HAPPY BIRTHDAY CESAR CHAVEZ

Si se peude!

Today is Cesar Chavez Day in some parts of this great nation. He would have been 78 (his actual birthday is March 31).

Why not send him or others a nice birthday card?

NYT: PEAK OIL

The end of oil is near. Repent. Repent. Repent.

HOW DOES CHINA DO IT?

Loyal Globalize This! reader DM recently wrote me with some questions regarding this post.

Here is what DM had to say:

Dear Globalize This!:
I see you write about development in China and you used to be involved in bikes.... wish we could tour some of China's developing countryside together...doing it on a bike is the best way of all. Of course you meet kids who have amongst them enough English so you can have wonderful conversations and you can learn about the most remarkable dreams they have!

Your short essay on "How China Does It" seems to attribute their quintupling of personal income to a "closed economy with indirect controls." You've studied a lot more economics than I have, but I have spent a lot of time in China and its hard to understand your answer. It's very different from the answers you get from people over there. Aren't there a lot of countries with "closed economies and indirect controls" who aren't growing at all? On the ground, in China, it looks to me like they are getting less closed every month. What am I missing here?

Since there are still several billion people who are so poor they loose children to things like diarrhea, TB and measles, it is pretty important that we study carefully what is happening in China and India, I am sure you agree.

When you shop at Target or Walmart or Home Depot, don't you get the impression China is getting more and more open? In fact, I would suggest that it is the aggressive buyers for these chains and their suppliers who are pushing development and opportunity further and further into the hinterlands of China and giving more kids reason to dream those big dreams.

...I read your article and I understand your point that financial crises can produce great losses and especially to the poorest of the poor. And I have no doubt that investors often prefer a stable (would you call it 'closed') exchange rate... so the growth that China has but most of the poor nations don't have can be partly explained by this element of the "closed economy".

But I get lost when you suggest that the Mandarins in Beijing can regulate trade and investment with such excellent precision that we can account for China's stupendous growth on this basis. Isn't the common wisdom that trade and investment are dramatically less regulated in China than in the stagnant poor countries? If this is wrong, could you help me understand what I thought I was seeing over there?

Thanks for listening,

DM
tree trimmer &
bonsai artist

Thanks for the comment, DM, and for the opportunity to clarify.

The longer paper posted here I think clarifies many of these issues and should be fairly accessible to the lay reader (no math involved).

The term "closed" should not be taken to mean shunting the world as in the case of, say, North Korea or Bhutan. It seems like from what you write this is how you are interpreting the term.

I am using the terms "open" and "closed" in a technical sense to describe the degrees to which national governments mediate economic interactions with foreign economic agents, meaning how much (and how) do governments regulate/control the movement of capital and goods across their territorially boundaries. You can imagine a spectrum where at one end the government dictates what and how much can be traded, how much investment will be allowed from foreigners, and the relative prices of these goods (the exchange rate), while at the other end the government plays no role whatsoever in these interactions.

Those interested in the topic should check out Fred Block's book under my Globalization Reading List. There I have tried to assemble books on globalization and development that are generally approachable (don't require specialist knowledge) and go beyond a purely economic perspective and mode of thought.

Perhaps the disctinction lies in specifying it as a closed economy as opposed to a closed country. Hence, a country may be engaging the world but be economically "closed." This may explain what you experienced in the countryside in China.

In practice, countries fall somewhere along the spectrum, but not at the extremes of the spectrum. The scale is more ordinal than cardinal, meaning it is not really possible to quantify how "open/closed" a country is, but you can say something about their relative position on the spectrum (though this can be tricky, too). From the revolution through roughly 1979-80 China was pretty much at the closed end of the spectrum. The argument I make in my paper is that though China has undergone tremendous policy reforms and social changes in the years since, it remains largely economically closed in that trade, investment, and the exchange rate are still mediated by the government. The difference is that whereas previously these economic interactions were mediated through direct controls, today after much reform they are mediated through indirect control. The indirect controls are much more efficient (easier to enforce and more precise) and allow for better economic outcomes for China.

The reason this is such an important issue is that for much of the last two and a half decades most countries have opted to liberalize or deregulate the policies and institutions used to manage international economic interactions--economic openning--often at the behest of the World Bank/IMF or rich country donors. The results have been disastrous for many countries: increased risks of financial crises and general economic instability, increased povery and inequality, loss of macroeconomic policy tools for managing their economies. This is the case almost everywhere in the world outside of East Asia, where China among a few other countries have largely resisted the pressures to liberalize. (For more information on this, see "The Unremarkable Record of Liberalized Trade."

I argue that China has done so well because it is engaging the world economy, but with careful, strategic mediation of how outside economic forces interact with its economy. This provides China not only with the autonomy to pursue policies conducive to economic growth, but it also insulates the economy from instability and external shocks. This is the key reason why China was able to avoid the Asian financial crisis.

Of course, this option may not be available to all countries. China is quite unique in its bargaining power with foreign governments and foreign capital owing to (1) the large size of its domestic market, (2) its enormous pool of poor, repressed workers, and (3) it's substantial military power. The first two provide China significant bargaining chips with the private sector, and the latter gives China geostrategic importance. Combined, all three provide China with great leverage to negotiate international economic agreements.

Of course not all regulations are created the same. Some may be stifling and some may be economically exhilirating. And regulations alone do not economic development make. Appropriate regulations must be mated with deliberate policies to promote industrialization and development.

I would be interested to hear where you got this notion that China is dramatically less regulated than other poor countries. In my reading of the evidence, is simply not the case. Both foreign investment and foreign trade are highly regulated in China. China has a fixed exchange rate, a virtual prohibition against foreign portfolio investment (investment in stocks and bonds and other highly liquid, non-productive investment), and stringent controls on foreign direct investment in terms of (a) industries than can be invested in, (b) geographic location of investment, (c) requirements to partner with domestic firms and to transfer technological knowledge, (d) restrictions on repatriation of profits, and so on. Chinese firms are not allowed to borrow money from abroad or take foreign currency denominated loans without government approval. China only joined the World Trade Organization in 2001, and many of its most sweeping changes in terms of trade liberalization have not yet fully phased in. Until quite recently, imports into China were subject to explicit government approcal. Tariffs were quite high, as were non-tariff quantitative and administrative restrictions (the USTR office publishes reports on this every year which tell this story in more detail).

So you can see that China is highly regulated in the sense that the government is actively involved in mediating economic interactions between the domestic and foreign economies. But China is doing more than just regulating the economy. It is using these policy tools (a) to insulate China from volatility and instability in international financial markets that create financial crises, and (b) to create a space in which China can pursue explicit policies of industrialization and development. This is essentially what every country that has industrialized has done in some way, shape or form. And it is precisely what multilateral development institutions discourage and what international trade agreements restrict countries from doing. (See Ha-Joon Chang's great book, Kicking Away the Ladder).

In contrast, almost every other country in the world over the past two and a half decades has undergone a process of liberalization, privatization, and "stabilization" following the "Washington Consensus" on development, often at the behest of IMF/World Bank imposed structural adjustment. While this has created conditions favorable to foreign bond traders, it has been a disaster for most of the countries and most of the world's population.

RICE, RICE BABY

Stateswoman Vanilla Rice breaks it down for the Chinese.

A few weeks ago when Condoleezza Rice was nominated to be Secretary of State, I quoted Michael O'Hanlon's predictions of her efficacy:

"I think if she...sort of...has a backbone she could be an effective Secretary of State..."

Well, Condi is in China this week, and it appears she has misplaced her backbone in standing up for Americans on trade issues.

Condi told the FT:

“It is really critical that people know China is acting within the recognised rules of the international economy and there is an understanding of the responsibility that comes with rapid economic growth.”

Apparently she doesn't understand. China is not acting within the recognized rules of the international economy. More than just skirting common courtesy, China is violating the terms of a number of international economic agreements that it is bound to uphold.

First is the whole exchange rate thing. According to both the IMF Articles of Agreement and the WTO prevent, this is a big no no. Economists from a broad political spectrum estimate that China's currency manipulation is undervaluing the Yuan by some 25-40 percent against the US dollar. This makes US exports to China more costly and US imports from China much cheaper to buy. It also makes for a big bilateral trade deficit financed largely through purchases of US government debt by the Chinese central bank. Essentially, the Chinese are loaning us money to keep buying their exports, and making a little bit of interest on the side.

Then there is also the whole labor rights dealie. As Rich Trumka puts it, "China has emerged as a chief violator of workers’ rights, and its workforce is so large and its labor repression so comprehensive, that it is dragging down standards for the entire world." Contrary to popular belief, the WTO agreement does provide prohibitions against some forms of labor rights abuses. Rice should know a good deal about this topic. Every year her own State Department documents such abuses in rather precise detail. Her Deputy, former USTR Robert Zoellick, also knows quite a bit about them. As USTR, he rejected a few trade remedy petitions highlighting China's labor and human rights abuses. Remember when Zoellick told the Jordanian Ambassador, "My Government would not expect or intend to apply the Agreement's dispute settlement enforcement procedures to secure its rights under the Agreement in a manner that results in blocking trade." Here we see precedent of willfull indifference of (now) State Department officials to violations of international economic agreements that hurt Americans.

To be fair, Condi certainly has her hands full in China. The nascent dragon sits amidst two tinderboxes.
Moreover, recent rumblings that Asian central banks might diversify out of the US dollar finally alerted the administration to the rather precarious US net international investment deficit position, for which China is our Atlas.

With China, the Bush administration is more focused on the former with a pensive eye to the latter. It's really a question of priorities and values. While the public rhetoric chimes all is well with the China economic relationship, the Bush administration simply does not value the dammage being done to American workers and the long-run competitiveness of the US economy as technology and productivity capacity set sail for China.

WOLFOWITZ BLOGGING

Keep tabs on the horse race to be the next World Bank President here: www.worldbankpresident.org.

WHERE THE WMDs REALLY ARE

Oh good. As it turns out, our "Coalition of the Willing" ally Ukraine was selling mid-range nuclear missiles to China and to our sworn "Axis of Evil" enemy, Iran. The FT.com has the story.

Way to make us safer, George.

WEIGH IN ON WOLFOWITZ

Over at FT.com's online poll.

Somehow, I put more trust in FT readers weighing in on the issue than those responding to the web poll CNN.com ran on Wolfowitz the other day.

KOOL AID AND THE PATHOLOGY OF GLOBALMANIA

The neoliberal theology runs deep, very deep, in our social and scientific fabric, afflicting multitudes with the pathology of globalmania. Take Paul Krugman. Of course, Krugman has built a career on cheerleading for the neoliberal globalization agenda: academic pulications, poster-session addresses, consultancies, speaker's bureau lectures, and so forth. Everyone wants to pay money to hear someone tell them what they already believe.

But Krugman is ultimately a scientist (okay, a social scientist), and as a scientist he cannot sit idle in the face of mounting evidence that the policies for which he has been proselytizing don't seem to be working (this is the big point that separates him from a Cato "economist". In the real world, almost all countries in the world have drank the Kool Aid that Krugman and countless others with even more zeal have been shilling. The result? More countries in financial crisis, more inequality, more poverty, less economic growth. Take two of these and don't call us when your economy falls into ruin. That's not to say that some economists have tried to show that in fact the neoliberal policy agenda has been good for developing countries, it's just that to do so they must employ heroically unrealistic and statistically indefensible methods to make the case. In fact, the only countries that are actually performing well, economically speaking, are those who have resisted the siren song of the globalmaniacs. Namely, China, India, and a handful of others mostly in East and Southeast Asia who for one reason or another have been able to resist downing the purple liquid.

Which brings us to Krugman's column this morning in the NYT. In the first few column inches, Krugman lambasts Bush's World Bank President pick, Paul Wolfowitz, for his ideological embrace of the neoliberal agenda in reconstructing Iraq--in other words, for mixing and serving up an Iraq sized pitcher of Kool Aid.

Here is what Krugman has to say about the neoliberal agenda:

Through much of the 1990's, they [developing countries--ed.] bought into the "Washington consensus" - which we should note came from Clinton administration officials as well as from Wall Street economists and conservative think tanks - which said that privatization, deregulation and free trade would lead to economic takeoff. Instead, growth remained sluggish, inequality increased, and the region was struck by a series of economic crises.

The real risk of Wolfowitz though, according to Krugman, is that his style risks souring developing countries such that they retreat from such economic reforms:

The backlash has reached our closest neighbor. Mexico's current president, Vicente Fox, a former Coca-Cola executive, is a firm believer in free markets. But his administration is widely considered a failure. Meanwhile, Mexico City's leftist mayor, Manuel López Obrador, has become immensely popular. And his populist rhetoric has raised fears that if he becomes president he will roll back the free-market and free-trade policies of the past two decades.

In the very next breath after castigating the record of neoliberalism--the brand of economic (and political) policies Wolfowitz will foist upon developing countries from his would-be World Bank perch--Krugman laments and fears that countries will forsake these very same policies. Yes, this globalmania is an alarming pathology, relegating those it afflicts to a state utter oblivion to their own logical inconsistencies and rendering them deaf to cognitive dissonance.

GASP! A NEOCON

What to say about Bush's selection of neocon stalwart and uber-jingoist Paul Wolfowitz to head the World Bank? Yes, just more in a long record of disdain for the multilateral cooperation.

Leave aside for a minute that Wolfowitz's academic experience is in international relations and security--not economic, social, or political development--and that his professional experience is whispering in politician(s)'s ears--not in running large bureaucracies. Wolfowitz's only experience with development is Iraq (aside from being the front man for US policy propping up a military junta in Indonesia). Not a real promising track record in nation building.

A few words of advice for Prof. Wolfowitz, should the World Bank executive board approve his selection: You can't build stable, sustainable societies by blowing shit up.

In the meantime, prepare the pies.

UPDATE: Jim Vallette of the Institute for Policy Studies answers the rhetorical question, "Why Wolfowitz?":

The United States fears democracy and reform at the Bank. In a
confidential June 2003 note to the World Bank board, then-Executive
Director for the United States Carole Brookins wrote a terse rebuttal.
“Giving population and other factors a weight in voting strength would
create a radically different, less desirable and non-financial structure
for the Bank,” she said.

Bush and Vice President Dick Cheney are now striking back with another
demonstration of “shock and awe,” by nominating Paul Wolfowitz, a primary
architect of the Iraq invasion and the botched reconstruction efforts
thereafter. Wolfowitz must be approved by the World Bank’s executive board
to get the job. For the sake of the world’s poor, let’s hope that the
board rebuffs this nomination.

Over decades of political work, Wolfowitz and longtime buddies Donald
Rumsfeld and Cheney have mastered the art of packaging raw geopolitical
and corporate objectives into initiatives named otherwise. Strategic oil
fields have preoccupied them in and out of office.

It is almost a natural progression for the Bush/Cheney administration to
want someone this steeped in blood and oil in charge of the World Bank. He
was a weapon of mass deception for corporate quests in Iraq. At the Bank,
he can serve the same function under the cloak of poverty alleviation.


More here.

ADS

You may have noticed the newly added Google ads on my sidebar. Am I a sell out? Hell yes. How much have I made so far? A whopping $0.26. Woohoo. At this rate, I'll be able to retire when Iraq is a stable, thriving democracy. But hey, why not click on some of the ads? It doesn't cost you anything. And you don't even have to read the other websites. Everyone's a winner.

DISENGAGING THE GLOBAL COMMUNITY

More of the same here...the Daily Progress Report has the skinny:

FOREIGN POLICY – RETHINK THOSE TRAVEL PLANS: The Bush White House announced yesterday it was pulling the United States out of the international agreement that protects citizens who are imprisoned in foreign countries. The rationale: the White House wanted to stop other countries from being able to fight the execution of its citizens by the United States. The result: Americans living or visiting abroad are now at great risk. The United States, you see, drew up the Optional Protocol to the Vienna Convention on Consular Relations in 1963 as a way to protect Americans living in other countries; the protocol was ratified in 1969. It requires countries to allow the International Court of Justice to intervene when citizens say "they have been illegally denied the right to see a home-country diplomat when jailed abroad." In fact, the United States was the first country to use the protocol, suing Iran for seizing 52 U.S. hostages in Tehran in 1979. The Bush administration withdrawing from the protocol shouldn't come as any surprise, unfortunately. President Bush and his right-hand man Alberto Gonzales have long been foes of the Vienna Convention. In 1997, Gonzales wrote a legal memo for then-Gov. Bush to try to get the state of Texas out of complying with the Convention. At that time, Gonzales sent a letter to the U.S. State Department in which he argued that the treaty didn't apply to the State of Texas, as Texas was not a signatory to the Vienna Convention.

If you aren't reading the Progress Report regularly, what are you waiting for?

YES, THIS IS THE REAL LOOMING CRISIS

Even conservative stalwart James Baker is recognizing our looming hydrocarbon crisis.

"I think we need to go forward with some sort of gradual, resourceful search for alternative sources," Baker said.

Baker was addressing the threat of global warming. But there ain't enough global warming to offset the chill left when our home heating fuel runs out. (Man, that's happened to me twice already this winter).

It doesn't matter how many OPEC countries we "regime change," there is just not enough oil under the ground to last too much longer.

BLOG UPDATE

Per moderately popular demand, I am now posting links to some of my writings, available on the right hand menu bar (or, on some browsers at the bottom of the page--not sure why this happens, any avid HTMLers out there have a fix for me?).

Don't bore yourself all at once.

HOW CHINA DOES IT

As promised a while ago, here is some of my recent work on the role of China's capital account controls in its remarkable economic development of the past quarter century.

Despite being heralded as a model globalizer, China's economic evolution is more aptly described as a closed economy that as moved from a system of direct to indirect controls. These institutional changes have allowed greater efficiency in price determination and therefore resource allocation throughout most of the Chinese economy, however the Chinese government still retains elaborate and pervasive controls to mediate the movement of financial capital in and out of its economy. These controls on capital flows have been essential to China's remarkably stable macroeconomic performance, and thus to its long-wave of rapid economic growth--a conclusion that can be drawn from comparison with many of China's neighbors afflicted by financial crises in 1997-1998.

The paper also provides a succinct overview of the risks associated with liberalized international capital flows and the rationales for for proactive management of capital flows.

DUNKIN DONUTS, ALL THINGS TO ALL PEOPLE

Slate is hitting close to my Boston Cream cholesterol-bloated heart today.

Dunkin Donuts is adapting to the Starbucks world, figuring out how to meld leather chairs and WiFi hotspots with donut eating contests. If anyone can, DD can.

SOCIAL SECURITY IN COMPARATIVE CONTEXT

Fuck Social Security "reform." By the time 2080 rolls around, and this wildly sucessful and popular social program faces a 0.4-0.7 percent of GDP actuarial shortfall, the world's oil spigot will be running dry.

According to many geophysicists, we have already passed the peak of world oil production. The world will continue to discover and produce oil, but at a diminishing rate. The oil will run out sometime between 2040 and 2070. Not a drop left.

Given that oil is the building block for almost everything in our daily lives, from Tivo and H2s to chili half smokes, and at the moment indispensible to the world economy, one might be excused for thinking this is a pretty big deal, worthy of urgent attention of our political leaders (isn't Bush always clamoring about leadership?). Talk about a threat to our way of life.

The Department of Energy had this warning about peak oil last month:

* Waiting until world conventional oil production peaks before initiating crash program mitigation leaves the world with a significant liquid fuel deficit for two decades or longer.

* Initiating a crash program 10 years before world oil peaking would help considerably but would still result in a worldwide liquid fuels shortfall, starting roughly a decade after the time that oil would have otherwise peaked.

* Initiating crash program mitigation 20 years before peaking offers the possibility of avoiding a world liquid fuels shortfall for the forecast period.

The DoE didn't mention what might happen if we wait until after peak oil to address the problem, but it's easy enough to extrapolate from the scenarios they do present. It's going to make the modest tinkering needed to secure Social Security pretty insubstantial.

LOVE THOSE IMPORTS

The US trade deficit is growing like gangbusters--so fast our ports can barely keep up!

It seems these days that the only thing keeping the trade deficit in check might be the capacity constraint of shipping logistics. We just can't get the imports in here fast enough!

From today's FT:

Container ships bound for California last year had to wait offshore for several days before a berth became free, delaying deliveries to retailers and pushing up costs for carriers and shippers.

If congestion persists, routing Asian-made goods through the Suez Canal and across the Atlantic might become a viable alternative, said John Isbell, director of logistics for Nike, the sports clothing brand.

Shippers have sought to bypass west coast congestion by redirecting cargo through the Panama Canal to east coast ports, such as Savannah and New York. But this is pushing the canal towards full capacity and forcing sharp increases in rates.

Mexican ports and more northerly west coast terminals, such as Seattle and Vancouver, have also absorbed some overspill but analysts said they were not big enough to resolve the crisis."