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Exclusive Q & A With Economist Reuven Brenner Of McGill University (Part 2)

Today we continue with the second and final part of our exclusive interview of economist Reuven Brenner, who is also a professor at McGill University in Montreal.

Cedric Muhammad: One more example of that, in my view is what the Bush administration is demanding of the Palestinian Authority. What do you think of that?

Reuven Brenner: This is an excellent but more complicated example of what we just discussed. One big mistake there, again, is that money is being transferred to an authority which, until now, did not have any checks and balances. So suddenly you see that the treasurer (of the Palestinian Authority) is saying that Arafat has transferred I don't know how many millions of dollars and everyone knows that his wife is living on the fanciest avenue in Paris. He doesn't make a secret of that. Well, this is exactly the problem, it goes back to the subject of accountability. Here a country transferred capital to Arafat's government but without asking for any checks and balances and any accountability. Well then, he established his power, he more or less eliminated his competitors and the money didn't go where it should have gone. One lesson from that is you don't transfer money to a potentially corrupt government because it will just encourage corruption. The Palestinian case is related, I would say, with what we just discussed about the aboriginals in Canada. Because part of the problem there is really, among the Palestinians you have two entirely separated groups. You have the Palestinians who live in the West Bank or in Gaza, let's say within Israel, who in 1948 never left the lands. And then there is another group, if my memory serves me correctly, 400,000 who in 1948 when the state of Israel was established, the Arab countries said, "quit your land, Israel will not exist for long, we shall conquer, and then you will get back everything". These 400, 000 people were put in camps, all of the neighboring Arab nations denied them any rights. They were not allowed to work there or anything and they really lived from United Nations' money. So in fact that money created a kind of new tribe who really lived in a horrible situation. Their whole hope was that the Arab nations, at some point would come and throw Israel into the sea and then these people could go back. So, after 50 years that has not happened and unfortunately that group by now is 1.5 million. Not only were they denied any rights to work but they continue living in horrible crowded places. The only hope was this promise of an Arab government and that Israel would be destroyed. So I think that in the press there is a very superficial analysis when they speak of Palestinians because there are two groups of very separate Palestinians. And you can't forget that Jordan took in all of these Palestinians. 60% of the country is Palestinian, the queen is Palestinian, so to say that there is no Palestinian state is a little bit of an exaggeration. The big problem to solve is just as you have put it, Cedric, alongside the problem of the aboriginals in Canada, who were immobilized and in spite of all of the money given to them; are a diseased society. How is that reflected? It is reflected in suicides and alcoholism and lack of performance. And among the Palestinians it has another expression. But this is the problem when almost artificially, the government or international institutions, often with the best of intentions create a problem by the way they transfer money. It would have been much better if the international community had said to those Arab states, "you have to give them certain rights". The reason the Arab countries did not do this is because all of the Arab countries in that region are dictatorships with a lot of internal problems and this cause against Israel was a scapegoat that politicians use to mobilize their populations and distract from their internal domestic problems.

Cedric Muhammad: Having said that, after getting to know you and reading your book, I know that when you say their should be accountability and rights you are not talking about the same thing that ideological conservatives in the United States have in mind. You are speaking about the democratizaion of capital and...

Reuven Brenner: Sure. Yeah. Because the rights in the abstract are a piece of paper. You can promise to anybody rights, but if these people don't have access to collateral and don't have some financial leverage, rights are something very dangerous because they raise in people hopes that cannot be realized. If you are promising people rights but on the ground, don't give them anything to go even one step in that direction, then what has really been accomplished? I think that tension that you can see in many countries is dangerous in that way. People have high expectations that they will enjoy rights that are dashed, then you start having problems. That is why for me, things start from the bottom up. You give people access to financial resources so that they can experiment. Once again, this emphasis on governments providing "education", I think is inaccurate. If you think about it in developing countries, first you have to train teachers, which takes about 10 to 20 years. And then it takes another 10 to 20 years to get the first generation up and until the first educated kids come out of school. So then we are talking about 40 years altogether. And in this 40 years, education is a cost, it doesn't bring any benefits. So, who pays for that? People also have some exaggerated expectations that somehow if you go to school for mathematics that somehow, because of that, you have automatically made progress. Take the aboriginals in Canada and how they are getting education but if it can't be applied it is useless. Yes you get the education. But then you must also show them where you can apply it and make a better life. And the better life does not necessarily come if you sit in an office and become a bureaucrat. A better life comes if you are a much better electrician, and plumber and construction worker or anything in technology. I will give you an example. I am not a very big believer in the very rigid apprenticeship system that has been practiced in Germany but yet I do believe in a system, which after five years or seven years of school, people have the option that a very small minority goes into general education and others go into technical schools. I can give the example of Israel because that is where this actually happens. You go to some of these technical schools and you decide that you really like that and you decide to become an engineer, you pass a few exams and then you go to one of the best technological schools in the world. No area should be closed to you. This is how the system should be done, not the very rigid system where if you are an apprentice you are an apprentice for the rest of your life and you cannot move on. Flexibility is the key. But in many developing countries today, I think they run into this overemphasis on education. There are reasons for that. Look at the many countries that are opening up universities. But who is invited and permitted into these universities? It is a very small group. Such an approach, and why money is spent on universities instead of on the education of the lower levels reminds me of what Katherine the Great of Russia said about education - that she would invest enough in education as not to lose the next war but not so much as to provoke a revolution. Nobody will say that publicly but I think of that when I look at how developing countries spend a disproportionate amount on universities while not providing the type of education that could be the source of a middle class.

Cedric Muhammad: Suppose you were given the opportunity to counsel one of the many great African or Arab leaders who has riches in physical capital. What do you tell them? How do you turn oil riches, gold riches and precious minerals into wealth?

Reuven Brenner: You privatize them. Because once that money flows through the government, it only establishes that power and when the prices of commodities are high it covers their mistakes. And that is one of the major reasons why there is such resistance in many of these countries to "privatizing" these resources. This is the first step. The second step is you open those countries to international financial and banking and other institutions because these are not simple things - how you give collateral, how you make a credit assessment, you have to know all of that. For me it is not a surprise that Citibank is in Mexico and they are retraining all of the workers at the bank because they see, that, first of all, you have a kind of a Mexican Diaspora in America that is transferring money, so part of the Mexican economy is really backed by the United States but they can see that the country is moving in the right directions and that people need collateral and loans and so forth. I would also encourage what you have in Asia, something like the Grameen bank and women's bank which make small loans to people so that entrepreneurship can also start on a smaller scale. I would say these are the first three step. It really must be "true" privatization...

Cedric Muhammad : Please spend some time on that because many people act as if privatization is a cure-all. You sell the state-owned properties and resources and that's it...

Reuven Brenner. No that is not at all what I mean by that. Because if some previously state-owned enterprise is now a private one but you don't open at the same time financial markets so that somebody can start and compete with you, then you stay a monopoly. So instead of being a state monopoly you become a private monopoly and that is generally what happened in all of these countries. Somebody who was called a Minister or a bureaucrat, he now becomes the CEO or the manager. You only change the form not the content. You have to look behind these terms "democracy" and "privatization". If the financial markets are closed you cannot have democracy or competition. Why not democracy? Because if the government controls most of the assets in the country, now think about it - where are the newspaper and magazine revenues coming from? From advertising. Well who advertises if most of the things are owned by the government? It is the government! Well, then the newspapers' fortune depends upon the goodwill of the government to advertise and if you say something critical of the government they will take away their advertising budget from your newspaper and there goes your freedom of speech. So in principle, the country can have freedom of speech but if I control, let's say the import of paper and the advertising for the newspaper, I can siphon you off even with the most beautiful constitution which guarantees you freedom of speech.

Cedric Muhammad: Now let's look at it from the foreign perspective. One of the things that I have been critical of is I always hear economists speak of foreign direct investment (FDI), privatization, financial intermediation by foreign institutions as a cure-all for countries in Africa, Latin America, the Islamic World and Southeast Asia. My view is that such an approach may be better in efficiency, in the short term, but in terms of developing the human capital and creating a market among the native people, it doesn't do anything...

Reuven Brenner: That's true...

Cedric Muhammad: How do you get around the exploitation or the excessive dependence upon foreign elements in the marketplace?

Reuven Brenner: Well, I would say the way to do it is...OK, let's look at the United States for a second. You have a lot of people who are close to retirement. Among them there are a lot of people who specialize in finance and banking and so forth. If a country in Latin America and Africa really wants to develop and can ensure the safety of the people, I am sure that a lot of people would go there and help from the "bottom-up" to develop these institutions. It is not easy to put in place a banking or credit or financial institution, and these people would do it from the bottom-up, in collaboration with the people who live there. This is the coordination that is needed. You start from the bottom but at the top you must have the commitment to things like safety, rule of law and whatever direction you are heading. It is not so important that you have that paper called a constitution - it is the enforcement that matters. If you look at the demographic picture of the world, you have Latin America and Africa with large young populations. Then you have Western Europe, the United States and Canada with aging populations. Well the ideal world would be for this aging population to somehow mentor and bring the network to that younger population, or for that younger population to come and get that experience in Europe etc... And this would really speed up development...

Cedric Muhammad: It would allow these countries to leapfrog the 40-year educational process you referred to earlier...

Reuven Brenner: Absolutely! Absoultely! If you look at my book at all of the cases that are mentioned as examples of how quickly countries can develop, be it Hong Kong or Singapore or West Germany after the Second World War, it was an influx of large numbers of skilled people that made those places grow fast. It was not that the local Hong Kong fisherman became a financial derivative expert or a manufacturer. Growth for Hong Kong occurred when China became communist and they threw out all of the businessmen from Shanghai. These businessmen came to Hong Kong, the businesses were all in their head and how to organize them; they had the credibility to restart and this goes back to your question about human capital because their assets were all left behind in China but they started with themselves. You look at the big success called Singapore. But it was a success because Malaysia discriminated against and threw out the Chinese. And all of those dispossessed Chinese people arrived in Singapore and this is how it was made. People look at national statistics and think of countries in terms of fixed populations but I don't know of one example of rapid development within 30 to 40 years that ever, ever happened without an influx of population. Look at Germany, you have the misleading statistics of the war but people forget that when East Germany became communist, West Germany got from there and the Czech Republic something like 12 million young people after the Second World War and during the 50's. And that combined, with (Ludwig) Erhard's fiscal policies and the monetary policy of Germany, is what propelled Germany to become the miracle and engine of Europe.

Cedric Muhammad: Tell me how it works in the opposite direction, when a country loses these brilliant people and human capital. Like Canada - you gave me an astonishing statistic regarding this.

Reuven Brenner: Yes. Over the last few years, Canada has been losing, every year, some 70,000 young entrepreneurs to the U.S. Now, the U.S. gets them ready-made, no costs paid for these people. It doesn't appear yet in the statistics but I think this is exactly - think of the Silicon Valley immigrants from India and France - what causes people to put their money in America because this is where the top talent is. So to me it is no surprise that Canada has been stagnating over the last ten years, because the money is following the talent. And people forget about what I call the "rule the vital few". A group is mediocre if it doesn't have a leader and can perform brilliantly when it gets one of those vital few. Why did it happen? If you look at Canada, the reasons are very simple. People all of the time, superficially compare just tax rates. Well, that is a pretty misleading comparison because - take for example Quebec - the marginal tax rate is 52%. That is high but that is not even the problem. However, it sets in at something like 27,000 U.S. dollars - 40,000 Canadian, where as in the U.S. you get to the top rate of 39 or 40% at $300,000 U.S. dollars. Well, those who make mistakes in comparing analysis of those rates say, "yeah, well here in Canada you get healthcare". Well first of all our healthcare system is completely broken. It would be even more broken if other countries would pursue more reasonable policies. What saves Canada's healthcare is that other countries are doing even bigger stupid things than Canada does, so we get an influx of physicians and nurses. But when you read the Canadian newspapers you see that the healthcare system is going through reconstruction. The Quebec government had to legislate last month (July) that physicians have to work in emergency rooms, and they cannot resign. I mean, this is like slavery, if you like, you know? The strange thing for me, and I grew up under communism until the age of 14, is that the major lesson from the collapse of the "evil empire" was not learned. That lesson is that the central authority thinks that it knows how to price steel, chicken, eggs and physicians - when they really don't have a clue how to price them! Yet that lesson, somehow, was forgotten. The reason Canada is in such trouble with physicians, nurses and so forth is that they put a cap on how much a physician can earn. Well, then by the month of May, physicians in Quebec, for example, fulfill their income quota, so if they continue to work past the month of May they don't get a penny. So God forbid that you, Cedric, are a tourist and you should get a heart attack in Montreal, in August. You should get it on a golf course at this time of year because that is where all of the physicians are - nobody is working!

Cedric Muhammad: Yesterday, I suggested that Africa could speed up its attraction of human capital, and that financial capital would follow if it would attractively offer dual citizenship to Blacks in America and a comfortable environment could be created where they would be accepted. Theoretically could this mirror what happened in Hong Kong and Singapore?

Reuven Brenner: Well, in terms of Hong Kong and Singapore, you ask a very good question. The people who went to these two countries were many Europeans and many around the world, not necessarily just those of Chinese origin or Asian origin. You go to Hong Kong it's a pretty cosmopolitan place. See, if you give opportunities in a place and they see that people prosper, then people come back. Now, will people go back who have family ties and some sentimental ties? They will go back in greater proportions but you will see many others going there...

Cedric Muhammad: Well look at Israel. What about Israel?

Reuven Brenner: Well, Israel is a very unusual situation. The reason that the country was created is because of the holocaust. That is why there is a Jewish state and Jews have a sentimental spot. But that is such an outlier kind of example that I wouldn't extrapolate from the experience of that country. The African countries would probably be closer to something like Singapore and Hong Kong and people would go there. Look at all of the people that go to Africa now - they come from all over Europe. So I would not make it a matter of race. There are many people genuinely interested in helping those countries to have a better future. I do not necessarily think that there would be a greater proportion of Black Americans who would go there than say, people from India or from Europe, if the conditions were right. And let's not forget the entrepreneurial class in Uganda who are from India originally. How productive capital is depends upon who has the ownership of those things and there should be a competition for that ownership, not that the government decides on the basis of race that I will throw you out because you don't belong to a certain group. It should be about who can be most productive.

Cedric Muhammad: What about the sense of injustice that exists in the country because the group that is now economically "more productive" came from another land and obtained the land or physical capital in a way that was unjust and offended, or alienated the native population?

Reuven Brenner: Those things can be compensated for in other ways. We are now, talking here, about how important it is to have property rights established. So the question is, this is the history of the country, so what do you do now? And I would say that if you start with a kind of political decision to confiscate property from those who came later, but you do so without compensation...keep in mind some people may not be natives but they may have arrived 300 years ago, a considerable amount of time. They have descendants. So are those who live on the land today to be blamed for what happened 300 years ago? I happen to believe that it is the future that will make wealth and not the past - we live in the future. So the issue is to plan for the future and how you can borrow against it and how you can generate more wealth from that. The other view is backward looking, a sort of settling of a balance sheet of history, which is dangerous. The two issues in my view must be separate: 1) how do you create the right incentives from now on 2) how you repair and compensate for past injustices. And I would say that you can only compensate for past injustices if that land where injustice occurred becomes richer. Then it is easier to compensate. If you are destroying the basis of what can make that country richer you will not be able to compensate. It may look superficially fine, like, "Ok, I am taking this land away from these White farmers and giving it to all of you". But does that necessarily create the best basis by which to create future wealth? I am not sure. Would it be better, let's say, if we recognize these farmers are very productive - the farms work very well. But we also recognize that a population must be helped because they were kept in close to slavery conditions and have been dispossessed. Ok, so then we have to tax the farmers at a higher rate, transfer that money so that we educate the suffering people and we set other rules in place about how you can pass the land from one to another and then you create wealth. The other approach - of just throwing away all of the human capital - what did you achieve? All of the human capital that knew the details...

Cedric Muhammad: So you are saying that...this is interesting Reuven. In essence, we both agree that there is a way to transfer the wealth to the indigenous community through proper taxation that still allows the land, the physical capital, to be productive, but if the people who were originally dispossessed have not had their deficit in human capital made up for, then, they get the feeling of reciprocity, but it is short-lived and...

Reuven Brenner: Absolutely, it is a kind of feeling of revenge, and revenge is dangerous. Exactly. There is a difference between what you really want and revenge - revenge is short-lived, it can give you a feeling of satisfaction and then you stop. OK. That is not what you really wanted. That is very dangerous. You also really have to go into detail with the land laws. Take for example in Mexico. There were a lot of laws that didn't allow people with relatively small properties to survive. You have to review and correct the laws . But it is a very dangerous process. This goes back to the opposite of what we were talking about earlier, where sudden movements of people made countries rich. If you look at Uganda and other African countries, when they lost the entrepreneurial class then they became very poor. I am sure that in the very beginning, at the first moment, it is a good feeling. You know, "we got rid of the foreigners" - although the foreigners may have lived there for 200 years or more. But this subject, Cedric, is a whole other interview. The only way to repair and compensate people for past justices is to…remember if that place becomes richer then you have something to pay. Otherwise, if you throw away the talent from that country, then other countries become richer and you have less to pay. So you become more equal in a sense, but everybody is becoming more poorer. And that slows down the process, it doesn't speed it up. More equal and more poor. And that is not what the people really want.

Cedric Muhammad: One final question Reuven. On pg. 148 of The Force Of Finance you wrote :

“One system that has been pursued with obvious success is the melting pot of the federal U.S. government - an example of a state creating, in the course of time, a new, larger tribe with the most open financial markets in the world. When American financial markets were closed to some groups, such as African Americans, symptoms of the aggressive "tribalism" that was common in eighteenth and nineteenth-century Europe surfaced there too. Militant organizations, whose goal was to rebuild the strength of the marginalized groups soon emerged.

But at the same time, events such as the civil rights movement were also helping to restore trust between the many "tribes" living under the U.S. federal umbrella. These new institutions were successful in transforming governments into a source of capital for these groups when private capital markets stayed closed. The debate today in the U.S. asks whether capital markets have now been opened sufficiently to members of these groups, and thus whether governments should no longer single them out for preferential treatment. In broad terms, then, the history of racial unrest in the U.S. over the past few decades can also be seen from the viewpoints advanced in this chapter and in chapter one. By looking at societies from the perspective of the "five sources of capital," one can predict the maze of complex conflicts that entangle societies when capital markets are closed and mistrust rises."

In these two paragraphs you made what some people have informed you is one of the most lucid articulations of what was at the root of the civil rights movement and what happened when Blacks more fully integrated into the U.S. economy. What exactly is it that you think enables insight when your "five sources of capital" model is transposed over the racial problem in America?

Reuven Brenner: Thank You for asking this question. The interview is now symmetrical. We started with the five sources of capital and we finish with it. What did it mean that Blacks were discriminated against? If we go back to those five sources of capital - that people have access to financial markets, retained earnings, and some type of natural resource. If you don't have those three then you turn to government and crime. Well, if you look at the Black experience from this angle, you see they were completely dispossessed of whatever they had not only in financial capital but even in the sense of social and family capital. That is what destroyed them. They did not have natural resources because they were dispossessed and they didn't have any access to financial markets. So to me it was not a surprise that in part, they turned to crime because that is what gives them access to capital and secondly, when they could, they turned to government. Now, the moment you are completely discriminated against in financial markets, which is the most important, it reflects in crime and violence. The United States in a way is unique in the sense that yes, it allowed groups to emerge to try and solve this problem internally. So on one hand you had the civil rights movement who really tried in various ways to open up the financial markets and also the government to give these denied opportunities. So when you see these events through this angle you can see the course of development over the last 30 years. And now I think the big debate in the Black community is really over the following: whether or not, at this stage, and to what extent the Black community should continue to rely on the government as a source of capital, or, should it have moved much faster now, to the private sources of capital which are much more flexible, and which provide much more opportunities - this is today where I think the Black community is.

Cedric Muhammad: I agree.

Thursday, September 26, 2002

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