Save the prosperity infrastructure

Chavez’s threat is only display of contempt for what can properly be called the “prosperity infrastructure.” One of the great gifts of Western civilization, this is the framework of international law and global trade rules, enforcement of the sanctity of contracts, and the power to ensure that the world’s oceans and air routes are open to commerce. While the infrastructure was developed mainly by the United States and Britain, its positive externalities extend around the globe. Everyone gains.
 
{mosads}In their book Invisible Wealth: The Hidden Story of How Markets Work (Encounter, 2011), Arnold Kling and Nick Schulz show that today the most important sources of wealth aren’t natural resources or factories. They reside in what the authors call “the software layer,” which is “a set of expectations and rules about negotiating, financing, and post-purchase obligations” (p. 5). These are among the intangibles that comprise the prosperity infrastructure.
 
A World Bank study looked at the difference between the total wealth of a nation and subtracted from it natural and produced capital. The result is intangibles, and the study concluded, “The most striking aspect of the wealth estimates is the high values for intangible capital. Nearly 85 percent of the countries in our sample have an intangible capital share of total wealth greater than 50 percent.”
 
To understand the importance of intangibles, just look at Singapore, a tiny island nation with practically no natural resources whoseper capita GDP rose from $438 in 1960 to $44,000 today – almost exclusively because of free trade and a trusted system of law and finance.
 
Singapore’s own prosperity infrastructure was built by disciplined and hard-working natives with an appreciation of the power of free markets, but it was, in large part, a legacy of Singapore’s experience as a British colony – a beneficial spinoff of Western civilization and of the trading system that developed after World War II.
 
Externalities, however, work in both directions. There is increasing evidence that some middle-income nations, which have been beneficiaries of the global prosperity infrastructure, are now undermining that system for what they see as their own short-term gain. Because they are getting away with their attacks, they are encouraging other nations to do the same.
 
If the results of such subversion were felt only by these nations themselves, we would have sympathy for their unfortunate populations, but the effects would be localized. Instead, the undermining could have a negative impact on the global infrastructure itself.
 
The recent wave began with Argentina. In 2001, that nation, member of the G-20 — the group of the world’s 20 largest economies that has gained prominence since the 2008-09 financial crisis — “welshed on $81 billion,” in debts, as the Economist magazine put it, in the largest sovereign default in history. Since then, Argentina has offered only coercive exchanges to bondholders who had little choice but to settle, and it has repudiated billions in outstanding debt – owed to both U.S. institutional investors and some 60,000 individuals in Italy.
 
The courts have ruled in favor of these remaining bondholders in more than 100 judgments, totaling more than $6 billion, but Argentina will not pay up. Judge Thomas Griesa, a U.S. District Court judge, has called Argentina’s stiffing of its creditors “immoral.” It is certainly unique in the annals of foreign debt.
 
On Jan. 9, three Senators, Democrats Robert Menendez of New Jersey, Kristen Gillibrand of New York, and Republican Marco Rubio of Florida, sent a letter urging Treasury Secretary Timothy Geithner to oppose an attempt at government-to-government debt restructuring by Argentina in the Paris Club, an informal but powerful group of creditor countries.
 
The senators noted that Argentina is sitting on $48 billion in reserves and clearly has the money to pay what it owes. The nation bragged to the International Monetary Fund in September that it was “unscathed from the international financial crisis.” Indeed, GDP per capita has more than tripled since 2002.
 
Argentina has also repeatedly ignored its obligations under the U.S.-Argentina Bilateral Investment Treaty and the ICSID arbitration process, where it has 49 open cases, some more than a decade old. It has the money, but it won’t pay, and that’s that.
 
By thumbing its nose at international law, Argentina is encouraging other countries to do the same and is thus helping destroy what the Senators call “the credibility of our vast network of investment treaties.”
 
Venezuela has learned from Argentina. A recent headline stated, “Venezuela to Pay Exxon Mobil $255 Million Instead of the $900 Million Awarded to the Company.” Exxon Mobil is also asking for $7 billion at the ICSID, a claim that Chavez and his oil minister say they won’t honor.
 
Whatever the argument over amounts, the fact is that nations like Venezuela, which prosper because of the prosperity infrastructure, should not expropriate property belonging to businesses, foreign or domestic, that abide by the law.
 
It’s not hard to find other miscreants. Consider China and its continuing lack of regard for intellectual property of other nations, or Brazil and its blatant trade protectionism, or India, with its recent attempts to impose billion of dollars of taxes on transactions between foreign companies. These countries are giving permission to others to subvert the prosperity infrastructure. They give permission for emulation by other developing nations and further undermine the prosperity infrastructure.
 
Imagine if Greece, Portugal, or Italy simply decided to ignore the claims of their creditors, even in default. To stem the growing tide, U.S. officials should move swiftly and decisively against countries like Venezuela and Argentina. At the very least, they should be barred from participating in the international economic order they are undermining. Argentina, for example, has no business part of the G-20.
 
It’s hard to overstate the fragility of the prosperity infrastructure today. It is a redoubt that needs a vigorous defense.
 
Glassman, a former undersecretary of State for public diplomacy and public affairs, is executive director of the George W. Bush Institute in Dallas.