Sentences to envy

It's pretty rare that a blog makes me want to buy a textbook; I've just finished graduate school, have a pretty solid grasp of my subjects (at least I like to think), and am pretty broke to boot. But MR makes me reconsider with one pithy sentence. On cap and trade:

...To make progress against global warming, may require building a political coalition. A carbon tax pushes one very powerful and interested group, the large energy firms, into the opposition. If tradable allowances are instead given to firms initially, there is a better chance of bringing the large energy firms into the coalition. Perhaps it’s not fair that politically powerful groups must be bought off but as Otto von Bismarck, Germany’s first chancellor, once said,“Laws are like sausages, it is better not to see them being made.” We can only add that producing both laws and sausages requires some pork.

For some reason, I don't remember my 101 class being this exciting...but maybe that's because it was MWF at 9 am.

Practicing development: reason and results

Chris Blattman asks:

Why don't we write more about worst practices?

Well for one thing, agencies and consultancies that rely on government funds are loathe to air their dirty laundry when future funding is on the line. Even when they do screw up reports are written so as to subtly blame local partners and government participants. Just like politicians, development professionals and NGOs - meant to act in the long-term interests of their supposed constituencies - profit much more from acting in their own short-term interests (exhibit A - schools).

Well, what to do? We must incentivize frank admissions of errors. Those who openly and honestly declare mistakes and poor programs should actually be rewarded - at least to a certain degree. 

The World Bank already has an Independent Evaluation Group and randomized evaluations are all the rage among academics. For markets to be efficient (and yes, proposals for development funding indeed comprise a market), information must be freely available and accurate; let's hold development results to the same standard.

(Picture from Penguin Blog)

The Future of Capitalism

For the past couple weeks, the FT has been running an uneven series called The Future of Capitalism. That said, I thought yesterday's entry by Quentin Peel was excellent, and you should read it in its entirety. There's nothing revolutionary here, but it's a remarkably articulate and balanced look at the future of the international political economy.

The Second Great Depression

Last October, we asked whether or not the world was heading for a Second Great Depression. Today a new piece by Messrs Eichengreen and O'Rourke addresses the question in much more detail. Their findings are sobering.

G20 deliverables

There's been some grumbling about how the G20 London Summit's deliverables are disappointing. Regardless, I feel like one substantial achievement has been underreported: the G20 pledged $250 billion in new trade financing to help plug a $300 billion worldwide gap. Trade finance isn't as sexy as financial regulation, new global reserve currencies or fiscal stimulus coordination, but it is absolutely essential to world commerce, the engine of economic growth. As an added bonus, it will disproportionately benefit developing nations.

On the G20

On the G20:

One risk is that the group, if it seeks consensus, will produce an anodyne statement that adds little or nothing to the existing efforts to respond to the global slump. A greater risk is that the summit is so badly divided, and the outcome is so feeble, that dashed expectations actually worsen confidence.

Unfortunately, I don't see the two as mutually exclusive. I have a feeling "confidence" - whether of investors, politicians, or pundits - is going to be eroded either way. In fact, the only people coming away with a morale boost will be either the protesters or the police.

(Photo from G20London2009)

Soft power vs. hard power

The fallacy of equating economic power with clout. Choice excerpts:

The US is the world’s pre-eminent military power, but the economic benefit of
that is hard to see...

In the modern world, there is no observable relationship
between size of country and its standard of living. Small and large countries
are found among the rich and among the poor...

Economic power is based on monopoly derived from being the only seller of a particular good or service, or on monopsony derived from being the only buyer. Such power is held by individuals and businesses, not by states. Dominance of an industry or activity is not the same as scale, though scale and dominance are loosely related. International trade is conducted by individuals and businesses, not governments, and it is individuals and businesses, not governments, that negotiate the division of the value added trade creates. The principal economic role of states is not to get in the way. They can impede the process of adding value through trade, protectionism or disruptive currency interventions. These actions damage their own businesses even more than they damage the businesses of other countries.

The inflation hedge of choice

On Wednesday, the US Federal Reserve "shocked the world" by announcing plans to buy $300bn of government debt and double its purchases of Fannie and Freddie securities. According to the FT, once the Fed's plans are fully realized its balance sheet could swell to $4,ooobn, one third the size of the US economy. Hellicopter Ben, meet Bazooka Ben.

The Fed's actions are an attempt to literally shock life into the credit markets. It may also have the convenient effect of driving down the cost of government borrowing. However, the Fed runs the very real risk of stoking a very big inflationary problem down the road. Weimar Republic the US is not, but the money supply is growing at such a rapid rate that the Fed had better hope the US economy rebounds this year. Remember central bankers, there are unintended consequences to such dramatic monetary easing; like say, a housing bubble (Mr Greenspan, I'm looking in your direction).

What then are some of the likely consequences of the Fed's policy innovations? For one, the dollar was the big loser last week; in fact, it registered its worst week against the major currencies in 24 years. This fed into an accelerating rally in commodities, the moment's inflation hedge of choice. The benchmark S&P GSCI index was up 8% last week. Or take copper, up some 28% this year, a feat completely divorced from the underlying fundamentals. Though, the FT has an article this morning on the actions of a "secretive" Chinese state institution stockpiling copper supplies (which sounds like the perfect plot for Bond film). Oil is back over $50, supported by the OPEC cuts, but boosted in recent weeks by Fed policy. The speculative inflow into commodities, as an asset class, may be small compared to the bubble of recent years, but it is nonetheless paring the steep losses experienced in the second half of 2008.

The sustainability of this rally is highly suspect. With Chinese growth forecast at 6% for the year, and the G7 contracting by 3.2%, the global recession will depress demand for commodities well into the year (with the possible exception of food, but that's another discussion). However, loosey-goosey monetary policy (as A-Rod would call it) comes at a price, with inflation second only to a loss of confidence in US treasuries. Bernanke has demonstrated that he is willing to throw everything in the Fed's arsenal at the credit markets. Until he wins, expect commodities to outperform as an asset class.

(photo courtesy of Shiny Things' photostream)

Big game hunting

* Trade posts represent solely my own opinions.

At a recent conference that I attended, one of the speakers borrowed a quote from Ike Eisenhower to great effect: “if a problem cannot be solved, enlarge it.” It occurs to me that this sentiment directly applies to the politics of trade in the United States. The public is divided on whether trade is beneficial to the economy, the 111th Congress has already demonstrated protectionist instincts, and it is increasingly difficult to advocate openness as jobs are lost and the recession deepens. How should President Obama, who understands the benefits of trade, address these political realities?

Enlarge the problem substantially by negotiating a comprehensive free trade agreement with the European Union or Japan. First, such an agreement would have huge economic benefits: EU-US trade flows were worth more than $640 billion in 2008. Export-oriented industries on both sides could be counted on to exert a lot of political pressure for that kind of market access. Second, a USEUFTA would take a very long time to negotiate due to the complexity of the trade relationship and both sides’ preference for high-quality agreements. This would put trade on the backburner for at least several years, which would help diffuse political tensions and give the economy time to recover, thereby mitigating the political influence of import-exposed industries. Negotiating with the EU would eliminate the standards (labor, environmental or otherwise) problem.

There are serious drawbacks to such an approach, such as the fact that it shuts out China, India, Brazil and other developing countries (though if you believe in competitive liberalization, you might argue that this would spur further negotiations.) Perhaps most worrisome, by establishing a substantive parallel system, it could easily undermine the multilateral trading system and provide a final knockout blow to the Doha Round. That would be terrible.

Still, the Obama Administration made it clear in its 2009 trade policy agenda that it would seek more economically meaningful agreements. Indeed, in a lot of ways, it would be better to complete one really big one instead of many smaller ones. Perhaps it’s time for trade policy-makers to consider big game hunting.

Free trade petition

The Atlast Global Initiative for Free Trade, Peace and Prosperity has written a petition for free trade, to be unveiled on April 1st before the London Summit. My favorite part:

Trade’s most valuable product is peace. Trade promotes peace, in part, by uniting different peoples in a common culture of commerce – a daily process of learning others’ languages, social norms, laws, expectations, wants, and talents.

Trade promotes peace by encouraging people to build bonds of mutually beneficial cooperation. Just as trade unites the economic interests of Paris and Lyon, of Boston and Seattle, of Calcutta and Mumbai, trade also unites the economic interests of Paris and Portland, of Boston and Berlin, of Calcutta and Copenhagen – of the peoples of all nations who trade with other.

Feeding humanity

* Posts on agriculture represent my personal opinions on the subject.*

Yesterday, Rory made an important observation: the global food crisis isn’t over. Indeed, many of the long-term changes in global food supply and demand haven’t changed since last year’s price spikes. And as the world’s population continues to grow, finding a way to feed everyone will become an increasingly central challenge for humanity.

When it comes to the feasibility of significantly increased food production, I am no Malthusian. The great promise of genetically-modified crops, combined with current low levels of agricultural productivity in most of the developed world, suggest that current yields can be substantially increased. To this end, we should support programs that aim to increase productivity in the developing world through better rural infrastructure, mechanization of agriculture, increased fertilizer use, seed pilot programs, etc. We should also encourage biotechnology research and development in rich countries.

However, agricultural land, like any natural resource, is distributed unevenly. Some countries are better positioned to grow food than others. Because of this, we need to advocate strongly for total liberalization of international agricultural trade. This is the only way to ensure that every country, including those with poor resource endowments, has equal access to market-priced agricultural staples. Let’s not forget that a significant trigger of global food price spikes were temporary export controls enacted by major wheat and rice exporting countries. Improve agricultural productivity wherever possible and work simultaneously toward agricultural free trade.

But agricultural trade liberalization would require an unprecedented degree of global policy cooperation. I am particularly worried that the economic crisis will actually result in a breakdown of international cooperation, which could herald a significant domestic retrenchment of politics. History shows us that globalization is hardly the natural state of international affairs. However, some of the most dangerous problems that humanity faces, like climate change and food security, will require global solutions. If we can’t find a way to cooperate, our shared future will be bleak.

The food crisis never ended

Christopher Delgado, an agricultural policy advisor at the World Bank, recently said of the global food crisis, "The food crisis has not gone away...In fact, it is coming back."

Combing through the media, it would be easy to assume that the food crisis had long ago subsided as demand for imports, commodity prices and economic growth declined. However, risks to food security and the possibility of famine are still very high in many countries. While food commodity prices have fallen from their record highs in 2007, the US Department of Agriculture forecasts that they will remain above historical levels in 2009. The combination of rising food prices, economic contraction, export/price controls and tight trade credit exposes many vulnerable countries, particularly LDCs, to serious risks of famine, poor crop yields and higher prices coinciding with falling income. This doesn't even begin to include the impact on food production by drought, land degradation and other environmental conditions; the UN recently warned that global food production may fall 25% by 2050.

Given the still prevalent risks, it is disconcerting that less is being done to combat the problems directly. Further, certain policy responses to the financial and economic crises, such as looser monetary policy in the developed world, or expropriation in countries like Venezuela, risk stoking the rising food commodity prices. Which brings me to the real danger on the horizon (beyond, of course, the human cost): that the financial, economic and food crises will reinforce each other in a vicious cycle. A food crisis is a likely second-round affect of the financial and economic crises, which in itself breeds political and economic instability, undermining the recovery process and further destabilizing the global economy.

Policy responses to the financial and economic crises are understandably driven by the need for immediate action; to stop the bleeding, so to speak. But what if the very policies necessary to bring us out of this downward spiral only reinforce it in the medium-term?

(photo from snake.eyes' photostream)

Reid Hoffman

Reid Hoffman is taking it to the streets and offers an entreprenuerial perspective on the current economic crisis. He has some valid insights, especially his idea on the highly politicized H-1B Visa.

Trade papers worth reading

Trade policy wonks have their hands full.

On Monday, the Obama administration released their 2009 Trade Policy Agenda, outlining their general strategy on trade for the next year. (Never mind that they don't have a USTR yet.) Unless you want to torture yourself, skip the 100+ page report on trade policy in 2008. Trust me, I'm speaking from experience. That said, it's definitely worth reading the five page summary on trade policy going forward at the beginning.

VoxEU has a phenomenal new e-book on the new "murky protectionism". It is absolutely fascinating reading all the way through, but at least have a look at the introduction. I'd write a much longer post on this if I could. Suffice to say that things have gotten worse since the G20 summit in November, and they could get much, much worse if things don't change.

Go check them out. I want a report on my desk by Monday morning at 8am.

Quantifying culture

As a student with formal training in a variety of fields, most notably anthropology and economics, I often find myself flummoxed at how drastically the two fields seem to speak past each other. This sentence gives me hope. 

One interesting bit of research suggests that "group values" cultures will export products that don't require as much impersonal contract enforcement, and thus values is part of what makes you specialize.

Besides the verb disagreement, that's one of the most intriguing ideas I've heard in recent development theory. Easterly, at his new blog AidWatch, vastly oversimplifies the research (as he openly admits) but boils the ideas down nicely. Read the whole thing.

New protectionism

This Vox EU piece on post-G20 summit protectionism sheds a lot of light on the current state of international trade. Two World Bank economists have tracked the implementation of 47 new protectionist measures since November. Most of these have had negligible effects on trade, but they're part of a worrying trend of domestic economic retrenchment, which spans agriculture, industry and finance. Also of particular note is a sharp increase in the number of anti-dumping cases.

How green is your stimulus?

The FT has a neat interactive graphic comparing "green spending" in the major national stimulus packages. I must admit, I was a little surprised by which country has the greenest stimulus by volume.

Why I love Warren Buffett

Who else can not only get away with this, but for such wisdom be revered by his audience, most of whom paid somewhere near $148k a pop to hear such gems. Warren Buffett on credit derivatives, which create dependence and entanglement across financial markets:

Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease. It's not just whom you sleep with, but also whom they are sleeping with.

Truer words have never been spoken.

Unsettling news of the day

The Dow Jones closes below 6800, its lowest level since April 1997. Lost decade, indeed.

Trade wars as a proxy for great power struggles?

The WTO can’t get no love. People criticize it for being slow, ineffectual, not comprehensive enough, too comprehensive, irrelevant, etc. Most of these arguments are as old as the GATT. If you have 3 hours, I’m happy to sit down over a few beers and hash them out again.

But every once and a while, you read something completely new. Enter Daniel Abebe. The University of Chicago Law School Faculty Blog is hosting a roundtable discussion on the future of the WTO this week, and Mr. Abebe contributes this fascinating thought experiment:

What does international relations theory tell us about these questions? ...With the end of the Cold War, the relative importance of realist concepts of security, survival and military power began to decline; the great powers all had nuclear arsenals, democracy was increasingly the preferred from of governance and globalization brought states together. Around the same time, the WTO came into existence and international trade, not naked security competition, became the prominent issue for some states in international politics... we should see great power competition to be increasingly focused on trade issues and, given the tentative claims here, we should see increasing gridlock in the WTO... the implication is that the WTO will be a venue for great power competition and struggle to generate compromises on trade issues and that changing the institutional rules is unlikely to address the underlying structural problem or variation in internal characteristics among the great powers.

I have a lot of problems with this analysis. Above all, it’s very hard to take a realist power framework and try to apply it to trade relations. Unlike traditional power struggles, trade is a positive sum game that’s underpinned by a robust international legal framework. Further, all of the major powers are still firmly committed to an open trading system and understand that constant sniping at each other will produce a worse outcome than cooperation.

I’m not suggesting that there’s no tension in global trade relationships. There’s a lot, and there have been some contentious, economically significant cases so far. But such tension is rooted much less in state-state power struggles than domestic political considerations. (Trade is a political economy issue, remember?) Countries generally bring cases in the WTO because they get complaints from domestic constituents.

Further, a brief look at the WTO’s dispute settlement understanding would suggest that the multilateral trading system makes for a pretty lousy venue for great power struggles. The Appellate Body can take years to deliver a ruling, which can then be appealed, thereby further dragging out the process. And if you’re economically powerful enough, you can ignore the AB’s rulings anyways: this has happened a number of times in post-Uruguay Round dispute settlement, and it would very likely be the case if the number of contentious cases increased. However, if all the major countries started ignoring most of the AB’s decisions, it would probably lose its credibility quickly. In short, concerted great power struggles would destroy the WTO.

Indeed, if the current crisis has shown us anything, it’s that the WTO is still remarkably fragile. The progressive rounds of trade liberalization over the past 60 years have been hard-won. The international community would do well to preserve and expand them. There's a lot of work to be done: tellingly, most of the new (post G-20 summit) protectionist measures don’t even violate obligations as they currently stand.

I think we’re a long way from trade wars supplanting real wars.

(photo from nomad photography’s photostream)