The Baccarat Apparatchiks: Macau Under Pressure

A family friend who regularly visits Macau recently commented on how empty the place has become. (I've been there before and it's certainly worth a visit. Heaven knows they could use some tourists.) She asserts that the reason is simple: ever since the PRC cracked down on granting Chinese officials visas to visit the place, business has suffered. A simple search brought me a recent New York Times article suggesting pretty much the same thing. That is, the recent boom in the world's top destination by gambling revenues is in no small part driven by corrupt PRC officials siphoning state funds to spin the wheels of fortune. Another story of hard times, albeit more colorful and indicative of the extent of corruption among Party cadres:

Mr. Li is one of an increasing number of Communist Party bosses and government officials who, government prosecutors say, pillaged state funds, company accounts and municipal treasuries to try their luck in Macao, which sits just across the border from Guandong Province. Many of the biggest losers have been sent to prison and at least 15 have been executed. Some have committed suicide. The scandals have become a source of deep embarrassment for the Chinese government, which has now begun cracking down on travel visas for Macao.

While gambling remains illegal in mainland China, it is pure oxygen for Macao, which Portugal handed back to China in December 1999. The tiny territory, which has been enjoying a gambling-tourist-building boom since 2004, relies on gambling for 75 percent of its tax base. Now the biggest gambling market in the world, Macao has annual gambling revenues higher than the Las Vegas Strip and Atlantic City combined. Among its 31 casinos is the world’s largest, the Venetian Macao.

Much of that prosperity is now threatened, experts here say, not only by the global economic crisis but also by the crackdown on gambling by the government in Beijing. The issue is so sensitive in China that more than a dozen interview requests over the past month were refused by government and party leaders.

A Chongqing official, the head of the local Communist Party’s propaganda department, was accused of embezzling a total of $24 million. Along with a co-worker, he blew at least half the money at the Casino Lisboa here, according to Xinhua, the official Chinese news agency. The Chinese officials who gamble here lose mostly at baccarat, the game of choice in Macao, but they also lose at blackjack, poker and a dice game called Fish-Prawn-Crab. And even though many of them are neophyte gamblers, they often bet thousands of dollars on a single hand.

A 2008 study of 99 high rollers from mainland China showed that 59 had some sort of state affiliation: 33 were government officials, 19 were senior managers at state-owned enterprises and 7 were cashiers at state businesses. They were typically men, between 30 and 49 years old, and lived in mainland areas close to Macao.

The government officials reported losing an average of $2.7 million each, according to the study, which was conducted by Zeng Zhonglu, a professor at Macao Polytechnic Institute. State managers lost $1.9 million each, on average, and cashiers dropped an average of $500,000. Most said their gambling careers lasted less than four years before they were found out. Their losses at the tables bankrupted at least 10 companies. An editorial in the Beijing Youth Daily said gambling by public officials “threatens the safety of the national treasury,” though it is unclear just how much public money has been gambled away [my emphasis].

“I doubt even the Chinese government knows,” said Desmond Lam, an expert on Macao and Chinese gambling who is currently a senior research fellow at the University of South Australia. “Still, the figure is likely to be very substantial, at least in the hundreds of millions so far. “And if you include the undetected money, it must be higher.”

China had tried repeatedly to clamp down on gambling by public officials but had never had much success until hitting on the idea of limiting visas. The new visa regulations, which went into effect last summer, limit mainland officials to just one trip every three months, and for no more than seven days, and have been highly effective, gambling analysts and scholars say. “It has been a very, very serious problem, but it’s better now,” said Mr. Zeng, the author of the study on high rollers. “The mainland government has strict controls over officials coming to Macao.”

But along the way, the restrictions have helped turn Macao’s boom into something of a bust, a connection that was underscored on Monday, when the stocks of Macao casino companies plunged by a fifth after Beijing announced that it would retain the visa controls. Share prices of the companies are down more than 80 percent on average from their highs a year ago. Casino bosses, tour operators, shop owners, restaurateurs and hoteliers say they are feeling the pain from what Samuel Yeung, the manager of the landmark Hotel Lisboa, calls “the tightening control of mainland China.”

Gambling revenues are plunging and luxury shops are empty. Soaring hotel and apartment towers stand half-finished. Thousands of construction and casino workers have been fired. Last month at the Venetian, half the singing gondoliers on its indoor “Grand Canal” were abruptly fired. “The government is saying Macao is going too fast and we need to cool it down,” said Davis Fong, a business professor and director of the Institute for the Study of Commercial Gaming at the University of Macao. He cited a freeze on new projects and tighter regulations on the territory’s casinos. It is as if the gold is running out in the Klondike.

“It’s not so much the global downturn that’s having an effect on Macao; it’s the visa restrictions that are having the most impact,” said Anil Daswani, an analyst in Hong Kong who follows the gambling industry for Citigroup. “Clearly there was way too much capital coming into Macao, and the mainland is trying to cool the economy. “But it’s definitely worrying. Volumes are down materially.”

A shining model of development, indeed. Whoever said corruption was bad for business?

Those Sexy Political Scientists; Unsexy Economists

Let's face it: those of us aspiring to a career in academia as political scientists don't get paid much compared to say, business instructors. However, I am glad to say that there are fringe benefits. Henry Brighouse over at Crooked Timber made a nice discovery recently that sheds light on this assertion via a research paper he found. Felton et al. (2006) make a serious study [nudge-nudge, wink-wink] concerning how instructor sexiness is related to teachers evaluations on RateMyProfessors.com. Before turning to this activity, the authors made a ranking of the perceived hotness of various academic groups:

I haven't the foggiest idea why religion is considered sexier that political science, but I am nonetheless chuffed that the latter discipline is among the top 5. Economists? They're seventh from dead last. I suppose self-regarding behavioral assumptions in economics--what normal people call being "self-centered" or "cheap"--doesn't do them any favors. At the risk of pushing the analogy too far, think of the difference between American practitioners: Barack Obama's charisma carries worldwide despite his fake internationalist and environmentalist credentials. I must grudgingly admit the man has charisma. Meanwhile, his honcho for the National Economic Council is...frumpy ol' Larry Summers. There's a real lesson here somewhere about the fringe benefits of being hot. So, I try hard to maintain myself at 12 stone, 7 pounds of twisted steel and sex appeal ;-) TGIF...

I Stand Trial Over Misrepresenting US-China Trade

Que barbaridad! Now I really know how Michael Corleone feels about being dragged back by ghosts of the past into business he wants to move away from. I am certain that many IPE Zone readers are not that interested in China-US economics relations. However, our friends at IPE@UNC keep referencing me on the matter, so I believe I'm obliged to respond out of politeness. Hence, I will make this post and try to move on until major developments arise. Recently, the group bloggers at Chapel Hill brought out trade expert Thomas Oatley to chime in on the matter and find little old me culpable of economic ignorance. The good professor faults yours truly for assuming that a large dollar devaluation would reduce America's current account deficit. To begin with, I never said it would. Here I make my defense and urge you, dear readers, to find the defendant "not guilty." I realized at the outset that my nuanced position--neither standard-issue free trader or mercantilist--would not be popular with either camp. Then again, novel proposals are what I think are in order.

(1) Thomas Oatley makes a genuinely interesting find from a 2007 IMF World Economic Outlook (WEO) in which IMF researchers build a model to estimate changes in price elasticity of demand for US imports and exports in response to currency movements (see the results above). In plain English, movements in currency affect the relative prices of imported and exported goods. A dollar devaluation would tend to lessen American imports by making them dearer locally and promote exports by making them cheaper abroad. If imports and exports are responsive or "elastic" enough to price changes, then the US current account deficit would be reduced. Dr. Oatley cites the WEO study for arguing that, for America, devaluation makes little or no sense because the price elasticities of demand for both US imports and exports are low. From p. 95 of the IMF study:

The results of the estimation conform to the elasticity pessimism view [of the US trade balance not being very responsive to exchange rate changes]. In particular, the long-run estimates of U.S. import and export elasticities are quite low—indeed too low to satisfy the traditional Marshall Lerner condition (Table 3.2).

Yikes! Has that econo-fraud Emmanuel finally been caught out? Well, no. In economics, the Marshall-Lerner condition is a widely-used benchmark for determining whether a currency devaluation has a positive effect of reducing a country's external imbalance. If the price elasticies of demand for exports and imports sum to less than an absolute value of 1, then they ought not have a positive effect on the trade balance and vice-versa. Returning to the table above, the IMF quotation is based on the simulation in red: (-0.69)+(0.02)=-0.67. Fair enough. However, what if certain adjustments are made to the model to make it more realistic? On p. 96:

The U.S. trade equations estimated above represent a basic, “stripped-down” version of the standard empirical trade model [red box]. Several efforts have been made over the years to improve upon this model and find more plausible values for trade elasticities in the long run.

It's a technical thing here called "aggregation bias" concerning how the numbers may underestimate price elasticity since differences among product categories are glossed over. What if goods- or sector-specific estimates were used to account for possible bias? Well, you get the results in blue: (-1.45)+(-0.26)=-1.71. Voila, price elasticities galore. As neither of us have the IMF's data set, this becomes a moot point. All I wish to say is that it's not an open-and-shut case of US trade being price inelastic that can be wielded against me. It now degenerates to three-handed economist style arguments which can and do go on ad infinitum.

(2) What Dr. Oatley seems to miss is another IPE point I wish to make instead of debating to no end about the IMF model. If the rest of the world becomes unwilling to fund America's CA deficit, then it has little choice other than to shape up. No ifs, not buts. Dollar devaluation will not be the main avenue for correcting global imbalances but rather LDC aversion to footing America's external tab. If capital account flows to the US slow dramatically as China stops piling on reserves and others follow suit, then America will have no choice but to undergo "structural adjustment." Nor am I claiming this will be a painless process. As I am more of an impartial spectator belonging to neither camp of combatants, I am probably more gung-ho on this point than my American counterparts. A reader also brought this point up about price elasticity of demand to which I made a similar reply. Savings are not exogenously determined; others' willingness to foot America's bill matters a lot and is not really considered by the IMF chapter. Simply, price elasticity of demand is a trivial consideration if there is no demand in the first place because China disabuses the US of its exorbitant privilege of cheap deficit financing.

(3) People keep hurling this idea at me that a China-US trade row is the slippery slope that leads to Smoot-Hawley II. Like Vietnam-era domino theory, I do not think this is likely. There is this thing called the WTO now, and LDCs have much tariff water to play with anyhow. I dislike protectionism in general, though I am keen on the possibility of the US initiating boneheaded currency legislation against China that makes the PRC reconsider its poor investment choices. To get things moving, China doesn't have to sell its Treasury stash a la the hyperbole of a "nuclear option." Mainly, it needs to stop buying Treasuries. As I've said, the US should kick China in the 'nads, pronto [1, 2] to get the adjustment process started.

Kindred cites a paper full of game theory in support of his assertion that a US-China trade conflict will lead to an outbreak of competitive devaluation. Aside from the obvious point that these authors are not playing with real numbers, there is no recognition of the real constraints on choice sets imposed by a multilateral economic regime called the WTO. To be fair, I will establish a scenario of how I believe things may play out. Bear with me as I'm all by my lonesome instead of four of them!

* * *
America has given the world an endless dose of courtroom dramas, so the next should be amusing to all re: the case of IPE@UNC vs. IPE Zone -

Judge Trudy: Has the jury reached a verdict?
Foreman George: We have your honor. We find the defendant, one Emmanuel from across-the-pond, not guilty on the count of economic ignorance.
Judge Trudy: The accused has therefore been cleared of all charges and is free to blog. This court is now adjourned [she bangs the gavel...KABLAM!]

Stupid Protectionist Tricks, French Aerospace Edn

The French are famous for industrial policy under the guise of dirigisme. This has, time and again, gotten them into trouble--especially with the coming of the WTO. Today's post concerns the never-ending Boeing-Airbus pot-calling-the-kettle-black show. At the moment, the EU and US have cases against each other pending at the WTO over aerospace subsidies. There is even a whiff of industrial espionage. I am of the opinion that both cases are a lot of hot air. Both sides have given sizeable subsidies, meaning that their claims against each other tend to cancel out.

Perhaps cognizant of this fact, France is now upping the sweepstakes in a manner implicating not only its aerospace industry but also its banking industry. You see, these fine fellows are conspiring to use French banks to provide aircraft financing to airlines and freighters [!] Talk about upsetting Boeing of America. Is it not enough that Airbus significantly outstripped Boeing in terms of both orders and deliveries in 2008? Rubbing salt into an open wound isn't a formula for improving trade relations methinks. From Reuters:

The French state plans to inject 5 billion euros ($6.5 billion) into banks with the aim of financing airplane purchases to help European planemaker Airbus (EAD.PA), a French government source said on Sunday. "There is indeed a plan to lend 5 billion euros to the banks to finance Airbus contracts," the source said, confirming an earlier report in the business newspaper Les Echos...

Although not presented as a direct bailout, the plan appeared to be the first significant government package directed towards the aerospace industry as industrial countries pour funds into propping up industries weakened by the credit crisis. There are also concerns that the aviation industry, one of France's biggest export earners and home to thousands of high-tech jobs, could be hit indirectly by the automobile crisis since the two industries share many of the same suppliers.

Les Echos said the state would inject the money into banks with a record of lending to the aeronautical industry. It named Calyon, Societe General and BNP Paribas. "The aim is to prevent airlines from cancelling orders citing difficulties in raising money," said the newspaper, which did not give its sources.

Owned by European aerospace group EADS, Airbus is the world's largest producer of civil jetliners ahead of rival Boeing. The two planemakers are locked in a transatlantic trade row over subsidies at the World Trade Organisation, with both accusing the other of taking illegal government handouts. It was not immediately clear whether the plan was designed specifically to funnel money into protecting deals with Airbus, something that may open it to scrutiny from Boeing and other planemakers, or ease credit across the aerospace sector.

The French government has already pledged help on a smaller scale to help aeronautical suppliers and bolster research. Airbus has in turn been asked for help by aircraft doors maker Latecoere, a supplier to both Airbus and Boeing. A French industry source said the new plan, originating from the French prime minister's office, would be broad-based and aerospace was one of several industries expected to benefit. Airbus had no immediate comment.

The Toulouse-based planemaker said on Jan. 15 deliveries could fall and orders were set to tumble as the global recession curbs demand for jetliners. Both Airbus and rival Boeing are bracing for more turbulence in an industry damaged by recent fuel price spikes as the economic downturn hits air travel. They also face a battle to prevent airlines cancelling or deferring orders.

Aircraft are usually ordered years before they are built and the financing is often not finalised until a few months before delivery, according to aviation executives. This raises doubts over whether some aircraft ordered at the height of a three-year ordering boom that peaked in 2007 will be delivered to their original customers or leave the factories with no buyer, becoming so-called "white tails" with no livery.

Airbus has said it stands ready to boost the use of its own cash resources to offer credit financing to prevent airlines cancelling or postponing orders at the last minute. It also expects European Credit Agency financing to double in 2009.

Good stuff. We are all French national champions now, mate. They had better make sure this proposed financing is provided in a way that doesn't attract American scrutiny, though I doubt that's entirely possible.

Stupid Protectionist Tricks, Buy American Edition

It is with great pleasure that I announce that blogging buddy Ben Muse is back in action after a short lapse. He notes that "Buy American" clauses in the forthcoming US stimulus package are subject to WTO contestation, to no one's real surprise. Here's the relevant quote from the trade lobbies concerning violations of agreements on government procurement:

Violate the United States’ international commitments, depending upon the actual proposal. The United States, through its membership in the World Trade Organization Government Procurement Agreement (GPA) and several bilateral and regional trade agreements, has guaranteed non-discriminatory access to the procurement markets of many of our largest trading partners. In return, the United States has agreed to provide non-discriminatory access to our own procurement markets for projects above certain dollar thresholds. The U.S. approach, crafted over successive Democratic and Republican Administrations, preserves many safeguards in our procurement rules for American goods and firms, including Buy American provisions for some projects, as well as small-business preferences. If the United States expands or enacts new Buy American-type provisions that abrogate U.S. GPA or our other trade agreement commitments, the United States and U.S. firms will face retaliatory sanctions in other markets and jeopardize our ability to open other foreign government procurement markets to U.S. goods and services.

It's well and truly raining protectionists now.

UPDATE 1: More on this point from Agence France-Presse (the irony here should be obvious).
UPDATE 2/4: Kevil Hall of McClatchy has a good backgrounder on the subject matter.

Same Old: Russian Ruble Devalues, France Strikes

I guess we're back to the bad old days when you could always count on two things. First, Russia's ruble losing value fast:

Russia’s ruble had its biggest two- day drop in a decade against the dollar as investors speculated the central bank will be forced to widen its target trading band after draining 35 percent of foreign-currency reserves.

The ruble depreciated 3 percent today to 34.9189 per dollar, the weakest since January 1998. The currency lost 5.2 percent in two days, the most since March 1999. It slipped as much as 2.3 percent to 45.6615 per euro, the lowest since the European currency’s introduction in 1999.

While Bank Rossii pledged last week to defend the ruble at 36 per dollar, that target may be “very quickly” breached, said Gaelle Blanchard at Societe Generale SA in London. Russia spent a record $11 billion in a day last week to support the exchange rate, after a 30 percent plunge against the dollar since August, according to Moscow’s Trust Investment Bank. Russia’s reserves, the world’s third-largest, fell $9.7 billion last week to $386.5 billion, Bank Rossii announced today. “As long as the central bank gives these targets then speculators are going to have something to aim for,” said Blanchard. “Right now the market is convinced it wants to see the ruble lower.”

Next, you have virtually all of France going on strike:

France’s rail network, airports and public schools were disrupted today as the country’s eight biggest labor unions called for a one-day general strike. In what is turning into the largest such action since President Nicolas Sarkozy was elected in May 2007, the unions are demanding that the government do more to counter rising unemployment and falling purchasing power as France enters its first recession in 16 years. The eight unions represent the bulk of France’s 1.9 million-strong unionized workforce...

Unions say measures announced by the government so far are inadequate. Sarkozy unveiled a 26 billion-euro ($34.4 billion) economic-stimulus package in December.

About 69 percent of the French people back the strike, according to a poll by CSA-Opinion for newspaper Le Parisien on Jan. 25. Forty-six percent support the strike, while 23 percent “sympathize,” with the union call, Le Parisien said. Of those interviewed, 12 percent were opposed or hostile to the strike. It’s the first time in Sarkozy’s presidency that a “social movement” has had such public approval, Stephane Rozes, head of CSA-Opinion told the daily...

Societe Nationale des Chemins de Fer Francais, or SNCF, France’s national railway, where workers began the strike last night at 8 p.m., said about 60 percent of the regional TER train services and 40 percent of high-speed TGV lines will be disrupted.

These are the Russians and French we all know, but do we share the love?

The World Social Forum Lives! (Well, Kind Of)

Every year around this time, two gatherings occur. The first is the World Economic Forum hosted by Klaus Schwab in Davos, Switzerland, where the world's elites gather to talk about the current state of the world economy. Given that it's not so hot right now, planning to hobnob with the good and the great can get you fired. Go ask John Thain. Hold the champagne and caviar, me lovelies. Naturally, this event receives masses of press coverage. At the same time, there has been an annual counterevent staged by globalization skeptics to coincide with the World Economic Forum held in different third world locations.

I got a bit worried in 2008 because there was no formal event held as it was supposed to be conducted in several locations instead. Given the dearth of media coverage, I had a similar impression that there wouldn't be any such event in 2009. It is with great fanfare [toot-toot] that I proclaim the World Social Forum is alive and well. Although not attracting the sort of star power of Hugo Chavez as in 2006's event held in Venezuela, this year's gathering in Brazil is still noteworthy. These guys don't even have a website for the 2009 event, fer crying out loud. To try and remedy the coverage imbalance, here's the Associated Press providing color--and I do mean color--to the proceedings:

Some 100,000 activists of all stripes converged on this steamy Amazon city Tuesday [Belem, Brazil], opening the World Social Forum with a rambunctious march to the beat of samba drums. An afternoon jungle downpour could not drown the spirits of those who came from all corners of the globe to participate: Socialists, environmentalists, anarchists, Indians, communists and even a fellow dressed as a pirate. [No Noam Chomsky this year, though.]

The massive meeting — coming amid the worst global economic crisis in decades — was held for the first time in the Amazon region, an especially poignant fact for attendees. "During a financial crisis, the environment is the first thing to be pushed off the agenda of most governments," said Andrew Riplinger, 22, of Chicago. "I think having the social forum here in Belem, surrounded by the rain forest — it's keeping environmentalism on the table."

The streets of Belem were overflowed — by both water and the activists, who came wearing homemade shirts extolling every social cause under the sun. Massive banners were unfurled, trumpets blared a chaotic chorus as Indians from across the Amazon performed traditional dances, barefoot, bodies ornately painted and heads adorned with the feathers of exotic birds.

Local fire officials and media estimated that 100,000 people were in Belem for the ninth World Social Forum and 50,000 took part in the march. "I'm here to fight for land, health and education," said one parading Indian, an older man who gave his name only as Miguel. Attendees see this year's forum as more vital than ever, with participants saying the world's economic crisis gave legitimacy to their demands for alternative development models.

The celebration in the Amazon was geographically half a world away — and ideologically on another planet — from the World Economic Forum in Davos, Switzerland, where a dour mood and a decidedly slimmer list of global luminaries was expected to prevail. The social forum was first held in 2001 in southern Brazil as a direct response to that economic meeting in Europe.

Standing on the deck of the Greenpeace ship Arctic Sunrise, docked in Belem, the environmental group's top Amazon campaigner Paulo Adario said this year's social forum was being held in the perfect locale. "The destruction of the Amazon is being propelled by the globalization of the Brazilian economy — cattle and soy for export," he said. "Socio-economic problems and the environment are interconnected. That is why it is very important to have the forum here, so we can highlight both issues."

Fair enough. It may surprise some of you that I would be more interested in attending the World Social Forum instead of the World Economic Forum. As their slogan says, "Another World is Possible"...but does this motley collection have a coherent picture of another world average Joes like me can assent to? More on this later. I have always thought that the anti-globalization movement raises several legitimate points, but it remains a fringe movement due to a weak agenda unlike the proverbial Davos man. Check out the comparatively sparse press coverage, f'rinstance.

Some Great New Blog Finds

Dear readers, I have been remiss in providing this blogging staple of pointing out fine new blogs that address similar fare to what you get here at the IPE Zone. Let me now correct this deficiency.

By all means, make a visit to the Global Economic Governance blog run by, well, the Global Economic Governance program at Oxford. Among the blogs mentioned here, it is the closest analog to yours truly's site. Although posting there is not very heavy, each topic receives thoughtful, in-depth coverage from acknowledged experts such as IPE godfather Robert Keohane talking about the possibilities for a global cap-and-trade climate change regime.

The credit crisis watchers among you will have probably seen the Baseline Scenario, a blog run by the insightful James Kwak and former IMF Chief Economist Simon Johnson. There is probably no more comprehensive source for up-to-the-minute commentary on the unfolding crisis. If you're thinking that Johnson and Co. are just rehashing the IMF line, note that Kwak has already found virtue in Joseph Stiglitz's proposals for dealing with the crisis. Stiglitz, of course, is the guy who unloaded on the IMF bigtime not so long ago in his book Globalization and Its Discontents. I particularly like the feature "Financial Crisis for Beginners" which should get anyone up to speed on the subject matter in no time.

Probably the heavyweight here is news of famous development aid skeptic William Easterly entering the blogosphere via Aid Watch. I am a bit disappointed to note that Easterly's schtick is becoming very repetitive as he starts by dumping on his former employer the World Bank, the Millennium Development Goals, and environmental concerns. I look forward to probing the libertarian-leaning Easterly on the latter point as I have received much flak for saying he has a Cato-esque attitude of "global warming...what global warming?"

And speaking of the World Bank, the world's most prominent aid institution has two more blogs, can you believe. The first has a regional focus, East Asia & Pacific. Their specialty is in case studies of World Bank operations in the region such as shrimp farming in Indonesia's restive Aceh region as well as fair trade cashews and ethical coffee cultivation elsewhere in Indonesia. Really, Easterly ought to go visit this fine blog. Next, it is a pleasure to note that probably the world's foremost expert on migration and remittances, Dilip Ratha, has put up a blog dedicated to the subject matter in People Move. Ratha and his team cover migration in fine detail.

All these blogs are definitely worth your while. Plus, I am sure that I have missed notable new blogs on the scene. If you have any more suggestions for the blogroll--as heroically stretched as it already is--just get in touch.

US 3, China 0: America Victorious in WTO IP Case

I have to run, but note that the US has upped its effective tally in cases brought to the WTO dispute settlement mechanism (DSM) to three. For the record:

1. China backed down and agreed to a settlement before a case concerning export rebates given to exporters was formally investigated;
2. China lost its appeal in the case concerning discrimination against foreign auto parts manufacturers;
3. Now, reports suggest the US has chalked up another one against China regarding intellectual property violations. From the US Trade Representative's site -
   

Acting U.S. Trade Representative Peter Allgeier [subbing until Ron Kirk is confirmed] announced today that a World Trade Organization (WTO) dispute settlement panel has found important aspects of China’s intellectual property rights (IPR) regime to be inconsistent with China’s obligations under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). The United States brought claims against China because of serious concerns about several shortcomings in China’s legal regime for protecting and enforcing copyrights and trademarks on a wide range of products.

“Today, a WTO panel found that a number of deficiencies in China’s IPR regime are incompatible with its WTO obligations,” Ambassador Allgeier said. “These findings are an important victory, because they confirm the importance of IPR protection and enforcement, and clarify key enforcement provisions of the TRIPS Agreement. Having achieved this significant legal ruling, we will engage vigorously with China on appropriate corrective actions to ensure that U.S. rights holders obtain the benefits of this decision.”

Allgeier added, “We are pleased that the Panel found that China’s denial of copyright protection to works that do not meet China’s ‘content review’ standards is impermissible under the TRIPS Agreement. Additionally, we are pleased that the Panel found it impermissible for China to provide for simple removal of an infringing trademark as the only precondition for the sale at public auction of counterfeit goods seized by Chinese customs authorities.”

“We also welcome the Panel’s clarification of China’s obligation to provide for criminal procedures and penalties to be applied to willful trademark counterfeiting and copyright piracy on a commercial scale,” Allgeier continued. [The DSM didn't find China in breach on this count as it lowered the threshold amount to press counterfeiting charges.] “The Panel did find, however, that it needed more evidence in order to conclude that actual thresholds for prosecution in China’s criminal law are so high as to allow commercial-scale counterfeiting and piracy to occur without the possibility of criminal prosecution. While this conclusion is disappointing, the United States is encouraged that the Panel, facing a case of first impression, set forth a market-based analytical approach that should help WTO Members and panels avoid or resolve future disputes concerning obstacles to criminal enforcement against counterfeiting and piracy.”

The Financial Times also has an article on the story about the usual Chinese "regret" over the loss. Meanwhile, Forbes says the US is claiming a hollow victory. Both China and the US can appeal, although I believe the former's chances for a major turnaround are minimal. There are yet more cases being contested by these two, but the tally is (unsurprisingly) going in America's favor. It's like shooting fish in a barrel as the Yanks say. Why does this matter? Feeling like it's on a roll, the US may be emboldened to launch the Big One, Section 301 legislation on Chinese currency manipulation. Things are still heating up.

UPDATE: The WTO site now has the reports on this case, DS362.

IMF Rope-a-Dope on China's Currency Policies

My goodness, this story never ends. The FT has an informative article about infighting going on at the IMF over whether to brand the yuan as "fundamentally misaligned." If you will recall, the US forced the IMF's hand to come up with a gimmick for bashing China's currency regime in 2007. However, IMF officials have been wary of siding with the US likely knowing full well that LDCs will not play along. Notably, the IMF hasn't performed Article IV consultations with China since 2006 (see this PDF) when all members are, in theory, required to undergo this procedure yearly. Out of fear of offending China, the IMF has passed the yuan, not the buck. What should we make of this? The IMF is timid and won't be the place where the US airs its dirty trade laundry. Where that will happen I will discuss more in the near future. Just a little patience...

The International Monetary Fund is caught in a stand-off between members over whether to label China’s currency as “fundamentally misaligned”, a politically explosive move that could stoke global tension over economic imbalances. The issue is so controversial the IMF’s executive board has not discussed the Chinese economy since 2006, in spite of rules saying it should regularly assess member economies.

The decision touches directly on one of the most divisive issues among governments worldwide: the extent to which huge current account deficits and surpluses and artificially managed exchange rates have contributed to the financial crisis. Washington has long pressed Beijing to let the renminbi rise.

The present dilemma comes after a decision by the IMF in 2007 to step up surveillance of its member countries’ exchange rates, under heavy pressure from the US. Tim Geithner, President Barack Obama’s designate as Treasury secretary, has said that China was “manipulating” its currency and promised that all diplomatic avenues would be pursued to make Beijing change course. The IMF is almost certainly one such avenue.

Eswar Prasad, professor of trade policy at Cornell University and former head of the IMF’s China division, said IMF economists had concluded China’s exchange rate was “fundamentally misaligned”, defined as creating “a risk of disruptive adjustment”, but that it was not deliberately manipulating it to gain a trade advantage.

But he said the IMF’s management, led by Dominique Strauss-Kahn, the managing director, decided not to bring the issue to the fund’s executive board and start a “special consultation” with China on currencies because of disagreements among member countries.

“The board has now not had a discussion on China since 2006,” Prof Prasad told the FT. “If it can’t even have consultations with its members, this is a very serious issue. To some extent I suspect this is why [Tim] Geithner has decided to draw a line in the sand.” [I'm more willing to give Geithner the benefit of a doubt.]

Fred Bergsten, director of the Peterson Institute think-tank in Washington, said: “The IMF’s idea of starting a special consultation seems to have collapsed. The MD [managing director] has backed off.” Both the IMF and a spokesman for the Chinese embassy in Washington declined to comment.

The IMF’s decision to focus on exchange rates in 2007 proved deeply controversial. At the IMF’s annual meetings last October Raghuram Rajan, the IMF’s former chief economist, now at the University of Chicago, said the focus on exchange rates from 2007 was “an unmitigated disaster” [Rajan speaks the truth].

Because China is not borrowing from the IMF and seems unlikely to do so in the near future, the fund has no direct instruments to force Beijing to change policy and allow the renminbi to appreciate. But for the IMF to designate its currency as “fundamentally misaligned” – which it defines as creating “a risk of disruptive adjustment” – would undoubtedly strengthen Washington’s hand in its campaign for a freer-floating renminbi.

I was surprised that my old friend the China Economist beat me to this since I usually am no sluggard. He sums things up nicely:

The last couple of days have seen the gloves come off over the valuation of the renminbi. The US threw the first glove less punch followed by retaliation by the Chinese. So what do the IMF think? They are busy punching each other at the moment.

Good one, mate!

China's Next Cultural Revolution Meets Frank Zappa

Like other countries in the region, China has good reason to be wary of student unrest. After all, the 1989 Beijing massacre was in no small part triggered by student protests. Then, as now, economic turmoil may be emboldening students to push for democracy and other Western capitalist nonsense. It is thus with little surprise that the PRC leadership is looking to avoid a 1989 rehash. In effect, the Communist Party is looking to replace flowery idealism a la the Beatles' Sgt. Pepper's Lonely Hearts Club Band with Frank Zappa and the Mothers of Invention-style realism a la We're Only In It For the Money (fake idealism). What are those legendary million unemployed college graduates to do instead of blasting each other online in massive multiplayer online role-playing games? From what's still our favorite official publication, the China Daily:

China's State Council announced over the weekend a plan to provide incentives to job-seeking college graduates, including professional training and preferential loans for start-ups. The government said it would help train one million unemployed college graduates in the coming three years to make them better qualified for jobs [instead of blasting each other all day in MMORPGS, presumably].

The Cabinet also said that civil service posts and state-owned companies should not charge job application fees from college graduates whose families are in financial hardship [!] For graduates who are willing to work in rural areas or join the armed forces, the loans for completing their college education might be partially or fully waived, the notice said [my emphasis].

Labor-intensive companies are also encouraged to recruit college graduates, with preferential government loans up to two million yuan ($293,000) for each company. Any graduates who are willing to kick off their own business would qualify for small loans of 50,000 yuan each.

The Ministry of Human Resources and Social Security said that as of December 31, there were 8.86 million urban residents registered as unemployed, 560,000 more than at the end of the third quarter. [This is likely understated given the PRC's legendarily--how do I put this--"massaged" figures.]

I am frickin' amused. Just as Chairman Mao created the "sent down generation" of tertiary-educated Chinese carted off to the provinces to do...nobody knows precisely what even now, today's newly-minted graduates are being encouraged to go to the provinces instead of expending youthful energy championing freedom in the major cities. Yes, it's the Cultural Revolution Reloaded.

The Communist gene in the PRC leadership may be dormant, but its past resurfaces every now and again. It's a pretty smart move for an authoritarian state bent on staying that way. After all, we're only in it for the money.

IMF: Global Growth Estimate Down to 0.5% in 2009

This is a quick one. Just five days ago, the IMF had this to say about its forthcoming updated forecast for world growth in 2009 (there's also a summary of current financial crisis borrowers):

[Dominique Strauss-Kahn] said the IMF would significantly adjust downward its forecast for world growth for 2009 when the 185-member international institution announces a revised assessment of the global economy on January 28. In an update released last November, the IMF had said that advanced economies would see a contraction in output in 2009—the first since World War II—but that growth in major emerging markets would still enable the global economy to advance by 2.2 percent in 2009.

Reuters now says a G-20 minister has leaked the IMF estimate at 0.5%:

The International Monetary Fund (IMF) has slashed its forecasts for 2009 global growth to 0.5 percent from 2.2 percent in its last economic outlook in November, a Group of 20 (G20) finance official told Reuters on Monday.

The Fund forecast the U.S. economy to contract 1.6 percent this year compared to an earlier forecast of a 0.7 percent fall, said the official, who had access to the forecast. It sees U.S. growth at 1.6 percent in 2010.

The IMF's revised economic outlook forecasts 2010 world growth of 3 percent, said the official, speaking on condition of anonymity. The revised forecasts are to be released in the next few days.

Grim stuff, but aren't the expectations for US growth in 2010 optimistic?

Why Chinese Think Geithner is Wet Behind the Ears

Kindred blogger Kindred raises some interesting points in his most recent posts at IPE@UNC. First, despite being an IPE guy, he comes to the defense of economists receiving a thrashing at the hands of one Will Wilkinson. Even within IPE, readers should note that there are clear differences among practitioners--especially across a transatlantic divide. Benjamin Cohen has come out with an article in the Review of International Political Economy asking why American and British IPE are so different. (There's a non-subscription version, too.) Having studied IPE in both educational systems, I vouch for Cohen's idea that US IPE is more prone to capture by "economic imperialism." At the same time, British IPE is more open to heterodox approaches such as Marxist ones that are a no-no in a country whose government once convened something called the House Un-American Activities Committee. What US practitioners rightly point out is that British IPE is weak on quantitative stuff, though I try to remedy this failing by presenting you with numbers to back my assertions if possible--stuff I largely learned Stateside.

This brings me to the next and main discussion here. Kindred dismisses the assertion that there has been a change of tone in US-China relations. What of course prompted this was incoming US Treasury Secretary Timothy Geithner relaying President Obama's conviction that China was manipulating its currency. If one were to take an economistic approach here, then nothing has changed. The US is merely calling a spade a spade with regard to currency manipulation--something that many commentators acknowledge, although opinions differ widely.

However, if you were to take a more nuanced approach, Geithner made a very basic no-no. In the eyes of the Chinese, (perhaps innocently) saying what his boss thought marked Geithner out as the proverbial "ugly American"--loud, brash, and lacking in cultural sophistication. The reason is something standard-issue economists would probably gloss over but anyone who's taken a course in cross-cultural communication should be aware of. In Chinese culture, face is a very important concept. Even if stating what's patently obvious to most observers, many Chinese were jarred by the severity of the dressing down as if it were an assault on national pride. I was struck by this excerpt from a news article from a recent post:

Mr Geithner’s comments were also criticised in strong terms by prominent academics in China. “This is a sign of his immaturity and his inability to do such an important job,” said Shen Dingli, professor of American studies at Fudan University.

Even something as plebeian as a Wikipedia entry will tell you why I expected the Chinese to react strongly immediately after Geithner's faux pas:

Face refers to two separate but related concepts in Chinese social relations. One is mianzi (Chinese: 面子), and the other is lian (Traditional Chinese: 臉, Simplified Chinese: 脸), which are both used commonly in everyday speech rather than in formal writings. Lian is the confidence of society in a person's moral character, while mianzi represents social perceptions of a person's prestige. For a person to maintain face is important with Chinese social relations because face translates into power and influence and affects goodwill...

Notice that directly lying does not cause a loss of face. For example, if a flight is cancelled by an airline, then they may lie that it is merely delayed. Inability to arrange the trip would cause a loss of face, while lying that it is delayed would help to save face. So-called "polite lies" are acceptable.

What The Great Paulsonio understood given his fabled 50+ visits to China as Goldman Sachs chief that his successor at Treasury Geithner doesn't is precisely what's in bold above. Paulson knew better than to pull China's pants down in front of the whole wide world by tagging it a "currency manipulator." Instead, Paulson tried for "currency flexibility" and flattering China by saying it was doing so well that it could accommodate a stronger currency. In his inconsideration of saving the Chinese face, Geithner caused major offense. It's so simple yet so important to the Chinese psyche.

Returning to the idea expressed at the outset, economics would gloss over such details. After all, two Nobel Prize-winning economists came up with the idea of de gustibus non est disputandum, or there's no arguing about tastes (as an aside, the link is appropriately numbered "666"). Unfortunately, such economistic thinking would run roughshod over the very things that have branded Geithner a parvenu in China. In writing this blog, I try to explain why an interdisciplinary toolkit is necessary for analyzing issues in the world economy. Economics is just one of many tools including, in this case, sociology and anthropology.

Here's the thing: if IPE cannot do anything more than regurgitate economistic reasoning--whatever its merits and demerits--why bother with IPE at all? I should trademark a new tagline: The IPE Zone - Not an Economics Retread™ [!]

UPDATE 1: Kindred still thinks I'm making too much of this.
UPDATE 2: A commenter astutely observes that Geithner took up Asian studies at Johns Hopkins. A very strange lapse from TG, indeed.

China/US: Cut the Crap and Just Fight Each Other

Now this is more like it in the "pot calling the kettle black" sweepstakes. China has now come out with an official response that takes great umbrage to just-installed US Treasury Secretary Timothy Geithner going along with the characterization of China as a "currency manipulator." From Reuters:

A Chinese central banker denounced accusations by U.S. Treasury Secretary-designate Timothy Geithner that China was manipulating its yuan currency, calling them misleading and warning against "excuses" for protectionism.

Su Ning, a vice governor of the People's Bank of China, called the comments by Geithner "out of keeping with the facts" and said they were "misleading in analysing the causes of the financial crisis," the official China News Service reported on Saturday. Su also warned against trade protectionism. "We believe that faced with the financial crisis there should be a spirit of self-criticism," Su said while visiting a business newspaper office in Beijing, according to the report. "The international community is currently working together in actively responding to the financial crisis, and it must avoid exploiting different excuses for renewing or encouraging trade protectionism," Su said, adding that such steps would harm global economic recovery.

Geithner's comments could signal that the new administration of President Barack Obama will take a tougher line against China in seeking to narrow China's big trade surplus, which some in Washington blame for stoking global economic imbalances. The yuan closed lower against the dollar on Friday and traded mostly below the Chinese central bank's mid-point, with speculation that Geithner's comments could spark a brief period of modest yuan depreciation.

To be fair to Geithner, I believe Brad Setser--who used to work under Geithner--when he says the Treasury chief is merely relaying his boss's opinion that China is a currency manipulator. Left to his own devices, Geithner would prefer a more conciliatory approach to economic diplomacy like The Great Paulsonio. The Financial Times adds more Chinese bellyaching, this time from the Commerce ministry instead of the PBoC. At this rate, virtually all trade and finance-related official functionaries will get a kick in:

The US and China have embarked on a public row over foreign exchange policy only three days after Barack Obama’s inauguration, with China denying on Friday night it was “manipulating” its currency and saying the allegation would only fan protectionist sentiment in the US. The Chinese government was responding to claims by Tim Geithner, President Obama’s choice for Treasury secretary, who told a Senate nomination hearing on Thursday that China was “manipulating” the renminbi. Mr Geithner’s blunt tone appeared to indicate a more confrontational approach towards China on economic issues.

In a statement on Friday night, China’s commerce ministry said Beijing “has never used so-called currency manipulation to gain benefits in its international trade”, AFP, the news agency, reported. “Directing unsubstantiated criticism at China on the exchange-rate issue will only help US protectionism and will not help towards a real solution to the issue.” The pointed comments between the two governments will exacerbate concerns of a surge in trade and currency disputes as a result of the slump in the global economy.

Mr Geithner’s comments were also criticised in strong terms by prominent academics in China. “This is a sign of his immaturity and his inability to do such an important job,” said Shen Dingli, professor of American studies at Fudan University.

China’s currency has appreciated 19 per cent since Beijing abandoned a dollar peg in 2005, but record trade surpluses over the past three months give ammunition to those who argue the renminbi is still undervalued [as imports for machinery and other capital goods fall faster than the PRC's goods exports].

Enough shadow boxing, I think it's high time we got some action from these antagonists. Frankly, I am getting tired of the bluster emanating from both. It's time they put the gloves on and got into the gladiator's arena known as power politics. Not only will be in a better place to figure out who calls the shots in the global political economy at this point in time, but we're likely better off if subprime globalization [1, 2, 3] is finished sooner rather than later. Here are my appeals to the belligerents -

President Obama, put your money where your mouth is at. Hit China hard with Section 301 legislation, ASAP. It will make you feel real good to punish these trade evildoers.

Chairman Hu, put your money where your mouth is at. Sell off some Treasuries to warn the US of its foolishness. You have Uncle Sam by the balls.

Today's Trope: Britain May Need IMF Bailout

Asking for an IMF bailout is among the worst things countries can do in terms of damaging national prestige. It's the global political economy equivalent of cadging distant relatives (i.e., "the international community") for money to help tide you over. I've covered several of the most recent approaches to the IMF including Iceland, Ukraine, and Hungary. Now, the leader of the British Conservatives, David Cameron, is leading a charge that the United Kingdom may soon go hat in hand to un grand seducteur Dominique Strauss-Kahn. From the Independent:

Britain risks bankruptcy and a humiliating bailout by the International Monetary Fund (IMF) because of Gordon Brown's borrowing, David Cameron said yesterday. With official confirmation that the economy has entered recession expected today, the Tory leader delivered his strongest warning yet: "If we continue on Labour's path of fiscal irresponsibility, at some point – and it could be very soon – the money will simply run out."

His speech to the Demos think-tank in London raised the spectre of the 1976 bailout, when James Callaghan's Labour government was forced to make deep public spending cuts in return for a £2.3bn loan from the IMF. His remarks are bound to provoke Labour accusations that he is running the country down. Mr Cameron insisted he was not predicting a date by which the Government would "end up back at the IMF". But he added: "What I am saying is that we are running the risk of those things happening and those are risks that no government should responsibly run."

The Tory leader added: "We are borrowing, according to the Government's current estimates, 8 per cent of our GDP in the next financial year. That is the same percentage that Denis Healey [the then chancellor] was borrowing when he went to the IMF in 1976."

The Tories are hitting Labour pretty hard with punches many would view as being below the belt. Late last year, Shadow Chancellor George Osborne warned that Labour's actions risked a "run on the pound." Although I believe that Britain is in dire straits, the Tory duo is certainly fanning the flames in a manner without historical precedent. Rough-and-tumble politics does not get any rougher than this. Are the Conservatives making things even worse for the electorate to hasten the inevitable? Unless something dramatic happens, I am convinced Labour will lose during the next round of elections. However, their statements may come back to haunt Cameron & Co. if things do not improve noticeably on their watch.

Britain currently maintains a triple-A credit rating. Can Britain go quickly into such dire straits that a bailout becomes necessary? News of a larger-than-expected contraction in GDP certainly doesn't help, though I remain skeptical.

China Unhappy About Yuan Manipulator Taunt

This place was among the first to note Timothy Geithner's more aggressive stance against China's foreign exchange policy. The New York Times has since covered the issue and so has fellow blogger Yves Smith. Trying to be at the forefront, it's my sworn duty to report that Chinese officialdom is not taking this accusation in stride as the following Reuters article notes. However, for someone curious about the outcomes of a possible trade war, I am not touting deliverance just yet as both sides are holding back from laying down the gauntlet with no chance of turning back. The text of the testimony is here (HT Trade and Taxes).

Again, the US Treasury issues biannual reports determining whether trade partners are practicing currency manipulation. I, for one, doubt whether there is sufficient political pressure to get this done at the first instance. On the Chinese side, they've taken the attitude of listening to what is said through diplomatic channels, choosing to ignore what's said in confirmation hearings and the like where there is presumably more posturing. What is unmistakable, though, is that Obama & Co. are not beyond taking a more aggressive attitude towards China, while the latter's patience is wearing thin.

Unless things calm down on either side, goodwill shall start wearing down. Eventually, we may get to considering Emmanuel-esque scenarios: Either the US brands China a currency manipulator--thus setting the stage for Section 301 legislation--or the Chinese sell off some of their stash of Treasuries to warn the US of its foolish intentions. Some commentators think China is more at risk in the event of a trade war; I think China has more room to stimulate demand at home at a time when exports are going downhill anyway. The PRC has simply more options. In any event, we draw closer to the endgame, if only by millimeters, not even decimiters...

China will make clear its displeasure at U.S. accusations of currency manipulation but hold its anger in check in the belief that President Barack Obama is simply posturing, Chinese analysts said on Friday.

Timothy Geithner, Obama's choice to head the U.S. Treasury, said the president believes China is "manipulating" the yuan, a loaded term that the Bush administration had deliberately avoided even as it criticised Beijing's exchange rate policy. The People's Bank of China, the central bank, had noted the comments by Geithner, a central bank official told Reuters on Friday. "We have reported them to relevant government departments and are awaiting a response," the official said, declining to elaborate.

Under U.S. law, formally labelling China a currency manipulator would require the Treasury to begin "expedited" negotiations with Beijing to reduce China's huge trade surplus with the United States and eliminate any "unfair" currency advantage. "China is going to be extremely unhappy, to say the least," Tao Xie, an expert on Sino-U.S. relations at the Beijing Foreign Studies University. "For administration officials, I do not think any one has ever pointed a finger so strongly at China."

Chinese anger at Geithner's choice of words, written in response to questions at his Senate nomination hearing, will add to simmering tensions over the global financial crisis. "President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency," Geithner wrote.

Chinese officials have accused the United States of regulatory failings that sparked the meltdown. When Henry Paulson, former U.S. Treasury chief, said that the high Chinese savings rate had helped sow the seeds of the crisis, a firestorm of criticism ensued in China. U.S. Treasury bond prices fell on worries that China might respond to Geithner's frank comments by cutting its holdings, the world's largest, of U.S. government debt.

But Yi Xianrong, a finance professor at the Chinese Academy of Social Sciences, said such concerns were premature. "They will not take the remarks very seriously," Yi said, referring to the foreign ministry and central bank. We will only try to understand their real stance via diplomatic channels," he added. "If they really resort to diplomatic tactics to intervene, we will take measures to respond."

Geithner, head of the Federal Reserve Bank of New York, said the Obama administration would "aggressively" use all its diplomatic tools to press Beijing on currency reform, but he also signalled some flexibility and patience. "The question is how and when to broach the subject in order to do more good than harm," Geithner said.

That hedging could suggest a more moderate approach. The first real test will come in a semi-annual Treasury Department report, due in April, on whether other countries manipulate their foreign exchange regimes.

"Obama will be too busy in his first 100 days to take on China," Xie said. "If he really wants to induce China to do something, he should do it in private, not in a public confrontational way." The yuan edged down against the dollar on Friday after traders concluded that China might usher in a period of mild depreciation as a shot across Washington's bow. "Such U.S. comments, if they become an official policy, will only lead to tit-for-tat moves from the Chinese side," said a dealer at a major European bank in Shanghai.

A Reuters poll earlier this month forecast that the yuan would remain virtually fixed in place this year at 6.83 to the dollar as China walks a tightrope between slowing growth at home and fears about a backlash abroad if it pushed through a significant depreciation. The yuan has been stable against the dollar for six months but broader strength in the U.S. currency has put upward pressure on China's trade-weighted exchange rate, Capital Economics, a London consultancy, noted in a report.

Chinese exports have fallen for two straight months, which, coupled with a domestic property slump, dragged down the economy's growth to a seven-year low of 9.0 percent last year.

France: British Pound is Getting Too Pounded

It is unfortunate that we must consider the British as "Americanized Europeans" in the negative sense. Like the Americans, the British are full of consumer debt borne of financial innovation. Both had massive property bubbles. Now that the UK's banking shenanigans are coming undone, the British government is similarly opening the spigots to hose down an incipient crisis with liquidity to little positive effect. Again like America, Britain has allowed its industries manufacturing tradable goods to dwindle vis-a-vis a burgeoning financial services sector. Unlike the US dollar, however, the British pound does not have the luxury of being the world's prominent reserve currency. In scarcely more than six months, the pound has dropped from the $2.00 handle to below $1.40. Recent news that the government will undertake another round of massive bailouts that might end up costing £200 billion has sent the pound reeling since the start of the week.

Famous investor (and China and commodities booster) Jim Rogers recently commented that the pound did not have a very bright future, to say the least:

Jim Rogers, chairman of Singapore-based Rogers Holdings, said the “U.K. is finished” and investors should sell the currency. Commonwealth Bank of Australia said there was a high risk of a cut to the country’s credit rating outlook and lowered its pound forecast. Prime Minister Gordon Brown authorized a 100 billion pound ($142 billion) bailout for banks. “I would urge you to sell any sterling you might have,” said Rogers. “It’s finished. I hate to say it, but I would not put any money in the U.K.”

Not being on the shy side on matters of international importance, the French are not too happy about this state of affairs. Economic Minister Christine Legarde is crying foul, seeing that the British pound may be getting an unfair advantage from all this "quantitative easing"--a euphemism for allowing the currency to bear the brunt of adjustment via (competitive) devaluation:

French Economy Minister Christine Lagarde said on Wednesday the Bank of England should take more steps to support sterling. "I note the Bank of England is doing what it can, but its monetary policy and management of rates ... have not been particularly efficient for supporting the currency a bit more," she told a parliamentary hearing. "It would be in their interest to support it a bit." There was "strong volatility" in sterling, the minister said, adding: "Very clearly monetary markets are worrying about how sterling is faring, looking at the British economy."

In the past year, the British pound has lost around 30 percent versus the dollar, 20 percent versus the euro and more than 40 percent versus the yen , according to Reuters data. Such depreciation, while making imports dearer, gives the British exporting industry [whatever is left of it] an edge in price competition with rivals in world markets.

In London, a UK Treasury source told Reuters: "The Bank of England's policy is to target inflation, not the exchange rate."

So there you have it: the dismantling of the British Empire continues as the pound sets all time low after all time low against the euro. Who was the wiseguy who kept the UK out of the ECU in the first place? Why that would be PM Gordon Brown, the Anglophone heckuva job Brownie guy. He bungled it long before assuming his current post by saddling the country with a relic of a currency.

Is Geithner Climbing the China-Bashing Bandwagon?

Beats me, actually. Reuters reports Geithner's coy statements before his Senate confirmation hearing. More or less, it's "I'll get back to you on that." Still, I must say that he appears more forthright in his criticism of China's practices than his Bush administration predecessors. Whether this is a prelude to some action will be very interesting to monitor:

Geithner was asked at his Senate Finance Committee confirmation hearing whether he thought China's "manipulation" of its currency remained a serious concern. "I do believe it is a significant issue," he told Sen. Jim Bunning, a Kentucky Republican who has sponsored legislation to press China to move a more flexible exchange rate policy. [That would be Bunning-Stabenow-Bayh, S.796.]

"As I said earlier, I believe it is important for the United States and the global economy that our major trading partners operate with a flexible exchange rate system and that market forces determine the level of those exchange rates," Geithner said. "I think that's very important and I will, when I have some time to think through how best to achieve that objective look forward to a chance to work with you and your colleagues on the committee on how we do that," Geithner said.

The thing here is that Geithner did not blanch at Bunning's description of China's activities as "manipulation." If you will recall, The Great Paulsonio continuously resisted pressure to get Treasury to brand China as a currency manipulator. It's a small detail worth keeping in mind, methinks.

Guiyu, China's Americanized e-Waste Capital

If you ever wondered where your disposed-of electronics go, chances are that it will find its way back to the country where it was originally manufactured. TIME recently had an interesting article on Guiyu, China. Notably, the US is once again an enviro-villain as it is the only developed country not to have ratified the Basel Convention on hazardous waste exports to LDCs. Is this the "way of life" Obama doesn't want to apologize for? It would be appalling if the answer was "yes":

The U.S. is the only industrialized country that refused to ratify the 19-year-old Basel Convention, an international treaty designed to regulate the export of hazardous waste to developing nations. Meanwhile, the Environmental Protection Agency (EPA) oversees the export of only one type of e-waste--cathode-ray tubes in old TVs and monitors--and a report last August by the Government Accountability Office dismissed the EPA's enforcement as "lacking..."

A lot of exported e-waste ends up in Guiyu, China, a recycling hub where peasants heat circuit boards over coal fires to recover lead, while others use acid to burn off bits of gold. According to reports from nearby Shantou University, Guiyu has the highest level of cancer-causing dioxins in the world and elevated rates of miscarriages. "You see women sitting by the fireplace burning laptop adapters, with rivers of ash pouring out of houses," says Jim Puckett, founder of Basel Action Network (BAN), an e-waste watchdog. "We're dumping on the rest of the world."

I'm trying to cut down on e-waste by extending the life of an older model two generations removed from the current state of the art, an AGP 8x platform. Also, I have now committed to buying a laser-printed keyboard whose lettering doesn't eventually wear out with use. After seeing the slideshow presentation, I do feel guilty.

Explaining the Postwar Economic Order in One Chart

What follows may be an oversimplification of the post-WWII order, but you may find that there is no small amount of truth to it. In a few hours, our American friends will inaugurate a new president. Although I am 100% percent certain that he and his advisors are not IPE Zone readers, the economic challenges they face--and indeed, the rest of us as well--can be informed by the following chart. It depicts historical US personal savings rates and is taken from ch. 9 of the EBRI Databook on Employee Benefits:

The important thing for me is, regardless of how you interpret this chart--the US as a spendthrift nation (negative view) or as a facilitator of a liberal economic order (positive view)--the implications you will arrive at remain the same. In both the data series used, the more familiar BEA NIPA or the Fed's Flow of Funds, there is a marked downward trend in personal savings over the last couple of years. There have of course been signs of a rebound in the savings rate in recent months as the credit crisis roils US consumer spending either through a lack of available credit (banks become warier of lending on easy terms), consumers simply hitting the wall (moving perilously close to bankruptcy or foreclosure), or wealth effects (folks tighten their purses as dwindling housing, stock, and retirement holdings make them feel less well off). Let's begin:

(1) The negative view is what you get a regular dose of in this blog and I needn't belabor it much. Here, the US is a once-great nation whose exporting industries have entered terminal decline. That is, its production of tradable goods has given way to a consumption-led Anglo-Saxon model that exacerbates its lack of savings, making the US reliant on the the kindness of strangers to fund its profligacy. Like Rocky-era Survivor, it's changed its passion for glory and lost its grip on the dreams of the past. The US has literally gone soft in the middle, further straining its also parlous public finances.

(2) OTOH, the positive view portrays the US in more flattering terms. Among the proponents of this view are authors championing the existence of a "Bretton Woods II" system. Here, postwar America acted generously by allowing war-torn Europe and Japan to export to the only consumer market left largely intact by WWII. Even the breakdown of the original Bretton Woods II system did not stop the US from acting as the world's consumer of last resort. In effect, newer export-led economies used fixed exchange rates and reserve accumulation to preserve America's status as such. Hence, the so-called Asian tigers (South Korea, Taiwan, Singapore, and Hong Kong) were able to follow Japan's lead and, after a lag, the PRC.

It is at the present time when (1) and (2) converge. With the benefit of hindsight, the US-as-intermediary story in (2) which portrayed the global economic order as "stable and sustainable" has been largely discredited by the credit crunch. The reason is simple: US consumers have simply run out of spending money as personal savings rates approached zero. Of course, there is a grain of truth to (2) in that US consumption has played an important role in the development of the aforementioned export-led economies. Even now, US consumption alone accounts for about 18% of world GDP by my reckoning, although others say it is more like 20%. You may think this isn't much in the global scheme of things, but consider the US as a "swing consumer" that can influence prices for America's all-important consumer credit via its monetary, exchange rate, and trade policies. As consumer of last resort, this role is key.

The chart speaks for itself. Bretton Woods II or whatever you call it has run aground simply due to American consumers hitting rock bottom. Export-led economies can no longer rely on the American consumer to pick up demand slack and must somehow stimulate domestic demand. Conversely, the US will need to address long-neglected industries in the tradable sector to escape the gravitational pull of its consumption-led growth model. Doing so is not an easy task for either as evidenced by US efforts to reflate consumption via virtually zero policy rates and exporters like China ladling on export incentives.

We are entering an interesting new phase for the postwar international economic order. It is often said that America's Anglo-Saxon model based on consumption and financial intermediation is endangered. Less often said is the obverse: Asia's export-led development model cannot which is in no small predicated on US consumption is similarly endangered. How we can move forward is the topic for another post, but the chart above should be plenty to digest for now.

Fight Time: EU to Slap 25% Duties on PRC Steel

With folks like me prattling on and on about an impending US-China trade war, don't forget that there are many other disgruntled nations that have come up against the mighty Chinese export machine. Today's case in point is the EU. In late 2007, there were already rumblings about an impending EU sanction, with angry noises being made about China's pollution-intensive manufacturing methods. Fast-forward to early 2009 and we now appear to have impending EU duties on Chinese concrete rebar and the like. (My apologies for not bringing this news earlier.) From Reuters:

A key European Union trade panel voted in favour on Thursday of imposing temporary antidumping duties of 25 percent on imports of Chinese-made steel wire rods, EU sources familiar with the case said. "The vote was in favour of the duties," one source told Reuters on condition of anonymity.

European steel producers requested the additional tariffs on the rods, used among other things to reinforce tyres and concrete. They had complained that Chinese exporters enjoyed an unfair advantage because suspected subsidies in China's steel industry gave them cheap raw material. The duties -- which are likely further to damage already brittle trade and diplomatic ties between Brussels and Beijing -- will come into force next month and remain in place for six months.

The European Commission, which oversees EU trade policy, must then decide whether to propose "definitive duties" lasting at least five years. EU trade ministers must approve any such move for it to take effect. Trade disputes between Brussels and Beijing are on the rise since the EU's trade deficit with China has ballooned, hitting 160 billion euros ($210 billion) last year. In December, the EU's antidumping committee voted to adopt import duties of up to 87 percent on screws and bolts from China.

I also found the following from a site I've just come across called SteelGuru. It says Chinese steel producers are girding up for the impending EU sanctions:

It is reported that China's steel enterprises have already prepared not to export any products as the result of the voting on whether to impose 25% temporary tax on Chinese steel imports will come out soon. If the proposal be approved, it will take effect from February and last for 6 months. Until then, the European Commission should decide whether to propose definitive duties which would last for at lease five years or not.

Mr Bai Ming, vice director of the international market research department of Chinese Academy of International Trade and Economic Cooperation, citing the European steel producers' complaints of China's suspected subsidies said the government had not provide[d] any kind of subsidies. The foreign producers just made a mistake to take the government services as subsidies.

He figured that, China is becoming the biggest steel producer in the world and it owns a pretty good international market. Therefore, some foreign producers think they have been ruined by Chinese enterprises amid the sluggish global market. In addition, some foreign states just trick their people by imputing (blaming?) China for the economic slow down so as to keep their own images. He added that "Therefore, not only steel export but also other exports do not perform well. However, each country will come across such [a] bad situation on the way of its economy growing up just like South Korea and Japan."

At present, most Chinese middle[-sized] steel enterprises have reduced their exports by 30% to 40%, Mr Xu the principal of one steel manufacturer in Foshan city, Guangdong province said "We would choose to sell products on domestic market instead of exporting to Europe just as the company can not bear such a heavy export tax. It is also quite difficult to export to South Korea and Japan for the lower price there. Whereas, steel demand stimulated by the state's investment on the domestic market is expected to rebound in H2.”

Interesting stuff. Will there be more to come? Maybe commentators like your truly mistakenly assumed that US-China trade relations would boil over before EU-China ones.

Surprise! 83% of Largest US Firms in Tax Havens

The United States' General Accountability Office (GAO) is out with a new report whose main finding is that 83 out of 100 of the largest American firms have subsidiaries in jurisdictions commonly regarded as tax havens. I have discussed the ongoing crackdown by industrialized countries on tax havens for the understandable reason that tax revenues tend to become less healthy in times of slowing economic activity. If you read the summary of the report, the GAO uses very careful language to suggest that operating a subsidiary in a tax haven is not necessarily evidence of companies engaging in tax avoidance.

Is this like being found with a strange woman in a motel who isn't your wife? See for yourselves. I suggest that revenue-hungry countries adopt Metallica's "All Nightmare Long" as their soundtrack in tracking these evildoers: 'cause we hunt you down without mercy...hunt you down all nightmare long...

Many U.S. corporations operate globally and have foreign subsidiaries. The subsidiaries may be created, for example, to take advantage of sales opportunities or favorable labor conditions. In some cases they may be used to reduce taxes. GAO was asked to update its 2004 report on large federal contractors with subsidiaries in countries sometimes called tax havens because of low taxes and a general lack of transparency. In response, GAO determined how many of the 100 largest publicly traded U.S. corporations and the 100 largest publicly traded U.S. federal contractors have subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions. GAO (1) combined three lists of such jurisdictions created by governmental, international, and academic sources and (2) identified large publicly traded U.S. corporations and federal contractors and the locations of their subsidiaries using the Fortune 500 list, a federal contracting Web site, and a Securities and Exchange Commission (SEC) database.

Eighty-three of the 100 largest publicly traded U.S. corporations in terms of 2007 revenue reported having subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions. Sixty-three of the 100 largest publicly traded U.S. federal contractors in terms of fiscal year 2007 federal contract obligations reported having subsidiaries in such jurisdictions. Since subsidiaries may be established in listed jurisdictions for a variety of nontax business reasons, the existence of a subsidiary in a jurisdiction listed as a tax haven or financial privacy jurisdiction does not signify that a corporation or federal contractor established that subsidiary for the purpose of reducing its tax burden. GAO did not attempt to determine if corporations or contractors with subsidiaries in such jurisdictions engaged in transactions with their subsidiaries to reduce their tax burden. In addition, the SEC only requires public corporations to report significant subsidiaries, so the number of subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions for each corporation or federal contractor may be understated in this report.

There is no agreed-upon definition of a tax haven or agreed-upon list of jurisdictions that should be considered tax havens. However, various governmental, international, and academic sources used similar characteristics to define and identify tax havens. Some of the characteristics included no or nominal taxes; a lack of effective exchange of information with foreign tax authorities; and a lack of transparency in legislative, legal, or administrative provisions. A few sources used terms such as offshore financial centers or financial privacy jurisdictions to refer to jurisdictions with similar characteristics. Based on a review of a variety of sources, GAO identified three lists of tax havens or financial privacy jurisdictions. The three sources GAO used are (1) the Organization for Economic Co-operation and Development, (2) a National Bureau of Economic Research working paper, and (3) a U.S. District Court order granting leave for the Internal Revenue Service to serve a "John Doe" summons. GAO combined the three lists into one for the purposes of this report. GAO did not develop its own definition of tax haven or its own list of jurisdictions. In commenting on a draft of this report, the Department of the Treasury expressed concerns about GAO using a list of tax havens or financial privacy jurisdictions because there is no agreed-upon definition of tax havens or list of jurisdictions. However, GAO noted that there is no agreed-upon definition or list and also noted that the jurisdictions on the three lists used have similar characteristics. Further, background for one list said that industry analysts recognize them as offshore tax haven or financial privacy jurisdictions and that they are promoted as such.

Obama-rama: Of Ethanol Tariffs & Brazilian Sugar

The agricultural protectionist stylings of one Barack Obama are well-documented. He's already suggested that, for him, the welfare of relatively well-off American farmers is more important than that of impoverished Kenyan ones when it comes to maintaining farm subsidies. Here we have another example just as he is about to become the American president. Like the EU, the United States has long kept punitive tariffs on Brazilian sugarcane, a biofuel source that is not only less expensive than US corn but also less environmentally destructive [1, 2, 3]. Since lessening global warming is one of if not the key goal in using biofuels, this criticism is not a trivial one.

Unsurprisingly, the ethanol lobby is keen on consolidating its gains with a new president assuming the reins of power. During his campaign, Obama was spotted touring with Tom Daschle (D-SD), senator-turned-ethanol lobbyist. Now, the Renewable Fuels Association is seeking to keep things just as they are. Rust never sleeps; rent-seeking never ends. As our American friends like to ask, "Who's you're (sugar)daddy?"

The US ethanol industry on Tuesday renewed calls for a continuation of the US tariff on Brazilian ethanol, arguing US taxpayers should not be required to subsidise biofuels made abroad. The US levies a 54 cent/gal tax on imported Brazilian ethanol, which the Renewable Fuels Association (RFA) claims is used to offset a tax credit the US gives for blending ethanol in gasoline. The RFA represents 90% of US ethanol makers. [Don't these guys have the argument backwards?]

RFA president Bob Dinneen downplayed talk of possible changes on the blending credit system that could eventually lead to changes on the tariff side. “If it ain’t broke don’t fix it,” Dinneen said during a conference call.

Brazil has for years decried the US import restriction on ethanol, saying it goes against free-trade principles. Brazil has also threathened to challenge US ethanol subsidies at the World Trade Organization (WTO).

The US Congress in 2008 extended both the import tariff and the blender credit, although the credit was reduced from the earlier 51 cents/gal to 45 cents/gal. The tariff was extended until 2010. President-elect Barack Obama indicated on the campaign trail that he planned to keep both the tariff and blender credit in place.

And yes, Brazil should take this sorry piece of policy to the WTO dispute settlement mechanism to administer an old-fashioned whupping.

More Fake Latin Socialism, Ecuador Edition

Ho hum, here's another case of socialist "idealism" running into cold, hard reality--and the latter winning. A few weeks ago, Ecuador's President Rafael Correa decided to default on sovereign debt that he believed was "illegitimate" despite having some money left over to pay the interest. As you'd expect from this open-minded commentator, I am not passing judgment yet. It may even be a nice ploy given the fractious politics common to the developing world: label your predecessors' fiscal excesses "illegitimate" and stick it to the (white) man by defaulting. Depending on how these bonds were issued, various countries will have differing abilities to give lenders a haircut.

Of course, they will also have to consider their ability to access credit in international capital markets after pulling such a stunt. (Argentina which Ecuador is presumably following the example of has been continually embroiled in legal entanglements.) The latest on these bonds is that the Ecuadorean government wants to use a reverse auction process to repurchase these bonds, giving investors a minimum 70% loss or "haircut" in bond trader parlance.

You'd think dyed-in-wool leftists are all rushing to hail Correa as the next Fidel Castro and whatnot, but such is not the case. No sooner had Ecuador defaulted on its debts did it embark on a policy giving foreign mining giants more access to contested lands. I guess "screw the gringos" doesn't work as well during lean times when collecting royalties counts for more than socialist principles. Indigenous peoples and environmentalists--the usual protagonists in socialist morality plays--are up in arms:

Ecuador President Rafael Correa on Thursday said he will not back down from a recently approved law that encourages mining and has sparked protests by Indians and environmentalists. The new law slaps royalties on mining companies and lifts a nine-month ban on exploration that hurt the stock price of companies operating in the Andean nation. Foreign mining companies have found massive gold, silver and copper deposits in southern Ecuador.

"It is necessary to propel responsible mining," Correa said during his state of the state to the assembly. "I will not back down on the mining law." Correa has to ratify or make changes to the new mining law approved by the assembly earlier this week. The socialist had threatened to veto the law if lawmakers made deep changes to the legislation.

The law sets at least 5 percent royalties based on sales and boosts government controls over the nascent sector. The law could spark new anti-mining protests by Indian groups and environmentalists who say the legislation favors foreign companies over poor communities and threatens the country's pristine environment. Sometimes violent protests have kept investors worried over the development of the sector.

Worldwide mining companies are slashing investment plans and selling assets to keep much-needed capital as international credit grows scarce and the price of industrial metals plummet on fears of global recession. Miners including Corriente Resources and Kinross sit on multibillion dollar metal deposits, but analysts say the development of those projects could be delayed due to the global crisis.

Viva la revolucion - and buy some mining stocks while you're at it, comrade ;-)

Fear of China is Greatly Overblown, a Reprise

A few months ago, I mentioned Yasheng Huang's book Capitalism With Chinese Characteristics. (You can download an excerpt from the SSRN.) In light of China's ongoing difficulties, it's worth revisiting. It tackles some of the more vexing questions I've tried to answer in recent posts. Inter alia: (1) Why is China unable to establish names with worldwide brand recognition unlike regional competitors such as Japan and South Korea?; (2) Can innovation be nurtured in an authoritarian regime?; and (3) Why have rather limited efforts to spur Chinese consumption been so lackluster? The Asia Business Council's Mark Clifford has timely commentary drawing from Huang's book. Add in China's very inefficient use of energy and I am firmly convinced that the whole of China's development is decidedly less than the sum of its parts in terms of various inputs. The cracks are already showing:

After the 1989 Tiananmen leadership purge, when Jiang Zemin and Li Peng took over from more liberal leaders, the reforms championed in the 1980s by a wave of largely rural entrepreneurs were stalled, and officials sought to reassert authority. In this "great reversal," Beijing's Xiushui Market, a thriving shopping area popular with tourists, was effectively expropriated by the city. The entrepreneurial founder of Kelon, China's most successful refrigerator maker, had his company seized in a backdoor takeover by local officials who then ran it into the ground. Land grabs by officials intent on real estate development soared. Rural credit cooperatives backed away from entrepreneurial finance and morphed into "policy pawns and cashiers of local government." The government abandoned attempts to develop village-level democracy and instead strengthened the Communist Party in the villages. And finally, fiscal and administrative controls were centralized. The result: depressed income growth and slower growth in domestic consumption.

Unsurprisingly, several big-name Chinese companies on the international stage — Lenovo, Alibaba, Sina and Haier — registered many of their operations as foreign firms, accessed Hong Kong's capital market and legal system and thus succeeded not because of the regime's economic conduct but in spite of it. For reinforcement of the mainland's shortcomings, Huang points to Shanghai, where the mushrooming Pudong skyline masked a poor record on innovation and a lack of private-sector companies of note (its greatest success story, e-commerce star Alibaba, fled to Hangzhou in the neighboring and more entrepreneurial Zhejiang province).

Ominously, Huang contends that productivity growth in China has collapsed. So, too, has personal-income growth. Meanwhile, the paucity of attention given to rural incomes, and the stripping away of educational and health-care services for the rural sector, suggest that the future China might not resemble South Korea, where the private sector has steadily grown in importance, but Latin America [!...bring on the Chinese Hugo Chavez.]

Milestones like China overtaking Germany to become the world's third largest economy need to be taken with a grain of salt.

Repression and Pollution: Is There a Link?

Here's food for thought from Asia: is there a link between GDP per unit of energy use and repression? While it's true that democratic regimes in the Western sense are not plentiful in the region, it seems many particularly authoritarian regimes tend to have lower energy efficiency. The following is taken from the Key Indicators for Asia and the Pacific 2008 published by the Asian Development Bank (ADB). Click for a larger image:

What is striking to me is that, at a glance, it seems authoritarian regimes fare rather worse. Once more, China's case is noteworthy. Here is a country supposedly poised to become the world's largest economy by mid-century being less than half as energy efficient as Bangladesh--hardly an economic powerhouse. Nor dose it compare favorably with its other neighbors in this respect. I have previously gone into some detail [1, 2] explaining why this may be the case. Authoritarian regimes tend to promote industries which allow them to retain the "commanding heights"--in other words, more of energy-intensive manufacturing. Further, authoritarian regimes are not particularly fond of eco-weenie (just kidding) activism: it's off to the gulag for you, buddy. The result speaks for themselves.

If I had more time, I'd try investigate a model using the above data regressed on various indicators of freedom--press, economic, etc. It's worth keeping in mind for a future academic project.

Jeffrey Sachs Wants Government ON Your Backs

I was reading the current issue of TIME in the dentist's waiting room when I saw a blurb on the cover that read, "Jeffrey Sachs: How More Government Can Save America." It was as pleasant as a root canal to see. Let me say this about Sachs: he is not lacking in braggadocio, whether it be in planning The End of Poverty or saving America, for that matter. Who needs the second coming when we've got the joy of Sachs? (I lay claim to this pun.) Predictably, the Mises Economics Blog is all agog over this, and so is Mish Shedlock.

Ronald Reagan made a famous plea concerning "getting government off the backs of the people." Now, Jeffrey Sachs argues the case for getting government to take on serial market failures he discusses at some length. Is he right? Read the article. As for me, your more or less non-partisan correspondent doubts whether this government action results in more social benefits (health care, education, infrastructure) than social costs (future taxation). At least Sachs is forthright in saying that America will have to pay for all of this in taxes--something a sacrifice-averse electorate doesn't want to hear and a less than forthright government doesn't want to talk about:

President-elect Obama inherits the worst economic crisis since the Great Depression: the financial sector is in ruins; the budget is hemorrhaging red ink; debt-ridden households have clamped down on spending, thereby pulling the rug out from under the economy; unemployment is soaring; the country is in two wars; and the unmet social and environmental needs are vast. These conditions demand a fundamental realignment in strategy that ultimately comes back to taxation: Will we pay for the government we need? Obama's big domestic program, the American Recovery and Reinvestment Plan, proposes doubling renewable-energy production and making public buildings more efficient. It calls for better schools and classrooms and the rebuilding of our crumbling roadways and bridges. The President-elect wants our fill-out-the-forms health-care system to be computerized, which will save both lives and money.

He'll certainly have to add to that list. Don't forget bailing out the financial system, helping deficit-ridden state and local governments, revamping the auto industry and funding more global-development assistance to defeat terrorism and overcome instability. Add it up and it will require perhaps 5% of national income on top of our current spending, or approximately 25% of our total GDP.

Send Naomi Klein to Venezuela for Some Disaster

Blowhards from the left (anti-globalizers and Che Guevarra fanatics) and the right (Randians and that sort) are usually in front of the line when it comes to receiving a thrashing here at the IPE Zone. In today's feature, I present two archetypal leftists for your consideration, with the emphasis on the latter. Naomi Klein is a popular author among impressionable freshmen and the like railing about the world's inequities while leading a pampered existence--trustafarians. Her powers of reasoning and perception are quite limited, as demonstrated by her fondness for false analogies and inability to distinguish between a libertarian and a neoconservative, among other things. Meanwhile, Hugo Chavez is a tyrant fond of populist rhetoric, a la Zimbabwe's Robert Mugabe--they promise revolution but serve up repression

What's the relation between the two? Klein was one of the signatories to a letter of support for Hugo Chavez during 2004's recall election. Nevermind that the Canadian Klein signed on to a letter which reads "[w]e are disturbed by our own government’s [US] interference in your internal affairs," but this sort of thing wouldn't bother Klein anyhow. Being quite fond of commenting on disasters, it probably won't sober her up that Chavez's (somewhat) capitalism-free Venezuela isn't faring too well. Bloomberg comments on the "stealth devaluation" underway in which black market rates significantly exceed the official exchange rate and inflation is definitely galloping at 31% and rising:

Venezuelan President Hugo Chavez says he won’t adjust the oil-exporting country’s pegged exchange rate amid a plunge in prices for crude. Instead, seeking to maintain his popularity, he may devalue the currency by sleight of hand. The government is already cutting its sales of dollars at the rate it established in 2005, forcing travelers abroad to turn to a parallel, unofficial market where U.S. currency sells at a 61 percent premium. Venezuelans need government authorization to get dollars at the official rate.

“What’s essentially going on is a surreptitious devaluation,” said Russell Dallen, head trader at Caracas Capital Markets, a unit of BBO Financial Services Inc., a Caracas-based brokerage and asset management company. “They’re pushing more people into the unofficial market, so that’s forcing a devaluation on more people.”

Chavez’s insistence on a pegged rate, which worked well enough as long as Venezuela was awash in petrodollars, turned into a liability since oil prices collapsed. The government can no longer afford to subsidize cheap dollars for the consumer imports Venezuelans have grown accustomed to. On the other hand, abandoning the peg would ignite a surge of inflation at a time Chavez is campaigning for a chance to run again for president.

Venezuela’s inflation, the fastest among the 82 economies tracked by Bloomberg, may accelerate this year as the supply of dollars at the official exchange rate shrinks, forcing importers to spend more for foreign goods. Consumer prices rose 31.9 percent in 2008.

Chavez is a one-dimensional tyrant. Fueled by dear oil, he was riding high. Now that the opposite holds, he's probably hoping for the opposite as Venezuelan debt isn't exactly selling like hotcakes. It looks like capital markets aren't buying into the Bolivarian Revolution, either:

Even after a recent rally, the benchmark 9 1/4 percent bond due in 2027 is down 32.8 percent since Sept. 10. Its 16.041 percent yield will keep the government from selling additional debt, said Claudia Calich, who manages $1 billion in emerging market debt at Invesco in New York. At current oil prices, devaluation is almost unavoidable without “massive” spending cuts, she said in an interview. Devaluation would boost the government’s earnings in bolivars for every dollar of oil sold. Oil accounts for 93 percent of exports and pays for half the budget.

Chavez and Rodriguez have said oil may be poised to rebound. In any event, Chavez says his socialist political project can survive low prices, as it did in 2001 and 2002. On New Years Eve he unveiled plans for $100 billion in projects over the next four years. “His mouth is writing checks that the oil price doesn’t allow him to cash at the moment,” said Dallen, the trader at Caracas Capital Markets.

Blaming the West for self-inflicted misfortunes is getting Mugabe-style old. Even former acolytes admit that Chavez's grasp of economics is effectively worse than Klein's. The numbers here speak for themselves. Interpid reporter Klein should do some fair reporting and comment on the fate of this populist movement. I guess George "El Diablo" Bush got the last laugh before leaving office. He'd probably tell Chavez the same thing he hold his infamous disaster honcho: Heckuva job, Hugo, heckuva job.

World Bank to India's Wipro: Yer Barred!

Readers outside of Britain are probably unfamiliar with the reference here to "Yer barred!" John Smith's Bitter used to run a series of popular ads in which a cranky bartender (played by Peter Kay) would throw out customers wearing outrageous toupees, watching "housewife telly," and fondling gadgets in his pub. The punch line was that John Smith's was "no nonsense." You can view the ads on YouTube; the latest ones are also pretty good if politically incorrect. Just recently, the World Bank revealed that it has barred Indian outsourcing powerhouse Wipro from doing business with it (along with the already-beleaguered Satyam). From the Financial Times:

India’s outsourcing sector suffered a fresh blow on Monday when the World Bank revealed it had barred Wipro Technologies – the industry’s third biggest outsourcing company by revenue – from doing business with it. The allegations against Wipro, which the bank accused of “providing improper benefits” to bank staff, come less than a week after news that the sector’s fourth largest operator, Satyam Computer Services, had been fixing its accounts in a fraud worth more than $1bn.

The ban on Wipro sent the group’s shares tumbling 9.3 per cent to Rs228.35 amid growing concern over governance in the sector – one of the country’s showcase industries with export earnings of more than $40bn. Wipro, one of three Indian IT outsourcing companies affected by the World Bank ban, was barred in June 2007 for four years. The others included Satyam, barred in September 2008 in a case unrelated to the present scandal, and Megasoft Consultants, a smaller operator.

Wipro said the ban related to an allocation of shares in its 2000 initial public offering of American depositary receipts [ADRs--see here to know what they are] to the World Bank’s senior chief information officer and another staff member. “They directed this offer to members of their family and friends,” Wipro said.

It said the offering was done under a scheme called the “directed shares programme” in line with Securities and Exchange Commission regulations that allow the allocation of shares to employees and clients.

The World Bank staff, who bought 1,750 shares for a total of $72,000, had signed a conflict of interest statement, saying the purchase did not violate the internal policies of their employer, Wipro said. [Wipro] said its revenue from the World Bank was “insignificant”. Analysts said even if Wipro had not acted unlawfully, the purchase sent the wrong signal.

Like the ejected pub patrons in the John Smith's commercials, I am inclined to give Wipro the benefit of the doubt. The World Bank employees who bought ADRs did sign a conflict of interest statement. Why is the World Bank now so sensitive to the slightest whiff of impropriety? This one I'll have to chalk up to its harrowing experience with its resigned former chief--Mr. Loverman himself--Paul Wolfowitz. As much as possible, it wants to avoid any rehash of that sort of thing.

The World Bank should change its tagline from "Our dream is a world without poverty" to "No nonsense, just development - World Bank." And it should hire John Kay. That'd spice up its moribund PR efforts, I'll bet.

Attention Pixar: Rats Don't Prepare the Food Here

Pixar's animated feature Ratatouille was a big hit worldwide for the obvious reasons: it was a really excellent movie backed by one of the largest media companies on the face of the Earth. I was digging through some holiday photographs taken while traveling through Asia when I came across the photo above. Talk about cultural globalization.

Somehow, I don't think rats are involved in the food preparation at this joint unlike in the cinematographic restaurant it ripped its name from. Indeed, it may be the only restaurant extant where customers would be unhappy about this fact. The USTR says intellectual property (IP) laws are loosely enforced in the developing world. What puzzles me is that I remember seeing it on a busy thoroughfare. Just think what Disney would have to say about this. They may very well--how do I put this--smell a rat. To jog your memory, here's the scene where Remy first sets sight on Gusteau's:

UPDATE: Guest NS had me searching for this restaurant's location. See here. It's supposed to be a "Restaurant and Comedy Venue." In contrast to Disney's family-friendly image, it turns out this place features bi(sexual) nights [!] when they sing karaoke [!!] I am not one to deny others with an enterprising spirit; it's likely that they've given some attention to what they can get away with as you'll notice their logo of a chef with a mic is unique to them.

Obama to Calderon: NAFTA Will Be Renegotiated

The meeting of US President-elect Barack Obama and Mexican President Felipe Calderon is not particularly newsworthy except for this tidbit from the Huffington Post. Obama says he will fulfill campaign promises to renegotiate NAFTA to include labor and environmental provisions. Again, I am of the opinion that this is little more than backdoor protectionism.

Do LDCs have anywhere near the institutional capacity to raise labor and environmental standards to industrialized country standards? If they had these or were able to do so, then they wouldn't be developing countries to start with.

The answer, of course, is that this is blatant protectionism. By using America's economic clout to arm twist LDCs into lopsided deals in which the US can slap down LDCs with purported labor and environmental violations should it become necessary to pander to rent seekers, this amounts to little more than beggar-thy-neighbor revisited. The Huffington Post article is quite frankly incomprehensible in arguing that burdening Mexico with all sorts of costs would somehow improve Mexican competitiveness. Calderon is justifiably appalled. Unlike retrograde flicks on trade, this is one bad movie which may come to life even if the "reasoning" is similarly MIA.

UPDATE: Reuters quotes Calderon saying that renegotiating NAFTA would be "a very bad idea" as it would increase and not decrease pressure for illegal immigration.

Disabusing You of "Deficits Don't Matter" Theories

I sometimes feel like Michael Corleone when it comes to global economic imbalances. No matter what he did to move his enterprise from a life of crime, things kept dragging him back. And so it is that I have to once again been dragged into this territory. This time, though, I intend to make a definitive statement that I can refer back to in the future. All the while, I want to keep things simple in a language everyone can easily understand. For each instance, I will cite the work of someone with a seeming inability to stay away from"deficits don't matter"-style theories ;-)

(1) "Deficits don't matter because there's a global savings glut" - Michael Pettis has continually leaned on this idea first propounded by Ben Bernanke; he is not the only one. By accounting identity, all the world's current account balances must sum to zero. Bernanke's spin on the matter goes like this: East Asian exporters and to a lesser extent Middle East oilers have been running large external surpluses due to burgeoning goods exports in the former case and energy exports in the latter. Returning to the accounting identity, the concomitant savings of these regions have been accompanied by a lack of savings elsewhere. In effect, the large savings of LDCs are "forcing" the US to dissave. Aside from the chicken-and-egg quality--does LDC saving precede US dissaving or vice-versa--there is also the inconvenient truth that global savings rates are not particularly high by historical standards. This figure is from the September 2005 World Economic Outlook of the World Bank:

Also notice the caption. Recently, Brad Setser resurrected the discussion on Bernanke's global savings glut theory and was promptly shellacked by some of his readers. Ultimately, I am in agreement with what he says, despite a doubtful effort to salvage Bernanke's terminology. Everyone pretty much recognizes the need to spur domestic consumption in China--fellow IPE blogger Kindred, Martin Wolf, Brad Sester, even Michael Pettis. What separates me from this illustrious cast is that I regard the answer as something economics has precious little to say about. Yes, China needs to consume more--just as the Israelis and the Palestinians need to calm down. Tell me something new. But how do you do that? Well, that's where some knowledge of marketing comes in handy when the subject matter turns to Chinese consumption. On this economists are mostly silent as they aren't really trained to answer such questions. Hopefully, IPE as a multidisciplinary field is better suited to the task at hand. Again, watch this space.

Before moving on, the main problem with the global savings glut theory is that Bernanke refers to the distribution of savings when the term refers to the level of savings. A "global savings glut" implies that savings are high globally. Let me provide you with a number of basic illustrations:

For simplicity's sake, let's consider the case of savings for two hypothetical regions, North Amorica (NA) and Aisha (AI). Now, (1) depicts a situation in which the level of savings is a touch less than a quarter of the world's GDP as per the preceding World Bank chart. What if we were to change the distribution of savings levels for both regions but kept the global level the same? You get (2), similar to a situation described by Bernanke. Is this a global savings glut? Of course not. What you can instead say is that there is a regional savings glut in AI--see the encircled portion--and an accompanying savings shortage in NA. Bernanke's semantics are thus faulty as a real global savings glut would look something like (3) or a less-evenly distributed (4) in which events push savings levels dramatically higher on a global basis. In his most recent post, Setser points out that the global savings rates in 2007 stood at 24.1% of world GDP to lend some credence to Bernanke. While this may be above trend, it certainly isn't a "glut" and is well below oil crisis levels. Gently nudging Dr. Setser, a couple of inches more in yearly rainfall doesn't mean we should start copying the example of Noah. There is no great flood here--or a "global savings glut" for that matter.

Bernanke is not only incorrect; he is also disingenuous. Although I cannot comment on his motivations for obvious reasons, many including myself have suspected that he made this stuff up to suit his would-be political paymasters. Back then, he was just among the many angling to become Alan Greenspan's replacement as Fed chairman. Consider the counterfactual if Bernanke were more intellectually honest when asked to comment on these matters: "President Bush, the real reason for us running large deficits is a combination of policies encouraging a dramatic rise in unsustainable private and public spending as well as America's inability to create tradable goods and services." Would saying that put you in front of the line to become Bush's Fed chair nominee? I leave it up to you.

(2) "Deficits don't matter because they are a natural byproduct of demographic imbalances" - Michael Pettis is once again at the forefront of these arguments. China with its rapidly greying population (due to the infamous one-child policy among other things) is accumulating claims now against the US. Demographic imbalances should mean that, in a couple of decades, aging China will rely more on a steady stream of payments from the US to compensate for an unfavorable potential support ratio (PSR). I have two points of contention here, neither of which should be unfamiliar:

a. China's claims against the US are of distinctly low quality: You name it, China has been suckered into buying dollar-denominated assets that have already lost or will soon lose value--dollars (which owe a lot of their remaining value to China), low-to-no yield Treasuries, a reported $376B in Agency bonds, Blackstone, Morgan Stanley, etc. Why would China be better off by accumulating money-losing claims? From an investment POV, wouldn't it literally be better off hiding (non-dollar) cash under its mattress?

b. The fiscal cost of retirees to the US is much, much higher than to China. We get nothing from Pettis about the impending retirement of 78 million baby boomers who have lavished themselves with old age and medical benefits to enjoy their future days with. The folks at the Peterson Foundation who do more than just armchair theorizing have computed future obligations arising from Social Security and Medicare at $42.9 trillion in a more immediate time frame. Why don't we hear about this from Pettis who is fond of discussing demographics? In stark contrast, let's just say China isn't exactly obligated to splurge on its retirees.

(3) "Deficits don't matter because additional household savings will compensate for the fiscal deficit, resulting in no additional external borrowing requirement" - Owing to him, I have already gotten off my duff to do the math. As you can see, I at the time estimated the additional fiscal deficit of the US at $700B based on a very optimistic scenario. Let us reconsider these calculations in light of recent CBO estimates that the deficit will reach $1.2 trillion prior to consideration of additional Obamanite stimulus. The forecast of the CBO for 2009 before additional hell broke loose was $438 billion. With Obama contemplating a $775B package over two years, let's say the additional fiscal deficit conservatively amounts to [(775/2) + (1200)] - 438 = $1149.5B. Again using rather generous assumptions, the target savings rate comes to 1149.5/11,319.4 = 10.1%.

In response to a comment I made on his blog, Brad Setser replies that because of a combination of wealth effects (people feel less affluent in lean times) and credit constraints (banks are becoming more reluctant to lend money to many Americans, especially the bankrupt and/or foreclosed), US savings rates are headed upwards. This is of course true. However, personal disposable income is bound to dive in America contrary to the more optimistic assumptions I make to come up with the figure above. Among other things, these include dwindling interest income due to American ZIRP and falling dividends as corporations aim to conserve cash from reduced profits. There is considerable upward pressure on the target savings rate--considerations scarcely mentioned by those optimistic about America's deficits.

* * *
On this matter I have not changed my line one iota, maintaining metronomic consistency. When your stuff is on the Internet, you can't cover up your tracks easily. I am thus at a loss as to why Pettis who's publicly said "I have never been terribly worried about the sustainability of the US trade deficit" is now cautioning about a financial "crisis." Why should we even bother dealing with these silly deficits if they're eminently sustainable for reasons he's given above? It sure beats me. Then again, I have deficit attention disorder.

As for Helicopter Ben Bernanke, I have some words of wisdom for him from, er, Nazareth that we're best advised to follow:

Some fools think of happiness
Of blissfulness, togetherness
Some fools fool themselves I guess
But they're not fooling me

The Protectionist Stylings of Warren Buffett

Trade Diversion has pointed me in the direction of this highly interesting Vox EU commentary from Jagdish "In Defense of Globalization" Bhagwati. It appears the good professor is now regretting his decision to (oddly) style Barack "China Currency Coalition" Obama as a free trader and Hillary Clinton a protectionist [!] I have always maintained that he had it backwards, but the point is academic now. Anyway, what he says makes for very interesting reading. Here he bashes Obama's appointees left and right (but especially left):

Alas, his cabinet appointments include Hillary Clinton, whose revealed trade scepticism is badly muddled, at best, and Labour Secretary Hilda Solis, who reflects the anti-trade sentiments of the union federation AFL-CIO. His “superstar” advisers include Robert Rubin, who is crippled by his Citigroup’s receipt of large bailout funds, the brilliant former Treasury Secretary Larry Summers whose recent Financial Times columns on the issue of “trade and wages” suggest prudence in the current political environment, and the remarkable Warren Buffett, who is notorious for having proposed (Fortune, 26 October 2003) an import control regime which would “solve” the trade deficit by not permitting imports that exceed export earnings. The USTR position was offered to Congressman Xavier Becerra, a trade-sceptic at best, and has now gone to Mayor Ron Kirk with credentials only as a NAFTA supporter, hardly a recommendation for a forceful presence on support for the open, multilateral trading regime. A “team of rivals” indeed.

Bhagwati pillorying Buffett interested me in particular. I have always liked Buffett's notion of financial weapons of mass destruction to describe derivatives. Unfortunately, Bhagwati is right in digging up Buffett's highly unconventional and unrealistic process of solving the US trade deficit. From the aforementioned Fortune article:

We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits. At a point, so it was claimed, the spree of the consumption-happy nation would be braked by currency-rate adjustments and by the unwillingness of creditor countries to accept an endless flow of IOUs from the big spenders. And that's the way it has indeed worked for the rest of the world, as we can see by the abrupt shutoffs of credit that many profligate nations have suffered in recent decades.

The U.S., however, enjoys special status. In effect, we can behave today as we wish because our past financial behavior was so exemplary—and because we are so rich. Neither our capacity nor our intention to pay is questioned, and we continue to have a mountain of desirable assets to trade for consumables. In other words, our national credit card allows us to charge truly breathtaking amounts. But that card's credit line is not limitless.

The time to halt this trading of assets for consumables is now, and I have a plan to suggest for getting it done. My remedy may sound gimmicky, and in truth it is a tariff called by another name. But this is a tariff that retains most free-market virtues, neither protecting specific industries nor punishing specific countries nor encouraging trade wars. This plan would increase our exports and might well lead to increased overall world trade. And it would balance our books without there being a significant decline in the value of the dollar, which I believe is otherwise
almost certain to occur.

We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties—either exporters abroad or importers here—wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.

Because our exports total about $80 billion a month, ICs would be issued in huge, equivalent quantities—that is, 80 billion certificates a month—and would surely trade in an exceptionally liquid market. Competition would then determine who among those parties wanting to sell to us would buy the certificates and how much they would pay. (I visualize that the certificates would be issued with a short life, possibly of six months, so that speculators would be discouraged from accumulating them.)

For illustrative purposes, let's postulate that each IC would sell for 10 cents—that is, 10 cents per dollar of exports behind them. Other things being equal, this amount would mean a U.S. producer could realize 10% more by selling his goods in the export market than by selling them domestically, with the extra 10% coming from his sales of ICs.

Does this sound like a development-friendly policy? They don't call it beggar-thy-neighbor for nuthin'.

Reinventing Rafael Nadal: A Cost-Benefit Analysis

Needing a respite from subprime globalization--it's important, but focusing on it too much will send me to the funny farm (if I'm not there already)--I came upon this TIME article on the forthcoming reinvention of the world's top-ranked tennis player, Rafael Nadal. You might be asking, "why fix what ain't broken"? Well, the article gives us a number of clues. First, Nadal's unorthodox game may be unduly harsh on his body, making it a real possibility that his career may be curtailed if he keeps playing in his unorthodox, all-out manner:

But there is a caveat. Can someone with such a high-intensity game last long enough to break all the records? Tennis players' longevity varies depending on their style of play. As points and matches lengthen, careers often shorten. Nadal and his coterie of physical trainers know that the flip side of his heavy topspin is that it forces him to engage in bruising rallies. His muscle-bound physique — which Nadal says is down to genes rather than weight-lifting — adds an extra burden: the explosive forces those muscles generate put his body under increased strain.

For him, there may be a tradeoff between winning championships now with a take-no-prisoners style and having a shortened career. In a profound irony, Nadal and his trainer aspire to be more like the less bodily-abusive Rog (Roger Federer). There is insight here:

Is his coach encouraging Nadal to mimic Federer? "No, Federer is too good," says [Nadal's coach and uncle] Toni. "Rafael must play like himself but better, [less spin], quicker points." But how can Federer be too good when Rafael is ranked No. 1? "There is a difference between who is better and who knows more," says Toni. "Better now is Rafael, he is No. 1 in the ranking. But who has the best game? Federer."

And, of course, there is the omnipresent commercial specter overhanging virtually all popular international sports. Come to think of it, me being more of a Federer fan may be down to buying into the Federer Mystique™ of him sponsoring Rolex and whatnot. Like many others, I suppose many would like to consider themselves as cool and cosmopolitan Rog clones: you can easily picture him sipping Veuve Clicquot on board a 146-foot Feadship yacht in contrast to the more brash Nadal. Before I digress any further and make this place a lifestyle blog:

Nadal's manager, Carlos Costa of the management company IMG, says the young champ is ready to grow up. The role model, again, is Federer, who has positioned himself as an elder statesman of the tour and whose exquisite touch on the court and advertiser-friendly image as a trilingual Swiss gentleman brought in an estimated $35 million in prize money and endorsements in 2008. (Nadal's camp won't discuss finances, but tennis writers estimate Nadal's earnings fall considerably short of that.) "When you see Nadal and Federer it's a different type of person," says Costa. [Federer] is more adult, [Nadal] seems more like a kid." If Nadal's earnings are to grow, that will have to change. Nadal's sponsors target "young people," says Costa. "But he needs to be the kind of guy that brands can think of as an ambassador. Someday he's going to be a man, more than a kid."

Come to think of it, Nadal does conduct himself well on court. Federer does utter an expletive every now and then, belying his suave reputation. In any event, Nadal has been reluctant with this rebranding effort:

As part of the campaign to rebrand Nadal, Nike announced last summer that the player would wear a new line of attire at the U.S. Open. Nadal normally wears knee-length shorts and a sleeveless shirt — a trademark pirate costume loved by fans, which looks ridiculous on anything other than Nadal's muscled body. Nike said the new line would be "more mature" and appeal to an older tennis-playing public. But only days before the tournament began, the clothes were withdrawn because Nadal said he felt uncomfortable.

It's all about the dreaded wonga (weird British slang for money), innit? Marx's economic determinism--you can't escape from it for too long.

8 Interesting Journal Articles on Financial Crisis

Our friends at Palgrave-Macmillan, one of the most established academic publishers, have sent me a note about eight journal articles that they have liberated from the subscription firewall bearing on the current financial crisis. They all look interesting as many of the authors and publications should be familiar to those dabbling in this subject matter. Off the cuff, I am interested in Lars Jonung's article as to how the Scandinavian banking cleanup was effected given that many American commentators see parallels between it and remedying the US mess. Leonard Seabrooke's "Varieties of Residential Capitalism!" [!] also looks provocative. I've met Len Seabrooke and while we don't share similar perspectives, he's an awfully nice fellow with many interesting viewpoints. Regardless, there are few doubts that housing constitutes a major political-economic realm in any number of countries. Happy reading...

1. Lessons from Financial Liberalisation in Scandinavia
Lars Jonung
Comparative Economic Studies

2. Umbrella Supervision and the Role of the Central Bank
Joseph G. Haubrich and James B. Thomson
Journal of Banking Regulation

3. The subprime mortgage debacle and its linkages to corporate governance
James Bicksler
International Journal of Disclosure and Governance

4. Varieties of Residential Capitalism in the International Political Economy: Old Welfare States and the New Politics of Housing
Herman Schwartz and Leonard Seabrooke
Comparative European Politics

5. Regulating risk: a measured response to the banking crisis
David Halliday McIlroy
Journal of Banking Regulation

6. Be careful what you ask for: is fair value accounting really fair?
Alfred M. King
International Journal of Disclosure and Governance

7. Economic Review: November 2008
Economic & Labour Market Review

8. Time to fix the plumbing: improving the UK framework following the collapse of Northern Rock
John Raymond LaBrosse
Journal of Banking Regulation

Those Frenchified Cautions on Anglo-Saxonomics

Let me begin by saying that I have nothing against the French in the Bushian vernacular. My uncle is a Frenchman and he is the dearest man you can possibly imagine. When it comes to French government pronouncements, however, I tend to be more cautious. The genius of French diplomacy in the postwar years has been its ability to punch above its weight. Do not forget, mon ami, that diplomacy is a French specialty par excellence. Take, for instance, recent pronouncements by Germany's Angela Merkel and France's Nicolas Sarkozy on civilizing capitalism:

The head of Europe's biggest economy said Thursday that world leaders should be looking at the massive U.S. deficit and other economic imbalances, not just problems caused by financial markets, as they debate a new global order.

Speaking at a conference in Paris on the future of capitalism, German Chancellor Angela Merkel singled out the American budget deficit and China's current account surplus — the difference between exports and imports — as problems upsetting the global economy. "We would be making an error if we were content to look solely at financial markets," she said. She deplored huge debts that governments are accumulating to spend their way out of the present crisis. But she said she recognized, for the moment, that "there is no other possibility..."

Merkel said the International Monetary Fund has not managed to regulate global capitalism, and she called for the creation of an economy body at the United Nations, similar to the Security Council, to judge government policy.

French President Nicolas Sarkozy, leading the two-day conference with former British Prime Minister Tony Blair, blamed financial speculators for encouraging a system fueled on debt. He called financial capitalism based on speculation "an immoral system" that has "perverted the logic of capitalism." It's a system where wealth goes to the wealthy, where work is devalued, where production is devalued, where entrepreneurial spirit is devalued," he said. But no more: "In capitalism of the 21st century, there is room for the state," he said.

Merkel I have few qualms about and I hold her in very high regard for obvious reasons. Meanwhile, Sarkozy makes the right noises--I'll give him that. We even sound alike, to some extent. However, before you buy the Sarkozy version hook, line, and sinker, I must warn you of another French diplomatic specialty: couching a self-serving agenda in altruistic rhetoric. After all, this is the same guy who wanted to make European SWFs to prevent Middle Eastern and Asian ones from buying into French companies. Are we all French national champions now? It wouldn't be a very congenial global political economy if it were so.

This has been an automated warning from the IPE Zone about the French siren song. Please don't be lulled and...have a nice day.

US Deficits, IMF Hypocrisy, China & You

Dear readers, never let it be said that my blog posts--rants if you're so inclined--are the product of mere creative writing. Making predictions is a tricky business, and I doubt whether people would bother with me if, on the balance, I got far more things wrong than right. It is my sworn duty to report that I again appear to have been vindicated. In mid-November, I estimated the 2009 US deficit to be in the $1.5 trillion range. The Financial Times now reports that the US Congressional Budget Office pegs this figure at $1.2 trillion--before Barack "Trillions in Deficits" Obama's proposed stimulus package (how I abhor that term) which is likely to cost $775B over two years. If so, I actually undershot the mark. I don't call the blog's official parlor game "How Much More Will Sammy the Beggar Owe in 2009?" for nothing. The CBO report is here; the Peterson Foundation has more.

Kindred at the University of North Carolina - Chapel Hill and I have been engaged in an exchange [1, 2, 3] about whether a trade war would be welcome to clear global economic imbalances now fouling up the world economy. Although Kindred is far too polite, I gather he thinks I've gone off the deep end ;-) Let me pull things together here using recent blog posts bearing on the matter. I really should be moving on as I suspect many visitors want more Doraemon and less Dick Cheney. Nevertheless, as this discussion lies at the heart of IPE matters--hegemony, trade, finance, and development, I guess it deserves one more go. In his latest missive, Kindred repeats a line common to those who are sanguine on US deficits: in GDP percentage terms, America's national debt isn't particularly high compared to those of other industrialized countries. Two things: not for long (see large PDF) and that we must be concerned with its absolute size as well. I am aware of America's extraordinary privilege of being able to print its debt denominated in the world's foremost reserve currency. What I am wary about is how the US goes about abusing this privilege and much else.

First off, Obama's promise to inflict trillions of dollars' worth of US debt on the rest of the world is not particularly liberal in the classic sense of the word. Or, for that matter, sustainable. The US will be testing the limits of its ability to count on the kindness of strangers. As I've repeated, the proper response of the rest of the world to this sort of behavior is to tell Sammy to beat it. Isn't depending on other countries to buy low-to-no yielding Treasuries at a considerable loss not a beggar-thy-neighbor strategy, dodgy math aside? As a development scholar, I find it simply appalling that the world's richest country expects LDCs to shoulder its burdens. Make no mistake that there are consequences here. In China's case, there are far more socially productive alternatives to piling on Treasuries. Speaking of education, how about building safer schoolhouses?

Recently, I expressed my dismay at the lack of LDC representation at international institutions. To be sure, the US has outsized influence over these institutions as it was instrumental in their creation. I'm sure all are familiar with American efforts to engage the IMF in currency-bashing shenanigans, though it's unlikely that the IMF will get the ball rolling on this matter. More importantly, I am struck by the change of tone made by the IMF from the Asian financial crisis days to the present. Before, it was all about belt-tightening, austerity measures, structural adjustment, and so forth. That of course was the situation when those erring East Asian LDCs engaged in all sorts of tomfoolery--crony capitalism, fat subsidies, and what else have you.
Nowadays, it seems the Washington Consensus made sense for others afflicted by contagion--but not Washington itself [1, 2]. Instead of structurally adjusting from a consumption- to a production-based economy to help pay for its onerous and quickly growing obligations, the IMF appears to be cheering on excessive US spending to hopefully cure what was caused by too much spending to begin with. I am struck by this interview with current IMF Chief Economist Olivier Blanchard:

IMF Survey online: Some people are questioning the wisdom of taking on new debt when the effect of past stimulus packages has been uneven at best. Aren't countries running a big risk of saddling future generations with massive new debt at the very time when the effects of population aging will hit many developed countries?

Blanchard: In normal times, the Fund would indeed be recommending to many countries that they reduce their budget deficit and their public debt. But these are not normal times, and the balance of risks today is very different.

In other words, the Asian financial crisis was "normal" as it concerned *only* unimportant LDCs, not the United States, so stimulate this and stimulate that is the proper response now in a way it wasn't then. I may not be very bright, but it seems that you cannot inspire discipline by indulging self-destructive behavior.

What the IMF is in effect doing is sanctioning subprime globalization via American profligacy--capital flowing uphill and the rest of it. Part of the deal includes zombie industries. Apparently, infant industries for LDCs were incorrect, but pump-priming any number of moribund American ones is just fine. The point of having a trade war with respect to zombie industries is that it would prevent their formation by making the cost of capital for firms and the US government more realistic unlike the current condition in which the latter gets a free pass. That is, both would be high to realistically account for the risks involved in lending to such legendarily profligate entities. At a time when the relevance of international institutions is being questioned, a clear case of IMF lackeyism isn't going to go down too well with LDCs which have borne the brunt of stringent policies in times past. You cannot have a liberal economic order with such stacked institutions that make a virtue out of America's bad example. It's realism, not liberalism, via Thucydides: The strong do what they will, the weak suffer what they must.

Last point--Kindred cautions that many Chinese would lose their jobs due to a trade war. There is good reason why global economic imbalances are called "unsustainable." If manufacturing overcapacity in China is one of its symptoms since the rest of the world cannot absorb what it manufactures, laborers employed under conditions of overcapacity are working on borrowed time. One of the ironic things about China's development has been the world's most populous nation being more capital-intensive than labor-intensive. World Bank research has consistently pointed this out. Shifting to a domestic focus will mean more than simply selling stuff meant for export markets at home given that they are (1) unaffordable to many Chinese and (2) not primarily designed to appeal to domestic markets. Shifting to a domestic focus will mean designing products for Chinese consumption as well as offering more labor-intensive services. Inter alia, think of banks extending currently negligible consumer credit.

* * *

I have not come up with this idea just now. In February of 2008, I said the following about the present subject matter on Martin Wolf's blog. I gather he's well-known among economist types:

Ironically, political protectionism is a more likely path to reducing global imbalances. Witness the sovereign wealth fund backlash as the EU and US vie to create voluntary codes of conduct, which in the event of LDC non-cooperation may lead to punitive measures. Biting the hand that feeds may only serve to deter capital flowing uphill and hasten the process of rebalancing as an unintended consequence.

Unintended consequences are a mainstay of liberal thought. Witness the "invisible hand" (I risk a thrashing from Gavin Kennedy). That subprime globalization has not only remained firmly in place but is expanding its reach in a manner damaging to the liberties of ordinary Americans, Chinese, and indeed the rest of us is fairly incontrovertible from my POV. If once-in-a-lifetime dislocations have not gotten rid of these imbalances, what will it take? I wish Kindred were right in saying that a negotiated solution between the US and China is within reach. However, endless strategic economic dialogues and G-20 meetings have failed to produce the desired result.

Moving the main protagonists out of their dead zones on their own accord has proven to be a fruitless enterprise. For everyone's benefit--and I do mean everyone--it's time to cry havoc and unleash the dogs of (trade) war. Ladeez and gentlemen, in the Red(s) corner, weighing in at $2.0 trillion, the heavyweight reserve champion of the world...

Thanks to Readers: We're #2 for IPE in Google!

I was kind of amazed that using the search term "international political economy" in Google resulted in the IPE Zone being the second thing listed after the Wikipedia entry. Although results may vary depending on the region, I gather that the blog shouldn't be ranked outside the top 3. Outdo Wikipedia? Forget it; I have better things to do.

Accordingly, I must thank regular blog readers for their continued patronage in making the IPE Zone a noteworthy Internet destination. At the beginning, I only had the humble intention of placing additional course content for my students at the University of Birmingham, or "Brum" as we affectionately call our beloved town. That we now attract readers from all parts of the world is a blessing. Unfortunately, they don't include those from China as the Great Firewall of China prevents Blogger sites from polluting the minds of the Chinese people with subversive bourgeois nonsense.

Despite my occasionally OTT perspectives and rants--an underopinionated blogger is an oxymoron IMHO--I hope that I have been a serviceable ambassador for the field of study known as international political economy. While it is still in its infancy, it is growing at a healthy clip. Like many other disciplines, IPE strives to escape the long shadow of economic imperialism, with all due respect to our economics blogging colleagues. Yet, novelty in approaching contemporary issues concerning the world economy should not degenerate into the pitfalls of Freakonomics-style novelty for novelty's sake. There are many current events with surprising roots, from a rocket scientist launching China's one child policy (and thus its demographic imbalances) to the testosterone-driven ruination of Iceland. Integrating these into the larger scheme of things requires more than just the economist's toolkit. Like the label says, IPE is multidisciplinary.

Blogging is a process of discovery, and while I cannot devote too many resources here, I hope the IPE Zone continues to be a resource for keeping tabs on the latest developments in global governance and related topics. Together, let us plot our escape from the clutches of subprime globalization.

The "Logic" of Bashing China's Currency Regime

In the previous post, I explained why a US-China trade war is a potentially welcome development. This, of course, puts me in your standard-issue economist's doghouse [woof, woof]. In my defense, I was at pains to point out that this course of action would, ironically, likely lead to a path more consonant with the desires of those who first argued for free trade. I further added that it was the most immediate alternative for removing price distortions bedeviling the world economy.

Like Cain, then, I have thus been cast out of not-quite-econo-paradise into the Land of Nod(ders). Never let it be said that baying for a trade war was a wholesome enterprise. Worse, the sorts of people who call for China-bashing seem to be singularly lacking in neighborly spirit--they don't call it beggar-thy-neighbor for nothing. Nor are their arguments particularly convincing or even coherent. Let us take one example. The folks at the China Currency Coalition (CCC) have provided the following chart whose assumed intent is to demonstrating how remiss China has been in revaluing its currency:

According to their thinking, China ought to have appreciated its currency by 0.3% daily since 21 July 2005, the day the formal peg to the dollar was removed in favor of a "managed float." Nevermind that the official statement didn't say that the currency would appreciate 0.3% daily but that it would move in a ±0.3% trading range against the US dollar. This chart reveals a lot of the ineptitude driving your boilerplate China-bashing calls. Among other things -

• why *just* a 40% revaluation? Nearly everyone is aware of the yuan being about that much undervalued in PPP terms. Still, wouldn't a 0.3% daily revaluation mean that the yuan would have reached parity with the dollar sometime ago? Indeed, why stop at parity?
• for all their China-bashing zeal, the CCC folks have been asleep at the wheel. In May of 2007, the People's Bank of China widened its trading band to ±0.5%. Are these hawks getting soft on the evildoers?
  

I hate to say it, but this is the sort of dreck I must now put up with. Why, who are the geniuses behind this artwork?

3-0-1: The Liberal Case for a US-China Trade War

Call me an economic infidel, but I do not champion free trade for its own sake. Kindred blogger Kindred from the fine IPE@UNC blog has asked me to elaborate on my recurring point that a US-China trade war has the potential to do more good than harm by reducing global imbalances. In particular, he faults me for not considering the economic distortions which will arise from such a conflict. The argument I elaborate on here is that already prevalent, state-induced distortions are of a magnitude greater than the ones likely to arise due to a trade war. I believe the start of the year should be a good time to set out my stall. Although liberals (in the classic, not the Krugman-esque sense, but more on this later) will fault me for hawking this apostasy, but I will contend that the global economic imbalances enabled by trade liberalization are certainly not liberty enhancing.

To begin, then, let us discuss the concept of free trade. The word "free" is a loaded term. This fact was most prominently imparted to me while studying at a Jesuit university. Among the Catholic orders, the Jesuits are the best-known educators. At the time, I questioned why this business student had to waste many credit hours in philosophy and theology classes better spent on learning options pricing models and suchlike. A particular essay question still comes to mind:

Jesus Christ nailed to the cross is the freest person of all. Explain.

If I remember correctly, the answer involves Jesus being free from the false sense of the word: being free is not "freedom to do whatever you want" as many mistake it to be. This false freedom is actually enslavement to the caprice of whims--think of the seven deadly sins. Jesus nailed to the cross has a clarity of purpose--free from such whims--that enables Him to make the ultimate sacrifice. And suffer He did. Many commentators on free trade have a similarly simplistic notion of economic freedom--lower trade barriers. From religious matters, we now turn to Adam Smith for expert commentary on economic matters. Again, it's a case of mistaking the forest for the trees. Free trade is not merely lowering trade barriers for the sake of doing so. In a Smithian conception, free trade is merely instrumental to enabling individual liberty: Why should individual welfare be sacrificed by state diktat?

We can only infer what Adam Smith would make of today's global economic imbalances. Still, it is apparent that he was no fan of mercantilist policies. It would seem quite odd to him that many of today's champions of free trade largely overlook this larger point in discussing its virtues: What has trade liberalization done to enhance individual liberty? My point is that, in its current iteration, liberty has been reduced. While some like Jagdish Bhagwati believe that (occasionally disruptive) financial flows can be dissociated from trade flows, it is more accurate to think of them as two sides of the same coin. For more on this point, see my ancillary post below.

The most important economic event of recent years for me has been the accession of China to the WTO in 2001. It has since become the world's largest goods exporter as well as the owner of an unprecedented $2.0 trillion in reserves. These are, of course, related occurrences. Bill Clinton was of the belief that China's further economic integration would make the Communist Party more responsive to enabling other valued freedoms identified by Amartya Sen: political freedoms, social opportunities, transparency guarantees, and protective security. I am convinced that the opposite has happened: China's export orientation has ironically been a freedom-depriving force for the Chinese people. The slowing export machine is leaving many unhappy. Conversely, the United States--home of the mind-blowing deficits--has hardly put individual welfare at the forefront given such things as stagnant wages since the start of the millennium.

From a social justice standpoint, it is regrettable that the poor (people in China and other developing countries) are funding the often frivolous expenditures of the rich (Americans inflating a pointless housing bubble). I thought that the popping of the housing bubble would correct many of the regrettable features of subprime globalization (I hereby claim authorship of the term), but no--things have gotten even worse. That the government is, with little exaggeration, now the sole risk-taker in the US bodes ill for the future of free enterprise. Worse, an effect of the subprime mess has been to reward a fiscally errant government with virtually unlimited access to credit as investors flee private markets in fear of lurking Madoffs and Lehman Brothers. Moving America's private sector deficits to the public sector--and they will move--doesn't cure the country's debt addiction. Once more, Adam Smith would likely be wary of government usurping so much power.

It is obvious to me that America's debt addiction has done it little good, now or especially in the future. At the same time, China's export orientation which has provided it with an incentive to write a blank check for American profligacy is of increasingly questionable merit. Why a trade war, then? Cutting off Beijing's blank check should set into motion a process to unravel subprime globalization in a way that the demise of the housing bubble hasn't. Before I start on the implications for the US and China respectively, let me be clear that I am not advocating an all-out trade war, which is in any case largely inconceivable given the realities of today's mutual interdependence. WTO membership imposes upper bounds on allowable tariffs both sides are loath to breach lest they risk sanction. (And developing countries like China have much leeway with respect to raising tariffs from currently applied levels to bound levels.) It is enough for China to reconsider its reserve accumulation and begin serious thought about creating domestic demand. Meanwhile, doing so should cause the US to sober up to its worryingly dismal economic prospects.

Let me also be clear that a US-led trade war is patently ridiculous for it will likely hurt the US more than China. A savings-deprived America has few continuing sources of financing--none as bountiful as China--while China has other export markets as well as the option of invigorating dormant domestic demand. While asymmetries in international institutions favor the US which came up with most of them in the first place, realpolitik suggests economic leverage lies with China. Yet in spite of its ridiculousness, I see it as the most immediate way to reduce global economic imbalances. The saying about biting the hand that feeds holds. With that caveat in mind, here are the potentially positive implications of a trade war -

United States

(1) The Obama administration promises change. Yet, instead of promising politically unpalatable cold turkey to US debt addiction, it has suggested that it will engage in massive infrastructure projects, investment in the green economy, massive bailouts, and other things predicated on the continued world patronage of US debt. Once more, I am not reflexively opposed to government spending alike most libertarians. Rather, I am uncertain if the continuance of government largesse will mean that the social benefits of these measures (in terms of creating economic activity) outweigh their social costs (in terms of an even heavier debt burden). For all this talk of change, I don't see much of it. What reason is there to believe much-vaunted New Deal-style infrastructure projects are more than just pork and bridges to nowhere? Similarly, do "stimulus packages" amount to more than further US indebtedness and unpopular measures such as bailing out errant banks? Does America's "green economy" involve more than propping up automakers incapable of selling conventional vehicles let alone alternative-powered ones and fat ethanol subsidies?

In the economist's parlance, it seems to me that the real cure is removing distortions to the cost of capital for the US government still prevalent in subprime globalization. Both the US and Chinese governments have contributed to price distortions now prevalent the world over. Given more realistic prices, which of the above projects still retain merit? I'd wager there are few. After all, how can even more spending remedy disorders caused by excessive spending?

(2) Japan's lost decade was famously replete with the formation of zombie industries. With any number of industries now counting on government support--airlines, housing, banks, automakers, steelmakers, aerospace, I am sure there are many more--what good does it do for their future competitiveness to rely on artificially cheap credit? It is fairly accurate to say that the US government is now the main conduit for American finance. What if it were no longer so? The main result would again be to remove distortions that reveal uncompetitive industries for what they really are. From a competitive standpoint, the US propping up manifold uncompetitive industries is surely a welcome thing for China as it can then play catch-up more effectively to a US weighted down by economic deadwood capturing an ever-greater share of national attention.

(3) America would be a lot more serious about confronting its towering obligations--$56.4 trillion and counting--if its enormity were more obvious at the present time. Is Barack "Trillions in Deficits" Obama brave enough to enforce PAYGO legislation? The cost of accumulating this debt should be made more apparent now. The quick and dirty way is to remove China's perverse incentives for funding US profligacy at the current time. Faced with such a situation, wouldn't America be compelled to invest in more productive endeavors that can improve its external position instead of attempting to reflate consumer spending and housing like it is doing now? Like it was formerly fond of prescribing, the US seems long overdue for some "structural adjustment."

China

(1) Chinese leadership should lose its aversion to spurring local demand - many economists suggest that creating domestic demand in China is a key to solving global economic imbalances. Obviously, I agree with this. Something that continues to puzzles economists is how, despite official lip service to doing so, few concrete steps have been done to promote domestic consumption. The Economist cover to the right from 21 October 2006 purported that emerging Asia would pick up the consumption slack from a slowing US. How wrong it was; instead of increasing, Chinese consumption has slumped to a record low 35% of Chinese GDP. Regrettably, China's announcement of a $586B stimulus package continues this pattern by largely ignoring the question of how to create domestic demand. As with many things, a nuanced political-economic analysis yields insights.

A more sobered up Economist recently acknowledged that Chinese producers have to circumvent export-promotion measures just to sell their wares at home. This export orientation persists for three reasons. First, Party leadership has put much stock in gradualism. Second, reorienting away from exports will take considerable time and effort given inertia effects. You can plausibly argue that, after all these years, the likes of Japan and Germany have been unable to pull this feat and are as vulnerable to export slowdowns as ever. Third, it should be obvious that, paradoxically, an export orientation is more conducive to centralized control of the commanding heights for the Party faithful. Gearing up for export means a tighter lid on national affairs, from vetting multinationals wishing to do business in the country to ensuring they make technology transfers that benefit local partners via future copycat exports. This invariably invites trouble--see the case of Alstom [1, 2].

Simply put, a domestic orientation requires more of the freedoms so long denied the Chinese people. Instead of picking winners, for instance, more credit needs to be made available to domestically oriented small-and medium-sized enterprises more attuned to the needs of local consumers than to the wants of Western ones. Also, a culture of innovation needs to be in place. What you have instead is the "Great Firewall of China" designed to stifle an open, collaborative culture. For some time, the Chinese leadership has been trying to create globally respected brands via various subsidies to no avail. Why have Japan and Korea, Inc. been able to establish recognizable brands when the world's foremost goods exporter hasn't? Consumers the world over value innovative brands, and the Chinese have not yet escaped the reverse-engineering paradigm just yet. Doing so will involve nurturing homegrown talent--something an authoritarian system isn't really equipped to do. What can spur a non-responsive Chinese leadership into action on this front? See the post's title.

(2) Cultivate an infrastructure for local demand - myself and several other commentators have noted that Chinese consumption has been hampered by the diminution of social benefits that would increase Chinese citizens' disposable income. Why do they save so much? Recent years have seen a continuing lack of social safety nets whose presence is conducive to consumption--health, education, and retirement expenses are mostly borne out-of-pocket. In part, the Hukou system continues to discriminate against the many migrant laborers who cannot avail of services outside of their places of birth [1, 2]. Also, as the WSJ notes, independent-minded local governments which are understandably keen on hosting revenue-generating export industries are not keen on doling out revenue-eating social services. Hence, a more concerted push needs to be made by central government to realign incentives at the local government level to the potential benefits which can be realized by laying the foundations for domestic consumption. However, as in (1), the government will have to believe this message first before preaching it.

Given the subprime mess, it's no surprise that Chinese leadership retains an aversion to extending consumer credit in the PRC. However, the analogy is a forced one. There is little reason to believe that the prudent Chinese will all of a sudden turn into American-esque spending automatons. Rather, Chinese consumers occupy the opposite extreme: whereas American consumers suffer under the weight of excessive credit, their Chinese counterparts suffer from a dearth of it. Again, the previously unimaginable $2 trillion pile of Chinese reserves is a continuing testament to the purchasing power denied to Chinese citizens by the Party. Furthermore, these reserves are not being used for productive purposes. Toss in a weak infrastructure for availing of financial services and the welfare of individuals is further hampered.

(3) Reduce overinvestment in marginally viable export industries - the incentives from China's export orientation are often perverse. These include a weak currency, cheap (government) credit and utilities, and general neglect of environmental standards. Some may wonder why I am compelled to write about the inevitable: with an economic slump in place, many such businesses are feeling the brunt anyway. Again, it returns to policies of allocating resources in ways more conducive to spurring domestic demand. Will service-oriented domestic industries be more able to avail of credit than export-oriented ones? China's legendary pollution is directly tied into this question as the former are less pollutionary sources of growth than the latter.

As a marketing major from way back, another thing that China commentators often miss is that it's not simply a matter of selling goods originally designed for export at home. Not only are ginormous flat screen TVs and the like out of the budget for those with modest means, but there's often little consideration given to the basic marketing concept of tailoring products to domestic markets. Once more, centralized regimes are better geared towards replicating products sold in global markets than fostering creatively designed products geared towards
local ones.

* * *

Even the Great Paulsonio now recognizes that solving the problem of global economic imbalances is crucial to fixing the ailing world economy. This is true but meaningless. It's like saying the key to world peace is for people to stop killing each other. We know that, but how do you go about achieving it? With regard to global economic imbalances, the most immediate and tangible course appears to be a US-China trade war that sees China waking up to the folly of supplying a debt addict with its daily fix of Treasuries. OTOH, the US can begin its long journey of rehabilitation. Rather than see things get worse, I am of the opinion that a trade war is a better option to shake these two out of their mutual complacency. There's something for everyone to dislike, but ultimately, I believe that the cause of liberty is paradoxically better served by a trade war than the continuance of today's false iteration of free trade--subprime globalization.

So here's to all the Americans warning their representatives about the evils of trade (and Chinese trade in particular). Take sledgehammers to literally bash Chinese products; I am sure it will make good footage. If that's what it takes to finish off subprime globalization, so be it. Individual liberty, the goal of free trade, has been sorely lacking in these discussions. To revive this emphasis, cockamamie China-bashing proposals with a realistic chance of passage should be encouraged. May Adam Smith forgive me for this heresy, but it seems to be the only viable way out. Tariffs are no answer; rather, it's what they will put into motion I am more hopeful of. Once more, what does it really mean to be free? With regard to the present subject matter, the answer is always three-nought-one.

Did Trade Liberalization Enable the Credit Crisis?

This post is meant to expand on an important point made in the already overly-long post above on why a US-China trade war is a potentially welcome development. Earlier on, someone claiming to be "Pascal" (Lamy?) asked me to expand on this point. More recently, I made a similar statement which was subsequently pounced on by a blog reader. I suspect many won't agree anyway me on this, but for what it's worth...

By necessity, current account transactions are accompanied by capital account transactions. Massive US external deficits now unwinding to spectacular have thus been accompanied by "vendor financing" care of foreign creditors. True, this practice is not new. The likes of Japan, the Asian tigers and so forth long ago set the example now followed by China. What is different now is twofold. First, the scale at which it is being practiced is without precedent as China has accumulated $2.0 trillion in reserves. Second, Americans have always been spendthrifts, but it is only in recent years that they've approached the zero savings mark. Further trade liberalization gave the likes of China reason to embark on these unimaginable levels of vendor finance. Had there not been as strong an incentive to build an export-based economy (current account side), there would not have been willingness to lend so much so cheaply (capital account side).

Relatedly, household savings is not exogenously determined. Coupling abundant foreign financing and a sanguine outlook on their future finances (especially housing prices), Americans embarked on a spending spree.

Lastly, tariff reductions send price signals not only to consumers (differentially affecting their consumption based on varying price elasticities of demand) but also producers. We need to consider how much American production was outsourced to destinations like China in response to tariff reductions. Moving production overseas exacerbates the trade imbalance and necessitates further foreign financing. Insofar as there are countries willing to "game the system" by practicing vendor finance, imbalances are magnified.

I am not against trade liberalization per se. All the same, I think it's hard to dissociate further trade liberalization from the rise of global economic imbalances now imperiling the health of the world economy. It's certainly food for thought--especially for reflexive trade boosters.

Pascal Lamy Will Run Unopposed for WTO Chief

Oh my, this is certainly not very good news for those of us wishing for more LDC representation in international institutions--especially multilateral economic institutions. The time has expired for WTO members to nominate candidates for WTO director-general. In 2009, French Socialist Pascal Lamy's current term ends. Unlike in 2005 when three candidates were forwarded by LDCs, there have been no candidates forwarded this year. Indeed, Lamy will run unopposed for a second term.

What explains this turn of events? On the positive side, you can suggest that Pascal Lamy has displayed exemplary leadership, gaining support from both developed and developing countries with his even-handed and accommodative style. Cambridge's Amrita Narlikar would probably agree with this assessment. OTOH, I can think of several other reasons that are much less positive about this development:

• Lamy's stature is such that he's scared away potential LDC candidates;
  
• being WTO chief is an unwanted job circa 2009. As countries the world over experience economic slowdowns, the prospects for an agreement on the Doha Round are as dim as ever;
• LDCs have more important things on their agendas than the symbolism offered by having one of their own preside over the WTO;
  
• LDCs simply don't care much about the WTO--it has become an irrelevant institution.

I thought that Lamy's inability to move Doha forward would spur LDCs to consider placing one of their own as WTO chief. Who'd be better placed to break repeated North-South deadlocks than someone from the Third World who grasps the nuances involved here? [Note to self: maybe I should aspire to become WTO Director-General one day.] The last was Thailand's Supachai Panitchpakdi, currently the UN Conference for Trade and Development (UNCTAD) secretary-general. Oh well, on to the inevitable. From Agence France-Presse:

The World Trade Organisation said Monday that its current director-general, Pascal Lamy, would be unopposed in his bid to renew his mandate when it expires in August this year. None of the organisation's 153 member states put forward another candidate by the deadline of December 31, 2008, WTO spokesman Keith Rockwell told AFP.

Lamy, who took the helm of the global trade watchdog in September 2005, announced last November that he would aim to take on a second term in office when his current four-year mandate expires in August.

The WTO's members are due to elect the next chief at a meeting of the trade watchdog's ruling General Council next month. Lamy is "practically assured" of re-election, a source close to the WTO said. It is the first time that an incumbent director-general will stand unopposed, the source added.

Previous leadership races at the global trade body have often been fractious affairs that highlighted splits between rich and poor countries or between Europeans and the United States. In 1999, the wrangling was only resolved by a compromise decision to appoint the two outstanding candidates on a shortened term of three years each. Former New Zealand prime minister Mike Moore was followed by the former deputy prime minister minister of Thailand, Supachai Panitchpakdi.

Lamy, a former French government official and the European Union's trade commissioner until 2004, has championed the rules-based global free trade system the WTO represents during his tenure and warned against protectionism.

They used to regard this as a plum job. I guess not anymore.

UPDATE: Carolyn Deere of the ICTSD also believes that Pascal Lamy shouldn't be given a free pass.

Cry Freedom: Charter 08 = Tiananmen 89 Rehash?

That sour economic times foment activism is nearly axiomatic. Those with long memories will recall that the Tiananmen protests of 1989 occurred against a backdrop of rising food prices. So it is in 2009 that China's ruling Communist Party finds newer expressions of discontent. One of the most troubling for the Party has been slowing employment in China's industrial sector. With jobs drying up for migrant laborers--an estimated 4 million have lost their jobs--criminal activity related to unemployment is rising.

Something all too common among totalitarian regimes is dislike of dissent that can lead to what they regard as "civil disturbances," regardless of their cause. Alongside China's concern for not living up to the tacit economic deal which has been in place since Deng Xiaoping's ascent to power--follow us and we can provide you with livelihoods--other sources of dissent are mounting. Regrettable but not surprising are China's recent attempts to muzzle milk scandal victims. More recently, I have become aware of an effort by Chinese activists to press for changes eerily familiar from the Tiananmen protests. There is potential for escalation here. From the Financial Times:

The Chinese government is moving to crush a group of prominent dissidents and intellectuals that has released a rallying call for democracy, human rights and rule of law. The group of about 300 writers, peasant farmers, students, professors, journalists, economists, and political activists from across the country all signed a document, known as Charter 08, that provides a detailed and wide-ranging blueprint for peaceful political, legal and economic reform in China.

Since then, nearly 7,000 Chinese and foreign intellectuals inside and outside the country have signed Charter 08, which warns of “the possibility of a violent conflict of disastrous proportions” if Beijing does not quickly move to reform the one-party authoritarian state.

Chinese intellectuals and dissidents are calling the document the most significant of its kind for at least a decade and possibly since the 1989 Tiananmen Square protests. Its name is a reference to Charter 77, the 1977 call for human rights issued by dissidents in former Czechoslovakia.

It has provoked increasing concern among China’s leaders. Since it began circulating one of the organisers has been detained without charge and friends and relatives had no word of his whereabouts until Friday. At least 70 of the Charter’s 303 original signatories have been summoned or interrogated by police and China’s powerful Central Propaganda Department has warned all domestic media not to interview or carry articles by anyone who signs the charter.

The interrogations gathered momentum this week and all those called in have been ordered to retract their support for the Charter. The government appears to be concerned by the heady language and the prominence of many of the signatories, who include mid-level government officials and Communist party academics.

The charter was made public through the internet on December 10 to mark the 60th anniversary of the Universal Declaration of Human Rights and comes on the eve of the 20th anniversary, on June 4, of the Tiananmen Square massacre, which it explicitly mentions.

Senior officials have shown increasing public concern over the potential for unrest as a result of lay-offs and crumbling growth. The charter could serve as a rallying call for up to 1.5m unemployed recent graduates...

The potential of this movement to appeal to college grads who may have difficulty finding work should be particularly troubling to the Party. Fortunately, Perry Link of the New York Review of Books has translated the Charter 08. What follows is the introduction although the rest is worth reading, especially for China followers:

A hundred years have passed since the writing of China's first constitution. 2008 also marks the sixtieth anniversary of the promulgation of the Universal Declaration of Human Rights, the thirtieth anniversary of the appearance of the Democracy Wall in Beijing, and the tenth of China's signing of the International Covenant on Civil and Political Rights. We are approaching the twentieth anniversary of the 1989 Tiananmen massacre of pro-democracy student protesters. The Chinese people, who have endured human rights disasters and uncountable struggles across these same years, now include many who see clearly that freedom, equality, and human rights are universal values of humankind and that democracy and constitutional government are the fundamental framework for protecting these values.

By departing from these values, the Chinese government's approach to "modernization" has proven disastrous. It has stripped people of their rights, destroyed their dignity, and corrupted normal human intercourse. So we ask: Where is China headed in the twenty-first century? Will it continue with "modernization" under authoritarian rule, or will it embrace universal human values, join the mainstream of civilized nations, and build a democratic system? There can be no avoiding these questions.

It is no surprise that another economic dislocation is propelling a reprise of Chinese activism. When the Party has difficulty delivering livelihoods, these calls regain momentum.

PS: By concidence, the reformed Guns N Roses recently released its long-delayed album, Chinese Democracy--its first in 17 years. Think about it: a band with "guns" and "roses" coming out with an album entitled like so whose last release was definitely Tiananmen-era.

Paul Blustein on Last Year's Doha Debacle

Readers of a blog on IPE should be familiar with Paul Blustein, longtime financial reporter for the Washington Post and author of The Chastening on the repercussions of the Asian financial crisis as well as And the Money Kept Rolling In on Argentina's subsequent economic misadventures. Both books are of course highly recommended; I particularly remember the former's cover depicting a dunce cap whose implied wearer was the (chastened) IMF.

Anyway, I was surfing the Net when I was led to the Brookings Institution site for one reason or another. There I came across some more top-class reportage from Blustein on the "so close yet so far" Doha Development Agenda (DDA) negotiations of July 2008. Blustein also discusses the relationship of this failure to more recent events like the November G-20 meeting. Like many, he saw the negotiations more as an opportunity to consolidate gains than to make new ones in a "let's make sure the global crisis doesn't reencourage protectionism" sense. There are also interesting nuggets like US Trade Representative Susan Schwab hurling the F-bomb at WTO Director-General Pascal Lamy [!] Here is a teaser from the Brookings report:

By turning down the deal that was under consideration in July, WTO members passed up the opportunity for a meaningful insurance policy against protectionism. The package of measures, though hardly the bonanza for global growth that its boosters often claimed, could have prevented countries from erecting significantly higher tariffs. Meanwhile, the precipitous change in the economic climate has dimmed prospects for a Doha accord anytime soon, because as economies slump, political resistance will stiffen against the dismantling of trade barriers and subsidies. For the long-run health of the multilateral trading system, the ultimate safekeeper of open world markets, the implications are ominous.

This article provides an in-depth account of the July meeting, based on interviews with top-ranking participants from major countries, WTO officials, and other attendees, a number of whom furnished extensive notes that they took of the most important sessions. It is a tale that shows multilateralism both at its most high-minded and at its most dysfunctional—the low points including a tantrum by Japan’s trade minister and an F-word-laden outburst aimed at Lamy by Susan Schwab, the U.S. Trade Representative. More importantly, it sheds new light on what went wrong in Geneva—and how far wrong things went.

Needless to say, it's required reading for trade buffs and credit crisis followers.

Korea's Super Smash Legislators Fight Over Trade

My first holiday season at home in many years has familiarized me with one of my younger cousins' favorite video game titles, Nintendo's bestselling Super Smash Brothers Brawl. I gather it is a less violent version of Mortal Kombat. In my younger days, I'd like to think I was a dab hand at video games. Nowadays, I get my behind handed to me on a regular basis by eight-year-olds. Interestingly enough, cartoonish violence is not just a staple of Wii consoles this holiday season. Recently, I discussed the brouhaha over the Korea-US Free Trade Agreement (KORUSFTA) in which the ruling party locked out lawmakers from the opposing party to ensure that the trade bill was introduced. Unhappy with this action, the opposition literally took a sledgehammer to, shall we say, break up proceedings.

Let us now pick up on the subsequent action. Opposition lawmakers have barricaded themselves inside the parliament building since 26 December in hopes of attracting sympathy for their cause of hindering the passage of KORUSFTA. Whereas the ruling party sees its passage as crucial to safeguard major export markets like the US, the opposition sees it as possibly resulting in an avalanche of US agricultural products for Korea's well-protected market. Remember that South Korea is also seeking bilateral deals with the EU, Canada, and India. I am not sure how much trade creation Korea expects from engaging in a frenzy of bilateral deals as these partners aren't faring much better than it at the moment. Nevertheless, the ruling party seems to have tied its political future to these deals and other liberalizing measures.

In any event, the Grand National Party (GNP) has not been able to proceed with voting on KORUSFTA despite its majority because the National Assembly has literally been hijacked by the Democratic Party. Today, security guards of the parliament building forcibly tried to eject the opposition lawmakers. Given their feisty history, it's no surprise that the latter have taken to fisticuffs with the security guards in a reprise of the 18 December brawl. The long and the short of it is that while the brave (foolhardy?) Democratic Party lawmakers have been roughed up, they are as of yet unbowed. From Reuters:

South Korean opposition lawmakers scuffled with security personnel on Saturday as guards tried to end their blockade of the assembly that has paralysed parliament and delayed voting on a U.S. trade deal and reform bills. The ruling Grand National Party (GNP) has been thwarted in its attempt to push through the trade deal, sweeping tax cuts and plans to privatise state firms by opposition lawmakers who have blockaded the door to the main parliament chamber.

More than 200 parliament security guards stormed the assembly building rotunda where opposition lawmakers have camped out and a large scuffle broke out, sending some MPs and guards to hospital for treatment for minor injuries. The main opposition Democratic Party has called conservative President Lee Myung-bak and his GNP's reform bills "evil" and pledged to block them. It called Saturday's action by parliament security, which was ordered by its speaker, illegal.

The latest attempt to strike a deal to end the impasse broke down on Friday, when a meeting of GNP and opposition leaders ended in a dispute over the participation of a minor opposition party. The GNP has outlined 85 bills it wants to pass that also include measures to ease bank ownership rules, give debt-relief to low income households and revamp the broadcast industry.

Lee, in a major policy speech on Friday, called on MPs to move on the reform agenda to help the export-drive economy steer through the global financial crisis. South Korea and the United States struck the trade deal in 2007 that some studies said would boost their $78 billion a year two-way trade by about $20 billion, but neither country's legislatures has approved it.

The BBC has prime footage of the latest carnage. President Lee Myung-bak wants to have a deal in hand before the current session of parliament (or whatever passes for it now) ends on 8 January, virtually guaranteeing more action. For a bit of trivia, readers should be chuffed to know that South Korea is known as the "Land of Morning Calm" [!] Coincidentally, I have been duly informed by my primary school game experts that the legendary Nintendo title Punch Out!! is coming out soon on Wii. Until matters are resolved...good fight, good night.

1/6 UPDATE: The opposition has agreed to leave the premises in exchange for the ruling party delaying a vote on KORUSFTA. The saga continues.

Is Asia's Export-Led Development Model a Goner?

India's Commerce Minister Kamal Nath once wryly noted that while WTO's Doha Round was not dead, it was definitely between intensive care and the crematorium. With some exaggeration and a side helping of hyperbole, the same can be said of Asia's export-led growth model. Export-led growth models work a treat--as long as you have someone to export to. With a global slowdown in place, many Asian economies are feeling the pinch, but more on that later. Something that has always struck me is how malleable the rise of Asia has been to commentators of varying persuasions on the political-economic spectrum. Robert Wade and Alice Amsden are among those who saw their rise as a vindication of government-industry collaboration at a time when laissez-faire policies were all the rage. Speaking of which, the late Milton Friedman found something worth lauding in Hong Kong, whose success as an "Asian tiger" he put down to high levels of economic freedom, nevermind the apparent contradictions. Meanwhile, the World Bank published a report on The East Asian Miracle attributing these countries successes to following a neoliberal agenda including "limited price distortions."

To be sure, there have been critics as well. Paul Krugman described the Asian miracle as a myth. For him, there is no "miracle" in preternaturally high investment rates since the real story lies in the lack of productivity gains made by these countries over time. He said: "Asian growth, like that of the Soviet Union in its high-growth era, seems to be driven by extraordinary growth in inputs like labor and capital rather than by gains in efficiency." All this brings us to the current time where an even more important question is being asked of how export-led economies fare when formerly bountiful export markets are becoming much less so. When economic activity worldwide is growing at a healthy clip, these nations' higher share of exports to GDP is welcome. When the opposite holds true, well, let us sample some reports from the front. On Singapore:

Singapore said on Friday the economy could contract by up to 2 per cent this year, raising fears that the city-state could be facing its worst downturn since independence in 1965. The ministry of trade and industry cut its forecast after the economy contracted by 2.6 per cent in the fourth quarter of 2008 from a year earlier, a significantly sharper fall than the market had expected.

Singapore, whose economy is highly dependent on global trade, already looks set to become the poorest performer among south-east Asian economies this year and one of the worst in Asia, alongside Taiwan...Private economists also revised downward their forecasts, with Citigroup predicting that the economy could shrink by 2.8 in 2009.

All of Singapore’s manufacturing industries are suffering, with a 9 per cent fall in the sector from a year ago. Exports of electronics fell for a 20th consecutive month in November. Singapore’s oil rig builders, the world’s leaders, reported that they received no new orders in the fourth quarter as global oil demand weakened.

It's similar for South Korea:

South Korea’s President Lee Myung-bak on Friday called for a “government of economic emergency” as exports plunged for a second consecutive month, pushing Asia’s fourth-biggest economy closer to the brink of recession. Exports, the bedrock of Korea’s industrial economy, slid 17.4 per cent in December after a revised 19 per cent fall in November, the Ministry of Knowledge Economy said...

Slumping exports have an immediate impact on the country’s factories and the government is steeling itself for a wave of unemployment with a raft of public works programmes intended to create hundreds of thousand of jobs...Carmakers Hyundai and Kia have had to reduce shifts, LG Electronics has laid off workers abroad and memory-chip maker Hynix is reducing its number of executives by 30 percent.

Failing businesses and bad loans will also rattle a banking system that is seen as one of the most precarious in Asia. Although outside observers are worried by heavy household debt and Korea’s high loan-to-deposit ratios, the financial authorities insist the situation remains “manageable”.

Meanwhile, Chinese manufacturing has declined for five straight months. The story in China has been one of imperiled, marginally profitable enterprises relying on generous state-provided incentives for utilities, credit, etc. now having to deal with slowing global demand. The drying up of trade finance isn't helping, either:

"Trade finance is collapsing," said Victor Fung, the chairman of the Li & Fung Group, the giant supply chain management company that connects factories in China with retailers in the United States and Europe. "We've got orders we can't ship right now." Fung estimates that 10,000 of the 60,000 factories in China owned by Hong Kong interests have closed or will close in the coming months.

Other business leaders say that the toll may be even higher and that factory closings are an even bigger problem among mainland Chinese businesses because these tend to be smaller and more poorly capitalized than those owned by Hong Kong businesses.

Government statistics show that Chinese exports slipped 2.2 percent in November when calculated in dollars, after seven years of rapid growth. But dollar figures do not come close to capturing the real depth of the downturn. Convert the export figures into China's own currency, a much better measure of the effect on the Chinese economy, and exports plunged 9.6 percent in November. Factor in inflation over the past year and the plunge was 11.4 percent.

Indications are that the December data will be even worse.

And which Asian country is a candidate for faring worst in 2009? Why, the granddaddy of all growth miracle stories, postwar Japan. GDP figures for Q4 2008 should provide a glimpse:

Japan's economy will probably shrink at an annual 12.1 percent pace this quarter, the sharpest drop since 1974, as exports collapse, Barclays Capital said. Gross domestic product in the three months ending tomorrow [31 December 2008] will fall at almost three times the 4.1 percent rate previously predicted, said Kyohei Morita, chief Japan economist at Barclays in Tokyo, after reports last week showed industrial production and exports posted the biggest declines on record in November.

“Given the speed and the length of the contraction, this recession could be the most severe in the postwar era,” Morita said. “We expect negative growth will continue for a fifth straight quarter to the April-June period of 2009.”

What is glaring to observers like yrs. truly is Asia's continuing inability to spur domestic demand. Even the Great Paulsonio recognizes that Asia's bias towards savings and investment in export-geared industries has its limitations. From what I can gather, I'm afraid that there is no Plan B involving the creation of Asian domestic demand, the Holy Grail of remedying global economic imbalances which have imperiled the fate of the world economy. More on this later, but there should be enough here to rethink platitudes about export-led growth. At the start of 2009, it appears the more they export, the harder they will fall.

It has often been said that current events signal the demise of Anglo-Saxon style capitalism. Can anyone say that the Asian export-led model is faring much better? Another development shibboleth may be biting the dust.

Slovakia is 16th Country to Adopt the Euro

Our Slovakian friends rung in the New Year in a novel way: by feting the country's adoption of euro currency on 1 January 2009. I, of course, will remain a large booster of the euro in 2009 given its handlers' general reluctance to molest the currency via negative real interest rates, unfettered money printing or other cheap tricks. For better or worse, the ECB is still heavily influenced by the conservatism of the German Bundesbank--a firm believer in sound money principles which have seemingly gone out of style, especially in countries featuring Anglo-Saxon models of economic governance. The ghosts of Weimar-era hyperinflation still spook the Germans and will do so well into the future.

It is precisely this kind of unfashionable adherence to sound money principles that will likely see Slovakia fares better than its neighbors in 2009 when it comes to dealing with currency issues. Many of its other Eastern European counterparts that put off adoption of the euro during less trying times are now regretting their decisions. As small open economies often running substantial external deficits during a credit crunch, many Eastern European countries are undoubtedly contemplating politically unpopular calls to the IMF, as Ukraine and Hungary have already done. The picture to the right says it all: two ladies decked out in New Year's livery standing near an ATM admiringly behold euro cash as some of the first to avail of it. The scene may appear perverse to casual observers and Eurosceptics, but their delight is genuine. When you understand the context, it becomes even more meaningful.

I suspect the Slovaks have good reason to cheer the arrival of the year 2009.

UPDATE: TIME has a piece entitled "Is the Euro the New Dollar?" which discusses countries lining up to join the EMU as well as the currency's tenth anniversary.