Month: June 2005

Farmers, who account for 70 percent of the world’s water consumption, are often hugely uneconomical about it.  For example, in growing water-intensive crops they derive a less-than-optimal nutrition content from a given quantity of water.  Agriculture, in fact, is one of the real villains in the global water drama…Half the water used by the world’s farmers generates no food…A 10 percent improvement in the distribution of water to agriculture would double the world’s potable water supply.

Middle Eastern countries could solve many of their water problems with free trade, economic diversification, and better agricultural incentives, and yes that means don’t grow bananas in the desert.  Yemen needs to stop growing qat; this addictive drug accounts for over seventy percent of their water use.

Ideally the relatively water-rich Syria, Lebanon, and Turkey could be selling water to the rest of the region but for political reasons don’t expect much of that anytime soon.  Sometimes the easiest way to trade water is inside a tomato.

As for desalination, the costs have fallen dramatically over the last decade, and may continue to fall.  The real problem is not producing the water but rather transporting it uphill.  Desalination won’t solve your problems if you live in the mountains.

The above passage is from Fredrik Segerfeldt’s excellent Water for Sale: How Business and the Market Can Resolve the World’s Water Crisis, published by Cato, and thanks to Alex for the pointer.

To what extent is weak financial intermediation in Asia part of the problem?

The Japanese case illustrates a general point absent from a discussion of a savings glut. The Keynesian reasoning assumes a simple black box between desired saving and investment–the financial system at home and abroad costlessly transforms lenders’ funds between savers and borrowers. A weak financial system–reflecting an underperforming banking system, poor investor protection and corporate governance, or fragile securities markets–yields a high cost of financial intermediation. For any given return on an investment project, savers’ net return is lowered by the high costs of intermediating funds. More broadly, regulatory restrictions in goods markets and labor markets reduce returns on domestic investment.

In a closed economy, high costs of financial intermediation increase the relative attractiveness of liquid, safe government obligations. (Again, household purchases of JGBs in Japan come to mind.) In an open economy, the international capital market offers the possibility of investing domestically generated savings in countries with a low cost of financial intermediation and/or a safe nominal anchor in government bonds–the U.S., for example.

Here is the full argument.

Here is one lengthy criticism of the treaty.  Look there for the details, but here are my views:

1. The Bush Administration has not negotiated the treay on a bipartisan basis.  In part this is Bush’s core style, in part the Democrats have not offered much useful assistance.  If the treaty passes, the "pork cost" to swing Republicans will be high.

2. The worst parts of the treaty limit anti-AIDS drugs by extending intellectual property rights to Central America too strictly.  Yes drug companies will try to price discriminate, but the Brazilian solution may be better.  What will happen to generic medicines in Costa Rica?  Of course patent-breaking is a bad international precedent, but is Central America the relevant international tipping point for the destruction of intellectual property rights?  The net effect is difficult to estimate, read more here.

3. On the other hand, sooner or later these stronger patent protections might be imposed anyway, as Central American nations develop and join the global mainstream.  The question is how many people will die in the meantime.

4. More generally, the U.S. is setting bad precedent by using free trade treaties as leverage to negotiate other non-trade deals.

5. The treaty remains hostage to the interests of Big Sugar, as the sugar quota is barely weakened.  Nonetheless the sugar lobby still opposes the treaty, fearing a slippery slope of further erosion of privilege.  This is a good sign for the treaty.

6. Don’t worry that the agreement does little for labor rights or environmental protection in Central America.  Imposing such policies, before the recipient countries are wealthy enough to support them, is usually counterproductive.

7. The net move toward free trade is relatively small.

8. The biggest benefit of the treaty may be symbolic, by encouraging the Central American nations to embrace democracy more strongly and also to develop closer trade relations with each other.

9. Failure of the treaty would be a disaster, again for symbolic reasons.  Trade negotiations would slow down significantly, and the age of trade agreements might be over.

The bottom line: This is probably a treaty we should pass, but it is not a treaty we should be proud of.

By the way, Heritage is now running a CAFTA blog.  Russ Roberts has a more positive take on the treaty.  Matt Yglesias says thumbs down.

…measures of aid quantity and aid quality seem to be correlated…The United States and Japan not only have the lowest effort among major donors, they also do relatively little targeting of aid to poor countries and to those with good policies…

That is Michael Klein and Tim Harford, two of the smartest people in the International Finance Corporation.  Are you interested in putting aside the polemics, and learning how foreign aid really works, or sometimes doesn’t?  Order the book here.