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North Korean Economic Reform and Political Stability

by Bruce Bueno de Mesquitavia Analysis
Saturday, June 1, 1996

Using a model with a strong track record of predictive accuracy, we posit the unraveling of Kim Jong-Il's hold over power in North Korea. Our analysis suggests that the North Korean military and leaders of heavy industry in North Korea are pivotal powers who control North Korea's destiny over the next few years. We infer from the evidence that Kim Jong-Il's family and the second generation of leaders are opportunists who are likely to break ranks with Kim Jong-Il to secure their own well-being. The result of their anticipated break with Kim Jong-Il is likely to be a slowing of economic reform and of economic openings to South Korea. North Korea is expected to enter a period of political instability that will render Kim Jong-Il little more than a figurehead. Barring strategic efforts by the partisans and some others with credible leverage, North Korea is unlikely to improve its economy or stabilize its government in the next two or three years.

Taxation and Economic Performance

via Analysis
Wednesday, May 1, 1996

Over the past two centuries, economists have debated whether or not higher rates of taxation lead to increased levels of government revenues. In the eighteenth century, Adam Smith pointed to a reduced level of revenues from substantially higher tariffs and duties on traded goods. In the twentieth century, the Laffer Curve postulated that there would be no government revenue at a taxation level of 100 percent or 0 percent. More recently, the debate focused on the tax increases of 1990 and 1993, which were designed to reduce the federal budget deficit through an increase in government revenues. In fact, the forecasted revenue generation following each tax increase fell short of the mark.

Increases in tax rates have not raised the desired additional revenues, but they have dampened economic activity. Higher tax rates tend to reduce the tax base as taxpayers have disincentives to work, produce, save, or invest. There are, however, incentives to hide, shelter, and underreport income as tax rates are raised. Thus, the economy as a whole tends to perform less well following a tax increase. Conversely, the economy tends to perform more favorably following a reduction in tax rates. In the postwar period, government revenues as a percentage of gross domestic product have averaged 19.5 percent despite marginal income tax rates as high as 92 percent and as low as 28 percent. Despite the historic record, policy makers continue to embrace the notion that an increase in marginal tax rates will raise revenues without any attendant adverse effects on economic growth, job creation, or standard of living.

The Democratic Advantage: The Institutional Sources of State Power in International Competition

by Barry R. Weingastvia Analysis
Friday, March 1, 1996

According to the standard wisdom in international relations, authoritarian states hold an advantage over democratic states because they can act more quickly and decisively. Yet over the last several centuries, every extended rivalry between an authoritarian state and a liberal one has been won by the liberal state: the Dutch revolt against Spain (late sixteenth and early seventeenth centuries); the 125-year rivalry between England and France (1689-1815); the Anglo-French-American rivalry with Germany (late nineteenth through mid-twentieth century); and the American/Allied rivalry with the Soviet Union after World War II.

This paper shows why liberal democracies have a long-term advantage in international competition with authoritarian states. We argue that this reflects the greater ability of liberal states to establish credible limited government. This ability has both long-term advantages for growth and substantial short-term financial advantages during periods of intense international conflict. The financial advantages allow a liberal democracy to raise massive funds through debt, thus financing larger and longer wars. After developing the theoretical perspective, we study two cases, the 125-year rivalry between England and France and the more recent cold war between the United States and the Soviet Union.

Let's Wait for Korea to Decide

via Analysis
Thursday, February 1, 1996

After a brief period of calm in the early 1990s, the United States and Korea are about to enter a new round of trade conflict. Given the importance of bilateral trade to each other's economy and the need for sustained cooperation in the face of North Korea's nuclear program, the United States and Korea must resolve emerging trade disputes over U.S. access to Korean auto, telecommunications, and food markets.

In dealing with Korean trade barriers, however, the United States should avoid a confrontational approach. Under his "globalization" initiative, President Kim Young Sam has placed a priority on deregulation and economic liberalization. Even without U.S. pressure, then, Korea will open its markets for its own good. If the current reforms in Korea do stall, the United States should consider offering a free trade agreement to Korea unilaterally and waiting for Korea to decide. This will give the people of Korea a chance to choose what kind of economy they want to have.

Judicial Reform in Latin America: A Framework for National Development

by William Ratliff, Edgardo Buscagliavia Analysis
Friday, December 1, 1995

Judicial reform is essential in Latin America today if the domestic and international economic changes that have drawn so much worldwide attention are to succeed. Yet heretofore this aspect of reform has usually drawn only passing attention or none at all in the region and beyond. We believe that this indifference cannot continue because law is the underpinning of true democracy and lasting economic reform, both within individual countries and in foreign relations in the emerging world of competition and interaction among nations. We examine this phenomenon from the combined perspectives of law, economics, political science, and history.

First, we describe the problem--the crisis within the judicial system in Latin America today that may itself precipitate changes that would be difficult or impossible to achieve otherwise. We offer new data on perceptions of the current crisis from within the judicial sectors themselves and societies at large. We touch as well on some nonjudicial factors, ranging from institutional inertia to traditional ways of thought and the quality of political leadership, that affect the role of law in society and that in varying ways promote or impede reform.

Second, we discuss judicial reforms needed today to bring justice to all levels of society by enhancing efficiency and reducing and in time eliminating the predatory role of the state, all of which are present or needed in judicial reforms under consideration or being implemented in varying degrees in Latin America. This part analyzes how factors related to the predatory power of the state--such as "rent seeking" (the bribe culture) and other unofficial activities, conducted by different groups within the public sector--increase the institutional inertia observed during judicial reforms. Our proposals take into account both the expected costs and the benefits of judicial reform for the people in general but also for government officials and politicians, considerations that are essential if reforms are to be drawn up realistically and enacted. In doing so we do not think of judicial reform as an entirely consensual matter but often as the playing off of one self-interested group in the government against another that is too weakened by the current crisis to resist effectively. Thus may the door open to long-term positive reform.

China's Economic Revolution and Its Implications for Sino-U.S. Relations

by Ramon H. Myersvia Analysis
Wednesday, November 1, 1995

In the next few decades Sino-U.S. relations will be strongly influenced by four issues: economic friction, international security interests, human rights, and conflicting claims by Taipei and Beijing over sovereignty to Taiwan. Economic friction and international security concerns will dominate as China's economic and military prowess grows.

The prospects seem bright for China's economy to become productive and sustain annual growth rates of around 8 percent because in 1992 the Chinese Communist Party decided that the majority of its 150,000 state-owned enterprises would be restructured by the year 2000. This means changing property rights to corporatize the state-owned enterprises and creating a market economy for them to operate in. If China's leaders successfully carry out this revolution, China will not only have a large, prospering middle class but become a major military power.

To anticipate these developments, the United States should now forge a close working relationship with the People's Republic of China by taking the following steps: establish annual summit meetings and a hot-line communication between Sino-U.S. leaders; create a high-level Sino-U.S. committee of officials and experts to manage potential economic friction; expand scholarly exchange programs; encourage local government exchanges. These overarching arrangements will facilitate communications, enhance mutual understanding, build confidence, and reduce tensions between the leaders and political elite of both countries.

Taiwan and the United Nations: Conflict between Domestic Policies and International Objectives

via Analysis
Wednesday, November 1, 1995

For reasons of nationalist sentiment and in hopes that it might help prevent People's Republic of China (PRC) military action, public opinion in Taiwan is strongly in favor of seeking U.N. membership. Responding to this sentiment, both major political parties, the ruling Kuomintang and the opposition Democratic Progressive Party (DPP), eagerly support the idea. But consensus ends there.

To promote its program of ultimate de jure separation from China, the DPP wants to apply as a new member called Taiwan even though it understands that new members can enter only with approval of the Security Council in which the PRC holds a veto. The government wants a General Assembly (GA) study committee formed in hopes that it will recommend amending GA resolution 2758, which expelled the Republic of China (ROC) in 1971.

The Taiwan government's approach is half right: any General Assembly can amend or revoke a resolution adopted by one of its predecessors. But even if a study committee were formed--and two previous assemblies have declined to create one--the PRC would have one of the seats and, because such committees operate on a consensus basis, would be able to block such a recommendation.

Given that there is no court that will decide the matter, the best, indeed only, way to amend resolution 2758 is by direct appeal to the assembly. This can be successful if the ROC can accumulate a working majority of its voting members. The author argues that this can be done by working through the specialized agencies within the U.N. constellation to demonstrate to Third World countries the valuable contributions Taiwan can make to their hopes for development and thus enlist their support.

Has China Lost Its Way?: Getting Stuck in Transition

via Analysis
Saturday, July 1, 1995

If China is to become an economic superpower in the next century, financial markets will be essential to arbitrage risk. Such markets may fail to develop because of uncertainty over the role of government. Efficient financial markets will require that the Chinese Communist Party reduce its political leverage over economic decisions and decision makers.

Not every newly industrializing country has well-functioning liquid financial markets in which investors can diversify their risks. Nor do all developing countries have efficient legal systems in which a broad range of property rights can be enforced. China, for example, has experienced considerable growth without either liquid financial markets or an efficient legal system by using intermediaries--officeholders who construct broad exchange networks that are based on relationships rather than on formal institutions. The reputation of individual power brokers and the strength of their connection to party power centers provide the system's coherence. The capital requirements for future growth, however, may surpass the capability of these intermediaries, putting the system under severe strain. To overcome this strain, alternative methods of contracting agency relations that will require considerable elaboration of the legal system are needed. A rule- compliant, constitutionally grounded society and economy must be established so that contracts can be maintained independent of the personal authority of power holders. The danger of not acting is a liquidity crisis, intensified by the absence of institutions to reduce risks.

Causes of Continuing Conflict in Nicaragua-A View from the Radical Middle

by Timothy Charles Brownvia Analysis
Saturday, April 1, 1995

World attention has wandered but neither the Contra war nor the Sandinista Revolution in Nicaragua has ended. Promises to former Nicaraguan Democratic Resistance combatants, better known as Contras, of protection and help with restarting their lives have been systematically broken. A second breath granted to the Sandinistas by President Violeta Chamorro has resulted in continuing threats to U.S. interests. Nicaragua, which has often generated political problems for this country, continues to do so because we failed to seize the moment in 1990. Since then $2.1 billion in foreign aid, including more than $1.5 billion in U.S. taxpayer dollars, has bankrolled Nicaraguan retrogression toward a patriarchal, nondemocratic political system. The primary aid beneficiaries, in an uneasy but symbiotic alliance, have been the pro-Chamorro elite and and the Sandinista senior cadre. The resultant political system fits an analytic model centered on identity and ethnicity. The core is dominated by a postcolonial Europeanate global tribe with political values that favor self, family, and private fortune over the nation and the poor. From this perspective recent Nicaraguan history, including the Sandinista Revolution, becomes simply a variant on traditional intraelite rivalries for power, with the peripheral masses, including the United States' erstwhile allies, the big losers. Current U.S. policies reinforce this nondemocratic process. New ones are needed. In addition to real, not minimal, democratization, these should include demilitarization, disarmament, and aggressive observation of the 1996 elections. Current political biases built into U.S. aid should also be reversed, and the Organization of American States' protection for our former allies should be reinforced. It is not too late to recover from the mistakes of 1990.

China's Transition to Markets-Market Preserving Federalism, Chinese Style

by Barry R. Weingastvia Analysis
Wednesday, February 1, 1995

This essay studies the relationship between decentralization and the success of economic reform in China. It begins with a theory about the relationship between the types of decentralization and economic performance. We argue that a particular form of decentralization, called market-preserving federlism, Chinese style, provides a critical component of the political foundations for market success in China.

After discussing the evolution of federalism, Chinese style, during the first fifteen years of reform (1979-1993), we turn to the political foundation of economic reform. We argue that economic success hinges in part on an important aspect of decentralization, notably, that it provides for the political security of the reforms. By creating alternative centers of power at local levels, decentralization established forces that could help resist attempts by the central government to compromise the reforms.

China's form of decentralization has served the critical purpose of creating markets at time when political resistance to economic reform remained strong and when the durability of the reforms was important. Nonetheless, federalism, Chinese style, remains incomplete, accounting for some of the anomalies surrounding China's success. It lacks some national public goods such as enforcement of a common market and a unified monetary system, and the system needs to be institutionalized via a set of rules underpinning the market. We also observed that aspects of the problems facing modern China are not unique but have historical precedents in the economic development of the West. To this end, we highlight some important parallels between the economic and political problems facing the early United States under the Articles of Confederation (1781-1787) and those of modern China.

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