Southeast Asia: Changing Geo-Political Dynamics in the Trump Era


August 30, 2018

Southeast Asia: Changing Geo-Political Dynamics in the Trump Era

Widespread reports of China’s hegemony over the neighboring region miss the nuance of fast-shifting political and strategic dynamics

Phnom Penh 
A historical map depicting China's flag over Southeast Asia. Photo: iStock

Is China truly establishing dominance over neighboring Southeast Asia, or is it a prevailing perception among academics and journalists who have uncritically adopted a pervasive pro-China narrative built on Beijing’s rising investment and influence in the region?

Two recent Southeast Asian elections denote a shifting spectrum. Last month’s general election in Cambodia, by far China’s most loyal ally in the region, was taken by some as indication of how far the country has moved away from its past Western backers and closer to Beijing.

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As Cambodia abandons multi-party democracy for one-party authoritarianism, similar to the dominance of the Communist Party in China, some see Cambodia as the first domino to fall in China’s grand regional ambition for political and economic control over the nearby region.

Indeed, some in Cambodia’s exiled opposition have claimed that the country has become a de facto “Chinese colony” under Prime Minister Hun Sen’s ruling Cambodian People’s Party (CPP).

The Harapan coalition’s win at Malaysia’s May 9 general election, however, pointed in the opposite direction. The long-ruling United Malays National Organization (UMNO) was ousted by an alliance whose campaign narrative was built in part on opposing Chinese investment, which boomed under the previous government.

Now as prime minister, Mahathir Mohamad has cancelled US$22 billion worth of Chinese-backed infrastructure projects, including a Belt and Road Initiative-inspired high-speed rail line, for reasons of fiscal prudence.

While Mahathir warned of the risk of new forms of “colonialism” during a recently concluded tour of China, he also made the diplomatic point that his government isn’t anti-China.

Indeed, some in Cambodia’s exiled opposition have claimed that the country has become a de facto “Chinese colony” under Prime Minister Hun Sen’s ruling Cambodian People’s Party (CPP).

The Harapan coalition’s win at Malaysia’s May 9 general election, however, pointed in the opposite direction. The long-ruling United Malays National Organization (UMNO) was ousted by an alliance whose campaign narrative was built in part on opposing Chinese investment, which boomed under the previous government.

Now as Prime Minister, Mahathir Mohamad has cancelled US$22 billion worth of Chinese-backed infrastructure projects, including a Belt and Road Initiative-inspired high-speed rail line, for reasons of fiscal prudence.

While Mahathir warned of the risk of new forms of “colonialism” during a recently concluded tour of China, he also made the diplomatic point that his government isn’t anti-China.

Malaysia's Prime Minister Mahathir Mohamad (L) and China's Premier Li Keqiang talk during a signing ceremony at the Great Hall of the People in Beijing on August 20, 2018.Mahathir is on a visit to China from August 17 to 21. / AFP PHOTO / POOL / HOW HWEE YOUNG

“We should always remember that the level of development of countries are not all the same,” Mahathir said this week at a joint press conference with Chinese premier Li Keqiang. “We do not want a situation where there is a new version of colonialism happening because poor countries are unable to compete with rich countries, therefore we need fair trade.”

It is undeniable that China now plays a major and growing role in Southeast Asian affairs, even if judged by only its economic heft.

A recent New York Times report noted that every Asian country now trades more with China than the United States, often by a factor of two to one, an imbalance that is only growing as China’s economic growth outpaces that of America’s.

With China’s economic ascendency projected to continue – the International Monetary Fund (IMF) predicts China could become the world’s largest economy by 2030 – some believe that Beijing aims to replace the US-backed liberal international order in place since the 1950’s with a new less liberal and less orderly model.

Cambodia’s case, however, tests the limits of that forward-looking analysis. The US and European Union (EU) refused to send electoral monitors to Cambodia’s general election last month on the grounds the process was “illegitimate” due to the court-ordered dissolution of the country’s largest opposition party.

Washington has since imposed targeted sanctions on Cambodian officials seen as leading the anti-democratic crackdown, while new legislation now before the US Senate could significantly ramp up the punitive measures.

Hun Sen aired a combative response to threats of sanctions, saying with bravado that he “welcomes” the measures. Some commentators read this as an indication that Phnom Penh no longer cares about the actions and perceptions of democratic nations because it has China’s strong and lucrative backing.

Yet the CPP still made painstaking efforts to present a veneer of democratic legitimacy on to its rigged elections, something it would not have done if it only cared about Beijing’s opinions. Hun Sen now says he will soon defend the election’s legitimacy at the United Nations General Assembly, yet another indication that he still cares what the West thinks.

China’s rise in Southeast Asia is viewed primarily in relation to the US’ long-standing strong position, both economically and strategically. Many see this competition as a zero-sum game where China’s gain is America’s loss.

Along those lines, some analysts saw US Secretary of State Mike Pompeo’s recent whirlwind trip to Southeast Asia as “parachute diplomacy” that only underscored certain entrenched regional perceptions of the US as an episodic actor that has no real strategy for Southeast Asia.

The Donald Trump administration certainly lacks an overarching policy comparable to his predecessor Barack Obama’s “pivot to Asia,” a much-vaunted scheme with strategic and economic components that made Southeast Asia key to America’s policy of counterbalancing China.

Despite no new policy moniker, Trump’s administration has in many ways continued Obama’s scheme: Vietnam remains a key ally, support for other South China Sea claimants is unbending, military sales remain high, and containing Chinese expansion is still the raison d’etre.

It’s also been seen in the number of visits to Southeast Asia by senior White House officials, including high profile tours by Pompeo and his predecessor Rex Tillerson, Defense Secretary Jim Mattis, and Trump himself to Vietnam in November 2017 and Singapore in June.

A little noticed December 2017 National Security Strategy document, produced by Trump’s White House, explicitly notes that “China seeks to displace the United States in the Indo-Pacific region, expand the reaches of its state-driven economic model, and reorder the region in its favor.”

Yet perceptions of new Cold War-like competition in Southeast Asia often fail to note the imbalance between America and China’s spheres of influence in the region.

 

US President Donald Trump (L) and Vietnam's President Tran Dai Quang (R) attend a welcoming ceremony at the Presidential Palace in Hanoi in Hanoi on November 12, 2017.Trump told his Vietnamese counterpart on November 12 he is ready to help resolve the dispute in the resource-rich South China Sea, which Beijing claims most of. / AFP PHOTO / POOL / KHAM

Absent President Donald Trump’s Asia Policy, China emerges as the dominant  player in Southeast Asia

China’s two most loyal regional allies are arguably Cambodia and Laos, countries of less economic and strategic importance than America’s main partners Indonesia, Thailand, Singapore and Vietnam.

The historically pro-US Philippines has gravitated somewhat into China’s orbit under President Rodrigo Duterte, though at most there has been an equalization of its relations between the two powers rather than outright domination by China.

Strategic analyst Richard Javad Heydarian recently noted that Duterte likes to think of himself as a “reincarnation of mid-20th century titans of the so-called Non-Aligned Movement,” though Heydarian suggested that this could prompt a backlash from the Philippine public that remains resolutely pro-America.

Malaysia, another country that was thought to have been moving closer to China, has ricocheted strongly in the other direction after the change in leadership from pro-China Najib Razak to China-skeptic Mahathir Mohamad.

Thailand has boosted military ties with Beijing since the country’s military coup in 2014, which caused some panic in Washington, but a recent incident has shown just how fragile their bilateral relations remain.

After two boats sank near the resort island of Phuket in early July, killing dozens of Chinese tourists, Deputy Prime Minister Prawit Wongsuwan blamed the Chinese tour operators, commenting the accident was “entirely Chinese harming Chinese.”

His claim led to calls in China for tourists to boycott Thailand, which could cost the country roughly US$1.5 billion in cancellations, according to some estimates. Thailand’s tourism sector is now facing a major public relations problem after China’s jingoist state-owned media lambasted Prawit’s tactless response.

More explosively, rare nationwide protests in Vietnam in June were sparked by nationalistic concerns that a new law allowing 99-year land leases in special economic zones would effectively sell sovereign territory to China.

There are strong perceptions, aired widely over social media, that Vietnam’s ruling Communist Party is too close to Beijing, a cause of resentment that some analysts suggest is the country’s biggest potential source of instability.

Even in perceived pro-China nations like Cambodia and Laos, anti-China sentiment is rising in certain sections of the public. Arguments that Chinese investment actually harms the livelihoods of many Cambodians, especially in places like coastal Sihanoukville and Koh Kong, is on the ascendency.

Social media criticism has centered on a concession deal the Cambodian government entered with a Chinese company that effectively gives it land rights to an estimated 20% of Cambodia’s coastline.

The same goes for Laos’ ruling communist party, which has taken steps to curb the growth of certain sectors dominated by Chinese investment, such as banana plantations and mining, over public complaints about their adverse health and environmental impacts.

The IMF and others, meanwhile, have expressed concerns that Laos risks falling into a Chinese “debt trap”via its Beijing-backed US$6 billion high-speed rail project, a claim that Prime Minister Thongloun Sisoulith felt the need to publicly rebuff in June.

Still, there is a certain misapprehension that China’s rising economic importance to the region, both as a provider of aid and investment and market for exports, necessarily equates to strong political and strategic influence.

It doesn’t always add up that way. In January, China fractionally overtook America as the largest importer of Vietnamese goods, according to the General Department of Vietnam Customs. Nonetheless, Hanoi remains decidedly pro-US in regional affairs and that position isn’t expected to change, even if its exports to China continue to outpace those to America.

More fundamentally, China’s rising economic presence in the region is in many instances destabilizing relations. Rapid growth in Chinese investment to Malaysia in recent years prompted a public backlash, a phenomena seized on by the victorious Harapan coalition. There are incipient signs the same type of backlash is now percolating in Cambodia and Laos.

Chinese investment is likely to play a role in Indonesia’s presidential and legislative elections next year, perhaps negatively for incumbent President Joko Widodo, under whose tenure China has become the country’s third largest investor.

“The relationship with China could turn toxic for [Widodo],” Keith Loveard, senior analyst with Jakarta-based business risk firm Concord Consulting, recently told the South China Morning Post.

To be sure, China has translated some of its economic largesse to strategic advantage. Philippine President Durterte, for example, said in October 2016 that his country’s one-way security ties with the US would come to an end, though America’s provision of “technical assistance” during the Marawi City siege last year cast the extent of that into doubt.

China has also developed closer ties to the militaries of Thailand and Cambodia, so much so that the latter cancelled joint military exercises with the US last year. It has also resumed its past position of shielding Myanmar’s generals from Western condemnation during the recent Rohingya refugee crisis.

But America still remains the predominant security ally of most Southeast Asian nations, something that will only become more important as concerns about the spread of Islamic terrorism heighten. This month, Washington provided an additional US$300m in security funding to the region.

Only Laos, Cambodia and Myanmar buy more arms from China than America, according to the Stockholm International Peace Research Institute. The rest of Southeast Asia’s military procurements, sometimes exclusively, come from the US.

Still, some of China’s recent regional successes have been the result of America’s missteps. China has been greatly helped by Trump’s withdrawal of America from its long-standing leadership role in certain multilateral institutions, as well as his ad hoc policy towards Southeast Asia that favors more bilateralism.

Had Trump not withdrawn the US from the Trans-Pacific Partnership, a multilateral trade deal championed by Obama that excludes China, regional trade flows would be geared more towards America, providing an important counterbalance to many regional countries’ rising dependence on Chinese markets.

By doing so, Trump allowed Beijing’s multilateral economic institutions, like the Asian Infrastructure Investment Bank and the New Development Bank, to gain an upper hand.

Yet most reporting on China’s influence in Southeast Asia rests on the assumption that the trends of the past decade will continue into the future. But it’s not clear that Chinese investment will keep growing at the same rate – or even faster – while America continues to fumble over how best to engage with Southeast Asia.

US Secretary of State Mike Pompeo (C) poses with Thailand's Foreign Minister Don Pramudwinai (L), Vietnam's Deputy Prime Minister and Foreign Minister Pham Binh Minh (2nd L), Malaysia's Foreign Minister Saifuddin Abdullah (2nd R) and Laos Foreign Minister Saleumxay Kommasith (R) for a group photo at the 51st Association of Southeast Asian Nations (ASEAN) - US Ministerial Meeting in Singapore on August 3, 2018. Photo: AFP/Roslan Rahman

China cannot rule out that in 2021 America could have a new president able to articulate and implement a more coherent policy towards Southeast Asia, nor that upcoming elections in Indonesia and possibly even Myanmar see the rise of anti-China candidates.

Neither can Beijing rule out that India won’t become a major player in the region, despite it so far failing to live up to expectations. A recent report by the Council on Foreign Relations, a US-based think tank, asserted that it can be “a more forceful counterweight to China and hedge against a declining United States.”

Moreover, there is great uncertainty over whether the South China Sea disputes pitting China versus the Philippines, Malaysia and Vietnam, among others, might at some point turn hot, which would significantly alter the region’s security approach in place since the 1990s.

China’s growing trade war with the US could also impact on its relations with the region. Some believe China could soon devalue its currency in response to the US-China trade war, though Beijing says it won’t.

Not only would a devalued renminbi make Chinese-made products cheaper, negatively affecting competing Southeast Asian exporters, it would also affect the region’s supply chains as Chinese buyers would be expected to demand cheaper prices. Few, if any, in the region would win from rounds of competitive currency devaluations.

But viewing China’s power in the region vis-a-vis America’s is only part of the picture. Japan, and to a lesser extent South Korea, are also major players and potential counterweights to China.

Since the 2000s, Japan’s infrastructure investment in the region has been worth US$230 billion, while China’s was about US$155 billion, according to recent BMI Research, an economic research outfit. The balance might tip in China’s favor with the US$1 trillion Belt and Road Initiative, but probably not for another decade or so, BMI projects.

Tokyo rarely boasts of its own soft power in Southeast Asia. Indeed, while Philippine leader Duterte’s overtures to China are among his major talking points, quietly it has been Japan, not China, that is funding his government’s ballyhooed major infrastructure programs.

Japan's Prime Minister Shinzo Abe (R) and Malaysia's Prime Minister Mahathir Mohamad shake hands during joint press remarks at Abe's official residence in Tokyo on June 12, 2018. / AFP PHOTO / POOL / Toshifumi KITAMURA

Japanese diplomacy towards the region falls somewhere between China and America’s. While Washington’s, at least past, insistence on human rights and democracy-building puts off to many regional countries, Beijing’s diplomacy is more laissez faire, as long as Chinese interests are protected by sitting governments.

Tokyo, by contrast, tends to practice quiet sustained diplomacy, decidedly in support of rule of law but without the threat of punitive measures if a partner government strays. That is likely one reason why there is little anti-Japan sentiment in the region and why its relations receive much less public attention.

Malaysia’s Mahathir, whose first trip abroad after May’s election win was to Tokyo, not Beijing or Washington, has recently spoken of Japan’s importance in regional affairs.

Mahathir shaped Southeast Asia’s approach to great powers during his previous tenure as Prime Minister from 1981-2003, and his belief that Japan can play an even larger role in regional affairs could soon be taken up by other regional governments.

“Specific Southeast Asian states are now seeking to diversify their strategic partnerships, beyond a binary choice between Beijing and Washington,” reads a recent report by the Council on Foreign Relations.

Mahathir’s apparent desire is for a more diversified regional network, similar to the hedging policies he promoted in the 1990s. Mahathir is certainly not pro-China, but neither is he pro-US.

What most Southeast Asian nations desire is not unipolarity but competition among many foreign partners that allows them to maximize benefits and negotiating leverage. When America and China, or Japan and India, compete to gain an economic and political footing, regional nations often win through the bidding.

 

 

Congratulations. Dr Khalid


August 24, 2018

Congratulations. Dr Khalid

PM appoints Muhammed Abdul Khalid as economic advisor

   Dr Abdul Khalid and Hwok-Aun Lee

Economist Muhammed Abdul Khalid has been appointed as the economic advisor to Prime Minister Dr Mahathir Mohamad.

This follows Muhammed’s stint as the secretariat head for the Council of Eminent Persons (CEP), which has served past its 100-day tenure.

Muhammed is best known for his talk show appearances, where he explains economic issues in simple language.

In 2014, he authored the well-received “The Colour of Inequality: Ethnicity, Class, Income and Wealth in Malaysia” which illustrated how Malaysia’s wealth gap was widening in tandem with its economic success.

He was formerly a research head at the Khazanah Research Institute, chief economist with the Securities Commission and senior analyst with the Institute of Strategic and International Studies.

He has also held positions with the United Nations Development Programme (UNDP), United Nations Children’s Fund (Unicef) and United Nations Economic and Social Commission for Asia and the Pacific (Unescap).

The Penang-born economist was awarded a PhD with highest honours from the Paris Institute of Political Studies, better known as Sciences Po, and is the founder of big data firm DM Analytics.

His appointment will take effect on August 27.

Demonizing State-Owned Enterprises


August 14, 2018

Demonizing State-Owned Enterprises

 

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Historically, the private sector has been unable or unwilling to affordably provide needed services. Hence, meeting such needs could not be left to the market or private interests. Thus, state-owned enterprises (SOEs) emerged, often under colonial rule, due to such ‘market failure’ as the private sector could not meet the needs of colonial capitalist expansion.

Thus, the establishment of government departments, statutory bodies or even government-owned private companies were deemed essential for maintaining the status quo and to advance state and private, particularly powerful and influential commercial interests.

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SOEs have also been established to advance national public policy priorities. Again, these emerged owing to ‘market failures’ to those who believe that markets would serve the national interest or purpose.However, neoliberal or libertarian economists do not recognize the existence of national or public interests, characterizing all associated policies as mere subterfuges for advancing particular interests under such guises.

Nevertheless, regardless of their original rationale or intent, many SOEs have undoubtedly become problematic and often inefficient. Yet, privatization is not, and has never been a universal panacea for the myriad problems faced by SOEs.

Causes of inefficiency

Undoubtedly, the track records of SOEs are very mixed and often vary by sector, activity and performance, with different governance and accountability arrangements. While many SOEs may have been quite inefficient, it is crucial to recognize the causes of and address such inefficiencies, rather than simply expect improvements from privatization.

First, SOEs often suffer from unclear, or sometimes even contradictory objectives. Some SOEs may be expected to deliver services to the entire population or to reduce geographical imbalances. Other SOEs may be expected to enhance growth, promote technological progress or generate jobs. Over-regulation may worsen such problems by imposing contradictory rules.

Privatization has never been a universal panacea. One has to understand the specific nature of a problem; sustainable solutions can only come from careful understanding of the specific problems to be addressed. To be sure, unclear and contradictory objectives – e.g., to simultaneously maximize sales revenue, address disparities and generate employment — often mean ambiguous performance criteria, open to abuse.

Typically, SOE failure by one criterion (such as cost efficiency) could be excused by citing fulfillment of other objectives (such as employment generation). Importantly, such ambiguity of objectives is not due to public or state ownership per se.

Second, performance criteria for evaluating SOEs — and privatization — are often ambiguous. SOE inefficiencies have often been justified by public policy objectives, such as employment generation, industrial or agricultural development, accelerating technological progress, regional development, affirmative action, or other considerations.

Ineffective monitoring, poor transparency and ambiguous accountability typically compromise SOE performance. Inadequate accountability requirements were a major problem as some public sectors grew rapidly, with policy objectives very loosely and broadly interpreted.

Third, coordination problems have often been exacerbated by inter-ministerial, inter-agency or inter-departmental rivalries. Some consequences included ineffective monitoring, inadequate accountability, or alternatively, over-regulation.

Hazard

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Moral hazard has also been a problem as many SOE managements expected sustained financial support from the government due to weak fiscal discipline or ‘soft budget constraints’. In many former state-socialist countries, such as the Soviet Union and Yugoslavia, SOEs continued to be financed regardless of performance.

Excessive regulation has not helped as it generally proves counter-productive and ultimately ineffective. The powers of SOEs are widely acknowledged to have been abused, but privatization would simply transfer such powers to private hands.

Very often, inadequate managerial and technical skills and experience have weakened SOE performance, especially in developing countries, where the problem has sometimes been exacerbated by efforts to ‘nationalize’ managerial personnel.

Often, SOE managements have lacked adequate or relevant skills, but have also been constrained from addressing them expeditiously. Privatization, however, does not automatically overcome poor managerial capacities and capabilities.

Similarly, the privatization of SOEs which are natural monopolies (such as public utilities) will not overcome inefficiencies due to the monopolistic or monopsonistic nature of the industry or market. The key remaining question is whether privatization is an adequate or appropriate response to address SOE problems.

Throwing baby out with bathwater

SOEs often enjoy monopolistic powers, which can be abused, and hence require appropriate checks and balances. In this regard, there are instances where privatization may well be best. Two examples from Britain and Hungary may be helpful.

The most successful case of privatization in the United Kingdom during the Thatcher period involved National Freight, through a successful Employee Stock Ownership Plan (ESOP). Thus, truck drivers and other staff co-owned National Freight and developed personal stakes in ensuring its success.

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In Hungary, the state became involved in running small stores. Many were poorly run due to over-centralized control. After privatization, most were more successfully run by the new owners who were previously store managers. Hence, there are circumstances when privatization can result in desirable outcomes, but a few such examples do not mean that privatization is the answer to all SOE problems.

Privatization has never been a universal panacea. One has to understand the specific nature of a problem; sustainable solutions can only come from careful understanding of the specific problems to be addressed.

 

Dr. Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

 

 

NY Times Book Review: Looking Back@Crash of 2008


August 11, 2018

CRASHED

By Dr. Fareed Zakaria

How a Decade of Financial Crises Changed the World
By Adam Tooze
706 pp. Viking. $35.

Steve Bannon can date the start of the Trump “revolution.” When I interviewed him for CNN in May, in Rome, he explained that the origins of Trump’s victory could be found 10 years ago, in the financial crisis of 2008.

“The implosion of those world capital markets has never really been sorted out,” he told me. “The fuse that was lit then that eventually brought the Trump revolution is the same thing that’s happened here in Italy.” (Italy had just held elections in which populist forces had won 50 percent of the vote.)

Adam Tooze would likely agree. An economic historian at Columbia University, he has written a detailed account of the financial shocks and their aftereffects, which, his subtitle asserts, “changed the world.”

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If journalism is the first rough draft of history, Tooze’s book is the second draft. A distinguished scholar with a deep grasp of financial markets, Tooze knows that it is a challenge to gain perspective on events when they have not yet played out. He points out that a 10-year-old history of the crash of 1929 would have been written in 1939, when most of its consequences were ongoing and unresolved. But still he has persisted and produced an intelligent explanation of the mechanisms that produced the crisis and the response to it. We continue to live with the consequences of both today.

CreditTyler Comrie; Photograph courtesy of GSO/Getty Images

As is often the case with financial crashes, markets and experts alike turned out to have been focused on the wrong things, blind to the true problem that was metastasizing. By 2007, many were warning about a dangerous fragility in the system. But they worried about America’s gargantuan government deficits and debt — which had exploded as a result of the Bush administration’s tax cuts and increased spending after 9/11. It was an understandable focus. The previous decade had been littered with collapses when a country borrowed too much and its creditors finally lost faith in it — from Mexico in 1994 to Thailand, Malaysia and South Korea in 1997 to Russia in 1998. In particular, many fretted about the identity of America’s chief foreign creditor — the government of China.

Yet it was not a Chinese sell-off of American debt that triggered the crash, but rather, as Tooze writes, a problem “fully native to Western capitalism — a meltdown on Wall Street driven by toxic securitized subprime mortgages.”Tooze calls it a problem in “Western capitalism” intentionally. It was not just an American problem. When it began, many saw it as such and dumped the blame on Washington.

In September 2008, as Wall Street burned, the German Finance Minister Peer Steinbruck explained that the collapse was centered in the United States because of America’s “simplistic” and “dangerous” laissez-faire approach. Italy’s finance minister assured the world that its banking system was stable because “it did not speak English.”

 

In fact this was nonsense. One of the great strengths of Tooze’s book is to demonstrate the deeply intertwined nature of the European and American financial systems. In 2006, European banks generated a third of America’s riskiest privately issued mortgage-backed securities. By 2007, two-thirds of commercial paper issued was sponsored by a European financial entity.

The enormous expansion of the global financial system had largely been a trans-Atlantic project, with European banks jumping in as eagerly and greedily to find new sources of profit as American banks. European regulators were as blind to the mounting problems as their American counterparts, which led to problems on a similar scale. “Between 2001 and 2006,” Tooze writes, “Greece, Finland, Sweden, Belgium, Denmark, the U.K., France, Ireland and Spain all experienced real estate booms more severe than those that energized the United States.”

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Credit Sonny Figueroa/The New York Times

 

But while the crisis may have been caused in both America and Europe, it was solved largely by Washington. Partly, this reflected the post-Cold War financial system, in which the dollar had become the hyper-dominant global currency and, as a result, the Federal Reserve had truly become the world’s central bank. But Tooze also convincingly shows that the European Central Bank mismanaged things from the start.

The Fed acted aggressively and also in highly ingenious ways, becoming a guarantor of last resort to the battered balance sheets of American but also European banks. About half the liquidity support the Fed provided during the crisis went to European banks, Tooze observes.

Before the rescue and even in its early stages, the global economy was falling into a bottomless abyss. In the first months after the panic on Wall Street, world trade and industrial production fell at least as fast as they did during the first months of the Great Depression. Global capital flows declined by a staggering 90 percent. The Federal Reserve, with some assistance from other central banks, arrested this decline. The Obama fiscal stimulus also helped to break the fall.

 

Tooze points out that almost all serious analyses of the stimulus conclude that it played a significant positive role. In fact, most experts believe it ended much too soon. He also points out that large parts of the so-called Obama stimulus were the result of automatic government spending, like unemployment insurance, that would have happened no matter who was president. And finally, he notes that China, with its own gigantic stimulus, created an oasis of growth in an otherwise stagnant global economy.

The rescue worked better than almost anyone imagined. It is worth recalling that none of the dangers confidently prophesied by legions of critics took place. There was no run on the dollar or American treasuries, no hyperinflation, no double-dip recession, no China crash.

American banks stabilized and in fact prospered, households began saving again, growth returned slowly but surely. The governing elite did not anticipate the crisis — as few elites have over hundreds of years of capitalism. But once it happened, many of them — particularly in America — acted quickly and intelligently, and as a result another Great Depression was averted. The system worked, as Daniel Drezner notes in his own book of that title.

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A trader on the floor of the New York Stock Exchange in February 2009. CreditJames Estrin/The New York Times

 

But therein lies the unique feature of the crash of 2008. Unlike that of 1929, it was not followed by a Great Depression. It was not so much the crisis as the rescue and its economic, political and social consequences that mattered most. On the left, the entire episode discredited the market-friendly policies of Tony Blair, Bill Clinton and Gerhard Schroeder, disheartening the center-left and emboldening those who want more government intervention in the economy in all kinds of ways. On the right, it became a rallying cry against bailouts and the Fed, buoying an imaginary free-market alternative to government intervention.

Unlike in the 1930s, when the libertarian strategy was tried and only deepened the Depression, in the last 10 years it has been possible for the right to argue against the bailouts, secure in the knowledge that their proposed policies will never actually be implemented.

Bannon is right. The crash brought together many forces that were around anyway — stagnant wages, widening inequality, anger about immigration and, above all, a deep distrust of elites and government — and supercharged them. The result has been a wave of nationalism, protectionism and populism in the West today. A confirmation of this can be found in the one major Western country that did not have a financial crisis and has little populism in its wake — Canada.

The facts remain: No government handled the crisis better than that of the United States, which acted in a surprisingly bipartisan fashion in late 2008 and almost seamlessly coordinated policy between the outgoing Bush and incoming Obama administrations. And yet, the backlash to the bailouts has produced the most consequential result in the United States.

Tooze notes in his concluding chapter that experts are considering the new vulnerabilities of a global economy with many new participants, especially the behemoth in Beijing. But instead of a challenge from an emerging China that began its rise outside the economic and political system, we are confronting a quite different problem — an erratic, unpredictable United States led by a president who seems inclined to redo or even scrap the basic architecture of the system that America has painstakingly built since 1945.

How will the world handle this unexpected development? What will be its outcome? This is the current crisis that we will live through and that historians will soon analyze.

Dr. Fareed Zakaria is a CNN anchor, a Washington Post columnist and the author of “The Post American World.”

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A version of this article appears in print on , on Page 1 of the Sunday Book Review with the headline: The Aftershocks.

No deal is often better than a bad deal. Not with Brexit


August 6, 2018

No deal is often better than a bad deal. Not with Brexit–Soft BREXIT,says The Economist

Britain’s dangerous bluff betrays a misunderstanding of its negotiation with Brussels

 Print edition | Leaders

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IN MOST negotiations, the maxim that “no deal is better than a bad deal” makes perfect sense. If you are buying a car, you must be ready to walk away or the seller has you over a barrel. The way to drive a hard bargain is to persuade him that he must offer you a good deal or there will be no deal at all.

Theresa May has made this commonsense principle the foundation of her talks with Brussels over Britain’s exit from the European Union. “No deal for Britain is better than a bad deal for Britain,” she said in January last year, setting out her red lines. With less than eight months until Britain is due to leave the EU, and only about four months left to reach an agreement on the terms of its exit, her government is still stressing its readiness to depart with no deal in place.

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It is time to drop the pretence. Leaving without a deal was never a wise option. The government ought to have spent the past two years steering the public through the painful trade-offs of leaving the EU. As we have argued, Britain’s interests are best served by a “soft Brexit” that preserves markets and security. Instead, big-mouth ministers have kept expectations sky high, claiming that the deal “will be one of the easiest in human history” and that “there will be no downside to Brexit”.–The Economist

 

The trouble is that Brexit is nothing like buying a car. In most negotiations “no deal” means sticking to the status quo. If you are not prepared to pay the asking price, you can walk away none the worse and try somewhere else. The Brexit talks are different. If no deal is reached Britain will not maintain the status quo of its EU membership, but find its links to the continent abruptly and acrimoniously broken off. The metaphor is not buying a car, it is buying a parachute—having already leapt out of the aeroplane. “Walking away” would land Britain in a situation so calamitous that it should not even be on the table.

A no-deal outcome would be bad for the EU, too, particularly Ireland, whose small, open economy is closely linked to Britain’s. But Britain would be hurt most by a hard landing. Trading with the EU on the terms of the World Trade Organisation, which would raise both tariffs and regulatory barriers, would reduce Britain’s GDP by 4% within five to ten years, according to the IMF. The EU’s GDP would fall by about 1.5%. Worse still—again, for everyone, but chiefly for Britain—would be the turmoil from leaving without agreements in place over everything from airline safety to the transfer of radioactive material. The supply of such essentials as food and medicine could be disrupted, too (see article).

A hard landing

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Boris Johnson–The Ambitious Tory Iago

For this reason, the EU has never taken seriously Mrs May’s claim that Britain is ready to walk away from the negotiating table. It sees her threat as a bluff—and it is right, judging by the lack of preparation in Britain for a no-deal outcome. Even with extensive (and expensive) planning, leaving the EU without a deal would have been difficult. As things stand, almost no work has been done to prepare for such an eventuality. Lately, Britain has taken to outlining desperate-sounding plans to stockpile medicine and set up electricity generators. Chaos would be hard to avoid.

Yet, although the EU’s negotiators in Brussels do not buy it, Mrs May’s slogan that “no deal is better than a bad deal” has struck a chord with the voting public. As the talks have dragged on and the EU has extracted concessions, such as a promise by Britain to pay a large exit bill, the desire to walk away has only grown. Polls show that nearly twice as many Britons would leave the EU with no deal as would support a compromise along the lines Mrs May proposed last month. By this logic, her eventual settlement with Brussels, if she reaches one, will look even more like a bad deal because Britain will have to give more ground. Many voters will thus quote the prime minister’s own slogan back to her, and argue to crash out.

The government is trapped by its own rhetoric. The louder it shouts in Brussels that it is ready for no deal, the more it emboldens voters and Brexiteer MPs to call for just such an outcome. Yet the more the government argues at home that Brexiteers should avoid the miseries of crashing out by embracing Mrs May’s compromise, the more it convinces Brussels that, except as a disastrous accident, “no deal” is not credible.

It is time to drop the pretence. Leaving without a deal was never a wise option. The government ought to have spent the past two years steering the public through the painful trade-offs of leaving the EU. As we have argued, Britain’s interests are best served by a “soft Brexit” that preserves markets and security. Instead, big-mouth ministers have kept expectations sky high, claiming that the deal “will be one of the easiest in human history” and that “there will be no downside to Brexit”.

Mrs May has belatedly come to accept the need for compromise—to the fury of a small coterie of hardline Brexiteers who would sooner crash out of Europe, kamikaze-style, than maintain any kind of obligation to the EU. The prime minister’s continued claims that Britain can simply walk away play into their hands. She must cease such talk. With a bit more compromise on both sides, a deal is reachable. Britain must seize that parachute before it is too late.

This article appeared in the Leaders section of the print edition under the headline “No ordinary deal”

Global Economy Vulnerable a Decade After


August 1, 2018

Global Economy Vulnerable a Decade After

Ten years ago, deteriorating confidence in the value of US sub-prime mortgages threatened a liquidity crisis. The US Federal Reserve injected considerable capital into the market, but could not prevent the 2008-2009 global financial crisis (GFC).

The 2008 meltdown exposed the extent of finance-led international economic integration, with countries more vulnerable to financial contagion and related policy ‘spillovers’ exacerbating real economic volatility. It also revealed some vulnerabilities of the post-Second World War (WW2) US-centred international financial ‘architecture’ – the Bretton Woods system – modified after its breakdown in the early 1970s.

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Robert Triffin, the leading international monetary economist of his generation, had long expressed concerns about the use of a national currency as the major reserve currency. International liquidity provision using the greenback required the US to run balance-of-payments deficits, ensuring US monetary policy spillovers to the world economy while eroding confidence in the greenback.

The Bretton Woods system was under increasing strain from the late 1960s, as US President Johnson funded the increasingly unpopular Vietnam War by issuing debt, rather than through higher taxes. The system finally broke down when the Nixon administration unilaterally cancelled the US commitment to dollar (gold) convertibility in August 1971.

What emerged was a ‘non-system’ for Triffin. Since then, the US dollar, issued by fiat, has relied on the greenback’s own credibility and legitimacy to continue as de facto world currency.

Current ‘non-system’

In 1985, Triffin identified three systemic problems of the international financial ‘non-system’. First, “its fantastic inflationary proclivities, leading to world reserve increases eight times as large over a brief span of fifteen years” since the breakdown of the Bretton Woods system.

Second, “skewed investment pattern of world reserves, making the poorer and less capitalized countries of the Third World the main reserve lenders, and the richer and more capitalized industrial countries the main reserve borrowers of the system”.

Third, “crisis-prone propensities reflected in the amplitude” and frequency of financial crises such as the 1980s’ debt crisis causing developing countries’ ‘lost decades’. Other critics have identified further flaws.

First is the ‘recessionary bias’, due to the asymmetric burden of adjustment to payments imbalances. While deficit countries are under great pressure to adjust, especially when financing dries out during crises, surplus countries do not face corresponding pressures to correct their own imbalances.

Second is the cost of the perceived need of emerging and developing countries to ‘self-insure’ against the strong boom-bust cycles of global finance by building up large foreign exchange reserves and fiscal resources, especially after the 1997-1998 Asian financial crisis.

Such precautionary measures enabled emerging market economies to undertake strong counter-cyclical measures during the GFC. But they have huge opportunity costs as such reserves are generally held as presumably safe, liquid, low-yielding assets, such as US Treasury bonds.

Hence, Triffin complained that “the richest, most developed, and most heavily capitalized country in the world should not import, but export, capital, in order to increase productive investment in poorer, less developed, and less capitalized countries… [The] international monetary system is at the root of this absurdity.”

Reform appeals

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There were renewed calls for reform of global economic governance in the wake of the GFC, especially by the 2009 UN Conference on the World Financial and Economic Crisis and Its Impact on Development.

Governance reform of the IMF and World Bank should ensure fairer, more equitable representation of developing countries. This should improve the accountability and credibility of the Bretton Woods institutions, enabling them to better address current financial and economic challenges in the world.

The UN also called for a “multilateral legal framework for sovereign debt restructuring”. Without a fair, legally binding, multilateral sovereign debt work-out mechanism, developing countries remain vulnerable to private creditors, including vulture funds.

There were renewed hopes for trade multilateralism and early successful completion of the Doha Development Round of the World Trade Organisation (WTO), giving developing countries better access to external markets, seen as vital for balanced global recovery and development. The promise to keep international trade open echoed G20 leaders’ unfulfilled commitment to eschew protectionism.

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However, only a few of the modest promised reforms have been implemented, with limited changes in international financial governance, still dominated by G7 economies. After all, every financial crisis is followed by appeals for reforms, with complacency setting in with hints of recovery.

Less coping capability

Most developed country governments are now more heavily indebted than in 2008, when they bailed out large financial institutions, but failed to sustainably revive the world economy. Major monetary authorities do not have much policy space left after long pursuing unconventional expansionary policies.

Meanwhile, developing countries have been subject to increasing international integration, e.g., through global value chains, foreign financial institutional investments and increased short-term capital flows induced by the unconventional monetary policies of the US Fed, ECB and Bank of Japan, while debt-sustainability concerns for some are growing again.

These vulnerabilities have been compounded by growing trade protectionism, and dwindling precautionary reserve holdings of many developing economies as global trade has slowed. Even before President Trump’s election, developed countries had effectively killed the Doha Development Round, not least by opting for bilateral and plurilateral, instead of multilateral free trade deals.

Trump’s more explicit rejection of multilateralism in his efforts to eliminate major US bilateral trade deficits are now expected to further set back prospects for world economic recovery. Despite pious declarations to the contrary, most national policymakers typically turn from rhetoric about international cooperation to focus on domestic issues.

It has not been different this last time. A decade after the worst economic downturn since the 1930s’ Great Depression, the world economy remains vulnerable.

Anis Chowdhury, Adjunct Professor at Western Sydney University (Australia), held senior United Nations positions in New York and Bangkok.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.