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April 2, 2013

Will We Enter a Post-Democracy World?

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"No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of Government except all those other forms that have been tried from time to time."
--Winston Churchill

It's been a rough few years for democracy. Despite that, Westerners always seem to assume that the most highly evolved form of government is democratic. The trouble with that notion is that, at some point, a majority of voters realize they can vote for politicians who promise them the most stuff, regardless of whether or not it is good policy or financially sustainable. And once that occurs, the country is (perhaps irreversibly) on a pathway to decline.

Take Greece, for example. Even though it isn't the sole (or even largest) cause of the Eurozone crisis, it stands as an example of a poorly governed nation that lived far beyond its means for years. Tax evasion was rampant, and when the credit card bill arrived in the mail, the Greeks couldn't pay up. They sought a bailout, and the austerity imposed upon them appears to have made matters even worse.

In short, an irresponsible, democratically elected government in Greece had to turn to unelected officials to get something drastic done (even if that solution is far from perfect). Greece's fate is now in the hands of non-Greeks: Angela Merkel and unelected bureaucrats in the troika -- the European Union, International Monetary Fund and European Central Bank.

Events like this have had a pernicious effect on how Europeans view the EU. One Charlemagne column in The Economist describes how the EU suffers from a legitimacy problem because of a democratic deficit. Many of the movers and shakers are unelected or too far removed from the citizens they represent. Charlemagne summarizes the problem:

The EU boasts of being a union of democracies. But its crisis of legitimacy is intensifying as it delves more deeply into national policies, especially in the euro zone. One problem is the evisceration of national politics: whatever citizens may vote for, southerners end up with more austerity and northerners must pay for more bail-outs. Another is that the void is not being filled by a credible European-level democracy.

In other words, regardless of what voters vote for, they get what leaders think is best.

But is that such a bad thing? As The Globalist reports, for two millennia, Europe considered democracy to be little better than "mob rule." The author, Zhang Weiwei, highlights four points to make his case:

(1) Democracies often elect untalented people; (2) the welfare state unaffordably increases in size; (3) consensus, and hence governance, is too difficult when minority parties are keen on obstruction; and (4) populism sacrifices long-term interests for the sake of short-term gains.

These criticisms aptly apply to the United States. Indeed, in 2011, we lost our AAA credit rating because our politicians had no good plan to reduce the national debt, and instead engaged in brinksmanship over raising the debt ceiling.

Similarly, Russians have flirted with democracy and free markets since the collapse of the Soviet Union. But, polls suggest that they wouldn't mind flipping the calendar back a few decades: 51 percent of Russians want a centrally planned economy and 36 percent believe the Soviet system was superior to what they have today.

Mr. Weiwei suggests that the world can learn from China, which chooses its leaders on a merit-based system. Of course, there's also a lot wrong with China, such as human rights abuses and a general lack of freedom.

Obviously, an entirely autocratic system is undesirable (and perhaps even evil), but it appears that a completely democratic one is, at best, dysfunctional. Is there a way, for the sake of economic prosperity, to strike a proper balance between the two?

(Parthenon: Steve Swayne via Wikimedia Commons)

March 26, 2013

China Now Has Even Less Leverage Over Japan

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Ever since China imposed an export ban on critical rare earth minerals to Japan (minerals Japan's high-tech industry feeds on for products such as GPS chips and solar panels), China has seen its resource weapon lose considerable potency. Even after lifting the ban in 2010, China has not recouped its lost shipments. In 2012, Japanese imports of Chinese rare earths fell to their lowest level in 10 years thanks to Japan's efforts to diversify sources, recycle more aggressively and use alternatives.

Now things are about to get worse for China.

According to Reuters, Japanese researchers have found "astronomically high levels" of rare earths in the ground near an island Southeast of Tokyo. (The thing with "rare" earths, as RCW contributor Daniel McGroarty has explained, is that they aren't rare at all.)

Of course, these resources aren't immediately exploitable, but they do bolster Japan's ability to insulate itself from resource-bullying. It also underscores just how foolish it is for states to wield resource weapons in the first place. The importers, like Japan, suffer in the short-term but over the long-term, it's the producing states that wind up hurting the most as alternative measures are implemented.

(AP Photo)

March 15, 2013

Here's How Global Warming Will Alter Global Shipping

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This image, published by the Proceedings of the National Academy of Sciences (via Fortune), shows a computer model of what "Supra-Polar" shipping routes will look like if global warming proceeds as expected. As you can see, a melting Arctic will open up a vast swath of ocean, including the Northwest Passage, which is expected to shave 30 percent of the distance to and from North America compared to the current Northern Sea Route, which hugs the Russian coastline.

By mid-century, the shortest route to travel from the Atlantic to the Pacific will be the North Pole.

The melting ice not only introduces unpredictable environmental variables, it also deals a blow to Russia's strategic position. As Jennifer Abbasi notes, Russia charges fees for vessels operating in its exclusive economic zone. As the ice opens up and more vessels can range beyond Russia's territorial waters, they'll lose out on their cut.

March 11, 2013

Asia's Other Economic Miracle

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We're used to hearing about China's amazing 30 year run of blistering GDP growth. But there's another Asian country that has enjoyed 21 straight years of economic growth: Australia.

That's right, it's been 21 years since Australia has had a recession. That is the longest "for any nation at any time," according to Chris Richardson of Deloitte Access Economics.

What's the secret? China.

Australia has profited immensely from China's rise. Its mining industry serves as a key source of raw materials to fuel China's manufacturing industries. Australia's growth has also earned it the distinction of being the fastest growing rich nation in the world, according to Deloitte.

Yet with exports surging, Australia, like China, is trying to "rebalance" its economy to boost domestic consumption, an effort that has yet to yield much success.

And while Australia's economy is closely linked to China, the relationship is still marked by unease. Just today, Australia's central bank reported that it was attacked by hackers possibly operating in China. Australia recently agreed to station U.S. Marines at a base in Darwin and the country's strategic community has been engaged in a passionate debate (encapsulated well by Hugh White's The China Choice and the invaluable blog The Interpreteter) about the role it should play between China and the U.S.

(AP Photo)

February 28, 2013

Will Argentina Default (Again)?

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Argentina is no stranger to defaulting on its international debt, having defaulted or restructured its loans four times since the 1980s. Today, though, it's at risk of default not because it's unable to pay its creditors but because, as Felix Salmon explains, it's unwilling to pay one in particular:

Argentina has both the willingness and the ability to pay its performing debt. It’s adamant, however, that it’s not going to pay $1.4 billion to Elliott Associates, a hedge fund which has been prosecuting a highly-aggressive litigation strategy against the country, based on the fact that it holds defaulted debt and refused to exchange that debt for performing bonds. Depending on where you sit, Argentina’s refusal to pay off Elliott is either noble or foolish. But after two and a half hours of highly contentious oral testimony in federal appeals court today, it’s pretty clear that the US courts aren’t going to allow Argentina to stay current on its performing debt — not unless the country also writes a ten-figure check to Elliott. Which means that we’re headed straight for default, with almost no realistic chance of avoiding it.

The case is being watched closely as it could have a significant impact on global debt markets.

(AP Photo)

February 15, 2013

Is China Cooking the Books?

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Outside observers have long complained about the quality of official economic statistics from China but according to Asia Sentinel, the disconnect between what multinational corporations are reporting from China and what the Communist party is touting is growing sharper:

The assembled date, Walker says, indicate that 2012 was significantly weaker than either 2008 or 2009, even though the official GDP numbers show only a marginal tapering off.

"Demand in the real economy was as weak as the picture painted by our PMI and electricity production indicators," Walker writes. "Tax receipts and corporate earnings, not to mention what we know of cash flows in the first half of last year, also indicate the slowest economy in the last half decade, and not by a marginal amount."

Most of these figures show that the boom most China Bulls discovered in the second half of 2012, and the fourth quarter in particular, isn't there.

The Walker quoted above is Dr. John Walker of Asianomics. He has pegged China's real growth rate for 2013 at between zero and four percent. Official Chinese estimates are closer to eight percent.

(AP Photo)

February 14, 2013

The Next Thing to Worry About: Drug-resistant Tuberculosis Plague

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There's no shortage of things to get your stomach in knots over, but just in case you were casting about in search of something fresh, researchers have found a "totally drug-resistant" strain of tuberculosis in South Africa that could kill an unspecified (but potentially large) number of people if it spreads unchecked. One virulent strain of TB broke out in New York in the 1980s and killed 90 percent of the people who contracted it. It's not clear if this current strain packs a similar punch, but researchers are reportedly working over time to study and contain it.

Besides from the obvious public health consequences, a recent report in Reuters noted that a global pandemic would cost the global economy billions. China took a $14.8 billion hit from the SARS virus, which also reduced global GDP by $33 billion, according to the World Bank. Let's hope it doesn't come to that...

(AP Photo)

January 30, 2013

Wall Street Capitalists Love Hugo Chavez's Socialism

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Venezuela's economy has not exactly flowered under the "Bolivarian socialism" of Hugo Chavez, but there are some investors who have made out quite well:

Since taking office in 1999, Hugo Chavez has spread his socialist revolution in Venezuela by seizing more than 1,000 companies. For bondholders that stuck by him, he’s also delivered returns that are double the emerging- market average.

The 681 percent advance, equal to 14.7 percent annually, has enriched investors from OppenheimerFunds Inc. to Goldman Sachs Asset Management LP that counted on Chavez’s willingness to siphon the country’s oil wealth to pay its creditors in the face of start-stop growth and falling reserves. While his policies drove away enough investors to keep Venezuela’s borrowing costs over 12 percent on average during his tenure, or 4 percentage points higher than those of developing nations, he’s never missed a bond payment.

“This is a really great high-income and high-total-return investment for your portfolio,” said Sara Zervos, an emerging- market debt manager at New York-based OppenheimerFunds, which oversees $176 billion in assets and has invested in Venezuelan notes for more than a decade. “Chavez hasn’t done a lot of good for his country, but he has the objective to service the bonds. Our interests are aligned.”


Indeed.

Will a Global Recovery Eat Itself?

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While the fourth quarter U.S. GDP numbers were soft, the global economy, anchored by the U.S. and China is still expected to grow in 2013. That is, if triple digit oil prices don't get in the way:

U.S. benchmark crude oil prices are expected to resume their march towards triple digits as stock markets respond to improved economic data in the U.S. and China, according to CNBC's latest oil market sentiment survey....

But if prices do rise and stay elevated above triple digits, some fear this may disrupt the economic recovery and hit sentiment on the equity markets. Higher oil prices would constitute an "added tax on consumers," Michael Gayed, chief investment strategist and co-portfolio manager at Pension Partners, LLC.

This dynamic -- economic growth leading to high oil prices leading to an economic downturn leading to lower oil consumption and lower oil prices -- is why some advocates of "peak oil" like Chris Skrebowski argue that is more of an economic phenomena than a geological one.

(AP Photo)

Can Europe's "Robin Hood Tax" Really Work?

Eleven European countries have agreed to levy taxes on financial transactions (a 0.1% tax on securities trades and a .01% tax on derivatives trades). The goal is to rake in some badly needed revenue and to discourage financial speculation.

Felix Salmon thinks the so-called "Robin Hood tax" will deliver on the revenues, but won't stop speculation:

I doubt that speculators will find this tax particularly off-putting. Europe doesn’t suffer from the high-frequency trading that has overtaken the U.S. stock market, and these taxes are low enough that any remotely sensible financial transaction will remain sensible on a post-tax basis. It’s possible that total trading volume might decline a little bit in some markets, and that would be fine: no one thinks it’s too low at the moment, and in the derivatives markets especially, increase in volumes generally just translates into increased rents being paid to big sell-side banks. But I’m not someone who believes that speculators are causing a noticeable amount of harm in European markets: as far as they’re concerned, the financial transactions tax is likely to make very little difference to a group of people who are not much of a problem in the first place.
Salmon also doubts the tax will do much harm to the European financial industry, as it's lower than London's more expensive "Stamp Duty" on financial transactions -- a duty which hasn't harmed the City's standing as a leading financial hub.

January 25, 2013

The Underside of China's Economic Miracle: Child Labor

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Last year, Apple came into some fierce criticism for poor conditions at its suppliers' factories in China. Today, Apple gave the boot to a supplier for using child labor:

Apple has terminated a contract with Chinese circuit board manufacturer PZ after discovering 74 under-age workers were working there.

The workers, who were all under 16, had been supplied by a regional recruitment company who gave them fake identity papers, the tech giant said.

They have since been returned to their families.


Why are Chinese factories turning to underage labor? The New York Times reports today that many college graduates are shunning factory jobs. There is a huge mismatch in the types of jobs China is producing and the kind of work its college educated young are hoping to do.

In the short term, this mismatch is going to do damage to China's attractiveness as a destination for low-cost manufacturing, but longer-term it's going to put immense strain on white collar work around the world. Consider what happened to U.S. manufacturing as rural Chinese flooded into urban factories over the past three decades. Now imagine what happens to higher-skilled work as the children of those factory workers graduate from college with advanced degrees and compete on a globalized market. Those jobs may not be as susceptible to out-sourcing as factory jobs were (although that's a point of debate), but it would be naive not to think the ramifications are potentially just as significant.

(AP Photo)

January 22, 2013

Is China Blowing Another Huge Bubble?

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Bubble, bubble:

China’s central bank, the People’s Bank of China, just okayed 3 trillion yuan ($482.6 billion) in new lending for 2013. It’s not much more than what it allowed in 2012—but still a considerable sum for a country struggling with overcapacity.

That’s merely worrisome though. What is actually stomach-churning, though, is the 679% year-on-year increase in “trust loans” disbursed in December, hitting 264 billion yuan. And, yes, that’s 679%, not a typo. (We recently explained in detail why these super-shady investment vehicles—which allow banks to finance off-the-books loans to companies and local governments by offering them to their retail customers as investments—should unnerve everyone, but the key words here are “Ponzi” and “scheme.”) The central bank also noted today that it expects a 16% year-on-year increase in “total social financing,” a hefty portion of which is trust loans.

Meanwhile, Kate Mackenzie worries that this is proof that China has failed to "rebalance" its economy away from state investment and toward a consumption based economy. Matthew Yglesias is less concerned:

To MacKenzie (or her headline writer) that means China "still has the same old problems." I would say the other way to look at that is that China still doesn't have the same old problem of having settled into a slow-growth, low-resources-utilization equilibrium that we see in much of the developed world.

One thing we learned from the U.S. financial crisis is that there's no gentle unwinding of bad debt when it's this pervasive. China, fortunately, is not as intertwined into the global financial machinery as U.S. and European banks are, but we'd be fooling ourselves to think that a financial crisis leading to a recession or sharply curtailed growth in China wouldn't have ripple effects on the global economy.

Still, before that financial Armageddon arrives we'll be able to enjoy an influx of Chinese gadgets:

China's industry ministry Tuesday set an aggressive goal of forging global giants in the electronics sector within the next two years through mergers and alliances and reiterated a long-standing push for Chinese companies to explore overseas acquisitions.


(AP Photo)

December 14, 2012

State Capitalism, Russian Style

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One of the simmering fears provoked by the rise of emerging market economies is that the race for critical resources is being won by states that are not afraid to bend the laws of capitalism to advance strategic interests. (The Eurasia Group's Ian Bremmer wrote a nice primer on the rise of "state capitalism" which we reviewed here.)

Russia's state-run energy giant Gazprom shows us how it's done:

Bloomberg has estimated that Russia's Gazprom will beat Exxon Mobil this year to become the most profitable company in the world, and yet its shares are down 18 percent. Why? As well as being the most profitable, it is also the biggest spender, using its cash to finance large infrastructure projects that are also priorities of Russian President Vladimir Putin.

Last year Gazprom spent $53 billion on capital expenditure projects, more than PetroChina's $46 billion or Exxon's $36.8 billion. The huge expenditure meant that just 7 percent of earnings remained to be paid out as dividends, the least amount of the top 10 largest energy companies in the world.

Anaylsts at IFC Metropol and Sberbank CIB have suggested that Gazprom's shareholders are basically paying for Putin's political priorities: building a pipeline to bypass Ukraine, and developing Russia's poor Eastern regions.

While the U.S. certainly puts a lot of diplomatic and military effort into making the word safe for U.S. firms to operate and win contracts, this kind of direct state control isn't yet the norm. Yet as the race heats up for strategic minerals and other resources, we'll likely see a sharper debate over which approach best secures a nation's interest. Will Chinese and Russian firms ultimately implode under the weight of state interference (or be propped up at a loss indefinitely) or will the U.S. begin to mirror their approach in bending (to an even greater degree than it already does) the operation of private firms?

(AP Photo)

December 6, 2012

Who Owns America? Not China

Daniel Gross dives into the figures:

Over the past few years, our dependence on China as a lender has declined in both absolute terms and in relative terms. For all those who say the U.S. doesn’t make anything the world wants, look no further than the Treasury’s monthly statement of the public debt, which can be seen here (PDF). We manufacture government debt. And the world buys it. In the recently concluded fiscal year, the deficit was about $1.1 trillion. Between September 2011 and September 2012, the grand total of marketable debt held by foreigners rose from $4.9 trillion to $5.455 trillion, or about $555 billion.

So, yes, the amount of debt owned by foreigners has risen in the past year. But the portion of the debt owned by foreigners has stayed about the same—at about 51 percent—and the portion owned by China has fallen sharply. China’s total holdings of U.S. debt are about where they were in the middle of 2010, when the volume of total U.S. debt was much smaller.

November 30, 2012

The Global Quest for a Better Car Battery

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Steve LeVine says the race is on:

As China continues its massive push in renewable energy, the Obama administration is doing so as well, betting another $120 million to win the global race for a better battery. The administration is allocating the money to a Bell Labs-style project that, over a five-year period, is intended to push the boundaries of current technology and create far more powerful transportation and stationary batteries.

The initiative is pitted against competing efforts in China, France, Israel, Japan, South Korea, the United Kingdom and elsewhere. It will be headquartered at Argonne National Laboratory, south of Chicago, which won the project this week in a competitive bid filed jointly with a team of US universities, companies such as Dow and Johnson Controls, and other national labs.

Even with the Solyndras and A123 Systems of the world, the U.S. is still flushing considerably more money down the tubes policing the Persian Gulf for the purposes of energy security. Subsidizing battery research to the tune of $120 million seems like a no-brainer.

(AP Photo)

November 28, 2012

France Beware: The Rich Might Flee After All

Earlier this month I noted a study suggesting millionaires may not necessarily flee a country in response to high tax rates. New figures released in the UK indicate otherwise:

In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.

This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election.

The figures have been seized upon by the Conservatives to claim that increasing the highest rate of tax actually led to a loss in revenues for the Government.

It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes.


It's not clear how many millionaires fled, used tax avoidance loopholes or simply lost too much income due to the financial crisis to no longer be counted. Still, Mr. Hollande will want to take note before he levies a much steeper tax bill on his own country's millionaires.

November 9, 2012

Maybe France's 75 Percent Tax on the Rich Won't Send Them Packing After All

When French president Francois Hollande unveiled his 2013 budget and kept his promise to hammer the rich with a 75 percent tax rate, conservatives howled. Bernard Arnault, France's richest man, filed for Belgian nationality. Reuters estimated that 300,000 French millionaires might pack up their yachts, private planes and butlers and head for greener pastures.

While Hollande's "millionaire's tax" may yet prove ruinous to the French economy, there's one thing it's likely not going to do: spark a rich exodus, at least according to a research report (PDF) from Stanford's Cristobal Young and Charles Varner. Studying California income tax records they found that the movement of millionaires to and from the state had almost no connection to the tax rate. It echoed findings from a similar study conducted in New Jersey.

While the Eurozone has made it easier for citizens to move around Europe, it's doubtful that it's made relocation easier than state-hopping in the U.S.

October 18, 2012

Is China Like a Fat Runner on Crystal Meth?

That's the evocative imagery used by Michael Pettis to describe China's stimulus-induced growth strategy:

It is as if you saw a middle-aged man in terrible physical shape running a marathon, and you predicted that after five or six miles he would be forced to quit. If however he took out a syringe and shot himself up with crystal meth, he would be able to continue running a few more miles, but this doesn’t mean that your analysis and prediction were wrong. It means that in a few more miles he will be worse off than ever (or will have to take an even bigger dose of crystal meth).

That's via Naomi Rovnick who offers some bullish takes on China:

The Beijing government has not announced a major economic stimulus project, as it did in 2009-10. But since the summer, central and local planners have begun propping up GDP with lavish spending on new projects. Industrial production rose 9.2% in September, year on year, after touching a 39-month low in August. So it is likely Chinese manufacturers are seeing the horrific conditions they have been laboring under start to ease.

I would say there are about as many people worried about a crashing (but not collapsing) China as there are about a rising one.

September 24, 2012

Contain China, Kill Capitalism?

New America's Barry Lynn argues that the Obama administration's China strategy makes no sense:

The Obama administration, over the last year, has chosen to pursue both of these extreme -- and opposed -- options. On the one hand, it has begun to devote real energy to a new generation of trade agreements, like the Trans-Pacific Partnership, which aim to tie the U.S. and Chinese economies together even more closely. On the other, it has begun to meet force with force. As Beijing blusters in the South China Sea and builds up military power, Washington has dispatched Marines to Australia, promised a new missile shield to Japan, and proposed to station a second carrier group in the region.

This is absurd. To tighten the gears of the international production system and, simultaneously, to position more heavy weapons right on the factory floor is a recipe only for catastrophe. Any conflict of any size would almost instantly break many of our most vital systems of supply. Instead, the United States should use its power to force corporations to distribute production capacity more widely. Such a move would reduce China's growing leverage over America -- and it would help stabilize the international system, economically and politically.

Lynn goes on to make the case that diversification of industrial production is what will ultimately guarantee U.S. security:

The only real option is to embrace the logic of industrial interdependence, hence to recognize that the only way for the United States to achieve its most vital national aims -- indeed, to be taken seriously by China -- is no longer to reposition its aircraft carriers, but to force its industrial and trading corporations to reposition the machines on which it depends. The United States does not need to bring all or even any of these systems of production home. But it can no longer continue to live in a world in which many activities remain in one location, under the control of one state, especially a strategic rival.

It's interesting that one of the consequences of shifting China into the "strategic competitor" basket is that it may force the U.S. to sideline free market orthodoxies.

September 4, 2012

The Economic Disaster You Need Not Fear

There's been awful lot of bad economic news of late from all corners of the globe, but I'm here with some good news (kind of). According to a paper from Steve Hanke and Nicholas Krus detailing every global instance of hyper-inflation, there's been no documented case of hyper-inflation being spurred by irresponsible central banks. Felix Salmon breaks it down:

The real value of this paper is its exhaustive nature. By looking down the list you can see what isn’t there — and, strikingly, what you don’t see are any instances of central banks gone mad in otherwise-productive economies. As Cullen Roche says, hyperinflation is caused by many things, such as losing a war, or regime collapse, or a massive drop in domestic production. But one thing is clear: it’s not caused by technocrats going mad or bad.

August 23, 2012

Can Immigration Save the Global Economy?

Everywhere you turn - from Europe to China - the signs of an impending global recession are multiplying. A new paper from the National Bureau of Economic Research (paywalled) argues that liberalizing immigration would be a boon for the global economy. Dylan Matthews explains:

University of Wisconsin’s John Keenan tries to quantify it in a new paper. He builds a model that assumes that in the absence of restrictions, people will try to maximize income while still feeling some attachment to their native countries, and so some but not all workers will move to where their wages will be highest. He estimates that fully eliminating immigration restrictions worldwide would effectively double the world’s labor supply. This, unsurprisingly, leads to enormous economic growth, such that typical workers in developing countries would see annual wages more than double, from an average of $8,903 today to $19,272 with open borders. That is, the typical worker in the third world would end up making about double the individual poverty line in the United States today. Certain countries have even more astounding results; the typical Nigerian would see gains of $21,940.
Needless to say, such an immigration scheme is unobtainable in today's world. But the world is still leaving a lot of economic growth on the table by bottling up its most important resource.

July 18, 2012

The World's Worst Currency Manipulators

China's getting beaten up in the U.S. presidential campaign for its practice of currency manipulation, but according to the Peterson Institute's Joseph Gagnon, most of the world's worst currency manipulators are close U.S. allies. Here's the ranking of the worst of the worst:

China
Japan
Saudi Arabia
Russia
Taiwan
Korea
Hong Kong
Switzerland

Hit the link for the full list.

July 12, 2012

The Council on Foreign Relations vs. Paul Krugman

Nothing like a good wonky throw-down:

What seems like an arcane squabble over relative growth rates between Iceland and Latvia has erupted into an argument between two heavyweight voices on economic policy—the Council on Foreign Relations (CFR) and Paul Krugman. Obscure though it may be, their disagreement is important. It is actually a proxy for a much bigger debate on whether external devaluation (followed by Iceland and supported by Krugman) or harsh internal austerity measures (pursued by some Baltic countries as well as much of Europe right now) is the better strategy for getting out of the slump afflicting many countries in the region. It is therefore important to understand and settle the numbers. In this post, I demonstrate that CFR was wrong in how it presented the numbers and that the medium-term economic performance of the Baltic countries relative to Iceland is neither as good as CFR implied nor as bad as those who sided with Krugman.

Hit the link for the thrilling conclusion.

July 11, 2012

Bank of England Prepared for Doom... By Buying Bikes

This is amusing:

When I was a member of the court, I sat in on a meeting of the financial stability committee – it would have been 2006 or 2007. One of the governors at that meeting proposed that as a mechanism to cope with crisis, the Bank should buy half a dozen or a dozen bicycles in order that members of the Bank could move swiftly and anonymously around the City.
That was Lord Myners, a former member of the Court of Directors of the Bank of England, testifying before the House of Lords.

July 10, 2012

Dr. Doom: Global Economy Could Implode in 2013

This won't make your day, but it's worth listening to. Nouriel Roubini explains how the world is heading into a 'perfect storm' of financial disaster in 2013 - including a possible recession in the U.S., a "hard landing" in China, a U.S./Israel-Iran war, a crash of (currently weakening) emerging market economies and, of course, the ongoing implosion of the Eurozone.

To top it off, Roubini notes that the world is also in a much weaker position to deal with the potential calamity now than it was in 2008 when crisis struck. Most of the "policy bullets" such as low interest rates and stimulus have been fired. "Too big to fail" banks are now even bigger.

That said, there's still room for some optimism: a war with Iran is not inevitable and the Chinese and American economies may surprise on the upside. Europe, though, looks in rough shape no matter how you slice it.

March 25, 2012

Energy Independence Won't Save the U.S. from the Mideast

The New York Times claims that the U.S. is "inching toward energy independence" which would deliver a host of benefits:

Taken together, the increasing production and declining consumption have unexpectedly brought the United States markedly closer to a goal that has tantalized presidents since Richard Nixon: independence from foreign energy sources, a milestone that could reconfigure American foreign policy, the economy and more. In 2011, the country imported just 45 percent of the liquid fuels it used, down from a record high of 60 percent in 2005.

We often hear from politicians that "energy independence" through more domestic drilling is a way to save the U.S. from all of its Mideast headaches. But that's simply not the case.

Oil is priced on a global market, so even if the U.S. were able to source all of its oil domestically, the price it pays is set globally and thus subject to the same geopolitical dynamics (like Mideast tension) that have caused prices to spike in the past. If U.S. foreign policy today is based on the principle that Mideast supply must pass through the Gulf unmolested less prices soar, it's going to remain anchored in that principle even as the U.S. produces more oil domestically.

To truly reap any foreign policy dividends from "energy independence" would require not just pumping more oil domestically but either: 1. finding so much oil in North America that's economically viable to extract that it would literally be impossible for any regional supply shocks to significantly impact prices; 2. using another energy source that is not impacted by oil price fluctuations. Neither of these options seems particularly plausible in the short-to-medium term.

Of course, there's nothing about America's oil consumption that mandates our current policies in the Middle East. But pumping more oil domestically is not going to sway the argument one way or another.

February 7, 2012

India Riskier Than China?

Stephen Roach thinks so:

Yet fears of hard landings for both economies are overblown, especially regarding China. Yes, China is paying a price for aggressive economic stimulus undertaken in the depths of the subprime crisis. The banking system funded the bulk of the additional spending, and thus is exposed to any deterioration in credit quality that may have arisen from such efforts. There are also concerns about frothy property markets and mounting inflation.

While none of these problems should be minimized, they are unlikely to trigger a hard landing. Long fixated on stability, Chinese policymakers have been quick to take preemptive action....

India is more problematic. As the only economy in Asia with a current-account deficit, its external funding problems can hardly be taken lightly. Like China, India’s economic-growth momentum is ebbing. But unlike China, the downshift is more pronounced – GDP growth fell through the 7% threshold in the third calendar-year quarter of 2011, and annual industrial output actually fell by 5.1% in October.

But the real problem is that, in contrast to China, Indian authorities have far less policy leeway. For starters, the rupee is in near free-fall. That means that the Reserve Bank of India – which has hiked its benchmark policy rate 13 times since the start of 2010 to deal with a still-serious inflation problem – can ill afford to ease monetary policy. Moreover, an outsize consolidated government budget deficit of around 9% of GDP limits India’s fiscal-policy discretion.

January 24, 2012

IMF to World: Gird Your Loins

The International Monetary Fund is out with its latest forecast and it expects the global recovery to stall. The above video does a nice job summarizing the findings, but the nickle version is that it's all Europe's fault. A chart showing the the latest IMF projections for most of the world's advanced economies is below the jump.

Continue reading "IMF to World: Gird Your Loins" »

A World In Debt: Who's Paying It Off

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Ever since the world ran face-first into the credit crisis, the phrase "de-leveraging" has been on a lot of people's lips. It's considered both a short-term curse (it reduces consumer and business demand) but the long-term cure (once our books our balanced we can head back to the mall).

A new study from McKinsey surveys a number of countries whacked by the financial crisis to see which consumers have done the best job paring back their debt loads. The answer, as you can see from the chart (click it for a larger image), is that the U.S. has done quite well in this regard but in other major economies, a lot of work still remains. There is some encouraging news, though, as McKinsey notes:

The deleveraging processes in Sweden and Finland in the 1990s offer relevant lessons today. Both endured credit bubbles and collapses, followed by recession, debt reduction, and eventually a return to robust economic growth. Their experiences and other historical examples show two distinct phases of deleveraging. In the first phase, lasting several years, households, corporations, and financial institutions reduce debt significantly. While this happens, economic growth is negative or minimal and government debt rises. In the second phase of deleveraging, GDP growth rebounds and then government debt is gradually reduced over many years.

McKinsey says the U.S. is "most closely following the Nordic path" which is comprised of six critical factors: a stable banking system, a credible plan for long-term fiscal sustainability, structural reforms already in place, rising exports, rising private investment, a stabilized housing market.

I'm not sure if the U.S. has yet reached a credible plan for long-term fiscal sustainability (just the opposite) but there it is.

[Hat tip: Drezner]

January 16, 2012

Who's Winning in the Global Economy

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Via the Economist.

December 1, 2011

Mapping Cross-Border Investment Flows

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Via the Big Picture, a look at how investment cash flows around the world.

November 30, 2011

Global Economy: Bad News Ahead


The above, courtesy of the OECD, provides a forecast for the global economy. To sum it up for the non-economists among us: it's bad.

Whistling Past World War III

I still cannot bring myself to believe that we are heading back to the 1930s. First, the very knowledge of what went wrong 80 years ago may help politicians to avoid the same mistakes this time around. China’s continued emphasis on the need for a "peaceful rise" owes something to a knowledge of the terrible errors of Imperial Japan.

Second, there is a plausible argument that the 66 years of peace between the major powers and developed nations since 1945 reflects the progress of civilisation, rather than a lucky cycle in world history.

Finally, the developed world is starting from a much higher level of affluence than it did in the 1930s. In an economic crash, people might still lose their savings, their jobs and their homes — but they are less likely to be reduced to utter destitution. - Gideon Rachman

I don't know about you, but losing my job, home and savings would be a fairly devastating experience. In fact, I suspect that were this unfortunate outcome to befall even more Americans and Europeans than it has already, it would indeed be very radicalizing, particularly when contrasted with the solicitousness shown large financial institutions. We see the contours of this already in the Tea Party and Occupy Wall Street movements but I think Rachman is being a bit too complacent here about the potential for more volatile social upheaval and political reaction if things do take a turn for the worse.

Does this mean World War III? If I had to bet my (meager) savings, I'd wager no, if only because nuclear weapons have foreclosed that option for many of the world's great powers, but I think the probability of a large scale military catastrophe grows the more people's expectations of a positive future are dashed.

November 22, 2011

State Capitalism: Good for Jobs?

Charlie Szrom thinks the Obama administration's foreign policy has failed to create jobs because, in part, the administration has not engaged in the same kind of state-capitalism that marks the economies of China and Russia:

The second policy set consists of those government actions that directly influence the sales, bids, and operations of American companies. In regions such as Central Asia, Africa, and Latin America, American companies often face steeper odds in winning new business than firms from countries whose governments provide more support.[Emphasis mine]

I'm confused. I thought conservatives believed that private enterprise would flourish if the government just got out of the way.

October 4, 2011

Which Countries Invest the Most in R&D?

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According to new figures from the OECD, Israel leads the way in investing in research and development, while Switzerland earns the most patents-per-percentage of GDP spent on research efforts.

April 7, 2011

Which Countries Love Capitalism

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According to a new poll from GlobeScan, public support for a free market economy is lower in the U.S. than it is in... China.

February 1, 2011

Food Prices & Stability

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One trigger of the recent instability in the Middle East is the price of food, something the Food and Agriculture Organization said hit near record levels in January. Several months ago as part of our Gallup Global Top Fives, we identified the five most food insecure countries (Egypt and Tunisia did not make the list). If the trend line above continues upward, it's possible a few more regimes will come under intense pressure from their disgruntled citizenry.

[Hat tip: Mark Leon Goldberg]

January 26, 2011

World Economic Forum Live Stream

If you, like me, were not invited to this year's World Economic Forum, take heart: it's being live streamed below.

January 20, 2011

World Energy Use

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BP has released their annual Review of World Energy. The above chart highlights oil trade movements around the world. You can read the whole report here. Also check out a very cool interactive tool to find various statistics about world energy use.

January 10, 2011

Global Responsibilities vs. Bond Vigilantes

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James Joyner examines Secretary Gates' defense budget:

Again, this is hardly "austerity" in the sense the rest of the NATO Allies are experiencing. But that's a reflection of not only greater financial resources here but of the responsibilities that come with being a global superpower.

Further, let me again re-emphasize that Gates is not pretending that these are deep cuts. Or "cuts" at all. Rather, he's recognizing that the era of unlimited growth in the American defense budget are over, at least for a while, and acting accordingly.

I think this reality - taken together with an obvious unwillingness on the part of the political establishment to tackle entitlement spending - means that some form of bond market-provoked crash austerity program of the likes that is currently roiling Greece and Ireland has now become more likely for the U.S. over the medium term. But at least we'll have met our "global responsibilities."

(AP Photo)

January 4, 2011

Will Washington Embrace European Austerity?

The Washington Post writes that incoming Majority Leader John Boehner will preach the gospel of austerity, but his philosophy seems to leave out defense spending, a large chunk of the federal government's discretionary spending:

"The American people want a smaller, more accountable government. And starting Wednesday, the House of Representatives will be the American people's outpost in Washington, D.C.," Boehner said. "We are going to fight for their priorities: cutting spending, repealing the job-killing health care law and helping get our economy moving again."
Over in Europe - where real austerity programs are underway - defense budgets are squarely on the table, and the chopping block. Ironically, both liberals and conservatives are likely to look nervously at European austerity - liberals, for its negative impact on economic recovery and conservatives for its impact on transatlantic security.

December 29, 2010

The Scramble for Rare Earth Minerals

China announced yesterday that it would cut its rare earth mineral export quota in 2011, following steep reductions in 2010. While the move is sure to deliver some short-term pain to industries in Asia, Europe and the U.S., it has been a boon for Australia:

Australia's emerging rare earths producers and explorers are enjoying a year-end surge in value thanks to China's latest move to limit supplies from its dominant industry to the rest of the world....

According to the US Geological Survey, rare earths are relatively common within Earth's crust but, because of their geochemical properties, are not often found in economically exploitable concentrations. It said new mines in Australia, the resumption of a big mine in the US, and the possible development of other deposits there and in Canada ''could help meet increasing demand''.

As Ian MacKinnon reports, the international scramble to shore up new sources of supply is creating some uncomfortable bedfellows - such as a tie-up between South Korea and Burma.


December 14, 2010

2010: A Costly, Deadly Year

According to the reinsurer Swiss Re, 2010 saw a tripling of monetary losses around the world due to disasters both man-made and natural:

According to initial estimates from Swiss Re’s sigma team, worldwide economic losses from natural catastrophes and man-made disasters were USD 222 billion in 2010, more than triple the 2009 figure of USD 63 billion. The cost to the global insurance industry was USD 36 billion, an increase of 34% over the previous year. Approximately 260 000 people died in these events, the highest number since 1976.

In 2010, severe catastrophes claimed significantly more lives than the previous year: nearly 260,000 were killed, compared to 15,000 in 2009. The deadliest event in 2010 was the Haiti earthquake in January, claiming more than 222,000 lives. Approximately 15 000 people died during the summer heat wave in Russia. The summer floods in China and Pakistan also resulted in 6,225 deaths.

The German reinsurance firm Munich Re seconded this assessment, noting that 2010 had been an "exceptional" year for weather-related disasters.

Good times.

Continue reading "2010: A Costly, Deadly Year" »

November 9, 2010

Islamic Finance and Microfinance

My RCW colleague Kevin Sullivan sent along this interesting China Post article concerning the rise of Islamic finance:

Will Islamic finance be a serious challenge to traditional Wall Street finance? That is a question that deserves a good answer.

First of all, thanks to the good work of Bank Negara Malaysia and the Gulf central banks, the infrastructure for Islamic finance has been laid, with the establishment of the Accounting and Auditing Organization for Islamic Financial Institutions (AOFFI), the Islamic accounting standards authority, the Islamic Financial Services Board (IFSB), the international Islamic financial regulatory standard-setting organisation and the Institute for Education in Islamic Finance (INCEIF). The International Shari'ah Research Academy for Islamic Finance (ISRA) also provides an invaluable website that is increasingly the transparent source for shari'ah interpretations on what is considered acceptable under Islamic law.

For people unfamiliar with Islamic finance, the basic principle of Islamic banking is the sharing of profit and loss and the prohibition of usury. Simply put, interest is prohibited, but profit sharing is not. A cynic can say that with zero interest rate policies adopted by advanced country central banks today, they are also practicing Islamic banking.

I am a bit skeptical about these conclusions. As a general principle, Islamic finance is illiquid and overpriced, primarily because it's not a large market. The people who make use of this financial source tend to be those who have no alternate choice, for sociocultural reasons, and anybody who does have a choice doesn't bother with it. And while some European banks have gotten into Islamic finance on the sell side, they're only doing so because there's a profit opportunity.

This does, however, raise another finance item for consideration.

Continue reading "Islamic Finance and Microfinance" »

October 19, 2010

Global Broadband

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According to the Broadband Forum, there are just shy of 500 million broadband subscribers worldwide:

China, the powerhouse of global broadband in the 21st century so far, was responsible for 43 percent of all net broadband lines added in Q2 and performed far better than the same quarter in 2009 (China includes Mainland China, Hong Kong & Macau). In Western Europe, many markets did better than the equivalent 2009 quarter. Germany, the UK, Italy, Spain, the Netherlands, Poland and Turkey, amongst others, all reported strong numbers. Central and South American markets have cooled to an extent, but many are still reporting good quarterly growth (of 5-7 percent). However, the US and in particular Canada, broadband growth has significantly slowed, affected by the end of housing stimulus packages. In Canada's case, the market slowed to levels not seen for a decade.


Asia now accounts for 41 percent of broadband subscriptions, followed by Europe with 30 and the Americas with 26 percent. China alone accounts for 120.59 million or over 24 percent of the 500 million broadband subs worldwide. Check out the Gallup/RCW list of the Most Wired Countries for more on global connectivity.

(AP Photo)

October 13, 2010

The Global Gender Gap

The World Economic Forum has released its 2010 Global Gender Gap Report, which ranks countries by the level of gender equality. The top ten countries with the highest levels of gender equality:

1. Iceland 2. Norway 3. Finland 4. Sweden 5. N. Zealand 6. Ireland 7. Denmark 8. Lesotho 9. Philippines 10. Switzerland

You can read the full report here (pdf)

October 5, 2010

How Much Defense Spending Is Enough?

It is unrealistic to imagine a return to long-term prosperity if we face instability around the globe because of a hollowed-out U.S. military lacking the size and strength to defend American interests around the world.

Global prosperity requires commerce and trade, and this requires peace. But the peace does not keep itself. The Global Trends 2025 report, which reflects the consensus of the U.S. intelligence community, anticipates the rise of new powers—some hostile—and projects a demand for continued American military power. Meanwhile we face many nonstate threats such as terrorism, and piracy in sea lanes around the world. Strength, not weakness, brings the true peace dividend in a global economy.

We have not done enough to help our military preserve the peace and deter (and if necessary, defeat) our enemies. Americans have fought superbly in Iraq and Afghanistan, and have prevented any further terrorist attacks on the scale of 9/11. But faced with a nuclear Iran, or a Chinese People's Liberation Army that can deny access to U.S. ships or aircraft in the Asian-Pacific region, there are many missions ahead.

Yet we face those challenges with a baseline defense budget—defense spending minus the cost of the wars—that is 3.6% of GDP, significantly less than the Reagan-era peak of 6.2%. Our active-duty military is two-thirds its size in the 1980s. - Brooks, Deulner, & Kristol

Ben and Drezner have tackled this op-ed already but to add my own two cents, I think some perspective is in order:

Between June 2007 and November 2008, Americans lost an estimated average of more than a quarter of their collective net worth. By early November 2008, a broad U.S. stock index the S&P 500, was down 45% from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30-35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans' second-largest household asset, dropped by 22%, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets lost $1.3 trillion. Taken together, these losses total a staggering $8.3 trillion. Since peaking in the second quarter of 2007, household wealth is down $14 trillion.

So yes, Brooks, Kristol, et. al. are right, there are threats to global commerce. But they overwhelmingly stem from the world's parliaments, central banks, debt-strapped consumers, and financial markets. The People's Liberation Navy and Somali pirates? Not so much.

September 17, 2010

How the Greek Economy Will Recover

By selling novel souvenirs, of course:

Two U.S. tourists unknowingly bought six human skulls in Greece, which they learned when they were stopped at the airport in Athens.

The Americans carried the skulls in their hand luggage, which was scanned during a layover on their way back to the United States from the island of Mykonos.

September 8, 2010

State Capitalism & Resource Scarcity

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One of the reassuring messages in Ian Bremmer's The End of the Free Market is that the world's autocratic capitalist states (China, Russia, Saudi Arabia, etc.) did not have a zero-sum view of economic growth, like many nations did in the early half of the 20th century. So while their state champions and sovereign wealth funds can distort global markets, the world can escape the beggar-thy-neighbor cycle of economic destruction that marked the Great Depression.

Reading Vivian Fritschi's analysis on a coming era of resource constraints, I'm no longer sure we can be so sanguine about state capitalism. Economic growth is fundamentally anchored in the exploitation of resources, many of them finite in nature. From food, to water, to key minerals, many of these resources are under strain and the state firms of China in particular are keen to shore up privileged access to these supplies. While they may take a more liberalized view on the prospects of shared economic growth, these autocratic states seem to take a more 20th century view of the resource base this growth is built upon.

(AP Photo)

June 16, 2010

Capitalism vs. the State

David Brooks, riffing off of Ian Bremmer's new book The End of the Free Market, sees the emergence of a new ideological standoff:

The rivalry between democratic capitalism and state capitalism is not like the rivalry between capitalism and communism. It is an interdependent rivalry. State capitalist enterprises invest heavily in democratic capitalist enterprises (but they tend not to invest in each other). Both sides rely on each other in interlocking trade networks.

Nonetheless, there is rivalry. There is a rivalry over prestige. What system works better to produce security and growth? What system should emerging and struggling democratic nations aim for? There is also rivalry over what rules should govern the world order. Should countries like Russia be able to withhold gas from Western Europe to make a political point? Should governments be able to tilt the playing field to benefit well-connected national champions? Should authoritarian governments like Iran be allowed to nuclearize?


As I wrote in my own review of Bremmer's book, I think the answer to the first set of questions - which system works better and what system should emerging market states choose - will be answered by how well the U.S. and Europe handle their current economic challenges. If we can ensure our economic recovery chugs along, and if Europe can get its house in order (admittedly a tall order) than we will have made a plausible case for a free market system. Whether emerging countries buy-in is up to them, but all we can (and should) do is lead by example.

But I think it's mistaken to view the contest between "state capitalist" systems and free market democratic systems as a coherent rivalry. As Bremmer makes clear in the book, countries like China and Russia are out for their own, they're not interested in forming a coherent ideological challenge to democratic capitalism. We would do well not to stamp an overly ideological framework over what it is a very time-honored tradition of countries seeking to maximize their position in the global order.

May 21, 2010

(Not So) Deep Thought

As the anniversary of Iran's June 12 unrest rapidly approaches, I had a (not so) deep thought about this year's headlines as compared to last.

The top foreign policy story of 2009, I'd assume rather indisputably, was Iran. But barring some sort of cataclysmic event (knock on virtual-wood), the world news story of 2010 will likely be Greece and the greater Euro debt crisis.

So I ask: Which do you believe to be the more significant of the two? I think one's answer may reveal a lot about how they consider and approach foreign policy. (and yes, my answer is the Eurozone crisis.)

Please add your thoughts in the comments section and call me Neville Chamberlain.

May 20, 2010

China Continues Aiding Iran

Washington may hype having gained China’s support for a fourth round of United Nations Security Council sanctions on Iran, but Beijing’s leaders still seem to be working with their counterparts in Tehran to make existing and future attempts at tightening Iran’s access to global finances meaningless.

A report (in Persian) by the Fars News Agency confirms fears that China continues playing both sides of diplomatic and economic fences between the United States and Iran. While publicly appearing to go along with the much watered-down draft of sanctions, China has also agreed to "finance U.S. $1 billion for municipal and civic construction in the city of Tehran."

Essentially, the standoff between the West and Iran continues to play into Beijing’s hands. What if anything the United States and its allies can do remains unclear and possibly hopeless.

With friends like China, it is not surprising that Ahmadinejad and his cohorts dismiss the proposed set of sanctions as having "no legitimacy at all," even if adopted by the Security Council.

These developments highlight, yet again, that it is unrealistic to expect other nations to view multinational issues in the same light as the United States does. Attempts at resolving ongoing tensions with Iran in America’s favor, alas, continue demonstrating the escalating limits of Washington’s influence on a world stage where many nations are jousting for power.

April 26, 2010

Video of the Day

In international institutions, China scored big diplomatic points this weekend.

Interestingly enough, while this is ostensibly a move motivated by economics, Robert Zoellick uses words more closely associated with power politics, like "polarity," than with political economy.

For more videos on topics from around the world, check out the Real Clear World videos page.

April 17, 2010

India Debunks the Currency Hawks

Perhaps the most common refrain from the folks in Congress and the punditocracy who are demanding a drastic appreciation in China's currency (the RMB) is that the revaluation is absolutely necessary to reduce the "dangerous" US-China trade deficit.  These currency hawks' underlying reasoning is simple: China's allegedly undervalued currency makes Chinese imports to the US cheaper and American exports to China more expensive, thus creating a woefully-distorted bilateral trade imbalance as compared to a situation in which both the RMB and USD "floated" based on market conditions.  (See here and here for examples of this rhetoric.)

Assuming for a moment that the RMB is significantly undervalued, and that the bilateral trade deficit (or any trade deficit) is a problem for the US economy, there remains a very serious question of whether any sort of RMB appreciation, based on market factors or otherwise, will actually affect the US-China trade balance.  The currency hawks certainly think so (it's their raison d'etre), but many scholars (and your humble correspondent) disagree, pointing to the recent history of the RMB and the US trade deficit, the past experiences of Japan's currency appreciation versus the dollar, and, of course, lots of economic analysis and modeling of structural factors in both the US and China - all of which strongly argue against the theory that RMB appreciation is some sort of "silver bullet" for the bilateral trade deficit.  Indeed, a very interesting new study released by the Centre for Economic Policy Research provides even more such evidence (and a lot of other good stuff).

Unsurprisingly, currency hawks like Paul Krugman have brushed these sound criticisms aside, arguing that they fail to capture current market realities (or something).  A story in Thursday's Wall Street Journal, however, provides very strong support for the currency skeptics' arguments about the disconnect between nations' currency policies and their bilateral trade balances - this time from what is arguably China's largest competitor, India. 

Continue reading "India Debunks the Currency Hawks" »

March 30, 2010

Critics and Consistency

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Responding to French President Nicolas Sarkozy's backhanded praise for American health care reform, Kevin Drum writes:

Sarkozy was something of a darling of the right when he was first elected, thanks to his support of laissez-faire economics and general embrace of American values. But the financial collapse of 2008 turned him into something of a regulatory hawk, and now there's this. I'll bet the American right doesn't think much of him anymore.

I'm not so sure. So long as he - or any leader of an allied country, for that matter - continues to criticize President Obama's performance abroad, I think the critics will continue to find praise, warranted or unwarranted, for Sarkozy.

I think this goes back to a point we've made repeatedly here on this blog, and that is that the president's critics have thus far demonstrated a serious lack of consistency when it comes to foreign policy. Neoconservatives in particular have been bemoaning the cultural and global decline of Europe for nearly a decade, but once administrations changed, so too did the tone.

This makes for some oddly inconsistent rhetoric, particularly from the right. So either Obama fails to meet the Sarkozy standard, or he leads a party too heavily influenced by the French. What does that even mean? Does it have to mean anything? Probably not; we're talking about the world of politics after all, where things needn't make sense in order to be repeated over and over again.

(AP Photo)

March 15, 2010

Paul Krugman: Neocon?

Dan Drezner makes the case.

February 28, 2010

Health Care and American Power, Ctd.

Last week, Kevin began to debunk two recent articles - one by the Times' Anatole Kaletsky and the other an article on recent statements by Sec. Hillary Clinton - which boldly argue that the death of current U.S. health care legislation will mean the inevitable death of America's influence around the world.

Clinton's argument is that ObamaCare's failure will signal to the rest of the world that American government is broken, and that this perception will adversely affect foreign countries' views on whether America still has the capacity to "move forward" and lead on international issues.  Money quote: "Their view does color whether the United States — not just the president, but our country — is in a position going forward to demonstrate the kind of unity and strength and effectiveness that I think we have to in this very complex and dangerous world."

Kaletsky takes an even harsher line and argues that the demise of ObamaCare will dismantle the American economy, and by extension, America's influence in the world.  He writes:

If nothing is done to change the US healthcare system, it can be stated with mathematical certainty that the US Government and many leading US companies will be driven into bankruptcy, a fate that befell General Motors and Chrysler largely because of their inability to meet retired workers’ contractually guaranteed medical costs....

Gridlock over healthcare would imply similar stalemates on taxes, public spending, the budget, macroeconomic stimulus and financial reform.  As a result, an active response to any future financial crisis might become impossible.  Even worse, any important action to control US government borrowing could be ruled out.

Alrighty then.  Kevin did a great job dismantling these arguments from the foreign policy angle by providing some excellent historical perspective on the issue, so I'm just going to weigh in from the international trade and economics angle.

My conclusion in short: Clinton's and Kaletsky's arguments are nonsense.

Continue reading "Health Care and American Power, Ctd." »

February 26, 2010

Health Care and American Power

In response to my post from yesterday, our friends over at the sans-green Daily Dish send along this Times piece by Anatole Kaletsky. In it, Kaletsky argues that the future of the American economy - and thus, American leadership around the world - rests on the results of yesterday's health care summit in Washington:

If nothing is done to change the US healthcare system, it can be stated with mathematical certainty that the US Government and many leading US companies will be driven into bankruptcy, a fate that befell General Motors and Chrysler largely because of their inability to meet retired workers’ contractually guaranteed medical costs.

Today’s summit represents Mr Obama’s last chance to find a way forward, either by shaming some Republicans into supporting him or by embarrassing his own perennially divided Democratic Party into uniting around a single plan. If he is unable to do this, he will have almost no chance of passing any significant legislation on any other issue—– not on energy, budgetary responsibility, macroeconomic management or even on such seemingly popular issues as bank regulation and jobs.

In short, Mr Obama has staked his entire presidency on today’s summit.

I don't know that this passes political or economic muster. I am no economist, so all I'll add here is that, to my knowledge, the largest economy in continental Europe, Germany, has been dealing with an aging and entitled work force for years. While economic discontent at home can of course impact all forms of policy - including foreign - I don't know that it has had any effect at all on Germany's role in Europe and around the world, respectively. On the contrary, Angela Merkel seems to have become more globally assertive in the face of Western financial crisis.

As for the politics, I believe the general consensus is that yesterday's summit moved no one and only further entrenched actors and voters in their respective camps.

Kaletsky goes on:

Gridlock over healthcare would imply similar stalemates on taxes, public spending, the budget, macroeconomic stimulus and financial reform. As a result, an active response to any future financial crisis might become impossible. Even worse, any important action to control US government borrowing could be ruled out. If the financial markets seriously reached this conclusion, all the debates about government debt and public spending in Britain, Greece and other countries would be a waste of breath. A genuine loss of confidence in America’s fiscal outlook would create a financial crisis so horrific that actions by the British or European governments would be swept away like beach huts in a tsunami.

[/hyperbole]

Did the United States not fight and win a world war in the face of economic depression and peril? Did economic ebb and flow affect the way in which the world perceived American leadership during the Cold War, or during the current War on Terrorism? Perhaps it did, which is why I open the floor up here to trade and economy wonks to fill in the gaps.

But I remain incredulous.

February 12, 2010

Goldman Sachs Hid Greek Debt

In the event you needed another reason to be angry at Goldman Sachs, Der Spiegel reports:

Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit.

The "Lord's work" indeed.

February 10, 2010

Greece's Bailout Plea

Greece, as you likely know, is in some deep trouble financially. Now, they want a bailout from the EU:

“We feel humiliated and we understand that things cannot remain the same as they were before,” said Vasiliki Revithi, 56, a biochemist at the National Organization for Medicines, noting that a monthly cut of about $950 to her salary would mean no new car and cheaper makeup. “But we gave the world democracy, and we expect the European Union to support us.”

Certainly a creative pitch, if nothing else.

January 29, 2010

R2-D2 to Lead the Global Recovery?

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Former chief economist at the International Monetary Fund and current Professor of Economics and Public Policy at Harvard University Kenneth Rogoff made a fascinating declaration:

As the global economy limps out of the last decade and enters a new one in 2010, what will be the next big driver of global growth? Here’s betting that the “teens” is a decade in which artificial intelligence hits escape velocity, and starts to have an economic impact on par with the emergence of India and China….

In 50 years, computers might be doing everything from driving taxis to performing routine surgery. Sooner than that, artificial intelligence will transform higher learning, potentially making a world-class university education broadly affordable even in poor developing countries. And, of course, there are more mundane but crucial uses of artificial intelligence everywhere, from managing the electronics and lighting in our homes to populating “smart grids” for water and electricity, helping monitor these and other systems to reduce waste.

In short, I do not share the view of many that, after the Internet and the personal computer, it will be a long wait until the next paradigm-shifting innovation. Artificial intelligence will provide the boost that keeps the teens rolling. So, despite a rough start from the financial crisis (which will still slow global growth this year and next), there is no reason why the new decade has to be an economic flop.

For an image of what a future controlled by computers and robots might look like, look no further than Japan, which employs over a quarter of a million robot workers, envisions using robots to counter future economic and demographic challenges, and creates robot fashion-models.

January 23, 2010

Could the WTO Tear Down China's Great Firewall?

Reuters reports that the United States Trade Representative (USTR) is "mulling" (great word!) a challenge to China's internet restrictions - the humorously-named-but-not-actually-funny-at-all "Great Firewall of China":


U.S. trade officials have asked for more information as they weigh whether to pursue a case against Chinese Internet restrictions that impede Google and other companies, an attorney for a U.S. free speech group said on Friday.

"They've asked us for more detail about it. We are trying to put that together right now," said Gilbert Kaplan, a partner at King and Spalding, which represents the First Amendment Coalition, a nonprofit advocacy group...

The U.S. free speech group, known then as the California First Amendment Coalition, first approached the U.S. Trade Representative's office in late 2007 with the idea of challenging China's barriers to Internet access at the World Trade Organization.

It gave the trade office, run at the time by the Republican administration of former President George W. Bush, "a very extensive white paper, or memo, describing the WTO violations that the 'Great Firewall' caused, and that were actionable in our view under the WTO, and a request that USTR begin a WTO case against China regarding the Firewall," Kaplan said.

Although no case was filed, Kaplan said U.S. trade officials never ruled out that possibility.

"We're continuing to request that they start that case. That dialogue is continuing," Kaplan said.

A spokeswoman for the U.S. trade representative's office had no immediate comment.

A study by the Brussels-based think tank ECIPE in November called government censorship the biggest trade barrier that Internet companies face.

Many countries censor the Internet for political or moral reasons. China has developed one of the most pervasive methods. In Cuba, all unauthorized surfing is illegal, while many Western countries limit access to child porn sites.

A WTO case could help "clarify the circumstances in which different forms of censorship are WTO-consistent," ECIPE said....

China agreed as part of its commitments to join the WTO in 2001 that U.S. service companies would have the same access in China as their own companies.

"We believe that applies to the Internet and Internet companies," Kaplan said.

China's web restrictions in effect force U.S. Internet companies to "put servers and hardware in China, rather than doing what they do everywhere else in the world, which is use their U.S. base," Kaplan said.

"If we try to serve the Chinese market from the U.S. or anywhere outside the Great Firewall, our Internet access is so slow that no one will use our sites," he said.

WTO rules also require countries to follow transparent and understandable procedures, he said.

Instead, China "is very randomly stopping our Internet companies and our Internet access with no prior notice and no set of regulations," Kaplan said.


The free speech group's 2007 white paper is here, and they state that China's internet restrictions violate a whole host of WTO rules, including GATT Article III (national treatment), China's services commitments under the GATS and China's WTO Accession Protocol. 

Continue reading "Could the WTO Tear Down China's Great Firewall?" »

January 21, 2010

Video of the Day

On the RCW video page we will periodically host interviews and speeches. Today we have Joseph Stiglitz:

Regardless of how many Nobel's someone has, one should never accept what they say uncritically. Nevertheless, Joseph Stiglitz is probably the most important critic of unchecked free markets in the west today. In academic circles, one would likely describe him as an opponent of the Chicago School, however in popular parlance, both Stiglitz and the Chicago School often devolve to parodies of themselves. One can see in this interview that Stiglitz may favor a second stimulus, but he is also concerned about deficit spending.

How the Post-Communist Generation See Things

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Pew Research's Juliana Menasce Horowitz sees positive signs in the attitudes of young people in post-Communist societies:

In every Eastern European country surveyed, the post-communist generation is much more supportive of the move away from a state-controlled economy than are those who lived as adults under communism. As is the case with opinions about the change to democracy, the generational divide is greatest in Russia; about six-in-ten (62%) Russians younger than age 40 say they approve of their country's change to capitalism, compared with just 40% of those in the older age group.

A double-digit gap also exists in Ukraine, Slovakia, Bulgaria, the Czech Republic and Poland, and a smaller gap is evident in Lithuania and Hungary. In Ukraine, where the overall level of support for the change to a market economy is lower than in any other country surveyed (36% approve of the change), nearly half (47%) of those younger than age 40 say they approve of the economic changes their country has undergone; just 28% of those 40 or older share that view.

The entire study is worth a read. Of note, Ukraine, which just concluded a first round of presidential voting, has the lowest approval when it comes to a country's move to multi-party elections.

(AP Photo)

January 20, 2010

The Index of Economic Freedom

The Heritage Foundation and the Wall Street Journal recently released their Index of Economic Freedom for 2010. In their own words:

Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.

There is a lot of data there, and undoubtedly people will make of it what they will. Moreover, these indices are fairly subjective, based upon the criteria selected for the creation of the index. Nevertheless, these indices can be good measures of what certain groups think of certain things.

In other words, if you care about what the Wall Street Journal and the Heritage Foundation cares about, then this index tells you a lot. zdgs

November 10, 2009

Peak Oil Back on the Radar

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The International Energy Agency is out with its new global forecast on oil and energy reserves (a short highlight is available here - pdf). Meanwhile, a whistle-blower at the IEA has gone to the Guardian to say the organization's estimates for global output are far too optimistic:

In particular they question the prediction in the last World Economic Outlook, believed to be repeated again this year, that oil production can be raised from its current level of 83m barrels a day to 105m barrels. External critics have frequently argued that this cannot be substantiated by firm evidence and say the world has already passed its peak in oil production.

Now the "peak oil" theory is gaining support at the heart of the global energy establishment. "The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year," said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. "The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this.

Kevin Drum isn't so sure this anonymous source is really onto something significant.

(AP Photos)

October 1, 2009

In Support of a Global Transaction Tax

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Last week, the G-20 formally agreed to become the new G-7, which theoretically will help put a little more "oomph" into policies designed to tackle the twin challenges of maintaining global economic growth while restructuring economies worldwide to fit low-carbon or even carbon-free economic growth models.

Piggybacking on the recent surge in international coordination, Germany's Minister of Finance Peer Steinbrück wrote recently on the case for a global financial-transaction tax:

A global financial-transaction tax (FTT), applied uniformly across the G-20 countries and covering all financial transactions at a very low rate, is the obvious instrument of choice to ensure that all financial-market participants contribute equally. Foreign Minister Steinmeier and I are suggesting that the G-20 take concrete steps toward implementing an FTT of 0.05% on all trades of financial products within their jurisdictions, regardless of whether these trades occur on an exchange. National governments could establish a personal allowance to exempt retail investors.

Based on calculations by the Austrian Institute of Economic Research, which studied the possible effects of general FTTs on behalf of the Austrian government, a global FTT of 0.05% could yield up to $690 billion per year, or about 1.4% of world GDP. Such a tax would not unduly burden financial-market participants, yet it would raise a significant amount of money to finance the costs of this crisis.

This makes a lot of sense. A small tax like this would help build a "rainy day fund" in preparation for whenever the global economy next takes a slight downturn, a policy that has proven highly successful in countries like Chile and Norway. The slight tax might also nudge investors toward buying and holding, which might also help deter against a major run on the dollar and other currencies. Maybe such a tax could also help the U.S. avoid eventual economic meltdown as the rising costs of social welfare programs cause public debt to explode in the near future.

Steinbrück's suggestion is a good one, and the G-20 would do well to consider it.

(Photo Credit: AP Photos)

September 30, 2009

U.S.-Colombia Free Trade Agreement: Rhetoric vs. Reality

By Scott Lincicome

Uh oh. Looks like someone forgot his Rahm-approved FTA talking points:

* WSJ: US Secy Locke: Colombia Trade Pact Not Likely Ratified In '09. "The U.S. Congress won't likely ratify a free trade agreement with Colombia this year as it's currently focusing on health care reform and energy-related legislation, U.S. Commerce Secretary Gary Locke said Tuesday."

* Miami Herald: U.S. Trade Representative: free trade agreements underway with Panama and Colombia. "Assistant U.S. Trade Representative for the Americas Everett Eissenstat told a crowd at the Americans Conference that work was progressing on free trade agreements with both Panama and Colombia, though 'less tangible' concerns about violence and impunity in Colombia have yet to be fully resolved."

What a debacle (and I don't mean the incongruous administration statements). The US-Colombia FTA was completed and signed on November 22, 2006. Since that time, American exporters have paid approximately $1.9 million per day in Colombian tariffs that they wouldn't have paid if the Democrat-controlled Congress had just passed the FTA back then and thus allowed it to enter into force. By my math, that means that Congress' and (now) the President's partisan stalling has resulted in a pointless tax on American businesses of almost $2 billion ($1.9798 billion = 1042 days times $1.9 million) and counting. Meanwhile, one of our closest allies in Latin America has bent over backwards to get the agreement passed, holding hundreds of public meetings, working hard to (successfully) reduce domestic labor union violence, and countering Hugo Chavez' viral influence in the region. Heck, the Colombians even sponsored a massive public art campaign here in Washington, DC in an attempt to improve public sentiment about their country.

And USTR's response to the billions in needless tariffs and the Colombians' humbling efforts? Ummmmm...

Speaking Thursday [Sept. 24, 2009] at the Congressional Black Caucus Annual Legislative Conference Town Hall on Capitol Hill, United States Trade Representative Ron Kirk stressed the importance of passing health insurance reform. Reforming the health care system is a trade priority - because American businesses and workers can't take full advantage of job-creating trade opportunities as long as our health care system drains their resources. Health reform will help to grow America's global economic competitiveness.

Oh, right. That makes perfect sense.

(Please note extreme sarcasm and disgust.)

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In 2008, Scott Lincicome served as a senior trade policy adviser for Senator John McCain’s Presidential campaign. He blogs at http://lincicome.blogspot.com/

September 29, 2009

Has the American Anti-Globalization Movement Jumped the Shark?

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By Scott Lincicome

Last week's G20 meetings featured anti-globalization protest shenanigans that have become routine since the genre began in Seattle 10 years ago - anarchists, arrests, misguided vandalism against Starbucks and other alleged symbols of corporate global-greed, English majors unintentionally demonstrating why they're English (and not Economics) majors, etc etc. But lost in the routine media coverage of the anti-trade protests in Pittsburgh was their striking impotence relative to earlier iterations of the "movement."

According to the AFP, Pittsburgh police estimated that up to 4,500 "protesters on Friday flooded into city streets lined with police in full riot gear, still tense after violent anti-G20 protests in the eastern US city late Thursday." Those violent Thursday protests featured only about 400 hooligans and a few dozen arrests, the AFP also reported.

Sounds pretty big, huh? Well, it's actually pretty insignificant when you provide some perspective (instead of just focusing on the protesters' attention-grabbing violence and tomfoolery):

* The granddaddy of the modern anti-globalization movement - the 1999 protests against the World Trade Organization's Ministerial Meeting in Seattle - drew over 40,000 protesters, according to similar local police estimates. Those protests - featuring the strange bedfellows of US labor unions, anarchists, environmental "advocates," socialists, and "consumer groups" like Public Citizen - really flooded Seattle's streets and literally shut down both the city of Seattle and the WTO meetings themselves.

* The follow-up to Seattle - the April 2000 protests against the annual World Bank and IMF meetings in Washington, DC - featured at least 10,000 protesters, summoned about 1,500 additional cops, and shut down most of DC (although the official meetings still managed to happen). I was working in DC at the time and vividly remember how most people stayed home that day in fear of violence (or just really, really bad traffic).

Compared to these protests, the G20 ruckus was pretty tepid. Granted, the devolution of the American anti-globalization movement is not a brand new phenomenon: compared to last April's World Bank/IMF protests - which apparently drew only 150 protesters - the G20 protests were huge. Nevertheless, the G20 meetings were highly publicized, came in the midst of a global recession that's (unfairly) being blamed on "free market policies," and were located in a traditional "rust belt" city with large numbers of folks that are highly skeptical of free trade (Pittsburgh is the national headquarters of the United Steelworkers union, afterall). And the March 2009 G20 protests in London drew "tens of thousands" of protesters.

Continue reading "Has the American Anti-Globalization Movement Jumped the Shark?" »

September 20, 2009

A Global Debt Clock?

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Global debt is exploding, and Harvard economist Kenneth Rogoff thinks that a new debt crisis is bound to follow the latest financial one.

Indirectly supporting the above thesis is a well-crafted and fascinating "Global Debt Clock" now maintained by The Economist. But before you check out the clock, glance over a recent piece by Joseph Stiglitz that smartly warns about the alluring, dangerous, and ultimately deceptive "fetishism" the world has on statistics.

(Cartoon Credit: The Korea Times)