Amerocentrism, Saving Doha, and Lamy the Savior

Amerocentrism, Saving Doha, and Lamy the Savior

I am currently listening to Handel's Messiah as conducted by Christopher Hogwood. This 1980 recording is credited with ushering a new generation of musicians from the "historically informed" school of classical music. (Although Messiah is often played during Christmastime, I listen to this fine recoding year round--not the least because I feature in a lot of the lyrics ;-) As much as possible, these musicians try to use musical instruments that are more in line with what long-gone composers had at their disposal: harpsichords instead of pianos, baroque instead of modern violins, etc. Anyway, the topic of today's post is famliliar fodder for those even remotely famliar with world trade: Pascal Lamy. I bring the Handel recording up because of a most incredulous op-ed I've come across in the Washington Post which places Lamy in nearly the same role as the titular character in the Handel oratorio. Needless to say, the WaPo makes some absolutely wacky points:

[If you have a copy of Messiah at home, cue "For behold, darkness shall befall the Earth"] -

SAVING DOHA: Why an obscure Frenchman may be the the last hope for global free trade.

You have probably never heard of Pascal Lamy, but he might be able to save the world. The only question is when he should do it.

Okay, so we're exaggerating a bit. Not about Mr. Lamy's obscurity: The veteran French bureaucrat is director general of the World Trade Organization (WTO), which hardly makes him a household name, even though he is a remarkably talented and persistent international public servant. It's not precisely true that he is the only person who can save our troubled planet. But he might just be the last possible savior of global trade liberalization.

Sometimes, the Amerocentrism of the US media gets to me. Of all people, how can WTO Director-General Pascal Lamy be called "obscure"? Isn't this the same guy who is attended to by the anti-globalization set nearly wherever he goes like in the picture above? Also, isn't this the same guy whose name returns over a million search results on Google? Although many Americans are famously ignorant of the rest of the world until events with global repercussions hit their shores, that one of America's newspapers of record needs to point out who the WTO D-G is surely an indictment of American incuriosity about world affairs. Worse, depicing him as the potential savior of the Doha agenda is surely hyperbole. True, the beleaguered round started before his term, yet he hasn't done much in moving it forward.

[Cue "Why do the nations so furiously rage together?"] -

The latest "round" of tariff-reducing talks began in Doha, Qatar, in 2001; it was billed as the "development round," because it was supposed to lead to a grand bargain between rich and poor countries that would open the former's markets to the goods of the latter, especially in agriculture. At a time of rising food prices, a successful Doha round could add billions of dollars to the earning potential of farmers in the developing world -- as well as to that of businesses and workers around the globe. The vast majority of poor countries are on board for an agreement.

!!!--developing countries have definitely not been "on board for an agreement" or we wouldn't be so far away from a deal. Moreover, the USTR during Clinton's term, Charlene Barshefsky, has insightfully suggested that the "development" designation for the trade round was made under essentially false pretences. Unlike Hogwood's performance on authentic instruments, Doha was a faker from the get-go. Between the WaPo editorial team's puffery and Barshefsky saying there is little enthusiasm for the round, I believe few would dispute the latter conviction. Let us move on...

[Cue "And I know my Redeemer liveth"] -

That's where Mr. Lamy comes in. If the participants in the round cannot bridge their differences in the trade ministers' meeting that he envisions for this month or July, he would have the option of devising a proposed settlement of his own, backed by the knowledge and authority of his office. Until now, Mr. Lamy has, reasonably, stayed neutral, preserving his political capital. But the time is fast approaching when he must step in, lest the Doha round fail, taking the once-promising World Trade Organization down with it.

Can Lamy take the trade bull by it horns that's loose in the WTO china shop (sometimes I think "china" should be capitalized) all by his lonesome? I doubt whether Lamy can. If one man can singlehandedly save Doha from an ignominious end, certainly there should be oratorios written for Pascal Lamy. Until then, I am afraid the WaPo op-ed writers have gone off the deep end. Very bad show, WaPo.

Pew: US is the Least Sanguine Country on Trade

Here's something to delight the trade sceptics: The most recent Pew Global Attitudes survey found that, in a sample of twenty-four countries, the United States came dead last in terms of viewing trade favourably. While the US (barely) ekes out a majority of respondents who view trade as either very or somewhat good, this position is certainly tenuous. There's nothing much to add to the bullet point provided by Pew on this matter: "Support for international trade continues to decline in the United States - 53% of Americans say trade is good for their country, down from 59% last year and 78% in 2002. Support for trade is lower in the U.S. than in any other country included in the survey." So let me get this straight: US GDP in Q1 2008 would have been nearly nothing had it not been for the contributions of net exports, yet America is the least trade-friendly country in this sample? Given current trends, it's certainly plausible that the trade sceptics already outnumber the pro-trade set. Just in time for the 2008 elections, too--it will be very interesting to see how this sort of sentiment will manifest itself come election time. The world awaits what the US has in store for it.

Hot Under the Collar: China's New Capital Controls

There's a pair of interesting articles in the Financial Times on a new regulation by China aimed yet again at curtailing hot money inflows. These inflows have so far frustrated the PRC's efforts at controlling domestic inflation. First, the culprit singled out for control by the semi-infamous State Administration of Foreign Exchange (SAFE) in this instance is over-invoicing by exporters. By declaring exports revenues to be higher than they really are, these exporters are entitled to exchange more renminbi from their foreign exchange earnings, thus boosting the local money supply:

China announced a major strengthening of capital controls last night in an attempt to limit the amount of speculative "hot money" entering the economy and frustrating its efforts to contain inflationary pressures. In an announcement on its website, the State Administration of Foreign Exchange, the country's foreign exchange regulator, said exporters would be required to park revenues in special accounts while the authorities verified the funds were the result of genuine trade. The new system risks becoming a cumbersome burden for exporters such as suppliers of cheap goods to western retailers.

Exporters will now be required to provide documentary evidence that their invoices are based on genuine transactions if they wish to change dollars into renminbi. The regulator said the new computer system for checking invoices would be introduced from August 4. A trial period begins on July 14.

Recent leaked figures showed record inflows of capital entering China over the past two months. Officials believe some money came in illegally after companies exaggerated export revenues. China has become an attractive country for investors and companies because interest rates are now above US levels and the renminbi is expected to appreciate.

According to Reuters, China's foreign exchange reserves increased by a record $114.8bn (£57.6bn) in April and May to $1,800bn. Although it is impossible to calculate how much of that inflow is short-term, speculative capital, the figures were substantially higher than the combined numbers for the trade surplus and foreign direct investment.

The capital inflows have made economic management more difficult because, even though domestic inflation has been high in recent months, the Chinese central bank has been reluctant to raise interest rates for fear of attracting more hot money. Authorities have so far prevented the inflows from causing money supply to grow too sharply by issuing bonds and lifting bank reserve requirements.

There has been a growing discussion among private sector economists about whether the authorities should introduce a large, one-off appreciation of the currency in order to limit speculation. However, most economists believe that the government would be very reluctant to take such a step as parts of the export sector are already suffering badly because of higher costs, including the stronger renminbi.

In a follow-up piece, the FT author, Geoff Dyer, notes some idiosyncratic implications of this latest move by the Chinese authorities. Given that China is the world's largest goods exporter, verifying the content and value of exports from China is a Sisyphean task if there ever was one. Moreover, if Chinese exports have been overstated all these years so that exporters could accumulate more yuan, then perhaps the real value of Chinese exports has been overvalued as well. While Chinese export figures are indeed impressive, they may have been artificially boosted by invoicing sleights of hand:

On the face of it, China might not seem the obvious place to invest at the moment. The local stock market has collapsed, property markets are weak and the interest rate on bank deposits is about half the rate of inflation. Yet that has not prevented a record flood of capital inflows even higher than China's huge accumulation of reserves in recent years. In the first quarter, foreign exchange reserves rose by $154bn (€98bn, £78bn). On top of that, according to usually reliable figures leaked to Reuters, reserves jumped by $75bn in April and $40bn in May to a total of $1,800bn. Given that the inflows far outstrip trade and direct foreign investment, China appears to be receiving vast amounts of speculative "hot money".

China has two big attractions for foreign investors - interest rates are higher than in the US and the currency is expected to appreciate. "China's FX reserves seem to have turned into some kind of massive black hole for the world's liquidity," says Stephen Green, economist at Standard Chartered. The huge armoury of reserves was actually designed to withstand the volatile capital flows that helped cause the 1997 Asian financial crisis. However, ever-mounting reserves bring their own economic risks - inflation could be aggravated if the inflows cannot be managed and the financial system could suffer whiplash if investors decide to withdraw funds all at once...

Yet some economists believe the official numbers might actually understate the hot money inflows. As part of the creation of China Investment Corporation, a $75bn-$100bn chunk of reserves was transferred to the new sovereign wealth fund. If most of that transfer took place in the first quarter of this year - as some analysts believe - then the surge in hot money inflows has been even higher. Logan Wright at Stone & McCarthy analysts in Beijing estimates that hot money entering in the first five months could be as high as $150bn-$170bn.

There are plenty of legal routes to bring capital into China. Foreign residents can deposit up to $50,000 a year and Hong Kong residents have a much higher quota. But government officials also believe that illegal transfers are taking place - through foreign companies declaring that funds are for direct investment and then putting the money in the bank and exporters exaggerating the value of overseas revenues in order to bring in extra funds. (As an aside, economists point out that if fraudulent export receipts really are widely used to bring in hot money, China's politically troublesome trade surplus would actually be much lower than thought...)

However companies and analysts were sceptical that the new capital controls would limit illegal capital flows. One exporter in Beijing said that simply checking documents given to the customs would not expose exaggerated invoices: inspectors would need to examine the actual value of the cargo itself to prove fraud. More-over if this new process is rigorously applied, the risk is that it will increase the burden on genuine trade.

China's central bank has faced huge capital inflows for several years and has so far managed to limit the impact on the domestic economy by draining the excess liquidity in the financial system through bonds issues and obliging commercial banks to deposit more money in reserves. However, there are some signs that the system for sterilising inflows is reaching its limit. The higher reserve requirements are putting heavy pressure on some cash-poor, smaller banks. Minggao Shen at Citigroup says that the only countries in the world with higher reserve ratios are Zambia, Croatia and Tajikistan and that Chinese levels cannot go much higher. Moreover, the difference between Chinese and US interest rates means that the central bank is making a loss on its bond issues, which have been rare in recent months.

If the system of sterilising inflows is becoming hard to operate, then the Chinese authorities could find themselves in a trap. Facing inflation at home, the obvious response is to appreciate the currency or raise interest rates. But both those options attract more hot money that will feed inflation. "We are passed the point when there were easy solutions," says Michael Pettis, a finance professor at Beijing University.

India Lets Success Happen

by Swaminathan S. Anklesaria Aiyar

China and India have followed vastly different paths to economic success. In China, a dictatorship has implemented its strategic vision with an iron fist. In India, under democracy, every party advocates different policies, so a national vision would be impossible even if people wanted one. Yet this non-strategy has produced 9% annual GDP growth for five years.

India's 1991 economic reforms abolished industrial licensing and many other controls, and demoted central planning to indicative planning. Deregulation plus investment in new infrastructure -- which provided the connectivity crucial for globalization -- created a million possible paths in place of the planned one. And entrepreneurs did the rest.

In under two decades, India has become a global force in computer software, business process outsourcing, R&D, and high-tech manufacturing. Before deregulation, no planner saw these as areas in which India could beat the world.

China has experienced more economic growth, but India may be better positioned for the future.

Computer software, India's most famous export, was hobbled by government policy for decades. In the 1980s, it took Infosys, now a star software exporter, two years to get a telephone connection and a computer import license. Politicians and trade unions opposed computerization as a threat to jobs. In the non-computerized economy, software engineers could not develop the skills they needed to compete. But they went to Silicon Valley, where they learned the business, then brought new abilities back to India, and established world-class companies. This was an unplanned success of non-strategy.

No planner imagined that hundreds of foreign companies would move back-office and technical services to India. General Electric's Indian subsidiary first tried this as a cost-reduction experiment, and it was such a dramatic success that multinationals galore soon followed suit. In the process, foreign companies found that India had not only low wages but untapped skills in everything from engineering and medicine to legal and audit services. Moody's and Standard and Poor's even shifted some of their rating operations to India.

The availability of highly skilled labor has also transformed India into a global R&D hub, attracting companies like GE, Suzuki, Intel, IBM and Microsoft. Renault-Nissan is even partnering with Bajaj, an Indian motorcycle specialist, to make a small car. Amazingly, Renault-Nissan has entrusted the R&D to Bajaj.

Most experts thought India would follow the labor-intensive export route taken by East and Southeast Asian countries like China and Vietnam. Alas, India's rigid labor laws made this strategy too risky. But to everyone's surprise, India became a world-class contender in high-tech areas like cars and pharmaceuticals.

All major Indian drug companies are now multinationals, making acquisitions across the globe. The government historically opposed strong patent laws, but the World Trade Organization forced it to accept them in 1995. Indian drug companies initially feared they would be wiped out, but soon found globalization an opportunity, not a threat. The end of the government's drug strategy was the start of global commercial success.

The automobile industry requires constant innovation, and Indian engineers and component manufacturers have proven that they can do it quickly and cheaply. American companies take three months to go from new concept to prototype to commercial production; Bharat Forge can do it in one month, and this helped make it the world's number two manufacturer of car parts like axles and engine blocks.

When the Indian economy opened up in 1991, many predicted that Indian companies would go bust or be taken over by multinationals. Nobody dreamed that one day Tata Steel would acquire Britain's Corus, which was six times its size, or that Tata Motors would acquire Jaguar and Land Rover, or that India's non-ferrous metals major, Hindalco, would take over Novellis.

Indian minnows swallowed foreign whales by borrowing massively from abroad. Until recently getting loans from abroad on such a grand scale was prohibited by rules intended to thwart irresponsible foreign debt. No planner realized that the prohibition was also preventing Indian takeovers of global giants.

In the 1980s, Sunil Mittal was a small trader importing portable generators. When the government banned their import, Mittal moved into push-button telephones. No planner, nor even Mittal himself, could have foreseen his meteoric rise to India's top cellphone magnate. His company, Bharti Airtel, is now worth $40 billion, and it's going global.

In 1983, Subhash Chandra, a rice merchant, was looking for plastic packaging at an international fair. Dealers told him laminated plastics were replacing aluminum tubes for toothpaste, and this accidental discovery helped transform Chandra from humble rice trader to owner of Essel Propack, the world's top producer of laminated plastic tubes for toothpaste, drugs, and cosmetics. Nobody planned that.

Many analysts, including Tarun Khanna of Harvard Business School, argue that China's success is largely government-driven, while India's is driven by private enterprise. So far, China has experienced more economic growth, but India may be better positioned for the future. In the long run, no other growth strategy is as good as no strategy at all.

Blame Taxes for Baltimore's Rot

by Stephen Walters and Steve H. Hanke

If you've seen HBO's "The Wire," you know why those of us who live in Baltimore are often asked whether our city really is the hellhole it is portrayed to be on TV.

Our answer is, well, yes. Baltimore deserves the Third-World profile it has developed because it has expanses of crumbling, crime-riddled neighborhoods populated by low-income renters, an absent middle class, and just a few enclaves of high-income gentry near the Inner Harbor or in suburbs.

Baltimore deserves the Third-World profile it has developed...

This wasn't what Baltimore looked like in the 1950s. Then it was a prosperous, blue-collar city of about 950,000 with a median family income 6.6% above the national average. Back in the good old days, Baltimore had a smaller percentage of residents living in poverty (22.7%) than the nation as a whole (27.8%), and a greater percentage of families (23.1%) earning a middle-class income of at least $44,600 in today's dollars than the rest of the country (19.1%).

Today, the city has a population that is almost 50% smaller, and about 40% of families with children live at or near the federal poverty line. Among the country's 100 most populous cities, Baltimore ranks a shameful 87th on median household income.

How did this happen?

Most people think of cities as dense concentrations of people. They are that, of course. But they are also dense concentrations of capital – homes, offices, factories, theaters and roads. All of these assets are attractive to people because, when they are in close proximity to each other, they offer the chance of a more prosperous life.

The problem is that once capital is built, it can become a target for tax-and-spend politicians who bank on the fact that physical capital will continue to draw people, even as it is taxed more heavily. This is what has happened in Baltimore. The city has waged a war on capital for more than 50 years, raising property taxes an astonishing 21 times from 1950 to 1985.

But what politicians don't seem to understand is that the target may be degraded or destroyed in the process. There are now at least 30,000 housing units in Baltimore that are abandoned and waiting to be demolished, while even old, upper-crust neighborhoods now have a seedy look. Property taxes are so high – as well as the strong likelihood they will soar even higher in the future – that even maintenance, no less capital improvements, are a losing proposition. Renovations or upgrades may add less value to a house than it will cost in taxes on that house with a higher assessed value.

Politicians, in short, reason that because physical capital cannot typically be picked up and moved, it is immutable. Wrong. It depreciates. Fail to replenish or improve it, and it decays to uselessness.

Moreover, while physical capital may not be mobile, financial and human capital are. Property tax rates in Baltimore County (outside the city) are less than half of those inside the city (1.1% versus 2.268%). The suburbs are thriving even with the center city decaying.

In the 1990s, private-sector employment shrank 12.7% (a loss of 46,800 jobs) in Baltimore. From 2000 to 2007 it shrank again, this time by 10.4% (33,600 jobs). By contrast, employment in the rest of the metro area grew by 25.1% in the 1990s, and by another 13.9% since 2000.

Steve H. Hanke is a professor of applied economics at Johns Hopkins University and a senior fellow at the Cato Institute. Stephen J.K. Walters is an economics professor at Loyola College in Maryland.

More by Steve H. Hanke

To the extent that city officials recognize the problem, they seem to confuse symptoms with the root cause of the economy's disease. For them, poverty, street crime or bad schools are the problem. Their solution is always more social spending and still-higher taxes, together with targeted tax breaks and subsidies aimed at bringing "big footprint" development projects downtown. And because the city has managed to entice developers to build a few large projects (the National Aquarium, two stadiums, several office towers, upscale hotels and pricey waterfront condos), the champions of public redevelopment argue that the city is on the right track.

True enough, the ability to hand out subsidies gives officials great power. But it also gives them a reason, and incentive, to dismiss the common sense that if tax breaks for the well-connected are a good idea, lower tax rates across the board would lead to broad-based redevelopment.

The person best positioned to put an end to the city's war on capital is Democratic Mayor Sheila Dixon. Over the past year she even hinted at making tax reform a priority.

In December, a commission appointed by Ms. Dixon concluded that the city should immediately cut its property tax rate to 2.02% and, within a few years, reduce it further to 1.614%. That isn't going to happen, however. Her budget, approved last month, raised spending 11% and reneged on a promise made by Gov. Martin O'Malley when he was still mayor in 2006 to cut property taxes by 0.02% to 2.248%.

But the issue of property taxes and development is not yet over. The state prosecutor is currently looking into allegations that Ms. Dixon took gifts from property developers while giving special tax breaks.

The evergreen rationale for high property-tax rates is that a city can't afford low ones. When she announced her spending plan for the year, Ms. Dixon insisted that "people think there's fat within the budget, [but] it's very lean."

Left unsaid: The city spends 61% more per person than the surrounding county. And in reality, cutting property taxes would only temporarily cut property tax receipts. Making Baltimore friendly to capital investment would unlock a flood of new (unsubsidized) investment that would restore revenues and facilitate an organic, widespread renewal of the city.

What's needed is the political will to tighten the bureaucracy's belt in the near term, and the ingenuity to create a fiscal bridge to a recapitalized, healthier city. So far, Baltimore is sticking with its "capital punishment" policies and it's killing the city.

The Aid Africa Can't Afford

by Edward N. Luttwak and Marian L. Tupy

If the G-8 really wants to help, it should cut off funds for dysfunctional states.

African development is high on the list of topics for the leaders of the Group of 8 countries meeting in Hokkaido, Japan. The host country has already pledged to double its aid to Africa from the current $6.9 billion over the next five years. President Bush, arriving in Japan on Sunday, made it clear he planned to push other G-8 nations to meet their 2005 promises to increase African aid.

Representatives of rich countries seem united in their belief that Africa would benefit from more international assistance and oblivious to the harm that aid has already inadvertently caused to African populations by propping up Africa's most dysfunctional states.

Instead of serving their people, most African states function as vehicles for the self-enrichment of political elites that have inherited none of the public-spiritedness of their colonial predecessors but all of the latter's contempt for the African masses. The remedy, therefore, might be to let Africa's failing neocolonial states disintegrate totally -- so that organic African political structures can emerge.

[A]id has kept predatory African states alive by enriching corrupt political leaders and paying the salaries of their bureaucrats, soldiers and police.

One of the key innovations that made the birth of the modern state possible was the emergence of a fundamental distinction between the government and the state. Over time, "states" came to mean the permanent territorial institutions that belong to all citizens, while "governments" denoted groups of people with temporary control of the machinery of the state. That crucial distinction nourished the ethos of public service that makes the embezzlement of public funds and all other abuses of state resources not only illegal but shameful.

The historical process whereby individual loyalties to families and clans lost ground to loyalties to states spanned many centuries in the West. Up to colonialism and after, original family and broader in-group loyalties remained largely intact in Africa.

When the colonial powers imposed the machinery of the modern state on Africa, complete with tax collectors, customs officers, police officers and soldiers, they did not instill an ethos of public service in local populations. After all, they meant to govern with their own officials. When Congo gained independence from Belgium in 1960, for example, it had only three Africans in the entire civil service and only 30 university graduates.

Is it surprising that when the colonial administrators abruptly left, almost all of their African successors proceeded to use their official positions to benefit themselves, their families and tribes? In fact, many Africans believe that it is immoral not to help family and clan if one can do so.

Corruption in Africa is almost a matter of common sense: As long as everyone else is abusing public office to benefit their clans and families, it remains self-defeating not to do so as well. A teacher in, say, Kenya may draw his government salary but seldom visit the classroom. Instead, he'll hold a second job -- driving a taxicab, maybe. In doing so, he may have learned from city government, in which public servants are nominally responsible for the delivery of public services but seldom do anything at all.

Most African states are therefore predators on the people they are supposed to serve and protect. Police officers extort bribes instead of protecting life and property; soldiers rape and rob the people they are supposed to protect from foreign attack; teachers collect salaries but do not teach; customs officers extract bribes instead of collecting duties; and for many African diplomats, foreign tours amount to prolonged shopping vacations.

From a historical perspective, then, the greatest harm inflicted by colonialism was to interrupt the organic evolution of indigenous African governments and states. That harm is being perpetuated by Western governments and nongovernmental organizations that want to help African populations.

On a micro level, Africa is littered with failed projects financed by foreign aid, including a steel plant in Ajaokuta, Nigeria, that does not produce steel and agricultural projects in Mali that decreased rather than increased the production of grain. Millions of Africans have been uprooted, with their livelihoods destroyed, by the pursuit of harebrained agricultural and irrigation schemes dreamed up by ignorant and arrogant, if well-meaning, foreigners.

On a macro level, aid has kept predatory African states alive by enriching corrupt political leaders and paying the salaries of their bureaucrats, soldiers and police. Uganda, by no means an outlier when it comes to "budget support," receives 50% of its annual government revenue from foreign aid. Economist Paul Collier of Oxford University showed that aid pays for up to 40% of African weapons purchases. On a continent where interstate conflicts are mercifully rare, those weapons are often used to crush domestic opposition -- as has been happening in Zimbabwe.

Pulling aid away from dysfunctional African states seems like a shocking move. Allowing failing states to collapse, it will be said, could lead to anarchy and turn Africa into a haven for terrorists. In the aftermath of the U.S. invasion of Iraq, however, many now believe that terrorists are best confronted by security measures, including intelligence gathering and surgical strikes against individual terrorist groups, rather than by social engineering on the scale of entire countries.

Aid is social engineering par excellence. But after 50 years and hundreds of billions of dollars, it should be clear that aid has failed to make the modern state viable in most of Africa. Instead, it has prevented the emergence and growth of authentic African polities rooted in African traditions. Aid should be ended along with most of the well-meaning but mostly harmful Western involvement in African affairs.

The well-meaning G-8 leaders can find an outlet for good works at home -- African countries are too poor to afford their charity.