The Free Thinker

"Boom Times Are Back, Outside the U.S." (Fareed Zakaria)

It is becoming increasingly clear that the story of the global economy is a tale of two worlds. In one, there is only gloom and doom, and in the other there is light and hope. In the traditional bastions of wealth and power—America, Europe and Japan—it is difficult to find much good news. But there is a new world out there—China, India, Indonesia, Brazil—in which economic growth continues to power ahead, in which governments are not buried under a mountain of debt and in which citizens remain remarkably optimistic about their future...

Around the globe, though, markets are humming. China's Shanghai index is up 45 percent, India's Sensex is up 44 percent, Brazil's Bovespa is up 38 percent and the Indonesia index is up 32 percent. Now, stock markets don't tell the whole story, but the reason many of these are rising is that the underlying economies of most of these countries are still registering significant growth. The evidence abounds. In April, India's car sales were 4.2 percent higher than they were a year prior. Retail sales rose 15 percent in China in the first quarter of 2009. China is likely to grow at 7 or 8 percent this year, India at 6 percent and Indonesia at 4 percent. These numbers are not just robust but astonishing when you line them up against those in the developed world. The U.S. economy contracted at an annual rate of 6.1 percent last quarter, Europe by 9.6 percent and Japan by a frightening 15 percent, something that truly does begin to rival the 1930s...

America is having trouble selling its IOUs at attractive prices (the last three Treasury auctions have gone badly); its largest state, California, is veering toward total fiscal collapse; and its budget deficit is going to surpass 13 percent of GDP—a level last seen during World War II. With all these burdens, even if there is a recovery, the United States might not return to fast-paced growth for a while... 

Meanwhile, emerging-market banks are largely healthy and profitable. (Every Indian bank, government-owned and private, posted profits in the last quarter of 2008!) The governments are in good fiscal shape. China's strengths are well known—$2 trillion in reserves, a budget deficit that is less than 3 percent of GDP—but consider Brazil, which is now posting a current account surplus. Or Indonesia, which has reduced its debt from 100 percent of GDP nine years ago to 30 percent today. And unlike in the West—where governments have run out of ammunition and are now praying that their medicine will work—these countries still have options. Only a year ago, their chief concern was an overheated economy and inflation. Brazil has cut its interest rate substantially, but only to 10.25 percent, which means it can drop it further if things deteriorate even more.

The mood in many of these countries remains surprisingly upbeat...

The United States remains the richest and most powerful country in the world. Its military spans the globe. But from the Spanish Empire of the 16th century to the British Empire in the 20th century, great global powers have always found that their fortunes begin to turn when they get overburdened with debt and stuck in a path of slow growth. These are early warnings. Unless the United States gets its act together, and fast, the ground will continue to shift beneath its feet, slowly but surely.

It's good to see that the Bush boom in the rest of the world hasn't gotten knocked off track too badly by the obstructionism of Democrats and nativists and the escapist irresponsibility of Obama and his constituents.  Let's open the borders and let some of that prosperity come in here!

"Summers, Geithner Are Silent as IMF Loses Grip" (Bloomberg):

The “Asian Monetary Fund,” so passionately derided by Summers and Geithner [in 1997/8], is back. There is little a crisis-plagued U.S. can do to stop Asia’s $120 billion foreign- exchange reserve pool. Its creation is the clearest sign yet that Asia's getting serious about combating the global crisis. Done right, it will bode well for the region’s outlook...

[Summers' and Geithner's] concern [in 1997/8] was that [an Asian Monetary Fund] would eclipse the IMF in the region and, by extension, the U.S.’s say in how Asia retooled economies. They feared doling out billions of dollars in aid with few policy-change strings attached would prove dangerous. And they got their way. That changed this week.

From 1997 to 1998, the IMF arranged about $100 billion of loans to Indonesia, South Korea and Thailand as currencies collapsed. In return, governments had to cut spending, raise interest rates and sell state-owned companies. The IMF’s policies needlessly deepened the turmoil. 

Aside: Asia recovered quickly under IMF "austerity" policies.  I doubt we'll recover so fast.  If only we could be under the stern tutelage of the 1997-8 IMF instead of under the Obama administration.

During this global crisis, nations sought help from neighbors instead of borrowing from the IMF.  Indonesia, for example, raised $5.5 billion of standby loans from theAsian Development Bank, World Bank, Australia and Japan, and increased the size of its currency-swap arrangements with China and Japan to bolster access to foreign exchange.

Asia’s new fund takes things to another level. On May 3, the Association of Southeast Asian Nations, together with Japan, China and South Korea, agreed on terms for the so-called Chiang Mai Initiative and to use the funds in times of trouble. The pool, to be ready by year-end, largely neuters the IMF in Asia.

Granted, $120 billion seems like a paltry sum in today’s world of cascading markets and recession. American International Group Inc. alone received $183 billion worth of public bailouts. The size of the stockpile isn’t the issue. It can always get bigger.  China and Japan boast almost $3 trillion of currency reserves. It’s the symbolism that really matters here.

Asia as been lacking in the cooperation department as the U.S. redit crisis infected global markets. Meeting in Bali, Indonesia, this week, governments put their money where their vulnerabilities are, and it’s about time.

Nice to hear of initiatives originating elsewhere.  Somebody needs to take the reins of world leadership now that we're falling apart.

"Trade, regulations, and income" (Journal of Economic Development):

We examine the relationship between openness and per-capita income using cross-country data from 126 countries. We find that trade leads to a higher standard of living in flexible economies, but not in rigid economies. Business regulation, especially on firm entry, is more important than financial development, higher education, or rule of law as a complementary policy to trade liberalization. Specifically, after controlling for the standard determinants of per-capita income, our results imply that a 1% increase in trade is associated with more than a one-half percent rise in per-capita income in economies that facilitate firm entry, but has no positive income effects in more rigid economies. The findings are consistent with Schumpeterian “creative destruction”, which highlights the importance of new business entry in economic performance, and with previous firm-level studies showing that the beneficial effects of trade liberalization come largely from an intra-sectoral reallocation of resources.

There's a complementarity between free markets at home and free trade abroad.

Russia's Suez Crisis Update

"Russia halts trading after 17% fall in share price" (FT, 9/16/2008):

Russian shares suffered their steepest one-day fall in more than a decade on Tuesday, losing up to 20 per cent, as a sharp slide in oil prices and difficult money market conditions triggered a rush to sell.

The heads of the Russian central bank, the finance ministry and the financial market regulator met on Tuesday night for an emergency discussion on ways to halt the crisis.

Earlier, trading had been suspended on both the Micex and RTS stock exchanges as investors ignored assurances by Russian officials and a cycle of distrust set in amid liquidity fears.

Margin calls forced domestic traders to liquidate positions and brokers pulled credit lines. At least one Moscow bank failed to meet payments.

The rouble-denominated Micex Index closed 17.75 per cent down, the sharpest one-day drop since the August 1998 financial crisis, while the dollar-denominated RTS index closed down 11.47 per cent, its lowest lvel since January 2006.

Interbank money market rates climbed to 11 per cent, their highest since a mini-banking crisis in summer 2004.

Chris Weafer, chief strategist at Uralsib investment bank: “We’re in completely uncharted territory where the prevailing emotion is of fear and numbnes. No one knows where this could stop”.

Alexei Kudrin, finance minister, insisted that the financial system was not in a systemic crisis but the central bank injected a record $14.16bn in one-day funds into the money market.

The finance ministry also placed an additional R150bn ($5.8bn) in one-month deposits into the banking system. Konstantin Korishchenko, central bank deputy, told Russian news agencies that the bank and the finance ministry could provide a total of $117.6bn in liquidity to the banking sector.

But market players said banks were ceasing to lend to second and third-tier companies and brokers were pulling credit lines. KIT Finance, big Moscow investment house confirmed rumours that it had been unable to make payment on a series of short-term loans.

It said: “In connection with the fact that a series of our clients did not meet their obligations to our bank, we have not met our obligations to our counterparties.

“We recognise our responsibility to our counter-parties and to the market and we are working intensively to resolve the situation.”

Andrei Sharonov, managing director of Troika Dialog, a Moscow investment bank, and a former deputy economic minister, said: “This is a vicious circle,” said , .

“It is a situation of total mistrust. The liquidity crisis is being caused by a crisis of confidence in which people are frightened to borrow and frightened to lend.”

Shares in Russia’s biggest state-controlled banks led the slide with Sberbank, the state-controlled savings bank, closing 21.72 per cent down and VTB losing 29.26 per cent. The bank was suffered on investor fears about its securities portfolio, which makes up about 10 per cent of its assets.

It's been ten years since Russia's last financial crisis, in 1998.  The war in Georgia is probably not the main cause of this-- turmoil on Wall Street, and falling oil prices, were surely the trigger-- but it undoubtedly made matters worse.

It's up to Putin, as prime minister, to do something about it.  For Russia's sake, I hope he gets them through it all right.  But if he doesn't, he ought to be vulnerable, and maybe he really is.

Meanwhile, let's hope Russians learn the lesson: Aggression doesn't pay.  Thanks to Tyler for the pointer.

"WTO Can Place Russia on the Right Track" (Anders Aslund, 7/31/2008)

Russia is very close to gaining admittance into the WTO, but three significant obstacles remain.

The first and most complex impediment is a bilateral agreement with Ukraine that demands months of negotiations. Each new member of the WTO has the right to ask for a bilateral protocol with applicants on market access. Recently, the United Arab Emirates, Saudi Arabia, Cambodia and Vietnam have done so with Russia, which has been compelled to offer each of them some benefits. The WTO is a club, and its members can demand applicants to comply with all of the rules of the club before they join.

Bilateral trade between Russia and Ukraine is huge -- nearly $30 billion a year -- and Moscow has had a habit of imposing protectionist measures on Kiev. The Ukrainians might be polite, but their trade negotiators are rather clever, as they have shown through their entry into the WTO. They will kindly request that Moscow abandons all trade barriers that do not comply with WTO rules, and Russia should meet this demand immediately. Otherwise, other new members will enter the trade group and pose new difficult demands. Like all current WTO members, Ukraine wants Russia to join the organization.

The second impediment is Georgia, which is politically more difficult. Although Russia has imposed multiple trade embargoes on the Georgians, Tbilisi has focused on one single issue -- border controls in Abkhazia and South Ossetia. This may seem political and beyond the range of trade policy, but the Georgians have successfully defended their position. This issue can be resolved, and the Kremlin had better realize it is in its own interest to do so.

Sounds like it won't take any special effort to prevent Russia from joining the WTO.  The condition Russia already had to meet now seems insurmountable.  Also, isn't it an eloquent statement of the peace-promoting value of trade that the only big country in the world that is not a member of the WTO is the one big country that started a war?

As the saying goes: If goods don't cross borders, soldiers will.

MORE: Another hint of the Putin/Medvedev difference:

President Dmitry Medvedev has said good things about the WTO, while Prime Minister Vladimir Putin ignored it during his last term as president. Russia's accession to the WTO could be Medvedev's signal that he is putting Russia on the right economic track again.

Medvedev may be Putin's stooge for now, but if Putin could be got out of the way, he might be civil.

The Russian Boom

Western press coverage of the Russian boom generally sees a dark side.  For example, "Russian boom time, but at what cost?" (12/22/2006):

Russia now pumps more oil than the Saudis, and with a 92 percent rise in oil prices in just three years, the government says incomes are up 10 percent annually. Moscow Carnegie Center's Masha Lipman described it as an economic revolution.

"It may be even argued that never in Russian history has the proportion of people with decent living standards been as high as it is today,” said Lipman...

But all of the economic progress is coming at what cost? There are eerie signs that Russia is revisiting some of its totalitarian Soviet past and is perhaps extending its reach.

Yevgeny Volk of the Heritage Foundation's Moscow office didn’t mince words. In his view, the government is "controlling everything in this society, so there is no dissidence. There should be uniformity of opinion, uniformity of behavior." 

Or, "In Russia's boom, rags and riches: More billionaires than ever, but wealth isn't trickling down" (International Herald Tribune, 4/15/2005):

Record high prices for oil and metals helped to give Russia, with its rich resources, the world's second-most new billionaires last year. But the wealth in this booming, communist-to-capitalist country is not trickling down.

Overall, Russia leapfrogged Japan to the No. 3 spot on Forbes magazine's latest list of billionaires, behind the United States, which is No. 1, and Germany.

Although wages in Russia have risen - the average jumped 50 percent in the past three years, to 6,832 rubles, or $246, a month in 2004 - the income gap between the richest and the poorest Russians is yawning noticeably, said Viktor Ivanter, director of the Economic Forecasting Institute at the Russian Academy of Sciences, in a recent interview with the Russian daily newspaper Nezavisimaya Gazeta.

Peter Westin, chief economist with Aton Capital Group, said:"People's incomes are growing across the board, and state sector workers have had huge wage increases in last few years. But they are still lagging behind the rich.

"Everyone is moving up the ladder, but the top rungs are moving faster."

But if the average wage jumped 50% in the three years to 2005, the wealth is trickling down, is it not?  There's less hedging in this NYT article: "Investment Boom Gives a Lift to the Russian Economy" (NYT, 6/17/2008):

Russia’s economy expanded an annual 8.5 percent in the first quarter, higher than economists expected, as consumer demand fueled an investment boom.

The expansion followed 9.5 percent growth in the previous three months, the Federal Statistics Service said on Monday...  The rapid expansion is also fueling inflation, which accelerated to 15.1 percent in May, and may be a signal that the economy is overheating, analysts said...

Russian industrial output grew an annual rate of 9.2 percent in April, the most in nine months, as output of trucks, cars and construction materials surged.

Real wage growth has advanced more than 12 percent every month this year, increasing demand for housing and consumer goods. The government expects the economy, the world’s 10th biggest, to expand 7.6 percent this year after growing 8.1 percent in 2007.

   

History gives ample reason to regard good news from Russia with skepticism.  Yet it might be worthwhile to drop the "good news, but" formula for a while.  According to Russia's federal statistical service, the growth in real disposal incomes, the following number series represents real disposable incomes for each of the past five years, as a share of the previous year:

2002          111

2003          115

2004          110

2005          112

2006          113

2007          111

If you multiply 111% * 115% * 110% * 112% * 113% * 111%, you will find that real disposable incomes have increased by 97.3% between the beginning of 2002 and the beginning of 2008.  A doubling of real disposable incomes.  And the statistics for median wages show about the same growth rate; this is not just the rich getting richer.  The statistics are not necessarily completely reliable-- it's possible, for example, that inflation is being understated-- but what they are showing is basically a reality.  In terms of economic well-being, there is little doubt that these are the best times for the common man in all of Russian history.  And there's no particular reason to think they won't keep getting better.

Final demand per capita is still only about $5,000 per annum, so Russians are still about 7-8 times poorer than the Americans.

The Worldwide Boom Continues

The good news about the global economy has been coming on strong for some time now.  The latest economic indicators from The Economist magazine confirms that the boom is alive and well.  Of 57 countries, not a single one is experiencing negative GDP growth right now.  There are two islands of sluggish growth in developing Europe: Hungary (1.0%) and Turkey (1.5%).  But the rest of the region is booming.  The euro area is chugging along at a respectable 2.7% average, with every euro-area country showing a decent rate of growth.  Outside Europe, Japan, and the developed Anglosphere, the slowest rate of growth shown in 3.7%, in Mexico.  Which is not slow at all.  Except by comparison to the real star performers, including, as usual, China (11.5%-- fast even for China!), and India (8.9%), but also Argentina and Venezuela (8.7%) and Peru (10.4%), and a bunch new EU countries like Latvia (10.9%), Lithuania (10.8%), Slovakia (9.4%), Poland (6.4%) and the Czech Republic (6.0%).  At the heart of the Middle East, Egypt (6.9%) is booming.  East Asia is slow by its own standards but mostly in the respectable 5-7% range.

The rising tide continues to lift all boats.

Oil Prices and Airships

Oil hits new record above $92

LONDON (Reuters) - Oil rallied to a fresh record high above $92 a barrel on Friday as the dollar tumbled to a record low, Washington imposed new sanctions on Iran and gunmen shut more oil production in Nigeria.

While supply disruptions may trigger price spikes, the medium-term upward trend is due to rising demand from a booming world economy, especially in developing countries. 

We all see the downside of high oil prices at the gas pumps, but it's worth remembering the upside.  First, they indicate that somebody out there has a lot of buying power; they're indicators of economic growth.  Second, they transfer lots of money from countries that demand oil to countries that supply it; by and large, this transfer is from richer countries to poorer countries (although a lot of oil-poor developing countries can get hurt too).  Third, they spur investment in alternative energy technologies.

Three days from now I'll be in Winnipeg, Manitoba, attending the Airships to the Arctic IV conference there.  Airships are a far more fuel-efficient form of flight.  My fellow delegates and I may feel the mood of the conference brightened by this boost to our competitiveness.

Dani Rodrik, Half-Hearted Free-Trader

My old prof Dani Rodrik answers the question "What would a progressive trade agenda look like?"  Hat tip: Tyler Cowen, who offers his own comments.  Rodrik has been a prominent globalization skeptic among economists, but he endorses globalization here, it's good to see.  (To his commenters' chagrin: I'm glad that I have my regular commenters and not his! Rodrik's commenters seem determined to disprove his insistent claim that "progressives are not today's Luddites.")  But I don't think this can be justified:

It would get real with the domestic social agenda. That means two things: more and better social insurance (safety nets) and more and better compensation. Progressives need to communicate that social insurance is the flip side of the open economy, that redistribution is logically the flip side of the gains from trade. The gains from trade do not become real unless and until there is compensation. (my emphasis)

What does Rodrik mean by the last sentence?  I think the implicit argument is that trade is not Pareto-improving unless you tax the winners to compensate the losers.  And given the theoretical problems with comparing interpersonal utility, there is a theoretical case for being agnostic about the gains from trade unless it is accompanied by redistribution.  Even if this is valid, and even if we put to one side the question of whether social insurance or other policies can actually compensate the losers and make trade Pareto-improving, I think Rodrik's formulation is misleading.  The gains from trade, in the sense of an increase in net utility, may be and probably are real even without compensation; they are just a little uncertain.

In any case, there already is "compensation," even in the US which is presumably the target of Rodrik's implied criticism: the Trade Adjustment Assistance program, which, according to Wikipedia, "provides a variety of reemployment services and benefits to workers who have lost their jobs or suffered a reduction of hours and wages as a result of increased imports or shifts in production outside the United States."  Rodrik seems to want something different: a general social insurance program, perhaps on the ground that using a band-aid approach to compensating people for the economic changes associated with globalization will never be adequate.  But this begs at least two questions.  First, is it morally acceptable to coercively expropriate the private property of affluent Americans or whoever else gets caught in the IRS's nets, in order to give handouts, and particularly to give handouts to American-born persons who, even if they are poor relative to other Americans, are themselves affluent by international standards, so that if affluent Americans chose to give of their substance to the needy, there are billions in this world who are more appropriate objects of their charity?  Second, do social insurance programs actually help their intended beneficiaries?  My interpretation of America's three-decade-long experience with the Great Society is that attempts to provide social safety nets do not help the poor but distort incentives, undermine moral traditions, and destroy social capital, creating new and more insidious poverty traps.  Contemporary Europe illustrates the rule in a different way: social insurance has undermined the incentive to work, and, even more fatally, the incentive for entrepreneurship and risk-taking, creating economic stagnation.  The worst victims of this are society's least fortunate, who are trapped in permanent unemployment, but everyone suffers from lower living standards and fewer opportunities.

Second, we need to elevate the role of democracy and human rights in the trade regime, not by micro-managing rules on labor and environmental standards, but by establishing some bright lines and broad principles.

It's good to see that self-styled progressives haven't totally ceded the advocacy of democracy and human rights to the Bush camp.  The trouble with this is that when you use trade as a tool for promoting democracy, you may end up punishing the victims, as tragically occurred in the years before the liberation of Iraq, when the Clinton administration condemned thousands, maybe hundreds of thousands, of children to death as it tried to strangle Saddam's regime through sanctions.

Rodrik calls for us to "chip away at the artificial distinction between the mobility of goods and capital, on the one hand, and the mobility of labor"-- his italics.  Bravo!  Cowen replies that "Boosting safety nets and boosting immigration are not in every way congruent."  But if we adopted the policies I argue for in my article "Don't Restrict Immigration, Tax It," then social safety nets for the native-born can indeed be perfectly congruent with greatly increased immigration.  One obstacle to this rational and beneficent approach is the pseudo-moral argumentation that is typically used to justify the welfare state-- pseudo-moral because there is nothing moral about handouts that simply reinforce locational birth-privileges.  To attack that pseudo-moral argumentation would be a better employment for one who wishes to make globalization "progressive not just for “us,” but also for the rest of the world—in particular for developing countries" than a tired insistence on more compensation in an effort to make trade Pareto-optimal which is probably, in the final analysis, in large part meaningless and irrelevant.

Very interesting:

Although China remains primarily a regional hub, new capabilities are quickly transforming the country into a global service provider. As local and international demand grows, service centers are moving up the value chain from low-end processing and programming functions to advanced IT applications and financial services. Knowledge of English is also spreading fast (some schools in China are teaching mathematics and science courses in English).

I'll bet there's some interest in higher native-English-speaking Western-educated economics professors. My next job?