November 2, 2018
Lecture: Climate Change and Governance
Category Archives: Macroeconomics
Safeguarding A Rules-based Trading System against America First Trade Economics
October 16, 2018
Safeguarding A Rules-based Trading System against America First Trade Economics
by Dr. Mari Pangestu, Universitas Indonesia
“Without concerted effort and a coalition of willing leadership, including from the EU and East Asia, the future of the rules-based trading system will remain under threat.”–Dr. Mari Elka Pangestu
Despite expectations that the US Federal Reserve would raise interest rates, capital flows to the United States have led to the appreciation of the US dollar against most major currencies.
The hardest hit countries are Argentina and Turkey, which are experiencing fiscal issues complicated by their political situations. Brazil, South Africa and the emerging countries in Asia have also been affected — albeit at a lower rate of depreciation of their currencies in the 10 to 12 per cent range. Even Australia and China have experienced depreciation of around 8 per cent and 5 per cent respectively.
The level of depreciation experienced by different economies reflects how investors perceive their different fundamental macroeconomic conditions, especially the level of their current account and fiscal deficits and policy outlooks.
The rising US dollar raises questions about the capacity of emerging economies to service their dollar-denominated debts and the vulnerabilities this could expose in their financial systems. Even if the current economic conditions point to a low potential for contagion from Argentina and Turkey, IMF Managing Director Christine Lagarde recently warned that ‘these things could change rapidly’. The uncertainty that already exists is a clear and present danger.
The uncertainty in the world economy has been increasing since Brexit and the election of President Trump in 2016, and in 2017 as the United States left the Trans-Pacific Partnership and announced many threats to impose trade restrictions. This uncertainty has heightened since January 2018 when US President Donald Trump made good on his threats to remedy bilateral trade deficits — what he sees as ‘unfair trade’ practices against the United States — by imposing tariffs on imported solar panels and washing machines, followed by aluminium and steel.
Since March, the greatest uncertainty has been from the brewing tit for tat trade conflict between the United States and China, which started with the imposition of 25 per cent tariffs on US$50 billion worth of China’s exports to the United States. China retaliated with the same sized tariffs on the same amount of trade from the United States. Trump then escalated the trade war further in September with the announcement of 10 per cent tariffs on US$200 billion worth of China’s exports to the United States.
The US–China trade conflict and the uncertainty surrounding it is expected to have knock on effects on global trade and investment flows. The impact of the reduction in China’s exports to the United States on China’s growth will reduce China’s imports, which in turn will impact the many countries that China has become a major trading partner for.
This means that China and other countries facing US trade restrictions will look for new markets for their goods. The situation has already led some countries to impose restrictions or initiate trade remedy investigations, for instance on steel. This uncertainty has and will continue to influence trade and investment, as businesses evaluate how the increased restrictions will affect their supply chains.
It is too early to tell how large the disruption will be, as it is not easy to dismantle supply chains. But the costs down the line could be great as businesses re-evaluate their trade and investment decisions to insulate themselves from tariffs rather than to maximise their competitiveness.
The most concerning aspect of all this is that, after 75 years of being its greatest advocate, the United States is now the biggest threat to the future of the rules-based trading system that has provided predictability and fairness in the way the world engages in trade. There is no clear light at the end of the tunnel.
The key question is: what is Trump’s intention? Is it to change the rules of the game to benefit the United States and address China’s ‘non-market-oriented policies’ or is it just anti-trade and America First? Assuming it is the former, there are at least three important responses needed.
First is safeguarding the stability of the World Trade Organization (WTO) as the overarching framework to provide predictability, fairness and stability. To this end, it is vital that the WTO dispute settlement mechanism continues to operate. The test case is the Chinese and EU case against US steel and aluminium tariffs and getting past the blocking of panel judge nominations by the United States.
Ensuring that the United States does not use blunt unilateral instruments to address its concerns also means that reforms to the WTO rule book are needed. More must be done to address concerns around intellectual property rights, investment, the environment, labour, competition policy, subsidies, tax, digital data and the treatment of developing countries.
Second, the process of opening-up must continue, with or without the United States. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership is a good start. And it is of the utmost importance that the Regional Comprehensive Economic Partnership negotiations are concluded in November this year. These are all important processes to signal the continued commitment of East Asia to expanding markets and fostering flows of trade and investment.
Third, and what most will agree is the most important process, is unilateral reforms. Given increased global uncertainty and limited policy space for fiscal stimulus, structural reforms are a must for East Asian countries, especially China. These range from trade and investment reforms, as well as reforms related to competition policy, intellectual property, the role of state-owned enterprises and sustainability. As in the past, unilateral reforms are more successfully undertaken when there is peer pressure and benchmarking from international commitments.
Without concerted effort and a coalition of willing leadership, including from the EU and East Asia, the future of the rules-based trading system will remain under threat.
Dr. Mari Pangestu is former Indonesian trade minister and Professor at the University of Indonesia.
This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Asian crisis, ready or not’.
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.
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.”
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.
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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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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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.
Jho Low’s Super Yacht –Equanimity– Back in Malaysia
August 7, 2018
Jho Low’s Super Yacht –Equanimity– Back in Malaysia
https://www.asiasentinel.com/politics/low-taek-jho-yacht-malaysia/
The US$250-million super-yacht Equanimity, which led international authorities on a high-seas chase across half the world before it was seized by Indonesian authorities in February, is expected to be turned over to Malaysia at Port Klang’s Boustead Cruise Center, according to authorities.
Equanimity, launched in 2013 in a Netherlands shipyard, was the brainchild of the youthful financier Low Taek Jho, who at age 28 helped former Malaysian Prime Minister Najib Razak turn an obscure investment fund into 1Malaysia Development Bhd., which became the biggest scandal in Malaysian history, with US$4.5 billion missing to scandal and billions more lost to epic mismanagement.
Najib is now free on bail facing corruption charges, maintaining his innocence, although he is barred from leaving the country. The cherubic Jho Low, as the Penang-born Wharton grad was known in his playboy days, is nowhere to be found. He is listed on Wikipedia as having a fortune estimated at US$1.5 billion.
Jho Low’s lawyer, James F. Haggerty, said in a prepared release that the seizure of the vessel was “a violation of an Indonesian law and court decision by a politically motivated Malaysian government bent on advancing its own political agenda with little regard to existing court rulings or basic legal rights.”
Equanimity, Haggerty said, is owned by Equanimity (Cayman) Ltd and the company was already litigating the matter in Indonesia and the United States. In April, a US judge ruled the yacht could be transported to the US and into the Justice Department’s custody. However, that ruling has never been carried out.
“Mahathir has chosen to bring the asset illegally into a rigged Malaysian system manipulated by a man who only cares about his absolute political rule. It is ultimately justice that suffers,” the statement said.
Finance Minister Lim Guan Eng, the head of the Democratic Action Party, said the vessel would be auctioned off.
News reports in July had Jho Low fleeing Macau, which has been a bolt-hole on several occasions, for China in front of a series of search warrants issued across the planet over his part in the 1MDB scandal. Malaysian police on July 9 said Macau authorities informed them by email that Low had left the gaming enclave.
Najib Razak and his cell mate, Jho Low
“The e-mail did not specify when Low left Macau,” Malaysian National Police Chief Mohamad Fuzi Harun told reporters on July 11. “It is hard to trace him as he is believed to be using multiple passports.”
The US Justice Department, which called 1MDB the biggest kleptocracy case in the agency’s history, had been trying to find the yacht since 2016 to add it to the vast list of confiscations it had made in the United States of goodies bought with stolen 1MDB money. Equanimity’s crew turned off the transponders which would allow it to beam its position to satellites and sought waters where G-men couldn’t go, turning up sometimes in New Zealand, sometimes in Macau, sometimes off Korea.
But eventually it turned up in Bali, where the US alerted Indonesian authorities. Jakarta’s notoriously corrupt South District Court blocked the Justice Department’s move to seize the vessel, raising concerns that it might take to the high seas again.
But when the United Malays National Organization and Najib lost the May 9 general election, the game was up. Prime Minister Mahathir Mohamad announced on August 6 in a Facebook post that that “we are happy since the Equanimity yacht has been handed over to us by Indonesia.”
Miranda Kerr–One of Jho Low’s Playmates
The 90-meter yacht is said in yachting magazines to feature a deck-level Jacuzzi, a sauna, helicopter pad, swimming pool, beach club, beauty salon, zero-speed stabilizers, gym, spa, elevator, movie theatre, tender garage, swimming platform, air conditioning, steam room, Turkish bath, beauty room, underwater lights and owner’s stateroom study, sleeps 26. Registered in the Cayman Islands, it was at the center of a truly astonishing burst of excess by Jho Low, his Arab Gulf buddies and the Najib family that raised questions how they ever thought they would get away with it.
The fund got underway in 2008. A couple of years later, Jho Low turned up in New York, buying magnums of Cristal Champagne and pouring it over the likes of Paris Hilton and other blondes. He buddied up with singer Lionel Ritchie and, with Arab friends who turned out to be heavily involved in fleecing 1MDB, staged a moveable feast across Broadway, making the notorious Page 6 of the New York Post, where celebrities go to be photographed.
Vast collections of jewelry, homes in New York and Beverly Hills, airplanes, paintings, a staggering panoply of loot has been sequestered by the US government, including the proceeds from two movies by the production company set up by Riza Aziz, the son by a previous marriage of Rosmah Mansor, Najib’s wife.
Although Malaysia authorities confiscated an astonishing US$193-233 million in jewelry, watches, handbags and other valuables from the Najib family’s homes, as much as RMB100 billion (US$24.8 billion) of funds linked to Najib and his wife, Rosmah are stashed in bank accounts outside Malaysia, according to a source quoted by Sarawak Report, which said much of that money is believed to be in Hong Kong bank accounts, after having travelled through German and Swiss banks.
That leaves the question of what’s become of Jho Low himself. It’s hard to believe Chinese authorities will have much patience with him.
Mahathir thanked Indonesian President Joko Widodo for his cooperation in returning the vessel. Mahathir visited Jakarta in June. Ties between Malaysia and Indonesia are close with Mahathir visiting Jakarta in June, his first official tour of the region.
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.
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
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.
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.
Din Merican: the Malaysian DJ Blogger 