27 September 2007

Bringing old ghosts back in

Amidst speeches praising the rescue of national sovereignty, the presidents of Bolivia, Evo Morales, and Venezuela, Hugo Chávez publicly announced, on August 10th, the creation of an oil company owned by both states: the Petroandina. Initial projections from both governments predict that the company will invest USD 600 million within the first year. This is intended for a further exploration into the oil and gas fields recently found just north of La Paz, the capital of Bolivia. The announcement is one step further down the road of a sui generis process of regional integration that has been developing in South America.

According to textbooks, regional integration processes usually lead to the formation of common markets, including lowered tariffs and trade barriers that ease the national firms’ ability to compete in their neighboring markets. Nonetheless, what is taking place in part of South America now is not an integration of markets but an integration of transportation and energy infrastructure led by common state-owned enterprises.

Despite the clear consolidation of market-oriented economies such as in Chile, Brazil and Colombia, newly elected governments are bringing the national States back into to business. After almost two decades of market-oriented reforms promoted since the debt crisis of 1980’s, countries such as Venezuela, Bolivia, and in a lesser degree Ecuador and Argentina, their respective national governments are reclaiming the right to manage main sectors of their domestic economies, in particular the oil and natural gas industries. What has changed in a continent that for decades was the stage of market-oriented reforms sponsored by international agencies such as the IMF and the World Bank?

In this short article we will try to answer this question and show the nature of that integration project sponsored by the President of Venezuela, Hugo Chávez.

New and Old Lefts

Crucial to this process is the already mentioned election of new state-oriented governments in many countries of the region. The wave of new left-leaning governments gaining power throughout the continent in the beginning of the decade can be interpreted as a desire for policies that would extend further than the stabilization programs of the 1990’s, as well for more effective social policies in a region fraught with social and economical inequality. It’s not a coincidence that the word “redistribution” was the catch-phrase of of the newly elected presidents’ campaign speeches (Panizza, 2005).

Nonetheless, as Castañeda (2006) suggests, the diversity within this freshly emergent left has to be taken into consideration.

The new governments can be divided in two different types. The first one is the “new” left which recognizes the importance of a market economy, low fiscal deficits and low inflation and which battles inequalities through social policies. The second type of left, though, could be seen an heir to the populist tradition of Latin America: fiscally irresponsible, nationalistic and prone to authoritarian decision-making. The latter left, elected in Venezuela and Bolivia, is the force responsible for bringing the state back in. According to Castaneda (2006), South America is far from being completely free of this ghost.

The Oil Effect

But the election of “old” left governments does not provide sufficient basis for understanding the whole process. One evident reason for the emergence of more responsible economic policies in South America since the 1980’s debt crisis was the well-documented shortage of credit in the international financial markets at that time. With the disappearance of easy sources of loans, there were few other alternatives than adopting sound fiscal and monetary policies, privatization and regulatory reforms in order to either attract international investments, or to generate surpluses that could be used in public investments. In this context, the pursuit of old-fashioned populist policies would be a prelude to a prolonged recession or hyperinflation, as experienced by several countries in the region.

So what could allow new governments to take this old path again? The answer can be found in the case of Venezuela and the country’s abundant oil reserves. With oil prices sky-rocketing, President of Venezuela Hugo Chávez is able to spend his country’s vast oil fields – it is the world’s fifth largest oil producer – to finance his “Bolivarian Revolution”. With this apparently infinite gold mine, President Chávez is increasingly taking back the control of privatized firms, threatening investors and firms that do not want to submit to his pricing regulation, and steadily increasing public spending through heavy subsidies (the price of a liter of gas around 4 cents of a US dollar) and generous social programs. The public appeal of these policies is evident in the terrible defeat by the opposition in the last election, as well as in the public support for the not-quite-democratic constitutional reforms, proposed by Mr. Chávez in the last years. In Venezuela, the State is definitely back in and fueled by a lot of gas (Shifter, 2006).

Just a Little Help to My Friends

The situation in Venezuela has resulted in more than domestic effects. President Chávez goal to export his 21st century oil-based socialism to his regional neighbours has produced a change in the regional balance of power and created favorable conditions for other governments in the region to implement new state-led economic policies. In addition to the controversial support for a presidential candidate during the last Peruvian election, and the disputes with Brazil for the regional leadership, Chávez is using the oil revenues to create conditions where friendly governments can adopt economic policies that diverge from the legacy of market-oriented reforms of 1980’s and 1990’s. The countries where this influence is more visible are Bolivia and Argentina.

In Bolivia the nationalization of natural gas refineries in 2006 led by Bolivian president, Evo Morales, was publicly supported by Chávez, and by the promise of investments by Petróleos de Venezuela S.A. (PDVSA), the Venezuelan state-owned oil company, to increase production. Consequently, Morales could send foreign oil firms – including the Brazilian state-owned oil firm Petrobras – home because he was backed by the petro-dollars of PDVSA (Oil and Energy Trends, 2006). It is reasonable to wonder if Mr. Morales project could be this radical without the Venezuelan support, especially when considering that the country is one of the smallest economies in the region, with a GDP in 2006 of only USD 22 billion. To reject all foreign investors under such conditions, without a Plan B, would be an unwise move even for the logic of more radical nationalism.

In Argentina, the help of Chávez has been less direct but not less effective. Since the Argentinean default of 2001, the country hasn’t tried to sell any new bonds on international financial markets, which puts less pressure on the government to implement more acute market-oriented reforms, or adopt more austere fiscal and monetary policies. With President Nestor Kirchner, the Argentinean government has implemented economic policies of nationalization, price-controls, systematically undervalued currency and plans to create a development bank to boost investments (Grugel & Riggirozzi, 2007). However, the sustained independence from the international financial markets has only been possible because the Venezuelan government has bought USD 2,7 billion in Argentinean bonds since 2004. In other words, the isolationist strategy of the Kirchner administration has been possible because Chávez has been financing the Argentinean debt. Besides the “little” help received from the Venezuelan government, both countries also benefit from the recent general increase in commodities prices, such as in natural gas, for Bolivia, and in wheat, for Argentina. With revenues from exports also going up, they are able to increase the scope of the State intervention in the economy and the range of social programs (Santana & Kasahara, 2007).

Infra-structure Integration and What Else?

The integration project financed by President Chávez is apparently bi-dimensional, based on the idea of a common infra-structure of roads, oil and gas pipe-lines, and a shared ideology of strong interventionist States and state-owned firms. But it is hard to figure out what else we could integrate since domestic markets tend to be protected from any kind of competition according to this logic. The idea of opening up the market for labor and goods, for instance, would represent a potential loss of domestic jobs, as well as making it difficult to justify state subsidies to domestic firms. The creation of common monetary institutions doesn’t seem very plausible either, considering that controlling the currency is a fundamental strategy of his economic model, a strategy that has also been adopted by Morales and Kirchner (Kellog, 2007). Because of that, it is not surprising that the Brazilian President, Lula da Silva, is not pushing his Congress harder to approve Venezuela’s membership in Mercosul – the regional free-trade agreement that includes Brazil, Argentina, Uruguay and Paraguay (Camargo, 2006). As representative of a more moderate left and president of the biggest economy in the region, Mr. Lula has good reason to be suspicious of Venezuela’s growing influence over the sub-continent.

Another interesting question is what we can expect of such integration in terms of stability. What would happen if Morales, his partner, lose the next election? Or what would happen if the oil prices fall? What will Chávez do if the inflation starts to rise again (it was already around 12% in 2006)? The answers are troubling. Even though the oil prices don’t show any signs of falling in the near future, it will end, and it will end faster if the production increases in order to finance Chávez’s many projects. And Bolivia’s and Argentina’s dependency on these revenues is do not bode well for their economic development.

An even more serious concern is the fact that, although legitimately elected, Mr. Chávez has been giving serious signs that he wants to stay in power longer than the constitution presently allows. His movement toward a constitutional reform that would change the Venezuelan rules in concordance with his desire to stay in power is a serious threat to a region that is experiencing its first taste of democracy after decades of military rule. And, although it might not be a real possibility, it will be even more dangerous if Chávez‘s controversial methods are adopted by his friends. In the worst case scenario, the result of this integration process, besides bringing back the ghost of economic mismanagement could be the return of the authoritarian ghost as well. Let’s hope that one is forever exorcized.

Yuri Kasahara


  • BUXTON, Julia (2005). “Venezuela’s Contemporary Political Crisis in Historical Context”. Bulletin of Latin America Research, 24 (3).
  • CAMARGO, Sônia de (2006). “Mercosul: Crise de Crescimento ou Crise Terminal?”. Revista Lua Nova, 68, 57-90.
  • CASTAÑEDA, Jorge (2006). “Latin America’s Left Turn”. Foreign Affairs, May/June.
  • GRUGEL, Jean & RIGGIROZZI, Maria (2007). “The Return of the State in Argentina”. International Affairs, 83 (1).
  • KELLOG, Paul (2007). “Regional Integration in Latin America: Dawn of an Alternative to Neoliberalism?” New Political Science, 29 (2), 187-209.
  • OIL AND ENERGY TRENDS (2006). “Latin America Ponders Nationalist Energy Policies”, 31 (6), 13-14.
  • PANIZZA, Francisco (2005). “Unarmed Utopia Revisited: The Resurgence of Left-of-Centre Politics in Latin America”. Latin America Politic Studies, 53 (4), 716-734.
  • ROCK, David (2002). “Racking Argentina”. New Left Review, 17, Sept/Oct.
  • SANTANA, Carlos Henrique & KASAHARA, Yuri (2007). “Algo de Novo no Front? O Retorno do Estado e seus Impactos sobre a Integração Sul-Americana”. Observador On-Line, 2 (4), April.
  • http://observatorio.iuperj.br/pdfs/17_observador_topico_Observador_v_2_n_4.pdf
  • SCHAMIS, Hector (1999). “Distributional Coalitions and the Politics of Economic Reform in Latin America”. World Politics, 51, January.
  • SHIFTER, Michael (2006). “In Search of Hugo Chávez”. Foreign Affairs, May/June.

23 September 2007

The Miraculous Asian Tiger

Olga Muravjova looks at how Hong Kong came to power in the international economic arena.
"If you approach Hong Kong from the sea, you will sail through a narrow channel between the island on the south and the mainland to the north, thus coming into the great harbor from which the island-colony gets its name. For Hong Kong (pronounced in Cantonese Heung Gong) means “Fragman Harbour” (Hague, 1959, p.7).

Sea and harbour are important for Hong Kong not only as determinants of its geographical position. The sea and the harbour may be seen as the symbols of trade and openness. And these two elements together with appropriate policy measures (and a dose of geographical luck) actually constitute the essence of Hong Kong's success.
In this article, I would like to show that the development of Hong Kong was due to policies that adopted the city-state's economy to changes and fluctuations in the post-war world economy. I also try to show how the development of Hong Kong affected the development of the Pearl River Delta in the People's Republic of China.

Tiger is Born: 1940s-1970s

The role of Hong Kong as an “entrepot” changed with the establishment of the People’s Republic of China in 1949 and the outbreak of the Korean War. As a consequence of the war the United Nations put an embargo on China in 1951 (Chan, 1996). This resulted in great waves of refugees, entrepreneurs and manual labor from China to Hong Kong, bringing along with them managerial and entrepreneurial skills, capital, market knowledge as well as an abundant labor force to the territory, and setting the foundation for the first phase of industrial development of Hong Kong (Chan, 1998).

From the mid 1950s, labor intensive industries directed by export oriented strategies developed, taking advantage of Hong Kong’s geographical and economic positions. Also, as Yulong and Hamnett (2002) say, other favorable conditions at that time, such as the freer economic policy, the emergence of the New International Division of Labor (NIDL) as well as integration with the world capitalist system, (especially in the “regulations governing the operation of economy and trading”) brought new opportunities for Hong Kong to improve its industrial structure and also had an influence on rapid development of the city.

Badcock (2002) says that the economic success of Hong Kong in the 1970s was due to its ability to “mass produce” consumer goods at lower prices than its main competitors in other places. The production of different electronic devices and toys was common among the industries. These goods were usually produced by small and medium enterprises, and this led to the economic paradox of mass production, since usually big companies experiencing economies of scale carried out mass production, as the Fordist model explains. However, Augustin-Jean (2005) says that Hong Kong had never been an example of the Fordist paradigm, and the small and medium enterprises managed to benefit from their ability to produce “differentiated products in small quantities and in a short period of time” using simple technologies. This gave the possibility for entrepreneurs to quickly adjust their production to changes in demand, to modify their products several times a year in order to satisfy their most demanding overseas customers and when orders were too large, companies subcontracted parts of the production. Indeed, as Badcock (2002) mentions, Hong Kong’s industries had adopted flexible production characteristic for post-Fordist manufactories. However, the development of Hong Kong depended on its external relations, the importance of its port, its free port status as well as its existence as a specific economic entity.

Since Hong Kong’s beginning in 1841, the city was declared a free port, which fitted the laissez-faire ideology of the time, specifically that of a supporter of the “free economy”, which British Government was. At that time, the “British Government decided that…British taxpayers should not subsidize the running of the colony”, and therefore there were no taxes on products (Augustin-Jean, 2005).

But that was not all. Industries in Hong Kong received benefits from government actions in the 1970s. In response to rising world trade protectionism and competitive pressures from its Asian counterparts and lower wage developing countries, Hong Kong’s government “embarked on a series of laissez-faire financial policies”, such as the introduction of low taxes, abolition of exchange controls, and the accessibility of an extensive range of financial and technical services (Yulong & Hamnett, 2002). This started a shift in its economic development strategy which entailed a move to a “diversified economic structure particularly focused on the financial and service sector”.

Furthermore, Hong Kong’s location on China’s doorstep, as well as near the sea, is another factor that has greatly benefited Hong Kong’s economic expansion. Since the middle of the 20th century, Hong Kong has been the major link for China’s relations with the outside world. Furthermore, Hong Kong’s industries received huge benefits from the waves of migrants from the Mainland, since the effect of that was the great supply of labor. Additionally, China had supplied Hong Kong with basic daily necessities including fresh food and drinking water, even during the “Cultural Revolution” (Yulong & Hamnett, 2002). The importance of the connection with China and Hong Kong’s location rose especially after the “Open Door” policy was implemented, which I will discuss later.

Role of Government: Urban Planning Strategies

Yet, not everything was according to laissez-faire lines in Hong Kong. Despite their laissez-faire attitude, and a policy of minimal intervention, the colonial authorities had become increasingly involved in the management of land and public housing. After the World War II, there was a rapid economic development as well as a huge inflow of immigrants. The Hong Kong Government quickly understood that some planning actions were needed. A famous urban planner, Sir Abercrombie, came from England to Hong Kong in 1947, however, due to the liberation attitude of the time, there was little done during that period. Nonetheless, after a tragic event, when a gigantic fire completely destroyed a slum area in New Kowloon and left about 50,000 people without shelter, “one of the most ambitious public housing programs on Earth” had been started (Augustin-Jean, 2005). Simultaneously, in order to try to reduce the inevitable disturbance (noise and pollution) caused by industries to the residential districts, local government put into practice a relocation program for small and medium enterprises (SMEs) and encouraged the creation of industrial zones. The local authorities presented their program as a part of their mission to help the poor and I definitely can state that local economy benefited from the government intervention in the housing market. The system was very simple, did not involve much transfer of public funds, and was economically beneficial. Therefore, as Augustin-Jean (2005) says, it was not considered as a “contravening mechanism” of an ideology of a “free economy”.

International Environment and Roots of Economic Development from 1979s

Gar On-Yeh (1997) says that the most significant economic restructuring in Hong Kong occurred in the late 1980s after the adoption of economic reform and open door policy of China in 1978. The catch phrase of the Open Economy Policy was “to open to the outside world and to revive the economy of the island” (Chan, 1998). Hong Kong transformed from an industrial to an information society; the major international centre was founded not only on trade, shipping, banking, investment and finance, but also on property, tourism and entertainment. The laissez-faire financial policies of the beginning of the 70s appeared to be victorious, and by the beginning of the 1980s, Hong Kong became the fourth largest financial market in the world after New York, Tokyo and London (Yulong & Hamnett, 2002). In the meantime, this resulted in a market decline in the industrial and manufacturing sectors. The Hong Kong economy survived the oil crises of the 1970s, but the growing land prices and increasing labor wages have deteriorated its industrial production advantages. A significant amount of manufacturing production moved to cities and towns in southern China (Chan, 1996). Moreover, the competitiveness of the United States and Europe in the world market improved, after they started using flexible production systems. However, these developments did not frighten Hong Kong, and because of the economic reforms occurring in China at that time, Hong Kong did not have to take extreme measures to remain a competitive actor in the world market (Augustin-Jean, 2005). Therefore, it is important to examine economic developments in the People’s Republic of China in order to evaluate the economic restructuring of Hong Kong.

Hong Kong and China

China's economic reforms since the late 1970s and 1980s have had a far reaching effect on the economic restructuring of Hong Kong's economy. Guangdong Province is the first province in China which benefited from the Open Door Policy. The reason for this is that three out of four SEZs and two out of the 14 coastal open cities are located there. The province is believed to move “one step ahead” of the other provinces in the People’s Republic of China. This is also the province to have the largest impact on trade between China and Hong Kong. As Chan and Kam mention, Hong Kong and China are currently the largest trading partners (Chan, 1996; Kam, 1999). For example, trade amounted to 395 billion Hong Kong dollars in 1990, and it has been described that Hong Kong’s role vis-à-vis China as being a “trading partner”, “financier”, a “facilitator” and “middleman” (Chan, 1996). These definitions are especially correct with respect to the Pearl River Delta, a composite delta in Guangdong Province of south China, developed into one of the leading growth regions in the People’s Republic, and where most of the wealth is situated.

Hong Kong and the Pearl River Delta Region

The Pearl River Delta was fundamentally an agricultural region, however, since the 1980s its economic profile had experienced significant transformation, changing from an agricultural to a manufacturing area, dominated by “textile, food processing, footwear and electronic assembly enterprises”. More recently, some cities have focused on expanding commercial and service sectors (Chan, 1998). After China adopted the “Open Door Policy”, the industrial and manufacturing sectors have been decreasing. As Chan (1996) mentions, there was a relocation of the local industries and factories from Hong Kong to Shenzhen and other parts of the Pearl River Delta region. Hong Kong industrialists used these regions as a “backyard”, since while administrative operations stayed in Hong Kong, the production lines gradually moved to Guangdong and were decentralized. Such complementarity of the factors of production gives us a significant explanation of the success story of Hong Kong. “China can provide cheap land and labor; Hong Kong has the capital surplus and know-how” (Augustin-Jean, 2005). The migration from rural areas provided the labor supply. The government strictly controlled rural-urban migration on the Mainland until the establishment of the rural responsibility system, which consisted of a set of reforms aimed on giving the individual peasant households bigger responsibility of managing their own economic matters. As a result, the Pearl River Delta region has experienced massive migration of farmers traveling to township enterprises. Since the adoption of the “Open Door Policy”, the portion of the delta in Guangdong Province has become one of the largest economic regions and a massive manufacturing centre of mainland China, and there is an increasing integration between Hong Kong and the Delta. Chinese government hopes that the manufacturing in Guangdong, in a combination with the financial and service economy in Hong Kong will create an economic gateway attracting foreign capital throughout mainland China (Rohlen, 2000). The closeness of the Pearl River Delta region to Hong Kong attracts the overseas investors, which consequently stimulates the economy of both Hong Kong and the Delta region.

Urban Planning after 1979

The control of urban planning after the introduction of the “Open Door Policy” was significantly higher than before the reforms occurred in China. However, the economic restructuring that has occurred since the mid-1980s has created new challenges for urban planning in Hong Kong. New measures had to be developed to deal with the increasing cross-border traffic and to accommodate the changing needs of economy. Thus, a Territorial Development Strategy appeared in the early 1980s to coordinate land use and transport development in order to be able to provide a better living and working environment as well as to sustain economic development (Gar-On Yeh, 1997).

After the establishment of People’s Republic of China, and after the Korean War, the industrial sector of Hong Kong was rapidly increasing because of the great labor supply, caused by the huge inflow of migrants from the Mainland to Hong Kong. Also, the flexibility of Hong Kong’s industries, and the ability to response quickly to demands, created big advantages. Hong Kong’s industries were either small or medium in size and also had simple and very flexible production systems. Other parts of the world would experience such flexible and post-Fordist way of production only decades later. Moreover, “free economy” (free port status and other laissez-faire policies) gave profits to local industries. Regarding the urban planning in Hong Kong, there was a significant intervention from the government, to a degree of paternalistic reasons.

The “Open Door Policy” influenced Hong Kong’s development in a major way, transforming the city from industrial to an information based society. Industrial and manufacturing activities moved to the Mainland, especially to the Pearl River Delta region. By that time, Hong Kong had become a major financial centre. The increase in the connection between Hong Kong and the Peal River Delta was economically beneficial. The connection with China on another hand made Hong Kong even more attractive for foreign investors. In the 1980s, the introduction of the Territorial Development Strategy in order to improve lives of people by sustaining economic growth was a major change.


Hong Kong had undergone many development phases before it achieved the status of developed city. Its geographical advantages, successful planning and openness to changing economic situations in the rest of the world, helped Hong Kong to become one of the most important cities and the fourth largest financial market in the world. Hong Kong may be a good example of how openness, free trade and, last but not least, appropriate government policies lead to economic prosperity. In this sense, Hong Kong is to a certain extent the child of an ongoing process of globalization.


Asian Info – Hong Kong. 3 May 2007.

Augustin-Jean, L., “Urban Planning in Hong Kong and Integration with the Pearl River Delta: A Historical Account of Local Development”, GeoJournal, Vol. 62, Issue: 1, pp. 1-13. 2005

Badcock, Blair. Making Sense of Cities – A Geographical Survey. London, Arnold. 2002

Bureau of East Asian and Pacific Affairs. “Hong Kong”. 2007. 2 May 2007.

Chan, R.C.K., “Cross-border regional development in Southern China, GeoJournal, Vol. 44, Issue: 3, pp. 225-237. 1998

Chan, R.C.K., “Urban Development Strategy in an Era of Global Competition: The Case of South China”, Habitat international, Vol. 20, Issue: 4, pp. 509-523. 1996

Hague Eric. In the Shadow of Nine Dragons. Hong Kong Sketches. London. 1959

Gar-On Yeh, A., “Economic restructuring and land use planning in Hong Kong”, Land Use Policy, Vol. 14, No. 1, pp. 25-39. 1997

Kam Ng, M., “Political economy and urban planning: a comparative study of Hong Kong, Singapore and Taiwan”, Progress in planning, Vol. 51, Issue: 1, pp. 1-90. 1999

Rohlen, P. Thomas. “Hong Kong and the Pearl River Delta: “One Country, Two Systems” in the Emerging Metropolitan Context”. 2002

The World Fact Book. “Hong Kong”. 2007. 1 May 2007.

Yulong, S., Hammett, C., “The potential and prospect for global cities in China: in the context of the world system”, Geoforum 33, pp. 121-135. 2002

19 September 2007

Global public goods

A new approach to development or a fashionable speculation to revitalize aid-fatigued donor countries?

In these years, development institutions' capacity of delivering results to poorest countries has been questioned a lot. World Bank's mission creep – that can be summarized as starting from basic infrastructure building in the 1940s and arriving to the "working for a world free of poverty" motto – has lead to serious accountability and effectiveness problems, up to the point that today's Bank's mission has become so complex that seem hardly manageable. The IMF is in deep water as well. The words "structural adjustment" had become a catch-all phrase for the pain inflicted on the poor in developing countries by faceless austere bureaucrats in Washington, and the new implementations do not seem to satisfy all: the debate about IMF and WB reforms is still open.

To fight this lack of effectiveness a new rhetoric about developing institutions has arisen, starting with the Millennium Development Goals and UN declarations, which advertised human development, pace, equity, justice, gender equality, environmental safeguard as the new performance benchmarks for development institutions.

Surfing this wave, a new concept has been forged to provide theoretical strength for a broad approach to development and to revitalize "aid-fatigued" donor countries with new appealing evidence: the concept of global public goods. An increasing literature (Kaul et al., 1999, Agerskov, 2005 among others) recommends focusing on global public goods for boosting growth in poor countries.

In Prague, 2000, the World Bank and IMF Development Committee identified five priority areas for GPG intervention, recognizing the need for the Bank to define more precise targets. These areas are communicable diseases; environmental commons; development information and knowledge; trade and economic integration; international financial architecture (which is an IMF specific role). Actually, the architecture for Bank involvement in global programs seems to be increasing. In fiscal year 2004, 64% of the Bank's trust fund monies ($7.1 billion), went to global and regional programs, compared to 57% in 2003 (source: OED 2004). The share of single country operations, however, is still much higher, and multi-country operations among small groups of countries remain low.
The UN has also identified in 2004 six clusters of global challenges: war between states; violence within states; poverty, infectious diseases and environmental degradation; nuclear, radiological, chemical and biological weapons; terrorism; transnational organized crime.

What are global public goods exactly? What are the insights on development that this approach provides? Can this concept be a reference point for development programs? Let's try to find an answer to these questions.

The term "public goods" was first mentioned by David Hume, the Scottish philosopher and economist, and later properly introduced in the economic field in 1954 by Paul Samuelson (Economic Nobel Prize Winner in 1970). Samuelson defined public goods as a commodity or an activity with the characteristics of "non-rivalry" and "non-excludability" in consumption, i.e. where any one's person consumption of the good doesn't affect the available amount for others, and where it's hard to exclude anyone from accessing the good. Public goods' nature making this class of goods undersupplied by the market, the need to supply public goods besides market allocations traditionally justifies government involvement in the economy.

The concept of "global public goods" (GPGs), counterposed to national public goods, became widespread in the literature with the UNDP publication Global Public Goods (Kaul et al, 1999). A global – or international, the terms are almost interchangeable – public good is one where the elements in question are nations, rather than individuals. Thus, the joint and non-excludable benefits apply among nations, in a globalized environment.

While the subsequent broad literature accord on the main definition of GPGs, there are great semantic variations and different classifications among the authors. Let's quote some of the main views: Agerskov (2005) provides a very theoretical division among demand-related variations or supply-related variations on the general "public goods" concept. Focusing on spillovers, Kanbur et al (1999) distinguish three types of spillovers - national, regional and global; Sandler (2001) further analyze the geographical range to which the benefits apply: he divides local, national, regional, international and global benefits, in ascending climax. Morrissey (2002), analyzing the spatial range from a different point of view, considers three kinds of benefits that GPGs give rise to - risk reduction, enhancing capacity, and direct provision of utility – and classifies the national or international level of a public good according to benefits.
The broadest and most general attempt of classifying and analyze GPGs can be found, however, in Kaul et al. (1999). With less stress on precise economically-supported distinctions, they simply divide their book in six case studies, each of them analyzing one or two closely-related GPGs: equity and justice, market efficiency, environment and cultural heritage, health, knowledge and information, peace and security.

As these many classifications prove, the concept of "global public good" has become wide, multifaceted and increasingly unclear. So large is the basket of GPGs that the only definition of GPG that may "contain" all the examples and study cases provided in the literature is the definition given by Morrissey (2002), "a benefit providing utility that is in principle available to everybody (let's say many) through the globe". Yet it's not a very stimulating or sharp insight. The main question in defining GPG – the same question that is involved in many economical concepts – is whether we want a theoretical or an operative concept.

The theoretical, idealistic concept of GPGs, which includes values as equity, justice and peace (I'll discuss later the advisability of such classification even in a wide contest), mainly focuses on the "underprovision" and "benefit-all" aspects of GPGs. This focus has the clear aim to revitalize with new incentives the "aid fatigued" donor countries, to give them a new boost for financial intervention. However, as Kanbur (2002) smartly points out, two concerns arise. First, the "there's something in it for us" argument used to stimulate the Northern public has less solid moral basis than assistance based on humanity and empathy. Second, and more economic related, the supposed unilateral positive spillover of aid from rich to poor countries is hardly sustainable; the empirical evidence on the efficacy of IMF's and World Bank's aid for promoting development is, at least, mixed.

The operative approach, on the other hand, moves from the definition of non-excludability and non-rivalry in consumption, and from the positive spillovers among countries, to underline the practical implication of GPGs for economic development, therefore to provide a new agenda focused on global and regional programs for international organizations, World Bank in primis, with new importance on effective cooperation among the recipient countries.

If our goal is to identify the reasons of the failure of unilateral aid approach, and to provide poor countries with new bases for development, an operative, narrower approach to public goods may be useful.

Let's analyze first the definition and the division provided by Kaul et al., to show their weaknesses and to underline the necessity of a narrower approach for development.

The authors, in the first chapter, traditionally define GPGs as something that "must meet two criteria. The first is that their benefits have strong qualities of publiciness (sic) – that is, they are marked by non-rivalry in consumption and non-excludability. […] The second criterion is that their benefits are quasi universal in terms of countries, […] people […] and generations […]. This property makes humanity as a whole the publicum." Taken literally, this definition can be either very broad, if we consider any kind of abstract concepts, or very narrow, if we consider "goods" as tangible goods. The former one seems to be the pattern followed by the authors. Later on, in fact, they explicitly further divide GPGs in final global public goods, which are "outcomes rather than goods in the standard sense", and which can be tangible (environment, common heritage of mankind), or intangible (peace, international stability), and in intermediate global public goods, which "contribute to the provision of final GPGs" (international regimes, economic growth).

Even considering "goods" not just in a strict sense, it's very hard to see how international regimes can really benefit the whole humanity (even organizations as UN and IMF face huge problems of representation and are not able to account for small countries), how economic growth can be non-excludable toward the whole humanity (just recognizing positive externalities doesn't mean that growth per se benefit all the globe, unfortunately), or how heritage of a culture can benefit everyone (how archaeological sites in Peru can benefit all the citizens of Russia, for example).

The standard definition applies neither to the equity nor justice nor peace, other GPGs mentioned in the book. Can we really define them as GPGs? Aren't them values to pursue and to be inspired by rather than "goods" to provide? How can equity concretely be part of a specific development program?

Regarding knowledge, it's at least curios to classify it as a GPG, after a whole branch of philosophy (epistemology and gnoseology) has been studying for centuries what knowledge is and how is provided. If we want to talk about externalities, we may consider public-made, shared knowledge rather than knowledge itself. And still, the implications are quite problematic: first, nothing assures that all "kinds" of knowledge will be shared to a global public and will become easily available; second, even when shared through printed documents, internet or mass-media (thus becoming "information"), strong prerequisites are necessary to access it – such as information technologies to physically access, education to fully take advantage of it. Thus, knowledge and information are everything but non-rivalry and non-excludable in consumption.

As for financial stability, market efficiency and security, they are classified as global public goods because they prevent global public "bads", i.e. financial crises, market failures and wars. Besides the appealing pun, the definition is again unclear: global public bads seem to be just negative externalities, and they do not really fall into the categories of non-rivalry and non-excludability. That does not mean that international institutions such as the IMF or NATO do not have to promote financial stability and security. It just means that not everything that is important for global growth can be labeled as GPGs.

Environment is maybe one of the few pure cases of GPGs: the stratospheric ozone layer and the stability of the climate affect the whole world, they are non-rivalry and non-excludable, and similarly reduction in the use of ozone-depleting chemicals and in the emission of greenhouse gases benefits the whole humanity. Moreover, they have practical connotations: the levels of emissions are scientifically measurable, and it's not hard to think about concrete project to enhance environmental protection. However, environmental problems usually have regional, not global, implications: water pollution, acid rain, biodiversity and resource conservation are examples of region-related problems.

As well as environment, health is a GPG that can have both a global and a regional connotation. Diseases such as AIDS, malaria and avian influenza may have worldwide spread, but they are mostly concentrated in specific regions (Africa, Asia).

Environment and health thus lead us to a question: are GPGs really global in a pure sense, or are they mostly regional? In the second case, does a "global approach" really make sense, and can it be operational and useful? Even if recent literature have mostly focused on the appealing concept of global public goods – so easy to link to the fashionable concept of globalization – besides few examples international public goods have more often regional rather than global implications. Consequently, a closer focus on narrower concepts such as regional public goods can be more useful for understanding public goods' potential for development.


* Addressing the challenges of globalization, World Bank Operations Evaluation Department, 2004

* Agerskov, A. H., Global Public Goods and Development – A guide for policy makers, in Global Development Challenges Facing Humanity, World Bank Seminar, May 2005

* Kanbur et al., The future of development assistance: common pools and international public goods, ODC, 1999

* Kanbur, R., International financial institutions and international public goods: operational implications for the World Bank, G-24 discussion paper series, December 2002

* Kaul et al., Global public goods, Oxford University Press, 1999

* Morrissey et al., Defining international public goods: conceptual issues, Overseas Development

* Sandler, T., Comment on "The growing importance of regional public goods by Marco Ferroni", February 2002

15 September 2007

Phantom Menace of Chinese Banking

Remy Piwowarski looks at the messy Chinese banking system and ponders whether the financial crisis is looming.

Many fans of Star Wars hate it, but I love the first episode. And I actually don’t know why? Sure, Jar-Jar and all those Gungans are the quintessence of childishness, but the mood of the movie is really interesting: the Republic seems to be rather peaceful - there are of course some mysterious dangers on the horizon and not everybody knows about them, but the general picture is not as violent as in further episodes. There is peace, but a misleading one with dangers clear and present though largely invisible. My intuition tells me that the world economy is now in a similar situation. Where does the danger come from? China.

The problem with the fastest growing economy in history is that it has a bank-centred financial system. The Chinese banking system is the main source of capital in China, the main venue of people’s savings and the main instrument of investment policies. Therefore, the banking system plays a crucial role in the Chinese economy and as such its state is irreversibly linked to the world economy. Unfortunately, to put it euphemistically, the system itself is in a bad shape and the threat of a financial crisis is clear and present.

Looking into the past

As Berger et al (2005) write, before the 1978 the Chinese banking system was modeled after the Soviet one with a single bank, the People’s Bank of China, responsible for all major banking operations. The situation came to a change in 1978 when from the People’s Bank of China four big quasi - commercial banks were separated: China Construction Bank, Agricultural Bank of China, Industrial and Commercial Bank of China and the Bank of China. Today, these banks still dominate the China’s banking industry and are commonly referred as the Big Four.

In the 1980s, the aforementioned banks served mainly as policy-banks, financing government projects and providing loans to state-owned companies (SOEs). Furthermore, till 1985 their operations were legally constrained to their respective areas (agriculture, construction etc.), which hampered competition. In 1994, a major overhaul of the Chinese banking system took place when it turned out the banks amassed large amounts of non-performing loans (NPLs). The Chinese government recapitalised the banking system by creating state-owned asset-management companies and later established two policy-oriented investment banks.

The growth of the private banking was rather limited in the 1990s. The first private Chinese bank China Minsheng Banking Corporation was created in 1998 and, in 1990s, entrepreneurs in China established 12 private banks in total. The entry of western banks was slow. In 1979, US and European banks were allowed to open their representatives offices in special economic zones (SEZ) and since 1982 they have been permitted to open operational branches. The regulations expanded in the 1990s and in 1999, 25 foreign banks had permission to operate all over the country. Some of the foreign banks bought also minority stakes in the Big Four.

Nevertheless, despite all these reforms, the Chinese banking system is facing tremendous problems.


What’s the main problem with the Chinese banking? To put it shortly: Chinese bankers make many loans not because of the profitability of ventures, but because some mighty regional rulers want them to finance state-owned companies. And since state-owned enterprises are running losses (why? mainly because they are state-owned and because they know the banks will lend to them!), the amount of non-performing loans is soaring.

Is this path sustainable? Have recent reforms improved the situation? Economists take two positions on these issues.

Kashyap and Dobson (2005) from the University of Chicago take a more skeptical attitude in their newest paper. The authors point out huge and persistent inefficiencies in the Chinese banking system. Bad lending practices are still continuing, despite a government bailout in 1994 and reforms, e.g. introducing new risk assessment
techniques, creating a supervisory institution, limited liberalisation, or entry of foreign

The previous wave of bad loans was caused by the government’s willingness to keep state-owned enterprises (SOEs) operating. The privatisation of SOEs did not take place, since many of them would not have been able to survive market competition, which would create unemployment and possibly social unrest. Direct subsidies would mean, in turn, a huge stress on government’s budget. Hence, the Big Four banks were ordered to provide loans to SOEs. Furthermore, since loans to SOEs were backed by the state, the banks did not implement credible methods of risk assessment and moral hazard came into place.

All these factors played an important role in the 1990s and, as said earlier, the same factors seem to be at work today. The authors notice that banks are lending to previous NPL clients. Furthermore, the data show that there is absolutely no correlation between the regional profitability of SOEs and the amount of lending. In addition, huge banks discriminate against small and medium enterprises and the range of interest rates is small, which denotes poor skills of assessing clients’ creditworthiness.

The anecdotal evidence shows, in turn, that the boards of major banks are not populated by technocrats, but by party officials. As a result, politically-motivated managers favour lending to SOEs. In addition, according to the authors, the impact of minority foreign shareholders is small mainly due to the very fact that they are minority shareholders.

As we can see, the picture is rather gloomy, but it is not the only one.

Are optimists right?

A more optimistic perspective is provided by Yusuf et al. (2006) in their
book about the condition of SOEs. Yusuf et al (2006) write: “The current growth
momentum, the small size of the official public sector debt […] the size of the foreign
exchange reserves (over $660 billions in March 2005) [which act us a back-up for shortterm savings according to Guidotti – Greenspan principle – R.P.], and the sheer volume of domestic savings (47% of GDP in 2003) provide a cushion sufficient to offset for 9 several years the excess resource consumed by inefficient SOEs (…)” (Yusuf et al (2006) p. 19-20). Furthermore the authors point to the fact that past callings for a substantial overhaul of the SOEs and banks have been largely misplaced: nothing like a financial crisis or the slowing-down of the economic growth took place (an example of a past call for reforms is 1998 paper by Dornbusch and Giavazzi or a paper by Lardy from the same year). The only risk that the Chinese economy is facing comes from the globalisation and the increasing need for competivness in international markets. Hence, although the authors devote their book to SOEs, the implication is clear: there is no need for a substantive overhaul of the banking sector due to the aforementioned factors.

For a non-economist, the argumentation of the authors might seem convincing, but I would like to make an important points.

It is true that slowing down the market reforms may be a sound strategy because of social concerns. Nevertheless, such an argumentation may be a good excuse to do nothing to revamp the banking system and the economy at large. The point is that the reforms will have to be conducted finally and the Chinese policymakers should be aware of that. A parallel (though quite distant) can be built with the policies of the current Polish or Hungarian governments: high levels of growth may make the government irresponsible in regards to budgetary policies or structural reforms. Similarly,
repeating the mantra about the need to create jobs for village inhabitants may
contribute to the lack of responsibility.

On the other hand, we have to do justice to the authors’ claims that the fundamentals of the Chinese economy (low budget deficit, high levels of foreign reserves) are strong and comprehensive schemes to deal with social issues need time to be devised and implemented. Perhaps, a good solution is privatisation and liberalisation together with offsetting social problems by an increase in spending on welfare and healthcare, proposed also by Eichengreen and Park (2006) as a measure to solve global imbalance problem.

Financial Crisis?

Non-economic readers may be wondering? What does the problem with Chinese banking has to do with the world economy? The answer is: a lot. If the Chinese financial system collapses (i.e. a financial crisis takes place), the Chinese economy will slow down. I don’t think that I need to explain potential repercussions. But is the crisis really likely?

Probably the most comprehensive analysis of the likelihood of a deep financial crisis is provided by Allen et al (2005). The authors state that in China three types of crises may occur: a financial crisis, a currency crisis, and a twin crisis.

The outburst of a real estate bubble may cause a financial crisis, similarly to the case of Thailand in 1998. In such a situation, many banks (including the Big Four) may become insolvent and the inflow of foreign funds and credits into the Chinese financial system may end abruptly. The primary reason for the crisis will be the agency problem – the lack of control from international investors over the way Chinese banks allocate their money.

The financial crisis may also take place in the event of a slowdown in the Chinese economy, or the persistence of NPLs. The authors point out that a small government budget deficit and high amounts of foreign reserves should enable the Chinese authorities to “prevent the situation from getting out of control” (p. 61). On the other hand, the Shanghai real estate market experienced many bubble outbursts in the past and the next one may have dire consequences.

Another possibility is a currency crisis. High amounts of capital in China is speculative in character and allocated there in order to reap gains from the future revaluations of the Chinese currency. If the revaluation actually takes place, or if it is determined that no revaluation takes place, speculators will withdraw their capital from China in a very abrupt manner. In the event it happens, the role of the Chinese government will be crucial: if it allows the currency to float, a devaluation will take place quickly, which will limit further outflows of capital; if the government decides to keep the peg, a currency crisis will ensue, leading to a banking crisis through a rapid bankrun. This will be the instance of a twin (financial and currency) crisis.

So, in general, it seems that the likelihood of a financial crisis in China is not predicated that much on the shape of the Chinese banking system. A more important factor is the level of Chinese foreign reserves. The economists give different opinions on the question of whether reserve accumulation may prevent a financial, or a twin (financial and currency) crisis. As regards the risk of a financial crisis, Grifith-Jones and Gottschalk (2005) state that the Chinese foreign reserves are well above the levels needed for a successful management of a financial crisis and in the event of a major financial disruption, only a certain fraction of them would have to be used. Hence, possible slowdown in the Chinese economy, or the crash in the Shanghai real estate market may be manageable.

Prasad and Wei (2005) state that the levels of the Chinese reserves should be sufficient to counter the negative effects of a financial shock, but they do not make any definite forecasts on whether this will turn out to be true in the future.

According to Wyplosz (2004), in the situation of an abrupt speculative withdrawal of funds, the build-up of foreign reserves may not be sufficient to manage the crisis. As Wyplosz (2004) writes in his paper: “Large reserves of foreign currency, such as those which have been accumulated since the 1997-8 crisis, are open to the same limit: when a crisis is in full swing, it soon overpowers any limited stock of ammunition”.

Where do we go from here?

Clearly, the Chinese banking system is in a bad shape. Nevertheless, as we said, the Chinese economy has something peculiar: 1,602 bln USD of foreign reserves (as of April 2007) that could be used to fight the crisis. Are they sufficient to fight a financial crisis? Are they sufficient to fight all possible threats to the Chinese economy? What is the past experience? Clearly, the opinions presented so far do not provide much evidence nor argumentation on that. In my next article, I will try to answer these questions and present my own model of estimating losses.


Allen Franklin, Jun “QJ” Qian, Meijun Qian(2004) “China’s Financial System: Past,
Present, and Future”. Last Revised: April 4, 2006

Berger Allen L., Iftekhar Hasan, Mingming Zhou (2006). Bank Ownership and
Efficiency in China: What Will Happen in the World’s Largest Nation?

Eichengreen, Barry and Yung Chul Park (2006). “Global Imbalances: Implications for
Emerging Asia and Latin America”.

Griffith-Jones s., R Gottschalk . Financial Vulnerability in Asia.
- IDS Bulletin, 2006 - asia2015conference.org

Kashyap, Anil K and Wendy Dobson. “The contradiction in China’s gradualist banking
reforms.” National Bureau of Economic Research. October 2006

Lardy, Nicholas R. and Morris Goldstein (2004)
“What Kind of Landing for the Chinese Economy?”Institute of International Economics. Policy Briefs. www.iie.com/publications/pb/pb04-7.pdf

Prasad, Eswar and Shang-Jin Wei (2005). “The Chinese Approach to Capital Inflows:
Patterns and Possible Explanations”. IMF Working Paper.

Wyplosz, Charles. (2004) “Regional Exchange Rate Arrangements: Lessons from Europe
for East Asia”. Graduate Institute for International Studies, Geneva and CEPR
First draft: February 2002

Yusuf (2006) Shahid, Dwight H. Perkins, and Kaoru Nabeshima. “Under New
Ownership Privatizing China’s State-Owned Enterprises”. In: Palo Alto. Stanford
University Press.

10 September 2007

Growth, Inflation and Globalization - Reviving the debate on causes of inflation

In June, Brazil’s Central Bank changed its forecasts for inflation and GDP growth. The latter was increased from 4.1% to 4.7% for 2007, which ceteris paribus should imply lower unemployment and thus higher inflation when compared to the previous forecasts, but interestingly enough, expected CPI inflation was reduced from 3.8% to 3.5% for the same year! In Bloomberg’s piece of news reporting this contradiction, it’s argued that the “accelerating economic growth in Latin America's biggest economy isn't sparking inflation as a currency rally slashes the cost of importing goods”, but can this be true?

Estimates of exchange rate pass-through on inflation show a modest effect when the home currency is depreciating. When the currency appreciates, as in this case, downward price inflexibility further reduces the effect import prices have on the aggregate price level, making it implausible the argument that the Real’s higher value has a stronger effect over inflation than the business cycle dynamics.

A solid explanation must show how the determinants of inflation may shift and lead to this unlikely combination, in other words, must show why the ceteris paribus assumption doesn’t hold. Because the goal here isn’t to discuss the Brazilian economy, we shall leave aside other considerations and show that the main and ultimate reason for the inflation to fall as the GDP rises is in this case a positive supply shock brought about by globalization.

For the higher GDP to be consistent with lower inflation, one of variables usually taken as constant must be changing, for example, if the potential growth were to increase by more than the expected actual growth, then inflation should fall. The only problem is that potential output depends on the structure of the economy and it makes no sense to think a priori it increased.

Alternatively, if we consider an augmented Phillips Curve, one of the other determinants of inflation may be pushing it down by more than the output gap’s upward pressure. This could be the case of a reverse oil shock – but the oil prices are on the rise –, increased central bank credibility – but that still doesn’t account for the higher GDP growth –, or even currency appreciation – but this isn’t enough to outweigh the business cycle pressure, as said above. It could also a positive productivity shock, however the last we saw was the personal computers revolution in the 80s. Or was it?

As presented in the World Economic Outlook (2006), globalization increases “pressures to innovate and other forms of nonprice competition”, raising productivity growth. This allows higher output without accelerating inflation. If the Central Bank recognizes the positive supply shock ahead of the private sector, “it can take advantage of its better forecasting to opportunistically lower inflation while delivering output growth rates that pleasantly surprise the private sector”. This is what Rogoff (2006) calls “opportunistic disinflation” and perfectly fits the Brazilian case.

Such explanation implies a permanent effect from globalization on inflation, for the Central Bank now targets a lower inflation rate – despite the official government target of 4.5% for 2008, the monetary authority already announced it will actually aim at 4%. Of course there’s no free lunch and the country gave up the opportunity to have an even larger GDP growth without accelerating inflation.

Because there’s general consensus that the long-run price level is determined by the money supply, economists agree that monetary policy would have to be altered for globalization to impact the inflation trend. And we have just shown how it can do so by creating policy incentives. Another way globalization can affect inflation is temporary shocks that change its short-run behavior, but theory for explaining it is not as widely accepted. For instance, Ball (2006) says “applied economist typically analyze short-run inflation behavior with a Phillips Curve”, but what to include varies a lot. In his paper he estimates 2 specifications and mentions a few other possible modifications.

In both cases he finds little to no effect: when testing the relevance of foreign output gap, he “pooled annual data” for a number of countries and found it “barely significant” and “at most a secondary influence on inflation”; when testing the role of trade, it had “at most a small effect”.

The problem is such results are contrary to the most prominent literature on the theme and his methodology way too simplistic to deal with the econometric difficulties. When assessing the role of trade, our pooled OLS estimates also resulted in small and statistically insignificant coefficients for openness, but tests on fixed and random effects strongly indicated that simultaneity was an issue that had to be addressed. Using instrumental variables to control for it, openness came with the expected sign and statistically significant.

As for the theoretical arguments, it may be useful to analyze Mankiw’s comment on Ball’s article for a Fed meeting. They both agree it’s possible competition may have lowered the “typical markup of price over marginal cost” and provided a “one-off beneficial shock to the inflation process”, but what really matters for the cyclical behavior of inflation is the sensitivity of mark-up to the business cycle.

Mankiw explains that very well, however both of them take for granted that “firms face diminishing returns as their output expands”. This neglects that the best reason for firms resort to outsourcing is to exploit economies of scale, and ignoring that is ignoring an essential feature of today’s globalization. In such a world, markups may still not be countercyclical, but part of firms’ desired prices is. Firms’ average costs go down as their production increases, for they benefit from EOS, and, ceteris paribus, prices fall. Of course prices don’t actually have to fall, firstly because markups may be acting on the opposite direction and secondly because actual prices also depend on the rate of adjustment. The important thing is globalization can put pressures on prices, dampening or compounding with other determinants. The more firms outsource, for example, the greater benefits they reap from EOS and the larger the impact on price dynamics.

We have thus a way for globalization to change the inflation process by affecting desired prices, in line with models of trade with imperfect competition and scale economies, and there is evidence from sound econometrics corroborating it [See WEO (2006)]. Additionally, one can consider the direct role of import prices and the exchange rate, which has been shown to have a marginal yet significant effect. Finally, as argued in the literature, globalization provides policy incentives that can alter long-term inflation trends, which fits the Brazilian recent development.

The extent to which these channels can alter the domestic price level is yet to be measured in consensus, but it is harder and harder to claim globalization is not crucial for the analysis of inflation.

-- André Luis Pulcherio


05 September 2007

CITIZEN OF EUROPE: Is Sarkozy a disappointment?

I was pretty enthusiastic when I heard that Sarkozy won elections in France this year. Wow, I said, something is gonna change in this country. After six months of Sarkozy in power, I must admit that my enthusiasm has rather faded and certain skepticism has appeared.

Why am I disappointed by what Sarkozy is doing? Or, it’s better to say: why do I have doubts that he’s gonna make any valuable reforms?

Well, the reasons are multiple.

Firstly, Sarkozy did his very best to remove clauses on “unrestrained competition” from the new European treaty (a bad document in itself, but that’s a topic for a different post…). You could of course say that it’s nothing really important, as the EU Commission competition division is still (hopefully) in existence, but as many experts say the lack of the aforementioned clause make the foundations for antitrust rather fragile (just have a look at the article from FT

The other problem is whether the European Antitrust should be more like the American one, with greater emphasis on the dynamic effects. This is not a topic of this article, but undermining the very fundamentals of antitrust itself is a rather incorrect policy.

Secondly, Sarkozy seems to be in favour of creating national champions. As we can see, with Colbert it is like with Elvis: the guy is dead, but some still believe that he’s alive. And, as to the results of creating national champions, I am personally rather skeptical. Just have a look at the French computer science industry, which still needs protection, Korean chaebols, or obvious mistakes of the Japanese Ministry for Trade and Industry (described here). Going further, the US government didn’t create the Silicon Valley… Of course, car companies like Toyota or Honda are examples to the contrary. Nevertheless, the general picture of the effects of industrial policy is rather unclear.

Thirdly, it seems that Sarkozy still cannot understand what the monetary policy is for… The guy still thinks that you can boost the economy by lowering interest rates below the NAIRU level not harming the long-term sustained growth. Fortunately, we have Germans in Europe and their healthy conservative attitude…

Fourthly, he isn’t too fiscally conservative either. France will not meet its Euro-area budget criteria till 2012. I am afraid (though not absolutely sure – don’t have precise data) that the rest of Europe will have to pay with higher interest rates and less investment.

There is surely some talking about labour reform in France and deregulation too, but what Sarkozy has done so far doesn’t really make me believe that he will implement new policies… But you never know… Politik ist keine exackte Wissenschaft, as Prinz von Bismarck said…

Clearly, Sarkozy is kind of a disappointment, but it is not a time to give verdicts yet…

Remy Piwowarski

01 September 2007

Focus on expertise

Welcome to Economics International Open Forum. Our goal is to create a place in which different views on international economics may be exchanged and debated. Although the website is primarily by students and for students, the crucial element will be the presence of experienced scholars in International Economics, moderating discussions and being the guardians of intellectual coherence.

But who are we, you may be wondering. We met as students at University of California, Berkeley, for a seminar on international economics and found ourselves working with a very skilled group, whose discussions during classes were interesting, entertaining and lead to valuable conclusions. Going to different schools from all around the world, we felt like it is often the case that these rich debates do not go beyond the wall of the universities and as such their conclusions are irrevocably lost.

Economics International thus aims at pooling students from top universities to provide a source of information and informed opinions for those majoring in Economics, Business, Political Economy, International Relations or anyone interested in these themes.

We focus on expertise, with collaborators coming from top schools and writing on relevant themes of the international arena, as well as moderators who are authorities in their fields and will be ensuring the quality of the debate.

--André Luis Pulcherio and Remy Piwowarski