Interview with Richard Fisher

Keynes’s Stimulus, Polanyi’s Moment

A Different Source of Renewable Energy: Collaboration

Expanding Neuroeconomics

A Path to Better Infant Health Through Mothers’ Labor Supply?

Africa in the Global Tourism Economy

Summer may take students away from Harvard Yard, but it never dampens the HCER’s dedication to providing our readers with compelling economic analysis.  Please enjoy the following articles from the Cover section of our issue, “The Economics of Energy.”

1. The Economics of Renewable Energy
2. Solar Power
3. Is a Cap-and-Trade System a Disguised Tax?
4. A Sustainable Supply Chain
5. The Importance of Oil Price Shocks for the Economy
6. Energy and the Environment

THE VIEWERS ARE STARING AGHAST at the television. The images are grainy and the angle of view is static—the camera that filmed the episode was hidden in a wall—but the viewers are transfixed as they watch a congressman taking a bribe from the nation’s spymaster.

“How much? How much?” says the spymaster pulling an envelope full of hundred-dollar bills out of his pocket. He says, “Here’s ten. You tell me.” The congressman replies “Let’s talk about fifteen, twenty.”

“Fine. Fifteen! Ten plus five, fifteen,” the other assents, as he hands over another cash-stuffed envelope. The spymaster has committed to paying the congressman, in total, almost a million dollars. 15,000 USD is to be paid each month over a five-year congressional term, plus a signing bonus. “That’s quite a lot, isn’t it?” he remarks. Pocketing the wads of dollars, the congressman dryly retorts, “It’s an investment.”

That 56-minute videotape brought down the government. Citizens took to the streets to demand the President’s resignation. The President and his spymaster fled the country in disgrace. It was September 2000 in Lima, Peru.

The spy chief who starred in the tape, Vladimiro Montesinos Torres, was the head of the SIN, the Servicio de Intelligencia Nacional (the national intelligence service). For a decade, acting in the name of President Alberto Fujimori, he controlled Peru, methodically bribing judges, politicians and the news media.

Montesinos kept meticulous records of his transactions. He required those he bribed to sign contracts detailing their obligations to him. He demanded written receipts for the bribes, and he had his illicit negotiations videotaped. Meanwhile, Montesinos and Fujimori maintained the facade of democracy—the citizens voted, judges ruled, the media reported—but they drained its substance.

While this behavior may seem peculiar, there is a logic to it. Record keeping proved essential to the management of a large network of corruption. By videotaping his negotiations, Montesinos had proof of the others’ complicity. He made sure the videos recorded the bribe-takers accepting his cash. By making people sign contracts and receipts, he had proof of their sins. In the event that the whole network collapsed, this evidence gave him a threat he could use against anyone who turned against him.

The tapes, which came to be called the ”Vladivideos”, revealed the breadth of Vladimiro Montesinos’ reach. They showed him offering Alipio Montes de Oca, a Supreme Court justice, the presidency of the National Elections Board plus an extra $10,000 monthly salary, medical care and personal security; bribing Ernesto Gamarra, a member of a congressional committee investigating Montesinos’ sources of money, to direct the investigation away from Montesinos; and assuring the owner of Lucchetti, a Chilean pasta company, of a favorable judgment in a legal dispute over the construction of a factory.

Montesinos and his associates made a point of counting in front of the (hidden) camera. One video shows the spy chief pulling wads of bills from a plastic bag and putting them into a briefcase. “And now comes the good stuff. One, two, three, four, five, six.” His counterpart said, “Here there is a million. Better this other little briefcase, no?” Montesinos replies, “Which one? No, no, this is great because you can close it… You can keep it as a gift. Look: one, two, three, four, five, six, seven, eight, nine, ten, a million. One, two, three, four, five, six, seven, eight, nine, ten, 2 million.”

The politicians’ bribes were mostly between $5,000 and $20,000 per month. Bribes went not only to opposition congressmen but also to Fujimori’s Cabinet. A prominent example is Federico Salas, Fujimori’s last prime minister, who confessed to accepting from Montesinos an extra salary of $30,000 per month.

The bribe price for ordinary judges was $2,500 to $10,000 per month. Supreme Court judges got bribes of around $25,000 per month, and the president of the Supreme Court got $35,000.

The director of Expreso, a broadsheet newspaper, received a lump sum of $1 million, ostensibly so he could buy a controlling block of the newspaper’s shares. El Tío, a tabloid newspaper, got an incentive contract, being paid over about two years a reported total of $1.5 million based on content: $3,000 to $4,000 for a front-page headline, $5,000 for a full-page article and $500 for a shorter article.

The five privately owned television broadcasters, Channels 2, 4, 5, 9 and 13, were bought off, as was a cable service, CCN. Only the remaining cable channel offered independent investigative journalism: Channel N, owned by El Comercio. (It was on this channel that the videotape that brought everything down first aired.)

Channel 4, which has the largest viewership, got $1.5 million per month in bribes, and Channel 2 got $500,000 per month. With such large amounts of money involved, Montesinos made the owners of the channel sign a contract with him. The contract gave Montesinos full control over news broadcasts. The channel agreed to allow him to review each day’s news programs before they aired, and not to broadcast anything about presidential or congressional candidates or any program referring “explicitly or implicitly to political issues” without Montesinos’ written approval.

The contract was drawn up as a legal document. Montesinos, who held the sole copy, is not named, but just called the “Contractor.” The contract adds that this “does not however nullify the legal value of this document” (oddly, since it clearly had no legal value at all). At the start of each month, Montesinos was to pay Channel 2 its half-million dollars.

The videos show Montesinos crowing about his control of the media. “Each channel takes, damn, $2 million monthly, but it is the only way, that is why, damn it, we have won, because we have sacrificed in this way.” Talking to some associates about the television owners, he said, “We have made them sign on paper and all. Now we are playing with something very serious. They are all lined up. Every day at 12:30 p.m., I have a meeting with them…We plan what is going to be aired in the evening news.”

Montesinos exerted control not only by bribery but sometimes by blackmail. He would obtain video proof of sexual indiscretions and use these tapes for persuasion. Some were filmed in a brothel where intelligence service agents had installed hidden cameras. (After he was imprisoned, the judges handed dozens of these videos over to the Roman Catholic Church, to be returned to those featured in them.)

With all of these tools at hand, Montesinos chose to pay some bribes in cash-occasionally extraordinarily large amounts of cash. The typical bribe paid to a television-channel owner was about a hundred times larger than that paid to a politician, which was somewhat larger than that paid to a judge. One single television channel’s bribe was five times larger than the total of the opposition politicians’ bribes.

A straightforward explanation for why the television owners were more expensive to bribe than the politicians and judges is simply that they were richer. The judges’ bribes were one-and-a-half times to four times their official salaries. The politicians’ bribes were multiples of their official income. By contrast, a few thousand dollars a month might not have impressed a wealthy television-channel owner.

TV owners were richer; they were also fewer and more precious. To a degree, it is a question of supply and demand. If Montesinos did not like a judge’s decision, he could replace her with a different one (he controlled the attorney general and through her the whole judiciary). As for politicians, he had to buy off a majority and not the whole of congress. If a congressman said no or asked for more, Montesinos could go to the next one.

It only takes a single TV channel to inform the citizenry. When it aired the video that brought down the government, Channel N proved that even a small cable channel with a small viewership can have an impact. It can inform the people and make them react.

The power to inform is the difference between the news media and the other checks and balances in a democracy. Television, informing with images, can bring forth the ultimate sanction of citizen reaction. Montesinos and his associates understood this. “If we do not control the television, we do not do anything,” said Gen. Elesván Bello at a 1999 meeting involving Montesinos, high-ranking members of the armed forces and television executives. “The addiction to information is like the addiction to drugs,” Montesinos declared. He considered information the basis of his power. “Here you feel the need for information…We live on information. I need information.”

“The accumulation of all powers, legislative, executive and judiciary, in the same hands,” said United States Founding Father James Madison, “may justly be pronounced the very definition of tyranny.” The Fujimori regime, by stealth, accumulated all of these powers, plus power over the news media. While Fujimori’s government did not own the media, it controlled many of its outlets. In a democracy, the news media provide the most potent checks and balances against government abuse. By informing the citizenry, television can bring it into action. Measured by the bribes Montesinos paid, the legislature and the judiciary are far weaker constraints on potential tyranny than television. When one check is weak, they are all weak. But even in a fake democracy, where all checks failed, television proved capable of producing the coup de grâce.

Pablo Zoido performed the research for this article at Stanford University. He is currently employed by the Organisation for Economic Co-operation and Development.

The Harvard College Economics Review discusses the current state of the world economy with Pascal Lamy, Director-General of the World Trade Organization [WTO]. Mr. Lamy holds degrees from the Paris-based École des Hautes Études Commerciales, from the Institut d’Études Politiques, and from the École Nationale d’Administration. He acted as advisor to French Finance Minister Jacques Delors, and subsequently to the Prime Minister Pierre Mauroy. From 1985 to 1994, Mr. Lamy was Chief of Staff for the President of the European Commission. As Director-General of the WTO, Mr. Lamy has worked to address issues pertaining to trade barriers and the alleviation of world poverty.

The HCER is grateful to the Institute of Politics for facilitating this discussion.

HCER: What do you think will be the impact of trade in a continuously globalizing world? Do you think it will increase more in light of growing economies such as China, or will it be more regulated because of increased barriers?
PL: I think the long-term trend is an increase in trade. When you look at the numbers, the ratio of trade to GDP or the ratio of expansion of trade to expansion of GDP is growing, so it is an increasing proportion of the size of the economies. It is this way because of globalization—globalization, technology, and transport costs allow for a larger shift in production in various places, which translates into the numbers on trade. So yes, I believe that this sort of international division of labor will increase in the future, and that all the big economies who joined this sort of “planet system” in the last 20 years have gone in the direction of increased trade, as seen in China, India, Brazil, South Africa, and Indonesia.

HCER: With group trade blocks like the EU, if you want to have global trade, do you see them as favoring this trend or as impediments?
PL: It’s for individual countries to decide how they want to run their trade policy. Europeans have decided they will pull their sovereignty. They decided this 50 years ago, not yesterday, because of globalization. They decided they were going to pull their sovereignty for various reasons, both political and those concerned with efficiency. They believed they needed to have a way to unionize on their table. No other place on the planet has yet gone this route. The Mercoser is a sort of custom union, but they haven’t decided whether to implement a single trade policy. Even in Africa, things like ECOAS, for instance, which are meant to be custom unions, haven’t decided that they need to have any kind of trading restriction. So it depends, though what I believe is that the trend of economic regional integration will reinforce groups such as the ASEAN group of countries, which is obviously after something more integrated. Now whether they decide to cross the line of single trade policy and fully participate in the WTO is for them to decide.

HCER: What do you think about the current hostility in the EU market towards Chinese goods? What do you think will be the impact of a barrier on the development and welfare of these countries?
PL: These frictions are certainly there. They are inevitable given the speed and the size of China’s entrance into the global economy. So there are frictions with Europe, there are frictions with Japan, with the US, and also with South Africa—look at textiles and clothing, for instance. So these frictions are there and they are inevitable given these huge forces that are at the origin of this process. This is a system in which people have subscribed to the collective insurance policy that is protectionism. And this system has a name: it is the WTO. So the question becomes how to use our collective capacity in the WTO to harness this process. And when China joined the WTO it took a big step in this direction by accepting the rules of the game, which are global rules. China benefits from this in terms of protection, but it also has taken on obligations to behave in a way that benefits other countries as well. So it all depends. Since all of these forces are here this process will occur, and it can happen in an orderly or disorderly way. We know what happened in the 1930s with protectionism—the domino effect it created and the impact it had on the war. So it is up to the members to decide. These forces are there—it can happen the right way, peacefully and to the benefit of countries, or in a more abrasive way. I am going to do my best in terms of my duty to push the system in the first direction rather than the second.

HCER: Do you think that the almost utopian idea of achieving a single global market is realizable or desirable in the long term? And do you think that global trade is 100 percent compatible with global social values? What would be an appropriate balance between the two?
PL: No, I don’t think that we are working toward a single market. We are simply working to make the playing field more level so that the game of comparative advantage, especially in developing countries, is fairer. This, of course, raises problems of articulation relating to other values with trade opening, which is not an end, but a means to increase welfare and reduce poverty. In the end it impacts other value systems, and this cohabitation can be seen at present. As I have said, there are explicit instructions that our members have given us at the WTO to make sure that trade and health, and trade and environment, do not bump into each other. This has been done at a certain stage of the economy’s development and the development of values, and it will have to adjust and change over time. But this cohabitation is necessary. It is as necessary in the WTO as it is necessary in the UN system, where the same sort of problems arise when you talk about issues such as human rights. We have to run this planet as a whole even if it won’t be a single market, which I don’t think it should be.

VIOLENT CRIME IN THE UNITED STATES shot up like a rocket after 1960. From 1960 to 1991, reported violent crime increased by an incredible 372 percent. This disturbing trend was seen across the country, with robbery rates peaking in 1991 and rape and aggravated assault following in 1992. But then something unexpected happened—between 1991 and 2000, rates of violent crime and property crime fell sharply, dropping by 33 percent and 30 percent, respectively. Murder rates were more stable up to 1991, but then plunged by a steep 44 percent.

A variety of plausible explanations have been advanced for the drop during the 1990s. Some stress law enforcement aspects such as increased arrest and conviction rates, longer prison sentences, “broken windows” police strategies, and the death penalty. Others emphasize different factors, including right-to-carry laws for concealed handguns, a strong economy, or the waning of the crack cocaine epidemic.

A controversial explanation attributes the drop to Roe v. Wade, the Supreme Court’s 1973 decision to liberalize abortion. The large number of women who began having abortions shortly after the Roe v. Wade decision were likely to be unmarried, in their teens, or poor, the argument goes, and their children would have been “unwanted.” This indicates a higher probability that these children, if born, would have grown up to be criminals. But because they were aborted, these children-who would have been teenagers entering their “criminal prime” in the early 1990s-were not around to commit the crimes expected of them. Advocates of this theory claim abortion thereby became “one of the greatest crime-lowering factors in American history.”

An attention-grabbing theory, to be sure. But, as we shall see, a thorough analysis of abortion and crime statistics actually leads to a contrary conclusion—that abortion, in fact, increases crime.

Supporters of abortion rights widely decried the crime and other social problems caused by “unwanted”¬ children from the beginning of the abortion debate. For example, the 1972 Rockefeller Commission on Population and the American Future, established by Richard Nixon, cited research purporting that the children of women denied an abortion “turned out to have been registered more often with psychiatric services, engaged in more antisocial and criminal behavior, and have been more dependent on public assistance.” Even in the Supreme Court’s decision in Roe v. Wade, Justice Harry Blackmun noted the same social problems attributed to “unwanted” children.

Much of this debate was greatly influenced by a Swedish study published in 1966 by Hans Forssman and Inga Thuwe. The two studied the children of 188 women who were denied abortions from 1939 to 1941 at the only hospital in Gothenburg, Sweden. They compared these “unwanted” children to another group-the children born next after each of the unwanted children at the hospital. The study found that the unwanted children were much more likely to grow up in adverse conditions, such as having divorced parents or being raised in foster homes. They were also more likely to become delinquents and have trouble in school. Unfortunately, the authors never investigated whether the children’s unwantedness caused these problems, or was simply correlated with them. Was it something else, such as the higher rates of divorce, or “unwantedness” that caused these children’s problems?

Yet, despite this, the argument became axiomatic among supporters of legalized abortion. During the 1960s and 1970s, before Roe v. Wade, abortion rights advocates attributed all sorts of social ills, including crime and mental illness, to unwanted children. Furthermore, they found that “unwanted children are more likely to be abandoned, neglected and abused,” and they tend to be “poorly fed, poorly housed and poorly clothed.” Weeding these poor, crime-prone people out of the population through abortion was therefore presented as a beneficial deed that would make society safer.

Recently, two economists—John Donohue and Steven Levitt—revived this debate and presented more current evidence claiming that abortion reduces crime. They argued that the drop in crime rates during the 1990s was primarily due to the increase in the availability of legal abortion in 1970—when abortion was deregulated in five states —and especially in 1973, when Roe v. Wade deregulated abortion in the remaining states. The effect, they claimed, was staggeringly large—they attributed up to “one-half of the overall crime reduction” and up to 81 percent of the drop in murder rates from 1991 to 1997 to the rise in abortions in the early-to-mid 1970s. If accurate, they had surely found the Holy Grail of crime reduction.

The theoretical link between “unwanted” children and crime is simple and powerful. Unfortunately, none of the original arguments ever acknowledged the possible pernicious effects of abortion on crime.

The liberalization of abortion dramatically changed sexual relationships. Pre-marital sex soared and couples also took less care in using contraceptives. Both occurred because abortion offered a backup option for women who got pregnant and thus made pre-marital sex less risky. Many of these pregnancies were terminated by abortion, but many women found that they could not go through with an abortion. Out-of-wedlock births soared.

Few of these children born out of wedlock were put up for adoption, as the type of woman who was unwilling to have an abortion was also likely to be unwilling to give up the child at birth. Abortion also eliminated the social pressure on men to marry women who got pregnant. But all of these effects —increased out-of-wedlock births, drops in the number of children put up for adoption, and the end of social pressure on men to “do the right thing”—lead to many more single parent families.

Indeed, multiple studies have shown that legalized abortion, by raising the rate of unprotected premarital sex, increases the number of unplanned births, even outweighing the reduction in unplanned births due to abortion. From the early 1970s, when abortion was liberalized, through the late 1980s, there was a tremendous increase in the rate of out-of-wedlock births, rising from an average of 5 percent in 1965-69 to over 16 percent twenty years later (1985-1989). For African-Americans, the numbers jumped from 35 percent to 62 percent. While this rise cannot be attributed exclusively to liberalized abortion rules, they were nevertheless a key contributing factor.

So what happened to all these children raised by single mothers? With work and other demands on their time, single parents, no matter how “wanted” their child may be, tend to devote less attention to their children than do married couples; after all, it’s difficult for one person to spend as much time with a child as two people can. Grandparents and other relatives may sometimes help out, but on average, the children of single parents still receive less care.

Single parents are less likely than married parents to read to their children or take them on excursions, and more likely to feel angry at their children or feel that their children are burdensome. Children raised outside of wedlock experience a higher rate of social problems than children of married couples in several aspects, including grades, expulsion from school, and poor health. Unsurprisingly, children from unmarried families are also more likely to grow up to commit crimes.

So the opposing arguments are clear—one stresses that abortion eliminates “unwanted” children, while the other emphasizes that abortion increases out-of-wedlock births. For the sake of argument, let’s assume that abortion actually has both of these consequences. The question is: which one has the bigger impact on crime?

The question is an empirical one. Unfortunately for advocates of the “abortion decreases crime” theory, Donahue and Levitt’s claims were undermined by methodological flaws. As The Economist noted in an article entitled “Oops-onomics,” “Donohue and Levitt did not run the test that they thought they had.” Work by two economists at the Boston Federal Reserve, Christopher Foote and Christopher Goetz, found that when the tests were run correctly, they indicated that abortion actually increases violent crime.

I co-authored an earlier study with John Whitley that found a similar connection between abortion and murder—namely, that legalizing abortion raised the murder rate, on average, by about 7 percent.

Even more problems arise for the “abortion decreases crime” theory when the population is analyzed by age group. Suppose that liberalizing abortion in the early 1970s can indeed explain up to 80 percent of the drop in murder during the 1990s, as Donohue and Levitt claim. Then the impact of deregulating abortion, undoubtedly, would first reduce criminality among age groups born after the abortion law was changed, when the “unwanted,” crime-prone elements of these groups began to be weeded out through abortion. Yet, this is not the case at all. Instead, the rate of committing murder began falling first among an older generation—those 26 and older—that was born before the Roe v. Wade decision. It was only later that criminality among those born after Roe began to decline as well.

In fact, legalizing abortion increased crime. Those born in the four years after Roe were much more likely to commit murder than those born in the four years prior. This was especially the case when these children were in their teens—in other words, in their “criminal prime”—as shown in the nearby figure.

And that’s not all. The “abortion decreases crime” argument encounters further problems when one looks at Canada. Although the province of Quebec effectively legalized abortion in late 1976, it wasn’t until 1988, in a case originating in Ontario, that the Canadian Supreme Court struck down limits on abortion nationwide. Yet crime rates in both the United States and Canada began declining at the same time in the early 1990s.

In sum, even if abortion did lower crime by culling out “unwanted” children—a questionable conclusion given the flaws in the original research—this effect is greatly outweighed by the rise in crime that abortion causes by increasing the rate of single parent families. Overall, the Roe v. Wade decision appears to have caused murder rates to be about 7 percent higher during the 1990s than they otherwise would have been.

John Lott is the author of Freedomnomics: Why the Market Works and Other Half-Baked Theories Don’t.