Assessing the ASEAN Economic Community


March  24, 2017

Assessing the ASEAN Economic Community

by Somkiat Tangkitvanich and Saowaruj Rattanakhamfu

http://www.eastasiaforum.org

Image result for asean economic communityMaking Progress Slowly–The ASEAN Way

East Asia continues to sustain a high level of economic integration, yet a significant proportion of intraregional trade is still uncovered by agreements to guard against current and possible future protectionism. Without multilateral movement under the World Trade Organization, further regional integration can proceed only through agreements that reduce trade barriers within the region.

ASEAN appears to be leading the Asia Pacific in FTA formation. The ASEAN Free Trade Area was implemented in 1993 and the ASEAN Economic Community (AEC) was officially launched in late 2015. The AEC aspires to go beyond typical trade agreements, aiming to create a single market and production base with equitable development across its 10 member countries.

 

ASEAN will celebrate its 50th anniversary in August, 2017. While ASEAN has made some significant political achievements during the past five decades, its economic integration project is still very much a work in progress, and could remain so for many years or even decades to come.

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The ASEAN Secretariat claims that the implementation of the AEC Blueprint 2015 — the community’s formal agenda — has been substantively achieved in many areas. In reality, the levels of integration vary greatly by sector. The only clear success ASEAN can claim is the reduction of tariffs among member countries. Since the implementation of the Common Effective Preferential Tariff agreement in 1990s, about 99 per cent of tariff lines between member countries have been reduced to zero.

Still, the free flow of goods among ASEAN member countries continues to be hindered by the use of non-tariff measures (NTMs). These may have adverse consequences on the sourcing decisions of firms and the structure of trade and related industries.

Countries such as Indonesia or Malaysia that employ active ‘industrial policy’ apply more NTMs. Car assemblers in Thailand, for example, have long complained about Malaysia’s restriction of the number of cars imported into Malaysia.

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While minimising non-tariff barriers is an action target in the AEC Blueprint, ASEAN has relied on a voluntary approach to reduce them — with very limited success. Under the voluntary approach, member countries can have an adverse incentive to under-report the barriers they are using. What’s more, there is no effective monitoring system to keep track of the changes of NTMs among member countries.

ASEAN has been negotiating services liberalisation since the creation of the ASEAN Framework Agreement on Services in 1996. The AEC Blueprint has established clear targets to remove all restrictions on trade in services by 2015. But some ASEAN countries, including Thailand, the Philippines and Indonesia, could not meet their targets by the deadline.

Critically, service liberalisation under ASEAN contains no commitment to address behind-the-border issues, such as interconnection for telecom services or access to ATMs for banking, which are crucial to the creation of competitive markets. The difference in laws and regulations among member countries is also problematic.

Service liberalisation under ASEAN in its current form would fail to create a single service market. Thailand, the Philippines and Indonesia, still could not meet the targets by the 2015 deadline. Indonesia and Thailand’s specific commitments under the latest offer contain many services that are inconsequential or even useless.

In terms of promoting cross-border movement of labour, ASEAN has achieved very little. From an economic development perspective, the opening up of unskilled labour markets through FTAs would be a useful policy option, given the relative abundance of unskilled labour in many ASEAN countries, but the AEC Blueprint attempts to facilitate only the mobility of skilled professionals, currently comprising just eight professions. The arrangement to facilitate the movement of these professionals is also problematic. In the case of Thailand, for example, the requirements imposed on ASEAN professionals are the same as those of the non-ASEAN countries.

To critical observers, ASEAN integration has so far produced very few tangible results. The Asia Trade Centre’s Deborah Elms concludes that ‘ASEAN officials shifted the rhetoric as the deadline loomed to argue instead that the AEC itself should be viewed as process and not a destination’. In September 2016, The Economist mockingly wrote that ‘[w]hen it comes to elevating form over substance, and confusing a proliferation of meetings and acronyms for a deepening of ties, ASEAN is the Zen master’.

The lack of momentum to deepen regional integration in ASEAN is largely a consequence of most member countries’ protectionist stances, perhaps with the sole exception of Singapore. Many ASEAN countries view one another as rivals in their pursuit of exporting to the global market or attracting foreign direct investment.

Domestic political conflicts, along with a lack of strong and stable government, have led political leaders in many ASEAN countries to look inward and lose their appetite for regional integration. Without confronting the core problems of its integration project squarely and urgently, ASEAN will not realise the AEC Blueprint vision of a single market and single production base.

ASEAN prides itself on being the ‘hub’ of bilateral FTAs in East Asia. The concept of ‘ASEAN centrality’ espoused in the group’s initiatives emphasises its role in facilitating economic integration in the region. But the economic integration among ASEAN countries has so far focused on creating a more attractive package for multinationals looking to operate in the region, rather than on creating stronger bonds between member economies.

When it comes to economic integration, ASEAN has to aim at achieving critical targets while ignoring trivial ones. In other words, ASEAN needs to be much more focused than it is now. Its current agenda is overly ambitious considering its limited resources.  The AEC Blueprint has established 17 core elements and set 176 priority actions, covering the free flow of goods and capital, movement of skilled labour, equitable development and protection of intellectual property rights, to name just a few.

A sharper focus would help ASEAN to deliver meaningful and tangible results without depriving member countries, especially less developed ones, of their limited resources. This requires ASEAN to return to the core missions of an FTA: reducing barriers to trade and facilitating cross-border trade in goods, services and the movement of labour and inputs to production.

Yet the real challenge for ASEAN is not economic but political. Full national sovereignty and economic integration are incompatible. The success of the European Union’s trade integration, for example, is based on pooled sovereignty.

The idea of ‘pooled sovereignty’ is not all-or-nothing in nature. When started, the EU was a comparatively modest project. It had few members and only one policy area for pooling sovereignty: a common market for coal and steel. Only gradually did it expand its membership and its mission.

Unless ASEAN countries are willing to increasingly pool their sovereignty and meet political challenges head on, the AEC project will go nowhere and ASEAN will be little more than a talking shop.

Somkiat Tangkitvanich is President of the Thailand Development Research Institute (TDRI). Saowaruj Rattanakhamfu is a Senior Research Fellow at TDRI.

This article summarises a paper prepared for the 2016 Pacific Trade and Development Conference in Australia.

 

When Facts don’t matter in America


March 13, 2017

When Facts don’t matter, Trump’s White House is the sole arbiter of truth.

by Paul Krugman@www.nytimes.com

Image result for Paul KrugmanDr. Paul Krugman-The Nobel Laureate in Economics

The U.S. economy added 10.3 million jobs during President Obama’s second term, or 214,000 a month. This brought the official unemployment rate below 5 percent, and a number of indicators suggested that by late last year we were fairly close to full employment. But Donald Trump insisted that the good news on jobs was “phony,” that America was actually suffering from mass unemployment.

Then came the first employment report of the Trump administration, which at 235,000 jobs added looked very much like a continuation of the previous trend. And the administration claimed credit: Job numbers, Mr. Trump’s press secretary declared, “may have been phony in the past, but it’s very real now.”

Image result for When Facts don't under TrumpTrump’s American Supporters are factually challenged

Reporters laughed — and should be ashamed of themselves for doing so. For it really wasn’t a joke. America is now governed by a president and party that fundamentally don’t accept the idea that there are objective facts. Instead, they want everyone to accept that reality is whatever they say it is.

So we’re just supposed to believe the president if he says, falsely, that his inauguration crowd was the biggest ever; if he claims, ludicrously, that millions of votes were cast illegally for his opponent; if he insists, with no evidence, that his predecessor tapped his phones.

And it’s not just about serving one man’s vanity. If you want to see how this attitude can hurt millions of people, consider the state of play on health care reform.

Obamacare has led to a sharp decline in the number of Americans without health insurance. You can argue that the decline should have been even sharper, that there may be troubles ahead, or that we should have done better. But the reality of the law’s achievement shouldn’t be in question, and you should worry about the consequences of Trumpcare, which would drastically weaken key provisions.

Republicans, however, are in denial about recent gains. The president of the Heritage Foundation dismisses the positive effects of the Affordable Care Act as “fake news.” In Louisville over the weekend, Vice President Mike Pence declared that “Obamacare has failed the people of Kentucky” — this in a state where the percentage of people without insurance fell from 16.6 to 7 percent when the law went into effect. And as for the likely impacts of Trumpcare — well, they literally don’t want to know.

When Congress is considering major legislation, it normally waits for the Congressional Budget Office to “score” the proposal — to estimate its effects on revenues, outlays and other key targets. The budget office isn’t always right, but it has a very good track record compared with other forecasters; even more important, it has always been scrupulous about avoiding partisanship, and therefore acts as an important check on politically motivated wishful thinking.

But Republicans rammed Trumpcare through key committees, literally in the dead of night, without waiting for the C.B.O. score — and they have been pre-emptively denouncing the budget office, which is likely to find that the bill would cause millions to lose health coverage.

The truth is that while the office got some things wrong about health reform, on the whole it did pretty well at projecting the effects of a major new bill — and far better than the people now attacking it, who predicted disasters that never happened. And whatever criticisms one may have of its forthcoming score, it will surely be better than the ludicrous claim of Tom Price, the secretary of health and human services, that “nobody will be worse off financially” as a result of a plan that drastically cuts subsidies and raises premiums for millions of Americans.

But this isn’t really about whose analyses of health policy are most likely to get it right. It’s about Trump and company attacking the legitimacy of anyone who might question their assertions.

The C.B.O., in other words, is in the same position as the news media, which Mr. Trump has declared “enemies of the people” — not, whatever he may say, because they get things wrong, but because they dare to challenge him on anything.

“Enemy of the people” is, of course, a phrase historically associated with Stalin and other tyrants. This is no accident. Mr. Trump isn’t a dictator — not yet, anyway — but he clearly has totalitarian instincts.

And much, perhaps most, of his party is happy to go along, accepting even the most bizarre conspiracy theories. For example, a huge majority of Republicans believe Mr. Trump’s basically insane charges about being wiretapped by President Obama.

So don’t make the mistake of dismissing the assault on the Congressional Budget Office as some kind of technical dispute. It’s part of a much bigger struggle, in which what’s really at stake is whether ignorance is strength, whether the man in the White House is the sole arbiter of truth.

Rethinking Labour Mobility


March 9, 2017

Rethinking Labour Mobility

by Harold James

http://www.project-syndicate.org

Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of the new book The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.

Image result for Labour Mobility A Social-Psychology or Security Issue

 

PRINCETON – The past year will be remembered as a period of revolt against what US President-elect Donald Trump likes to call “globalism.” Populist movements have targeted “experts” and “elites,” who are now asking themselves what they could have done differently to manage the forces of globalization and technological innovation.

The emerging consensus is that people and communities displaced by these forces should be compensated, perhaps even with an unconditional basic income. But that strategy has many hazards. People who are paid to do meaningless activities, or nothing at all, will likely become even more disengaged and alienated. Regions that are subsidized simply because they are losing out may demand more autonomy, and then grow resentful when conditions do not improve.

Thus, simple transfers are not enough. Humans are ingenious and adaptable, but only in some circumstances; so we must continue to search for viable opportunities that allow people to participate creatively and meaningfully in the economy. To that end, we should look to history, and study what happened to the “losers” during previous periods of rapid techno-globalization.

In the Industrial Revolution of the late eighteenth and early nineteenth centuries, technological innovation, especially in textile machinery, displaced skilled artisans and craft workers en masse, and left them deprived of any real safety net to cushion the blow. But, in retrospect, it is not obvious that governments could have done anything to compensate Silesian handloom weavers or rural Irish artisans. Although they were hard workers, their products were both inferior in quality and more expensive than what was being manufactured in the new factories.

Instead, many displaced workers emigrated – often long distances across oceans – to places where they could take on new forms of work, and even prosper. As the late Thomas K. McCraw’s brilliant book The Founders and Finance shows, America’s tradition of entrepreneurship is a testament to inventive migrants.

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In reality, freedom of movement for skilled labor across ASEAN remains a distant dream…There is little doubt that human capital development will be crucial to the ASEAN Economic Community’s feasibility. While globalization has made it easier for companies to fill positions by looking beyond ASEAN, continued reliance on such a strategy will be unsustainable.So what is stopping ASEAN governments from addressing this obvious obstacle to the economic community’s success?–http://www.cfoinnovation.com

To see the benefits of migration, we need look no further than Kallstadt, a town of small-scale farmers in southwest Germany where Friederich (Fred) Trump – Donald Trump’s grandfather – was born on March 14, 1869. He moved to the US in 1885 (his wife was also born in Kallstadt, and he married her there on a return visit in 1902). The father of the founder of the food giant Heinz (now the Kraft Heinz Company), Henry John Heinz, was born in Kallstadt as well, in 1811, and emigrated to Pennsylvania in the 1840s, to escape an agricultural crisis.

But just one century later, emigration was no longer an option for people whose economic activity had suddenly become obsolete, not least because most countries had imposed tougher barriers against migration. In the first half of the twentieth century, the most vulnerable producers were rural, small-scale farmers who could not compete with expanding food production elsewhere in the world.

This was especially true for European farmers, who responded to their sudden impoverishment and bankruptcy with the same sort of populist politics that featured so prominently in 2016. They formed and voted for radical political movements that blended economic and social utopianism with increasingly militant nationalism. These movements against globalization, which culminated in World War II, helped to destroy the contemporary international order.

In the aftermath of World War II, politicians in industrial countries found a different solution to the problem of displaced farmers: they subsidized agriculture, supported prices, and sheltered the sector from international trade.

In the US – which, tellingly, avoided the nationalist surge – this effort had already been embodied in the 1933 Agricultural Adjustment Act. In Europe, price maintenance and supranational protectionism formed the political basis for European integration in the European Economic Community, which would become the foundation for the European Union. To this day, the EU budget is overwhelmingly devoted to the Common Agricultural Policy, the system of subsidies and other measures to support the sector.

Agricultural protectionism worked well for two reasons. First, US and European agricultural products in this new regime were not fundamentally worthless, as handmade, technically inferior cloth was during the Industrial Revolution. American and European producers still fed the populations of rich countries, even if they did so at a higher cost than was economically necessary. Second, and more important, workers were able to change occupations, and many moved from the countryside to fill attractive, high-paying jobs in urban manufacturing and services.

Of course, today the threat posed by globalization extends precisely to these “new” jobs. Europe and the US have long attempted to support “losers” in manufacturing and services through various small-scale programs that do not, in fact, benefit many workers. For example, the US Trade Adjustment Assistance program, which was augmented under the 2009 Trade and Globalization Adjustment Assistance Act, and the EU’s Globalization Adjustment Fund are small, complex, and expensive measures to compensate displaced workers.

As a result, many of the dilemmas that confronted nineteenth-century policymakers are confronting their counterparts today. No one can deny that it is a waste of human and natural resources to prop up occupations that create unwanted or obsolete goods. Earlier generations had emigration as a release valve, and many people today, especially in Eastern and Southern Europe, are responding to poor local economic conditions in a similar fashion.

Internal migration into dynamic metropolitan hubs is still a possibility, especially for young people. But this kind of mobility – which is increasing in modern Europe, but not in the US – requires skills and initiative. In today’s world, workers must learn to embrace adaptability and flexibility, rather than succumb to resentment and misery.

The most important form of mobility is not physical; it is social or psychological. Unfortunately, the US and most other industrialized countries, with their stultifying and rigid education systems, have failed to prepare people for this reality.

 

NY Times Editorial Board reacts to President Donald J. Trump’s Address to US Congress


March 1, 2017

NY Times Editorial Board reacts to President Donald J. Trump’s Address to US Congress

If there was a unifying theme to President Trump’s campaign, it was his pledge to serve America’s “forgotten men and women,” working people forsaken by the economy and Washington.

In his speech Tuesday night to a joint session of Congress, Mr. Trump presented himself as having made an aggressive start at championing the cause of working people, and promised a new era of rising wages, bustling factories and coal mines, sparkling air and water, and cheaper and better health care, all behind a “great great wall.” He told a few whoppers, but largely kept his eyes riveted to his teleprompter and his delivery subdued. He even opened his speech with a long-overdue condemnation of hate “in all of its very ugly forms.”

We heard again the same sorts of gauzy promises and assertions of a future Edenic America, a sort of Trumptopia, that characterized his campaign. He didn’t explain how he would get it all done, much less pay for any of it; indeed, it sounded at times as though he were still running for the job, rather than confronted with actually doing it. Across his first few weeks in office, Mr. Trump has shown little sign of delivering anything for working Americans beyond whatever satisfaction they may derive from watching him bait the Washington establishment and attack the reality-based media.

Mr. Trump likes to describe his chaotic first month as “promises kept.” Really? Remember how he promised during the campaign to “immediately” fix Obamacare and deliver “great health care for a fraction of the price”? He hasn’t even put a plan on the table. On Monday, he complained to the nation’s governors that “nobody knew” replacing Obamacare “could be so complicated.”

As in the campaign, Mr. Trump also promised Tuesday night to accelerate economic growth with a $1 trillion infrastructure plan. “Crumbling infrastructure,” he said, “will be replaced with new roads, bridges, tunnels, airports and railways, gleaming across our very, very beautiful land.” Sounds great. What’s the plan? How will we pay for it? He wasn’t saying. He also renewed his promise of “massive tax relief” for the middle class — but once again there are no details in sight.

It is very early yet in this presidency — though it sure doesn’t feel that way — and Mr. Trump may yet keep some of his proliferating commitments to Americans.

But the plans he has put forward so far, and the few actions he has taken, do not bode well. He proposes to cut the health, disability and job-training programs that working people, as well as the poor, rely upon. Mr. Trump’s first big initiative was a draconian immigration ban, now mired in court challenges, that’s caused problems for businesses from Silicon Valley to Wisconsin. Mr. Trump proudly noted Tuesday that one of the administration’s first orders froze federal hiring, but he seems unaware that those jobs aren’t only in Washington, they’re in communities across the nation.

Mr. Trump has successfully started a national assault on unauthorized immigrants — and it is already tearing families apart and disrupting businesses, and is likely to cost billions without improving the fortunes of the working poor. On Tuesday he dangled the possibility of supporting some form of “merit based” immigration reform that would make struggling families “very very happy indeed.”

Again, that last bit sounds really nice. But it’s hard to escape the conclusion that, so far, the only working people the president has really delivered for are members of his own family, who are using his presidency as a brand-building opportunity, and former campaign officials, who are cashing in as lobbyists in Washington.

Yet Mr. Trump has certainly not forgotten America’s “forgotten men and women.” The White House is assiduously stoking their fears, grievances and prejudices, and selling photo-ops as accomplishments in order to portray an undisciplined, unfocused president as “President Action, President Impact.”

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Steve Bannon–The Strategic Thinker and Ideologue in the Trump White House

Meanwhile, he and his aides have counted on the protests of Americans outraged by his antics to create the appearance of an activist presidency. The cable shows are always on in the West Wing, where Stephen Bannon loves seeing split-screen television images with Mr. Trump meeting business executives on one side and opposition protest rallies on the other.

Mr. Trump closed his address to Congress by recalling the historic accomplishments of “the country’s builders and artists and inventors” and imagining what Americans can accomplish today. It’s time for the American President to do his job as well.

A version of this editorial appears in print on March 1, 2017, on Page A30 of the New York edition with the headline: Visions of Trumptopia.

Read Thomas Friedman’s article as well:

The Anatomy of Populist Economics


February 27, 2017

The Anatomy of Populist Economics

by Economist Brigitte Granville*

http://www.project-syndicate.org

Today’s populist movements are all following a similar economic prescription, and governments in Hungary, Poland, and the US are giving the world an early dose of what the future may hold. Will voters swallow the medicine, or will they soon start seeking a second opinion

For at least the past year, populism has been wreaking havoc on Western democracies. Populist forces – parties, leaders, and ideas – underpinned the “Leave” campaign’s victory in the United Kingdom’s Brexit referendum and Donald Trump’s election as President of the United States. Now, populism lurks ominously in the background of the Netherlands’ general election in March and the French presidential election in April and May.

But, despite populism’s seeming ubiquity, it is a hard concept to pin down. Populists are often intolerant of outsiders and those who are different; and yet Geert Wilders, the far-right Dutch populist leader, is a firm believer in gay rights. In the US, Trump’s presidential campaign was described as an anti-elite movement; and yet his administration is already practically a subsidiary of Goldman Sachs.

While today’s populist resurgence comes from the nationalist right, some of the leading populist exponents in recent decades – such as Venezuela’s late president, Hugo Chávez – were firmly on the left. What they share is a zero-sum view of the world, which necessitates the creation of scapegoats who can be blamed for all problems. Moreover, because populist leaders claim to embody the uniform will of a mythical “people,” they consider democracy to be a means to power, rather than a desirable end in itself.

Image result for populism

But populists have more in common than an obsession with cultural boundaries and political borders. They also share a recipe for economic governance, one that Project Syndicate commentators have been tracking since long before today’s brand of populism began dominating the world’s headlines. Guided by their insights, we can begin to understand the origins of today’s populist resurgence, and what is in store for Western countries where its avatars come to power.

Diagnosing the Problem

Given populism’s many faces, is it really possible to identify a root cause? For Warwick University’s Robert Skidelsky, it is no coincidence that the two major political upheavals of 2016 – the Brexiteers’ success in last June’s referendum and Trump’s election victory – occurred in “the two countries that most fervently embraced neoliberal economics.” The US and the UK’s economic model over the past few decades, Skidelsky observes, has allowed for “obscenely lavish rewards for a few, high levels of unemployment and underemployment, and curtailment of the state’s role in welfare provision.” And this widening inequality, he writes, “strips away the democratic veil that hides from the majority of citizens the true workings of power.”

But Gavekal Dragonomics Chief Economist Anatole Kaletsky sees another dynamic at work, and offers “several reasons to question the link between populist politics and economic distress.” For starters, he points out that “most populist voters are neither poor nor unemployed; they are not victims of globalization, immigration, and free trade.” Having analyzed Brexit exit polls and voter-survey responses, Kaletsky concludes that “cultural and ethnic attitudes, not direct economic motivations, are the real distinguishing features of anti-globalization voting.”

At first blush, these arguments may seem incompatible; but their disagreement is really only between ultimate and proximate causes. For Skidelsky, “It is when the rewards of economic progress accrue mainly to the already wealthy that the disjunction between minority and majority cultural values becomes seriously destabilizing.” Likewise, for Kaletsky, “The main relevance of economics is that the 2008 financial crisis created conditions for a political backlash by older, more conservative voters, who have been losing the cultural battles over race, gender, and social identity.”

Harvard political philosopher Michael Sandel warns against focusing exclusively on “the bigotry in populist protest” or viewing it “only in economic terms.” The fundamental issue, he argues, is “that the upheavals of 2016 stemmed from the establishment’s inability to address – or even adequately recognize – genuine grievances.” And, because these grievances “are about social esteem, not only about wages and jobs,” they are difficult to disentangle “from the intolerant aspects of populist protest” – namely, anti-immigrant sentiments.

Nobel laureate economist Edmund Phelps also links populist voters’ anger to their loss of dignity in the larger political economy. As the share of US employment in manufacturing has steadily declined, blue-collar workers, Phelps notes. “have lost the opportunity to do meaningful work, and to feel a sense of agency.” In other words, “losing their ‘good jobs’” meant losing “the central source of meaning in their lives.” And while many of the lost manufacturing jobs were replaced with new jobs in new sectors, as Oxford University historian Margaret MacMillan cautions, nuanced economic arguments “cannot counter the unhappiness of people who feel marginalized, undervalued, and scorned.”

A Democratic Disease

Princeton University’s Jan-Werner Mueller, who published a highly regarded book about populism last year, has identified such “feelings of dispossession and disenfranchisement” as “fertile ground” in which populist politicians can sow seeds of resentment. And, in an earlier commentary that long predated the current news cycle, Mueller explained that, “Populism cannot be understood at the level of policies; rather, it is a particular way of imagining politics.” Above all, he observes, the populist imagination is inherently divisive: “It pits the innocent, always hard-working people against both a corrupt elite (who do not really work, other than to further their own interests) and those on the very bottom of society (who also do not work and live off others).”

In its more virulent forms, populism can be thought of as being akin to an autoimmune disease, whereby democracy gives rise to forces that attack it. Andrés Velasco, a former finance minister of Chile, laments that the nature of representative democracy can create an impression that politicians are “distant and untrustworthy.” The “rhetoric of modern democracy,” he writes, “emphasizes closeness to voters and their concerns.” But elected representatives cannot spend all of their time interacting with constituents when they have a duty to govern. When this dissonance between rhetoric and reality becomes “too glaring,” Velasco notes, “political leaders’ credibility suffers.”

This loss of trust leads disaffected citizens to put a premium on perceived authenticity. So, “although populist policies reduce overall economic welfare,” Velasco notes, “rational voters choose them because they are the price of distinguishing between different types of politicians.” In fact, such a willingness to suffer further economic pain in order to avenge elite betrayals and strike back at scapegoats may be a defining element of today’s populist resurgence.

Populist leaders in Hungary and Poland, who are currently advancing their own brand of “illiberal democracy,” seem to have staked their governments’ future on this presumption. As Central European University’s Maciej Kisilowski points out, it may not even matter that “the high economic costs of illiberal democracy are already apparent.” These countries’ electorates, Kisilowski surmises, “may regard economic stagnation as an acceptable price to pay for what they want most: a more familiar world where the state guarantees the dominant in-group’s sense of belonging and dignity, at the expense of ‘others.’”

Sławomir Sierakowski of the Institute for Advanced Study in Warsaw provides further support for this point. When Jarosław Kaczyński’s Law and Justice Party (PiS) returned to power in Poland a year ago, many assumed that it would quickly fail. Instead, it has succeeded, because Kaczyński mastered the politics of “two issues near and dear to voters: social transfers and immigration,” Sierakowski explains. “As long as he controls these two bastions of voter sentiment, he is safe.” Of course, given the PiS government’s politicization of the courts, the civil service, and the press, the same cannot be said for Poland’s democratic institutions.

A Populist Placebo

But how long can populist governments sustain generous transfers in the absence of strong economic growth? The answer will depend on how long their supporters remain convinced that they can have their cake and eat it – which is precisely what former Brexit leader and current British Foreign Minister Boris Johnson promised to Leave voters. Indeed, as Columbia University’s Jeffrey Sachs observed just after the Brexit vote, “Working-class ‘Leave’ voters reasoned that most or all of the income losses would in any event be borne by the rich, and especially the despised bankers of the City of London.”

Given the UK economy’s unexpected resilience last year, the populists probably feel vindicated. But, though most economists misjudged “the immediate impact that the United Kingdom’s [vote] would have on its economy,” writes Chatham House’s Paola Subacchi, “a gloomy long-term prognosis is probably correct,” given British leaders’ desire for a complete break from the European Union’s single market and customs union.

Such delayed effects can create an alibi for unsustainable policies, which, according to Velasco, is precisely “how economic populism works.” For example, the approach that Trump seems likely to take – tax cuts, growth-stimulating measures, and protectionism, with little thought given to inflation or public debt – is untenable, and will ultimately fail. But, as Velasco puts it, “‘Ultimately’ can be a very long time.” And that can give populist governments more staying power than many observers assume. “Populist policies are called that because they are popular,” he notes. “And they are popular because they work – at least for a while.”

In the meantime, populist leaders can pursue policies favored not only by their base, but also by many of their opponents. In the whirlwind of his first days in office, for example, Trump fulfilled his campaign promise to abandon the 12-country Trans-Pacific Partnership (TPP). This, Princeton University’s Ashoka Mody believes, was actually a welcome move, given that “international trade agreements, propped up by powerful interests, have become increasingly intrusive.” Similarly, before Trump’s election, Harvard University economist Dani Rodrik called for a rebalancing “between national autonomy and globalization.” In Rodrik’s view, it should go without saying that “the requirements of liberal democracy” must come before “those of international trade and investment.”

Trump’s promise of corporate tax reform has also wide appeal beyond his electoral base. For Harvard’s Martin Feldstein, who chaired President Ronald Reagan’s Council of Economic Advisers, current legislative proposals to overhaul the US’s outdated tax system could “have a highly favorable impact on business investment, raising productivity and overall economic growth.” Assuming that Trump, working with congressional Republicans, can strike the right policy balance, he will have bought himself some time with the business community.

Princeton University economic historian Harold James makes a related point, arguing that “the economics of US populism will not necessarily fail, at least not immediately,” owing to the US’s “uniquely resilient” position in the global economy. “Because [the US] has historically been the global safe haven in times of economic uncertainty,” James notes, “it may be less affected than other countries by political unpredictability.”

A Turn for the Worse

But even if Trump can extend his honeymoon, James does not discount the possibility that “today’s contagious populism will create the conditions for its own destruction.” One way that could happen, argues Benjamin Cohen of the University of California, Santa Barbara, is if the US loses its “exorbitant privilege” as the issuer of the dominant international reserve currency. If Trump “pursues his protectionist promise to put ‘America first,’” Cohen writes, “investors and central banks could gradually be impelled to find alternative reserves for their spare billions.”

Trump’s version of economic populism could also face a reckoning if it results in a new boom-bust cycle – one that could end in a period of stagflation around the 2018 US congressional elections. Just before the election, Feldstein warned that “overpriced assets are fostering an increasingly risky environment.” Given that the US economy is already at full employment, with an inflation rate near 2%, Trump’s planned fiscal stimulus could push it into overdrive, and force the Federal Reserve to raise the federal funds rate.

Such a scenario would certainly worsen the plight of Trump’s constituency of white working-class voters in America’s former manufacturing heartland. But so, too, would his trade proposals, which could easily precipitate trade wars with China, Mexico, and other trading partners. Trump has told displaced blue-collar workers to blame trade deals and competition from imports for the loss of their jobs. But, “with productivity gains exceeding demand growth” worldwide, Nobel laureate economist Joseph Stiglitz points out, America “would have faced deindustrialization even without freer trade.”

Given this, Trump’s prescription of trade protectionism, Stiglitz says, will only “make all Americans poorer.” One reason, explains former World Bank Chief Economist Anne Krueger, is that imports create and sustain jobs, too. The irony of Trump’s proposed import tariffs is that they threaten American exporters. Many export-industry jobs, Krueger points out, exist because inexpensive imports enable American manufactures to compete domestically and abroad; and “exporting to the US gives foreigners more income with which to buy imports from the US and other countries.”

Simon Johnson of MIT also fears such a lose-lose scenario. If Trump starts taxing imports, Johnson argues, “the cost per job will be high: all imports will become more expensive, and this increase in the price level will filter through to the cost of everything Americans buy.”

Botching the Operation

Other Project Syndicate commentators have pinpointed a deeper flaw in populist economics, apart from any specific policy proposal: recklessness. Populists often overplay their hand by flouting legal, economic, or political conventions, or by exerting inappropriate influence in markets to try to funnel benefits to their supporters. In fact, according to a classic study of economic populism in Latin America by Sebastián Edwards of UCLA and the late Rüdiger Dornbusch of MIT, it is standard populist practice to show “no concern for the existence of fiscal and foreign exchange constraints” in the pursuit of faster growth and redistribution.

New York University’s Nouriel Roubini suspects that Trump may be similarly tempted to interfere inappropriately in currency markets. As his stimulus measures push up the value of the dollar, Roubini says, “Trump could unilaterally intervene to weaken the dollar, or impose capital controls to limit dollar-strengthening capital inflows.” But if Trump is too reckless with his “damage-control methods,” already-wary markets will succumb to “full-blown panic.”

Mody, for his part, sees serious risks in Trump’s interference in corporations’ practices and business decisions. By bullying companies over Twitter to keep jobs based in the US (or to punish them for dropping his daughter Ivanka’s clothing line), Trump has already begun to undermine “the norms and institutions that govern markets.” And in Phelps’s view, Trump’s Twitter interventions, combined with his deregulation agenda, risk entrenching corporatism at the expense of the innovation and competition necessary to sustain economic dynamism and income growth.

The Search for a Cure

With populist movements leaving political establishments reeling, could a positive counter-populist economic policy agenda soon emerge? The Nobel laureate economist Michael Spence sees an opportunity in disaffected voters’ rejection of an insufficiently inclusive economic-growth model. “With previous presumptions, biases, and taboos having been erased,” he writes, “it may be possible to create something better.” Likewise, for Stiglitz, Trumpism’s silver lining is that its opponents are experiencing “a new sense of solidarity over core values such as tolerance and equality, sustained by awareness of the bigotry and misogyny, whether hidden or open, that Trump and his team embody.”

An implicit argument running through many Project Syndicate commentaries is that the only prophylactic against economist populism is more aggressive redistribution. As Rodrik puts it, populism – and poor governance generally – emerges when elites prove unwilling to “make adjustments to ensure that everyone does indeed benefit” from the existing economic model.

Behind recent, large-scale rejections of the “system” is a widely shared sense among certain groups of voters that the “establishment” has subordinated citizens’ interests to cosmopolitan goals such as globalization, immigration, and cultural diversity. Most commentators agree that economic shocks such as the Great Recession or the eurozone sovereign-debt crisis are neither necessary nor sufficient to explain the rise of populism. Rather, populism is more a response to prolonged economic malaise, deteriorating living standards, declining trust in established institutions, and a common perception that incumbent leaders have feathered their nests at the people’s expense.

These are complex economic and political problems for which populism offers fancifully simple solutions. Efforts by the media to move the populist mind have proved counter-productive, and will likely continue to do so.Those opposed to the populist cure will have to come up with an equally powerful alternative, or look on helplessly as economic uncertainty and despair overwhelm the patient.

Jeffery Sachs on his new book, Building the New American Economy


February 27, 2017

Jeffery Sachs on his new book, Building the New American Economy–Smart, Fair, & Sustainable

 

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Money is politics is a serious problem in America today–Jeffery Sachs

Professor Jeffery Sachs discusses his new book, Building the New American Economy– Smart, Fair, & Sustainable. I agree with this Columbia University don that America needs a make over by a progressive President like a President Bernie Sanders. Unfortunately, Americans have to learn to live with a Republican President Donald J. Trump and a Republican controlled  House of Representatives and the Senate. To these politicians, sustainable development is a Grecian nightmare.

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Trust (s0cial capital) is diminishing in the Land of the Free and Home of the Brave. The last decade has been 10 years of greed and widening income inequality in American polity. Politics ought to return to the politics of IDEAS, says Sachs. Listen him and decide what you think of his book.  –Din Merican

Don’t be discouraged. Just click and you can watch it directly on youtube.com