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Old Tuesday, April 03, 2012
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Return of 2007-08?

Dr Ashfaque H Khan
Tuesday, April 03, 2012

The year 2007-08 was one of the most difficult years for world economy with fuel prices soaring to a historical high ($147 per barrel in July 2008) and food prices escalating to the highest levels in over 20 years, thereby creating serious hardships for the poor in developing countries.

The crisis of 2007-08 brought multi-dimensional problems for millions of poor including those in Pakistan. More than 26 million people may have lost jobs by the end of 2010, with millions who took decades to work their way out of poverty slipping back in a matter of months. In Pakistan, the crisis of 2007-08 suspended the growth momentum, led to the emergence of higher inflation, worsened both the fiscal and external account deficits, and pushed millions below the poverty line. The government has yet to release the basis data for poverty measurement, but it is justifiable to speculate that millions may have risen substantially.

Food and fuel prices are on the rise again, an issue of serious concern across much of the developing countries, including Pakistan, and a phenomenon very much reminiscent of the 2007-08 period. This ominous development is threatening to slow down economic growth, poverty reduction, and the achievements of the Millennium Development Goals (MDGs) in developing countries.

What is driving the recent surge in oil prices? In the aftermath of the 2008 global economic crisis, the price of oil dropped to $41 per barrel in early 2009, but then, fuelled by the sustaining dynamism of emerging economies, particularly Asia, the oil price rose to $122 per barrel in early 2011. A number of supply shocks, particularly resulting from geopolitical instability in the Middle East and North Africa have also contributed to the recent rise in oil prices.

High oil prices have emerged as the latest source of worry for the world economy. HSBC termed oil as the “new Greece”. The standoff between the West and Iran over its nuclear programme is raising further concerns about oil prices. The sanctions imposed by the West will be effective from July 1, 2012. If Iran retaliates and attempts to close the Strait of Hormuz (one-fifth of global supplies or 17m bpd of oil supplies passes through the Strait), the oil prices could reach as high as $150 per barrel with all its consequences reminiscent of the 2007-08 crisis.

The higher price of fuel is bound to increase food prices on several counts. It will increase transportation cost, push up the prices of agricultural inputs, which in turn would increase the price of food items. Increase in oil prices would indirectly lead to greater pressure on food prices through biofuels. It has generally been argued that oil prices, if rebounding to $100 or more, would make biofuel-use more economical, with adverse impact on the poor.

High food and fuel prices affect several macroeconomic aggregates directly or indirectly. These macro aggregates include consumption, investment, economic growth, inflation, trade and fiscal balances. The impact on overall inflation is straight-forward. In order to contain inflation, the central bank would increase the interest rate, which would affect investment and growth negatively. For food and fuel importing countries, increased import prices would certainly lead to deterioration in trade balance and consequent pressure on exchange rate. Fiscal balance would come under pressure when government implements social protection measures.

Increase in food and fuel prices would seriously undermine decades of poverty reduction gains achieved by the developing countries. Higher food and fuel prices will have a two-pronged effect on poverty. People who are unable to emerge from poverty due to lower economic growth, and people who are driven into poverty due to a fall in real incomes will be impacted the most. People who are already living below the poverty line may suffer greater hardship due to higher food and fuel prices.

Pakistan’s macroeconomic fundamentals have been weakened to the core over the last four years. Economic growth has slowed to an average of less than three percent with investment rate registering a 37 year low, unemployment and poverty increasing alarmingly, budget deficit remaining large, public debt more than doubling, and most importantly inflation, particularly food inflation, remaining in high double digits over the last 50 months.

The persistence of higher inflation, particularly food inflation, for such a prolonged period has totally devastated the poor, low income, fixed income, and even the middle income groups. The new round of fuel and food price hikes are likely to further crush these segments of society. The oil price in Pakistan is rising for multiple reasons. It is rising mainly because the international price of oil is rising. The depreciation of the exchange rate has increased the landed cost of oil as well. On top of this, a large number of taxes and charges on compound basis (tax on tax) have further increased the domestic price of oil.

While the economy and consumers are badly affected, the Federal Board of Revenue and the government are the major beneficiaries of the oil price hike. Tax revenue from the petroleum sector has emerged as one of the largest sources of the FBR revenue, accounting for almost 30 percent of the total revenue.

Failure of the government to bring hitherto untaxed or undertaxed sectors under the tax net has resulted in shifting of taxation towards the petroleum sector. This is unsustainable and will have a wide-ranging adverse impact on the economy. More so, it will have a devastating impact on poor, fixed and low-income groups and even put a severe strain on the middle income group.

I would urge the government to review its taxation policy on the petroleum sector, particularly the way those taxes are collected and other charges and commissions are determined. Achieving budgetary target of revenues through inflicting severe pain and suffering on the masses will not be treated as a victory. I hope sanity will prevail.

The writer is principal and dean of NUST Business School, Islamabad.

Email: ahkhan@ nbs.edu.pk
-The News
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The bio-fuel debate

Shahid Khalil

Bio-fuel is produced in the developed economies, as being surplus in food crops, they can afford to set aside the bulk of their production for bio-fuel production. However, bio-fuel is a villain for food-starved under- developed countries, as it creates food shortages and increase in food prices.

The G20 countries recognized the need to examine the role of bio-fuels in food, but failed make more definitive statements about bio-fuels and their link to food prices because of disagreements between large producers (like Brazil) and net food importers (like China) on the importance of these links.

The role of the policy support to domestic bio-fuels sectors - in the form of tax credits, subsidies, and tariffs against imported ethanol (for the United States and the European Union) - remains a concern for key stakeholders.

Indeed, key countries display different social preferences in handling the delicate issue of food - fuel links depending on the local dynamics of agricultural demand and supply. In Brazil, the flexibility of sugar-ethanol mills allows producers to shift easily between ethanol and sugar production based on prevailing market conditions for food (sugar) and fuel (ethanol/gasoline) and provides them with constant, year-round outputs in their supply chain. Since 2008, Brazil has reduced its exports of ethanol to the world markets, in part because of rising US production and exports, increased demand for sugar from large consumers like India, and high and uncompetitive prices in its domestic ethanol market. As a result, in 2010 and 2011, Brazil found itself importing ethanol from the United States, boosting US bio-fuel revenues, and making the US tariff against Brazilian ethanol imports inconsequential.

China has backed off from the aggressive expansion of bio-fuel production in the past five years because of concerns about domestic grain markets and prices. China's bio-fuel production started rapidly with the building of four state-owned ethanol plants in 2001. By 2007, it had produced a total of 1.35 million tons of ethanol, placing it third in the world. At that point, this rapid rise was halted and the use of cereals in bio-fuel production was capped.
Despite some attention to the impact of bio-fuels on food security, much of the policy discussion over bio-fuels in 2011 focused on environmental concerns. 5 International bio-fuel markets are dominated by the European Union and the United States, the largest consumers and producers of bio-diesel and ethanol, respectively. While neither adopted major policy changes in 2011, the year was still one of intense debate, paving the way for potentially important decisions in 2012. Although the policy debate focused on the environment, any decisions made regarding bio-fuel production will have implications for global food markets, given the volume of crop-based feed stocks that are converted annually.

In the European Union, the consumption of bio-fuels is a key component of a decision to reduce greenhouse gas emissions from the transport sector by replacing fossil fuels with renewable energy.

In 2003, a European Union directive set a target of 5.75 per cent for renewable-energy use in the transport sector by 2010. In 2009, the European Union adopted the Renewable Energy Directive, which has a target of 10 per cent by 2020. Although renewable energy can include electricity, hydrogen, or second-generation bio-fuels (that is, ethanol and bio-diesel made from non-food feed stocks such as agricultural residues and switch grass), the main mechanism for meeting this target is, and will remain, first-generation bio-fuels.

The directive also established environmental sustainability criteria for bio-fuels, including a minimum rate of direct greenhouse gas emission savings (35 per cent in 2009, rising to 50 per cent in 2017) and restrictions on the types of land that may be converted to production of bio-fuel feedstock crops. This restriction covers direct land-use changes only. The revised Fuel Quality Directive, adopted at the same time as the Renewable Energy Directive, is more technical, includes identical sustainability criteria, and targets a 6 per cent reduction in greenhouse gas emissions from transport fuels by 2020.

One study, conducted by the International Food Policy Research Institute (IFPRI), analyzed the impact of the European bio-fuels mandate and possible changes in Europe's bio-fuel trade policies on global agricultural production and the environmental performance of the European bio-fuel policy, as spelled out in the Renewable Energy Directive. The report suggested that indirect land-use change was a valid concern but that there was a high degree of uncertainty regarding its magnitude. Following these investigations and public consultation, in December 2010 the Commission published a report acknowledging that indirect land-use change can reduce greenhouse gas emissions savings associated with bio-fuels.

Bio-fuel producers disagreed with the concept of indirect land-use change and claimed that even the debate and uncertainty about future legislation deters investments and is costly to Europe's economy and climate change strategy.
On the other hand, many members of the European scientific community and observers from the United States asked the European Commission to reconsider its position regarding bio-fuels and urged it not to make emissions accounting mistakes regarding bio-fuels. Nongovernmental and environmental groups actively highlighted the social risks linked to bio-fuels (such as "land grabbing" and competition between food and fuel uses) as well as environmental risks (such as increased emissions). Although the European Commission had not yet released its impact evaluation report by the end of 2011, it did release a new modelling exercise conducted by IFPRI on the land-use issue in October. Reflecting the fact that the merits of first-generation bio-fuels are highly disputed, the Commission also stated that it would no longer support bio-fuel projects in its overseas development policies.
In the United States, discussions of bio- fuel policy take place at two levels. At the federal level, the US Environmental Protection Agency regulates bio-fuel blending through the Renewable Fuel Standard. At the state level, some ambitious states have set up their own bio-fuel policies (such as California's Low Carbon Fuel Standard), seeking to improve upon the Renewable Fuel Standard in terms of environmental performance.

In 2011, there were a number of policy discussions at the federal level about whether the bio-fuel tax credit - called the Volumetric Ethanol Excise Tax Credit - should be repealed. In an atmosphere of increasing fiscal austerity within the United States, an unusual alliance of fiscal and social conservatives and environmentally minded opponents of bio-fuels emerged around the issue of repealing the tax credit. Researchers have pointed out the welfare and efficiency losses that result when such a tax credit is combined with a blending mandate, which is part of the federal Renewable Fuel Standard policy. Food security concerns have been raised over the effects of tax credits and subsidies on bio-fuel production and, in turn, on the level and stability of agricultural and food prices. Some have pointed out, however, that energy prices were a stronger driver of past growth in bio-fuel production than tax credits alone.

At present, a number of initiatives and studies are being conducted in the United States to see if it is feasible to scale up a California-like policy on a wider regional basis. A national low-carbon fuel policy would need to take into account the different fuel demands of the various sub regions of the country in order to come up with a standard that could both lead to reduced use of high-carbon fuels and meet the concerns about energy security and affordability that are major components in the US debate about energy policy.

-cuttingedge
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The eurozone’s policy dilemma
By Dr Akmal Hussain
Published: May 12, 2012

The writer is Distinguished Professor of Economics, Forman Christian College University and Beaconhouse National University

In this, the deepest economic recession (at least in the West) in a century, the policy prescriptions of orthodox economics are being challenged by the people of Europe. European leaders, advised by neoclassical economists, had agreed to an “austerity compact”. In the elections on May 6 in France and Greece, respectively, the leaders who had propounded sharp reductions in public expenditure as a means of pulling out of the crisis have suffered a resounding defeat. Soon after his election victory in France, newly-elected President Francois Hollande announced his intention of renegotiating the economic strategy for addressing Europe’s crisis. However Angela Merkel, Chancellor of Germany, stuck to her guns by saying that the fiscal pact agreed by 25 countries was not negotiable.

Underlying the political deadlock is a contention between two schools of thought: the Neoclassical economists and the Keynesians — just like the historic debate between the Classical economists and Keynes during the Great Depression of the 1930s.

The Neoclassical view of conservative European leaders, along with the IMF, is that the central issues to be addressed are unsustainable budget deficits and rising debt. So slash public expenditure, they say, even if it means cutting expenditures on pensions, education and health, let alone physical infrastructure. But how will this help pull Europe out of double-digit unemployment and end the growing misery of the underprivileged, made worse as government welfare payments are axed as part of austerity measures?
The Neoclassical answer to this question is the argument that when budget deficits are reduced, and “financial stability” restored, this will (through a yet unspecified mechanism), create the confidence amongst entrepreneurs to invest, and so economic growth will once again pick up. This proposition which is being propounded with such stridency by the neo-classicists led by the IMF, actually rests on rather weak theoretical and even weaker empirical foundations. How does a mere reduction in the budget deficit induce capitalists to invest, especially in the face of falling aggregate demand due to declining consumption expenditure and public sector outlays? To argue that by deepening the recession now, economic growth can be accelerated at some unknown future date, through the mysterious hidden hand of the market, is a kind of oxymoron: unless the causal mechanism between expenditure cuts today and increased investment in the future is clearly articulated and backed by data. Neither exists. As Paul Krugman in a recent article in the International Herald Tribune has pointed out, persisting with the economic strategy associated with the “austerity compact” would be reasonable “… if it were working, or even had a reasonable chance of working. But it isn’t and doesn’t”. Hence, the hope in Monsieur Hollande’s promise of rethinking policy.

The European policy dilemma essentially emerges from the very concept of a common currency, in a situation where such wide disparities exist in the relative economic strength and economic management capacity of countries within the European Union. In the old days, a particular European country faced with a lack of export competitiveness and slow growth could devalue the national currency as a quick fix to achieve export-led growth. Now this device is not available, given a common currency. So what happens is that the stronger countries, as a condition for a financial bailout, insist on cost reductions through austerity, reduced real wages, and higher unemployment.
The events in Greece and France show that the people have rejected this view. That the official economic argument is questionable in terms of its conceptual and factual basis, makes the manifest pain of the people even more poignant. The protracted recession and associated human suffering requires a fundamental rethinking of economics and economic policy. As Professor Joseph Stiglitz has observed recently, it is time to “rewrite the textbooks”.

The Express Tribune
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An order in danger
May 27, 2012
Manu Bhaskaran

Deliberations on leaving a secure Afghanistan after NATO withdraws are essential. But the world is facing an even more urgent crisis that calls for immediate, coordinated action by the Group of 20.

A confluence of dangerous trends threatens the global economy. Virtually all major sources of demand in the world economy seem to be seizing up at the same time – the eurozone is facing multiple stresses, the Chinese economy is slowing at a worrying pace, Japan’s recovery from its triple disasters is hobbled by a power shortage, and recovery in the US economy appears to be losing momentum. Since these major economies are interconnected in so many ways, we should expect these risks to reinforce one another and produce an outcome far worse than what might be expected if examined individually – hence the need for swift, coordinated policy responses at the global level.

The major drivers of the global economy are at risk. Amid much uncertainty, some projections can be made.

First, the eurozone will suffer a deeper recession than forecast, coupled with substantial financial disturbances and huge political uncertainty.

With Greece facing the prospect of a chaotic exit from the euro, the eurozone’s downward spiral is moving faster. The combination of the deleveraging after the financial crisis and fiscal austerity to deal with the sovereign debt crisis is producing more than just a recession. It’s creating a political backlash that makes it increasingly difficult for governments to adhere to the bailout packages, which had temporarily brought relief from the crisis. But since the bailout packages are a delicate assemblage of fragile compromises to accommodate sharply divided views on policies, failure to honour one part of the package could upset the entire assemblage. With Greece unlikely to have a government that will deliver on bailout conditions, a Greek default and exit from the euro are now dangerously possible.

Second, China’s economy – the largest source of growth in global demand – is slowing sharply. Chinese policymakers know that premature easing of policies could rekindle these risks. The massive 4 trillion yuan policy response of 2008 simply won’t happen again.

Third, the US economic recovery will remain modest at best and, therefore, highly vulnerable to external shocks such as renewed financial distress in global markets or weakness in major export markets such as Europe and China. The US economy was starting to put into place the foundations for a sustainable recovery – easing credit conditions, rising business and consumer confidence, the housing market finding a bottom and easing unemployment. However, recent data cast doubts on the recovery’s durability in these areas. The US economy is not going to fall into another recession, but neither is it going to enjoy more than modest growth.

Fourth, the Japanese recovery is at risk. The loss of nuclear-generated electrical power is likely to weaken Japan’s recovery from the triple disasters of early 2011.

Fifth, these unfavourable developments will not operate in isolation. Instead, they will reinforce one another and produce a sharper than expected deceleration in global demand. With all the major engines of global growth weakening simultaneously, the risks are that each of these major economies pulls down its major trading partners. Unlike Asia’s experience during its 1997-98 crisis, today’s distressed economies cannot rely on still-strong global demand to power a recovery. They are the global economy – together representing near 70 per cent of the global GDP of $63 trillion in 2010. The US, Europe and China are so large, so interconnected through trade and investment flows, that negatives in one country reinforce negatives in another.

Coordinated global policy actions are needed to break the downward momentum. Individual countries are constrained by huge debt levels, and worries about inflation or currency risks from embarking alone on the substantial policy responses that are needed. The G-20 needs to be activated and confidence restored through a series of measures:

First, there must be a commitment to simultaneous fiscal stimulus – with fiscally stronger economies such as Germany, China and the oil exporters doing the heavy lifting while the fiscally challenged economies are allowed to phase in deficit reduction more gradually.

Second, the world must strengthen defences against financial panics. The firewalls – such as the International Monetary Fund and the eurozone’s stabilisation funds – should be expanded substantially enough to convince financial markets that they can deal even with the larger eurozone economies that are at risk. There should be an explicit commitment given to recapitalise banking sectors in Europe, which are increasingly in distress.

Third, emerging economies should commit to a simultaneous easing of monetary policies.

Fourth, the oil exporters need to make a firm commitment to sustain as much an increase in oil production as possible so that oil prices fall by enough to boost global demand. A fall in oil prices would also help restrain inflationary pressures, making it easier to adopt the expansionary policies mentioned above.

In short, the global economy is at risk of a downward spiral, and only powerful globally coordinated policy actions can prevent a major crisis.
Manu Bhaskaran is a partner with the Centennial Group

© 2012 Yale Center for the Study of Globalisation
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What’s next for euro?
May 28, 2012
Alistair Burnett

French and Greek voters have spoken loudly on austerity measures, but perhaps not so decisively. In Greece’s case, the message was so unclear that the country returns to the polls on June 17th. Chance is that no matter how they vote the tension between the market and democracy is here to stay.

This month’s election results can be broadly categorised in three ways: The most common headline was a variant on the London Daily Mail’s “Au Revoir Austerity.” Another interpretation was that Europe kicked out another bunch of incumbents. A third variation – Europe’s mainstream parties are losing support to extremists on both the ?right and left.

A strong argument can be made that results in the French presidential and Greek parliamentary elections show that voters have had enough of the debt-reduction policies. In Greece, parties that campaigned explicitly on an anti-austerity platform did very well. But the results may be a continuation of a trend underway since the financial crisis struck in 2008, with leaders of any party tossed out of office once their electorates had the chance to vote – the defeat of US Republicans that year, Gordon Brown’s Labour in the UK in 2010, Spanish Socialist Jose Luis Zapatero in 2011 and now Nicolas Sarkozy.

Then again, recent votes in France and Greece also saw increased support for parties of the far-right and far-left campaigning against the effects of globalisation – the right took issue with immigration while the left oppose power of financial capital and bankers.

There’s an element of truth in all three explanations, which to some extent feed off one another.

The most straightforward factor explaining the French and Greek results is that the parties that had been in power when economic crisis hit four years ago got the blame for the consequences, including increased public debt, public spending cuts and tax rises to pay for bank bailouts by national governments.

Sarkozy, who came to power in 2007, promising to reform the French economy for faster growth, was only a little more than a year into his presidency when the crisis hit. The crisis derailed much of his reform programme and also associated him in the minds of his electorate with rising debt and the euro crisis.

In the Greek election, socialist PASOK, in power in 2008, saw its support plummet, blamed for not preventing the collapse of the country’s finances and severe austerity measures that have hiked unemployment and reduced the standard of living. There was a rise in support for smaller parties opposing austerity measures and a fall in support for the main opposition party.

There is one exception to the trend of European incumbents since 2008 failing at re-election, blamed for not preventing the crisis and associated with the recessions, spending cuts and tax increases – Poland.

Last year, Poles re-elected the coalition led by Prime Minister Donald Tusk. Still, this result also confirms the view that Europeans base their voting decisions on the state of the economy. Voters rewarded incumbent Tusk, because the Polish economy escaped Europe’s suffering and continued to grow, perhaps benefitting from proximity to the German market and exchange rate flexibility arising from not being in the euro.

The economic crisis has spurred the rise of far-right and far-left parties in recent European elections.

But across Europe, voters are also rejecting conventional politics and politicians, left and right. In Italy’s recent local elections, the Five Star Movement, led by former comedian, Beppe Grillo, who supports Italy’s leaving the euro, garnered almost a fifth of the vote in some cities and won the Mayoralty of Parma, while in Germany the Pirate Party, which campaigns for internet freedom, got almost 8 percent in the North Rhine-Westphalia state election in Germany on May 13th.

In contrast to France and the Nordic countries, parties that focus on the place of Muslims in society and immigration controls may have peaked in other countries. So perhaps a neglected outcome of the French and Greek elections is the tension exposed between democracy and the interests of financial capitalism.

Democracy in Europe is facing a challenge. And some see it coming less from parties of the far-right or far-left and more from the interests of financial capital as expressed in the markets.
Alistair Burnett is the editor of The World Tonight, a BBC News programme

© Yale Center for the Study of Globalisation
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Time to recast economic policy
June 1, 2012
Will Hutton

THE European economy is in the doldrums. The countries on the periphery are already threatened by sky-high youth unemployment, stricken banking systems and economic stagnation — all before a possible break-up of the euro that would make matters still worse. Even countries at the centre are being impacted by loss of confidence and fear of the future.

What we need from European leaders and policymakers is to seize the moment — not just to stabilise the euro but to use the opportunity to recast the whole framework of economic policy so that it permits member states to put their public balance sheets behind their banking systems, reframe innovation and investment policy and redesign their social contracts so they offer crucial security — but also more flexibility. This is a moment to act.

Perhaps the worst aspect of the current crisis is the way it is killing faith in the notion of European integration — that Europeans acting in concert can make their economies and societies stronger rather than weaker. Political leaders in both France and Germany genuflect to the idea of more Europe — but with no agreement about what more Europe could mean.

There is well-meaning intent but no intellectual content that goes beyond national agendas — in Germany the well-known commitment to budgetary discipline and in France, under its new leadership, to government-inspired “growth”.

What is needed is a common analysis driven by practical realities and intellectual energy, some joint giving of ground and then decisive action in the name of Europe.

Firstly Germany must begin to recognise that asking all eurozone countries to commit to incredible economic policies, especially in the wake of a financial crisis and overhang of enormous private debt, is simply unrealistic.

Financial markets do not believe that Greece can stay in the euro if the price is mass unemployment and privation, even if to a degree the Greeks are the architects of their own ruin. Nor do they believe that Spain can solve its banking crisis with no support from the rest of Europe, even if again Spain is in part the architect of its own folly. Credibility is not served by incredible policies.

Begin with the eurozone rules. One of the follies of American neoconservatism was the proposition that capitalist economies and businesses could manage existential risk without the support of the government. After the financial crisis we know differently; the long-standing European view, that business and the state are co-dependent, has been proved wholly right.

If the eurozone is going to express the particularities of European capitalism it has to permit states a degree of freedom to use their balance sheets and their tax base to co-generate wealth.

Instead, German anxiety to impose iron discipline across a continent is fusing with American neoconservative notions that nothing more is needed to stimulate enterprise than a free market and a minimal state.

Rather, what is needed is the creation of a 21st-century European social market economy in every member country — but respecting its particular institutions.

The main elements are clear. The European Central Bank should be able to support national central banks which buy any class of financial asset that has created new jobs, new lending or new investment.
Courtesy: The Guardian, London
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‘Is China buying the world?’
June 1, 2012
By Dr Pervez Tahir

This is the title of the recently published book by Peter Nolan, professor of Chinese development at the University of Cambridge, who was also my faculty adviser when I was doing my PhD here in the 1980s. According to the Financial Times, he “knows more about Chinese companies and their international competition than anyone else on earth, including in China”. After the fall of the Soviet Union, transition experts like Jeffrey Sachs began warning China about the incompatibility of the Communist Party with the market economy. To borrow (and slightly modify) Mark Twain’s famous words, the news of the death of the Chinese economy was ‘vastly exaggerated’. The Chinese Communist Party is alive and kicking, overseeing the country’s spectacular rise that has seen it become the second largest economy of the world in a very short span of time. So much so that the influential Western media is now busy churning out story after story about the threat of the Chinese buying up the world, be it the huge Western firms, African energy resources or Latin America’s natural resources. Nolan’s book contains a wealth of information and insightful analysis to show that the shopping spree is more noise than news.

Of course, China possesses in its coffers the world’s largest foreign exchange reserves. However, the depth of the Chinese purse ought to be seen in the proper perspective. Around one-fourth of America’s externally-held debt is owned by China. But this is only 12 per cent of America’s publicly held debt and eight per cent of its publicly and non-publicly held government debt. The so-called Beijing Consensus is still no match for the Washington Consensus. Even if China has money, it still faces some insurmountable barriers to entry in the Western world.

In the globalised economy, there is no such thing as a level playing field. First, three decades of intense globalisation has led to very high levels of concentration. To give only two out of the many examples in the book: 80 per cent of the global production of industrial gases is in the hands of only three firms and 75 per cent of the supply of braking systems for large commercial aircrafts is controlled by only two firms. Most of the concentration occurs in what Nolan calls “superior technologies”. A small number of system integrators atop the global value chain control 50 per cent of the world market. Second, the top 100 firms control 60 per cent of research and development (R&D) spending, giving them an immense competitive advantage.

Among the top 500 global firms listed in the Financial Times, there are only 79 firms from low and middle income counties, which mostly consist of banks and state-owned entities, which are all users rather than producers of high technology. Again, the Foreign Direct Investment (FDI) from developing countries has increased, but an overwhelming proportion of it is from firms with headquarters in developed countries. China heads this list of developing countries, but it is still far from catching up with the developed countries. Its income per capita is only 16 per cent of the figure for developed countries.

No Chinese firm is among the top 100 firms in terms of R&D spending. In terms of FDI, Chinese investment in developed countries is very small compared with FDI coming into China. Attempts to acquire Western assets have mostly failed.

Western countries are more into China than China is into them. “China has not yet bought the world and shows little sign of doing so in near future”, concludes Peter Nolan.

The Express Tribune
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The financial crash

By:Joshua Kurlantzick

Will not bring about ‘globalisation on steroids’
In the wake of Barack Obama’s re-election and the leadership change in China, many economists, businesspeople and leaders have assumed that, with internationalists at the helm of the world’s two largest economies, the world will see a new period of greater economic integration. Optimists hope that this integration eventually will pull the globe out of its prolonged economic malaise. Indeed, many struggling economies, such as Greece, already are seeking closer economic integration with China; Chinese aid and investment has helped revitalise Greece’s most important ports.And as developing nations such as China take the lead on trade deals, they also are gaining a bigger role in international financial organisations, which thus supposedly also are becoming more integrated. The future, as one American columnist wrote, is “globalisation on steroids”.Yet in reality today’s economic slowdown, over the long term, is likely to have just the opposite effect. The slowdown will leave as its legacy the worst deglobalisation in modern history, a period of shutting down international lending, government protectionism, failed free trade deals, and the renewed power of state capitalists. Even if the slowdown soon ends - if Xi Jinping in China and Barack Obama in the US can use their mandates to push for freer trade and global integration - the long-term effects of this deglobalisation will last decades, putting a ceiling on how much the world economy can ever rebound.For at least a century, the world economy has run in cycles, in which integration, in the form of closer trade and financial ties, cross-border bank lending, and rising trade and migration, has been followed by short periods of slowdown and deglobalisation, periods in which the world economy became less linked together.At times, the slowdown and de-globalisation was precipitated by world wars, as in the 1910s. At other times, it was precipitated by major energy shocks, such as in the early 1970s.Yet after each period of deglobalisation, the world economy quickly bounced back, with banks soon seeing new opportunities to lend abroad, new trade rounds launching, new companies springing up to increase global exports, and new financial services products emerging to tie markets together.Not so this time. This de-globalisation is so severe that its effects will not be easily reversed. In nearly every leading nation, not only politicians on the left - the opponents of globalisation in earlier periods - but also on the right have come to a consensus sceptical of greater economic integration.In the 2012 US presidential campaign, Mitt Romney attacked trade with China even more than Barack Obama, while both Democrats and Republicans almost unanimously supported new measures to block Chinese telecommunications firm Huawei from investing in 4G phone networks in the US - and received no opposition even from the most pro-business Republicans.Meanwhile in France the right-leaning Gaullist parties, under Nicolas Sarkozy and his heirs, have become as supportive of greater protectionism as the Socialist Party, which under the current president, Francois Hollande, has enacted new import restrictions on major trading partners like South Korea and pushed French supermarkets to sell only French products.Meanwhile, leaders of many developing nations have become nearly as sceptical of globalisation as their western peers.In the past year, major coalition partners of the Indian Congress government have left the coalition to block the prime minister’s efforts to open up India to foreign retail. In Brazil, the president, Dilma Rousseff, has increasingly pushed for greater protection of strategic Brazilian industries, telling the UN: “We cannot accept that legitimate initiatives of commercial defence by developing countries can be classified as protectionist.”Politicians, at least, often exit the scene without having lasting effects. But more frightening, the financial institutions that once propelled globalisation have retrenched so badly that their shift will last for years.Today, as crisis-hit European nations have passed legislation forcing banks to maintain higher capital requirements and to invest more within their own borders, these European institutions, which had been the major sources of emerging world investments, have started a process of massive deleveraging. Until two years ago, European banks accounted for about 90 per cent of all foreign bank lending in Africa, eastern Europe, and the Middle East. That figure is dropping rapidly.Trade, one of the other pillars of globalisation, also will take decades to recover. The World Trade Organisation’s current round of negotiations, known as the Doha Round, has been stalled for years, and the regional free trade agreements enacted by Asian nations in part to replace Doha contain far less liberalisation than meets the eye. A third major pillar of the globalisation of the 1990s and 2000s was increased migration.But as the economic slowdown has morphed into a longer-term period of stagnation, the tolerance of wealthier nations for migration has ebbed.In the US, the Republican Party’s 2012 platform called for “self-deportation” of illegal migrants in the US. This tough stance is being echoed in many other wealthy nations, where the level of anti-immigrant sentiment is high.Even tiny Singapore, a country that despite the global slowdown has maintained a GDP per capita of $61,000 at purchasing power parity and which depends on trade and foreign workers to prosper, has seen its public turn sour on migration. Anti-foreign worker sentiment helped propel the Singaporean opposition, dormant for decades, to its strongest showing ever in last year’s elections, as it criticised the ruling party for being too lenient in allowing migration.As trade flows, financial globalisation, and cross-border migration recede, the state has returned to power around the world, turning back the gains made by free markets in the 1990s and early 2000s.While state-owned enterprises only controlled six times as much of China’s industrial output as private firms in 2004, today they control 11 times as much. And they are hardly unique. In the years 2004-2009, while 120 state-owned companies made their debut on the Forbes list of the world’s largest corporations, more than 250 Western private companies fell off that list.For the global economy, this probably will mean a dearth of new entrepreneurial companies, particularly in developing nations.In addition, it will mean that trade wars probably will only escalate, since these regional trade deals do not hold world leaders to the tough standards that previous WTO rounds did; in the long run, this could lead to an overall decline in trade, which would make the entire international economy far less dynamic, and could even lead to greater political tensions between big trading powers such as the US and China.

Joshua Kurlantzick is Fellow for South-east Asia at the Council on Foreign Relations

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