The Immorality of Free College

Over at Caracas Chronicles, they are having a very interesting debate about the needs of the university system in Venezuela. The whole debate began with a salvo from Juan Cristobal Nagel against the entire concept of universal free college education in response to university protests across Venezuela. The whole debate is well worth reading, but I would like to focus on JC’s posts. Overall, I agree with virtually everything he says, but I feel that he misses one critical argument: the opportunity costs within the education sector overall.

JC focuses on the opportunity costs of Venezuela’s oil spending. Specifically, that since Venezuela subsidizing both college and gas, and since there is only so much money to go around, money that could be spent on college goes to subsidizing gas and universities get the short shrift. This is certainly true in the Venezuelan case, but I think that in the broader debate about free tertiary education, especially in poor countries, it is most important to look at the opportunity costs within the education sector.

If you assume that there is a limited portion of GDP that any given non-rich country government can or will devote to education, then how you distribute those resources becomes extremely important. Essentially, every dollar you spend on primary education is a dollar not available for secondary or tertiary and vice versa. Obviously, even if primary and secondary-level education is sub-par in a given country, it is valuable to have publically-funded university since all countries need college graduates. However, in most of Latin America, tertiary education is free in spite of poor primary and secondary education. As a result, many of the kids attending universities for free were educated in private schools (since the public ones are so poor). The upshot of this is that beyond the basic regressive nature of free tertiary education (everyone is paying for rich people go to school), there is the further regressive component in that they are doing this at the expense of improving the quality of primary and secondary education for the poor.

In a region where there is limited social mobility and tremendous inequality, this is a process of calcifying inequality under the guise of purporting to reduce it.

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Maybe the Giant has Narcolepsy

Tyler Cowen makes an interesting point in passing about the protests in Brazil that I think are worth expanding upon further:

Without wishing to rely too heavily on Tocqueville’s analysis of the French Revolution (pdf), that’s not how things usually work. Very often there is an ongoing history of major problems and depredations. Then things seem to get better or perhaps they really do get better. Expectations start to rise. Then some small events come along and those events are blown out of proportion, leading to the crisis in public opinion that didn’t quite happen in the first place.

The current Turkish crisis was set off by a dispute over a public park, and the recent demonstrations in Brazil seem to have been prompted by a 7% hike in bus fare prices, which is about ten U.S. cents. Yet in neither case is the small trigger the ultimate cause of the discontent.

Many deconversions from religion, or from fandom, or even from marriage, work the same way. Big lies are told and those lies inflict some damage. The institution in question soldiers on. A bit later, an apparently smaller slight or problem brings the whole thing crashing to the ground, precisely when things appeared to be getting better.

I’m not saying it always runs that way, only that it is a very common path. Furthermore the steepest period of decline is very often when people are too preoccupied with coping to make the major adjustment.

In the Brazilian context, I think this is absolutely true. The last decade and a half has been a unique time of consistent improvement for Brazilians. Whereas the 60s and 70s saw brutal military dictatorship, the 80s and early 90s hyperinflation, and then a devaluation in 1999 as a result of contagion from the Asian Financial Crisis, the 2000s have been a time of steady growth and increasing social inclusion. However, in the last couple of years, things have stopped improving as quickly and the million little annoyances that typify daily life in Brazil suddenly become less tolerable. This is unequivocally a good thing; a growing middle class has rewritten Brazil’s social contract such that Brazilians expect their elected officials to make their lives better and not just tolerable.

The question is, how much can the government do (and how much will it be allowed to do) in the next few years to improve people’s lives?

Economically, Brazil’s problems are largely on the structural side and the solutions could be implemented relatively quickly, though many of the benefits would take time to percolate and would cause dislocations in the meantime. For instance, taxes are far too high relative to the quality of services the government provides. Instead of providing useful services, taxation in Brazil is mostly just a transfer of wealth from a relatively efficient private sector toward an extremely inefficient public sector. Lowering taxes could be achieved quickly in theory, but would necessitate cuts to public sector employment that would most affect the middle class Brazilian currently protesting. Moreover, this wouldn’t necessarily be met with a concurrent rise in private employment or improvement in the quality of government services.

Similarly, labor markets are extremely inflexible. Once a person is hired into the formal sector, it is prohibitively costly to employers to then fire them, whatever the reason. The upshot of this is that firms are extremely reluctant to hire and laws designed to protect workers end up forcing many into the informal sector where they have no formal protections and are far less productive. Again, there is a clear theoretical solution to this problem; weakening or eliminating the most onerous requirements on employers such as massive, guaranteed severance. However, increased labor market flexibility does, as a professor said, mean that you’re making it easier to fire people. In certain contexts, being more easily able to fire someone does also make it more likely that they’ll be hired in the first place, but it is rarely a popular sentiment, particularly with the largely middle-class group of people who benefit most from the existing labor laws and are also the most likely to lose their jobs in their absence.

Beyond those issues are problems with crime, corruption and the quality of education, all of which have significant impacts on economic growth, social mobility and quality of life. Whereas some of Brazil’s biggest economic problems persist because politicians lack political will, these problems intractable and lack even clear theoretical solutions. They are also among the most common complaints leveled against the government by the protesters.

To answer my own question from before, I am bearish on Brazil in the near future. Brazil’s economy is much less distorted than its Mercosur counterparts like Argentina and Venezuela, but still has some significant supply-side problems. During the latter part of the Lula presidency, there was some expectation that he might engage in a bit of reforming, but largely did not. Now, with commodity prices coming off their incredible highs, the Brazilian economy is less buoyant than it as and the structural weaknesses in Brazil’s economy are increasingly salient. Unfortunately, in the face of massive protests, it seems unlikely Brazil’s government will be able to address the issues it can improve, and unable to improve the things protesters are most upset about.

Making the Least of It: Brazil’s World Cup

Over the past week, Brazil has been swept up in a series of massive protests. Originally stemming from rising bus fares in São Paulo, they have expanded across the country into a more generalized critique of the governing system. Some of the complaints have been directed at Brazil’s preparations for next year’s World Cup and the Summer Olympics which Rio de Janeiro will host in 2016. Specifically, Brazilians are upset at how many resources are being wasted on stadiums while more pressing issues like education and a slowing economy get the short shrift.*

On the whole, the evidence seems to point toward hosting large-scale sporting events as being a tremendous waste of resources for a country relative to the increased tourism and notoriety. I think this would be increasingly the case for larger, multi-sport events like the Olympics where many of the event spaces serve no post-Olympic purpose (i.e. building baseball stadiums in countries where no one plays baseball). That said, I think there are benefits that can arise from preparing for large events like the World Cup or Olympics that make it less of a boondoggle than it appears.

For instance, in the Brazilian case, building or refurbishing a bunch of state-of-the-art soccer stadiums for the World Cup is maybe not the best use of government resources, but it is an investment in capital that will at least be used. Brazil has a thriving domestic league and clubs getting to play in those stadiums will probably increase revenues, while the stadium experience will probably be safer and more comfortable for the attending fans.

More importantly, large-scale sporting events can be an important impetus to improve certain types of infrastructure. Brazil’s transportation infrastructure is widely regarded to be terrible. Hosting an event like the World Cup requires being able to move large numbers of people quickly across and between cities. Hosting therefore necessitates a country improve its transportation infrastructure or risk the humiliation of failure with the whole world watching. Obviously, improving infrastructure should be a priority of any government regardless of the World Cup, but politicians face a lot of conflicting interests, especially in a country like Brazil with its unstable parties, and those improvements often get put off or underfunded in order to spend on more short-term projects. If an outside pressure is a way to get those improvements done when they won’t otherwise, hosting can be more worth it than the raw numbers might indicate.

The problem in Brazil, however, is that those very improvements to the transportation infrastructure have failed to materialize. Because of delays in auctioning contracts, there will only be time for superficial improvements to a number of the country’s already constrained airports. Public fund were supposed to be directed toward urban renewal projects and transportation improvements such as rail lines to São Paulo’s airports, but are instead being spent on stadiums that may not even be ready for the World Cup.

It’s of little wonder that Brazilians are frustrated. They are staring down the barrel of a World Cup that looks set to bring an excess of the costs and few of the benefits it entails, with further preparation pending for the Olympics. All while the economy slows and inflation creeps upward.

* For a deeper look at the protests, I recommend following @riogringa. She has been posting tons of great links in both English and Portuguese.

Sinking into the Devil’s Excrement

Several weeks ago, a friend took to tweeting about the shifts in US oil supplies. Mainly, he focused on how Canada has returned to prominence as the largest supplier to the United States and how Venezuelan exports have fallen. There are a number of factors that play into those statistics—specifically, a major boom in tar sands in Canada and declining production and politically motivated diversion of exports in Venezuela. That Venezuelan oil production has been falling for most of the chavista era is a relatively well-known fact among people who follow the Venezuelan situation. However, it’s not until one really looks into the numbers that it becomes clear just how much of Hugo Chávez’s political success was built on his tremendous luck in governing during a commodity boom.

As the chart shows, Venezuelan oil exports fell by more than 40 percent between 2000 and 2012. In the same period, the approximate value of its exports nearly doubled.* Now, because of the opacity of the Venezuelan state and the large amount of its exports that are sold at heavily subsidized prices to allies, these numbers likely overestimate the actual income from exports the state received. Nevertheless, it provides a clear illustration of the degree to which oil prices (an exogenous variable) and not oil production (and endogenous one) determined the fate of the Venezuelan economy during the 14 years of Chávez’s presidency. Similarly, over the past 14 years, crude oil and refined products have increasingly come to be all Venezuela exports, with crude oil (read: no value added) outpacing refined products. The 2012 percentages may well be even higher, with crude exports surging as a percentage of the total as Venezuela has begun importing refined oil products in large amounts.

This is a story of Venezuela’s economy benefitting from growing world demand for energy, and not of a farsighted or competent economic manager.

* The number is a proxy based on the average West Texas Intermediate (WTI) spot price for each given year.

One man’s imperialist…

Yesterday I examined Nicaragua’s approval of a massive concession to build an interoceanic canal through the lens of its viability and the government’s motivation for rushing the project through. Equally interesting though, is the fact that the concession has been granted to a Chinese company and what that says about Latin America’s perceptions of China and the limits of the left’s anti-imperialism and self-professed socialism.

While many in Latin America, including even some on the right, view significant involvement of US and European companies in “critical” industries with suspicion, few seem to have developed the same attitude toward Chinese companies. To a large degree this is due to China being the new alternative; there hasn’t yet been a Chinese United Fruit Company in Latin America. Moreover, particularly on the Latin American left, there is a strong sense of solidarity with China. Some of this is admiration for Chinese resistance to the US during the Maoist era, and in less radical circles, it is a form of South-South solidarity—China is considered more in tune with Latin America’s development needs because it is also part of the Global South.

While understandable, this perception of China is exceptionally naïve. China, at least as of now, is not a rapacious, burgeoning imperial power in Latin America, but it is a giant country with a fragile (if deeply rooted) political system that must put domestic considerations at the forefront. This typically manifests itself in a sort of neo-mercantilist strategy in Latin America. The Chinese government and Chinese firms are happy to build infrastructure for, provide loans to and pursue joint resource extraction projects with Latin American governments, but these are projects that ensure a stable supply of resources keep the Chinese economy growing, not ones that necessarily add any productive capacity in Latin America. Beyond that, Chinese firms have been known to bring Chinese workers with them for the most lucrative jobs, blunting the job-creating effect of Chinese investment.

Why, then, would an anti-imperialist and socialist government in Nicaragua give a fifty year concession to build the most important piece of infrastructure in the country’s history to a private firm from a foreign country? Most importantly, for the Latin American left, being anti-imperialist means being anti-American and occasionally anti-European. This is how Fidel Castro can be described as an anti-imperialist despite the decades-long presence of Soviet troops in Cuba and his government’s marching lock-step with the Soviet Union while it invaded Czechoslovakia and Afghanistan. So while no politician would ever dare giving a fifty year concession to an American company, one can with a Chinese company. Moreover, since there are geopolitical implications to a second interoceanic canal, having the Chinese build it is a way to agitate the United States and challenge the Monroe Doctrine.

Similarly, socialist in the context of the new left in Latin America is better understood as referring to a highly statist political economy, but not one where there is a significant attempt to have the state own even a majority of the means of production. In the case of Nicaragua, it is even more simply crony capitalism. Daniel Ortega is pro-business when it benefits him either personally or politically. In this instance, it allows him to wrap himself in the glory that comes from finally fulfilling Nicaragua’s 200 year national dream, with, as I wrote yesterday, limited immediate downside risk on his part.

Teddy Ortega? Nicaragua Builds a Canal

Daniel Roosevelt

The big news out of Latin America today is the approval of a concession for a $40 billion canal by the Nicaraguan parliament. If all goes to plan, it will be the second transcontinental canal in the Americas, and will allow for the largest of cargo ships to pass its entire length; a capacity the Panama Canal will still lack even once its current expansion is completed in 2015. Moreover, the project will be completely privately funded, with a Chinese company footing the bill and managing the canal for at least fifty years.

While the bill passed easily through the Nicaraguan parliament, it is not uncontroversial. Environmentalists are concerned about the impact of supertankers and other large container ships on the ecosystem of Lake Nicaragua, while others worry that the project is being rushed—a feasibility study has only just begun and the specific route has not been chosen out of four possibilities. Additionally, while the government pitches the canal as the fulfillment of Nicaragua’s 200 year national dream and its path to prosperity, there are significant doubts that it will be the sort of windfall that they hope.

Daniel Ortega and Sandinista legislators have claimed that, simply as a result of construction, GDP growth could surpass 15% in just two years, with the completed canal generating consistent high growth thereafter. While the process of construction of such a massive project will certainly lead to a temporary boom, it is easy to envision how the canal could still prove to be a boondoggle on an unprecedented scale. The most obvious way this could happen is if something disrupts construction midway, resulting in a massive investment in a useless piece of infrastructure. Less obvious, but perhaps more salient is the possibility that the canal is successfully completed but fails to be as profitable as predicted.

As it currently stands, the Nicaraguan government projects that a canal in Nicaragua would be equally or more profitable than the Panama Canal. That is certainly possible, but it is also possible that while one canal is hugely profitable and an engine of growth, that two canals are both minimally profitable or even unprofitable. Essentially, this would be a similar situation to the paradox of cable TV infrastructure, where the process of installing the infrastructure is extremely expensive, but the first one to make the investment gets to charge monopoly prices while the second to invest has to charge a competitive rate and is therefore unable to recoup its investment. Nicaragua is obviously counting on the demand for a passage for extremely large ships being so large that it is only in indirect competition with the Panama Canal and therefore able to charge monopoly prices.

However, as it stands now, the canal will be entirely financed by private money, leaving the Nicaraguan government less exposed than it might be otherwise. That does no allay the other worries about the project, particularly the environmental concerns, but it explains why the government is so cavalier about pushing the project through; it has little to lose relative to what it stands to gain.