Why the Euro is B**ch Slappin' the US Dollar

♠ Posted by Emmanuel in , at 7/31/2010 01:50:00 AM
I got a chuckle out of this one: Not so long ago during the height of the so-called euro crisis, foreign exchange commentators were issuing doom-laden prognostications about how the single currency would fall to parity with the US dollar in a short space of time. Well wonder of wonders--the Eurozone is not collapsing. Indeed, the currency has recently vaulted its way past the $1.30 handle. I like to think it has something to do with ECB President Jean-Claude Tritchet--a great, great man--warning against runaway stimulus spending's deleterious effects on maintaining the value of the currency debts are denominated in. As America has shown in recent years, it has little compunction in devaluing its currency. (After all, shortcuts to boosting export competitiveness and devaluing debts can't be that bad, right?) Store of value--such an eccentric European conceit.

Sometime ago when the euro was soaring, gangsta rap artist Jay-Z replaced greenbacks with euros in his music videos (see here for footage). They say life imitates art; and so it is now. An argument that previously struck me as an urban legend was that gangsters (criminals who can spell?) were ditching dollar for euro notes since €500 notes existed whereas only $100 ones did, making it easier to traffic in the former than the latter. Well, the Wall Street Journal has a new article that aims to put my apprehensions to rest. Yes, Virginia, it appears that criminal interest is, er, a legitimate explanation for the single currency's buoyancy:
Gangsters, drug dealers and money launderers appear to be playing their part in helping shore up the financial stability of the euro zone. That's thanks to their demand, according to European authorities, for high-denomination euro bank notes, in particular the €200 and €500 bills. The European Central Bank issues these notes for a hefty profit that is welcome at a time when its response to the financial crisis has called its financial strength into question.

The high-value bills are increasingly "making the euro the currency of choice for underground and black economies, and for all those who value anonymity in their financial transactions and investments," wrote Willem Buiter, chief economist at Citigroup, in a recent research report. The business of issuing euro notes, produced at almost zero cost, is "wildly profitable" for the ECB, Mr. Buiter wrote...

By value, 35% of euro notes in circulation are in the highest denomination, the €500 bill that few people ever see. In 1998, then-U.S. Treasury official Gary Gensler worried publicly about the competition to the $100 bill, the biggest U.S. bank note, posed by the big euro notes and their likely use by criminals. He pointed out that $1 million in $100 bills weighs 22 pounds; in hypothetical $500 bills, it would weigh just 4.4 pounds.

Police forces have found the big euro notes in cereal boxes, tires and in hidden compartments in trucks, says Soren Pedersen, spokesman for Europol, the European police agency based in The Hague. "Needless to say, this cash is often linked to the illegal drugs trade, which explains the similarity in methods of concealment that are used."
So word up, homies. Like me, the gangstas are down with Jean-Claude T--a "badass mofo" if there ever was one.

UPDATE: LSE alum William Vlcek who is now lecturing at the University of St. Andrews dropped a note telling us to look at two BBC articles which he finds more informative than the WSJ one. First, the widespread use of this denomination for illegal purposes has resulted in UK authorities curtailing their availability here:
Exchange offices in the UK have stopped selling 500 euro banknotes because of their use by money launderers. The Serious Organised Crime Agency says 90% of the notes sold in the UK are in the hands of organised crime. Soca deputy director Ian Cruxton said 500 euros had become the currency of choice for gangs hiding their profits.

The move means nobody will be able to buy the note in the UK - but travellers will be able to sell them if they enter the UK carrying them from abroad. There has been mounting international concern over the note, which is worth more than £400, and its use by criminals or tax evaders.
Second, another article details a sting operation that prompted the ban:
In some countries they're known as "Bin Ladens" - the banknote everybody knows exists but few, other than criminals, ever see. Now the 500 euro note is being withdrawn from sale in the UK.

Like almost all organised crime, the breakfast cereal box plan was done with the minimum of fuss. Eftychia Symeonidoy stood outside a London apartment, casually holding the box under her arm. But instead of it containing the recommended daily amount of vitamins and minerals, it had been stuffed with 300,000 euros.

As the undercover team from HM Revenue and Customs secretly filmed her, an ordinary estate car pulled up and the box was handed to the driver. It was another consignment of laundered drugs cash safely delivered - or so the gang thought. Symeonidoy and the rest of the 13-strong laundering gang were all later convicted and jailed. The group smashed by HMRC investigators had taken £24m of dirty money from their clients in the criminal underworld - and returned "clean" euros.

Every month, they'd take in between £1m and £4m in cash - massive bags of sterling notes. They had so much of it, they had to stack it on sofas and in cabinets, and stuff it in bags in cupboards. The jailing of that gang was a major breakthrough for investigators - but it's only the tip of the money laundering iceberg which revolves around fake bureau de change and the 500 Euro banknote.
Money laundering centering on €500 notes is a game that's increasingly up in the UK. With the pound appreciating somewhat, hey, maybe it isn't too bad ;-) Gangsta, gangsta, it's not about a salary it's all about reality.

Will Immigration Endanger UK Lib-Con Coalition?

♠ Posted by Emmanuel in ,, at 7/29/2010 10:13:00 PM
Like in other countries--most prominently the United States in today's headlines--immigration is an issue fraught with difficulty. Largely overlooked, however, are the efforts of certain UK Conservative to limit immigration to Britain by non-EU citizens (like yours truly). Though a hard cap hasn't been determined yet, tensions are beginning to surface among the Tories themselves and with their allies in coalition government, the Liberal Democrats. Unlike the Conservatives who used ads like that above during the 2005 election cycle that were just asking to be vandalized, the Liberal Democrats tend to speak less in such terms.

Matters may soon come to a head between the Tories and the Liberal Democrats over this issue. I tend to view the latter as a brake on the former's excesses--no more so than on migration. The spur for this conflict was PM David Cameron visiting India to (surprise!) drum up more trade and investment ties with Britain's rising former colony. While there, however, Indian authorities raised objections to the limits being proposed on non-EU migrants. Alike in the US, India has many knowledge workers who are keen on capitalizing on opportunities in the UK. However, the old bugaboos have resurfaced:
David Cameron on Wednesday promised to carry a “spirit of humility” to India as he lands on a “jobs mission” to the subcontinent that will reassure New Delhi that Britain’s immigration cap will be enforced “liberally”...Mr Cameron’s team will pledge to heed India’s concerns on the details of Conservatives flagship immigration policy, as it presses New Delhi to “reduce barriers” to foreign investment in financial services and defence.

Vince Cable, business secretary, told the Financial Times of his determination to ease the fears of Indian companies. “Certainly in terms of work permits for management and technical staff who are needed in the UK we want the system to operate flexibly. I want to reassure the Indians that we are going to deal with this liberally,” he said.

The cabinet is split over the impact of the cap, which both Tory and Liberal Democrat ministers fear will stifle growth if enforced too strictly – a disagreement Mr Cable laid bare in a separate interview with Indian media. “It’s no great secret that in my department and me personally, we want to see an open economy and as liberal an immigration policy as it’s possible to have,” he said. “We are arguing, within government, about how we create the most flexible regime we can possibly have but in a way that reassures the British public.”

A temporary cap of 24,100 is currently in place on non-European Union workers before the full cap is implemented in April. On a visit to London this month, Anand Sharma, the Indian commerce minister, raised his “concerns” with Mr Cameron directly over the restrictions. A Downing Street insider stressed on Tuesday that there was a consultation on the proposals. “We want to work with India...on the implementation,” he said.
Meanwhile, British industry is up in arms:
The stand-off between British business and the coalition government over plans to cap immigration was threatening to turn into open conflict after it emerged that many companies would not be allowed to hire any non-European staff for the rest of the financial year.

Lady Jo Valentine of London First, a lobby group representing many FTSE 100 companies, described the measures as “economically insane”. Leading City law firms said several of their biggest blue-chip clients, including large international banks, would be given only a handful of work permits, and in some cases none. “We have a number of international financial institutions whose allocation has been reduced to zero,” said John Skitt, head of immigration at Clifford Chance.

Caron Pope, who leads the immigration practice at Cameron McKenna, said companies were “furious” about the restrictions. “I’ve had conversations with people who are saying ‘if they are going to make it this hard for us then we’ll just go offshore’,” she said. The issue is fast becoming one of the biggest early tests for David Cameron, the prime minister...several of Mr Cameron’s cabinet colleagues have raised profound doubts about the cap, arguing that it would damage Britain’s competitiveness and anger important trading partners such as India...

Damian Green, the immigration minister, said yesterday: “Businesses have known about the limit for a month, so it is a little implausible that they are expressing shock now ... They are going to have to reduce their reliance on migrant workers.”
Are Tories still thinking what they were thinking in 2005? Hopefully, the Liberal Democrats and India can pressure them into thinking otherwise. Lib Dems hold considerable political leverage, while India considerable economic leverage.

Ayatollah Khomeini, Ayatollah Khamenei & Me

♠ Posted by Emmanuel in , at 7/29/2010 12:11:00 AM
Well dear readers, I am back from the historic city of Tehran, Iran. Since I am rather tired having just returned, I will just post two photos that are nonetheless important for a host of reasons. As you very well know, higher education in the United Kingdom is experiencing massive cuts, So, I had to make sure that I had proof that I actually delivered a lecture in Iran. (Dear LSE administrators, I will hand in my reimbursement forms later this week ;-) Above is a photo of yours truly at the main auditorium of the National Library of Iran. As you can see, a portrait of Ayatollah Khomeini watches over me. Below is another photo towards stage left under a portrait of the current Supreme Leader Khamenei:

Briefly returning to the subject matter of the conference, what did I make a presentation about?

(1) The Great Satan Did Itself In Via Subprime
(2) Death to America Was Self-Inflicted Through Financial Securitization
(3) Global Economic Imbalances: Real Axis of Evil
(4) The ASEAN Way as a Paradigm for Intercultural Dialogue

While potentially entertaining, the first three are clearly not what I was there to talk about but the fourth. Indeed, the terms "Great Satan," "Death to America," and "Axis of Evil" are precisely the sort of polemics we should get away from if there is to be any semblance of mutual understanding--especially between the likes of the United States and Iran. Professor William Beeman who I met at the conference is the author of the insightful book The “Great Satan” vs. the “Mad Mullahs”: How the United States and Iran Demonize Each Other. Great title aside, he believes that the use of such terms has, for decades now, poisoned attempts at communication between the two. With the Iron Curtain pulled back and Libya relatively docile, it's been Iran's turn to bear the brunt of American barbs. Even if both sides' bark has been far worse than their bite [1, 2], matters certainly aren't improving significantly.

Just as it is in so many other parts of the world, cross-cultural dialogue would ideally start by doing away with such mischaracterizations on both sides. Many leftover cold warriors (and not necessarily neoconservatives) criticize Beeman, but his is far from a one-sided perspective insofar as he also faults the obviously declamatory tendencies of Iranian leadership. He is no big fan of the rhetorical flourishes of the former mayor of Tehran and current Iranian President Mahmoud Ahmadinejad. the revolution may have been impelled by such rhetoric, the ordinary business of improving the lives of citizens is at the same time less grandiose and more involved.

Ultimately, setting a basis for cultural understanding that could lead to better results is what the conference was about. Aside from academics like yours truly, there were several civil society participants--do-gooders--working on such things as broadening the civic opportunities of economic migrants in host communities, fostering religious understanding among Buddhist and Muslims in conflict, and sensitizing media coverage of disparate cultures. Otherwise. it would have been another mundane conference--by academics for academics of the typically dull, real-world irrelevant sort.

Indeed, it is comical how there are so many American and British academics who just keep regurgitating leftist rhetoric from the comfort of their "imperialist" surroundings. Sadly, academia is littered with petty Marxists writing for audience of...each other. Meanwhile, it's centre-of-centre me who actually goes to Third World lands to listen to and speak of ways to improve cross-cultural understanding between historic oppressors and oppressed. For all my faults, I still know that you must talk the talk and walk the walk at the end of the day.

US-Led Anti-Counterfeiting Trade Agreement is Vile

♠ Posted by Emmanuel in ,, at 7/28/2010 08:03:00 PM
If anything else, you must admit that the Yanquis are persistent. With the coming of the so-called information age, a concern which has been near and dear to many US firms has been intellectual property rights enforcement (henceforth IP enforcement). The essence of the American concern is simple: with a modicum of effort online, it is not particularly difficult to "pirate" books, films, music, shows, and video games. For instance, the Recording Industry Association of America (RIAA) cites an Innovation Policy Institute study that claims losses to the recording industry amount to some $12.5 billion worldwide from physical and online music piracy.

Aside from not being particularly keen on the apparently endless proliferation of song-and-dance bimbettes, gangsta rappers, and other exemplars of high American culture, a more serious concern of mine is the method behind these studies. For instance, the Innovation and Policy Institute makes some fairly heroic (and obviously self-supporting) assumptions. First, they claim that 20% of those currently pirating music would pay for it without the benefit of substantially justifying where this figure comes from. Second, they blithely assume that these would-be converts to legal downloads would be willing to pay an assumed "Legitimate World and U.S on-line price of $0.99 per downloaded song" (see table 2). Again, there's the implicitly Amerocentric assumption that international music listeners would be willing to pay that price when (a) most physical music products are marketed at lower prices worldwide and (b) the price quoted is more reminiscent of that being charged by US online music stores like Apple iTunes.

Now, the Anti-Counterfeiting Trade Agreement (ACTA) is the latest in a long line of US-led efforts to preserve software rents largely at the behest of media titans represented by RIAA and the like. ACTA is not a trade agreement in the conventional understanding as it deals solely with IP issues. While essentially all of the counterparties involved in negotiating ACTA are developed country peers of the US, the key thing to remember is that, when enforced, ACTA would operate outside of existing global bodies dealing with intellectual property rights. Why is this important? Being the acknowledged architect of many international institutions, a recurrent criticism has been that of America continually devising more regimes if existing regimes are not deemed welcoming enough to US interests. For instance, while there already was a World Intellectual Property Organization (WIPO) prior to the creation of the WTO, the US lobbied hard for the inclusion of Trade-Related Intellectual Property Rights (TRIPS) since America didn't deem the WIPO stringent enough on enforcing US claims worldwide. Even arch-globalizers like Jagdish Bhagwati and Martin Wolf have criticized this excessive stringency on IP (more on this in a minute), and highly controversial applications are too numerous to list here alike the case of access to drugs for HIV-AIDS sufferers in the Global South.

In IPE, there is a phenomenon called "forum shopping" in which countries attempt to gain traction on pet issues by scouring international organizations for the most favourable legal opinion. Given its diminishing though still substantial power in agenda setting, the US has not only forum shopping but also forum creating abilities. That is, it shows little compunction in, well, dumping international organizations it itself often created if they prove to be insufficient in enforcing American interests. Perceptions of still-rampant piracy by RIAA and the like are now spurring the US government to (again) seek something via ACTA which is even more stringent than WTO-TRIPS (which, in turn, effectively superseded WIPO).

Development observers should particularly note that many developing countries are already wary of ACTA's implications. The US hopes that signing on developed countries would ratchet pressure on developing countries to do the same. That is, as developed countries adopt stricter regimes, they will feel unduly compromised by those who don't and demand that they do so. The South Centre has an informative primer on how developing countries, especially the likes of Brazil and India which have always been active players on global governance issues, are looking warily at this latest IP gimmick in a long line of IP gimmicks:
Though at present ACTA is being negotiated only between 11 parties, it is of concern for the developing countries because they could be required to enforce ACTA provisions through cross-referencing in bilateral free trade agreements with developed countries and in WTO accession agreements. The countries that are negotiating ACTA accounts for about 70 per cent of world trade. Hence, application of TRIPS plus enforcement standards in these countries [like ACTA] could lead to targeting products from developing countries as counterfeit goods, since the ACTA envisages any form of IPR infringement as counterfeiting.

This is illustrated by requests for detaining shipments of soymeal from Argentina in European ports on the request of Monsanto Corporation on the ground that the soymeal contained a gene over which Monsanto has a patent in Europe, though it did not have a patent in Argentina where the soymeal was produced [see here].

Further, the broad scope of border measures under ACTA that also require customs seizures of goods in transit can have a severe impact on the trade of developing countries. This can also impede the ability of developing countries to use the public health related flexibilities under the TRIPS Agreement that would enable them to import affordable generic medicines for ensuring access to medicines for their population. This has been shown in the seizure of genetic drugs produced legitimately in India when they were in transit in European airports (especially in the Netherlands) when these medicines were in transit on the way to Brazil, Africa, etc.

ACTA is at the centre of the TRIPS plus IP enforcement agenda that is being pushed by developed countries through various multilateral and bilateral forums such as the World Customs Organization (WCO), the Universal Postal Union (UPU), INTERPOL, WHO-IMPACT, and bilateral FTAs and EPAs. The provisions in ACTA would tend to set the template for TRIPS plus IP enforcement provisions that are being pushed through these various channels.

Therefore, developing countries should question the legitimacy of the ACTA negotiations and also highlight in multilateral forums how such negotiations are undermining the existing balance between IP and public policy issues in respect of food security, access to medicines and access to knowledge.

Developing countries should also closely examine the nature of institutional relationship between ACTA and multilateral organizations like WIPO and WTO, with the objective of ensuring that such institutional relations do not promote an unbalanced IP enforcement agenda through technical and legislative assistance provided by these organizations. Moreover, there is a need for awareness of this issue to be developed in the capitals and greater dialogue among developing countries on this issue beyond the ambit of the Geneva based missions. This would be particularly useful in helping developing countries being better informed about the grand strategy behind IP enforcement in bilateral negotiations with developed countries.
Supporting trade is already such a difficult cause. Many third world folks like me are not insuperably opposed to trade, but the US sure makes it difficult to argue for trade when the deck is often stacked so unfavourably against poor countries. In the words of one of America's most cherished entertainers, "Oops I Did It Again"--and you can bet the US is not that innocent in the trade realm.

I'm Off to Iran; Light Posting Until Wednesday

♠ Posted by Emmanuel in at 7/23/2010 02:45:00 PM
Dear readers, I mentioned earlier that I was invited to present at a conference on multiculturalism run in conjunction with UNESCO Iran. And so I'll be leaving shortly and should be back sometime during the middle of next week. Being an inherent believer in peace, love, and understanding, I am off to learn more about how cross-cultural communication can function better in our stressed-out world.

At the same time, I'll be presenting on how the "ASEAN Way" which is the diplomatic process used by Southeast Asian countries might serve as a template for fruitful cross-cultural collaboration--especially in the economic sphere. Here is the abstract of my talk if you're interested.
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The ‘ASEAN Way’ as a Paradigm for Intercultural Dialogue

Since its formation in 1967, the Association of Southeast Asian Nations has grown in stature to become the preeminent regional organization in East Asia. At the beginning, its focus was on fostering peace in a region with a tumultuous past. Its success in this respect has been reflected by the lack of major conflicts among founding members Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Brunei (1984), Vietnam (1995), Laos and Myanmar (1997), and Cambodia (1999) have, since joining ASEAN, also contributed to securing peace in the region. This situation has set the stage for ASEAN to work towards the establishment of a single market by 2015.

What makes ASEAN unique among other regional integration projects is the cultural and political diversity of its membership. Those of Europe (European Union) and North America (Nafta) have predominantly Christian democracies; South America (Mercosur) Roman Catholic democracies of Latin lineage; the Caribbean (Caribbean Community) postcolonial Christian democracies; and the Middle East (Gulf Cooperation Council) Islamic monarchies. By contrast, ASEAN has a plurality of religions—Buddhism, Catholicism, and Islam; and political systems—fledgling democracies, Communist republics, a monarchy, and a military junta.

Despite the challenges of accommodating cultural and political diversity, however, ASEAN has made notable strides in setting foundations for durable economic, socio-economic and security mechanisms in Southeast Asia. Over the years, ASEAN has developed a mode of diplomatic conduct now known as the ‘ASEAN Way’. Given the plenitude of vexing global governance questions we face that require more political-economic cooperation among countries with diverse cultures and polities—the environment, the world economy, and so forth—the ‘ASEAN Way’ holds strong suggestions on how fruitful interfaith dialogue and cross-cultural communication can take place. Drawing from the ASEAN experience, this paper explains how unity in diversity may become more of a reality worldwide by distilling the virtues of the ‘ASEAN Way’.
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Until then, best regards to all!

Jeff Sachs' Amazing Takedown of US Stimulus

♠ Posted by Emmanuel in at 7/22/2010 09:49:00 PM
It's not often that I agree with the famed development economist Jeffrey Sachs of Columbia on much of anything, but he's now delivered a pretty damning indictment of the senselessness of US stimulus. (This contribution is yet another in the series of op-eds run by the FT on the stimulus versus austerity debate.) First, he compares the rudderless way the US has gone about its activities in relation to China, which has carefully studied what sort of infrastructure improvements the PRC needs in order to grow. Yes, there are good reasons why China is leaving America in a trail of dust. Next, he slams calls for further (undirected) stimulus as spending good money after bad in throwing everything against the wall--including a lot of pork--to see what sticks. Call it the revenge of Yerkes-Dodson:
Despite the evident need for a rise in national saving after 2008, President Barack Obama tried to prolong the consumption binge by aggressively promoting home and car sales to already exhausted consumers, and by cutting taxes despite an unsustainable budget deficit. The approach has been hyper short term, driven by America’s two-year election cycle. It has stalled because US consumers are taking a longer-term view than the politicians.

By contrast, the administration’s interest in boosting investment has been haphazard. Mr Obama has shown a strange inability to articulate an operational and forward-looking policy framework in signature areas such as healthcare, energy, climate change, and long-term fiscal policy. At a time when China is building hundreds of miles of subway lines, tens of thousands of miles of highways, a couple of dozen nuclear power plants, and a network of tens of thousands of miles of high-speed intercity rail lines, the US struggles to launch a single substantial project. China saves and invests; the US talks, consumes, borrows, and talks some more.

It is wrong in this context to believe that the only choice is further fiscal stimulus versus a repeat of the Great Depression. Further short-term tax cuts or transfers on top of America’s $1,500bn budget deficit are unlikely to do much to boost demand, while they would greatly increase anxieties over future fiscal retrenchment. Households are hunkering down, and many will regard an added transfer payment as a temporary windfall that is best used to pay down debt, not boost spending.
So no and never--the US McMansion-superconsumption complex should never be reflated since it's not likely to work. It didn't before, so there's no reason to think it will now. On its current path, America will have hell to pay largely of its own making. If we could only get Sachs to be a full-time critic of the United States' fiscal policies instead of a leading voice in calling for massive aid...

'Ten Commandments for Fiscal Adjustment' Revisited

♠ Posted by Emmanuel in at 7/21/2010 12:12:00 AM
The Financial Times has been running a pretty lengthy debate on post-crisis response AKA stimulus versus austerity. To me, the matter hinges on (1) whether meaningful additional economic activity is spurred in present value terms than what is spent on stimulus, and (2) whether current fiscal conditions warrant caution lest markets become wary of overspending. As both of these are quite hard to ascertain, we're left dealing with many-handed economists and the odd historian thrown in.

You can follow the various, alternatively fascinating and repulsing scribblings of Martin Wolf (neutral over the long-term, perhaps in 'golden rule' fashion); Brad DeLong and Larry Summers (pro-stimulus, duh); and my erstwhile LSE IDEAS colleague Niall Ferguson (anti-stimulus). Yes, the latter is a historian and not an economist, but in this day and age, that may actually be beneficial.

At any rate, all their writings brought to mind something that I came across not so long ago in the IMF Direct blog. While economists Olivier Blanchard and Carlo Cotarelli don't get to discussing why measures for fiscal adjustment in advanced and developing countries should necessarily be different in principle as I would like to know, their suggestions echo many points made by the various FT contributors. Without further ado...
Commandment I: You shall have a credible medium-term fiscal plan with a visible anchor (in terms of either an average pace of adjustment, or of a fiscal target to be achieved within four–five years).

There is no simple one-size-fits-all rule. Our current macroeconomic projections imply that an average improvement in the cyclically-adjusted primary balance of some 1 percentage point per year during the next four–five years would be consistent with gradually closing the output gap, given current expectations on private sector demand, and would stabilize the average debt ratio by the middle of this decade. Countries with higher deficits/debt should do more, others should do less. Such a pace of adjustment must be backed-up by fairly specific spending and revenue projections, and supported by structural reforms (see below).

Commandment II: You shall not front-load your fiscal adjustment, unless financing needs require it.

For a few countries, frontloading may be needed to maintain access to markets and finance the deficit at reasonable rates—but, in general, a steady pace of adjustment is more important than front-loading, which could undermine the recovery and be reversed. Nonetheless, a non-trivial first installment is needed: promises of future action will not be enough.

Current fiscal consolidation plans in advanced G-20 countries imply on average a reduction in the cyclically adjusted deficit of some 1¼ percentage point of GDP in 2011, with significant dispersion around this according to country circumstances. This seems broadly adequate, and consistent with commandment I, at least based on current projections on the recovery of aggregate demand. This said, while front-loading fiscal tightening is, in general, inappropriate, front-loading the approval of policy measures (which would become effective at a later date) will enhance the credibility of the adjustment.

Commandment III: You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilization at post-crisis levels.

High public debt tends to raise interest rates, lower potential growth, and impede fiscal flexibility. Since the early 1970s, public debt in most advanced countries has been the ultimate absorber of negative shocks, going up in bad times, not coming down in good times. In the G-7 average, gross debt was 82 percent of GDP in 2007, a level never reached before without a major war. The current fiscal doldrums are due not only to the crisis, but also to how fiscal policy was mismanaged during the good times. This time, it must be different: the final goal must be to lower public debt ratios, gradually but steadily.

Commandment IV: You shall focus on fiscal consolidation tools that are conducive to strong potential growth.

This will require a bias towards (current) spending cuts, as spending ratios are high in advanced countries and require highly distortionary tax levels. Some cuts should be no brainers: for example, shifting from universal to targeted social transfers would involve significant savings, while protecting the poor. Containing public sector wages—which have risen faster than GDP in several advanced countries in the last decade—will be necessary.

This said, nothing should be ruled out. Countries with low revenue ratios and large adjustment needs—like the United States and Japan—will also have to act on the revenue side. Promising “no new taxes,” in all countries and circumstances, is unrealistic.

Commandment V: You shall pass early pension and health care reforms as current trends are unsustainable.

Increases in pension and health care spending represented over 80 percent of the increase in primary public spending to GDP ratio observed in the G-7 countries in the last decades. The net present value of future increases in health care and pension spending is more than ten times larger than the increase in public debt due to the crisis.

Any fiscal consolidation strategy must involve reforms in both these areas. This includes Europe, where official projections largely underestimate health care spending trends. Given the magnitude of the spending increases involved, early action in these areas will be much more conducive to increased credibility than fiscal front-loading. And will not risk undermining the recovery. Indeed, some measures in this area—while politically difficult—could have positive effects on both demand and supply (for example, committing to an increase in the retirement age over time).

Commandment VI: You shall be fair. To be sustainable over time, the fiscal adjustment should be equitable.

Equity has various dimensions, including maintaining an adequate social safety net and the provision of public services that allow a level playing field, regardless of conditions at birth. Fighting tax evasion is also a critical component to equity. For VAT, a tax that is relatively resilient to fraud, tax evasion averages about 15 percent of revenues in G-20 advanced countries. Evasion for other taxes is likely to be higher.

Commandment VII: You shall implement wide reforms to boost potential growth.

Strong growth has a staggering effect on public debt: a one percentage point increase in potential growth—assuming a tax ratio of 40 percent—lowers the debt ratio by 10 percentage points within 5 years and by 30 percentage points within 10 years, if the resulting higher revenues are saved. An acceleration of labor, product and financial market reforms will thus be critical.

In the current context of weak aggregate demand, reforms that increase investment are more desirable than reforms that increase saving. While both have positive long-run effects, investment friendly reforms increase demand and output in the short run, while saving friendly reforms do the opposite. A word of caution, though: the timing and magnitude of the effects of structural reforms on growth are uncertain: fiscal adjustment plans relying on faster growth would not be credible.

Commandment VIII: You shall strengthen your fiscal institutions.

Sustaining fiscal adjustment over time requires appropriate fiscal institutions. The current ones allowed a record public debt accumulation before the crisis. They are insufficient. This requires better fiscal rules, including in Europe; better budgetary processes, including in the United States, where, at least for Congress, the budget is essentially a one-year-at-a-time exercise; and better fiscal monitoring, including through independent fiscal agencies of the type recently created in the United Kingdom.

Commandment IX: You shall properly coordinate monetary and fiscal policy.

If fiscal policy is tightened, interest rates should not be raised as rapidly as in other phases of economic recovery. Calls for an early monetary policy tightening in advanced economies are misplaced.

Commandment X: You shall coordinate your policies with other countries.

In a number of advanced countries, the reduction in budget deficits must come with a reduction in current account deficits. Put another way, if the recovery is to be maintained, the initial adverse effects of fiscal consolidation on internal demand have to be offset by stronger external demand. But this implies that the opposite happens in the rest of the world.

In a number of emerging market economies, current account surpluses must be reduced, and these countries must shift from external to internal demand. The recent decisions taken by China are, in this respect, an important and welcome step. Policy coordination will also be important in some structural areas: for example, over the medium term, it will be critical to protect fiscal revenues from rising tax competition.

Obey these commandments, and chances are high that you will achieve fiscal consolidation and sustained growth.
This stuff sounds awfully familiar to current American lingo (pace Summers). This being the IMF, they will more likely than not stick to the US line that stimulus is necessary to ensure long-term sustainable growth. That is, the kind of growth that will eventually pay for the stimulus measures undertaken (and more). At present, I certainly can't see how US stimulus which lies at the heart of this debate and which is funded by any number of other countries is helping create such favourable conditions.

Again, if massive debts helped create America's current woes, there's little reason to believe that even more massive debts should have begun to fix these woes by now. Worse, preliminary evidence suggests the US economy remains anemic, so should that trigger even more stimulus? If it ain't working, perhaps it's time to change tack. As Einstein once said, insanity is doing the same thing over and over again and expecting different results. Reflating the housing-overconsumption complex just isn't happening

Call for Papers: Int'l Econ Law in a Time of Change

♠ Posted by Emmanuel in at 7/21/2010 12:01:00 AM
I thought those who work in fields at the intersection of international economic law and global governance would find this event interesting. Our friends over at the University of Minnesota Law School sent along a notice of their upcoming symposium. By all means, get in touch with them if the subject matter is of interest...
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The International Economic Law Interest Group of the American Society of International Law wishes to solicit paper and panel submissions in connection with its Biennial Conference at the University of Minnesota from November 18-20, 2010. The conference is a wonderful opportunity to collaborate with a broad cross-section of international economic law specialists and hear from prominent keynote speakers including Professor Jose Alvarez at NYU and WTO Appellate Body member Ricardo Ramirez (Mexico).

Under the theme of International Economic Law in a Time of Change: Reassessing Legal Theory, Doctrine, Methodology and Policy Prescriptions, the Interest Group has issued the following call for papers:

“The start of the second decade of the twenty-first century is witnessing a confluence of events affecting international economic law that calls for re-evaluation. The international context has radically changed. Most analysts contend that we are shifting toward a multi-polar world in light of economic transformations in China, India, Brazil, and other developing and transitional countries, coupled with economic stagnation in the United States and Europe which are beset by a financial crisis and embroiled in foreign wars and security concerns. These developments have arguably complicated international economic governance, yet other factors–such as the current financial crisis–press consideration of new forms of international economic governance, such as the G-20. Global economic interdependence, exemplified by global production and supply chains, calls for sustained attention to international economic law and institutions.

With this backdrop, the November conference will organize sessions that address the full range of international and transnational economic law. We encourage scholars to submit papers or panel proposals related to trade, investment, international financial regulation, transnational private law, and development law, as well as their intersection with social regulation such as over global warming, labor rights and consumer safety. This call for papers welcomes submissions that provide new analytic frameworks, reassess legal theory, evaluate developments in legal doctrine, engage in empirical analysis of the way international economic law operates, and provide guidance for policymakers, regulators and adjudicators in this time of international economic change.”

Hungary Like A Wolf for IMF Loans? Perhaps Not

♠ Posted by Emmanuel in , at 7/20/2010 12:05:00 AM
European financial markets were in for a bit of a surprise Monday as Hungary was not able to agree with the EU and IMF on conditions for the release of another tranche of its €20 billion standby agreement concluded in 2008. Current Hungarian Prime Minister Viktor Orban of the right-of-centre Fidez party ousted the previous socialist leadership which negotiated the IMF deal. Orban had already been PM from 1998 to 2002, but lost at the polls in 2002 and 2006. As is often the case in politics, traditional notions of "left" and "right" do not always match when it comes to dealing with the IMF and other foreign interlopers. Whereas the previous government was obviously more amenable to making concessions--especially on the fiscal austerity front--the current government is not quite.

And so we have a populist backlash against the IMF. Ho-hum, where have we seen this movie before...
Hungary's government said the International Monetary Fund and European Union are ignoring the economic risks of excessive austerity measures and that Budapest can't make deeper spending cuts now, despite a punishing reaction from markets after bailout-loan talks between the two sides broke off this weekend.

The Hungarian currency, the forint, on Monday fell to its lowest level against the euro in more than a year, and the cost of insuring Hungarian government bonds against default jumped sharply after the IMF and EU walked out of talks with Budapest on Saturday, saying the government wasn't doing enough to shrink its budget deficit...

The new populist government of Hungarian Prime Minister Viktor Orban is trying to push back, arguing that further budget cuts risk stifling the country's nascent economic recovery. Hungary's gross domestic product is forecast to grow by about 0.6% this year, after contracting 6.2% in 2009.

"We've been through more than four years of austerity and that's why we have lost our competitiveness," Hungary's economy minister, Gyorgy Matolcsy, said in television interview Monday. "We told our partners that further austerity packages were out of the question."

Mr. Matolcsy also said the government planned to go ahead with a hefty new tax on [Western--see below] financial institutions aimed at raising nearly $1 billion to boost government revenue this year, despite concern from the IMF and EU that the measure would constrain economic expansion. "The only alternative to the bank tax is austerity," Mr. Matolcsy said. And that "would dampen growth more..."

If the government fails to strike a deal with the IMF and EU, it won't be able to draw on the remaining funds in a €20 billion ($25.9 billion) rescue package obtained in 2008, when it was unable to raise money amid a global credit crunch. Hungary hasn't drawn any money from the standby loan so far in 2010, and doesn't need funds to finance itself for the rest of the year.
Aside from not needing the IMF loans just yet, there are other reasons why the Fidesz party is undertaking this gambit. With local elections upcoming, a populist backlash may be just the thing to win votes and solidify a government majority. What's more, this backlash is further enhanced with revenue generation plans aimed at big (read: Western) banks while sparing indigenous firms that are of more modest size. Reuters has a neat Q&A from which the following are taken:
IS FIDESZ TRYING TO BUY TIME FOR LOCAL ELECTIONS?

Fidesz won a parliamentary election in April on the promise of generating growth and jobs through tax cuts, which appears to have been its only economic policy plan, analysts say. Global markets have taken a sour turn, however, and the government was forced to abandon its budget loosening policy. It has done so half-heartedly, and the programme it was forced to put forward in June reflects a resentment toward austerity.

Fidesz hopes to maximise popular support for the local elections on Oct. 3. Before ousting the Socialists from power in April, the party had won voters by campaigning against a series of austerity measures by the left. Coming out with such measures of their own would risk alienating swathes of the electorate. If they are to consolidate their power at the local level that will give Fidesz 3-1/2 years without an election, giving the government a freer hand.

Hungary's existing IMF/EU agreement will expire by October, giving Fidesz enough time to secure a safety net to fall back on. It remains to be seen whether the patience of markets will last another two months.

IS THERE A DANGER FIDESZ WILL RISK CONTINUED MARKET SELLOFF?

Yes, there is. Fidesz's popularity is rooted in a populist agenda that eschews austerity. To execute its agenda -- supporting families and small businesses at the expense of taxing banks and multinational firms -- Fidesz needs to control local governments. The breaking point will likely come soon after the local elections, which will coincide with writing next year's budget and the expiry of the current IMF/EU aid deal. If Fidesz does win local elections with a strong mandate, it can relax the populist agenda.

WHAT IS FIDESZ'S ECONOMIC PHILOSOPHY?

The party has proposed legislation to lower the tax burden on households and companies and wants the financial sector -- mainly banks with west European parents -- to foot the bill...Fidesz, which wants to distance itself from leftist governments of the past 8 years, loathes the idea of austerity for fear of being branded the same as the Socialists.

Its efforts to meet the 3.8 percent of GDP budget deficit goal centre on a financial sector tax. Fidesz's reluctance to introduce harsher spending cuts and its insistence on the bank tax strengthened its populist image among investors.
Isn't Eastern bloc political economy grand?

After PRC, Other Asian Nations See Pay Disputes

♠ Posted by Emmanuel in ,,, at 7/19/2010 12:12:00 AM
Workers of the world unite! (Or, at least some of those in Asia.) After the much-ballyhooed worker suicides at Chinese original equipment manufacturer (OEM) Foxconn, many multinationals sensitive to charges of operating in China to, well, exploit labour arbitrage opportunities quickly followed suit with pay rises. The PRC powers-that-be then mounted an investigation to try and quell matters. Nevertheless, a spectre is haunting Asia--the spectre of labour militancy. In true butterfly-flapping-its-wings-starting-a-hurricane fashion, anecdotal reports now report that countries in the wider region are facing similar howls of protest over insufficient pay. Avast, ye capitalists!

The following FT article focuses on aftershocks being felt in Southeast Asia. Like China, Vietnam and Laos are ostensibly "socialist" regimes that have in recent times adopted measures to solicit foreign direct investment--AKA "market socialism." I'd certainly like to ask Marx what that is...
Chinese labour unrest is being replicated in south-east Asia where factories that compete with China to supply low-cost goods face walkouts as employees demand better pay and benefits. In Cambodia, workers are poised to stage a three-day strike this month in a dispute over the minimum wage while in Vietnam, thousands of workers at a Taiwanese-owned shoe factory staged a strike demanding higher salaries.

The disputes match similar action in China, where growing worker dissatisfaction has led to industrial unrest and higher wages. As a result, foreign factory owners are increasingly moving production from southern and eastern China – long seen as the “workshop of the world” – to the interior and other Asian developing nations. Chengdu in western China has already attracted IT giants such as Intel, Microsoft and IBM while Vietnam has become a manufacturing base for companies such as Foxconn, the world’s largest contract electronic manufacturer, Intel and Canon.

Labour costs in countries such as Cambodia, Vietnam and Laos remain a fraction of those in China. But, while their governments have been jostling to attract foreign manufacturers, unions are keen to protect their members and industrial action is on the rise, together with minimum wages across the region.

The average garment worker in Cambodia, where the minimum wage is one of the lowest in the world, earns $50 (€40, £33) per month plus a $6 living allowance bonus. The government has proposed a $5 increase but the Free Trade Union, which represents more than 80,000 labourers, intends to go ahead with the strike unless minimum pay is increased to $70.

The union represents more than 80,000 workers in factories across the country. Hundreds of international companies, including PCCS Garments, a Malaysian company which supplies goods to Adidas, Puma and Nike, and Korean manufacturer Yakjin, whose clients include Walmart and Gap, may have operations disrupted if the argument is not resolved.

The Vietnamese government increased the minimum wage for workers at foreign-owned companies to 1m dong ($52.50) this year. In Laos, the minimum wage was rose last year from 290,000 kip ($35) to 348,000 kip ($42) per month. Cambodia has a relatively high number of [real, not state-run] active unions and most garment factories are represented, says John Ritchotte, of the International Labour Organisation. However, he points out that industrial unrest is not uncommon across the region. “Even in those countries without independent unions, such as Vietnam and Laos, disputes occur, particularly during periods of high inflation,” he says. “The number of disputes has grown substantially over the past five years.”

At the same time, Cambodia’s open business environment, in which companies can be 100 per cent foreign owned [WOFE--wholly owned foreign enterprise], is expected to attract increasing foreign investment. According to figures from the Cambodian Ministry of Commerce, 290 new foreign companies registered in the country in the first quarter of 2010, an increase of 56 per cent on the same period last year. The World Bank estimates foreign direct investment in Cambodia will grow to $725m in 2010, up from $515m in 2009, partly as a result of an increase in Chinese investment.
Like China, most of Asia is open for business. However, might firms seeking relief from increasing wages in China find themselves having to deal with...workers clamouring for higher pay in Southeast Asia? As gnarly Uncle Karl once wrote, the proletarians have nothing to lose but their chains. They have a world to win.

World Cup's Curse of Nike (& Bad American Mojo)

♠ Posted by Emmanuel in , at 7/17/2010 04:10:00 PM

Leave it to an American company to mess up its advertising efforts at the 2010 World Cup, bigtime. Oftentimes, listening to Americans talk about football is like listening to Obama talk about deficit reduction--an exercise in raucous hilarity since they so obviously don't know what they're talking about. So, we shouldn't expect much better when an American company opens its wallet while choosing the wrong ad pitchmen for the biggest football tournament on Earth. Sure, the Adidas Jabulani ball received some bad press from those who couldn't master it like Uruguay's Diego Forlan, but when it came down to it, the Spanish victors still wore the three stripes. Which, of course, leaves us with Nike. In essence, it banked on the most highly compensated and recognizable names to strike gold in South Africa but ended up with a bevy of own goals.

I first glimpsed the three-minute-segment above on ITV. Nike feted the Alejandro G. IƱarritu-directed "Write the Future" prior to the World Cup. Given the characters involved and that a typical ad segment lasts 30 seconds, you can bet it cost a a small fortune. Worse, extended involvement in this megabuck commercial seems to have predicted World Cup failure (some Spanish players appear in a cameo but for less than 3 seconds or so). Consider what happened to some of the prominent characters involved:
  • Didier Drogba - His Ivory Coast crashed out of group stage;
  • Fabio Cannavaro - Italy didn't make it out of the group stage, defending champs didn't win a single match;
  • Wayne Rooney - much-hyped England star didn't score in a second straight World Cup, England thumped by (Adidas-clad) Germany 4-1 in second round;
  • Theo Walcott - England midfielder was left at home by Don Fabio after not following orders and didn't go to South Africa;
  • Franck Ribery - Also didn't score a single goal as France went on strike, didn't make it past the group stage
  • Ronaldinho - Former Brazilian team coach Dunga left him at home, too
  • Cristiano Ronaldo - Scored only once as Portugal wasn't able to in three of four matches; left South Africa a "broken man" [?!]
Friends, if there's any firm that best epitomizes the current American spirit for spending big on losers, it's Nike. Just as the American government spends hundreds of billions on pointless, non-stimulating stimulus, so did Nike waste millions featuring non-performers in its ads. Alas, it was rather subprime. But hey, in its own way Nike does "Write the Future" of the US, eh? Crass commercialism imitates life or something like that.

When an ordinary octopus at a humble German water park gets oodles more attention and its predictions right, I guess that says something about the future of sports marketing. Creativity and spontaneity often attract favourable public attention in a way doomed megabuck play-it-safe efforts don't. It's the private sector equivalent of ladling out pork. I guess some people never learn: Nike, just don't do it.

Next President Palin, Try New UK Sado-Monetarism

♠ Posted by Emmanuel in , at 7/16/2010 12:02:00 AM
OK, so the post title is speculative, but I believe most will agree with two relatively uncontroversial statements: (1) there is a conservative backlash against Obama that focuses on his maniacal spending, and (2) Obama's spendthrift ways are forcing moderates' views of the current administration. While most of the rest of the world would probably prefer Obama to a backlash candidate taking the reins of power, there is no guarantee that non-reactionary choices will prevail come 2012. The 2010 midterm elections will indicate how much support Obama still retains two years later given that the US economy is quite pitiful as various macroeconomic indicators say despite unprecedented deficit spending unseen in world history. With disapproval of Obamanite policies across the board, current trends look unfavourable for the incumbent and his party.

Anyway, the point I wish to make is that a President Palin may not be as bad as it sounds. Indeed, the rest of the world may come to realize that, despite the unappealing Amerocentric bluster, tea party-esque candidates may win favour by inflicting less massive deficits on Americans and abroad. The term "sado-monetarism" was coined by Bill Keegan to denote what Margaret Thatcher put the UK through as the eighties rolled in. Nowadays, we have yet another Tory administration taking the reins of power after a profligate Labour one.

Once more, however, the song remains the same as echoes of sado-monetarism recur in present-day and rather cash-strapped Britain. As new Chancellor of the Exchequer George Osborne asks various departments to look for up to 40% savings, the surprising thing is that the public is actually reacting favourably--although it must be noted that almost all of the cuts will still be phased in during the next fiscal year:
George Osborne was surprised to learn this week that he is the most popular Conservative chancellor since Ipsos/Mori began testing public opinion on the issue in the 1970s. But he knows that the warm feeling may not last. Mr Osborne’s Budget last month heralded £113bn of spending cuts and tax rises, an austerity package whose necessity seems to be appreciated by the public, who have yet to see what it means in practice.

For now the chancellor’s positive approval rating of about plus 20 is above that enjoyed by Nigel Lawson, Ken Clarke and Sir Geoffrey Howe, not to mention Norman Lamont, whose approval rating plummeted below minus 50.

The axe falling on about 700 school building projects is a taste of what that austerity package means in practice and Mr Osborne’s work is only just beginning. This week the chancellor convened a meeting with senior ministers sitting on the public expenditure committee – alias the “star chamber” – to hammer out plans for achieving average departmental cuts of 25 per cent by 2014-15.

Mr Osborne wants his cabinet colleagues to provide him with a “menu” of cuts – ranging from the merely painful to the truly excruciating – before MPs rise for their summer recess this month. The chancellor will give ministers at least two targets for cuts. For most departments that will mean a “best case” scenario of at least 25 per cent, while ministers will be asked to model for bigger cuts of perhaps 40 per cent or more...

Health and overseas aid budgets have been protected from the cuts, while Mr Osborne has said defence and education will be spared the worst effects of the spending curbs.
So there are lessons here. As I suggested earlier, people generally are willing--if sometimes grudgingly so--to forsake public largess provided that the rationale is spelled out clearly. Remember Canada's example next to that of economically illiterate America. Next, I am damn sure that the tea party-esque candidates will claim to be able to close the fiscal gap through spending cuts alone. For that the British example indicates increasing revenues will also play a role as value-added tax goes to 20%. Higher taxes are an utterly hard sell in the land of the soft in the middle, but they need to be tabled if they're serious.

The Evening Standard's Anthony Hilton begins to complete the picture. Sado-monetarism turned into, ah, a term of endearment shouldn't be all negative cut/hack/slash/burn. Alike with sadomasochism's enthusiasts, there should be an element of, yes, fun involved (as strange as it may sound). Certainly, Obama's joyless brand of megadeficit spending--few results and gigantic outlays--pleases few. So there. The renewed version of British sado-monetarism may be what can help cure America of its fiscal morass should it prove to be promising. Just like Thatcher preceded Reagan to office, Cameron may be setting the stage for a similar anti-deficit character stateside. Remember, the UK has already broken ranks with the US in the stimulus versus austerity debate:
There is scope here for a more fundamental shift in the role of the state than that implied by simple belt-tightening. Cabinet Secretary Gus O'Donnell revealed at a Pro Bono Economics lecture this week that the website asking the public for ways to save money had attracted 60,000 suggestions. This hints at a considerable public appetite, not necessarily for cuts, but for making sure public money is well spent. People still want public services but they don't want the waste and fraud that often seem to go with them.

The Government has considerable support for a purge, and that is new. But a little less glee among some of its number would also not go amiss. If they can get the tone right, they have a big opportunity. Talking about the quality of public services in the future rather than the quantity to be cut now could change the way we are governed — and for the better.
If US politics weren't so primitive and the tea party movement's adherents had any brains, they'd follow goings-on in Blighty. To paraphrase Deng Xiaoping, it doesn't matter if the deficit reducer is Palin so long as the deficit is actually reduced.

UPDATE: The WSJ blog even sees the pound sterling as a safe haven amidst the US going down the tubes.

The IMF Sucks Up to Asia...

♠ Posted by Emmanuel in , at 7/15/2010 12:04:00 AM
...because that's where the money is. Above is Korean PM Lee Myung-Bak welcoming IMF Managing Director Dominique Strauss-Kahn to his country. Now here's another story most of the whitebread commentariat has missed, but that's unsurprising. However, they perhaps ought to pay more attention for it may be Asia that rescues their behinds from the fiscal morass they're digging themselves in. It's only natural that with most of the Western world in sorry fiscal shape, the IMF is calling on Asia to play a larger role in global economic governance. In plain English, that's called "rattling the begging bowl in Asia."

Not so long ago if you remember, Korea was forced to resort to IMF emergency lending during the Asian financial crisis. Although it has since gone soft on hardcore Washington Consensus-style prescriptions of liberalization, privatization, and deregulation, the IMF did indeed prescribe the lot for South Korea. Not that it was necessarily popular or successful with even current IMF leadership spurning high neoliberal ideology, but there are good reasons a somewhat reinvented IMF wants to make amends. (Remember, its managing director has always been from old Europe, while its first deputy managing director from the US.)

In the meantime, how the world has changed! Now flush with reserves--more than a quarter of a trillion dollars--South Korea is not only the current chair of the G20 but an economic force to be reckoned with. Instead of being dictated terms to by the Washington-based institution, the IMF crew has set up shop in Korea to try and woo the favour of South Korea and other Asian nations. Yes, it's quite apologetic now for the misery it inflicted. From the IMF website comes news of the recently concluded conference in Daejon, South Korea:
Wrapping up a two-day conference on Asia’s future, IMF Managing Director Dominique Strauss-Kahn announced a set of commitments, labeled the “Daejeon Deliverables,” that he said will significantly strengthen the Asia-IMF partnership in a year that South Korea chairs the Group of Twenty (G-20).

Acknowledging that the IMF’s relationship with Asia had been damaged during the 1997–98 Asian crisis, Strauss-Kahn said the IMF had changed and learned important lessons that had helped the 187-member global institution tackle the recent global economic crisis better. “This conference has been an opportunity for the IMF to begin the process of stepping up its engagement with Asia,” said Il SaKong, chairman of Korea’s G-20 summit presidential committee. More than 1,000 regional economists, bankers, analysts, and financial media crowded into the Korean city of Daejeon for the conference, titled “Asia 21: Leading the Way Forward,” hosted by the Korean government and the IMF.
And here are the new IMF pledges of support:
At a concluding press conference, Strauss-Kahn made three key commitments to Asia, which is leading the world out of the recession caused by the global financial crisis, but which now faces challenges from large capital inflows that may trigger economic overheating.

• The IMF will work to make its analysis more useful and available to Asian members. This includes strengthening the IMF’s early warning systems, sharpening its focus on cross-border spillovers, and increasing work on cross-cutting themes, including macrofinancial linkages. It committed to a more even-handed approach to its surveillance of economies around the world.

• The IMF will work to strengthen the global financial safety net. To do so, the Fund will work closely with Asia—through Korea’s leadership on this issue in the G-20. The IMF is examining several options to strengthen its tools to help prevent crises and mitigate systemic shocks, including more tailored crisis prevention facilities and multi-country approaches.

• The IMF will support the further strengthening of Asia’s role and voice in the global economy. This can be done, first of all, by building on the package of 2008 IMF reforms which boosted Asia’s voting power in the Fund. The IMF is working on a second stage to be completed by the G-20 summit in Seoul in November. In addition, the Fund will strengthen its collaboration with regional organizations in Asia—and, as a first step, Asia will be represented at a major meeting on this issue that the IMF is organizing in October 2010.

Strauss-Kahn said he wanted to make Asia feel at home at the IMF and become more involved in global solutions. For Asia’s low-income countries, Strauss-Kahn noted they have the potential to become the next generation of emerging markets. Delegates also focused on continued inequality in Asia, despite the growing prosperity, with the IMF Managing Director talking about inclusive growth.
The cynic in me thinks all this (revisionist) lovey-dovey stuff has something to do with the IMF attempting to fundraise 250 billion euros out of the 750 billion euro bailout package for ailing EU member states. As yet, there have been no concrete details provided of where these proposed IMF monies will come from.

There's even a new factsheet where the IMF issues more apologies for its handling of the Asian financial crisis along with talk about less draconian conditionalities and more social prioritization. Here's the key text:
The IMF learned important lessons from the Asian crisis. In particular, the Fund recognizes that while tough measures are needed to address deep economic problems, the conditions accompanying its programs need to be more focused on the problems at hand, and it needs to be more conscious of the social impact of those programs. The IMF has sought to apply this and other lessons to its more recent lending programs. The example of Asia’s resilience during the current crisis and the examples of good practice from the region have helped inform IMF advice to other member countries.
Ultimately, the IMF may have more to gain from Asia than the other way round. With the Chiang Mai Initiative Multilateralization (CMIM) in full swing and quite possibly forming the basis of a regional IMF, Asia has no real problems going it alone. Yet somewhat obviously, the IMF welcomes more funding from Asia--even to fight fires in the developed world. Neoliberalism, we hardly knew ye.

US [Hearts] Deficits, Pay $2T in Interest by 2020

♠ Posted by Emmanuel in at 7/14/2010 12:09:00 AM
We have just received word from the US Treasury that America's fiscal deficit for the year has just crossed the $1 trillion mark with one more quarter to go. While this figure is certainly no surprise, perhaps the only slight "improvement" over the previous year is. The trick this and the previous administration has used is to quote some massive deficit projection beforehand to show that, gee, they actually were "frugal" despite running up massive deficits by undershooting somewhat:
The federal deficit has topped $1 trillion with three months still to go in the budget year, showing the lasting impact of the recession on the government's finances. In its monthly budget report, the Treasury Department said Tuesday that through the first nine months of this budget year, the deficit totals $1 trillion. That's down 7.6 percent from the $1.09 trillion deficit run up during the same period a year ago...

The deficit in the federal budget in June totaled $68.4 billion, the second highest June deficit on record, but down from the all-time high of $94.3 billion in June 2009, a month when the government was spending heavily to stabilize the financial system and jump-start economic growth...

Many private economists are forecasting that the deficit for the entire budget year, which ends on Sept. 30, will come in around $1.3 trillion. That would be the second highest deficit on record, but it would be down slightly from last year's all-time high of $1.4 trillion. The Obama administration is forecasting that the deficit for the 2011 budget year, which begins Oct. 1, will remain above $1 trillion for a third straight year, projecting an imbalance of $1.27 trillion. And the administration predicts the imbalances over the next decade will total $8.5 trillion.
What will be the sum total of all this Obamanite spending on current trajectory, however? The picture looks pretty appalling. I've patiently tried to debunk all sorts of "deficits don't matter"-style arguments emanating from mathlexic and/or logic-proof commentators. However, one flagrantly logic-free argument has been "deficits don't matter because interest rates are so low." Apparently, even Obama's fiscal commission--which I've criticized much already--realizes that this pathetic line of argument is patently absurd. For, they predict that debt service costs on interest alone will amount to $2 trillion by 2020:
The nation's total federal debt next year is expected to exceed $14 trillion — about $47,000 for every U.S. resident. "This debt is like a cancer," [UNC President and Fiscal Commission Chairman Erskine] Bowles said in a sober presentation nonetheless lightened by humorous asides between him and Simpson. "It is truly going to destroy the country from within."

Bowles said if the U.S. makes no changes it will be spending $2 trillion by 2020 just for interest on the national debt. "Just think about that: All that money, going somewhere else, to create jobs and opportunity somewhere else," he said.
It's good to know that, no matter how hamstrung by the administration's own spending, powers-that-be at UNC get the idea. If the US spending disease is indeed cancerous, I suggest a strong programme of chemotherapy that will have the disbelievers' hair falling out, pronto. Face it: America is, at present, out of control. It certainly isn't creating any jobs [1, 2] to create taxable revenues, so there's every reason to disbelieve. The American dream is dead, my friend. From here on in, it's just deficits upon deficits.

Just Nuke It: Is Cash-Rich Burma Pursuing Fission?

♠ Posted by Emmanuel in , at 7/13/2010 12:03:00 AM
And now for more strange goings-on in Southeast Asia. A few days ago, I questioned the wisdom of the military in Cambodia pursuing military sponsorship, dubbing it the return to the shilling fields. To paraphrase the timeless and nearly universally familiar slogan of Nike, just shoot it, eh? Well, I may now have another security-related concern that should raise eyebrows from more than a few Westerners. Once again following Nike, Burma is perhaps considering the possibility of, well, just nuke it.

It is no big secret that Burma is rich in natural resources--particularly natural gas. In their quest to secure energy supplies, many neighbouring countries have risked incurring the disapproval of Washington by warming to Myanmar's ruling junta for economic reasons. At the end of the day, Washington's globocop tendencies only go so far in a world where scarcity of any number of resources is only set to intensify.

Now, however, the activist grapevine is sounding a warning that Myanmar's junta is eagerly pursuing the ultimate trump card to fend off all comers in nuclear weaponry. Although not a prosperous nation by any stretch of the imagination, it appears that there is something major underway as Myanmar decides what to do with a sudden influx of cold hard cash. From TIME:
Burmese gas already powers half of Bangkok, and it will soon start flowing to China, making billions of dollars of profit. For many though, it's how the money is being spent that's worrying...Up until a few years ago, Burma's military government, cut off from trade with the West, led a "hand-to-mouth existence," says Sean Turnell, an economics professor at Macquarie University in Australia. Now, thanks in no small part to its resource-hungry neighbors, the pariah state has $6 billion in cash reserves, according to Turnell. As cash is flowing in, the military junta that has run the country since 1962 is spending lavishly. With about a third of the country in poverty, the junta could invest in health, education or job creation, but instead, new evidence suggests Burma is spending billions on outlandish military projects, including, perhaps, a secretive nuclear weapons program. Turnell says the junta is "absolutely paranoid about international interference in the country."

A documentary released last month by the Norway-based NGO Democratic Voice of Burma (DVB) purports to detail the beginnings of a Burmese nuclear program. Though much of the documentary's evidence comes from a single defector living in hiding, the NGO contends that hundreds of color photographs lend support to the rumors swirling for the past few years that Burma has been pursuing the bomb. The Burmese Ministry of Foreign Affairs calls DVB's accusations "baseless," but Robert Kelley, a former director of the International Atomic Energy Agency and weapons scientist at Los Alamos National Lab, concluded from the DVB evidence that the technology in the photos "is only for nuclear weapons and not civilian use or nuclear power."
And there's no prize for guessing who their muse is said to be...
If this sounds similar to another Asian pariah state, it should; Burma is trying to follow the North Korean model, according to Khin Maung Win. Than Shwe reportedly admires Kim Jong Il for standing up to the international community, and ever since the countries formalized relations in 2007, the two states have deepened their military connections, say DVB sources.
Elsewhere, the article quotes the activists mentioning that many Burmese scientists are going to Russia for training--especially at institutions associated with training Soviet-era nuclear weapons experts. IMHO, Myanmar is a far more interesting case than North Korea. Whereas the latter is not particularly blessed with resources marketable to the rest of the world, the former has them in spades. If it plays its cards right, it will be able to tell many critics to buzz off in a way North Korea ultimately cannot.

UPDATE: Remember that like all other ASEAN members, Burma is a signatory to the Treaty on the Southeast Asia Nuclear Weapon-Free Zone. It will be interesting to see what the reaction of the others will be if Burma is indeed identified as being in the process of developing such weapons.

Would American Industrial Policy Create Jobs?

♠ Posted by Emmanuel in , at 7/12/2010 12:14:00 AM
Andy Grove, the former CEO of semiconductor giant Intel, has written a much-remarked article in BusinessWeek on how the US can fix its economy and create jobs by emulating the example of Asian tigers that have deployed industrial policy to dramatic effect--as well as China which has followed in their wake to shake the world. Other bloggers have covered this article in some detail. While it is well worth reading, here are the key parts before I dive into another article which contradicts Grove. Maybe we shouldn't criticize Grove too much as he even manages to quote the LSE's very own Robert Wade (see my recent post on how Wade advises LDCs on adopting industrial policy post-economic crisis):
How could the U.S. have forgotten? I believe the answer has to do with a general undervaluing of manufacturing—-the idea that as long as "knowledge work" stays in the U.S., it doesn't matter what happens to factory jobs. It's not just newspaper commentators who spread this idea. Consider this passage by Princeton University economist Alan S. Blinder: "The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became 'just a commodity,' their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success."

I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today's "commodity" manufacturing can lock you out of tomorrow's emerging industry...

The government plays a strategic role in setting the priorities and arraying the forces and organization necessary to achieve this goal. The rapid development of the Asian economies provides numerous illustrations. In a thorough study of the industrial development of East Asia, Robert Wade of the London School of Economics found that these economies turned in precedent-shattering economic performances over the '70s and '80s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries...

The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability—and stability—we may have taken for granted...[i]f what I'm suggesting sounds protectionist, so be it.
Them's fighting words, Andy Grove. Not only are you offending the economist class, but also America's trade partners by floating impracticable ideas. However, Vivek Wadhwa takes exception to what Grove suggests also in the pages of BusinessWeek. Let's begin with his critiques of following Asia's example too closely:
First, even the bluest of blue chip American companies aren't really American anymore: They typically get more than half their revenue from abroad. Take Hewlett-Packard, Caterpillar, and IBM. They generate two-thirds of their sales in foreign markets. Intel's proportion is even higher: 72 percent of its revenue now comes from abroad. To create jobs, Grove advocates a trade war and says we should "treat it like other wars—fight to win." The problem is that American companies will be the first casualties in such a war, and American jobs will be lost. There is no way to win. [But doesn't this assume that countries America plans to export to and those that will be offended by its presumably offensive trade actions are one and the same?]

Second, do we really want the types of manufacturing jobs being created abroad, at companies like Foxconn? The recent spate of suicides at Foxconn's giant factory complex in Shenzhen, China, was attributed to the mindless work and repetitive tasks that its employees had to perform, day in and day out. Things were different at the turn of the century and after the Great Depression, when American workers did not have the education and skills to perform higher-level chores, or were desperate for any kind of work. I doubt that even the most depressed regions of America would want to be home to factories that pollute the environment, pay minimum wage, and work at the profit margins of these sweatshops. [Take that, Chinese slave drivers!]

Third, the majority of new jobs created in the U.S. aren't created by companies like Intel, but by startups. The Kauffman Foundation's analysis of Census Bureau statistics shows that net job growth in the U.S. economy occurs only through startup firms. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new outfits in their first year added an average of 3 million jobs annually. Having small firms scale into large firms is important, but the cycle of destruction of old industries and the creation of the new has given the U.S. its greatest global advantage. Protecting old industries isn't the best way to reduce unemployment; it is a sure road to downsizing.
Instead, he believes the US should focus on the following:
Let's start by first recognizing that globalization will disrupt industries and cause job losses in one industry while creating jobs in another. We need to upgrade our investment in workforce training and development as a national priority. We need to have the concept of lifelong education become part of our culture. Education doesn't end when you graduate from college; that is when it begins. This is the best way of staying ahead in the global race for skills.

Second, we need to foster entrepreneurship at the source: the workforce. My team's research has shown that most high-growth companies are founded by middle-aged workers who have extensive industry experience, want to capitalize on their idea, and want to build wealth before they retire. What inhibits Americans from starting companies is a lack of knowledge of how to do it, lack of financing, and fear of failure. Clearly, not everyone is cut out to be an entrepreneur, but a significant proportion of the workforce can be taught to start successful companies and create jobs.

Third, we need to recruit the world's best and brightest to the U.S. and do all we can to keep here those already in the U.S. on temporary visas. My team's research has also shown that during the recent tech boom, immigrants founded more than half of Silicon Valley's startups. In recent times, they have contributed to more than a quarter of U.S. firms' global patents and helped boost U.S. competitiveness. These skilled workers tend to be highly educated, to understand foreign cultures and markets, and to be highly entrepreneurial.

Fourth, we need to more effectively tap the gold mine of knowledge and innovation locked in our universities. We've invested on the order of a trillion dollars in university research over the years. Yet we have consistently failed to convert all but a tiny fraction of these lab breakthroughs into actual products and further economic activity. We need to harness this innovation treasure by building mechanisms to break the innovation logjam at the source—the nexus between the scientists who make the discoveries, the universities that market the discoveries to the world, and the entrepreneurs with domain experience who could take these discoveries and turn them into products.

Last, we need to provide incentives to American companies to keep research in the U.S. Grove didn't mention the huge incentives that countries like China provide to Intel and other tech companies. The lure for them isn't just cheap labor (with lax labor regulation), but also heavily subsidized infrastructure and cash subsidies. We may have to level the playing field in industries where other countries aren't playing by the rules. But we need to be smart in how we do it.
Let's just say that I agree with neither to a large extent. In future posts, I will explain (1) why betting on innovation won't redeem America and (2) why the world's elite workers now shun the United States. IMHO the US should just accept that its best days have passed it by. In a world of diminished expectations, it is better not to throw away good money after bad chasing unattainable dreams of yesteryear--bringing back industrial jobs--and live within one's means.

Finally, an Answer for "Who Speaks for Europe"?

♠ Posted by Emmanuel in , at 7/12/2010 12:01:00 AM
Her ad lib lines were well-rehearsed
But my heart cried out for you

About two months ago, Baroness Catherine Ashton, Baroness of Upholland, came to speak here at the LSE on "Economics and Politics post-Lisbon." I must sheepishly admit to dubbing her the "EuroPalin" after replacing the much-vaunted Peter Mandelson as EU trade commissioner after he was recalled home to shore up support during Gordon Brown's dying days as prime minister. Whereas Mandelson and Brown certainly need no introduction on the world stage as the architects of New Labour [RIP], Ashton was largely unknown outside of Labour ranks. Hence my initial reaction of a lady being picked from obscurity and with little experience for her role alike the aforementioned Palin.

Nearly two years have passed since she replaced Mandelson at the EU. In the meantime, she has also become the very first High Representative of the European Union for Foreign Affairs and Security Policy. In the post-Lisbon scheme of things, she is second only to Herman von Rompuy who is President of the European Council. Still, I cannot honestly say that she's left her mark as either the trade commissioner or, subsequently, the foreign affairs chief.

Perhaps it's Eurosclerosis still at work since her office is very new and she has yet
to find her wings. There's also the considerable financial turmoil that's roiled the EU--much ado about nothing, I believe--leaving matters unsettled. However, it's with some interest that I note Ashton is a pretty good public speaker. Alike with the Rod Stewart lyrics quoted above, I must admit she comes across well despite deploying what are by now well-worn lines about herself and her job. I should know--she used them in her LSE presentation, and also in this latest "Lunch with the FT" entry.

My favourite is the question of whether she can finally speak for the entire Europe as per former US Secretary of State Henry Kissinger asking, "Who speaks for Europe?" Apparently, things are not quite yet as clear cut as she jokingly notes...
Expectations, she says wryly, are what she would change about the job, which was created more than eight years ago when the EU’s member states were high on prosperity and keen to tackle the long-term confusions and failures of EU foreign and security policy. They wanted a heavyweight figurehead, backed by a strong diplomatic corps, so that the EU, an economic superpower expanded to 27 nations, could speak with a coherent and unified voice. The question supposedly asked by US secretary of state Henry Kissinger, “If I want to speak to Europe, who do I call?” would finally be answered with a single name and number...

This easy break into humour proves typical of Ashton’s informal manner. Her own favourite joke about the Kissinger question is meant to hammer home a warning. She says the Americans do now have a number to call for Europe, but that they will hear Ashton’s voice (a soft Lancashire accent) asking them to “press one for the French position, two for the German position, three for the UK, etc.” She is at the beginning of a process of creating an effective voice for Europe, she explains, and that will take time to achieve. “For now we are building the foundations.”
I suppose it's only fair--she's still pretty new to the job, having just taken it near the end of last year. I also like this one about her response to being named a baroness:
As she points out herself, Ashton’s main problem in her current role is that she does not meet people’s preconceptions of a foreign affairs supremo. She likens it to a film audience’s shock at seeing an unconventional actor cast as their favourite character in a novel. High representative is a grand role but grandeur is not her style – she also plays down her peerage, quoting how one of her daughters had once explained to a teacher that her mother’s title meant “something between a politician and a princess”.
Also note her perception that China does want a single European voice representing the EU-27 to talk to as well as the EU's more impartial stance in Palestine. Indeed, she even hints at--who would've guessed--international political economy in the process:
So, I ask, did the EU really miss out when it didn’t have one person and one institution to talk to? “China particularly has made it clear to me that they are keen on having an interlocutor that is European with whom they can talk about things that affect all 27 countries. I have been at great pains to say it is not instead of bilateral relationships, but there are things that we do together where we are stronger, and the obvious example is trade.” She is proud of being one of the first politicians allowed into Gaza since the building of the wall, and frank that the “clout” she enjoys there is because of €1bn in aid spent in the Palestinian territories. “I call this job, ‘Where politics meets economics’, and it’s important that we bring the two together,” she says.
A person ends up in a position to do great things often not by accident but by making their own luck. For Europe, I certainly hope her affable character can be used to create recognizable and coherent EU foreign policy.