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January 22, 2008

Economist's View - 5 new articles

"Small is Resilient–the Impact of Globalization on Denmark"

The nordicmodel blog highlights a paper discussing the impact of globalization on Denmark:

Small is Resilient–the Impact of Globalization on Denmark, by aplefebvre: ...it is really interesting to see that a small country is sometimes better at facing globalization than bigger ones. The example of Denmark, in this article from Klaus Nielsen and Stefan Kesting..., is ... a lesson for our governments.

Abstract The aim of this article is to investigate the impact of globalization on the Danish economy. We focus on four possible influences of globalization and European integration (as one of the expressions of globalization) which are widely discussed in the scientific discourse on this topic and appear to be relevant for the Danish case. These dimensions are the reduction of the repertoire and effectiveness of national economic policy, the pressure for industrial restructuring, the seemingly required welfare retrenchment and the ideological implications of globalization as a predominant neo-liberal discourse. On the one hand we discuss Denmark as a typical example of a small European state and a Scandinavian welfare state regime, on the other hand we put emphasis on its nation peculiarities. The article shows that Denmark changed and adapted successfully to challenges of globalization while keeping the core of its particular form of the Scandinavian welfare model.

In addition, both its smallness and its distinctive national characteristics equipped Denmark well to turn the impact of globalization into a successful strategy for survival. However, there are indications that the translation of neo-liberal ideas in the Danish negotiated economy will lead to political disruption that challenges fundamental features of the model. Whether this may undermine the dam that had hitherto held back the globalization pressures in the Danish context and secured a response in accordance with the inherited characteristics of the Danish model remains an open question.

Introduction There is an extensive literature on the impact of globalization on the autonomy of nation states, social democracy and the welfare state. Much of this literature seems to agree on the fact that globalization has reduced the importance of national boundaries for economic transactions and has asserted structural pressures for change. However, there are diverging views about the overall effects of these changes. Some argue that the forces of global competition lead to reduced state spending and state intervention, more "market-friendly" policies, and the demise of social democracy and the modern welfare state (e.g., Garrett and Lange 1991, Gill 1995, Cox 1997). Others argue that the social and political impacts of globalization vary significantly dependent on the mediating role of the institutions of nation states (e.g. Hirst and Thompson 1999, Weiss 2002, Kjaer and Pedersen 2001). A growing literature, drawing primarily from an institutionalist perspective, stresses the growing empirical evidence of a wide variety of nation specific trajectories of national welfare and industrial-relations institutions and their path-dependence (Esping-Andersen 1996, Berger and Dore 1996, Crouch and Streeck 1997).

The predominant view seems to hold that economic globalization exposes all nations to policy constraints with the strongest pressures coming to bear on small nations who are more economically vulnerable. Yet this view is not uniformly held. Based on her review of three areas of economic policy and intervention–taxation, fiscal spending and industrial policy–Weiss (2002) concludes that the state has much more room for maneuvering than what she calls the "constraints school" seems to assume. She argues that globalization has even "enabling" effects, and that small states are not necessarily more "constrained" and less "enabled" by globalization than larger states. Size matters less. What matters more is the character of national domestic institutions.

Denmark is an interesting case in this respect. As part of the Scandinavian vanguard model of social democracy with its high-tax, high-spending regime, strong labor market policies, high income equality and equal wealth distribution, Denmark would seem a prime candidate for declining autonomy in the era of globalization. Furthermore, the Danish industrial structure has often been characterized as lagging, vulnerable and pre-Fordist, especially in comparison to its Scandinavian neighbors (Mjoset 1987). In recent years. however, Denmark has been viewed by some as a model for maintaining high aspirations of welfare and social democracy despite the challenges of globalization (Nielsen 2001). The full article on the web

The Challenge of Sovereign Wealth Funds

There are lots of worries about sovereign wealth funds and what countries who have amassed large amounts of financial assets might do with the money. For example, if a foreign country decides to invest in and take majority control of the Wall Street Journal, CBS, or key strategic industries in the economy, are we completely comfortable with that? Is there a line that shouldn't be crossed? In the Vox EU article below, Philipp Hildebrand develops a voluntary code of conduct for investments by sovereign wealth funds with an eye toward avoiding protectionist responses to acquisitions by countries controlling the funds.

Here's another potential solution. In financial markets, savings are made available in two ways, through direct and indirect finance. When the relationship is direct, the borrower and lender are known, e.g. if I buy a stock in a company, I know which company received my money and the company knows who bought the stock, it knows who lent them the money. In essence, though brokers, etc. may be involved, these transactions are "face to face". Think of a loan from friend as an example - and also all the problems, hard feelings and so on that come with a loan from a a friend as compared to, say, a small loan of the same amount from a bank.

With indirect finance, it's different. In this case, the borrower does not know for sure who borrowed their money, and the lender does not know for sure who provided the funds. A traditional bank plays this role. A large number of depositors put their money into a bank, the deposits are pooled together into one big "loanable fund", and somewhere else in the bank the money is lent to borrowers that appear to be acceptable credit risks. When I deposit a dollar in a bank, I don't know for sure which of the many borrowers receives that dollar - nobody bothers to keep track - and the borrower does not know who provided the money behind the loan.

Finance [Source: Mishkin's Money and Banking Text]

I think a lot of the problems we are worried about with sovereign wealth funds could be avoided by setting up an indirect international financial intermediary. If all of these countries were to get together, pool their funds into an international bank, and then hire a professional staff to evaluate and make loans, buy stocks, and make other investments all over the world, many of the problems of direct finance could be avoided. Because the funds are pooled, the exact identity of the country providing the funds would be unknown to the borrower thus reducing substantially worries about using these funds for strategic or political advantage. Furthermore, since market processes are at work as agents decide to take out a loan (or not), the return on these investments would likely be higher than what individual countries might earn trying to target and make these investments themselves (and when mistakes are made, losses are pooled across countries rather than falling wholly on individual countries).

Politics won't be avoided entirely with such an intermediary - for example some countries could be denied access for political or other reasons - but it seems to me that some institution that serves to pool funds before they are lent solves a lot of the problems that come with more direct lending arrangements. And with such an institution in place and ready to make loans to all who qualify, I would be much less worried about rules limiting the degree to which sovereign wealth funds can exert direct control over assets within a foreign country.

Here's Philipp Hildebrand:

The challenge of sovereign wealth funds, by Philipp M. Hildebrand, Vox EU: Sovereign wealth funds (SWFs) are not a new phenomenon. With its Caisse des Dépots et Consignations, France essentially set up a SWF in 1816![1] But such funds have recently grown both in number and size and now exceed the combined assets of hedge funds and private equity. Their rapid growth is closely linked to the prevailing global macroeconomic imbalances, and that means that SWFs will be around for some time to come. Even under the assumption that global imbalances unwind over the next ten years and commodity and oil prices revert to long-term averages, these funds will continue to deploy substantial financial assets in the global market place.

The rise in SWFs has undoubtedly brought a number of benefits. One of these has become particularly evident recently. Against the backdrop of the current market turmoil, SWFs have been a welcome source of capital, strengthening the vulnerable balance sheets of some of the world's largest financial institutions. But they have also given rise to considerable political controversy, as their rapid ascent challenges some long-held assumptions about how the global economy works.

Challenges to conventional views

First, since the early 1980s, we have witnessed broad-based and sustained political momentum to deregulate and liberalise economic structures, enhance the role of market forces and attempt to reduce the role of governments in the global economy. In this context, sovereign wealth funds' increasing number of sizeable state-sponsored foreign investments in mature economies can be perceived as a challenge to free market forces.[2] Moreover, such investments run the risk of triggering protectionist reactions in the recipient countries.

Second, one of the basic premises of open global capital markets is the idea that capital flows freely worldwide in search of investment opportunities that yield optimal risk-adjusted rates of return. The fact that large and government-controlled investment companies make substantial foreign investments in privately owned companies raises concerns about the validity of this hypothesis. Specifically, could a government be tempted to use its SWF as a financial instrument in pursuit of a particular political objective? The mere fact that such questions arise could trigger protectionist policies in recipient countries, thus again undermining the proper functioning of free markets.

Third, as a general rule, capital has historically tended to flow from the core of an economic system to its periphery.[3] But global capital flows from the periphery to the core are clearly on the rise, and sovereign wealth funds play a potentially important role in this apparent reversal. The sense that capital is increasingly flowing from the periphery to the core is raising a variety of political sensitivities in the core countries. I fear that many of these sensitivities will likely be protectionist in nature.

In my view, the single most important challenge associated with the rise of sovereign wealth funds is therefore to ensure that the policy reactions in the recipient countries of potential and actual SWF investments do not degenerate into what ultimately amounts to financial protectionism.

Potential policy responses

How should policy respond to the challenge of SWFs? Proposals and actual policy initiatives have varied widely, from calls for increased transparency of funds' investment positions to calls for reciprocity in market access. But there is now considerable political momentum behind the idea of a voluntary code of conduct or a set of guidelines for SWFs. The effort by the authorities of the largest industrialised countries and the leading sovereign wealth funds to jointly develop such guidelines is timely and clearly sensible. There is a risk, however, that the efforts will prove counterproductive if the demands from the industrialised countries are too ambitious or driven by protectionist motives.

In my view, a future code of conduct or a set of guidelines must cover two central issues if they are to be effective. First, to quell the concerns of recipient countries with respect to politically motivated investments, a code of conduct must contain governance prescriptions that ensure that SWFs are not driven by political objectives. The institutional design of modern central banking may offer some clues as to the appropriate form of such prescriptions. Central banks and sovereign wealth funds obviously pursue fundamentally different objectives but share the risk of being hijacked by governments for political aims. In the case of central banks, this problem has been successfully addressed by the adoption of an institutional design based on two powerful features: a clear mandate and statutory independence to pursue it.

Second, to preclude a resurgence of state ownership in our economies, and to alleviate fears about excessive meddling of governments in private companies, SWF guidelines need to spell out upper limits to individual investment stakes in foreign private companies. Such limits should be set significantly below the typical threshold of a controlling minority, let alone an absolute majority.

As long as a recipient country can be confident that a particular SWF operates in accordance with these two guidelines, there is no reason to demand intricate levels of portfolio transparency from SWFs. Transparency is unlikely to solve the problems outlined here. Indeed, I fear that, in some cases, extensive transparency requirements for SWF portfolios could actually end up triggering protectionist reactions in mature markets. There is, of course, a host of other reasons why more transparency makes sense for sovereign wealth funds. Accountability is clearly one of them. Incidentally, the history of central banking suggests that the more independent a central bank becomes in pursuing its stated mandate, the clearer becomes its institutional obligation to be accountable and thus transparent. The same may turn out to be true for sovereign wealth funds.

Future prospects

There are a number of difficult questions that need to be addressed before a set of SWF guidelines can become operational. What do we mean by a non-political investment mandate? How do we gauge to what extent there might or might not be political interference in the pursuit of such a mandate? Will there be a need for a referee to determine whether a SWF complies with a particular set of guidelines? What happens if a SWF initially signs up to a code of conduct but subsequently fails to comply with its guidelines? Much work remains to be done and the timeframe is tight. Ideally, a first set of guidelines will be agreed upon jointly between the G7 countries and the most prominent SWFs by the 2008 spring meetings of the IMF and the World Bank. If well designed and agreed upon, such a set of guidelines could serve as a basis for determining which sovereign wealth funds will continue to enjoy full market access in mature economies.

References

Bernanke, Benjamin S. 2006, "Global Economic Integration: What's New and What's Not?", Speech held at the Federal Reserve Bank of Kansas City's Thirtieth Annual Economic Symposium, Jackson Hole, Wyoming, August. Coeuré, Benoit, 2007, "Faut-il Avoir Peur Des Fonds Souverains?", forthcoming, Les Cahiers, Le Cercle des économistes. Cox, Christopher, 2007, "The Role of Governments in Markets". Speech at Harvard on 24th October 2007. Jones, Matthew T. and Maurice Obstfeld, 2000, "Saving, Investment, and Gold: A Reassessment of Historical Current Account Data", in Calvo, Guillermo A., Rudiger Dornbusch, and Maurice Obstfeld, eds., Money, Capital Mobility, and Trade: Essays in Honor of Robert A. Mundell, Cambridge: MIT Press, 2000. Obstfeld, Maurice and Alan M. Taylor, 2003, "Globalization and Capital Markets". In Michael Bordo, Alan M. Taylor and Jeffrey G. Williamson, Globalization in Historical Perspective, Chicago, The University of Chicago Press.

Editors' note: This article first appeared in French on our consortium partner's site www.telos-eu.com.

Footnotes

1 I am grateful to Benoit Coeuré of the French Treasury for this comment (see Coeuré, 2007). 2 SEC Chairman Christopher Cox, for example, points out possible conflicts of interest arising from foreign government ownership of businesses (Cox 2007). 3 Bernanke (2006) also makes this point. See Jones and Obstfeld (2000) and Obstfeld and Taylor (2003) for historical evidence.

King and His Day

If some people had gotten their way, today wouldn't be a holiday:

The Moment That Carried This Day, by Allison Silberberg, Commentary, Washington Post: As we honor the Rev. Martin Luther King Jr. today, it bears remembering how the holiday came to be.

The legislation proposing creation of a federal holiday was not at all assured in the fall of 1983. The Democratic-controlled House had passed its bill in August with bipartisan support, but Democrats in the GOP-controlled Senate faced a fight despite support from some prominent Republicans. President Ronald Reagan was against this type of memorial. Many Republicans said they opposed it for economic reasons, arguing that our nation couldn't afford another federal holiday.

At the time, I was an intern for Sen. Edward M. Kennedy (D-Mass.) and was following the bill carefully. ... I remember the October day ... I begged for permission to go to the galleries above the Senate floor to watch Kennedy deliver the speech.

The galleries and the Senate were nearly empty when Kennedy walked onto the floor. I saw only three members -- Kennedy, the senator who was presiding, and Jesse Helms (R-N.C.), who was speaking against the holiday.

After several minutes, Helms said that he thought it "ironic" that "black citizens" were the ones who most needed jobs and yet were demanding a holiday. The few of us in the gallery gasped. Helms said repeatedly that the legislation was being railroaded through the Senate without proper hearings. Having heard enough, Kennedy rose to ask Helms to yield. Helms refused. Kennedy sat down and waited... Finally, Helms said he would conclude -- and then he uttered the words that turned the tide of the whole debate.

Helms had been speaking about the negative economic effects of a federal holiday, but he announced that he also opposed the holiday because King had used "nonviolence as a provocative act to disturb the peace of the state and to trigger, in many cases, overreaction by authorities" and that King supported "action-oriented Marxism." Then he yielded the floor.

Kennedy rose, his face reddening with anger. He put his prepared remarks aside and began to explain that Helms's statement was exactly why our nation needed this holiday. The words seemed to come from deep within him. Kennedy said Helms's comments took him back to an uglier time in America, a time that King courageously fought to correct, as Kennedy's own brothers had.

Helms, who had been leaving the chamber, returned. "Will the senator please yield the floor?" he shouted.

"No, I will not yield the floor," Kennedy replied.

As Kennedy spoke, other senators appeared, trying to see what the commotion was about. The doors to the press gallery flew open, and reporters rushed forward and peered over the railing with notepads in hand. It was like a scene from a movie.

I was moved as Kennedy spoke... He wanted the holiday to remind Americans that our nation must ensure equal opportunity for all and said that King had died fighting for that inalienable right.

It was his finest hour, and Helms's worst.

The next day, The Post ran a front-page story about Helms's remarks. Helms defended his statement and continued questioning King's patriotism. ... As the vote loomed later that month, some senators switched sides out of fear of being associated with Helms's views.

The legislation passed.

Right after the Senate vote, which I watched from the packed gallery, I rushed in excitement to the room that had been set aside for a reception. Not seeing anyone there, I turned around. I remember hearing a thunderous sound coming toward me. A crowd turned the corner, and there were Kennedy, Coretta Scott King, other famous civil rights leaders and so many other supporters filling the long hall. As they walked, arm in arm, they began singing "We Shall Overcome." It was a glorious moment.

President Reagan signed the bill, but the fight over the holiday continued. Some states initially refused to honor it, and it was years before the last holdouts -- New Hampshire and Arizona -- acknowledged the day. ...

This is a day for Americans to think of those who seek freedom from want and injustice... Dr. King's dream will be alive and well if each of us does what we can for the most vulnerable in our midst.


I Have a Dream Speech - Address at March on Washington

The article referenced above:

Helms Stalls King's Day In Senate, by Helen Dewar, Washington Post, October 4, 1983; Page A01: Sen. Jesse Helms (R-N.C.), charging that the Rev. Martin Luther King Jr. espoused "action-oriented Marxism" and other "radical political" views, yesterday temporarily blocked Senate action on a House-passed bill to create a new national holiday in memory of the slain civil rights leader.

Helms' assault on King, which prompted a scathing denunciation from Sen. Edward M. Kennedy (D-Mass.), came as the White House was putting out word that President Reagan intends to sign the measure, even though the administration once had opposed it. ...

Sen. Robert J. Dole (R-Kan.), floor manager for the legislation, acerbically attacked the contention by Helms and other critics of the bill that another federal holiday would be costly for the economy. "Since when did a dollar sign take its place atop our moral code?" Dole asked.

Although Helms' colleagues had expected his effort to derail the bill by sending it to committee for hearings, the tone of his attack--linking King to what he called "the official policy of communism"--appeared to take them by surprise.

"I will not dignify Helms' comments with a reply. They do not reflect credit on this body," an angry Kennedy said, adding that what Helms said should be "shunned by the American people, including the citizens of his own state." Later, Kennedy accused Helms of using "Red smear" tactics.

Asked before television cameras to say whether he considered King a "Marxist-Leninist," as he had suggested..., Helms at first demurred, then said, "But the old saying--if it has webbed feet, if it has feathers and it quacks, it's a you-know-what." Asked again later if he considered King a Marxist, Helms said, "I don't think there is any question about that."

When asked if his attack on King would cause him political trouble in North Carolina, where he faces a tough race for reelection next year, Helms said bluntly, "I'm not going to get any black votes, period." ...

[T]he White House indicated that Reagan probably would sign it despite earlier reservations about the cost. Helms began his attack by suggesting the bill's cost in loss of productivity could be as high as $12 billion a year, although the Congressional Budget Office has said it would be more like $18 million. ...

But it was Helms' attack on King himself that drew the most notice.

A federal holiday should be an occasion for "shared values," but King's "very name itself remains a source of tension, a deeply troubling symbol of divided society," Helms said.

Helms said King had used "nonviolence as a provocative act to disturb the peace of the state and to trigger, in many cases, overreaction by authorities."

He asserted that there were Marxists in King's movement and that King had been warned against them by the president at the time, apparently meaning President Kennedy.

Added Helms: "I think most Americans would feel that the participation of Marxists in the planning and direction of any movement taints that movement at the outset . . . . Others may argue that Dr. King's thought may have been merely Marxist in its orientation. But the trouble with that is that Marxism-Leninism, the official philosphy of communism, is an action-oriented revolutionary doctrine. And Dr. King's action-oriented Marxism, about which he was cautioned by the leaders of this country, including the president at that time, is not compatible with the concepts of this country."

Kennedy was joined by Sen. Arlen Specter (R-Pa.) in disavowing Helms' charges. Specter, calling King a "Herculean figure on the American scene," credited an appearance by King in Philadelphia with being a "stabilizing influence" that prevented rioting there in the 1960s.

Said Dole: "To those who would worry about cost, I would suggest they hurry back to their pocket calculators and estimate the cost of 300 years of slavery, followed by a century or more of economic, political and social exclusion and discrimination."

Paul Krugman: Debunking the Reagan Myth

Paul Krugman explains why people should be upset with Barack Obama's praise of Ronald Reagan:

Debunking the Reagan Myth, by Paul Krugman, Commentary, New York Times: Historical narratives matter. That's why conservatives are still writing books denouncing F.D.R. and the New Deal; they understand that the way Americans perceive bygone eras ... affects politics today.

And it's also why the furor over Barack Obama's praise for Ronald Reagan is not, as some think, overblown. The fact is that how we talk about the Reagan era still matters immensely for American politics.

Bill Clinton knew that in 1991, when he began his presidential campaign. "The Reagan-Bush years," he declared, "have exalted private gain over public obligation, special interests over the common good, wealth and fame over work and family. The 1980s ushered in a Gilded Age of greed and selfishness, of irresponsibility and excess, and of neglect."

Contrast that with Mr. Obama's recent statement ... that Reagan offered a "sense of dynamism and entrepreneurship that had been missing." ...[W]here in his remarks was the clear declaration that Reaganomics failed?

For it did fail... Yes, there was a boom in the mid-1980s, as the economy recovered from a severe recession. But while the rich got much richer, ...[b]y the late 1980s, middle-class incomes were barely higher than they had been a decade before — and the poverty rate had actually risen.

When the inevitable recession arrived, people felt betrayed — a sense of betrayal that Mr. Clinton was able to ride into the White House.

Given that reality, what was Mr. Obama talking about?... For example, I'm not sure what "dynamism" means, but if it means productivity growth, there wasn't any resurgence in the Reagan years. Eventually productivity did take off — but [not until]... 1995.

Similarly, if a sense of entrepreneurship means having confidence in the talents of American business leaders,... American business prestige didn't stage a comeback until the mid-1990s, when the U.S. began to reassert its technological and economic leadership.

I understand why conservatives want to rewrite history and pretend that these good things happened while a Republican was in office... But why would a self-proclaimed progressive say anything that lends credibility to this rewriting of history — particularly right now, when Reaganomics has just failed all over again?

Like Ronald Reagan, President Bush began his term in office with big tax cuts for the rich and promises that the benefits would trickle down to the middle class. Like Reagan, he also began his term with an economic slump, then claimed that the recovery from that slump proved the success of his policies.

And like Reaganomics — but more quickly — Bushonomics has ended in grief. The public mood today is as grim as it was in 1992. Wages are lagging... Employment growth in the Bush years has been pathetic... [T]he optimism of the 1990s has evaporated.

This is, in short, a time when progressives ought to be driving home the idea that the right's ideas don't work, and never have.

It's not just a matter of what happens in the next election. Mr. Clinton won his elections, but — as Mr. Obama correctly pointed out — he didn't change America's trajectory the way Reagan did. Why?

Well, I'd say that the great failure of the Clinton administration ... was the fact that it didn't change the narrative, a fact demonstrated by the way Republicans are still claiming to be the next Ronald Reagan.

Now progressives have been granted a second chance to argue that Reaganism is fundamentally wrong: once again, the vast majority of Americans think that the country is on the wrong track. But they won't be able to make that argument if their political leaders, whatever they meant to convey, seem to be saying that Reagan had it right.

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