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?

Obama is to Romney as Stiglitz is to Wolf

It’s hard to talk about anything other than the presidential debate tonight when blogging, especially since I’m pretty sure it’s being broadcast on twelve different channels. The debate so far (I’m 24 minutes in) has consisted entirely of talk on tax cuts and the deficit. Romney has been defensive of attacks on his plan for tax cuts given Obama’s criticism that he cannot enact these cuts without harming the middle class or increasing the federal deficit.

The issue turns into the economics of big businesses, because as Romney explains, the top 3% of businesses employ the majority of small businesses jobs. Should corporations be subsidized by the government in order to stimulate growth? As should be expected, Obama declares no while Romney nearly has a heart attack in contradicting the President’s criticism.

When listening, the debate seemed to refer to our reading for this week. How should developed countries handle government involvement? Should this be different for developing countries? Martin Wolf argues that government is too prone to be “bad government,” and developing countries are especially sensitive to this misuse (62). Opening borders offers stability, stability convinces investors to invest their capital into that stable economy. Given that the United States has faced increasing criticism abroad and faces increasing fiscal dependency upon China, convincing foreign direct investors to return their capital to the market economy of the United States is essential.

Not surprisingly, Wolf’s writing supports Romney’s policies and Stiglitz likewise echoes throughout Obama’s talk. Obama criticizes tax cuts to corporations and the arguments seems the other side of the coin; corporations are just as prone as governments to be “bad” because, as Stiglitz explains, “private incentives are often not aligned with social costs and benefits…[so] the pursuit of self-interest will not result in the well-being of society” (190).

Wolf makes a concession within his work that he understands the need for some government action, especially in areas of medicine and education. His allowance suggests that he and Stiglitz are not so radically different in terms of policy, which is not surprising considering the U.S. as a nation is considered moderate and centrist. Watching this debate, however, the fate of American politics appears a little bit darker…this thing is getting tense.