Brexit Outcome: Schumacher’s Lessons for Nations

New York

June 28, 2016

by Dr. Lim Teck Ghee

Over 40 years ago, a British economist, E.F. Schumacher, published a collection of essays on the theme of “small is beautiful” which argued that the modern growth-obsessed economy is unsustainable.

Anticipating the present global warming and environmental crisis in our land and oceans, he noted that natural resources should be treated as capital, since they are not renewable and subject to depletion. He further argued that nature’s ability to fight and resist pollution is limited as well – a warning which has still not sunk deeply enough into the corridors of power all over the world.

Besides his somber – and now proven to be correct – message on environmentalism, he made the case for sustainable development and against inappropriate technology transfer to developing countries which, in his view, would not resolve the underlying problems of unsustainable economies.

Schumacher was also amongst the earliest economists to question the appropriateness of using gross national product and other pure economic indicators to measure human well-being.

What has been referred to as “his dense mixture of philosophy, economics and politics” struck an immediate chord with Western readers, especially during the era of the 70s and the advent of the first global energy crisis. In 1995, the Times Literary Supplement ranked the slim volume of his work as among the 100 most influential books published since World War II.

Since then his influence appears to have waned. New critiques of conventional economic thinking have emerged; and Schumacher’s concern for the “philosophy of materialism” to be replaced or subsumed to ideals such as justice and harmony, and his counter-cultural ideas on the organic, the gentle, the non-violent, the elegant and beautiful as laid out in his Buddhist economics, have been taken up by less credible “gurus” with new vocabulary omitting his ideas and name.

Today, however, some of the concerns which “small is beautiful” raised in 1973 just before the push for European Union began to take place, are echoing in the popular sentiments and issues raised by the “Leave” voters in the Brexit referendum.

Why Britain is Leaving EU

The historic upset defeat of the “Remain” camp and successful revolt against the EU has been explained and interpreted in many ways.

In a lead article, the day after the referendum result, the BBC listed 8 reasons why Leave won the UK referendum on the EU. These reasons included the backfiring of Brexit economic warnings; bungled leadership of the Prime Minster, David Cameron; Labour’s disconnect with voters; the inter-generational divide with older voters preferring to leave; the ascendency of immigration and national and cultural identity issues in the minds of lower income voters; perceived economic benefits; and finally, the influence of Euroskeptic leaders and critics such as Nigel Farage and Boris Johnson during the referendum campaign.

While all the reasons advanced played a role in the final voting count to tilt the balance towards those opting for an uncharted and potentially precarious future, in one sense it represented a rejection of what local Britishers see as a much too big, too powerful and out-of-touch technocratic Frankenstein’s monster – as described in a United Kingdom Independence Party’s internet newsletter on the eve of the referendum – which has made life not only difficult but has also profoundly alienated the common citizen (http://www.ukipdaily.com/eu-is-a-frankenstein/)

In the immigration issue especially which assumed center stage in the Brexit debate, many Britons resent the EU migrants who legally move to jobs in Britain, are seen as taking jobs away from locals and are alleged to abuse the country’s benefits and welfare system.

And this is by no means just a view found in Britain. Other nations in the EU face similarly disenchanted citizens fed up with the “big is good; bigger is better” philosophy in economic and political systems that Schumacher warned against, and which the enlarged grouping of European nations seemed to signify.

Ordinary people and communities seem to be looking for solutions which call for more local autonomy and for moves away from centralized control towards greater decentralization and a return to local and national economies in which they have greater influence, however naive or impractical it may appear to the political and business elites that run our world today.

The same soul searching in the rest of Europe has already produced populist politicians and a growing number of Euroskeptics. They will seek their own referendums on EU membership and if successful will produce a breakup of the present union; and the need as French Prime Minister  Manuel Valls puts it “to invent another Europe.”

Can Malaysia Learn

In Malaysia the Brexit referendum result has produced the predictable dollars and cents focused analysis of what it means to the nation’s trade and investment flows as well as to the property, education and other sectors whose links with the UK are based on its inclusion in the EU. This is a limiting and inadequate focus which misses the larger lessons to be learned.

In our part of the world, especially in Sabah and Sarawak which opted to join Malaya and Singapore in the formation of Malaysia in 1963, a sense of alienation towards the federalized centralized political entity, run from Kuala Lumpur and beholden to UMNO’s agenda, has been brewing for some time.

In August 2014, a coalition of NGOs, politicians and activists from Sarawak and Sabah drew up a petition addressed to the United Nations (UN) secretary-general to re-open the issue of self-determination for the two East Malaysian states. The petition believed to be signed by some 100 representatives was also copied to the UN Special Committee of 24 (C-24) and the UN Human Rights Committee (http://www.theborneopost.com/2014/08/13/group-draws-up-self-determination-petition-for-sarawak-and-sabah/#ixzz4Ccnmmakv).

These local autonomy and even separatist tendencies and forces are not going to go away. At some point – unless real reforms are put in place to provide for greater autonomy and to protect the freedoms and sense of local identity that the local communities from the two states feel they have lost – we will have our own version of Brexit demanded more forcefully.

 

For America, ‘Brexit’ May Be a Warning of Globalization’s Limits

New York

June 25, 2016

By Nelson D. Schwartz and Patricia Cohen

http://www.nytimes.com

A trader at the New York Stock Exchange sported a Union Jack on her bag. The Dow Jones industrial average finished down over 600 points after the vote results became known. Credit Joshua Bright for The New York Times

When the mills that birthed the industrial revolution in cities like Manchester and Birmingham still powered the British economy of the mid-20th century, Robert Stevenson was a frequent visitor to the Midlands.

Eastman Machine, the company his family helped start in upstate New York 128 years ago, had a big factory 100 miles north of London, and Britain accounted for roughly a fifth of the firm’s sales.

That was then. While Britain is still an important market for Eastman’s sophisticated cutting tools, its workshop there was shuttered in the 1970s, and British customers are now served by Eastman’s main factory in Buffalo and a smaller one in China.

So when the British electorate stunned the world on Friday with the results of the vote to leave the European Union, it was a shock for Mr. Stevenson, but not because it poses an immediate threat to Eastman’s bottom line or the job security of its heavily blue-collar, 120-strong work force in downtown Buffalo.

What most concerns Mr. Stevenson and owners of businesses big and small is what the so-called Brexit says about the shape of economic things to come.

“You never know if there will be a domino effect, and we worry about other countries securing their borders,” Mr. Stevenson said. “We were certainly surprised.”

For all the shock and awe on Wall Street and financial markets around the globe on Friday, the imminent danger to the underlying American economy is relatively small. What’s far more worrisome is whether Britain’s decision represents an end to the economic integration and opening markets that have helped propel sales at companies like Eastman over the last few decades.

Since the fall of Berlin Wall in 1989, politics and economics have mostly moved in one direction, with the elites on both sides of the Atlantic favoring policies like the North American Free Trade Agreement with Canada and Mexico, the introduction of the European currency and the entry of China into the World Trade Organization. Business has applauded these moves, but voters are not necessarily on board as they once were.

“I think a lot of the market reaction is less about the financial impact and more about populism and what it means for the liberal economic order,” said Glenn Hubbard, a top economic official to President George W. Bush who now serves as dean of the Columbia Business School.

The Brexit vote, he added, reflects a deep distrust of the benefits of the global economic system among a wide swath of voters in Europe and the United States, and a broadly held view that government institutions — whether in Washington or Brussels — are calcifying and don’t work well.

“Both of those forces have a lot of wind at their back,” he said.“In the near term, you’re seeing markets being roiled, and feedback effects for the Federal Reserve,” Mr. Hubbard said. But for now, at least in the United States, “I don’t think it’s going to raise recession probabilities.”

When it comes to commerce, Britain is not even among the United States’ top five trading partners — it’s currently the seventh largest, according to the United States Census Bureau, which tracks trade data. American exports to Britain last year totaled $56 billion, or just over 0.3 percentage point of gross domestic product.

Partly that’s a reflection of how the United States, despite leading the era of globalization, remains something of an economic island. Exports account for 13.4 percent of American economic output, according to the World Bank, compared with roughly 30 percent for Britain.

The 2015 slowdown in the United States’ biggest trading partner — China — may have blunted domestic growth in the last year, but even that hardly threw the American economy into a tailspin. Nor should Brexit, most experts say.

Jared Bernstein, a liberal economist who most recently served in the Obama administration and is now a senior fellow at the Center on Budget and Policy Priorities, sees minimal pain within American borders. “It won’t be helpful for our economy,” Mr. Bernstein said, but “we won’t take anything like the direct hit that I expect will befall the economy.”

Several economists estimated that the fallout from the vote would probably end up decreasing growth in the American economy by about a quarter of a percentage point or less, while postponing any push by the Federal Reserve to raise interest rates, possibly through the end of 2016.

“The flight to safety means lots of people are flocking to U.S. Treasury bonds, putting downward pressure on interest rates,” Mr. Bernstein said. “One possible outcome is that Fed’s path to higher interest rates may become flatter as these events play out.”

Brexit’s impact on the United States economy will mostly be felt through the falling value of the pound and the euro against the dollar, Mr. Bernstein said, which is “likely to slow down inflation and exacerbate our trade deficit.”

A surging dollar would hurt American exporters facing weaker demand from customers in Europe and Asia. In fact, Mr. Stevenson’s main worry on Friday was whether his British competitors might actually benefit in the short term.

“With the pound dropping 10 or 15 percent, it may strengthen a couple of our competitors in the U.K.,” he said. “I think they could be quite happy about it and gain market share.”

As befits the owner of a company that survived World Wars I and II, outlasted the Great Depression and the Great Recession, and survived the collapse of the American textile industry — all without abandoning Buffalo — Mr. Stevenson has learned to adapt to potential shocks like Brexit.

Increasingly, that’s meant focusing on making high-tech, software-driven equipment to cut composites and carbon-based fabrics for the aerospace industry and automakers, rather than the woolens and cotton Eastman’s equipment was once designed to slice.

Many of Mr. Stevenson’s current customers in Britain are in these sectors, he noted. The dressmakers and hosiers and other clothiers that once populated England’s redbrick towns have long departed.

“Our focus has been to understand where the market is going,” said Mr. Stevenson. Twenty years ago, 70 percent of Eastman’s products were of traditional fabrics; the rest were space-age materials. Now, it is the reverse, which is among the reasons a fifth generation of Stevensons will have a company to take over.

“Our goal has been to maintain the company in Buffalo and as a family business,” Mr. Stevenson said. “My son is 40, and I’m 65, and he is focused on these new materials. This saved our butt.”

For those exporters that have managed to hang on in the industrial heartland of Britain, the Brexit could actually be good news, simply because the pound’s plunge against currencies like the euro and the dollar makes their goods more competitive.

British exports like Rolls-Royce jet engines, high-end Jaguar automobiles and certain food products could get a lift. Last month, for example, Britain exported the largest cargo of wheat to the United States in more than two decades.

So would British hotels and restaurants, eager to host American visitors looking for what could amount to a 10 to 20 percent-off sale.

“If you wanted to buy a nice little house in Scotland, today’s the day,” said Kevin A. Hassett, an economist at the conservative American Enterprise Institute.

Chief executives of major American companies are paid well to see around corners, and must adapt their businesses even to trends they oppose, or face the consequences in the form of falling stock prices and angry shareholders.

That’s among the reasons General Electric, which relies on foreign markets for more than half its revenue, has been preparing for the kind of political retreat from open markets that the British vote to leave the European Union represents.

“Companies must navigate the world on their own,” G.E.’s chief executive, Jeffrey R. Immelt, said in the commencement speech last month at the N.Y.U. Stern School of Business.

For G.E., he said that meant seeking to achieve “a local capability inside a global footprint.” Today, its 420 factories spread across the world give G.E. “tremendous flexibility,” Mr. Immelt said, with jet engines, power generators and rail locomotives increasingly manufactured at several sites to ensure market access.

“A localization strategy,” Mr. Immelt said, “can’t be shut down by protectionist politics.”

G.E. had prepared for the risk that Britain might vote to leave the E.U. by hedging in foreign currency markets. But beyond that immediate step, a G.E. spokeswoman said on Friday it was too early to discuss longer-term moves the company might make.

Mr. Immelt, in a statement, said that G.E., America’s largest manufacturer, which employs 22,000 people in Britain and 100,000 in Europe over all, remains “firmly committed” to both Britain and Europe.

While Brexit’s impact on Britain’s overall economy may be mixed, its London-based financial sector is likely to feel the full force of the coming storm. The City, as London’s equivalent of Wall Street is known, has boomed in the last 20 years as a global financial capital, especially for Continental banks seeking a more market-friendly home than Frankfurt or Paris.

With a recession in Britain now a distinct possibility, some experts worry that a government desperate to create and maintain jobs could seek to save the financial sector by making the City more attractive as an offshore haven.

“This could lead to London becoming even more like the Cayman Islands and other British territories, skirting around regulations, in a race to the bottom for the financial sector,” said Adam S. Posen, a former member of the rate-setting committee at the Bank of England and now president of the Peterson Institute for International Economics in Washington. “This potentially could leave pretty big holes in the financial safety net.”

He pointed to the 2008 crisis involving the insurance giant American International Group, where a hedge-fund-like subsidiary operating in London and under less stringent rules nearly brought down the company and contributed to the financial crash.

“They could get away with things in London that they couldn’t get away with in New York,” Mr. Posen said, “So imagine repeating that on a larger scale or a more frequent scale.”

Of course, dangers like those are the hardest to anticipate. “Right now we’re in one of those points in history,” Mr. Hassett of the American Enterprise Institute said, “where there are lot of ‘unknown unknowns,’” referring to the infamous comment by former Defense Secretary Donald Rumsfeld on the Iraq war.

Consider two very different types of uncertainty, Mr. Hassett explained, citing a well-known economic metaphor. If you bet on a roulette wheel, you know all the possible outcomes and the attendant risks. But now imagine a game where you don’t know all the places the roulette ball might land, or the chances of it falling into different slots or even the prizes if you are fortunate enough to bet correctly.

“In those types of situations,” he said, “anything can happen. And if you don’t know what will happen, the optimal strategy might be to assume the worst.”

Steve Lohr contributed reporting.

A version of this article appears in print on June 26, 2016, on page BU1 of the New York edition with the headline: ‘Brexit’ in America. Order Reprints| Today’s Paper

BREXIT and British Nationalism: Emotion versus Economics

June 3, 2016

Danish experience and an anti-EU vote

by Joergen Oerstroem Moeller in Singapore

“There is no compelling economic case for ‘Brexit’. Economic facts point unequivocally to Britain losing from leaving. The size of the loss is open for dispute; the direction is not. By contrast, the economic arguments for departure are vague and half-formed. Some Brexiteers say the UK would be less constrained by red tape. Yet Britain already is one of the least regulated economies. There is not the slightest evidence why a departing UK would have more or better opportunities for non-European Union trade…

In a media maelstrom people fall back on whom they trust. Voters all over the world are losing confidence in mainstream politicians, giving their support to so-called plain speakers who (however improbably) appear to care for ordinary citizens, like the UK’s Boris Johnson and America’s Donald Trump.”—Joergen Oerstroem Moeller

It hardly helps the Remain camp that, in the past, Prime Minister Cameron has been less than clear about his commitment to Europe. Not so long ago he was seen as a eurosceptic.

As a dedicated European, I fear the Leave campaign (BREXIT) will prevail on June 23. This prognosis of the British referendum outcome is based on experience of four Danish votes on European issues – in June 1992, May 1993, September 2000 and December 2015 – two of which took place when I was state secretary in the Danish Foreign Ministry.

We can’t rely too much on opinion polls. According to an old saying, politicians shouldn’t call referendums unless, from the beginning, they can be sure of the outcome. Yet three of the Danish referendums led to a No vote, despite a big Yes majority when they were announced.

There is no compelling economic case for ‘Brexit’. Economic facts point unequivocally to Britain losing from leaving. The size of the loss is open for dispute; the direction is not. By contrast, the economic arguments for departure are vague and half-formed. Some Brexiteers say the UK would be less constrained by red tape. Yet Britain already is one of the least regulated economies. There is not the slightest evidence why a departing UK would have more or better opportunities for non-European Union trade.

Yet – precisely because so much of the argument turns on economic questions – I conclude that the answer might be No to the EU. Many voters agree neither that the referendum should be fought on economic issues, nor with Prime Minister David Cameron’s dire analysis of the consequences of EU rejection.

Forecasts from the UK Treasury are played down as high-level conjecture, hotly contested by other experts. Danish referendum experience tells us, alas, that anti-establishment dissenters refuting official theses command great media attention, leaving the electorate baffled and reaping great gains for the anti-government cause.

In a media maelstrom people fall back on whom they trust. Voters all over the world are losing confidence in mainstream politicians, giving their support to so-called plain speakers who (however improbably) appear to care for ordinary citizens, like the UK’s Boris Johnson and America’s Donald Trump.

Such no-longer-fringe politicians address issues such as migration. They ply the electorate with talk of the ‘good old days’– in Britain’s case, the empire and the special relationship with the US. In fact, almost all Commonwealth countries, along with President Barack Obama, have made clear they would prefer Britain to stay in. But that cuts no ice with the voters.

The populists’ trade is in lines such as, ‘There will be mistakes made in the future, but let them be our own mistakes.’ That counts for much more than statistics about growth and costs of living.

It hardly helps the Remain camp that, in the past, Prime Minister Cameron has been less than clear about his commitment to Europe. Not so long ago he was seen as a eurosceptic.

When the Prime Minister tabled his list of proposed reforms, this implicitly did not exclude recommending departure if the result was unsatisfactory. Cameron has frequently stated that Britain could survive outside the EU without dire hardship. All this resonates badly with his present tone sketching cataclysm outside the EU. Short though the electorate’s memory may be, voters remember enough of what Cameron said before to hold him to at least some of the findings.

The 23 June vote is politically and psychologically complex. It is not a general election where party loyalty plays a role and simple questions decide the outcome. A cocktail of sympathies, emotions and sentiments are at work, reflecting attitudes towards politicians, neighbouring countries and the world.

Reflecting this broad interplay of forces, pro-EU campaigners are deluded if they think they can win the referendum solely on economic arguments. They will have to engage on the emotional questions too. Otherwise, on 24 June, Britain may find itself out in the cold.

Joergen Oerstroem Moeller is Senior Research Fellow, ISEAS Yusof Ishak Institute, and Singapore Management University, and a former State Secretary at the Danish Foreign Ministry. This is No.75 in the series – the 100th article will appear on 23 June.

OMFIF’s series on the UK EU referendum presents a wide variety of perspectives from Britain and around the world ahead of the June 23 poll. We are assuring a balance between many different points of view, in line with OMFIF’s overall neutral stance on the issue.

© 2016 OMFIF

 

Malaysia’s economy contracts–Bad News

May 13, 2016

by Joseph Chin

http://www.thestar.com.my

Malaysia’s economy grew at a slower pace of 4.2% in the first quarter of 2016, due to slower growth in the manufacturing and services sectors, but the overall growth was still above economists’ forecast of a subdued 4% growth.

The Statistics Department said on Friday the growth of 4.2% was slower when compared with the 5.7% growth a year ago. It was also slower than the 4.5% expansion in the fourth quarter ended Decembe 31, 2015.

“On a quarter-on-quarter seasonally adjusted, the GDP for first quarter of 2016 grew 1.0%,” it said. In the Q1, 2016, all sectors on the production side posted a positive growth except for agriculture. The continuous expansion in the dervices, manufacturing and construction has led the growth and remained as the main catalyst.

2016 is going to be a difficult year–Get Real

In a separate statement, Bank Negara Malaysia (BNM) said the services sector grew 5.1% in Q1, 2016 from 6.4% a year ago, manufacturing expanded 4.5% from 5.6% a year ago also. As for mining, it shrunk to grow at 0.3% only from 9&.Construction expanded at a slower pace of 7.9% from 9.6% while agriculture’s contribution was -3.8% from -4.1% a year ago. The Statistics Department said on the expenditure side, the economy was spearheaded by private final consumption expenditure and government final consumption expenditure.

“The expansion in both consumptions has offset the sluggish performance in external demand,” the department said. Malaysia’s value of GDP in current terms for Q1, 2016 amounted to RM291bil.

Q1 2016 GDP versus Q4 2015

The services sector expanded at 5.1% (Q4, 2015: 5.0%) supported by the wholesale & retail trade (5.2%) and information & communication (8.5%).

The manufacturing sector grew 4.5% (Q4, 2015: 5.0%) supported by the electrical, electronic & optical products (5.7%), mainly in semiconductors, computers and peripheral equipment.

The department said this sector performance’s was further supported by petroleum, chemical, rubber & plastic products that grew 2.7% (Q4, 2015: 1.4%) following a turnaround in refined petroleum products and expansion in chemical and plastic products.

Construction sector rose at a faster rate of 7.9% (Q4, 2015: 7.4%). Civil Engineering sustained its double-digit momentum bgrowth of 17.5% though slower from the preceeding quarter (Q4 2015: 20.4%) and continued to support the construction sector.

In terms of expenditure, the department said private final consumption expenditure rose to 5.3% (Q4, 2015: 4.9%) underpinned by consumption of food & beverages, housing & utilities, communication and transportation.

But gross fixed capital formation (GFCF) eased to 0.1% (Q4 2015: 2.7%) due to the deceleration in machinery & equipment (-7.1%) as well as other asset (-3.3%). While the public sector (share: 30.1%) contracted 4.5% which has influenced towards the moderation of GFCF in this quarter, the private sector posted a growth of 2.2% (Q4 2015: 4.9%).

 

Psychology matters a great deal

May 1, 2016

Psychology matters a great deal in determining shifts in the economy.

by Robert J. Shiller

http://www.nytimes.com

“We don’t know whether any specific event — say, an unexpected spike in oil prices or a decline in the stock market — will help transform any of the current social stories into a truly virulent economic disruption. We don’t know what is coming or when. But history does tell us that human imagination can spontaneously transform discrete events into world-shaking narratives of unexpected colour and force.”– Robert Shiller –Nobel Prize Laureate in Economics 2013

Economists are good at measuring the past but inconsistent at forecasting future events, particularly recessions. That’s because recessions aren’t caused merely by concrete changes in the markets. Beliefs and stories passed on by thousands of individuals are important factors, maybe even the main ones, in determining big shifts in the economy.

That is likely to be the case again, whenever we next endure a global recession. Worries that a big downturn might be imminent seem to have abated, but they still abound. In April, for example, the International Monetary Fund reported in its World Economic Outlook that while very modest growth is likely this year, the world economy was in a “fragile conjuncture.”

It is therefore worth asking what actually sets off a real global recession. Most discussions focus on leading indicators — statistics about economic variables that have preceded recessions. While these kinds of correlations can sometimes be useful in forecasting, they provide little understanding of why major changes are taking place. Leading indicators don’t usually address ultimate causes, nor do econometric models that try to predict events.

In fact, it’s instructive to remember that global recessions have usually begun suddenly and been a real surprise to most people. As I have argued in this column and with George A. Akerlof in Animal Spirits (Princeton 2009), such events can largely be ascribed ultimately to contagious stories of wide significance. Basically, global recessions tend to begin when newly popular narratives reduce individuals’ motivation to spend money. Psychology matters a great deal.

The biggest recession of all, the Great Depression, began suddenly with the stock market crash of October 1929, as Christina Romer, former chairwoman of President Barack Obama’s Council of Economic Advisers, pointed out in a famous paper. Even before 1929 was over, she found, department store sales and automobile registrations had declined, indicating that consumer spending had already dropped sharply. But why?

Economists were alarmed by the crash, she found, and their warnings helped make consumers wary. But let’s not overestimate the importance of these economic forecasts: Most people never actually read them. They received their information from other channels.

Back then, immediately after the market crash, church sermons were a powerful influence. Congregations were told that many business people had behaved like gamblers and hucksters. Through these sermons and other word-of-mouth sources, moralising about the stock market crash spread, affecting mass psychology. Frederick Lewis Allen, in the epilogue to his 1931 best-seller Only Yesterday: An Informal History of the 1920s, wrote that cultural values changed after the crash: People began to dress more modestly, adopting a new formality and religiosity, reviving Victorian sexual taboos. It is reasonable to assume that many of these changes had an economic impact, mainly by discouraging spending.

Similarly in more recent downturns, broad cultural and social changes had big effects, too. Since World War II, there have been four global recessions, according to the International Monetary Fund, which defines such an event very specifically as negative global per capita economic growth over at least one year. In each case, these recessions lasted only one year, although relatively slow economic growth rates were also an issue in periods surrounding them. The recessions ended in 1975, 1982, 1991 and 2009.

As they had with the Great Depression, economists have cited concrete causes for these events. Oil has been named as a fundamental factor in each case, with price spikes blamed on the Yom Kippur war of 1973, the Iran-Iraq War beginning in 1980, the 1990-91 Persian Gulf war and rising energy demand in China and other emerging countries in 2008.

Broader social narratives are sometimes ignored, but they matter, too. Consider the recession of 1975. Along with oil prices, common ways of understanding and describing daily life also changed. The oil crisis was widely said to signal the end of an era of abundance. Lower highway speed limits were imposed to conserve fuel, and cars grew smaller. Americans were told to lower their home thermostats to 68 degrees. In large numbers, people began wearing sweatsuits, flannel leg warmers, thermal underwear and long johns. Among all this austerity, economist E.F. Schumacher’s 1973 best-seller Small Is Beautiful became a global morality lesson.

Let’s jump to the most recent global recession, the one of 2009. Oil prices, subprime mortgages and the freezing up of the financial system after the collapse of Lehman Brothers were all important factors. But why did we have a global recession? The transformation of distinct events into a broad global slowdown occurred through a variety of mechanisms. Reports about financial misdoings, the possible collapse of venerable institutions, rising unemployment caused by advanced technology — all of these affected the psychology of spending.

Where does this leave us now? No single narrative seems to have enough compelling force at the moment to engender a downturn as big as the last one. Many people have been borrowing from older narratives of risk and vulnerability while trying to understand the current economy. Oil prices have been slumping, not soaring, but there are significant worries about outsourcing, downsizing and globalisation, along with deep concerns about rising inequality, refugee and immigrant flows, and what has been called secular stagnation of the economy. Political candidates on both the left and the right have been spinning charged and sometimes disruptive narratives about these issues.

We don’t know whether any specific event — say, an unexpected spike in oil prices or a decline in the stock market — will help transform any of the current social stories into a truly virulent economic disruption. We don’t know what is coming or when. But history does tell us that human imagination can spontaneously transform discrete events into world-shaking narratives of unexpected colour and force.

 

‘Free trade’ in trouble in the United States

May 1, 2016

‘Free trade’ in trouble in the United States–Obama’s TPPA Legacy hangs in a balance in a US Presidential Election Year

by Martin Khor

http://www.thestar.com.my

“Many development-oriented economists and groups were right to caution poorer countries against sudden import liberalisation and pointed to the fallacy of the theory that free trade is always good, but the damage was already done.Ironically, it is now the US establishment that is facing people’s opposition to the free trade logic. “–Martin Khor

Reaganomics vs Clintonomics?

As free trade reaches a crossroads in the US, developing countries have to rethink their own trade realities for their own development interests.

“FREE trade” seems to be in deep trouble in the United States, with serious implications for the rest of the world.Opposition to free trade or trade agreements emerged as a big theme among the leading American presidential candidates.

Donald Trump attacked cheap imports especially from China and threatened to raise tariffs. Hillary Clinton criticised the Trans-Pacific Partnership Agreement (TPPA) which she once championed, and Bernie Sanders’ opposition to free trade agreements (FTAs) helped him win in many states before the New York primary.

That trade became such a hot topic in the campaigns reflects a strong anti-free trade sentiment on the ground .Almost six million jobs were lost in the US manufacturing sector from 1999 to 2011. Wages have remained stagnant while the incomes of the top one per cent of Americans have shot up.Rightly or wrongly, many Americans blame these problems on US trade policy and FTAs.

The downside of trade agreements have been highlighted by economists like Joseph Stiglitz and by unions and NGOs. But the benefits of “free trade” have been touted by almost all mainstream economists and journalists. Recently, however, the establishment media have published many articles on the collapse of popular support for free trade in the US:

•  Lawrence Summers, former Treasury Secretary, noted that “a revolt against global integration is under way in the West”. The main reason is a sense “that it is a project carried out by elites for elites with little consideration for the interests of ordinary people”.
•  The Economist, with a cover sub-titled “America turns against free trade”, lamented how mainstream politicians are pouring fuel on the anti-free trade fire. While maintaining that free trade still deserves full support, it cites studies showing that the losses from free trade are more concentrated and longer-lasting than had been assumed.
•  Financial Times columnist Phillip Steven’s article “US politics is closing the door on free trade” quotes Washington observers saying that there is no chance of the next president or Congress, of whatever colour, backing the TPPA. The backlash against free trade is deep as the middle classes have seen scant evidence of the gains once promised for past trade deals.
• > In a blog on the Wall Street Journal, Greg Ip’s article The Case for Free Trade is Weaker Than You Think concludes that if workers lose their jobs to imports and central banks can’t bolster domestic spending enough to re-employ them, a country may be worse off and keeping imports out can make it better off.

Orthodox economists argue that free trade is beneficial because consumers enjoy cheaper goods. They recognise that companies that can’t compete with imports close and workers get retrenched. But they assume that there will be new businesses generated by exports and the retrenched workers will shift there, so that overall there will be higher productivity and no net job loss. However, new research, some of which is cited by the articles above, shows that this positive adjustment can take longer than anticipated or may not take place at all.

Thus, trade liberalisation can cause net losses under certain conditions. The gains from having cheaper goods and more exports could be more than offset by loss of local businesses, job retrenchments and stagnant wages.There are serious implications of this shift against free trade in the US.

The TPPA may be threatened as Congress approval is required and this is now less likely to happen during Obama’s term.Under a new President and Congress, it is not clear there will be enough support.

If the US does not ratify the TPPA, the whole deal may be off as the other countries do not see the point of joining without the US.US scepticism on the benefits of free trade has also now affected the multilateral arena. At the World Trade Organisation, the US is now refusing attempts to complete the Doha Round.

More US protectionism is now likely. Trump has threatened to slap high tariffs on Chinese goods. Even if this crude method is not used, the US can increasingly use less direct methods such as anti-dumping actions. Affected countries will then retaliate, resulting in a spiral.

This turn of events is ironic.For decades, the West has put high pressure on developing countries, even the poorest among them, to liberalise their trade.A few countries, mainly Asian, staged their liberalisation carefully and benefited from industrialised exports which could pay for their increased imports. However, countries with a weak capacity, especially in Africa, saw the collapse of their industries and farms as cheap imports replaced local products.

Many development-oriented economists and groups were right to caution poorer countries against sudden import liberalisation and pointed to the fallacy of the theory that free trade is always good, but the damage was already done.Ironically, it is now the US establishment that is facing people’s opposition to the free trade logic.

It should be noted that the developed countries have not really practised free trade. Their high-cost agriculture sector is kept afloat by extremely high subsidies, which enable them to keep out imports and, worse, to sell their subsidised farm products to the rest of the world at artificially low prices.

Eliminating these subsidies or reducing them sharply was the top priority at the WTO’s Doha Agenda. But this is being jettisoned by the insistence of developed countries that the Doha Round is dead.

In the bilateral and plurilateral FTAs like the TPPA, the US and Europe have also kept the agriculture subsidy issue off the table.

Thus, the developed countries succeeded in maintaining trade rules that allow them to continue their protectionist practices.Finally, if the US itself is having growing doubts about the benefits of “free trade”, less powerful countries should have a more realistic assessment of trade liberalisation.

As free trade and trade policy reaches a crossroads in the US and the rest of the West, developing countries have to rethink their own trade realities and make their own trade policies for their own development interests.

Martin Khor (director@southcentre.org) is executive director of the South Centre. The views expressed here are entirely his own.