Business Regulation in America - The Wages of Sin

To encourage business, America needs to cut red tape. 

Worldwide, the United States is known as the home of laissez-faire. But at the home front the country is being suffocated by excessive and badly-written laws. The list of business regulations in America is endless:  Dodd-Frank law of 2010, Sarbanes-Oxley Act, Clean Air Act and Patient Protection and Affordable Care Act (otherwise known as Obamacare), among others (Gattuso & Katz, 2013).

The problem here is that, while the rules may sound reasonable on their own, they do impose huge burden collectively on American businesses. Ideally, unlike the Europeans whose lives have long been circumscribed by meddling governments and politicians from Brussels, America is meant to be the home of laissez-faire where people are free to make their own choices, whether those choices are good or bad.  From ever indication, America appeared to have strayed from this ideal within the last decade (The Economist, 2012).

For instance, the aim of the Dodd-Frank law of 2010 is to prevent another financial crisis – a noble goal. While the strategy for implementing this law is simple, it contain 848 pages (covering such issues as improving transparency, stopping banks from taking excessive risks, and putting an end to “too big to fail” syndrome by authorizing regulators to seize any big, tottering financial firm and wind it down) and hence is about 23 times longer than the  Glass-Steagall , the reform that followed the Wall Street Crash of 1929. This makes it too  complex  to understand and explained why those few people who have read it struggle to make sense of it. Consider the “Volker rule”, which is one bit of it that is aimed at curbing risky proprietary trading by banks. Its 383 questions that breakdown into  an additional 1420 sub-questions means that the financial firms in America  struggle to comply with a law that is partly unintelligible and partly cumbersome(Public Law, n.d.; Markovich, 2013). 

Too Complex for Comfort

The fact that the government of the two ruling parties in America had kept adding stacks of rules, most of which are retained, means that Dodd-Frank is merely one part of a wider trend. Broadly speaking, while the Democrats make rules to expand the welfare states, the rules written by the Republicans to thwart terrorists has made flying to America an uphill task and, as a result, have prompted legions of brainy migrants to choose Canada and Western Europe instead.  Barack Obama’s healthcare reform of 2010 also illustrates the regulatory perils facing companies in America. As a practical matter, the healthcare law does little to reduce the system’s staggering and increasing complexity even though it has many virtues, especially given that it attempts to make health insurance universal in America. Going by the provisions of the healthcare law, every hour spent in treating a patient in America will require at least 30 minute to one hour of paperwork. And by the end of 2013, the hospitals in the country faced news rules which increased the number of federally mandated categories of illness and injury for which they may claim reimbursement from 18,000 to 140,000(Anderson, 2014; The Economist, 2012).

The American laws are too complex for two main reasons. First, the lawmakers are extremely proud and they believe that they can govern every eventuality with laws and regulations. This important fact may be clarified by some their laws that are both delusional(for example the Dodd-Frank law with which they believe can help them anticipate and ban every nasty tricks which financial institutions will dream up in the future) and annoying(such as the once proposed Colorado law that specifies how many crayons each box of crayon must contain). The bottom line here is that when rules become too complex,  they seldom prevent abuses. Instead, they create loopholes which the shrewd and the unscrupulous can abuse with impunity(The Economist, 2012). 

American laws are also complicated due to the activities of the lobbyers.  In a broader sense, when a government like America strives to micromanage so many activities, they, unfortunately, creates huge incentives for lobby groups to push for special favors. Hence, it is not hard for  the politicians at Washington to slip in clauses that benefit their campaign donors and friends when a bill is hundreds of pages long. It is thus not surprising that Obama’s healthcare law and the Congress’ bill to regulate greenhouse gases included ton of favors for the pushy(The Economist, 2013). 

What the US Congress should realize is that complex rules costs money too. For instance, America’s share of initial public offerings(IPOs) fell from 67% in 2002 when Sarbanes-Oxley law was passed to 16% in 2011 because the law, despite some benign tweaks to it, made it so difficult to list shares on the country’s stock markets – a development that  forced firms to look elsewhere or to stay private. According to America’s Small Business Administration, overregulation can add as much as $10,585 in costs per employee – the kind of cost that businesses will be glad to avoid(Feulner, 2012; The Economist, 2012). 

Simplifying the Rule Book

From a political standpoint,  it appears that the Obama administration and the Democrats at Capitol Hill has a bias towards overstating benefits and understating costs and, as such, pay lip service to the need to ensure that new rules are cost effective. Even the Republicans give only a sketchy idea of how they would slim the rulebook and repeal Obama Care and Dodd-Frank law, even though they repeatedly  claim that they would do so.  For a country in desperate need of jobs, there’s no doubt that America needs a smarter approach to regulation. First, before any rule is enacted, they should be subjected to cost-benefit analysis by an independent watchdog that will, in turn, make the result public. Second, the legislators should pass simple rules that will have sunset clauses and leave regulators to enforce them so that they(the legislators) can re-authorize them when they expire after, say, ten 15 years. Simplicity in this regard means that all big regulations should be watered down to broad goals that prescribe only what is strictly necessary to achieve them, and not their  very familiar ‘all-purpose’ instruction manual in which the important dos and don’ts are lost in an ocean of verbiage(The Economist, 2012).  Finally, to mitigate the real danger of regulation crushing the life out of America’s economy, those regulators who made bad decisions should be made more accountable and easily sack-able, and any unreasonable judgment by the bureaucrats should be subjected to swift appeal. 

References

Anderson A.(2014): The Impact of the Affordable Healthcare  Act Healthcare Workforce. Heritage Foundation. Retrieved April 4, 2014 from http://www.heritage.org/research/reports/2014/03/the-impact-of-the-affordable-care-act-on-the-health-care-workforce

Economist(2012): United States Economy – Overregulated America. Retrieved April 4, 2014 from http://www.economist.com/node/21547789

Economist( 2013): Legislative Verbosity. Retrieved April 4, 2014 from http://www.economist.com/blogs/democracyinamerica/2013/11/legislative-verbosity

Feulner E.(2012): Onerous Effects of Overregulation. Heritage Foundation. Retrieved April 4, 2014 from http://www.heritage.org/research/commentary/2012/02/onerous-effects-of-overregulation

Gattuso J., Katz D.(2013): Red Tape Rising – Regulation in Obama’s First Term. The Heritage Foundation. Retrieved April 4, 2014 from http://www.heritage.org/research/reports/2013/05/red-tape-rising-regulation-in-obamas-first-term

Markovich S.J.(2013): The Dodd-Frank Act. Council on Foreign Relations. Retrieved April 4, 2014 from http://www.cfr.org/united-states/dodd-frank-act/p28735

Public Law(n.d.): Dodd-Frank Wall Street Reform and Consumer Protection Act. 111 Congress Public Law 203. Retrieved April 4 2014 from http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm

What’s the Matter With Russia?

If both Washington and EU wants a world order in which states by and large respect international agreements and borders, then they need to do something to stop Russian’s intransigence.

The crisis in Ukraine is a sobering reminder of the character of Vladimir Putin: he is the kind of leader who always think about the past. Unfortunately for the Russians, the hard cold fact remains that, by focusing on history, Putin is bound to impoverish them in the long run. Start with Crimea(Zakaria, 2014).

The current Russia-Crimea crises spurs a recollection of some lessons from Russian history. In 1783, the Russian wrested  Crimea from the Ottoman Empire. This feat marked the rise of Russia to great power status. By taking control of Crimea during that era, Russia enjoyed a privilege it never had: a direct access to the Mediterranean and the rest of the wider world. Even though Russia lost the Crimean War in the 19^th century(1853-1857), it maintained its hold on the Crimean region. In addition, it controlled the region’s growth after it claimed it from the Nazis in early 1944 – almost a century later. Then came the strange and fateful twist in 1954 when the Soviet Premier Nikita Khrushchev – a self-styled Ukrainian – created the Autonomous Crimean Soviet Socialist Republic and transferred legislative control to the Ukranian SSR,  basically giving Crimea  to Ukraine (Lonely Planet, 2014; Zakaria, 2014).

The above simple explanation is merely history. According to Henry Ford, and American industrialist who was the founder of Ford Motor Company,  history is nothing but bunk(Lockerby, 2011).  When he said that, he meant that the people of the world – particularly the world leaders – should not allow themselves to be trapped by history. This doesn’t imply that history is unimportant. It simply means that people should think and look forward to future instead of going backward. Henry Ford’s exact words are as follows:

History is more or less bunk. It’s tradition. We don’t want tradition. We want to live in the present, and the only history that is worth a tinker’s damn is the history we make today(Chicago Tribune,  1916).

By taking over Crimea last week, Russia’s Putin seems to be still trapped by history, tradition and geography. The natural question to ask at this time is this: What has Russia gained by this political stance? To this very day, Russia has continued along its path as an oil-dependent country.  Russia’s action during the past two decades also indicates that it has remained an authoritative state which has failed to develop its economy and civil society. It is thus not surprising that it had continued to bully almost all the former Soviet countries, particularly, Ukraine.

The West’s Reactions

During the  cold war which lasted for 45 years, from 1946 to 1991 (National Archives, 2006) the politicians in Europe and United States worried that their countries were at a disadvantage because they are not willing to put up with the inconvenience victory might require at the time.  Russia’s annexation of Crimea (a   Ukraine’s territory) last week – a behavior that is typical of the former Soviet Union – brought with it a revenant of the same feeling from both the neighboring  European countries and the European Union in general:  That the West is not willing to pass meaningful sanction against members of Vladimir Putin’s government because they are too greedy for Russian’s money. This is true because Russia has close economic ties with Britain and the rest of the European Union(EU), as can be seen from table 1. With the EU ranking as Russia’s number one trading partner – accounting for almost 41 percent of all Russia’s international trade(see Table  1) – any trade and financial sanctions are likely to hurt both sides. This explains EU’s lukewarm attitude to the issue of enforcing trade and

Table 1 – Russia’s Top Trading Partners, 2012

Country	Value(€ Billions)
European Union	267.5
China	64.1
Ukraine	24.3
Belarus	24.1
United States	18.9
Japan	17.0
Turkey	17.0
South Korea	16.1
Kazakhstan	15.5
Switzerland	7.9

Source: BBC, 2014

political sanctions on Russia.  More evidence of this European attitude abound. For instance, the EU  did nothing when all evidence was pointing to Russia’s involvement in the murder of Alexander Litvinenko in a London sushi restaurant in November 2006. In addition, there was a lack of response from the EU  to the war in 2008 between Russia and Georgia. The unhappy truth is that the targeted measures taken by the EU after  Russia’s annexation of Crimea has yet to banish the suspicion that the former are unserious about punishing the later.

In line with its argument that the pro-Russian referendum in Crimea has no legitimacy, the US government announced sanctions against 11 prominent Russians and Ukrainians  on March 17. The EU was less aggressive than US  in going after the members of the Russian government even though they issued a longer list consisting of 21 people. Those named on each list will have all the assets they hold in US and EU frozen. In addition, they will be unable to travel  to US and EU. According to the US Treasury Department, this strategy  will  also hurt those Russians who do not have assets in United States, for two reasons. First, they will be unable to use dollars in any transactions. Second, international banks will become wary of attracting the attention that may come from trading with them(The Economist, 2014).

More important, though, is that the lukewarm attitude of the EU  do reflects the union’s internal divisions. For instance, EU countries like Poland, Sweden and the Baltic States are hawkish. Cyprus position is very understandable – it is still in recession after the collapse of its offshore banking system, which caters heavily to wealthy Russians. For a country like Greece, the prospect of economic sanctions that might keep Russian tourists away is a cause of much worry because it is desperately seeking new growth to revamp its economy.

In Europe and the United States, the current popular views among the politicians and policy makers is that the above measures are just a start and hence can be extended, depending on Russia’s reactions and future actions. But what is clear is that even if the European Union and United States lengthen the lists to include the families of the main targets, the effects of the sanctions on Russia’s economy may not be as harsh as that of a similar sanction imposed on Iran,  for the simple reason that they were comparatively easy to put in place  on the later, at the time it was already cut off from the world economy.  Unfortunately, this is not the case for Russia: Imposing tough sanctions on Russia means saying to corporations  like Siemens, Boeing, Shell, Exxon, BP, Chevron, and others that they can’t do business in Russia. According to the available published evidence, this will damage both western governments as well as their companies(The Economist, 2014). But then, that doesn’t mean that the EU should do nothing: They should not allow Putin’s  illegal annexation of Crimea. Otherwise Putin will become more emboldened to be a force for instability and strife, bending international agreements and ignoring borders at will.

It is really a  shame that there is no certainty that the EU will impose tougher measures that would rein Russia’s intransigence. It is ridiculous that Western governments are not willing to sacrifice much for Ukraine. For the moment, the feeling in Washington, Brussels and Berlin appears to be that registering a serious protest over Crimea does not worth it since isolating Russia would do real harm to the world economy. However, if both Washington and EU wants a world order in which states by and large respect international agreements and borders, then they need to do something.

 

 

 

References

BBC (2014): Russia’s Trade Ties With Europe. Retrieved March 30, 2014 from http://www.bbc.com/news/world-europe-26436291

 

Lockerby P.(2011): Henry Ford Quote – “History is Bunk”.  Science 2.0. Retrieved March 30, 2014 from http://www.lonelyplanet.com/ukraine/crimea/history

 

Lonely Planet(2014): Crimea – History. Retrieved March 30, 2014 from http://www.lonelyplanet.com/ukraine/crimea/history

National Archives(2006): The Cold War – An Eye Witness Perspective. Retrieved March 30, 2014 from http://www.archives.gov/research/foreign-policy/cold-war/symposium/cleveland.html

The Economist(2014): The West’s Sanctions – Follow the Roubles. Retrieved March 30, 2014 from http://www.economist.com/news/briefing/21599409-how-america-and-europe-hope-put-pressure-russia-follow-roubles

 

Zakaria F.(Producer).(2014): Global Public Square[Motion Picture]. Atlanta, GA: CNN

A Scorecard for the British Commonwealth, Seven  Decades Later

What’s the point of having a Commonwealth, anyway?

Our world is teeming with people or agencies who fail to practice what they preach:  doctors who smoke 40 cigarettes a day; teachers who cheat on grades; politicians who accept bribes; accountants who forget to file their tax returns; financial institutions that launder cash for terrorist organizations; and the UN Security Councils that fails to intervene decisively in a political crises. The British Commonwealth of nations is no different.  When people talks about the British Commonwealth they are usually referring to the association of countries consisting of the United Kingdom and several former British colonies  who still pay allegiance to the British Crown even though they are now sovereign states(The Commonwealth, 2014; The Royal Household, n.d.). With fair justification, the  only remarkable thing about the club of former British colonies is that it exists at all. It is important to note here that the countries who are members of the British Commonwealth(which comprises of almost a third of the  world’s population) are 53 in number,  excluding Burma and Aden.

 

The big question, of course, is whether the citizens of its member nations actually knows its purpose. For instance, when asked who is the head of the Commonwealth, about a quarter of Jamaican citizens will reply that they are ready to bet  that it is Barack Obama(The Economist, 2013). Even some of the enlightened citizens of the member nations would probably cite the Commonwealth games, which is normally held every four years, as a proof of the club’s active involvement in the affairs of its members.  From a functional point of view, the club member nation’s most important concessions was that it runs a good scholarship program and development projects for its poorest members, particularly those of them in Africa, Caribbean  and Asia. The British Commonwealth also runs a tangled and ineffective bureaucracy, including the Secretariat, Commonwealth Foundations, Royal Commonwealth Society, and 67 other organizations, which appears to exist  mainly to provide extravagant trips and celebrations for a well-heeled Commonwealth elites in Britain, Canada and other rich member nations.

 

If the experience of the past five decades teaches us anything, it is that the British Commonwealth has, in most cases,  actually failed in fulfilling its obligations to its member nations. The facts speaks for themselves:  The organization has a poor record of enforcing  its members’ commitment to human right and the rule of law. The latest embarrassment for the organization occurred when it allowed Sri Lanka’s abusive regime – a regime that has the autocratic and corrupt  President Mahinda Rajapaksa as its Tsar – to host a biennial Commonwealth leaders’ meeting in November 2013(The Telegraph, 2014). There are, however, similar instances that showcases the organization’s failures with respect to ensuring that its member nations follow its rules. For instance, even though the Commonwealth partially suspended Nigeria in 1995 after it hanged Ken Saro-Wiwa  - a human rights activist - on that year, it showed little interest on the abuse of the Ogoni people who were doomed on an oil-rich Niger Delta area of Nigeria,  and whose plight motivated Ken Saro-Wiwa’s human rights campaign(BBC, 1995). Also, the organization suspended Pakistan in 1999 after the coup that occurred that year but showed little interest about the habitual abuses against religious minorities and women in that country.  In spite of these, the club do share some beneficial British legacy: The members are bonded by a common language – that is, English – a common legal code and aspects of shared cultural norms. In a sense this advantages had , to some extent, helped some of the members, particularly those African members,  to prosper: the African members of the clubs, including Nigeria and Kenya, are conspicuously better-off than their non-commonwealth neighbors, such as Central African Republic, Liberia and Sudan. This, more than anything else, explained  why a country like Rwanda, which was not colonized by Britain but by Germany and Belgium, chose to join the Commonwealth in  2009(The Royal Household, n.d.).

Commonwealth’s Future – Back to Basics

It would be logical to suggest here that a more focused and agile Commonwealth could do more to reinforce those advantages within the member nations. According to the available published evidence, some right-wing Eurosceptics in the British Conservative Party are suggesting that the club be transformed to become an alternative free-trade zone to the European Union(The Economist, 2013). Even though this type of “Commonwealth Dream” may never come to pass, it will definitely be a good idea to gear the club towards trade and economic development. When done the right way, the two would become mutually reinforcing in the long run. From an entirely practical standpoint, achieving this important feat will take better leadership than the Commonwealth has so far enjoyed during its eight decades of existence.  What is certain is that insidious post-colonial  politics means that Britain and other rich members, such as Canada and Australia, are not be willing to provide this kind of leadership. Hence the onus is on the developing countries who are members of the club, chiefly  India, South Africa and Nigeria, to push for this kind of Commonwealth reform. The unhappy truth, however, is that they, on their current political state and  form, are leery about taking on such a role in a club that they appear to find not only endearing and somewhat useful, but also faintly embarrassing. But that does not alter the basic fact that the British Commonwealth needs to implement serious reforms in these key area – reforms that can be induced by agitations from the developing member nations .

References

BBC(1995): 1995 – Nigeria Hangs Human Rights Activists. Retrieved March 3, 2014 from http://news.bbc.co.uk/onthisday/hi/dates/stories/november/10/newsid_2539000/2539561.stm

The Commonwealth(2014): About Us. Retrieved February 27, 2014 from http://thecommonwealth.org/about-us

The Economist(2013, November): The Economist Explains. Retrieved March 2, 2014 from http://www.economist.com/blogs/economist-explains/2013/11/economist-explains-12

The Royal Household( n.d.): Commonwealth Members. Retrieved March 3, 2014 from http://www.royal.gov.uk/monarchandcommonwealth/commonwealthmembers/membersofthecommonwealth.aspx

The Telegraph(2014): Britain “Timid” Allowing Sri Lanka to Host Commonwealth Summit. Retrieved March 3, 2014 from http://www.telegraph.co.uk/news/worldnews/asia/srilanka/10383546/Britain-timid-allowing-Sri-Lanka-to-host-Commonwealth-summit.html

Let There Be Light! I hold this Truth to Be Self-Evident for Africa

More than anything else, Africa needs a  consistent power supply as a prerequisite for enticing foreign companies to establish operations in the continent.

A traveler to Lagos(Nigeria), the largest commercial city in West Africa, will definitely be delighted by the bustle and business at all sides of each street and  road, and by all the signs that Nigeria  is a nation on the move.  But as soon as the sun goes down at tropical speed, the whole scenery changed and all that will be visible from the bus would be  a few dim lights and large sounds from personal electric generators punctuating a heavy darkness – one of the identifying features of Lagos’ blackout.

For the 1.1 billion people who live in Africa, particularly those of them in the Sub-Saharan Africa, life as it is known in Western Europe, United States and other advanced countries, stops after dark. Except for South Africa, even some poor Asian countries like Vietnam and Philippines consumes as much power    as all of Sub-Saharan Africa.[i]  In African countries like Uganda, Nigeria, Kenya, Cameroon and Benin Republic (among many others), the lack of access to reliable electricity supply means that children cannot do homework at night, women give births by candlelight and kerosene lamps, foods spoils quickly, and cooking can only be done on basic stoves using dungs or firewood as fuel – fuels that normally  takes African mothers and children hours to collect from forests or fields and which can be a source of pollution that can kill millions of Africans when burnt indoors.[ii]

In a broader sense, in Africa,  it is not only at the household level that electricity matters. From an entirely practical standpoint, without reliable power, African businesses and economies cannot develop; factories operating within the continent cannot meet orders. In addition, vital connections to the already existing vast African markets cannot be maintained. This kind of scenario scares away foreign investors. It is thus not surprising that the level of foreign direct investment(FDI) in Africa is low when compared to that of the countries in Asia and in South America.[iii] In view of this,  many of Africa’s  most dynamic leaders(there’s only a few of them) say that electricity and power  are  more important than anything else when it comes to the continent’s development needs.

Hakuna Matata!

What is certain is that soon more African countries will have enhanced access to power and electricity. In 2014, tackling energy poverty in developing countries is  high on the international agenda. This is because 2014 is the year when the United Nations Organization’s (UNO)  “decades of sustainable energy for all” will kick off[iv] ; and when it does poor countries, especially the African countries, will be required to draw up plans  to provide their citizens with access to stable and reliable energy by 2030. In the United States, there’s a high possibility that the Obama administration will extend its trumpeted African development policy, namely, the Power Africa Initiative – a policy that he unveiled  in Tanzania in 2013, whose goal is to secure enough government and private investment to provide energy to at least 20 million households and businesses in Africa.[v] There is also a high chance that the U.S. Congress may pass an Electrify Africa Act of 2013 in 2014-2015,[vi] making them  to be even more ambitious and proactive with respect to boosting power supply in Africa. If the Act is passed, there is also a high possibility that between 2014-2014, investors from the European Union, North America and some rich nations in Asia(including China, Australia, Singapore and Japan), will seek opportunities to bring stable electric power to especially the poorest countries in Africa and a burst of technological wizardry will flood the continent’s vast market with smart gadgets and clever ways to generate as well as distribute electric power.

For a continent in desperate need for energy, all the above efforts and activities  will be required. Generally speaking, measuring the world’s unmet need for electricity and power supply can be a challenging task, given the different requirements  in urban and rural areas, as well as between households and businesses, in both the rich and the poor countries. The International Energy Agency(IEA)  estimates that to provide all those who lack power with enough for an electric light, a fan and a mobile phone charger, an additional investment of $600 billion would be needed by 2030.[vii] In comparison, the Obama administration’s Power  Africa Initiative pledges to spend $7 billion of public money to implement electricity and energy related projects in six selected countries in Africa – an initiative that can precipitate more $9 billion in private finance in the continent. Obviously, there is a long way to go when it comes to lighting up Africa.

In a practical sense, the task of providing  a stable and reliable electricity to Africa is enormous, but so also is the opportunity.  It is important to state here that if the rich world wants to assist in electrifying Africa, they should do it the right way, which will involve doing it in a cleaner way than the old industrial world managed.[viii]

The Clean Air Question

During the 1950s, pea-soup smog was a standard winter experience in any typical British city and the natural color of elegant classical-revival buildings in that country during that era is usually soot-black.  A  lot has, however, changed since then: Today, these buildings  glow in their original  delicate shades of pink, nearly 50 years after Britain passed its  clean-air legislation.

The fundamental lesson here is clear: With current technology, bringing stable power to those who do not have it, whether they are Africans or not, will inevitably raise the global carbon emissions a little bit – at the IEA’s basic level of access, about 0.7% more, which is equivalent to the amount being produced  by the five largest coal-fired power  plants in China.[ix] Nevertheless, technological innovations and policies  that encourage renewable power and natural gas, which were being promoted by the rich countries, can do wonders for Africa.  It should be observed here that Africa has barely  harnessed its renewables.  According to the available published evidence, as of 2013, only about 7% of Africa’s hydropower potential   and less than 0.7% of its wind potential  has been harnessed.[x] The continent’s solar power is still in its infancy. Meanwhile ,  in almost all the oil producing regions of the continent, gas is flared instead of powering  businesses and homes. Judged from a practical perspective, meeting the demand for equity in terms of providing Africans with the  basic services that those in the rich world expect without  exacerbating the risks associated with climate change is highly possible.

The above combination – powering Africa while having insignificant impact on climate change – would be an extraordinary feat. Eye glasses became widely available in Europe in the 18^th century and their use made the unimaginable possible by stretching out what people could do. In a similar vein, powering Africa will have significant transformative effect: It would bring in more foreign investments into the continents, create more jobs, reduce poverty and social unrests,  as well as bring hours of life after dark to millions of Africans who, at present, are denied it.

Notes.

---

[i] Population Reference Bureau(2013): World Population Data Sheet 2013. Retrieved January 28, 2014 from http://www.prb.org/Publications/Datasheets/2013/2013-world-population-data-sheet/data-sheet.aspx

[ii] Elliott M.(2013): Lighting Up Africa – How Electricity Will Transform the Continent. The Economist . Retrieved January 28, 2014 from http://www.economist.com/news/21588905-how-electricity-will-transform-continent-lighting-up-africa

[iii] Dupasquier  C. & Osakwe, P. N. (2005):Foreign Direct Investment in Africa – Performance, Challenges and Responsibilities. African Trade Policy Center. Retrieved January 28, 2014 from http://repository.uneca.org/bitstream/handle/10855/12601/bib.%2053710.pdf?sequence=1

[iv] UN General Assembly(2012): United Nations General Assembly Declares 2014-2024 Decade of Sustainable Energy for All. UN General Assembly Press Release.  Retrieved January 28, 2014 from http://www.un.org/News/Press/docs/2012/ga11333.doc.htm

[v] United States Agency for International Development(2014): About Power Africa. Retrieved January 28, 2014 from http://www.usaid.gov/powerafrica/about-power-africa

[vi] House Foreign Affairs Committee(2013): Electrify Africa Act of 2013. Retrieved January 29, 2014 from http://foreignaffairs.house.gov/sites/republicans.foreignaffairs.house.gov/files/Electrify%20Africa%20Act%20of%202013%20--%20Section-by-section.pdf

[vii] International Energy Agency(2013): World Energy Outlook – Energy Access Projections to 2030. Retrieved January 29, 2014 from http://www.worldenergyoutlook.org/resources/energydevelopment/energyaccessprojectionsto2030/

[viii] Elliott M.(2013): Lighting Up Africa – How Electricity Will Transform the Continent. The Economist . Retrieved January 28, 2014 from http://www.economist.com/news/21588905-how-electricity-will-transform-continent-lighting-up-africa

[ix] Ibid

[x] Ibid

Minimum Wage Debate.

Fiddling with wages by fiat can poison the job market. However, a moderate minimum wage,

when set by technocrats instead of politicians, may blunt this effect.

How Much is Enough?

Minimum wage  debate is on the air again. The State of California appears to be the standard bearer in the debate, proposing to raise its minimum wage to $10 an hour by 2016. It may be stated here that California’s proposal – a minimum wage of $10 an hour – is higher than that of any other state in the country, at least for the time being.[i]  No wonder the increase   inspired some copycats: In November 2013, the voters in  New Jersey approved a  proposal to raise that state’s minimum wage from $7.25 to $8.25, making that state the fifth state to increase its minimum wage in 2013.[ii] In states like South Dakota, Massachusetts, Idaho and Alaska, the push for a minimum wage hike has grabbed headlines throughout 2013 and continues today as if advocates and the state establishments are in a court battle. Meanwhile, in states like Maryland, Illinois, Hawaii and the District of Columbia, it is actually the elected officials who are leading the crusade for a  higher minimum wage.

If the position of the states is the biggest propaganda on the issue of minimum wage, the actions of organized labor and liberal groups are a close second. These groups have backed a wave of strikes by fast-food workers in the major cities of the countries, arguing that hourly wage hikes is justified by practical reasoning and a fair appraisal of the plight of the low skilled workers. Here’s the most surprising part: They are pressing for a  value that is more than twice the $7.25 federal minimum wage[iii], namely, a $15 hourly wage.

What is certain is that, by law, states are not allowed to set a minimum wage that is lower than the federal standard. However, they has the freedom of establishing a higher minimum wage than this standard stipulates. The state that currently pays the highest minimum wage to its workers – a wage of $9.32 – is Washington. Next in rank are the states of Oregon and Vermont, with minimum wages of $9.10 and $8.73 respectively. Illinois, the District of Columbia and Connecticut all have a state minimum wages of $8.25. [iv] The individual cities in the country seem to be adopting their states’ standards with respect to minimum wage hike: As of 2013, about 120 cities has made laws that required businesses that receive city contracts to pay their employees what they term “living wages,” which in some cases ranges from $9-$16 an hour.[v]

California’s passage of a $10 minimum wage, however,  was the  spark that ignited the push for action in this area by other states for one reason: It appeared to have set a standard which these states should aim for. But the most surprising thing about it is the enthusiasm with which many states are  endorsing minimum wage hike – particularly at this time when all efforts to increase federal hourly wage have stalled at the Congress. It should be observed here that the last time that Congress raised the minimum wage was in 2007. Since then, the Democrats in Congress have been canvassing for raising federal minimum wage to $10.10 per hour by 2015 – a strategy they want to use to lift their fortunes both locally and nationally.[vi] But unfortunately, it is unlikely that the Republicans – who currently controls the House – will approve it.

Market Sense – The Case for Moderate Minimum Wage

The debate about minimum wage is not limited to the U.S. economy alone: On both side of the Atlantic, politicians are warming to the idea that a critical purpose of labor law is to address the unequal bargaining power between workers and their employers by establishing minimum standards for wages, safety and other terms of employment –  measures that would enhance the quality of life of the lowest paid workers. Germany, for instance, is one of the few  advanced countries that do not have a national wage floor. However, as of December 2013, the incoming coalition government passed a resolution on across-the-board hourly minimum of 8.50 Euros ($11.50), starting from 2015. Even in Britain, which has a minimum wage since 1999, the opposition Labor Party are discrediting the perceived “freedom of contract” system that enshrined the right of employers to exploit, and workers to be exploited, and are thus cajoling firms into voluntarily paying higher living wages.[vii]

From a functional point of view, fiddling with wages by fiat is not a big hit with the free-market types. Generally speaking, in a competitive market anything that artificially raises the price of labor will cause employers to pay their workers more than the value of the additional products that the produce. And since employers typically are not willing to do this, such economically unsustainable minimum wage legislation will curb the demand for labor, and the very people who the intervention is supposed to help – that is, the least skilled workers – will be the first group to lose their jobs. This explains why Milton Friedman, a renowned economist, argued that minimum wage legislations are a form of discrimination against the low skilled workers. [viii] It also explained why he noted that a far more sensible means of reducing poverty is to top up the incomes of the working poor with public subsidies.

The unhappy truth is that there is no free lunch when the government mandates a minimum wage that is above the market wage rate. However, the case for action to help the low-paid has continued to grow due to the widening income inequality as well as the shrinking workers’ share of national income. More important, though, is that, in this era of austerity, when there are many other pressing claims on national coffers, addressing the problem through subsidies for the working poor can be an uphill task for the government. Besides, other policy options, including the use of confiscatory taxes, are neither realistic or attractive.

One evidence of the distributional effects of a minimum wage that is set above the market rate is provided by Linda Gorman, a writer for the Library of Economics and Liberty. She summarized the results of Australia’s experience on minimum wage legislation thus:

 “Australia provided one of the earliest practical demonstrations of the harmful effects of minimum wage laws when the federal court created a minimum wage for unskilled men in 1921. The court set the wage at what it thought employees needed for a decent living, independent of what the employers would willingly pay. Laborers whose productivity was worth less than the mandated wage could find work only in occupations not covered by the law or with employers willing to break it. Aggressive reporting of violations by vigilant unions made evasion difficult. The historical records shows that unemployment remained a particular problem for unskilled laborers for the rest of that decade.”[ix]

The above analysis do not mean that a moderate minimum wage is not desirable or practicable. As a practical matter, real labor markets are not perfectly competitive. Thus, given that workers who want to change jobs face costs and risks, it is still possible for the employers to set pay below its market-clearing rate. This implies that a minimum wage could boost pay with no ill effects on jobs,  provided that it is not set too high.

Evidence from Europe and United States

The above argument is supported by empirical evidence from both Europe and America. In flexible economies a low minimum wage do not always decrease employment among low-skilled workers. The United States has one of the rich world’s lowest federal minimum wage – at about 38 percent of median income. Broadly speaking, most independent studies conducted within the country find no serious harm to employment from federal or state minimum wages. Britain has a similar experience: At around 47 percent of median income, with a lower rate for young people, that country’s minimum wage also does not seem to cause job any loss.

In rigid labor markets, however, high minimum wages can hit employment hard. France, for instance, has a wage floor that is more than 60 percent of the median for adults and a far bigger fraction of the typical wage for the young – the highest among the rich countries. It is thus not surprising that France has shockingly high rates of youth unemployment, which, as of 2013, was as high as 26 percent for 15-20 year olds.[x]

The above explanations  has brought to light two lessons  in  the system, usually obscured by near – unanimous commitment to setting or changing minimum wages at almost any cost. The first lesson is ensure that the minimum wage level is pretty low, specifically, to set it at a level that is less than 50 percent of the median wage, while, at the same time, implementing lower levels for the less productive workers such as the young and the long-term unemployed. Given that Germany’s proposed level is, by one calculation, 62 percent of the median wage, it risks breaking this rule. As a matter of fact, in the eastern part of the country, which is considered to be the country’s less productive region, only 17 percent of the workforce is paid less than 62 percent of the median wage, which suggests that jobs will be lost in the region. In a similar vein, the proponents of minimum wage hike in Britain are calling for a value that is 20 percent higher than the minimum wage and, as a concession to practicality, it must be conceded that that could hit employment. On the positive side, even though America’s  proposed increase is big, the minimum wage would still be about 50 percent of the median wage.[xi]

Second, the politicians are not qualified to set minimum wages. Let’s face it: Even  though minimum wage legislations may sound so populist in the heat of a  campaign, it often does not work so well in the real world of profits and losses when it is set by the politicians.  They should delegate the power of setting minimum wages to technocrats. In Britain, minimum wage levels has generally advanced gradually because the floor is adjusted annually on the advice of economists and statisticians working with the Low Pay Commission,  and not by the politicians. In contrast, the American politicians are the people who set the federal floor and, unfortunately, they often adjust it irregularly in huge increments – a method that is foolishly simplistic because it favors neither the employers in the country nor the workers themselves.

The bottom line: The world governments need to realize that minimum wage legislations are merely a palliative approach to poverty reduction. Hence, such legislation should not be allowed to distract their attention from addressing the more fundamental causes of low wages and poverty, namely, lack of education and skills.

NOTES

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[i] Prah P.M.(2013): Many States Looks to Raise Minimum Wage. The Pew Charitable Trust. Retrieved January 8, 2013 from http://www.pewstates.org/projects/stateline/headlines/many-states-look-to-raise-minimum-wage-85899505219

[ii] Livio S.K.(2013): New Jersey Voters Approve Constitutional Amendment Raising Minimum Wage. New Jersey Online. Retrieved January 8, 2014 from http://www.nj.com/politics/index.ssf/2013/11/nj_voters_approve_constitutional_amendment_raising_minimum_wage.html

[iii] National Council of State Legialators(2013): State Minimum Wages. Retrieved January 8, 2014 from http://www.ncsl.org/research/labor-and-employment/state-minimum-wage-chart.aspx

[iv] Ibid

[v] Wallace G.(2014): Seattle Mayor - $15 Minimum Wage for City Workers. CNN Money. Retrieved January 8, 2014 from http://money.cnn.com/2014/01/05/news/seattle-minimum-wage/

[vi] Martin J, Shear M.D.(2013): Democrats Turn to Minimum Wage as 2014 Strategy. New York Times. Retrieved January 9, 2014 from http://www.nytimes.com/2013/12/30/us/politics/democrats-turn-to-minimum-wage-as-2014-strategy.html?_r=0

[vii] The Economist(2013): Minimum Wage – The Logical Floor. Retrieved January 9, 2014 from http://www.economist.com/news/leaders/21591593-moderate-minimum-wages-do-more-good-harm-they-should-be-set-technocrats-not

[viii] Wilson M.(2012): The Negative Effects of Minimum Wage Laws. Cato Institute. Retrieved January 9, 2014 from http://www.downsizinggovernment.org/labor/negative-effects-minimum-wage-laws

[ix] Gorman L. (2008): Minimum Wages. The Concise Encyclopedia of Economics. Retrieved January 9, 2014 from http://www.econlib.org/library/Enc/MinimumWages.html

[x] The Economist(2013): Minimum Wage – The Logical Floor. Retrieved January 9, 2014 from http://www.economist.com/news/leaders/21591593-moderate-minimum-wages-do-more-good-harm-they-should-be-set-technocrats-not

[xi] Ibid