Tuesday, February 21, 2006

External debt, the Suez Canal and US ports

New York Gov. George Pataki and Maryland Gov. Robert Ehrlich on Monday voiced doubts about the acquisition of a British company that has been running six U.S. ports by Dubai Ports World, a state-owned business in the United Arab Emirates.

The British company, Peninsular and Oriental Steam Navigation Co., runs major commercial operations at ports in Baltimore, Miami, New Jersey, New Orleans, New York and Philadelphia.
Associated Press

Muhammad Ali’s son Muhammad Said (1854-63), and his successor, Khedive Ismail (1863-79) came under the influence of European bankers. Partly under their influence, Ismail embarked on a series of expensive projects, which pushed the country deeper and deeper into an external debt trap. The Suez canal linking the Red Sea and the Mediterranean was dug during the period of his rule. But its control passed almost at once into the hands of the British who had managed to acquire most of the shares of the canal company, including those which had been originally allotted to Khedive Ismail.Egypt effectively passed into the control of European financial advisers because of the inability of the Khedive to repay his debt. The Other side of Foreign Investment

Frédéric Bastiat's Selected Essays on Political Economy explored, inter alia, the unforeseen future negative effects of policies which had initial temporary benefits. As I read the debate over the potential sales of commercial operations at 6 major US ports I have yet to see reference to the causal impulse, rising external debt in the US. If the US was running a surplus this debate would most likely be moot as US corporations would be more likely to be scrambling around to find investments, rather than Middle Eastern or Asian investors. I'll let Bastiat have the metaphoric floor for a moment.

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

The Ottoman Empire was destroyed, in large part, not by war, but by debt, which forced the sale of crucial operations and increased tax predation on its citizens. The opening of the Suez Canal reduced overland trade fees and Egypt's loss of the Suez Canal to Britain due to external debt further reduced income.

Next time you hear or read someone proclaim the wisdom of US economic policy, remember Bastiat, the Suez Canal, these 6 ports and other sales of US businesses that lead the nation ever closer to Buffett's sharecropper society.