Thoughts on Economics: Coke Index & the free market

Perhaps living in the city of Adam Smith, who wrote the Wealth of Nations in 1776, the year my forefathers signed their names to a declaration to King George III declaring their intentions to sever ties with the colonizing power, has sparked an interest in economics and the interaction with law. Prior to Christmas 2010 I was in Marrakesh, Morocco and met four students from Malaysia, who, were finishing their degrees in London, respectfully in medicine, economics and international trade. Our conversation on a train ride to Rabat sparked my interest in the Coke Index, which was promulgated in the affirmative by two of the four. First, I will explain the index and then contemplate UK tax law with a comparison to the health care. This latter point was prompted by recent discussions with fellow course mates about the Republicans in the US House of Representatives voting last week to repeal “Obamacare” (US National Health Care Act (H.R. 676)), which is the American version of socialized medicine, signed into law by President Obama in 2010 and set to take effect in 2014.

The Coke Index is a variation of PPP (purchasing power parity), an economic theory of long term equilibrium exchange rates is based on the relative price levels in two different countries. The theory has an absolute and a relative model. In the former, the purchasing power of different currencies is equalized for a given good. Whereas the latter is the difference between the prices, in say a can of Coke, between country A and B. The difference in the inflation rates will be more or less equal to the percentage of appreciation or depreciation in the exchange rate. The Coke Index can therefore give you an on-the-ground indication of the “real exchange rate”, because you know that a can of Coke costs $0.50 in Denver and 5dirhams in Marrakesh. According to XE.com the exchange rate is $1.00 = 0.12149 Moroccan dirham, so the “real exchange rate” is actually a little worse than quoted, as the can of Coke actually cost $0.61. Where the Coke Index breaks-down and becomes subject to volatility is in the arena of non-traded goods and services, in other words, I could have purchased a haircut for the same value as a can of Coke or hired a driver for a similar price. The Economist popularized the “Big Mac Index”, which I personally reject as the magazine is a bit too pretentious and arrogant for my tastes, though it is the exact same principle. Both the Coke and Big Mac Index are criticised in developing countries because those two goods are seen as luxury items. Coke is less so, as it is found even in the most rural of regions – according to Jessica Stern’s book, Terror in the Name of God, members of al-Qaida and the Taliban always served Coke as an aperitif. All this said, a 1,5 litre bottle of water in Marrakesh cost me the equivalent of £0.04 – a bit shocking since a similar bottle would cost between £0.34 and £0.65 in Edinburgh! I still drank a lot of Coke, because a medical doctor (single & female) I befriended said Coke kills any bugs which might have been on the Moroccan food – good advice – I didn’t get sick!

In regards to tax law in the UK, I have been reaking Tolley's Yellow Tax Handbook 2010-11 and Revenue Law: Principles and Practice. These books, along with lectures indicate the UK-US comparison is actually not that much differnt as far as revenue collected per capita, The US still has over-all lower taxes, but not by as great a differnce as existed in the 1980s. The textbook authors seem to insinuate Americans perceive themselves as paying fewer taxes and receiving fewer benefits, though the lecturer of the course commented that Americans contribute slightly less (when considering federal and state income tax, plus sales tax and property taxes), but receive tremendously fewer benefits. I almost stood up and said, “I’d gladly pay minimal taxes and receive limited equivalents.” Though I can tell my Republican ideology doesn’t exactly flow with the average Brit. The largest tax increase in American history was signed into law by President Obama in 2010 - the National Health Care Act - which binds all citizens into a single federal scheme (in my opinion usurping the concept of dual-federalism and the autonomy of the states) Europeans love the concept of 'free health care' (though if they thought about it, they are paying for it and even if it is less than most American insurance plans, the quality of service, expertise and facilities are considerably behind the US). Take all the factor which create value and Americans have BMW plans compared (using the auto analogy) Vespas in the UK. Cost wise, there should be a more affordable plan, but it should also carry a linear equivalence as far as value. I wouldn’t expect to buy a real BMW at a Vespa price, nor would I suspect the showrooms look similar. Yet both should take me from point A to B. I also dared to say that the free market should guide these prices and services, not the government – I was called a few cute and short names for what seem to be rather reasonable ideas. Much of my reasoning comes from observing how my fellow law students act at an “open-bar”, as opposed to a “cash-bar”. They’re sloshed in the former instance and reasonable in the latter (mind you, they’re British, students and in the faculty of law – all of which have high drinking propensities).

India, Pakistan & American foreign intrests

At times I become frustrated by American foreign policy, as it is like a violinist who picks up the interment with his right hand, but plays with his left. During the Cold War, Pakistan was a loyal allied of the United States, though in the 21st Century we have elected to ease friendship ties in support of Pakistan’s arch rival, India. Securing more trade with India, a nation previously supported by the Soviet Union and on the verge of becoming one of the most populous nations on Earth, is brilliant in terms of opening more markets and advancing American commercial interests. The frustration comes from the US not doing more to strengthen security efforts with Pakistan. The Surge, which occurred back in July saw a massive influx of NATO military forces, but led to a tsunami of anti-western dissidents fleeing into the mountainous regions of Pakistan. The evacuation of Afghanistan by the majority of al-Qaeda and the Taliban to Pakistan has led to a de-stabilization in parts of that nation.

Peshawar, Pakistan is the home of one of my good friends. I was with her the day she learned her aunt had been killed by a suicide-bomb in one of the market places. Her brother-in-law is a professor of terrorism studies at the university and I learned a lot from them about life on the ground as it were. Abandonment in Pakistan and a focus solely on Indian trade and economic policy is a risky move for Pakistan. From a US perspective, the shift in support and trade advantages to counter that of China and secure vast markets for goods, services, labour and capital did not come soon enough. Pakistan is quite insignificant in an economic sphere of influence. Those who are strong Indian supporters argue that Pakistan is one of the most corrupt States in the world and that constantly having military leaders is an indication of the weakness of the democracy. These assertions whether true or not are probably closer to fact, than fiction.

What can be done about Pakistan? The US has a reputation for failing to think about unintended consequences and I am proposing using history as a means for not repeating cyclical errors. Pakistan is ripe for further destabilization and angering the population by using statements, such as “militant”, which are tantamount to asserting the Pakistani State is recklessly out of control and in the realm of what a previous American president would have called “evil”. Pakistani officials realized that President Obama had to talk tough in order to win the support of India and secure trade advantages in the Far East. Proposing a UN Security Council permanent seat for India is a step towards diluting the voting power of China and Russia along with France and the United Kingdom on some issues. Pakistan is too small a political power to ever be seriously considered for an expansion seat. If any American foreign policy team can persuade the UNGA and the UNSC to amend the charter to add India to the ranks of the permanent five, then it will be President Obama and Secretary of State Clinton, both of whom the world seems to view in more divine terms, as opposed to political actors on a world stage.

Considering history, the US always abandons good ideas long before the relevance becomes empirical. The US should begin transfer funding to Pakistan’s educational system to ensure al-Qaeda and the Taliban do not brainwash weakening allies into becoming our enemies. NATO and Pakistan should work on creating a joint security plan for alleviating the major security risks. In light of changing policies, the UK and US should retract proposed plans to restrict Pakistanis travelling to their respective sovereignties. Continuing a culture exchange to break down looming societal barriers will serve the west well in years to come.

The weaknesses of my argument concern the lack of political will, a shift in policy from Pakistani based to Indian based, and being a bit idealistic in proposing aiding Pakistan’s educational system and calling for a NATO security arrangement.

Indian trade security and the potential for new markets for goods, services, labour and capital is a major advantage in the east, especially as China is beginning to flex its economic muscle. Fear of China moving off of the dollar as it’s hedging currency could further devalue the US dollar. India is not without its flaws, as it has a rich heritage of class divide, corruption, domestic crime, and governmental and omissions human rights abuse. Pakistan is a nation in peril, as it went from a relatively save country at the beginning of the War in Afghanistan to being a very dangerous State today. Strong support for Pakistan’s neighbour and calling the state “militant”, and not making a distinction between radical Islam and the Religion of Islam are good methods for losing the allegiance of a now questioning Pakistani society. The situation is summed up best by saying, “That's Maciavelli”.