perhaps surprisingly, introduced a series of free-market liberal reforms. One of these was to change Chile's hopeless chain-letter pension system – that is, one like ours – into a system based on personal savings accounts.

Overall, the system has been a fantastic success. It gave people choice in how they saved, and incentives to do so. Personal savings in Chile are up from just a few hundred million dollars to tens of trillions of dollars today.

But no system is perfect. Self-employed people were not required to join the system, so many such people saved nothing or little. Young workers often did not bother to contribute, reckoning that retirement was a long way off. Low-paid, temporary workers had patchy saving records. The government guaranteed a minimum pension for those who contributed long-term – which, like the pension credit in the UK, gave many workers no incentive to save much at all. Some retired people drew down their pension benefits too rapidly, and ran out of money.

In 2008, Chile introduced a number of reforms to try to get round these problems. There were new supplements for people with little or nothing saved in their accounts. Wealthier people, and some self-employed persons, are now obliged to participate. Younger workers were given subsidy incentives to join. New rules were introduced to make sure that pensioners did not exhaust their accounts before they died. And there were new requirements on people to buy survivors' and disability insurance.

Will this work? My worry is that two-thirds of all pensioners will now receive some government pension support – which must reduce the incentive to save. Public benefits will comprise half the retirement income of the poorest households. The new survivors' and disability insurance will impose a new financial burden on families, which will eat into their savings. The public benefits will cost a noticeable fraction of the government budget – and paying for them will impose an effective tax, and quite a hefty one, on private pensions.

Chile's pension system was a commonsense breakthrough that many other countries have copied. As a pioneering system, it is not surprising that it threw up some problems to solve. But the solutions, I believe, should have been more in the direction of extending market principles rather than extending government interventions. It will be interesting to see what happens – and it will provide a lesson for us all.