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Wednesday, 8 March, 2006

Shukri Ghanem: A Raven With Peacock's Feathers;
A Charlatan Who Starved The Reforms
(*)

By : Libyan Economist

If the raven were to guide a people, it would take them past the rotten remains of dogs.

An Arab poet      

Look here: if instead of the palace there were a chicken coop, and it were raining, I just might crawl into the chicken coop to keep from getting wet, but nonetheless I wouldn’t take the chicken coop for a palace, simply out of gratitude for being sheltered from the rain. You laugh, you even say that it wouldn’t matter in this case whether it were a chicken coop or a mansion. Yes, I answer, if not getting wet were the only reason for living.

Fyodor Dostoevsky

In the case of water, one of the problems in the past is that public water systems often only supply the wealthier districts and the poor have been left without water. And the government water agency says it doesn't have any resources to extend the water supply. The poor are left to buy water privately. So the current situation is one where the poor are under a private system and the better-off are under a public system.

Joseph Stiglitz

The economical scheme, which Shukri Ghanem promotes, is barbaric. It is a vulgar and cruel show, which continues to dispossess the Libyan people with no relief in sight. Shukri Ghanem, of course, will object to calling an economical policy cruel. He is one of those sneering, jeering empty suits who think that economics has to do with neither justice nor sympathy. His friends, if he had any, should help him to reconsider; for only thieves and pimps believe that economics has nothing to do with our “sentimental” interests in justice and sympathy. In fact, even thieves and pimps show an occasional interest in justice and sympathy. A thief would be twice as indignant should any of his possessions be stolen. He would no doubt think it was unjust. And few pimps would think that it is right to sell the anatomy of their mothers, daughters, or sisters for money.

Justice and sympathy are always at the heart of any rational economical policy. Mathematical techniques of economics, of which Shukri Ghanem knows nothing, are instruments for analysis and not ways to silence people who have every right to converse about the best ways to earn bread and medicine for their children.

Of course, there is no problem with Shukri Ghanem not being a professional economist in the true academic sense. The problem is that he uses the veneer of a mathematical economist in order to silence those who disagree with him in serious matters of policy. Very few Americans and European citizens, for example, have any formal training in economics, and yet politicians cannot dismiss the views of these citizens on taxes, interest rates, unemployment, wages, labor laws, health insurance and the various forms of public assistance. The views of the Libyan people on matters that have to do with their economical interests should not be less legitimate than those of the citizens of other countries. The citizens of any country cannot tell their political leaders to ignore the scientific techniques of economics, but, still, they have the right to demand a fair access to their national wealth. Now, since Shukri Ghanem continues to promote his snake oil as good medicine, it is important to show that true economical analysis belies the pretenses of his cruel mumbo jumbo.

Obviously, professional economists cannot be taken seriously unless they make themselves acquainted with the mathematical and empirical techniques of physical sciences. This, however, does not mean that economics is not a social science. Nor does it mean that the economical laws, universal as they are, apply to all local economies in the same way. Those who think that only liberal economists consider economics a social science may want to hear what the Noble Prize and conservative economist, Milton Friedman, had to say.

“Economics, by our definition, is not concerned with all economic problems. It is a social science, and is therefore concerned primarily with those economic problems whose solutions involve the cooperation and interaction of different individuals. It is concerned with problems involving a single individual only insofar as the individual’s behavior has implications for or effect upon other individuals. Furthermore, it is concerned not with the economic problem in the abstract, but with how a particular society solves its economic problems. Formally, the economic problem is the same for a Robinson Crusoe economy, a backward agricultural economy, a modern industrial society organized on a communistic basis, and a modern industrial society organized on a capitalistic basis. But these different societies use different institutional arrangements to solve their economic problems. Thus there is need for a different economics—or a different chapter in economics—for each kind of society. There turns out, in fact, to be much that is in common to the various chapters, but this cannot be required in advance; it is rather, one of the conclusions of economic science.” (Price Theory, 1976, 2, emphasis in the original).

TOWARDS MARKET ECONOMY

The obnoxious policy of Shukri Ghanem ignores that there is a distinction between economical programs that are suitable for market economy and other programs, which are intended to create market economy. The policy, in fact, is worse than obnoxious. It is a vainglorious and childish attempt to subject the poor Libyan people to draconian measures on the pursuit of prejudices -- prejudices which honest free market economists abandoned a long time ago. It is reckless to insist against all evidence that the Libyan national economy, with its enterpriseless income, can, with higher prices and lower wages and nothing else, turn into a market economy. And it is indecent to force the rules of market economy down the throats of the Libyan people, while the economy of their country does not satisfy the most basic requirements of a market economy. If Shukri Ghanem did not know these requirements, then he is an idiot, and if he knew them and decided to ignore them, then he is cruel. Here are some of these requirements.

  1. There must be clear and enforceable rules that define property rights and allow private control over goods and services.
  2. Individuals are considered competitive traders who are free to exchange goods and services either to make ends meet or to make a profit.
  3. The exchange must be transparent. Illicit exchanges, such as those of organized crime, take place outside the market, and are not legitimate ways to make economical gains
  4. None of the competitive traders are coerced by the threat of the use of force to engage in any exchange or to agree to any terms, which do not serve their interests and which are inconsistent with the rules that define property rights and free choice.

Obviously, the Libyan economy is not a market economy and the economical programs, which Libya needs at this time, are programs to create a market economy from scratch. In other words, programs not unlike those which industrial economies use to restore the markets destroyed by wars or extensive natural disasters. There is no doubt that creating a market economy may at times cause some pain, but there is no global calculus of pain, and Libya, with its wealth, can move to a market economy with no pain to the poor whatsoever.

The main objective of any serious economic reforms is to increase efficiency, and, thus, produce new winners and losers. The problem of Shukri Ghanem’s scheme is that there are no new winners. If anything, the losers, that is, the largest number of the Libyan people lost more; and the new winners is a small group of a second-generation of corrupt and parasitic political, and market, entrepreneurs. The fact that political reforms always produce winners and losers led economists to develop mathematical models that balance efficiency with fair compensation for the losers. Some of these models, which can be applied to the Libyan economy, could have been used. Not a chance. To compensate the losers was the last thing in Shukri Ghanem’s mind. It did not even matter to him that the losers are the great majority of the Libyan people.

He might not have known about these models, but he could have asked the experts. However, it does not seem important to him to protect the large numbers of the Libyan people who do not even have the chance to make ends meet. Not once did he speak about the need to create a system of compensation for those who are becoming worse off as the economy struggles towards efficiency. He just kept going on his merry way, singing the obnoxious nonsense of no-pain-no-gain, as if it were an economical law of nature.

ARE LOW WAGES GOOD FOR THE LIBYAN ECONOMY?

Shukri Ghanem and company continue to tell the Libyan people that an increase in wages is not good for them. Good wages, the Libyan people are told, are not good for the economy as a whole, and whatever is not good for the economy is not good for them. That is why the policy is not just idiotic, but cruel. There is no economist who would agree that under all economical conditions good wages cause either inflation or unemployment or both, and, therefore, in the long run, are not good for the economy. To say that good wages always cause unemployment and inflation is to commit the fallacy of confusing correlation with causation. The relationship between high wages and unemployment is not analytical. It is statistical and contingent on particular economical conditions. Indeed, the Libyan economy is a textbook example of how low wages can lead to very high rates of unemployment and high inflation in relative terms. Why, then, does Shukri Ghanem continue to tell the Libyan people that low wages are good for them?

Shukri Ghanem and company think that the Libyan people are lazy and should they have access to their national wealth, they will have no incentive to work and produce. Yet, paradoxically, he thinks that these same lazy Libyan people ought to find some way to create wealth without having access to capital. Now, Shukri Ghanem knows that capital is surplus-money available for investment and not mere subsistence, and that this money can also be in the form of marketable land or labor, which an individual or family does not need for subsistence. He also knows, let us hope, that there are very few Libyans who have any assets which exceed what they need for subsistence, and that a healthy increase in wages will help create capital. His problem, or rather the problem of the Libyan people, is that he continues to commit himself to some of the bad arguments against paying good wages. Most economists, except for a handful of modern feudalists, consider these arguments nothing more than prejudices, relics of the past. Here are the most common of these arguments.

  1. Paying a living wage causes inflation and inhibits economic growth.
  2. A living wage policy makes it difficult for existing businesses to continue and deters new investment.
  3. Not all jobs are worth paying a living wage.
  4. The free market should determine the price of labor (wage levels).
  5. Companies have a responsibility to maximize profits for their shareholders.
  6. Raising wages will result in job loss for the very workers you are trying to help.

None of these arguments are of any value when applied to the particular case of the Libyan economy. Nor are they of any general scientific value whatsoever. Indeed, it is more appropriate to call them assertions than arguments. They are, as analytical and empirical arguments show, justifications of political realities and not consequences of pure economics. Indeed, the evidence shows that good wages, that is, living wages, are, in most cases, good for the economy as a whole. In the few cases, when good wages do not directly contribute to economical growth, the evidence shows that they are neither necessary nor sufficient causes of inflation or unemployment. In fact the opposite is true. For example, when, in the wake of the Great Depression, the United States government needed to create jobs, it made sure that wages would not fall. Not only this. It acted to increase wages and incomes by adopting various measures. Thus, the federal minimum wage was adopted for the first time in 1938, as part of the Federal Fair Labor Standards Act. This, among other measures, increased consumer purchasing power, which contributed to creating more jobs. It is also obvious that good wages increase efficiency, which allows firms to absorb the increase in labor costs without having to pass them on to consumers in the form of higher prices for the goods and the services they produce. They also decrease the demand for government assistance to low income families, and create new entrepreneurs who are willing to invest some of their savings in the market and, thus, creating more wealth and more jobs.

The view that lower wages make the labor market more flexible “everywhere” is not consistent with the facts. At best, it is nothing more than a dogma. The political engine that powers this dogma, as part of its global liberalization program, is known as the Washington Consensus. It is the convenient meeting of the minds among some of the powerful members of the International Monetary Fund (IMF), the U.S. Treasury Department, and the World Bank.

Here is what the Nobel laureate economist and University Professor at Columbia University, Joseph Stiglitz had to say about the Washington Consensus’ policy of lower wages “everywhere”. (Stiglitz was also, among other things, the former chair of the U.S. Council of Economic advisers, and former vice president for development economics at the World Bank. He also taught at Princeton, Stanford, MIT, and was the Drummond Professor and a fellow of All Souls College, Oxford.)

“As part of the doctrine of liberalization, the Washington Consensus said, "make labor markets more flexible." That greater flexibility was supposed to lead to lower unemployment. A side effect that people didn't want to talk about was that it would lead to lower wages. But the lower wages would generate more investment, more demand for labor. So there would be two beneficial effects: the unemployment rate would go down and job creation would go up because wages were lower. The evidence in Latin America is not supportive of those conclusions. Wage flexibility has not been associated with lower unemployment. Nor has there been more job creation in general.

The mind-set of many people within the Washington Consensus has been very much influenced by a kind of flexible, full-employment dynamic in an advanced country like the United States. In the United States, almost anyone who wants a job can get a job. We have a good capital market. If you have a new idea, it's remarkable how easy it is to find finance. New enterprises are being created all the time. That's not the case elsewhere. Capital markets in many countries don't function. There's very little enterprise creation, very little job creation. When you lose a job in one part of the economy it isn't the case that you will automatically create a job elsewhere.

Labor market flexibility was designed to move people from low productivity jobs to high productivity jobs. But too often it moved people from low productivity jobs to unemployment, which is even lower productivity.

In a world in which there are large mobility costs, the issue of workers' rights becomes very important. Those issues -- workers' rights, safety legislation and so forth -- are appropriately within the purview of government. The right to collectively bargain and organize should be viewed as a basic right that is needed to redress the balance of power.”

Perhaps this makes it clear why I called the Washington Consensus the “political engine,” and not the “philosophical engine,” that powers the view that economic reforms mean low wages. The methods, which the members of the “Consensus” use to sell their point of view, are coercive. They are neither dialectical nor negotiable.

THE DEEP DEPRESSION OF THE LIBYAN ECONOMY

All other things being equal, the Libyan economy today is not very different from that of the United States during the Great Depression. When there is “an unusual increase in unemployment, restriction of credit, price deflation or hyperinflation, large numbers of bankruptcies, a poor amount of trade and commerce and a substantial and sustained decrease of the ability to purchase goods relative to the amount of the potential output, “ then the economy is in depression. These are just some of the symptoms, which best describe the Libyan economy. Other symptoms make the depression of the Libyan economy worse than that of the United States during the Great Depression. For example, while the level of unemployment during the Great Depression in the U.S. was 25%, the level of unemployment in Libya at the present exceeds 30%.

Not only this. America’s Great Depression was at least manageable, since it was caused by the failure of the market to function without the occasional intervention of the government through fiscal and monetary policies. This makes Libya’s Depression deeper than that of the great depression, since there is no market in Libya whatsoever. There is only an underground bazaar, an oil flea-market, where crony capitalists like Shukri Ghanem do their own thing with the national wealth.

It is obvious that the Libyan economy does not compare to that of the United States in the 1930’s, or at any other time. Still, there are no models more suitable for overcoming dysfunctional economies than that of the New Deal. The New Deal was made of a sequence of programs, which the American administration under FDR used to get the country out of the Great Depression. The Libyan economy needs programs similar to those of the New Deal. These programs will make it possible to deal with the depression and also to develop sustainable market structures, which are both efficient and democratic. The New Deal was made of three stages, Relief, Recovery and Reform. Relief was made of a set of measures to provide immediate assistance for those who cannot help themselves (work relief programs, unemployment insurance). Recovery was a set of measures intended to bring the economy out of depression, through government spending on new public projects (pump priming), lower taxes on business and personal income, wage increases and financial incentives to encourage those who are able to work to take jobs on the service and construction sectors, which in turn would raise consumer purchasing power and increase employment. Reform was a set of permanent measure and structural adjustments, which were intended to serve as mechanisms that can be used to prevent future depressions.

GHANEM’S PATERNALISTIC POLITICAL ECONOMY

Shukri Ghanem continues to say that the Libyan people prefer to be hired by the state and receive money for doing nothing. Again, what he means is that the Libyan people are unenterprising and parasitic, and the only way to get them to work is to throw them out in the streets and let them face the facts. (I say the streets, and not the market, since there is no market in Libya.) I don’t know how Shukri Ghanem’s parents made their living, but every Libyan remembers how hard their mothers and fathers worked to make ends meet. “Yes,” Shukri Ghanem would say, “Libyans worked hard in the past, but that is because Libya had no oil and people had to fend for themselves.

So, according to this view, Libyans must forget that they hit the geological lottery and go on with their lives as if Libya is as poor today as it was before the oil. Who then should benefit from the oil money? What is wrong with somebody hitting the lottery and wanting to live a different life than before they hit it? Let us take this analogy a bit further. Say a person hit the lottery. There are three possible recommendations we can make to this person. We can tell him to go and spend the money to his heart’s desire, which of course is not wise since he will eventually run out of money. We can tell him to give us the money, all of it, for us to spend and then he can go and find himself a job, which is exactly what Shukri Ghanem and company are telling the Libyan people to do. Or, we can tell the person that it is your money and you have every right to keep it, and then we create conditions that will encourage this person to invest this money in ways that will create more wealth for him and all others. The question, once again, is to whom the national wealth belongs? Shukri Ghanem and company say that we are saving it for the next generation. Why the next generation? Why not the generation after the next generation or the one after that and so on all the way to the Day of Doom? This is shear madness. The great economist, Lord Keynes, who believed that government should make sure to solve the short term economical problems rather than waiting for market forces to do that, said, “in the long run, we are all dead”. And who is this mythological next generation? At what age group do they start? And does this next generation have interests that are independent from the interests of their mothers and fathers? This is a policy of a government that is suitable maybe for ants, which work all year so as to store food for the winter. Human beings, I guess can do a little better than ants, which have no creative mechanisms that help them decide when it is more beneficial to save than spend, and which have no mechanisms to help them invest some of their resources so as to become more comfortable and prosperous. The policy of Shukri Ghanem is to make a generation and a half go into hibernation. The ants, if they could, would award him the Nobel Prize for economics, or better yet, for hibernation.

Excessive saving, that is saving more than what is needed for planned investment, is a serious problem that leads to recession or even depression. The opportunity cost of not investing a healthy amount of the national wealth now is much higher than saving it for the next generation. So many good things can be done with the money, which are not being done. The fear that only foreign interests will benefit from investing the money is an excuse and not a reason. Give the Libyan people the money in the form of wages for jobs and create the market conditions for the Libyan potential investors to invest.

GOOD WAGES HELP CREATE NEW CAPITAL

Shukri Ghanem, however, talks also as if when people become entitled to their national wealth, they will have no incentive to work or invest. This is not true. Reason and experience tells us that the more money people make, the more money they want to make. Also, high wages increase efficiency, since people will have good reasons to perform well so that they will not lose their jobs and so that they will qualify for promotions. They say if you give Libyans money, they will become consumers. What is wrong with that? How can any economy have producers without having any consumers? It is the job of the government to encourage producers and investors without counterproductive limits on consumption, since no one will produce anything unless there are potential consumers, that is, people with purchasing power to buy the good and services offered for sale.

Shukri Ghanem keeps spreading around this cruel myth that people, once they are left on their own in the streets, will become resourceful and industrious and, somehow, like magic, be able to create wealth. How can people who have access to neither capital nor land, nor the rules that allow them to engage in free and fair commerce, people who are struggling to make ends meet, create wealth? Europeans did not create wealth from nothing. They had the virtually free labor and natural resources of Asia and Africa. Nor did the Americans make their wealth from nothing. They began with so much free and rich land and so much free labor (the slaves from Africa), which made it possible for them to create their wealth. These remarks are not intended as a frivolous protest against things past. They are only meant to show that you cannot make capitalists out of those who have no access to capital. Shukri Ghanem expects Libyans to be Gods, to create wealth ex nihlio, from nothing. They will not, because they cannot, create wealth from nothing. They will just continue to be disfranchised and poor. This is not a way to run a national economy.

Wages are prices of labor and, like prices in general, are subject to the laws of supply and demand. If the number of people who are capable and willing to work is larger than the numbers of workers demanded by the market, then the wages are lower than if the demand on labor is higher than the supply. A wage, however, is not the same thing as an income. Wage is only one form of income, since it is possible to have an income without investing any labor, as in the case of income by inheritance, public or private assistance or crime (including economical and political corruption). There are two kinds of people who cannot earn wages, those who are unable to do work (the disabled, the too old and the too young) and those who cannot find work. There is little disagreement among economists that those who cannot do work and, therefore, cannot take care of themselves, are entitled to some form of assistance. Economists, however, disagree on what to do with those who do not have incomes because they cannot find work (the unemployed).

We, thus, have those who call for universal basic income, like Felippe van Parijs of the University of Lowain in Belgium (see his Real Freedom from All: What if Anything Can Justify Capitalism). His views, controversial as they may be, are not altogether unwarranted. In the early 1970’s, Milton Friedman called for a negative income tax, which is not very different from a universal basic income. We also have those who call for following the New Deal model of creating jobs, like economists L. Randall Wray and Mathew Forstater, professors at the University of Missouri. A third plan is that of S. Phelps, professor emeritus at Columbia University, who articulates a system, based on both empirical evidence and orthodox economics, to provide graded public subsidies so as to increase the wages of those who are incapable of finding jobs that pay a living wage. (See his, Reward and Work: How to Restore Participation and Self-support Free Enterprise, Harvard University Press, 1997)

Obviously, these are not the only views regarding wages. I mention them here only to show that even in the prosperous Western countries the problem of low wages is not left to the market alone. Indeed, the problem of unemployment is structural and not contingent on market failures which the market itself can overcome. The reason for that is simple. The market alone can never provide jobs for all those who need them. Professor Wray puts it this way, “If you bury nine bones and send ten dogs out to get them only nine of them are going to come back with bones. Now, you can take that one dog and teach him the latest, most-up-to-date bone-finding techniques, and he might come back with a bone next time. But you know that some dog is always going to come back empty.”

Shukri Ghanem says that we need not worry about those who come back empty. They may all just go away and die, for all that he cares.

True to his character, Shukri Ghanem continues to pull his favorite fast one. He claims that the number of Libyans who are on the government payroll is 800,000. This is a lie. Considering the number Libyans as a whole, and taking away the number of the members of the armed forces who are not included in the 800,000, this means that one of every six Libyans, children and all, receives a salary from the government. This is, obviously, not the case. Not only this, among those who are on the government payroll many do not receive their paychecks every month, sometimes not for a whole year or even longer. Now, even if we assumed for the sake of argument that there are indeed 800,000 Libyans on the government payroll, most of these Libyans should not be considered part of a bloated bureaucracy. The problem with Shukri Ghanem’s number is that he counts everyone who receives a salary from the government. He, somehow, ignores the fact that for a whole generation the government, by law, was the only possible employer. And so the Libyans who provide professional (and not bureaucratic) services, such as teachers, nurses, engineers, doctors, drivers, lawyers, policemen, and the honorable Libyan men and women who clean after people like him should not be considered a part of government bureaucracy. Had doctors and engineers, for example, had any choice, they would not have worked for the government. Shukri Ghanem acts as if there are now choices outside the government, but people love working for the government so much, they are not willing to take any of the too many available jobs. Only in his twisted imagination are there any jobs.

Shukri Ghanem, a crony capitalist par excellence, is fond of blaming the victims of crony capitalism, that is, the Libyan people, for their misfortunes. Again, let us, for the sake of argument, agree that there are too many people on the government payroll, who, then, should be held responsible for that? Certainly, it is not the Libyan people. In the past, they were told that they have no choice but to be on the government payroll; and now, at these good times of high oil prices, they are told by Shukri Ghanem that they have no choice but to be off the government payroll. Where does Shukri Ghanem expect them to go at this time? To Vienna perhaps, where they may eat cake instead of bread.

There really isn’t any difference between the greedy enemies of free and democratic market, who continue to believe that the Libyan people should have no other choice but to work for the government, and not get paid, and Shukri Ghanem, who believes that the Libyan people have no other choice but to not work at all, and not get paid. The only difference between him and his alleged opponents is what kind of nonsense each uses to say that the Libyan people are not worthy of making free choices.

They are both wrong. The Libyan people, like all people, should have fair access to their national wealth. Each one of them is a free individual, as good and worthy as the rest. They should no longer be considered a raw material to be molded according to the whims of crony capitalists, who starve them, once in the name of revolution, and once in the name of reforms.

What Shukri Ghanem has done has nothing do with true reforms. He is one of those who believe that the cause of poverty is the moral failure of the poor. He is malicious. The true cause of poverty is the moral failure of those who deny the poor equal access to their national wealth. To blame the poor for their poverty is to render the science of economics useless.

The Libyan people should not be left alone, defenseless. And so I call upon all Libyan professionals, those with a sound background in economics in particular, to stand up, with arguments and commitment, against those who would not allow their people a fair chance to their national wealth. I call upon them to work closely with their colleagues in the law profession, and to use Libya’s political and legal systems to defend those who cannot defend themselves. Let science, liberty and the rule of law settle the issue.

A Libyan Economist
alibyaneconomist@hotmail.com
_____________________________________________________________
(*) The article was written before the recent changes in the Libyan government. Since all the arguments included in the article remain valid and relevant, I decided to make them available to the public. In favor of time, I decided not include the helpful, but otherwise dispensable endnotes.   The author


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