Tag Archives: global financial crisis

China and the US: A Case of Mutual Dependency?

There’s been a lot of interesting discussion about President Barack Obama’s Asian tour this week. And I don’t mean the controversy over whether or not the U.S. President should bow to the Japanese Emperor (though if you’ve been watching the domestic news media, you’d be hard pressed to realize there were any other issues at stake).

Far more important has been Obama’s visit to China. While the U.S. government has shied away from the more controversial topics (perhaps forced to do so by the more than $1 trillion in U.S. treasury bills currently held by the Chinese government, notes Stephen Walt). It also failed to win any concessions on the major issues it has hoping to address (again, not a surprise).

The most interesting story, though, was noted by John Cassidy at Rational Irrationality. Cassidy wrote,

Speaking at a conference in Beijing just hours before Air Force One arrived, a top Chinese financial official attacked the Federal Reserve, and, by extension, the rest of the American government for stoking another speculative bubble, which could have disastrous consequences for the global economy…Liu Mingkang, China’s top banking regulator, said the Fed’s policy of keeping interest rates artificially low “is boosting speculative investments in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets.” In particular, Liu said, the Fed’s cheap-money policy was encouraging investors to borrow heavily in dollars and then use the money to buy higher-yielding investments in other countries, such as stocks, bonds, and real estate. This “huge carry trade” was having a “massive impact on global asset prices,” Liu insisted.

Cast in this light, the United States and China appear to be in a situation of mutual dependence. The United States depends on China to purchase Treasury bills, essentially financing the day-to-day operations of the U.S. government. But China already holds more than $1.6 trillion in dollar-denominated assets, primarily U.S. treasury bills. Any decline in the value of the U.S. dollar undermines China’s position as well.

The debate over the value of the renminbi is one part of a much bigger debate over the broader regulation of the global economy, as Arvind Subramanian observes at Baseline Scenario. Efforts to resolve the financial crisis in the United States (by maintaining loose monetary policy(glossary)) drive capital into emerging markets, including China, where returns on investment are greater.

We certainly appear to be living in interesting times…

Advertisements

Time for the Tobin Tax?

In August 1971, as President Richard Nixon was struggling to bring the United States off the gold standard, the economist James Tobin proposed that any new system of currency exchange should include a small tax on transactions. The tax would, in theory, provide greater stability in exchange rates [glossary] by limiting speculative flows, which, according to Dani Rodrik, have “doubtful social value yet eat up real resources in terms of human talent, computing power, and debt.”

Although the tax was never adopted at a global level, it has reared its head from time to time, including in the aftermath of the 1997 Asian financial crisis, and as a potential funding mechanism for both development aid and for the United Nations system. Most recently, Brazil imposed a 2% tax on currency inflows into the country in an attempt to limit the appreciation of its currency, the real.

At a meeting of the G20 finance ministers this weekend, British Prime Minister Gordon Brown proposed a new tax on international financial transactions to offset the costs associated with the rescue of banks during the global financial meltdown. The proposal represents a shift in policy for the Brown cabinet, which had previously opposed similar proposals by France and Germany as too difficult to manage. But according to Brown, the new proposal would not be a tax but “an insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global financial transaction levy.” Brown argued that,

It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us…There must be a better economic and social contract between financial institutions and the public based on trust and a just distribution of risks and rewards.

The proposal, which received a cold reception from both U.S. Treasury Secretary
Tim Geithner and Russian Finance Minister Alexei Kudrin, bears remarkable similarities to a criticism leveled by hedge fund manager George Soros in an interview with the Financial Times last week.

But the G20 has been struggling to develop a new system of financial regulation to prevent another global economic crisis. Despite a number of vague commitments to rethink their economic policies and establish stricter regulations governing the financial sector, little real progress has been made. Meanwhile, as the Economist’s blog points out, protectionism is on the rise and trade disputes between the United States and China are intensifying.

Perhaps it is time to think about more radical changes. A Tobin-style tax on global financial transactions could easily raise billions of dollars. A German proposal to impose a 0.005% tax on international financial transactions, for example, could generate between €20 billion and €30 billion per year. A more aggressive tax (say of 0.01%) could easily generate more than the cumulative official development assistance (ODA) budget of all developed countries (currently estimated to be around US $100 billion) while simultaneously limiting the negative impact of hot money on developing economies. Sounds like it might be time for the Tobin tax.

Five Stories You Might Have Missed

It’s been an interesting week for the U.S. economy. According to figures released on Thursday, the U.S. trade deficit jumped by 16.3 percent to $32 billion in June, a figure sharply higher than the $27 billion that had been forecast. The dramatic increase in imports was fueled by the “Cash for Clunkers” program, which led to a dramatic increase in auto imports. Meanwhile, the Commerce Department reported that the poverty rate had increased from 12.5 percent in 2007 to 13.2 percent in 2008. The poverty rate, which is defined as the number of people with an annual income of less than $11,200 (or less than $22,000 for a family of four), increased as a result of the global economic downturn. Home foreclosures also remain near their record high level. The troubled status of the U.S. economy led the Federal Reserve to indicate that it would be unlikely to raise interest rates in the first half of next year.

In news from outside the U.S. economy last week:

1. A trade dispute between the United States and China may be headed to the World Trade Organization for resolution. The United States last week imposed a new duty on tires manufactured in China, less than one week after it also imposed higher tariffs on Chinese steel piping. A spokesperson for the Chinese government condemned the move as protectionism, warning that “a chain reaction of trade protectionist measures that could slow the current pace of revival in the world economy.” Observers fear that the Chinese could respond with higher tariffs on U.S. agricultural and automotive exports, potentially sparking a trade war. But in an interesting editorial in the Financial Times, Clyde Prestowiz argued that the imposition of higher tariffs on Chinese exports to the Untied States could potentially help the push for free trade.

2. With the German election just a couple of weeks away, campaigning is in full force, and observers are already working through the numerous possible coalition arrangements. But in perhaps the most interesting development to date, German Finance Minister Peer Steinbrück last week called for the imposition of a new global tax on international financial transaction, the proceeds of which would be used to repay governments for the cost of fiscal stimulus packages and bank rescue operations. While not dismissing the idea out of hand, German Chancellor Angela Merkel called the proposal “electioneering.” Steinbrück’s call follows a similar proposal made by the Chair of the British Financial Services Authority, Lord Turner, and could make for interesting discussions at the upcoming G20 summit.

3. The counting process in the Afghan elections continues to drag on. Although incumbent President Hamid Karzai now has enough votes to win the disputed presidential election outright, according to the most recent results of the Independent Election Commission, widespread irregularities have led to calls for partial recounts. On Sunday, the IEC agreed to move forward with discussions on a recount, but it stopped short of spelling out precisely what votes would or would not be included. The Electoral Complains Commission, a body established by the United Nations to observe elections and investigate allegations of fraud, noted “clear and convincing” evidence of fraud and vote rigging in southern provinces which went heavily towards Karzai.

4. The first high-level contact between the government of Zimbabwe and the west took place on Sunday, as the European Union’s Commissioner for Humanitarian Aid and Development and the Swedish Prime Minister (who also holds the European Union’s rotating presidency) met with representatives of the Zimbabwean government in Harare. The meeting is the first high-level contact since the European Union imposed sanctions against Zimbabwe in 2002. While the European Union delegation remained noncommittal regarding the future direction of contact with the Zimbabwean government, stating only that “We’re entering a new phase. The [power-sharing agreement in Zimbabwe] was an important step forward, but much more needs to be done. The key to re-engagement is the full implementation of the political agreement.” The status of the power sharing arrangement in Zimbabwe remains uncertain, as President Robert Mugabe and his rival, Prime Minister Morgan Tsvangirai, continue to struggle over the distribution of political authority within the country.

5. The government of Guatemala last week declared a “state of calamity” in response to the widespread hunger gripping the country. The World Food Programme estimated that the country would require an immediate shipment of 20 tons of food the worst affected areas in order to stave off starvation. Alvar Colom, Guatemala’s president, said that global climate change was affecting the El Niño, causing a massive drought in the northeastern portion of the country. But Colom was also critical of the high level of inequality in the country, observing that “There is food, but those who go hungry have no money to buy it.” Critics also note that poorly defined land rights, narcoviolence, and alleged corruption have also undermined food production. According to the World Food Programme, half of all children under five in Guatemala suffer from malnutrition.

And in a bonus story for this week:

6. After more than three months since the general election, the political situation in Lebanon remains cloudy. On Thursday, Saad Hariri, the leader of Lebanon’s pro-Western majority, resigned as prime minister designee, despite performing well-above expectations in June’s elections. According to Hariri, the country’s parliamentary minority blocked efforts to develop a coalition government, leaving the country in a period of political uncertainty.

Five Stories You Might Have Missed

It’s been another busy week for President Barack Obama, who started the week laying the foundation for a new arms control agreement with Russian President Dmitry Medvedev, then moved on to discuss a range of issues including food security and climate change at the G8 summit in Italy, before concluding the week with a visit to Ghana, where he delivered a speech calling for more effective and accountable leadership in Africa.

In other news from the previous week:

1. In a surprising move, Russian President Dmitry Medvedev announced on Friday that Russia was still interested in securing membership in the World Trade Organization. In doing so, President Medvedev reversed Prime Minister Vladimir Putin’s June announcement that Russia was ending its bid to secure WTO membership, moving forward instead with a customs union incorporating several of the former Soviet republics. While Medvedev’s spokesperson sought to minimize the differences between Medvedev and Putin’s approaches the policy reversal nevertheless represents the most dramatic policy clash between Russia’s two top political leaders. The uncertainty surrounding Russia’s position on WTO membership further complicates ongoing talks between Russia and its trade partners.

2. A series of denial-of-service attacks against the United States and South Korea on Wednesday were likely the result of a North Korean cyber attack. In a denial-of-service attack, thousands of simultaneous electronic information requests are made, causing computer servers to crash. Wednesday’s attacks were directed against South Korean and U.S. financial sector and government computers, including Department of Defense and FBI networks. The attacks followed a series of increasingly aggressive missile test launches by North Korea, including several launched over the July 4th weekend, and highlighted the vulnerability of U.S. computer networks to relatively simple cyber attacks. Many analysts believe this sort of denial-of-service attack—in an effort to inhibit communications—would precede a North Korean military attacks against the South.

3. Israel’s National Security Advisor, Uzi Arad, considered by many to be Prime Minister Benjamin Netanyahu’s closed political advisor, announced that Israel would not return the Golan Heights to Syria as part of any peace deal. The two countries are currently engaged in indirect talks aimed at reaching a “comprehensive peace.” But the status of the Golan Heights remains disputed, as both countries seek control of the region, which is of strategic importance, as well as being a major source of water and a popular tourist destination in the water-scarce region. Israel seized the Golan Heights in 1967, after the Syrian army used the strategic position to shell Israeli positions in the Hula Valley below. The status of the Golan Heights, along with the status of Israeli settlements in the West Bank, remains the major stumbling blocks for a comprehensive peace between Israel and its neighbors.

4. Talks intended to resolve the political crisis in Honduras began in Costa Rica on Thursday. The crisis began two weeks ago, when President Manuel Zelaya was removed from office and put on a military transport out of the country. Roberto Micheletti has been named interim president, but his government is not recognized by the international community. The Organization of American States has taken the lead on addressing the standoff, sponsoring talks to peacefully resolve the standoff. But so far, both sides are unwilling to compromise on the central question: who should rule in Honduras?

5. The United States and the European Union appear to be on a collision course with respect to new financial regulations intended to prevent another global financial crisis like the one that ripped through markets late last year. The U.S. Congress is currently considering a new regulatory system that would impose stricter regulation on derivatives, including bans on some of the riskiest financial instruments. But many are concerned that stricter regulations in the United States would encourage regulatory arbitrage, where financial companies would simply relocate to jurisdictions with weaker regulatory systems.

Five Stories You Might Have Missed

According to the G8, it looks like we may be starting to see signs that the global economic crisis is beginning to ease. The final communiqué of the G8 summit on Saturday expressed the sentiment that the worst of the crisis may now be over, and that it may be time to begin addressing the challenges of inflation rather than stagnation. According to the communiqué,

There are signs of stabilisation in our economies, including a recovery of stock markets, a decline in interest rate spreads, improved business and consumer confidence, but the situation remains uncertain and significant risks remain to economic and financial stability.

Despite the relatively upbeat assessment, hopes for a quick recovery in the Eurozone (glossary) continue to be thwarted by sharp declines in industrial production and high unemployment.

In other news from the previous week,

1. Incumbent president Majmoud Ahmadi-Nejad decisively won Saturday’s presidential elections in Iran, defeating the moderate reformist candidate Mir-Hossein Moussavi. Although Moussavi alleges Ahmadi-Nejad’s victory was the result of unfair electoral practices and intimidation and has demanded a new poll, the supreme leader, Ayatollah Ali Khamenei, has declared the results final, suggesting any challenge would be unsuccessful. Turnout in the election was high—surpassing 85 percent. Protests broke out across Tehran after the election, and the international community is watching developments in Iran with great concern. The elections carried big implications not just for domestic Iranian society, but also for U.S. foreign policy.

2. The United Nations tightened sanctions on North Korea on Friday. After several weeks of increasing tensions in which the government of North Korea had expanded nuclear warhead and missile tests, the U.N. Security Council passed a resolution expanding sanctions beyond the narrow focus on weapons and weapons technology (which has long been in place) to now include suspending foreign aid, loans, and export credits outside of humanitarian aid. The passage of sanctions by the Security Council signals a shift in Russian and Chinese policy. The two countries had long opposed intensifying sanctions on North Korea, fearing the collapse of the unstable regime.

3. In a dramatic shift in Russian foreign policy last week, Prime Minister Vladimir Putin announced the country would drop its bid to join the World Trade Organization and would instead seek to develop a customs union with Kazakhstan and Belarus. Russia has been negotiating for WTO membership for 16 years, but has been blocked largely as a result of U.S. opposition. Two schools of thought to explain the shift in policy have emerged. According to the first, this represents Russia’s frustration with the process and is merely a ploy to speed up accession talks. According to the second, Russia is more interested in expanding its influence in its former sphere of influence, and the new customs union would help to achieve that goal. Whatever the truth, the move clearly surprised most observers and confounded analysts.

4. The oil giant Royal Dutch Shell reached a settlement with the family Ken Saro-Wiwa and eight other activists executed by the Nigerian government in 1995. According to the suit, Shell had requested the Nigerian government to intervene—going so far as to finance and assist in operations against groups in the Niger River delta region. Without conceding any involvement in their deaths, Shell agreed to pay $15.5 million in damages to settle the claim. The case was one of the first to be brought before U.S. courts under the Alien Tort Statute of 1789, which gives non-U.S. citizens the right to sue in U.S. courts for human rights violations committed abroad. Shell had unsuccessfully sought to have the case dismissed.

5. The crisis in Peru continued last week, as protestors continue to confront police in the capital Lima. A national strike had been called by indigenous groups and labor unions to protest changes in land rights laws. An estimated 10,000 people turned out on Thursday before police dispersed the crowds. The government of Peru is now moving to suspend the law which led to the protests.

Will the G20 Bust?

The G20 is meeting in London tomorrow. It is supposed to address the ongoing global economic crisis. But there appears to be some widespread disagreement between its members over how precisely to do that. Germany and France are pushing for stricter financial regulation. The United States wants Europe to commit more money to their economic stimulus efforts. Argentina, Brazil, South Korea, and China want a greater say in the international financial institutions.

Not surprisingly, the blogosphere is alive with discussion of the G20 spectacle. France’s threat to walk out of the G20 meeting unless agreement is reached on “key issue” of offshore tax havens was greeted with ridicule by Dani Rodrik. Gideon Rachman argues that the G20 is focusing on the wrong issues; that unless the problem of toxic assets in the banking sector is addressed, no financial stimulus or regulatory changes can be successful. Alex Evans and Rob Elliott both argue that the G20 should not forget the environment in their discussions.

And Daniel Drezner, who always seems to be at the forefront, has already leaked the G20’s final communiqué, the Miracle of London, in which all the G20 parties get everything they want, thereby resolving the world’s economic crisis and achieving the goals of Security Council reform and concluding the Doha Round in one fell swoop—okay, this was an April Fool’s gag, but a good one!

But back in the real world, I’m suspicious that the G20 will not be able to produce any real agreement. The problem is that, despite his popularity, Obama faces an uphill battle in convincing the other G20 countries that they should sacrifice for his program. As Clive Crook surmised, Obama’s nice guy image buys only so much goodwill. This is a classic example of the free rider problem. The G20 members are each hoping that the other members will bear the cost of stimulating the economy, saving them from having to do it themselves. At the same time, no single country has the hegemonic position necessary to advance real, fundamental reform of the global financial system. As a result, I believe we are more likely to see piecemeal changes to the international financial institutions. Perhaps the International Monetary Fund will move to an open selection process for its Managing Director. But any real restructuring of financial regulations would depend on closer cooperation between the United States, Europe, China, and other leading financial players. And I don’t see that in the cards. Hegemonic stability theory tells us that the construction of any effective and powerful international regime (such as a global system of financial regulation) requires the existence of a hegemon willing and able to create and enforce norms, and having the economic, technical, and military capacity to do so. The United States was clearly this country after World War II, as was the United Kingdom during the period of Pax Britanica. The overriding question, then, is whether or not the United States (or some other country) plays that role today. Of that, I’m not sure.

Five Stories You Might Have Missed

The world is preparing for the upcoming G20 summit, scheduled to meet in London later this week. While each country is arriving at the meeting with their own objectives, it is clear that the global financial crisis will dominate discussions. In this context, the main issues on the table appear to resolve around three key policy debates: developing a globally coordinated stimulus package, strengthening global financial regulation, and reforming the international financial architecture, particularly the International Monetary Fund. Police are preparing for widespread tens of thousands of protestors accompanying the meeting.

In other news from the previous week:

1. President Barack Obama on Friday announced that the U.S. would expand its commitment in Afghanistan, sending an additional 4,000 troops to train Afghan security forces. The Obama administration is also hoping to refocus the U.S. mission in Afghanistan, moving away from the nebulous mission of national building and democratization and instead focusing on defeating al-Qaeda and Taliban militants operating along the Afghan-Pakistan border. FT blogger Gideon Rachman raises some important questions about the new strategy, pointing out that bringing the fight to al-Qaeda militants in Pakistan may well undermine the stability of Pakistan—an ultimately self-defeating strategy, he argues.

2. After struggling for weeks to secure a coalition government, incoming Israeli Prime Minister Benjamin Netanyahu was able to convince their center-left rival, the Labour party, to join a new coalition government on Tuesday. Netanyahu hoped to bring the center-left Labour party into the coalition in order to avoid allying with a number of far right parties and running the risk of souring relations with the U.S.  Nevertheless, the new government raises concerns among many Palestinian leaders about the future prospects of the peace process.

3. The medical journal the Lancet offered a powerful criticism of Pope Benedict’s recent speech during a trip to Cameroon and Angola. During the visit earlier this month, the Pope claimed that condom use increased the prevalence of AIDS on the continent. After the World Health Organization and other AIDS experts attacked the claim, the Vatican last week issued a statement that reasserted the Pope’s claim that condom use was both ethically wrong and actually exacerbated the AIDS crisis. The condom/AIDS debacle is just the recent in a series of missteps and controversies that have plagued the current Pope. In February, he lifted the excommunication of four ultra-conservative clerics who denied the holocaust. And in 2006, he quoted a fourteenth century emperor who characterized Islam as “evil and inhumane.”

4. On a Thursday press conference with British Prime Minister Gordon Brown, Brazil’s President Luiz Inácio Lula da Silva told reporters, “This [current global economic] crisis was caused by the irrational behaviour of white people with blue eyes, who before the crisis appeared to know everything and now demonstrate that they know nothing…I do not know any black or indigenous bankers so I can only say [it is wrong] that this part of mankind which is victimised more than any other should pay for the crisis.” Brown immediately sought to distance himself from the comments. But the comments underline the potential difficulty of securing agreement at the upcoming G20 meeting, in which Argentina and Brazil will be pushing for reform of the international financial institutions and campaigning against protectionist policies in the developed world.

5. German Chancellor Angela Merkel cautioned against excessive stimulus spending in Europe while at the same time calling on China to expand its stimulus package in an effort to address the global financial crisis. In an interview given in anticipating of the upcoming G20 summit, Merkel argued that the current crisis was caused, in part, by policies which facilitated unsustainable growth with too much money. She argued it was necessary to avoid repeating those mistakes in the recovery. Spain’s finance minister, Pedro Solbes, on Friday said that Spain would not be able to expand its own stimulus spending, fearing that excessive national debt would undermine future economic prospects.