ldf-news.com

By Fernando Álvarez: Ex IMF Economist

Dr. Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, and Senior Fellow at the Hoover Institution, Stanford University. He holds the view that if one looks at the trade patterns of the global economy’s two biggest players, two facts leap out. One is that, while the United States runs a trade deficit with almost everyone, including Canada, Mexico, China, Germany, France, Japan, South Korea, and Taiwan, not to mention the oil-exporting countries, the largest deficit is with China. If trade data were re-calculated to reflect the country of origin of various components of value-added, the general picture would not change, but the relative magnitudes would: higher US deficits with Germany, South Korea, Taiwan, and Japan, and a dramatically lower deficit with China.

The second fact is that Japan, South Korea, and Taiwan – all relatively high-income economies – have a large trade surplus with China. Germany has relatively balanced trade with China, even recording a modest bilateral surplus in the post-crisis period. The US has a persistent overall trade deficit that fluctuates in the range of 3-6% of GDP. But, while the total reflects bilateral deficits with just about everyone, the US Congress is obsessed with China, and appears convinced that the primary cause of the problem lies in Chinese manipulation of the renminbi’s exchange rate.

One problem with this view is that it cannot account for the stark differences between the US and Japan, Germany, and South Korea. Moreover, the real (inflation-adjusted) value of the renminbi is now rising quickly, owing to inflation differentials and Chinese wage growth, particularly in the country’s export sectors. That will shift the Chinese economy’s structure and trade patterns quite dramatically over time. The final-assembly links of global-value added chains will leave China for countries at earlier stages of economic development, such as Bangladesh, where incomes are lower (though without producing much change in the balance with the US).

A somewhat more sensible concern might be that the dollar’s reserve-currency status causes it to be “over-valued” with respect to every currency, not just the renminbi. That could create additional pressure on the tradable part of the US economy, and thus might help to explain why the US tradable sector has not generated net employment for two decades. But, in order to explain performance relative to Japan and Germany, one would have to argue that the euro and the yen have been undervalued, which makes no sense. In fact, the employment generated by the tradable sector has been in services at the upper end of the distributions of value-added per person, education, and income. As a result, growth and employment in the tradable sector have gone separate ways, with healthy growth and stagnant employment. In Germany, by contrast, the tradable sector is an employment engine. The same is true of Japan.

The US economy’s distinctive features for at least a decade prior to the crisis that began in 2008 were an unsustainably high level of consumption, owing to an illusory wealth effect, under-investment (including in the public sector), and savings that fell short of the investment deficiency. That excess household and government consumption fueled the domestic economy – and much of the global economy as well. In several European countries that now confront fiscal and growth challenges, the pattern was somewhat different: most of the excess consumption and employment was on the government side. But the effect was similar: an unsustainable pattern of income and employment generation, and lower productivity and competitiveness in these economies’ tradable sectors, leading to trade deficits, stunted GDP, and weak job creation.

One could argue that the euro has been and still is overvalued, and that this has hindered many eurozone economies’ productivity relative to non-eurozone countries. But the relative productivity deficiencies within the eurozone are more important for growth, and have nothing to do with the exchange rate.

The focus on currencies as a cause of the West’s economic woes, while not entirely misplaced, has been excessive. Developing countries have learned over time that real income growth and employment expansion are driven by productivity gains, not exchange-rate movements. This, in turn, requires public and private investment in tangible assets, physical and telecommunications infrastructure, human capital and skills, and the knowledge and technology base of the economy.

Of course, it is possible for a country’s terms of trade to get out of line with income and productivity levels, requiring a rebalancing. But resetting the terms of trade is no substitute for tackling the structural underpinnings of productivity. None of this is peculiar to developing countries. Underinvestment has long-term costs and consequences everywhere. Excess consumption merely hides these costs temporarily. In the US, productivity deficiencies have led to a pattern of disconnection from global supply chains. So the challenge for America is not only to restore productivity, but also to restore its links to the main currents of world trade.

China’s growth – and, more generally, that of the major emerging economies – provides a substantial potential tailwind. That is certainly true nowadays for Germany, Japan, and South Korea. The US and others can take advantage of it as well, but only if productivity relative to income levels in specific areas of potential competitiveness begin to rise. 

As long as America economic policy remains focused primarily on deficits, domestic demand, exchange rates, and backsliding on trade openness, its investment deficiencies will remain unaddressed. That means that its employment and income-distribution problems will remain unaddressed as well.

The good news is that, at a deep level, incentives across advanced and developing countries are aligned. The emerging economies would like nothing more than the restoration of sustainable patterns of growth in the advanced economies, and are prepared to be cooperative players in that process. But focusing on these countries’ exchange rates is not the right way to go about it. 

By Fernando Álvarez: Ex IMF Economist

The proclamation of December 9 as International Anti-Corruption Day is a further recognition of the universal significance of this problem and of the need to strengthen the efforts to deal with this issue more effectively.  Within the OAS we should congratulate ourselves on having been pioneers in adopting the Inter-American Convention against Corruption, the first international legal instrument on this issue, which opened up the way for the subsequent adoption of other treaties in the matter, such as those of the OECD, the Council of Europe, the African Union, and the United Nations.

Cooperation against corruption is related to several key topics on our common agenda. First of all, it is related to democratic governance. This has been confirmed by the Inter-American Democratic Charter, adopted in 2001, which defines a series of elements, including transparency in government activities, probity, and accountability in the public administration on the part of governments, as essential components for the exercise of democracy. Second, it is related to social development. Studies have shown that the main victims of corruption are the poor. And, third, it is related to economic growth. Research has confirmed that countries with higher levels of corruption have lower rates of investment and economic growth.

The creation of the MESICIC, the Follow-up Mechanism for the Inter-American Convention against Corruption, has reaffirmed the commitment of our States in addressing this problem that does not distinguish borders or ideologies. Since the launch in 2002 of this cooperation mechanism, which is intergovernmental in nature but with broad opportunities for civil society participation, our countries have undergone a rigorous review on how they are complying with their obligations under the Convention and have benefited from recommendations and support programs that have enabled them to strengthen their legal and institutional frameworks for tackling corruption more effectively.

We have good reason to believe in the usefulness of what we have been doing. The hemispheric and progress reports adopted by the MESICIC this year shows obvious progress by the States in their legal and institutional frameworks in areas such as the prevention of conflicts of interest, access to public information, government procurement, statements of net worth of public servants, the protection of corruption whistleblowers, and international assistance and cooperation for the prosecution of perpetrators of acts of corruption.

We are making progress but, of course, actions to address a problem as complex as that of corruption do not have an end. Our collective action in this matter must be understood as an ongoing process that requires many actions at different levels and with different orientations.

We are convinced that it is not just States and their authorities that are responsible for tackling corruption; instead, it is a task which should also involve the private sector, civil society and the international community as a whole. The States have agreed that starting in 2012, the MESICIC will comprehensively evaluate the oversight bodies in our countries, and for the first time for a hemispheric mechanism of this nature, to carry out on-site visits to verify the application of the Convention “in the field.” This decision undoubtedly represents a major leap forward in the commitment of our States to strengthen effective cooperation against corruption.

We at the OAS General Secretariat will continue to do our part and our countries can continue to count on our support so that their commitment to fight corruption, formalized with the adoption of the Convention and strengthened with the adoption of its follow-up mechanism (MESICIC), is increasingly more effective and increasingly more beneficial to its citizens.
 

By Fernando Álvarez: Ex IMF Economist
 
Dr.  Jagdish Bhagwati is Professor of Economics and Law at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations. He holds the view that the 17th conference of the UN Framework Convention on Climate Change, popularly known as COP-17, is taking place in Durban, South Africa, at a critical moment, as the historic 1997 Kyoto Protocol is set to expire next year. But, like the climate-change conferences in Copenhagen in 2009 and in Cancún in 2010, COP-17 can be expected to spend much and produce little. Indeed, the extravagance of these conferences seems to grow, rather than shrink, as their dismal results become more apparent. COP-15 in Copenhagen lasted 12 days, and is estimated to have attracted 15,000 delegates and 5,000 journalists. The carbon emissions created by so many people flying to Denmark was real, while the emissions targets that the conference sought remained beyond reach. That will be true in Durban as well – and on an even greater scale.

The real problem is that the expectations concerning meaningful action on climate change, as opposed to gimmicks such as US President Barack Obama’s last-minute arrival and minuscule gestures in Copenhagen, are now lower than ever. There are two problems that cannot be wished away. First, the United States under Obama’s ineffective leadership has drifted yet further into a “What’s in it for me?” attitude on key issues requiring international action. In place of what the economist Charles Kindleberger once called an “altruistic hegemon,” the America that the world now faces is what I call a “selfish hegemon.” Thus, the US has virtually pulled out of the Doha Round of multilateral trade negotiations, with Obama acquiescing to greedy business lobbies that will not settle unless more of their demands are met. But not only has Obama abandoned Doha; he has also seriously endangered the multilateral trading system by diverting US efforts and resources to discriminatory bilateral trade deals and, most recently, to the Trans-Pacific Partnership, which will principally aid countries that are worried about an aggressive China and seek political security rather than increased trade. The same is true of environmental action: after Australia’s belated ratification of the Kyoto Protocol in 2007, the US remains the only country that has not ratified the agreement.

The second problem is that the sheer weight of the US in international affairs, though diminished nowadays, has nonetheless led to a corruption of the principles that should underpin a new climate-change treaty to succeed the Kyoto Protocol.For example, unlike the World Trade Organization, whose dispute-settlement mechanism imposes penalties for abandoning negotiated reductions of trade barriers, the targets for emission reductions are not binding and enforceable commitments. The US has not agreed to accept such sanctions for failing to meet emissions targets; but, without penalties, the exercise is largely futile and only encourages cynicism about the effort to combat climate change.

Moreover, abandoning the Kyoto Protocol’s exemption of developing countries from obligations for current emissions, the US has insisted on obligations from China and India that reflect a common form of “taxation” of emissions. But there are persuasive reasons why these countries insist that the obligations must instead reflect per capita emissions, a criterion that would require far greater emission cuts by the US than its leaders now contemplate. Besides, these countries correctly argue that the tradeoff between action on climate change and poverty reduction is more compelling for them at their level of per capita income, unless they can access newly emerging technologies at low cost. This demand suggests that the US should subsidize the flow of technology to India and China from US firms holding patents, which is highly impractical.

That is where the $100 billion Global Climate Change Fund, promised at the Cancún COP-16 conference, comes in. Unfortunately, even environmental icons like Al Gore in the US are so heavily invested in new green technology that their self-interest is tied up in this fund being spent on developing privately owned new technologies that are protected by patents.

The new “Green Revolution” seeds that the Nobel laureate agronomist Norman Borlaug developed with public money were freely available to all users anywhere. The technology developed by the money spent from the Global Climate Change Fund also should be equally available to all, including India and China, which would then enable them to agree to more emissions cuts. Indeed, even the contributions to the Fund should have reflected the past damage by the developed countries over the course of a century of carbon emissions – an obligation based on the well-established tort principle that the US has accepted for domestic pollution. But here, too, the US has rejected the idea outright.

Several such sensible ways to design the Kyoto Protocol’s successor treaty have been undermined by efforts to accommodate inappropriate US-led demands and objections, resulting in the impasse that became evident at the COP conferences in Copenhagen and Cancún. Those who do not believe in magic know better than to hope that it will somehow disappear in Durban.