The Free-Trade Charade

Joseph E. Stiglitz

04 July 2013

This illustration is by Margaret Scott and comes from <a href=""></a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.

NEW YORKThough nothing has come of the World Trade Organization’s Doha Development Round of global trade negotiations since they were launched almost a dozen years ago, another round of talks is in the works. But this time the negotiations will not be held on a global, multilateral basis; rather, two huge regional agreements one transpacific, and the other transatlantic – are to be negotiated. Are the coming talks likely to be more successful?
The Doha Round was torpedoed by the United States’ refusal to eliminate agricultural subsidies – a sine qua non for any true development round, given that 70% of those in the developing world depend on agriculture directly or indirectly. The US position was truly breathtaking, given that the WTO had already judged that America’s cotton subsidiespaid to fewer than 25,000 rich farmerswere illegal. America’s response was to bribe Brazil, which had brought the complaint, not to pursue the matter further, leaving in the lurch millions of poor cotton farmers in Sub-Saharan Africa and India, who suffer from depressed prices because of America’s largesse to its wealthy farmers.
Given this recent history, it now seems clear that the negotiations to create a free-trade area between the US and Europe, and another between the US and much of the Pacific (except for China), are not about establishing a true free-trade system. Instead, the goal is a managed trade regimemanaged, that is, to serve the special interests that have long dominated trade policy in the West.
There are a few basic principles that those entering the discussions will, one hopes, take to heart. First, any trade agreement has to be symmetrical.
If, as part of the Trans-Pacific Partnership (TPP), the US demands that Japan eliminate its rice subsidies, the US should, in turn, offer to eliminate its production (and water) subsidies, not just on rice (which is relatively unimportant in the US) but on other agricultural commodities as well.
Second, no trade agreement should put commercial interests ahead of broader national interests, especially when non-trade-related issues like financial regulation and intellectual property are at stake. America’s trade agreement with Chile, for example, impedes Chile’s use of capital controls – even though the International Monetary Fund now recognizes that capital controls can be an important instrument of macro-prudential policy.
Other trade agreements have insisted on financial liberalization and deregulation as well, even though the 2008 crisis should have taught us that the absence of good regulation can jeopardize economic prosperity. America’s pharmaceutical industry, which wields considerable clout with the office of the US Trade Representative (USTR), has succeeded in foisting on other countries an unbalanced intellectual-property regime, which, designed to fight generic drugs, puts profit ahead of saving lives. Even the US Supreme Court has now said that the US Patent Office went too far in granting patents on genes.
Finally, there must be a commitment to transparency. But those engaging in these trade negotiations should be forewarned: the US is committed to a lack of transparency. The USTR’s office has been reluctant to reveal its negotiating position even to members of the US Congress; on the basis of what has been leaked, one can understand why. The USTR’s office is backtracking on principles – for example, access to generic medicines – that Congress had inserted into earlier trade agreements, like that with Peru.
In the case of the TPP, there is a further concern. Asia has developed an efficient supply chain, with goods flowing easily from one country to another in the process of producing finished goods. But the TPP could interfere with that if China remains outside of it.
With formal tariffs already so low, negotiators will focus largely on non-tariff barriers – such as regulatory barriers. But the USTR’s office, representing corporate interests, will almost surely push for the lowest common standard, leveling downward rather than upward. For example, many countries have tax and regulatory provisions that discourage large automobilesnot because they are trying to discriminate against US goods, but because they worry about pollution and energy efficiency.
The more general point, alluded to earlier, is that trade agreements typically put commercial interests ahead of other values – the right to a healthy life and protection of the environment, to name just two. France, for example, wants a “cultural exception” in trade agreements that would allow it to continue to support its films – from which the whole world benefits. This and other broader values should be non-negotiable.
Indeed, the irony is that the social benefits of such subsidies are enormous, while the costs are negligible. Does anyone really believe that a French art film represents a serious threat to a Hollywood summer blockbuster? Yet Hollywood’s greed knows no limit, and America’s trade negotiators take no prisoners. And that’s precisely why such items should be taken off the table before negotiations begin. Otherwise, arms will be twisted, and there is a real risk that an agreement will sacrifice basic values to commercial interests.
If negotiators created a genuine free-trade regime that put the public interest first, with the views of ordinary citizens given at least as much weight as those of corporate lobbyists, I might be optimistic that what would emerge would strengthen the economy and improve social well-being. The reality, however, is that we have a managed trade regime that puts corporate interests first, and a process of negotiations that is undemocratic and non-transparent.
The likelihood that what emerges from the coming talks will serve ordinary Americans’ interests is low; the outlook for ordinary citizens in other countries is even bleaker.
Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, was Chairman of President Bill Clinton’s Council of Economic Advisers and served as Senior Vice President and Chief Economist of the World Bank. His most recent book is The Price of Inequality: How Today’s Divided Society Endangers our Future.

Last updated: July 4, 2013 6:38 pm
The Cairo coup is a rude awakening for the west
The help the Middle East needs is not of the type the west has been giving
©Ingram Pinn

How much have the US and its allies spent fighting wars this past decade? Add Iraq to Afghanistan, throw in the ever-prowling drones over Pakistan and Yemen and the bombs dropped on Libya, and the sum must amount to several trillion dollars. How much have these governments invested in would-be democracies since the start of the Arab uprisings? Unless you classify F-16 fighter jets as aid, it is a struggle to count much beyond a billion or so.

The record makes one hesitate to say that the west has anything resembling a sensible prescription for the Middle East after this week’s coup in Egypt. The postcolonial settlement in the region is collapsing into sectarian strife. Borders are being erased as Sunnis square up against Shia, and Islamism battles secularism. Yet political leaders in Washington, Paris and London mostly occupy themselves mulling military intervention in Syria.
In a different mindset, these leaders would have been attentive to the slow-motion car crash that ended in the toppling of Egyptian president Mohamed Morsi. Where was the promised economic aid to buttress political pluralism after the fall of Hosni Mubarak? I was sure I heard someone talk about a Marshall plan for the region. It might even have been Barack Obama.
It is so much easier to focus on guns than butter – to direct missile-firing drones against groups of jihadis holed up in the mountains of Waziristan rather than to consider the great victory that would fall to the disciples of al-Qaeda through the snuffing out of Egypt’s democratic experiment. When did David Cameron, Britain’s ever-hawkish prime minister, last turn his mind to nurturing democracy in Tunisia – or, for that matter, helping to salvage something in post-Gaddafi Libya?
The Egyptian president, it can be said, was never his own best advocate. The majoritarian instinct of his Muslim Brotherhood, having won office in a free election, was to suppress the freedoms integral to a democratic system. Mr Morsi flirted with extremist Salafists.

A new constitution was twisted in favour of Islamists, and the power of the state bent towards theocracy. Egyptians had not turned out in their millions to depose Mr Mubarak in order to assert the primacy of the mosque. By the end, Mr Morsi could not recognise his own weakness.

The mistake on all sides in the Middle East has been to confuse democracy with the ballot box. It is not enough that leaders submit themselves for periodical elections. Democracy demands a commitment to pluralism, the submission of the powerful as well as the weak to the rule of law, protections for minorities and respect for cultural and ethnic difference. None of these was in plentiful supply during Mr Morsi’s year-long presidency.

For all that, a coup is a coup, even when its supporters call it a revolution and when flag-trailing military helicopters win loud applause from the vast crowds in Tahrir Square. There is a long history in this part of the world of the military interveningon behalf of the people”. The precedents are not at all encouraging.

Perhaps General Abdel Fattah al-Sisi, the Egyptian defence minister, really means what he promises: a swift return to civilian rule and a pluralist constitution. But the Muslim Brotherhood cannot be excluded from such a settlement. In any event, calling in the army is not how democracies behave when leaders fail. If Mr Morsi had to go, what was needed was his defeat in an election. The ballot boxes cannot be the property of generals.

Mr Obama, of course, was careful not to call it a coup. To have done so would automatically have halted the flow of US aid. Most Egyptians would not have noticed, but the generals would. The bulk of the $1bn-plus offered to Cairo in annual US aid comes in the form of new military kit for the air force and army. This represents Washington’s leverage over the military. Doubtless it will be deployed to urge Gen Sisi to ensure a swift return to civilian rule. Whether it will count for much is doubtful.
Egypt needs two things to build a democracy. Tunisia, and any other Arab state seeking to make the transition, need the same. The first is massive aidtechnology as well as money, trade access as well as educational assistance – to modernise the economy, and to keep people off the streets while constitutions are written and institutions built. The second is expert advice and powerful incentives to create the political ecosystem in which opposing political forces can flourish.

Dictators operate zero-sum regimes. Democracy demands positive sum outcomes that safeguard the interests of minorities as well as majorities.

Europe has been no better than the US in this respect, even though many of these countries sit on the southern rim of the Mediterranean. Sure, there are EU programmes, European Investment Bank projects and promises of better trade terms. These are useful. But none has measured up to the need and the potential prize. Tunisia should by now be a role model for the regiontestimony to Europe’s capacity to export prosperity and stability. Instead, as in Egypt, society and politics have been polarising.

Only daydreamers thought the Arab uprisings would see a transition within a decade or two to a region of shiny new democracies. On the very best assumptions, shaking off authoritarianism was going to be a generation-long project. Now, with civil war in Syria and the coup in Egypt, the region has started to go backwards. This is not to say it is time to give up and embrace the generals; it is to demand that the west think again about how to help.
Copyright The Financial Times Limited 2013.

sábado, julio 06, 2013



China’s Risky Finances

Zhang Monan

04 July 2013

 This illustration is by Tim Brinton and comes from <a href=""></a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.

BEIJINGIn the coming years, China’s government will have to confront significant challenges to achieve stable, inclusive, and sustainable economic growth. But, with mounting fiscal and financial risks threatening to derail its efforts, policymakers must act quickly to design and implement prudent, forward-looking policies.
The most significant medium- and long-term threat to China’s fiscal position lies in the system of implicit guarantees that the central government has established for local-government debt. In the wake of the global financial crisis, local governments borrowed heavily from banks to support China’s massive stimulus program, amassing ¥10.7 trillion ($1.7 trillion) worth of debt by 2011.
China’s leaders hope to control potential risks stemming from local-government investment vehicles (LGIVs) by limiting bank lending. The balance of bank loans to LGIVs increased only slightly in 2012, to ¥9.3 trillion, from ¥9.1 trillion in 2011. And the China Banking Regulatory Commission has called on banks to retain last year’s LGIV loan quotas for 2013, and to ensure that the overall balance of loans to LGIVs does not exceed the 2011 year-end total.
But LGIVs obtained a massive amount of financing in 2012 by issuing bonds and trust loans. This includes ¥250 billion in local-government bonds, ¥636.8 billion in urban-investment bonds, and technical cooperation trust-fund projects totaling ¥501.6 billion, representing year-on-year increases of ¥50 billion, ¥380.6 billion, and ¥247.9 billion, respectively.
Even with these funds, however, local governments have struggled to make ends meet. Tax reforms implemented in 1994 caused local governments’ share of national fiscal revenue to decline steadily, from 78% in 1993 to 52% in 2011. Over the same period, however, their share of total government expenditure increased from 72% to 85%.
The need to fill the resulting gap has forced local governments to depend on land sales. But land-related income has plummeted over the last two years, from 32% of total revenue in 2010 to 20% last year. Measures mandated by the central government to control surging real-estate prices will continue to reinforce this trend, increasing pressure on local-government revenues.
The risk stemming from local-government debt is exacerbated further by massive amounts of non-explicit debt acquired through arrears, credits, and guarantees. When a local government is no longer able to service its debt, the central government will have to place its own fiscal capacity at risk by assuming the responsibility.
China’s financial stability is also under threat, as lenders turn to unofficial channels to circumvent tighter government regulations on the formal banking system. Perhaps the biggest risks stem from China’s rapidly growing shadow banking system.
Shadow banking can be conducted through trust loans (extended by trust companies), entrusted loans (company-to-company credits brokered by financial institutions), bank acceptances (company-issued drafts or bills that are endorsed by banks), and corporate bonds (debt securities issued by companies directly to investors). These instruments’ combined worth reached ¥5.9 trillion last year, led by corporate bonds (¥2.3 trillion).
New lending by trust companies – which rose by more than 400% last year – is generating significant solvency risk in China, given that it is frequently extended to higher-risk entities, including real-estate developers and LGIVs. A spike in defaults could destabilize the entire financial system and trigger an economic downturn. And trust loans tied to LGIVs ultimately enjoy the same implicit guarantee from the central government as official bank loans.
Regular banks, too, are trying to evade new regulations by ramping up off-balance-sheet lending. Indeed, it is increasingly common for banks’ off-balance-sheet lending to exceed newly issued balance-sheet credit. In 2011-2012, such lending grew by ¥1.1 trillion, reaching ¥3.6 trillion (23% of total bank financing), while balance-sheet lending increased by only ¥732 billion.
But the former is usually implicit and uncertain, making it vulnerable to default. If faced with such losses, banks might choose to protect their reputations by using official funds for repayment, transferring the risk onto their balance sheets.
More generally, the rapid expansion of credit risks increasing inflationary pressure and fueling the formation of asset bubbles. Conversely, when the monetary authority tightens credit too quickly, asset prices become more volatile, resulting in more non-performing loans and triggering economic shocks.
China’s government must implement prudent macroeconomic policies now to minimize escalation of these risks later. Medium- and long-term fiscal stability will require policies that account for the growing disparity between fiscal revenues, which are suffering from slowing GDP growth, and expenditures, which will be driven up by structural tax cuts and increased social-welfare spending.

In order to manage growing pressure on public finances, China must establish highly efficient public-budget and fiscal-restraint systems. To this end, the government must tighten financial supervision, improve budgetary management, and enhance the operational efficiency of fiscal policies.
China also needs a new financing model for infrastructure projects. The current system relies heavily on LGIV loans and fiscal expenditures. But local governments cannot continue to rely on revenue from land sales to repay their debts or support current spending. More stable financing channels and stronger enforcement of operating standards are essential to support rapid urbanization.
As prudent fiscal and financial policies gradually stabilize China’s economy, monetary policy must remain neutral. Loosening monetary policy would increase significantly the risks stemming from local-government debt and shadow banking, while tightening monetary policy would fully expose those risks, posing a serious systemic threat.
With the right balance of vision and caution, China’s leaders can tackle the buildup of fiscal and financial risk. If they fail to act decisively, China’s leadership of the future global economy will hang in the balance.
Zhang Monan is a fellow of the China Information Center, a fellow of the China Foundation for International Studies, and a researcher at the China Macroeconomic Research Platform.