Greenspan asked a difficult question

Greenspan asked a difficult question

Alan Greenspan has been asked an excellent question: Why do we have a Fed? Why do we have someone adjusting the rates if we’re a free-market society? Alan’s answer is not satisfying, but I don’t blame him: The economics profession does not have a good answer. We economists are rigorous in explaining why we have environmental regulation and to explain why we have antitrust laws, but there is no consensus about what market failure calls for the existence of a central bank. The answer has something to do with the benefits of a system of fiat money. And it has something to do with sticky prices and/or imperfect information about prices. But the precise combination of elements that would yield a satisfying answer is still elusive.

Unleashing Sri Lanka’s growth potential

Since the late 1970s, Sri Lanka has been liberalizing its economy. The fact that its wealthiest province, the western province, grew rapidly while the rest of the country stagnated, and Sri Lanka now has the highest inequality in South Asia, confirms the worst suspicions of anti-globalizers: Economic liberalization causes the rich to get richer, and the poor, poorer.

In fact, the opposite is true. The reason the western province grew so fast is that it benefited the most from economic reforms. Trade liberalization and industrial de-regulation led to a boom in manufactured exports Manufacturing was concentrated in the western province, which halved its poverty rate. Meanwhile, the rest of the country is heavily dependent on agriculture, which has seen very little growth.

Owing to land regulations, farmers in Sri Lanka are forced to grow paddy, even though they can earn much more from growing fruit and vegetables. Fertilizer and other subsidies are also geared towards paddy farmers. Attempts to reform land regulations, or transform subsidies to across-the-board support for any crop, have been unsuccessful.

Sri Lanka is a textbook case of how globalization works. Where there is liberalization, the economy booms; where there is no reform, the economy stagnates.

—Shanta Devarajan

The coming debate on Internet regulation

Two stories about Internet regulation have caught my eye in recent days. Firstly, Google is calling for an international standard of privacy in Internet communications. They argue the Internet is a global phenomenon and that it has become a vital tool for commerce and personal data is now regularly sent all around the world in massive quantities. Most countries do not have adequate security precautions in place.

On the other hand, we have the sad case of Kevin Whitrick who killed himself whilst being goaded on by others in a so-called “insult chat room". This had provoked calls for such chat rooms to be banned. The argument is that the Internet is potentially dangerous and corruptive and that it should be regulated.

While these two stories aren’t exactly polar opposites—one deals with regulating information flow and the other with permissible content— they do reflect two different positions on the future of the Internet. At it’s simplest, this is the classic libertarian argument: On the one hand, regulation might help to keep a few people safe. But on the other, we have a right to live our lives our own way and make our own choices. Any attempt to restrict that will open the door to much abuse andcensorship.

In legal terms, the Internet and the Web are still young. Few if any governments have yet got around to putting in place an adequate framework of rules to secure our online privacy and facilitate commerce. For better or worse, the debate over electronic commerce rules will remain at the top of the government’s agenda for many years to come and sooner or later this nettle will have to be grasped.

But the tendency for governments to regulate and control must be resisted. The fantastic growth of the Internet has transformed business in a few short years.

—David Cuthbertson