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August 21, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

Corporate Rotten Eggs

Posted: 21 Aug 2010 12:16 AM PDT

Robert Reich:

Corporate Rotten Eggs, by Robert Reich: There are rotten apples in every industry. Or perhaps I should say rotten eggs.
One especially rotten egg is Jack DeCoster, whose commercial egg agribusiness, which goes under the homey title "Wright County Egg," headquartered in Galt, Iowa, sends eggs all over the country under many different brands. Those eggs have now laid low thousands of Americans with salmonella poisoning, and may well infect thousands more.
DeCoster is recalling 380 million eggs sold since mid-May. Another commercial egg company, also headquartered in Iowa, and in which DeCoster is a major investor, is recalling hundreds millions more.
It's not clear how recall rotten eggs are recalled. They're not like Toyotas. They're already in our food supply. 
But this is only the beginning of the story. ...[continue reading]...

links for 2010-08-20

Posted: 20 Aug 2010 11:01 PM PDT

Does China Prove That the Washington Consensus Works?

Posted: 20 Aug 2010 01:24 PM PDT

This might provide some amusement on a Friday afternoon. Stanford's Ronald McKinnon says China proves the Washington Consensus works. It comes via John Taylor, who comments:

Does China's remarkable economic growth, its stability during the recent financial crisis, and its immense foreign aid/investment in Africa raise doubts about free market policies and provide evidence in favor of a more interventionist approach? In a new review paper, my colleague Ronald McKinnon says "Surprisingly no." In fact, while many tout a "third way," China has followed quite closely the 10 liberal market-oriented rules commonly called the Washington Consensus after John Williamson wrote them down 20 years ago. McKinnon convincingly shows that "The Chinese economy itself has evolved step-by-step…into one that can be reasonably described by Williamson's 10 rules!"
Some experts worry that U.S. influence is waning relative to China, and there is cause for worry, but McKinnon argues that "U.S. influence…can be largely recouped if its government returns to a hard version of its own 'Washington Consensus'— as China has done."
McKinnon also offers a fascinating political/economic analysis and explanation for China's rapidly growing economic involvement in Africa.

It's interesting how, after so many years of dismissing Europe and China as inferior to the dynamic US economy -- we grew faster, could handle shocks better, had a much better financial system, had lower unemployment, etc., etc. -- the right is suddenly urging us to be more like Europe (deficits, Germany, etc.) and China (as below). Here's McKinnon's argument:

Review - China in Africa: the Washington Consensus versus the Beijing Consensus, by Ronald I. McKinnon: ...The Beijing Consensus versus the Washington Consensus In promoting growth in developing countries through foreign aid and investment, does the Beijing approach conflict with "Washington" guidelines used by the World Bank, International Monetary Fund, the OECD, and the United States itself?

The Beijing Consensus is hard to write down as a precise set of rules because of its pragmatism involving "a commitment to innovation and constant experimentation" (Ramo 2004)—as per the old Chinese saying "crossing a river by feeling the stones". It is also associated with China's specific commercial interests in, say, investing for extracting minerals on favorable terms—which enhances sustainability on both sides. In contrast, the Washington agencies in principle are more selfless (at least since the end of the Cold War) in aiming to raise per capita incomes and welfare in the recipient countries—but run the risk that aid recipients become permanent supplicants.

John Williamson (1990) did all a great favor by writing down the rules for what he called "The Washington Consensus" for developing countries to follow to absorb aid efficiently:

  1. Fiscal policy discipline.
  2. Redirection of public spending from subsidies ("especially in discriminate subsidies" toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care, and infrastructure;
  3. Tax Reform—broadening the tax base and adopting moderate marginal tax rates:
  4. Interest rates that are market determined and positive (but moderate) in real terms;
  5. Competitive exchange rates;
  6. Trade liberalization—with particular emphasis on the elimination of quantitative restrictions; any trade protection to be provided by low and relatively uniform tariffs;
  7. Liberalization of inward foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation—abolish regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions.
  10. Legal security for property rights.

To provide perspective on these ten rules, the year 1990, when Williamson wrote, is important. It was just after the fall of the Berlin Wall and the complete collapse of confidence in Soviet-style socialism. The rules reflect the hegemonic confidence that most people then had in liberal market-oriented capitalism—think Ronald Reagan and Margaret Thatcher. But, 20 years later, should the meteoric rise of socialist China—both in its own remarkable growth in living standards, and in the effectiveness of its foreign "aid" to developing countries, undermine our confidence in Williamson's Washington Consensus?

Surprisingly, no. The Chinese economy itself has evolved step-by-step (feeling the stones) into one that can be reasonably described by Williamson's 10 rules! Chinese gradualism avoided the "big bang" approach to liberal capitalism, with the financial breakdowns that were so disastrous for Russia and some smaller Eastern European economies in the early 1990s, while retaining financial control in a model textbook sense (McKinnon 1993). So let us look again at Williamson's 10 rules to see how well they fit China today in comparison to the United States.

Rules 1 to 3 on fiscal probity are more than satisfied by China: robust and growing revenue as a share of GDP has allowed massive investments in infrastructure both at home and abroad—and are increasingly directed toward health care, education and pension funding. Income taxes have been rationalized with marginal rates lowered, while a uniform VAT (17%) is a robust source of revenue shared between the central and provincial governments. In contrast, the American income tax has become riddled with exemptions and exclusions (think nonprofits), and the sales tax base of state and local governments has been eroded. The upshot is uncovered deficits at each level of government in the U.S. federal system.
On Rule 4, China has fixed it its bank deposit rate at about 2 percent and loan rate at 5 percent, retail bank credit expanded strongly in 2009-10 to offset the global downturn. Its price level remains quite stable. Meanwhile the U.S. has fallen into a liquidity trap with short term deposit and interbank lending rates of interest near zero. Since 2008, retail bank credit has been contracting thus jeopardizing American recovery from the global crisis.
Exchange rate policies, Rule 5, are hard to compare because China fixes the yuan/dollar rate. Although the dollar fluctuates a lot against other currencies, it is not obviously persistently out of alignment in the sense of purchasing power parity.
On Rules 6 and 7, both countries follow fairly liberal policies for trade and investment.
On Rule 8, China has gradually privatized many enterprises. But there is still a large state-owned sector. However, most state-owned enterprises have been corporatized with strong incentives to operate profitably. Indeed corporate profitability is at an all time high.
On Rule 9, China has still some over regulated sectors—including some price controls on energy inputs. But its financial system—particularly the banks—has been regulated much more prudently than the American.
On Rule 10, private property rights remain much less secure in China than in the U.S., but not so much as to inhibit the efficient decentralization of economic decision making within the economy and in foreign trade.

 ... Halper worries that U.S. influence in the world economy is waning. ... For more than two decades after World War II, the U.S. economic model was so successful that others want to emulate it—particularly in Europe with help of the Marshall plan, but also in developing countries outside the communist bloc. The strength of the U.S. economic and political model is now ebbing as China rises. However, U.S. influence in this soft dimension can be largely recouped if its government returns to a hard version of its own "Washington Consensus"— as China has done. ...

Aid-granting international agencies such as the World Bank, and crisis lenders such as the International Monetary Fund, have also changed. In the immediate postwar, the World Bank was formally known as the International Bank for Reconstruction and Development (IBRD). The focus then was to invest long term in infrastructure development—big dams and power plants—much as the Chinese do now. ...

Beginning in the 1970s, Stage II for the IBRD—now the World Bank—was to focus more on program lending to encourage governments to reform important parts of their weak economies by giving them cash. For example they would be given cash to liberalize foreign trade, or to strengthen bank regulation, or to strengthen public health facilities. But the World Bank would only disburse money in the context of so-called structural adjustment programs (SAPs). ...

Occasionally SAPs worked, and perhaps still work—for example, Ireland and maybe Greece. But this program lending had, and has, an important downside. The international agency providing the money necessarily gets deeply involved in the monetary and fiscal affairs of the recipient country with an inevitable political backlash, perhaps made worse by attempts to change the political structure, e.g. introduce more democracy. ...

Since 2000, now enter China. Its largely apolitical concern is to build infrastructure sufficient to sustain payment in the form of minerals or other natural resources—a mutually beneficial exchange. China's Eximbank or Department of Foreign Aid would not dream of imposing structural adjustment programs on a new potential trading partner—much less get directly involved in nudging its politics in one direction or another, unlike the earlier Maoist adventures in Africa in the 1950s into the 1970s. True, the large scale of these projects will inevitably affect the economy, and perhaps the politics of the recipient country. But any such changes will be a natural outcome from the project itself—rather than the result of outside mandates, such as SAPs.

The least we can say about the "Beijing Consensus" in aid giving is that it fills niches that international agencies such as the World Bank don't cover, but still complements what they do. The most we can say is that more and more developing countries will respond to China's soft power by trying to emulate its economic regime. Perhaps as they mature economically, these emulators will converge to the rules of the "Washington Consensus" much like China itself has. ...

Do Seasonally Unadjusted Claims for Unemployment Insurance Tell a Different Story?

Posted: 20 Aug 2010 11:37 AM PDT

Have I been too pessimistic about the economy?

Do Seasonally Unadjusted Claims for Unemployment Insurance Tell a Different Story?

I don't think so, if anything labor markets are worse than I thought they'd be by now, in part because I thought policymakers would respond more aggressively to a problem of this magnitude. But it is important to put the latest data on new claims for unemployment insurance in the proper context.

Over Promise, Under Deliver

Posted: 20 Aug 2010 09:40 AM PDT

The administration's willingness to believe the very best news about oil in the gulf -- it's nearly gone! miracle of miracles!, we love microbes! oh wait -- reminds me of its approach to the economy. There too the administration has always been willing to believe the very best news while discounting any bad news, and both confidence in the administration and its economic policy have suffered because of it.

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