Category Archives: Economic

Arts, Books, Economic, Government, Politics, Society

Book Review: The Great Convergence

the-great-convergence

BOOK REVIEW

Intro: Globalisation has developed in waves. First it was free movement of goods, then ideas. The free exchange of people will be the hard part and likely to be problematic.

FORMER US President Bill Clinton once referred to globalisation as “the economic equivalent of a force of nature, like wind or water”. The concept, which has had a major impact on world trade and markets, pushes countries to specialise and swap. Such a force of inertia makes countries richer, but one in which the world becomes smaller. In this book “The Great Convergence”, by Richard Baldwin, the author, a Geneva-based economist, adds an important caveat.  Like wind and water, he argues, globalisation is powerful, but can be inconstant or even destructive. True. How often have we heard and witnessed the erosion of local markets to the price-dominance of globalisation? Unless beloved nations catch up with reality, politicians will be pushed to make grave mistakes.

In an economist’s ideal world, things, ideas and people would flow freely across borders. Reality is less pragmatic, stickier, and often far less mobile in terms of movement. Historically, constraints on trade once bundled consumption and production together, limiting its growth.

Mr Baldwin’s grand theory of globalisation is of a series of unbundlings, driven by sequential collapses in the cost of moving things and ideas across cyberspace. From the domestication of the camel around 1,000 BC to the first commercial steam engine in 1712, the first great wave of globalisation unbundled production and consumption. From 1820, prices in Britain were set by international demand, and consumers were offered an increasing range in diversity of goods and services. Café goers, for example, could sip Chinese tea sweetened with Jamaican sugar.

Although moving goods became cheap, it wasn’t until the end of the 20th century that expensive prices for moving ideas became more affordable for most. Mr Baldwin invites readers born in the mid-1960s to remember the price of making an international call at $5 a minute, or the $50 price of sending a single document by an overnight courier. Industries clustered by default. The centres of economic activity emerged in those countries we now know as the G7. In this form of globalisation, national groupings of ideas and workers battled for market share, and became richer in the process. Mr Baldwin uses the analogy of two sports teams swapping players to improve their performance.

Since the 1990s, however, globalisation has changed radically. The internet has lifted the cost of moving ideas, and fuelled a second unbundling. Because co-ordinating international production is now much cheaper, faster and safer, supply chains are afforded the enormous benefit of ignoring borders to go sprawling across the world. Thus, a Canadian aeroplane-maker can direct a team of Mexican engineers. Apple can combine American design with Chinese assembly lines. With many products made everywhere, trade has become, in effect, denationalised.

The pace and speed of change and the now modern ease with which rich-world companies can outsource work have eliminated the old boundaries around knowledge. But in doing so has created a new, more unsettling trade landscape. Once, textile-mill workers in South Carolina had exclusive access to American technology. Although some may suggest that they have lost out to competition from Mexican workers, more accurately they face an altogether more formidable competitor: Mexican workers have been made more productive by American know-how.

Continuing the sports analogy, Mr Baldwin implies that today’s trade is like the coach of a top team being allowed to offer his services to those less successful. The coach gets rich from the double market for his services, while the better team gets a sudden surprise from the newly skilled competition. Mr Baldwin makes the inference that discontent with globalisation stems in part from an “ill-defined sense that it is no longer a sport for national teams”. The sporting parallels offered by the author are well placed and provides the reader with an insightful grasp of the magnitude of issues that globalisation encompasses.

Raising tariffs to placate or appease voters in protecting its national goods and services is a mechanism and tool best suited to the 19th or 20th century, not one that should be utilised in tackling 21st century globalisation. Given the new world of global logistical supply chains, a tariff is like erecting a wall in the middle of a factory. Mr Baldwin’s 21st-century policies involve setting common rules and standards to make companies feel secure that their supply chains will work. These are the goals of trade deals like the Trans-Pacific Partnership (TPP), or Britain’s membership of the European Union’s custom union – both of which are under threat. He says little on how to win over disgruntled voters, save a few lines on support for workers rather than jobs, and a vague plea that gains should be shared between winners and losers.

Critical also of the author is that he appears too sanguine about the politics of globalisation. A bright and rosy vision of the future imagines globalisation totally unshackled from its third constraint, as labour will invariably become replaced with robots and people being more routinely allowed to offer their services remotely.

–     The Great Convergence: Information Technology and the New Globalisation, by Richard Baldwin, is published by Belknap at $29.95 and £22.95.

Standard
Britain, Economic, Europe, European Union, Financial Markets, Government, Italy, Politics

Italy’s populist vote and the uncertainty of the euro

EUROZONE CRISIS

IN a continuation of a wave of populist voting following Brexit and the election of Donald Trump, Italy has now followed suit. The ousting and forced resignation of Matteo Renzi, a very successful prime minister in Italy, adds yet more resonance to an EU that is breaking at the seams.

Despite what Marine le Pen, the far-right leader of France’s National Front, would like to portray, Italy’s revolt was not particularly based on an anti-EU stance. The top populist parties in Italy, Five Star and the Northern League, are not opposed to membership of the EU itself but they are averse to the Eurozone.

Nevertheless, it will hardly be seen as a ringing endorsement of the actions of the EU. The issues that have driven this latest referendum result – fears over the waves of refugees from Africa, a desire to rise up against the establishment, and unhappiness over the way the economy has been managed – are the same dissenting signals that we have seen elsewhere.

It is the economic impact that we have most to fear from the Italian result. There is also the issue of what that might mean for the negotiations over Britain’s exit from the EU. The Italian economy is far from healthy, despite marginal improvements in unemployment rates, and the banks remain weak. The country’s debt-to-GDP ratio, at a staggering 133 per cent, is second only to Greece’s in the Eurozone. Despite Italy being the Eurozone’s third largest economy, the country has contracted by around 12 per cent since the financial crisis of 2008.

President Sergio Mattarella will be anxious now to ease fears of instability. But regardless of what action he takes there will be a delay as the markets adjust. In reality, he remains helpless as to what he can do to ease those fears. How long that period of instability lasts is the biggest uncertain factor the markets face. Financial markets do not like uncertainty or instability.

There is a risk that the failure of a major Italian bank, such as the troubled Banca Monte dei Paschi di Siena, could set off a wider crisis. Making the banks strong enough becomes more difficult amid political ambivalence.

That could well provoke another crisis in the euro, at a time when Britain will be in negotiations about its withdrawal from the EU. The fusion of these events is not going to help any new euro crisis or aid Theresa May and her government getting a favourable Brexit deal.

The most telling comment yet has come from the German finance minister Wolfgang Schaeuble, who has said there was no reason for a euro crisis but that Italy urgently needs a functioning government. Startling. Mr Schaeuble infers that a currency crisis was not inevitable. Unfortunately, ending the uncertainty is more than just an Italian problem.

Standard
Arts, Asia, Books, China, Economic, Government, Politics, Society, United States

Book Review – Easternisation: War and Peace in the Asian Century

THE EMERGING NEW SUPERPOWERS

easternization

Easternisation: War and Peace in the Asian Century by Gideon Rachman is published by Bodley Head (£20)

Intro: As eyes look East, can Gideon Rachman’s new book predict what will happen next? By the year 2025, some two-thirds of the world’s population will be living in Asia.

THIS summer’s Olympic Games in Rio surprised many when the UK pipped China to second place in the overall medal table. That aside, we should be under no illusions as to who the big players are when it comes to global affairs. The British Government’s decision under prime minister Theresa May to review its plans for the Hinckley Point C nuclear power plant suggests that Mrs May has erred more on the side of caution when it comes to dealing with China than David Cameron and George Osborne. Mrs May’s initial prevarication was met by a warning from the Chinese state news agency that her apparent ‘suspicion towards Chinese investment’ threatened the arrival of the ‘China-UK golden era’ that President Xi Jinping declared on his trip to London last year. On her first trip to China as Prime Minister earlier this month, our American friends would have been watching closely. The U.S. was left frustrated last year when the UK announced it was to join the Asian Infrastructure Investment Bank.

In 2014, the IMF announced that China had become the world’s largest economy in terms of purchasing power. There are, though, many indices by which the United States remains way out in front: mineral wealth, oil and other energy sources, and its geopolitical neighbourhood is far more secure and stable.

At the end of this insightful book which focusses largely on the ‘Asian century’ that lies ahead, Gideon Rachman makes the point that the current position of the West is supported by certain inbuilt advantages, such as its representative institutions and open (albeit increasingly fractious) societies.

The reader is enlightened to the well-grounded assertions that the tectonic plates of global influence is changing. By 2025, some two-thirds of the world’s population will be living in Asia, with 5 per cent in the United States and 7 per cent in Europe. Even the US National Intelligence Council warns that the era of Pax Americana is ‘fast winding down’. Despite Barack Obama’s announcement in 2011 of America’s ‘pivot’ towards Asia, however, such policies are yet to assume a tangible form. Washington’s approaches to Asia remain torn, ranging from ‘primacy’ to ‘offshore balancing’ and from ‘containment’ to ‘accommodation’. Better political fluidity is needed rather than a bumper-sticker approach.

For the UK, the rise of China is likely to trigger a harbinger of dilemmas. Hinkley Point and the collapse of the British steel industry are just the mere tip of an economic revolution that will become far reaching. For example, to what extent will Britain seek to synchronise its approach with the next US administration (especially given its stated position of seeking a bespoke trade deal and strong defensive alliance with Washington)? The irreconcilable should not be overlooked. Instructive in the argument here is the experience of Australia, which also lives under the US security umbrella but is umbilically tied to Asian markets. In July of this year, when an international tribunal at The Hague ruled against China’s territorial claims to sovereignty over most of the South China Sea, Australia joined the U.S. and the Japanese in calling for the Chinese to respect the verdict. Australia has now become a source of major Western irritation for Beijing. Like many other countries, Australia has become increasingly wary of Chinese investment in its energy infrastructure.

Earlier this year in Washington, the Australian prime minister, Malcolm Turnball, gave a speech and expressed concern about the ‘Thucydides Trap’. Named after the classical Greek historian, this notional concept is a creation of the Harvard political scientist Graham Allison. He determined that in 12 of the 16 cases in which a rising power has confronted a status quo power over the last 500 years, war has always prevailed. Former and past iterations of Chinese strategy under Xi’s predecessors, Deng Xiaoping and Hu Jintao, spoke in terms of China’s “peaceful rise”, its amenability to international rules and its apparent willingness to fit in with the existing order. But the period of “hide and bide” may now have passed. Fu Ying, a former Chinese ambassador to the UK, has said that the US-led world order is a suit that no longer fits for China and the emerging Asian markets. Close observers and analysts of Chinese reform even suggest that the People’s Liberation Army (PLA) is exerting a growing influence on decision-making, and that the Communist Party has sought to shore up its legitimacy by riding on the back of nationalist sentiment.

Politically, both Washington and Beijing have very long-term and all-encompassing definitions of what their peripheries and first line of defences are. War games, for example, often scope out a series of alarming scenarios. The Pentagon views Chinese defensive strategy as “anti-access and area denial” and has developed its own “air-sea battle” doctrine in response. And, concurrently, China’s “belt and road” strategy, by which it aims to reconstitute a Silk Road through the Eurasian landmass, can be explained partly by historical fears of Western blockades of Chinese ports or incursions into its territorial waters.

The historical enmities and divisions in Asia are marred with flashpoints that could ignite a larger conflagration on land or sea. There are territorial disputes in the South China Sea over a series of uninhabited islands – those such as the aptly named Fiery Cross and Mischief Reefs – which, according to Beijing, fall within the “nine-dash line” by which China’s territorial waters are defined. There are large numbers of ethnic Chinese in places such as Malaysia and Indonesia for whom Beijing feels some responsibility. Meanwhile, however, Japan, under Prime Minister Shinzo Abe, has assumed a much more offensive posture in response to Chinese claims to the uninhabited Senkaku Islands (as the Japanese call them) in the East China Sea. South Korea has endeavoured to reach an understanding with Beijing but Vietnam has looked to the US for protection as relations with China have soured.

 

In Easternisation, Rachman calls for a rapid improvement in the West’s situational awareness. The book is a welcome rebuttal of the tendency to view Asia through the prism of the markets alone. Although it has become fashionable and customary to speak of the “Pacific century”, the author suggests that an “Indo-Pacific” lens might be a more helpful way of viewing Asian geopolitics from the West. For instance, the development of the relationship between China and India – which share a contested land border and are highly suspicious of each other – is worthy of focus and attention.

India has already emerged as a global powerhouse in its own right. It has a similar size population to China, but a much healthier demographic balance and more established and experienced military.

Whilst still something of a geopolitical outsider, with India having no seat on the UN Security Council, there is gathering consensus that it could become a “swing state” and be harnessed to form part of a newly constituted democratic alliance. For the new superpowers in the East, the learning curve for tilting global powers in its favour might still be steep and perilous, though the West does appear to have tacitly accepted that the certainties of the past are passing. The US “pivot” towards Asia is a clear acknowledgement of this shift.

 

Standard