Monthly Archives: October 2008

Five Stories You Might Have Missed

The American presidential race is finally entering its final stretch.  With a little more than a week left in the campaign, both candidates are sharpening their attacks against one another, and the news coverage has largely devolved into a horse race in Pennsylvania, Colorado, and a handful of other tossup states.  From a global perspective, perhaps the most interesting story from the campaign trail this week was Joe Biden’s warning that the next American president would be tested early in his new administration.  The McCain campaign seized on the comments, quickly producing an apocalyptic commercial warning of the dangers facing the United States and hinting that McCain was the only candidate who could successfully navigate those dangers.  Despite the gaffe, Obama seems well-poised to win the presidential election next Tuesday.

But enough on the American election.  Here’s five stories you might have missed with all the attention on the race for the presidency: 

1.  Responding to sharp declines in global oil prices over the past few weeks, the Organization of Petroleum Exporting Countries (OPEC) announced it would cut its output by 4.5 percent from November.  On Friday, oil fell to $62.25 per barrel, its lowest level since June 2007 and a sharp decline from the nearly $150 per barrel over the summer.  Oil prices have fallen dramatically as a result of the global financial crisis, which has resulted in sharp declines in demand for oil.

2.  A 43-nation meeting of Asian and European leaders on Friday met to consider a range of issues, including a new system of global financial regulation.  As home to the world’s largest foreign currency reserves, China has come under increasing pressure to help address the global financial crisis.  So far, China has avoided making any public commitments regarding the crisis.  But according to Charles Grant, director of the London-based Centre for European Reform, “All countries with current account surpluses have people knocking on their doors at the moment and China with the biggest surplus will be the most courted.”  A global summit scheduled fro next month will address global financial regulation in greater detail, and China looks to be a key player there.

3.  Israel appears to be headed towards early elections as Tzipi Livni, who replaced Ehud Olmert as leader of the governing Kadima party, was unable win the support of the ultra-orthodox Shas party.  The differences between the two parties center largely on the status of Jerusalem in negotiations with the Palestinians.  Shas demands that Jerusalem be the undisputed capital of Israel and maintains that the status of Jerusalem is off limits in negotiations.  But by refusing to even consider the status of Jerusalem as part of a broader settlement of the Israeli-Palestinian dispute, Shas’ position undermines the likelihood of a negotiated settlement.

4.  Iceland became the first western country since the United Kingdom in 1976 to seek a rescue package from the International Monetary Fund.  Facing an economic contraction as large as 10 percent next year and a decline in currency value of 70 percent during the crisis, the government of Iceland requested a $2 billion loan from the IMF as part of a larger $6 billion rescue package provided by other Nordic countries.   As part of the IMF package, the government of Iceland will have to impose severe financial restrictions, including curtailing government spending with a goal of balancing the structural budget in the medium term.

5.  The government of Mexico has pushed through changes in the country’s oil sector intended to make the country energy independent and halt declining production.  The changes would grant greater flexibility to Pemex, the national oil company of Mexico but imposes strict limits on the ability of private or foreign oil companies from tapping Mexican oil resources.

Does the Welfare State undermine economic competitiveness? No, just ask Ford.

There’s been a great deal of debate in the presidential campaign about the role of taxes.  McCain has argued that the United States has the highest corporate taxes rate in the world, and that companies are therefore driven out of the United States searching for better opportunities in lower-tax countries.  Obama has argued that smart taxes are the way to go, using tax policy to promote investment in new sectors, such as green energy.  As is often the case in politics, both sides overstate the strength of their own arguments.  McCain is correct that the United States officially has one of the highest corporate tax rates in the world…but due to the effective use of loopholes, deductions, and tax credits, few corporations actually pay that tax rate.  And Obama’s plan to use tax incentives to create green jobs sounds promising, but it remains to see if it could be effective.

All of this raises questions about the role of the state and the impact of taxes on corporate decision making.  And here, the relationship is less clear than is often assumed.  It seems obvious that corporations will relocate to countries where taxes are low.  Yet if this were true, we’d expect a flood of companies relocating to tax havens.  In reality, we see very little of this.  Why? 

There are two reasons.  First, capital is not as mobile as is often assumed.  Companies do relocate, but they cannot relocate anywhere.  And relocation costs money. 

Second, and more importantly, taxes are just one of a number of factors that influence corporate decision making.  Indeed, corporations may sometimes choose to relocate to higher-tax countries in exchange for other benefits.  In 2005, for example, Toyota chose to build a factory in Canada rather than in the United States because, despite having to pay higher corporate taxes, the Canadian health care system reduced corporate expenses for health care.  U.S. auto manufacturers have long complained that worker health care costs are undermining their global competitiveness.  According to some estimates, General Motors pays an average of $1500 per car to cover the cost of health insurance for its employees.  For Ford, its $980 per car.  Not surprisingly, workers health insurance costs have been at the centre of union contract negotiations for all major U.S. auto manufacturers.  German and Japanese auto manufacturers do not have to pay these costs, which are instead borne by the government.

This specific example is confirmed by more general studies.  The World Economic Forum, an independent organization which provides global discussions among the world’s business leaders, produces an annual Global Competitiveness Report, in which it ranks the business environment in countries around the world.  If low taxes were the driving force for corporate investment decisions, we would expect the countries with the lowest taxes (and therefore the lowest level of social welfare services) to be the most competitive.  The results?  Not even close.  According to business leaders, the most competitive countries in the world are:

1. The United States
2. Switzerland
3. Denmark
4. Sweden
5. Singapore
6. Finland
7. Germany
8. Netherlands
9. Japan
10. Canada

Hardly a list of low tax havens!  Clearly, other factors must enter into the decision.  In the real world, it appears, corporations are willing to operate in countries with higher marginal tax rates (e.g., Denmark, Sweden, Finland, Germany, the Netherlands, and Canada) when there are social welfare benefits associated with higher taxes.  Corporations, just like people, expect something for their tax money.


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Five Stories You Might Have Missed

Not surprisingly, coverage of the campaign for the U.S. Presidency continued to dominate the headlines this week.  Obama has taken a commanding lead in many polls, and McCain is embracing his role as underdog.  This morning, Colin Powell endorsed Obama suggesting that the race may quickly be spiraling out of McCain’s reach.

In other news:

1. President Bush on Sunday announced his intention to call a global financial summit.   The move appears to be an attempt to undermine efforts by the European Union, led by French President Nicolas Sarkozy, to reconsider the foundation of the global economic order.  Meanwhile, Pascal Lamy, director general of the World Trade Organization was warned against a rise in protectionism by governments who seek to blame other countries for their financial crises.  “This is exactly what happened in the 1930s when [protectionism] was the virus that spread the crisis all over the place…This is a risk,” he cautioned.

2. New economic figures out of China this week illustrate that no country is immune from the current global crisis.  Figures due out on Monday will provide some insight in to current developments in the Chinese economy.  But economists are bracing for a continued economic slowdown in China.  Already, the Chinese government has introduced an economic stimulus package intended to boost the economy. 

3. A status of forces agreement between the United States and Iraq has been negotiated, but the agreement now faces the difficult task of garnering support from the Iraqi parliament.  The draft agreement, which was circulated on Friday, would extend the U.S. commitment to Iraq to 2012.  The agreement faces numerous obstacles, including the question of jurisdiction over American soldiers who commit crimes while in Iraq.  The agreement, which faces stiff opposition in the Iraqi Parliament, must be passed by the Iraqi parliament by the end of the year, when the United Nations mandate for the U.S. operation ends.

4. The South African political fissure continues to grow.  The ruling African National Congress ousted its sitting president, Thabo Mbeki, several weeks ago.  In more recent developments, Mbhazima Shilowa, an influential figure within the party and close ally of Mbeki, quit the party and has hinted that he will found a new party to challenge the ANC in upcoming elections.  The fissure threats to deprive the African National Congress of the two-thirds majority it has held in the parliament since the establishment of multiracial democracy in 1994.  If that happens, it would force the ANC to compromise with rival parties to effect constitutional change in the country.

5. The sharp decline in global oil prices over the last two months has led to economic problems for countries once flush with cash.  Oil has slipped under $80 per barrel on global markets.  Over the summer, oil was trading near $150 per barrel.  The decline has created problems–such as declines in government revenue and export earnings–for major oil exporters, including Russia, Mexico, and Nigeria, and the oil exporting Gulf States.

Paul Krugman’s Nobel Prize

Congratulations to Paul Krugman, who won this year’s Nobel Prize in Economics for his work on international trade and economic goegraphy.  According to the Nobel Prize Committee,

Krugman’s approach is based on the premise that many goods and services can be produced more cheaply in long series, a concept generally known as economies of scale. Meanwhile, consumers demand a varied supply of goods. As a result, small-scale production for a local market is replaced by large-scale production for the world market, where firms with similar products compete with one another.

Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods. The new theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products – for instance, a country such as Sweden that both exports and imports cars. This kind of trade enables specialization and large-scale production, which result in lower prices and a greater diversity of commodities.

Interested in more Krugman insights?  Head over to his blog, The Conscience of a Liberal.

And for just for fun, try the Journal of Improbable Research, which specializes in publishing work that “makes people laugh, then think.”  It awards its Ig Nobel Prize every year in anticipation of the Nobel Prize Award.

Five Stories You Might Have Missed

Here’s this week’s installment of Five Stories You Might Have Missed, with a special bonus entry on Tuesday’s Canadian elections!  Enjoy!

1. The Bush administration has removed North Korea from its terror list.  In exchange for its removal, North Korea has agreed to allow nuclear inspects into its facilities to verify compliance with the agreement produced in the six-party talks.

2. World economic markets continue to be turbulent, as demonstrated by the global market selloffs last week, including the largest single-largest day decline for the U.S. stock market since 1987.  In a move intended to address the crisis, most of the world’s major central banks last week announced simultaneous cuts in inertest rates.  But despite the ongoing financial crisis, the United States remained the most competitive country in the world, topping the World Economic Forum’s Global Competitiveness Index.  The remaining countries in the top 10: Switzerland, Denmark, Sweden, Singapore, Finland, Germany, the Netherlands, Japan, Canada, Hong King, and Britain.

3. Concerns over the continued development of Iran’s nuclear program sparked discussions between the U.S. and its allies last week about imposing sanctions on Iran without the support of the United Nations Security Council.   Action by the Security Council seems unlikely given the strength of objections raised by China and Russia.  The proposed sanctions would be imposed on a voluntary basis and would likely target Iran’s petrol imports and refining sector.

4. The tentative settlement of the crisis in Zimbabwe  reached several weeks ago now appears to be in limbo, as the Mugabe government has unilaterally moved to seize control of key positions within the government of national unity.  Mugabe announced his party, the Zimbabwe African National Union, would control several key ministries, including justice, media, home affairs (police), foreign affairs, defense, local government, and finance.  The opposition parties would be given control of relatively less important ministries, including constitutional affairs, energy, health, labor and social welfare.  No word yet on the response from South Africa, which had mediated the original settlement.

5. In local election results last week, Mexico’s Institutional Revolutionary Party (PRI) performed above most expectations, nearly capturing a majority of seats in two districts, while the ruling National Action Party (PAN) placed third.  The results suggest that Mexico may be in for a political transformation in its next round of mid-term, scheduled for summer 2009.

6. And in a bonus story for this week, Canada may be the first country to experience a political transition due to the current global economic crisis.  When a snap election was called six weeks ago, Stephen Harper’s ruling Progressive Conservative party had been projected to cruise to victory, perhaps even winning a majority in the parliament.  It now appears that Stéphane Dion’s Liberal Party may be positioned to play spoiler.

The New Face of Capitalism: Are We All Socialists Now?

Less than a month ago—in what now seems like a lifetime ago and another world—I was engaged in a discussion with a colleague from the economics department down the hall.  He was arguing that—at least in policy circles—the neoclassical paradigm was the only model really under consideration.  We had reached the “end of history” as Fukuyama would have it. “There is [was] no alternative,” to quote Margaret Thatcher.

Less than a month later, we now seem to be living in a different world.  With world credit markets seizing up, financial markets in meltdown, and the Dow Jones in apparent freefall, governments are increasingly intervening in an attempt to prevent the expansion of the global financial crisis.  The U.S. Congress passed a $700 billion rescue package.  The British government took an even more dramatic step, partially nationalizing several major banks on Wednesday.  The U.S. government is now considering a similar measure.  The Federal Reserve has described the new policy as a “regime change,” stressing that the current economic environment is such that radical policy changes may be necessary, even going so far as to suspend traditional neoclassical principles of noninterference in the free market.  This represents a dramatic shift from March 2007, when, during a visit to Shanghai to meet with Chinese officials, U.S. Treasury Secretary Henry Paulson argued that “an open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention.”

The policy reversal has led the conservative Daily Telegraph to conclude that “we’re all socialists now.” Perhaps a bit of dramatic license.  But it does highlight the dramatic changes taking place in the world today.  Communism it is not.  But perhaps return to the Keynesian system of regulated domestic and international markets.  Time will tell.

Improvements in African governance

The 2008 Mo Ibrahim Index of African Governance was released on Monday.  The index tracks five overarching categories of governance: safety and security; rule of law, transparency, and corruption; participation and human rights; sustainable development opportunity; and human development.  The purpose is to provide a comprehensive measure of progress in improving the quality of governance on the continent.

The report offers an upbeat assessment overall.  Two-thirds of African governments have improved their overall rankings from last year, with Liberia making the greatest improvements. The establishment of a democratic government under the leadership of Africa’s first female head of state, Ellen Sirleaf-Johnson, no doubt helped.

Topping the list were three small island states: Mauritius, the Seychelles, and Cape Verde, as well as the relatively-wealthy states of South Africa and Botswana.  At the bottom of the list were those where ongoing war has resulted in state failure: Somalia, the Democratic Republic of the Congo, Chad, Sudan, Angola, and the Central African Republic.


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Five Stories You Might Have Missed

Congress finally passed a bailout package on Friday.  The bill, which promises up to $700 billion to purchase failing mortgages from banks, was quickly signed into law by President Bush.  The vice presidential debate between Senator Joe Biden and Governor Sarah Palin also garnered much attention.  But will all the focus on the outcome of the bailout and the VP debate this week, you might have missed some other important developments in the world this week.  Here are my top five:

1. We discussed the political transition in South Africa last week.  One interesting (and critically important) result: a new health minister.  The incoming heath minister, Barbara Hogan, has vowed to make fighting HIV/AIDS the ministry’s top priority.  In a country where an estimated 5.6 million people are HIV positive, and more than 1,000 die from HIV/AIDS-related illness every day, the disease touches everyone.  Hogan was a well-know critic of the Mbeki government’s HIV/AIDS policy, campaigning for improved access to medicines and a greater emphasis on education.  Hogan was a white anti-apartheid activist who spent eight years in prison for fighting for democracy and majority rule. 

2. The Bush administration notified Congress of its intention to move forward with a $6.5 billion weapons deal with Taiwan.  The deal would include some of the U.S.’s most advanced weapons systems including Patriot missiles, Apache helicopters, submarine-launched Harpoon missiles, and spare parts for F-16 fighter jets.  Taiwan feels the weapons are necessary to increase the island’s ability to defend itself.  China views the sale as a provocation.

3. In another U.S. foreign policy development, the Senate appears likely to approve a civilian nuclear energy deal between the United States and India next week.  Secretary of State Condoleezza Rice is visiting with Indian government officials this weekend to hammer out the deal, which could receive approval from the Senate as early as Wednesday.  The deal represents a fundamental shift in U.S.-Indian relations.  Because India had developed nuclear weapons outside of the Nuclear Non-Proliferation Treaty, it was subject to intense trade-restrictions on nuclear-related technologies.  In light of the U.S. move, Europe is making a similar policy shift.

4. In Angola, the government announced a plan to attract $6 billion in new agricultural investment over the next five years.  Encouraged by high global food prices, the government of Angola hopes to diversify the country’s economy away from exclusive reliance on diamonds and oil, into new areas.   The country has already attracted two new investors, Lonrho and Chiquita, both of which hope to capitalize on the new initiative.  However, the United Nations has raised concerns over the risk of “food neo-colonialism” in the context of such efforts.

5. French President Nicolas Sarkozy’s Saturday summit intended to develop a plan to prevent a European-wide credit meltdown—similar to that which seems to be developing in the United States—ended without a specific plan on action.  The summit’s outcome was undermined by competition between the German and French governments over responsibility for and the nature of a rescue package.