Way back in the Early Stone Age of the Internet -- i.e., the mid-1990s -- a group of developed countries started negotiating a Multilateral Agreement on Investment (MAI). Negotiated in semi-secret, the MAI soon triggered a backlash among elements of global civil society. In response, they initiated mass protests, petitioned governments, and -- most subversively -- posted MAI treaty drafts on the web. According to them -- (and, to be fair, some scholars) they played a
crucial role in the stalling out of the MAI in December 1998.
The thing is, there is minimal evidence that global civil society was really the cause of the MAI's downfall. As the draft documents suggested at the time, the member states were far from reaching an agreement - the last draft version of the treaty had contained almost 50 pages of country-specific exemptions. The United States and European Union were also deadlocked over the issues of extraterritorial sanctions, application of the most-favored nation principle, and cultural protectionism. In his book Fighting the Wrong Enemy, Edward M.Graham concluded: "the negotiations were indeed in very deep difficulty before the metaphorical torpedo was fired by the NGOs... this torpedo thus was more a coup de grâce than a fatal blow in its own right." The precise role of global civil society in scuttling the MAI remains a topic for debate.
I bring up this ancient IPE history because it appears that Wikileaks is about to provide a great natural experiment on the power of these kind of networked actors to influence the global political economy:
Today, 13 November 2013, WikiLeaks released the secret negotiated draft text for the entire TPP (Trans-Pacific Partnership) Intellectual Property Rights Chapter. The TPP is the largest-ever economic treaty, encompassing nations representing more than 40 per cent of the world’s GDP. The WikiLeaks release of the text comes ahead of the decisive TPP Chief Negotiators summit in Salt Lake City, Utah, on 19-24 November 2013. The chapter published by WikiLeaks is perhaps the most controversial chapter of the TPP due to its wide-ranging effects on medicines, publishers, internet services, civil liberties and biological patents. Significantly, the released text includes the negotiation positions and disagreements between all 12 prospective member states....
The TPP is the forerunner to the equally secret US-EU pact TTIP (Transatlantic Trade and Investment Partnership), for which President Obama initiated US-EU negotiations in January 2013. Together, the TPP and TTIP will cover more than 60 per cent of global GDP. Both pacts exclude China....
The TPP negotiations are currently at a critical stage. The Obama administration is preparing to fast-track the TPP treaty in a manner that will prevent the US Congress from discussing or amending any parts of the treaty. Numerous TPP heads of state and senior government figures, including President Obama, have declared their intention to sign and ratify the TPP before the end of 2013....
The longest section of the [Intellectual Property] Chapter – ’Enforcement’ – is devoted to detailing new policing measures, with far-reaching implications for individual rights, civil liberties, publishers, internet service providers and internet privacy, as well as for the creative, intellectual, biological and environmental commons. Particular measures proposed include supranational litigation tribunals to which sovereign national courts are expected to defer, but which have no human rights safeguards. The TPP IP Chapter states that these courts can conduct hearings with secret evidence. The IP Chapter also replicates many of the surveillance and enforcement provisions from the shelved SOPA and ACTA treaties.
The consolidated text obtained by WikiLeaks after the 26-30 August 2013 TPP meeting in Brunei – unlike any other TPP-related documents previously released to the public – contains annotations detailing each country’s positions on the issues under negotiation. Julian Assange emphasises that a “cringingly obsequious” Australia is the nation most likely to support the hardline position of US negotiators against other countries, while states including Vietnam, Chile and Malaysia are more likely to be in opposition. Numerous key Pacific Rim and nearby nations – including Argentina, Ecuador, Colombia, South Korea, Indonesia, the Philippines and, most significantly, Russia and China – have not been involved in the drafting of the treaty.
Now, Wikileaks actually has a decent point to make on the intellectual property front. It also makes many absurd points about how a) the TPP is "the largest-ever economic treaty" (when it really isn't); b) the TPP and TTIP are intertwined (when they really aren't); and c) it's so unfair that some countries are negotiating an agreement that doesn't include other countries (why, you'd never see China or Russia doing that kind of thing!!).
Truthfully, however, the substance of the TPP is not the point of this post -- it's the political economy. Compared to the MAI, it's safe to say that the TPP negotiations are much further down the path to completion. Furthermore, from a geopolitical perspective, the Obama administration has a lot more invested in TPP than the Clinton administration did in the MAI. If, by publishing the draft texts, Wikileaks manages to derail the agreement, then that's a data point in favor of the power of networked global civil society. If, on the other hand, TPP proceeds relatively unscathed, then it suggests that perhaps the power of these non-state actors has been exaggerated, even in a Web 2.0 world.
If I'm reading the tea leaves correctly, the United States Congress is pretty close to a debt/budget deal. Still, the U.S. is right up against the deadline, and even if capital markets aren't freaking out in obvious ways, they are freaking out in more subtle ways. Furthermore, the contours of the deal suggest that Washington could very well be right back at this point come January/February.
The economic costs of this repeated brinksmanship since 2011 have been pretty significant for the American economy -- but that's not the point of this post. Rather, I'm interested in the global reaction to these political convulsions. Remember, no matter what you read, the U.S. remains the financial hegemon -- and in theory, a superpower is supposed to provide "hegemonic stability" to the world economic system. It is tough to argue that these repeated fiscal and debt crises have contributed to stability.
So how is rest of the world reacting to DC's shenanigans? It's pretty pissed off, according to the New York Times' Damien Cave:
The word many Mexicans now use to describe Washington reflects a familiar mix of outrage and exasperation: berrinche. Technically defined as a tantrum, berrinches are also spoiled little rich kids, blind to their privilege and the effects of their misbehavior.
“It’s a display of American arrogance,” said Raúl Silva, 40, an entrepreneur grabbing coffee at an upscale cafe here. “It’s a problem, and it’s going to affect us.”
Faced with Washington’s march toward a default, the world has reacted mostly with disbelief that the reigning superpower could fall into such dysfunction, worry over global suffering to come and frustration that American lawmakers could let the problem reach this point....
Indeed, the unequal distribution of power and wealth — part of the exceptionalism that American politicians loudly defend — has become a focal point for many foreign economists and officials. If any other nation had gotten this close to failing to pay its debts, they say, its economy would have already collapsed as investors fled, creating the need for a bailout not unlike what occurred here in Mexico in 1994....
Already, many argue, the standoff in Washington has deepened the sense of America’s decline. On the streets of many countries, conversations about the United States now regularly include expressions of shock and dismay. One businessman in Mexico said that following the fracas was like watching a famous couple’s marriage collapse in public, with shoving, shouting and ugly insults.
Now, if you read closely, you see two contradictory impulses in Cave's story. The first is frustration at a financial superpower that gets to exercise its exorbitant privilege because it's so powerful. The second is the conviction that the U.S. is on the way down. It's possible to reconcile those two views in the present -- but in the future, one of these two beliefs has to give. Either the rest of the world will continue to resent persistent U.S. hegemony, or the rest of the world will observe America's decline. It can't really be both.
We can also see this in China's reaction to this spasm of American political fecklessness. Everyone and their mother has been linking to the Xinhua editorial suggesting that, "it is perhaps a good time for the befuddled world to start considering building a de-Americanized world." And yet, as the New York Times' Mark Landler notes, it's easy for China to say this.... and much tougher for China to actually do it:
China does not have many options beyond wringing its hands. Despite its efforts to steer its economy away from exports and toward domestic demand, China generates billions of dollars of excess cash that it needs to park somewhere. And for all the chaos in Washington, Treasury bonds remain a safer investment than most of the alternatives....
On one level, China’s $3.66 trillion hoard is a symbol of its financial might. But on another, it has tied Beijing’s hands. China’s central bank, the People’s Bank of China, cannot dump its Treasury bonds without driving down their value and incurring a painful loss on paper.
So here we are. Despite repeated own-goals, study after study after study after study after study shows that even after 2008, the United States remains the undisputed financial hegemon. But will this latest episode trigger a concerted effort to reduce the reliance upon the United States? Let's go back to Landler:
That does not mean a brush with default will not have long-term damaging consequences for the United States. Even if China continues to buy Treasury bonds, economists said, it may opt for those with shorter maturities, which would drive up long-term interest rates in the United States, hurting home buyers and owners of small businesses.
The sour taste from the budget impasse will also motivate the Chinese to intensify their efforts to deepen their own debt markets. Already, China has negotiated swaps for its currency, the renminbi, with the European Central Bank and other institutions, a step toward making the currency convertible and, someday, a rival to the dollar and euro.
“This gives them a kick in the pants to do it,” said Kenneth S. Rogoff, professor of public policy and economics at Harvard and a former chief economist of the International Monetary Fund.
Any decline in the status of the dollar will be gradual, said Mr. Rogoff, who pointed to the erosion of the British pound sterling over several decades as a precedent. But, he said, “Memories are long: you do this once, you do this twice, and people start to think.”
At the time, U.S. policy during the Asian financial crisis seemed to reinforce views that the United States was the world's benevolent hegemon. As the next decade demonstrated, however, U.S.-enforced policies in the Pacific Rim caused countries in that region to adopt policies designed to reduce their reliance on the United States and international financial institutions.
Thanks to the Mongolian clusterf**k that Ted Cruz, John Boehner, and some other economic know-nothings in the U.S. Congress have perpetuated, the next decade of global political economy will provide an excellent natural experiment to see whether there will be any form of economic balancing against the United States. Realists have been
advocating predicting balancing behavior again and again and again and again since the end of the Cold War. It hasn't come to pass -- the benefits of U.S.-centered globalization have been too good for most countries. Furthermore, there are pretty sound reasons to believe that the future is bright for the U.S. economy. The question is whether it's worth being dependent on a growing economy that's so politically unreliable. So now we're gonna see whether incipient U.S. rivals will start making the necessary down payments to act on their increasingly justified complaints.
What do you think?
Over at Tablet, Michelle Goldberg writes about the new trend among critics, hipsters, and intellectuals -- Karl Marx.
[We are] at a moment of newly fervent interest in Marx among young writers, activists, and scholars, who have begun, the wake of the financial crisis, to identify capitalism as a problem rather than an inevitability....
After the financial crisis, “you didn’t need to be Karl Marx to see that people were getting kicked out of their homes,” says [n + 1 cofounder Keith] Gessen. And privileged young people—particularly the kind of who are inclined to read and write essays about political theory—haven’t just been spectators to immiseration. Graduating with student debt loads that make them feel like indentured servants, they’ve had a far harder time than their predecessors finding decent jobs in academia, publishing, or even that old standby law and are thus denied the bourgeois emollients that have helped past generations of college radicals reconcile themselves to the status quo.
If there were a Republican president, they might see hope in electing a Democrat. But Barack Obama already won, and it didn’t help. “If you win something and you are disappointed with the results, in a way that’s more politicizing than just losing and losing and losing over again,” says [Jacobin founder Bhaskar] Sunkara.
So, they’re hungry for a theory that offers a thoroughgoing critique of the system, not just a way to ameliorate its excesses. “[F]or at least a generation now, not only the broad public but many radical themselves have felt uncertain that the left possessed a basic analysis of contemporary capitalism, let alone a program for its replacement,” [writer Benjamin] Kunkel writes in the introduction to Utopia or Bust. Reaching back into the canon, he and others have found, at least, the former.
As for the latter? In the absence of a clear programmatic goal, never mind a party or organization, the new Marxism has a certain weightlessness. No one seems to have even a wisp of an answer to the perennial question: What is to be done?
I have some decidedly mixed feelings about all of this.
My first, superficial reaction is, as someone who had to read a lot of Marx in college and graduate school, I'm glad to see that those hours/days might not all go to waste.
My second reaction is that a return to Marx seems entirely appropriate. For all the twentieth century focus on what Marxists did once they came to power, it is worth remembering that 95% of what Marx wrote about was a critique of capitalist political economy -- he offered very little in the way of what to do instead. Indeed, Marx's made a couple of significant contributions to political economy, and the post-2008 world puts a lot of them on display. Following Smith and Ricardo, he was really one of the first to think about capitalism as a global rather than a national phenomenon.
Going beyond Smith and Ricardo, Marx stressed two important facets of the market that they did not. First, he stressed that crisis was endogenous to global capitalism. Marx acknowledged and admired the productive machine that was the capitalist system, but he also stressed that periodic busts were baked into the system. This is a point that spread into some corners of mainstream economics -- see Hyman Minsky, Charles Kindleberger or even Reinhart and Rogoff -- but could do with a little more emphasis in the old grad school syllabus.
The second dimension Marx stressed was power -- which is why he's still appreciated among those who study global political economy. A riff through The Communist Manifesto or the highly underrated Wage Labor and Capital shows the ways in which Marx appreciated how capitalism led to a redistribution and concentration of economic power over time. It's not that hard to find recent empirical work that bolsters a Marxist analysis of economic power.
That said -- and you knew there was a "that said" coming -- the current moment also highlights some Very Big Things that Marx got wrong -- badly, world-historically wrong. First, as an economic determinist, Marx was convinced that class triumphed over all other political cleavages -- including nationalism. That's.... really untrue -- and the lack of truth about it affects any decent analysis of the global political economy.
Second, Marx believed that ideas were merely the manifestation of economic power, with little independent influence of their own. And if nothing else, the way the current debt ceiling deadlock/government shutdown has played out in Washington suggests the limits of that kind of structural Marxist analysis. We're operating in a world where the core business interests in the United States -- for kicks, let's call them the "executive committee of the bourgeoisie" -- are being ignored. Now it's possible that Tea Party activists have some economic skin in the game - see this outstanding exchange between Ezra Klein and Tim Carney for more on that -- but it's a stretch to say that the Tea Party is acting out of economic interests rather than, say, creedal passions.
Still, no one's model of political economy is perfect, and I do think Marx has a few insights that might be worth contemplating (and rebutting). Your humble blogger will be intrigued to see whether this intellectual embrace of Marx will lead to some better analysis of the global political economy.... or, instead, a cameo appearance by the Marx-Engels reader in an episode of Girls (even if Lena Dunham is an underrated political thinker).
What do you think?
Your humble blogger has been growing out his beard in support of the Boston Red Sox this playoff season, a decision that paid off handsomely last night. There's a little more salt in this beard than the last time I grew it out, a reminder of time's passing. I used to be a young, rebellious IPE scholar. Now I'm a middle-aged cantankerous IPE scholar.
One of the few benefits that comes with age, however, is acquiring the necessary experience to recognize when someone is making a retread argument -- a thesis that is not terribly original or provocative. Now that's not always a bad thing -- sometimes the remake is better than the original. But sometimes not.
For example, I've been … let's say less than thrilled with Parag Khanna's insights into the global political economy. Yesterday, someone let him have the keys to the New York Times Sunday Review section, with a piece titled, "The End of the Nation-State?" Now that is an awful title that is likely not Khanna's fault, so let's move past that. What's his argument?
[T]hough most of us might not realize it, “nonstate world” describes much of how global society already operates. This isn’t to say that states have disappeared, or will. But they are becoming just one form of governance among many.
A quick scan across the world reveals that where growth and innovation have been most successful, a hybrid public-private, domestic-foreign nexus lies beneath the miracle. These aren’t states; they’re “para-states” — or, in one common parlance, “special economic zones.”…
This complex layering of territorial, legal and commercial authority goes hand in hand with the second great political trend of the age: devolution.
In the face of rapid urbanization, every city, state or province wants to call its own shots. And they can, as nations depend on their largest cities more than the reverse.
So, three things. First, this sounds awfully similar to Kenichi Ohmae's The End of the Nation State: The Rise of Regional Economies, which made an argument about "region-states" way back in … 1995. I remember because I reviewed Ohmae's book back in the day. It wasn't terribly persuasive then, and it's not any more persuasive now.
Second, states have always been, "one form of governance among many" -- this ain't new. Hell, even a glance at, say, Hendrik Spruyt makes that clear. So what Khanna needs to show is that real power/authority/governance is shifting from states to subnational actors.
Third, showing that devolution or diffusion of state power in the global economy ain't easy. Indeed, the same weekend Khanna published this essay, Greg Ip's Economist survey on the state of globalization five years after the 2008 financial crisis comes to a very different conclusion:
A clear pattern is beginning to emerge: more state intervention in the flow of money and goods, more regionalisation of trade as countries gravitate towards like-minded neighbours, and more friction as national self-interest wins out over international co-operation. Together, all this amounts to a new, gated kind of globalisation.
The appeal of gated globalisation is closely tied to state capitalism, which allowed China and the other big emerging markets—India, Brazil and Russia—to come through the crisis in much better shape than the rich world. They proudly proclaimed their brand of state capitalism as superior to the “Washington consensus” of open markets and minimal government that had prevailed before 2008.
Now, I think Ip is overstating his case considerably, an argument I'm in the middle of developing at length -- but at least he's bringing some data to the table. And that data doesn't support Khanna's thesis.
Am I missing anything?
Dear Rest of the World,
Hi there. Let's get some preliminaries out of the way. First off, I'm really sorry about the whole U.S. government shutdown/possible "possible default on the U.S. debt" thing. I know that many of you are eager to negotiate trade treaties with the United States, and now that's on hold. I know that the U.S. is the world's financial anchor, and manufactured crises like this one can muck up your economies a bit. I know that many of you are clucking at how maybe the presidential system of government ain't all it's cracked up to be. Fair enough. Right now America is exceptional -- at racking up policy own-goals.
All that said, can I make a teeny, tiny suggestion? If you want the United States government to resolve this deadlock, you're gonna have to rethink whether you can influence what is, essentially, a domestic politics game. For example, I'm not sure that this is the best idea:
China called on the U.S. to take necessary steps to avoid defaulting on government debt, in the first official comment on the shutdown impasse from Washington's largest foreign creditor.
Noting that China is a major holder of U.S. Treasurys, Chinese Vice Finance Minister Zhu Guangyao warned Monday that failure by the U.S. to raise its debt ceiling would have global ramifications.
"Because of this, We naturally are paying attention to financial deadlock in the U.S. and reasonably demand that the U.S. guarantee the safety of Chinese investment there," Mr. Zhu said, according to a report on the website of the official Xinhua news agency.
"On the question of the debt ceiling, the Chinese side feels the U.S. needs to take realistic and resolute steps to ensure against default on the national debt," he added.
How to put this gently.... these sorts of statements are at best futile and at worst counterproductive.
To understand what I mean, go click here, here, here, here, and here to get a sense of the dynamics at play in the U.S. House of Representatives right now. It doesn't matter that the shutdown is unpopular and more people are mostly blaming Republicans. What matters is that the representatives in most GOP districts (though not all) aren't feeling much political pain right now. Hell, as the links above suggest, many GOP politicians are unconvinced that a default on the debt is possible and/or undesirable. They're completely wrong, of course -- but this is the mindset you must acknowledge right now.
In this kind of political ecosystem, you know what won't help? Complaints from a possible foreign rival. If you think GOP members of Congress will become less intransigent because of Chinese pressure, well, you haven't been watching recent political campaigns. If China is complaining about some aspect of U.S. policy, that's seen as a good thing by most members of Congress.
Is there any kind of foreign pressure that would help? In the old days of the 1990s, I suppose a joint statement by America's closest friends and allies might at least garner some attention. But we're operating in a political universe right now where the chairman of the House Rules Committee publicly articulated the GOP's bargaining position as: "Look. We're not French. We don't surrender." So no, I doubt that would help either.
The most frustrating thing in international politics is to see a crisis and do nothing about it. But in this case, foreign pressure on Congress - whether from friends or rivals -- will do nothing to alleviate the deadlock.
Yours very sincerely,
Daniel W. Drezner
As John Boehner continued to dig in his heels over the weekend, it seems more and more likely that the current government shutdown/impending debt ceiling deadlock will not be resolved until the very last minute -- if that.
With the exception of Ted Yoho, there appears to be a general consensus that the global economic effects of defaulting on the debt would be Very, Very Extra-Special Bad. Given the fragilities of the global economy over the past five years, this seems particularly troublesome.
Except the interesting thing is that the global economy isn't as fragile as one would expect:
Surging business confidence in rich countries has put the global economy “back on track” to resume a steady recovery, according to the latest Brookings Institution-Financial Timestracking index.
The improvement in outlook has come as a surprise over the summer, but the relatively upbeat message from economic data over the past few months is vulnerable to many threats on the horizon which could again kill the emerging confidence....
Tiger(Tracking Indexes for the Global Economic Recovery) shows the global economy “being borne along by surging business and consumer confidence in advanced economies, and stabilisation in the growth of emerging markets”, said Prof Prasad.
Having lagged behind emerging economies since the financial crisis, advanced economies now score higher in the financial and confidence components of the index.
The Tiger index combines measures of real economic activity, financial variables and indicators of confidence, according to the degree to which they are all moving up or down at the same time. Using sophisticated statistical methods it can capture similar movements of data which are measured on a very different basis and across many countries.
The overall levels of the index, which still languish well below the initial recovery period in late 2009 and early 2010, have nevertheless improved from their recent lows in mid-2012. A reduction in fear of an imminent eurozone collapse, alongside gradually improving data, is the most important factor in the upswing
A standard lament about the 2008 financial crisis is that it happened because of "market fundamentalism." There's at least a small grain of truth in the accusation that market failures triggered the greatest downturn since the Great Depression. But between the Eurozone crisis and U.S. policy deadlocks, it's striking how much the gyrations of the past few years are because of governance failures. And it's depressing to consider how much better the global economy would be doing if politicians in the advanced industrialized economies were a bit better at their jobs.
So yesterday Mexican president Enrique Peña Nieto made some news, according to the Washington Post's Stephanie McCrummen:
Mexican President Enrique Peña Nieto proposed historic changes to this nation’s state-run energy sector Monday, cracking open the door for global oil giants such as Exxon Mobil and Shell to invest in Mexico’s lethargic 75-year-old state oil monopoly, Pemex, the eighth-largest oil company in the world and a symbol of deep nationalist pride.
So, this seems like a pretty big deal, as the Financial Times' John Paul Rathbone and Eduardo Garcia note:
Mexico sits on reserves estimated at 115bn barrels of oil equivalent, comparable to Kuwait’s. Just over half its reserves are non-conventionals, including shale gas, and Pemex estimates that with the right investment and technology about 27bn barrels of deep sea crude could be added to the nation’s proven reserves.
All stages of Mexico’s energy chain – from production and refining to distribution – have remained the legal property of the Mexican people since 1938, when President Lázaro Cárdenas expropriated fields from US and British companies and changed the nation’s constitution.
Although the expropriation is a point of nationalist pride celebrated every March 18, the burden that Pemex faces of being the government’s cash cow – providing a third of government revenues – has led to years of under-investment. Pemex, with $100bn of revenues, is the world’s seventh-largest oil producer, but output has fallen by a quarter to under 2.6m barrels of oil a day over the past 10 years.
Mr Peña Nieto said the reform would reverse that decline, and “provide cheaper energy for all Mexicans”. He said the changes would allow Mexico to boost oil production to 3m bpd by 2018 and to 3.5m bpd by 2025. Gas production would also increase from 5.8bn cubic feet currently, to 8bn cubic feet by 2018 and 10.4bn cubic feet by 2025.
Both stories indicate that between his PRI party and the National Action Party (PAN), Peña Nieto has the votes to get this through the Mexican legislature. So, again, a pretty big deal... but back to McCrummen for some of the details:
[Peña Nieto] proposed constitutional changes that would allow for risk- and profit-sharing partnerships between foreign firms and Pemex, a move aimed at luring the money and technology necessary to exploit Mexico’s immense but hard-to-reach deep-water and shale oil fields. At the same time, Peña Nieto emphasized that Pemex would remain the sole owner and manager of Mexico’s oil.
And back to the FT story for why U.S. oil firms might not be all too keen on these proposed arrangements:
“It’s a pretty solid proposal,” said Duncan Wood, director of the Wilson Centre’s Mexico Institute in Washington DC. “But it will be interesting to see how oil companies take to profit-sharing rather than production-sharing contracts as that may limit their ability to book reserves.” Generally, under US Securities and Exchange Regulation, a company must have a right to produced reserves in order to book them.
My hunch is that, compared to some of the other places oil companies have chosen to invest, Mexico might look comparatively good. Assuming the proposed reforms don't lead to mass mobilization against the constitutional changes, some MNCs are gonna be very interested. Which makes this simply one more data point that suggests interesting things are afoot in the North American energy scene.
During my brief time working for the Treasury Department, officials who travelled to Europe were allowed to take the red-eye flight two nights before the beginning of any negotiations. The premise was simple: jet-lagged officials are probably not going to be the best negotiators. The U.S. also usually had one of the larger delegations at the meetings I attended. This was extraordinarily useful, because when bargaining disputes came up, it was the Americans who were usually able to chase down the relevant piece of information that turned into a small concession. I don't mean to exaggerate the effect of these things -- it's not like Germany was going to acquiesce to everything because the United States negotiating team was larger and well-rested. Still, on the margins, this sort of thing mattered.
I bring this up because Mark Landler has a truly depressing story in the New York Times about one effect of the budget sequester: the office of the U.S. Trade Representative is finding it hard to, you know, negotiate or enforce trade agreements:
The Office of the United States Trade Representative has been waging a lonely battle for its budget, which shrank 7 percent to $47 million this year because of sequestration spending caps. Officials in the office, pointing to the 2014 budget proposal in the Republican-controlled House, fear that they could end up with even less money next year.
This matters, officials say, because trade negotiators fly hundreds of thousands of miles just doing their jobs. Since the trade representative’s office spends the bulk of its budget — $46 million — on fixed costs like salaries, benefits and office supplies, a cut of $5 million or $8 million could effectively ground much of its 250-person work force.
“We are in a situation where we’ve having to choose: Can we send people to a negotiation? Can we bring this enforcement case or another?” the newly appointed trade representative, Michael Froman, said in a recent panel discussion with the president of the U.S. Chamber of Commerce, Thomas J. Donohue....
The office’s financial woes have become a minor scandal in trade circles. Susan C. Schwab, a former trade representative in the George W. Bush administration, noted that even in the best of times, life at the office is not glamorous. Negotiators typically squeeze into economy-class seats for 15-hour flights to Asia, after which they plunge into round-the-clock talks on complex issues.
“All of this is under severe threat by virtue of $5 million, $8 million, $10 million,” Ms. Schwab said. “That’s a real travesty.”
If you excuse me, I need to go do this:
[C'mon, Dan, geography doesn't matter anymore!! Why can't they just Skype these negotiations?!--ed.] I'm glad you asked. Let's go back to that Landler story:
As anyone who has watched the ritual of the Doha Round of talks between World Trade Organization members can attest, international trade negotiations are grinding, labor-intensive ordeals, requiring teams of lawyers and other specialists who camp out in hotels in foreign capitals for months. Breakthroughs, when they come, are often reached away from the bargaining table.
When the White House was renegotiating a provision of the South Korean free-trade agreement pertaining to market access in South Korea for American cars, Mr. Froman, then the deputy national security adviser for international economic affairs, and South Korea’s trade minister, Kim Jong-hoon, left the hotel for a stroll around a lake.
Their walk produced a critical advance in the negotiations — a fortuitous moment that generally does not happen when negotiators are squinting at fuzzy images of one another on video conference calls.
This is the kind of budgetary expenditure that perhaps even Rand Paul would agree is one of the things that only the federal government can do. And yet U.S. economic leadership is being compromised because of a measly $10 million. And I'm going to deduce that because this is the sequester kicking in, it's not just the USTR that is finding its travel budget cut, but the Departments of State, Treasury, Defense, Justice and Energy as well.
Now I know, I know, that this is because the budget sequester was designed to be so unbelievably f**king stupid that it would somehow jolt Congress into saner budget cuts. And yet, now it's being implemented.
As longtime readers are aware, I'm reasonably upbeat about the fundamentals of U.S. power. It's when I see stories like this, however, that I despair about the ways in which Congress can weaken U.S. influence in the world with just the tiniest of budget cuts. Plus, it means I might lose my bet to Phil Levy.
The U.S.-China Strategic and Economic Dialogue (SED) has only generated fitful levels of interest in recent years. With this year's SED coming on the heels of Sino-American rancor involving Edward Snowden, expectations for this week's talks were tamped down as well.
With D.C. swamped with all the high-profile sharknado news, it would be easy to miss this week's SED talks. In a semi-surprising development, the Washington Post's Howard Schneider reports that something significant happened:
China and the United States have agreed to restart negotiations over a possible investment treaty that could substantially open the Chinese economy to more American companies.
During high-level talks over the past two days, Chinese officials agreed to drop a longstanding demand that negotiations over a Bilateral Investment Treaty would have to exclude sensitive or developing sectors of the economy that it wanted to protect.
Although many American companies have businesses in China, investment there is governed by a strict set of rules that often limits foreign ownership — a policy, U.S. officials argue, that will crimp China’s growth in the long term and which limits the benefits American companies and workers can gain from China’s economic expansion.
American officials characterized the change in negotiating policy as a major concession and a sign that the new Chinese government wants to speed economic opening.
The Financial Times' Geoff Dyer provides some interesting details:
The two governments began discussion of a bilateral investment treaty in 2008, but the talks did not progress. According to US officials, the discussions are now being revived after China made an important concession about the basis for the negotiations. Every sector will be up for discussion unless one of the governments declares it off-limits – a “negative list” approach, which Washington had long called for.…
China has also agreed this year to revise its offer for signing up to the World Trade Organisation’s agreement on government procurement rules.
Both stories stress that there's no guarantee a bilateral investment treaty (BIT) will be negotiated -- in theory, they've been negotiating this for five years. Still, what's interesting is why China agreed to these concessions. There are three proffered reasons in the news roundups: 1) putting a halt to rising levels of U.S. investor protectionism in reaction to things like the proposed takeover of Smithfield Foods by Shuanghui International, 2) a desire by China to jump-start lagging U.S. foreign direct investment in the country since 2010, 3) a crowbar to allow China Inc. to buy up the world, or 4) a mechanism by China's new leadership to jump-start domestic economic reforms.
I don't think it's (1). The truth is there really hasn't been a lot of U.S. investor protectionism directed against China. Furthermore, no BIT in the world is going to crimp the CFIUS process if there really is a national security case.
It could be (2). According to the Commerce Department's Bureau of Economic Analysis data, U.S. foreign direct investment in China has fallen from $58.9 billion in 2010 to $51.3 billion last year. That last figure is still way above pre-2008 levels, however, so I'm not sure it's enough of a motivating factor.
I don't think it's (3), and I'll outsource why to this Martin Wolf column.
I have no positive evidence for (4), except that it would be consistent with what President Xi Jinping and Premier Li Keqiang have been jaw-jawing about with respect to domestic economic reform. And using an international agreement to force domestic change in China is not an unprecedented maneuver.
Developing … in some very interesting ways.
Let's be clear at the outset of this post that its content is almost completely driven by envy. Total, abject, rage-inducing envy.
Now, with that in mind, I see that KKR is creating a fancy-pants new institute. And guess who's gonna head it?
Kohlberg Kravis Roberts & Co. L.P. today announced the appointment of retired four-star General and former Director of the CIA David Petraeus as Chairman of the newly created KKR Global Institute.
Henry Kravis, Co-Founder and Co-CEO of KKR, stated: "I have long known and respected General Petraeus and, on behalf of everyone at KKR, I welcome him to the firm. As the world changes and we expand how and where we invest, we are always looking to sharpen the ‘KKR edge.' With the addition of General Petraeus, we are building on the work we have done to understand the investment implications of public policy, macro-economic, regulatory and technology trends globally. We are pleased to bring all of this expertise together under one umbrella, the KKR Global Institute, to deliver the best of KKR's insights for our investors."
Over the past several years, macro-economic and geopolitical considerations, including the heightened role of central banks following the financial crisis, new regulation and major changes in public policy, have led to KKR's increased engagement on these areas and on environmental, social and governance issues. At the same time, KKR is a global firm investing in new and emerging markets that have new risks and opportunities, The KKR Global Institute will be the nexus of KKR's focus on the investment implications of these issues. It will also further build on the firm's efforts to help KKR's portfolio companies expand globally, and it will periodically serve as an outlet for publishing the firm's thought leadership products, including views from portfolio managers and industry experts....
General Petraeus observed. "I am very pleased to join such a great team. I have watched KKR evolve as it adapted to the post-financial crisis world and became a go-to partner for companies worldwide. I look forward to supporting the investment teams in their pursuit of the best opportunities for clients and also being a part of a new initiative to provide additional insights to KKR's clients and companies."....
General Petraeus holds a PhD in international relations from Princeton University and has taught economics and international relations at the United States Military Academy at West Point.
So this, in addition to his CUNY post, suggests that Petraeus has successfully completed his soft landing (though this and his CUNY position are gonna lead to some interesting conversations on campus). Which, in the abstract, he pretty much deserves. He served his country in a variety of not-very-easy positions for a long period of time. Sure, there's accusations of self-puffery, but that's par for the course in Washington. No, Petraeus totally deserves to be the head of some Bigthink Institute devoted to assessing geopolitical threats in the world and the best way to respond to them.
[Um … did you actually read the press release? --ed.] Well, not carefully, but … but … wait, this institute is about global political economy??!! What??!!
No, that's OK; I'm still happy for Petraeus. Really. It doesn't matter that I've devoted my entire career to studying these issues; what matters is that General Petraeus once taught economics at West Point and has a lot of leadership experience, and that translates into cognate fields like "the heightened role of central banks following the financial crisis, new regulation and major changes in public policy" and SERIOUSLY, WHO THE F**K DO I HAVE TO DRONE-STRIKE TO GET A CUSHY CORPORATE THINK-TANK POST??!!
Sorry, I just needed to vent for a second about the unidirectional nature of security folk spreading into other disciplines. But it's not all bad. After all, I still get to rail at members of Congress in an unconstrained manner! [Just not as effectively as the military! --ed. If you excuse me, I'm going to spend the rest of the day in the fetal position.]
Since I was a young boy studying global political economy armed with little but an Economist subscription and a smile, I've noticed that, at some point, every country and their neighbor tries to do something to create their own Silicon Valley. Whether it's Great Britain, China, France, Brazil, or even North Korea, it seems as though every country in the world is trying to hit upon the right policy formula to create their own hub of high-tech innovation and entrepreneurship.
tax avoidance value-added created by Silicon Valley, this is no surprise. At the same time, all of this is the IPE equivalent of Gretchen Weiner's efforts to coin urban slang in Mean Girls:
I don't mean this in a "HA HA HA, you stupid non-Americans!!" way. I'm pretty sure that the conditions that created the actual Silicon Valley had more to do with serendipity, fortuna, and happy accidents than any conscious set of policies (though see here for my deeper thoughts on this subject).
Which brings me to Russia's efforts to grow its own version of Silicon Valley. It launched Skolkovo Innovation Hub, a pet project of Russian President Dmitri Medvedev, and then paid MIT a boatload of money ($300 million) to set up a school and design a curriculum to attract Russia's best and brightest. High-profile western firms like Cisco have gotten involved. In all, the Russian government has thrown an estimated $4.2 billion at this project.
So how's it going? Well, Courtney Weaver and Charles Clover have a Skolkovo update over at the Financial Times. Here's how it starts:
Just over a month ago, Tony Blair and Colin Powell were sitting in Moscow’s towering World Trade Centre, helping Kremlin officials brainstorm how they could attract more investment to Russia. A few storeys above them, employees of Skolkovo, the government’s flagship high-tech project, received a few visitors of their own.
At 9.30am on April 18, more than a dozen agents of Russia’s domestic security agency stormed Skolkovo’s office, confiscating mobile phones and removing reams of paper.
Skolkovo was meant to be Russia’s answer to Silicon Valley – a Kremlin-sponsored technopark with research centres for the world’s leading science and technology companies. But over the past few months it has found itself caught in the crossfire of Russian politics, causing those involved to question the project’s future....
People close to Skolkovo, including [Kremlin "gray cardinal" Vladislav] Surkov, have suggested that the volume of charges and their highly public airing are signs that the investigations are not part of an anti-corruption drive but are politically motivated. The crackdown comes amid a power struggle within the government between more liberal ministers led by Dmitry Medvedev, the prime minister and former president, and hardliners who are pushing back against the pet programmes of Mr Medvedev’s presidency, the most visible one being Skolkovo.
So, a few things:
1) Here's a thought: if you are trying to woo high-tech foreign direct investment and your go-to guys are Tony Blair and Colin Powell, then you can pretty much forget trying to clone Silicon Valley. Only Russian politicians could envision the following script playing out:
SILICON VALLEY MOGUL: Set up a major investment in Russia? Yeah, they've got the human capital, but the downside risk is massive. It's government by diktat, and Putin blows hot and cold with foreign investment. There are too many ways we can lose our lunch.
EXECUTIVE ASSISTANT: Pardon me, but I have Colin Powell on the line. He says he'd like to talk to you about investing in Russia.
SILICON VALLEY MOGUL: Did you say Colin Powell???!!! Hold my calls for the next hour. It's not every day you get to hear the business musings of a man who has limited business experience and hasn't been in office for close to nine years!!!
2) Correct me if I'm wrong, but any time Putin and Medvedev have a policy disagreement or turf war, Putin wins. Why, if you're negotiating some kind of Russian venture, would you ever feel secure with any arrangement with Medvedev?
3) Wait, scratch #2 -- even if you cut a deal with Putin's men, would you ever feel secure about it? As I said at the outset, it's hard enough trying to incubate an innovation hub in the best of circumstances. Trying to do so with a government that doesn't understand the words "credible commitment" makes it damn near impossible.
Am I missing anything?
Yesterday the New York Times announced a brand new conference called The Next New World. The URL gives the game away, however -- it's the Friedman Forum. The précis:
Pulitzer Prize–winning New York Times columnist Thomas L. Friedman hosts this timely forum, bringing together chief executive officers, tech pioneers, government officials, influential decision-makers and scholars to discuss the new world economy, opportunities and challenges. We will explore the complex dynamics of new-world infrastructure, especially the transformative electronic, digital and mobile environment. Attendees can expect invaluable insights into strategies for success in today’s new world order.
If you act before May 10, you can get the discounted rate of $995.00 to attend!
Why should you shell out that kind of cabbage to go to such a confab? Well, there's the speaker list of course, but even better, the Friedman Forum has a "Why Attend?" page that will answer this very question. The good parts version:
The New York Times Next New World Forum is an invitation-only, highly interactive forum that explains:
How this Next New World is changing your job, your workplace, and your competition...
How cyberattacks and monetary crises are the new national security threats—threats to global businesses as well as nations....
How brands are threatened as never before by new players, and why C-Suite executives are both more constrained and less likely to last....
How robotics and other cutting-edge technologies can increase productivity but also disrupt your office and workforce....
How everything from climate change to fallen infrastructure is threatening global supply chains and how the rise of a new global middle class is disrupting American global dominance—while creating new markets.
After reading this, as well as CUNY's announcement that former CENTCOM commander/CIA Director David Petraeus will lead a seminar on the United States and the global economic crisis, I had two reactions.
1) At what point does one decide, "Why, yes, I should lecture people on the New New Things in the Global Economy! And charge at least a thousand dollars for the privilege"?
This is a serious question. I get asked this a lot at various talks, and I'm always befuddled by the query. I mean, if I had the actual answer, I wouldn't be so low in the international relations speaker ecosystem.
2) Forget Davos, Aspen or TED -- the Friedman Forum suggests a whole new vista of conferences branded around the idiosyncracies of individual thought leaders. Friedman better nail this down fast, because the coming competition will be fierce. In the spirit of... er... alliteration and Robert Ludlum titles, let me predict some other possible confabs on the horizon:
A) The Gross Gaggle. Organized by PIMCO's Bill Gross, this would be a collection of the world's most florid investment letter-writers in the world, warning about risk and uncertainty.
The Big Finale: Gross doing a spoken-word version of his latest newsletter with Dave Brubeck's "Take Five" playing in the background.
B) The Slaughter Seminar. The new president of the New America Foundation will lead a highly interdisciplinary gathering to focus on the myriad ways that the 21st century is upending our static 20th century mindsets. Topics will include the role of social networks, social media networks, online networks, gendered networks, and networked networks.
The Big Finale: A three-hour break in the middle of the day for participants to bond with their families.
C) The Dowd Doohickey. Join the Red Priestess as she explains how leadership is supposed to be done in the 21st century. After the ritual flaying of a political scientist to appease the Social Science Gods, Dowd will explain exactly how politicians used to Get Things Gone back in the day.
The Big Finale: Dowd and Aaron Sorkin will re-enact some of the classic Josh Lyman-Donna Moss scenes from The West Wing.
D) The Taleb Teach-In. Just how fragile is your financial position in this time of massive geopolitical and geoeconomic uncertainty? The author of The Black Swan and Antifragile will unleash his crystal ball and stare deeply into your portfolio to see if you're really and truly prepared for a volatile century.
The Big Finale: Taleb unleashes an army of zombies into the auditorium to sort out the resilient from the posers.
E) The Morozov Mish-Mash. Everything is sh*t -- your beliefs, your ideas, your likes, your dislikes, and particularly your values. If you dare attend, Morozov will explain why Everything You Hope for is a Chimera.
The Big Finale. Morozov will glare out at the audience, grumble, "you all suck," drop the mic, and walk off stage.
[And what about your confab?!--ed. I'll let the commenters decide the contents of... the Drezner Deliberations!]
So, after reading up on the Cyprus deal from the Financial Times, the Economist, and Quartz, I think I have a pretty good idea of what happened. Tyler Cowen isn't happy with the deal, and I can see why, but I don't think that means the deal won't stabilize things for a spell. My four quick takes:
1) I've been pretty insistent that the most surprising thing about the aftermath to the 2008 financial crisis is how much global policy norms haven't changed. By and large the major economies are still rhetorically and substantively committed to trade liberalization, foreign direct investment, and a constrained role for the state in the private sector. The one exception? Capital controls. The earth has moved here, and the fact that this deal will require fair amounts of financial repression and cross-border controls is just the latest sign of this fact.
From a normative perspective, I can't say I'm too broken up about this. It's not that I'm a huge fan of capital controls or anything. In the various policy trilemmas or unholy trinities that Dani Rodrik and others talk about, however, it strikes me that unfettered capital mobility is the policy preference with the least upside. And Cyprus does seem to be the fifth iteration of the lesson that countries that live by large unregulated offshore finance will die by large unregulated offshore finance.
2) If the FT's Peter Siegel and Joshua Chaffin are correct, then the political backlash in Cyprus from this deal won't be that great:
In Nicosia, political leaders generally greeted the deal as painful but necessary.
The city streets were quiet and peaceful, with most businesses closed for a public holiday.
Even before the agreement was clinched, most Cypriots had come to grips with the fact that the offshore financial business sector that has powered the economy since the Turkish invasion in 1974 would be but a shell of its recent self.
And as the Economist explains, the current Cypriot reaction is based on the fact that the new deal is a damn sight better for them than the previous deal:
On March 16th Cyprus’s president, Nicos Anastasiades, desperate to protect Cyprus’s status as an offshore banking model for Russians, had decided to save the two biggest banks and thus to spread the pain thinly. He would have applied a hefty tax to all depositors: 9.9% for those too big to be covered by the EU-mandated €100,000 deposit guarantee, and 6.75% for the smaller depositors.
But after a week of brinkmanship—including protests by Cypriots, the extended closure of banks to avoid the outrush of money, a failed attempt by Cyprus to throw itself at Russia’s feet, an ultimatum by the European Central Bank and an eleventh-hour threat by Cyprus to leave the euro zone—a different decision was made: to apply the pain much more intensely, but on a smaller number of large depositors.
Which leads me to....
3) So much for Russia as a counterweight to the European Union. Cyprus tried to realign itself closer to Moscow, but it didn't take. Furthermore, the new deal really puts the screws on the large deposits of Russian investors that have parked their money in Nicosia. As Felix Salmon explains:
In the Europe vs Russia poker game, the Europeans have played the most aggressive move they can, essentially forcing Russian depositors to contribute maximally to the bailout against their will. If this is how the game ends, it’s an unambiguous loss for Russia, and a win for the EU.
The Financial Times makes a similar point:
One Moscow businessman blamed the harsher haircut on the Kremlin, which he accused of failing to protect Russia’s interests, “thereby allowing the Germans to bully Cyprus and thousands of Russian depositors”.
“As soon as the EU saw that Russia was not going to protect its citizens, the confiscation of Russian money in Cyprus was pushed by the EU. All that was necessary for Russia to do was to provide €2.5bn secured by Cyprus’s nationalised assets,” he said.
With Xi Jinping's visit to Moscow, there's been a lot of chatter about "rise of BRICS" and "Russia turns East" and "SCARY!! SCARY!!" Bear in mind, reading all of this, that Moscow couldn't budge the ostensibly enervated EU from its position on the EU member with the closest ties to Russia.
[Can't Russia just mess with the Europeans on energy?--ed. Um... no. Sure, they could try to do that, but the long-run implications of that move for Russian exports ain't good. To paraphrase an old Woody Allen joke, Russia might find its economic relationship with the European Union to be totally frustrating and irrational and crazy and absurd... but Russia needs the eggs.]
4) What I said about Cyrprus last week still seems to hold for this week. So I guess this means Cyprus now falls under the "good enough" global governance category, with the caveat that this involves eurozone officials, so "good enough" here is defined down to mean "managed not to wreck the rest of the global financial system."
Am I missing anything?
As longtime blog readers are aware, I'm working on a book-length project arguing that global economic governance has done a surprisingly good job of things in the post-2008 world. Not perfect, mind you, but "good enough" global governance.
Now, the interesting thing about making such a counterintuitive argument is the number of opportunities one comes across of the conventional wisdom asserting itself -- the idea that the system is crumbling, we're in a Brave New World of uncertainty, no one is in charge, yadda yadda yadda. You, my dear reader, must wonder how I react when I see such assertions. Well, pretty much like Cliff Poncier but with shorter hair:
No, seriously, I like seeing good arguments pushing against my position -- it's a way for me to see whether my argument holds up.
Which brings me to Naazneen Barma, Ely Ratner and Steve Weber's new essay in The National Interest, entitled "The Mythical Liberal Order." The title is pretty clear -- as is their argument:
Instead of a gradual trend toward global problem solving punctuated by isolated failures, we have seen over the last several years essentially the opposite: stunningly few instances of international cooperation on significant issues. Global governance is in a serious drought—palpable across the full range of crucial, mounting international challenges that include nuclear proliferation, climate change, international development and the global financial crisis.
Where exactly is the liberal world order that so many Western observers talk about? Today we have an international political landscape that is neither orderly nor liberal.
It wasn’t supposed to be this way. In the envisaged liberal world order, the “rise of the rest” should have been a boost to global governance. A rebalancing of power and influence should have made international politics more democratic and multilateral action more legitimate, while bringing additional resources to bear. Economic integration and security-community enlargement should have started to envelop key players as the system built on itself through network effects—by making the benefits of joining the order (and the costs of opposing it) just a little bit greater for each new decision. Instead, the world has no meaningful deal on climate change; no progress on a decade-old global-trade round and no inclination toward a new one; no coherent response to major security issues around North Korea, Iran and the South China Sea; and no significant coordinated effort to capitalize on what is possibly the best opportunity in a generation for liberal progress—the Arab Spring.
It’s not particularly controversial to observe that global governance has gone missing. What matters is why. The standard view is that we’re seeing an international liberal order under siege, with emerging and established powers caught in a contest for the future of the global system that is blocking progress on global governance. That mental map identifies the central challenge of American foreign policy in the twenty-first century as figuring out how the United States and its allies can best integrate rising powers like China into the prevailing order while bolstering and reinforcing its foundations.
But this narrative and mental map are wrong. The liberal order can’t be under siege in any meaningful way (or prepped to integrate rising powers) because it never attained the breadth or depth required to elicit that kind of agenda. The liberal order is today still largely an aspiration, not a description of how states actually behave or how global governance actually works. The rise of a configuration of states that six years ago we called a “World Without the West” is not so much challenging a prevailing order as it is exposing the inherent frailty of the existing framework.
I encourage you to read the whole thing. I have two reactions to it. The first is thast I wholeheartedly endorse one point that they are making. The notion that the liberal wprld order was perfectly functioning prior to 2008 is one of the biggest sources of misperception about the global political economy. As Barma, Ratner and Weber point out, this was at best a partial order even prior to 2008. This matters: a misplaced nostalgia for prior eras of global governance is one reason that so many commentators think that the system is f**ked right now. Once you realize that the post-1945 liberal order was partial, riddled with exceptions, and also prone to crisis, suddenly the present day doesn't look so bad in comparison.
Now, that said, I think Barma, Ratner and Weber get some big things wrong. This is a blog post, so I'll focus on one point in particular -- the claim that liberal ideas are faltering in today's world:
Ask yourself this: Have developing countries felt and manifested over time the increasing magnetic pull of the liberal world order? A number of vulnerable developing and post-Communist transitional countries adopted a “Washington Consensus” package of liberal economic policies—freer trade, marketization and privatization of state assets—in the 1980s and 1990s. But these adjustments mostly arrived under the shadow of coercive power. They generally placed the burden of adjustment disproportionately on the most disempowered members of society. And, with few exceptions, they left developing countries more, not less, vulnerable to global economic volatility. The structural-adjustment policies imposed in the midst of the Latin American debt crisis and the region’s subsequent “lost decade” of the 1980s bear witness to each of these shortcomings, as do the failed voucher-privatization program and consequent asset stripping and oligarchic wealth concentration experienced by Russians in the 1990s.
If these were the gains that were supposed to emerge from a liberal world order, it’s no surprise that liberalism came to have a tarnished brand in much of the developing world. The perception that economic neoliberalism fails to deliver on its trickle-down growth pledge is strong and deep. In contrast, state capitalism and resource nationalism—vulnerable to a different set of contradictions, of course—have for the moment delivered tangible gains for many emerging powers and look like promising alternative development paths. Episodic signs of pushback against some of the excesses of that model, such as anti-Chinese protests in Angola or Zambia, should not be confused with a yearning for a return to liberal prescriptions. And comparative economic performance in the wake of the global financial crisis has done nothing to burnish liberalism’s economic image, certainly not in the minds of those who saw the U.S. investment banking–led model of capital allocation as attractive, and not in the minds of those who held a vision of EU-style, social-welfare capitalism as the next evolutionary stage of liberalism.
Yes, this explains why the publics in the developing world have rejected economic globalization as an economic strategy -- oh, wait, I'm sorry, they haven't done that, nor have their governments. If anything, the commitment to a liberal economic order has held up remarkable well since 2008. As for the appeal of the "Beijing Consensus" or the "China Model," I'll outsource this refutation to Yang Yao, Scott Kennedy, and Matt Ferchen.
The fundamental disagreement between these authors and myself is revealed in this paragraph:
Global governistas will protest that the response to the global financial crisis proves that international economic cooperation is more robust than we acknowledge. In this view, multilateral financial institutions passed the stress test and prevented the world from descending into the economic chaos of beggar-thy-neighbor trade policies and retaliatory currency arbitrage and capital controls. The swift recovery of global trade and capital flows is often cited as proof of the relative success of economic cooperation. The problem with this thesis is that very real fears about how the system could collapse, including the worry that states would retreat behind a mercantilist shell, are no different from what they were a hundred years ago. It’s not especially indicative of liberal progress to be having the same conversation about global economic governance that the world was having at the end of the gold-standard era and the onset of the Great Depression. Global economic governance may have helped to prevent a repeat downward spiral into self-defeating behaviors, but surely in a world order focused on liberal progress the objectives of global economic governance should have moved on by now.
My response to this is two-fold: first, given the crisis-prone nature of global capitalism, preventing and repairing catastrophes should be a pretty timeless function of global economic governance. Second, there is no way that one can objectively compare the world order of the 1930s -- or 1940s or 1970s, for that matter -- and not conclude that massive amounts of liberal progress have not been made. The world is far more free politically and economically now than at any point in history. That suggests a surprisingly robust liberal world order.
Or, in other words, all this negative energy about global economic governance just makes my argument stronger, man.
What do you think?
Like other wonks, I watched last night's State of the Union address with a mixture of curiosity and whiskey. As I noted a few days ago, each State of the Union address contains some statements that history will judge rather harshly. Initially that was my focus in listening to last night's speech. That was quickly supplanted by a more interesting undercurrent to Obama's text, however.
Foreign policy wonks like Fred Kaplan have argued that there wasn't much foreign policy content in the speech. That's true only if one has a rather narrow definition of foreign policy. What was striking to me was Obama's global justifications for a lot of his economic policy. Throughout his speech, he used the specter of foreign economic threats to prod Congress into action. Consider the following:
Every day, we should ask ourselves three questions as a nation: How do we attract more jobs to our shores? How do we equip our people with the skills needed to do those jobs?....
After shedding jobs for more than 10 years, our manufacturers have added about 500,000 jobs over the past three. Caterpillar is bringing jobs back from Japan. Ford is bringing jobs back from Mexico. After locating plants in other countries like China, Intel is opening its most advanced plant right here at home. And this year, Apple will start making Macs in America again.There are things we can do, right now, to accelerate this trend....
After years of talking about it, we are finally poised to control our own energy future. We produce more oil at home than we have in 15 years....
Four years ago, other countries dominated the clean energy market and the jobs that came with it. We’ve begun to change that. Last year, wind energy added nearly half of all new power capacity in America. So let’s generate even more. Solar energy gets cheaper by the year – so let’s drive costs down even further. As long as countries like China keep going all-in on clean energy, so must we.....
America’s energy sector is just one part of an aging infrastructure badly in need of repair. Ask any CEO where they’d rather locate and hire: a country with deteriorating roads and bridges, or one with high-speed rail and internet; high-tech schools and self-healing power grids. The CEO of Siemens America – a company that brought hundreds of new jobs to North Carolina – has said that if we upgrade our infrastructure, they’ll bring even more jobs....
Let’s also make sure that a high school diploma puts our kids on a path to a good job. Right now, countries like Germany focus on graduating their high school students with the equivalent of a technical degree from one of our community colleges, so that they’re ready for a job....
In each of these passages, Obama was using comparative language to contrast the United States with other countries -- or, as he would put it, other magnets for jobs. The explicit thesis is that unless the United States makes the necessary investments, scarce jobs will leave American shores.
Obama has used this kind of rhetoric on the campaign trail and in previous SOTUs. It reveals a somewhat mercantiilist worldview, one in which jobs and economic growth have a zero-sum, relative gains quality to it.
[So, what, Dan? Most Americans see the world through a mercantilist lens as well. Will this kind of rhetoric matter?--ed.] I'm honestly not sure. Here's the foreign economic policy component of the SOTU:
Even as we protect our people, we should remember that today’s world presents not only dangers, but opportunities. To boost American exports, support American jobs, and level the playing field in the growing markets of Asia, we intend to complete negotiations on a Trans-Pacific Partnership. And tonight, I am announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union – because trade that is free and fair across the Atlantic supports millions of good-paying American jobs.
Now on the one hand, announcing the formal start of negotiations with the EU on a trade deal augurs well for my prediction last year about foreign economic policy playing a big role in Obama's second term. On the other hand, viewing trade through a mercantilist lens will make tough negotiations even tougher ... which means I might owe Phil Levy an expensive DC dinner.
In a speech in which traditional security threats seemed very much on the wane in terms of actual threat as well as political salience, it would be a cruel twist of fate to ratchet up ill-conceived foreign economic threats as a substitute.
About six months ago, when the world's major central banks all started pursuing aggressive strategies of quantitative easing, I blogged that, "the international bitching and moaning about QE3 seems much less than the 'currency war' rhetoric that QE2 triggered."
With Japan's decision to unleash the monetary taps, the "currency war" meme has cropped up again, but in an odd way. To be honest, I'm reading a lot more essays that smack down the "currency war" claim than are making it. For recent and salient smackdowns, see Felix Salmon, Mario Draghi, Gavyn Davies, Philipp Hildebrand, Matthew Yglesias, and Paola Subacchi.
So this raises an awkward question -- who is claiming that there's a currency war and why? Is there a lobby that's agitating for an end to certain policies and using the guise of a "currency war" to try to make it happen? Who are these shadowy groups?
As near as I can determine, there are three interest groups with the motivated interest in doing this:
1) The Bundesbank. One can think of the eurozone crisis as one long, inexorable weakening of the Bundesbank's grip on European monetary policy. Bundesbank president Jens Weidemann set off the latest round of currency war puffery in a speech in which he bemoaned the "increased politicisation of exchange rates" and warned that central bank indepenence was eroding. Now I'm not a German-speaker, but it's possible that when Weidemann says central bank independence is "eroding" he means, "I don't have a veto over eurozone monetary policy like I used to and Draghi won't return my calls."
2) The bond funds. Bondholders aren't big fans of inflating currencies, which is the designed effect of this collective round of quantitative easing. Or, to put it more pithily, it's not a currency war unless someone at PIMCO is hyping it!! In this case, Mohammed El-Erian:
[T]here is a lot of scholarship demonstrating why such beggar-thy-neighbor approaches result in bad collective outcomes. Indeed, multilateral agreements are in place to minimize this risk, including at the International Monetary Fund and the World Trade Organization.
Yet, when push comes to shove, country after country is being dragged into abetting a potentially harmful outcome for the global economy as a whole. Worse, this process has not yet registered seriously on the multilateral policy agenda.
El-Erian needs to read the Financial Times a bit more often. The problem isn't that this isn't on the "multilateral policy agenda" -- it's that these global governance structures are less stressed about it than El-Erian:
The world’s largest developed nations reaffirmed their commitment not to target exchange rates in a statement on Tuesday aimed at addressing concerns over a fresh round of global currency wars.
In a move widely seen as an attempt to defuse tensions over recent rapid moves in the currency market, the Group of Seven countries -- comprising the US, the UK, France, Germany, Italy, Canada, and Japan -- said they would “consult closely” on any action in foreign exchange markets.
"We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” the ministers and governors said.
This doesn't sound like the G-7 is all that troubled -- or, to put it more bluntly, not as troubled as El-Erian wants them to be.
3) The developing world. While the G-7 seems pretty copacetic with the combined quantitative easing, the G-20 is another matter.
The words “currency wars” are too blunt for a G20 communique, but that is what the world’s finance ministers will talk about when they meet in Moscow this week.
A new round of monetary easing in advanced economies is pushing down their currencies and prompting howls of protest from the developing world.
Indeed, the most cogent critiques of the developed world's combined QE strategy comes from officials and op-ed writers focused on the less developed world. And to be sure, the combined effect of developed country actions on the monetary front can create some policy problems in the developing world.
Again, though, what's striking isn't the vocal complaints about currency wars in 2013 but the relative absence of them compared to, say, the fall of 2010 after QE2. Which suggests that while there might be some mild grumbling among the advanced developing countries, they prefer the status quo to policies that cause the OECD economies to contract in size.
So, to sum up: when you read about someone voicing "grave concern" about currency wars, see if they are based in A) an export-dependent developing economy; B) a bond fund; or C) the German central bank. If they are, you can safely tune them out. It's when people outside those places start carping that I'll start getting concerned about a currency war.
Am I missing anything?
The Washington Post's Howard Schneider and Danielle Douglas have a story detailing the ways in which post-crisis global financial reform has allegedly ground to a halt:
Five years after the collapse of Lehman Brothers, a global push to tighten financial regulation around the world has slowed in the face of a tepid recovery and a tough industry lobbying effort....
the post-Lehman goal — of a global scheme that would immunize the financial system from another large-scale shock — remains incomplete. Big banks, insurers and other financial giants remain intact and arguably “too big too fail.” Tools to guard against dangerous bubbles in the value of property or other assets are not yet in place. There is no agreement on how countries should coordinate the failure of a globally important financial company. Implementation of basic banking rules in major nations has fallen behind schedule.
Finishing the job “is going to take many years,” International Monetary Fund chief economist Olivier Blanchard said last week. “It is conceptually very difficult, politically very difficult.”
In their effort to overhaul the global system, regulators have been confronted by a number of head winds. The world’s economy has been unexpectedly slow to recover, making governments leery of doing anything that might make banks cautious to loan and invest. The financial industry has pushed back hard, warning that aggressive regulation might undermine growth. And regulators are simply limited in their understanding of how modern finance can be made safe while still supporting economic activity.
The result: Some of the proposals once considered core to a safe, post-Lehman system have been delayed and weakened, and others have been played down, at least for now, as too politically complex.
Well, this sounds like a blow against my theory of "pretty good" or "good enough" global governance that I've been yammering about on the blog.... that is, until one starts reading the rest of the Post's story.
First of all, with the exception of one Jamie Dimon quote, there's not any real evidence in the story that industry lobbying is to blame. I'm not saying that this means that there was no industry lobbying, or that it was inconsequential -- merely that there's no evidence in the story to support the lede.
What there is evidence of, however, are two things that seem pretty consistent with "good enough" global governance. The first is that even in areas where there's been minimal global agreement, there have beern "patchwork" arrangements that look like they will work. For example:
There also is no comprehensive global approach for addressing bank failures. Individual members of the Basel committee, including the United States, have established resolution plans in case their own lenders become insolvent. And the United States and Britain in December released a set of guidelines to handle a major insolvency — a potentially important agreement between two world financial centers.
But determining how to coordinate the collapse of a major multinational bank is an area where the IMF and others have had limited success in pushing for a broader global agreement. The issue is important because a method to share the fallout of a bank failure across national borders would probably make countries more willing to let institutions go out of business, rather than propping them up with taxpayers’ money.
Again, in a perfect world one would like to see a comprehensive agreement. Given the center of gravity for the financial sector, however, an Anglo-American arrangement is actually pretty powerful and covers the biggest concerns.
Then we get to the implementation of the Basel III accords, designed to insure that banks have sufficient reserves of safe and liquid assets on hand to prevent a panic. As Schneider and Douglas note, the Financial Stability Board reports that only 8 of 27 nations are on track to implement these reforms on schedule.
Why is that the case? Here we find that interest group lobbying seems to matter less than... a recognition by regulators that life is not so simple:
[O]ther Basel proposals have been revised as regulators, bankers and officials have better understood how some of their major assumptions about finance and risk had been upended by events.
In Basel this month, regulators scaled back one key set of provisions that would force banks to keep the equivalent of larger levels of cash on hand to guard against a run on deposits or another fast-moving crisis.
Such highly liquid assets had been defined to include government bonds — which traditionally can be sold quickly and at close to their face value — and to exclude securities backed by residential mortgages, the bundled, complex assets that had triggered the financial crisis in 2007 when they proved difficult to sell other than at a steep loss.
The financial crisis in the euro zone showed a flaw in the approach when Greek, Portuguese and other government bonds plummeted in value. Smaller U.S. banks, meanwhile, argued that to completely exclude mortgages from the new “liquidity coverage ratio” would reduce their ability to make home loans.
When the final Basel rules on the issue were released this month, the required liquidity levels were reduced, mortgages were included in the tally and banks were given extra time to comply.
“Nobody set out to make it stronger or weaker as a standard but to make it more realistic... to make sure there was no impediment to financing recovery,” said Bank of England Governor Mervyn King, who chairs a Basel committee of central bankers and regulatory chiefs.
So, to sum up: after an initial burst of regulatory arrangements, progress has slowed down in some areas, and in other areas relies on a more patchwork arrangement. That said, there appear to be intrisically good reasons for the slowdown, and the patchwork covers the major financial centers.
Yeah, this is "good enough" global governance.
It's that time of the year again, when the Great and Good and Rich converge to Davos, Switzerland for the
realpolitik starfucking World Economic Forum. The coverage of this event gyrates wildly between bland pronouncements from attendees and world class snark from the Not as Great and Good and Rich that are not invited to attend. I will certainly confess to my own contribution to the snark pile.
As someone who casually curses way too much to ever score an invitation, I nevertheless wonder if some of the critiques of Davos are just a bit overhyped. Take Timothy Noah, who blogged the following at The New Republic yesterday:
There is no better example of social and economic policy discussion as an idle pastime for the rich than the World Economic Forum at Davos....
Ian Bremmer, who chairs Davos’s Global Agenda Council on Geopolitical Risk reports in the Huffington Post that the unifying theme this year at Davos is, yes, “the increasing vulnerability of elites.” Keep in mind as you read what follows that Bremmer is not a parodist:
We're seeing leaders of all kinds, in the developed and developing world, in politics as well as business and media, answering to constituents who grow more dissatisfied... and information-rich. Look at the riots in India over the recent rape scandal, the U.S. Congress' abysmal approval ratings, or the phone hacking scandal at News Corp. Corruption, special interests, or a lack of transparency will spell trouble for leaders. The same goes for a widening gap between rich and poor.
....if I’m reading Bremmer right, Davos sees inequality mainly as a problem bearing down on elites. The blighters simply won’t shut up about living in mud huts (or enduring weak rape laws, a dysfunctional legislature, corporate malfeasance, etc.) while the rest of us hit the slopes.
Now, much as I'd love to snark along with Noah, I don't think he's entirely reading Bremmer right, and I also think he's making a categorical policy error. To be fair to Noah, Bremmer's geopolitical risk report does have a section on the problems with too much transparency that does read a bit too much like a pity party for the elite ("in developed democracies, scandals involving leaders can distract whole nations for weeks on end, while more important business remains undone.")
That said, I don't think this is my FP colleague's main point. His primary thesis is that tectonic shifts in domestic politics are imposing increasing political constraints on what political elites can do to ameliorate policy problems:
In 2013, this breakdown of international coordination will go increasingly local: in such a world, governments will focus more on their domestic agendas, which will create new risks in and of itself. Most importantly, the growing vulnerability of elites makes effective public and private leadership that much more difficult to sustain. Leaders of all kinds are becoming more vulnerable to their constituents, generating more reactive and short-term governance....
Welcome to ‘the new local,’ where governments are more shackled by regional concerns and their domestic constituencies—at the expense of tackling larger-scale global issues that need collective leadership to solve.
Now I'm on record as thinking that Bremmer overstates the collapse of global governance. That said, if one accepts his premises, then the ability of leaders to address policy problems is more constrained. Whether you think this is a problem or not depends on how much faith you have in public policy elites -- and public policy in general -- to compensate for the vicissitudes of the marketplace.
Stepping back, however, I'm not sure inequality is as big of an issue as either Bremmer or Noah think it is. What we presumably should care about at places like Davos is poverty reduction, which is not necessarily correlated with inequality reduction. And the dirty secret of the post-crisis global economy is that global poverty reduction is proceeding quite nicely, thank you very much.
The primary problem with the current state of the global economy is that the biggest losers are unskilled and semi-skilled laborers in the developed world. That's an issue -- but it's one that I don't think developing country atendees at Davos are gonna care too much about.
One of this blog's
annoying tics persistent themes has been its insistence that the 2008 financial crisis did not, in fact, doom the United States to a future of inevitable decline. Indeed, there are many reasons to be optimistic about America's future, and there are many reasons to be skeptical about claims that China will be able to exercise leverage over the United States.
Now, one of the counterarguments to this thesis over the past five years has been the explosion of U.S. debt and Washington's need for Beijing to continue to buy that debt to finance America's current expenditures. This was a running theme of financial writers in 2009. Four years ago, there was a particular concern that "China is also trading long-term Treasuries for short-term notes." If the United States could only borrow overseas by issuing more short-term debt, that ostensibly gave China some kind ov leverage as Washington needed to continually roll over those debt obligations.
I bring this up because Daniel Altman highlights a fascinating data point in his Foreign Policy essay about the shifting composition of the federal government's debt:
In the past several years, the national debt of the United States has undergone a tremendous change. Long-term securities -- those with maturities of seven years or more -- have gone from about 30 percent of the debt in 2009 to about 40 percent today. By 2018, according to the Treasury's own estimates, they'll make up 50 percent of the debt, a proportion the Treasury expects to maintain from then onward. The United States is doing what any smart borrower would do: locking in low rates for the long term. As a result, its probability of default for any given level of debt has dropped.
Huh. So it turns out that desite a surge in borrowing by the U.S. government and China's desire to keep the arrangement on a short-term basis, Washington has managed to borrow in a relatively efficient manner at historically low interest rates.
Oh, and by the way, how has China altered its purchases of U.S. debt? Well, besides a general slackening of such purchases (which partially explains the appreciation of the yuan) and a general lack of complaint in response to QE3, it has also changed the composition of those U.S. debt purchases:
China has actually decreased its short term U.S. bond holdings by 5.1%. China holds $US 3.7 billion short term U.S. paper. On June 2011 China held $US 4.9 billion of short term U.S. paper. So basically all the debt that China holds are long term treasuries now. Interesting to know, China had $US 200 billion in short term U.S. debt in May 2009. So they divested all short term paper to long term paper.
In other words, contrary to the fears of debt hawks in 2009 -- including, it should be noted, Hillary Clinton -- China has not exercised an iota of influence over the United States via its debt holdings. Indeed, the shifting pattern of their debt purchases strongly suggests that the Chinese have recognized the futility of such an approach.
While Beijing has recognized this truth, certain Very Serious People who write Very Serious Columns persist in being afraid of China's mythical debt leverage. So, on occasion, as a public service, this blog will continue to remind its readers that U.S. remains clothed in immense financial power.
To follow up with another data point suggesting that we're living in a world of "good enough" global governance, let's take a look at piracy on the high seas , shall we?
You might recall that in 2009 piracy off the Horn of Africa and elsewhere was skyrocketing. This triggered multiple policy responses by shipping companies as well as governments. Ships started carrying armed guards on tankers as a form of deterrene. An ad hoc and diverse group of countries formed Combined Task Force 151 to help patrol the Horn of Africa to prevent pirate attacks. Hell, even Iran sent ships to participate in anti-piracy operations.
So it turns out that all of these measures seem to be working. By 2012, both press reports and official statistics suggested that the tide had turned. As the New York Times' Thom Shanker wrote up one U.S. Navy finding last September:
Data released by the Navy last week showed 46 pirate attacks in the area this year, compared with 222 in all of last year and 239 in 2010. Nine of the piracy attempts this year have been successful, according to the data, compared with 34 successful attacks in all of 2011 and 68 in 2010.
How bad have things gotten for Somali pirates? The top pirate just announced that he has retired from piracy.
So can we chalk this up as an example of successful global governance? I would say yes, but it's worth noting two additional points. First, it's far from clear that activity on the water is the sole factor responsible for the decline in piracy attacks. Events on land -- including Kenya's invasion of Somalia and Puntland's increasing "stateness" -- might have something to do with it as well. Second, it's not only multinational sea patrols that have played a role. If it was, then shipping companies wouldn't be mobilizing their own private navy.
Still, these actions compliment rather than substitute for each other. The protection of shipping is one of the global economy's oldest public goods -- and it appears that after a post-financial crisis spike, there has been a useful policy corrective. That's good enough.
The mobilization towards an agreement reflects the changing landscape of global trade. If a deal emerges, it will allow the U.S. and EU more leeway to set the rules of the road for the industries that matter most to them....
This potential trade deal is also a further sign of the collapse of the movement toward global free trade. The new round of WTO negotiations is effectively dead, and a major deal between two of the world’s largest economies would be a further signal that bilateral negotiations are once again becoming the norm.
Finally, this deal shows us that the BRICs are not quite as influential as many think. A U.S.-EU trade deal is essentially a way to ignore countries like Brazil and India while crafting rules that will govern some of the high-tech industries and information-based services that play a growing role in US-EU trade.
Mead is correct to point out the advantages of the US and EU trying to craft an FTA template, particularly for the sectors they care about a lot. Still, a few quibbles and disagreements.
First, a transatlantic deal doesn't signal a "collapse of the movement toward global free trade" -- it signals a different pathway towards that goal. The collapse of Doha suggests that the traditional multilateral round negotiaions are dead, but it's worth remembering that the global economy got very close to zero barriers in the late 19th century and there was nary a multilateral institution to be found. True, the trade agreements of the 19th century had most-favored nations clauses and their 21st century counterparts do not. Nevertheless, the political economy of trade diversion still generates competitive incentives for a growth in FTAs, thereby leading to a similar end outcome -- a world blanketed in free-trade agreements.
Second, contra Mead, I'd suggest that a transatlantic trade deal is not a sign of US-EU strength, but rather its weakness. There have been rumblings and trial balloons to do something like this for the past fifteen yewars, but it never really got off the ground. The reason it never got off the ground was simple -- both Americans and Europeans were worried that any trade deal this massive would scupper the WTO system. It would seem like a developed country effort to completely rewrite the rules of the global trading game. Since everyone had a lot of skin in the WTO game, it didn't seem like it would be worth it.
Two things have changed. First, the traditional method of multilateral trade liberalization has died. Second, while both the US and EU are major trading states, they're not quite as pivotal as they used to be. Ironically, it's their declining (though still appreciable) importance in global trade that makes a US-EU agreement feasible now. The BRIC economies are now sufficiently large that a transatlantic trade deal doesn't seem like an existential threat.
Your humble blogger was watching CNN late last night after the House of Representatives passed the fiscal cliff compromise, and was struck by the
anchor's Ali Velshi's complete and total disdain for what had just transpired. He repeatedly said that this was, "an embarrassing moment for America," and that it was so frustrating because these wounds were self-inflicted. This was surprising, since CNN is ostensibly the cable news netowrk that's the least partisan and most likely to maintain the detached, sonorous perspective that can only be incubated after prolonged exposure to Wolf Blitzer.
Now I'm certainly not gonna defend what went down the past two months as the exemplar of Jeffersonian democracy or anything, but I do think some perspective is in order here. The truth is that America's political institutions engage in self-destructive behavior on a fairly regular basis. This holds even in the post-Vietnam era. In the 1970s the country nearly tore itself apart because of Watergate. In the 1980s it was Iran-Contra. In the 1990s the federal government was shut down because Republicans and Democrats couldn't agree on the budget for a spell. That was followed by the House of Representatives impeaching President Clinton for perjury and obstruction of justice. In late 2000 the Supreme Court issued a 5-4 ruling short-circuiting ballot recounts in Florida and making George W. Bush the next president using a legal logic that was so tortured that the Court said no one could ever use it again. And last year U.S. debt was downgraded -- not because of any fundamental U.S. economic weakness, but because of the U.S. political system. All of these episodes were politically self-inficted wounds -- and the United States weathered all of them pretty easily. Please bear this in mind the next time you read something about America going to hell.
[But haven't things gotten worse?--ed. Well, no, I think what's changed is that the Dems and the GOP are acting more like European parliamentary parties in a constitutional system that emphasizes the separation of powers. That's a problem, and gerrymandering is exacerbating the situation. But it's a situation that a few nonpartisan districting commissions would be able to solve.]
Now, with this dose of perspective sauce, there also needs to be a recognition that elements of the United States have shifted in an ideological direction that makes them increasingly isolated in the world. To see why, look at this Financial Times story by Hannah Kuchler on David Cameron's G8 priorities. The salient part for this conversation:
In a letter to the leaders, Mr Cameron said the world will continue to face “grave economic uncertainty” in 2013 but the rich countries must set “ambitious standards” to drive growth in their countries and across the globe.
The UK will push for action in three key areas: trade deals, including a potential EU-US trade agreement; measures to tackle tax evasion and open government; working with developing countries to fight corruption....
The British government has prioritised chasing tax evaders, with prosecutions for tax evasion up by 80 per cent and a treaty with Switzerland, its largest ever deal on tackling tax evasion. Mr Cameron wants to use the UK’s time at the top of the G8 to “galvanise collective international action”.
“We can lead the way in sharing information to tackle abuses of the system, including in developing countries, so that governments can collect taxes due to them,” he wrote in the letter. “We can work together to sign more countries up to international standards. And we can examine the case for strengthening those standards themselves.”
Now, international tax evasion has been an on-and-off G8 priority for the past 15 years, and there's actually been some progress on tax havens. I guarantee you, however, that to the House GOP caucus this will look like some back-door globalist conspiracy by the Obama administration to raise taxes or enforce collection through jackbooted G8 thugs. So anything that will require legislative approval ain't going anywhere.
[Uh, isn't this kinda nuts? Everyone knows that the G8 doesn't have any thugs, much less jackbooted ones!!--ed. Yes, and everyone knows that Agenda 21 is a nonbinding plan of action for sustainable development, but that hasn't stopped a few deluded people from freaking out about a U.N.-hatched global conspiracy.]
So some things have changed, and for the time being there will be some issues on which legislative action is likely not gonna happen. On the other hand -- much like Americans after New Years Eve parties -- the United States usually recovers from these bouts of temporary stupidity. The federal government will muddle through, and I suspect even the 113th Congress will be interested in a U.S.-E.U. trade deal.
Am I missing anything?
I was trying to cogitate a post on the attacks in Cairo and Benghhazi yesterday inspired by this 13-minute piece of tripe that was consistent with what I've said before about stupid speech acts and the necessity of government tolerance of them.
Fortunately, Marc Ambinder has already written something that is better than anything I can craft on the fly, so I'll just outsource the argument to him. In particular:
We live in a world where American provocateurs can easily arouse the militancy of Muslim extremists who are more ubiquitous than even I would like to admit, or, at the very least, allow bad people to use extant anti-American sentiment to whip crowds into frenzies. In either case, innocent people, including Americans, die.
On Twitter, the first instinct of a lot of Americans was retributive justice. But the U.S. government's sensitivity about the mood of the violent protesters is maddening but necessary. Being aggressive would cause more unnecessary dying.
Those who use the gift of institutionally and legally-protected free speech to exploit and prey upon the vulnerability of certain people to violence ought to be shamed.
At the same time, the people who killed people; protesters, thugs, militants, whomever, are ultimately responsible for their actions. If the U.S. government is going to discourage our own idiots from provoking people, then the governments of Egypt and Libya should act to corral those within their own nations who would storm an embassy on the pretext that a film offends. Well, barely, a film. A piece of anti-Muslim bigotry that was made to make the filmmakers feel good and others feel bad. If, as an American, I feel embarrassed that so many of my fellow Americans are bigots, I would, as an Egypt or a Libyan, be even more horrified that the majority in my country seemed unable to stop (and barely condemn) the even more deplorable violent religious extremism of a minority.
The Arab Spring is incredibly messy and it is hard to see how American values and sensibilities about religious speech will ever take hold in some countries there. That’s incredibly depressing, but I do know this: The barrels of our own guns won't help anything either.
Hey, remember when I said that China's debt holdings did not pose a serious threat to the United States? And remember when I banged my head against the desk because Very Serious People continue to insist otherwise?
I bring this up because, according to Bloomberg's Tony Capaccio and David Kruger, the Department of Defense has my back:
China's holdings of more than $1 trillion in U.S. debt and the prospect that it might “suddenly and significantly” withdraw funds don’t pose a national security threat, according to a first-ever Pentagon assessment.
“China has few attractive options for investing the bulk of its large foreign exchange holdings out of U.S. Treasury securities,” given their extent, according to the report dated July 20 and obtained by Bloomberg News
China is the second-largest holder of U.S. government debt after the Federal Reserve. Acting at the direction of Congress, the Defense Department studied the rationale behind the investments and whether “the aggressive option of a large sell- off” would give China leverage in a political or military crisis. China’s debt holdings have been cited as a sign of U.S. vulnerability by Republicans in this year’s election campaign....
“Attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States,” according to the report, which was sent to congressional committees by Defense Secretary Leon Panetta. “As the threat is not credible and the effect would be limited even if carried out, it does not offer China deterrence options” in a diplomatic, economic or military situation, the Pentagon found....
China decreased its Treasury holdings last year with little apparent impact in the market, Treasury data show. The world’s most populous country reduced its position in Treasuries in the first yearly decline since Bloomberg began tracking the data in 2001.
The holdings declined 0.7 percent, or by $8.2 billion, to $1.15 trillion last year. The decline was much steeper in the second half of the year when China’s stake plunged 12 percent, or by $163 billion, from an all-time high of $1.31 trillion in July 2011, the data show.
During that period, 10-year Treasuries rallied as the U.S. credit rating was reduced by Standard & Poor's to AA+ from AAA and the European sovereign debt crisis worsened, pushing the yield to 1.88 percent from 2.80 percent.
Foreign investors held 50.3 percent of the $10.52 trillion in outstanding Treasuries as of June, government data show. That’s down from April 2008, when they reached 55.7 percent of the $4.64 trillion in U.S. marketable debt....
The Pentagon said in its report that the Fed also is “fully capable of purchasing U.S. Treasuries dumped” by China and “reducing the economic impact.”
A Chinese move to “suddenly and significantly” reduce its Treasury holdings “would fundamentally change the international finance and business community’s perception of China as a reliable and respected economic and financial partner,” the Pentagon said.
This report isn't going to end the silly campaign rhetoric or the Niall Ferguson/Tom Friedman foreign policy community talking point, of course. But I thought it was worth posting here so I can link back to it the next time I need to bang my head against a desk.
If you're an American and want o worry about China, don't focus on the debt -- focus on the apparent disappearance of China's next leader.
I should be really pleased with Thomas Friedman's column today. Entitled "In MItt's World," Friedman pens a substantive column criticizing Romney's foreign policy rhetoric to date and wishing that Romney displayed the same analytic acumen about foreign policy that he displayed as CEO of Bain Capital.
So I should be happy, except that I passed out from banging my head against my desk after reading the first two paragraphs:
Mitt Romney has been criticized for not discussing foreign policy. Give him a break. He probably figures he’s already said all that he needs to say during the primaries: He has a big stick, and he is going to use it on Day 1. Or as he put it: “If I’m president of the United States ... on Day 1, I will declare China a currency manipulator, allowing me to put tariffs on products where they are stealing American jobs unfairly.”
That is really cool. Smack China on Day 1. I just wonder what happens on Day 2 when China, the biggest foreign buyer of U.S. debt securities, announces that it will not participate in the next Treasury auction, sending our interest rates soaring. That will make Day 3 really, really cool.
No. No, no, no, no, no, and no.
To elaborate a bit further:
First, it wouldn't be enough for China to stop buying Treasuries -- as Joe Weisenthal showed with some fun charts a few weeks ago, China has pared back its Treasury purchases intermittently over the past few years -- with zero appreciable effect on U.S. interest rates. (see non-panda-hugger Paul Krugman on this point as well). No, for China to have the effect that Friedman envisions, they would also have to actively dump most of their holdings of U.S. debt as well.
So what if they do? Well, second, while Romney's stated China policies border on the destructive, the "labeling" move is bone-headed rather than truly calamitous. China wouldn't dump its debt unless things got really bad between the two countries. Not even Stephen Roach thinks this would be the initial Chinese response -- and I think Roach is being way too gloomy about Sino-American relations under Romney.
The reason China won't respond with the nuclear option of dumping all its U.S. debt holdings is that -- to repeat a theme -- this move would hurt China way more than it would hurt the United States. The far more likely response by China would be to retaliate with trade measures. This would not be good, as China is now the third largest export market for the United States. Beijing can hurt a Romney administration by reducing its American imports far more adroitly than trying to trigger another financial crisis.
Now, for the record, I don't think Romney should label China as a currency manipulator on day one, and I think Friedman makes some trenchant observations on Romney's consequences-free foreign policy statements later in his column. But this Niall Ferguson-lite version of Sino-American relations is bad international relations theory and really bad economics -- and yet Very Serious People keep trotting it out.
I really, really wish this would disappear from public discourse. But it won't. So, most likely, my desk is gonna get dented a few more times before Election Day.
Annie Lowrey ably summarizes the outcomes of spring meetings of the IMF and World Bank for the New York Times. Here are her first two paragraphs:
Meetings of finance ministers and central bankers here over the weekend started with a pledge by wealthy nations to significantly increase the lending capacity of the International Monetary Fund to defend against the possibility of worsening economic conditions in the debt-laden euro zone.
But they ended on Sunday without a consensus on just how to speed up the economic recovery, stamp out the European debt crisis or lower unemployment around the world, officials said.
Now, I would say how you interpret this outcome is an excellent indicator of your overall opinion of post-crisis global economic governance. On the one hand, if you're Alan Beattie, Edward Luce, Ian Bremmer, Charles Kupchan, or Ted Truman, well, this outcome is a sign of chronic dysfunction. If the world's great powers can't agree on what to do with the specter of a double-dip global recession looming over them, there's little reason to hope. The glass is half-empty.
On the other hand, if you're John Ikenberry, Robert Kagan, Bruce Jones, or Alan Alexandroff, the glass looks half-full. Boosting the IMF's reserves by more than $400 billion ain't nothing, and it's faintly absurd to believe that any global governance structure will ever be able to "speed up the economic recovery, stamp out the European debt crisis or lower unemployment around the world."
I'll be tipping my hand as to which way I'm leaning in the coming months, but for now, I'm curious about my readers. What do you think? Is global economic governance a mess or doing reasonably well in trying circumstances?
I've been reading a raft of books recently arguing that authoritarian capitalism is a more sustainable model than us in the West appreciate. According to this meme, entities like sovereign wealth funds, state-owned enterprises, and national oil companies will be carving up ever-greater slices of the global economy.
Whenever I read these arguments, the question that gnaws at me is how these authoritarian capitalist institutions will operate in other authoritarian capitalist countries. See, this kind of argument presumes a harmony of interests that doesn't necessarily exist between authoritarian states. It also presumes a standard of competency and efficiency - or, at least, efficient corruption -- that makes these firms and institutions able to compete with private sector firms.
For see what I'm talking about, see this Washington Times story by Kelly Hearn on China's growing frustration with Venezuela:
China has poured billions of dollars into Venezuela’s oil sector to expand its claim over the country’s massive oil reserves.
But Beijing is getting relatively little for its investments, and Chinese officials are increasingly frustrated with Venezuelan President Hugo Chavez, according to energy analysts and former managers of the state oil company, Petroleum of Venezuela, or PDVSA as it’s known by its Spanish acronym....
In 2010, CNPC signed a deal to help Venezuela develop a major Orinoco oil field known as Junin 4, which includes the construction of a facility to convert heavy oil to a lighter crude that could be shipped to a refinery in Guangdong, China.
“Although the contract was signed in December 2010, not one barrel of oil has yet been produced, much less upgraded,” said Gustavo Coronel, a former PDVSA board member.
“So far, nothing much seems to be happening, except for the arrival of a large group of Chinese staff to the CNPC’s Caracas office,” he added, referring to the Venezuelan capital, Caracas.
“Apart from money, there seems to be little that China can offer Venezuela in the oil industry,” he said, adding that a “culture gap will make working with China very difficult for Venezuelan oil people, who were mostly trained in the U.S.”....
The Chinese also seem to be increasingly wary.
Internal PDVSA documents released by a Venezuelan congressman show that the Chinese balked at a $110 billion loan request by Mr. Chavez in 2010, after PDVSA officials failed to account fully for where the money would go.
Venezuela is not the only place that Chinese foreign direct investment in energy is running into bottlenecks and roadblocks. There was Myanmar last year:
fter five years of cozy cooperation with Burma’s ruling generals, China Power Investment Corp. got a shock in September when it sent a senior executive to Naypyidaw, this destitute Southeast Asian nation’s showcase capital, a Pharaonic sprawl of empty eight-lane highways and cavernous government buildings.
Armed with a slick PowerPoint presentation and promises of $20 billion in investment, Li Guanghua pitched “an excellent opportunity,” a mammoth, Chinese-funded hydropower project in Burma’s far north.
Then came the questions: What about the risk of earthquakes, ecological damage and all the people whose homes would be flooded? Is it true that most of the electricity would go to China?
Two weeks later, Burma, also known as Myanmar, scrapped the cornerstone of the project. President Thein Sein, a former general who took office in March, announced that he had to “respect the people’s will” and halt the $3.6 billion dam project at Myitsone, the biggest of seven planned by China Power Investment, or CPI.
As the world’s biggest consumer of energy, China has hunted far and wide in recent years for sources of power — and of profit — for state-owned corporate behemoths such as CPI. The result is a web of deals with often-repressive regimes, from oil-rich African autocracies such as Sudan and Angola to river-rich Burma.
But coziness with despots can also backfire.
Amid a dramatic, though still fitful, opening in Burma after decades of harsh repression, public anger has swamped China’s hydropower plan. The deluge threatens not only hundreds of millions of dollars already spent but also China’s intimate ties to what had been a reliably authoritarian partner, its only East Asian ally other than North Korea.
Beijing still has big interests in Burma, including a multibillion-dollar oil and natural gas pipeline that is under construction. But a partnership forged with scant heed to public opinion has been badly jolted by a barrage of no-longer-taboo questions.
These are just isolated cases -- I have no doubt that China has a boatload of successful FDI projects in energy. What's telling, however, is that regardless of whether the host regime is democratizing or reverting to autocracy, the political economy of these investments is far from problem-free.
One must sympathize with the Chinese firms here. China's domestic politicsal economy of investment aren't this messy. Oh, wait...
With 2011 down to a few hours, it's now safe to announce the 2011 Albies -- named in honor of noted political economist Albert O. Hirschman. The Albies are awarded to the best writing in global political economy for the past calendar year. The writing can be in a book, journal article, think tank report, or blog post -- the key is that the article makes you reconsider the way the world works.
This year yielded a bumper crop of excellent IPE writing. I attribute this to the 2008 crisis and its aftereffects generating such a bounty of fascinating trends/events that even straight reportage has been interesting. Indeed, it was such a good year that, for the first time, I'm including some "honorable mentions" at the bottom.
In no particular order, here's the top 10:
1) Chrystia Freeland, "The Rise of the New Global Elite," The Atlantic, January/February 2011. A slender common thread of the Arab Spring protests, Occupy Wall Street, and the Russia protests was a perception of rising inequality, and the refusal of elites to acknowledge that there is even a problem. Before any of these movements made the front page, Freeland examined the global 1% in this essay. As much as political scientists like to talk about public ignorance of the way the world works, Freeland makes the case that the global elite suffers from a different but very dangerous perception -- that fortuna and inherited advantage had no role in their own prosperity.
2) Thomas Oatley, "The Reductionist Gamble: Open Economy Politics in the Global Economy," International Organization, April 2011. Over the past decade, the "open economy politics" paradigm has dominated the study of global political economy. There are some strengths to this kind of approach, but the law of diminishing marginal returns kicked in a long time ago (OEP has little to say about the 2008 financial crisis). Oatley's paper -- published in the leading journal -- was a powerful wake-up call to the subfield.
3) Tyler Cowen, The Great Stagnation, Dutton. Americans have taken prospertity, and the engines of prosperity, for granted. Cowen's short book suggests that, appearances to the contrary, all of the easy ways for promoting economic growth in the developed world have dried up. I would posit that Cowen contradicts himself with his innovative way of getting this argument published (first as an ebook) but this is an excellent, accessible read on the future of the U.S. economy.
4) Boston Consulting Group, "Made in America, Again," May, and Edward Luce, "America is Entering a New Age of Plenty," Financial Times, November 20. These two essays provide an interesting counter to Cowen's prognosis. BCG's projections on manufacturing, and Luce's summary on energy innovations, suggest that a decade from now -- regardless of who is president -- the United States will be a manufacturing and energy powerhouse.
5) Damien Cave, "Better Lives for Mexicans Cut Allure of Going North," New York Times, July 6, 2011. I blogged about this story when it was first published about why it was so interesting. Now, I just want the debate moderators to hold it up like John Cusack in Say Anything whenever the GOP candidates natter on about stopping illegal immigration.
6) Jacopo Ponticelli and Hans-Joachim Voth, "Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009," Centre for Economic Policy Research discussion paper no. 8513, August 2011. 2012 is going to be a year of austerity for a lot of countries. This timely paper looks at the causes of European social unrest over the 20th century, and concludes that fiscal retrenchment is the primary driver of unrest. Bear this in mind whenever you read about new austerity measures being imposed.
7) Andrew Hill, "Inside McKinsey," FT Magazine, November 25. As the GOP looks set to nominate a former consultant as its standard-bearer, the culture of management consulting is worth considering. McKinsey is to consulting as Goldman Sachs was to management consulting, and this year a scandal has rocked that firm to the core. Hill's FT story gets at the powerful corporate culture that defines McKinsey -- and the ways in which the renumeration gap between management consultants and hedge fund managers led to a breakdown in McKinsey's norms.
8) Prabhat Jha et al, "Trends in selective abortions of girls in India," The Lancet, June 4, 2011. I blogged about this article back in May. Long story short: as India has grown richey, India's educated, wealthy elite have engaged in selective gender-based abortion on a massive scale. A very sobering reminder that modernizing societies will not necessarily become more Western in their values.
One does not have to dig very deep into foreign-policy punditry to find the belief that the question of the next decade is how world order will adapt to a waxing China and a waning United States. Will China embrace, reject, or simply ignore the set of pre-existing global norms? Will the United States continue to assert its privilege in setting global norms, or will it retreat into unilateralism? Beyond the punditry, very few scholars have bothered to look systematically at how both of these countries interact with global governance norms and structures. Rosemary Foot and Andrew Walter tackle the general question of Sino-American interactions with global rules and norms in a rigorous and informative manner, discussing issues as diverse as nonproliferation and financial regulation with a degree of empirical sophistication that borders on the astonishing. Foot and Walter have produced a must-read for anyone interested in the future of global governance
10) Michael Forsythe and Henry Sanderson, "China Debts Dwarf Official Data with Too-Big-To-Finish-Alarm," Bloomberg News, December 17, 2011. This was the year that China bears came to the forefront. I'm a bit more optimistic about the communist regime's prospects than, say, Gordon Chang, but this piece of investigative reporting by Bloomberg does a fine job of demonstrating the depths of the bad debt problem that pervades China's banking sector.
Honorable mentions: Nouriel Roubini, "China's Bad Growth Bet," Project Syndicate; Henry Farrell's "contagion" blog post, The Monkey Cage, August 15, 2011; J.C. Chandor's audacous directorial debut Margin Call, and, last but not least, the Ryan Gosling International Development Tumblr.
After a year of nearly-nonstop travel, I've flown airlines ranging from American to SATA, to airports as large as Shanghai's Pudong International Airport and as small as Ithaca's Tompkins Regional Airport. Which ones can I recommend? Which ones should be avoided? My long-awaited picks:
Best Airline: It's Virgin Atlantic, and whichever airline finished second ain't close. Admittedly, I was flying in their "Upper Class" cabin. Still, their airport lounges are far and away the most pleasant places to be in an airport, and their planes are quite comfortable as well. The food on the plane was tasty, the food in the airline loundes was exceptional, and the service was impeccable. These were the only flights I can honestly say I enjoyed this year. Besides, their commercials are just so darn kicky.
Worst Airline: I'm tempted to just say "all the rest," but I will put Lufthansa in its own inner concentric circle of hell. Old planes, grumbly service, and really, really bad food. The low point was when they showed a Golden Girls episode on hour 5 of The Longest Transatlantic Flight I've Ever Taken.
Worst Airport: My criteria here is very simple: How easy is it for me to get from the curb to my airplane seat with a minimum of time and a maximum of choices to feed myself? Using these criteria, I will be trying to avoid Dubai International Airport fot a spell. The security checks there are the more onerous I've seen in any airport anywhere -- and I'm including trying to fly in and out of Ben-Gurion Airport in this assessment. The Dubai security personnel were all nice, and I understand that they have a job to do, but this was a wretched experience.
Best Airport: I'm surprised to come to this conclusion, but I have to award this to Reagan National Airport. I fly in and out of this airport a lot, and I realized that I have never once had a bad TSA experience there. This is surprising, given the kind of travelers they encounter. Plus, they have a Five Guys.
Your humble blogger has been on an airplane twice in the past week on separate trips -- which, over the past year, was a depressingly common occurrence. Indeed, since December 2010, I've been to Mexico City, Dubai, Geneva, Basle, Montreal, Lisbon, Brussels, Beijing, London, Berlin, Shanghai, and Toronto. That was just the international travel; between business trips, promotion for Theories of International Politics and Zombies, and an actual vacation, there was a lot of domestic transportation as well.
With so much sojourning, I've managed to pick up a few impressions and pointers. So, in honor of this period of relatively intense travel for many newcomers, this week I'll be offering some useful tidbits of advice. Note: I have received no promotional considerations for the commercial endorsements and disses.
Let's start with a simple one:
Best Travel Aid for Avoiding Illness: For me, travel + alcohol + lack of sleep = guarantee of getting sick. I used to get sick quite a bit after travel, because such trips usually combined my three trigger mechanisms. For conferences, travel and drinking are pretty much essential, so the key thing for me ito avoid getting sick is sleep. Which is tough for me, as I traditionally have not slept on planes.
Despite this travel, I didn't get sick once during this past year (with the exception of Friedman's Disease, of course). I attribute this to taking melatonin as a sleep aid. It does make me feel drowsy, but it doesn't make me feel drugged.
Melatonin plus Vitamin Water Zero appears to have kept me virus-free for the year. Well, that or I'm now old enough to have been exposed to every travel bug out there.
More advice and tips to follow, including best and worst airlines, etc. Commenters should feel free to place requests in the comments.
Coming next: the best and most overrated pieces of travel luggage.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.