Wednesday, February 22, 2006

"Hugo Chavez Economics For Syria?" By EHSANI2

By Ehsani2

In the comments to the previous post, an Anonymous writer expressed his frustration at Mr. Ajjan’s pole cards because their economic variable was focused on “attracting foreign investment.” The author objected to the notion of foreign investment. To be fair, I also do not like to define an economic policy purely as “attracting foreign investments”; nevertheless, I believe investment is important, both domestic and foreign.

Foreign investors decide to invest when they sense that a country has a friendly business environment that will protect capital and offer higher rates of return than elsewhere. Capital is unlikely to head to countries that have a poor legal system, heavy-handed state intervention, corruption, and cronyism. Capital migrates to vibrant market based economies, where property is protected. In sum, there is no economic system of “foreign investments.” Instead, a country needs to establish economic policies that attract investment, domestic and foreign. As I will argue later, business creation and competition creates jobs. For these businesses to continue to grow, they need to make a profit. When they make a profit, they decide to invest further in the business. This results in more hiring. The higher employment brings with it higher wages, income, and hence consumption. Businesses meet the increased demand with increased production and jobs. This is the virtuous circle that market economies have been able to deliver. The father of this simple economic approach is Adam Smith. But before I try to convince you about the powerful positive forces of capitalism, let us go back to what our Anonymous person wrote.

The suggestion was made that Syria should strive for economic development that would involve “very strong labor laws, mass participation in labor unions and syndicates, developing local industry and maintaining food self-sufficiency.” The Syrian people should in effect tell foreign investors to “go to hell” we were told. Syria is urged to follow a model of “democratization of capital” where “democratic and popular organizations” take more direct popular control over resources (as opposed to state or private sectors taking over such control). It was concluded that Syrians should work hard on rejecting foreign investments by adopting domestic economic policies that “will most definitely hurt foreign investors.”
What is this Anonymous person talking about? What does he mean by democratic and popular organizations taking direct control of resources? Why would he reject foreign investors and ask them to “go to hell”? Let us enter the world of Hugo Chavez, the economic hero of our Anonymous poster. I will start by explaining what the Venezuelan President’s record has been and whether Syria should embrace that country’s economic platform as it was suggested.

A primer on the Hugo Chavez’s Venezuela:

To be sure, the entire continent of Latin America is currently experiencing a resurgence of populist leaders who are pushing for a heavy government hand in the economy. This grew out of opposition to U.S.-backed free trade proposals. Chavez and these leaders are trying to promote a world that is anti free trade and anti laissez-faire. In its place, they want to convince us that there is a new alternative, which Chavez dubbed “socialism of the 21st century.” His new brand of socialism works like this:

The central Government imposes strict price controls to protect the poor majority from “greedy capitalists” and “speculators.”

Any businesses that refuse to abide by these price controls and decide to shut down their plants (most can no longer make any money selling at such capped prices) will have their plants expropriated. These expropriated companies will be turned into government-financed operations, jointly by the state and worker cooperatives. The program was named “democratizing capital” which is the same expression our Anonymous Syrian poster used above. What this program involves is a backdoor attempt to lead the country down the path followed by Castro's Cuba, Mr. Chavez’s mentor. Once the companies have been taken over, the government will sell its stake to the workers of these companies.

Where does the money come from? In the case of oil rich Venezuela, the state simply embarks on a large-scale subsidy framework for weak companies financed with oil revenue. Whatever privately owned companies remain will be asked to share profits with employee cooperatives and give them seats on their boards, in exchange for working capital from the government. Where does the money come from? Oil revenues of course.

So let us recap again. The government will turn all cash strapped private sector companies into co-managed concerns in exchange for government funds. Private firms that decide to idle their land and plants will have them expropriated and confiscated. The government will also have the right to seize the assets of healthy private companies if it so chooses. Companies, which have been taken over, will be converted into co-managed entities. For the record, most private companies that have adopted co-management have yet to begin production. The first Company that was confiscated and that received government subsidy has already filed for bankruptcy.

Mr. Chavez continues to defend his “socialism of the 21st century” program of course. The self-declared socialist also continues to argue that the state has to play a larger role in the economy to protect the poor. His populist leftist political agenda has already wrecked havoc on his nation. As the world’s fifth largest oil exporter, Venezuela has used hoards of its new oil money to fund a philosophy that has resulted in product shortages and a thriving black market in this rich nation of 26 million people, where poverty is widespread.

Is this what we want for Syria?

Once everyone reads the above economic prescription, I hope that it will become obvious that Syria does not need more State intervention, but less. I also hope that people will agree that Syria does not need more price controls and subsidies but less. The Baath party brand of socialism has already damaged this country enough. The last thing that we need now is a new brand of socialism even when it has sexy titles such as “socialism for the 21st century”, “co-managed economy,” or “democratization of capital.” Such fancy titles do not obscure the fact that every country that flirted with socialism and Marxism has seen lower standards of living for the very same people that these philosophies were created to protect.

Let us now go back to my world of Adam Smith.

“The wealth of nations derives from the uniform, constant, and uninterrupted effort of every man to better his condition.” The basic principles of Adam Smith’s stress the importance of free trade, putting consumers before producers, allowing and encouraging competition, rolling back state regulation, and preventing politicians from trying to shape economic life in their own image. These are clearly the type of policies that Syria ought to embrace after years of flirting with the failures of socialism. People on this forum have asked for import and investment controls as well as a “self-sufficient Syria.” Allow me to quote the 36-year-old Scottish Adam Smith once again:
Very good grapes can be raised in Scotland, and very good wine can be made of them-at about thirty times the expense for which at least equally good wine can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of Claret and Burgundy in Scotland?
Every country that has embraced the above principles has succeeded in increasing wealth for its people. Take Britain as an example. Before 1979, it was the ideas of Karl Marx and Keynes, which were influential; after 1979 it was the ideas of Adam Smith. Anyone that knows anything about Britain can tell you the difference. Prior to 1979, the state was taking over industries, union power was rising, and government was growing larger while the individual smaller. The country was in a steady decline. After 1979, free enterprise, individual choice, competition, less regulation, freer trade, and open markets all came together to reinvigorate that ailing economy.

Syria needs to follow in Britain's footsteps. Its future economic system needs to let its ordinary people be set free from the heavy hand of the government. It needs to introduce competition by giving people room to create and innovate. It needs to remove much of the protection of government. It needs to end subsidies and supports by placing industries under the competitive pressures of the private sector. One poster on this forum wanted economic reform and investments in Syria to provide Syrians with:
a “protected” living wage; National Health Care; K-12+4 free education; x number of weeks of vacation; a retirement plan and free rights to unionize and strike.
How about free coffee and breakfast to all employees in the morning? What is interesting about proponents of these programs is how they conveniently ignore how and who is going to pay for all of this?

Chavez of Venezuela has decided to squander his country’s oil revenues on his crazy philosophy. Can Syria afford such an experiment? Has the country not spent enough on subsidies and so–called free education, and haven’t the results been disastrous? Our anonymous writer wants to tell foreign investors to “go to hell.” Well, Syria has done that for the last 43 years with devastating effect. Foreign investors and owners of capital scour the world searching for a return on their investments. They look for places that would legally protect their investments and allow them to earn a healthy return.

No government entity can or should tell them which sector to choose. Governments can certainly have tax incentives to direct these investments if they so wish. Note that global competition for such capital is very intense. Wrong policies and ill-advised economic programs are quick to scare investors away. Rather than saying to foreign investors “go to hell,” Syria should craft policies that attract them to its industries. This would help create jobs and reduce its large pool of unemployed. Only when Syria embraces market economics will investors - whether foreign or Syrian - feel confident enough to invest in Syria rather than doing so in neighboring economies. Let us please stop this nonsense about copying the crazy policies of Chavez or the old tired socialist system of the Baath.

In conclusion, the heavy hand of government regulation has never proved to be a good agent when it comes to raising living standards. Programs that are designed with the noble purpose of helping the poor inevitably end up creating wasteful government bureaucracies; shrinking economies, lower productivity, high unemployment and lower standards of living. When you hear about a government program, always ask yourself the question of who is going to pay for it and where is the money going to come from. Syria’s Baath gave us their brand of Socialism and the results are for all to see. We do not need a new brand of socialism. Chavez can have his and leave our already damaged economy alone. There is no such thing as a “foreign investor’s policy.” What Syria needs is a dose of free market capitalism that unleashes the potential of this great nation. If we ever succeed at this, foreign investment will be the by-product of successful policies. What sectors they will invest in will be sorted out by the markets not by a government or party officials.

We need to be part of the global economy. It is going to be hard because we are late. Our education system is woefully inadequate. Our infrastructure is not up to the task. Our labor force does not have the needed skills. But start we must. It is not too late. Syria is on the cusp of being next door to an EU country in the next ten years. This will present enormous opportunities for increased revenues from transit, trade, and tourism. But the competition for capital is going to be intense. If foreign investors agree to invest in Syria, we should thank and receive them with open arms. Chavez may ask them to "go to hell.” Hopefully, the Syrian people are too smart to emulate him.

40 Comments:

At 2/22/2006 07:34:00 PM, Blogger norman said...

Ehsani2 ,you wrote the road map to Syria,s economic revivel and for that i thank you as i agree with everything you said,what i want to add is that what Chaves is trying to do Syria did for fourty years and knows that it does not work and that is why they are moving toward free market economy slower than i like but lifting price control on products and encouraging investments are indication of their intend so we should cheer them and push them ,i remember the eighties in the US when president Regan became president and started implementing deregulation and smaller govorment which led to the inflation under control and to the longest economic recovery that the US had seen all because of free market, deregulation , smaller govorment and fair tax system,that is what Syria needs.

 
At 2/22/2006 08:04:00 PM, Blogger George Ajjan said...

Excellent analysis Ehsani2.

On the poll, the economic attribute has 2 choices:

Economic reforms, encouragement of foreign investment, & reduced corruption will lead to higher wages & strong economic growth
or
Slow progress of economic reforms & inability to attract foreign investment or tackle corruption will keep wages flat & prohibit economic growth

These statements propose an end, and the means to get there. The end is, basically, good economy or bad economy. The means are 3-fold: economic reforms, corruption, & foreign investment.

Therefore, syriapol asks the participant to accept that encouragement of foreign investment will be one of 3 factors that leads to economic growth, or that inability to attract foreign investment is one of 3 factors which prohibit economic growth.

Ultimately, the poll user is evaluating the end outcome.

Some people may debate Ehsani2's free market argument, but based upon the results obtained thus far from poll-takers, they are in the minority. Within the economic attribute, the preference of poll takers seems to be overwhelmingly in favor of the first option, in which foreign investment is one of 3 factors that grows the Syrian economy.

Therefore, I plan to leave the economic issue alone, as it is currently phrased.

 
At 2/22/2006 08:17:00 PM, Blogger Joshua Landis said...

This post has been removed by a blog administrator.

 
At 2/22/2006 08:52:00 PM, Blogger syrian said...

Ehsani,

While I appreciate free market economics to the fullest, I would like to point out a couple of things.

1. The arguments Adam Smith uses to justify free trade are mostly erroneous and outdated. Capitalist principles of free trade are based on the concept of Comparative Advantage (David Ricardo). (see http://www.econlib.org/library/Columns/Teachers/comparative.html for a history of Comparative Advantage)

2. Free market capitalism does not place consumers before producers; it assumes that no single consumer and no single producer is large enough to have a significant effect on the market. At the Macro level, you can argue that Consumption and not Consumers it the driving force behind the performance of the economy.

3. Your analysis completely ignores the view of public education and national health care as Public Goods. The benefits that accrue to society as a whole exceeds the cost imposed on society from making certain that certain minimal levels of both goods are desirable. Most Libertarians are people who adopt the view that free market systems are the answer to the entire world’s problem. They seem to have stopped studying economics right after supply and demand and go on assuming that markets never fail. Market failures are many and common and some form of government intervention would be desirable.
4. Who would pay of all that. (answer) Some tax revenues need to be directed to the provision of public goods.

5. Labor should be free to unionize and strike?? The simple defense for this statement is the basic argument of all market economics – Individual liberty must be preserved at all times. More fundamentally, labor generally tends to unionize in industries where bargaining power is unequal between employers and employees. And that is usually in large industries dominated by a few employers (one of the cases where market economics would fail in providing the socially optimal level of output.) The discrepancy in bargaining power is the root cause of all unions and they (unions) do serve a purpose in that they, at least in theory, can lead to more equal division of the excess economic profits that are made by employers in the relevant markets.

6. I have to agree with you on the minimum wage here. The minimum wage is nothing more that a law that makes it illegal to employ people with very few skills. However, I would also argue that minimum wages in a growing economy would tend to become ineffective as the economy grows. Economic growth would generally be accompanied by increases in real wages across all sectors of the economy and the minimum wage becomes a simple political tool that makes someone look good without really doing much harm.

7. “Business creation and competition creates jobs. For these businesses to continue to grow, they need to make a profit. When they make a profit, they decide to invest further in the business. This results in more hiring. The higher employment brings with it higher wages, income, and hence consumption. Businesses meet the increased demand with increased production and jobs. This is the virtuous circle that market economies have been able to deliver”. According to this analysis, there is no such thing as a business cycle (again macro). While this might be true for a single company or even industry, it would not be true for the economy as a whole. Long-run economic growth is much more complicated than a simple businesses make more money so they raise wages and that makes people want to buy more stuff and that causes companies to produce more….. We can finish this story by saying that the increases in demand for the product will cause prices to increase which will raise profits even further and now the whole cycle will start again companies pay more, people buy more, more profits, higher prices……..I think I’ll stop here.

If you buy that story then please elaborate on where all this extra money is going to come from. If the prices are rising, isn’t that inflation and isn’t that bad…

The fact is, to promote real economic growth (real increases in an economy’s productive capacity), policies, fiscal and monetary, have to be implemented. Implementing these policies in an effective manner is a delicate balancing act that requires a whole lot more in-depth analysis than can be provided here and that would most certainly be dependent on the conditions under which growth is taking place.

There is probably not enough space on this blog to discuss long run economic growth and how government policies can be directed to that end. Government intervention is definitely needed to mitigate the effects of the Business Cycle (Stabilization Policies)

8. As to FDI, economists disagree on the effects of FDI on a national economy; however, in an economy as small as Syria’s, I would doubt that there is sufficient internal financial capital to finance the needed infrastructure that needs to be built and I would suspect that FDI could have a positive effect on the Syrian economy.

9. If the Syrian government announces tomorrow that all economic regulations are lifted, all taxes are cut and all subsidies are stopped. If they free all trade and… well, basically the government says we are out of the business of dealing with the economy and we are just going to trust the markets to do the job for us, what do you think will happen????

10. Reform is necessary, we all agree on that. We all agree that economic reform should take us more and more towards a competitive market capitalist economy. This is probably true for the overwhelming majority of outside observers such as ourselved. Now, consider the case where in the course of reforming the economy you were able to secure a license to build a 5-star hotel on the Syrian coast. One of the first things you would do, once your license is secured, is to start to lobby the government to make the license exclusive. Self interest will prompt you to do that and if it does not then you will be violating the first tenet of a free market economy (Adam Smith's invisible hand where all are guided by the pursuit of self interest.) You in effect will be attempting to slow down the pace of the reform (see point 11.) Most observers, however, disagree on the pace of the reform which is a very subjective assessment. Of course the pace of the reform is going to depend on the conditions on the ground where reform is taking place. For my part, I am willing to trust that the reformers are progressing at the best pace they can accommodate simply because they have more information about their environment than I.

11. It is further important to remember that economic policies are formulated by politicians and not economists. Politicians have multiple objectives when formulating policies and economic efficiency does not always play the leading role. Having said that, I do not believe that economic reforms can be taken seriously in a society dominated by a dictatorship. All the reforms depend on the benevolence of the dictator and all the laws can be changed overnight. I believe that the pace of the reform in Syria can be taken as an indicator of the strength of the dictator (not the regime). There is no doubt that the interest of a lot of powerful people stands threatened by changing a system that is built to benefit them and they would do everything in their power to stop the changes or at least stall them as long as possible. As the strength of benevolent but weak dictator increases, so would the pace of reform. The true test of benevolence is when the dictator implements political reforms under which laws are passed by means other than presidential decree.

 
At 2/22/2006 09:08:00 PM, Blogger Lockheed Hayheehoo Macedon said...

We all know the Oppressed become worst than their former Oppressors.

Venezuala is a flash in the pan... nothing more...

 
At 2/22/2006 09:53:00 PM, Blogger EHSANI2 said...

Syrian30,

Thank you for this post. We could discuss this subject forever of course. Let me just say that monetary and fiscal policies are important cornerstones for market based economic management. Indeed, central banks play an important role in smoothing out economic cycles and help in achieving the goal of maximum sustainable economic growth with low inflation. You also made a comment about a 5-star hotel license and the ability to make it exclusive. As you know, Smith urged governments to enforce competition. It should not give in to well-argued demands of monopolists. It should punish people and authorities that conspire to fix prices, divide up markets, or restrict production. Monopoly, writes Smith, is a great enemy to good management. The lack of competition, similar to your 5-star hotel example, is one of the main problems with Syria, as we know today. As to your comment on education and the need for public policy that targets this critical area, I could not agree more. Indeed, this is another cornerstone of competitive and vibrant societies. Syria as I had argued earlier is woefully unprepared in this regard. I am in favor of significant public investment in this critical area. The basic point here is that all the excellent points that you raised are consistent with economies that embrace capitalism and free markets.

 
At 2/23/2006 03:15:00 AM, Blogger Torstein said...

I strongly agree with Syrian30 on the points he raises on extreme capitalism. Because there is capitalism and there is capitalism. I sincerely hope that Syria will not go down the road of other developing countries that have completely freed up their economies with the following social breakdown and loss of control over their own societies. The most successful countries that have reached high living standards (which cannot only be measured in GDP per capita), for the general population, such as the East Asian Tigers, have not only followed the rules of capitalism, but have also intervened heavily in the economy. Capital seeks return, but does not create a good society. That is the job of the government.
That is why the economic policies of Thatcher in Britain in the 1980s is highly controversial to use as an example. Since then, Britain has not only had higher growth than the rest of Western Europe, but has also generated increasing social problems and has as far as I can remember the highest proportion of poverty in the region.

 
At 2/23/2006 06:33:00 AM, Blogger ugarit said...

EHSANI2:

"a “protected” living wage; National Health Care; K-12+4 free education; x number of weeks of vacation; a retirement plan and free rights to unionize and strike.

How about free coffee and breakfast to all employees in the morning? ..."

If you truely believe that people having a living wage, national health care, k12... is equivelant to free coffee and breakfast then you don't have a clue on what matters to most people. There must be limits on what the market can and should do to a people. Neither the "free" market nor "socialist" market should be worshied. Neither one is going to be successful on its own.

A mixed economy is a recipe for robustness. Please don't use the US as an example for how a free market should be. The people of the US are in trouble.

Agreed so called "socialism" can and will stifle much innovation, but not all of its positive attributes should be discarded.

 
At 2/23/2006 09:44:00 AM, Blogger syrian said...

Ugarit,

What do you mean by "mixed economy".

Suppose you create a bureaucracy to implement a well intentioned program. The people who are entrusted with the implementation of your program will have at least two relevant objectives. 1) Implement the program and 2) make sure that they keep their jobs. Since they are entrusted with the program it would stand to reason that the second objective will take precedence over the first (self interest always trumps public interest). A portion of the resources directed to the program will then be used to make sure the program grows and become more and more indespensbile. You end up with a large bureaucracy where the atual program takes a backstage to the bureaucrats propagating their own interest.

If, on the other hand, you mean the implementation of a set of laws that protects individual liberties, enforce property rights and promote competition then you are talking capitalism without socialism.

Please note that while I agree that K-12 education is a public good and should be provided by public monies, I do not believe it should be provided by building large and complex public institutions where education becomes secondary to educators' self interest.

for more on free market read this
http://jim.com/hayek.htm
or the full version if you care to get a copy.

 
At 2/23/2006 10:15:00 AM, Blogger ugarit said...

"If, on the other hand, you mean the implementation of a set of laws that protects individual liberties, enforce property rights and promote competition then you are talking capitalism without socialism.
"

A set of laws to protect individual liberties, property rights, workers' rights, gender rights, educational and health access rights would be essential to the well being of a nation. That would be a mixed economy, in my mind. The welfare of citizens is not merely measured by how a stock market is doing or GDP per capita.

Just as we scoff at the idea of how "socialism" can solve most problems we should have healthy skepticism of "capitalism".

I don't want to see the authoritarianism of "socialism" to be replaced by the authoritarianism of "free" markets and excessive consumerism.

 
At 2/23/2006 10:30:00 AM, Blogger syrianjuice said...

Well to be flat out honest, ehsani and syrian 30, all you are doing is reciting my first year microeconomics and macroeconomics. I ask you to stop blinding yourselves and taking that market theory for granted. If you listen to biggest players in the financial world, they tell you how unstable markets are and how they can be extremely inefficient in things that matter to people. I am not trying to push a socialist point of view. Do i know what kind of system Syria needs? Heck no, but i surely know that with the existing conditions, a free market will only allow the most corrupt thieves to act people with capital. Who is going to hold them accountable? No one, thats the answer. Running an economy is no textbook followed task in which you brag about high investment --> high wages and all that crap. Look at the facts on the ground and judge. The free market is failing in the united states, just look at how much poverty is increasing. A european approach i think is more relevant. I mean you guys want a free market for a country that its whole economy is based on Wasta, corruption, bribery, patronage, tribal etc etc. Look at what happend to some countries like Mexico, Argentina, Turkey, Russia when so called free markets were introduced for the IMF to give them money. All these economies crashed, whats going to safeguard the Syrian one?

 
At 2/23/2006 10:53:00 AM, Blogger ugarit said...

syrianjuice:

You've said it so well. The western european model is much better. that's what I've been trying to say. The quality of life in western europe is generally better than the US. There are more protections for its citizens against the authoritarianism of coroporations.

There is nothing sacred about capitalism nor "free" markets.

 
At 2/23/2006 11:31:00 AM, Blogger syrian said...

Juice,

You are right in that the discussion never progressed beyond basic free market analysis that you would learn in the intro to micro and macro classes. However, what you learned in those classes is the basis of all market economics.

Both you and Ugarit have fallen into the trap of associating free markets with big business. If you remember from your intro classes, the assumptions of a perfectly competitive market is that there are no businesses large enough to affect the market.

The free market system would not work in a society dominated by wasta, corruption... because it will not be a free market. It will simply be a system set up to hand out monopolies and no free-market economist will think that would be a good idea.

The reform process is one in which culture, law and economics are all inter-related. That makes reform a pretty complicated task that cannot be taken lightly or sped up to the point where you will end up in the same situation as the countries you mentioned.

The consistent underlying theme of all arguments for big government is that the government can do for people what they cannot do for themselves While that might be true in cases of public good provision it is completely false in areas where the government undertakes that task of fighting poverty through handouts. Social programs the way they had been implemented in Western Europe and the United States create an incentive system that is counterproductive and, while it may superficially take some people over the poverty threshhold, would invariably provide no incentive for people at the bottom of the scale to better themselves.

Everything we discuss here will remain nothing more than mental masturbation. The problems of reforming an economic, political and social system would definitely require a hell of a lot more than one person typing a few paragraphs in a few minutes.

The one indisputable and generic fact the cannot be argued is that as a nation move towards market based economies (not monopolies and government handouts) the welfare of all its citizens will improve. Maybe not equally but it will definitely improve.

 
At 2/23/2006 11:45:00 AM, Blogger Nafdik said...

Great post Ehsani.

It brings an important question of should we favor:

a) Russia model, democracy first, economy later

b) China model, economy first, democracy later

Unfortunately so far the syrian model has been:

Assad, first
Assad, Later

 
At 2/23/2006 11:55:00 AM, Blogger ugarit said...

Let's face it guys there is no such thing as a free market. Let's not fall for that myth.

Markets are always regulated and should be, to reduce their negative impact yet allowing them to have a positive impact.

If a government is controlled by its people it will have to bend to the people. If corporations control governments (USA :-)) they're always going to prepetuate the myth that big government is not good yet they will ask for corporate "welfare" from the govt.

I work at a US civilian govt facility and see how corporations overcharge and yet claim that they have made the govt leaner and more efficient. It's non-sense. It's voodoo economics or also known as Reagonomics.

 
At 2/23/2006 12:52:00 PM, Blogger Hanny Hindi said...

Ehsani,

I appreciate your thoughtful post. However, I think that Chavez and "socialism" are strawmen that may obscure what's really at issue.

First, to examine Chavez's policies in purely economic terms is to ignore the proverbial "800 pound gorilla": Chavez is an autocrat who is using populist bluster to consolidate his position. Enlisting "the poor" in a power grab isn't exactly a novel tactic.

Second, a true debate on the merits of socialism would be very different than what we're engaging in here; comparing Smith to South American populism is an unfair fight. The proper comparison would be between Smith, Ricardo, Hayek and other theorists of capitalism and the brilliant and thorough writings of Marx and Engels.

I do not propose that we open that debate here. Instead, I'd like to introduce a third alternative: the economic protectionism of Friedrich List. (The best introduction to List that I know of is James Fallows' 1993 article in the Atlantic: http://www.theatlantic.com/politics/foreign/fall1f.htm)

Very briefly, List believed that "free market" capitalism was only viable in mature economies. Developing economies and industries require state protections in order to thrive and would fail without them. As List put it in his 1837 work _The Natural System of Political Economy_ (cited in Fallows):

"The lessons of history justify our opposition to the assertion that states reach economic maturity most rapidly if left to their own devices. A study of the origin of various branches of manufacture reveals that industrial growth may often have been due to chance. It may be chance that leads certain individuals to a particular place to foster the expansion of an industry that was once small and insignificant -- just as seeds blown by chance by the wind may sometimes grow into big trees. But the growth of industries is a process that may take hundreds of years to complete and one should not ascribe to sheer chance what a nation has achieved through its laws and institutions. In England Edward III created the manufacture of woolen cloth and Elizabeth founded the mercantile marine and foreign trade. In France Colbert was responsible for all that a great power needs to develop its economy. Following these examples every responsible government should strive to remove those obstacles that hinder the progress of civilization and should stimulate the growth of those economic forces that a nation carries in its bosom."

Ehsani, you made the comparison between the bloated welfare state of pre-1979 England and the growth that resulted from Thatcherite reforms. I grant the point without argument. However, I believe that List would point out that England was already a *highly* developed economy in 1979 and therefore ready to introduce a more laissez-faire approach. To take another instance, even if we ignore the nearly free labor force that the Americans had at their disposal until 1864, it would be very difficult to argue that the early economic growth of the United States was not dependent on protectionist tariffs, etc. The same can be said of England in Edward III's day, or France in Colbert's. The "Asian Tigers" can serve as contemporary examples.

This is the point I'd like to offer for debate: Syria today is closer to England in the days of Edward and Elizabeth than it is to the England of Baroness Thatcher. Therefore, developing its economy will require some degree of results-oriented state intervention and protectionist economic policies. Because Syria is currently in no position to compete with the likes of America, South Korea or Japan on "equal footing," abstaining from this kind of protectionism will lead failure.

I do not necessarily agree with this proposition, but I'm curious to hear what others think. Also, I mean "state intervention" generally and don't want to focus on the current regime's ability to implement it.

Best,
HH

 
At 2/23/2006 01:25:00 PM, Blogger EHSANI2 said...

This is turning out to be a great discussion. I am so impressed with all the posters here.
Syrianjuice is correct in saying this started as a basic and relatively shallow textbook economic discussion. My initial objective was to start a discussion on the subject matter and see whether enough people would join the discussion and in the process help take it to a higher level.

I am glad to report that you have indeed.

I will offer my own thought shortly.

In the meantime, I would like to summarize the discussion thus far.

A number of you seem to have a problem embracing a full-fledged market economy. Ugarit, for example, thinks that the people of the U.S. are in trouble and that he would therefore prefer a mix of socialism and capitalism. While he agreed with Syrian30 that capitalism has a better chance of protecting civil liberties and property rights, he continues to be wary of the power of free markets. According to Ugarit, “the welfare of citizens is not merely measured by how a stock market is doing or GDP per capita”.

Ugarit, how do you suggest we “measure and track” the welfare of citizens?

Syrianjuice admits that he does not know what the best system for Syria is. What he is sure of though is that Syria is currently unprepared for capitalism given its rampant corruption and cronyism. He then proceeds to agree with Ugrait that the “free market is failing in the U.S.” and that countries that embraced free markets and listened to the advice of the IMF have all “crashed”.

Syrian30 counters by reminding us that free market systems fight monopolists (please see my Adam Smith quote on the subject above). He also thinks that in spite of our best efforts, we are merely involved in mental masturbation as a serious discussion of this topic is impossible on a forum like this. He concludes by touting the indisputable power of market-based economies to raise the welfare of all citizens.

Nafdik succinctly reminds us that the Syria of today is the unique brand of Assad economics-call it what you want, my family has to make money and lots of it.

Ugarit concludes that he has seen enough private sector greed at his job to convince him that Reaganomics is voodoo economics and that it nonsense.

Hanny Hindi has just posted an outstanding comment. He reminds us that free market capitalism is only viable in mature economies. Developing economies like Syria are, therefore, better off with “some” degree of results-oriented state intervention and protectionist economic policies. He urges us to read the writing of Friedrick List as an intellectual framework.

Well, what I can say? I never thought there were so many thoughtful people on this forum. Having summarized the discussion thus far, I recommend we move it specifically to Syria now. I will be following up with that soon, but would love to hear from others in the meantime.

 
At 2/23/2006 01:32:00 PM, Blogger ugarit said...

Hanny Hindi:

The arguments you pose are very mature and make sense.

It would a disaster for Syria if it adopted a "free" market economy without protections and guidance by a government. The problem is the government would have to know what's doing.

Let's not forget that Englad industralized mostly because of its exploitation of much of the world and of its extensive use of east asian technology, chiefly chinese.

On a different note, Thatcherism was good for a small group of elites.

 
At 2/23/2006 01:43:00 PM, Blogger ugarit said...

EHSANI2:

"Ugarit, how do you suggest we “measure and track” the welfare of citizens?"

That's a great question and a very difficult one. Clearly I'm not an expert at this but here's some brainstorming (how does one say that in arabic?:

% of population with access to safe food and water.
% of population which has access to safe housing
% of population at poverty or lower level (tought to define)
Literacy rate
distribution of wealth
% of population which has received a minimal level of education (minimal would have to be defined)
% of population with access to health care
crime rate
fertility rate
unemployment rate

the list goes on and on. GDP/capita and stock market is mostly relevant to the elites of a country.

there are methods to assess different countries. I'll track some down. The US does'nt fare well when compared to Europe.

 
At 2/23/2006 02:18:00 PM, Blogger syrian said...

Hanny,

Protectionism, even of infant industries, might make sense to some people but it is still dead wrong.

Protecting an infant industry is saying that your population must use inferior products while the producer learns how to make them better, shifting the cost of learning from the profit seeking firm to the hapless consumer.

Just because someone does not know how to do something well (domestic producers) is no reason to give them an advantage at the expense of someone else (domestic consumers). It would only stand to reason that the producer, who sees a profitable opportunity, should bear the cost of learning how to be in the industry.

List and Smith both make the mistake of evaluating trade in terms of the distribution of income that would result from such trade. Free trade is not desireable because of the incomes it generates but because of the added consumption possibilities that it creates.

Ugarit,
GDP/capita is not the end all measure of the standard of living in a nation. Most of the other things you listed are important in making an informed evaluation of the standard of living. Having said that, real GDP/capita does historically have a significant positive correlation with most of the other factors you identified.

 
At 2/23/2006 02:25:00 PM, Blogger syrian said...

Ehsani,

I would love to move the discussion specifically to Syria. Only problem is that I know nothing about Syrian laws, taxes, subsidies, social programs....

I've been out of the country for over 30 years now and, sadly, did not keep up with changes that may have taken place. An when I left I was way too young to really have known anything.

Looking forward to what you have to say.

 
At 2/23/2006 03:11:00 PM, Blogger EHSANI2 said...

Syrian30,

Regardless of your current knowledge of Syria, I am sure that you will have a lot of relevant insights as we discuss this further.

One of the most intriguing and relevant examples that we could focus on is that of Turkey. I have watched that country very closely for sometime now. What this country has been able to achieve over the past 26 years is nothing short of remarkable. As I was growing up, Turkey suffered from a stagnant economy, rampant smuggling, product shortages and general malaise. Believe it or not, Turkish merchants used to visit the markets of Damascus and Aleppo to find the basic products that they were hard pressed to find back home. Syria, at the time, had just embarked on its “corrective movement” under the new Presidency of Hafez Assad. Starting in 1970, the country experienced an economic revival that lasted at least eight years. Turkey looked south of its border with envy. Syria’s fortunes reversed with the start of the Moslem Brotherhood uprising. The economy was one of the victims and has not recovered since. Turkey on the other hand, started its own miraculous economic turnaround thanks to one man:

Enter the world of Turgut Ozal:

What this man was able to do for his country could well be a textbook roadmap for Syria today. I would like to open this for discussion because Turkey embodies tremendous similarities to Syria from a developmental, geographic, religious, cultural and historical perspective. I have studied this issue in a lot of detail and would love to hear what others have to say before I offer my own thoughts. If you read about Turgut Ozal and come to realize what he has been able to achieve for his country on the economic front, you cannot but feel optimistic in knowing that “it can be done” , and that were Syria to have the will to reform its economy, an excellent previous template is there for it to study.

More later, but would love to hear from you in the meantime.

 
At 2/23/2006 03:47:00 PM, Blogger Atassi said...

This post has been removed by a blog administrator.

 
At 2/23/2006 03:50:00 PM, Blogger Atassi said...

This is indeed very interesting discussion; I would advice the Syrian economies and finances ministers and high level ministry staffs to participate in this forum. It will be unprecedented to see some comments from either of them. I know for sure that Mr. Lotufi is a well educated, open-minded and English speaking Minster.
syrianjuice
Wrote
"Look at what happened to some countries like Mexico, Argentina, Turkey, and Russia when so called free markets were introduced for the IMF to give them money. All these economies crashed what going to safeguard the Syrian one?"
Please look at the same countries now, their economy has recovered remarkably, and almost back to pre crash point; they even paid the IMF and world bank debuts EARLY.
Syrian needs to concede their economic failures and work on a producing an economic program and policy analysis
That significantly increases efforts to strengthen the financial architecture of the state.
This program should be endorsed and championed by international organizations such the IMF and the World Bank. to minimize the risks and misperceptions

 
At 2/23/2006 03:54:00 PM, Blogger ugarit said...

A couple of useful links:

Syrian Economy (Nation Master)

Nation Master

 
At 2/23/2006 04:03:00 PM, Blogger Hanny Hindi said...

syrian30,

What I find most compelling about List's argument is how seamlessly it integrates with our knowledge of history. It's difficult to claim that the First World nations got where they are as a result of free market policies. List, on the other hand, doesn't need to explain away the imperialism and slavery and tariffs and protections; his argument depends on them. Does this mean that we simply engage in all of these practices, some of them unspeakable crimes? No. But, it may require us to draw the line well to this side of "laissez faire."

I ask from ignorance: Can you give an example of a major economy that did not require state protection in its infancy? Turkey? I'm looking forward to hearing where Ehsani's going with that example.

You're right that any policy of economic protectionism will necessarily be to the consumer's short-term disadvantage (and perhaps to their long-term disadvantage, though that's not as obvious). List faces this point honestly. He would submit that either you can allow your consumers access to the best products or they have to suffer at the expense of developing the economy. He prefers the latter. It's not simply a question of who should bear the cost of development. The cost of competing may be *fatal* to "immature" domestic producers, rather than simply being "expensive." With protections, consumers are (at worst?) inconvenienced.

To make this more concrete, I ask another question from ignorance: what industries might Syria plausibly compete in if "free market" policies were immediately adopted?

Best,
HH

 
At 2/23/2006 04:05:00 PM, Blogger ugarit said...

Some more links:

Human Development Reports :SYRIAN ARAB REPUBLIC 2005 (arabic: pdf format)

"Education and Human Development: Towards Better Efficiency

This year's NHDR, focuses on the role of learning in the preparation of young Syrians for impending challenges. Reform of the educational system has been acknowledged as a key strategic initiative for equipping Syrian society with the skills needed to prosper within the framework of a knowledge-based society, characterized by a market economy, good governance, gender equality, human rights and the rule of law. The report calls upon stakeholders of educational policies, decision makers in the public and private sectors and civil society to develop an alternative, comprehensive strategy that moves from piecemeal micro-level educational reform policies towards comprehensive, structural adjustments."

Source

 
At 2/23/2006 04:15:00 PM, Blogger ugarit said...

What appears to be useful documents on the syrian economy:

Source

 
At 2/23/2006 04:16:00 PM, Blogger ugarit said...

Every economy protects its national assets. There is no such thing as a free market.

 
At 2/23/2006 04:47:00 PM, Blogger Nicolas92200 said...

Dear All,

I have to say that the this exchange is among the most exciting I have read yet, and that this has pushed me to wake up after a long blog-hibernation period. It is heart warming to read such debates, let alone throw in a couple of cents worth.

All that I can say has already been said, but just for the sake of statistics, I tend to lean toward Ugarits initial model of “mixed economy” found in real life in France, Scandinavia, etc. Whether this well implemented there or not is a different debate and this might not be the place for it.

Just like HH, I would love to see where Ehsani is going to go with Turkey comparison. HH’s question about what industries Syria can compete in in a free market economy is very interesting. My intial guess I would hate to say none! This is bcs in order to provide a platform for any industry to exist (let alone grow and attract investments) there are numerous measures that need to be put in place and these can only be provided a “state”, and this has not been done (or not been done properly) in Syria. To take a concrete example, let’s look at the tourism industry. Syria has the raw material (historic sites, scenery, climate, etc) but then the “infrastructure” still need to be developed before we can start talking about a really competing tourism industry. This infrastructure is to include : transportation networks (better roads, improved rail tracks, air transport, etc), Laws, security, labor skilled in the industry(via education programs, etc) and let’s face it: a good reputation!! These can only be provided by a “state”. But in Syria, these have not been provided adequately in order to form a platform for the tourism industry to grow on. This is where states have roles to play! Then once, an economy “grow up”, “States” still act as the watchdog for a country’s interest. (US congress and the Dubai Ports story for example).

 
At 2/23/2006 05:25:00 PM, Blogger syrian said...

"Can you give an example of a major economy that did not require state protection in its infancy?"

Actually I cannot. That is because there is probably no economy that did not participate in protectionism at one point in time or another.

Protectionism cannot be argued as a pre-requisite for economic success simply because we have no examples to the contrary.

I will try to write more about the subject with examples when I have more time; but now I have to run so till then...

 
At 2/23/2006 09:22:00 PM, Blogger Joshua Landis said...

Syrian30, when you do your protectionism story. Let me put it up at the top. Great response to Ehsani2. Important discussion. Thanks, Joshua

 
At 2/23/2006 09:38:00 PM, Blogger norman said...

Syrians in the US are propably more sucsessfull than in the EU and that is because of the opportionety that the US offer ,i think we should ask the Syrians .(if you have an opprtionety to live out side Syria which country would that be the US or the EU )the answer is ,I beleive overwhelmingly will be the US.

 
At 2/23/2006 11:16:00 PM, Blogger majedkhaldoon said...

It is a great discussion, but mostly theories, what we want in Syria is free market combined with taxation enough to cover goverment services to be used for defense, education,health care etc., provided that they can not be provided by individuals, or private corporations, but insist on transparency, and no corruption is tolerated,clauses like exclusive, or protection must be temporary,no more than three years, competitions are great, judicial and public control is necessary, whoever violate the law must be punished,giving rebirth to honest fair and reliable judicial system, and no one should be able to benefit from his job in addition to his salaries, the money that has been stolen by the officials in the goverment, or their friends and relatives, this money must return to the people, this money, as they return then, will be used for investments,that will turn Syria to heaven.

 
At 2/24/2006 02:38:00 PM, Blogger syrian said...

HH,

While it is true that the industrialized world may have started by implementing protectionist policy, those policies where not a result of List's argument. They were borne out of the traditions of mercentile culture when it was believed that a positive balance of trade account was a good thing. The wealth of nations in those days was measured by the amount of gold the nation had in its treasury and not by the consumption power of the population.

As a historical remark, industrialized economies keep getting stronger as the protectionist policies are removed not the other way around and the US would do well to ignore Mr. Fallow and his arguments in the Atlantic Monthly.

 
At 2/24/2006 02:40:00 PM, Blogger syrian said...

Josh,

Feel free to re-post my following post anywhere you like (with edits if you wish). I also leave it to you to try and give it a title.

I'm certainly honored that you even made the request.

 
At 2/24/2006 02:41:00 PM, Blogger syrian said...

Here it goes,



The principle of comparative advantage states that nations should specialize in those activities (production) where their opportunity cost is lower than other nations. We use the term “Opportunity Cost” here is used to imply that the relevant cost is not the money cost of production, rather, it is the real cost. The real cost of production, or of any activity, is what you must give up to participate. For example, I do not pay anything to write these words but writing imposes a cost in the sense that I would not be able to do something else using this same time. This cost is real and must be accounted for since it enters into my decision as to when I would write.

So, when a nation decides to use its resources to produce roads, it has simultaneously decided not to use these same resources to produce houses. The houses that were not produced are the cost of producing roads.

The great thing about comparative advantage is the implication that no resources can go to waste. Every person and every nation must have a comparative advantage in some activities and people and nations should specialize in those activities. The simplest example is one of a lawyer and a secretary. We take it for granted that the lawyer is better than the secretary at writing contracts or arguing cases; however, the lawyer may be better than the secretary at typing and filing. Does this mean the lawyer should fire the secretary and do everything himself/herself? Of course not; if the lawyer is to spend an hour typing he/she would have given up an hour of legal work. The lawyer and the secretary have done what nations should do. They are both better off by specializing and trading. This is made possible because, even though the lawyer has an absolute advantage over the secretary in everything, the secretary would still have a comparative advantage in typing (she does not have to give up as much as he does to type).

When nations specialize and trade, they produce output at the lowest possible cost and would be able to provide the product to their citizens at lower prices than could be achieved through protectionism.

Protectionism, the suppression of trade among nations, would require that products be produced inefficiently and would divert resources from productive uses to inefficient ones. The inefficiency in production will be reflected in higher costs and higher prices to the consumer. Furthermore, by protecting a specific industry you will undoubtedly hurt another industry. Suppose the government decides to protect the industry of engine production so that it limits the number of engines that can be imported. The protection will have a negative effect on the engine market in that only higher priced engines will be available. It will further have additional negative effects on the import industry; Importers of engines will no longer be able to operate on profitable terms. For every dollar, or Lera, gained in the domestic production industry there a corresponding dollar lost in the domestic import industry. The story does not stop here. The protection will have negative effects on additional sectors of the economy, namely those sectors that need access to engines in their production. They now have to operate with a more costly engine. The increase in cost will invariably be reflected by an increase in prices and decline in profits. As profits decline so would employment levels and average incomes.

The Recardian model of comparative advantage is a static model that describes how nations, and individuals, can decide on their areas of specialization. To answer a question posed earlier as to what Syria would be able to produce, the answer would be in those activities in which Syria has a comparative advantage. From the little I know about the specifics of Syrian economy I can comfortably say that, to start, Syria can specialize in Labor Intensive Industries. Syrian labor is cheap and a relatively small investment in training and education can go a long way towards improving the well being of all.

There is no single argument that can defeat the logic of Comparative Advantage in a static model and successfully introduce a rationale for protectionism. In order to defend protectionism, the argument has to go to a dynamic model in which learning the efficient methods of production requires time and during these learning periods, protectionism will be necessary (Fredrich Lisp/Alexander Hamilton argument).

This would be true under strict conditions of evaluating the future benefits from learning and the future value of the current costs associated with short-term protectionism. Academics have successfully demonstrated that it would be possible for the expected benefits to exceed the costs which lent a tiny little bit of support to the idea of protectionism in the case of infant industries.

The issue with the dynamic models used to support protectionism is that they only present a possibility. This is a possibility that depends on a lot of factors. The first factor is the amount of knowledge the government would need to have regarding what would constitute a sufficient amount of time for learning. Industries that succeed in lobbying the government into implementing protective measure have a huge incentive to claim they are still in the learning stages, should the protection continue? To take the point another reader made of setting arbitrary deadlines such as 3 years no more. What if the industry is actually learning but has not gotten quite so efficient at production just yet?

The second factor is the determination of what an infant industry is. Suppose a domestic auto industry has been profitably operating for 20 years is now faced with new stiff competition from imports of cars that are more fuel efficient, require less maintenance and cheaper to buy. Not protecting the industry would be “fatal” to this industry. Protecting the industry would be announcing to all industries that it is acceptable to stop innovating and its ok to operate inefficiently because the government will bail you out.

A third factor is the determination of what industry is actually worth having and protecting. I will use an extreme example where the answer is obvious. Suppose I decide start a passenger Jet manufacturing plant in Syria, should I be protected? How long should I be protected for? Should Syrian passengers be forced to fly using a plane that is built during a learning phase?...

I will pose the following question for you to think about

What is the difference between an investor who made his money in an existing industry that he does not deserve protection (second factor) and an investor who made his money in a different industry that makes him deserving of protection (third factor)?

Lastly, people in a free economy are constantly voting for what products they want by their purchases of these products. If there is a national feeling that an industry should be subsidized then they certainly should be willing to subsidize it voluntarily through a willingness to pay more for the domestic product than they would for the imported product. The idea that a government must force people in the process of subsidies tastes too much like the government knows what’s good for me better than I do. If you are willing to believe that some person sitting in an office can determine what is better for you than you can then you should not be complaining about the government that shares your views.

 
At 2/24/2006 05:01:00 PM, Blogger EHSANI2 said...

This post has been removed by a blog administrator.

 
At 2/24/2006 05:34:00 PM, Blogger EHSANI2 said...

Syrian30,

Let me start by thanking you and congratulating you for taking the time to explain the basic and elegant economic rationale behind free trade. In some sense, you stole my thunder because I was planning to write about comparative advantage myself, but I am glad you did since you did a superior job than what I would do. The reason I have not followed up with my promise to write is because I had a serious sports injury last night that has rendered my right shoulder and arm immobile for up to six weeks. Typing with my left hand is much harder than I thought. I did want to add two quick points to what you wrote. In my main post above, I think the quote by Adam Smith with regards to whether growing wine in Scotland is a good idea or not very much supports the case of free trade that you describe. I also want to mention a very relevant anecdote that concerns Syria itself. Back in the late 1970’s the country embarked on the so-called concept of self-sufficiency and state support for local industry at the expense of foreign imports. One of these industries targeted was “pencil” manufacturing. At the time, Syria used to import pencils from China for ½ Syrian franc. The pencil had its small rubber on top. Following the decision to support local industry, the state decided to start its own pencil manufacturing that would hire Syrian workers and avoid the strains on imports. Millions of Dollars later Syria did have its pencil industry, but the results were simply disastrous. By 1980, Syrian consumers had to pay 7 Syrian francs to buy their pencils. Moreover, these pencils now came without the useful rubber piece on top. An imminent Syrian businessman at the time had been invited to a meeting with Hafez Assad to discuss internal economic matters. When he was asked about how he saw Syria’s economic prospects, this Businessman recited to the President the Above example. At that stage, the President turned to his advisors and asked:

“Is this true? Is the pencil now selling At 7 francs?” I tell this story because I had personally heard it from the businessman himself.

I could go on and describe so many other stories and examples of the massive state sponsored grand experiments that have gone to massive waste. Let me just cite the tire, ceramic, wood, batteries and countless other industries that come to mind, and which wasted so much of our resources that would have been to better productive use. All these industries have failed miserably and have been depreciated down to zero in asset value. I wish I could write more but I physically cannot do so any longer. I will leave you with two additional economic concepts to ponder and think about. A country’s long-term economic growth potential is a function of its growth in productivity. Labor and capital flexibly and mobility are key prerequisite in enhancing such productivity. Joseph Schumpeter coined the term “creative destruction” back in 1941. Please take the time to study his basic rationale. When you do, you may be persuaded by the power of defining capitalism as a form of change, which should never be stationary. If there was ever a need to embrace such concepts, I cannot think of better example than the Syria of today.

 
At 2/25/2006 08:42:00 AM, Blogger George Ajjan said...

Ehsani and others:

How would you rate the Syrian agricultural sector?

What are the prospects for additional fully-owned foreign manufacturing facilities in Syria? Nestle was the first, from 2001 I believe. I was recently informed that a French cheese company is only the 2nd. Why the slow pace?

Is the "licensee" manufacturing model an effective one for the Syrian economy? How should it be modified/altered?

 

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