Corruption, Not Globalization, Is To Blame For Poverty

Por Alejandro Chafuen: Publicado el 7/1/20 en:


When discussing globalization, advocates of the free economy usually start by stressing the large number of people who have risen out of extreme poverty in the last three decades. This period of poverty reduction showed a parallel growth in globalization. But it has not been even.

Those who try to prove that we are living in the best of times usually use monetary statistics – they count the number and percentage of people who earn less than $1.90 per day. Thanks to progress and some inflation, the threshold for extreme poverty is being revised upward to $3 and even to $5 per day. “Optimistic” economists also provide statistics for factors such as access to clean water, access to electricity, and better and cheaper communications. In most countries human development indices have also improved. Their message is often summarized as “we never had it so good.”

It is only during the last three decades that we have seen think tanks, NGOs, and international bodies introduce indices that measure economic freedom, globalization and respect for the rule of law. Surprising as it might seem, we still do not have reliable international poverty statistics. It seems shocking that the World Bank and its multimillion-dollar bureaucracy – which states that poverty reduction is one of its main goals – can’t come up with up-to-date comparable figures. Most countries use different measures and thresholds and do not report on a yearly basis.


Alejandro A. Chafuén es Dr. En Economía por el International College de California. Licenciado en Economía, (UCA), es miembro del comité de consejeros para The Center for Vision & Values, fideicomisario del Grove City College, y presidente de la Atlas Economic Research Foundation. Se ha desempeñado como fideicomisario del Fraser Institute desde 1991. Fue profesor de ESEADE. Síguelo en @Chafuen 

What the gold standard is and why government killed it

Por Nicolás Cachanosky. Publicado el 19/4/17 en:


The gold standard is both a strongly advocated and vehemently opposed monetary regime. Both positions, however, usually rely on misconceptions on what the gold standard actually is and why it failed. Below, I will discuss (1) what the gold standard is, (2) what is not, and (3) why it failed.

What the gold standard is

Under a gold standard, gold is money . This means that gold is (1) the most common means of exchange, (2) it is a good store of value, and (3) it is a unit of account. While we can picture gold coins being used for transactions in small amounts, larger amounts are done with a substitute of gold, usually a banknote with a promise that the bearer can exchange it for gold. These banknotes are issued by central banks, and are convertible to gold at par.
One feature of the gold standard is that the change in gold reserves signals to the central bank if it is issuing too many (or too few) convertible banknotes. If the central bank over-issues banknotes, meaning that banknotes increase more than the value individuals want to hold, then consumption at the aggregate or national level increases. Since individuals now see more banknotes than they want to hold in their pockets, they will spend the extra cash. This means that, unless production has increased, imports will also increase.

But in the exporting country the domestic banknotes do not circulate. Therefore the importer has to pay for the imports with gold. If imports increase more than exports, then the central bank sees their reserves decreasing. In modern days, where central banks issue fiat money (that is, banknotes not backed by gold or any other commodity), central banks need to find a substitute to figure out if they are issuing too many banknotes. That substitute is usually inflation; if inflation rises, central bankers reason that money supply might be too loose.
A common concern with the gold standard is that is prone to unexpected and random discoveries of gold that could produce inflation and monetary imbalances. Surely, no regime would be perfect. It would be unwise to criticize the real-world shortcoming of the gold standard in comparison to, for instance, an idealized but unreal central banking regime that issues fiat money. The useful, and fair, comparison would be to compare the real gold standard with a real modern central bank rather than an ideal central bank.

It is true that under gold standards of the past there were periods of inflation. But rather than assuming that these were problems with the gold standard itself, we can look closer at the events taking place at the time. When we do so, we find that either the many cases of inflation were not due to random gold discoveries or that the inflation rates were not actually very high.

Take, the case of the United States. The inflation “peaks” of less than 2% between 1812 and 1816 and again between 1861 and 1866 correspond with the War of 1812 and the Civil War respectively. In these cases, inflation is not explained by a shortcoming in the gold standard, but by an increase in government spending due to armed conflicts.
Another example is that of the Price Revolution that took place in Western Europe between the second half of the 15th century and the first half of the 17th century. During this time period of approximately 150 years the price level increased six times. That translates to an average yearly rate of inflation of just 1 to 1.5 percent.
I t seems that modern central banks, rather than the old gold standard, are the ones that have a poorer track record with respect to keeping a lid on inflation. Since 1971 (when the last remnant of the gold standard was abandoned), the inflation rate in the United States has had a yearly growth rate of 4%. This means that between 1971 and 2017, the price level has increased six times .

What the gold standard is not

There are two important clarifications to make in terms of that what the gold standard is not. The first one has to do with gold standard pegging the price of gold, and the second has to do with the gold standard as an international regime of fixed exchange rates.

The gold standard does not fix the price of gold.

As mentioned above, under a gold standard, gold is what functions as money, the convertible banknotes issued by central banks are money substitutes. Recall that ultimately what functions as the unit of account is gold. This means that the gold standard is not a policy that fixes the price of gold as if central bank banknotes were money and gold just a commodity of reference. This is not just semantics.

When you deposit your dollars (or Euros, British Pounds, etc.) into a bank account you receive a checkbook that you can use to write checks that are “convertible” to dollars. This check is similar to the convertible banknotes that central banks issues. And just as if you write too many checks your bank account balance goes down, if a central bank issues too many convertible banknotes their reserves go down as well. And just as we do not say that we fix the price of the dollar in terms of our checks, we cannot argue that under gold standard we are fixing the price of gold in terms of central bank convertible banknotes.

Today gold is no longer widely perceived or accepted as money. The observed volatility of its price against a currency such as the US dollar is seen as a concern if gold were to be the reference commodity under a gold standard. If, hypothetically speaking, a central bank were to go back to the gold standard, this means that gold would function as money, not that the price of gold would be fixed and the central bank would have to expand or contract the money supply to stabilize its price (i.e. buy and sell gold at the given fixed price.)

The gold standard is not a regime of international fixed exchange rates.

If gold is the commodity that functions as money, then this also means that the gold standard is an international monetary regime. Just as two individuals may write checks from different banks convertible into the same currency, under a gold standard different central banks issue convertible banknotes convertible into the same commodity: gold.

If this is the case, then the gold standard cannot fix exchange rates because there are no exchange rates to fix in the first place. An exchange rate is the price between two different currencies. In a gold standard we have one currency for many countries, similar to today how a group of European countries share the Euro as their currency (the Eurozone).

If we had two metals, gold and silver, then will see an exchange rate between gold and silver. But this would be a bi-metallic system, not just a gold standard.

To argue that there is an exchange rate between two convertible banknotes issued by different central banks is like arguing that there is an exchange rate between two checks denominated in dollars but issued at different banks. If one check is for $50 and the second one for $100, the relation is that we need two $50 checks to equal the value of on $100 check. This is a parity relationship, not an exchange rate. Once again, to argue that the gold standard is an international regime of fixed exchange rates is to confuse what is and what is not money under such a system. These checks, or convertible banknotes, have different denominations or measurements of the same good (pounds, ounces, etc.) the same way that miles and kilometers are different measures of the same thing. There is no price between miles and kilometers, there is a parity conversion.

Why the gold standard failed

A popular argument is that the gold standard failed due to flaws in its design. According to critics, the gold standard is in fact responsible for the Great Depression. According to this argument, when aggregate demand fell central banks had their hands tied by the gold standard and could not react by increasing the money supply. This made the Great Depression a worse crisis than it would otherwise have been. The institutional reforms that followed moved the US away from the gold standard into a more flexible and free system based on fiat money.
But something important happened before the Great Depression; World War I. Remember that the gold standard is an international monetary regime. This international characteristic was broken during WWI, where (1) international shipments of gold were suspended or reduced and (2) major countries suspended their banknotes’ convertibility in order to “print” money to pay for the expenses of war.
WWI meant a de facto end to the gold standard even if de jure no country “gave up” the gold standard. After WWI important decisions had to be made. One of those was the United Kingdom going back to the prewar convertibility of its own banknotes without removing from circulation the excess of banknotes.
This caused the British Pound to devalue against the US dollar. And the United States decided to also increase its money supply in order to contain the British Pound. This eventually fueled the financial bubble that burst in 1929, signifying the beginning of the Great Depression.

Once we take this sequence of events into account we can see that the gold standard broke down because of WWI and it never returned to its normal functionality. The gold standard cannot be responsible for the Great Depression for the simple fact that it stopped working more than a decade before.

Now, there is a more subtle argument made by some economists that the gold standard was responsible for the Great Depression, not because of the gold standard regime but because of the gold standard mentality that constrained the central bankers of the time.

However the behavior of UK and US policymakers of the time went against the gold standard mentality. Especially in the US, where the idea of increasing the money supply without a commensurate increase in gold reserves, all in an effort to help the British Pound, was not part of the gold standard mentality.
The gold standard did not fail due to its own internal problems, but because of government driven, calamitous events such as WWI and the post-WWI policy makers’ looser monetary policy, made possible due to the inconvertibility of the banknotes.


Nicolás Cachanosky es Doctor en Economía, (Suffolk University), Lic. en Economía, (UCA), Master en Economía y Ciencias Políticas, (ESEADE). Fué profesor de Finanzas Públicas en UCA y es Assistant Professor of Economics en Metropolitan State University of Denver.

Prospects And Challenges For The U.S. Economy In 2016

Por Alejandro Chafuen: Publicado el 1/1/16 en:


Unemployment continues to fall, inflation is in check, interest rates remain near historical lows, the governments of major U.S. partners have no intention to engage in trade wars, and the price of oil and energy continues to fall. There are no major storms in the forecast for the U.S. economy.  Nevertheless, very few economists, if any, are forecasting a growth rate of more than 3% for next year. What is holding back the U.S. economy?

Three factors conspire against growth: the uncertainties about which road will the U.S. economy will take after the next presidential election; the continued high cost of the regulatory state and all its effects, from corruption to arbitrariness; and the lackluster performance of most major western economies.

Forbes_Chafuen for 2016

The stock market indices are close to their all-time high, almost at the same level as the end of last year. They have recovered nicely since their low in September. Unemployment stands now at 5%, lower than last year’s 5.8%. That means 1 million fewer people are unemployed, but this figure does not reflect the fact that 2 million more people have left the labor force since last year, so in terms of the percentage of workers in the labor force we are back to the late 1970s. In addition, almost half of the increase in the newly employed (470,000) were in the health care sector. I doubt that it is because “Obamacare” is less costly — just the opposite, it is more expensive and cumbersome. It imposes heavy costs on employers who want to hire more than 50 employees or offer more than 30 hours of work to those who are working less than part-time.

In the monetary arena, I forecasted last year that, as a way of precaution, the Federal Reserve was likely to begin introducing higher rates early in the year. My timing was wrong; the Fed waited until December. By announcing that it will increase the federal funds rate gradually, and modestly, a quarter point each time, it has already led the market to anticipate and factor that move.

In my Jan. 1, 2015, piece, I wrote that “with monetary easing in Europe and more prudence in the Fed, the U.S. dollar could likely strengthen another 10 percent against the Euro.” That is what happened on a year-to-year basis. There is still room for the dollar to strengthen another 5% against the Euro in 2016. Borrowing in Euros and investing in U.S. assets might still be a good strategy for 2016. Currency “wars,” with China trying to increase the role of the renminbi, will continue, but the impact will not be dramatic—at least not for the next couple of years.

With government debt passing $18 trillion, Obama keeps beating his record of increasing federal borrowing more than any other president in U.S. history. During his tenure, government debt increased by $8 trillion, and there is still more time to go. Yet, as interest rates will continue to be extremely low, the costs will not be felt this year.

Storms continue to cloud the future on the national security front. This is an area that should not be neglected. Both the reality and the perception of security threats have huge implications for the economy. A free economy is nothing but the free movement of goods, money, and labor. Those same freedoms can be exploited by those who want to cause harm, and those abuses can be used as excuses for those who want to promote protectionism and restrict the entry of competitors.

In 2014, we had the Russian intervention in Ukraine and the rise of the Islamic State, ISIS. In 2015, we saw new tensions with Russia in Syria, and with China in the South Seas. Apart from a successful catastrophic attack in the homeland, confrontations with Russia or China can have a much greater impact in the economy of the United States than all other security threats. Central and Eastern European countries are devising their own way to counter Russia. U.S. diplomats will work to prevent major issues with China, so I expect a stable “uneasiness” on both fronts, but no major confrontation.

In addition to terrorist violence in the Middle East, the acts of violence of Boko Haram in Nigeria and neighboring countries, Cameroon, Niger, and Chad, continue to be a grave threat to that region. The role of the United States is that of helping the local governments contain and defeat them. Given the little economic relevance of those countries for the U.S. economy, their threat does not enter into the economic debate. More problematic were the Paris attacks, the numerous terrorist events in Turkey, and the recent San Bernardino attack. Libertarian economists might point out that, statistically, they are not very significant, but the attacks have huge cultural and social impacts and can marginalize efforts to promote more restraint in U.S. foreign interventions. With little willingness to send large amounts of U.S. troops abroad, and with defense spending at manageable levels, the growth or decline of the U.S. economy will not depend on this sector.

The forecasts on the price of oil continue to underestimate supply and overestimate its price. Except for some of the oil-producing states, this will be a boon for the economy. If you own oil stocks, enjoy the high dividends but do not expect much growth. The positive impact of cheap oil and gas will be mitigated, however, by an intrusive regulatory state, and by the uncertainties created by the political battles over health care and immigration that will continue during 2016. Do not expect much change during these next 12 months. The recent budget deal can serve as an indicator that the Republicans will avoid major battles in Congress. The national debate will continue, but in the presidential campaigns, as usual, real action will be reserved for the future.

World trade has stalled at 2008 levels, and it has even gone down this last year. Free or freer trade is a great engine for healthy economic growth, and despite some protectionist voices, I do not expect trade wars — but neither do I anticipate much advance. Last year, I stated that “President Obama’s search for a positive legacy in the international arena might still lead him to turn his back on his more ideological base and push to approve TPP and TTIP.” After the approval last October of the Trans-Pacific-Partnership (TPP), the next challenge is the Transatlantic Trade and Investment Partnership (TTIP) with Europe. I believe that even in this polarized pre-electoral political environment, it will be easier to achieve consensus in the United States than in Europe for its passage. But, because of opposition across the Atlantic, it is doubtful that the agreement will be signed before the end of Obama’s term.

The 2016 U.S. economy can’t expect much push from its neighbors. Mexico and Canada, which together represent 30% of total U.S. trade and one third of U.S. exports, will continue to grow at modest rates. Mexico’s GDP will likely increase by 3.6%, one percentage point more than this past year. Canada, on the other hand, will likely grow at a more modest rate, just above 2%. Europe, another major trade partner, survived the Greek and other radical populist crises, but, on average, will grow less than the United States; I anticipate the same with Japan.

Respect for the rule of law in the United States has been declining, and, unfortunately, respect for private property continues to go down in the world. In the Fraser Institute index, the U.S. score in this front went slightly down (from 7.02 to 6.97), but it is way down from the year 2000, when it stood at 9.23. The United States is now 29th in the world. In the Heritage Foundation index, respect for property rights in the United States went down from 4th place in 2009 to 20th today, same as last year. In the rule of law index of the World Justice Project, (which ranks 102 countries), the United States is again in 19th place. Of the top 10 economies, four countries—Germany, the United Kingdom, Japan, and France—have better rule of law scores than the United States. Nevertheless, given the size and opportunities in its economy, the United States will remain as an attractive destination for foreign investment in 2016.


Alejandro A. Chafuén es Dr. En Economía por el International College de California. Licenciado en Economía, (UCA), es miembro del comité de consejeros para The Center for Vision & Values, fideicomisario del Grove City College, y presidente de la Atlas Economic Research Foundation. Se ha desempeñado como fideicomisario del Fraser Institute desde 1991. Fue profesor de ESEADE.