ECONOMIC FREEDOM IN 2008

In a mutual cooperation, Heritage Foundation and Wall Street Journal issued a new 2008 Index of Economic Freedom (link). The index measures the level of economic freedom in the world, emphasizing the degree of economic liberty in each country. Some countries, such as Montenegro, Serbia and Iraq, remained unranked subject to incomplete information about the areas reflecting the level of economic freedom. By a methodological definition (link), the economic freedom is a material autonomy in relation to the state and organized groups. An individual is free who can secure and protect his human resources, labor and private property. Economic freedom involves several sub-levels such as freedom to invest, freedom to start a business, freedom to choose, freedom to trade, freedom from corruption, freedom from government, fiscal freedom and the protection of private property rights nevertheless. Higher the value of each component, higher the level of economic freedom.

The Meaning of Economic Freedom

Innumerable empirical investigation has confirmed a positive correlation between economic freedom and sustainable economic performance. Gwartney, Lawson and Holcombe (1999) have explored the relationship between economic and economic growth (link). They concluded that an environment with a high degree of economic freedom is essential to sustainable growth performance. As an ingredient of general prosperity, high level of economic freedom is impossible without a firm role of institutions whose aim is to protect private property from expropriation and to enforce the rule of law. Institutions are defined as the rules of the game and interaction between individuals. Institutions are a set of formal and informal rules that define the scope and shape of behavioral limit in private contracts. Inevitably, the aim of institutions is to minimize the transaction cost through codified arrangements and the respect for individual liberty and a limited role of government. The pursuit of institutions to minimize the transaction cost is, of course, essential to sustainable economic performance. Douglass North, the father of new institutional economics once wrote:

"The inability of societies to develop effective, low-cost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment in the third world."

Source: Douglass North; Institutions, Institutional Change and Economic Performance, Cambridge University Press, 1990 (link)

The quality of the business environment regarding creativity, innovation, financial markets and free exchange, is a set of components that determine the rank of economic freedom in a particular country. By the logic of the common sense, economic freedom is a necessity for both human and political freedom. Economic control is not only the control of economic transactions. It is the control of the means for all individual ends. And whoever has the control over the means must also determine which values will rate higher and which ends shall be served. The following relationship has been succinctly explained by Friedrich August von Hayek who once wrote:

"Even striving for equality by means of a direct economy can result only in an officially enforced inequality - an authoritarian determination of the status of each individual in the new hierarchical order"
-- Friedrich August von Hayek

Top 10 - The Champions of Economic Liberty

In this year's index, economic freedom in only seven nations was distributed as free. The distribution of economic freedom is officially shaped in six different categories. Again, Hong Kong remained the freest economy in the world, scoring very high on each component of economic liberty. In the group of free economies there are also Singapore, Ireland, Australia, United States, New Zealand and Canada. Those countries scored very high in monetary freedom, business freedom, private property rights, labor freedom and financial freedom. Among top 10 there are three countries left: Chile, Switzerland and United Kingdom. Sound regulatory environment, efficient judicial system, deregulated product markets, liberalized financial sector and low exchange costs reflect the ranking of countries among top 10. Among them, only Chile is a middle-income country but economic reforms in the past decade such as the privatization of the pension system boosted growth performance of the Chilean economy and contributed to Chile's high score in economic freedom. In 2008, the overall economic freedom of the world has not increased, but some countries progressed dramatically well while some other countries diverged. For example, Mauritius and Denmark performed a continued improvement from previous ranking while Russia's ranking decreased substantially.

Economic freedom in Nordic countries

The proponents of the so-called Nordic model argue that it is possible to combine sound economic performance and an unlimited welfare state. At this stage, they cite the example of Nordic countries. It is somewhat of a paradox to speak of the Nordic countries as they notably differ in several aspects. Therefore, it is actually impossible to speak about the Nordic model in general. Nordic countries score very well in the area of the quality of the business environment, having created one of the freest business areas in the world. Nordic countries also score very well on freedom to trade internationally, open investment environment, non-existent corruption, flexible financial environment, and independent judiciary. But Nordic tigers score quite badly in the areas of fiscal burden and government size. However, each Nordic countries has its own features. Iceland has been very successful in tax reform, entrepreneurship and competitiveness, Denmark has reformed its labor market towards far greater flexibility, Finland is known for the highly rated elementary and secondary education system, Sweden pioneered voucher system and the privatization of health-care and pension funds. Norway, the least free Nordic country, is known for rich natural resources, enabling both generous welfare system and impeding structural environment.

Slovenia - Subalpine Jail

This year's rank of Slovenia in terms of economic freedom has not improved substantially. Officially, economic freedom in Slovenia improved by 0,4 percentage point reflecting a cautous approach to pro-growth economic reforms. However, Slovenia is ranked as 75th freest economy in the world. A growing number of former communist countries has overtaken Slovenia such as Albania, Macedonia, Romania, Bulgaria. Even Lebanon has surpassed Slovenia. The country scored well on trade freedom and monetary freedom. Poor quality of the business environment reflects the overburden and failure of the regulatory environment. Slovenia lacks the privatization of banking and insurance sector. Also, the judicial system lacks the independence from political influence and it is known for substantial court delays, inefficient staff and slow procedures. Halted privatization programs have been a wish of political aim to control particular sectors of the economy. In addition, minor tax reform slightly cut tax rates on productive behavior. However, tax rates remained steeply progressive and high. Public spending has not increased substantially but the level of public spending is still very high accounting for 47,2 percent of the GDP in recent year.

Trade Unions as Means of Coercion

The most significant obstacle to higher level of economic freedom is Slovenia's highly regulated and rigid labor market that hinders productivity growth and job opportunities. Without a radical deregulation of the labor market, productivity growth could slow substantially. Flexibility is a key feature of the labor market, brining generous effect on labor supply. In fact, the power of labor unions is the greatest obstacle to the strength of economic freedom in Slovenia.


Rok SPRUK is an economist.

Copyright 2008 by Rok SPRUK

FRANCE'S STREET RIOT SHOWDOWN

Weak property rights, excessive government burden and the lack of rule of law have led to street riots in France. The Economist has published an article describing how French rioters are destroying private property and public means (link).

REGIONAL OUTPUT GROWTH IN CHINA

Dozens of popular opinions have claimed that the size of government and state-owned enterprises does not actually and potentially affect growth performance.

In real terms, the empirical argument in favor of privatization is a simple theoretical and practical fact that the allocation of resources in private ownership is done more effectively than under public ownership. Privatization, in fact, significantly stimulates growth and is a primary tool to reduce external distortions on capital markets and overall economic performance.

When government borrows more, it reduces the amount of capital the investors could borrow, thus raising the level of interest rate. This is a typical situation that describe how resources are scarce and become even scarcier when government funds the budget deficit by borrowing.

In China public ownership is widespread subject to China's economic system. Kerk Phillips and Kunrong Shen's research on the effect of public ownership on regional economic growth in China concludes the following:

"We find that controlling for a variety of other factors, the greater the importance of state owned enterprises, as measured by the proportion of total industrial production they produce, the lower the provincial growth rate. The average estimate is that a decrease in the SOE share of industrial production by ten percentage points increases real GDP growth the following year by 1.14%"

Source: Kerk Phillips, Kunrong Shen: What Effect Does the Size of State-Owned Enterprises Have on Regional Growth in China, Burghham Young University Economics Working Paper, April 2003 (link)

NEW JERSEY AND NEW YORK HAVE THE HIGHEST PROPERTY TAXES

An article at MSN's Real Estate denotes the argument that New York and New Jersey have the highest property tax burden due to approximated property values but the reason is high property tax bill (link).

NOBEL PEACE PRIZE 2007

Nobel Peace Prize has usually been awarded to the individual contribution for making the world a more peaceful place. The list of prominently distinguished prize winners include Yasser Arafat, Shimon Peres, Aung San Suu Kyi, Mohamed El Baradei and other distinguished names as well.

In 2007, the prize was awarded to Albert Al Gore and Intergovernmental Panel on Climate Change. The committee explained the awarding decision to those two entitities in the following way:
"for their efforts to build up and disseminate greater knowledge about man-made climate change, and to lay the foundations for the measures that are needed to counteract such change"

IPCC has put together scientific knowledge in quite a comprehensive form while Al Gore has pushed policymakers to take action concerning global warming. Establishing scientific consensus on global warming is a difficulty. Regarding the definition of the consensus is that the latter is the agreement on particular issue or type of issue where everyone agrees with it, but in broader terms, nobody believes in. In 1992, professor Richard S. Lindzen wrote a fascinating article, a compelling truth about global warming where he wrote:

"The simple picture of the greenhouse mechanism is seriously oversimplified. Many of us were taught in elementary school that heat is transported by radiation, convection, and conduction. The above representation only refers to radiative transfer. As it turns out, if there were only radiative heat transfer, the greenhouse effect would warm the Earth to about seventy-seven degrees centigrade rather than to fifteen degrees centigrade. In fact, the greenhouse effect is only about 25 percent of what it would be in a pure radiative situation. The reason for this is the presence of convection (heat transport by air motions), which bypasses much of the radiative absorption."

Source: Richard S. Lindzen: Global Warming, The Origin and Nature of the Alledged Scientific Consensus (link)

In the course of global warming debate, there are several sceptics. On the issue of global warming, the understanding of science is crucial to the analytical predictions and estimates in the future about this particular issue. In addition, it is essential to separate science from non-science. Remember what Mr. Gore said in the interview on ABC when Mr. Stephanopoulos confronted him with the fact that the best estimates of rising sea levels are far less dire than he suggests in his movie:
"Scientists don't have any models that give them a high level of confidence."

Economist published a well-argued and notable article, judging whether Al Gore truly deserved to get a Nobel prize. In fact, the question is since when a movie which could hardly be identified as a documentary can serve as a tool for decision-making over such a distinguished award as a Nobel prize for peace. Clearly, the term "peace" includes effort that support the institution of peace in relation to preventing conflicts and suggesting solutions to solve particular complex problems. For instance, if there is a vast empirical evidence on the positive correlation between the decline of regional conflicts and free trade, then free international exchange is, in fact, the contributor to peace.

In Guardian, Bjorn Lomborg wrote a sizzling article on the Nobel prize for peace in this year. Have you read Mr. Lindzen's article Don't believe the hype? Here is a link to the article where professor Lindzen summarizes the fact that there is actually no consensus on global warming:

"So what, then, is one to make of this alleged debate? I would suggest at least three points.

First, nonscientists generally do not want to bother with understanding the science. Claims of consensus relieve policy types, environmental advocates and politicians of any need to do so. Such claims also serve to intimidate the public and even scientists--especially those outside the area of climate dynamics. Secondly, given that the question of human attribution largely cannot be resolved, its use in promoting visions of disaster constitutes nothing so much as a bait-and-switch scam. That is an inauspicious beginning to what Mr. Gore claims is not a political issue but a "moral" crusade.

Lastly, there is a clear attempt to establish truth not by scientific methods but by perpetual repetition. An earlier attempt at this was accompanied by tragedy. Perhaps Marx was right. This time around we may have farce--if we're lucky."

MARKETS AND CHOICE: THE CASE OF KOSOVO

Once again, Economist offers an excellent analysis about the future status of Kosovo, predicting the effects of choice between the model of full independence and the self-governing status of minimal dependence on Serbia.

Nevertheless, the issues deserves the piece of attention through the prism of economic analysis.

First, assume that Kosovo's long term objective is to seek the course of output growth and good structural environment that could, in turn, boost both: growth and development. As an empirical matter, the correlation between growth and democracy is weakly negative, meaning that the case of full democracy leads to the loss of growth momentum as well as to the widespread increase of bureaucratic and administrative means which deprive the dynamics of growth in a broader perspective.

Second, one of the main engines of prosperity and growth is the country's business and investment environment. Assuming the "catch-up"effects of a country with comparably low GDP per capita, the Kosovo's GDP would streamline the convergence quickly but in a larger sense, the quality of investment environment determines the intensity of investment, since a degree of firm's interest, looking forward to invest in particular segments of the region, would largely depend on the quality of the legal environment, such as the absence of barriers to saving and investment.

The ability to open the enterprise quickly, is also a part of the ability of how quickly job creation could go on. In fact, one of the broadest standpoints on which nearly all economists agree is that job creation is the best way to reduce structural unemployment of a typical post-communist economy in transition. In addition, high quality of the business environment is a thorough indicator of country's openness to trade and investment.

Third, the area in which most of post-communist countries lag is the labor market. In fact, labor is product that is traded in a voluntary agreement between the employee and employer at a certain price called the wage. In this respect, the general equilibrium of labor supply and demand for labor works as in usual cases.

If there is a scare labor supply in concrete area (say IT) compared to derived demand, then the price per unit of labor will go up and so will the employee's return to education and skills derived from labor's human capital. On the other side, if there is an extensive labor supply in concrete area (say sociology) and demand for labor is low, then the return to education will fall, raising the probability of unemployment and causing an incentive to accept the fact of lower return on education in case if labor demand is low in quantity terms.

The price behavior in this exchange partly depends on the willingness of labor supply to embrace lower price than in comparable areas, since an employer is induced and given an opportunity to hire the labor supply at a lower cost than under conditions of high demand and scarce availibility of labor supply.

From labor market aspect, democracy entails a bulk of negative effects that hinder productivity growth and reduce the extent of flexibility of labor market through means of collective bargaining and monopoly power exercised by labor unions. By empirical and practical terms, productivity is the leading engine of growth of standard of living and thus, lower productivity growth correlates with a lower comparable standard of living.

Fourth, the comparison of benefits between multiple option of independence deserves a detailed study and empirical investigation. A macroeconomic quest for this particular choice, is the question of exchange rate risk but this also depends on the ability of the country to have its own independent central bank.

In fact, if the National Bank of Serbia suddenly started to manipulate with exchange rate such as subsidizing the export sector through inflationary policies, and if Kosovo had no central bank, then it could openly feel the negative effects of high inflation. On the other side, if National Bank of Serbia maintains tight anti-inflationary policies, then the absence of costs and risk could benefit Kosovo's economy. But of course, to analyze the effects of multiple options, there must be concrete data to start disseminating and analyzing the effects of political status regarding the future growth and prosperity.

And fifth, as an economist, I think that political mitigation of future status of Kosovo is overhaul. In fact, the systematic efficiency of political status includes the efficiency of institutions protecting the enforcement of private property rights and individual liberties. Nevertheless, individual rights emerge from the private property, i.e. from the ability to manage private property without external interference.

In fact, the question which country advances in economic and structural terms significantly and competitively, does not depend on whether country is fully democratic or not, but on which country is freer than others in terms of taxation, choice and deregulation, enabling faster and higher growth of output and productivity, and thus creating a comparative advantage.

Read also:
Steffen Ganghof, Phillip Genschel: Taxation and Democracy in the EU (link)
Amleto Cattarin: "Hands off my taxes!": a comparative analysis of direct democracy and taxation, NYU Law School (link)
Kosovo, Economic Profile, European Commission (link)
Capitalism & Freedom: Kosovo, European Hong Kong? (link)
The State of Kosovo's Economy; Perspectives and Development, CEEOL Südosteuropa Mitteilungen, Issue no.3/2005 (link)

DOING BUSINESS: REVIEW AND PERSPECTIVE

The 2008 Doing Business project solidly provided a valuable tool in ranking the economies with respect to the ease of doing business. The quality of the business environment is, by any means, one of the essential supporting components of growth and value creation. Put simply, the greater the flexibility of the business environment and the ease of doing business, the greater the opportunities for the firm to target markets and growth while the foremost advantage of a dynamic business environment is the minimization of external risk, notably macroeconomic risk and the risk emerged from external vulnerabilities such as the failure of the public administration to provide sound entrepreneurial framework and business conditions. In spite of vital importance of dynamic entrepreneurial framework, small-scale economies are, by empirical investigation, affected by the extent of quality of the business environment far more than the economies of large scale according to the share in global economy they possess. That’s why; the first-class quality of the business environment is essential to long-term creation of venture capital and jobs as well as to output growth.

First, let’s take a look at the microeconomic aspect of rating the quality of business environment. Suppose there is a consulting firm with a certain amount of investment from venture-capital fund with an idea to target and invest in emerging markets whether by direct market entry or by indirect market access, i.e. through intermediaries. Firm’s executive board mutually decides to hire local human capital; local labor to reduce the potential risk of firm’s perception of asymmetric information about the local business environment in conducting consulting services to local firms or branches of global firms. Assume that the decision processing is as in usual firm’s entry. The barriers to doing business, in turn, crucially impact firm’s decision for investment location accountably regarding the size and attractiveness of market niches. Suppose the firm is decided to target emerging markets in Central and Eastern Europe and in broader Asian market. Consequently, the firm obtains all available data and information about the particular business environment, varying which one to choose. If a firm jointly varied among Czech Republic, Hungary and Slovenia as a headquarter base, how would the quality of the particular business environment affect firm’s decision where to invest. Suppose each business environment carries-in some strengths and weaknesses. For example, Czech Republic offers sufficient transportation links to the rest of Eastern Europe while Hungary offers a sound and deregulated corporate conditions such as low corporate tax burden and dynamically competitive financial sector (access to attractive financial, capital and insurance services) while Slovenia offers sound access to potential booming markets in South-Eastern Europe. In Asia, the firm varies between sophisticated and growing markets, say between China, India and Vietnam and Singapore and Hong Kong on the other side. Depending on the preferences included in firm’s panel, where would the firm decide to invest in to setup a base for targeting specific markets?

Of course, it is impossible to predict all circumstances of the firm’s decision since information is distributed asymmetrically. But let’s predict the possible scenario with respect to the quality of business environment, assuming that firm’s main decisive objective is to decide for the location with the easiest and most business-friendly environment with least administrative and regulatory burden given the impact of external cost pressures affecting firm’s output and organic growth performance.

Depending on the impact of firm’s strategic decisions regarding the performance of output and supply, the firm would, by rational means, choose the environment with the least regulatory complexity and administrative burden such as the quickness of starting a business, time costs of getting required licenses, the flexibility of labor market, the security of property rights, access to credit information, transparency of transactions, self-dealing liability, shareholders’ suing ability for misconduct and hence, tax compliance and time cost of paying taxes, the costs associated with international trade, contract enforcement, and the legal protection of the deprived party in exchange in case of payment dispute or payment delay and the extent of procedural backlash in case of closing the business.

The quality of the above-listed factors crucially determines the overall attractiveness of a particular business environment as an investment location. Looking globally, Singapore, New Zealand and the United States were ranked among top 25 on most areas except for in the area of the difficulty of paying taxes in case of the U.S. Emerging market countries scored variably. Russia is ranked 106^th, India 120^th, China 83^rd and Brazil 122^nd. From investment decision aspect, high economic growth in BRIC despite the low quality of the business environment is driven by strong investment boosted by remaining influential factors such as low proportion of labor cost attached to manufacturing and the convergence potentials of the GDP in those countries nevertheless. What about countries in transition? As top performers, Baltic tigers par the quality of business environment of advanced countries. Estonia is ranked 17^th, Latvia 22^nd and Lithuania 26^th. In central Europe, the ranking is much less competitive; Slovakia is ranked 32^nd, Slovenia 55^th, Czech Republic 56^th and Poland 74^th. Each year, Nordic countries constantly perform highly competitively. Taking a closer look on Nordic countries, the figures show that a typical Nordic business environment is almost completely free without hampering regulatory burden. Further, sophisticated and competitive access availability of venture and investment capital adds to the ease of doing business together with strong security contract validation and enforcement. Denmark’s flexible labor market free trade ranked it 5^th respectively, Iceland is ranked 10^th, Norway 11^th, Finland 13^th and Sweden 14^th.

THIS IS HOW BELARUS WOULD BE BETTER OFF

Nearly a week ago, I came across an interesting website entitled Economy.by, presenting the project "The Community of Young Economists and Entrepreneurs" which was organized as a reaction to the lowest level of education in Belarus. The project aims to give opportunities to young students in Belarus to support their scientific work. This particular initiative is very ambitious indeed. In fact, Belarus is croaching in Soviet-styled political dictatorship together with poor track on the respect of human rights, civil and personal liberties. Doing business is difficult and the economic environment is embroiled by government involvement, protectionism and widespread corruption. Also, the education system is instilled by staunch ideological propaganda (here and here).

Regarding the practicing of human rights in Belarus, State Department reports:

"Prison conditions remained austere and were marked by occasional shortages of food and medicine and the spread of diseases such as tuberculosis and HIV/AIDS. Leila Zerrougui, chairperson of a UN working group on arbitrary detention who visited the country in 2004, reported that conditions in detention centers were worse than those in prisons because of poor sanitary and living conditions and restrictions on visitation, phone, and mail privileges. According to human rights monitors, conditions in prison hospitals also were poor...The government restricted access to the Internet. Credible reports indicated that the government monitored e-mail and Internet chatrooms. Many individuals and groups could not engage in peaceful expression of views via the Internet, including by electronic mail. During the March 19 presidential election, there were numerous credible reports that the government blocked several opposition campaign and independent media Web sites. Many opposition groups and independent newspapers have switched to Internet domains operated outside the country because of the government's campaign against Internet freedom. There also were credible reports that authorities attempted to block Radio Liberty's Web site in the country during the March presidential elections. On November 7, the NGO Reporters Without Borders again included the country on its annual list of "enemies of the internet," countries that censor independent news sites and opposition publications and monitor the Internet to stifle dissident voices."

Disclaimer: Capitalism & Freedom strongly supports "The Community of Young Economists and Entrepreneurs" in their efforts to pursue the ideas of individual and economic liberty, human rights, international awareness and knowledge development in Belarus.

DEMOCRACY: THE ENEMY OF ITSELF

One of the most strinking thins which can be observed around the world is the misguided connecting of liberty with democracy. Empirically, the effect of full democracy on economic growth is weakly negative.

In political terms, democracy means voting. It means the ability of the voters to elect representatives. There are many dubious side-effects of what is referred to as the "real democracy". In the state of democracy, there are few things that are contradictory to civil, human, political and economic freedom.

Coercion and constraints

1. Coercion. If political leaders are elected democratically through voting, it means that they have a full ability to pursue a particular political philosophy. As Friedrich August von Hayek wrote in The Constitution of Liberty, each extensive political philosophy supposes that the lives of individuals mismanaged by themselves, and thus they should be controlled through any means of coercion and constraint whether it be the taxation of individual income, information-sharing or the government force to agree and respect the disagreeable. Hence, the main determinator in the state of democracy is not the market where wants and goods are compensated by value exchange, but is the majority that casts the demands imposed on political bodies. Depending on the extent of majority rule, the demands will be suited only if they suit the political support over the term. The sum effect of majority rule is thus guided by the sources of political power which is close to the oligarchic rule. Thus, in many particular items, democracy is a self-contradiction governed by the seed of collectivism and by the tyranny of the majority rule as Alexis de Tocqueville wrote brilliantly in his work Democracy in America.

2. Interest groups: to gain support, the political rivals compete on getting votes from particular interest groups such as trade unions and agricultural lobbies to receive private interests on behalf of public good. In the free market, demand and supply are matched and taken as given. The ability to meet the market needs of individuals is determined by the freedom of choice, given the total utility impact. In political market, the ability to meet the needs of voters is determined by the concentration of power in the hands of most influential groups and formations in public whom the priority is given. This is another proof that democracy is perhaps the most notable hidden evidence of discrimination since "everyone-is-treated-equally" is rambled by "you-are-treated-equally-if-you-belong-to-majority".

3. Extensive government: Great Britain was free way before it became democratic. A country can be free and prosperous even without being dichotomously democratic. Singapore has a high degree of economic freedom and is treated as politically hybrid regime. Estonia is among the freest economies in Europe and the world, but its grade in democratic performance is likely marked by the label of flawed democracy. On the other hand, Sweden is known as "full democracy" but its 81,3 percent economically free relative to Hong Kong which is known as the economically freest place in the world.

Democracy - a self-contradiction

Democracy is treated as an untouchable dogma which is supposed to be in the interest of all. Failed and falsified as it is, democracy is neither close to liberty nor minimal state. Classical liberalism is based on the grounds of negative liberty of non-interference as well as on the absence of government coercion. Fundamentally, democracy mischiefs the extent of government coercion. Classical liberal/libertarian pursuit always predicts the individual and political action to reduce (or possibly eliminate) the extent of government coercion while the dogma of democracy takes no notice on the extent of government coercion, but only on the action which is governed by the rule of majority.

Democracy - the slavery of positive liberty

That is why government based on the principle of the minimal state, providing only the fundamental general framework of interaction (the-rule-of-law), functions efficiently and contributes a significant share to the future creation wealth in going for growth and prosperity. Minimal government is the best friend of individual initiative accompanied by the degree of being free to choose, live and create.

Read also:
Denis Bider: Robert J. Barro's Democracy and Growth (link),
Libertarec: Socializem ustvarja vojne (Socialism creates wars) (link)
Libertarec: Zgodba o dveh vased (A tale of two villages) (link)
Greg Mankiw: A question for democrats (link)
Robert Nozick: A tale of the slave (link)

POLITICAL ENTREPRENEURSHIP AND CORRUPTION

Writing for Wall Street Journal, Burt Folsom compares the entrepreneurship in two countries; the U.S. and Mexico.

The discussion in the article is focused on Carlos Slim who supossedly surpassed Bill Gates as the world's richest person. As the article demonstrates, the spread of political entrepreneurship coexists with weak contract security and insecure protection of private property rights. In comparison to market entrepreneurship, political entrepreneurship is costly to growth and does not embrace risk-taking, quality maximization and price minimization as strategic terms. Here is an interesting story:

"Enter Carlos Slim. His father, Julian Slim Haddad, a Lebanese immigrant, made his money as a merchant during the chaos leading up to the Constitution of 1917. Carlos Slim greatly expanded the family fortune by working closely and cleverly with government officials. (In fairness to Mr. Slim, there may not be another avenue to great wealth in a massively interventionist economy.) His major opportunity came when President Carlos Salinas de Gortari decided to privatize some inefficient industries. Mr. Slim bought Telmex, the nation’s phone company, in 1990 in a controversial auction which was decidedly less than transparent. With that purchase came a six-year monopoly guaranteed by the government. Although Mr. Slim was supposed to relinquish the monopoly in 1997, he used a variety of legal and political tools to maintain it, for example filing injunctions in court to block orders from the regulator to provide competitors fair access to his network. According to OECD figures, Mexican consumers and businesses still pay above market telephone rates. Fewer than one-fourth of Mexican homes have telephones. With a near monopoly of fixed-line telephones and data access (the Internet), Mr. Slim has reaped windfall profits which, wisely invested, have propelled him to immense wealth. Meanwhile, Mr. Slim’s newer ventures—his construction company and his oil services company—rely on government contracts for their major business. Recently President Felipe Calderon met with Mr. Slim and urged him to accept greater competition."

Source: Burt Folsom, Slim Pickings, Wall Street Journal, August 29, 2007 (link)

THE SETBACK OF GOVERNMENT OWNERSHIP

It is always a great pleasure to read the columns of Mićo Mrkaić. In yesterday's edition of Finance, Mićo practically highlighted why government ownership of property and assets fails compared to private ownership based on the ability of the owners to directly enforce private property rights to maximize the outcome and return from investment and management of the property itself. I strongly recommend everyone to read the abovecited article.

From the behavioral point of view, the efficiency of property management depends on the rate of responsibility which investors or households possess. The greater the responsibility, the greater the opportunity to maximize the value of the property or certain type of asset in the market. Household management is, of course, highly sensitive to risk and value fluctuations of property in the market, that's why households form rational expectations and adapt them when the fluctuation distort the expectations set at the margin.

It is not difficult to find out that government ownership fails in most cases. The lack of risk-taking and cost-control, the minimal responsibility for possibly negative returns from investment into particular projects, followed by the property devaluation resulted from inefficiency management and investment; are among the forefront reasons why government ownership frequently creates a loss from property value.

In the light of practical experience, it is ought for empirical facts and conclusion to be thoroughly supported by the observed evidence regarding the volatility and performance of government ownership of property relative to the maximization of return. Individuals in the market possess far more interest to protect the property and maximize the return from it than the government can. Also, government participation in the form of intervention or/and public enterprises, fails to share risk and absorb the potentials regard company performance. From this point of view, it is concisely wise and logical for post-communist countries to accomplish the privatization and avoid the loss of wealth and property through letting markets and private investors control and manage property. In fact, it's about the maximization of net value of wealth which supposedly determines the standard of living respectively.