Ferraris for all

The following is my latest comment from Fund Strategy.

The proposed bail-out of Detroit's big three car manufacturers raises several potential problems.

For a start it raises the question of what capitalism means. Generally market economies are characterised by substantial private sectors. The state usually plays a role in the economy but its ownership of business assets is limited. Now it seems that even in America, generally seen as the world's pre-eminent market economy, key parts of the financial and auto sectors could soon be in state hands.

This in turn raises the question of the soundness of state finances. The more governments spend rescuing troubled companies the more their finances are likely to suffer. At some point they are likely to have to pay a high price in terms of higher taxes, reduced public spending or a combination of the two. They may be able to postpone the day of reckoning by increasing public borrowing but at some point their time will come.

But perhaps the biggest problem, and probably the least understood, is that of protectionism. Rescuing, say, General Motors (GM) raises the question of public money for other car makers such as Fiat, Toyota or Renault. Each could make a case to their own national governments that GM has an unfair advantage owing to its access to Federal funding. To make matters worse Barack Obama, the president-elect, has shown leanings towards protectionism with his criticisms of the North American Free Trade Association.

Protectionism is often wrongly understood as simply relating to tariffs. Yet there are many ways that states can back their own home-based companies besides tariffs. Providing subsidies of various sorts is probably the most important.

The rise of protectionism could easily undermine international cooperation. As economic circumstances get harder it could become increasingly difficult for countries to cooperate. The recent row between European Union countries over guarantees for retail bank depositors could be a sign of things to come. And the spat between Britain and Iceland could be a forewarning of larger-scale conflicts.

Of course all countries maintain some interest in international cooperation. Nobody is likely to benefit from all-out economic conflict. But the more protectionism takes hold the harder it will become to resist the forces pushing the world towards international rivalry.

Labels: America, economics, trade

The last programme in the series of the BBC Radio 4 Iconoclasts programme looked at the debate around third world sweatshops. Jagdish Bhagwati, a professor of economics at Columbia University, argued that sweatshops should not be criticised for paying poor wages although he conceded it was wrong to have poor working conditions. He emphasised that industrial exports could lead to growth which could in turn life countries out of poverty.

After an initial introduction by Bhagwati there was a debate involving Ceri Dingle of Worldwrite a campaigner from War on Want and the owner of a fair trade fashion label. The advocates of ethical consumption came out with the usual clichés: complaining about free market economics and trickle down theory (even though neither had been mentioned by Bhagwati or Dingle). They also focused on sweatshops in the poorer countries without understanding that the plight of those working on the land is generally worse. There were also complaints about inequality (but not arguing for more growth) and an implicit assumption that the British government could somehow help trade unions organising in poorer countries. Dingle ably put the case for more growth, greater industrialisation and higher expectations.

Labels: consumption, development, ethics, radio, trade, work, Worldwrite

Supachai Panitchpakdi, the secretary general of the United Nations Conference on Trade and Development, will present The Trade and Development Report 2008 at a public lecture at the London School of Economics on the evening of Tuesday 2 September. The theme of this year’s report is "Commodity Prices, Capital Flows and the Financing of Investment”. I am planning to attend.

Labels: development, economics, finance, trade

Gordon Ramsay, probably Britain’s most annoying celebrity chef, has spoken to the prime minister about fining restaurants which serve out of season produce.

There are at least two things wrong with Ramsay’s proposal. First, why shouldn’t people be able to eat out of season food if they want to? If I want Kenyan strawberries in March I should have the freedom to buy them. It might satisfy my desire for strawberries and it could benefit the Kenyan economy too. No one is forced to buy such strawberries if they prefer local produce.

Second, just because someone doesn’t like something it doesn’t mean there should be a law against it. Such an attitude leads to gross intrusions on personal freedom. I detest Ramsay’s boorish and formulaic TV programmes but I have never campaigned for them to be banned.

Labels: celebrities, consumption, food, trade

William Easterly, doyen of free market development economists, had a polemic against Bill Gates’ “creative capitalism” schemes to help the poor in yesterday’s Wall Street Journal. Easterly rightly attacks the limitiations of schemes such as the partnership to give African farmers access to the premium coffee market. “This is fine as a modest endeavor to help a few Rwandan and Kenyan coffee farmers, but it's hardly going to remake capitalism.”

Easterly is also right that economic development is preferable to such limited schemes. “The number of poor people who can't afford food for their children is a lot smaller than it used to be - thanks to capitalism. Capitalism didn't create malnutrition, it reduced it. The globalization of capitalism from 1950 to the present has increased annual average income in the world to $7,000 from $2,000. Contrary to popular legend, poor countries grew at about the same rate as the rich ones. This growth gave us the greatest mass exit from poverty in world history.”

However, Easterly’s avid support for capitalism grates at times. It is true that the market system has provided significant growth - and to that extent it should be welcomed - but growth remains too limited and uneven. The demand should be for more rather than less.

Labels: Africa, development, trade

Kenneth Rogoff, a professor of economics at Harvard and former chief economist at the International Monetary Fund, expressed concern about inequality in an article in yesterday’s Financial Times. Although the article focused on the possibility of a Chinese economic slowdown its points on inequality were much broader. He argues that:

“Protectionism is another growing risk. With income and wealth inequality rising throughout the developed world, politicians may start lashing out at China with trade sanctions on automobile parts, steel, paper products and, of course, textiles. China’s explosive export growth has made it far more vulnerable to a fall in exports than it was during the 2001 global recession.

“Perhaps the greatest threat to China’s expansion, however, comes from pressures created by its own exploding inequality levels. According to World Bank statistics, income inequality in China has leapfrogged that of the US and Russia, which is no small feat. Rising inequality is placing enormous strains on the political system, as is evident from a recent sequence of ill-considered policies that have been aimed at mitigating the problem. The government’s recent attempt to fight food inflation by using price controls is a highly conspicuous example.”

Later on Rogoff argues for welfare reforms as the best way of dealing with inequality:

“Rather than try to deal with inequality by labour market fiat, the government would do better to improve the social safety net through provision of more and better healthcare and pensions.”

Soon I hope to write a critique of these limited views of inequality.

Labels: china, economics, inequality, trade

Even free market economists are rethinking their outright support for free trade according to an article in Business Week (31 January). Worries focus on the alleged impact of trade growth in widening inequalities: “concern is rising that the gains from free trade may increasingly be going to a small group at the top. For the vast majority of Americans, Dartmouth's [Matthew J ] Slaughter points out, income growth has all but disappeared in recent years. And it's not just the low-skilled who are getting slammed. Inflation-adjusted earnings have fallen in every educational category other than the 4% who hold doctorates or professional degrees. Such numbers, Slaughter argues, suggest the share of Americans who aren't included in the gains from trade may be very big. ‘[That's] a very important change from earlier generations, and it should give pause to people who say they know what's going on,’ he says.”

Labels: economics, inequality, trade

The World Bank has updated the development notes on its website. They give a useful summary of the current orthodoxy on topics such as aid, climate change and development, equitable growth, governance and trade policy.

Labels: aid, climate, development, economics, trade

A key chapter (PDF) in the latest World Economic Outlook from the International Monetary Fund (IMF) looks at globalisation and inequality. The chapter concedes that inequality has generally widened over the past 20 years although it also makes the point that living standards have generally risen. In other words the poor are better off in absolute terms but the gap between rich and poor has widened at the same time.

The chapter also uses an econometric model to try to identify the sources of inequality. Contrary to common belief it concludes that increased trade does not lead to wider inequalities. Instead inequality is associated with financial openness – particularly foreign direct investment – and most of all to technology. The reasoning behind the latter is that skilled workers are better able to make use of technology.

I am sceptical about the use of such models. They may help identify correlations – for example, one variable is associated with another – but that is not the same as explaining relationships. To be fair to the IMF it is also cautious about the conclusions that can be drawn from the model.

Labels: finance, globalisation, inequality, technology, trade

There follows a comment by me on the debate about financial globalisation in the latest Fund Strategy (6 August). It refers to a cover story I wrote on the subject

There are more misconceptions about globalisation than most other areas. What is more the key features of the global markets and the global economy are little discussed.

Of course there are heated debates around aspects of globalisation. Some argue it should be welcomed while others see it as largely negative. There are also discussions about the best ways to regulate it.

But the substance of the notion of globalisation is generally left unchallenged. It is almost universally assumed that the increase in cross-border trade and finance inevitably means a decline in the power of the nation state.

Daniel Ben-Ami questions the orthodoxy in this week's cover story. He argues there are several reasons why the conventional view of global finance is flawed. For example, a crude use of statistics can exaggerate the size of the global financial markets relative to nation states. More fundamentally he argues, among other things, that the power of the state has increased at the same time as the world has gone more global.

Confirmation that the state's role is crucial in globalisation was apparent
last week in a new paper (PDF) published by the International Monetary Fund (IMF). Contrary to those who see globalisation as purely a market phenomenon it argues that complementary "institutions" are necessary for its success.

The World Bank has taken a similar view in relation to trade. A report published last year argued that state institutions were a key component of successful globalisation.

Such reports slightly redress the balance in the discussion but they do not go nearly far enough in recognising the state's role in globalisation. It is not a question of more state intervention, or better "institutions", being a desirable policy option. It is, rather, that the state is an inextricable part of the globalisation process.

Just as trade and finance have become more globalised the state has taken on a broader role in economic activity. Old-fashioned forms of intervention, such as exchange controls, have disappeared but new ones have emerged. For instance, financial markets are regulated by far more powerful regulators than in the past. Until the early 1980s the City of London was largely run as an old-fashioned gentlemen's club. Today the Financial Services Authority has enormous regulatory power.

It would be more accurate to describe today's markets and economy as international rather than global. The scale of cross-border trade and finance has become enormous but the state still plays a substantial role in economic activity.

Labels: finance, Fund Strategy, globalisation, trade

This week’s Fund Strategy included a comment by me on changing patterns of world trade.

Agriculture has become a relatively niche enterprise in modern industrial economies. However, the latest 10-year Agricultural Outlook from the Organisation for Economic Development (OECD) and Food and Agriculture Organisation (FAO) of the United Nations highlights some important trends*. These apply to the economy and investment more generally rather than just agriculture.

Perhaps the most straightforward is that, in relative terms, agriculture is becoming less important. Everyone still needs to eat but agriculture is accounting for a smaller proportion of world trade and the global economy.

Second, trade is expanding, both in terms of the numbers of countries involved and the extent of trade. This is a key part of the globalisation process.

However, a few big players still dominate trade in agriculture. Back in the late 1980s the largest exporter was America followed by the European Union (EU) 15, Australia, Canada and Brazil. In the early part of this decade the EU had taken the lead followed by America, Brazil, Canada and Australia.

But the pattern is in the process of changing with the rapid growth of the developing world and Asia in particular. South-South trade is becoming increasingly important. In the case of agriculture the report describes the growing presence of Argentina and Brazil as "staggering". Other key southern exporters include India, Malaysia, Russia, Thailand, Ukraine and Viet Nam. In manufacturing it is clear that China is playing the leading role.

The growing affluence of the developing world is also affecting consumption. One of the clearest indicators is that people in the south are eating more meat. As countries become more affluent their consumption, and meat in particular, tends to rise.

Finally, the report shows how the increasing popularity of biofuels is putting up the cost of agricultural commodities. As biofuel production is increased the amount of land devoted to producing food falls. This has a direct impact on agricultural commodities and an indirect effect on meat as feed prices increase too.

This is also part of a broader trend in which environmental measures could play a role in increasing prices overall. For example, regulation and the promotion of environmental standards incur costs. While there is sometimes room for such measures it is important to recognise that they are not free and they can go too far.

So in some respects the world has not changed as much as many assume. The developed economies still play a dominant role in the world economy. However, as the rapid development of the south continues, particularly in East Asia, this pattern looks set to change considerably.

*OECD-FAO Agricultural Outlook 2007-2016. Highlights are available: here.

Labels: development, Fund Strategy, trade

I do not share the pro-intervention stance held by Alan Beattie, the world trade editor of the Financial Times, on Africa. However, his deliciously acid remarks in today’s paper are astute:

“Africa needs more than to be 'put on the agenda'. It has been on dozens of agendas down the decades. Nor does it need to be 'put on the map'. For the confused, it's the big wedge-shaped continent south of Europe.”

Labels: Africa, trade

Dani Rodrik, a professor of international political economy at Harvard, has set up a blog. Rodrik is one of the leading thinkers in what could be called the anti-globalisation or global justice movement. That is he is generally in favour of greater regulation of capitalism and supports such initiatives as fair trade.

In my 24 March 2007 post I outlined other useful economics blogs.

Labels: economics, globalisation, trade

The following is a comment by me from the 9 April issue of Fund Strategy.

The past few days have seen mixed news on the world economy. The bad news emanates from America while good news originates in emerging markets.

Probably the worst news is America's decision to impose tariffs on imports of "coated free sheet paper" from China. The Commerce Department has deemed that China is providing unfair subsidies to this industry. Therefore, so the argument goes, America needs to take action to level the playing field between the two sides.

Clearly America's move is symbolic. It is concerned about China's huge trade surplus with the US. The tariffs on paper are therefore designed to encourage China to curb its exports to the US or buy more American goods.

Some might argue America's recently announced free trade agreement with South Korea to an extent offsets its protectionist measures against China. But this is the wrong way to look at the move. The bilateral deal with Korea, giving it preferential access to the American market, is another form of protectionism. America rewards some countries and penalises others as part of a concerted trade policy.

It would be far better if America lived up to its rhetoric of free trade. In principle trading relations between different countries have the potential to benefit all parties in the relationship. Living standards can rise as each country focuses on what it can produce most efficiently.

In contrast, protectionism threatens to fracture the world economy. It could lead to a situation in which there is less trade, not more. As a result everyone, particularly the poorer countries, could suffer.

Fortunately some good news has offset the bad. Figures from the Asian Development Bank, in its annual Asian Development Outlook, forecasts GDP growth in developing Asian at 7.6% in 2007 and 7.7% in 2008. The two demographic giants of the region, China and India, together account for much of this growth.

Even better news is the expansion of the African economies. The continent looks set to grow by 5.8% in 2007 after its 5.7% in 2006, according to the United Nations' Economic Report on Africa 2007. It is growing from a meagre base but the trajectory is hopeful. The main worrying sign is its continuing dependence on primary commodity exports.

If only America, and the West in general, allows the emerging economies to continue to grow then everyone could benefit.

Labels: development, economics, Fund Strategy, growth, trade

An astute point on the downside of relying on local food sources from the unexpected source of the International Monetary Fund’s World Economic Outlook. Its chapter on commodity prices (PDF) makes as an aside the point that:

“the volatility of food and raw agricultural material prices seems to have fallen on average over the past couple of decades, as growing geographical diversification of production and technological advances have reduced the sensitivity of food prices to supply shocks, such as bad weather or natural disasters.”

In other words global food production and high technology can help prevent food shortages and even starvation. If there are problems in one part of the world then food can be transported in from other regions of the globe. The original source is a 2004 report on the state of agricultural commodity markets by the Food and Agriculture Organisation.

The same chapter makes the point that the supply of base metals is practically unlimited. Aluminum, for example, accounts for 8% of the earth’s crust and iron 5%. The original source is a 2003 study by John Tilton.

Labels: food, technology, trade

The slogan “Ferraris for all” comes for Worldwrite; an education charity campaigning for real development in the third world. Ceri Dingle, the director of the charity, was evidently asking some of its volunteers what they would really like to have. They said Ferarris. I am sure they did not necessarily mean it literally. No doubt Lamborghinis, McLarens or Maseratis would do for some. The point is that everyone should have access to the best that the world has to offer.

I appeared in the Bitter Aftertaste; a short documentary Worldwrite made criticising fair trade. To view the film on the internet click HERE. I have also written an article on the subject, called the coffee con , for Spiked.

On 28 October I will be chairing a discussion of Worldwrite’s new film Damned by Debt Relief at the Battle of Ideas festival. In 2005 I wrote an article on debt relief for Spiked.

Labels: development, film, media appearances, speeches, spiked, trade, Worldwrite