India: Trade Talks on Agriculture, Automobiles, and Finance

The democratic state of India has been a member of the World Trade Organization since January 1, 1995, a development that occurred four years after the presidential assassination in 1991 that spurred economic reform and an opening of the Indian markets. The country now understands that more free and open trade can contribute to the necessary growth of the economy by “foster[ing] investments, increase[ing] the market…and enhanc[ing] global participation.” Evidence of this Wolfian free market system can be seen within India’s participation at an April 16, 2012 meeting with Korea and China, among others. The meeting saw efforts to open markets for exports from the world’s poorest countries, where 12% of the world’s population lives on only 1% of global trade. The meeting’s participants aim to achieve this goal by eliminating non-tariff barriers such as duties and quotas by 85% before the year 2013.

            The evolving automobile industry within India represents one facet of its recent efforts towards stronger global integration. The late 20^th-century Indian automobile industry included the requirement of Public Notice No. 60, a law known as the “indigenization” condition that required a percentage of every car made within the nation to contain parts manufactured on Indian soil. The protectionist measure was revoked starting in April 2001, and recent studies indicate that “India is now turning into a major international hub for technical textiles trading and manufacturing. Multinational companies have started making their presence in India known in various technical textiles sectors such as automobiles” (export.gov/india).

            Despite India’s efforts to increase economic growth through open trade, the agricultural sector represents the last vestiges of their formerly protectionist model. The government continues to support farmers through subsidies and distort prices through high import tariffs, issues which prevent the productivity increasingly prevalent within the technological innovation in the nation. At the heart of the agricultural issue within the nation is poor infrastructure—the government has no means to deal with high unemployment, and the result has been an increasing trend towards the low-skilled agricultural sector of the economy. The agriculture problem for India remains a large concern as well, because “agriculture’s share in India’s overall GDP is gradually declining with the current share at less than 19% while nearly two-thirds of the population depends on agriculture for their livelihood” (export.gov/india). High unemployment because of poor national infrastructure, in other words, prevents the growing economy from developing within the dominant agricultural sector.

            India’s efforts to integrate with world markets depend on the creation of effective infrastructure that the nation hopes will increase once inflation decreases and drive interest rates down—the effect will be manufacturers increasingly willing to both export and build Indian industry. As one Economist article notes, some industries have succeeded in this respect: “India’s carmakers, by and large, have done well…[but] if services are to keep expanding, the country needs huge quantities of skilled labour that will not be easy to come by” (The Economist). Crippled by high unemployment and a lack of productivity, India remains unwilling to open borders within its agriculture sector despite the success of a recently integrated automobile industry.

Works Consulted

“Background Note: India.” Background Notes/Country Fact Sheets. U.S. Department of State: Diplomacy in Action. 17 April 2012. Web. 27 Nov. 2012.

U.S. Department of State-supplied basic facts on Indian demographics, including information on presidential assassination and the beginnings of global trade and investment.

“Day 1: Public Forum begins seeking answers to global trade challenges.” WTO: 2011 News Items. World Trade Organization, 19 Sept. 2011. Web. 27 Nov. 2012.

The WTO’s report on India’s actions to end Public Notice No. 60 and the indigenization condition that encouraged privatization within the automobile industry. The article describes the country’s efforts to greatly reduce import restrictions.

“Import Requirements and Documentation.” Doing Business in India: 2010 Country Commercial Guide for U.S. Companies. US Commercial Service: United States ofAmerica Department of Commerce, 29 April 2011. Web. 27 Nov. 2012.

The article describes the state of the automobile industry within India, focusing on its successful growth and the hope for a globally integrated future in the nation given the continuation of growth in the manufacturing sector of the economy.

“India: Measures Affecting the Automotive Industry.” World Trade. World Trade Organization Appellate Body, 19 Mar. 2002. Web. 27 Nov. 2012.

Information on the April 16, 2012 meeting between India and China, among others, that outlined plans to relinquish nontariff barriers by 2013.

“Leading Sectors for U.S. Export and Investment.” Doing Business in India: 2010 Country 

Commercial Guide for U.S. Companies. US Commercial Service: United States of America Department of Commerce, 29 April 2011. Web. 27 Nov. 2012.

Description within the U.S. Department of Commerce of India’s struggling agricultural sector, including price distortion, declining public investment, and high import tariffs. The article focuses on the effect of the agriculture industry on the Indian economy as a whole.

“The Economy: Express or stopping?” economist.com The Economist, 29 Sept. 2012. Web. 29 Nov. 2012.

The Economist provides information on the problems within the Indian economy that stem from poor agricultural infrastructure, high unemployment, and the high cost of labor. The article mentions the success of a few open markets, but suggests that agriculture’s severe issues will handicap the economic future of the nation as a whole.

Cuban-Virginian Relations…Hope for a More Open Future?

The United States is famous (or really, infamous) for its agricultural subsidies that support American farmers and in doing so prevent foreign farmers from entering the economy. Economists go crazy because of the economic inefficiency and American consumers are faced with higher prices for their run of the mill cantaloupe.

The Washington Post is reporting something different. In a surprising twist of events, one article documents the struggles of Henry Chiles, a nearby apple farmer in Charlottesville renowned for his produce but unable to expand his business to neighboring Cuba because of trade embargos placed on the communist country. The issue is an interesting dilemma—again, we have economic inefficiency, but in this instance the political ramifications for opening up borders with Cuba and expanding the same subsidized industry within the U.S. are too much to cash in upon the benefits of an increase in trade.

The article makes an interesting distinction within the context of a discussion about two countries and their political differences. While the United States as a whole has seen an enormous drop in exports to Cuba (the article cites a move from $711.5 million in 2008 to $363.3 million last year), Virginia as a state has grown in their exports. According to author Laura Vozzella, this increase in Virginian demand abroad is the result of good relations between companies in the state and the Cuban government. Vozzella includes the expertise of one consultant focused on trade in Cuba that explains that, “so many products are so competititve, and they’re priced by the world market anyway. It comes down to two suppliers at basically the same price – that’s where the personal contact becomes very important.” Ironically, despite the economic inefficiency of the national trade embargo, Virginia as a state has experienced economic benefit from an increase in efficiency.

Virginia’s opening of its borders with Cuba speaks to a hope for future national openness, albeit one that must begin with a better relationship between the two nations as a whole. Despite the fact that the trade embargo established by JFK during the Cold War has been reduced, borders between the two nations must be opened even further if economic efficiency is to be reached. The problem then becomes political: even though the Cold War ended more than twenty years ago, anti-Communist sentiment remains. The U.S. as a capitalist country must resist any vestiges of Communism, but ironically, the efficiency of free-market capitalism is being hindered by its own political concerns.

            The issues are thus more political than economic, and for now Virginia will wait, and continue to reap the rewards of a mutually-beneficial relationship. As the farmer Chiles explains, “we know sooner or later that Cuba will open back up again…it’s a market that’s close to us. It makes sense for us to export as close to home as we can.”

Here’s the article:

http://www.washingtonpost.com/local/va-politics/va-farmers-find-eager-trade-partner-cuba/2012/11/25/59834264-3018-11e2-ac4a-33b8b41fb531_story_1.html

Not a Surprise: More Problems in Italy

Reuters published an article this afternoon about manufacturing within Italy, and it immediately sparked my attention because I’m headed there in January for the semester. Not surprisingly considering it’s Italy, but the article talked about the heavy corruption that led to the demise of a steel plant within Taranto in southern Italy.

            As the article introduces, the closing of the plant is problematic because Italy has been plagued by a slow economy and most afflicted by incredibly high unemployment. The government had tried to spur economic activity by taking over the company that ran the plant, but the government in Italy is notoriously corrupt—hence the (alleged) problems with bribery and scandal at the highest levels of the company.

            The article doesn’t address the following issue, but I found it relevant given our IPE discussions. Italy has long been a developed country, and yet it has fallen behind in comparison to the US, China, and even other European countries such as Germany. The country, as the article documents, is dependent upon the manufacturing sector of its economy and represents a focus on a less-advanced industry in comparison to other developed countries.

            Furthermore, the article mentions the “shrinking number of major manufacturing employers in the poor and underdeveloped south.” The issue reminds me of China, where wealth has not been effectively distributed to the more underdeveloped villages in the nation in comparison to the wealthy cities. And yet, Italy does not have the same excuse of massive size in comparison to China—much less infrastructure is needed.

            The bottom line is that the government’s early actions to bail out one manufacturing plant seem to be an ineffective bandaid on a bevy of larger problems. Corruption, ineffective infrastructure, and inequality are plaguing the nation and don’t appear to be disappearing anytime soon. It’ll certainly be an interesting semester.

Here's the link to the article: http://www.reuters.com/article/2012/11/26/us-italy-ilva-idUSBRE8AP0Z520121126

Buying a plane ticket to Greece? Not quite yet.

Reuters posted an article tonight that reports that Greece has finally reached an agreement with the IMF in order to relieve some of its debt and hopefully spur its economy back into fruition. The article reminds me of a couple issues that we have discussed recently in class, not necessarily specific to Greece but relevant in light of their recent struggles.

The first of these is that we have talked in class about how the IMF is often painted as the ‘bad guy’ even after bailing out countries because of the austerity measures they force upon any country needing their assistance. And yet, the article seemed supportive of the organization, lauding their ability to effectively negotiate a deal with Greece that would both spark its economy and also keep other countries in the EU from facing financial difficulty after funding the efforts in Greece. Germany, for obvious reasons, receives special attention and goes so far as to suggest that “a debt cut was legally impossible, not just for Germany but for other euro zone countries, if it was linked to a new guarantee of loans.” Important to note is that news of the specifics of the debt relief wasn’t available, and so German resistance is to one option among a multiple of potentially viable debt relief.

Another element of the debt relief related to the portrayal of the IMF was the implicit debate over whether Greece has the necessary institutions in place in order to effectively use their debt relief in order to help their economy function. Just as with developing countries, foreign aid cannot be helpful without programs established within the country that spread money throughout the nation.

And given this insecurity, will foreign investors want to place their money in a country so dysfunctional even forced IMF sanctions may not be enough? Especially considering much of Greece’s economy is built upon tourism, its financial solvency depends on a positive impression of the country by foreigners around the globe.

These questions are not to discredit Greece or the IMF, but rather to suggest that the article’s celebration of new European success (the article mentions that “the euro strengthened against the dollar after news of a deal was reported by Reuters) should be taken with a grain of salt. Financial solvency for Greece and the EU might be on the way, but it’s not there quite yet.

Not Your Average Energy Island

Returning to my earlier focus on the news concerning U.S. oil production, I wondered what the international opinions of the development would be. From Saudi Arabia they are probably (and understandably) pessimistic—the US would be too if our largest resource might be rendered obsolete.

I found articles on the same subject from the UK (BBC News) and South Sudan (The New Nation), however, and they were surprisingly unconvinced that the US would succeed in fulfilling its announcement. Both articles recognized the danger of the new technology in terms of environmental concerns, while the New Nation article also highlighted the IEA’s warning that the technology “would not insulate the US from developments in international markets and remove its vulnerability to price spikes.” It discourages the popularization of the US as an “energy island,” and reinforced the lack of feasibility in creating a country independent of foreign influence.

The New Nation article made one more insight that I found somewhat disarming. From an international perspective, the author wonders whether the US will cease to patrol the world’s sea lanes it depends upon to transfer oil, and whether China will take over this role. Ironically, China is increasing its dependency on foreign oil while the US attempts to reduce it, further suggesting that China’s imminent dominance might not be the threat it appears.

New Nation article link: http://thenewnationbd.com/newsdetails.aspx?newsid=57255

BBC News article link: http://www.bbc.co.uk/news/business-20304848

Self-Sufficiency and U.S. Oil

Thomas Dietz’s article on the tragedy of the commons outlines a number of concerns that span not only IPE but also sociology, biology, etc. The depletion of natural resources common to the world is a legitimate concern; Dietz is quite convincing in that respect. However he focuses entirely on those resources which are common to the globe. This is the premise of his argument so that makes sense, but I found it hard to read an article about the political ramifications of environmental concerns without thinking about the world’s (specifically U.S.’s) dependency on oil.

In terms of foreign relations and international economies, oil seems to be second to no other concern. Perhaps Dietz’s common focus can be attributed to the fact that the article was written in 2003, because the Washington Post ran an article today in which foreign relations in the Middle East and oil production were at the forefront of the news. The article in the Post is actually much more optimistic than I expected when scanning over the words “U.S. oil” and “Saudi Arabia.”

The article cites new technology in extraction methods as reasoning behind why the U.S. will in the next decade become nearly self-reliant in oil production. The U.S. dependency on foreign oil based in the Middle East has dictated much of foreign policy in the past few decades, and the newfound self-sufficiency will help bolster national security.

The most disturbing piece of the article in my opinion was a small blurb that appeared somewhat out of context at the end of the essay. The author mentions that, “in emerging nations, government subsidies will continue to spur fossil fuels use, even as lower-carbon energy sources become more popular.”

Although the U.S. may strengthen its Middle Eastern relations by subsidizing its own eco-friendly energy sources, the move will also widen the gap between developing and developed countries. The article doesn’t go into enough detail to predict whether this will spawn new political energy turmoil in the future, but it seems unavoidable. By improving relations in one area of the world, the U.S. is worsening them in another.

Link to the Post article: http://www.washingtonpost.com/business/us-oil-output-to-overtake-saudi-arabias-by-2020-iea-says/2012/11/12/4b89c9ee-2cf3-11e2-b631-2aad9d9c73ac_story_1.html

The U.S. Election and IPE

The election is over, but coverage continues. The race between President Obama and Romney was exciting, but it hampered any discussion of IPE within the news as the candidates focused on social issues in the last few days despite largely economy-driven campaigns. In what may seem as if a bit of a stretch, I wondered how this Reuters article about the post-election fiscal cliff relates to our recent Krugman reading.

In criticizing the lack of banking regulation during the early 2000s, Krugman says that, “the Bush administration used federal power, including obscure powers of the Office of the Comptroller of the Currency, to block state-level efforts to impose some oversight on subprime lending” (164). Krugman advocates higher regulation rather than increased innovation in 2004, rejecting Alan Greenspan’s proclamation that the financial sector has “become more resilient.”

Given the danger of the fiscal cliff, would Krugman likewise suggest that we must continue to regulate banks and punish Wall Street for their role in the financial crisis? It seems as though he would be less willing to dismiss the need for financial innovation if he saw the trillion-dollar debt and $600-million dollar tax increases that the article addresses.

The fiscal cliff, as the article mentions, will also be affected by a vote in Greece’s parliament to approve an austerity package with international aid. Upon further digging through Reuters, the austerity package was in fact approved albeit by a narrow margin, but doubt for Greece’s future in the EU remains.

Doubt also exists in terms of Obama’s future and the market. After the election results emerged, the DOW dropped 312.95 points (as documented in the article). Despite Obama’s reelection, the threat of the fiscal cliff and the solvency of the American economy continue to haunt the financial sector. Is the regulation that Krugman lauds in 2004 still essential?

Sorry for the political underpinnings of this blog post, it’s the effect of the omnipresent election. There are vestiges of IPE within it, even if they are sometimes hard to find.

What Do Jimmy Stewart and Bruce Willis Have in Common?

If you’ve seen the most recent Die Hard, you’ll know the premise of the movie is for the most part violence as entertainment for its audience. When Bruce Willis pauses from destroying a helicopter with a runaway car, however, he learns from younger compatriot Justin Long about the danger of a fire-sale. In the context of the movie the term refers to the American perception that the government has lost all control of technology and telecommunications, and are facing imminent danger. The real danger, as Long insinuates, comes from the ensuing panic by the American people (which then leads to society’s downfall, etc.).

Although the concept of a fire-sale appears new to Bruce, it contains vestiges of the economic distress experienced by Jimmie Stewart’s character in “It’s a Wonderful Life.” Both storylines revolve around the problem of snowballing panic in society, a subject that Paul Krugman addresses in his discussion of bank runs. As Krugman explains, “bank runs became self-fulfilling prophecies: a bank might collapse, not because there was a rumor about its investments having gone bad, but simply because there was a rumor that it was about to suffer from a run” (154). Perception, in other words, largely governs the outcome of the U.S. banking sector.

Perhaps this argument appears outdated, for the threat of “Potterville” is supposedly destroyed with the policies following the Great Depression on bank regulation. And yet the most recent crisis could have used more regulation. The housing crisis in 2007 can largely be attributed to the use of subprime loans. Their abuse has been attributed to a number of factors, from disengaged, corrupt CEOs to dishonest ratings on the value of homes. While in this instance the frantic American public poured investment into the economy rather than taking it out of banks as in the Great Depression, this frenzied behavior nevertheless led to a subsequent bust as homeowners began to default on their loans. Although we may not have Potterville, we now have instead neighborhoods undeveloped past their foundations. 

The History of Panics: A Critical Summary of Michael Lewis's NYT Bestseller

            Michael Lewis’s Panic!: The Story of  Modern Financial Insanity (2009) misleads its readers to an extent: rather than consisting of journalism entirely by the editor himself, the anthology contains a series of individual articles by a variety of authors spanning from July 27, 1987 to January 15, 2008. Lewis pens a few of these, but his most important contribution is the arrangement of the articles from the 1987, 1997, and 2000 financial crises as preparation for the most recent economic downturn. Marked by the proliferation of subprime and adjustable rate mortgages in the housing market, the articles spanning the past three decades of American economics illustrate the circumstances that allowed for these economic structures. Each of these market failures contains within it a healthy economy experiencing the boom-and-bust structure of American free-market capitalism, but Lewis’s choice of articles also identifies the dangerous bubbles that emerge within these markets because of three interdependent factors. Speculation, technology and the dishonesty of power-hungry leaders all destroy investor confidence, and whether legitimate concerns or fallacies, rumors of their demise begin a pattern of panicked trading that inevitably leads to financial instability.

Lewis initially points to the danger of speculation in his coverage of the 1987 financial crash that “marked the beginning of something else too—a collapse brought on not by real or even perceived economic problems but the new complexity of financial markets” (4). On Black Monday in 1987, panic ensued after stock indexes diverged in price from their futures index. The problem, as Lester C. Thurow explains in one article, rests with the rise in popularity of portfolio insurance, a technique that automatically buys and sells stocks based upon movements in the market that trigger activity. Not surprisingly, many of the articles from this time period discuss the role of technology, as these automatic triggers within program trading software allow for more efficient trade but reduce the security of human judgment. Lewis acknowledges his own reckless behavior during early pre-journalism days at former Wall Street behemoth Salomon Brothers when he admits that, “it was striking how little control we had of events, particularly in view of how assiduously we cultivated the appearance of being in charge” (38).  Technology-led institutional failure does not limit itself to 1987, either. As later documentation supports, the early 2000’s saw the rise of a technology bubble because of the newfound Internet boom. Investors poured money into new technology such as Healtheon, a website that appeared as a foolproof new industry with its “Chart of Many Bubbles” (179). In effect, the 1980’s saw a trend of increasing individualism that continues into the early 2000’s: from the role of speculators to the small investors in 1987, Lewis outlines the extent to which the markets can be managed without the role of enormous Wall Street firms.

     A natural development that emerges from this argument concerns the role of individuals within these big Wall Street firms and their power to single-handedly harm the U.S. economy. In the 1990’s, for instance, John Meriwether’s Long Term Capital Management had to be bailed out by the U.S. government only weeks after the Dow’s 512-point drop. Further exacerbating the crisis is the panic ensuing in Asia following the implosion of the Thai baht; speculators shorted the currency and hastened the destruction of the markets in Thailand. And while Alan Greenspan does not avoid judgment, Lewis’ focus on Meriwether and others such as Jim Clark (see Healtheon, Netscape) and John Gutfeund (Salomon Brothers) implies a stronger critique of those he believes intentionally allowed for harm to come to the economy in order to further their own individual gains. Crony capitalism, briefly outlined in one article through a study of the Mexican tequila crisis, exists even in the democratic U.S. Lewis’ condemnation of some businessmen does not apply universally, as he documents the brilliance of George Soros and his commanding authority following the Russian central bank crisis. By Lewis’s design, what appears most alarming is the level to which a single individual can control the outcome of the country’s financial markets, a dangerous development that the country experiences again and again.

            Elements of the stock market crash in 1987, the 1997 implosion by Long-Term Capital that destroyed international capital flows, and the dot-com boom in 2000 combine to predict problems that contributed to the current economic stagnation. Jim Cramer’s brief endorsement of $30 shares of James Cayne’s Bear Stearns Cos. on theStreet.com, for instance, hints at the unpredictability of Wall Street firms present since the rise of Salomon Brothers in the 1980s while also illustrating the danger of the (formerly new) Internet technology (343). Furthermore, a widening wealth disparity demonstrates vestiges of crony capitalism when John Paulson bets against the housing market and makes $15 billion in 2007 while thousands of Americans lose their homes and livelihoods. In essence, Lewis provides a historical background for each of the elements of the current crisis, ultimately compiling evidence that illustrates the danger of a boom-and-bust economy destined for crisis in the late 2000s. While the current financial situation may not mimic each of the previous three crises, articles handpicked by Lewis demonstrate the extent to which the economic disaster today contains the vestiges of past problems.

Would YOU like to become a Hungarian citizen?

As talks continue over foreign aid in the Eurozone, Hungary has taken control of its foreign aid by offering permanent residency and citizenship to those outsiders who invest at least 250,000 euros in purchasing Hungarian government bonds.

The ploy to manufacture foreign aid and investment hints at our class discussion the other day in response to Professor Anderson’s talk on trade with culturally similar populations in different countries. This isn’t implicit in the article, but I have to wonder, are the Hungarian economists and lawmakers behind this legislation hoping that once Hungarian citizens (you don’t have to actually live in Hungary) will continue to contribute past their initial investment if they are demographically and psychologically linked to the country?

The proposal for continuing aid because of sociological ties might have merit, but it seems to me like a stretch. Hungary, like much of the Eurozone, is strapped for aid and investment. The Reuters article mentions that “Budapest has asked for a financing backstop from the EU and the International Monetary Fund, but talks are dragging on.” Hungary has taken matters into its own hands given its projected lack of assistance. Note the inclusion of the IMF: implicit in the discussion is a lack of faith in the ability of the IMF to help the country. Given that the U.S. dominates the IMF, does the Hungarian legislation suggest a denunciation of the ability of the U.S. to distribute aid?

The article continues on and describes the focus on “trying to attract major new investors from Asia.” Because “the move…is designed to attract new investors, especially from China,” the implication is that Hungary is appealing to a new order of world power in which the United States is not solely dominant.

And yet perhaps the Chinese are simply more willing to invest in real estate and retail markets, as the article suggests, than their American counterparts. If so, it makes sense to appeal to the Asian market rather than the United States, regardless of who appears as more capable of distributing large amounts of foreign aid. The article hasn’t dominated the headlines, but the discussion of foreign aid in class can through the article be linked to a larger questioning of the changing international roles for the world’s superpower(s).  

Hurricane Sandy and IPE Development

Given that even the overwhelming election coverage in the U.S. has subsided in the past few days due to Hurricane Sandy, it seems unnatural to post about international politics without relating the most recent and dominating news of late. And despite being somewhat tenuous, our discussion of international development within IPE relates to the recent crisis.

I was initially struck by this Washington Post article that cited politicians’ praise of President Obama in the wake of the hurricane. Even fervent Republican and Obama-hater Chris Christie of New Jersey has been unusually supportive of the President’s efforts in disaster relief, with the comparison made by the article (and undoubtedly countless others) the critique that President Bush faced following the FEMA disaster with Hurricane Katrina.

The article continues on in a political scope by talking about how the storm will affect election politics, but I found my mind wandering back to our reading for Tuesday about the developing world and international influence. For instance, Stiglitz is critical of economic globalization as unmindful of the national infrastructure needed to shape development. What if Hurricane Sandy had hit outside of Bangalore, India, instead of the American Northeast? Perhaps this is unrealistic in terms of weather patterns, but Stiglitz’s Indian example highlights the dangerous juxtaposition of relatively economically advanced, developed cities surrounded by rural areas unaffected by their country’s economic progression.

Stiglitz continues on to insist that “there have been marked differences in performance, that the most successful countries have been those in Asia, and that in most of the Asian countries, government played a very active role” (29). The allusion to Asia brings to mind most clearly one country: China. In the battle of China versus India, Stiglitz suggests that the more active Chinese government has spurred its nation to better development than the democratic India. This is not to say that Stiglitz advocates communism, and his point about necessary infrastructure holds true. And yet, China remains a mystery—its dominance over India is not as clearcut as Stiglitz implies. Yes, the Asian country currently controls a large portion of the world superpower’s trillion-dollar debt, but its population-fueled economy will face structural complications as that population ages. India might in fact pose a more vicious threat to the U.S.’s power monopoly long term.

The discussion is certainly a stretch from one article about the domestic political ramifications of an American hurricane, but I think it has merit in the context of our discussion of development within the IPE. Both India and China would suffer responding to such a natural disaster, but the extent to which their developing infrastructure would hinder national reactions is not quite as clearcut as Stiglitz might suggest.

Finally a word about the IMF

Finally, a word in the news about the IMF (even if it does arrive in a political context). Paul Krugman describes the International Monetary Fund as that scolding parent that’s necessary but never popular, with his reasoning being the sanctions placed on countries in order to recover. In an Opinion article by Washington Post journalist Fareed Zakaria, the IMF finally gets a little credit. Zakaria’s article is the most optimistic about the current state of the US economy I think I’ve seen since the beginning of the financial crisis, and probably much before that (although I was 16 so I didn’t really know a thing). As Zakaria reports, the IMF projects that the US will respond well to the actions of the government in the economic sector and that whoever the next president is, he will preside over a period of relative economic growth.

There are a couple of points here that I want to discuss, but first of all, Zakaria alludes to the issue of lag time that will give credit to our next president for his economic policy, even though it will in fact reflect the strategies put into place during the last four years. I was reminded of Krugman’s discussion of Alan Greenspan, and how he took credit for his predecessor’s hardline economic policies before leaving his successor in future financial ruin. Because of the issue of lag time, it’s not always obvious what policies have been effective in helping restore growth to the economy. Perhaps to economists this distinction isn’t difficult, but economists aren’t the only ones heading to the voting polls in November (this is where the political element of economics becomes frustrating).

Secondly, I disagreed with Zakaria in one respect. He makes the point initially to say that the IMF predicts that international growth is on a downward trend in Europe and China, whereas the United States will see an increase in growth. While Zakaria appears to use this domestic success as evidence of the US’s continued superiority, the interdependency of the globalized world suggests otherwise. China provides a prime example. The Chinese hold an inordinate amount of US debt, and the futures of the Asian country is therefore intertwined with the US. If it were to experience a Thailand-style financial crisis, the US could become its Malaysia, and all of the sudden the 3 percent in growth that Zakaria acknowledges becomes a short term caveat to a long-term downward spiral.

All this is to say that, as much as his optimism is encouraging, it feels as though Zakaria is overly supportive of the IMF’s predictions in the US. The “fiscal cliff” in Europe, not to mention the changing face of China in the wake of its aging population suggests that, yes, the US might retain its dominance, but only until the effects of globalization dampen its level of expected domestic growth.

Zakaria’s article: http://www.washingtonpost.com/opinions/fareed-zakaria-the-us-economy-is-recovering-well/2012/10/24/9c34df9e-1df0-11e2-ba31-3083ca97c314_story.html?hpid=z2

A New Age of Development in Greece

A Reuters article today discussed the potential for monopoly in the Grecian aeronautical industry following the merger of two large airlines, Olympic Air and Aegean Airlines. If my description of the transaction ended there, perhaps the merger sounds like a dangerous economic move that should be resisted by the government. And to an extent, it was; the government in Greece has made several attempts in the past few years to curb the newly monopolistic Aegean Air from dominating the industry. And while some of these sanctions were passed, the merger eventually went through. Why? Most importantly, Greece needs the business. Greece’s well-documented debt has required the bailout of international institutions in order to stave off insolvency, a move that many questioned (especially those in Germany who have worked hard to create a thriving economy in the wake of post-WWII sanctions of its own).  Because of this desperation, because Greece needs all the help it can get, monopolies are, for the moment, an acceptable form of industry because they foster at least some economic activity.

Perhaps I’m stretching the comparison, but I was annoyed a little by Joseph Stiglitz’s commentary on the need for new debt regulations between developing and developed nations. He insists that “money should flow from rich countries to poor, but partly because debt repayments have become so large in some years the flow of funds has been moving in the opposite direction” (212). This clearcut assumption is certainly true in some instances, but the episode with Grecian monopolies provides a necessary caveat that international economic relations are not nearly as obvious as Stiglitz would like to portray. Suggesting that poor developing countries are “often” unnecessarily blamed for their economic instability seems to me too general to apply to even most cases. For instance, another Reuters article from today talks about Poland’s recent economic successes as they try to garner support for a bid to join the EU. The article references political turmoil in Venezuela as reason for slow growth, while in the Middle East the Arab Spring developments last year meant a decrease in investments coming into the country. Stiglitz attributes developing countries’ poverty to their constant attempt to pay off their debts, and yet this purely economic solution ignores the political circumstances that shape economic policy.

First article: http://www.reuters.com/article/2012/10/22/us-olympic-aegean-idUSBRE89L11P20121022

Second article:http://www.reuters.com/article/2012/10/23/worldbank-business-idUSL1E8LMIFS20121023

Close but No Cigar: Is the Fed a Legitimate Target?

Can one bomb bring down the U.S. financial system? Fox News today published a report on a bomb threat by a Bangladeshi man with alleged ties to Al Qaeda. The man, Quazi Mohammad Rezwanul Ahsan Nafis, claimed that he “wanted to “destroy America” and determined that the best way to achieve that goal was to target the economy.” He was also documented as targeting the New York Stock Exchange.

Clearly Nafis has not read Martin Wolf, Joseph Stiglitz, or Paul Krugman. If he had, he would know that it would take more than one bomb and the destruction of one building to bring down the American financial system. The potential terrorist attack was a danger to innocent bystanders and those individuals within the building, but, as Krugman explains, it is not the destruction of physical structures that endanger U.S. economics. Rather, Krugman references the tequila crisis in Mexico and the financial flop in Asia as precursors to a potential depression in the United States. The danger comes from recessions that undo years of economic progress because “the conventional policy responses don’t seem to have any effect.” What the U.S. economy needs is an FBI-level of efficiency in weeding out the financial abuse more damaging long term than anything Nafis could effect.

The point here is not to discount the danger of the attack or the brilliance of law officials in protecting the American people. Rather, I wish that we had similar institutions in place to save the American economy. Krugman writes: “reform of the weaknesses that made this crisis possible is essential, but…first we need to deal with the clear and present danger” (184). The way to do this, he insists, is to “get credit flowing again and prop up spending” (184). Instead of being a physical threat to the economy, Nafis’ actions are instead a physical manifestation of the havoc wreaked on the world economy during this period of depression economics.

Here's the link to the article: http://www.foxnews.com/us/2012/10/17/feds-arrest-man-who-tried-to-blow-up-federal-reserve-bank-in-nyc-sources-say/

Scotland's Independent Potential

As the Washington Post reports in this article, Great Britain and Scotland have agreed to terms that will give Scotland independence sought after by the Scottish National Party. As the article reports, Scotland will hold newfound freedom in economic and political ventures both nationally and internationally, including “withdrawing from NATO and…the freedom to vote separately from – and perhaps counter to – Britain in world bodies such as the United Nations and the International Monetary Fund.”

The move will alter world economic policies with a new player, while also potentially decreasing the pull of a former European superpower in Great Britain. As the article mentions, “a move toward independence would also lock Edinburgh and London in fierce negotiations over the cash cow that is North Sea oil – control of which is seen as essential to National Party dreams of Scotland emerging as a wealthy and progressive nation.”

I was surprised initially that I hadn’t heard anything of this news before, given the U.S.’s ties to Great Britain and its potentially diminished power. The American elections are probably to blame for this, as the fight between Romney and Obama over the economy and Obamacare continues to dominate headlines. And yet with the aforementioned line about Scotland’s potentially wealthy emergence as an oil “cash cow,” it seemed as though the news is more related to other issues than previously expected.

Will Scotland emerge as a successful nation offering new competition and criticism to the Eurozone, United Nation, and IMF policies? Or will it rather become the next Ireland, Greece, or Spain, devoid of effective governing and dependent on its more wealthy neighbors? In a sense, will Scotland skip past its period as a developing nation and, because of its history and ties to Great Britain, immediately fall into the category of developed nation? Certainly it has the history, but whether it has the established institutions necessary for governing remains to be seen. For instance, the country is still debating over the voting age, with some suggesting that given the focus on a new, young Scotland, citizens as young as 16 should be allowed to vote.

Most important, however, is the economic question. In light of the trouble faced by the Euro, will Scotland’s newfound independence threaten the currency? As the article points out, “experts say the current double-dip recession may actually spook Scots into voting to stay within [Great Britain].” Perhaps the new independent nation will spur economic success given its oil resources, but the potential for another unsteady developing nation also exists, and adds further stress to a Eurozone already tasked with supporting a few of its self-destructive members.

Is the U.S. headed for a tequila crisis?

Reuters published an article today concerning J.P. Morgan and financial-crisis lawsuits, alluding to our reading this week out of Paul Krugman’s book on financial crises. Krugman criticizes the international community for not learning from their mistakes, specifically for not avoiding the Asian financial crisis by looking back at the warning signs seen within the tequila crisis in Mexico and Latin American financial distress. The Reuters article alarmed me to an extent because of this logic. The authors write that major U.S. bank Wells Fargo has been “misleading the government in a “longstanding and reckless” pattern of certifying the quality of questionable home loans.”

In addition to the alleged mismanagement, the authors include that “instead of quickly settling the charges, as has happened in most financial-crisis cases, Wells Fargo is contesting the allegations.” I was immediately reminded of the tequila crisis in Mexico, where the government, with no good economic standing to rest upon, was incredibly cooperative and willing to own up to its mistakes, swallow its pride, and follow U.S. direction in avoiding national insolvency. Although Krugman is quick to point out that Mexico was luckier than anything else in their economic recovery, without the government’s cooperation they certainly would not have recovered. Is Wells Fargo crippling itself and by extension the U.S. in remaining so uncooperative?

The mitigating factor in this instance is the history of long-standing democracy and good governance in the United States. Yes, big banks are now less willing to continue to pay for their mistakes in relation to the financial crisis four years ago, but the American government continues to hold these Wall Street companies responsible for their mistakes in order to help pay for the recession they caused. This is no Mexican tequila crisis—a responsible government exists that, void of corruption, knows how to hold responsible parties liable.

In the interest of playing devil’s advocate, there’s also the question that banks are posing as to whether the American government truly is acting in the best interest of the common good. JPMorgan, another bank that is fighting the charges laid against it recently, has received criticism from some for its relationship with the government in conjunction with alleged tax fraud. The authors of the article point out that “for years, government enforcers have been criticized for not being forceful enough in pursuing marquee Wall Street banks and bankers for recklessly churning out loans, then spreading around the risk by repackaging and selling securities backed by those loans.”

Is the government corrupt in supporting big business with the probability of a return in capital or do the new investigations suggest a successful embodiment of the American system of checks and balances? It’s my hope that the latter is true, but possibly just because the pessimistic Nihilism of the former view is too discouraging to consider. What do you think?