The title of this article is a little misleading, it does not show so much who won or lost with NAFTA as much as it shows the complexities of trade and production within the agreement. Beer sold in Mexico brewed from grains grown in America. Jeans made cheaply in Mexico for American markets, but with American cotton. Bacon from pigs born in Canada but raised in the USA…. The author argues in the case of the jeans, that without NAFTA production would likely move to Asia. This may or may not turn out to be the case. It seems very hard to tell what would happen. But this is the main point. The arguments we usually hear about who wins or loses from trade agreements like NAFTA are superficial. Much of the trade and production involved in manufacturing is not obvious to consumers who only see the final product. And, the people who profit from it are not always as salient as the people who have been hurt by the changes created by NAFTA. In the United States, Donald Trump has played to the type of superficial understanding of trade this article exposes. In the UK, the Brexit campaign did too. This is not to say these deals are good or bad, just that they are complex.
With all of the violence and ideological strife, issues of health and poverty are often overlooked in the Middle East. They may seem mundane in comparison, but they are no less important. Thanks to Shaelee M. for pointing this article out to me.
- “Six countries in the region are among the top 10 globally with the highest prevalence of diabetes. They include the United Arab Emirates, showing the second-highest rate in the world — behind only the tiny Pacific island state of Nauru — followed by Bahrain, Egypt, Kuwait, Oman and Saudi Arabia.
- The International Diabetes Foundation estimates that 26.6 million adults in the Middle East and North Africa currently have diabetes, accounting for 9.3 percent of the world’s adults with the disease. The region spends $5.5 billion annually on diabetes, accounting for 14 percent of its total health care expenditure. In Qatar, expenditure is as high as $2,960 per person.
- The figures are already worrying, but the foundation predicts worse to come. It says that over the next 20 years the number of people with diabetes in the region will almost double, reaching 51.7 million by 2030.”
Wise old saying: “Be careful what you ask for, you might just get it.”
Perhaps someone should have reminded the British of this before they voted, or even began the referendum process. The result was a surprise to the pollsters, the leader of the “Leave” campaign, and many of those who voted to exit.Its not clear what happens next or what the repercussions will be. Britain’s economy is so closely tied to the EU that its impossible to say what will happen if they try to disentangle it. Similarly, the legal implications are too complex to predict at this point in time. It is also possible that Article 50 will not be implemented. The vote, after all, was not binding, only advisory.
Below is a sampling from list of the possible economic consequences to the BREXIT vote published by the Globe and Mail:
- Britain’s economy would grow more slowly outside the EU than if it stayed in, according to a raft of projections made in the run-up to the referendum by the government, the Bank of England, think tanks, international organizations and hundreds of academics.
- The fall in sterling, which on Friday hit its lowest level against the dollar since 1985, could help exporters – although demand in many countries around the world remains weak.
- The OECD and the IMF have said a Brexit will hurt the rest of the EU and affect other countries further afield. The OECD has said output in the EU, not including Britain, will be around 1 per cent weaker by 2020 than otherwise if Britain left bloc, a palpable hit for a region which is growing only weakly.
- The OECD has said there could be deeper economic fallout if a Brexit undermines confidence in the future of the EU, a scenario not included in its forecasts.
- BoE Governor Mark Carney responded to the vote quickly, saying the central bank was ready to provide 250 billion pounds of additional funds to support markets. He also said the Bank will consider additional policy responses in the coming weeks.
- Before the vote, Carney said it was too simple to assume the Bank will cut interest rates from what is already a record low of 0.5 per cent to cushion the economy after a Brexit vote. The BoE says it would have to weigh up slower growth against higher inflation caused by a weakening of the pound.
- Britain racked up its biggest current account deficit on record last year, equivalent to 5.2 per cent of economic output. The shortfall reflected higher flows of dividends and debt payments to foreign investors than similar flows into the country, as well as its wide trade deficit. Mr. Carney has said a Brexit could test the “kindness of strangers” who fund the balance of payments deficit.
- Mr. Osborne said during campaigning for the referendum that he would have to raise taxes and cut spending if Britain voted to leave the EU to prevent the slowdown in growth from hurting his push to bring down Britain’s still large budget deficit. After Mr. Cameron’s resignation, it was not clear if that plan would be maintained.
Sterling and gilts
- Sterling plunged to a 31-year low on Friday, its biggest fall in history. George Soros, the billionaire who earned fame by betting against the pound in 1992, said it could go as low as $1.15. On Friday, it was trading at around $1.39.
- Most forecasters have said Britain’s unemployment rate – now at a 10-year low of 5.0 percent – would rise after leaving the EU, although after the financial crisis Britain managed to avoid job losses on the scale seen in other countries.
- As seen after the crisis, wages will probably bear the brunt of any post-Brexit slowdown, according to the IMF. Britain’s National Institute of Economic and Social Research think tank estimated real consumer wages will be between 2.2 per cent and 7.0 per cent lower in real terms by 2030 than if Britain had stayed in the EU.
- World leaders from the United States, Japan, Germany and France have warned Britain that leaving the EU would hurt its standing as a global trading power.
- U.S. President Barack Obama said Britain would join “the back of the queue” for talks with the United States. This week, French President Francois Hollande said leaving the EU would put at risk Britain’s access to the single market.
For the full list see: http://www.theglobeandmail.com/report-on-business/international-business/european-business/what-brexit-could-mean-for-the-uk-economy/article30614021/
A recent article published by the IMF, “Neoliberalism: Oversold?” suggests a long overdue ideological reappraisal is taking place. The article challenges standard neo-liberal beliefs about austerity, capital controls, economic inequality and the one-size-fits-all approach to economic planning. Below are links and a few highlights from the article and a discussion published at Salon.com, “Wrong all along: Neoliberal IMF admits neoliberalism fuels inequality and hurts growth”.
- “The world’s largest evangelist of neoliberalism, the International Monetary Fund, has admitted that it’s not all it’s cracked up to be.
- Neoliberalism refers to capitalism in its purest form. It is an economic philosophy espoused by libertarians — and repeated endlessly by many mainstream economists — one that insists that privatization, deregulation, the opening up of domestic markets to foreign competition, the cutting of government spending, the shrinking of the state and the “freeing of the market” are the keys to a healthy and flourishing economy.
- Yet now top researchers at the International Monetary Fund, or IMF, the economic institution that has proselytized — and often forcefully imposed — neoliberal policies for decades, have conceded that the “benefits of some policies that are an important part of the neoliberal agenda appear to have been somewhat overplayed….”
- “In analyzing two of neoliberalism’s most fundamental policies, austerity and the removing of restrictions on the movement of capital, the IMF researchers say they reached “three disquieting conclusions.”
- One, neoliberal policies result in “little benefit in growth.”
- Two, neoliberal policies increase inequality, which produces further economic harms in a “trade-off” between growth and inequality.
- And three, this “increased inequality in turn hurts the level and sustainability of growth.”
- The top researchers conclude noting that the “evidence of the economic damage from inequality suggests that policymakers should be more open to redistribution than they are…”
For more from the Salon article, see: http://www.salon.com/2016/05/31/wrong_all_along_neoliberal_imf_admits_neoliberalism_fuels_inequality_and_hurts_growth/
From the IMF:
- “Moreover, since both openness and austerity are associated with increasing income inequality, this distributional effect sets up an adverse feedback loop. The increase in inequality engendered by financial openness and austerity might itself undercut growth, the very thing that the neoliberal agenda is intent on boosting. There is now strong evidence that inequality can significantly lower both the level and the durability of growth..”
It will be interesting to see if this critique has an impact on IMF policy. It is after all a research paper. There will doubtless be bureaucratic and political push-back from within the IMF and from some of the donar countries.
For the IMF article, see: http://www.imf.org/external/pubs/ft/fandd/2016/06/ostry.htm
By Dr. Mark DeWeaver
Not long ago, the future looked bright for the Kurdistan Region of Iraq (KRI). Long an oasis of peace in an otherwise unstable region, by 2013 the three Kurdish provinces of Erbil, Sulaimaniyah, and Dohuk had become the most prosperous part of the country. Not only were they developing their own oil and gas resources but they were also diversifying into non-oil sectors such as cement, tourism, and real estate. In the major cities consumers were flush with cash—business was booming at shopping malls, car dealerships, gold shops, hotels, and restaurants. Iraq’s tallest apartment and office buildings were under construction. The region’s dream of becoming the “next Dubai” seemed to be fast becoming a reality.
Today the KRI’s multi-year economic boom has turned to bust. Last year’s 50% drop in oil prices, the occupation of neighboring provinces by Islamic State (IS) militants, and the suspension of fiscal transfers from Baghdad to the Kurdistan Regional Government (KRG) have resulted in a government-budget crisis of epic proportions. State-sector salaries have gone unpaid for months at a time, KRG-controlled banks have no cash to fund depositors’ withdrawals, arrears to construction contractors are piling up, and billions of dollars in payments due to foreign oil companies have not been made.
The impact on the private sector has been little short of catastrophic. Consumer spending has collapsed, property prices have crashed, occupancy rates at four and five star hotels have plummeted, and work on many projects has come to a virtual standstill. Capacity utilization at cement plants is falling, car dealerships are struggling, income at banks and insurance companies is down sharply, and sales of big-ticket electronics items are slumping. Businesses that only two years ago were making record profits are now fighting for survival.
Outside of Iraq, Kurdistan’s great recession has attracted surprisingly little attention. While the war against the Islamic State continues to monopolize the headlines, the KRI economy is seldom in the news. This one-sided emphasis on the security situation is unfortunate because it obscures some of the most serious problems the region is facing. The outsider might well be left with the impression that everything in Kurdistan will be fine once enough precision guided munitions have found their targets in the IS-controlled areas south and west of the border. In this report, our objective is to fill in some of the gaps in previous coverage of the KRI by providing a comprehensive account of the region’s current economic downturn. We believe that our findings will be useful not only to those following the KRI economy for practical reasons but also to researchers interested in the business cycle dynamics of commodity exporting countries.
An interesting look at the Greek financial crisis as part of a larger systemic problem in the management of the EU eurozone, one that will not get fixed even if a solution to the Greek situation is found.
“What is clear is that the underlying problems of European monetary union – macroeconomic divergences and lack of fiscal policy coordination among a group of countries bound by a single currency and a single monetary policy – have not gone away. Unless these problems are addressed, even a Grexit is unlikely to provide more than a temporary respite for the Eurozone. Without reforms that bring the Eurozone toward closer fiscal integration, restore the severely compromised independence of the European Central Bank, and eliminate the massive debt overhang plaguing the Eurozone’s southern periphery countries, the future of the single currency may be bleak and brief……
Why is this the case? The current episode has highlighted and magnified three potentially fatal weaknesses of the Eurozone, none of which bodes well for the long-term sustainability of the monetary union.”
Here is an overview of the Greek situation, covering the decision to impose capital controls, some background on how capital controls work, and some of the potential outcomes of the crisis. Capital controls prevent capital flight. That is, everyone taking their money out of the banks and the country and therefore undermining the country’s financial institutions. This sounds like a reasonable policy, though one of the ironies is that once people think capital controls are going to be put in place, they have an extra incentive to take their money out of the bank fast so they don’t get caught. In the short term, they also reduce the money available for people to spend and therefore depress the economy further. In the long term, they can scare away future investment because potential financiers are afraid they will lose control of their funds once they invest in a country with a history of imposing capital controls. This is why the current global free-trade regime places so many restrictions on the use of capital controls. If investors feel secure, they will, in theory, put more money into the global economy thus spurring growth etc… etc… Nevertheless, there is considerable debate about whether it is better to break with the established economic wisdom when a country is faced with crippling debt as Greece is, or some other type of economic melt-down. Malaysia, for instance, used capital controls to help deal with the Asian financial crisis of the late 1990s.
“After bailout talks between the leftwing government and foreign lenders broke down at the weekend, the European Central Bank froze vital funding support to Greece’s banks, leaving Athens with little choice but to shut down the system to keep the banks from collapsing.”
“Banks will be closed and the stock market shut all week, and there will be a daily 60 euro limit on cash withdrawals from cash machines, which will reopen on Tuesday. Capital controls are likely to last for many months at least.”
-Greece imposes capital controls as crisis deepens
“Basically, a capital control is when the government tells you that you are no longer allowed to move your money around freely.
A government can use capital controls to order its banks to impose strict limits on daily withdrawals and overseas transfers of cash. It can also impose other measures such as limiting foreign exchange transactions.
In this case it would be to prevent euros flowing out of Greek banks – to overseas banks, into a different currency, or to be stashed under the mattress.”
-Greek debt crisis: What are capital controls?
“Until Saturday the last-ditch option to cover the IMF payment for Athens was to strike a deal on reforms and make available 1.8 billion euros worth of profits made by the European Central Bank on purchases of Greek bonds during the debt crisis.
But because Greece ended talks on a deal last night and called a referendum, the money cannot be disbursed and Greece is on course to default on Tuesday.”
-Factbox – Possible scenarios for Greece after a default
All Greek to you? Greece’s debt jargon explained
“…the AIIB has stoked controversy because Asia already has a multilateral lender, the Asian Development Bank (ADB). Why is China creating a new development bank for Asia?
China’s official answer is that Asia has a massive infrastructure funding gap. The ADB has pegged the hole at some $8 trillion between 2010 and 2020. Existing institutions cannot hope to fill it: the ADB has a capital base (money both paid-in and pledged by member nations) of just over $160 billion and the World Bank has $223 billion. The AIIB will start with $50 billion in capital—hardly enough for what is needed but still a helpful boost. Moreover, while ADB and World Bank loans support everything from environmental protection to gender equality, the AIIB will concentrate its firepower on infrastructure.”
“But the real, unstated tension stems from a deeper shift: China will use the new bank to expand its influence at the expense of America and Japan, Asia’s established powers. China’s decision to fund a new multilateral bank rather than give more to existing ones reflects its exasperation with the glacial pace of global economic governance reform. The same motivation lies behind the New Development Bank established by the BRICS (Brazil, Russia, India, China and South Africa). Although China is the biggest economy in Asia, the ADB is dominated by Japan; Japan’s voting share is more than twice China’s and the bank’s president has always been Japanese. Reforms to give China a little more say at the International Monetary Fund have been delayed for years, and even if they go through America will still retain far more power. China is, understandably, impatient for change. It is therefore taking matters into its own hands.”
The Guardian also has a few interesting things to say about the new bank. In addition to echoing the Economist’s comments about competition between China and the US/Japan, it also argues:
“the world suffers from insufficient aggregate demand. Financial markets have proven unequal to the task of recycling savings from places where incomes exceed consumption to places where investment is needed.
When he was chair of the US Federal Reserve, Ben Bernanke mistakenly described the problem as a “global saving glut.” But in a world with such huge infrastructure needs, the problem is not a surplus of savings or a deficiency of good investment opportunities. The problem is a financial system that has excelled at enabling market manipulation, speculation, and insider trading, but has failed at its core task: intermediating savings and investment on a global scale. That is why the AIIB could bring a small but badly needed boost to global aggregate demand.”
In defence of the Asian Infrastructure Investment Bank
“Companies from Saudi Arabia and the United Arab Emirates together pulled in about $12 billion in trade financing over the past five years — 8.5% of the $141 billion global total — to help pay for nuclear reactors, industrial power generators and new fleets of Boeing jets. That includes a record-setting $5 billion loan to help Saudi Arabia build one of the world’s largest petrochemical complexes.”
The US subsidizes purchases made by the oil monarchies of the Persian Gulf? Big surprise, that is not a popular idea:
“The companies keep the profits if sales go well; taxpayers bear the risk of loss if not,” House Financial Services Committee Chairman Jeb Hensarling, R-Texas, wrote in The Wall Street Journal last week. “The bank is a small-scale example of a larger and more dangerous threat: the shrinking of the free-market economy and the rise of a progressive welfare state — with its attendant cronyism, public-private partnerships and spreading government economic controls.”
The rational however, is that by providing loans and guarantees, the ‘ExIm’ Bank is supposed to facilitate trade, increase US exports and support the US economy. It is also argued that the bank provides a necessary service because other states intervene in similar ways to boost the sales of their own products on foreign markets.
Nevertheless, there are still questions about which industries get support and how much of the profits remain in the US. ExIm claims the biggest category of US companies it works with is “small businesses”: http://www.exim.gov/about/facts-about-ex-im-bank
Hensarling and other critics on Capitol Hill, remain unconvinced.
The ExIm bank also provides an interesting example of the role that states play in promoting trade. To the extent that institutions like ExIm provide a strategic advantage of one country over another, trade is still being pursued on mercantilist terms, a zero-sum competition between states.