Can South Asia Do Better Than East Asia?

♠ Posted by Emmanuel in , at 5/29/2009 02:39:00 PM
The UNDP's Ajay Chhibber (cool name that) makes a lot of sense in claiming that South Asia will likely outdo East Asia in terms of economic growth in 2009. Although slow to reform and lacking in social safety nets, two things go in their favor: First, their export wares are largely basic goods whose demand is presumably not as quickly hit as big-ticket items such as electronics. Second, their reliance on exports as a percentage of GDP is altogether smaller. This is, of course, on top of the more recent news that India's Q1 2009 growth came in higher than expected at 5.8%.

It's nice to hear some good news, eh? From the Financial Times:
Ajay Chhibber, the head of the UNDP in Asia Pacific and a former World Bank senior economist, said that growth in the east Asia region would be dragged down by the poor performance of countries like Thailand, Singapore and Malaysia. He warned that many of the so-called group of Asian Tiger economies could no longer pursue the export-led growth strategies of the past, and continue to prosper.

“There’s something that I thought I would never see in my lifetime. For the first time, there is the possibility that south Asia may have higher growth than east Asia,” he said in an interview.

Mr Chhibber forecast that China would grow by 7 per cent this year, India by 6 per cent, its neighbours by 5 per cent, but in Thailand, Singapore and Malaysia growth would slump to about 3-4 per cent. He expressed particular alarm about the dramatic drop in trade suffered by previously conflict-marred Cambodia, Laos and Vietnam.

The prospect of south Asian countries, many of whom have severe social deficits and challenging security environments, outstripping the performance of other emerging markets in Asia will surprise many. Where export-orientated economies have suffered sharp falls in demand for their products, countries like India - with its 1.2bn population - have been sustained by domestic demand less affected by the global financial crisis. Only about 17 per cent of India’s Gross Domestic Product comes from exports; whereas in some countries in Asia exports represent more than 60 per cent of GDP.

Bangladesh, in particular, appears to have shown resilience to the downturn, with international buyers trading down to its garment exports, while its remittances flow has held up. Meanwhile, International Monetary Fund officials regard the stabilisation of Pakistan’s economy with a $7.6bn rescue package at the end of last year as broadly successful.
And yes, perhaps it's time East Asian exporters begin to resemble the long-maligned South Asian ones--at least in terms of relying more on domestic demand:
The UNDP’s regional head, who had a 25 year career at the World Bank, recommended that countries highly dependent on export-led growth needed to make a “structural shift” away from the old model as consumption in the West would never return to its previous highs.

“The export led model of growth was followed by Asia after the Asian crisis. East Asia took the lead, then south Asia was getting into the mix. This model has to change,” he said. “We can’t go back to the imbalances that we saw before. The level of exports before [is not going to return]. The US consumer is not going to absorb that much products from the rest of the world.”
Go South, young man, go south.

EU to Russia: Join WTO, Then We Talk Trade

♠ Posted by Emmanuel in , at 5/28/2009 09:43:00 AM
I've had this looooong running series of posts [1, 2, 3, 4, 5, 6] about Russian negotiations to join the WTO. My intuition of Russia being a long shot contender is based on the Ukraine and Georgia joining well ahead of it. After cutting off the former's gas supplies and engaging in a border conflict with the latter--both matters with trade interests, of course--Russia will have an almighty difficult time of getting these two countries' assent as it must do with all WTO members.

Now comes word that the EU Trade Commissioner Baroness Ashton is prodding Mother Russia to join the WTO prior to engaging in negotiations concerning EU-Russia trade. While there is an existing deal, both parties want to update it to account for changes since then. Moreover, with Russia engaging in all sorts of protectionist policies, those don't bode well either for its membership prospects. Here are excerpts from a recent article by Reuters:
The European Union's trade commissioner ruled out on Friday finalising a strategic pact with Russia before it joins the World Trade Organisation and warned Moscow against introducing new protectionist measures. "WTO accession paves the way to the broader free trade agreement we need," Catherine Ashton told Reuters in the city of Khabarovsk where Russian and EU leaders met on Friday. The wide-ranging strategic deal, intended to replace a 1994 pact puts trade as a cornerstone of relations that may cover all areas of relations between Brussels and Moscow, but is still under negotiation.

The European Union has voiced concerns about Russian protectionist measures including a hike in export tariffs on timber and restrictions on foreign gas imports which were adopted to support domestic industries in the crisis. "Russia needs to demonstrate it really is keen to move to WTO accession and part of that is not imposing any new duties, which in any event damage business," said Ashton. "We want to see them not impose new duties," she added.

Her remarks followed an angry statement by the Kremlin's chief foreign policy advisor Sergei Prikhodko, who said on Wednesday Russia was losing patience with delays in WTO adoption and could scrap self-imposed trade restrictions.
We then get to the heart of the bilateral matter, with the EU pushing for a more comprehensive deal with a major trading partner:

Russia is the third largest trade partner for the EU, which is dependant on Russian energy imports. The EU had a 70 billion euro trade deficit with Russia in 2008. The two sides are now working on the details of the new partnership agreement, but differences have stalled the talks. Russia is seeking a short document laying down key problems while the European Union insists the treaty should include detailed agreements on key sectors like energy and trade rules.

Asked if the EU-Russia agreement could be concluded without Russian membership of the WTO, Ashton was clear: "It is contingent, not least because all the issues for me have got to be within the context of WTO rules, it's just a much more straightforward and simple process on trade."
Can EU demands that Russia join the WTO spur it to membership? Perhaps it's another motivating factor. With energy prices at least temporarily lower, Russia's leverage in going it alone may also be diminished with regard to the EU.

WTO Lite: November Ministerial But No Doha

♠ Posted by Emmanuel in , at 5/28/2009 08:51:00 AM
For all the talk about waiting for Godot with the new Obama administration getting its trade negotiators in place, preliminary results are now in and are quite disappointing. In theory, the organization is mandated to hold ministerial-level gatherings every two years. Given the disappointment that was Hong Kong 2005 which failed to make much headway towards completing the Doha Round, no ministerial meetings have been held since then.

News out of Geneva is that there will be a ministerial meeting in November 2009. But, get this--global trade talks (i.e., Doha) are off the agenda. Hence, key issues concerning LDC access to agricultural sectors of industrialized countries and industrialized countries' access to manufacturing sectors of LDCs will be by and large glossed over. From Bloomberg:
The World Trade Organization scheduled its first ministerial meeting in four years in November, though global trade talks won’t be on the agenda. Under the Geneva-based WTO’s rules, ministerial conferences should be held at least once every two years. Negotiators had held off scheduling a ministerial meeting in the hopes they would be able to use the gathering to wrap up a global trade deal that would cap tariffs and farm subsidies.

“There is a strong and widespread feeling that a regular ministerial conference should take place this year, given that it has now been almost four years since the most recent ministerial conference in 2005,” General Council Chairman Mario Matus told the WTO’s 153 members yesterday. “I would like to stress the word ‘regular,’ as it has also become clear that this conference is not intended to be a negotiating session --- the Doha negotiations are on a separate track.”

The Doha Round of talks began in 2001 with a plan to cut agricultural subsidies in rich nations and tariffs on industrial and farm goods worldwide. Since then, the talks have stumbled, with a series of meetings of trade ministers from the U.S., the European Union, China, India and other nations ending in failure.

Talks to craft a deal before changes in the U.S. administration and the EU and Indian governments fell apart last July. The main sticking point, highlighted in a divide between the U.S. and India, was the trigger for a mechanism to allow developing countries to raise agricultural tariffs to protect their farmers from a surge in imports.

The theme of the seventh ministerial conference, which runs from Nov. 30 to Dec. 2 in Geneva, will be “The WTO, the Multilateral Trading System and the Current Global Economic Environment.” A ministerial conference can make decisions on all matters under any multilateral trade agreement. The last ministerial meeting was held in Hong Kong in December 2005.
Ho-hum, another "how to deal with the crisis" theme involving trade. Aside from not being particularly timely, it's also besides the point of traditional ministeral gatherings. Talk about diminished expectations. Note too that the US (and EU) seems to be more interested in reinstating dairy export subsidies that, while under WTO limits, go against the spirit of free trade. Perhaps it's a sign of the dire straits the US finds itself: if it cannot even save itself, surely it cannot save Doha.

Don't Believe the Hype on Dambisa Moyo

♠ Posted by Emmanuel in ,, at 5/26/2009 09:58:00 AM
Being sympathetic to the aid skeptic argument, I may surprise some readers in being skeptical about today's highest profile aid skeptic, Dambisa Moyo. The basics of the story behind Moyo are well-known: Aid skeptics have typically been dowdy white guys from industrialized countries. Then, all of a sudden, this attractive Zambian woman--formerly of Goldman Sachs--releases a book on Dead Aid as a spin on Live Aid and receives a boatload of attention in the process. In response, the aid fundamentalists are all over her case. It's a sad reflection of our times when celebrity seems to be mistaken for genuine intellectual achievement, but I'm afraid that's largely the case here. As many commentators have already pointed out, Moyo regurgitates a lot of aid skeptic rhetoric, the only revision being that its new champion is an African woman.

There's also the exceedingly troubling recommendation by Moyo that African countries rely more on capital markets for their funding instead of foreign aid. I suspect that Moyo wrote this book during a time when her former employer, Goldman Sachs, and other Wall Street firms were high in the saddle prior to the subprime debacle. At the time, spreads for emerging market debt was at historic lows (and stock markets at all time highs). With these factors now reversed and the EMBI+ at nearly 5.00%--and even higher for several African countries--Moyo's recipe is one of creating more heavily indebted poor countries. Then again, true believers in the salvific powers of the Anglo-Saxon model tend to overlook these considerations despite evidence of the pitfalls involved--especially in countries with still-limited institutional capacity. Although spreads have come down somewhat, they are nowhere near where they were before on emerging market debt:

As someone not particularly enamored with celebrity culture, I think "Hey, look at me--the Zambian William Easterly" doesn't count for much. Indeed, while Easterly supports Moyo for essentially this reason (an African assumed to be speaking about the plight of Africans), I cannot say that she adds anything to what he's already expressed in The Elusive Quest for Growth and The White Man's Burden. Worse, the numbers she does cite to back up her assertions are dubious. Moyo has written more of a polemic, with not much attention paid to the vast, vast development literature on aid's efficacy that has accumulated over the years. If you want such an overview, the more neutral Roger Riddell probes the question of Does Foreign Aid Really Work? in far greater depth than Moyo's skimpy volume. For someone with a PhD in economics, Moyo does not demonstrate much familiarity with the pertinent literature on development. Riddell might not be a talk show fixture, but those more interested in gaining a better understanding of aid's history will gain much more from him.

You also have to consider that several books have followed the same formula of catchy title plus skepticism about aid. Others have said it earlier--and better. Accordingly, there are several ones which I would recommend well ahead of this one. Michael Maren's The Road to Hell (is paved with good intentions) dating from 2002 comes to mind. If you're more interested in reading about the political economy underpinning the aid industry, you can can read James Ferguson's The Anti-Politics Machine. There's also Nicholas van de Walle's African Economies and the Politics of Permanent Crisis. Or, if you're into how aid dispensed according to geopolitical objectives can hinder development and prop up dictators, there's In the Footsteps of Mr. Kurtz. by Michela Wrong. With regard to microfinance, you can do much better than accept Moyo's umpteenth recycling of the Grameen Bank story for a broader look at the issues involved in microfinance with books such as Beatriz Armendariz and Jonathan Morduch's The Economics of Microfinance.

Nevertheless, the Bonos and Sir Bobs of this world deserve Dambisa Moyo. The aid fundamentalists have long been hogging magazine covers and talk shows. It's about time the opposite camp got a charismatic and photogenic equivalent to balance out the debate in the court of public opinion. How aid is used is certainly an important topic for discussion at a time when developed countries themselves are strapped for cash given a global financial crisis. Raising awareness counts for something. However, when it comes to serious discussion about the issues at hand, I would tend to lump Moyo with Bono and Sir Bob as less-than-authoritative voices. To paraphrase Sir Bob, you can give them the bleeping air time--but not the far weightier policy debate.

If aid dependency is undesirable, I cannot say her prescription for the Goldman-Sachsonization of Africa is necessarily better.

A More Positive Spin on Concluding WTO Doha

♠ Posted by Emmanuel in at 5/24/2009 03:39:00 PM
I've made a previous post taking note of the cool reception given to the new US Trade Representative Ron Kirk during his first visit to WTO headquarters in Geneva. In the interest of fairness, however, I should add a couple of qualifiers and present more sanguine opinions. (Also, I have to erase bookmarks stacking up in my bookmarking account.) First up, Reuters notes that despite its lessened stature in international politics, the rest of the world is still "Waiting for Godot" (the US) like in the famous play by Samuel Beckett. Has Washington's attention gone to presumably heftier matters like keeping America afloat?
The diplomats spoke at a lunch hosted by the National Foreign Trade Council on condition they not be identified. They said they received "mixed messages" during their Washington visit about the U.S. position on the talks, which launched in 2001 with the goal of helping poor countries prosper through trade.

On the one hand, U.S. Trade Representative Ron Kirk and senior trade lawmaker Charles Rangel, the chairman of the House Ways and Means Committee, spoke positively about Doha and told the diplomats they don't want to "unravel" progress made on the agreement thus far, the group said.

But other Washington groups and think tanks said trade was not a priority for the United States because of the economic crisis, and some continued to express reservations. "I don't understand what's going on here," a diplomat said.
Despite the less-than-enthusiastic reception for Kirk at Geneva, his visit may have nonetheless generated some forward momentum. This is especially so for the proposed supplementation (replacement?) of modalities or across-the-board tariff reduction negotiations with bilateral market access negotiations or scheduling instead. There may also be more acceptance of sectoral deals by the South in the offing. Again from Reuters:
Kirk took up a Canadian proposal to move beyond the current focus of talks which aim to reach an outline deal on the formulas for cutting tariffs and subsidies, known in WTO jargon as modalities, and go straight into detailed bilateral negotiations on cutting individual tariffs, known as scheduling.

U.S. ambassador Peter Allgeier told Wednesday's meeting this was not about skipping modalities or dropping multilateral talks but supplementing them in the interests of transparency. Negotiators would have a clear idea of what they would get in sectors that interest them, giving them more confidence to negotiate the overall deal.

This approach met with more understanding. "We have to have conversations with each other, and for political reasons we haven't been able to do that," said the trade official. "People seem much more ready to start talking."

It could work like this. A U.S. negotiator sits down with her Indian counterpart to get a sense of how many U.S. tractors India would be willing to import, and at what duty. In return, the Indian diplomat would make clear how many temporary work visas India would seek in return.

In fact, the WTO is training diplomats and officials on scheduling in the week of July 13, the chairman of negotiations on industrial goods, Swiss ambassador Luzius Wasescha, said. This was intended to help them understand the complex process, not skip modalities, he told a briefing.

Wasescha said negotiations on creating duty-free zones in individual industrial sectors such as chemicals or textiles -- one of the issues that torpedoed last July's talks -- had moved on from a rich-poor confrontation to an objective and technical examination of opportunities for importers and exporters. [This is the bit on sectoral deals.] "For the time being we have succeeded to bring this discussion on a factual level and we no longer have... theological discussions," he said.
Godot...theological discussions? That's some interesting wording, and I daresay some divine intervention may be necessary in completing Doha. Nevertheless, I don't think trade commentators like Jagdish Bhagwati would approve of this move towards bilateral deals (via scheduling) ostensibly aimed at ushering a wider trade deal (via traditional modalities) as the former do look like a detour from the latter. Once more, less endowed countries may find it harder to negotiate deals alongside those with massive experience in trade negotiations like the US and EU--hence the reference to the training of diplomats in the subtleties of scheduling.

If you're just going to have a noodle bowl of bilateral deals, scheduling, or whatever you call it, doesn't that render a multilateral round superfluous?

I Really Want to be Wrong on US Not Losing AAA...

♠ Posted by Emmanuel in , at 5/22/2009 09:39:00 AM
FX commentators, like other market commentators, are held hostage by the news cycle in constantly having to provide an explanation for market movements no matter how far-fetched. The latest one making the rounds in the FX world is that a threat to downgrade Britain's sovereign debt from AAA given a negative outlook is causing dollar weakness. (As I write, the euro is flirting with the $1.40 handle.) Since the structural flaws of the American economy are similar to Britain's, the story goes, then Treasuries be in imminent danger of downgrading. Take this write-up from Reuters (please):
The dollar fell to a 2009 low on Friday as fears intensified that the United States could lose its triple-A rating, while renewed caution about the world economy and banks prompted Asian and European stocks to slip.

The dollar's latest decline started when ratings agency Standard & Poor's cut its ratings outlook on Britain to negative from stable, stoking fears other AAA-rated countries which are running huge debt levels could share a similar fate.

Moody's Investor Service said on Thursday it was comfortable with its triple-A sovereign rating on the United States but that it was not guaranteed forever. "The main issues are related to yesterday's movement on fears that the U.S. might lose its triple-A rating," said Roberto Mialich, FX strategist at Unicredit in Milan. "This exacerbated the dollar's losses over the last few days ... (and) for the time being it's hard to imagine a sharp reversal of the dollar's trend."
Oddly, Britain being put on a negative outlook--a step towards cutting its credit rating--is causing the pound to strengthen against the currency of a country merely suspected of being next in line for a downgrade. Talk about excess speculation.

I wholeheartedly agree with the idea that Treasuries do not merit an AAA rating. If "insolvent" means a high probability of being unable to meet future obligations, then the US is well on that road with its towering unfunded liabilities and make-believe gestures towards addressing them. All the same, I have expressed reservations about American credit rating agencies' willingness to given Uncle Sam a well-deserved kick in the balls precisely because they are American. Being barred from rating securities in one of the world's largest bond markets is a real threat. Moreover, who still puts stock in credit rating agencies? Weren't various subprime-related securities bestowed the same AAA rating by this motley crew prior to being revealed as (literally) junk? If clients' pressure could make these agencies slap AAA on pure garbage, what more US pressure that could affect their very ability to rate dollar-denominated securities?

Believe me, I really, really want to be wrong as the world's largest debtor nation is no more creditworthy than your average subprime security issuer. $56.4 trillion in obligations that will not likely be met given America's bleak prospects don't lie. Plus, this older estimate should be adjusted upwards given the continuing effects of the credit crisis. Ultimately, we alone will have to make informed decisions, and what I see sure ain't pretty. I hope the US gets walloped and walloped hard for its foul fiscal and monetary practices, but I'm not holding my breath.

Will the Real Michael Pettis Please Stand Up?

♠ Posted by Emmanuel in at 5/22/2009 08:42:00 AM
I honestly don't know what's whose when it comes to discussing global economic imbalances: being fundamentally incorrect about its nature but pushing the same story line anyway despite all evidence to the contrary (Bretton Woods II) or pulling a 180 degree turn without explanation like Michael Pettis now does. In the past, I have pointed out that he hasn't really come across a "deficits don't matter"-style story he didn't like [1, 2]. Let us have a look at Michael Pettis circa 2005 from the op-ed pages of the Wall Street Journal commenting on "Deficit Attention Disorder":
Seen in this light, concerns about whether the world can continue to finance the U.S. current-account deficit are overstated. Not only can the world continue to finance the U.S. deficit into the foreseeable future, but the deficit may arise precisely because a large part of the world must continue to accumulate financial assets in the U.S. to help badly needed future adjustments. Instead of bewailing the current balance of payments and the supposedly unsustainable U.S. current-account deficit, Europe, Japan and the U.S. must work together to ensure that the adjustments forced upon the world by demographic changes work smoothly over the long term.
I really enjoy the wisecracks about the sustainability of large deficits. Now let's see Pettis 2009 in the pages of the Financial Times:
The Asian model, in other words, implicitly involved a massive bet on the willingness and ability of the US to continue to run large and rising trade deficits.

For nearly two decades US households borrowed recklessly to finance the consumption binge that allowed Asian exporters to continue exporting excess capacity but, as household balance sheets in the US became vastly overextended, it was just a question of time before a long deleveraging process would occur. The global financial crisis is part of this very process.
Huh, deficits suddenly matter and are unsustainable? Given Pettis' track record, perhaps I should become more sanguine on gargantuan deficits right about now. Anyway, where's the real Michael Pettis? More importantly, is he worth listening to after providing contradictory opinions without the benefit of either an explanation or an apology?

UPDATE: And here's another thing that gets to me. In addition to being fundamentally contradictory, Pettis is rather tardy and unoriginal. In the FT piece, he claims "Asia needs to ditch its growth model." As early as the start of the year, some bozo claimed that Asia's export-led development model was a goner.

I'll tell you what: my outlet may be a humble blog (admittedly with a decent-sized readership of those in the know) as opposed to Pettis appearing in the WSJ and FT, but I do not foresee being significantly outmaneuvered by him anytime soon. Not that it's exceedingly difficult...

Will UAE Tantrum Sink Mideast Common Currency?

♠ Posted by Emmanuel in , at 5/22/2009 07:23:00 AM
News out of the Middle East now hints at the reason why the UAE has pulled out of plans to establish a pan-regional currency union (somewhat) resembling the EMU. The UAE is said to be throwing a tantrum over where the central bank for this new grouping will be. In this version of the story, the UAE wants to secure Abu Dhabi's as a regional financial hub, while the Saudi's also envision this role for Riyadh. There may also be jealousy over Saudi Arabia being in the G20. From Emirates Business 24/7:
The UAE's surprise decision to pull out of a EU-style monetary union planned by regional oil producers is being seen as an expression of the country's unhappiness at not being chosen to host the Central Bank of the six-nation Gulf Co-operation Council (GCC), analysts said yesterday.

"A hint of the UAE's unhappiness at the decision to locate the headquarters of the GCC Central Bank in Riyadh was conveyed the very same day the announcement was made when the UAE expressed its 'reservation' over the choice," an analyst pointed out. The decision to locate the GCC Central Bank headquarters in Riyadh was announced on May 5 by the GCC Secretary-General Abdulrahman bin Hamad Al Attiyah.

He said Riyadh, which already hosts the GCC Secretariat, was selected as the location for the GCC Monetary Council - a precursor to the GCC Central Bank. A high-ranking UAE delegation was in Riyadh for the 11th GCC Consultative Summit and the team returned to the UAE the same day and expressed its 'reservation' over the decision...

Analysts said logical contenders for the proposed GCC Central Bank's location would be financial centres such as Dubai and Bahrain. They pointed out that the location of the GCC Central Bank headquarters is vital as, with the backing of the immense oil wealth and other assets of the cash-rich GCC behind it, the bank could become one of the world's largest banks and its ability to transact across the GCC as well as with the rest of the world, would be a critical factor.
Importantly from my POV, the introduction of a GCC currency would have few implications for the world economy as the countries involved have planned to keep a peg to the US dollar:
Since the new currency is to be pegged to US dollar, as all GCC currencies are (with exception of the Kuwaiti Dinar, which is pegged to a basket of currencies), there will also be few changes regarding the monetary policy in the UAE in relation to its neighbouring states - if the 'Al Khaliji', as the new money is rumoured to be named, ever comes into being.
So there you have it: what we have here is a pointless tantrum over a pointless currency union that will peg to the US dollar as virtually all GCC states already do. Why do they even bother?

Spoils of Victory: India's Duty Slapping Frenzy

♠ Posted by Emmanuel in , at 5/20/2009 09:59:00 AM
The Nehru-Gandhi dynasty lives on with the resounding victory of the Congress Party in the recently held nationwide elections in India. The financial section of India Times, the Economic Times, heralds this victory as a potentially important occasion for Indian trade and industry. For, the number of seats won by the Congress Party means it can avoid currying favor with coalition partners possessing quirky (read: anti-business) agendas like its erstwhile Communist allies. Indeed, many commentators are now banking on this victory to secure forward momentum in the long-running soap opera that is the Doha Round of trade negotiations.

Or is this really so? In recent months, India has stealthily applied import restrictions--without much explanation, I should add-- to toys coming from China [1, 2, 3] and steel coming from South Korea. Hot on the heels of the Congress Party's victory comes word of India informing the WTO that it will invoke safeguard clauses to protect segments it says are being threatened by an inundation of exports. Again from the Economic Times:
Playing by the book, India has notified its decision to initiate investigations on the need to impose special import duties on hot-rolled steel, certain automobile parts, acrylic fibre and coated paper at the World Trade Organisation (WTO).

WTO allows imposition of special duties (called safeguard duty) on imports, provided the affected country carries out a comprehensive investigation on the need to impose the duties by holding discussions with all affected parties.

We cannot carry out investigations on safeguards without keeping the WTO in the loop. This is to ensure that countries do not impose safeguards without firmly establishing that there has been an import surge which has led to disruption of the domestic market," a government official, who did not wish to be named, said.

Interestingly, an attempt was being made by the DG [India's Directorate General of Foreign Trade] safeguards office to impose interim duties on the four products without consulting the user industry was rejected by the board on safeguards (a body of secretaries headed by the commerce secretary) on the ground that there was not enough evidence to show that the domestic industry was hurt due to increased imports. It gave the DG office two months to consult all parties, including the user industry, and come up with its report.
The Koreans are not likely to be happy about this turn of events. In any case, the question to ask is this: If the more protectionist/isolationist elements of the alliance have been neutered after the elections, then is it really the purportedly pro-business Manmohan Singh behind these trade-negative moves? Also remember that India is the world leader in initiating anti-dumping cases. Somehow, I do not think the rest of the world--both developed and developing nations--is deliberately ganging up on India.

UPDATE: Also see Reuters on the steel issue.

Even Worse Math: "Bretton Woods II" Must Die

♠ Posted by Emmanuel in , at 5/19/2009 11:39:00 AM
The "Bretton Woods II" theory was one of the first to come out of the woodwork while America's current account deficit was exploding to dramatic effect. That is, it added a veneer of respectability to Dick Cheney's famous economic insight that "deficits don't matter." According to the Bretton Woods II authors, deficits don't matter because countries developed by using the United States as a major export market. Insofar as these countries were willing to provide vendor finance on the capital account side by buying American assets and accumulating reserves to keep down the value of the dollar, what existed was, in their words, a "stable and sustainable" regime. You had Japan and Germany do so in the postwar years, Asian "Tiger" economies and China followed, and soon Vietnam will follow their lead, etc. The bursting of the housing and securitization bubbles seems to have belied these authors' convictions, and I am not one to defend them.

If you think the current economic crisis has humbled these authors, think again. While bouncing around the blogosphere, I was led to this Vox EU essay by two of the principal authors of the BW2 theory, Michael Dooley and Peter Garber. (There is a longer work available as an NBER working paper.) They remain utterly unapologetic about what has transpired. You can read the entire thing for yourselves, but here is what struck me:
One “lesson” that seems to be emerging is that international capital flows associated with current account imbalances were a cause of the crisis and therefore must be eliminated or at least greatly reduced. The idea that fraud and reckless lending flourished because US financial markets were unable to honestly and efficiently intermediate a net flow of foreign savings equal to about 5% of GDP, while having no problem with intermediating much larger flows of domestic savings, is astonishing to us. If so, would not the much larger gross capital flows into and out of the US also cause an outbreak of bad behaviour even without a net imbalance? If this were true, we would have to stop all capital flows, not just net imbalances. In the US context, we are unable to think of any plausible model for such behaviour.
There are many, many problems with this paragraph. Most glaringly, they do not appreciate the commonsense idea that American households have a finite capacity to absorb debt, and that household savings rates have been dwindling. What "savings" are these folks talking about? While it may be correct to say America served as a large and welcoming market for consumer goods in the postwar period, this orientation towards overconsumption enabled by financialization has taken its gradual toll on consumer finances. Here again is a chart I found of US savings rates over time:

To any reasonable observer, the explanation of what's happened is obvious: the BW2 system as they call it could persist for as long as US consumers still had a modicum of savings. However, there came a point when taking on too much debt had deleterious effects. This point is reached when you can no longer service your debts. In the land of subprime, two things have happened with increasing frequency, demonstrating America's inability to swallow more and more debt. The first is called "bankruptcy" and the second--related to HELOCs and other fine innovations designed to squeeze more consumption out of rising home prices--is called "foreclosure." In retrospect, the simple reason why this system was neither stable nor sustainable was that American households ran aground when their savings rate became zero. It's so simple, yet they make no mention of this reality.

The current crisis has been a long time coming. It has been fueled by folks with similarly dangerous convictions that "deficits don't matter." There are clear developmental implications here as I've said over and over again. Just as consumption-driven Anglo-Saxonomics are endangered, so too is the export-led model of development. Those days are gone for reasons the chart above should make amply clear, and the solution is not going to be reflating overconsumption that has run its course. Meanwhile, they even take a stab at defending financial innovation and blame lack of regulation in the process. They say:
In our view, a far more plausible argument is that the crisis was caused by ineffective supervision and regulation of financial markets in the US and other industrial countries driven by ill-conceived policy choices...

Third in the roundup of usual suspects in the blame game is financial innovation. There is no doubt that innovation has dramatically altered the incentives of financial institutions and other market participants in recent years. Securitisation of mortgages, for example, clearly reduces the incentives for those that originate credits to carefully screen applications. But securitisation also reduced the cost of mortgage credit and increased the value of housing as collateral. Private equity facilitated the dismantling of inefficient corporate structures. Venture capital has directed capital to high-risk but high-reward activities. Before we give up these benefits we need to ask if it is possible to retain the advantages of these innovations without the costs associated with the current crisis.
These are contradictory arguments. Witness -
  1. Financial innovation is good and should not be discarded;
  2. The financial services industry pushed for deregulation enabling financial innovation;
  3. It is the fault of government regulators that there was insufficient supervision and regulation of financial markets.
It has always troubled me that two of the authors of BW2, David Folkerts-Landau and Peter Garber, work at Deutsche Bank. Given their paymasters, you cannot exactly expect Garber to find fault with the industry, private equity, venture capital, or securitization. It's a Lipsky-esque scenario. Hence, using government as a scapegoat like they do is an exceedingly poor ploy as--correct me if I'm wrong--industry has long been pushing for liberalization and deregulation of the financial services sector. Garber's employer, Deutsche Bank, is a proud member of the American Securitization Forum. The irony is clear for all to see: the financial services industry got everything it wanted, but only managed to make a mess of things big enough to endanger its very existence. As Lord Acton said, absolute power corrupts absolutely.

These guys remind me of the aforementioned Dick Cheney who still keeps butting into America's public life despite being told by the electorate to keep quiet already. They've already been made into a punch line, yet they persist in making indefensible arguments. Economics is the dismal science, but this is more like masochism. As Kenny Rogers once sang, you have to know when to hold 'em and when to fold 'em, and they should have consigned BW2 to the trash pile of history a long, long time ago.

IIE's Bergsten, Bad Math, & PRC Yuan Intervention

♠ Posted by Emmanuel in , at 5/16/2009 12:42:00 PM
I was very puzzled after reading this statement in a letter to the Economist from Fred Bergsten, director of the Peterson Institute of International Economics. In response to a recent article on China's currency practices, he had this to say:
The punchline to your article on China’s foreign-exchange reserves is that “China cannot sour on the dollar without letting its own currency rise” (Economics focus, April 25th). This is not correct. China can continue to hold down the yuan’s exchange rate by buying dollars but then convert those dollars into euros or other hard currencies. The exchange rate between the dollar and the euro would change but the yuan would remain substantially undervalued.
Sorry, Mr. Bergsten, but it is you who are incorrect. Let's go back to Foreign Exchange 101. All the world's exchange rates are expressed with reference to the US dollar, also known as the "buck" or the "greenback." Now, there are only two possible ways of expressing these exchange rates. You can state how many local currency units are equivalent to $1. For instance, Japan's currency, the yen, is expressed like so: $1/¥95. Or, exchange rates are expressed in terms of dollars needed to acquire one unit of the local currency, such as that of the Eurozone: €1/$1.35.

Whatever it is, the numerator currency always has a value of 1; it is only the denominator currency whose value changes in an exchange rate quotation. That's why the abbreviations here are USD/JPY and EUR/USD, respectively. Now, a "cross rate" is an exchange rate expressed without reference to the dollar. For example, let's consider EUR/JPY. To get this cross rate, we must multiply EUR/USD with USD/JPY so that USD cancels out: (1/1.35)x(1/95) = 128.25 yen for every euro. As you can see, EUR/JPY cannot be computed without reference to the US dollar. Hence, Bergsten is incorrect in stating "China can continue to hold down the yuan’s exchange rate by buying dollars but then convert those dollars into euros or other hard currencies." This is tantamount to saying the yuan cannot possibly revalue in relation to the dollar if official EUR/CNY purchases increase. Of course not: the dollar already is and will always be involved in cross rate transactions.

Further, Bergsten has trouble distinguishing between stocks and flows. What counts more is the latter. As he points out, the US dollar is readily traded. However, nobody cites China using the dollar in international transactions--something virtually everybody does, though China is proposing alternatives--as the basis for currency manipulation. Rather, it is the unparalleled accumulation of dollar-denominated assets like Treasuries (Brad Setser says they're worth $1.5 trillion and rising) that matters. Using the USD as a vehicle currency has little bearing on its value--this is as true now as when the euro commanded $1.60. Hence, it is a "flow" concept that local currencies must be exchanged for dollars to transact internationally. What matters more is how proceeds from international transactions are stored--this is a "stock" concept. If the Chinese stop adding to their stock of dollar assets, then dwindling demand for dollars will lower its price.

Finally, remember that China is not the sole entity in currency markets, hard as it is to believe sometimes. So far, its continued patronage of Treasuries and other dollar-denominated assets despite cheap talk to the contrary has, to a significant extent, assuaged others' concerns about holding dollars. It's the PRC as backstop and lender of last resort to the US buoying others' confidence in the greenback. Now suppose this understanding changes. Will the expectations of other dollar holders regarding the future value of these assets remain the same? Of course not. Being a particularly flighty sort, FX traders will start dumping dollars instantly. Go ask Tim Geithner. Hence, we don't need a dramatic sell-off of existing dollar assets by China to get the ball rolling, but only a firm sign of diversification into other currencies.

Here's the bottom line: the Economist could have been more specific in saying "China cannot sour on the dollar without letting its own currency relation to the US dollar." Bergsten failing to appreciate the nature of foreign exchange only worsened matters. Of course, falling demand in dollar-denominated assets will cause the renminbi to rise in relation to the dollar. It's strange world we live in: a Nobel Prize winner doesn't know how GDP is computed, while a director for an institute of international economics doesn't know what a cross rate is or what the difference is between stocks and flows. These sorts of mistakes you'd expect from undergrads, but from Important Economic Authorities, they are quite unacceptable.

Sorry, Fred Bergsten, but your letter to the Economist merits an "F"!

The Economist's Love Affair w/ Anglo-Saxonomics

♠ Posted by Emmanuel in at 5/15/2009 09:30:00 AM
Like the Wall Street Journal, the Economist is a fine publication if broad and detailed news coverage--particularly financial news, of course--is what you're after. However, the opinions expressed in both news outlets are decidedly slanted. In the former case, an outdated neoconservative opinion still predominates as if these were still the Reagan years and the subprime debacle didn't really happen. In the latter case, we have seemingly undying fealty to the tenets of Thatcher(ism) despite Britain's debacles which are highly reminiscent of America's. The trouble with the Economist, as any casual reader should know, is that while you can ignore WSJ op-eds, there is a heavier sprinkling of ideology in Economist news articles that you must actively filter.

However, as the Emperor once told Luke Skywalker, the Economist is mistaken about a great many things. From championing Bush over Gore to cheerleading the Iraq invasion, it misfires and misfires badly. Turning to the political-economic realm, let us consider its notions of how European economies should be like. In October of 2006, it had this advice for France in the run-up to the elections for Jacques Chirac's replacement:

While Sarkozy has some reformist leanings, he is quite Gallic in favoring national champions, protecting agriculture, and pooh-poohing Anglo-Saxonomics so beloved by this publication. So in 2006, they effectively asked, "Why can't France be more dynamic--like Britain?" This brings me to last week's cover which raised a good laugh from me at least:

Ha-ha, very funny. Yes, the "French model" is somewhat in vogue, but it's the best of the worst as the entire lot depicted here are well and truly in recessionary waters. Plus, this effort at yukking it up is qualified by a statement about not expecting this pecking order to last for long. Thrown in for good measure is a reference to Adam Smith being a proud champion of the Anglo-Saxon model which is, of course, erroneous as Gavin Kennedy and others who've actually read his works will tell you. More ominously, they (surprise!) laud the thirtieth anniversary of Thatcher's accession to office by having Bagehot recycle that old chestnut of a line: There is no alternative. I guess some things will never change.

UPDATE: A reader reminds me that, yes, it's like Polanyi's very familiar notion of a "double movement": Movement towards a self-regulating market (SRM) eventually inspires a backlash from those seeking greater social protection from the market's depredations. While I am not a Polanyi believer, I'll say this much--as before, it will always be again as political-economic fashions have their own cycle.

More China-Bashing Currency Proposals from US

♠ Posted by Emmanuel in , at 5/14/2009 05:50:00 PM
There is another bill being contemplated in the US Congress targeting trade evildoers who undervalue their currencies (read: China). We've been here before with Schumer-Graham, Baucus-Grassley-Schumer-Graham, Ryan-Hunter...I'm sure that I've missed some as these proposals pop up more often that Michael Jackson at kiddie parties.

There isn't much for me to add other than that representation from virtually every sunset industry in America appears to have signed on, going by the list on the "Fair Currency" website. And, quite frankly, I doubt whether appreciating others' currencies will solve the basic problem of many American manufacturers selling stuff buyers don't want. Chrysler and GM, anyone? In the final analysis, US manufacturing's wounds are largely self-inflicted. You couldn't give away many of their hulking gas guzzlers if you tried. Apparently, Debbie Stabenow (D-Michigan) is still of the opinion that Japanese is unfairly manipulating its currency despite the yen being at a historically strong 95 to the dollar. When she started complaining about unfair currency, the yen was near ¥120/$1. You get the feeling these people wouldn't be satisfied even at ¥70/1.

Anyway, from the folks over at the American Manufacturing Trade Action Coalition:
The Fair Currency Coalition (FCC), an alliance of industry, agriculture, and worker organizations whose mission is to support U.S. manufacturing and production, thanked U.S. Senators Debbie Stabenow (D-MI) and Jim Bunning (R-KY) and Congressmen Tim Ryan (D-OH) and Tim Murphy (R-PA) for introducing the Currency Reform for Fair Trade Act of 2009 (CRFTA).

Including Congressmen Ryan and Murphy, a bipartisan group of 40 Members, 23 Democrats and 17 Republicans, have sponsored the House bill, H.R. 2378. U.S. Senators Sherrod Brown (D-OH) and Olympia Snowe (R-ME) have also sponsored the Senate bill (no bill number yet available).

CRFTA makes the unfair trade practice of prolonged currency misalignment actionable under U.S. countervailing duty (CVD) and anti-dumping law. Prolonged currency misalignment occurs when a foreign country aligns its currency to the U.S. dollar for a prolonged period at a below market rate. This acts both as a trade barrier and as an illegal export subsidy by making goods from the offending country artificially less expensive compared to products made in the United States.

AFL-CIO Secretary-Treasurer and FCC Co-Chair Richard L. Trumka said, “Job creation is the number one issue on the minds of the AFL-CIO’s 10 million members right now. While enacting the stimulus has provided critical short-term relief, the United States will not see sustained employment growth until our government stops China, Japan and others from using their undervalued currencies to steal American jobs. That is why Congress must pass the Ryan-Murphy CRFTA as quickly as possible."
Once more, I find these sorts of proposals utterly self-defeating in that an essentially insolvent country like the US will fare worse than its creditors if push comes to shove. Things should get interesting if and when China gets fed up with subsidizing Americas variegated deficits. So, I am holding my nose (and my disbelief at how economically illiterate these representatives of the people are) in once again calling for these brain dead measures to be passed ASAP [also see 1, 2]. Not only will the aftermath conclusively demonstrate that the American emperor has no clothes. but it will also free up capital wasted on Treasuries for more productive investments.

Again, it's a function of how bad things get Stateside how viable this sort of legislation becomes. C'mon, Uncle Sam. Punish these trade evildoers, it will make you feel good. With "China Currency Coalition" Obama and his Treasury Secretary Geithner predictably wimping out on labeling China a currency manipulator, someone needs to take immediate action. As I've said, it's high time they cut the crap and just fight each other over currency matters.

An Inauspicious WTO Debut for USTR (Cap'n) Kirk

♠ Posted by Emmanuel in , at 5/14/2009 05:10:00 PM
The Doha Development Agenda is nearing eight years in purgatory (hell?). The Americans in particular have tried all sorts of things to get it moving: Swiss formulas, sectoral deals, etc. have done little to convince LDCs that they'd be better off completing Doha than staying away from it. New US Trade Representative Ron "Cap'n" Kirk has made baffling suggestions in his first visit to WTO headquarters in Geneva that appear to make matters worse. That is, the new terms he proposes appear even more lopsided to American interests.

Basically, he is calling for LDCs to stop pushing for special safeguard mechanisms in case these countries become inundated with exports after implementing tariff reductions. (India has been keen on these to help protect subsistence farmers, though Americans clearly have different ideas.) Worse yet, Kirk has made suggestions that the lack of movement on a plutilateral basis should prompt more bilateral arrangements--something that would again favor wealthy countries rich with lawyers and lobbyists. From the Associated Press:
Part of the problem has been that negotiators have sought global formulas for cutting agricultural and manufacturing tariffs, with only a sketchy understanding of how they would translate into new market gains for exporters of everything from beef and poultry to cars and computers.

The U.S.-Canada approach, officials say, proposes to shift the focus to the end result instead of the formulas, meaning countries would have to negotiate one-on-one over how much to liberalize their markets. Such a change would favor rich countries with their large teams of lawyers, economists and industry support groups, over poorer nations that need to rally together at the WTO behind a common position.

"Nobody seems to be agreeing with it," said Ujal Singh Bhatia, India's WTO ambassador. He said the underlying assumption was that Washington was looking for new ways to limit how much developing countries could adjust their tariffs to deal with sensitive farm products or a sudden surge of imports -- a reference to the issues rich and poor nations clashed over when the talks last collapsed in July. "That is a strict no-no," Bhatia said.
Not that Kirk doesn't notice the yawns generated by new American proposals:
Kirk said he found it "curious" that the Obama administration's change in tone and style from its predecessor has been "almost joyously celebrated" in discussions with other governments on national security, economics and other fronts, but at the WTO "we are being asked to stand still." He said the U.S. was not "locked into any particular process" and wanted only that WTO members remain open to alternative approaches to reach a deal. "This is not simply a matter of the United States showing up and saying here is the silver bullet that we have all been searching for," Kirk said.
Kirk's statements from his WTO appearance are available on the WTO site. Kirk appears to be moving matters--backwards, that is. At least he did not bring up Obamanite proposals to inject labor and environmental clauses that many believe are merely backdoor protectionism.

Shanghaied? MNC Banks in China (Again)

♠ Posted by Emmanuel in , at 5/14/2009 08:10:00 AM
The list of barriers to multinational financial services providers operating in China are plentiful. In this new Wall Street Journal article, highlighted are well-known restrictions on trading shares of common stock among non-Chinese, currency convertibility, and restrictions on inward and outward capital mobility. In this day and age where the "Washington Consensus" triad of liberalization, privatization, and deregulation has become much derided, you can probably argue that this is a good thing and find agreement. However, the issue is also one of trade in fair market access among MNC banks wishing to tap into the China market. If you will recall, one of the reasons why Bush tapped former Goldman Sachs honcho as Treasury secretary was to use his accumulated familiarity with PRC elites to "crack open" this important sector.

There still remain high hurdles to MNC banks doing business in China. Something that has gone unmentioned in the article are high capital requirements. Sometime ago, some commentators were saying that a US case against China regarding excessive barriers to this kind of services trade was bound to happen. In what follows, the WSJ's James Areddy notes that China's goal to establish Shanghai as a regional financial center alike Hong Kong or Singapore is causing a number of legislative--and perhaps more importantly, attitudinal--changes. While the process is slow, the burghers of Beijing may indeed be warming up to foreign financial services providers. Hu-ever said central planning was dead?
The list of frustrations about China's shortcomings as a base for foreign banks and investment firms is long. But many of those companies are increasingly enthusiastic about the profits they are making here. China, excluding Hong Kong, was the fourth-most-profitable country last year for HSBC Holdings PLC's unit that trades local currencies, bonds and derivatives for large corporate customers. That business churned out $353 million in pretax profits, up 137%, offsetting losses in consumer banking. HSBC hasn't disclosed its first-quarter results in China.

At Citigroup Inc., net income in China jumped 95% in 2008 to the equivalent of $191 million, helped by a 20% rise in commercial foreign-exchange transactions. The surge was a sharp contrast to the New York bank's overall net loss of $27.68 billion last year. The results show that financial-sector profits in China aren't just wishful thinking anymore. The banking industry's woes in the U.S. and elsewhere accentuate the growing importance of developing markets like China and India, even though those countries generate small slices of the revenue and profits at the foreign banks doing business there.

In China, the growth also underscores how Beijing is offering foreign banks, fund managers and other firms more leeway to pursue business despite tight overall restrictions in the country's financial system. For example, China strongly controls its currency's exchange rate and capital flows across its borders, which can crimp the role of foreigners. Still, J.P. Morgan Chase & Co. says it handles about 25% of China's U.S.-bound dollar transfers, which is similar to its clearing volume elsewhere. "Having a controlled currency doesn't mean there are no opportunities to make money," says Lisa Robins, head of China treasury services for J.P. Morgan in Beijing. "Our China business is growing and profitable."

Foreigners also face limits on direct stock-market investment in China. Nevertheless, global money-management firms operated 32 joint ventures last year that controlled almost half the local mutual-fund industry's $290 billion in assets, generating average management fees of $52 million each, according to Shanghai market-research firm Z-Ben Advisors Ltd.

And even though foreigners technically can't trade commodity futures in China, some of the world's biggest trading houses have found indirect ways to trade through local brokers. Non-Chinese firms are emerging as influential players on the country's four exchanges, including in soybean futures. "They are trading large volumes," says one bank analyst who follows the sector.

In recent weeks, China has added vigor to a long-running effort to position Shanghai as a global finance and shipping hub. It has pledged pro-market rule changes, new products, technological advances and lower taxes. Despite the global recession, the moves reflect the belief that China's growing economic might will translate into more money to manage in Shanghai.

The central government is determined to draw global banks, brokerages and other firms to Shanghai over the coming decade, promoting the city as a peer of Hong Kong, London and New York -- and as preferable to Chinese cities like Beijing, Tianjin and Shenzhen. "It is of both long-term and strategic importance," said Liu Tienan, a vice chairman of the National Development and Reform Commission, China's planning agency.

And Now for Iraqi WTO Accession

♠ Posted by Emmanuel in , at 5/05/2009 03:09:00 PM
I am a bit strapped for time, but here is a thought-provoking if often quizzical article for your consideration. A partner at the powerhouse law firm DLA Piper argues for Iraqi inclusion in the WTO. The piece was occasioned by a high-level delegation sent from Iraq to the UK last week drumming up business. It appears this chap is a true believer in the civilizing qualities of trade as reiterated by figures as diverse as Adam Smith and (gulp) Thomas Friedman. From the Daily Telegraph:
Last week's visit provided a reminder of the trade and investment opportunities in Iraq, a country currently achieving GDP growth rates of 7.8pc - rates to which many countries can only aspire. As part of Iraq's continued reintegration into the global economy, the UK must consider what more it can do to support Iraq's World Trade Organisation (WTO) accession process.

World leaders should cooperate to encourage Iraq into the WTO, not just as a major benefit to Iraq but also to the rest of the world. For internal reform and economic development, membership is vital for Iraq itself but it is also crucial in broader geopolitical terms.

The WTO has, however, been notably absent from the headlines since the collapse of the latest Doha Round of trade liberalising talks last December. With the attention of world leaders now focused on the financial crisis it could be questioned whether there is the time or the will to make a compelling case for trade liberalisation.

Furthermore, the current economic climate begs the question whether countries that remain outside the 153-member Geneva-based WTO club, such as Iraq, should continue their journey on the road to membership. I believe, unequivocally, that they should. The benefits of WTO membership stem from the cumulative impact of the hundreds of legislative, policy and institutional changes that countries make in order to join. Those reforms provide applicant countries with an operating system that's ready to be integrated into the global economic system.

Membership of the WTO serves to discipline Governments in their dealings with the private sector, and, since WTO commitments are binding, creates a more predictable, secure and enticing business environment for the internal and external investors alike.
He goes on to discuss how liberalization proceeded in Saudi Arabia [?!] in order to meet WTO membership criteria. Along the way, he mentions a host of other Middle Eastern states that, like Iraq, should be taken in. Somehow, though, I think Iraq's current chances rate even lower than those of Russia.

Japan, China Contest Asian Power via Loans

♠ Posted by Emmanuel in ,, at 5/04/2009 12:22:00 PM
Call it the Larry Summers chronicles. Given a choice, most Asian countries experiencing balance-of-payments shortfalls do not want to resort to the IMF. This aversion is directly attributable to what many in the region and beyond regard as the IMF's botched handling of the Asian financial crisis of over a decade ago when "Washington Consensus"-style policies of liberalization, privatization, and deregulation were forced down the throats of borrower countries. Even then, Japan tried to set up an alternative Asian Monetary Fund (AMF) to counter the perceived harshness of IMF policies. Then-US Treasury Secretary Larry Summers took issue with this attempt to "usurp" US regional influence; nowadays, of course, the US is recoiling from undergoing much-needed "structural adjustment" it so famously recommended to others while Summers has become the #1 cheerleader for stimulus mania. As Korea's JoongAng Daily recounts:
AMF [Chiang Mai Initiative] is Asia’s long-cherished project, launched with an idea of helping economically stricken Asian countries using Asia’s co-sponsored fund. Asia was deeply distrustful of the IMF, which is led by the United States and Europe [in its policymaking], and the harsh terms imposed on Asia during the Asian Financial Crisis 12 years ago. Since then, Asia endeavored to launch the AMF, but has yielded no tangible result.
It is good news for the region that the ASEAN+3 (Japan, China, and South Korea) have finalized plans for implementing the Chiang Mai Initiative, whose main idea of a regional lending facility was first mooted in the AMF. Figuring big are the countries represented by the finance ministers pictured above: Xie Xuren of China, Kaoru Yosano of Japan, and Yoon Jeung-hyun of South Korea. This time around, it is highly unlikely that Larry Summers will butt into others' affairs as he must tend to his own debt-ridden subprime economy which is now suffering from the excesses of his (formerly) favored agenda of liberalization, privatization, and deregulation. Go figure. Here is the joint statement of ASEAN+3 finance ministers:
On the Chiang Mai Initiative (CMI), we have reached agreement on all the main components of the CMIM, including the individual country’s contribution, borrowing accessibility, and the surveillance mechanism. The agreed components of the CMIM, which is a framework of mutual assistance among ASEAN+3 countries, are consistent with its two core objectives: (i) to address short-term liquidity difficulties in the region and (ii) to supplement the existing international financial arrangements.

We agreed to implement the CMIM before the end of this year. In this regard, we tasked our Deputies to work out the operation details and implementation plan, particularly the legal documents that will govern the CMIM.

We agreed that an independent surveillance unit will be established as soon as possible to monitor and analyze regional economies and support CMIM decision-making. As a start, we agreed to establish an advisory panel of experts to work closely with the ADB and the ASEAN Secretariat to enhance the current surveillance mechanism in order to lay the surveillance groundwork for the CMIM. In addition, we welcomed Hong Kong, China, to participate in the CMIM.
It appears that China is now joining Japan in vying for regional influence by offering more emergency loan funding to other East Asian countries. Despite being hamstrung by its own crisis, Japan is not to be outdone in indicating a willingness to lend an additional $100B via bilateral swap arrangements over the amount it has already pledged for Chiang Mai. From the Financial Times:
Japan has offered $100bn in financial assistance to Asian countries hit by the global financial crisis in a move that shores up its economic leadership in the region in spite of its own severe recession. Tokyo announced at a meeting of the finance ministers of the 10 countries of the Association of South-East Asian Nations in Indonesia that it would set up a Y6,000bn ($61.5bn) bilateral currency swap scheme , on top of a $38.4bn commitment to the multilateral Chiang Mai initiative...

Japan pledged $100bn in extra capital to the International Monetary Fund in November, and has been anxious to sustain its leadership in Asia in the face of China’s huge foreign reserves and rising economic muscle.

Rivalry between the two countries spilled over into the final stage of the Chiang Mai negotiations, with both agreeing to provide $38.4bn each. China’s share includes $4.2bn from Hong Kong. South Korea is providing $19.2bn, with the rest shared among the 10 south-east Asian nations.
The total amount of funding agreed to for Chiang Mai amounts to $120B in a 2:2:1 ratio: Japan and China $38.4B each; South Korea $19.2B; and ASEAN nations the remainder of $24B. Also take note of the Asian Bond Market Initiative (ABMI) moving forward. The ABMI seeks to prevent a rehash of the Asian financial crisis by reducing currency mismatches (borrowing in US dollars due to Asian capital markets not being very deep and suffering from default when devaluation occurred) and maturity mismatches (projects being long-term while funding was short-term and flightly).

UPDATE: See Barry Eichengreen comment on the Asian Monetary Fund.

Asia Retooled; ADB on Export-Led Growth's Demise

♠ Posted by Emmanuel in ,,, at 5/04/2009 10:16:00 AM
If you are convinced that Anglo-Saxon forms of economic governance observed in the US and UK emphasizing financialization and consumption are now history, then you should also believe that export-led growth which counterbalanced debt-fueled consumption binges in the former countries are similarly endangered.

It seems that our colleagues over at the Asian Development Bank are coming to a similar judgment. For once, I am glad that a major international meeting is being held in a tony resort area. You see, the Asian Development Bank (ADB) is currently holding its annual meetings in Bali, Indonesia. Especially now when tourism in the region is sagging, it is good that these lenders are putting their money where there mouth is at by creating demand within Asia. That's a good example from Haruhiko Kuroda, the ADB president. Here is the part of his opening address where he discusses a "new development paradigm" in which unwinding global imbalances makes more balanced growth conditioned on both domestic and export demand necessary:
With global imbalances now unwinding, Asia needs to adjust. The transfer of savings from one part of the world to another worked well when advanced economies could absorb production from developing economies. But the current state of the global economy suggests that era has passed. By rebalancing export-driven growth with a greater reliance on domestic demand and consumption, Asia can lead the way in charting a new, globally beneficial development course. Asia's export-led growth has delivered enormous benefits and will continue to do so.

Protectionism--within the region or elsewhere-must be avoided at all costs. But let us also recognize that a stronger and more resilient regional economy, with multiple sources of growth, will also contribute to a stronger, more vibrant, and more resilient global economy.

To rebalance growth, developing Asian countries need to reinforce domestic demand and revitalize their domestic economies. They need to spend more on health, education, and social security to reduce household needs for precautionary savings. They need strategies to transfer more corporate savings to households to encourage greater consumer spending. And they also need the policies that promote small and medium-sized enterprises and service industries to better align domestic production with domestic demand. In designing our country-level operations, ADB will work closely with governments in the true spirit of partnership to find effective and concrete solutions.

Rebalancing also requires a stronger and more stable regional investment climate to channel savings into effective and efficient investment within the region. Over the past several years, ADB has worked with the Asian Bond Markets Initiative to enhance transparency, remove obstacles to investment, broaden the investor base, and improve related institutions.

To further strengthen the investment climate, Asia needs a seamless infrastructure, which includes physical assets and the enabling policies, regulations, and institutions. ADB's infrastructure investments last year totaled more than $5 billion in transport and energy alone. But with financing needs estimated at $750 billion a year, much more needs to be done. Our Asian Infrastructure Financing Initiative, unveiled last year, is a step in that direction. Later today, we will launch an important new book entitled Infrastructure for a Seamless Asia, focusing on major issues in regional infrastructure to the year 2020.

Greater exchange rate flexibility with the world's major currencies will ease the change in the region's production structure. In the current global economic environment, the exchange rates of economies with excess savings will tend to appreciate under more flexible management, encouraging greater consumption.

Concrete steps to promote regional trade will speed up the rebalancing process. A larger Asian market will allow for economies of scale, encourage greater specialization, and increase the scope for trade in finished goods. In these uncertain times, a push for more openness within the region will also keep the forces of protectionism at bay.

Ultimately, the correction of global imbalances requires a concerted global effort. All countries must take into account the spillover effects of their policies on the rest of the world. It is also important to create a financial architecture that gives developing countries a voice more commensurate with their share of world output and trade.
On the last point, also see a recent post on major LDCs wanting more say in international financial institutions like the IMF.

Kids, Here's Why Pay-Per-View is a Fool's Bargain

♠ Posted by Emmanuel in at 5/03/2009 06:50:00 AM
A few days ago, I compared the upcoming LDC (India/Brazil) vs. EU fight over pharmaceuticals being transhipped and confiscated in Amsterdam to Pacquiao vs. Hatton. Suitably enough, they're both North vs. South quarrels. Given my peculiar proclivities, you ought not be surprised that I didn't fork any money to watch the latter boxing match, preferring to observe the trade clash as it unfolds.

And it was a good thing I didn't pay anything since the match lasted a mere two rounds as England's pride Ricky Hatton was, like the British "economy" (or whatever passes for it nowadays) caught in rather subprime condition. Is Manny Pacquiao some sort of mauling machine or was Ricky Hatton unprepared to adjust his brawling style to a fighter of superior technique? A little of both, perhaps. Heavy odds in favor of Pacquiao proved spot-on here, although you have to feel sorry for those who shelled out $49.95 for this thrashing--even the Pacquiao fans. Sometimes fights are dull and drag on forever with little action, but exciting one-sided fights that are over in a blink of an eye also represent limited entertainment value. Either way, payers lose.

Perhaps this portents an EU drubbing at the WTO. We can all hope, no? Until then, stay away from pay-per-view. Sweet dreams, Ricky.

Four More Years for Pascal Lamy as WTO Chief

♠ Posted by Emmanuel in , at 5/01/2009 07:04:00 AM
Well this was a mere formality really as Pascal Lamy ran unopposed for a second term as WTO Director-General, the first time that's happened in the organization's history. And so it's four more years for him without much comment from elsewhere. Were other potential candidates--especially those from LDCs--intimidated by Lamy running again or has this job become passe due to deadlock in the Doha Round and the more recent drop-off in world trade? I have two previous posts exploring some of these issues [1, 2].

In any event, here is part of his 29 April speech a day before the decision was made where he set out his plans for the next four years. It's well worth reading. Here he inveighs against all sorts of regional trade agreements as detracting from the multilateral cause:
On RTAs, it is difficult to see why such deep concessions and commitments are undertaken today in the context of preferential agreements, without any consequences in the multilateral context. We all know this is a complex issue and that there are differences between RTAs aiming at deep regional integration and other free trade agreements. But, if we are serious about the prevalence of the Most-Favoured-Nation principle, we should collectively think about some way of gradually “multilateralising” concessions made in free trade agreements. Food for thought for Article XXIV negotiators.
He ends by making seemingly sensible suggestions going forward of not overly publicizing ministerial meetings and having meaningful negotiations evenly spread out. Plus, he reaffirms the value of the WTO at a time when it is being questioned. A few changes here and there, not a wholesale makeover is required sayeth he:
Let me close by addressing the question of WTO ministerial meetings, which many of you have raised during our consultations. We should de-dramatize ministerial meetings, make them a more regular exercise, where WTO activities are reviewed across the board, to ascertain the level of satisfaction of members with the running of WTO activities and to address priorities at a political level. We have not had a ministerial meeting since 2005 and my own sense is that we should not close 2009 without one. A regular ministerial meeting is one thing; ministerial involvement in negotiations is another. We should not confuse the two.

In conclusion, Mr Chairman, no major surgery needed in the WTO. No major overhaul of the system is required. But rather a long to-do list to strengthen the global trading system. I am ready to do my part and to assist members in achieving the objectives of this Organization. The WTO, as a living organism, should continue to improve its capacity to rapidly react to global challenges, as we are seeing in the current crisis, and to contribute to devising solutions to those challenges.
It's a pretty rich reward for mission unaccomplished (inheriting and not completing a Doha deal), methinks.