global political economy

The Carnegie Endowment for International Peace's Uri Dadush and Bennett Stacil have released The G20 in 2050, in which you learn the following:

China will become the world’s largest economy in 2032, and grow to be 20 percent larger than the United States by 2050. Over the next forty years, nearly 60 percent of G20 economic growth will come from Brazil, China, India, Russia, and Mexico alone. However, these emerging markets will not rise among the world’s richest countries in per capita terms: their average income in 2050 will still be 40 percent below that of the G7 states today. The end of the decades-old correlation between economic size and per capita income will have profound effects on global economic governance.

Hmmm.... yes, this sounds familiar:

  

Studies by Goldman Sachs and Deutsche Bank on growth trends for big developing economies contains some startling predictions. By 2010, the annual growth in aggregate demand from Brazil, Russia, India, and China will be greater than the combined growth of the United States, Japan, Germany, Italy, and Great Britain. By 2020, China and India are projected to have the second and third largest economies.  By 2025, the annual growth in aggregate demand from the four leading developing economies will be twice that of the G-7.  By 2030, the combined purchasing power of China's and India's consumers is projected to be five times that of today's United States.  While simple extrapolations from the recent past can be misleading, economic and demographic trends suggest that growth of India and China will shift what is currently a bipolar economic distribution of power into a more multipolar world.

As the number of actors increases, the likelihood of creating a concert of common preferences among them necessarily declines.  This holds with particular force if these countries achieve great power market size while still having low per capital incomes.  In addition to the current tension between the American and European varieties of capitalism, another source of preference divergence could emerge among the great powers:  the tension between rich countries willing to trade off economic growth for quality of life issues, and still-developing countries that are more reluctant to sacrifice growth.

Following up on my dollar post from earlier this week, I see that Paul Krugman is talking a related issue in his New York Times column today -- the refusal of the renminbi to depreciate against the dollar:

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

Krugman then goes on to excoriate the U.S. Treasury department for not upbraiding the Chinese more on this. 

Fair enough, but the thing is, the United States is not the country that's hurt the most by this tactic.  It's the rest of the world -- particularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy.  These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means their products are less competitive in the U.S. market compared to domestic production and Chinese exports. 

This leads to the title of this post.  Krugman presumes that the U.S. has the strongest incentive to talk to China about this issue.  If one thinks of the U.S. acting as the hegemon, that's possibly true.  As a matter of direct economic interest, however, why haven't the Europeans and East Asians been screaming bloody murder about this?  China's policies are forcing them to take actions they don't want to take -- so why aren't they complaining more loudly about this? 

Why? 

Over at Politico, Eamon Javers notes an odd trend in the Drudge Report: 

On Tuesday, Matt Drudge ran a headline about the weakening U.S. dollar on his website, Drudgereport.com. In and of itself, that would be unremarkable, except that it was the 18th time Drudge had posted a link to a story about the weak dollar this month.

And October was only 20 days old.

Clearly, Matt Drudge has developed a fascination with the declining U.S. dollar.

“He’s fixated on it,” said Tom Rosenstiel, director of the Pew Research Center’s Project for Excellence in Journalism. “There’s no question that Drudge can alter what people are paying attention to.”

Market watchers say it’s unlikely that Drudge is actually moving the currency markets with his relentless attention.

“I don’t think that anyone who seriously trades currencies reads The Drudge Report before making important buy or sell decisions,” said Chris Roush, a professor of business journalism at the University of North Carolina at Chapel Hill. (emphasis added... because that's a priceless quote)

Drudge isn't the only one obsessed about the dollar.  Last week, James Pethokoukis blogged the following for Reuters: 

The aftershocks of the global financial crisis may now be propelling the dollar back to the political forefront. The greenback’s continuing slide makes it a handy metric that neatly encapsulates America’s current economic troubles and possible long-term decline. House Republicans for instance, have been using the weaker dollar as a weapon in their attacks on the Bernanke-led Federal Reserve.

For more evidence of the dollar’s return to political salience, look no further than the Facebook page of Sarah Palin. The 2008 GOP vice presidential nominee — and possible 2012 presidential candidate — has shown a knack for identifying hot-button political issues, such as the purported “death panels” she claims to have found in Democratic healthcare reform plans. In a recent Facebook posting, Palin expressed deep concern over the dollar’s “continued viability as an international reserve currency” in light of huge U.S. budget deficits.

She might be onto something here, politically and economically. A recent Rasmussen poll, for instance, found that 88 percent of Americans say the dollar should remain the dominant global currency. Now, the average voter may not fully understand the subtleties of international finance nor appreciate exactly how a dominant dollar has benefited the U.S economy. But they sure think a weaker dollar is a sign of a weaker America.

OK, let's be as plain as possible about this - as a reserve currency, the dollar is not going anywhere.  Really. 

The dollar's slide in value has been predictable, as the need for a financial safe haven has abated.  By and large, a depreciating dollar helps the U.S. trade balance (though it would help much more if the Chinese renminbi got in on the appreciation).   

Even the Chinese, who have spoken like they want an alternative to the dollar as a reserve currency, are in point of fact not doing much to alter the status quo.  Why?  To paraphrase Winston Churchill, the dollar is a lousy, rotten reserve currency - until one contemplates the alternatives. 

Because all of the alternatives have serious problems.  The euro, the only truly viable substitute for the dollar, is not located in the region responsible for the largest surge of growth.  It would be unlikely for the ASEAN +3 countries to agree to switch from the dollar to a new currency over which regional actors have no influence (the Europeans wouldn't be thrilled either, as it would lead to an even greater appreciation of the currency).  Oh, and the European Union has no consolidated sovereign debt market.  The euro is worth watching, but it's not going to replace the dollar anytime soon.  

The other alternatives are even less attractive.  Most other national currencies beyond the euro - the yen, pound, Swiss franc, Australian dollar - are based in markets too small to sustain the inflows that would come from reserve currency status.  The renminbi remains inconvertible.  A return to the gold standard in this day and age would be infeasible - the liquidity constraints and vagaries of supply would be too powerful.  There's the using-the-Special-Drawing-Right-as-a-template-for-a-super-sovereign currency idea, but this is an implausible solution.  As it currently stands, the SDR is not a currency so much as a unit of account.  Even after the recent IMF authorizations, there are less than $400 billion SDR-denominated assets in the world, which is far too small for a proper reserve currency. 

So, what's really going on here with the dollar obsession?  I suspect that with the Dow Jones going back over 10,000, Republicans are looking for some other Very Simple Metric that shows Obama Stinks.  The dollar looks like it's going to be declining for a while, so why not that?  Never mind that the dollar was even weaker during the George W. Bush era -- they want people to focus on the here and now. 

The thing is, I'm not sure this gambit is going to work.  People who already think Obama is a socialist will go for it, sure, but that's only rallying the base.  I'm not sure how much fence-sitters care about a strong dollar, however.  If anything, populist movements tend to favor a debasing of the currency rather than a strengthening of it. 

Still, I'm just a political scientist -- I'm sure that, "theories on political behavior are best left to CNN, pollsters, pundits, historians, candidates, political parties, and the voters." 

So, have at it, readers!  Will the falling dollar be a source of populist outrage if Drudge links to it enough? 

UPDATE:  contrasting takes from Kevin Drum and Megan McArdle. 

Jad Mouawad and Andrew Revkin report in the New York Times on just the most darling Saudi proposal for how to help solve the global warming problem: 

Saudi Arabia is trying to enlist other oil-producing countries to support a provocative idea: if wealthy countries reduce their oil consumption to combat global warming, they should pay compensation to oil producers....

The chief Saudi negotiator, Mohammad al-Sabban, described the position as a “make or break” provision for the Saudis, as nations stake out their stance before the global climate summit scheduled for the end of the year.

“Assisting us as oil-exporting countries in achieving economic diversification is very crucial for us through foreign direct investments, technology transfer, insurance and funding,” Mr. Sabban said in an e-mail message....

A recent study by the International Energy Agency, which advises industrialized nations, found that the cumulative revenue of the Organization of the Petroleum Exporting Countries would drop by 16 percent from 2008 to 2030 if the world agreed to slash emissions, as opposed to the projection if there were no treaty.

But with oil projected to average $100 a barrel, the energy agency estimated that OPEC members would still earn $23 trillion over that period.

If Saudi Arabia was serious about diversifying its economy, it would open up its spigots and let the price of oil fall to the point where there were market incentives for economic diversification.  Somehow, I don't see that happening.   

So, this isn't really going to go anywhere -- but what I do find particularly amusing is that if one thought about compensating dirty energy producers for the costs of climate change mitigation, then oil producers would be close to the back of the line.  Coal-producing economies -- like China and the United States -- would be justified in demanding much greater levels of compensation, since coal is a much dirtier energy source.  Oil would be in front of natural gas producers, and that's about it. 

Readers are encouraged to proffer their own proposals in the comments that would seem more outlandish than the Saudi one.  Creativity counts!!

Your humble blogger has a rather long essay in the Fall 2009 issue of International Security.  What's a lowly IPE scholar doing publishing in a high and mighty security journal?  Assessing whether China's massive holdings of dollar-denominated assets is a big deal or not.  The title may or may not give away my argument:  "Bad Debts: Assessing China's Financial Influence in Great Power Politics."

Here's the abstract: 

Commentators and policymakers have articulated growing concerns about U.S. dependence on China and other authoritarian capitalist states as a source of credit to fund the United States' trade and budget deficits. What are the security implications of China's creditor status? If Beijing or another sovereign creditor were to flex its financial muscles, would Washington buckle? The answer can be drawn from the existing literature on economic statecraft. An appraisal of the ability of creditor states to convert their financial power into political power suggests that the power of credit has been moderately exaggerated in policy circles. To use the argot of security studies, China's financial power increases its deterrent capabilities, but it has little effect on its compellence capabilities. China can use its financial power to resist U.S. entreaties, but it cannot coerce the United States into changing its policies. Financial power works best when a concert of creditors (or debtors) can be maintained. Two case studies—the contestation over regulating sovereign wealth funds and the protection of Chinese financial investments in the United States—demonstrate the constraints on China's financial power.

Read it and weep. 

No, that's not the name of my new band -- though, man, that would be a geekily awesome name for a band -- but a cue for my latest bloggingheads diavlog with NSN's Heather Hurlburt.  Topics include Iran, the G-20 summit, and multilateralism more generally:

One follow-up note -- I've been amused to read the reactions to the G-20 summit, which range from (justifiably) mocking the communique to complaining that the summit failed to develop a cure for cancer to worries about a new oppressive global governance mechanism.

I believe that I might be the only blogger who thinks that the G-20 solved the Goldilocks problem of not being meaningless without being so binding that there's no wiggle room.  The peer review mechanism is the best enforcement arrangement that's possible given the heterogeneous cluster of countries involved, and I give the Obama administration full marks for setting its agenda on macroeconomic imbalances. 

That is all

As previously noted, the G-20 has done a much better job than I would have thought possible a year ago.  It now looks like the Obama administration is close to earning consensus on a framework arrangement on macroeconomic policy coordination.  The devil's in the implementation, of course, but the fact that they're close to consensus on such a framework is truly surprising. 

Naturally, the French like to focus on peripheral issues that they are convinced contributed to last year's financial meltdown.  Last April it was tax havens; this time France's pet peeve is placing a cap on bank bonuses (admittedly less peripheral than the tax havens). 

It now looks like there will be agreement on that issue -- in part because the caps will not include specific monetary caps. 

I raise all of this because Nicolas Sarkozy's "bonus tsar", Michel Camdessus, gave an interview to the Financial Times in which he was refreshingly candid about the issue: 

 

France’s bonus tsar on Thursday said that traders’ bonuses were a largely symbolic issue for G20 leaders, and that in terms of money they were the “least important” item on the agenda.

Michel Camdessus, the former head of the International Monetary Fund, said: “If you look at this issue of remuneration in the global agenda of the G20, it is certainly – in terms of cash, money – the least important of all issues on the table.”

Mr Camdessus, charged by Nicolas Sarkozy, the French president, last month with monitoring bonuses of traders at state-aided banks, added: “But if you look at the symbolic value of the issue, it is one of the most important.”

Fine -- it's symbolically important.  But if a symbolic agreement can allow the G-20 to keep their eyes on the macroeconomic prize, then three cheers for symbolic gestures. 

After the sturm und drang of last week's decision by the Obama administration to slap tariffs on Chinese tires, I've seen a bit of a pushback among the economic commentariat.  This pushback comes in one of two forms: 

1. This is not a big deal
2. Obama has his eyes on the larger prize

Over at TNR, Noam Scheiber makes the first case -- that this is a tempest in a teapot: 

With anti-trade sentiment rising in the aftermath of the worst financial crisis since the 1930s, it's become increasingly difficult to resist genuine protectionism--to say nothing of passing new trade pacts. (Bilateral deals with Colombia, South Korea, and Panama have all stalled out in Congress.) Absent a small gesture on behalf of American workers, it's safe to say the trade agenda would be doomed for the foreseeable future. (It may be anyway, of course.) Which is why Obama's decision seemed relatively straightforward once the International Trade Commission ruled that Chinese tires were in fact disruptive. Even so, Obama announced that the tariff would top out at 35 percent, well below the 55 percent recommended by the ITC.

So the tariff is modest, narrow, legal, and designed to preserve the political viability of free trade....

[B]oth Bush and Obama were rhetorically committed to free trade at the time of their tariff flirtations, and both men had taken practical steps to promote it. (Bush had sought fast-track authority from Congress; Obama, in a much tougher political environment for trade, scaled back a "buy American" provision in the stimulus.) So pretty much the only way to divine this difference is by peering into the two men's souls.  

Hmmm........ no, not buying the equivalence between Bush and Obama here.  First, to repeat, just because something is legal doesn't mean it's good policy. 

Second, as Phil Levy pointed out, the Bush administration specifically declined to apply these tariffs when he was president.  So there is some different between the two administrations' perspectives on trade.

Third, if Scheiber is correct that this is merely "a small gesture on behalf of American workers," then I'd be fine.  But I'm curious about his faith in that assertion.  All the political signs point to a lot of gestures in the protectionist direction.  Each of them, by themselves, is Lilliputian in their effects -- but the cumulative effect can be to keep the Gulliver of freer trade under lock and key. 

The Financial Times' Alan Beattie makes the more interesting argument -- which is that a short term sacrifice of trade policy in favor of health care will sow the seeds of a viable long-term policy of trade liberalization: 

The conventional wisdom in Washington is that this is a straight trade-off. Placate the labour unions on trade and get them to support Mr Obama on healthcare. Whisper it quietly, and be prepared for accusations of heresy to rain down on your head, but that might be a deal worth making....

Instead of hoarsely exhorting the benefits of trade to people who aren’t listening, [trade enthusiasts] need to be seen to soften its downside. Since the American public seems to ascribe much job loss in the US economy to globalisation – usually wrongly, but there we have it – this means reducing the costs of being laid off. Since much healthcare is currently tied to employment, achieving universal coverage would be one of the best ways of doing that....

Mr Obama has now come down on the wrong side of three big decisions on trade: happily signing a stimulus bill with Buy American provisions, abrogating an agreement allowing more Mexican trucks to operate in the US, and now granting the first ever emergency tariffs under a particular “safeguard” measure in US law. All are damaging both to trade and to the US’s international standing. All risk inflaming protectionist sentiment at a sensitive time.

But if he can use his capital to achieve universal healthcare and begin to shift the visceral dislike of trade that has gripped large parts of the American public and their representatives on Capitol Hill, it might prove worth it. He is playing with fire, which has creative but also destructive power. Just like globalisation.

Beattie gets at an interesting proposition -- that stronger safety nets will make Americans more comfortable with globalization.  You can certainly point to public opinion polling in support of this hypothesis. 

It's a good argument, and it's the one I suspect Larry Summers and Tim Geithner told themselves after the tire decision was made.  The thing is, I'm not sure whether it's politically accurate. 

In my debates about trade over the years, I've talked with a lot of union activists on the other side of the fence.  These are people dedicated to the protection of them and theirs -- and given the economic straits of their workers, I can't blame them.  I know from talking with them, however, that a stronger social safety net will have zero effect on their trade position.  Sure, they want health care -- but they also want to make sure that their union continues to exist as a viable political entity.  Regardless of universal health care coverage, globalization eats away at the unionized employment sector in the United States.  For unions in the 21st century, protectionism is not a policy position to be traded away -- it is at the core of their perceived interests.  Health care will not affect that position. 

Am I missing anything? 

UPDATE:  Noam Scheiber responds on TNR's blog to say that maybe I am missing something: 

[T]he political context looms incredibly large here. Simply put, it's incredibly difficult to defend, much less expand, free trade in the middle of a deep recession. And this is the deepest since the 1930s. In that context, the best you can probably do is beat back the worst protectionist excesses and live to fight another day. 

Which is to say, you can't just make a straight-forward point-by-point comparison between Bush and Obama. The question is, what would a pro-trade president do in the current political context? My point is that it's far from clear he or she would behave any differently from Obama.

Scheiber is absolutely correct that the curent political environment is hostile to trade -- but I'm not all that sure the environment was any less toxic in the early half of this decade.  In December 2001, George W. Bush, flush from the success of the war in Afghanistan, possessing an approval rating above 80 percent and larding out pork like no one's business, secured the passage of Trade Promotion Authority through the GOP-controlled House of Representatives by a single vote.  In 2005, CAFTA made it through the House by a two-vote margin. 

Let's face it, however -- this debate is about the future.  If Obama abstains from futher acts like the tire tariff, I'll concede that I've overreacted.  If there's more of this to come, then I think Scheiber will have underreacted.