I had planned an entry on the foreclosure mess and property rights in the United States, but I will save that topic until next week and instead write about a specific instance of weak property rights in Mexico. Unfortunately, the story I will recount seems to be a common one in Quintana Roo and, probably, other parts of Mexico.
There are at least two important economic functions of the legal system. First, the system must protect life and property. Second, the system must provide a means of resolving disputes in a timely, relatively low-cost fashion according to the law, not personal preferences of those in authority. A legal system that satisfies these two requirements is one characterized by strong property rights. One can argue that such a system is desirable because it is fair or just. But apart from these arguments, economies with strong property rights generally grow faster and have higher levels of income. Individuals and businesses are more likely to invest if they do not fear expropriation of their property by the government or the cronies of those in power.
Sadly, today (26 October, 2010) I witnessed firsthand the weakness of property rights in Quintana Roo. My brother-in-law is owner of two taxis. His name is on the titles so there is no question of ownership. Some time ago he rented each of these taxis to individuals. Contracts were signed in which the individuals promised to pay a fixed amount periodically for the rentals. All the legal formalities were followed. Both stopped making payments shortly after getting the taxis. More than a year ago he filed the necessary documents with the appropriate authorities, the judicial police, to recover the taxis. The police knew who had his property and that the taxis were still being operated as taxis in Chetumal, yet nothing happened. His property had been stolen.
Today, he found one of the taxis parked in downtown Chetumal and informed the judicial police, as well as my wife and me. The driver fled. Although there was a key in the taxi, an alarm installed by the thief prevented starting the motor. The police stated that my brother-in-law should call a tow truck and have the taxi towed to the police impound lot. While my brother-in-law was on the phone trying to contact a tow truck operator, the judicial police received a call from one of their superiors ordering them to leave the taxi parked on the street and vacate the scene. Other than to inform my brother-in-law of the order they had received, the police offered no explanation. About a minute after their departure, the thief showed up with 3 other men and tried to take the taxi but were not allowed to do so. Shortly thereafter, the state police arrived and, also acting under orders, let the thief take the taxi despite my brother-in-law's protest.
So, what does this story the protection of private property in Quintana Roo and elsewhere in Mexico? The moral I draw from this tale is that anyone with influence can subvert the rule of law. The ominous implication is that such a system of weak guarantees of property rights depresses investment and citizen confidence in the law. Why invest if the legal system does not protect your property, as happened to my brother-in-law? Why support a system where the police are viewed as tools of those in power? Weak property rights and public insecurity are probably not the only reasons for Mexico's rather dismal macroeconomic performance since 1981 but they surely must rank high on the list of the most important reasons for slow economic growth.
Tuesday, October 26, 2010
Friday, October 22, 2010
Government Finances-Belize
In my last post (dealing with the Belize dollar) I wrote about government mismanagement of the Belize economy. In this post, I continue with the theme of government mismanagement in Belize.
First, a few basics. Governments, like people and businesses, have budget constraints. Governments have three general ways of financing their spending; taxes, borrowing, and creating money. I include revenue from the sale of government assets and user charges in the category of taxes. For example, a significant portion of oil revenues generated by the state oil company pays for federal government spending in Mexico. Any spending in excess of revenue must be paid for with borrowing and/or money creation. Apparently, Belize has done both. The problem with the regular creation of money to finance spending is the inflationary impact on the economy. As stated in the previous post, official figures have shown relatively low rates of inflation; although I remain skeptical of these figures.
By one common standard, the government deficits in Belize have not been outrageously large. As a percentage of GDP, deficits have been between 1.9% and 8.8% of GDP since 2002, with a small surplus amounting to 1.1% of GDP in 2008. The surplus was not the result of increased tax collections or spending cuts but appears to be the result of a one-time grant or perhaps sale of an asset. The largest deficits, as fractions of GDP, were in 2003-2005; the Belize government has done better in recent years although it may be reverting to its former habits as the 2009 deficit is 4.1% of GDP, the highest share since 2005. By comparison, the European Union allows its member states to have deficits of up to 3% of GDP; but the EU, seemingly, does little to enforce this limit.
But, by another standard the government's deficits are disturbingly large. Since 2002 annual deficits have averaged 16% of total government revenue. This average includes 2003, when the deficit was 38.6% of total revenue, and 2004, with a deficit of 30.1% of total revenue. Deficits have been relatively smaller since 2006, averaging 6% of total revenue; but still quite high. This decline as a percent of total revenue may have occurred because the country arranged a restructuring of its external debt in 2007 and interest payments to debt holders are smaller. However, in 2009 the deficit increased to 10% of total revenue. Whether the government has returned to old habits, spending well more than its income, or whether the high deficit in 2009 is a temporary result of the world wide recession remains to be seen.
There are good reasons to be skeptical of any apparent change in government fiscal behavior in Belize. As argued in the previous post, the fixed exchange rate appears unsustainable over the long run and the official price indexes appear to understate inflation. Financial markets and Belize's creditors would regard fudging the inflation statistics, if indeed that is happening, as a worrisome sign. Maintaining an overvalued, fixed exchange rate hurts Belizean export industries such as agricultural products and toursim. Indeed, tourism in Belize is appears expensive compared to Mexico or Costa Rica, another country that has, like Belize, emphasized the small-scale ecotourism industry. The overvalued exchange rate does keep import prices relatively low, so the persistence of the fixed rate undoubtedly has more to do with politics and voter support than economics. The government's fiscal mismanagement combined with an overvalued currency and, perhaps, deliberate under-reporting of inflation rates suggest that the Belize economy is headed for the same sort of nasty financial crisis which has plagued Greece, most recently, and other countries during the last 30 years.
Note: All data are from the Central Bank of Belize Statistical Digest, 2009. The dating of the government's budget figures was adjusted to conform with the calendar year, the original budget data are reported for the fiscal year in Belize, April 1 to March 31.
First, a few basics. Governments, like people and businesses, have budget constraints. Governments have three general ways of financing their spending; taxes, borrowing, and creating money. I include revenue from the sale of government assets and user charges in the category of taxes. For example, a significant portion of oil revenues generated by the state oil company pays for federal government spending in Mexico. Any spending in excess of revenue must be paid for with borrowing and/or money creation. Apparently, Belize has done both. The problem with the regular creation of money to finance spending is the inflationary impact on the economy. As stated in the previous post, official figures have shown relatively low rates of inflation; although I remain skeptical of these figures.
By one common standard, the government deficits in Belize have not been outrageously large. As a percentage of GDP, deficits have been between 1.9% and 8.8% of GDP since 2002, with a small surplus amounting to 1.1% of GDP in 2008. The surplus was not the result of increased tax collections or spending cuts but appears to be the result of a one-time grant or perhaps sale of an asset. The largest deficits, as fractions of GDP, were in 2003-2005; the Belize government has done better in recent years although it may be reverting to its former habits as the 2009 deficit is 4.1% of GDP, the highest share since 2005. By comparison, the European Union allows its member states to have deficits of up to 3% of GDP; but the EU, seemingly, does little to enforce this limit.
But, by another standard the government's deficits are disturbingly large. Since 2002 annual deficits have averaged 16% of total government revenue. This average includes 2003, when the deficit was 38.6% of total revenue, and 2004, with a deficit of 30.1% of total revenue. Deficits have been relatively smaller since 2006, averaging 6% of total revenue; but still quite high. This decline as a percent of total revenue may have occurred because the country arranged a restructuring of its external debt in 2007 and interest payments to debt holders are smaller. However, in 2009 the deficit increased to 10% of total revenue. Whether the government has returned to old habits, spending well more than its income, or whether the high deficit in 2009 is a temporary result of the world wide recession remains to be seen.
There are good reasons to be skeptical of any apparent change in government fiscal behavior in Belize. As argued in the previous post, the fixed exchange rate appears unsustainable over the long run and the official price indexes appear to understate inflation. Financial markets and Belize's creditors would regard fudging the inflation statistics, if indeed that is happening, as a worrisome sign. Maintaining an overvalued, fixed exchange rate hurts Belizean export industries such as agricultural products and toursim. Indeed, tourism in Belize is appears expensive compared to Mexico or Costa Rica, another country that has, like Belize, emphasized the small-scale ecotourism industry. The overvalued exchange rate does keep import prices relatively low, so the persistence of the fixed rate undoubtedly has more to do with politics and voter support than economics. The government's fiscal mismanagement combined with an overvalued currency and, perhaps, deliberate under-reporting of inflation rates suggest that the Belize economy is headed for the same sort of nasty financial crisis which has plagued Greece, most recently, and other countries during the last 30 years.
Note: All data are from the Central Bank of Belize Statistical Digest, 2009. The dating of the government's budget figures was adjusted to conform with the calendar year, the original budget data are reported for the fiscal year in Belize, April 1 to March 31.
Wednesday, October 13, 2010
Speculative attacks on the Belize dollar.
Since 1976 Belize has maintained a fixed exchange rate of Bel $2 per US $1. So, I pose the question, how much longer can Belize maintain a fixed exchange rate given the government's mismanagement of the country's macroeconomic situation? Briefly, to sustain a fixed exchange rate a country must be willing to buy or sell its own currency with foreign reserves (in this case the US dollar). This is feasible if the costs of traded goods and services in Belize increase at about the same rate as those in the US, in which case the current account would generally be in balance over time so that only small purchases or sales of Belize dollars would be necessary to avoid pressure on the exchange rate. Official figures suggest that the rate of inflation has been very modest in Belize. As I explain below, there are reasons to be skeptical of the official inflation figures. Note: According to the CIA World Factbook, the US is Belize's most important trading partner, accounting for over 30% of exports and imports in 2009.
But, according to the Central Bank of Belize Statistical Digest 2009, Belize has had annual current account deficits, often large ones, since 1996. Before 1996, the current account was usually in deficit although in a few years there were small surpluses. Essentially, this means there are lots of Belize dollars floating around in the foreign exchange market. It seems unlikely that Belize is such an attractive place for private investors that these Belize dollars are reinvested in the country, at least for such an extended period. Of course the US has been able to maintain large current account deficits precisely because foreign investors have been, and apparently still are, willing to invest in US assets; hence the huge holdings of US government securities by the Chinese government. As Belize is a former colony of Great Britain, perhaps the British government is buying the Belize government's debt thus helping to support the fixed exchange rate?
The price level data reported by the Central Bank of Belize seem to be at odds with the relatively rapid rate of money growth in the country. Briefly, there is a strong correlation between inflation and the rate of money growth so that rapid money growth generally leads to rapid price level growth, i.e. inflation, which the official figures do not reflect. Belize has certainly been creating money; between December 1989 and December 2009 the money supply (M1) has increased at an annual rate of 10.38%. For comparison, the rate of growth of the US M1 money supply has been 3.88% annually over the same period. Consequently, one would expect a higher rate of inflation in Belize than in the U.S., but this is not shown in the official inflation data. How can this be?
It could happen if price increases are kept artificially low by government decree, that is, there are price controls in the economy. Of course it could also happen if the Belize economy were growing very rapidly (comparable to the Chinese economy in recent years), but this is clearly not the case. If price controls (a bad policy in itself) are not maintaining an officially low rate of inflation, then I suspect the price level data in Belize are understated. Governments such as Argentina and Greece have clearly manipulated (putting it charitably) the economic data they report, it is certainly within the realm of possibility that Belize has done so as well.
Anecdotal evidence also suggests that the price level in Belize is relatively high. Every weekend, many residents of Belize visit the supermarkets of Chetumal to make their purchases. This phenomenon began well before the depreciation of the Mexican peso (fall of 2008) made goods and services bought in Mexico even more of a bargain for Belize shoppers. The CIA World Factbook indicates that Mexico was the source of more than 14% of Belize's imports, second only to the US in terms of imports.
So, what does all this mean. Simply that, if it continues along the path of the last 20 years or so (rapid money growth, fixed exchange rate), prices in Belize will continue to rise more rapidly than those of its major trading partners and competitors (in terms of exports) in world markets. Current account deficits will continue increasing. At some point, speculators will start attacking the Belize dollar. So, I conclude the blog with a partial answer to the question I posed at the beginning of the blog. I don't know how much longer the Belize government can sustain a fixed exchange rate, but the fixed rate regime is clearly unsustainable. If current policies continue (a likely prospect, I think), then a devaluation of the Belize dollar is coming along with all the problems associated with a sudden, large change in the exchange rate.
Monday, October 11, 2010
Nobel Prize
Well, I was wrong about the Nobel prize in economics. Jorgenson will have to wait another year, at least.
Monday, October 4, 2010
Introduction-October
This blog is focused primarily on the economies of Quintana Roo and Belize. In case you are not familiar with Mexico, Quintana Roo is a state in the Yucatan Peninsula. Cancun, Cozumel, Tulum and other well-known tourist destinations are located in Quintana Roo. Despite the emphasis on the economies of Q Roo and Belize, I will occasionally write about other subjects.
I am an economist at the Universidad de Quintana Roo in Chetumal, Q Roo. If you wish to know more about my background, work, or interests you may check my webpage http://www.dcsea.uqroo.mx/fwalla/
Although I speak Spanish, the blog entries will usually be in English simply because I make fewer grammatical mistakes writing in my native language.
As far as blog rules go, I ask only that you be civil with your comments.
In this, my first blog entry, I depart from the Quintana Roo and Belize focus to predict that Dale Jorgenson will win the Nobel Prize in Economics, to be awarded on October 11, 2010. The prize is overdue for Professor Jorgenson.
Welcome to my blog-Bienvenidos a mi blog.
I am an economist at the Universidad de Quintana Roo in Chetumal, Q Roo. If you wish to know more about my background, work, or interests you may check my webpage http://www.dcsea.uqroo.mx/fwalla/
Although I speak Spanish, the blog entries will usually be in English simply because I make fewer grammatical mistakes writing in my native language.
As far as blog rules go, I ask only that you be civil with your comments.
In this, my first blog entry, I depart from the Quintana Roo and Belize focus to predict that Dale Jorgenson will win the Nobel Prize in Economics, to be awarded on October 11, 2010. The prize is overdue for Professor Jorgenson.
Welcome to my blog-Bienvenidos a mi blog.
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