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December 18, 2008

This year, next year: worldwide economic recession

The specter of recession is haunting the world’s major economies. Whilst there is an intellectual argument about who is to blame and the correct policy packages, democratically elected leaders feel the need to take action. In the United States financial market bailouts are the order of the day. The UK government under Gordon Brown has developed a policy towards the shaken banking sector that aims at restoring liquidity and boosting economic activity. In France, the President, Nicolas Sarkozy has authorized a huge package of measures to stimulate the economy. A government-sponsored investment package of Euro 26 billion is to be spent on boosting investment. Keynesian policy, admired by the left and attacked by the right, is now back in fashion. Recessions, because of the high degree of “roundaboutness" in economic life quickly spread from one sector to another and lead to a drop in growth, a rise in unemployment and a shake out of industries and firms that are not meeting consumer wants in a cost-effective way. They also spread quickly from one country to another. Why this huge change in attitude towards government intervention in developed market economies?

There are a number of ways of answering this question. First, it is clear that if banks collapse or if they are strapped for liquid resources then credit contracts and if credit contracts then purchases contacts and so it goes on. Second, even although there may be doubts over the initial source of the problem (some argue an inadequate supervision by the monetary authorities, others argue that the very existence of monetary authorizes suggests an in appropriate expansion of the money supply anyway) democratically elected governments find it difficult to resist citizen pressure that something should be done, even if that “something" builds up a problem of government indebtedness that future governments are likely to find restrictive. No economic policy idea is ever truly dead and policies are or tend to be historically contingent. For thirty years Keynesianism was out but now a mixture of monetary policy (dramatically-reduced interest rates) and fiscal policy (tax reductions of one sort or another or boosting government expenditure) are back, in the United States, in the United Kingdom, and in Western Europe generally. Whilst the stricken giants of the US automobile industry, for example, need either to collapse or dramatically shrink and change, no government is going to be able to stand by and watch the sector disintegrate in a messy way. Some degree of economic management of decline is inevitable.

The impact of the recession is, because of the interconnection between and amongst national economies, not simply in the United States but world-wide. The United States is expected to experience a very deep recession and maybe even a very long period of no growth. This could be the worst experience of economic malaise in the last fifty years. It will pre-occupy, as it has already done so in terms of the pre-inauguration experience, the Obama presidency. He is already deeply committed to a sustained package aimed at stimulating the US economy. The domestic agenda will be more significant for him than the international agenda immediately upon taking office and for some time afterwards. His plans are bold. The experience of recession in France and in Western Europe as a whole is, if we can use Sarkozy’s proposed package as a measure, predicted to be the worst downturn on twenty years. Even if China and India are seen as “engines of growth" in Asia, their exports are linked to expansion in the markets in developed market economies (“western markets"). China’s economy is skewed. Domestic production is not evenly balanced with export production and if exports collapse, the economic impact is huge. Chinese growth will slow but it will not be eliminated. Economies dominated by natural resources such as Russia, are already experiencing significant falls in demand and this is likely to continue. It is bad news all round.

Growth in the world economy is inevitably interlinked. There have been some efforts of economic coordination internationally within Europe and between Europe and the United States. In recognition of their economic inter-dependence, China, South Korea and Japan have been in communication in an economic summit at Prime Ministerial level. China is using some of its surplus to stimulate its economy (domestic expansion in China creates opportunities for imports from Japan, especially of goods for the new Chinese middle-class). The present stage of “economic globalization" is not under question; markets vary from period to period, despite the recession, unless countries opt for strong protectionist measures or consolidate strong regional alliances that benefit a defined group of countries on a regional basis. Trade is always and everywhere a political issue, more so in bad times than in good. Critics of the current trends in policy should reflect on the possible alternatives. The choice politically is not do this (expansionist economics packages) or do nothing (belief in the self-regulating nature of economic life). It is do this (expansionist package) or do something worse such as reverting to deep and sustained economic protectionism.

December 11, 2008

Review of Global Trends 2025: A Transformed World published by the National Intelligence Council, November 2008.

The aim of Global Trends 2025 is to set out the factors that are expected to shape international events over the next two decades and to stimulate strategic thinking with respect to a future where no single narrative yet dominates. The report is compiled by the National Intelligence Council, drawing on “communities of experts" within the United States and elsewhere, including for example, experts from Chatham House in the UK and from China. The strategic thinking in the end comes down to how the international system as it now stands will need to adapt and change and the question of United States leadership in a multipolar world. What are the key factors identified in this report? What are the implications?

The report identifies “relative certainties" and “key uncertainties" as one way of getting at the significant factors that will impact on international events. Taking first place is the shift from a unipolar to a multipolar world as a result of the shift of resources from West to East. The implications of this is that whilst the United states will remain the most powerful country, its dominant position will be challenged by a changed configuration of influential states, most notably China and India with Russia tagging along too. The rise of Asian economies will lead to pressure on food, energy and water resources. How significant this pressure will be will depend on the pace and type of technological change that is achieved. Population growth in most states will reflect the influence of ageing but in an identifiable number of countries, including Pakistan, Afghanistan and Yemen, young populations will continue to cause problems for political stability. Terrorists will continue to be active with the danger that they will be able to gain access to more dangerous technologies of mass destruction. Conflict over natural resources is more likely than conflict over ideological issues. Sub-Saharan Africa will continue to be marginalized and in Latin America, Brazil is the key contender for international influence.

“Key uncertainties" concern for example the pace of technological innovation with respect to carbon-based natural resources. If oil and gas remain dominant then Russia and Iran and such countries will prosper and grow in economic significance and power. If “clean" coal is possible, this will suggest a different kind of shift. The economic and demographic future of Europe as a place for growth or secular decline is another uncertainty as is the fate of globalization. Is the globalization doomed to halt under the forces of economic recession and protectionist demands? Will “state capitalism" (a developmental model now best exemplified by China, and to some extent Russia) rather than liberal democracy be the predominant developmental mode over the next twenty years? The report investigates each of these elements in detail in the main body.

Global Trends is speculative with respect to the development of the details of the international system. Growing regionalism is one way in which some economic growth can be compatible with some degree of protectionism but a world of power blocks will not make in any easier for the United Nations to get leverage. States will be important but non-state actors will grow in significance, including religious leaders with the dynamism within Islam and in Christianity coming from poorer parts of the world. There will be a need for “global governance��? but the report seems to suggest that this need will increase faster than the capacity to supply it. If this is the case then significant state actors will need to shoulder responsibilities even if they are questions marks over their willingness to do so. India and China will still be concerned with the domestic agenda as much as the international one. Europe is not seen as having great strategic capabilities. There is unlikely to be any radical challenge to the existing system itself, though Russia will continue to challenge United States domination in that system, though the system itself will become, without significant reform, increasingly outmoded.

In such a world then it is clear, to those that compiled Global Trends, that there will be a “demand" for leadership from the United States, particularly with respect to the Middle East and parts of Asia. The capacity to supply that leadership will be constrained by other actors and by economic and other factors, including significant but declining military capacity. What the report re-asserts is the significance of human capacity and leadership. However there does not seem to be any clear indications as to the attributes (and sensitivities) of leadership required in a complex multipolar and culturally diverse world.

This report is essentially an audit of prospects and problems in a world that is to be, in some sense, “managed" The problem is that the world that is being described is not one that is readily amenable to the visible hand of United States “management" any more than it is amenable to management by the invisible hand of the globalized market place. There are more issues than management capacities. What is needed, now and in the future, is the wisdom to know what is and what is not an issue requiring either policy action, or other forms of intervention. International action in a multipolar world will require sensitive and cooperative political and diplomatic action and a realistic sense of what such action is capable of achieving.

December 9, 2008

Review of Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, by W.J. Baumol, R. E. Litan and Carl J. Schramm Yale University Press 2007.

Capitalism, like the notion of property itself, is not one thing. There are those who argue that capitalism and free markets go hand in hand. This is clearly not the case as capitalism, in one form or another, can accommodate itself to many different political economies so long as some regarded is paid to the principle of private property. Thus in times of severe depression, capitalism tolerates large levels of state intervention and involvement in both the macro and micro economy. China’s emerging capitalist economy under socialist political administration need not be a transitory phenomenon however unlikely that would appear. It is perhaps wrong to personify capitalism in this way. Capitalism has been subjected to historical evolution and change. Historicism is unfashionable in mainstream economics, notwithstanding Adam Smith’s interest in historical change and institutional development, but the awareness of different types of economies and institutional settings was, in the past at least, thought to have been an essential component of thinking about economic development and the nature of the generalizations that can be made with respect to developmental policy. The book, Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity has, as its subject matter the different forms of contemporary capitalism and how good these different forms are at generating growth. It has a slight historicist and institutionalist bent. What, accordingly, are the good and bad forms of capitalism? What are the good forms of capitalism good for?

There are, according to the authors, four identifiable types of capitalism. “Entrepreneurial capitalism? is a form of capitalism in which innovation is key to growth and change. The United States is seen as an economy in which this form of capitalism flourishes. A second form of capitalism is of the “big firm? variety. Europe can be used here as an exemplar. The book suggests that “good capitalism? is a blend of entrepreneurial and big-firm with the actual combinations being determined by historical and cultural contexts in different countries. The book is in this sense country focused where as “big-firms? themselves are market focused, wherever that market may be. “State-guided capitalism? (found in what other writers have called “developmental states?) is a form found in emerging countries or past economies that modernized rapidly, such as Japan. China is “state-guided? but is also “entrepreneurial?. These categories are clear-cut but their manifestations in particular economies are not. “Oligarchic capitalism?, in which wealth and power are concentrated amongst the few, and where the intention is that this should remain to be the case, is the last of the categories.

What, according to the authors is “good capitalism? good at? The answer is the traditional one: at generating economic growth and increases in well-being. Growth matters and the anti-growth conventional wisdom is mistaken. The sense is clear: technological innovation and change is essential if we are to find a means of raising living standards world-wide and growth through “good capitalism? ensure that. There is very little attention paid to re-distribution. An aim of the book is to use the four types of capitalism to come up with new ways of looking at the question of growth and growth policy. Economies are complex and culturally and historically located. Knowing where you are ought to help in working out what policies to promote but at the end there is one preferred path. For all the nodding with respect to history and culture, the promotion of growth is about the promotion of beneficial entrepreneurship through ease of business entry and formation; effective rewards to enterprise; the avoidance of unproductive forms of entrepreneurship and incentives to continue to innovate. The “ultimate goal? is unleashing the entrepreneurial spirit in developing countries.

For developed market economies where the “big-firm? model holds, the goal is to avoid weak growth by eliminating barriers to entry for new firms and assisting big firms to be innovative. Deregulation has achieved this to some extent though in the energy sector there are political and institutional problems in some European countries. Such firms will face global competition from multi-nationals for the emerging economies of India and Brazil. Will this not be enough? China according to the authors can teach the Europeans how to get the kind of change that is required: do not threaten too many vested interests but get the change going where you can. People in Europe have tended to choose a particular approach to the notion of economic-well being in the sense that they have been willing to sacrifice some growth for social welfare. The internal political economy in France for example means that change has not come easily. Japan has chosen to take from the West only that which it wants and to avoid that which it does not want. It is not, as a book of types might be, essentially about political economy, it is more an argument for American-style entrepreneurial capitalism, a capitalism that seems to have been called into account by the present economic circumstances. This book is, without a doubt, interesting but it some respects it promises more than it delivers.

December 1, 2008

India, Pakistan and terrorism

The attacks on Mumbai have had huge political consequences already in India with the chief security officer dead, political resignations or offers of resignations and India’s borders placed on a war footing. There is more to come. Indian political opinion has turned on the politicians as it has been alleged that security alerts concerning Mumbai had been ignored. Relations between India and Pakistan are severely strained. A major security review is under way in India with concerns being raised for security not only in Mumbai but in Delhi where there have been further threats allegedly targeting the international airport and key railway stations. Fears that gunmen are still on the loose in Mumbai and the information that the targeted number of deaths was 5,000 have caused further insecurity, fear and anger. Condoleeza Rice, the United States secretary of State, has been sent to India to review the situation with politicians there and no doubt to urge caution on the developing tension between India and Pakistan. If the idea was to throw relations in the sub-continent into disarray then the terrorists must be denied this prize. Other countries face problems too as a result of this new wave of terrorism.

Condoleeza Rice is trying to reduce the tension between India and Pakistan. She has already been in contact with ministers in both countries and her visit to India is about maintaining this diplomatic initiative. Even at this stage with little public information to go on, it seems fairly certain that the plot was hatched in Pakistan and the terrorists trained there. Newspapers have suggested that the clandestine Pakistani group known as Lashkar-e-Taiba is involved. However, Condoleeza Rice must reflect on the fact that United States policy towards Pakistan, including US border raids from Afghanistan in Pakistan, has fuelled popular discontent with the United States. Non-state actors taking up terrorism creates problems for all governments but Pakistan is facing a difficult set of domestic issues. There is a rich soil on which extreme fundamentalism and terrorism can grow. Given the deteriorating situation in Afghanistan and terrorist activity within Pakistan, and, popular views on Kashmir, the danger of exporting terrorism into India has always been real. Pakistan groups have been inciting Indian Muslim groups, such as the Deccan Mujahedeen, to take direct action. The situation has just become worse. Domestically India which is essentially a secular state, must avoid problems between Muslims (in the minority in most states) and Hindus. There are domestic extremists on both sides.

The security situation has domestic implications but it must be considered also within a broader framework of international and political relations in the region. India must be mature enough not to “export? the problem. Its leaders must reflect also on Mumbai as a target. Ease of penetration may have been one factor though the terrorists must have had a means of getting close by sea. That Mumbai is the financial capital of India and hence closely associated with Indian economic success is perhaps another significant reason. Mumbai’s symbolic value as a focus for the application of “economic globalization? and hence the spread of western economic values, is considerable. Sustainable economic growth requires stability. Westerners were the prime target even if this in fact failed to be the case. Counter-productive policies, American policies in particular, in Afghanistan, towards Pakistan and other countries such as Iran, need to be reviewed. This will need to await the new administration. Obama’s team will be closely informed about the discussions with the Indian government. Talking about a foreegn policy testing of a new adminstration seems appropriate, though this may be reading too much into the situation. Clarity of though rather than emotional reaction is essential. As with other aspects of United States foreign policy, a new approach may well be essential but practical polices that can achieve change may continue to be out of reach. Deep and detailed political as well as security cooperation is required and not an escalation of conflict between India and Pakistan.