Economic Reporting Review May 13

Economic Reporting Review
May 13, 2002

By Dean Baker, co-Director of the Center for Economic and Policy Research

OUTSTANDING STORIES OF THE WEEK

Enron Pipeline Leaves Scar on South America
James V Grimaldi
Washington Post, May 6, 2002, Page A1

This article reports on how Enron was able to construct a natural gas pipeline in Bolivia, with assistance and loans from the U.S. government, which was far more damaging to the environment than an alternative route. The article reports that Enron was able to use its political influence to gain government support for its plan, is spite of the environmental harm it would cause.

Generic Drug Maker Challenges AstraZeneca Patent for Prilosec
Milt Freudenheim
New York Times, May 4, 2002, Page B1

This article reports on the efforts of generic drug manufacturer's to gain the right to sell a generic version of Prilosec, a treatment for heartburn and ulcers. The article reports on many of the legal maneuvers that AstraZeneca and other brand drug manufacturers have employed to extend their patents. In this case, every month of patent extension translates into hundreds of millions of dollars of additional profit.

Vote on an Offshore Tax Plan Is Roiling a Company Town
David Cay Johnston
New York Times, May 9, 2002, Page A1

This article reports on the debate over the plans by Stanley Works to relocate its official corporate headquarters from New Britain, Connecticut to Bermuda. The article reports that shifting its legal headquarters will reduce the company's tax liability by almost 30 percent.

Factory Jobs, Then Workers, Leaving Poorest Southern Areas
David Halbfinger
New York Times, May 10, 2002, Page A16

This article reports on the impact on rural counties in the Southeastern United States of the decision to shift production to developing nations. These counties, which are largely poor and black, are seeing declines in population as workers move away in search of jobs.

The Farm Bill and Trade Policy

U.S. Farm Bill Finds Few Fans Abroad
Paul Blustein
Washington Post, May 5, 2002, Page A24

This article discusses the passage of a new farm bill in the context of its impact on world trade and development. It begins by asserting that "of all the problems that plague the world's poor in the age of globalization, few are so widely condemned as the subsidies that rich countries provide their farmers."

The article does not indicate how it has determined the frequency with which policies are condemned. The I.M.F.'s austerity programs, for example, have provoked hundreds of protests and riots throughout the developing world. The article does not identify any instance in which the farm policies of rich nations have provoked a comparable reaction.

It is also worth noting that the impact of developed country farm policies on developing nations is mixed. For example, the article refers to U.S. cotton subsidies that, according to a World Bank study cited in the article, are preventing Burkino Faso from reducing its poverty rate by 50 percent. Even if this assessment were accurate, the availability of low cost cotton on world markets would be a boon to developing nations that are either net consumers of cotton or who use it in the production of textiles and apparel. The same is true of other goods that are subsidized. The effect of a subsidy on world markets is exactly the same as an increase in productivity that produces the same reduction in price. If economists really believe that the agricultural subsidies of rich countries are having a devastating effect on developing nations, then they must also believe that the effect of a significant increase in agricultural productivity in the rich nations would be devastating.

In fact most studies, including those from the World Bank, indicate that the effect of the developed countries' agricultural subsidies and quotas on the economies of developing nations are mixed and generally small (e.g. see World Bank, "Global Economic Prospects 2002", www.worldbank.org; and "CGE Modeling and Analysis of Multilateral and Regional Negotiating Options," by Drusilla Brown, Alan Deardorff, and Robert Stern, which found that most developing countries were actually net losers from the last round of trade liberalization in agriculture.).

By contrast, the policy that has been advocated by rich countries, to force developing countries to honor copyrights and patents, offers almost no benefits for developing countries. It amounts to a massive transfer of resources from poor countries to rich countries in the form of royalties and licensing fees, for items that would be available at little or no cost in a free market (e.g. software, digital music and video material). It also will jeopardize the health and lives of hundreds of millions of people in developing nations, in the case of patented medicines. It is worth noting that the rich nations themselves generally did not honor each other's claims to intellectual property until they were far advanced in the process of economic development.

There has been widespread opposition in developing nations, as well by NGOs in the rich nations, to the efforts to impose patent and copyright protection in developing nations through the TRIPS agreement. This opposition has received less attention in the U.S. media than has the opposition to the developed nations' agricultural policy, but this does not mean that it is not as broadly based or important to the future of developing countries.

At one point this article comments that the U.S. farm bill, which is estimated to cost $180 billion over ten years, "would add to the $350 billion in farm subsidies that the world's richest countries provide each year." The article does not identify the source for its $350 billion estimate of annual farm subsidies in other rich nations. Since the U.S. subsidies come to $18 billion annually, it implies that the subsidies of other industrialized nations are nearly 20 times as large as those from the U.S. If this is true, then the U.S. subsidies are of
relatively little consequence in this debate.

South Korea

South Korea Finds Fortune By Shunning Japanese Ways
James Brooke
New York Times, May 4, 2002, Page B1

This article discusses the recent strength of South Korea's economy. It argues that by adopting an American model of capitalism, and rejecting the Japanese model, Korea has prospered while Japan continues to stagnate.

It is worth noting that many observers do not believe that South Korea has fundamentally overhauled its system and adopted the U.S. model. This has been a topic of many previous articles in the New York Times (e.g. see "Behind South Korea's Political Crisis, an Economy in Disarray," by James Brooke, New York Times, September 9, 2001, Section 1 page 9; "South Korea Slips Away From Changes Imposed in Bailout," by Don Kirk, New York Times, December 17, 2001, Page C14;"Skepticism Over Korean Reform," by Stephanie Strom, New York Times, 7/30/99, page C1; and "Asian Rebound Derails Reform as Many Suffer," by David E. Sanger and Mark Landler, New York Times, 7/12/99, page A1).

In discussing the health of the Korean economy, the article notes that South Korea has accumulated $108 billion in foreign reserves, an amount that is more than 20 percent of GDP (the equivalent of approximately $2.5 trillion in the United States). While it may be necessary for developing nations to hold reserves of this magnitude, this is more a statement about the failure of the international financial system than the health of Korea's economy. Reserves are held in the form of short-term deposits that pay little or no real interest. This money could otherwise be used to build up the infrastructure and capital stock or to improve education in developing nations. The fact that instability in the world financial system forces these resources to be wasted as reserve holdings imposes an enormous cost on developing nations (see "Money for Nothing: The Increasing Cost of Foreign Reserve Holdings to Developing Nations," http://www.cepr.net/Reserves%20paper.htm).

At one point the article includes a comment from a vice chairman at an accounting firm that, "Korea is approaching the homestretch: one more doubling in size and Korea will be a truly fully developed country." According to the OECD's estimate of per capita GDP (measured on a purchasing power parity basis), Korea was already ahead of Greece and Portugal in 2000, and less than 10 percent below Spain and New Zealand. Korea's rapid growth in the last two years would have put its per capita income roughly even with these latter nations. All four of these countries are usually are counted as among the developed nations.

Productivity Growth

Productivity Surged in First Quarter
John M. Berry
Washington Post, May 8, 2002, Page E1

This article reports on the Labor Department's release of new productivity data, which showed it growing at an 8.6 percent annual rate in the first quarter of 2002. The article goes on to discuss at some length the strong productivity growth numbers reported over the last two years.

It is worth noting that productivity is very poorly measured and the data is often subject to substantial revision. Much of the strength in the reported productivity data is attributable to an unusually large drop reported in the number of hours worked per worker. As a result of showing a large drop in hours, the productivity data shows a much more rapid rate of growth in hourly compensation than other series which directly measure hourly compensation, such as the Labor Department's average hourly wage series or its employment cost index. (The hourly compensation measure in the productivity data calculates hourly compensation by dividing a measure of total labor compensation by its measure of hours worked.) If these other measures of hourly compensation prove accurate, then the productivity data has understated the rate of growth of hours by approximately 2 percentage points over the last two years, and therefore overstated the rate of productivity growth by the same amount (see ERR 3-10-02).

Copyrights

Privacy Fight Centers on Ad-Zapper
Christopher Stern
Washington Post, May 4, 2002, Page A1

This article reports on efforts by the broadcast industry to outlaw digital video recorders, which will facilitate watching replays of television shows, without seeing the commercials. The article notes the concern of the entertainment industry over similar devices, which enable consumers to quickly duplicate copyrighted material.

It would have been appropriate to include the views of economists on this topic. The information presented in the article indicates the enormous costs to consumers and to the economy that result from efforts to protect copyrights. It is difficult, if not impossible, to have a complete policy discussion of these topics without taking into account these costs. In this case, the industry groups want to make certain types of technology illegal, not only denying consumers their benefits, but threatening to imprison people solely for developing and distributing better recording equipment. As technology makes copyright protection more difficult to enforce, it is likely to lead to demands for greater government repression by the entertainment industry.

Patents and Biological Research

Biologists Sought a Treaty; Now They Fault It
Andrew C. Revkin
New York Times, May 7, 2002, Page D1

This article reports on the difficulties that many scientists are facing when carrying through research in developing nations, because of governments' fears that they will seek to patent and profit from their findings. The article asserts that the main problem is an international treaty that gives developing nations more control over how the genetic material discovered in their country can be used. It is more accurate to say that the patent system, which grants monopoly control over a product to the patent holder, is posing an obstacle to scientific progress. If it were not possible to profit through patented genetic findings, then there would be nothing to fight over, and scientists would be free to carry through their research without obstructions.

Uruguay

Argentina Shakes, Uruguay Rattles
Jennifer L. Rich
New York Times, May 8, 2002, Page W1

This article discusses the economic difficulties that Uruguay is currently facing, which stem in large part from Argentina's economic collapse. At one point it notes that Uruguay's government deficit had been 4.0 percent of GDP, but had been reduced to 2.5 percent of GDP. The article reports that the I.M.F. praised this "energetic" response and awarded new loans to the government. By contrast, Argentina was cut off from further loans by the I.M.F. at a time when its deficit was equal to 2.5 percent of GDP. The I.M.F. acknowledged at the time that the government had made spending cuts and tax increases, which would have reduced the deficit by 2.0 percentage points of GDP, but this effect was offset by the deepening of the recession.

It interesting to note that this article presents the view of "many analysts and economists" that further tax increases in Uruguay may be counterproductive since it has been suffering from a recession for four years. This perspective has not been prominent in reporting on Argentina, which has also been suffering from a recession for four years.

The article includes the assertion that Uruguay "needs to privatize energy, telecommunications and infrastructure assets," a view which is attributed to unidentified analysts and economists. Based on the record of such privatizations in Argentina and elsewhere, there are many economists who would question this claim.

In support of the claim that Uruguay must privatize assets, the article presents the comment of an analyst at a financial company that "Uruguay is country where one in six people work for the government." The United States is a country where one in 5.8 people work for the government.

Germany

First Wave of Strikes In Germany Shuts Plants
Edmund L. Andrews
New York Times, May 7, 2002, Page W1

This article reports on a strike by Germany's metalworker unions against two major automobile manufacturers. At one point it includes an assertion that "economists and business executives worry that a generous wage settlement for the metalworkers will lead to higher wages for the huge public employees' union, construction workers and banking workers."

While some economists undoubtedly share the concerns of business executives, there are also economists who are not especially troubled if workers experience some gains in real wages. According to data from the OECD there has been a large redistribution from labor to capital in Germany over the last fifteen years; there is no obvious reason to fear economic damage from a modest reversal of this trend.

At one point this article notes Germany's system of coordinated wage bargaining, under which multiple employers agree to a common wage structure. It refers to this system as "an enormous German weakness." Actually there is a large body of economic research, by economists with widely varying political perspectives, which shows that this sort of coordinated wage bargaining is associated with lower rates of unemployment.

Germany: Unemployment Rises
Reuters
New York Times, May 8, 2002, Page W1

This brief news article reports on an increase in April of 6,000 in the number of German workers who are reported as being unemployed. The article describes this rise "a hit" to Chancellor Gerhard Schroder's hopes of an economic upturn before the fall election. Actually, an increase of 6,000 in the reported number of unemployed workers is far too small to be statistically significant. The April data is consistent with German unemployment remaining unchanged.