Category: Foreign Trade

US President Obama Picks new Head of World Bank

This week POLI 1140 will be focused on the international political economy (IPE). As we’ll learn, much of the international institutional infrastructure for the current global economy was set up at a meeting in July 1944 in the New Hampshire mountain resort town of Bretton Woods. At the meeting, which the ailing economist John Maynard Keynes attended, created the World Bank, and the International Monetary Fund (IMF). (The International Trade Organization, which was planned, never came to fruition, and the General Agreement on Trades and Tariffs (GATT), would later be formed, which has been morphed into the World Trade Organization (WTO). These three institutions–World Bank, IMF, WTO–support the liberal (neoliberal) economic order, each of which provides a different main function.

Yesterday, US President Barack Obama named an academic–Dartmouth College president Jim Yong Kim–as his nominee to head the World Bank. Convention dictates that the USA be given the power to select the World Bank president while European states are given the right to select the head of the IMF.

This definitely counts as an “outside-the-box” pick for Obama. First, Dr. Kim is a global health expert, and not an economist. This may signal a change in direction and philosophy at the World Bank.The New York Times reports:

Highly respected among global health experts, Dr. Kim is an anthropologist and a physician who co-founded the nonprofit Partners in Health and a former director of the department of H.I.V./AIDS at the World Health Organization.

“The leader of the World Bank should have a deep understanding of both the role that development plays in the world and the importance of creating conditions where assistance is no longer needed,” President Obama said Friday. “It’s time for a development professional to lead the world’s largest development agency.”

This move bears watching in the future. It also signals one of the major differences between Democratic and Republican presidents. It is highly doubtful that any of the Republican candidates for president would name somebody with a similar resume as the head of the World Bank.

For a quick video of the creating of the Bretton Woods system, see the video below (the relevant excerpt begins at 36:36).

Development and Underdevelopment–the Commanding Heights

We addressed the topic of development and underdevelopment in POLI 1100 this week. Amongst the many issues covered, we started to explore some of the alleged causes of economic growth and development. Why is there still such disparity in income and economic growth around the world, not only between countries, but within? Why have countries in the global “South” lagged behind, for the most part, their counterparts in the global “North”? There are various answers to this question and we addressed a couple of them in class. I showed clips from a fantastic documentary series put together by PBS, called (and based on the book of the same name) The Commanding Heights. All the information you’ll need is at the PBS website. Fortunately, each of the three 2-hour episodes has also been uploaded (in its entirety) to the Internet. From the narration at the beginning of the first episode, we learn that

This is the story of how the new global economy was born. A century-long battle as to which would control the commanding heights of the world’s economies–governments or markets.

I encourage you to watch all three episodes.

 

More on Representation and Electoral Systems

Prompted by a comment on a previous post regarding how voter representation would be different if Canada had a proportional representation system, I decided to do some reading on the Fair Vote website and stumbled upon some interesting facts. The first is an illuminating quote regarding the difference between decision-making (rule) and representation by somebody named Ernest Haville:

 “In a democratic government, the right of decision belongs to the majority, but the right of representation belongs to all.”

As we noted in class earlier today, many of the votes cast in our elections are wasted as a result of our first-past-the-post system. Below is a screenshot from the website wastedvotes.ca, which shows that in the 2008 federal election in Gatineau, QC, fully 70% of the voters were not represented. This is because the Bloc Quebecois candidate, Richard Nadeau, won a tight four-way battle, garnering a plurality of the vote at 29.2%.

This is just the most egregious example of wasted votes (and, thereby, of non-representation), but every Canadian election and electoral district sees wasted votes. Indeed, the folks at wastedvote.ca have calculated that of the more than 14 million votes cast during Canada’s last federal election (2011) only slightly more than half (50.4%) were effective, while 49.6% were wasted.

Why is this bad for democracy? Well, here is another excerpt from fairvote.ca:

Does Canada actually have representative democracy? In the 2008 federal election:

  • 940,000 voters supporting the Green Party elected no one, while fewer Conservative voters in Alberta alone elected 27 Conservative MPs.
  • In the prairie provinces, Conservatives received roughly twice the votes of the Liberals and NDP combined, but took seven times as many seats.
  • Similar to the last election, a quarter-million Conservative voters in Toronto elected no one and neither did Conservative voters in Montreal.
  • New Democrats: The NDP attracted 1.1 million more votes than the Bloc, but the voting system gave the Bloc 49 seats, the NDP 37.

What about majority rule? Canadians are usually ruled by majority governments that the majority voted against. In some provincial elections, parties coming in second in the popular vote have won majority control of the legislature.

In class, we noted the irony of the part above that is in bold font! The 1988 federal election was fought primarily on the basis of a pending free trade agreement amongst Canada, the United States, and Mexico. In Canada, the Progressive Conservatives (led by Prime Minister Brian Mulroney) were in favour of (what would become) NAFTA, while the NDP and the Liberal Party were against. In the end, a majority of Canadians voted for parties that were against NAFTA, yet the PCs won a majority of seats in parliament, enabling them to push through the necessary legislation.

PM Harper’s Foreign Policy Shift Towards China

In the National Post, Peter Godspeed argues that Prime Minister Stephen Harper’s pending visit to China represents somewhat of a foreign policy pivot for the Conservative government.

Like the United States, Canada is in the midst of a foreign policy pivot in Asia…

…Tuesday, Stephen Harper, the Prime Minister, arrives in the Chinese capital for what almost amounts to a traditional “Team Canada” trade mission, seeking to strengthen economic ties with Canada’s second-largest trading partner.

With four cabinet ministers — John Baird, the Foreign Affairs Minister, Ed Fast, the International Trade Minister, Gerry Ritz, the Agriculture Minister, and Joe Oliver, the Natural Resources Minister — and seven MPs and 40 business executives and academics, he hopes to build on rapidly expanding ties that have pushed bilateral trade to US$57.7-billion a year in 2010.

“China’s growth as an emerging market is very significant for Canada’s business community, and it is an economic relationship that requires the attention of the highest political level,” said Peter Harder, president of the Canada-China Business Council.

From the perspective of foreign-policy decision-making in IR theory, the makeup of the Team Canada mission to China would indicate the importance of the pluralist and organizational/bureaucratic models. The pluralist model notes the impact of powerful interest groups, such as the Canada-China Business Council, and business executives and academics. Radicals, especially Marxists, would note the absence of any environmental or union groups amongst the mission’s members.

About the tone of the trip, NDTV reports that

The visit can be seen as a change in attitude for Canada, which has a record of taking a hard stance on the Chinese regime’s human rights abuses, as it looks as if economic ties between the two nations are warming.

Joseph Nye on Shifts on Smart Power

One of the leading scholars of IR theory is Joseph Nye, who teaches at Harvard University. He, along with co-author Robert Keohane, wrote one of the seminal works in IR theory–Power and Interdependence. Here is a short, but interesting TED talk in which Nye explains, amongst other things, the distinction between power transition and power diffusion, the “rise of China” and what “smart” power is.

What is the link between Globalization and Poverty?

In my previous post, I noted that the narrator of the Globalization is Good documentary claimed that there was a strong correlation between how globalized a country is and poverty. Specifically, those countries that are globalized are likely to have less poverty. How does this claim stand up to empirical scrutiny? Well, one answer comes from the National Bureau of Economic Research (NBER) in Cambridge, Massachusetts.

“The evidence strongly suggests that export growth and incoming foreign investment have reduced poverty everywhere from Mexico to India to Poland. Yet at the same time currency crises can cripple the poor.”

Does globalization, as its advocates maintain, help spread the wealth? Or, as its critics charge, does globalization hurt the poor? In a new book titled Globalization and Poverty, edited by NBER Research Associate Ann Harrison, 15 economists consider these and other questions. In Globalization and Poverty (NBER Working Paper No. 12347), Harrison summarizes many of the findings in the book. Her central conclusion is that the poor will indeed benefit from globalization if the appropriate complementary policies and institutions are in place.

Harrison first notes that most of the evidence on the links between globalization and poverty is indirect. To be sure, as developing countries have become increasingly integrated into the world trading system over the past 20 years, world poverty rates have steadily fallen. Yet little evidence exists to show a clear-cut cause-and-effect relationship between these two phenomena.

Many of the studies in Globalization and Poverty in fact suggest that globalization has been associated with rising inequality, and that the poor do not always share in the gains from trade. Other themes emerge from the book. One is that the poor in countries with an abundance of unskilled labor do not always gain from trade reform. Another is that the poor are more likely to share in the gains from globalization when workers enjoy maximum mobility, especially from contracting economic sectors into expanding sectors (India and Colombia). Gains likewise arise when poor farmers have access to credit and technical know-how (Zambia), when poor farmers have such social safety nets as income support (Mexico) and when food aid is well targeted (Ethiopia).

The evidence strongly suggests that export growth and incoming foreign investment have reduced poverty everywhere from Mexico to India to Poland. Yet at the same time currency crises can cripple the poor. In Indonesia, poverty rates increased by at least 50 percent after the 1997 currency crisis in that country, and the poor in Mexico have yet to recover from the pummeling of the peso in 1995.

Without doubt, Harrison asserts, globalization produces both winners and losers among the poor. In Mexico, for example, small and medium corn growers saw their incomes halved in the 1990s, while larger corn growers prospered. In other countries, poor workers in exporting sectors or in sectors with foreign investment gained from trade and investment reforms, while poverty rates increased in previously protected areas that were exposed to import competition. Even within a country, a trade reform may hurt rural agricultural producers and benefit rural or urban consumers of those farmers’ products.

The relationship between globalization and poverty is complex, Harrison acknowledges, yet she says that a number of persuasive conclusions may be drawn from the studies in Globalization and Poverty. One conclusion is that the relationship depends not just on trade or financial globalization but on the interaction of globalization with the rest of the economic environment: investments in human capital and infrastructure, promotion of credit and technical assistance to farmers, worthy institutions and governance, and macroeconomic stability, including flexible exchange rates. The existence of such conditions, Harrison writes, is emerging as a critical theme for multilateral institutions like the World Bank.

Globalization is good…or is it?

Is globalization good for those in developing countries? What is the link between globalization and poverty? What about globalization and democracy? Today in IS210 we watched a documentary in which the narrator argued that more globalization is good for the poor in developing countries. He argued that countries that have (and are) globalizing, such as Taiwan and Vietnam,  have become richer, more democratic, and poverty levels have plummeted. On the other hand, countries that haven’t democratized, regardless of whether this is the result of domestic or external policy, have done poorly. They’re less democratic and poorer than they otherwise could be.

Here’s a link to the documentary, and some questions that you may want to think about:

  1. Has globalization been beneficial or detrimental to Taiwan’s economic development? Explain.
  2. What role, according to the narrator, do multi-national corporations (MNCs) play in globalization? Should LDCs embrace the arrival of MNCs into their economies? How can the example of Vietnam inform our answers to these questions? Is there a link between MNCs and worker productivity?
  3. According to the narrator, what was the role of sweatshops in the development of Taiwan’s economy? Were they necessary?
  4. What is the link between globalization and democracy? What is the process that causes this empirical link?
  5. What is the reason for Africa’s slow growth, according to the narrator? Which of Collier and Gunning’s [from Chapter 9 of Essential Readings) four categories would apply? How does the situation of Kenya inform our answers to this question?
  6. What is the e ect of developing countries trade policies on economic outcomes in Kenya and in other parts of the developing world?

Washington Post Reports that China no longer as Attractive an “Outsourcing” Target

The average person may not know the difference between “offshoring” and “outsourcing”, but one would think that it would be a condition of employment for someone who writes for the business section of the Washington Post. In an otherwise informative story on the decreasing attractiveness of China as an “outsourcing” location for US companies, we are witness to another example of a member of the traditional media seemingly uninformed of basic facts.

Outsourcing is simply the idea that a company chooses to have another company produce a good or service rather than produce that same good or service in-house.  Outsourcing has been happening for a long time, and an example is when the Ford Motor Company decided that it would be better to use their productive capacity to produce engines, and outsource the task of making tires to a different company rather than make tires itself.  This helped increase productivity by allowing Ford to concentrate on the making of engines, and have the other company (Goodyear, Bridgestone) focus on making better tires.

Offshoring simply means sending work beyond one’s national boundaries.  Notice that not all offshoring is also outsourcing.  In fact, I have previously read (but I can’t find the source) that most offshoring is, in fact, not also outsourcing.  How can this be?  Well, what happens when General Motors decides to close down a car factory in Flint and make begin producing vehicles in Windsor, Ontario instead?  That production (and the jobs accopanying it) has been offshored (moved to a different country–Canada) but it hasn’t been outsourced, since GM is still producing the vehicles.  Here’s a little chart that will help you understand the difference.

As for the article itself, it demonstrates that rising fuel costs have increased the cost of shipping to such an extent that the potential savings for a US company of producing in China are completely eliminated.  One such company has repatriated production to the US from China (I suppose that’s called “onshoring”?)   We read:

SHANGHAI — Harry Kazazian built his business on sleeping bags that are made in China and shipped across the ocean to the United States, but he realized recently that the math doesn’t work anymore.

With fuel prices at record highs, the cost of sending a standard 40-foot container of goods has gone from $3,000 in 2000 to about $8,000 today, squeezing profit.

So this summer Kazazian, chief executive of Exxel Outdoors, a Los Angeles-based maker of recreational equipment, did something radical: He moved the manufacturing back to Haleyville, Ala.

Soaring energy costs, the falling dollar and inflation are cutting into what U.S. manufacturers call the “China price”– the 40 to 50 percent cost advantage once offered by Chinese producers.

The export model that has powered China and other Asian countries for three decades will be compromised if fuel prices continue to rise, said Stephen Jen, a managing director for Morgan Stanley.

“Globalization has gone a little bit too far. It has overshot,” Jen said. “We’re not saying Asia is going to crumble, but we are saying Asia enjoyed extraordinary conditions in the past. Now the conditions are changing very quickly because of the energy shock, and Asia is coming under pressure.”

The ripple effects have been far-reaching. The trade imbalance between the United States and China — a source of political tension for years — is beginning to right itself as Chinese exports fall and U.S. exports rise. Global trade routes are being transformed, suggesting a possible return to a less integrated world economy.

Dependency Theory and Import Substitution Industrialization (ISI)

PBS broadcast a tremendously informative series called Commanding Heights, which took a look at the the battle over the world’s political economy during the 20th century.  Below you’ll find a portion of the episode on Latin America, which has been uploaded to You Tube.  The clip below explains the concept of dependency theory–the theoretical impetus behind the establishment of the political economic institution of import-substitution-industrialization (ISI).  Unfortunately, ISI did not work very well in practice, and Moises Naim–the editor of Foreign Policy Magazine, explains why in the clip below.

P.S. “The Chicago Boys” were not Michael, Scotty, and Phil. 🙂

So What does the Price of Soybeans have to do with Smog in Buenos Aires?

When I was younger, my friend’s father would often respond to our childhood rantings with the question, “but what’s that got to do with the price of tea in China?”  I still don’t really understand what it means, but in this increasingly globalized world, there is a direct causal link bewtween the price of soybeans and smog in the Argentinian capital city of Buenos Aires.  The causal mechanism is outlined in this Bloomberg news report:

April 17 (Bloomberg) — Smoke from fires set by farmers to clear fields for grazing covered the city of Buenos Aires and shut down some highways leading into the Argentine capital.

Interior Minister Florencio Randazzo called the smoke a “disaster” and said 292 separate fires covering 70,000 hectares (173,000 acres) had been detected in the provinces of Buenos Aires and neighboring Entre Rios.

Farmers are burning more land as they create pastures for cattle that previously grazed fields now dedicated to soybeans, said Randazzo.  An 89 percent increase in soybean futures prices in the past year, part of a global explosion in food costs, has prompted Argentine farmers to increase the area sown to the oilseed by 10 percent, according to the Agriculture Secretariat.

“Those responsible are farmers who are burning their meadows to cut costs and maximize profits without considering the consequences,” said Randazzo in a news conference at the Presidential Palace. “We are conducting investigations to find those responsible.”

Notice this chart of soybean prices below and the fact that many farmers are moving into the soybean growing business and I think we could have the potential for an intermediate-term top in the soybean market.  As in many speculative markets, many would-be speculators rush in just at (or even just after) the top has been set for that particularly stock or commodity.  It’s not a surprise the the record number of sales transactions for US real estate occurred in the month (around Summer 2005) as a top was setting in.  If I had to bet, I’d wager that many of those new soybean farmers will wish they had remained cattle farmers.