Africa Tries Free Trade

Or, more accurately, a customs union.

With all the proposals for hundreds of billions of dollars in new government spending and new taxes in the United States in recent days, there hasn’t been much good economic news.

Alexander C. R. Hammond, of the Institute of Economic Affairs (IEA) and of African Liberty, writes about it in “Africa Tries Free Trade,” Reason, April 2021. He writes:

On January 1, the long-awaited African Continental Free Trade Area (AfCFTA) came into effect. Aside from the economic benefits that the arrangement will bring to the continent, Africa’s newfound support for free trade and liberalization marks a clear rejection of the socialist ideology that has tormented African politics for decades.

In recent decades Africa has been the sick puppy of the six heavily populated continents. A glance at the Economic Freedom of the World map of economic freedom shows why. Over half of the 50+ African countries are in the least-economically-free quartile of the world’s 190+ countries. Not a single African country is in the top quartile. Hammond calls Nigeria, South Africa, and Egypt “regional economic powerhouses,” but of the three, only Nigeria is in the second-from-the-top quartile, South African is in the second-from-the-bottom quartile, and Egypt is in the bottom quartile.

One of the five measures of economic freedom is freedom to trade internationally. With AfCFTA, this will increase for many African countries.

This agreement is like NAFTA and its successor, USMCA: it’s a customs union. The idea is to have low or zero tariffs between and among members of the group, but a common tariff rate on imports from outside. Nevertheless it’s a big, if slow, step toward freer trade.

Hammond writes:

Within 5–10 years, the AfCFTA will ensure that 90 percent of tariffs on goods traded between member states will be abolished. Within 13 years, 97 percent of all tariffs will be removed. By 2035, the World Bank has predicted, this enormous liberalization effort will boost Africa’s gross domestic product by $450 billion, increase wages for both skilled and unskilled workers by 10 percent, and lift more than 30 million people out of extreme poverty, defined as living on less than $1.90 per day. According to the same estimates, by 2035, the AfCFTA will see more than 68 million people rise out of moderate poverty, defined as living on $1.90–$5.50 per day. The “countries with the highest initial poverty rates,” the World Bank says, will see the “biggest improvements.”

Given Africa’s flirtation with socialism and protectionism from the 1960s through at least the 1980s, this is a welcome development.

For more on Customs Unions, see Douglas A. Irwin, “International Trade Agreements,” in David R. Henderson, ed., The Concise Encyclopedia of Economics.

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Free Enterprise: A Daring New Year Wish

A December 28 report in the Wall Street Journal illustrates (again) how a wish for free enterprise in America is not like carrying coals to Newcastle (see Charles Passy, “New York to Penalize Health-Care Providers $1 Million for Covid-19 Vaccine Fraud“). For Mr. Cuomo, who drinks at the zeitgeist of our times, “fraud” simply means what the government does not like. A few excerpts:

New York Gov. Andrew Cuomo said Monday he will sign an executive order to penalize health-care providers that administer the Covid-19 vaccine without following state prioritization protocols. … Mr. Cuomo, a Democrat, said that providers that ignore this will face fines of up to $1 million and a revocation of all state licenses. …

State Health Commissioner Dr. Howard Zucker said over the weekend that ParCare was being investigated by the state police for possibly obtaining the vaccine fraudulently and then transferring it to other parts of the state and administering it to the public without paying heed to the prioritization rules. …

Mr. Cuomo said he wasn’t surprised that issues are already arising with health-care providers potentially violating state mandates with vaccine prioritization.

“You’re going to see more and more of this. The vaccine is a valuable commodity,” he said.

The first two paragraphs cannot but remind us of the old USSR government, the mother of all persecut0rs of those who don’t respect “state prioritazition protocols.” Why shouldn’t groceries, say, be allowed to ignore  “state prioritazition protocols” on food allocation? But fascism may be a more relevant reference than communism since the former allowed more tightly-controlled private businesses than the latter, as Lawrence Dennis argued.

The last two paragraphs remind us that, indeed, any commodity that many people consider valuable and which the state tries to control is going soon be the object of smuggling—what statocrats call “fraud”—for the benefit of individuals who want it and are willing to pay for it.

Should vaccines first go to cops or to teachers? To the old or to the young? There is no way for a government planner to make an efficient decision on this if only because there are some among individual teachers and some among the old who would be willing to sacrifice more to be vaccinated than other members of the groups to which the state arbitrarily identifies them. What if Google wants to buy vaccines for all its employees? What if a charitable organization wants to purchase some for its poor clientèle? As my co-blogger Scott Sumner just argued, the price mechanism is more efficient and even more just (if we want to jump in the undecided philosophical debates that have been raging for 25 centuries) than decisions made by politicians and bureaucrats.

Moreover, if the available vaccines were sold to the highest bidders (like beef, cars, or shoes) noting would (or, in the current emergency, should) prohibit the government from bidding in the same market, but without prohibiting others to do the same. The market exclusion that the governor of New York advocates seems alas natural to most people. It always strikes me how inclusion-obsessed activists work to exclude so many people.

The current situation is economically inefficient, morally questionable if not absurd, and dangerous for social peace. The federal government distributes the vaccines to the state governments, with all the vagaries of state distribution systems. State governments then add another layer, albeit variable, of inefficiency and authoritarianism by deciding who among their citizens will get the vaccine and who will, in the best case, have to wait their turn. (See Dan Frosch, Elizabeth Findell, and Peter Loftus, “As Covid-19 Vaccins Roll Out, States to Determine Who Gets Shots First,” December 9, 2020.)

Yet, isn’t an emergency situation like a pandemic different? A long (classical) liberal tradition from Adam Smith to Friedrich Hayek or Milton Friedman would answer yes. But—and here lies the big difference—liberals would not forbid free markets and voluntary cooperation to coexist with justifiable government intervention. A free market will insure, through the profit motive, that more vaccines are available, while not banning the free expression of individual preferences according to different personal circumstances. As I just argued, the government could bid against its own citizens, as when it buys anything (including labor services) on the market, but without prohibiting them from outbidding it.

Classical liberals and many more radical libertarians share a common ideal: the presumption of liberty, which can only be overcome when restrictions are necessary to protect liberty itself, or something to that effect. In a major crisis (and Covid-19 is probably one), such restrictions may be warranted if they don’t seriously undermine liberty—for now or for the future. This being said, there is room for disagreement in the liberal-libertarian tent. (In a Café Hayek post of yesterday, Don Boudreaux articulates a libertarian position on the conditions of the presumption of liberty.)

Everybody in the tent must wish that economic freedom and free enterprise will not continue to be so tightly shackled in 2021.

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Similarity Between Socialism and Fascism: An Illustration

Fortunately, socialism and fascism are not the only two political alternatives, for neither is attractive. Moreover, a well-kept secret is how similar the two ideologies are. Substituting socialism for fascism in many statements from fascists would bring instant approval from socialists. Many antifa agitators would be surprised to realize that they are doing fascism unknowingly, just as Mr. Jourdain was doing prose without being aware of it.

The following quotes come from The Coming American Fascism (Harper & Brothers, 1936) by Lawrence Dennis, a well-know American fascist of the time:

Fascism does not accept the liberal dogmas as to sovereignty of the consumer or trader in the free market. It does not admit that the market ever can or should be entirely free. (p. 299)

Social planning is the outstanding imperative of public order and material abundance in the present day and in the near future. (104)

Fascism assumes that individual welfare and protection is mainly secured by the strength, efficiency, and success of the State in the realization of the national plan. (p. 160)

Under fascism, private property, private enterprise, and private choice in the market, have no rights as ends in themselves. They have different measures of social usefulness subject to proper public control. (p. 180)

Light and power, transportation, and basic foods and textiles in given but limited quantities, can be assumed necessary at an arbitrarily fixed price, and State intervention can insure the production of an adequate supply of these goods within an arbitrarily fixed price range for the common good. (p. 180)

The source of the similarity between the two ideologies is that both want to impose politically-chosen ends on everybody. The main source of difference is that each system coercively favors and harms different groups of individuals in society.

Comparing moderate fascism to communism (which is extreme socialism), Dennis chooses the former. Somewhat surprisingly, he refers to Ludwig von Mises’s and F.A. Hayek’s arguments about the impossibility of calculation under communism:

In so far as property rights and private enterprise are concerned, however, the strongest argument for fascism instead of communism may be found in the regulatory functions of an open market. The strongest criticism of any socialism of complete expropriation is that it leaves no free market, no pricing mechanism and no valid basis for economic calculation. Pure socialism is collective ownership and unified central direction of material instruments of production which, sooner or later, must leave little or no freedom of choice for the individual as to consumption or occupation. These criticisms may be brought up to date and made relevant to communism in operation in Russia in the symposium of Professors Hayek, Pierson, Barone, Halm and von Mises entitled Collectivist Economic Planning, and the work of Professor Boris Brutzkus entitled Economic Planning in Soviet Russia. (pp. 177-178)

Dennis exaggerates the place of markets—of free markets—under fascism. In “Why Hayek Was Right about Nazis Being Socialists” (AIER, December 8, 2020), Richard Ebeling mentions many similarities between socialism and the Nazi brand of fascism. He is responding to Ronald Granieri who, in a Washington Post article, objected to the argument that the National Socialists were indeed socialists “The Right Needs to Stop Falsely Claiming that the Nazis Were Socialists,” February 5, 2020).

Given the logic of state power, fascism is likely to steamroll obstacles in the path of the state and thus economic freedom. Moreover, fascism’s heightened nationalism is likely to lead to war against foreign or internal scapegoats. Fascists hate different minorities (the Jews, for example) than socialists hate (the merchants and the rich). Dennis naïvely dismisses these dangers:

It is easy to draw alarming pictures of a powerful State against which the individual would have the resource of no judicial veto on government acts. Conceivable, of course, a State and government might fall under the hands of a few individuals whose every act would be an abuse. But such an eventuality seems most improbable in any modern State, least of all in the United States. (P. 160)

The other alternative besides the different forms of socialism and the different forms of fascism lies, of course, on the continuum of classical liberalism and libertarianism.

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The 1918 Pandemic and Economic Freedom

One would think that, in the case of an economic shock such as a pandemic, a country’s economy would suffer less damage and recover more rapidly the greater its level of economic freedom and the more flexible the economy is. To the typical economist, this seems rather obvious in theory. But is it empirically confirmed?

Worse than the current Covid-19 pandemic, the influenza pandemic that started in 1918 infected half a billion individuals or one-third of the world population and killed 50 million.

In a recent paper “Economic Freedom and the Economic Consequences of the 1918 Pandemic” (SSRN, May 2020), two young economists, Vincent Geloso (King’s University College, Ontario) and Jamie Bologna Pavlik (Texas Tech University) provide an empirical confirmation that economic freedom dampened the effects of the 1918 pandemic. They analyze 20 countries where, over the period 1901 to 1929, estimates of economic freedom are available as well as data on deaths from the pandemic (and from WWII, to avoid this confounding factor). They regress the levels or growth of real GDP per capita on these variables. They admit that the small number of countries in the sample represent “the main downside of [their] approach.”

Economic freedom is measured by a long-term index (going back to 1850 in some cases) developed by Leandro Prados de la Escosura of the Universidad Carlos III in Madrid and similar to the contemporary Economic Freedom of the World Index by the Fraser Institute. In both cases, the score of economic freedom can run from zero to a maximum of 10.

Geloso and Bologna Pavlik’s econometric estimates are generally highly statistically significant, especially in their main specification. They show that

countries with higher levels of economic freedom suffered substantially less from the pandemic … [H]igher levels of economic freedom mitigate the effect of the crisis. In terms of magnitude, an extra point [on 10] of economic liberty offsets roughly 16% of the [economic] effect of an extra flu death per 100,000 persons.

Another very interesting, but not surprising, result is that it is general regulation and restrictions to international trade that interfered most with the maintenance and recovery of GDP per capita in the 1918 pandemic.

A longer version of the article will be published in Contemporary Economic Policy. The revised paper further shows that democracy had a much smaller effect than economic freedom in mitigating the economic impact of the pandemic.

Let me add that the importance of economic freedom in mitigating the impact of the 1918 pandemic suggests that the American economy (and most if not all other economies in the world) would have weathered Covid-19 much better if prices had not been controlled as they would have rationed quantity demanded (better than queues), incited producers to increase quantity supplied, and thus prevented shortages. In America, the majority of states have “price gouging” laws that prevent prices from increasing once an emergency is declared. At the federal level, the Defense Production Act, invoked by President Donald Trump on March 18, have also contributed to the shortages. I have a number of Econlog posts on this topic.

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