Poor Democracy

In this age of globalization and advanced technology, it is taken for granted that economic progress is touching every nation on the planet. This is simply not true. Many people in many countries are actually getting poorer, not richer. It’s a travesty, therefore, when the bureaucrats make things even worse…

A recent report by the World Commission on the Social Dimension of Globalization, sponsored by the International Labour Organization, is long on pious advice and short on economic reasoning.

It lists 16 developing countries, with 45 percent of the world’s population, where the gross domestic product is rising by more than 3 percent a year. Among them are the world’s giants, China and India. But in 23 countries, with 5 percent of the world’s population, GDP per head is falling. In another 14 countries, with just 8 percent of the world’s population, incomes per head are rising by less than 1 percent a year. In short, the age of globalization, which has brought significant economic advances to many countries, is not reaching 37 countries with some 750 million inhabitants. Lingering in dearth and want, many millions continue to struggle for food and shelter.

The report admonishes poor countries to pursue social and economic policies that characterize all Western democracies. It urges prompt adoption of a democratic form of government, of national independence and sovereignty, and high labor standards enacted and enforced by government. Unfortunately, the advice is apt to be as unrealistic as is its explanation of high standards of living in more productive countries.

World Commission on the Social Dimension of Globalization: Democracy Not Necessary

Democratic institutions surely provide a broad basis for popular government and give people the noble notion and pride that the country belongs to them. Whenever they grow weary of their government, they can exercise their right to change it. Yet democratization is not a necessary condition for economic development. The most startling economic progress, over the past two decades, has been in China, which labors under an authoritarian regime. And many new democracies, from Azerbaijan to Kazakhstan, show little ability to progress economically. Even established democracies stagnate economically, with millions of workers condemned to unemployment and declining standards of living when guided by economic ideologies hostile to economic productivity. Government by the people may be as injurious to economic well being as any other form of government.

Similarly, national independence and self-government are no guarantee of economic progress. The world’s poorest countries, such as the Democratic Republic of the Congo, Burundi, and Ethiopia, are as independent as the wealthiest countries, but are poorly governed. In fact, the world’s poorest countries may even be poorer today than they were in ages past when they labored under foreign rule. In contrast, many countries that, until the twentieth century, lacked complete independence and self-government, such as Australia (1901) and New Zealand (1947), expanded rapidly as colonies of the British Empire. They enjoyed the ideological and legal preconditions of economic development, that is, safety of private property, entrepreneurial freedom, and the spirit of enterprise. The poverty of many countries, which moves wealthy countries to pity and foreign aid without end, obviously lacks these preconditions; the suffering of the people is likely to continue as long as the sovereignty of their disfunctioning governments remains unchallenged.

It cannot be surprising that the Commission report also acclaims stringent labor legislation while it condemns the omnipresence of informal, illegal labor markets. It obviously ignores the harmful consequences of labor legislation that creates huge surpluses of unskilled labor and thereby gives rise to informal labor markets, commonly called "black markets." Legal labor markets tend to be characterized by standards and benefit costs that exceed actual employee productivity and, therefore, condemn millions of workers to chronic unemployment. While some victims readily content themselves with lives on unemployment benefits and other forms of public charity, many prefer to descend to the underground economy where services are rendered at true market rates and contracts are concluded by word of mouth and a handshake.

World Commission on the Social Dimension of Globalization: An Inevitable Underground Economy

Stringent labor legislation, such as that in old welfare states, invariably gives rise to dualistic national economies with a highly paid legal sector and a huge illegal market sector. The former, stunted by legislation and regulation, generates the surplus of labor for the large underground economy, which tends to grow with every new law and regulation that grant costly benefits to labor. In the old welfare states of Europe, where the official rate of unemployment rarely falls below ten percent of the official work force, the informal underground sector may exceed one-third to one-half of total economic production. Without the underground economy, many people would be immeasurably poorer.

The chronic conflict between the legal economy and the unregulated market – which is immune to regulation – begets corruption and decadence. Where the authorities are determined to enforce the myriad of labor regulations they turn their countries into "police states" that prosecute feverishly and meet out fines and imprisonment for petty infractions. To offer unregulated employment to unemployed workers is a grievous employer offense that is punished with heavy fines. They are rather effectual in maintaining high unemployment rates.

The Commission’s report clearly reflects its sponsorship by the International Labour Organization. It spurns market economics and sows class conflict. Democracy, sovereignty, and labor regulation give no assurance of economic development; only private property in the means of production and the unhampered market order will encourage economic development and ever-rising standards of living.


Hans Sennholz
for The Daily Reckoning
June 23, 2004

Editor’s note: Dr. Hans Sennholz is president emeritus of The Foundation for Economic Education (FEE) in Irvington, NY. His essays and articles have appeared in over thirty- six major German journals and newspapers, and 500 more that reach American audiences. Dr. Sennholz is also the author of 17 books covering the Great Depression, Gold, Central Banking and Monetary Policy. You can write to him by sending an e-mail to this address:hans@sennholz.com.

How is our ‘trade of the decade’ doing? Well, not bad. Nothing much has happened. It is doing just fine, in other words.

Long-time Daily Reckoning sufferers will recall our lazy man’s way to wealth – just make an investment decision once every 10 years. Then, turn off the television, cancel your subscription to Money Magazine, and turn your attentions to things that really matter – women, and drinking, for example.

Our ‘trade of the decade’ was announced in the year 2000. ‘Sell stocks, buy gold,’ we said. At the time, stocks were higher, especially Nasdaq stocks, and gold was lower. So, we’re ahead. But we’re not rich. The Dow lost about 2,000 points. Gold rose about $100. Big deal. You can still get 26 ounces of gold for one Dow (the combined value of the Dow stocks). A quarter of a century ago, it was one-for- one.

The real payoff, we suspect, still lies ahead. We don’t know what is coming, but we greatly doubt it will include higher stocks and lower gold. It is one of those rare times when people have never been more sure that nothing will happen…thus greatly increasing the odds that if something does happen – it will pay off big for those who take a chance on it.

"Stability causes instability," said economist Hyman Minsky. "There’s a crime for every purpose under heaven," we add, here at the Daily Reckoning office.

Either by ineptitude or perverse intention (see readers’ notes, below)…Mr. Greenspan’s deep purpose is to wreck the world’s faith in the dollar…in the American economy…and in paper money. He does this by creating a phony boom and a deceptive stability.

In a real boom, people earn more money. With more money to spend, they buy things…employers employ…profits are made and reinvested. But in a phoney boom, real demand is replaced by phoney demand – based on borrowing rather than earnings, debt rather than wages. And real assets – profit making/wage paying businesses – are replaced by phoney assets, or ‘pseudo-wealth’ as Kurt Richebächer calls it…expensive houses and over-priced stocks.

In 1952, household sector assets equalled 3.75-times the GDP. Today, the ratio is 4.9. As recently as 1995, household debt was only 70% of GDP. Now, it is 85%. Personal savings were at nearly 6% of income in 1995. Last year, they were less than 2%.

"It didn’t take long for the American consumer to uncover the miracle of the Roaring Nineties," writes Stephen Roach. "The ‘wealth effect’ – the ability to monetize asset inflation and convert it into consumer purchasing power – quickly became the rage. The macro role of wealth effects is very much dependent on context. In a vigorous income generation climate, wealth effects are the ‘icing on the cake’ – in effect, allowing households to indulge in excess spending or build saving for the future. In an income- constrained environment, the wealth effect takes on a very different role; it can plug the gap brought about by a shortfall in income generation, thereby enabling consumers to defend the lifestyles they had grown accustomed to. Both roles have come into play in recent years.

"But the Great Enabler [Alan Greenspan] has now created the ultimate moral hazard: overly-indebted consumers and overly-exposed financial institutions, both of which are exceedingly vulnerable to a long-overdue normalization of monetary policy."

The lumps cannot believe their good fortune; they borrow and spend money they never had to earn…taking out ‘equity’ from their houses…sure that they will never have to pay it back.

Someone will pay, of course. But how? Inflation will rob creditors little by little. Deflation will cheat them all of a sudden. And any kind of ‘flation at all will cause the Dow to collapse.

And gold? Inflation will send it soaring. Deflation should send it up too – as people flee less secure assets.

But who knows? Maybe central bankers have finally mastered the art of paper money…of creating purchasing power out of the thin air of pure credit…and then controlling it so carefully that neither inflation nor deflation ever go anywhere but right where Alan Greenspan and Co. want them. Ever. There’s no guarantee of any kind of ‘flation at all, in fact.

On the other hand, even Greenspan is human. And all humans err. That the Fed chairman and his jolly co-enablers have erred is just a bet…but, right now, we know of no surer wager in the world.

Sell stocks, buy gold. Back in the USA, with more news:


Tom Dyson, reporting from Camden Yards…

– Your lesser of two Baltimore-based editors was treated to a sporting spectacle last night. The New York Yankees were in town. We walked down to the Orioles’ stadium after work…

– By the mid-point of the second inning, 9 runs had been smashed via three home runs. Unfortunately, from his spot in the hotdog queue, underneath the stand, your editor missed all the action. To the disappointment of the crowd, the Yankees never relinquished their lead, and won the game 10 – 4.

– But unlike the events here in Baltimore, things didn’t start off so well in New York. Stocks got clobbered out of the gate. Nevertheless, investors never gave up hope and matching the style of their pinstriped mascots, and with a few home runs of their own, stocks also surged to victory.

– The Nasdaq had been down by as much as 11 points mid- morning, but following an impressive 30-point rally, the index was recording 1,994 at the bell, up exactly 1% on the day. The Dow added 24 points to 10,395, while the S&P closed at 1,134, up 4 points. The S&P has now spent 7 consecutive days trapped between 1,130 and 1,135.

– With all the nonchalance in the markets, we turn to our readers for entertainment. It’s not always possible to reply to all the correspondence, but rest assured that, here at the Daily Reckoning HQ in Baltimore, we read everything. Dear reader, please continue to send your thoughts, criticisms, jokes, articles and questions…we love them.

– Today, we kick off this special Reader Reckoning market notes with an interesting theory on Alan Greenspan and his love of bubbles. This from a reader in Vancouver, with a guess about the Great Enabler’s real intentions (he’s true to Ayn Rand, after all):

– "In the guest essay dated June 21, 2004, the Mogambo Guru ponders, ‘One of the big mysteries to me is why Alan Greenspan, a guy who once wrote a defense of gold as money, while writing, at the same time, a classic denunciation of fiat currency, would do what he does.’ I too have thought about this apparent contradiction and would like to suggest a theory to explain it…"

– "Suppose Alan Greenspan wholeheartedly believes what he wrote about gold in The Objectivist in 1966. Suppose also, for a moment, that with this belief he realized that he would probably spend the rest of his career as a brilliant, but frustrated, academic economist espousing the merits of gold and decrying the monetary theft being perpetrated on the world by government.

– "He might conclude that the only way he could actually prove his belief about gold and its essential monetary role might be to do what he is currently doing. After all, by printing money at the rate he has been, he is merely giving the people and their governments what they want anyway. At the same time he has managed to become one of the most powerful people on the planet and will undoubtedly collect untold riches from his political masters for doing so. This would be infinitely more preferable than working as an under-funded academic economist that nobody listens to.

– "Now, suppose that, at the same time, and known only to him (and perhaps Ayn Rand), his real motivation is to set the required conditions for his ultimate goal: to prove to the world without equivocation that governments (the people) must base a currency on more than faith, on something that will prevent government abuse. Sure, the world will suffer from the lesson, but the lesson shall be learned (until the next time). In the meantime, Alan Greenspan might be known, throughout history, as the greatest economics professor of all time. And as the man who taught the world a lesson. Wouldn’t Ayn be proud of her pupil now? Just a theory."

– In the markets, nothing is often more remarkable than something. It is of no surprise, therefore, that the current lethargy in the S&P, as we touched on above, has attracted attention. Next up, we offer you a timely conspiracy theory sent from a concerned reader. Naturally, we don’t believe it, but we enjoyed reading the note all the same…

– "There’s a powerful story circulating on the Internet these days," writes our eagle-eyed friend, "and it deals with the mysterious "990N" account, handled by Gelber, Inc…"

– More bad news…another reader writes:

– "My wife brought my attention to an article in the July edition of American Vogue, which reports that mini skirts are out, and that long hemlines and otherwise demure clothes are in. Quite apart from the disappointment this may lend to those of us who are male heterosexuals, there are those, as I’m sure you are aware, that claim that stock markets track the length of women’s hemlines. And if this is true, it isn’t looking good…and nor is it good looking."

– To wrap up this special Reader Reckoning, we leave you with this – from Down Under…

– "Many commentators are now speculating on the timing and form of the end of the current wave of real estate speculation," writes today’s final reader. "This is an especially important question for those of us who live in Australia, where the real estate boom has gone further than almost anywhere else, where adjustable rate mortgages are regarded as the norm, where the current account deficit is over 6% of GDP (higher than in the U.S.), and which does not have the luxury of owning the world’s reserve currency."

"History does give pointers as to what is possible, and some may be interested in the following extracts from the book "The Land Boomers" by Michael Cannon, published in 1966. The book deals with the experiences of the Australian State of Victoria in the 1880s and 1890s. At that time Victoria was a self-governing colony under the British Empire…"


And over in London, we go back to Bill Bonner…

*** Americans believe the whole world longs to be just like them. Send the army to knock off Saddam, said the neocons, and the whole country will rise up in relief…all yearning to be democrats and republicans.

"Stay the course," says President Bush. The Iraqis still want to be Americans; there are just a few reactionary elements standing in their way.

This conceit is projected not just upon the desert tribes of Mesopotamia, but all over the world.

Of course, as everyone knows, the Chinese are just like us now. They’re all capitalist roadies, right deviationists, and closet democrats. Give them a choice and they would vote for George W. Bush and open boutique hedge funds on every street corner.

But as recently as the last years of the Eisenhower Administration, the Chinese seemed very different:

In the winter of 1959, the Chinese communist leadership of Mao decided to make war on the peasants, writes Jasper Becker in his book, "Hungry Ghosts." Troops were sent to confiscate grain. ‘Rich’ peasants were tortured and murdered. Moronic farm practices were decreed. Private kitchens were outlawed. Old people were sent away to "Happiness Homes" where they were allowed to starve to death. Children were put into communal barracks – where they, too, starved.

"The most extraordinary aspect of these events is that, throughout the famine, the state granaries in the prefecture were full of grain which the peasants said was sufficient to keep everyone alive," writes Becker. "Several sources have stated that even at the height of the famine, the Party leadership ate well. By the beginning of 1960, with nothing left to eat and no longer able to flee, the peasants began to die in huge numbers. In the early states of the famine, most of those who died were old people or men forced to do hard labor on inadequate rations. Now, it was women and children. Whole villages starved to death. In Xixian country alone, 639 villages were left deserted and 100,000 starved to death. A similar number died in Xincai from starvation. Corpses littered the fields and roads as the peasants collapsed from starvation. Few of the bodies were buried. Many simply lay down at home and died.

"That winter, cannibalism became widespread. Generally, the villagers ate the flesh of corpses, especially those of children. In rare cases, parents ate their own children, elder brothers ate younger brothers, elder sisters ate their younger sisters…"

*** It is a typical summer day here in London – it is raining. But then again, it always rains for Wimbledon.