Mexico’s troubled oil industry

The Economist asks, “How many Mexicans does it take to drill an oil well?”

The answer: “More than 140,000, and even then they’re not very good at it. For this, now acute, problem, blame the politicians.”

The author paints an ugly picture:

It is bad enough that Mexico’s economy is in deep recession, triggered by its close links to the ailing United States. To make matters worse, the country’s oil industry, its fiscal cash-cow for the past three decades, is declining swiftly (see chart). As recently as 2004 Cantarell, the country’s main offshore field, produced 2.1m barrels per day (b/d) of crude. Now its output is just 600,000 b/d. There are no obvious replacements: 23 of the 32 biggest fields are in decline. Barring big new finds, the world’s seventh-largest oil producer is forecast to become a net importer by 2017.

“There is no mystery behind the decline,” writes The Economist:

The constitution bans private investment in hydrocarbons. Ever since Lázaro Cárdenas expropriated foreign oil companies in 1938, the state oil monopoly has been seen by many politicians, especially from the formerly ruling Institutional Revolutionary Party (PRI) and its offshoots, as the untouchable bone marrow of Mexican sovereignty. To make matters worse, Pemex has been run more in the interests of its workers and their trade unions than of the Mexican people, its notional owners.

…Even if Mexico allowed private companies to explore for oil, they would have to invest $10 billion a year to halt the decline in output, reckons David Shields, who edits a specialist magazine on Mexican oil. Under today’s law, in which private firms can only act as service providers for Pemex, that investment would be much higher, he says.

Economic vandalism: Barack Obama and free trade

The Economist has a timely and spot-on article on Obama’s “string of ominously protectionist policies” highlighted recently by his decision to impose a 35 percent tariff on imported Chinese tires. The magazine writes:

This newspaper endorsed Mr Obama at last year’s election (see article) in part because he had surrounded himself with enough intelligent centrists. We also said that the eventual success of his presidency would be based on two things: resuscitating the world economy; and bringing the new emerging powers into the Western order. He has now hurt both objectives.

…The tyre decision needs to be set into the context of a string of ominously protectionist policies which started within weeks of the inauguration with a nasty set of “Buy America” provisions for public-works contracts. The president watered these down a bit, but was not brave enough to veto. Next, the president stayed silent as Congress shut down a project that was meant to lead to the opening of the border to Mexican trucks, something promised in the NAFTA agreement of 1994. Besides these sins of commission sit the sins of omission: the president has done nothing at all to advance the three free-trade packages that are pending in Congress, with Colombia, Panama and South Korea, three solid American allies who deserve much better. And much more serious than that, because it affects the whole world, is his failure to put anything worthwhile on the table to help revive the moribund Doha round of trade talks. Mr Bush’s tariffs, like the Reagan-era export restraints on Japanese cars and semiconductors, came from a president who was fundamentally committed to free trade. Mr Obama’s, it seems, do not.

Click here to read the full article.

‘Hard Times’ for the Pornography Industry

Click here to read the Economist’s report on the struggling pornography industry.

Capitalism Is Thriving

Freakonomics points to a great article from the Economist that suggests that Capitalism is thriving. According to the World Bank’s annual Doing Business report, “which tracks changes to the regulations that affect business”:

In the year since June 2008, 131 countries introduced 287 pro-business reforms—20% more than in the previous 12 months and more than in any year since the World Bank started the survey in 2004.

Low and lower-middle income economies accounted for two-thirds of the action, with Rwanda turning out to be the world’s champion reformer—the first time a sub-Saharan country has claimed the prize. Eastern European and Central Asian countries were the most energetic reformers by region for the sixth year in a row (26 out of 27 governments there introduced reforms). Middle Eastern and North African countries were not far behind (17 out of 19 countries), and 17 high-income countries also spruced up their business regulations.

Of significance, the article also notes that,

…in poor countries, a ten-day reduction in the time it takes to start a business can lead to an increase of 0.4 percentage points in GDP growth. Another shows that people who have a formal title to their property invest as much as 47% more in their businesses.

The Power of the Poor

On October 8, PBS will braodcast The Power of the Poor, a new documentary featuring Hernando de Soto, among my favorite economists. The documentary was produced by the same team that brought us Milton Friedman’s classic documentary series Free to Choose. Below is a preview of what to expect:

The Power of the Poor will demonstrate “how free markets, individual freedom and especially the right to property can transform the poor into the most powerful resource in the world. At its heart is the potential triumph of capitalism as a system.”

Click here to read my previous post on the ideas of Hernando do Soto.

Child welfare in rich countries: weak correlation between spending and outcomes

Earlier this week, The Economist released a report card on “child welfare in rich countries.” The report points out that governments often believe that the path to societal happiness lies with increased spending on the welfare of children. But according to an OECD report, this has not been the case. OECD researchers ranked countries based on six categories: material well-being, housing and environment, educational well-being, health and safety, risky behavior and quality of school life. According to the report, “Government spending per child varies a lot, as do outcomes; but the correlation is not strong.”

According to The Economist,

No country gets it all right, though some, like the Nordic ones, do better in general than others, notably America. America spends more than the average of $126,000 per child (excluding health) but its children fare worse than their European peers in areas like health, education and living standard, in part because the poorest American children are considerably more likely than are their European counterparts to stay poor.

Milton Friedman on the responsibility to the poor

The video below is from a 1978 debate between Milton Friedman and members of the student body at Stanford University. In one segment, Dr. Friedman receives a question on the government’s responsibility to the poor. He calmly replies that the government holds no responsibility over poverty, only people do.

Agitated murmurs from the audience can be heard as a student shouts, “Have you ever been on welfare…or poor,” implying that a wealthy economist, such as Milton Friedman, could not empathize with poor people and thus could not prescribe a proper remedy.

Milton Friedman quickly replies, “Of course…but that is all irrelevant. Is there one of you who is going to say you don’t want a doctor to treat you for cancer unless he himself has had cancer?”

Drugs in Portugal: Did Decriminalization Work? Part II

According to The Economist, the evidence from Portugal since 2001 shows that decriminalizing drug use and possession has “benefits and no harmful side-effects”:

Officials believe that, by lifting fears of prosecution, the policy has encouraged addicts to seek treatment. This bears out their view that criminal sanctions are not the best answer. “Before decriminalisation, addicts were afraid to seek treatment because they feared they would be denounced to the police and arrested,” says Manuel Cardoso, deputy director of the Institute for Drugs and Drug Addiction, Portugal’s main drugs-prevention and drugs-policy agency. “Now they know they will be treated as patients with a problem and not stigmatised as criminals.”

The number of addicts registered in drug-substitution programmes has risen from 6,000 in 1999 to over 24,000 in 2008, reflecting a big rise in treatment (but not in drug use). Between 2001 and 2007 the number of Portuguese who say they have taken heroin at least once in their lives increased from just 1% to 1.1%. For most other drugs, the figures have fallen: Portugal has one of Europe’s lowest lifetime usage rates for cannabis. And most notably, heroin and other drug abuse has decreased among vulnerable younger age-groups, according to Mr Cardoso.

The share of heroin users who inject the drug has also fallen, from 45% before decriminalisation to 17% now, he says, because the new law has facilitated treatment and harm-reduction programmes. Drug addicts now account for only 20% of Portugal’s HIV cases, down from 56% before. “We no longer have to work under the paradox that exists in many countries of providing support and medical care to people the law considers criminals.”

Click here to read Part I.

Effective tax rates across the globe

From The Economist:

A person earning $100,000 in Sweden has 37.5% of it deducted as income tax, according to an annual survey of effective tax rates by KMPG, an accounting firm. Sweden’s income-tax rates are among the world’s highest, but the addition of social-security contributions means that people earning this sum in Slovenia, India or Italy take home an even smaller share of their gross earnings. Slovenia’s government deducts almost 55% from earnings of $100,000. Social-security levies eat up a chunky 22% of earnings at that level in France, but low income taxes bring the total take, at 36%, into line with that in other rich nations. Switzerland’s effective tax rate on the fairly well-off is one of the lowest in the world.

The Average Work Week

The Economist reports:

South Korean workers toil for over 45 hours every week on average, nearly seven hours longer than workers in any other OECD country. Americans put in 15% more hours on average than workers in the western (richer) bit of the European Union. Poorer Eastern Europeans work considerably longer. Flexible arrangements for part-time workers, generous welfare systems and a limit on the working week all contribute to western Europe’s seeming indolence. But where more people work part-time the average working week is likely to be shorter. The Netherlands, where 45% of workers are part-timers, the highest proportion in any OECD country, has the shortest working week.