Bachelet vs. Neo-Con Bolton at The United Nations


September 20, 2018

 Bachelet vs. Neo- Con Bolton

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The new UN High Commissioner for Human Rights, former Chilean President Michelle Bachelet (pic above), arrives on the job at a time when the office she leads is coming under attack – and not only from the usual suspects. In fact, it is US National Security Adviser John Bolton, a longtime adversary of the UN, who poses the biggest threat.

 

NEW YORK – On September 1, Michelle Bachelet, the former president of Chile, took office as the United Nations High Commissioner for Human Rights. Her long record of success in Chilean politics has prepared her well for this assignment, which could easily become one of the toughest of her career.

The office she leads is under attack, and not only from thuggish authoritarian leaders in Egypt, Hungary, the Philippines, and Russia. American officials – and in particular, National Security Adviser John Bolton – are also working hard to undermine the office’s effectiveness. Among Bachelet’s top challenges will be persuading the US Congress to block efforts by the Trump administration to withhold funds from her agency in violation of US treaty obligations.

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That message may be a hard sell, but her experience makes her uniquely qualified to deliver it. In 1975, Bachelet and her mother were imprisoned and tortured by Chilean dictator Augusto Pinochet’s regime. For several weeks, Bachelet was blindfolded and strapped to a chair in the Villa Grimaldi detention center in Santiago as her captors threatened to kill her mother. They were eventually released and allowed to go into exile in Australia, and then to East Germany.

Bachelet’s father, an Air Force general, died of a heart attack from the torture he suffered during his imprisonment for opposing the military coup that brought Pinochet to power. And Bachelet’s then-partner, a leader of the country’s Socialist Party, was detained and disappeared during the dictatorship.

After Bachelet returned home in 1979, she became a doctor and later studied military science in Chile and the United States. When democracy was restored in 1990, she served as health minister and defense minister, before twice being elected president. In the interim, she led UN Women, the UN’s office for gender equality and women’s empowerment.

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Distinguished Jordanian Diplomat Zeid Ra’ad Al Hussein

As the UN’s human rights commissioner, Bachelet is succeeding another distinguished administrator, Jordanian diplomat Zeid Ra’ad Al Hussein. Zeid was an outspoken critic of rights abusers, and his public statements were always well informed, perceptive, and fair. During his four-year tenure, no government or group received special treatment for political or geopolitical reasons. Although Zeid did not seek a second term because of what he called pressure to curb his candor, the standards he set strengthened the UN’s reputation as a global defender of human rights. But Zeid’s approach also put a bull’s-eye on the office and its work.

Presidents Rodrigo Duterte of the Philippines, Abdel Fattah al-Sisi of Egypt, and Vladimir Putin of Russia, along with Prime Minister Viktor Orbán of Hungary, frequently accused the agency and its boss of bias. In the US, Bolton is using similar language as he leads efforts to slash the office’s annual budget. This is the breach into which Bachelet steps.

Like Zeid, Bachelet will not take direction from the UN Human Rights Council. While high commissioners carry out the Council’s work, they essentially function as free agents, able to air their opinions freely. That is a good thing. The work of the Council – an intergovernmental body of 47 UN states that operates with rotating membership – has long been influenced by national interests. For example, in June, the Trump administration cut America’s ties to the Council, citing its frequent criticism of Israel. And, because membership can include rights violators themselves, its agenda is susceptible to politicization.

Still, the quality of the Council’s output has been improving. A recent report on Myanmar, for example, pulled no punches and directly accused the country’s military leadership of committing genocide against the Rohingya. Other recent contributions that earn high marks include inquiries on Syria and North Korea.

Bolton has sought to undermine the effectiveness of the UN ever since 2005, when President George W. Bush installed him as US ambassador to the organization. The US Senate’s eventual refusal to confirm the recess appointment limited the damage that Bolton might have done.

But, today, Bolton has even more power; it will once again be up to Congress to ensure that his destructive influence is kept in check. If Bolton gets his way in damaging the office of the UN High Commissioner for Human Rights (as well as the International Criminal Court, at which he took aim on September 10), Bachelet’s stellar resume will not be enough to keep human rights atop the UN agenda.

 

What Lehman Brothers’ Failure Means Today


What Lehman Brothers’ Failure Means Today

by Harold James

https://www.project-syndicate.org/commentary/lehman-brothers-ten-year-anniversary-by-harold-james-2018-09

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The standard story about the September 2008 collapse of Lehman Brothers is that it led to a deeper understanding of the risks of financial complexity and free-wheeling capitalism. In fact, the ensuing crises in the US, Europe, and elsewhere were more a product of broader changes in twenty-first-century politics and society.

 

PRINCETON – So far this year, the world has marked the 50th anniversary of the Prague Spring (and its suppression), the centennial of the end of World War I, and the bicentennial of Karl Marx’s birth. Against that backdrop, should one really care about the tenth anniversary of the collapse of Lehman Brothers?  

Yes, we should. Lehman may not have been a particularly large bank, and it probably was not even insolvent when it failed. Nonetheless, it nearly took down the global financial system and triggered the Great Recession. Lehman was transformative because it fundamentally altered people’s understanding of the world around them.

After September 15, 2008, the fear of “another Lehman” and a deeper financial catastrophe put the United States on the path toward wide-ranging reform. And Lehman was constantly invoked during the European financial crisis that erupted after 2010, highlighting fears of a “death spiral” stemming from state bankruptcies and defaults. Since then, the scare story seems to have lost its effectiveness. In the US, banking reforms are now being undone; and in the European Union, government debt-to-GDP ratios are well above where they were in 2008.

Still, for policymakers and opinion-shapers, the 2008 financial crisis produced three new grand narratives. First, after Lehman, the American economist Charles Kindleberger’s 1978 masterful book Manias, Panics, and Crashes met with a newfound popularity. Kindleberger had drawn explicitly from the American economist Hyman Minsky’s work on financial cycles, and his arguments were read as a warning against “market fundamentalism.”

The second narrative was that Lehman’s failure had made the Wall Street crash of 1929 and the Great Depression newly relevant. Policymakers drew lessons from the interwar years, and successfully avoided a full repeat of that period. During the Great Depression, especially in Germany and the US, the prevailing attitude was that of then-US Secretary of the Treasury Andrew Mellon: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” By contrast, the response during the Great Recession was to use public debt to replace insecure private debt – an intervention that would prove sustainable only as long as interest rates remained low.

The third narrative held that Lehman’s collapse augured the end of American capitalism. This butterfly-effect story was popular in every country that was tired of being bossed around by the US. As Germany’s then-finance minister, Peer Steinbrück, explained in September 2008: “The US will lose its status as the superpower of the global financial system, not abruptly but it will erode.”

At first, the 2008 crisis was widely regarded as a quintessentially American disaster, owing to the country’s mix of testosterone-driven finance and penchant for promoting home ownership even for those who cannot afford it. Only gradually was it recognized as a truly transatlantic affair. As the economists Hyun Song Shin and Tamim Bayoumi subsequently show, badly regulated, oversized European banks played a key role in the build-up of risk throughout the financial system.

Neither of the first two popular narratives is really correct. The crisis was not a market failure, but rather the product of opaque, dysfunctional non-market institutions that had become perversely intertwined. It exposed the problem of complexity – not of markets as such.

Specifically, the reason that Lehman was such a problem was that it was not really a single corporation. It comprised some 7,000 separate entities in over 40 countries, all of which would need to go through a complex and costly valuation and bankruptcy process. This opacity, which was hardly unique to the US, created the sense that the world was close to another Great Depression when it really wasn’t.

The crisis was the product of escalating short-termism in financial markets. While banks wanted to offload securitized products before they became toxic, other market participants were looking to win on short-term bets, paying little mind to the longer-term viability of the investment. In this sense, volatility was desirable, as it created new opportunities for gain.

After Lehman collapsed, the twin narratives about “market failure” and “another Great Depression” had a massive effect on public perceptions, and fueled the third narrative, which actually happens to be true. America’s financial and political preeminence has in fact waned.

The global primacy of the US was based on economic and political power, but it also depended on something more fundamental: trust in America’s capacity to deliver on its promises over the long term. The crisis undermined that trust, even though US economic and political power remained only slightly diminished. The deeper contagion was intellectual, not financial.

Financial behavior does not occur in a vacuum. The same kind of short-term, hyperactive mindset that felled Lehman was also taking root in the rest of society at the time. Tellingly, the iPhone was introduced in June 2007, just as early signs of the impending crisis were coming into view.

With the smartphone came all kinds of new possibilities. It added dynamism to inchoate social-media platforms like Facebook and Twitter. And it provided the basis for Tinder and other apps which have transformed the social life of millions, pushing dating further in the direction of short-termism and away from longer-term commitment.

The new digital devices and platforms encouraged hyper-individualism. But they also affected political outlooks and behavior, by making it easier than ever to reinforce one’s own views while avoiding alternative opinions. One result, little wonder, is the online culture of demonization, abuse, harassment, and manipulation we see today.

Much of today’s political volatility is a consequence of these new ways of thinking and communicating. Technology and finance adopted the same ethos: destroy continuity and glorify disruption.

Lehman Brothers’ collapse revealed a flaw not just in finance, but in twenty-first-century politics and society. The irony is that, rather than forestalling an era of technologically driven short-termism, the subsequent crisis seems to have accelerated it.

 

How ASEAN can be resilient


September 11, 2018

How ASEAN can be resilient

Borge Brende and Justin Wood / Khmer Times
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ASEAN has long been praised for its ‘open regionalism’ whereby it pursues economic integration among member states without discriminating against non-ASEAN economies. 

 

As other powers rise, ASEAN is at risk of losing its collective commitment to a shared vision for the region and a common stance on geopolitical issues. Unless ASEAN remains united as a bloc, write Borge Brende and Justin Wood, it will lose its ability to convene regional actors, mediate disputes, and shape principles of international behaviour and interaction.

Is the Association of Southeast Asian Nations (ASEAN) resilient enough to thrive amid the regional and global transformations taking place today? While the global economy continues its broad-based expansion, disruptive economic, geostrategic, and technological forces may threaten Asean’s gains of recent years. To survive, Asean members must make important decisions about the role of their community in regional affairs. With the right choices, the region can convert disruption into an opportunity for a resilient future.

ASEAN has undergone an impressive turnaround in the past five decades. A region of turbulence, disharmony, and underdevelopment in the 1960s is today one of relative peace and economic success. Much of the credit belongs to the community-building efforts of the countries under the Asean umbrella. But the region also benefited strongly from the post-World War II global architecture and institutions that promoted inward flows of investment and outward flows of exports.

Today, this global backdrop is in a state of profound transformation. The benefits of free and open trade are being questioned, international institutions are being challenged, new geopolitical powers are rising, and – despite ups and downs – the global economy continues to tilt further toward emerging markets. All of this creates an opportunity for new and competing visions of how the world should be organized and run.

Alongside rising geopolitical uncertainty, ASEAN countries must grapple with the Fourth Industrial Revolution. The exponential development of technologies such as artificial intelligence, advanced robotics, precision medicine, and autonomous vehicles is transforming economies, businesses, and societies.

ASEAN members will feel the effects of the Fourth Industrial Revolution acutely. Consider the future of jobs. The working-age population in the bloc is increasing by 11,000 people daily and will continue to grow at this rate for the next 15 years. This demographic expansion is happening just as many existing jobs will be substituted by intelligent automation and AI. Systems of taxation that rely on labour income will come under pressure. National budgets will be challenged at exactly the moment when Asean members must increase their investment in reskilling labour forces and developing infrastructure for this new age.

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Or consider the future of manufacturing. Technologies such as 3D printing and cheap industrial robots are enabling products to be made in small, highly-customized forms rather than large batches of uniform goods. For ASEAN, the shift from centralized global supply chains to localized production systems could have a serious impact on export revenues and the investment by which it is driven.

Faced with these disruptive shifts, ASEAN must strengthen its community. Economically, regional resilience can be bolstered by building a genuine single market: ASEAN has 630 million citizens with rapidly rising spending power. Fully implementing the ASEAN Economic Community will be key. With a strong regional market, ASEAN can drive its own economic destiny, rather than relying on demand from external markets, and will be better insulated against potential protectionist shocks.

Creating a single market for services will be critical. Here, especially, ASEAN members must respond to the Fourth Industrial Revolution, tackling issues such as harmonization of rules governing the use of data. New technologies – including digital platforms, big-data analytics, and cloud-based services – do not recognize national borders and function best when they operate at scale. With a single digital market, ASEAN can develop truly pan-regional services in finance, health care, education, and e-commerce.

Of course, ASEAN should not build a fortress that keeps out the world. Indeed, the bloc has long been praised for its “open regionalism,” whereby it pursues economic integration among member states without discriminating against non-ASEAN economies. This approach has been integral to its economic strategy from the beginning, and continues with the soon-to-be concluded Regional Comprehensive Economic Partnership joining ASEAN with China, Japan, South Korea, India, Australia, and New Zealand.

Strengthening the political-security community is equally essential. With the architecture of global governance being challenged, ASEAN members must make their voices heard if they want a world that supports their interests. Individually, Southeast Asia’s countries carry little weight; collectively, however, they represent almost a tenth of the world’s population and nearly 5 percent of its GDP.

Historically, ASEAN has played a pivotal role in facilitating regional relationships, giving rise to the notion of “ASEAN centrality” in Asia. In 1993, the bloc established the ASEANn Regional Forum – now with 27 members – to foster dialogue on political and security concerns. It established the East Asia Summit, currently with 18 member states, in 2005.

Today, however, the geopolitical context is evolving. As other powers rise, ASEAN is at risk of losing its collective commitment to a shared vision for the region and a common stance on geopolitical issues. Many observers believe that other countries are undermining ASEAN n unanimity by developing dependencies with individual countries, built on investment, trade, and assistance. Unless it remains united as a bloc, ASEAN will lose its ability to convene regional actors, mediate disputes, and shape principles of international behaviour and interaction.

The so-called ASEAN way, characterized by consensus-based decision-making and non-interference, has served ASEAN well, and the bloc would be unwise to jettison it. But a reassessment is needed if ASEAN is to speak with a strong voice on regional matters, rather than allowing dissenting voices within the group to prevent the adoption of collective positions. Given that existing global institutions are being challenged, and given the rise of Asia in global affairs, Asean must reinforce its ability to influence the debate.

The World Economic Forum on ASEAN will be held in Hanoi, Vietnam, on September 11-13 and will provide an opportunity for such a reassessment. In an increasingly uncertain world, the need for the countries of ASEAN to deepen their community and their commitment to integration and collaboration is stronger than ever.

Copyright Project Syndicate 2018.

Borge Brende is President of the World Economic Forum; Justin Wood is Head of Asia Pacific and a member of the Executive Committee of the World Economic Forum.

 

 

China is Losing the New Cold War


September 9, 2018

China is Losing the New Cold War

https://www.project-syndicate.org

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In contrast to the Soviet Union, China’s leaders recognize that strong economic performance is essential to political legitimacy. Like the Soviet Union, however, they are paying through the nose for a few friends, gaining only limited benefits while becoming increasingly entrenched in an unsustainable arms race with the US.

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HONG KONG – When the Soviet Union imploded in 1991, the Communist Party of China (CPC) became obsessed with understanding why. The government think tanks entrusted with this task heaped plenty of blame on Mikhail Gorbachev, the reformist leader who was simply not ruthless enough to hold the Soviet Union together. But Chinese leaders also highlighted other important factors, not all of which China’s leaders seem to be heeding today.

To be sure, the CPC has undoubtedly taken to heart the first key lesson: strong economic performance is essential to political legitimacy. And the CPC’s single-minded focus on spurring GDP growth over the last few decades has delivered an “economic miracle,” with nominal per capita income skyrocketing from $333 in 1991 to $7,329 last year. This is the single most important reason why the CPC has retained power.

But overseeing a faltering economy was hardly the only mistake Soviet leaders made. They were also drawn into a costly and unwinnable arms race with the United States, and fell victim to imperial overreach, throwing money and resources at regimes with little strategic value and long track records of chronic economic mismanagement. As China enters a new “cold war” with the US, the CPC seems to be at risk of repeating the same catastrophic blunders.

At first glance, it may not seem that China is really engaged in an arms race with the US. After all, China’s official defense budget for this year – at roughly $175 billion – amounts to just one-quarter of the $700 billion budget approved by the US Congress. But China’s actual military spending is estimated to be much higher than the official budget: according to the Stockholm International Peace Research Institute, China spent some $228 billion on its military last year, roughly 150% of the official figure of $151 billion.

In any case, the issue is not the amount of money China spends on guns per se, but rather the consistent rise in military expenditure, which implies that the country is prepared to engage in a long-term war of attrition with the US. Yet China’s economy is not equipped to generate sufficient resources to support the level of spending that victory on this front would require.

If China had a sustainable growth model underpinning a highly efficient economy, it might be able to afford a moderate arms race with the US. But it has neither.

On the macro level, China’s growth is likely to continue to decelerate, owing to rapid population aging, high debt levels, maturity mismatches, and the escalating trade war that the US has initiated. All of this will drain the CPC’s limited resources. For example, as the old-age dependency ratio rises, so will health-care and pension costs.

Moreover, while the Chinese economy may be far more efficient than the Soviet economy was, it is nowhere near as efficient as that of the US. The main reason for this is the enduring clout of China’s state-owned enterprises (SOEs), which consume half of the country’s total bank credit, but contribute only 20% of value-added and employment.

The problem for the CPC is that SOEs play a vital role in sustaining one-party rule, as they are used both to reward loyalists and to facilitate government intervention on behalf of official macroeconomic targets. Dismantling these bloated and inefficient firms would thus amount to political suicide. Yet protecting them may merely delay the inevitable, because the longer they are allowed to suck scarce resources out of the economy, the more unaffordable an arms race with the US will become – and the greater the challenge to the CPC’s authority will become.

The second lesson that China’s leaders have failed to appreciate adequately is the need to avoid imperial overreach. About a decade ago, with massive trade surpluses bringing in a surfeit of hard currency, the Chinese government began to take on costly overseas commitments and subsidize deadbeat “allies.”

Exhibit A is the much-touted Belt and Road Initiative (BRI), a $1 trillion program focused on the debt-financed construction of infrastructure in developing countries. Despite early signs of trouble – which, together with the Soviet Union’s experience, should give the CPC pause – China seems to be determined to push ahead with the BRI, which the country’s leaders have established as a pillar of their new “grand strategy.”

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An even more egregious example of imperial overreach is China’s generous aid to countries – from Cambodia to Venezuela to Russia – that offer little in return. According to AidData at the College of William and Mary, from 2000 to 2014, Cambodia, Cameroon, Côte d’Ivoire, Cuba, Ethiopia, and Zimbabwe together received $24.4 billion in Chinese grants or heavily subsidized loans. Over the same period, Angola, Laos, Pakistan, Russia, Turkmenistan, and Venezuela received $98.2 billion.

Now, China has pledged to provide $62 billion in loans for the “China-Pakistan Economic Corridor.” That program will help Pakistan confront its looming balance-of-payments crisis; but it will also drain the Chinese government’s coffers at a time when trade protectionism threatens their replenishment.

Like the Soviet Union, China is paying through the nose for a few friends, gaining only limited benefits while becoming increasingly entrenched in an unsustainable arms race. The Sino-American Cold War has barely started, yet China is already on track to lose.

Minxin Pei is a professor of government at Claremont McKenna College and the author of China’s Crony Capitalism.

The Current Account Counts


August 30, 2018

The Current Account Counts

https://www.project-syndicate.org/commentary/current-account-imbalances-precursor-to-crisis-by-stephen-s–roach-2018-08

Despite the US government’s recent upward revision to personal saving data, the overall national saving rate, which drives the current account, remains woefully deficient. And the major surplus countries – Germany, China, and Japan – have been only too happy to go along for the ride.

 

NEW HAVEN – In an increasingly interconnected global economy, cross-border trade and financial-capital linkages have come to matter more than ever. The current-account balance, the difference between a country’s investment and saving position, is key to understanding these linkages. The dispersion of current-account positions tells us much about the state of global imbalances, which are often a precursor of crises.

The same is true of trade tensions, such as those now evident around the world. Current-account disparities often pit one country against another.

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Economies running current-account deficits tend to suffer from a deficiency of domestic saving. Lacking in saving and wanting to invest, consume, and grow, they have no choice but to borrow surplus saving from others, which gives rise to current-account and trade deficits with the rest of the world. The opposite is the case for countries with current-account surpluses. They are afflicted by subpar consumption, excess saving, and chronic trade surpluses.

There is a long-standing debate over who is to blame for this state of affairs – the deficit countries, which draw freely on the saving of others to finance economic growth, or the surplus countries, which choose to grow by selling their output in foreign markets. This blame game, which has long been central to disputes over international economic policy and trade tensions, is particularly contentious today.

The United States has the largest current-account imbalance in the world. It has recorded a deficit for all but one year since 1982, the sole exception being 1991, when foreign contributions to its military campaign in the Persian Gulf underpinned a miniscule surplus (0.05% of GDP).

During the 2000-2017 period, the US amassed $9.1 trillion in cumulative current-account deficits. That is larger than the $8.9 trillion of cumulative surpluses run collectively by the three largest surplus economies – Germany, China, and Japan – over the same period.

Many observers believe that the US is doing the rest of the world a huge favor by running chronic current-account deficits – namely, supporting the large surplus countries, which tend to suffer from a shortfall of domestic demand. Others, including me, are more critical of America’s long-standing penchant for excess consumption and the role that surplus economies play in enabling it. While there is undoubtedly some validity to both points of view, I worry more about the destabilizing role of the US.

America’s consume-now-save-later mindset, which is at the heart of its current-account deficit, is deeply embedded in its political economy. The US tax code has long been biased toward low saving and debt-financed consumption; the deductibility of mortgage interest, the absence of any value-added or national sales tax, and a dearth of saving incentives are especially problematic.

So, too, are the wealth effects from a profusion of recent asset bubbles. Aided and abetted by the Federal Reserve’s über-accommodation since the late 1990s, there was no stopping the interplay between America’s asset-dependent economy and an equally pernicious leverage cycle underwritten by bubble-inflated collateral. Why save out of income when frothy asset markets can do the job? The preference for asset-based saving over income-based saving is central to America’s current-account deficit.

The surplus countries have been delighted to go along for the ride. It didn’t matter that the US consumption binge was built on a foundation of quicksand. Excess export growth in the large surplus economies enabled the excesses of the world’s largest consumer.

That was especially the case in China. Spurred by Deng Xiaoping’s “reform and opening up,” China’s export sector increased sixfold – from 6% of GDP in 1980 to 36% in 2006.

Mirroring America’s massive current-account deficit, China’s current account went from relative balance in 1980 (+0.1% of GDP) to a massive surplus of 9.9% in pre-crisis 2007. The same was true in major developed economies, albeit to a lesser extreme: Germany’s export share of GDP went from 19% in 1980 to 43% in 2007, while Japan’s went from 13% to 17.5% over the same period.

In many respects, a marriage of convenience between the surplus and deficit countries eventually blossomed into full-blown codependency. But then, with the wrenching global financial crisis in 2008, the music stopped. Since then, frictions between deficit and surplus countries have intensified, now risking the possibility of a full-blown trade war.

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President Donald Trump’s administration has played an especially antagonistic role in asserting that the US is being victimized by large trade deficits. Yet America’s trade gaps have, in fact, been spawned by a chronic deficiency of domestic US saving. Despite the government’s recent upward revision to a still-depressed personal saving rate, the overall US national saving rate, which drives the current account, remains woefully deficient, averaging just 1.9% in net terms (adjusted for depreciation) over the post-crisis 2009-17 period. That is less than one-third the 6.3% average during the final three decades of the twentieth century.

Large and growing federal budget deficits over the next several years will only exacerbate this problem. Blaming China misses the obvious and important point that the Chinese current-account surplus has fallen sharply in recent years, from 9.9% of GDP in 2007 to an estimated 1% in 2018. In 2017, China’s current-account surplus of $165 billion was well below that of Germany ($297 billion) and Japan ($195 billion).1

As China presses ahead with consumer-led rebalancing, it will continue to move from surplus saving to saving absorption, with the distinct possibility that its current account will shift into permanent deficit (a small deficit actually was recorded in the first quarter of this year). That will leave a deficit-prone America with one less surplus country to draw on in funding the growth of its saving-short, excess-consumption economy. Maybe the rest of the world will step up and fill the void. But with the Trump administration now disengaging from globalization, that seems less and less likely.

History suggests that current-account imbalances ultimately matter a great deal. A still-unbalanced global economy may be forced to relearn that painful lesson in the coming years.

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.

Protectionism for Liberals


August 21, 2018

Protectionism for Liberals

The ability of companies to allocate jobs globally changes the nature of the discussion about the “gains from trade.” In fact, there are no longer guaranteed “gains,” even in the long run, to those countries that export technology and jobs.

 

LONDON – Liberal revulsion at US President Donald Trump’s mendacious and uncouth politics has spilled over into a rigid defense of market-led globalization. To the liberal, free trade in goods and services and free movement of capital and labor are integrally linked to liberal politics. Trump’s “America First” protectionism is inseparable from his diseased politics.

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But this is a dangerous misconception. In fact, nothing is more likely to destroy liberal politics than inflexible hostility to trade protection. The upsurge of “illiberal democracy” in the West is, after all, the direct result of the losses suffered by Western workers (absolutely and relatively) as a result of the relentless pursuit of globalization.

Liberal opinion on these matters is based on two widespread beliefs: that free trade is good for all partners (so that countries that embrace it outperform those that restrict imports and limit contact with the rest of the world), and that freedom to trade goods and export capital is part of the constitution of liberty. Liberals typically ignore the shaky intellectual and historical evidence for the first belief and the damage to governments’ political legitimacy wrought by their commitment to the second.

Countries have always traded with each other, because natural resources are not equally distributed round the world. “Would it be a reasonable law,” asked Adam Smith, “to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?” Historically, absolute advantage – a country importing what it cannot produce itself, or can only produce at inordinate cost – has always been the main motive for trade.

But the scientific case for free trade rests on David Ricardo’s far more subtle, counter-intuitive doctrine of comparative advantage. Countries with no coal deposits obviously cannot produce coal. But assuming that some production of a naturally disadvantaged good (like wine in Scotland) is possible, Ricardo demonstrated that total welfare is increased if countries with absolute disadvantages specialize in producing goods in which they are least disadvantaged.

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Rejection of neo-liberalism as the ideology of market fundamentalism fails to grasp its social validity. 

http://logosjournal.com/2017/authoritarian-liberalism-class-and-rackets/

The theory of comparative advantage greatly widened the potential scope of beneficial trade. But it also increased the likelihood that less efficient domestic production would be destroyed by imports. This loss to a country’s production was brushed aside by the assumption that free trade would allocate resources more efficiently and raise productivity, and thus the growth rate, “in the long run.”

But this is not the whole story. Ricardo also believed that land, capital, and labor – what economists call the “factors of production” – were intrinsic to a country and could not be moved round the world like actual commodities. “Experience … shows,” Ricardo wrote,

“that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and intrust himself, with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations.”

This prudential barrier to capital export fell as secure conditions emerged in more parts of the world. In our own time, the emigration of capital has led to the emigration of jobs, as technology transfer has made possible the reallocation of domestic production to foreign locations – thus compounding the potential for job losses.

The economist Thomas Palley sees the reallocation of production abroad as the distinguishing feature of the current phase of globalization. He calls it “barge economics.” Factories float between countries to take advantage of lower costs. A legal and policy infrastructure has been built to support offshore production that is then imported to the capital-exporting country. Palley rightly sees offshoring as a deliberate policy of multinational corporations to weaken domestic labor and boost profits.

The ability of companies to allocate jobs globally changes the nature of the discussion about the “gains from trade.” In fact, there are no longer guaranteed “gains,” even in the long run, to those countries that export technology and jobs.

At the end of his life, Paul Samuelson, the doyen of American economists and co-author of the famous Stolper-Samuelson theorem of trade, admitted that if countries like China combine Western technology with lower labor costs, trade with them will depress Western wages. True, citizens of the West will have cheaper goods, but being able to purchase groceries 20% cheaper at Wal-Mart does not necessarily make up for wage losses. There is no assured “pot of gold” at the end of the free-trade tunnel. Samuelson even wondered whether “a little inefficiency” was worth suffering to protect things which were “worth doing.”

In 2016, The Economist conceded that “short-term costs and benefits” from globalization are “more finely balanced than textbooks assume.” Between 1991 and 2013, China’s share of global manufacturing exports increased from 2.3% to 18.8%. Some categories of American manufacturing production were wiped out. The United States, the authors averred, would gain “eventually.” But the gains might take “decades” to be realized, and would not be equally shared.

Even economists who concede the losses that come with globalization reject protectionism as an answer. But what is their alternative? The favored remedies are somehow to slow down globalization, giving labor time to re-skill or move to more productive activities. But this is scant comfort to those stuck in the rust belts or decanted into low-productivity, low-paid jobs.

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Liberals should certainly exercise their right to attack Trumpian politics. But they should refrain from criticizing Trumpian protectionism until they have something better to offer.