Trade, Facts, and Politics


December 7, 2016

http://krugman.blogs.nytimes.com/2016/12/05/trade-facts-and-politics/?_r=0

Trade, Facts, and Politics

“Part of the whole Trump phenomenon involves white working class voters rallying around a candidate who promised to bring back the coal and industrial jobs of the past, and lashing out at anyone who refuses to make similar promises. Yet the promise was and is fraudulent. If trying to get the analysis right is elitist, we’re in very big trouble — and perhaps we are.”–Nobel Laureate Dr. Paul Krugman

by Paul Krugman

I see that Tim Duy is angry at me again. The occasion is rather odd: I produced a little paper on trade and jobs, which I explicitly labeled “wonkish”; the point of the paper was, as I said, to reconcile what seemed to be conflicting assessments of the impacts of trade on overall manufacturing employment.

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But Duy is mad, because “dry statistics on trade aren’t working to counter Trump.” Um, that wasn’t the point of the exercise. This wasn’t a political manifesto, and never claimed to be. Nor was it a defense of conventional views on trade. It was about what the data say about a particular question. Are we not allowed to do such things in the age of Trump?

Actually, maybe not. Part of the whole Trump phenomenon involves white working class voters rallying around a candidate who promised to bring back the coal and industrial jobs of the past, and lashing out at anyone who refuses to make similar promises. Yet the promise was and is fraudulent. If trying to get the analysis right is elitist, we’re in very big trouble — and perhaps we are.

So what would a political manifesto aimed at winning over these voters look like? You could promise to make their lives better in ways that don’t involve bringing back the old plants and mines — which, you know, Obama did with health reform and Hillary would have done with family policies and more. But that apparently isn’t an acceptable answer.

Can we promise new, different jobs? Job creation under Obama has been pretty good, but it hasn’t offered blue-collar jobs in the same places where the old industrial jobs have eroded.

So maybe the answer is regional policies, to promote employment in declining regions? There is certainly a case in principle for doing this, since the costs of uprooting workers and families are larger than economists like to imagine. I would say, however, that the track record of regional support policies in other countries, which spend far more on such things than we are likely to, is pretty poor. For example, massive aid to the former East Germany hasn’t prevented a large decline in population, much bigger than the population decline in Appalachia over the same period.

And I have to admit to a strong suspicion that proposals for regional policies that aim to induce service industries to relocate to the Rust Belt would not be well received, would in fact be attacked as elitist. People want those manufacturing jobs back, not something different. And it’s snooty and disrespectful to say that this can’t be done, even though it’s the truth.

So I really don’t know the answer. But back to the starting point: when I analyze the effects of trade on manufacturing employment, the goal is to understand the effects of trade on manufacturing employment — not to win over voters. No, dry statistics aren’t good for political campaigns; but that’s no reason to ban statistics.

Killing the Mekong, Dam by Dam


November 30, 2016

Killing the Mekong, Dam by Dam

by Tom Fawthrop

Image Credit: Tom Fawthrop

SIPHANDONE, LAOS — Explorers, travelers, and traders have long been enchanted by the magical vistas and extraordinary biodiversity of the Mekong, especially here.

Swirling rapids roar through the surrounding forest to unleash the magnificent Khone Phapheng Falls in southern Laos. The surrounding myriad islands and forested islets, dotted among the tranquil waterways and braided channels of the Mekong, inspire awe and wonder. This is Siphandone (Four Thousand Islands) district of Southern Laos, nestled alongside the Cambodian border.

However, the serenity of Siphandone has recently been rudely disrupted by the dynamite-blasting of rocks, shattering the tranquil reverie of this ecotourism paradise.

Malaysia’s Mega-First and the Don Sahong Dam

The ugly intrusion of earth-moving trucks in this picturesque landscape has accompanied the launching of the Don Sahong dam, a joint venture of Malaysian company Mega-First (MFCB) and the government of Laos, in January 2016. The dam has gone ahead without approval from the Mekong River Commission and in defiance of wide-ranging protests from regional NGOs and downstream countries Cambodia and Vietnam.

In 2012 the bitterly contested first dam on the Lower Mekong, the Xayaburi dam, a $3.8 billion project based on Thai investment and controlled by Bangkok engineering company Ch.Karnchang, began its controversial construction.

According to scientists, both dams pose a major threat to fish migration and food security.

Chhith Sam Ath the Cambodian Director of the World Wide Fund for Nature (WWF), told The Diplomat, “The Don Sahong Dam is an ecological time bomb that threatens the food security of 60 million people living in Mekong basin. The dam will have disastrous impacts on the entire river ecosystem all the way to the delta in Vietnam.”

The Lao government plans to build nine dams on the mainstream Mekong, and hundreds more on other rivers and tributaries, claiming that this is the only path to development for one of the region’s poorest countries.

Just across the river from the Don Sahong dam site, on the Cambodian side of the Mekong, ecotourists gather at the Preah Romkel commune. This correspondent witnessed tourists poised with their cameras, trying to catch a glimpse of the three remaining Irrawaddy Dolphins clinging onto their fragile home despite being under daily siege from the dam-builders. This wetlands zone has been a popular destination for ecotourism in both Laos and Cambodia, but WWF warns that damming the Mekong will soon drive all the remaining dolphins to extinction.

The Malaysian dam developers and the Lao Energy Ministry have airily dismissed all the protests, claiming that their fish mitigation engineering – the expansion and widening of two other channels – can fix the problem.

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Irrawaddy or Mekong River Dolphin by Tammy Yee (pic above)

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Source: Google images

The future site of the dam across the Sahong Channel is recognized by fishery experts as the only one out of seven braided channels of the Mekong that is deep enough and wide enough for large fish to migrate, providing effective fish passage around the rapids, rocks, and waterfalls year round. Now the dam construction has diverted all the water from the channel, and it will permanently block this natural fish migration route and passageway.

The Malaysian dam developers and the Lao Energy Ministry have airily dismissed all the protests, claiming that their fish mitigation engineering – the expansion and widening of two other channels – can fix the problem.

The Xayaburi dam also claims that its “fish-friendly turbines,” fish ladders, and locks can protect at least 28 species of fish that have been targeted for special attention by Poyry Energy the Swiss-based company hired to supervise the engineering and fish mitigation.

However the Poyry presentation and research by fish consultants Fishtek shows there are at least 139 fish species that would be blocked from swimming past the dam.

Fish mitigation on these two dams may look impressive in presentation videos, but Dr. Ian Baird, who has published many studies on Mekong fisheries, notes that “this is a high risk experiment, as these sort of mitigation measures have never been attempted before on tropical rivers.”

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The Mekong Crisis: When Ecology and Economy Suffer in Tandem

The mighty Mekong, flowing for 4,630 km through the heart of Southeast Asia, is in deep crisis. The delta in Vietnam is both shrinking and sinking.

The loss of nutrient-rich sediment is wrecking havoc on the delta region. All large dams trap sediment and deprive the downstream areas of vital nutrients. Vietnam is suffering from huge sediment loss, running at 50 percent less than the regular flow. Rampant sand-mining in Cambodia and Vietnam has also aggravated the delta’s acute sediment shortage.

The miraculous but fragile ecosystem that connects the Four Thousand Islands in Laos, Tonle Sap in Cambodia, and the delta in Vietnam is directly threatened by these two dams – the Don Sahong and the Xayaburi (in addition to all the damage done by six Chinese dams upstream from Laos). Now a third dam at Pak Beng has been announced by the Lao government.

A new WWF report has drawn attention to how the dramatic decline in the health of the Mekong is not only an ecological disaster, but also a serious threat to the economy of the region. With a fresh perspective on how ecology and economy are intimately linked together, the report reminds all stakeholders, “Economic growth in the Greater Mekong region depends on the Mekong River, but unsustainable and uncoordinated development is pushing the river system to the brink.”

WWF’s lead coordinator for Water and Energy Security in the Greater Mekong, Marc  Goichot, sees the delta as crucial to Vietnam’s economic future. “It produces 50 percent of the country’s staple food crops and 90 percent of its rice exports. It is one of the most productive and densely populated areas of Vietnam, home to 18 million people. Vietnam cannot lose the delta.”

But right now Vietnam is losing it. The delta is shrinking and unless there is a major policy turnaround on the Mekong, scientists in Can Tho have warned that 27 percent of its GDP, furnished by the delta, could evaporate during the next 20 years.

The strong momentum toward damming the Mekong has been greatly assisted by the widely held perception that dams are a reliable source of energy, producing great economic benefits.

The Mekong River Commission, the World Bank, and USAID have promoted dam-building with this approach, billed as “Sustainable Hydropower.”

The prevailing assumption has been that trade-offs, including negative environmental impacts, are inevitable, but we should not worry too much because improved environmental impact assessments (EIAs) and effective mitigation would provide adequate safeguards to protect ecosystems. It is only recently that researchers have been submitting these assumptions to closer scrutiny.

The credibility of this narrative is increasingly being challenged. Dr. Philip Hirsch a Mekong specialist, concluded after decades of inspecting dams that “some hydro-power impacts can simply not be mitigated – only compensated. And compensation systematically falls short.”

Most fisheries experts in the region familiar with the Sahong and Xayaburi dam projects consider that the mitigation experiment is a risky venture into uncharted waters and cannot be relied on to protect fisheries and the ecosystem.

Whereas the apparent benefits of hydropower can easily be quantified in terms of electricity, the financial losses inflicted by dams have been consistently underestimated or ignored by economists and governments.

The combined fisheries assets for the MRC countries are now valued at $17 billion and vital to the food security of tens of millions.

On the other side of the ledger, energy from 11 scheduled dams may yield economic benefits valued at $33.4 billion according to an international study on hydropower impacts on the Mekong based at Mae Fa Luang University in Chiang Rai.

But set against losses from a denuded river system and huge losses of fisheries, sediment, agricultural produce, and livelihoods, this same study predicts a loss of $66.2 billion, resulting in an overall negative impact of $21.8 billion if all 11 dam projects go ahead.

According to one of the three authors, Dr. Apisom Intralawan, “hydropower benefits have been over-stated in these figures (2015) and based on current economic data we are about to revise them.”

Hirsch confirms that “many studies show that the real costs of hydropower outweigh the benefits but the projects still go ahead.”

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Can The Mekong Survive?

Wetlands ecology specialist  Nguyen Huu Thien, a Vietnamese scientist based in the delta’s capital Can Tho, concluded The sure thing we know, if the delta cannot support its population of 18 million, then people will have to migrate – migrate everywhere. The dams are sowing the seeds of social instability in the region.”

The only way forward, says the Vietnamese Director of Hanoi’s Institute of Economics, Tran Ding Thien, is for Mekong countries to move beyond what he calls “the small-pond mentality.”

That seems unlikely at the moment. In Laos, Daovong Phonekeo, director general of Laos’ Department of Energy Policy and Planning, told Voice of America: “For the development of the Mekong River, we don’t need consensus!”

It is true that the 1995 Mekong Agreement does not provide for any veto on controversial dam projects, but it does enshrine principles of international river cooperation and good water governance that are undermined by the Lao government’s penchant for unilateralism.

Stuart Orr, WWF’s leader for Water Resources Practice, observes that “Water underpins our agricultural systems, our energy production, manufacturing, ecosystems, food security, and our wellbeing as humans. So if economic growth is to continue better river management is called for, that respects the limits of the ecosystem.”

Can the once mighty Mekong alter its currently blighted course of unregulated development, and this alarming rate of depletion of its natural resources?

“One step is that before we build any more dams, new green energy technologies need to be explored,” argues Hirsch. “It would be a tragedy to see the world’s greatest inland fishery destroyed for lack of imagination in applying cost-effective innovative solutions”

There also needs to be a new river-wide consensus that ultimately will have to include China.

Tran decries this small-minded approach, which clings to the “little pond of sovereignty” and cannot grasp the bigger picture of sharing water resources and respecting the whole river.

In this perspective of international scientific cooperation the Mekong should not belong to any one nation. As Tran, speaking at Mekong conference held in Can Tho in April, declared:

“If the Mekong is turned into a series of ponds and reservoirs, it is a loss not only for the region it is a loss for the world. The water that fuels the dams belongs to us all. We need to create an International Mekong Foundation and protect it.”

Tom Fawthrop is a freelance  journalist and film-maker based in Southeast Asia.

Killing the Mekong, Dam by Dam

5 ways to really ruin an economy


November 29,2016

After Brexit: 5 ways to really ruin an economy–Any resemblance to the Malaysian situation is purely coincidental

https://intheblack.com/articles/2016/08/08/5-ways-to-really-ruin-an-economy?utm_source=Taboola&utm_medium=cpc&utm_content=3&utm_campaign=KCtrial

By Jason Murphy

 

The UK’s exit from the European Union may slow European growth over the next two years – but to truly and deeply wound an economy requires more dramatic strategies.

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No-one yet knows what will be the full economic impact of Brexit, the surprise British vote to leave the European Union. The British pound quickly fell by approximately 10 per cent, and share and bond prices dropped too. It’s less clear what will happen to the “real economy” – production, consumption and jobs. Whatever happens to the UK, though, should be kept in perspective. Even if the UK economy contracts by a percentage point or two, it will be a long way from the worst economic disasters of recent years.

To produce true economic disaster, you need to do something more misguided than deciding to leave an economic bloc. Here are five ways to really ruin an economy.

Price controls – Venezuela

To the late Venezuelan President Hugo Chavez, inflation looked easy to solve: issue a law that made it a crime to sell at high prices.Introducing the 2011 Law for Fair Costs and Prices, Chavez spoke about tortillas – priced at B7.50 at government supermarkets, they sold for up to B40 at private stalls. This could not stand – the price control law was “to advance the struggle against the injustices of capitalism,” Chavez said.Venezuela had a history of price controls. For a time a litre of petrol, for example, cost just US$0.01 under subsidy (which, not surprisingly helped spark a boom in smuggling fuel out of Venezuela).

The Law for Fair Costs and Prices didn’t use subsidies. It lacked anything more than government say-so. Shortages of food and other basic supermarket goods spread, black markets thrived, riots followed.

Neither the death of Chavez nor the collapse in oil prices that once made Venezuela viable has put an end to the policies. In May 2016, CNN reported that the country was not just running out of food, medicine and electricity but even lacked toilet paper.

According to the World Bank, 2016 will be Venezuela’s third consecutive year of shrinking GDP, and 2017 is forecast to be its fourth.

Debt – Greece

Greece’s problems were that it was allowed to build debt for too long, and that it was unable to adjust when it needed to do so. It joined the European Economic Community (later the European Union) in 1981, adopted the euro as its currency, and for years funded growing budget deficits at low rates as a member of the eurozone. The deficits pushed up Greek government debt; by 2010 it was reported at 120 percent of GDP, double the supposed Eurozone limit. But the real level of debt, audits found, was almost 150 per cent.

Analysts and foreign officials began to ask questions that ought to have been asked earlier. Greece’s annual government fiscal deficit – the gap between spending and revenue – was revealed to be larger than official statistics were letting on. It was by then in fact one of the highest in the world.

Such a situation would normally trigger a currency devaluation. As an EU member, however, Greece could not devalue – a problem which made its situation far worse. The EU eventually offered bailout funds in return for a series of 13 increasingly severe austerity packages. Gross domestic product, which reached US$354 billion in 2008, dropped to US$195 billion by 2015 and fell again in early 2016, according to World Bank reports.

The Greek unemployment rate – which was 8 per cent in 2008 – now sits at 23 per cent. The combination of high public debt and the country’s inability to adjust to changed circumstances has made Greece a byword for debt-driven economic mismanagement.

Self-sufficiency – North Korea

North Korea trades very little, boasting it is “self-sufficient”. The “self” part is these days mostly true, but the “sufficient” part is debatable.

The end of the Soviet Union was substantially less welcome in North Korea than in, say, Europe. The true reality of self-sufficiency was about to dawn, with terrible consequences. It is estimated that North Korean GDP fell by more than half in the decade after 1990, from around US$2700 per person to less than US$1000 in 2000.

This period, known officially in North Korea as The Arduous March (and named after a story of Kim il-Sung leading guerrilla fighters against Japan) included a famine that is estimated to have killed between several hundred thousand to several million people.

This is not to say self-sufficiency has been devoid of successes. North Korea is a leader in production of Vinylon. Invented by a scientist who defected from South to North Korea, Vinylon is a fabric produced from locally-sourced limestone and used in clothes, shoes, bedding and rope.

You can’t eat it, however. According to the World Food Programme, “one in every three children remain chronically malnourished or stunted” in North Korea. The country has recently allowed small-scale private business in an attempt to rebuild its economy.

Lack of property rights – Zimbabwe

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Robert Mugabe

Zimbabwe was never rich. But the lesson of meltdowns is you don’t need to climb high to start your plunge. In 1982, Zimbabwe’s GDP per capita was US$1060; by 2008 it was just US$300, according to the World Bank.

The reign of Robert Mugabe – elected Prime Minister in 1980 and President in 1987 – has had many economic policy errors, but two stand out.

The first is redistributing farmland via violence. In 2000 an existing program to move land from white to black ownership with compensation was trampled by a state-sanctioned land seizure program that helped create a famine.

The second error was the 2005 destruction of homes and businesses belonging to opposition supporters.

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Malaysians should do the Murambatsvina on Najib Razak, God’s chosen Prime Minister (Zahid Hamidi)

Operation Murambatsvina (“Clear the Rubbish”) was an attempt to clear illegal slums, the government says. The UN says it was politically motivated, coming shortly after an election at which the opposition did well.

The World Bank in its published overview says these and other crises between 2000 and 2008 “contributed to the nearly halving of its gross domestic product (GDP), the sharpest contraction of its kind in a peacetime economy, and raising poverty rates of more than 72 per cent, with a fifth of the population in extreme poverty.”

Lack of security over your possessions will never spur much in the way of investment, and with rich white and poor black alike at risk, Zimbabwe is going from bad to worse. In 2016, with Mugabe aged 92, Zimbabwe’s economic problems are said by the IMF to have “deepened” and activity is “severely constrained”.

Poor investment – Nauru

Perhaps the greatest swan dive on this list is that of Nauru. The world’s smallest independent country in terms of both population and land area, it was during the 1970s and 1980s the world’s richest, in per capita terms.

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Courtesy of its phosphate rock reserves, the country of 10,000 grew fat (quite literally – a 2007 World Health Organization report (PDF) identified 94.5 per cent of its residents as overweight). Nauru mined its tiny landmass like there was no tomorrow, digging up its dwindling phosphate reserves in the 1980s when prices were high.

The Micronesian country’s wealth was legendary, and it made attempts to diversify. Nauru bought commercial properties in Australia and the USA, and started its own airline. Among its investments was a West End musical about Leonardo da Vinci. On opening night, much of the cabinet of Nauru was in attendance. The musical (titled Leonardo the Musical: A Portrait of Love, and running for four hours) was short-lived, and so was Nauru’s status as a wealthy country.

Exactly where the incredible wealth went remains unclear, but Nauru’s eventual net debt – hundreds of millions of dollars owed all over the world – was not. Nauru is now impoverished and dependent on foreign aid.

In 2014, Sydney University geosciences professor, John Connell, told the Financial Times newspaper that mass emigration might be the only long-run solution.

Ignominious ‘Victory’ for Najib and Zahid


November 22, 2016

Ignominious ‘Victory’ for Najib and Zahid

 by Lim Teck Ghee

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As to be expected, the combined forces of UMNO and some BN leaders adept at political spinning are crowing that they have won a famous victory by their ‘success’ at containing the BERSIH protest rally on 19 November. And some ‘independent’ officially linked media commentators and analysts are playing ball to this fiction by claiming that the peaceful nature of the assembly was because of “the steps taken by the authorities” to ensure that there would be no untoward happening.  

On which planet are these people living? Every possible provocation and trick was tried by UMNO and the authorities beholden to their political master to prevent Bersih protestors from converging and exercising their right of peaceful assembly and lawful dissent. The preferred weapon of de-legitimization and demonization of BERSIH was the Malay media and JAKIM-controlled mosques. This propaganda artillery was principally targeted at the Malay community.

 Closely following the blatant attempt at compelling the Malay community to view the rally through racial lenses was the high level strategy aimed at undermining the larger public’s confidence and participation. This strategy included the initial demands, which rapidly escalated to harsh warnings, by the Inspector General of Police; admonitions and ultimatums from UMNO’s leaders; threats of punishment directed against civil servants and university students who may have contemplated participating; instigation of UMNO-friendly traders to use the court of law to stop the BERSIH rally; and a myriad of other dirty tricks, including the resort to over the top scare mongering implying the possibility of violence and bloodshed should the rally proceed.   

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Jamal Yunos and his Red Shirts were supposed to be UMNO’s trump card in ensuring that the BERSIH rally would not take place. Hence the turning of the official blind eye and refusal to act against him and his supporters, despite his numerous hate speeches, calls for the shedding of innocent blood, and various intimidatory actions directed at the BERSIH convoy during its seven-week roadshow to promote the BERSIH 5 rally.

When it became clear with each passing day closer to the rally that BERSIH organizers and supporters would not be cowed into surrendering their right to dissent, a change in the UMNO game plan was needed. UMNO members were given the go-ahead to join Jamal’s band of political rempits. Surely a force of 300,000 troopers – promised by Jamal on the eve of the rally – confronting BERSIH’s supporters and the promise of violence and ‘flying parang’ would impress on BERSIH’s supporters to stay at home.  And wouldn’t a crowd of 300,000 in their red shirts marching in counter protest also be the most potent image of UMNO’s hold over the Malay masses?

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 So when the rally finally took place was it such a clear victory for Najib, Zahid and the status quo; and a defeat for BERSIH and others seeking reform and change?  Unofficial media accounts estimate the number of BERSIH participants at more than 50,000 with thousands more unable to reach the main convergence areas due to Police road closures and barricades put up.

The thinly-veiled plot to label it as a Chinese-orchestrated and Chinese-dominated rally also fell flat. Malays made their way to the rally in large numbers from different parts of the country and some of the most fiercely anti-Government rhetoric and arguments for a change of government were by Malay participants.

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 The contrast between Malay participation in the Redshirt and BERSIH rallies could not have been more striking. Redshirt participants – even with UMNO’s blessing and strong support – probably did not exceed 8,000. It was certainly a smaller number compared with their yellow shirted counterparts.

 It is not from size alone that one can draw deductions. Many among what appears to have been a participant-for-rent grouping lacked the stamina and fortitude to press their demands on the BERSIH participants and made their way home quickly when they were not allowed to bully or pick up fights. BERSIH participants on the other hand were a much more determined and clearly not-for-sale group, committed to their cause and staying on until the end.

The presence of so many young Malays concerned for their own future as well as that of their community’s and challenging UMNO will be the main reason for the nightmares and sleepless nights that UMNO’s leadership must now be experiencing after BERSIH 5.

 What this group of young Malays has experienced will be widely shared in social media and the Malay heartland. No amount of counter propaganda from UMNO can take away their sense of accomplishment at passing this test of moral courage or detract from the brave way in which they stood up for clean government and clean elections while rejecting the crude racist and religiously-bigoted accusations hurled at Bersih’s leaders.

What Do Foreigners Really Think of Government And BERSIH?

 Besides the national constituency, there was one other audience that Najib and Zahid wanted to impress – that of foreign governments and businesses whose continued support the BN Government is increasingly reliant for survival.

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 Some years from now when the foreign despatches sent from Kuala Lumpur are revealed over Wikileaks or some other whistle-blowing outfits, I wonder what the Ambassadors and envoys to this country will have written to their governments about the state of democratic freedom in Malaysia under these two leaders and this particular episode.

Among other questions, I am sure that they must be puzzled – as with many Malaysians – why it was not possible for our Prime Minister and Deputy Prime Minister to direct the Police to ensure that the Red Shirts movement hold their counter rally at a different time or a different location to prevent them from clashing with Bersih supporters. Would this no-brainer instruction be seen as interfering with the freedom of assembly of Jamal and his men?  Or perhaps the Home Ministry could not issue this directive since the Police are an ‘independent force’ acting without any interference whatsoever from their political master? 

 Or could it be that the two top leaders did not have the national interest, or even BN’s, at heart – only UMNO’s – when they engineered this ignominious victory for Najib’s survival and UMNO’s right wing.   

 

How Trump happened?


October 16, 2016

How Trump happened?

by Joseph E.Stiglitz

Joseph E. Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979, is University Professor at Columbia University, Co-Chair of the High-Level Expert Group on the Measurement of Economic Performance and Social Progress at the OECD, and Chief Economist of the Roosevelt Institute. A former Senior Vice President and Chief Economist of the World Bank and chair of the US President’s Council of Economic Advisers under Bill Clinton, in 2000 he founded the Initiative for Policy Dialogue, a think tank on international development based at Columbia University. His most recent book is The Euro: How a Common Currency Threatens the Future of Europe.

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As I have traveled around the world in recent weeks, I am repeatedly asked two questions: Is it conceivable that Donald Trump could win the US presidency? And how did his candidacy get this far in the first place?

As for the first question, though political forecasting is even more difficult than economic forecasting, the odds are strongly in favor of Hillary Clinton. Still, the closeness of the race (at least until very recently) has been a mystery: Clinton is one of the most qualified and well prepared presidential candidates that the United States has had, while Trump is one of the least qualified and worst prepared. Moreover, Trump’s campaign has survived behavior by him that would have ended a candidate’s chances in the past.

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So why would Americans be playing Russian roulette (for that is what even a one-in-six chance of a Trump victory means)? Those outside the US want to know the answer, because the outcome affects them, too, though they have no influence over it.

And that brings us to the second question: why did the US Republican Party nominate a candidate that even its leaders rejected?

Obviously, many factors helped Trump beat 16 Republican primary challengers to get this far. Personalities matter, and some people do seem to warm to Trump’s reality-TV persona.

But several underlying factors also appear to have contributed to the closeness of the race. For starters, many Americans are economically worse off than they were a quarter-century ago. The median income of full-time male employees is lower than it was 42 years ago, and it is increasingly difficult for those with limited education to get a full-time job that pays decent wages.

Indeed, real (inflation-adjusted) wages at the bottom of the income distribution are roughly where they were 60 years ago. So it is no surprise that Trump finds a large, receptive audience when he says the state of the economy is rotten. But Trump is wrong both about the diagnosis and the prescription. The US economy as a whole has done well for the last six decades: GDP has increased nearly six-fold. But the fruits of that growth have gone to a relatively few at the top – people like Trump, owing partly to massive tax cuts that he would extend and deepen.

At the same time, reforms that political leaders promised would ensure prosperity for all – such as trade and financial liberalization – have not delivered. Far from it. And those whose standard of living has stagnated or declined have reached a simple conclusion: America’s political leaders either didn’t know what they were talking about or were lying (or both).

Trump wants to blame all of America’s problems on trade and immigration. He’s wrong. The US would have faced deindustrialization even without freer trade: global employment in manufacturing has been declining, with productivity gains exceeding demand growth.

Where the trade agreements failed, it was not because the US was outsmarted by its trading partners; it was because the US trade agenda was shaped by corporate interests. America’s companies have done well, and it is the Republicans who have blocked efforts to ensure that Americans made worse off by trade agreements would share the benefits.

Thus, many Americans feel buffeted by forces outside their control, leading to outcomes that are distinctly unfair. Long-standing assumptions – that America is a land of opportunity and that each generation will be better off than the last – have been called into question. The global financial crisis may have represented a turning point for many voters: their government saved the rich bankers who had brought the US to the brink of ruin, while seemingly doing almost nothing for the millions of ordinary Americans who lost their jobs and homes. The system not only produced unfair results, but seemed rigged to do so.

Support for Trump is based, at least partly, on the widespread anger stemming from that loss of trust in government. But Trump’s proposed policies would make a bad situation much worse. Surely, another dose of trickle-down economics of the kind he promises, with tax cuts aimed almost entirely at rich Americans and corporations, would produce results no better than the last time they were tried.

In fact, launching a trade war with China, Mexico, and other US trading partners, as Trump promises, would make all Americans poorer and create new impediments to the global cooperation needed to address critical global problems like the Islamic State, global terrorism, and climate change. Using money that could be invested in technology, education, or infrastructure to build a wall between the US and Mexico is a twofer in terms of wasting resources.

There are two messages US political elites should be hearing. The simplistic neo-liberal market-fundamentalist theories that have shaped so much economic policy during the last four decades are badly misleading, with GDP growth coming at the price of soaring inequality. Trickle-down economics hasn’t and won’t work. Markets don’t exist in a vacuum. The Thatcher-Reagan “revolution,” which rewrote the rules and restructured markets for the benefit of those at the top, succeeded all too well in increasing inequality, but utterly failed in its mission to increase growth.

This leads to the second message: we need to rewrite the rules of the economy once again, this time to ensure that ordinary citizens benefit. Politicians in the US and elsewhere who ignore this lesson will be held accountable. Change entails risk. But the Trump phenomenon – and more than a few similar political developments in Europe – has revealed the far greater risks entailed by failing to heed this message: societies divided, democracies undermined, and economies weakened.

https://www.project-syndicate.org/commentary/trump-candidacy-message-to-political-leaders-by-joseph-e–stiglitz-2016-10

Thomas Piketty’s Capital–A Book Review


September 30, 2016

BOOK REVIEW

Capital in the Twenty-first Century by Thomas Piketty

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by Stephanie Flanders

There has been an intense debate about this surprise bestseller. What is the upshot?

This is a VIB – very important book. Nearly everyone agrees about that. But the reasons for its importance have changed in the months since it was published. At first it was important because it was a big book on a big subject: a book of grand ambition about inequality, written not by the latest “thinker” but a respected academic economist with real numbers to go with his theory. We hadn’t had anything like that in ages. This was the “Piketty as rockstar” phase, when the book was an “improbable hit” and people wrote breathless articles about the modern successor to Marx who could crunch the numbers but also quote Balzac, The Simpsons and The West Wing.

Writing a bestselling economics book is usually a good way to make other economists hate you. But at first even they heaped praise on Thomas Piketty for casting fresh light on inequality – an area where the official statistics are notoriously weak. Say what you like about the theory, the argument went, you had to thank him for the numbers.

At this point you didn’t need to read it to have an opinion about it. Indeed for some, not having read it was a badge of pride. Ed Miliband unashamedly told people he hadn’t got beyond the first chapter – and kept on saying that for several weeks. Maybe he has now. Or maybe he’s just decided that the debate about the book is more important than the book itself. That’s certainly the conclusion I have come to, and not just because several of its central arguments have now been questioned.

There are many claims in the 700-odd pages, but let me highlight some of the important ones, before moving on to whether – and why – any of this matters.

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Claim one is that income inequality has increased sharply since the late 1970s, with a particularly dramatic rise in the share of total income going to the very highest earners. The most quoted Piketty statistic here is one that no one, to my knowledge, has questioned: that 60% of the increase in US national income in the 30 years after 1977 went to just the top 1% of earners. The only section of the US population that has done better than the top 1% is the top 10th of that 1%. The top 100th of the 1% have done best of all.

These are remarkable numbers. Uncovering and bringing together this data for the US and a handful of other countries using tax returns is a major achievement, which some say merits a Nobel prize on its own. Piketty goes on to show that this dramatic rise in income inequality hasn’t happened in all rich economies, and, oddly, does not really have much to do with capital. Even in the US, it has been driven by soaring salaries at the top end of the pay scale, not rising incomes from capital.

That rather large complication to the story does not stop Piketty focusing the rest of the book on capital, which he says has also become more unequally distributed since the 1970s, not just in the US but in Europe too. He believes this trend toward greater wealth inequality is very likely to continue, because the returns from capital are likely to grow faster than the economy itself, and faster than the owners of that wealth are likely to be able to spend it.

This is the “central contradiction of capitalism”, which he summarises with a Marxian turn of phrase: “the entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labour. Once constituted, capital reproduces itself faster than output increases. The past devours the future.”

This is where things get tricky, not just for Piketty but for the general reader, who simply wants to know whether he’s right. Let me cut to the chase and say that the evidence for rising wealth inequality is not nearly as clear as the evidence for rising inequality of incomes. Further, even some of Piketty’s biggest fans in the academic world have their doubts whether the forces pushing the economy in that direction are as strong as he suggests. Most would agree that the developed economies are likely to grow more slowly as their populations get older. This might have the “terrifying” consequences for wealth inequality that he suggests, but it’s also possible that slower growth will be as costly to the owners of capital as it is for everyone else. Their share of the total pie might even decrease.

That is actually what has happened in the UK recently. In the boom years after the mid 90s, the owners of capital took a larger share of national income, and the labour share tended to decline. But the trend reversed itself when the economy hit the skids in 2007, and the labour share is back to where it was in the early 70s. Income inequality has also fallen slightly over this period, at least in the UK. So, whatever terrible things have happened to our economy in the past five years, they haven’t followed the long-term path sketched out by Piketty. Rather the opposite.

There is some evidence that the top 10% in the US is sitting on a higher share of total wealth now than in the 70s. But it’s difficult to draw similar conclusions about Britain or France because the data is so patchy. From what we can tell, the share of total wealth held by the top 1% – and 0.01% – hasn’t changed much at all.

Piketty has some interesting analysis demonstrating that wealth begets more wealth: the richer university endowments, for example, tend to earn the highest returns on their investments, not just in absolute but percentage terms. This rings true and also has some economic logic to it. The more money you have to invest, the more – in cash terms – you can afford to spend on finding the best opportunities, without materially cutting into your returns. As a force for rising wealth inequality this makes sense and probably merits a book of its own, given that individuals across the developed world are increasingly having to take greater responsibility for saving for their retirement. It matters if small investors are going to be systematically disadvantaged in making these long-term investments.

But the concentration of wealth at the top doesn’t seem as inexorable as all that. As the economist and former US treasury secretary Larry Summers has pointed out, most of the people on the list of 400 wealthiest Americans in 1982 would have had enough to money to qualify in 2012 if they had simply earned a return of 4% a year. But fewer than a 10th actually did so. The proportion of the top 400 who inherited their wealth has actually been falling – not rising, as Piketty’s theory would also suggest.

Given what has been happening to incomes at the top, you would expect to have seen more concentration of wealth than we can find in the data. That might be – as Piketty suggests – because rich people are good at hiding their money from the taxman. But it might also be because they are very good at spending their money, and their children even more so. I was at a conference recently for advisers and trustees to family estates, and was amused to hear speaker after speaker assert that the “biggest threat” to a family fortune was “not the taxman or the markets but the family itself”.

Say we agree with Piketty, and conclude that wealth has become more concentrated, his own numbers show this is a fairly recent phenomenon. As he admits, the single most important structural change in the distribution of wealth in the past 100 years has been in the other direction. That is the emergence of a new “patrimonial class”, somewhere between rich and poor, owning 25%-35% of the nation’s wealth.

He describes the emergence of this class in the middle years of the 20th century as a transformation that “deeply altered the social landscape and the political structure of society and helped redefine the terms of distributive conflict”. That may well be true. But for me, what’s more interesting about this shift is not what it might or might not have done for “the terms of distributive conflict”, but what it did for households – and the broader economy. Piketty really doesn’t go into that at all, which is a shame because if you don’t have a clear understanding of the benefits of broader capital ownership it’s difficult to explain why it’s so “terrifying” if things are now moving back in the other direction.

The latest official survey of UK household incomes and wealth shows that around a third of all UK households has either negative net worth – debts greater than their assets – or net financial assets worth less than £5,000. I am more worried about that lack of wealth at the bottom and in the middle of the income scale than about the squillions being amassed by a very few.

We know that families with that little to fall back on are much more likely to fall into long-term cycles of dependency and poverty. We also know – and if we didn’t know we could learn from reading the Daily Mail that Piketty’s “patrimonial middle class” feels more squeezed these days, whatever might have happened to the financial value of their home. He seems to assume that all these things are connected, that the greater income flowing to the 1% is making things worse for everyone else. But he never really makes the case. That is remarkable omission for a book of such magisterial sweep.

When I was first learning economics in the late 80s and 90s, the UK was just getting used to the free-market idea that higher incomes at the top did not have to mean lower incomes at the bottom. To ensure growth in the economy, the message went, you had to give the “wealth creators” the incentive to increase both the pie and their slice of it. Economists still believe that, up to a point. But in the wake of the financial crisis there has been broader acceptance of the view that very high levels of income inequality can increase the risk of such crises, and so hurt the economy. We also have evidence – from the IMF, of all places – that in unequal economies, more redistributive taxes might promote faster growth. As with most things, it’s a matter of degree.

This all helps to explain why Piketty’s book has been such a smash. Many people are worried about the slow rate of growth in the developed economies since the financial crisis in 2008. Many are also worried about rising inequality. At first glance, Capital seems to offer an elegant way to explain both. But, by his own admission, the world is a lot more complicated than talk of a “central contradiction to capitalism” might suggest. So is the relationship between capital accumulation and growth.

Like Miliband, Piketty sees a clear difference between the wealth creators and the asset strippers – between the fat cat “rentier” capital that devours the future and the more socially useful capital of the entrepreneur. But his own broad definition of capital doesn’t really help us draw that kind of distinction. It’s all thrown in together, along with all of our houses, and everything else with a financial value that can be bought or sold. That’s a pity because if there’s one thing that policymakers around the world are looking for it’s a way to channel a bit more money into productive investment – and a bit less into house prices and stocks and shares.

Piketty deserves huge credit for kickstarting a debate about inequality and illuminating the distribution of income and wealth. But when it comes to the forces driving growth and wealth accumulation in our modern economy what he has probably done most to bring out into the open is our collective ignorance and confusion.

Stephanie Flanders is chief market strategist for Europe, JP Morgan Asset Management.

https://www.theguardian.com/books/2014/jul/17/capital-twenty-first-century-thomas-piketty-review