US Escalation Against Iran Would Carry High Cost For Global Economy

Jasmin Ramsey:

The world economy would bear substantial costs if the United States took steps to significantly escalate the conflict with Iran over its controversial nuclear programme, according to the findings of a Federation of American Scientists’ (FAS) special report released here Friday.

Based on consulations with a group of nine bipartisan economic and national security experts, the findings showed the effects of U.S. escalatory action against Iran could range from 64 billion to 1.7 trillion dollars in losses for the world economy over the initial three-month term.

The least likely scenario of de-escalation, which would require U.S. unilateral steps showing it was willing to make concessions to resolve the standoff, would result in an estimated global economic benefit of 60 billion dollars.

“The study’s findings suggest that there are potential costs to any number of U.S.-led actions and, in general, the more severe the action, the greater the possible costs,” Mark Jansson, FAS’s special projects director, told IPS.

“That being said, even among experts, there is tremendous uncertainty about what might happen at the higher end of the escalation ladder,” added Jansson, the second author of the report after Charles P. Blair, an FAS senior fellow on state and non-state threats.

The six plausible scenarios of U.S.-led actions against Iran included isolation and a Gulf blockade, which would include U.S. moves to “curtail any exports of refined oil products, natural gas, energy equipment and services”, the banning of the Iranian energy sector worldwide (incurring an estimated global economic cost of 325 billion dollars), and a comprehensive bombing campaign that would also target Iran’s ability to retaliate (incurring an estimated global economic cost of 1.082 trillion dollars).

The report is explicit in not endorsing any particular policy recommendation, although others are not so reticent.

Paul Sullivan, an economics professor specialising in Middle East security at Georgetown University, told IPS that, “The fact that the hardest core of the neoconservative ‘strategists’ have not thought through the costs of escalating conflict with Iran is proof of their group intellectual inadequacy.

“The main effects to the U.S. if there is escalation is through the price of oil and increased military and other national security costs,” said Sullivan, who evaluated the scenarios as an expert but could not comment on the specific figures due to Chatham House Rules.

“If there is an attack on Iran, with the expected counterattacks the price of oil could quite easily go to 250 dollars or higher. This could push the U.S. right back into a recession,” he said.

The Iran Project Report released in September showed that the cost of Iranian retaliation would be “felt over the longer term” by the U.S. and could result in a regional war.

“In addition to the financial costs of conducting military attacks against Iran, which would be significant…there would likely be near-term costs associated with Iranian retaliation, through both direct and surrogate asymmetrical attacks,” according to the report, which was endorsed by a long list of high-level, bipartisan national security advisers.

“A dynamic of escalation, action, and counteraction could produce serious unintended consequences that would significantly increase all of these costs and lead, potentially, to all-out regional war,” notes the report.

An Oct. 19 event on the economic and military considerations of war with Iran at the Center for the National Interest (CNI) offered similar assessments.

“You could lose eight million barrels a day of production, and it would not come back quickly,” said J. Robinson West, who has also held senior positions in the White House, the Energy Department, and the Pentagon under various Republican administrations. “We believe the price of oil will go above 200 dollars a barrel.”

Via: "IPS News"

Leaderless Global Governance

The World Economy Is Entering A New Phase, In Which Achieving Global Cooperation Will Become Increasingly Difficult. 

By Dani Rodrik 
Dani Rodrik is author of The Globalization Paradox and professor of IPE at Harvard University. 
Last Modified: 19 Jan 2012 19:27 
Courtesy Of "Al-Jazeera"

Cambridge, Mass. - The world economy is entering a new phase, in which achieving global co-operation will become increasingly difficult. The United States and the European Union, now burdened by high debt and low growth - and therefore preoccupied with domestic concerns - are no longer able to set global rules and expect others to fall into line.

Compounding this trend, rising powers such as China and India place great value on national sovereignty and non-interference in domestic affairs. This makes them unwilling to submit to international rules (or to demand that others comply with such rules) - and thus unlikely to invest in multilateral institutions, as the US did in the aftermath of World War II.

As a result, global leadership and co-operation will remain in limited supply, requiring a carefully calibrated response in the world economy's governance - specifically, a thinner set of rules that recognises the diversity of national circumstances and demands for policy autonomy. But discussions in the G20, World Trade Organisation, and other multilateral fora proceed as if the right remedy were more of the same - more rules, more harmonisation, and more discipline on national policies.

Empire - Superclass

Going back to basics, the principle of "subsidiarity" provides the right way to think about global governance issues. It tells us which kinds of policies should be coordinated or harmonised globally, and which should be left largely to domestic decision-making processes. The principle demarcates areas where we need extensive global governance from those where only a thin layer of global rules suffices.

Economic policies come in roughly four variants. At one extreme are domestic policies that create no (or very few) spillovers across national borders. Education policies, for example, require no international agreement and can be safely left to domestic policymakers.

At the other extreme are policies that implicate the "global commons": the outcome for each country is determined not by domestic policies, but by (the sum total of) other countries' policies. Greenhouse gas emissions are the archetypal case. In such policy domains, there is a strong case for establishing binding global rules, since each country, left to its own devices, has an interest in neglecting its share of the upkeep of the global commons. Failure to reach global agreement would condemn all to collective disaster.

Between the extremes are two other types of policies that create spillovers, but that need to be treated differently. 

First, there are "beggar-thy-neighbour" policies, whereby a country derives an economic benefit at the expense of other countries. For example, its leaders restrict the supply of a natural resource in order to drive up its price on world markets, or pursue mercantilist policies in the form of large trade surpluses, especially in the presence of unemployment and excess capacity.

Because beggar-thy-neighbour policies create benefits by imposing costs on others, they, too, need to be regulated at the international level. This is the strongest argument for subjecting China's currency policies or large macroeconomic imbalances such as Germany's trade surplus to greater global discipline than currently exists.

Beggar-thy-neighbour policies must be distinguished from what could be called "beggar-thyself" policies, whose economic costs are borne primarily at home, though they might affect others as well.

Consider agricultural subsidies, bans on genetically modified organisms, or lax financial regulation. While these policies might impose costs on other countries, they are deployed not to extract advantages from them, but because other domestic-policy motives - such as distributional, administrative, or public-health concerns - prevail over the objective of economic efficiency.

The case for global discipline is quite a bit weaker with beggar-thyself policies. After all, it should not be up to the "global community" to tell individual countries how they ought to weight competing goals. Imposing costs on other countries is not, by itself, a cause for global regulation. (Indeed, economists hardly complain when a country's trade liberalisation harms competitors.) Democracies, in particular, ought to be allowed to make their own "mistakes".

"Over-ambitious and misdirected efforts at global governance will not serve us well at a time when the supply of global leadership and co-operation is bound to remain limited."

Of course, there is no guarantee that domestic policies accurately reflect societal demands; even democracies are frequently taken hostage by special interests. So the case for global rulemaking takes a rather different form with beggar-thyself policies, and calls for procedural requirements designed to enhance the quality of domestic policymaking. Global standards pertaining to transparency, broad representation, accountability, and use of empirical evidence, for example, do not constrain the end result.

Different types of policies call for different responses at the global level. Too much global political capital nowadays is wasted on harmonising beggar-thyself policies (particularly in the areas of trade and financial regulation), and not enough is spent on beggar-thy-neighbour policies (such as macroeconomic imbalances). Over-ambitious and misdirected efforts at global governance will not serve us well at a time when the supply of global leadership and cooperation is bound to remain limited.

Dani Rodrik, Professor of International Political Economy at Harvard University, is the author of The Globalization Paradox: Democracy and the Future of the World Economy.

A version of this article first appeared on Project Syndicate.

Global South Key To African Economies

"South-South" Cooperation Will Help Both African Countries and Other Emerging Economies.

By Global Development Agencies
Last Modified: 05 Aug 2011 19:13
Courtesy Of "Al-Jazeera"


People across the African continent share the same aspirations: decent employment, affordable access to basic services such as health and education, and opportunities to participate in shaping the future of their countries.

While Africa has experienced high economic growth and reduced poverty since the mid-nineties, one in two people in Sub-Saharan Africa still live on less than $1.25 a day. Too many men, women and children in most of the continent's 53 countries are still not benefitting from economic and social progress.

The key question is how to encourage people-centred growth, which creates jobs and opportunities to save and invest in the future.

This is the theme explored in the African Economic Outlook 2011, a report jointly written by the African Development Bank, the Organisation for Economic Cooperation and Development, the United Nations Development Programme and the United Nations Economic Commission for Africa.

Half of all people in Sub-Saharan Africa still live on less than $1.25 a day

The report stresses that there is no roadmap for success in achieving people-centered growth. It encourages the continent to focus on "south-south cooperation" - cooperation among developing countries - as a catalyst for economic growth and human development.

Africa's new partnerships with emerging economies like Brazil, China, India, Korea, Turkey and Indonesia offer immense opportunities. They present a broad range of policy ideas to inform such a growth process.

These countries have charted independent paths to development, devising home-grown solutions to address their own realities on the ground. Countries such as China and Vietnam have had astounding success in lifting millions of people out of poverty in just a few years. Brazil transformed its agriculture in a couple of decades, and is bringing hunger, poverty and inequality down.

These and other emerging economies have been able to bolster growth and trigger large-scale improvements in living standards, adopting and gradually expanding their own set of innovative policies.

By drawing lessons and inspiration from their successes, but also their shortcomings, many African countries can tailor their own institutions and policies to meet their development aspirations.

While traditional partners still represent the majority of Africa's trade, aid and investment, emerging economies bring new flows of finance and expertise to the continent.

In 2009, China overtook the United States as Africa's main trading partner. Two years earlier, for the first time, the share of Africa's total trade with the group of developing countries - mainly emerging economies - surpassed Africa's share of trade with the European Union.

To reap the full benefits of these partnerships, African policy-makers need to define the terms of their engagement with partners, based on clear development strategies. In doing so, they would advance their national interests and ensure that trade opportunities and investment flows deliver the development outcomes that matter to people: jobs, health, and education.

In addition, coordination at the regional and sub-regional levels would allow African countries to have more weight in negotiations with traditional and emerging economies, bargaining collectively to ensure these partnerships are geared toward achieving regional development priorities.

By the same token, traditional and emerging powers should consider the aspirations of their African counterparts to foster more systematic win-win outcomes.

Jean-Philippe Stinjs, Economist, Organisation for Economic Cooperation and Development; 
Pedro Conceicao, Economist, United Nations Development Programme; 

Desire Vencatachellum, Director, African Development Bank research department; 

Emmanuel Nnadozie, Director, Economic Development and New Partnership for African Development Division, United Nations Economic Commission for Africa

Inside Job

'Inside Job' provides a comprehensive analysis of the global financial crisis of 2008, which at a cost over $20 trillion, caused millions of people to lose their jobs and homes in the worst recession since the Great Depression, and nearly resulted in a global financial collapse. The film traces the rise of a rogue industry which has corrupted politics, regulation, and academia. It was made on location in the United States, Iceland, England, France, Singapore, and China.

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Part-8

The Collapse Of Globalization

Demonstrators carry an effigy of Ronald McDonald


The refusal by all of our liberal institutions, including the press, universities, labor and the Democratic Party, to challenge the utopian assumptions that the marketplace should determine human behavior permits corporations and investment firms to continue their assault, including speculating on commodities to drive up food prices.

By Chris Hedges
Posted on Mar 27, 2011
Courtesy Of "Truth Dig"

The uprisings in the Middle East, the unrest that is tearing apart nations such as the Ivory Coast, the bubbling discontent in Greece, Ireland and Britain and the labor disputes in states such as Wisconsin and Ohio presage the collapse of globalization. They presage a world where vital resources, including food and water, jobs and security, are becoming scarcer and harder to obtain. 

They presage growing misery for hundreds of millions of people who find themselves trapped in failed states, suffering escalating violence and crippling poverty. They presage increasingly draconian controls and force—take a look at what is being done to Pfc. Bradley Manning—used to protect the corporate elite who are orchestrating our demise.

We must embrace, and embrace rapidly, a radical new ethic of simplicity and rigorous protection of our ecosystem—especially the climate—or we will all be holding on to life by our fingertips. We must rebuild radical socialist movements that demand that the resources of the state and the nation provide for the welfare of all citizens and the heavy hand of state power be employed to prohibit the plunder by the corporate power elite. We must view the corporate capitalists who have seized control of our money, our food, our energy, our education, our press, our health care system and our governance as mortal enemies to be vanquished.

Adequate food, clean water and basic security are already beyond the reach of perhaps half the world’s population. Food prices have risen 61 percent globally since December 2008, according to the International Monetary Fund. The price of wheat has exploded, more than doubling in the last eight months to $8.56 a bushel. When half of your income is spent on food, as it is in countries such as Yemen, Egypt, Tunisia and the Ivory Coast, price increases of this magnitude bring with them malnutrition and starvation. Food prices in the United States have risen over the past three months at an annualized rate of 5 percent. There are some 40 million poor in the United States who devote 35 percent of their after-tax incomes to pay for food. As the cost of fossil fuel climbs, as climate change continues to disrupt agricultural production and as populations and unemployment swell, we will find ourselves convulsed in more global and domestic unrest. Food riots and political protests will be inevitable. But it will not necessarily mean more democracy.

The refusal by all of our liberal institutions, including the press, universities, labor and the Democratic Party, to challenge the utopian assumptions that the marketplace should determine human behavior permits corporations and investment firms to continue their assault, including speculating on commodities to drive up food prices. It permits coal, oil and natural gas corporations to stymie alternative energy and emit deadly levels of greenhouse gases. It permits agribusinesses to divert corn and soybeans to ethanol production and crush systems of local, sustainable agriculture. It permits the war industry to drain half of all state expenditures, generate trillions in deficits, and profit from conflicts in the Middle East we have no chance of winning. It permits corporations to evade the most basic controls and regulations to cement into place a global neo-feudalism. The last people who should be in charge of our food supply or our social and political life, not to mention the welfare of sick children, are corporate capitalists and Wall Street speculators. But none of this is going to change until we turn our backs on the Democratic Party, denounce the orthodoxies peddled in our universities and in the press by corporate apologists and construct our opposition to the corporate state from the ground up. It will not be easy. It will take time. And it will require us to accept the status of social and political pariahs, especially as the lunatic fringe of our political establishment steadily gains power. The corporate state has nothing to offer the left or the right but fear. It uses fear—fear of secular humanism or fear of Christian fascists—to turn the population into passive accomplices. As long as we remain afraid nothing will change.

Friedrich von Hayek and Milton Friedman, two of the major architects for unregulated capitalism, should never have been taken seriously. But the wonders of corporate propaganda and corporate funding turned these fringe figures into revered prophets in our universities, think tanks, the press, legislative bodies, courts and corporate boardrooms. We still endure the cant of their discredited economic theories even as Wall Street sucks the U.S. Treasury dry and engages once again in the speculation that has to date evaporated some $40 trillion in global wealth. We are taught by all systems of information to chant the mantra that the market knows best.

It does not matter, as writers such asJohn Ralston Saul have pointed out, that every one of globalism’s  promises has turned out to be a lie. It does not matter that economic inequality has gotten worse and that most of the world’s wealth has became concentrated in a few hands. It does not matter that the middle class—the beating heart of any democracy—is disappearing and that the rights and wages of the working class have fallen into precipitous decline as labor regulations, protection of our manufacturing base and labor unions have been demolished. It does not matter that corporations have used the destruction of trade barriers as a mechanism for massive tax evasion, a technique that allows conglomerates such as General Electric to avoid paying any taxes. It does not matter that corporations are exploiting and killing the ecosystem on which the human species depends for life. The steady barrage of illusions disseminated by corporate systems of propaganda, in which words are often replaced with music and images, are impervious to truth. Faith in the marketplace replaces for many faith in an omnipresent God. And those who dissent—from Ralph Nader to Noam Chomsky—are banished as heretics.

The aim of the corporate state is not to feed, clothe or house the masses, but to shift all economic, social and political power and wealth into the hands of the tiny corporate elite. It is to create a world where the heads of corporations make $900,000 an hour and four-job families struggle to survive. The corporate elite achieves its aims of greater and greater profit by weakening and dismantling government agencies and taking over or destroying public institutions. 

Charter schools, mercenary armies, a for-profit health insurance industry and outsourcing every facet of government work, from clerical tasks to intelligence, feed the corporate beast at our expense. The decimation of labor unions, the twisting of education into mindless vocational training and the slashing of social services leave us ever more enslaved to the whims of corporations. The intrusion of corporations into the public sphere destroys the concept of the common good. It erases the lines between public and private interests. It creates a world that is defined exclusively by naked self-interest.

The ideological proponents of globalism—Thomas Friedman, Daniel Yergin, Ben Bernanke and Anthony Giddens—are stunted products of the self-satisfied, materialistic power elite. They use the utopian ideology of globalism as a moral justification for their own comfort, self-absorption and privilege. They do not question the imperial projects of the nation, the widening disparities in wealth and security between themselves as members of the world’s industrialized elite and the rest of the planet. They embrace globalism because it, like most philosophical and theological ideologies, justifies their privilege and power. They believe that globalism is not an ideology but an expression of an incontrovertible truth. And because the truth has been uncovered, all competing economic and political visions are dismissed from public debate before they are even heard.

The defense of globalism marks a disturbing rupture in American intellectual life. The collapse of the global economy in 1929 discredited the proponents of deregulated markets. It permitted alternative visions, many of them products of the socialist, anarchist and communist movements that once existed in the United States, to be heard. We adjusted to economic and political reality. 

The capacity to be critical of political and economic assumptions resulted in the New Deal, the dismantling of corporate monopolies and heavy government regulation of banks and corporations. 

But this time around, because corporations control the organs of mass communication, and because thousands of economists, business school professors, financial analysts, journalists and corporate managers have staked their credibility on the utopianism of globalism, we speak to each other in gibberish. We continue to heed the advice of Alan Greenspan, who believed the third-rate novelist Ayn Rand was an economic prophet, or Larry Summers, whose deregulation of our banks as treasury secretary under President Bill Clinton helped snuff out some $17 trillion in wages, retirement benefits and personal savings. We are assured by presidential candidates like Mitt Romney that more tax breaks for corporations would entice them to move their overseas profits back to the United States to create new jobs. This idea comes from a former hedge fund manager whose personal fortune was amassed largely by firing workers, and only illustrates how rational political discourse has descended into mindless sound bites.

We are seduced by this childish happy talk. Who wants to hear that we are advancing not toward a paradise of happy consumption and personal prosperity but a disaster? Who wants to confront a future in which the rapacious and greedy appetites of our global elite, who have failed to protect the planet, threaten to produce widespread anarchy, famine, environmental catastrophe, nuclear terrorism and wars for diminishing resources? Who wants to shatter the myth that the human race is evolving morally, that it can continue its giddy plundering of non-renewable resources and its profligate levels of consumption, that capitalist expansion is eternal and will never cease?

Dying civilizations often prefer hope, even absurd hope, to truth. It makes life easier to bear. It lets them turn away from the hard choices ahead to bask in a comforting certitude that God or science or the market will be their salvation. This is why these apologists for globalism continue to find a following. And their systems of propaganda have built a vast, global Potemkin village to entertain us. The tens of millions of impoverished Americans, whose lives and struggles rarely make it onto television, are invisible. So are most of the world’s billions of poor, crowded into fetid slums. We do not see those who die from drinking contaminated water or being unable to afford medical care. We do not see those being foreclosed from their homes. We do not see the children who go to bed hungry. We busy ourselves with the absurd. We invest our emotional life in reality shows that celebrate excess, hedonism and wealth. We are tempted by the opulent life enjoyed by the American oligarchy, 1 percent of whom control more wealth than the bottom 90 percent combined.

The celebrities and reality television stars whose foibles we know intimately live indolent, self-centered lives in sprawling mansions or exclusive Manhattan apartments. They parade their sculpted and surgically enhanced bodies before us in designer clothes. They devote their lives to self-promotion and personal advancement, consumption, parties and the making of money. They celebrate the cult of the self. And when they have meltdowns we watch with gruesome fascination. This empty existence is the one we are taught to admire and emulate. This is the life, we are told, we can all have. The perversion of values has created a landscape where corporate management by sleazy figures like Donald Trump is confused with leadership and where the ability to accumulate vast sums of money is confused with intelligence. And when we do glimpse the poor or working class on our screens, they are ridiculed and taunted. They are objects of contempt, whether on “The Jerry Springer Show” or “Jersey Shore.”

The incessant chasing after status, personal advancement and wealth has plunged most of the country into unmanageable debt. Families, whose real wages have dropped over the past three decades, live in oversized houses financed by mortgages they often cannot repay. They seek identity through products. They occupy their leisure time in malls buying things they do not need.

Those of working age spend their weekdays in little cubicles, if they still have steady jobs, under the heels of corporations that have disempowered American workers and taken control of the state and can lay them off on a whim. It is a desperate scramble. No one wants to be left behind.

The propagandists for globalism are the natural outgrowth of this image-based and culturally illiterate world. They speak about economic and political theory in empty clichés. They cater to our subliminal and irrational desires. They select a few facts and isolated data and use them to dismiss historical, economic, political and cultural realities. They tell us what we want to believe about ourselves. They assure us that we are exceptional as individuals and as a nation. They champion our ignorance as knowledge. They tell us that there is no reason to investigate other ways of organizing and governing our society. Our way of life is the best. Capitalism has made us great. They peddle the self-delusional dream of inevitable human progress. They assure us we will be saved by science, technology and rationality and that humanity is moving inexorably forward.

None of this is true. It is a message that defies human nature and human history. But it is what many desperately want to believe. And until we awake from our collective self-delusion, until we carry out sustained acts of civil disobedience against the corporate state and sever ourselves from the liberal institutions that serve the corporate juggernaut—especially the Democratic Party—we will continue to be rocketed toward a global catastrophe.

Chris Hedges’ column appears every Monday at Truthdig. Hedges, a fellow at The Nation Institute and a Pulitzer Prize-winning journalist, is the author of “Death of the Liberal Class.”

Global Imbalances Without Tears

Countries and individuals need to better control the amount of money they borrow to ensure stability [GALLO/GETTY]

Excessive Debt Concentrations, Rather Than Hot Capital Inflows, Are Causing Global Economic Imbalances.

By Kenneth Rogoff
Last Modified: 03 Mar 2011 12:08 GMT
Courtesy Of "Al-Jazeera"

Doctors have long known that it is not just how much you eat, but what you eat, that contributes to or diminishes your health. Likewise, economists have long noted that for countries gorging on capital inflows, there is a big difference between debt instruments and equity-like investments, including both stocks and foreign direct investment.

So, with policymakers and pundits railing against sustained oversized trade imbalances, we need to recognise that the real problems are rooted in excessive concentrations of debt.

If G-20 governments stood back and asked themselves how to channel a much larger share of the imbalances into equity-like instruments, the global financial system that emerged just might be a lot more robust than the crisis-prone system that we have now.

Unfortunately, we are very far from the idealized world in which financial markets efficiently share risk. Of the roughly $200 trillion in global financial assets today, almost three-quarters are in some kind of debt instrument, including bank loans, corporate bonds, and government securities. The derivatives market certainly helps spread risk more widely than this superficial calculation implies, but the basic point stands.

Bad Debt

Certainly, there are some good economic reasons why lenders have such an insatiable appetite for debt. Imperfect information and difficulties in monitoring firms pose significant obstacles to idealized risk-sharing instruments.

But policy-induced distortions also play an enormous role. Many countries' tax systems hugely favor debt over equity. The housing boom in the United States might never have reached the proportions that it did if homeowners had been unable to treat interest payments on home loans as a tax deduction.

Corporations are allowed to deduct interest payments on bonds, but stock dividends are effectively taxed at the both the corporate and the individual level.

Central banks and finance ministries are also complicit, since debt gets bailed out far more aggressively than equity does. But, contrary to populist rhetoric, it is not just rich, well-connected bondholders who get bailed out. Many small savers place their savings in so-called money-market funds that pay a premium over ordinary federally insured deposits.

Shouldn't they expect to face risk? Yet a critical moment in the crisis came when, shortly after the mid-September 2008 collapse of Lehman Brothers, a money-market fund "broke the buck" and couldn’t pay 100 cents on the dollar. Of course, it was bailed out along with all the other money-market funds.

Growing Wealth

I am not advocating a return to the early Middle Ages, when Church usury laws forbade interest on loans. Back then, financial-market participants had to devise fantastic schemes and contortions to disguise interest payments.

Yet today the pendulum has arguably swung too far in the opposite direction. Perhaps scholars who argue that Islamic financial systems' prohibition on interest generates massive inefficiencies ought to be looking at these systems for positive ideas that Western policymakers might adopt.

Unfortunately, overcoming the deeply ingrained debt bias in rich-world financial systems will not be easy. In the US, for example, no politician is anxious to say that home-mortgage deductions should be eliminated, or that dividend payments should be tax-free. Likewise, developing countries should accelerate the pace of economic reform, and equity markets in too many emerging economies are like the Wild West, with unclear rules and lax enforcement.

Worse still, even as the G-20 talks about finding a "fix" for global imbalances, some of the policy changes that its members have adopted are arguably exacerbating them. For example, we now have a super-size International Monetary Fund, whose lending capacity has been tripled, to roughly $750bn.

Europe has similarly expanded its regional bailout facility. These funds may prove to be an effective short-term salve, but, over the long run, they will likely fuel moral-hazard problems, and potentially plant the seeds of deeper crises in the future.

Default Option

A better approach would be to create a mechanism for orchestrating orderly sovereign default, both to minimise damage when crises do occur, and to discourage lenders from assuming that taxpayers’ money will solve all major problems.

The IMF proposed exactly such a mechanism in 2001, and a similar idea has been discussed more recently for the eurozone. Unfortunately, however, ideas for debt-restructuring mechanisms remain just that: purely theoretical constructs.

In the meantime, the IMF and the G-20 can help by finding better ways to assess the vulnerability of each country's financial structure – no easy task, given governments' immense cleverness when it comes to cooking their books. Policymakers can also help find ways to reduce barriers to the development of stock markets, and to advance ideas for new kinds of state-contingent bonds, such as the GDP-linked bonds that Yale’s Robert Shiller has proposed. (Shiller bonds, in theory, pay more when a country's economy is growing and less when it is in recession.)

Of course, even if the composition of international capital flows can be changed, there are still many good reasons to try to reduce global imbalances. An asset diet rich in equities and direct investment and low in debt cannot substitute for other elements of fiscal and financial health. But our current unwholesome asset diet is an important component of risk, one that has received far too little attention in the policy debate.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.

This article was first published by Project Syndicate.

How Do Other Nations Balance Their Trade?

Try Germany

By Ian Fletcher

Online Journal Guest Writer

Jul 2, 2010, 00:22

Courtesy Of "The Online Journal"

As America continues to contemplate its trade mess, the question naturally arises how other developed nations manage to trade with the world without deficits and without turning high-wage industries into low-wage industries to compete. Although some other developed nations, like Britain and Spain, have trade situations almost as bad as ours in recent years, some have been quite the opposite.

Germany is perhaps the best case in point, as this Montana-sized country of 82 million people was the world’s #1 exporter until 2008, surpassing the United States even today and only surpassed by China in 2009. Germany is more culturally familiar to Americans than Japan, another strong performer in the developed world, and thus its policies are easier to understand. (Both nations, by the way, now pay their workers industrial wages higher than the U.S.) This is all without significant natural resources to export (Canada doesn’t count) and while supporting a welfare state generous by American standards. And the rest of Germanic and Scandinavian Europe follows, broadly speaking, similar economic policies, so it is well-worth understanding how the Germans do it.

Germany, like the U.S., is nominally a free-trading country. The difference is that while the U.S. genuinely believes in free trade, Germany quietly follows a contrary tradition that goes back to the 19th-century German economist Friedrich List (who was, ironically, a student of our own Alexander Hamilton, the man on the $10 bill). So despite Germany’s nominal policy of free trade, in reality, a huge key to its trading success is a vast and half-hidden thicket of de facto non-tariff trade barriers. That these barriers exist is not especially controversial, even among those who espouse free trade and thus deny that they serve any useful purpose. For example, according to a report by the conservative Heritage Foundation:

Non-tariff barriers reflected in EU and German policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members. Restrictions in services markets and the burden of regulations and standards exceed EU policy.

Germany’s covert trade barriers -- which should perhaps better be called “trade balancing measures,” as it would be a mistake to confuse them with crude protectionism -- begin with careful control over Germany’s currency. As Americans presumably realize by now thanks to our problems with China, overt or covert currency manipulation can do a lot to improve a nation’s trade performance at the expense of its trading partners. When Germany was still on the Deutschmark, for example, it did not allow mass asset sales and foreign borrowing, preventing its currency from being manipulated, and thus it was protected against trade deficits. Germany’s adoption of the euro constituted a de facto downwards manipulation of its own currency, because the euro is essentially a one-size-fits-all “blend” currency, too strong for the weaker economies of Europe, but too weak for the stronger ones. The net effect is to encourage a trade surplus by the strong countries and the gradual selling-off and indebtedness of the weaker ones. Because two-thirds of Germany’s trade is with the rest of Europe, euro-related policies have a huge effect on German trade.

Another key policy: Germany does not use the credit system to subsidize short-term consumption as the U.S. does. For example, Germany has remarkably few credit cards per person. This tends to direct lendable money into investment, not consumption. This tends to favor balanced trade because investment strengthens industrial competitiveness, while consuming more than one produces necessarily means sourcing from abroad (as there’s nowhere else to get goods if you didn’t produce them yourself). Different tax policies also have a big effect. Above all, Germany has a 19 percent value-added tax (VAT) and the US doesn’t. So American goods entering Germany pay a border-adjustment tax, but German goods entering America don’t, a fact perfectly legal under WTO rules.

The corporate structure of Germany also fights trade deficits. Germany’s universal banks, for example, pressure the companies they own stakes in not to source components from abroad, which would weaken supplier companies they have big loans to. Similar pressures operate in retail and other parts of the supply chain. And the generally high level of German state involvement in industry, ranging from training schemes to state-owned banks, comes with similar strings attached. As one German puts it,

Germany as a whole has a near 48% share of its economy is some shape or fashion state controlled or run. The German is not even really fully aware of the true tax load he’s under nor the proportion of government that controls his life. Tell most Germans that the FRAPORT [airports] is a state entity and they are perplexed and confused. Explain to them about the GEZ, and how ARD, ZDF, HR3, SWF, DW, BR3, NDR, WDR etc. are more or less ‘state’ run entities and they are in disbelief. But the truth is, these agencies get their money through a tax that the state controls and their CEO is state-appointed by a committee. The 

 Deutsche Bahn [national railway system] is another state entity, as is the Telecom.

The excruciatingly high technical and quality standards of many German (and now European) goods, ranging from the need for cars to do 150 MPH to survive the autobahn to the fact that American appliances (other than a few elite brands like the top Whirlpool, Jenn-Air, and Subzero models) are regarded as 1970s junk to European consumers, serve as barriers to penetration of European markets from the low end. This low end is, of course, the thin end of the wedge, as Americans learned from watching first Japanese and then Chinese imports to this country. Some of these standards are based on actual laws; others are deep set cultural preferences and thus consumer-driven.

It also doesn’t hurt that the German economy is, thanks to decades of policy, biased towards specializing in highly-exportable manufactured goods, while the U.S. excels in services -- which may be nice to consume on a Sunday when the shops are closed in Berlin, but are hard to export and thus don’t help our trade balance.

Although Germany is nominally compliant with WTO rules, in reality, all manner of legal red tape is employed to discourage imports. As one web commentator puts it:

The reason why France had Citroen Peugeot and Renault for all these years and even BMW and Mercedes, Fiat, Lancia etc. or Audi and VW could not break into their market is because even Germany, Great Britain and Italy were being kept out of the French market with such games for years. Now they ‘harmonized’ a lot of hidden trade barriers and while they no longer play the games they once did with each other, they still play them with the U.S.

Import duty was (probably even more now from outside the EU) 10 % based on the purchase price + freight costs to the place of destination in Germany + freight insurance. Then comes the Mehrwertsteuer [value-added tax or VAT], and you have to get a German VIN [vehicle identification number] because of course the U.S. VIN in no good, and even if it’s a brand new car you have to take it to the TUV [German equivalent of Underwriters Laboratories] and the Kraftfahrtbundesamt [Federal Motor Transport Authority] has to first say that it’s even allowed to register the car in Germany.

German motor vehicle standards require many modifications to the US car despite the fact that German safety standards (No side impact struts in doors, safety glass that isn’t as good. . . . .etc.) are lower. Example: On U.S. cars you had to disconnect the red brake light in the window of cars many years ago. Years ago (The U.S. used halogen lights first) you had to switch out headlights because the US used halogens on some cars and the Germans didn’t. Why? What safety aspect was impacted? None! It was pure games just to make it hard to import a car.

In sum, as another web commentator explains, “free trade” to a German means:

We should be able to sell all the cars in the US, but please don’t bring your Ami hormone beef Dreckschleuder [environmental hazard] car and silly Mickey Mouse phones to Germany! We have the Telecom and they build perfectly good phones that come in 4 colors (until the early 90s), and our cars without Kat [catalytic converter] are so much cleaner and safer without airbags, without side impact struts that are mandatory in the US and not in Germany (even today), without better safety glass . . .

In fact, we Germans, with our big foreheads, have determined that despite our BSE [mad cow disease], chicken flu, and the occasional farmer who feeds his cows illegal steroids and antibiotics anyway, these are much safer than U.S. beef that is hormone treated with (regulated) hormones and controlled by the USDA. Also don’t bring your bad tasting US wine to our country! Yes, you use (hybrid) plants and we don’t -- and therefore your wine is much worse than our antifreeze wine from Italy and France and should be banned, after all -- how dare you do something so uncultured as using hybrid vines?

Ian Fletcher is the author of the Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933; he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.

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