Government Failure: Another Example

Regulations will not work if the regulators refuse to do their jobs. With regards to the massive $8 billion dollar Robert Allen Stanford fraud, the SEC did just that. An internal report released on the same day the Goldman case was filed (of course), revealed that the SEC knew of the fraud as far back as 1997.

The OIG investigation found that the SEC’s Fort Worth office was aware since 1997 that Robert Allen Stanford was likely operating a Ponzi scheme, having come to that conclusion a mere two years after Stanford Group Company (“SGC”), Stanford’s investment adviser, registered with the SEC in 1995. We found that over the next 8 years, the SEC’s Fort Worth Examination group conducted four examinations of Stanford’s operations, finding in each examination that the CDs could not have been “legitimate,” and that it was “highly unlikely” that the returns Stanford claimed to generate could have been achieved with the purported conservative investment approach. Fort Worth examiners dutifully conducted examinations of Stanford in 1997, 1998, 2002 and 2004, concluding in each case that Stanford’s CDs were likely a Ponzi scheme or a similar fraudulent scheme. The only significant difference in the Examination group’s findings over the years was that the potential fraud grew exponentially, from $250 million to $1.5 billion.

While the Fort Worth Examination group made multiple efforts after each examination to convince the Fort Worth Enforcement program (“Enforcement”) to open and conduct an investigation of Stanford, no meaningful effort was made by Enforcement to investigate the potential fraud or to bring an action to attempt to stop it until late 2005. In 1998, Enforcement opened a brief inquiry, but then closed it after only 3 months, when Stanford failed to produce documents evidencing the fraud in response to a voluntary document request from the SEC. In 2002, no investigation was opened even after the examiners specifically identified multiple violations of securities laws by Stanford in an examination report. In 2003, after receiving three separate complaint letters about Stanford’s operations, Enforcement decided not to open an investigation or even an inquiry, and did not follow up to obtain more information about the complaints.

It is any wonder why I am so cynical over government control and fixes for our economy?

Haitian Culture and Poverty: A Debate On How Culture Influences A Nation's Success Or Failure

David Brooks wrote a controversial op-ed in the New York Times stating the importance of culture in a nation's success or failure.

Third, it is time to put the thorny issue of culture at the center of efforts to tackle global poverty. Why is Haiti so poor? Well, it has a history of oppression, slavery and colonialism. But so does Barbados, and Barbados is doing pretty well. Haiti has endured ruthless dictators, corruption and foreign invasions. But so has the Dominican Republic, and the D.R. is in much better shape. Haiti and the Dominican Republic share the same island and the same basic environment, yet the border between the two societies offers one of the starkest contrasts on earth — with trees and progress on one side, and deforestation and poverty and early death on the other.

As Lawrence E. Harrison explained in his book “The Central Liberal Truth,” Haiti, like most of the world’s poorest nations, suffers from a complex web of progress-resistant cultural influences. There is the influence of the voodoo religion, which spreads the message that life is capricious and planning futile. There are high levels of social mistrust. Responsibility is often not internalized. Child-rearing practices often involve neglect in the early years and harsh retribution when kids hit 9 or 10.

We’re all supposed to politely respect each other’s cultures. But some cultures are more progress-resistant than others, and a horrible tragedy was just exacerbated by one of them.

Fourth, it’s time to promote locally led paternalism. In this country, we first tried to tackle poverty by throwing money at it, just as we did abroad. Then we tried microcommunity efforts, just as we did abroad. But the programs that really work involve intrusive paternalism.

The op-ed led to the usual leftist hand-wringing and reluctance to "impose" culture on another society this time echoed by Chris Blattman.

His confidence makes me uncomfortable. To paraphrase, unkindly: These Haitians need to be more like hardworking, thrifty Americans. We’ve spent five decades learning that everything we thought would work in aid did not. Clearly it’s time to get tough. I read about some people who made this work in Harlem, so it’s obviously the answer for Haitians, whom through newspaper reading, I have deduced are also resistant to progress.

Don’t misunderstand me: Brooks could be right. In fact, I’m starting one randomized control trial to test the idea. I’m a little further from propounding it as God’s honest truth on the pages of the Times.

Sometimes the problem with big development solutions is they spring from hubris and certitude rather than caution and humility. There’s another approach to change, described in the previous post.

Finally, this topic was debated on Economist's View, a blog I frequently comment on. A college educator, Michael Gordon aka The Buggy Professor, wrote a detailed comment to which I responded after his post generated many negative responses by the leftist crowd found there. Please go here and scroll down to view the full post by The Buggy Professor as it is too long for me to quote, only half is offered below.

1) THE SUMMARY PROFESSOR CHRISTOPHER BLATTMAN OF DAVID BROOKS NY TIMES OP-ED IS UNFAIR TO BROOKS, especially since Blatttman ignores two key paragraphs that refer to a recent good book by a number of well-known developmental theorists: “What Works in Developoment: Thinking Big and Thinking Small” ed, Jessica Cohen (2008): Brookings Institute. Source, http://www.amazon.com/What-Works-Development-Thinking-Small/dp/0815702825

Specifically, with not just a reference to this impressive book, but also with an explicit quote from the most stimulating of the chapters --- the summary one by Abhijit Banerjee of MIT --- Brooks sides with the microeconomists who specialize in development theory as opposed to macroeconomic developmentalists who have been pushing one set of nostrums after another as the solution to economic backwardness, and for over 65 years now.

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2) CONSIDER, AGAINST THIS BACKGROUND, THE OMITTED TWO PARAGRAPHS IN THE BROOKS OP-ED

“In the recent anthology “What Works in Development?,” a group of economists try to sort out what we’ve learned. The picture is grim. There are no policy levers that consistently correlate to increased growth. There is nearly zero correlation between how a developing economy does one decade and how it does the next. There is no consistently proven way to reduce corruption. Even improving governing institutions doesn’t seem to produce the expected results.

“The chastened tone of these essays is captured by the economist Abhijit Banerjee: “It is not clear to us that the best way to get growth is to do growth policy of any form. Perhaps making growth happen is ultimately beyond our control.”

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3) THAT BROOKS ACCURATELY SUMMARIZES WHAT MICROECONOMISTS IN DEVELOPMENTAL THEORY HAVE BEEN INSISTING ABOUT BIG BIG QUESTIONS AND BIG BIG ANSWERS or Nostrums that macroeconomist theorists in developmentalism have been pushing for 65 years now --- one after another, each nostrum hailed as the key to rapid and sustained economic growth for economically backward countries, none of which have worked in most of Asia, the Middle East, Africa, or large parts of Latin America --- can be underscored by quoting the end of Professor Banerjee’s chapter (my paragraphing and capital letters).

“Which brings us to our last, most radical, thought: It is not clear to us that the best way to get growth is to do growth policy of any form. Perhaps making growth happen is ultimately beyond our control. Maybe all that happens is that something goes right for once (privatized agriculture raises incomes in rural China) and then that sparks growth somewhere else in economy, and so on.

“Perhaps, we will never learn where it will start or what will make it continue.

THE BEST WE CAN DO IN THAT WORLD IS TO HOLD THE FORT TILL THAT INITIAL SPARK ARRIVES: MAKE SURE THAT THERE IS NOT TOO MUCH HUMAN MISERY, MAINTAIN THE SOCIAL EQUILIBRIUM, TRY TO MAKE SURE THAT THERE IS ENOUGH HUMAN CAPITAL AROUND TO TAKE ADVANTAGE OF THE SPARK WHEN IT ARRIVES.

SOCIAL POLICY MAY BE THE BEST THING THAT WE CAN DO FOR GROWTH TO HAPPEN AND MICRO-EVIDENCE ON HOW TO DO IT WELL, MAY TURN OUT TO BE THE KEY TO GROWTH SUCCESS”

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4) WHAT EXACTLY HAS BROOKS THEN SAID ABOUT HAITI ‘S FAILED STATE AND ECONOMIC BACWARDNESS HAT ALMOST ANY DEVELOPMENTALIST TODAY --- including those in political science who specialize in political institutions, political conflict, civil war, corruption, crony patron-client networks, ethnic diversity etc --- Would Agree With:

(i.) Namely, it’s a dismal mess ---the poorest country and probably the worst governed in all of Latin America and the Caribbean.

And nothing by way of outside help --- foreign aid, American military intervention to help overthrow a dictatorship, and more recently limited UN intervention, 10,000 various micro-economic projects funded from abroad --- has improved the abysmal conditions in Haiti:

Its infrastructure is primitive still; its building codes are ignored; its hospital and medical services were abysmal before the recent devastating earthquake; poverty is rife; agricultural development has languished for generations; huge jerry-built shelters have been created around its two main cities, former peasants flocking by the millions there; and the huge gulf between the few rich and powerful on one side and the vast mass of Haitians on the other still looms despite all outside efforts.

Its population of slightly more than 9 million, moreover, suffers as the CIA World Factbook observes, from widespread infectious disease . . . not least owing to a lack of access to clean water, proper sewage removal systems, and basic healthy food.

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(ii.) As for its economic conditions, the best summary is found in the CIA World Factbook for 2010:

“Haiti is the poorest country in the Western Hemisphere with 80% of the population living under the poverty line and 54% in abject poverty.

“Two-thirds of all Haitians depend on the agricultural sector, mainly small-scale subsistence farming, and remain vulnerable to damage from frequent natural disasters, exacerbated by the country's widespread deforestation.

“While the economy has recovered in recent years, registering positive growth since 2005, four tropical storms in 2008 severely damaged the transportation infrastructure and agricultural sector.

---- [Buggy note: the Dominican Republic, which shakes the same island, climate, and geography with Haiti, suffered the same tropical storms, but weathered them far better --- not least to markedly superior infrastructure, fire-and-police systems, and healthcare systems. The economy quickly recovered from those storms, only to be hurt by the current global recession: As the CIA World Factbook observes,”T he Dominican Republic has enjoyed strong GDP growth since 2005 and continued to post sound gains through mid-2008 . . . “

Back to Haiti’s economy:

“US economic engagement under the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act, passed in December 2006, has boosted apparel exports and investment by providing tariff-free access to the US. HOPE II, passed in October 2008, has further improved the export environment for the apparel sector by extending preferences to 2018; the apparel sector accounts for two-thirds of Haitian exports and nearly one-tenth of GDP.

“ Remittances are the primary source of foreign exchange, equaling nearly a quarter of GDP and more than twice the earnings from exports. Haiti suffers from high inflation, a lack of investment because of insecurity and limited infrastructure, and a severe trade deficit. In 2005, Haiti paid its arrears to the World Bank, paving the way for reengagement with the Bank. Haiti is expected to receive debt forgiveness for about $525 million of its debt through the Highly-Indebted Poor Country (HIPC) initiative by mid-2009.

“The government relies on formal international economic assistance for fiscal sustainability.”

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(iii.) CONSIDER BY CONTRAST HE DOMINICAN REPUBLIC RIGHT NEXT DOOR IN GREATER DETAIL

• With a tad more population than Haiti’s 9.2 million people --- and, to repeat, located on the same island and hence sharing the same natural conditions and history of colonialism, slavery, and dictatorship for most of its history until American military intervention in the early 1960s, followed by a corrupt rigged electoral democracy that then evolved since 1996 into a solid electoral democracy --- is far richer, far better governed, has far better infrastructure, and enjoys A PER CAPITA INCOME 7 TIMES HIGHER THAN HAITI’S

• Specifically, per capita income is $8200 in the Dominican Republic. In Haiti, it is $1300.

• As for poverty, 80% of Haiti’s population was estimated in 2003 (latest figures) to live below the poverty line. Next door in the Dominican Republic is half that: 42%.

• On top of this, even as the Dominican Republic’s more diversified economy continues to export large amounts of coffee, sugar, and tobacco --- not least owing to free-trade zones with the USA and others --- its largest foreign exchange comes now from its thriving service sectors, and especially tourism . . . now the largest employer in the country.

• Unemployment shows a similar huge gap: estimated to be 14.1% in the Dominican Republic, it happens to be . . . well, the CIA World Factbook admits it can’t estimate the level because 80% of the Haitian 9 million population has no formal jobs!

o Literacy is 87% in the Dominican Republic and 52% in HaITI

Another worthwhile lesson from the buggy professor, unfortunately you can't make people learn, thus ignorance is perpetuated.

With regards to the Dominican Republic and its greater wealth, I was wondering the same thing. Why does the Dominican Republic have better infrastructure and greater political and social stability despite similar histories than Haiti? The cultural and social factor can't be dismissed, try as those here might.

Almost every nation on the planet (I can't think of an exception) has faced foreign invaders and "interference". The United States was invaded in 1812 by the most powerful nation in the world. It's navy was no match for England's, allowing the English to land forces at will. Washington D.C., the capital, was captured, the White House burned to the ground. Using a leftist perspective, this should have led to utter collapse of U.S. progress, we should have been mired in poverty and even now be roaming masses of despondent poor due to this invasion and incidence of European imperialism (that Madison foolishly welcomed war can be dismissed, the internal actions of the invaded are irrelevant in leftist analysis or viewed simply as resisting colonialism) and our failure to this day can be blamed completely on this incident in the past. But we are not a nation of roaming despondent poor, neither is China which had to endure colonialism and several opium wars along with a prolonged occupation by Japan that only ended after WWII. Warfare in Europe during the Middle Ages to 1800's was constant. Two world wars devastated the continent, yet somehow the affected countries were more or less able to recover, especially Germany after WWI which suffered heavy foreign interference along with outright occupation by France after they missed debt repayments. Yet somehow Germany was able to establish itself as a dominant power in a mere 20 years after its defeat. Foreign interference is so common that it cannot be the single factor that determines success or failure. I won't even go into the occupations of Germany and Japan post WWII. Standard leftist analysis would state that Japan is still occupied to this day as U.S. forces have bases in Okinawa against the wishes of the local populace, Japan should be even worse off than Haiti since its constitution was largely written by American imperialists.

The view that institutions and culture, each which influence the other, are the largest factors in a nation's success or failure is gaining support even amongst the left. Obama seems to understand, but as the buggy professor notes, actual policy is much more difficult to enact.

We can try to set up institutions and change culture through education, but the populace have to be willing to adopt and embrace the changes. Otherwise the effort will fail and will result in resentment along with more leftist accusations of colonialism. Yes any help we offer today, should it not succeed is immediately viewed as imperialism. Furthermore there is danger that our educational efforts, even the small scale educational programs the buggy professor recommended above, will be rendered ineffective by destructive leftist accusations of propaganda and brainwashing. An effective surefire policy method still has not yet been found that can guarantee success in light of the many difficulties, the leftist-Marxist influence amongst the worst and most destructive. So we struggle on, I suppose if it were easy, every nation would be prosperous. Good thing President Clinton's involvement shelters our help somewhat from leftist attacks. That is the real value of having a Clinton and Obama, as members of the left, they are more resistant to false leftist accusations.