Tag Archives: global economic crisis

Price Controls, Trade Restrictions, and Global Competition

Venezuela’s economy has been hit hard in recent years by the sharp decline in global oil prices. According to OPEC, oil accounts for about 95 percent of all of Venezuela’s export earnings and about a quarter of its total gross domestic product. Declining oil revenue has sparked an economic crisis in the country, leading to anti-government protests. In an effort to stem discontent, the government has imposed currency controls and limited the prices of key consumer goods—all in an effort to stabilize the economy and limit inflation estimated at about 60 percent.

But broad economic policies are felt on the ground as shortages of key commodities and long lines for basic supermarket goods. The unintended consequence of price controls combined with high inflation has led to shortages and hoarding. Meanwhile, the government of Venezuela asserts that the country’s economic collapse has been driven by US efforts to destabilize the regime, once seen as an alternative to American influence in the region.

What do you think? What was the primary cause of the crisis? What balance of international and domestic factors explain the crisis? How might Venezuela address its ongoing economic crisis? And how might it be resolved?

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Will Domestic Politics Paralyze World Politics in 2012?

As revelers in New York's Times Square celebrated the arrival of 2012, pundits and scholars gazed into their crystal balls to make forecasts about the new year.

As the world turns the page to 2012, watchers of world politics have unleashed an array of forecasts for the new year, ranging from the optimistic to the pessimistic to everywhere in between.  One interesting prediction is contributed by Financial Times blogger and foreign affairs expert Gideon Rachman. Rachman writes that efforts to achieve international cooperation–particularly on global economic issues–will be hindered in 2012 by a “perilous political paradox.”  Rachman describes this dilemma as a frustrating catch-22:

“But as the economic position deteriorates, the actions demanded of national leaders become ever more drastic and harder to sell at home: take part in big bail-outs of indigent nations, subsidise wildly unpopular bankers, work patiently with countries that large parts of your own population believe are bankrupt or dishonest.  In 2012, the world’s most important leaders are likely to be asked to do all of the above — and will find it ever harder to deliver. The conditions of recession, instability and panic that demand international co-operation also make voters angrier and less generous.”

This dilemma is exacerbated by the fact that leaders in many major powers will be preoccupied with elections and leadership transitions at home in 2012.  These domestic developments will both (a) decrease the time and energy available for diplomacy and (b) increase the pressure for leaders to “pander” to domestic groups’ parochial concerns rather than engaging in far-sighted efforts to save the global economy.

These forecasts highlight an argument that political scientists have been making for decades: though they are sometimes treated as distinct spheres, domestic and international politics are intertwined in innumerable ways.  And the “causal arrow” runs in both directions: domestic political factors, including regime type, interest groups, and public opinion, shape states’ foreign policy behavior, while international economic and political factors affect political outcomes at home.

What do you think?  Will domestic politics trump international considerations as leaders make decisions in 2012?  How might that affect outcomes in world politics, in areas ranging from security to economics to the environment?  Do you find Gideon Rachman’s arguments persuasive, or does he exaggerate the power of domestic politics?

What’s Going on at the IMF?

International Monetary Fund Headquarters, Washington DC

International Monetary Fund Headquarters, Washington DC

Once the unabashed advocate for cutting government regulation and liberalizing economies worldwide, there have been recent murmurings from the International Monetary Fund moving in a dramatically different direction. This is not to suggest that critics of the IMF—most notably Joseph Stiglitz—have run out of ammunition. Rather, as Duncan Green has been reporting on his Oxfam blog, the IMF appears to be opening up to new proposals. For most, the concession that the state may have a role to play in development is hardly a dramatic finding. But from the organization that promoted cuts in government spending and liberalization of capitalism markets as the solution to nearly every economic and financial crisis from Asia to the United Kingdom, from Russia to Brazil, it’s quite a concession.

We’re specially looking at three developments, all covered by Duncan. First, in early February, the IMF began to rethink its traditional focus on inflation. In a paper co-authored by the IMF’s chief economist, Olivier Blanchard, the organization conceded that it had become too focused on inflation at expense of other goals, like fiscal policy, interest rate stability, and—wait for it—preventing global financial crises like the one that rocked the world beginning in 2008.

Later the same month, responding to increasing pressure from countries like Brazil, the IMF began to rethink its traditional opposition to capital controls.  For years, the IMF had promoted open financial markets as a central component of development strategies. But such openness carried significant risk of fostering financial instability. We saw this, for example, during the 1997 Asian financial crisis. In 1997, the IMF prescribed cutting capital flows as part of its reform package. But in 2010, it reversed course, conceding that capital controls, under certain circumstances,  may be an effective part of the policy toolkit to manage capital flows.

In April, the IMF announced its most dramatic change to date, announcing its support for establishing a “Robin Hood Tax” intended to force banks to pay for the direct and indirect costs associated with government interventions to bail out the banking sector following the global financial meltdown. While this initiative has stalled amid strong divisions between major players—particularly between the United States and France—the willingness with which the IMF embraced the proposal stood in stark contrast to its earlier positions on financial deregulation and lowering tax rates.

Now, in a new working paper published this month, two IMF economists draw a connection between inequality and the outbreak of financial crises, concluding that higher levels of inequality make an economy more prone to the kinds of crises that have rocked the global economy in recent years. They conclude that preventing future economic crises may depend on reducing the total level of inequality in any given society.

Duncan Green is right. They must be putting something in the water at IMF headquarters. How else do we explain the dramatic shifts taking place there?

Five Stories You Might Have Missed

Afghan elections took place last week, and both sides are claiming victory at the polls. President Hamid Karzai, who has led Afghanistan since the 2001 invasion which displaced the Taliban government, declared victory on Friday. Meanwhile, his main rival, Abdullah Abdullah, accused Karzai of rigging the poll but said that Karzai would not win enough votes in the first round to avoid an October runoff election. Voter turnout in the election had declined sharply from the previous presidential elections, amid accusations of voter fraud and threats by the Taliban to cut off any fingers marked with the indelible purple ink identifying voters. The election is an important component of President Barack Obama’s strategy in Afghanistan, where the United States has maintained a troop presence for more than seven years. 

In other news from the last week:

1. The Scottish government on Thursday released Abdelbaset Ali Mohamed al-Megrahi from prison, returning him to his native Libya. Al-Megrahi had been extradited from Libya to the United Kingdom in 1999 in exchange for the United Nations agreeing to drop sanctions imposed on Libya. Al-Megrahi was convicted by a Scottish jury of conspiracy for his involvement in the 1988 bombing of Pan-Am flight 103 over Lockerbie, Scotland. Although sentenced to life in prison, al-Megrahi served 8 ½ years before being released on compassionate grounds on Thursday. Al-Megrahi has terminal prostate cancer. The United States condemned al-Megrahi’s release and his welcome by Libya’s President, Muammar Gaddafi.

2. Efforts to protect intellectual property gained a boost in China and the United Kingdom last week. In China, the founders and executives of Tomato Garden, a website which that provided free downloads of Microsoft Windows XP and other programs, were convicted of piracy and sentenced to 3 ½ years in prison and a fine of $146,000 each. According to Microsoft, approximately 90 percent of all software sales in China are counterfeit, costing the company an estimated $6.68 billion in sales annually. The Business Software Alliance, the leading lobbying firm for the software industry, celebrated the decision, noting that “This shows that the government [of China] is really taking action.” In the past, the United States has accused the Chinese government of not doing enough to protect intellectual property rights, going so far as to threaten suit before the World Trade Organization.

Meanwhile, the British government has begun consideration of a number of proposals intended to reduce illegal file sharing in the United Kingdom by 70 percent. The proposals under consideration now could slow the speed of internet connections for people found to be downloading protected content, and access to some sites could be blocked altogether.

3. A prolonged drought in Kenya has resulted in a 50 percent increase in the number of people requiring food aid, according to a report released by the World Food Programme. The report also notes that some regions of the country are suffering from shortages of power and water. Although triggered by the ongoing drought, the country’s weak coalition government faces widespread popular discontent as a result of its inability to carry out much needed political and economic reform.

4. Despite some positive developments over the past several weeks in the United States, Germany, and elsewhere, the global economic crisis continues. On Thursday, the government of Mexico announced the economy shrank by a record 10.3 percent in the second quarter of this year, the fastest rate ever for the country. The global economic crisis has affected Mexico particularly had, as the country has been impacted by the U.S. recession, declining oil revenues, and the H1N1 swine flu virus which decimated the country’s tourism industry.

5. A series of bomb attacks killed almost 100 and wounded almost 500 people in Baghdad on Wednesday. The attacks, which mark the deadliest day since the withdrawal of U.S. troops from the city in June, targeted two central locations and the heavily fortified Green Zone, where the U.S. embassy and many Iraqi government buildings are located. Although no one has claimed responsibility for the attacks, they nevertheless illustrate the challenges facing the Iraqi government.

Five Stories You Might Have Missed

The political situation in Iran continued to evolve over the past week. Last week, a standoff between President Mahmoud Ahmadi-Nejad and Iran’s Supreme Leader, Ayatollah Ali Khamenei, culminated in the dismissal of two conservatives from the cabinet and the firing of Vice President (and close ally of Ahmadi-Nejad), Esfandiar Rahim Mashaei. The deteriorating relationship between Ahmadi-Nejad and Khamenei further undermines the political stability of Iran, already weakened by June’s disputed presidential elections and the subsequent protests which have rocked the country. Protests have been a regular feature of the Iranian political scene for the past month, including clashes between police and opposition supporters like those that occurred on Thursday.  Although the Iranian government last week released hundreds of people arrested for participating in the post-election protests, the trial of 100 of the most prominent detainees is moving forward. Critics of the regime have condemned the trial as a spectacle.

Meanwhile, three Americans were arrested on Saturday by Iranian security forces for allegedly entering the country illegally.  The three were camping in Kurdistan (near the Iraqi-Iranian border) when they crossed over into Iran. They have been transferred to the capital, Tehran, where they are currently being held.

In news from outside Iran in the last week:

1. Two statements by the Indian government last week dashed hopes of progress in multilateral negotiations. On Wednesday, India’s commerce secretary, Rahul Khullar, dismissed hopes of rekindling World Trade Organization talks as unrealistic in the current global political and economic climate. The current round of talks, referred to as the Doha agenda, has been under negotiation for nine years. The talks have been suspended numerous times, largely as a result of the inability of WTO member states to agree on binding cuts to agricultural subsidies. According to Khullar, progress is unlikely because, in the context of the global economic crisis, political leaders are focused on job losses and the lack of domestic economic growth, a focus which makes it difficult to move forward on a new global trade deal.

In another development, India’s environment minister, Jairam Ramesh, said on Friday that India would not agree to binding emission cuts for at least ten years, potentially throwing climate talks scheduled to take place in Copenhagen in December into disarray. India and China are both dismissive of western pressure to agree to greenhouse gas reductions, believing that such reductions would undermine future economic growth and development in their countries. But without the participation of China and India in climate change negotiations, progress will be far more difficult, particularly given the historical U.S. negotiating position that it will not be bound by any climate change agreement that does not also include reductions for China and India.

2. Over the weekend, Russia concluded negotiations to expand the Russian troop presence in Kyrgyzstan. The expanded Russian presence is part of Russia’s broader effort to reassert itself in its traditional sphere of influence, an effort which included the development of the Collective Security Treaty Organization, a counterpart to NATO which includes Russia and six other former Soviet Republics, Kyrgyzstan, Kazakhstan, Tajikistan, Uzbekistan, Armenia and Belarus. The United States and Russia have been competing for influence in Kyrgyzstan, which occupies an important geo-strategic position, and Kyrgyzstan’s president, Kurmanbek Bakiyev, has skillfully negotiated between competing Russian and American interests. In February, after receiving $2 billion in aid from the Russian government, Bakiyev ordered the United States to leave Kyrgyzstani bases by June. The bases are part of the U.S. air transit route to supply forces in Afghanistan. After the United States agreed to triple rent payments for use of the base and to offer additional financial assistance to the Kyrgyzstani government, Bakiyev rescinded his request that the U.S. withdraw.

3. Venezuelan President Hugo Chávez has once again sparked widespread criticism, this time among human rights groups. At issue is the latest development in the president’s campaign against “media terrorism”—a new law which would punish journalists and their sources with up to four years in jail for “causing panic,” “disturbing social peace” or compromising national security.

In an unrelated development, the government of Venezuela has “frozen” diplomatic and economic relations with its neighbor, Colombia. Relations between the two countries have been poor since March 2008, when Colombia launched a raid into Ecuador, a close ally of Venezuela. The decision to suspend relations came after Colombia accused Venezuela of supplying rocket launchers to Marxist rebels in Colombia.

4. Clashes between security forces and an Islamist sect in three states in Nigeria continued last week despite the death of Islamist leader Mohammed Yusuf in police custody. More than 150 people have died in five days of fighting in Nigeria, where a sharp economic and political divide between the largely Muslim north and the predominately Christian south has been exacerbated by the country’s declining economic situation. The fighting in the northern part of the country complicates efforts to address the longstanding crisis in the southern, oil producing region of the country, where conflicts between militant separatist groups and the government have continued off-and-on for the better part of a decade. Taken together, these conflicts represent the most significant challenge to the Nigerian government since independence.

5. The International Monetary Fund on Friday issued a statement intended to play down the standoff between the Fund and the government of Iceland. At issue are the conditionalities imposed on the government of Iceland as a requirement for the dispersal of $2.1 billion in IMF loans. The government of Iceland has been under immense political pressure regarding the status of foreign savings deposits in Icelandic banks, which collapsed last year as part of the global economic crisis. The IMF is requiring that the government guarantee all foreign savings deposits, but the government of Iceland has so far refused, bowing to domestic political pressure not to compensate account holders.

Five Stories You Might Have Missed

The turmoil over last week’s Iranian elections continued into this week, with thousands of people defying a statement  by the country’s spiritual leader, Ayatollah Ali Khamenei, and orders by President Mahmoud Ahmadi-Nejad and the country’s Revolutionary Guard banning such protests. Over the weekend, hundreds of supporters of Mir-Hossein Moussavi were arrested during protests. Moussavi’s supporters believe the election was rigged, but international observers and foreign governments have so far refused to comment.

In other news from the previous week:

1. The World Bank issued a statement urging the developed world to focus on the global economy in their recovery efforts. The collapse of global credit markets over the last year, the Bank noted, had led to a dramatic decline in private capital flows, with investment in developing countries declining from $1,200 billion in 2007 to an estimated $363 billion this year. Meanwhile, announcement of the new stimulus package by the Chinese government led the World Bank to increase its forecasts for the Chinese economy this year. But the decision of the Chinese government to include a ‘Buy China’ policy in its stimulus package has led to increasing tensions over the specter of protectionism in the global recovery effort.

2. French President Nicolas Sarkozy gave a rare address to the country’s parliament at the Palace of Versailles this week. For more than 130 years, the French President had been constitutionally prohibited from entering parliament—an attempt to ensure legislative independence. But after the constitution was amended last year—in the name of increasingly parliamentary oversight—the restriction was removed. French Green and Communist parties boycotted the speech in protest of what they see as an attempt to increase the power of the French presidency. Sarkozy used the opportunity to outline measures intended to address the problem of rapidly detiorating public finances, sparked by the global economic crisis. In the speech, Sarkozy rejected the introduction of austerity measures, instead focusing on the need to protect jobs.

3. The situation in Iraq deteriorated over the past week, as the number of bombings as increased. On Saturday, a large truck bomb exploded outside a Shi’ite mosque in the Kurdish town of Kirkuk. The attack, the deadliest single attack in more than a year, killed 73 people. Meanwhile, a series of smaller attacks in Baghdad killed 15 people on Monday. The declining security situation comes as the United States prepares to begin its withdrawal from Iraqi towns, handing responsibility for day-to-day security over to Iraqi police by the end of June.

4. The speaker of the parliament in Somalia has issued a call for neighboring countries to send in troops to help prop up the country’s fragile government. The security situation in Somalia remains grim. On Thursday, the government’s security minister, Omar Hashi Aden, and more than 20 others were killed in a suicide attack by Islamic militants known as al-Shabaab. Al-Shabaab seeks to overthrow the country’s western-backed government and impose its vision of strict sharia law in Somalia. So far, international assistance has been limited, and al-Shabaab has confined the influence of the government to the country’s capital, Mogadishu. Meanwhile, according to United Nations estimates, some 122,000 civilians have been forced to flee as a result of fighting which began in early May.

5. Tensions between the government of Hugo Chávez and the anti-government television station Globovisión have increased in Venezuela in recent days. Chávez accuses the station of “media terrorism” as a result of its critical coverage of his government, particularly following a minor earthquake which hit the capital, Caracdas, in early May. According to observers, the station makes an easy target for Chávez, who has stepped up his efforts to transform Venezuelan society and economy in recent months.

Five Stories You Might Have Missed

A new report issued by the International Monetary Fund on Saturday suggests that the globally economy will contract by 1.3 percent in 2009 with a slow recovery beginning in 2010. While the United States has been pushing countries to expand stimulus spending, the IMF said that existing stimulus spending already committed for 2009 should be sufficient to address the crisis. A Friday meeting of the finance ministers of the G7 countries was more cautious, concluding that, “the pace of decline in our economies has slowed and some signs of stabilization are emerging,” but simultaneously warned that “downside risks persist.”

In news outside the global economic crisis from the last week:

1. The outbreak of a new flue strain has raised concern in Mexico, as 68 people have died and more than 1,000 have been infected. The World Health Organization is monitoring the situation to determine if it is likely to reach pandemic status. While the Mexican government is urging people to remain calm, authorities have already canceled more than 500 public events and many residents in Mexico City have opted to stay home rather than travel for shopping and work. Tests have also confirmed the virus has made people in California, Texas, Kansas, and New York ill.

2. Elections in Iceland have produced the country’s first center-left government. The previous government of Iceland had been forced to resign as a result of the devastating impact of the global financial crisis on the country. Preliminary election results give Johanna Sigurdardottir’s Social Democrats 30 percent of the vote. With their coalition partner, the Left Greens’ 22 percent of the vote, the coalition appears well-positioned to drive the political agenda in Iceland. Sigurdardottir becomes the first openly gay person elected head of state in the modern world. The first item on her agenda: Icelandic membership in the European Union.

3. While the Obama administration is hoping to resume the six-party talks with North Korea, the government of North Korea appears to be taking a more hardline stance. Earlier this month it test fired a long-range missile, sparking a confrontation with the UN Security Council. Last week, the government of North Korea last week announced it would put two U.S. reporters on trial, charging them with illegal entry and “hostile acts.” Additionally, after expelling international atomic inspectors two weeks ago, North Korea has announced its intention to resume plutonium extraction. It is widely believed that North Korea already possesses enough plutonium for six to eight nuclear bombs. According to some observers, the deteriorating relations between North Korea and the West may be part of the country’s efforts to force the United States into direct, bilateral negotiations.

4. The sharp upsurge of violence in Iraq, including two suicide attacks that killed 75 people outside a Shia shrine in Baghdad on Friday, have raised concerns that Iraq is sliding back into civil war. Recent attacks raise the concern of sectarian violence, suppressed by a strong U.S. presence over the past year, but never entirely defeated.

5. Reversing a longstanding policy of the Bush administration, Secretary of State Hillary Clinton announced on Thursday that the United States would be willing to work with a Palestinian government backed by Hamas so long as the organization met international demands to renounce violence and recognize Israel’s right to exist.  The Bush administration had refused to work with Hamas, which has effectively controlled the Palestinian government since it defeated its rival, Fatah, in elections in 2007. Meanwhile, Israeli Prime Minister Benjamin Netanyahu is under pressure to engage meaningfully in international diplomacy and to be seen acting.

And because it was such a busy week internationally, here are two bonus stories from this week:

6. The rebel Tamil Tigers in Sri Lanka on Sunday declared a unilateral ceasefire, a move almost immediately rejected by the government. An operation launched by the government last month has effectively confined the Tamil Tigers to a small enclave in the northern part of the country, and the government is expected to announce the defeat of the Tigers any day. But the United Nations has described the situation as a humanitarian disaster, with more than 6,500 civilians already killed and as many as 100,000 refugees created as a result of the fighting.

7. It was announced on Friday that China has become the world’s fifth largest holder of gold reserves, with 1,054 tones of gold. Seen as part of a broader strategy to diversify its nearly $2 trillion in foreign exchange reserves, the government of China has slowly been building its gold reserves over the several years. However, even with the recent purchases, China has a level of gold reserves (as a percent of its total reserves) far below that of the United States and other developed countries.