International Monetary Fund

Some Monday Links

Michalis Trepas Links , , , , , , , , ,

Redefining Death (National Review)

Some medical devices don’t mean to be racist, but they are (Psyche)

Monetary Meld (IMF)

And, inspired by this NOL discussion here,

A History of My Economic Opinions (Deirdre McCloskey)

This is a long, but enrapturing piece (I am not familiar with McCloskey’s work, which was also referenced en passant in another fresh NOL post). An excerpt:

I happened in 1958 to devour in the Andrew-Carnegie financed public library of Wakefield, Massachusetts the Russian prince Pyotr Kropotkin’s Mutual Aid: A Factor of Evolution (1902) and the gullible American journalist John Reed’s Ten Days That Shook the World (1919). If I had instead come across Rose Wilder Lane’s The Discovery of Freedom (1943) or Ayn Rand’s Atlas Shrugged (1957) I suppose I would have gotten a better grasp of market pricing, earlier. Many market-loving classical liberals came to liberalism by that free-market path, and were never socialists. Yet the socialism-to-liberalism route is very common in 20th century political biographies, such as Leszek Kołakowski’s or Robert Nozick’s or, to descend a couple of notches, D. N. McCloskey’s. (The contrary route from market liberal to state socialist is vanishingly rare.)

The view from New Delhi: Pakistan and the coronavirus

Tridivesh Singh Maini Current Events , , , , , ,

Introduction

The number of cases arising out of coronavirus in Pakistan continues to rise steadily. As of April 14, 2020, there were well over 5,000 cases (5,716) and deaths due to the virus totaled 96. China is providing assistance to Pakistan in dealing with the virus, and apart from medical assistance in the form of materials (including ventilators, masks, test kits, protective clothes), a team of medical experts reached Pakistan on March 28 for a period of two weeks. The team of Chinese medical experts argued for the extension of the lockdown in Pakistan (especially the province of Punjab, which has been hardest hit by the epidemic), arguing that one of the factors which helped China in controlling the further spread of the outbreak was the lockdown.

While the Chinese delegation laid great emphasis on extending the lockdown, and greater ‘social distancing’, one of the major challenges for the Pakistan PM, Imran Khan, has been the state of Pakistan’s economy. It is for this reason that he was reluctant to go in for a lockdown, but eventually pressure from opposition parties (the province of Sindh went for a lockdown even before the Federal Government) and, more importantly according to some, from the Army was what finally compelled Khan to go in for the lockdown.

On April 12, in an appeal on social media to the international community, the United Nations Secretary General, and the world’s international financial institutions, Khan appealed for ‘debt relief’ to developing countries.

Khan also pointed to the fact that the challenges faced by developing and developed countries were markedly different. Said the Pakistan PM:

While in the developed world, the main dilemma is containing with the coronavirus through lockdowns and then dealing with the economic impact, in the developing world, apart from containing the virus and dealing with the economic crisis, our biggest worry now is people dying of hunger.

He also pointed to the need for an initiative with a thrust on ‘Global Debt Relief’, one where all stakeholders are brought on board for coming up with a well-thought out economic and health response to the pandemic.

Welfare measures by the government

As the number of cases has been rising continuously, Khan has warned people to take the necessary precautions, saying that the country’s hospitals may not be able to cope with the rising number of cases. The Pakistan PM – who had earlier announced a stimulus package (to the tune of Rupees 1.2 Trillion Pakistan) to provide relief to labourers, businessmen, as well as the middle class – also stated that the government would start distributing cash to poor families through a program: ‘Ehsas Emergency Cash Program’. According to this program, Rs. 144 billion (Pakistani) would be distributed amongst 12 million low income families.

Chinese Assistance

While Chinese assistance to Pakistan has been drawing attention, with both countries laying emphasis on the point that the bilateral relationship is an all weather one and that the ‘Pakistan-China All-weather Strategic Cooperative Partnership’ has grown under the leadership of Chinese President Xi Jinping and Khan. Pakistan Foreign Minister, Shah Mehmood Qureshi, while receiving the team of Chinese medical doctors which arrived in Pakistan on March 28 stated:

Chinese have once again shown to the world that they are friends of Pakistan. They care for us. We stand with each other in difficult times. This is a unique relationship and such testing times tell us how close we are to each other.

China on more than one occasion has thanked Pakistan for the assistance, which it had provided when the coronavirus outbreak had begun and has assured full support to Pakistan. Pakistan’s President, Arif Alvi, had also undertaken a trip to China in March, in order to show solidarity with it’s ‘all weather’ ally (he was the first head of state to visit China after the outbreak of the deadly epidemic). Alvi’s China visit took place days before the lockdown was initiated in Pakistan, and a number of MOU’s were signed between both sides to counter the deadly epidemic. While Pakistan wanted to extend its solidarity with China, something which was acknowledged by Beijing, it also got assurance regarding its own fight against the coronavirus.

Commenting on his China visit, Alvi said:

China trip was very beneficial to show support & counter propaganda. We also need to get technical help from them for biggest health crisis Pakistan is going to face. Their experience is unique. Six hours of exhaustive meetings took place. Signed many MOUs for #iFightCorona.

Assistance from other quarters

While it is true that Beijing has been quick to provide logical assistance to Pakistan, China’s financial assistance would not have been sufficient for Pakistan to provide much-needed relief to the not-so-privileged in Pakistan. In this context, the International Monetary Fund has acceded to Pakistan’s request of $1.4 billion (under the Rapid Finance Instrument for fighting the coronavirus) according to sources. This amount would help Pakistan to increase it’s foreign exchange reserves as well as provide budgetary support at a time when the country faces a serious economic slowdown. The World Bank and Asian Development Bank (ADB) have also provided Pakistan aid – to the tune of $1 billion and $1.5 billion, respectively. The Pakistan PM had referred to the assistance provided by international financial institutions in his social media recording on Sunday.

It would be pertinent to point out that Pakistan is already working with the IMF on a three year program called the Extended Fund Facility Program (EFF). The organization had sanctioned $6 billion and, according to analysts and rating agencies, it is the reform program of the IMF, which had played a key role in Pakistan being able to stabilize its economy (in December 2019, Moody’s Investors Services had raised Pakistan’s credit rating to ‘stable’ from negative). Pakistan has reiterated its commitment to the EFF (due to the current crisis, the IMF will be unable to release the third trance, $450 million, of the $6 billion total loan).

Not only has the assistance from IMF, ADB, and World Bank come as a major relief for Pakistan as it battles the coronavirus, Islamabad will also be heaving a sigh of relief after the review of Pakistan’s greylisting by the  FATF (Financial Action Task Force) has been pushed from June to August/September 2020. Pakistan, which was put on the watchdog’s greylist in 2018, was given 27 points to comply with, and it has only been given two extensions after failing to convince FATF on 13 of the 27 points (Beijing has been extending support to Pakistan). While Islamabad was supposed to submit its progress in April 2020, it has now got time till July 2020 to address the points it needs to comply with. In the long run, it will need to address the points raised by FATF if it wants access to international financial institutions and needs to carry out transactions without any problem.

Imran Khan’s dilemma with regard to the lockdown

In the last few months, Pakistan’s economy was beginning to show some signs of a revival, and this was acknowledged by international agencies and a number of countries who had begun to show interest in investing in the country. There is no doubt whatsoever that the coronavirus has come as a sudden setback. With the number of cases steadily rising, Khan’s challenges are only going to increase and the dilemma for the Khan administration will be the length of time of the lockdown. Businesses have been opposed to the lockdown and sooner or later are likely to pressure Khan to lift lockdown orders (a decision has already been taken to open some companies, which supply to brands like Puma and Nike, with only essential employees, while taking key precautions such as ensuring regular disinfection), as well as a more comprehensive package which Khan’s government may not be able to provide. Opposition parties, the Pakistan army (which has not been on the same page as Khan on a number of issues, including the handling of the coronavirus), and China, upon whom Pakistan is dependent, have of course been backing the lockdown. Given the lack of medical facilities, there may not be any other option but to lockdown.

Conclusion

In the midst of all these challenges, there is some relief for Pakistan:

First, while Islamabad may publicly hail China for its assistance, the assistance from multilateral bodies like the IMF, World Bank, and ADB has been what’s helped Pakistan deal with the coronavirus crisis. The assistance provided by these institutions also raises the point of whether the obituary of ‘internationalism’ and ‘multilateralism’ and the relevance of international institutions, with all their flaws, was rather premature.

Second, the delay in the FATF gives Pakistan some more time, though it will have to address the remaining points and can not be evasive in the long run. Turning a blind eye to the activities of terror groups and their financing is not likely to benefit Pakistan in any way.

Islamabad’s task is cut out however, and it remains to be seen how the government deals with the multiple problems arising out of the coronavirus (Pakistan’s growth forecast for 2020 has been reduced from 2.6% to 0.8% for the current fiscal year). In the short run, it may be able to weather the storm, albeit with great difficulty, but in the longer run it is in for some serious problems. Pakistan’s government would however be relieved with the above two developments at this point of time.

Down All Your Markets

Fred Foldvary Economics, Liberty , , , , ,

The US stock market had its worst ever initial trading weeks in 2016. Speculators are alarmed by the fall in the stocks of China. The economy of China has been growing more slowly, if at all. Also, most of the economies of the world are in growth recessions, a reduction in the rate of growth. The US dollar is high relative to other currencies, which reduces exports.

The government of China has yet to learn that interventions into financial markets often backfire. The Chinese chiefs have halted stock transactions when the market average falls to seven percent. They also have not allowed sales by investors who own more than five percent of a company. One problem with financial “circuit breakers” – a halt of trading – is that when stocks start to fall, speculators will panic and sell more quickly before trading halts. Restrictions on selling stocks create uncertainty when buying them. A speculator will fear being unable to sell shares later.

There is enough inherent uncertainty in markets without government adding to it. Uncertainty makes it important to let the market set the prices. Markets are a discovery process in which prices and quantities evolve through the bids of buyers and offers of sellers. When government interferes, we cannot know the price. Since the leaders of China have decided to have a market economy in goods, input factors, and financial assets, they should allow the market to do its job of setting the prices.

When I visited China three times, I saw a forest of cranes in all the cities I went to. Construction has driven the economy of China, along with exports. But, similar to real estate booms elsewhere, this construction was propelled by governmental policy. Throughout the world, cheap credit and fiscal subsidies to real estate have fueled unsustainable speculation.

Now China has much excess building capacity, and the halt in construction reduces related goods such as furniture and raw materials. The slow-down in China and sluggish growth elsewhere has resulted in a collapse of commodity prices.

The chiefs of China seek to move the country’s economy towards more domestic consumption. But they interfere with domestic spending by imposing a value-added tax of 17 percent on most goods other than real estate. The government of China probably chose to impose a VAT because the World Trade Organization allows the VAT to be subtracted from the price of exports, unlike an income tax. But Chinese consumers suffer a higher cost of living.

The Chinese leaders could have instead enacted LVT, land-value taxation, which would not add to the cost of goods. A tax on land value reduces the purchase price but not the land rent, so also not the price of goods. A tax on most of the rent or land value would stop the land speculation that has made a few people rich at the expense of the public.

The government of China still maintains tight control over the banking system. All the markets – real estate, financial, goods – would be more efficient if interest rates too were set by the market supply and demand for loanable funds. Of course the central banks of Europe, Japan, and the USA also are not letting their markets set the money supply and interest rates. But common practice does not imply optimal policy.

I don’t think the big drop in stock market averages imply impending economic doom. For 200 years, the US economy has had a real estate cycle of an average duration of 18 years. The current cycle began with the depression of 2008. The recovery has been slow, but the expansion has continued as employment and output have grown. Real estate construction has contributed to the expansion, and land values have recovered. The economy seldom has a recession while interest rates and commodity prices are low.

The economy of China has some severe long-run problems, but its economy is still developing and catching up. The government seems ready to let the currency trade more freely, and the coming acceptance of the currency (the yuan or renminbi) into the “special drawing rights” of the International Monetary Fund will boost the economy.

In the short run, the US stock market could fall some more, as markets often overreach, but over the next few years, financial markets will be consistent with the economic reality of restored world-wide economic growth, if there are no major destructive attacks. What we should be worried about is the unsustainability of debt and the next real estate speculative boom. The next economic disaster is about a decade into the future, and nobody is yet alarmed about that.

The Dangerous Inequality Meme

Fred Foldvary Economics , , , , , , , , ,

The inequality of wealth and income has become a meme loaded with danger. A “meme” is an idea that gets propagated like genes in biology. Economic inequality has long been a topic of interest, but during the past few years, and especially during the 2015-2016 American elections, the inequality meme has erupted into a major political issue among those who identify as progressive, liberal, and socialist.

The facts about inequality in the USA are clear. Since 1970, income inequality has increased. As national income has grown, most of the gains have gone to the rich. Average incomes have even dropped since the recession of 2007-2009.

During the 1800s, the first economist to analyze equality and inequality was Henry George. Karl Marx had touched on economic inequality by saying that the surplus from production was due to labor but was captured by the capitalist, the owner of the firm and its tools. Thus, the proletariat, the workers, stay poor and the capitalists get rich, creating inequality. But Marx and his followers focused on the conflict between labor and capital rather than the inequality.

Henry George pointed out that the surplus from production is not in wages, nor in business profits, but in land rent, which is a pure surplus, since land has no cost of production. George showed how land rent captures the gains from economic progress, creating the inequality in wealth and income between workers and the landowners. Competitive firms make normal profits, which has no surplus. Of course monopolies can capture surplus also, but the profits from entrepreneurship are a bonus to society, rather than a social problem, as entrepreneurs drive innovation and economic progress.

Unfortunately, when the classical economics of the 1800s turned into the neoclassical doctrines of the 1900s, both by design (in opposition to the Georgist remedy of taxing land value) and for mathematical convenience, land was dropped as an input factor, and mainstream economics became the two-factor production function Q=f(K,L). It is illogical that land rent gets included in the distribution of income in the return on K, but excluded on the production side, as the models are based only on the two inputs, labor L and capital goods K. This contradiction is not questioned by graduate students in economics, who are too busy learning the calculus of “math econ” to bother asking if the whole system makes sense.

Therefore the inequality meme is now blended with the labor-capital meme, ignoring the real source of economic inequality, unequal land tenure. Politicians exploit the all-too-real economic inequality with a superficial, simplistic, and dangerous remedy: tax the rich and transfer the funds to the poor. Of course governments are doing that already, and that has not reduced inequality, but the welfare-statists insist that government should do more of it.

Conservative opponents of greater redistribution point out, correctly, that higher taxes and takings from the rich will stifle entrepreneurship and savings, reducing the economic growth. But other than eliminating some of the tax deductions and generating more growth by reducing the top tax rates, the conservatives have no effective remedy. Their call to flatten the tax rates play into the political agenda of the redistributionists who call for higher, not lower, tax rates on the rich.

The danger in the inequality meme is the confiscation of the wealth not just of the rich but also of the middle class. A family that spent all its income and now has no wealth would be given welfare aid, while the family with the same income but frugally saved its income for retirement or to provide for their children would have their wealth taken away, not just by ordinary and predictable taxation, but by a sudden taking, as happened in Cyprus in 2013. Government chiefs facing a debt crisis can kill two birds with one stone: confiscate savings and use some of it to pay off debt and the rest to transfer to the poor. Such confiscation has been suggested by the International Monetary Fund, which lends funds to countries bogged down in debt. In its publication Fiscal Monitor Report, the IMF stated (pdf):

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).” There we have the proposition that such confiscation of wealth can be “fair” (49).

This IMF capital-levy proposition was presented in Forbes with the title, “The International Monetary Fund Lays The Groundwork For Global Wealth Confiscation.” The Wikipedia article on “capital levy” shows that this meme is getting some traction, such as by Germany’s Bundesbank. The concept of a capital levy, confiscation of savings and investment, comes from the meme of economic inequality that looks only at the superficial existence of unequal wealth and not to the source.

It has been well pointed out by British journalist and economist Fred Harrison in his Youtube video “Ricardo’s Law: the Great Tax Clawback Scam” that while the rich pay much in taxes, many of them get the tax back, as a clawback, from government’s public goods, which generate higher rent and land value.

The effective and equitable remedy for economic inequality is not redistribution but the proper initial distribution of income. Wages and capital yields should be kept by the workers and investors, while land rent should be equally distributed either as cash or in public services. Public revenue from land rent would equalize income while promoting growth and raising wages. We need to bring land back into economic discourse, but that requires penetrating the appeal of superficial thinking. That’s what Henry George tried to do, and the Georgist meme had reached up to the heads of state in China, Great Britain, and Russia (after the first revolution with Kerensky), but World War I blasted the impending tax reforms to bits.

The candidates who now rant against inequality, the corporations, and the billionaires, even if they don’t win the election, will influence policy and generate calls for more redistribution and, perhaps in the next financial crisis, a capital levy. While alarmists often exploit impending doom for their own gains, sometimes they are right.

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This article is also in progress.org under the title “Tyrants Exploit Income Inequality”

[Ed. note: I added tags, categories, and links, and patched up some grammar – BC]