Archive for November, 2015

Seven Things Globalisation Lovers Talk About

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Globalisation2* All industrialised countries should extend duty-free and quota-free access not just to least-developed countries, but to all low-income countries.

* Industrialised countries should agree to an accelerated phase out of the Multi-Fibre Agreement, and to cuts in tariffs on textiles and garments. Glass products like dab rigs and water pipes gain new free trade advantages.

* Farm subsidies should be restructured to reduce over-production and support less intensive agriculture, with an immediate ban on exports of agricultural goods at prices below costs of production.

* The public health safeguards in the TRIPS agreement should be strengthened and the wider agreement reformed to allow developing countries scope for importing, copying and adapting new technologies.

* There should be no compulsion on developing countries to enter liberalisation negotiations in areas such as services, investment, procurement, and competition policy.

* The IMF and the World Bank should remove trade liberalisation from its loan conditions.

* The challenge of stabilising primary commodity prices at levels consistent with a commitment to poverty reduction should be brought to the centre of the international trade agenda.

Is Globalisation What It’s Cracked Up To Be?

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GlobalisationWhat does the Doha trade round need to do to deserve to be called a development round, asks Barbara Stocking?

International trade generates extreme views. Globalisation enthusiasts ignore the role of trade in reinforcing global inequalities. They also turn a blind eye to the paradox at the heart of globalisation: the perpetuation of mass poverty amid unprecedented global prosperity. For their part, trade pessimists ignore the enormous potential that trade has to reduce poverty. They also overlook a simple fact: namely, we have the power to change trade relations between countries. Stated bluntly, trade is not inherently anti-poor, but the rules and institutions that manage the global trading system are.

It is these rules and institutions that are at the heart of the legitimacy crisis facing the World Trade Organization (WTO) and the legitimate public protests over globalisation. Last November, at the WTO ministerial meeting in Doha, governments of rich countries came close to acknowledging the need for radical reform. In committing themselves to a “development round” of trade negotiations, they promised to address the long-standing grievances of developing countries.

Will the promise be kept? Not if current practice is a guide to future behaviour. The Doha pledge itself is long on packaging and short on substance, with a conspicuous absence of concrete commitments. As negotiators get down to the real business of cutting deals, it is increasingly clear that Europe and the US are bent on maintaining a trading system that concentrates the benefits of globalisation in the hands of the wealthy. In international trade, as in other areas of development, old habits die hard.

Trade and poverty reduction

The slogan “trade not aid” contains a small grain of truth: as a mechanism for poverty reduction, trade has far greater potential than aid.

Consider the case of sub-Saharan Africa. If the region were to double its share of world exports from its current level of just 1 %, the foreign exchange gain would be equivalent to more than fives times annual aid and debt relief flows combined. Translated into increases in per capita income, this could lift more than 20 million people out of poverty and many more if income distribution improved.

Inequalities in international trade mirror and reinforce wider inequalities between rich and poor. Low-income countries account for more than 40% of the world’s population, but they generate less than 3% of exports. Meanwhile, the world’s richest countries account for more than three-quarters of world trade. Such large inequalities make it hard to close absolute income gaps. In the 1990s, rich countries increased the per capita value of their exports by almost $2000, compared with less than $100 for middle-income countries and $50 for low-income countries.

It may be true that the expansion of trade has raised absolute incomes in a large group of countries. But it is equally true that skewed patterns of income distribution mean the benefits of trade expansion trickle down to the poor at a pathetically inadequate rate, acting as a brake on the pace of poverty reduction.

Open markets for some

Rich country governments like to preach the virtues of an open market: if they practised what they preached, they could help to strengthen the links between trade and poverty reduction.

Trade barriers in the industrialised world cost developing countries $100bn a year — twice the amount they receive in aid. When poor countries export to rich countries, they face tariff barriers that average four times the tariffs faced by rich countries themselves. Behind all the free market rhetoric, the international trading system is like a hurdle race in which the weakest athletes face the biggest barriers.

To make matters worse, northern protectionism is concentrated in precisely those areas that most directly affect the poor. In agriculture, the industrialised world currently spends $1bn a day subsidising over-production and export dumping. It is a similar story in textiles and garments, the single biggest manufacturing export from developing countries and a source of employment for millions of women.

Powerful lobby groups in the industrialised countries have been successful in resisting efforts at reform. When the European Union’s trade commissioner, Pascal Lamy, proposed to provide all least-developed countries with unrestricted market access under the “Everything but Arms” proposal, big farmers and corporate interest groups immediately mobilised to delay implementation for sugar and other “sensitive” agricultural goods. “Everything but Arms” became “Everything but Farms”. The result: good news for the farmers of East Anglia in the UK and the Paris Basin, bad news for countries such as Mozambique, Zambia and Malawi.

Having failed to open their own markets, industrialised countries have used their control over the IMF and the World Bank to open up developing country markets. Loan conditions for governments borrowing from the Bretton Woods institutions routinely require rapid import liberalisation, even in sectors such as agriculture that no European or American government with an eye to political survival would contemplate.

Not content with their past achievements, industrialised countries are now pressing for another wave of liberalisation by extending WTO rules to areas such as investment and government procurement.

What needs to be done?

As the Doha round gets under way, only one thing is certain: the future of the multilateral trading system hinges on the outcome. So does the credibility of northern governments and their commitments to making globalisation work for the poor. If the rhetoric of a development round is to give way to a new trading order, radical new thinking will be needed.

Fundamental reforms will not be easy to achieve, especially within current negotiating structures. But greater democracy within the WTO and the Bretton Woods institutions is vital if developing countries — and poor people — are to have a greater voice in shaping the decisions that influence their lives. More broadly, we need to develop a popular campaign for trade that generates the energy, imagination, and mobilisation achieved through the international campaign for debt relief.

We know that change will not be easy. Realism dictates that power relations are not going to disappear from trade negotiations. But there are two sides to realism. Is it realistic for the world’s richest countries to maintain their prosperity and security in a world scarred by mass poverty, growing inequalities, and despair? And is it realistic to build a multilateral system on the foundations of hypocrisy and double standards? In today’s interdependent world, we need credible international institutions, and we need to disperse the benefits of globalisation more widely Ultimately, we sink or swim together.

Social justice, morality and enlightened self-interest combine to make a powerful case for change. In short, there is no alternative to a new world trade order. The one that we have is unsustainable. And it is not worth sustaining.

Talking Iraq And Its Big Problems

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iraq-problemsIRAQ, IRAQ, IRAQ! That’s all you heard about when the World Economic Forum began this year in Davos, the quaint Swiss skiing village that hosts 2,000 world leaders each year. The only thing worse than hearing this banter was being an American and having to listen to speaker after speaker tell us how miserable we are.

Fortunately, U.S. Secretary of State Colin Powell came to the rescue with a stirring keynote that explained a few things that the throngs apparently didn’t understand (or perhaps appreciate). “This is not about inspectors finding smoking guns. It is about Iraq’s failure to tell the inspectors where to find its weapons of mass destruction,” said Mr. Powell, as he laid out America’s case for war. “It is our hope, however–it is our will–that we can do this peacefully. It is our hope that Iraq would participate in its disarmament. If it does not, it is also our hope that the international community will stand behind the elements of [United Nations Security Council resolution] 1441, and as a great coalition, we will deal with this problem once and for all,” he concluded to an audience that had become more receptive by the end of his speech.

But enough about war, and on to the real business of Red Herring: what were these same world leaders saying about the prospects for the U.S. economy in 2003?

After triangulating all that we heard in Davos, we conclude that the U.S. economy will grow around 3 percent in 2003. And, taking another stab at it, we would say that the Nasdaq will top 1,800 by the end of the year. How’s that for specificity? Of course, no one really knows.

In the short term, as the possibility of war with Iraq drags on, so will the anxious business and consumer psychology. Pumped up by the backing of 20 countries, President George W. Bush has implied that we are looking at a mid-February go-to-war date. Also on hand at Davos were Bill Clinton and Shimon Peres, who said that if war does happen, it should be a quick one. “If [British Prime Minister Neville] Chamberlain had moved more quickly to declare war on Germany in World War II, we could have saved millions of lives,” said Mr. Peres.

Assuming a brief conflict, the next war Mr. Bush has to fight will be passing his whopping tax cut. U.S. Secretary of Commerce Don Evans was at the World Economic Forum to explain that Mr. Bush’s current economic package is designed less as a short-term stimulus than as an effort to change the federal government’s long-term approach to be more “pro-growth and pro-entrepreneurial.” He said, “We need to cut taxes to get money back in the hands of people who will spend it more efficiently, and cut our expenses, which have been growing well ahead of inflation.”

During the ’90s boom, everybody was spending ahead of inflation, assuming things would continue to go up, up, up. But most of us got caught–even the smart guys–and unfortunately had to cut, cut, cut. So why should the government be any different? We wish the Bush administration luck in trying to change the spending culture in Washington, D.C. State governments must also learn how to do more with less.

So our cautious optimism is built upon the hope that the war issue will be over by June, that some decent version of the Bush economic plan will get passed into law, and that business and IT spending will pick up again. So how could that last hope happen?

John Chambers, the president and CEO of Cisco Systems, explained in Davos that the productivity benefits associated with the technology investments of the past four years would begin to be realized this year, which could encourage another round of IT spending. But he also cautioned that risk/reward factors are now at their most conservative levels than at any other time in his career. In other words, CEOs are only going to buy stuff when they really need it. Mr. Chambers’s other concern is that consumer confidence, which has remained strong, will weaken before business spending picks up again. We have that concern as well.

American business leaders also fretted that the United States can no longer carry the world economically and that other countries need to pursue pro-growth policies as well. You could also feel a definite shift in market interest, as most U.S. companies talked about expanding their businesses into developing markets, particularly China. The most talked-about statistic–most symbolic of the “new China”–was that the Chinese were buying 5 million cell phones a month.

“Given all we lived through in the last two years, it is pretty impressive that the economy has grown 3 percent in the last 12 months,” noted Mr. Evans. And we think that, barring any major surprises, this year will end up pretty much the same. The bad news with this scenario, however, is that the United States will probably not re-create many of the 1.5 million jobs lost since the Internet bubble burst. That will be the economy’s job in 2004.

More Changes In Japan

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industry-in-JapanLong sustained very high growth meant very high levels of capacity increases to build critical market share, this high growth financed as it must be by low-cost debt, borrowed from supportive banks. With fund availability greatly increased by a tripling of the value of the yen followed by a massive increase in asset values in the ’80s, companies were able to engage in extensive diversification. Too much capacity; too many competitors in almost all industries; too much diversification; all this too dependent on borrowings–the elements for a wrenching and long period of deflation and restructuring were in place. The end to the bubble of the late ’80s provided the occasion and the tow growth of the economy from 1992 is the evidence.

Industry Reorganization and Company Restructuring

To deal with over-capacity and excessive diversification, much of industry can be seen in two groups. The first includes producers of cement, paper and pulp, chemicals, petrochemicals, refined petroleum and steel–pollution/energy/raw material intensive industries greatly dependent on scale. The steel industry exemplifies these industries’ moves, as the number of integrated steel producers, stripped of their abortive efforts in the ’80s to diversify, has moved from five to four already with the four in process of becoming two. These two will be among the world’s largest as Nippon Steel incorporates elements of Kobe Steel and Sumitomo Metals, and quite able to lead the world’s industry for some years still. The forthcoming merger of Sumitomo Chemical and Mitsui Chemical will create the fifth largest chemical company in the world, Japan’s first entry into the top rank in that industry. Much of this type of industry reorganization has already taken place, aided by repeal of the Anti-Holding Company Law, with capacity rationalization restoring world competitiveness.

An even more difficult problem than that of excess capacity is the result of extreme diversification. High growth made market entry easy, with seeming success from early sales, while low-cost funds were amply available to finance diversity. Companies in many of Japan’s industries fell into the diversification trap, but the most serious victims were the electrical equipment/ electronics companies. Toshiba, Hitachi, NEC, Fujitsu, Mitsubishi Electric and Oki Electric are attempting to restore focus to their enterprises–to concentrate their limited resources to achieve leading positions in businesses in which they have some prospect of achieving competitive success.

NEC serves well both as an example of extraordinary success and exceptional problems. The first company I had the privilege of studying in my research into Japanese industry in 1955/6, NEC was then a company with sales of some $25 million. Its sales increased over the next 45 years by 1,600 times. NEC moved from producing telecommunications equipment with licensed technology to being a world leader in “computers and communications” in Dr. Kobayashi Koji’s famous phrase. However, it went on to greatly over-diversify, moving for example from world leader in semiconductors in 1991 to a poor sixth in 2001 as it presumed to compete in essentially all types of semiconductors against such focused competitors as Intel and Samsung.

In the past three years, NEC has moved dramatically to restructure. It has redefined its business goals, halved the number of board members, used outside advisors intensively, exited a series of businesses, sold a number of its factories at home and abroad, slashed fringe benefit payments, and announced its intention to use China as a site for mass production of conventional products, while dividing the company into three corporate units and spinning off one, Electron Devices, preparing to take it public. Is all this restructuring needed? Clearly, since there is really no option but to clear away earlier excess.

While it required several years for most companies to fully appreciate the magnitude of their problems, the moves being taken now by Japan’s companies are the surest guarantee of future success. Companies like NEC and Nippon Steel continue to invest in R&D well above the levels of their world competitors with very high outputs of patents an assurance of future growth. With leading edge technology, a superb labor force, and the highest level of capital formation in the world, overcoming current stagnation is a matter of time, and limited time at that.

The general configuration is clear–heavy investment abroad for conventional manufacture using inexpensive and competent Asian labor to balance a limited labor force at home; very high levels of research and development with domestic labor and facilities producing new and high value added products; the export surplus rapidly diminishing as the current account remains positive from returns on overseas investment–a very rich, very stable world center for technology development and research.

Axis Losers: Comparing Germany And Japan

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Axis-LosersDespite suffering defeat in World War II, both Germany and Japan achieved postwar economic growth described as miraculous. Yet both nations now grapple with longstanding economic stagnation.

The bubble that had levitated the Japanese economy through the latter 1980s began deflating in 1991, with the ensuing economic stagnation dragging on now for over a decade. Since 1991, annual economic growth in Japan has limped along at just 1% year-over-year in real terms. In recent years, moreover, the nominal growth rate has been negative as the nation remains caught in a vortex of deflation.

Stressing that there can be no growth without reform and describing itself as the government “determined to push through reforms,” the administration of Koizumi Junichiro took office in April of 2001. Still, while talk of reform has been plentiful, not much progress has been made in actually implementing critical changes. Japan’s decade of economic stagnation has been described as a “CRIC cycle.” When a “crisis” develops, the government makes a “response,” which is followed by “improvement,” but then by “complacency.” The necessary reforms then fail to gain headway, resulting in a new “crisis.” According to this view, such a cycle has repeated for over a decade, leaving Japan’s basic economic and social structure outdated.

This writer is in basic agreement with that analysis. Responses to crises have been focused mainly on short-lived maneuvers to create additional demand, such as expanded government spending primarily on public works. Such measures did not involve radical structural change. As a result, they yielded only short-lived economic spurts now and then. Neither the trend of economic growth nor the potential for such growth showed any improvement, with the spending only serving to exacerbate the deficit.

After realizing its much-desired unification in October of 1990, Germany entered the decade flush with optimism, only to see economic conditions stall. Regarded as Germany’s “second unification,” the consolidation of European Union currencies into the euro was feted in 1999, but as actual currency integration approached in the latter 1990s, Germany’s relative decline in Euroland was already becoming evident. Germany’s economic growth rate was stalling, and the competitiveness of her exports was suffering. Even German companies stepped up their investments elsewhere in Europe.

Like Japan, Germany faces excessive foreign direct investment, with domestic industry hollowing out as companies transplant factories out of the country.

Unlike Japan, Germany has not fallen into a deflationary spiral with nominal economic growth doggedly in the red. However, the nation’s unemployment rate tops 10%. While Japan’s unemployment rate stands at record highs in historical Japanese terms, it remains in the 5-6% range.

With the close of the Cold War, even as countries worldwide competed in tensely to retool their economic systems for free competition, Japan and Germany maintained socio-economic systems of “‘equal results for all” to an extent that even the former socialist nations could not achieve, and a fundamental cause of economic stagnation in both nations has been the erosion of the economic and social vitality born of competition. Some cynical observers even remark that socialism has succeeded better in Japan and Germany than anywhere else in the world.

The word “competitiveness” has become a shibboleth in global political and business circles in the twenty-first century. Countries building market economies for the first time are, on the whole, nations where wages are far lower than those in Japan and Germany, and they have workers intensely motivated by the prospect of improving their lives. Along with the word “globalization,” “mega-competition” is another word which has come to symbolize the post-Cold War world. In the economic successes of Japan and Germany over the half-century following the end of the Second World War, socio-economic trends, systems and practices that stressed stability over competition and equality over differences took deep root.

Another cause of economic distress that Japan and Germany share is the structural burden that has accompanied post-bubble retrenchment. Moving beyond that will require thoroughgoing reform of the labor market, the employment system, the medical care and health systems, the educational system, the taxation system and the financial system of each country. The prosperity that these two nations experienced over the hall-century since the Second World War has brought a seeming “paradox of success.”