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.

 

Global Debt Crisis and Relief

The issue of the global debt crisis–and particularly the onerous debt levels of developing world (“Southern”) countries–was a topic that we covered in POLI 1100 today. It will allow me to combine two class topics–issues pertaining development and underdevelopment, and interest groups (NGOs)–into one blog post. The interest group, Global Issues, is dedicated to analyzing “social, political, economic, and environmental issues that affect us all” and has a section on debt relief for the developing world. Here are some facts and figures related to the scale of the debt crisis in the developing world:

Consider the following:

  • In 1970, the world’s poorest countries (roughly 60 countries classified as low-income by the World Bank), owed $25 billion in debt.
  • By 2002, this was $523 billion
  • For Africa,
    • In 1970, it was just under $11 billion
    • By 2002, that was over half, to $295 billion
  • Debts owed to the multilateral institutions such as the IMF and World Bank is currently around $153 billion
  • For the poorest countries debts to multilateral institutions is around $70 billion.

$550 billion has been paid in both principal and interest over the last three decades, on $540bn of loans, and yet there is still a $523 billion dollar debt burden.

Here are some remarks by Professor Susan George on how to tackle the debt crisis. Money quote:

…there is no level of human suffering, which in and of itself, is going to change policy. The only way policy changes is because people demand it, and in this case, it has to be the people of the North, because the people of the South have very little political clout.

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.

How Your Mortgage Payment Funds Norwegian Town’s Workforce

On the first day of class, I made the argument that in order for me to fulfill my pedagogical goals this semester, I need your help. I needed you to understand that what you choose to do (or not to do) in the classroom (and on your blog) will affect not only the grade you receive and how much you learn in this course, but will also affect the learning and grades of your peers sitting beside you in class. We live in societies, in which we all–to a greater or lesser extent–have an effect on those with whom we come into contact, with whom we share work places, roads, stadia, and class rooms. We all understand that if your neighbor’s house is unkempt and the lawn is overgrown, this will have a detrimental effect on your own property values.

Since we’re talking about property and the effects of social interaction, how is it that the town of Narvik, Norway (on the Arctic Circle) has had to miss a payroll for its municipal workers as the result of residents of Stockton (CA), Miami (FL), Flint(MI), and Worcester (MA), no longer being able to pay their residential mortgages? This New York Times article helps explain, and so does Jon Stewart’s guest, CNN Personal Finance editor Gerri Willis:

— At this time of year, the sun does not rise at all this far north of the Arctic Circle. But Karen Margrethe Kuvaas says she has not been able to sleep well for days.

What is keeping her awake are the far-reaching ripple effects of the troubled housing market in sunny Florida, California and other parts of the United States.

Ms. Kuvaas is the mayor of Narvik, a remote seaport where the season’s perpetual gloom deepened even further in recent days after news that the town — along with three other Norwegian municipalities — had lost about $64 million, and potentially much more, in complex securities investments that went sour.

”I think about it every minute,” Ms. Kuvaas, 60, said in an interview, her manner polite but harried. ”Because of this, we can’t focus on things that matter, like schools or care for the elderly.”

Norway’s unlucky towns are the latest victims — and perhaps the least likely ones so far — of the credit crisis that began last summer in the American subprime mortgage market and has spread to the farthest reaches of the world, causing untold losses and sowing fears about the global economy.

Where all the bad debt ended up remains something of a mystery, but to those hit by the collateral damage, it hardly matters.

Tiny specks on the map, these Norwegian towns are links in a chain of misery that stretches from insolvent homeowners in California to the state treasury of Maine, and from regional banks in Germany to the mightiest names on Wall Street. Citigroup, among the hardest hit, created the investments bought by the towns through a Norwegian broker…

…But Narvik has $34.5 million in a second Citigroup-devised investment, known as a collateralized debt obligation, which has also lost value as a result of the broader market turmoil. The town stands to lose at least some of that money, too.

Those investments represent a quarter of Narvik’s annual budget of $163 million, and covering the losses would necessitate taking out a long-term loan, which the town could only pay off by cutting back on services.

”You can calculate this in terms of places for schoolchildren or help for the elderly,” said Mr. Hermansen, a soft-spoken man who sat in his office in near-darkness, the lights switched off…

…In 2004, Narvik and a number of other towns took out a large loan, using future energy revenue as collateral. They invested the money, through Terra Securities, in the Citigroup debt vehicle, which offered a better return than traditional investments. In June 2007, as the subprime problems were brewing, Narvik shifted some money from that investment into an even more complex one, again through Terra Securities.

Do read the whole thing as it is interesting. Note, however, the really key part of the whole story in bold in the paragraph above and use the experience of Narvik to learn a very important lesson about investing. There is a clear immutable relationship in the investing world: the higher the expected return, the higher the level of risk associated with that return. If you expect to receive outsized returns, be prepared to accept outsized risk. Period. There may have been fraud perpetrated here (and it’s difficult to know without reading the signed agreements), but caveat emptor would have been valid advice in this situation.

What is the general link between subprime mortgages and other collateralized debt obligations (CDOs)–such as auto loans, student loans, and credit card debt–and the international political economy. Is there a general systemic risk to the global economy from new financial instruments, which Warren Buffett has referred to as “financial weapons of mass destruction?” Here is a panel at the 2008 World Economic Forum in Davos, which will shed more light on the financial industry.

Poor Countries, Agriculture, and IMF Policies

There has been a rapid increase in food prices over the last couple of years, seen most dramatically in the recent 30% one-day rise in the price of rice worldwide.  This is putting tremendous pressure on the poor and is leading to instability in countries around the world.  There have been violent demonstrations–and equally violent government responses–to food rioting in Egypt and Haiti in the last couple of weeks.  They may be but a harbinger of the economic and political instability to come.  Here is a report from the BBC, in which an expert argues that IMF policies have contributed to the rise in food prices:

“Poor countries need to invest heavily in agriculture to feed their people.  There’s been a dearth of investment in agriculture in poor countries, mainly because of IMF and World Bank policies…”

Is NAFTA good or bad for US Workers and the US Economy?

With Democratic Presidential candidates Hillary Clinton and Barack Obama tussling over the relative  merits of the North American Free Trade Agreement, this Boston Globe column, in which Canadian Trade Minister David Emerson is quoted, is useful as quick background reading.  NAFTA, signed by former President Bill Clinton and ratified by the US Congress in teh mid-1990s, sought to bring down trade barriers amongst the Mexican, Canadian, and United States’ economies.  A common lament amongst those in rust-belt states and along the Mexican border is that the agreement has sent millions of jobs formerly held by Americans to Canada and Mexico.  Emerson cautions us to be wary of this claim, parsing the logic:

I strongly believe that the growth in protectionist sentiment is somewhat misplaced and irrational. It’s people who are concerned about the loss of jobs over the last 10 years which largely — analytically — has been shown to be driven by technology,” he told reporters.

“To the degree that it’s the result of liberalized trade, it’s more to do with the Asian dynamos like China and India and Vietnam, and countries like that. It’s not NAFTA that is hurting the North American worker. It’s not,” Emerson said.

“In fact, NAFTA is probably the friend of the North American worker because it enables us to achieve a level of efficiency and competitiveness that helps us take on the real competitive threats.”

Emerson said he had urged his counterparts in Canada’s 10 provinces to stress this message in dealings with the governors of U.S. states and members of the U.S. Congress.

“When you recognize that 39 out of 50 states have Canada as their number one export market, you start to realize governors and congressmen at the local level have an awful lot at stake, and we need to make sure they understand that,” Emerson said.

“Premiers and provincial ministers are very good, they have lots of contacts. The federal government cannot do it all.”

Prime Minister Stephen Harper has expressed confidence that, despite the rhetoric, the North American Free Trade Agreement will not be reopened. Emerson was not quite as confident.

“We’ve all been hearing the comments of presidential candidates, of congressmen. Protectionist forces have been gathering steam for some years and they’re showing no signs of abating,” he said.