Geezernomics: Can Migration Revive Japan, Inc?

♠ Posted by Emmanuel in , at 11/27/2008 08:46:00 AM
Can a country's level of xenophobia be so high that it would rather sacrifice its economic future than admit more immigrants? That, my friends, is what I wonder about when it comes to Japan. It is ironic that some of the most closed societies are the ones that can benefit the most from migration. The archetypal case in point is, of course, Japan. The roots of its current economic malaise are in large part demographic. Never forget that the benefits from social cohesion borne out of homogeneity have costs in terms of economic dynamism.

Efforts to spur domestic consumption at a time of export weakness face huge difficulties in Japan. Aging workers save perhaps excessively from understandable fears that mostly non-existent future generations of laborers won't be able to pick up the slack. Couple the fact that the Japanese are the longest-lived people on Earth with their unusually low fertility rate and you have a demographic disaster whose effects are already being felt. That Japan's projected old-age dependency ratios are off the charts is no mystery.

What can gaijin do to help remedy this situation? Their influx may help alleviate a deflationary trap on a number of fronts. First, their eventual integration can reduce old-age dependency ratios, giving retirees and those nearing retirement more confidence that pensions and suchlike will actually be funded going forward. Second, and perhaps more immediately, they can provide sources of domestic demand at a time when Japan is running a trade deficit--a bad omen for any export-driven economy. Third, they can inject cultural dynamism in a country already seeking to become more cosmopolitan in outlook, particularly in the stagnant services sector.

If I sound Philippe Legrain-ish, so be it. I have always thought that good public policy is crucial to ensuring that chances of immigration resulting in smoother integration can proceed. Truly, it's a liberal idea in the classic sense. There is no lack of quite frankly racist migration agendas in the political discourse of any number of industrialized countries facing similar challenges, but I will have none of it here. These countries will have to import manpower given that they aren't going on babymaking binges anytime soon. The only question is whether they will come up with thoughtful solutions to the migration dilemma or just keep kicking the can down the road to no one's real benefit.

Here are key excerpts from a Financial Times piece that inspired this post, although the rest of its is well worth reading:
Private consumption has been edging down, to about 57 per cent of GDP. In the view of some, a greying – indeed, decreasing – population means domestic demand is doomed to continue a relentless decline and that Japan’s future depends on even greater expansion overseas. “The domestic economy can’t grow. The smart thing to do is focus on overseas markets,” says Martin Schulz, senior economist at Fujitsu Research Institute...

For one thing, the argument goes, people spend less as society ages. Already, “household surveys show that 27 per cent of households with two people or more have no employment, that is, they are pensioners,” says Hideo Kumano, chief economist at Dai-ichi Life Research Institute. “Pensioners don’t spend that much money regardless of their economic conditions...”

Ms Ota also points to the need for reforms to improve productivity in services, a sector that accounts for 70 per cent of GDP. “In the 1980s, when manufacturing was strong, it was able to pull the economy up with it. But with globalisation, manufacturers can move overseas,” she says...

Owners could be encouraged to rent out unused retail properties to businesses that better meet the needs of consumers, Ms Ota also suggests. That is what Marugame, on the south-western island of Shikoku, did and its shuttered shopping street was transformed into a thriving neighbourhood, she points out. By taking such steps to boost productivity in a broad range of sectors, domestic growth could be revived significantly, analysts say. “Japan has one of the lowest levels of productivity in services worldwide, so the growth potential is huge,” says Mr Schulz...

Critics point out that the Council on Economic and Fiscal Policy has lost its clout and the momentum behind deregulation that invigorated the Koizumi era is gone. The immediate outlook for further bold reforms is not promising. “Unless we bring new ideas and new people from overseas, Japan can’t grow,” says Ms Ota.
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Thai Airport Sieges and Japanese Marxist Tactics

♠ Posted by Emmanuel in , at 11/26/2008 08:21:00 PM

Images of Thai protesters camping in Thailand's brand-spanking new airport as dumbfounded foreign tourists bemoan their fortunes are being beamed around the globe thanks to the wonders of modern communications technology. If disrupting the Thai political economy was their objective, they've certainly done the business by hitting it where it hurts. The "Land of Smiles" is quite dependent on tourism for its economic well-being, with various estimates pegging its contribution to Thai GDP between 7% and 12%. Thai tourist arrivals have already been hurt by the credit crunch; this disruption near the peak of the tourist season as Westerners seek escape to warmer climes cannot be a welcome development.

The recent Prime Ministers of Thailand since Thaksin's removal have been, to say the least, a colorful bunch. Prior to the current PM, a TV chef with loyalties to Thaksin, Samak Sundaravej was selected by the People Power Party (PPP). The PPP is formed of remnants of Thaksin's now-defunct Thai Rak Thai party. After protesters claimed Samak as a political scalp, the PPP chose a decidedly non-appeasing tactic by selecting as the new PM, er, Thaksin's brother-in-law, Somchai Wongsawat. As you'd expect, rather than calm those calling for an extirpation of Thaksinite influences in Thai politics, this further inflamed their passions. The current airport siege is the culmination of these events. It sounds like a "professional wrestling" plotline, but it's true--to the detriment of many Thais' well-being.

Interestingly, the People's Alliance for Democracy (PAD), mostly composed of Bangkok urbanites in contrast to the PPP's rural base, had already used this airport raiding strategy against Samak, besieging the airport in popular tourist destination Phuket in August. This time around, they're merely going from shutting down Thailand's second largest to its largest airport.

Going back further in time, there are parallels here to Japanese Marxists shutting down airports during the 60s. Yes, protesters were active even in Japan. Back then, it was over the Japanese government wanting to sign security treaties with the United States, potentially involving Japan in Vietnam and other Yankee misadventures. Roving street battles, attempts to shut down major airports, accusations of Western lackeydom etc.--the template was set then by the zengakuren and its ilk, or the All-Japan Federation of Student Self Government Associations. Of course, the current batch of Thai protesters are decidedly bourgeois, but the tactics are largely similar.

It is difficult to find a clear protagonist in this situation. The Thaksinite forces won the popular mandate by winning parliamentary elections in 2007. All the same, instead of being conciliatory, they have chosen PMs who are decidedly unacceptable to the opposition: Thaksin's brother-in-law as PM? It's a surefire recipe for continued trouble. OTOH, the PAD's efforts are akin to cutting off one's nose to spite your face. Further endangering Thailand's already faltering tourist industry by this action is a questionable move. Moreover, electoral politics in Southeast Asia (in the countries that have them) seem to have degenerated into a pattern of holding Philippine-style "people's power" protests to remove popularly selected governments. Why even bother with elections and just let people duke it out in the streets every so often? The result will largely be the same as what's happening now.

PS: History buffs will recall that the yakuza was eventually enlisted by the government to put down the zengakuren. It worked. At the height of the Cold War, enlisting the help of gangsters was probably a more palatable alternative to empowering Marxists even of the flower power variety.
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Her Name Was Rio (Tinto), She Was a No-Buy

♠ Posted by Emmanuel in , at 11/25/2008 07:02:00 PM
It appears the bizarre commodity love triangle of BHP Billiton - Rio Tinto - PRC has come to an abrupt end as Billiton is now dropping its previous takeover bid for Rio. There will be no merger of the mammoth Australian mining firms. China can now rest from its efforts to frustrate this proposed pairing and the pricing power it might have created over China. In large part, this turn of events is due to spectacularly falling commodity prices. In contrast to earlier scenarios where continued global growth would occur due to a "decoupling" of the rest of the world with America's downturn, things have recoupled in spectacular fashion.

The story roughly goes like this, as you all know--nearly insolvent American consumers, battered by stagnant incomes and falling home and equity prices, have hit the wall. In turn, export-oriented economies like that of China have seen less demand for consumer goods. With less demand for consumer goods, China has less need for commodity exports such as coal to power its factories and steel to manufacture its export wares. Thus, the Aussie mining giants have also cut back. I sometimes need to pinch myself in thinking how, in such a short span of time, oil was over $140 a barrel in mid-July and is at about $55. The trajectory of other commodities has followed a rather similar parabolic pattern. These are interesting times. From Reuters:
Top mining giant BHP Billiton's decision to pull its $66 billion hostile bid [it was almost double at the height of the commodity spike] for rival Rio Tinto sent its debt protection costs sharply lower on Tuesday. Five-year credit default swaps on BHP Billiton tightened by 130 basis points to 305 basis points, although five-year CDS on Rio remained unchanged at 800 basis points amid concerns about the company's relatively higher debt levels, an analyst said. That means it costs 305,000 euros ($392,700) and 800,000 euros ($1 million) a year respectively to protect 10 million euros of each company's debt against default.

Meanwhile, BHP shares jumped more than a fifth in hectic London trading, while Rio Tinto slumped as much as 40 percent. [The acquiring company's existing shareholders would have suffered via share dilution from a merger, while those of the acquired company would have benefited from a higher bid price in order to attract their interest.]

Concerns about the all-share deal were centered on the ability of the companies to refinance their existing debt burden, ING credit strategists said. The decision was a high profile example that the credit crisis is crimping mergers and acquisitions, the bank added. "The greater debt exposure of the combination plus the difficulty of divesting assets have increased the risk to shareholder value to an unacceptable levels," BHP Billiton said.

BHP, which had already won U.S. and Australian regulatory clearance for a deal, said it had been ready to offer concessions to Brussels to secure the European Commission's blessing, but would not have been able to sell assets at a fair price in the current climate.

Rio Tinto had $42 billion in net debt at end June, after taking on $40 billion in debt to buy U.S. aluminum producer Alcan last year. The company also has around $8.9 billion of debt maturing in October 2009, which it has said will be paid off easily through its $15 billion asset disposal program. Credit rating agency Moody's Investors Service said earlier this month, however, that the planned asset sales by Rio to reduce debt would be slower than planned and could bring in less cash than hoped.

Moody's said it may lower its A3 senior unsecured rating on Rio as the company generates lower cash on the back of declining prices on key products such as copper, aluminum and iron ore, and as the company battles its high debt levels. It also changed its outlook to developing from positive.

Standard & Poor's rates Rio Tinto at BBB+ while Fitch has an A+ rating. By comparison, Moody's rates BHP Billiton at A1, while Standard & Poor's rates the company at A+.

BHP Billiton is one of the least-geared mining groups with net debt of $6.3 billion at the end of October, and has a portfolio of assets that is expected to deliver solid cashflows, the company said.

"BHP Billiton's priorities for cash flows remain to invest in its core businesses, manage its balance sheet to a solid A credit rating, maintain its progressive dividend policy and return any surplus cash to shareholders," BHP said.

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Japan Explores "Manga Diplomacy"

♠ Posted by Emmanuel in , at 11/21/2008 12:33:00 PM
TIME has a neat article on how, despite (or perhaps because of) a domestic economy mired in yet another recession, Japan is becoming keen on reaching out to the world. Among other things, it's sending global goodwill ambassadors, buying up foreign firms, proposing to give the IMF $100B in emergency funds, increasing foreign aid, establishing more embassies abroad, and creating cartoon ambassadors like Doraemon here. Elsewhere, the article notes how foreign opinion of Japan is now only exceeded by that of Germany. Is there something to WWII aggressors trying harder to make amends with everyone else? While commercial interests are never far away, there may be an attitudinal underway that can culminate in Japan becoming more welcoming to migrants. After all, Japan still has the world's second largest economy while possessing fairly unpromising demographics, to say the least. It begins:
Is the world turning Japanese? Even as Japan's domestic economy slips into recession and its politicians dither endlessly, the country's overseas influence is reaching new heights. Limited by a postwar constitution from developing military power, Japan's international clout relies on soft power, the term coined by Harvard professor Joseph S. Nye in 1990 to describe how countries "get what [they] want through attraction rather than coercion." Today, a generation of idealistic Japanese is attempting to sway the world through cultural, social and economic means. Japan doesn't tend to trumpet its efforts — understandable given the nation's imperial past and historic disregard for national boundaries...

Japan's charm offensive is taking shape on several fronts. Cash-flush Japanese banks, which have only just emerged from their own decade-long debt crisis, are infusing money into distressed companies such as Morgan Stanley. Japan Inc. is going on another of its famous investment sprees abroad, opening factories and representative offices across Africa and Asia. In October, the country's central bank even offered part of its nearly $1 trillion in reserves to financially strapped nations like Iceland. In November, Japan also expressed willingness to lend up to $100 billion to the International Monetary Fund. But it isn't just money that's being spread around. "Because Japan's financial system is the least tainted at the moment," says Japanese parliamentarian Kotaro Tamura, "we have the opportunity to help save the world and spread a message of social responsibility..."
It's also interesting how globalization of Japanese culture is paying dividends via "manga diplomacy." For those who think Mickey Mouse is too much of a bourgeois capitalist stooge, there are alternatives. Indeed, Japanese politicians are keen on leveraging this global recognition:
If many Japanese-language students had their druthers, they'd probably want a pair of cool cats to helm their classes. In May, Japan designated Hello Kitty as a tourism ambassador, two months after Doraemon, the aqua-hued robot feline, was named the nation's first cartoon envoy. The designation of these two cat representatives symbolizes just how much Japan's overseas reputation is tied to pop culture. That's a connection that surely pleases Japan's new Prime Minister Taro Aso. The 68-year-old premier, who is a self-confessed manga addict, has called for Japan to pursue what he calls "comic-book diplomacy." (Last year, when he was serving as Japan's Foreign Minister, Aso counted among his accomplishments inaugurating an International Manga Award that honors foreign artists.) Aso's own internationalism is rooted in personal experience, a relative rarity among Japanese politicians. In addition to studying at Stanford University and the London School of Economics, he spent time in Sierra Leone and Brazil, where he ran family mining businesses. A vocal advocate of Japan's foreign-aid efforts, Aso calls assistance for developing countries "a respectable means to export Japanese culture [and] an important means to disseminate Japanese values."

Although he has barely had time to articulate his leadership priorities, Aso appears committed to burnishing Japan's global influence. Over the past decade, the nation's foreign-aid budget has nosedived. In the early 1990s, flush with cash from its long boom, Japan was the world's largest donor. Now, it's fifth. Aso might reverse the trend. In August, Japan's Foreign Ministry requested a 13.6% increase in next year's foreign-aid budget. In October, Aso made headlines when he signed off on a record $4.5 billion loan to India. That commitment followed on the heels of Japan's promise in May to double the amount of aid it doles out to Africa by 2012. With China's footprint in Africa growing ever larger, Japan has opened three new embassies on the continent...
Something that interests me in particular is talk of the curreCheck Spellingnt charm offensive setting the stage for attracting migrants to Japan. Given the country's famously woeful demographics and not-so-heroic ways of coping with them, is it finally preparing the way for the inevitable influx of migrants? Reluctance to systematically address migration has been characteristic of Japan for the longest time. In TIME's reading of events, making the rest of the world comfortable with Japanese culture is paving the way for making Japan a migration destination of the future. We'll see:
Other factors have forced the nation to look anew at its role in the world. A crucial consideration is the nation's dwindling birth rate. Japan is running out of workers. To fill its factories and care for a graying population, the Asian nation will need to import ever greater numbers of laborers from abroad. What better way to lure skilled immigrants to Japan — ones who might be just as interested in moving to the U.S. or Australia — than piquing their interest in all things Japanese?

In the same way, unless Japan relaxes its rigid immigration policies, cultivating foreign Japanophiles will be a waste of time. Indeed, in moving beyond Japan's insular past, Prime Minister Aso might do well to take inspiration from a cuddly cat. Hello Kitty, it turns out, may not be ethnically Japanese. Her surname is not Suzuki or Sato but White. Her parents are named George and Mary. Yet the mouthless feline has prospered as one of Japan's most successful exports, a fitting symbol of an open Japan. Arigato Kitty, hello world.
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Will US Sovereign Debt Ever Be Downgraded?

♠ Posted by Emmanuel in , at 11/20/2008 07:12:00 PM
MarketWatch commentator Paul B. Farrell has just penned a typically entertaining op-ed on why the US is headed for an even greater world of trouble come 2011. Among other things, entitlement spending is going to spiral upwards given the imminent retirement of the baby boom generation. Throw in stagnant wage growth for almost an entire decade with a collective unwillingness to contemplate tax increases and the US is in a fiscal bind of enormous proportions that will only grow. I have few difficulties with Farrell's bleak prognosis: the US is the world's biggest economic basket case and it is dragging the rest of the world down the sinkhole care of such mindless actions as continually funding America's huge external deficits no matter what. Who is dumber, the fool running unsustainable deficits or those allowing the fool to run unsustainable deficits year in, year out? My response, of course, would be the latter. Given a collective unwillingess to stop allowing the US to behave badly, the rest of us get what we deserve. Garbage in, garbage out. Globalization is, at best, subprime.

Something that Farrell and others keep recycling though is this idea that American sovereign debt will be downgraded from AAA in the near future. Again, we are talking about two different things. You do not need to convince me that US Treasuries are utter rubbish given America's unquestioned strategy of running even more massive deficits to solve the problem caused in the first place by, er, running large deficits. However, that American sovereign debt should be downgraded is different from believing this debt will be downgraded. Those quantitatively inclined can probably use models such as Cantor-Packer to simulate what America's debt rating ought to be going forward.

As an IPE scholar, I am inclined to believe that no amount of red ink will make the major credit rating agencies--S&P, Moody's, and Fitch's--downgrade US debt. The reasons are political-economic. With the exception of Fitch's, these are all US-based firms. When push comes to shove, they will try to protect the national interest, provided not-too-subtle nudges from Sammy. For instance, American authorities have sole discretion for classifying these entities as nationally recognized statistical rating organizations (NRSROs). If American authorities catch wind of an impending downgrade, it is child's play to kick them out of the US credit rating business entirely by removing this designation (despite these being American firms). Being disqualified to rate a significant portion of dollar-denominated debt would endanger credit rating agencies in a way that the Asian financial crisis and the credit crunch failed to do.

In many ways it's very ironic. NRSROs can badly misjudge sovereign debt of LDCs and financial weapons of mass destruction all they want and get away practically scot-free. But, issue an accurate assessment of Uncle Sam's fiscal depravity and there will be hell to pay. Hey, it's an unfair and messed up world, but it was that way long before I got here.

Bottom line: chronic US deficits don't matter--if you're a major credit rating agency. That's one of the rules of the game.
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Detroit Needs...an American Bob Geldof

♠ Posted by Emmanuel in at 11/18/2008 01:23:00 PM
Everyone is aware that the endgame for Detroit nears. Desperate cash-raising measures are being made by automakers to at least try and make it to the purportedly more automaker-friendly Obama administration. That, of course, is no guaranteed thing. GM is selling its stake in Suzuki, while Ford its stake in Mazda. Although I remain firmly opposed to all forms of government bailout, there is a good point many are making that automakers are not so insignificant compared to banks in America's economic fortunes. Why them, not Detroit?

So Detroit's lobbying presence and representation of former industrialists in government may be lacking compared to Wall Street's clout in these respects [1, 2]. In addition to continued Republican opposition to using the $700B to bail out automakers, public opinion is firmly against a Detroit bailout. What is a dying industry to do? It occurred to me that since Detroit is clamoring for federal aid, it had better make its case more strongly and creatively. When it comes to soliciting aid for Africa, there are few better examples of using marketing than Bob "Just Give Us the Fockin' Money" Geldof. Sir Bob, of course, was the driving force behind the Live Aid effort, whose hit song topped charts around the world. Can the Big Three come up with a similar effort to win friends and influence people? Certainly it's worth a try. From Boomtown Rats to Doomtown Brats or something like that:

It's Christmastime
There's a need to be afraid
At Christmastime, we buy imports and spurn homemade
And in our town of little we can spread a sound of jeer
Throw your arms around Detroit at Christmastime

But say a prayer

Pray for the UAW
At Christmastime it's hard, but when you ain't having fun
There's no Fords outside your window
It's a world of Honda and Toyota
Where the only cars running around are steenkin' transplants
And the death knell that rings there are the clanging chimes of doom
Well tonight thank Bush it's them instead of you

And there won't be cars made in Detroit this Christmastime
The greatest gift they'll get this year is life support
(Oooh) Where nothing ever's made
No government aid flows
Do they know it's Christmastime at all?

(Here's to you) raise some cash for Michigan
(Here's to them) underneath that burning P&L
Do they know it's Christmastime at all?

Feed Detroit
Do they know it's Christmastime at all?
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What a G-20 That Didn't Matter Looked Like

♠ Posted by Emmanuel in , at 11/16/2008 03:07:00 PM
If you've read the previous post, you know that I was not expecting a wide-ranging rethink of the international economic order. As with many of these gatherings, the most tangible outcome was, er, holding another gathering in the near future (more specifically, "by April 30, 2009"). It was, to my mind, pretty much wasted time--except for those whose main interest is in preserving the status quo. Which, as I've suggested, is the Bushian BATNA in negotiation-speak. Reading the G-20 Summit Declaration is instructive. Just as Bush did before going into the summit, we get the usual affirmation of the virtues of free market capitalism:
Our work will be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated financial markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment, and poverty reduction.
So far, so what. We don't expect a Hugo Chavez-style denunciation of capitalism's follies at a White House-hosted economic summit. Moving right along, Bush's unwillingness to even entertain the idea of a global overseer--with teeth--tells you pretty much all you need to know about the futility of this meeting. Bush's desire for a regulatory hodgepodge--DIY at a global level--is again reflected here:
Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability. However, our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international standards, where necessary, and their consistent implementation is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability.
Trade watchers will also note the sop to the completion of the Doha Round. Will this lend the required momentum to finally get it done?
Further, we shall strive to reach agreement this year on modalities [pertaining to tariff reductions] that leads to a successful conclusion to the WTO's Doha Development Agenda with an ambitious and balanced outcome. We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary. We also agree that our countries have the largest stake in the global trading system and therefore each must make the positive contributions necessary to achieve such an outcome.
The "Action Plan" section is fairly detailed and in some places quite ambitious. There are short-term objectives which are supposed to be met by the end of March 2009 as well as medium-term ones. First, in contrast to the DIY approach to financial regulation, there is a strong call for eventually standardizing global accounting practices, especially for "complex, illiquid products" as well as disclosing off-balance sheet vehicles. Will these measures help stave off future LJMs (Enron) and Granites (Northern Rock)? I sure hope so. If you're a cynic like me, however, American accounting firms which are still in the forefront of the trade can benefit as reporting requirements for derivatives and suchlike are ratcheted upwards. Unlike with a global financial overseer, there is a clear plus for America here.

There is the usual talk of shaping up credit rating agencies. The Asian crisis and the current implosion of the securitization bubble give me reason to pause as to whether these agencies can be nudged in the direction of aligning business incentives with properly assessing creditworthiness. It is mentioned:
Regulators should take steps to ensure that credit rating agencies meet the highest standards of the international organization of securities regulators [are they referring to IOSCO?] and that they avoid conflicts of interest [yes, they should do away with paid-for ratings], provide greater disclosure to investors and to issuers, and differentiate ratings for complex products. This will help ensure that credit rating agencies have the right incentives and appropriate oversight to enable them to perform their important role in providing unbiased information and assessments to markets. The international organization of securities regulators should review credit rating agencies' adoption of the standards and mechanisms for monitoring compliance.
Next, there is mention of improving risk management practices in the near future. With so much unsettled, I hardly think that suggestions such as "[s]upervisors should ensure that financial firms develop processes that provide for timely and comprehensive measurement of risk concentrations and large counterparty risk positions across products and geographies" are feasible by March 31, 2009. Not only are "risk positions" hard to ascertain at the moment given several examples of market seizure, but developing risk measures post-Basel will take time to be ironed out given a fluid situation.

As mentioned in the earlier post, a medium-term objective is greater LDC participation in IFIs, although developing countries may be somewhat wary of this responsibility as they will be made to ante up more emergency funding as more countries run into balance of payments problems:
We underscored that the Bretton Woods Institutions [the IMF and World Bank] must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges. Emerging and developing economies should have greater voice and representation in these institutions.
Greater communication, cooperation, and coordination--these are staples of summit texts. If I can sum up what was agreed to, it's to "enhance transparency." What troubles me is that markets can be reasonably transparent and yet will to take concrete action absent when it becomes evident that things are going awry. The housing bubble was plenty apparent to many, yet there was nothing done at either the national (US) or international level to take corrective measures in good time. Leaving it up to countries to enhance their regulatory apparatus the way they see fit seems like a punt on meaningfully adressing the current crisis. In the sense of evading a most important issue, the G-20 didn't matter. And, as I've suggested, it's probably by design. Same old, same old.
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What'd a G-20 Agenda That Mattered Look Like?

♠ Posted by Emmanuel in at 11/15/2008 01:09:00 PM
Today may be remembered as an important one in the annals of economic history; then again, it may be largely forgotten. The so-called Summit on Financial Markets and World Economy has been styled as a successor to the now-legendary Bretton Woods meeting. (See the natty logo I picked up from the US Treasury site.) Sebastian Mallaby and others have styled it as a 21st Century Bretton Woods, though those attending the summit are more circumspect. To me, their circumspection may prove to be correct in the sense that far-reaching changes in the global economic architecture will not be forthcoming. Not only is Bush a lame duck, but there are clear differences among the attending parties that won't likely be settled in one go.

To begin with, I am rather dismayed that the US is hosting such a meeting given that it has contributed more than any other country to our current woes. In a manner of speaking, it's like Gary Glitter hosting a summit on "Protecting Children From Sexual Predators." Smart aleckiness aside, the choice of host is important as it can set the agenda for discussion. Call me a dyed-in-wool cynic, but I believe Bush's primary concern isn't arriving at long-lasting solution to current woes but of ensuring that even more drastic measures are not initiated which would undo what Bush and Co. believe are in America's best interests. As his father said in a similar context, "The American way of life is not up for negotiation." With a humbled US no longer in a place to make such an arrogant statement, mounting a largely empty dog and pony show is better than having others take the initiative.

With that in mind, I believe that the Bush administration would prefer things remain largely as they are with regard to global economic governance. In any event, let me mention a couple of things which may be on the table and their prospects:

(1) A final push in the Bush term for completing the WTO Doha Development Agenda - an effort at is a given, though a deal isn't by any stretch of the imagination provided things like undying French intrasigence on agricultural subsidies [also see a recent post];
(2) Tighter regulation of hedge funds and derivatives - the US has long resisted this but will probably have to give in this time around;
(3) Better LDC representation at multilateral financial institutions like the IMF and World Bank (especially by major emerging economies) - this is likely, though the purpose is tied to making others ante up emergency funding when many LDCs' finances are worsening;
(4) "Early warning system" or "college of supervisors" for global finance - a nice, empty UNesque gesture of little political cost to anyone is likely to prove, well, inoffensive;
(5) More oversight of credit rating agencies - let's face it: these institutions cannot help but be backward-looking as there is nothing much else for them to go on. From the Asian crisis to the subprime crisis to whatever future crisis, I am not convinced that they can remedy this fundamental flaw;

And moving to the more Francophone-ish agenda:

(6) Cracking down on tax havens - the US hosting this summit suggests to me that this is not going to be on the table in a meaningful way;

I have given further thought to this G-20 meeting: What would a more comprehensive package look like of interest to folks from the developing world? Let me say that I have few qualms about (1) through (6). It would be very good if a number of them could be agreed to in this and subsequent meetings. However, there are others that I am rather keener on, many of which are more meaningful to LDCs. Fortunately, I have the help of accumulated IPE Zone posts for these things:

(a) Creation of a genuine multilateral framework for migration - the gains to be had from further trade liberalization are trivial compared to those from further migration. If there ever was a poor man's agenda, migration would be it. Of course, it will be ignored at the G-20 despite the potentially overwhelming economic gains ranging up to an estimated doubling of world GDP upon removal of all migration barriers;

(b) Adoption of more comprehensive measures of well-being - measures of opulence such as GDP per capita capture a limited picture of human progress. In the same way that thinking like a hammer makes everything look like a nail, a "growth fetish" mistakes accumulation as the desired end goal as opposed to the proper view that such accumulation is only useful insofar as it facilitates fully human functioning. On this see [1, 2, 3];

(c) Moving away from quarterly earnings as measures of firm success - the whole system of make-or-break quarterly earnings pressures companies into adopting short-term outlooks that harm their various stakeholders. Just as (b) seeks to remedy hackneyed notions of progress for persons, this seeks to do the same for firms;

(d) Proper economic valuation of environmental considerations - conventional economics has rightly been faulted for being uneconomic when it comes to the environment. That is, finite natural resources are often treated as limitless resources, externalities of pollution are not properly accounted for, and so forth. There are blogs that regularly feature intelligent commentary on these topics; I leave it to them for a more comprehensive discussion of these matters;

(e) Seaching for life after export-led growth - the export-led growth model has been a development staple for so long. Yet with the likes of even Japan and South Korea now feeling pain over dwindling export markets, the time is nigh to think about designing products and services that appeal primarily to those in LDCs instead of the West. Let's face it: export-led growth works a treat only when you have people to sell to abroad. With a massive American slowdown in place, many LDCs will now have to think twice before becoming so export-reliant;

(f) Put in a real effort to remedy global economic imbalances - this crisis has exacerbated the worst tendencies of two important protagonists, the US and China. While private saving in the US is set to improve as marginally solvent Americans have no alternatives when they hit the wall, public saving will worsen to heretofore unreached levels. Thus, it remains to be seen if America's need for external financing will shrink in any meaningful manner. Meanwhile, China is doling out ever more export incentives to forestall the inevitable--a significant diminution in export growth. Again, more demand creation at home seems to be a more sensible path at this point in time.

(a) through (f) won't be on the table for reasons ranging from xenophobia to Lomborgism. However, any list of important matters for multilateral economic discussion would be remiss in leaving them off.
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EU Readies WTO Litigation on US Auto Subsidies

♠ Posted by Emmanuel in , at 11/15/2008 11:18:00 AM
As if we needed further proof that official aid for America's dying automakers was a bad idea--truly a "sunset industry" if there ever was one--here come more bad news. EU-US conflicts at the WTO are usually interesting, from Boeing versus Airbus to genetically modified foodstuffs. Deutsche Welle now reports that the US disbursing $25B in automaker aid will likely result in the EU taking the US to the WTO's dispute settlement mechanism:
The EU is ready to go to the World Trade Organization should US governmental aid to its struggling auto industry be deemed "illegal" by European lawyers, Commission head Jose Manuel Barroso said Friday.

"We are looking at the (US) plan. The plan has not yet been made official but certainly, if it amounts to illegal state aid we will act at the WTO," Barroso told Europe 1 radio when asked about the US bailout package.

An aid package worth $25 billion was approved by the US Congress in September. The package was earmarked for investment in new generation technology but no timetable was fixed for payments to be made.

Since September, all three of the US major car manufacturers -- General Motors, Ford and Chrysler -- have been hit by the global financial crisis which has savaged the US economy, prompting the auto giants to call for bail-out assistance in much the same way as the country's banks.

US president-elect Barack Obama raised the issue of help for the industry with the aim of protecting jobs in the US industrial heartland but President George W. Bush has been reluctant to take action.

The WTO has a trade dispute mechanism to which aggrieved parties can take their complaints for settlement. If the EU deems the US package to be illegal state aid, the Commission will activate the mechanism in an attempt to win compensation.
Democrats thinking of throwing even more money at the "Big Three" (maybe we should add quotation marks from now on) should now be forewarned that the EU will drag the US to court on top of everything else. The most viable solution given a bad situation increases in attractiveness: sell Ford and GM to the Chinese.

To be fair, note that EU automakers are also petitioning for--you guessed it--state aid. As with Boeing versus Airbus, EU countries resorting to automaker subsidies would largely stalemate the matter.
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How to Run a $273B Budget Deficit - In a Month

♠ Posted by Emmanuel in , at 11/14/2008 03:16:00 PM
Sometimes you don't need to look very far for things to blog about. Ironically, I was cutting store coupons--an American invention, mind you--when the front page of Yahoo! featured a story on the US budget deficit swelling to $273.2B in October alone--the first month of fiscal year 2009. The juxtaposition was nearly perfect: here I was taking advantage of a useful American money-saving idea just as its government has just run up over a quarter trillion dollar deficit--in a single month.

In a burst of inspiration (or depravity depending on your POV), I recently wrote that the US was embarking on "a level of (fiscal) debauchery unseen since the heyday of Sodom and Gomorrah." However overstated, I can now comfortably say that the truth is stranger than fiction as all my expectations have been exceeded. Perhaps you're thinking, "What happens when you annualize this figure?" Well, it comes to $3.278 trillion. Even I am 100% certain that Sammy's IOUs won't amount to that much in 2009. Not only are there different high and low points in revenue collection and spending during a fiscal year, but spending at this rate would imply public ownership of vast swathes of the US banking industry and much other besides. For instance, a quick check finds that $273B exceeds the market capitalization of Citi, JP Morgan, and the Bank of America.

The "Paulson Plan" formerly known as TARP doesn't inspire confidence at all as the US Treasury boss keeps changing his mind on how to spend $700B or so. At first, it was for mopping up toxic securities via a reverse auction process to facilitate the process of price discovery. More recently, he changed course and said the funds should be used to facilitate student loans, auto loans, and consumer credit by reviving moribund securitization markets for these. It simply befuddles me why Paulson thinks further indebting already overindebted American consumers should do the trick. As Nouriel Roubini likes to say, the problem bedeviling many in the US is insolvency, not illiquidity. There is cold comfort that Paulson will be gone soon. Will Obama's Treasury man be similarly loose with the purse strings? From an impending US automaker bailout to various "stimulus packages," I am not looking forward to any improvement.

Final fish to fry: continued dollar strength is inexplicable given the unprecedented debts the US will mount. In contrast, the EC will actually try to curtail fiscal expansion in the coming year. Keynes once said the market can stay irrational longer than you can stay solvent. Dollar strength is perhaps the most irrational thing I've seen in a truly mad year. This "special FX" is due for a really good whupping, though many others take the Cheneynomic route.

In any event, I am now upping my estimate in the official IPE Zone parlor game of "How Much More Will Sammy the Beggar Owe in 2009?" to the middle of the $1T to $2T range. A trillion here, a trillion there...from Bloomberg:
The U.S. budget deficit last month exceeded the shortfall for President George W. Bush's first full year in office, spurred by purchases of stakes of some of the nation's largest banks. The deficit in the first month of the 2009 fiscal year climbed to a record $237.2 billion, compared with a gap of $56.8 billion in October last year, the Treasury Department reported today in Washington. Revenue fell 7.5 percent, while spending soared 71 percent.

Treasury Secretary Henry Paulson spent $115 billion last month to buy shares in eight of the biggest U.S. banks as part of his $700 billion Troubled Asset Relief Program. Deteriorating credit conditions and the economic slump are straining the nation's finances and will leave President-elect Barack Obama with a deficit worse than the record $455 billion of last year.

``The deficit is going to explode this year,'' said David Sloan, a senior economist at 4Cast Inc. in New York. ``Given that the economy is going to be even weaker next year, the Obama administration will likely need to spend more, pushing the deficit up'' to as much as $1 trillion this year, he said. Treasury also spent $21.5 billion to buy mortgage-backed securities from Fannie Mae and Freddie Mac in October, up from $5.1 billion a month earlier, today's report showed.

The October deficit was forecast to widen to $200 billion, according to the median of 32 estimates in a Bloomberg News survey of economists. The total exceeded the $232 billion gap predicted by the Congressional Budget Office on Nov. 10. Corporate income tax receipts fell to $81 million in October, from $6 billion a year earlier, according to the Treasury. Individual income-tax collections declined to $86.2 billion last month, down 10 percent from $95.6 billion a year earlier, the report showed.

Total revenue fell to $164.8 billion in October, compared with $178.2 billion a year ago, according to the Treasury report. Spending increased to $402 billion from $235 billion last year.

Outlays for the Social Security Administration rose by 13 percent from a year ago to $59.2 billion) from $52.6 billion, while Department of Defense spending rose 16 percent to $66.1 billion from $57 billion. Spending by the Department of Health and Human Services, which administers the Medicare and Medicaid health programs, totaled $76.5 billion, up 31 percent.

The Treasury this month said it will more than triple its planned debt sales this quarter to help finance this year's shortfall. The government needs to raise money not only for the TARP program, but also to pay for its bailouts of mortgage companies Fannie Mae and Freddie Mac. ``This year's financing needs will be unprecedented,'' Anthony Ryan, Treasury's acting undersecretary for domestic finance, said in a speech last month.

Borrowing needs are expected to rise to $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July. Bond trading firms predicted the shortfall may rise to $988 billion in 2009.
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Is a Doha Round Deal Really Imminent?

♠ Posted by Emmanuel in at 11/13/2008 11:16:00 AM
Here we go again with rumblings that the Doha Development Agenda (DDA), better known to the rest of us as the Doha Round, is nearing completion. A few days ago, newly installed EU Trade Commissioner Catherine Ashton commented that the upcoming G-20 summit in Washington holds the key for at last finishing this bit of tricky business.

What strikes me at this point in time is that Brazil and India seem to be just as keen on getting Doha done as their US and EU counterparts. LDCs seem to be buying into WTO Director-General Pascal Lamy's idea that the completion of Doha should shore up the trust vital to functioning of world markets. Which, of course, makes me fearful that people are overselling Doha: how can an agreement on tariff reductions be the "magic bullet" that cures the world's credit ailments? Didn't global economic imbalances triggered by further trade liberalization contribute to the current mess?

If folks battered by the current crisis are soothed by the completion of multilateral deals such as this one--despite its tenuous connection to fixing current woes--then maybe something is in the offing. To be sure, trade-facilitating credit is drying up. Just don't ask me how they all fit together. Perhaps Lamy's request for a second go-around as WTO chief hinges on the outcome. From Reuters:
Pressure is building up at the World Trade Organisation for a meeting of ministers in the coming weeks to make a breakthrough in the WTO's long-running Doha round, diplomats said on Wednesday. Several key members called at a WTO council for ministers to come to Geneva to secure an outline deal in the core areas of agriculture and industrial goods before the Christmas break.

A new effort to reach an elusive deal depends on whether this weekend's summit of rich and poor countries in Washington gives clear orders to trade ministers to finish the job or offers a routine endorsement of the Doha round, diplomats said.

WTO Director-General Pascal Lamy said members had made it clear they wanted to reinforce the insurance policy against protectionism that the WTO represented by concluding the Doha round as soon as possible. That meant securing an outline deal by the end of the year, he told a news briefing on the council, called to discuss the impact of the global financial crisis on trade finance.

"Lamy probably thinks he's got his mandate. But he has to make sure it doesn't go horribly wrong at the summit this weekend," said one senior diplomat from a rich country. "It's too soon for him to start counting his chickens -- but he might start counting on Monday," he said...

More important, say WTO officials and trade diplomats, would be the boost to business confidence that a deal among 153 countries would engender at a time of global crisis. Agreement has so far been thwarted by differences between rich and poor nations and between importers and exporters, most recently at a meeting of ministers in July. That meeting hit a deadlock when the United States and India disagreed over measures to protect poor-country farmers from a surge in imports.

WTO members from Brazil to Lesotho say a deal was tantalisingly close at that point, and only a little more work is required to agree the outlines. WTO members calling on Wednesday for a meeting by Christmas included Brazil, the European Union, Mexico, Ecuador, Chile, and Mauritius on behalf of the African, Caribbean and Pacific group of former European colonies.

The EU's WTO ambassador, Eckart Guth, was particularly forthright. He called on the mediators for the agriculture and industrial goods talks to produce revised negotiating texts by end-November and said the EU commission had instructed him to do all he can to enable ministers to finalise an outline deal by Christmas.

The United States also called for a meeting by the end of the year "if possible", while China and India did not object, diplomats said. The only major country to object to the idea was Argentina, which has not yet agreed to the current draft proposals on industrial goods.

Lamy said that as things stood today, he was not ready to invite ministers to Geneva next week, as it was not yet clear whether leaders were willing to push politically for a deal, and negotiators still had some technical issues to thrash out. "If these conditions are met, and it's up to me to contribute to try and organise a meeting, then there is indeed a possibility to get the ministers to meet before the end of this year," he said.

Some diplomats in Geneva remain sceptical that negotiators can deal with the technical issues in time for ministers to take the political decisions next month -- and many in Washington share that view.

"Doha is dead. It's not even a remote possibility at this point," Grant Aldonas, a former under-secretary of commerce for outgoing President George W. Bush, told a briefing in Washington on the forthcoming summit. But Dan Price, a senior aide to Bush for international economic policy, said virtually all participants in the summit hope a framework to complete Doha will be agreed this year.
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Sell Ford and GM to the Chinese (Part 3)

♠ Posted by Emmanuel in , at 11/12/2008 12:32:00 PM
I am absolutely gobsmacked that, even now, I am about the sole voice calling for the US automakers to be sold to the Chinese [1, 2]. Unlike, say, defense technology gear, sellers of cars can hardly say that they're vital to America's national security needs. Now, everyone and her dog knows American carmakers have been begging Uncle Sam for federal mercy to the tune of some $50 billion. When Obama takes his oath and the even more Democrat-laden Congress goes back into session, it will be hard not to expect automaker aid from Washington. As always, I remain unconvinced of this meddling: whereas the Koreans had reason to help out their automakers by my reckoning as they actually manage to sell cars in global auto markets, US automakers can barely even sell their wares at home.

Which of course brings me back to the post's title. The logic is hard to fault. Here are some points to consider on the US side:

1. Every American automaker is on the verge of bankruptcy;
2. Difficult economic conditions will prevail for some time as debt-loving Americans are well and truly overspent;
3. Even those who are in a position to buy a car are likely to have trouble arranging financing;
4. Highly unionized workforces ensure that overhead will remain high for Detroit in the foreseeable future;
5. Historically, 'Buy American' has been a dud and won't likely work well;
6. If Detroit's finances are bad, those of its putative donor, the US of A, are even worse;
7. With even Kerkorian pulling a Kevorkian on his Ford share holdings, it's nowhere but down for automakers' stocks.

Now consider things on the other side where the grass is indeed greener:

1. China, Inc. has so many dollars they don't know where to put them anymore;
2. With consumption constituting about 38% of GDP in China as opposed to 70% in the US, there is considerable room for consumer culture to grow in the PRC;
3. Actually, you may be surprised that Buicks and Hummers sell pretty well in China;
4. Membership is encouraged in China's state-sponsored union;
5. Say what you will of Detroit's marketing, but the Chinese have had trouble establishing global brands like the Japanese and Koreans have done. If you can't build brands, buy 'em;
6. While protectionist xenophobia will always be there, Chinese ownership of US automakers is preferable to imminent default;
7. The automakers are dirt cheap for Chinese investors.

Let's face it: Detroit is a financial black hole. If automakers are looking for salvation, they won't find it in poor, bedraggled Washington but from the good burghers of Beijing. If Pelosi et al. are really interested in "saving" Detroit and the jobs associated with car manufacturing, then the best course of action is to invite those who can throw billions and billions of dollars at these firms for some time--and have good reason to do so. The brands and the dealer networks of the Big Three are still worth something, though time is slipping away.

The current course of action--Sammy the Beggar pimping for Detroit--will likely lead to the Big Three becoming the Small Zombie Firm Three. If American politicians have any sense left, the proper course is to sell Ford, GM, and Chrysler to the Chinese.

PS: The Center for Automotive Research (CAR) has a report estimating the number of jobs affiliated with the moribund US auto industry.
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Is the 'Fair Trade' Movement Exploitative?

♠ Posted by Emmanuel in ,, at 11/11/2008 12:36:00 PM
I fortuitously came across this back-and-forth exchange while looking for something almost entirely unrelated: Free trade supporters have long faulted the fair trade movement and vice-versa. Whereas the fair trade movement often presupposes that--for the lack of a better term--"conventional trade" fails to give proper remuneration to farmers in the developing world, free trade supporters cast doubt on whether the fair trade agenda can achieve a scale that can result in material improvements for developing world farmers. In a series of posts, Dani Rodrik cast doubt on the efficacy of the fair trade movement because (1) it fails to achieve a large-scale presence and (2) it imposes IMF-style conditionalities on farmers.

If you are familiar with the institution, the you shouldn't be suprised that the UK's Adam Smith Institute has an even dimmer view of fair trade than him. Whereas Rodrik called it "a ruse," the Adam Smith Institute labels it as ultimately "unfair." Following their reasoning, fair trade deters these farmers from pursuing improved farming technologies, keeping them in a low-level equilibrium trap. Is fair trade romanticizing LDC farming for the benefit of developed world consumers in such a way that ultimately hurts these farmers? What follows is the executive summary, though the entire report is worth reading if the topic interests you:
  • Fairtrade Fortnight is a marketing exercise intended to maintain the Fairtrade mark’s predominance in an increasingly competitive marketplace for ethically-branded products. The hype is necessary, because there is every reason for the shrewd consumer to make other choices.
  • Fair trade is unfair. It offers only a very small number of farmers a higher, fixed price for their goods. These higher prices come at the expense of the great majority of farmers, who – unable to qualify for Fairtrade certification – are left even worse off.
  • Most of the farmers helped by Fairtrade are in Mexico, a relatively developed country, and not in places like Ethiopia.
  • Fair trade does not aid economic development. It operates to keep the poor in their place, sustaining uncompetitive farmers on their land and holding back diversification, mechanization, and moves up the value chain. This denies future generations the chance of a better life.
  • Fair trade only helps landowners, not the agricultural labourers who suffer the severest poverty. Indeed, Fairtrade rules deny labourers the opportunity of permanent, full-time employment.
  • Four-fifths of the produce sold by Fairtrade-certified farmers ends up in non-Fairtrade goods. At the same time, it is possible that many goods sold as Fairtrade might not actually be Fairtrade at all.
  • Just 10% of the premium consumers pay for Fairtrade actually goes to the producer. Retailers pocket the rest.
  • The consumer now has a wide variety of ethical alternatives to Fairtrade, many of which represent more effective ways to fight poverty, increase the poor’s standard of living and aid economic development.
  • Fairtrade arose from the coffee crisis of the 1990s. This was not a free market failure. Governments tried to rig the market through the International Coffee Agreement and subsidized over-plantation with the encouragement of well-meaning but misguided aid agencies. The crash in prices was the inevitable result of this government intervention, but coffee prices have largely recovered since then.
  • Free trade is the most effective poverty reduction strategy the world has ever seen. If we really want to aid international development we should abolish barriers to trade in the rich world, and persuade the developing world to do the same. The evidence is clear: fair trade is unfair, but free trade makes you rich.
The Fairtrade Foundation pooh-poohs the Adam Smith Institute's criticisms, as you would expect. Among other things, these include:
  • That Fairtrade producers only benefit at the expense of other producers outside the system. No evidence is cited for this other than two economists who say that “this must happen because free market theory says so”. In fact, Fairtrade farmers say their co-operatives often bring competition into local markets for coffee for the first time, forcing other traders to match their prices so that more farmers benefit.
  • That Fairtrade helps farmers in Mexico (a relatively prosperous country) while ignoring the plight of very poor countries like Ethiopia. Leaving aside the fact that the coffee producing regions of Chiapas in Mexico are some of the poorest in Central America, anyone who has seen the film “Black Gold”[2] will know that Fairtrade through partnerships with people like Tadesse Meskela of the Oromia Co-operative Union is working with thousands of small farmers across Ethiopia.
  • Fairtrade keeps people trapped in their traditional poverty instead of diversifying into new ways of earning a living. Again this ignores the feedback from hundreds of producers that the stability and security offered by Fairtrade enables them to invest in diversification which otherwise would be too big a risk.
  • The consumer now has a choice of ethical alternatives to Fairtrade. Many of these are promoted by the Adam Smith Institute precisely because they do not attempt to intervene in the free market. However, Fairtrade remains unique in ensuring farmers a price for their crops that covers the cost of sustainable production, a premium for investment in future improvements and support for small-farmer organisations that enable them to compete more effectively in global markets. That is why charities like CAFOD, Christian Aid, and Oxfam, with decades of practical experience of fighting poverty in the developing world back Fairtrade as a model for development through trade.
It's an interesting controversy--and something which I am largely undecided on for a change!
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Rahm Emanuel: A Good Wall Street Investment

♠ Posted by Emmanuel in at 11/06/2008 04:40:00 PM
Phew! If I have kept strangely silent on the matter of the US elections, let me explain. Obama's victory has been a foregone conclusion for quite some time now. Thus, instead of weighing how much candidate Obama's (more populist) rhetoric compares to McCain's, the post-election period will better establish how much his talk translates into action. The post before this presents a problem Obama must face right away concerning rather overt rent-seeking behavior, while this post discusses why fears of a commie pinko Obama are wildly overblown.

Readers of the Wall Street Journal editorial pages and similar commentary are doubtlessly familiar with the allegedly Marxist stylings of Barack Obama. Those who share similar concerns will no doubt be comforted that he is reportedly choosing among very business-friendly alternatives to be the next Treasury secretary. Now comes news that Obama is selecting Rahm Emanuel as his chief of staff, which should set the hearts of financiers leaping for joy. Today's newspaper headlines from New York to New Delhi are filled with Wall Street bets gone bad. Indeed, with the demise of most American broker-dealers, it may be inaccurate to speak of "Wall Street" in the sense it used to be understood. Yet, in the twilight of the securitization era, the world finds itself with an American president on the brink of choosing a chief of staff with strong Wall Street affiliations.

The New York Times offers this caution of sorts:
Mr. Emanuel’s stint in high finance and his experience in the banking world opens him to some criticism of being too allied with Wall Street, not the image Democrats want to cultivate these days. Critics have asserted he was only able to succeed in the banking world because of his political connections. Since he is part of the Daley circle, Mr. Emanuel’s appointment as chief of staff could also create the appearance of a White House that is too Chicago heavy. His manner can also create enemies, and Mr. Emanuel has ruffled the feathers of many on Capitol Hill, particularly black and Hispanic lawmakers.
OpenSecrets adds more detail:
A day after being elected president and acknowledging "the worst financial crisis in a century," Barack Obama asked one of the biggest recipients of Wall Street campaign contributions to be his chief of staff. Rep. Rahm Emanuel, the Illinois congressman who was an aide in the Clinton White House, was the top House recipient in the 2008 election cycle of contributions from hedge funds, private equity firms and the larger securities/investment industry--not the most popular of industries in the current economy. Since being elected to Congress in 2002, after working as an investment banker, Emanuel has received more money from individuals and PACs in the securities and investment business than any other industry.
There have been many dud investments by Wall Street, but investing in Rahm Emanuel should still pay dividends in the next administration.
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Obama's Job #1: Save Big Three (Perhaps)

♠ Posted by Emmanuel in at 11/06/2008 01:13:00 PM
After soliciting the support of the automobile industry during the current election cycle (as Democratic candidates for president typically do), Obama will be put to an immediate test: GM, Ford, and Chrysler are in imminent danger of being driven off to the Great Car Dealership in the Sky. Aside from Americans demanding more fuel-efficient (usually foreign) cars after oil prices went up, all carmakers now have to deal with scarce auto financing. With over three-fourths of cars sold in America on financed terms, this is no minor problem. Indeed, President Bush's [remember him?] reluctance to bail out the auto industry is worrying as these carmakers may not even make it to the start of the Obama years. From Reuters:
President-elect Barack Obama courted distressed U.S. automakers during his campaign and pledged to help them, but the industry's health is so bad it may not be able to wait for him to take office.

"He's not here until January (20th) and that's a long time in the life of these companies at the moment," John Engler, a former Michigan governor and president and chief executive of the National Association of Manufacturers, said on Wednesday.

Engler expects fundamental changes in industry before Obama's inauguration. Engler was not specific. General Motors Corp said on Wednesday it plans to reveal new cost cuts when it reports quarterly earnings on Friday. Results at GM and Ford Motor Co are expected to be dismal. Both GM and Ford congratulated Obama on his election and associated overall U.S. economic weakness with Detroit's worsening financial prospects.

Automakers hold out hope the Bush administration, reluctant to bail out Detroit, will act before yielding power to Obama. Carmakers, their allies in Congress and other industries have called on the Treasury Department to extend loans or other capital as a stop gap.

In coming weeks, companies and their lobbyists plan to "dial up" their urgency. Industry plans to underscore its belief that its immediate problems are not of its own making -- that the dire predicament is closely linked to the global credit crunch and survival depends on federal intervention.

While GM and Ford struggle, prospects at Chrysler LLC are the most uncertain. People involved in discussions about its future say the smallest of the U.S. manufacturers could merge, be spun off or be pushed into bankruptcy if not helped soon. Engler said a Chrysler failure could cost up to 1 million jobs throughout the economy. "It's not just the three auto companies, it's suppliers, all the way down the chain," Engler said.

While Obama is not yet in office, industry sources say he could still pressure the Bush administration and exert leverage on the Democratic-led Congress, if he believes action is needed to avert a broad economic crisis in manufacturing.

House of Representatives Speaker Nancy Pelosi called on Wednesday for a $61 billion stimulus plan to spur the U.S. economy, but said passage later this month would depend on Senate Republicans and the mood of the White House. Pelosi met on Monday with auto industry allies in Congress and key committee chairmen. There is no consensus yet on an aid proposal for Detroit.

Carmakers, their lobbyists and congressional officials have suggested up to $25 billion in direct loans with few or no strings attached to help them through the current crisis, officials said. Government red tape is holding up another $25 billion in advanced technology loans for automakers that was approved in September. During the campaign, Obama called on the Bush administration to accelerate that financing.

The United Auto Workers has suggested billions in congressionally approved aid could go to covering retiree health care costs, freeing up money that companies would otherwise have to contribute for benefits.
Large benefits that the automakers gave to workers during happier times are part of the problem. In contrast to American ones, foreign carmakers are mostly non-union shops, having set up in the south where the United Auto Workers and others are thin on the ground. While the UAW has given in somewhat to competitive pressures to cut down on these benefits, past commitments made by these automakers are a burden carmakers have to bear going forward. from the Financial Times:
The problems facing Detroit’s three carmakers, which are struggling to survive amid the worst trading conditions in 25 years, are quickly claiming a prominent position in president-elect Barack Obama’s bulging “in” basket.

General Motors and Chrysler failed to cobble together support from the Bush administration for a merger ahead of Tuesday’s US election, in spite of efforts to impart a sense of urgency on the need for a government-backed deal.

Mr Obama’s administration may find providing aid to the struggling industry to be equally unpalatable. But it may have little alternative if it aims to avoid a collapse of one or more carmakers.

While Mr Obama will not take office until January 20, a deal between GM and Chrysler – or an alternative effort to save them from bankruptcy – could be struck earlier if current officials are willing to broker a solution with input from the incoming administration.

Representatives of the carmakers and Mr Obama’s administration have been talking for weeks, but lobbying efforts have now kicked into full gear. GM, Chrysler and Cerberus, the buy-out group that owns Chrysler, are clamouring over what they say is an increasingly dire need for help, following a precipitous plunge in US auto sales last month.

That sales decrease was spurred partly by a drop in demand but also by the credit crisis, which has decimated auto lending and helped push GMAC, GM’s auto and mortgage lending arm, to a $2.52bn third-quarter loss.

A bankruptcy of GM – the largest and most immediately cash-strapped of Detroit’s three producers – could take down Ford Motor as well. The two companies share a number of suppliers, many of which are themselves verging on insolvency.

“If one of these guys goes down, it would probably take the entire industry down,” said David Cole, chairman of the Center for Automotive Research, an Ann Arbor, Michigan-based non-profit group associated with the University of Michigan. “The numbers are that stark.” A failure of America’s domestic carmakers and their supplier base would affect some 2m jobs and have a $200bn impact on the economy, Mr Cole said.

GM, Chrysler and Cerberus have agreed on the amount of support they are seeking from the government, according to one source close to the talks. Several industry sources have pegged that number at at least $10bn. But the structure under which that support would be given, if at all, is still up in the air.

“Nobody wants this to be something where they come back every so often and ask for more,” said one person involved in the talks. Proposals for government support range from loan guarantees, a fast-tracking of a current $25bn loan programme – ostensibly aimed at retooling factories to produce low-emission vehicles – direct injections, or a hybrid model, in which the government could guarantee loans in exchange for preferred ownership in the company.

“A loan guarantee could work, and so could a direct injection,” the source said. “But a direct injection brings along issues of governance, which are uncomfortable for everybody.”

Detroit’s Big Three could remain a thorn in Mr Obama’s side well into next year, if the unions and other blue-collar workers, who form part of his constituency, hold him accountable for the handling of a problem he inherited.

“The car companies, because they’re dependent on the finance companies, are a collateral victim of the credit crisis and they shouldn’t be overlooked,” said one source involved in the merger talks. Roger Altman, who worked on the 1979 bail-out of Chrysler as assistant Treasury secretary, is among those advising GM and stressing the need for rapid government support.

Opponents to government aid have been equally vocal, however, pointing to the continuing malaise at government-backed insurer AIG as evidence that dumping cash into failing institutions without dramatically reworking their strategies and management does not work.
Those familiar with the "infant industry" argument may see parallels here. What we have instead is a "geriatric industry" seeking favor from the government. Instead of asking for protection from market forces to launch a new line of business, we have an old line of business asking from protection from the gales of creative destruction. Certainly, the figures being bandied about of 1-2 million automobile-related jobs and a $200B annual industry are not easy to ignore in political-economic terms. This is not a constituency that will be easy to ignore, although the government's ability to prod the dying US auto industry into a profitable direction is certainly questionable given Detroit's proven inability to make cars people actually want to buy--with or without credit.
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Pascal Lamy Wants 4 More Years as WTO Chief

♠ Posted by Emmanuel in at 11/05/2008 02:02:00 AM
Care of the International Economic Law and Policy blog comes word that Pascal Lamy will seek a second term as WTO Director-General. Below is part of his statement on the matter:
In keeping with the procedures established in document WT/L/509, I would hereby like to notify you of my decision to seek reappointment as Director-General of the World Trade Organisation for a further term upon the expiry of the current one on 31 August 2009.

On my appointment as Director-General on 1 September 2005, I undertook to reinforce multilateralism, to work to ensure that trade opening continues to contribute to development and that the interests of developing countries are placed at the heart of the world trading system. I said then and, I believe it is as valid – if not more - today, that concluding the Doha Development Agenda Round of trade talks goes a long way in achieving these goals...

All of this, and in particular the Doha Round, will not materialise without a concerted effort by all members, without the capacity to compromise in pursuit of a more open and fairer trading system. For my part, I stand ready to continue to serve the WTO for a second term and to make a contribution to reinforcing multilateralism and development.

In closing, I would like to thank you and through you the entire WTO membership for the trust they put in me when they selected me for this job. I look forward to continue to serve this organisation, should the membership so decide.
Something I would like to see with the WTO as with other international organizations is better representation by those from LDCs. Especially at this point in this day and age with the economic balance of power shifting, it would of course be fitting. The only person to come from an LDC to become WTO director-general was Thailand's Supachai Panitchpakdi (currently UNCTAD secretary-general). Unlike in times past, there seems to be no rush to be WTO chief this time around as trade issues go on the backburner to solving the global credit crisis and whatnot. Brazil's Foreign Minister Celso Amorim--one of the four main negotiatiors from the quad of US, EU, India, and Brazil--was one of those lending support for another Lamy term. There are also suggestions that Lamy is well-placed because of his previous experience to lead the organization during a time of credit turmoil. If you will recall, Lamy's term was preceded by a split in occupying the post between Supachai and Mike Moore of New Zealand (not that Michael Moore).

Worth reading is the document Lamy mentions, one of whose stipulations is that the incumbent D-G may seek a second four-year term. My wish is for a strong candidate from an LDC to step forth and contest this post. S/he will have a legitimate claim to it on the basis of fair representation. If not, another Lamy go-around is not to be ruled out--especially if it's just other candidates from industrialized countries contesting the post against him. If you will again recall, Lamy--previously EC trade commissioner--beat three others from LDCs in assuming his current post. Aren't we thus due for, yes, change?
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EuroMartyrdom: Budget Rules to Prevail in EC

♠ Posted by Emmanuel in , at 11/04/2008 12:35:00 PM
With apologies to The Man of La Mancha:

This is my quest, to follow that Pact
No matter how painful, no matter how wracked
To fight for the right, without question or pause
To be willing to tighten purse strings for a Heavenly cause...

Regular readers should be aware of my strong predilection for euro currency over the American equivalent. Is it irrational? This bit of news suggests otherwise as our European friends are hellbent on maintaining a semblance of fiscal conservatism in the face of a full-blown global slowdown. Pump priming is, to these fine fellows, overpumped. Yes, The Man of La Mancha is real, it's just that he's actually The Man from Brussels. Let me explain.

The whole world knows Uncle Sam's game plan of running somewhere between a trillion dollar and a two trillion dollar deficit in 2009--a level of (fiscal) debauchery unseen since the heyday of Sodom and Gomorrah. Obama...McCain...it doesn't matter; America's debt-loving ways are moving in a big way from the private to the public sector in an orgy of IOUs. Ultimately, the question we must all face is this: "Is lack of fiscal rectitude the same as lack of moral rectitude?" If you ask me, the answer is in the affirmative for reasons I will outline in a future post. Somehow, I doubt whether America's current bout of debt-fueled megaspending is the change America needs (for there is no change to begin with).

One of the current weaknesses American politicians have irrespective of affiliation is the inability to prescribe thrift and sacrifice as virtues in favor of uneconomic "free lunch" promises. In this respect at least, European leaders are different. In contrast to the American spender-in-chief-elect and his minions, EC officials have stated that they will, as much as possible, try and stick to the stipulations of the Stability and Growth Pact. Among other things, it mandates that countries not run budget deficits larger than 3% of GDP. Yes, notable violations have and will occur, but for the region as a whole, the EC's deficit should be far smaller than that which will be run by America in 2009 and beyond. From Reuters:
Euro zone finance ministers pledged on Monday to stick to European Union budget rules even though economic growth is seen halting next year, in a deal the European Commission hailed as needed policy cooperation.

"This is not the time to let the deficits rip," said Jean-Claude Juncker, chairman of monthly talks among the finance ministers of the 15-country currency area. "We don't want to indulge in an orgy of spending and indebtedness -- in essence, mortgaging future generations," he told a news conference after their Monday talks.

The ministers backed European Commission forecasts that the aggregate budget gap of the euro countries would rise to 1.8 percent of gross domestic product in 2009 from 1.3 percent seen this year and to 2.0 percent in 2010, unless policies change. They also supported the Commission's estimate that euro zone economic growth would slow to a mere 0.1 percent next year from 1.2 percent expected in 2008 in the wake of the financial crisis.

EU Economic and Monetary Affairs Commissioner Joaquin Almunia said the widening of the deficit, mainly as a result of a natural fall in revenues and a rise in expenditure, already constituted a significant fiscal stimulus for the euro zone [the much-vaunted "automatic stabilizer"]. But while a general revival package for the whole euro zone was unnecessary, upholding public demand through targeted, short-term measures was crucial, Luxembourg's Juncker said. "Growth is not being fuelled by private consumption or investment but by public demand," Juncker said. "It is a question of organising public demand in an orderly fashion. "Public investment should continue to be at a high level. (Governments can use) fiscal or budgetary means to support short-term positive developments," he said.

Almunia welcomed the ministers' agreement to abide by the EU budget rules, the Stability and Growth Pact. He called it much-needed cooperation on the real economy, like earlier agreed measures to restore confidence in the banking system. "There is a 100 percent consensus to implement the pact under these difficult circumstances," Almunia said. "This is an extremely good substance of cooperation that there is peer support for those who had budgetary difficulties and peer pressure for those who have not decided yet how to comply with the Stability and Growth Pact," Almunia said.

The pact says EU countries should not run budget deficits higher than 3 percent of GDP or they will face disciplinary steps that could result in fines. But it also says that in tough economic times, countries may take longer to bring such a shortfall back in line...

The Commission estimates that euro zone GDP fell 0.1 percent in the third quarter of 2008 after a 0.2 percent contraction in the second, adding up to two consecutive quarters of negative growth -- a common definition of technical recession. The economy is to shrink 0.1 percent in quarterly terms in the fourth quarter, it said, and warned that further worsening in financial markets could push the euro zone into outright recession...

The euro zone outlook is still better than for the United States, whose economy the Commission forecasts to shrink 0.5 percent next year. The EU executive expects Japan to contract by 0.4 percent in 2009. In the wider European Union, Britain's economy is seen shrinking 1 percent next year, the Baltic states of Estonia and Latvia will contract this year and next, and Lithuania will shrink in 2010, the forecasts showed.

Euro zone inflation is likely to slow to 2.2 percent next year from 3.5 percent seen this year and decelerate further to 2.1 percent in 2010, the Commission forecast. The European Central Bank wants inflation to be just below 2 percent, but consumer-price growth was boosted by surging oil and food prices in the 12 months to mid-2008.

The bank has signalled it may cut interest rates in November as inflation risks have diminished, a prospect welcomed on Monday by BusinessEurope, an umbrella organisation for some 20 million European companies.
"This is not the time to let deficits rip" and "[w]e don't want to indulge in an orgy of spending and indebtedness -- in essence, mortgaging future generations" are clearly referencing Uncle Sam. Hocking the future is oh so very American. I don't doubt that there will be more pain for the Europeans as a result of trying to meet the Pact, but America's recession in going to be even worse and the consequences of its current profligacy will be paid for in the future bigtime. Given the Eurozone's reluctance to engage in fiscal debauchery, holders of euro currency know they're in a safer set of hands than American ones. They're sacrificing their welfare so that holders of their currency won't be get a raw deal. What more can you ask for?

The current bout of "special FX" should soon peter out as economic reality sets in. Preserving the value of the euro still means something to the EC, in contrast to some others. And the world will be better for this, indeed.
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