The Fall of Rome

by W.H. Auden

The piers are pummelled by the waves; In a lonely field the rain Lashes an abandoned train; Outlaws fill the mountain caves. Fantastic grow the evening gowns; Agents of the Fisc pursue Absconding tax-defaulters through The sewers of provincial towns. Private rites of magic send The temple prostitutes to sleep; All the literati keep An imaginary friend. Cerebrotonic Cato may Extol the Ancient Disciplines, But the muscle-bound Marines Mutiny for food and pay. Caesar's double-bed is warm As an unimportant clerk Writes

I DO NOT LIKE MY WORK On a pink official form. Unendowed with wealth or pity, Little birds with scarlet legs, Sitting on their speckled eggs, Eye each flu-infected city. Altogether elsewhere, vast Herds of reindeer move across Miles and miles of golden moss, Silently and very fast.

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Friedman's Fools and Krugman's Kronies

“A foolish consistency is the hobgoblin of little minds.” -Ralph Waldo Emerson

Since the earthquake struck Chile a little over a week ago, the opinion press in the United States has run rampant with polarised ideological pieces lauding Milton Friedman and Augusto Pinochet on one side and condemning him in favour of Marxist Salvadore Allende on the other.  The Wall Street Journal and the triage of Krugman, the Huffington Post, and Salon have battled each other with useless rants based on a tenuous grasp of the facts. 

Life and economics are messy businesses, and economic theory (on either side of the spectrum) rarely accommodates reality. Chile, like all macroeconomic success stories, lacks a history that falls neatly along any ideological lines.  

Massive privatizations of state-owned enterprises, the strict protection of private property, deregulation, and free trade have driven the country’s prosperity, attracted tens of billions in foreign investment, and have made Chile the most developed country in Latin America.  Simultaneously, strict building codes, the surpluses from state-owned copper giant Codelco, and the state-funded nascence of the salmon farming industry in the 1980s have made Chile the diversified and stable country with a resistance to the effects of earthquakes.

To call the country a mixed economy would be too obvious, as every economy in the world (save perhaps North Korea, Zimbabwe, Cuba and a few others) is in some way a mixed economy with some market mechanisms and some state control.  

What ultimately differentiates Chile from its neighbours in the region (and with countries like Haiti) is that ideology has actually played very little role in policymaking in the last 30+ years, and successive governments have eschewed most interventionist policies in the economy while maintaining those that seemed to work.  The right-wing dictatorship of Pinochet pursued both free market and statist economic policies, as has the centre-left Concertacion since the return to democracy.  And the new centre-right government of Sebastian Piñera will have more in common with Concertacion than not.

This no doubt frustrates both the Krugmanites and the Friedman sycophants who want to turn every disjointed bit of data in other countries into an indisputable case for their respective partisan ideological claims in the United States, a country with more than 17 times as many people as Chile, an economy 88 times larger, and with a radically different historical context.  

Chile has neither vindicated Keynes nor substantiated Friedman.  What it has proven, however, is that:

• People, when left alone in most matters, are more productive and more prosperous than people whose lives are subject to constant meddling. 
• Private property protection is a necessary prerequisite for foreign investment. 
• State encouragement of targeted new industries where the country has a competitive advantage can work.
• Saving rather than deficit spending promotes stability (even if it is achieved through a state-owned copper company).
• Litigious countries discourage economic growth (Chile is notoriously not litigious).
• Lack of government corruption and faith in institutions engenders an honest citizenry (How many other countries could convince looters to return stolen merchandise after a natural disaster?)
• Building codes in earthquake-prone countries prevent people from dying.
• Free trade, even if unilateral, creates unparalleled prosperity and discourages countries from militancy. 

If people wonder how Chile could have developed so differently from Argentina or Venezuela, for example, there is a clear historical answer: for some reason, throughout Chile’s recent history, the country has been run by mature people who more often than not put their country’s interests above their own political power and above their own political ideology.  Pinochet gave up power willingly after losing the plebiscite of 1988, the first president after the return to democracy refused to extend his term in spite of his immense popularity, and in 2010, the Concertacion has handed over power to the centre-right amicably, even after more than 20 years in power.  

Other countries in Latin America and the various emerging economies of the rest of the world would do well to imitate Chile in this basic premise--that ideology and personality cults do not bring nations to sustained prosperity: hard work, reason, and flexibility do.

Posted via email from The Invisible Sand

A Tale of Two Chiles

This past weekend's earthquake exposes a geographic and cultural rift in South America's strongest, most stable, and most resilient country that the incoming government must address if it desires to sustain the miraculous economic development that this country has enjoyed over the last two and a half decades.

Having recently returned from a trip to the South of Chile myself, and having been in Santiago for nearly the last two years, I am struck by the developmental disparities. In the more touristic city of Puerto Varas, one might find modern 4 star hotels, nice restaurants, clean streets, new buildings, and modern grocery stores. But the surrounding towns cause one a bit of a time warp, with old, unrenovated houses, small local markets, and deteriorating infrastructure. Compared to the steel and glass high rises and hypermarkets of Santiago's Las Condes or Vitacura comunas, one might think they had been transported to another country.

Growing up in rural northwest Arkansas has given me a reasonable perspective on the subject, however, for Chile's problems are little different from the same problems facing largely rural areas in the highly developed economies of the United States and Canada. The urban-rural divide is perhaps not a problem to be solved, but a reality to be dealt with over the course of time. However, my own home town of Bentonville is an excellent example of how a rural, small-town community can be transformed into a hotbed of commerce and innovation by the presence of entrepreneurship and market forces. Chile does not need another Santiago in the same way that the United States does not need another New York City. But Chile needs a Bentonville, a Redmond, a Cupertino, an Omaha, and a Research Triangle spread over its beautiful and diverse 2,600 mile corner of paradise, wedged between the mighty Andes mountains and the cold blue Pacific Ocean. The new government, personally led by entrepreneur and billionaire Sebastian Piñera (who also holds a PhD in Economics from Harvard) has this challenge ahead of it. His dynamic teams at both the Ministry of Economy and the Ministry of Planning and Development should work to design attractive market mechanisms to draw industry, culture, and entrepreneurs from all over the world, while encouraging the talents of its (by Latin American standards) highly educated population to be directed toward entrepreneurship as well.

So many developing economies have made the mistake of offering temporary gimmicks and short-term tax breaks to attract foreign investment, and for the most part Chile has avoided this temptation (and should continue to do so), but the country is reaching the limits of current policy and incentives. Santiago is bursting at the seams, and is sprawling into the valleys outside the city in search of lower-cost real estate. The further development of Santiago will undoubtedly come at costs, even while Chile is among the least densely populated countries in the world. The right permanent shifts in tax policy combined with a few strategic investments in infrastructure could transform the unipolar economy of Chile, centered around Santiago, into a bustling and diverse nation with several regional economic hubs that lift millions into the global middle class, eradicate poverty, and transform Chile into the Hong Kong or the Singapore of the Western Hemisphere. The 5th freest economy in the world already (according to the CATO institute), Chile is poised for this transformation, but political speeches and mere desire alone are insufficient to inaugurate the necessary legal and cultural changes.

If the cities of southern Chile were as well developed as Santiago, the human tragedy of this weekend's earthquake would have been substantially mitigated, and the impact in the South would have been closer to the minor impact it has had on the city of Santiago. The question is: does the new government have the the will and the creativity to aid in this transformation, or will it let inertia dictate its developmental agenda?

Posted via email from The Invisible Sand