Mexico and the U.S.: Good Fences Won't Make Good Neighbors

It's no secret that China's economy is booming, and that the large, quickly-industrializing country is becoming a serious contender as a new global power. China's sheer population numbers, as well as its technological innovations, make it the obvious focus of the U.S. public and private sector alike. In fact, China's appearance in the news is almost tiresome, with the prominent fear-mongering becoming almost commonplace.

However true and valid these claims may be, they do tend to draw attention away from other areas of the world experiencing rapid growth. When we think of countries that are developing new capabilities and have rapidly expanding economies, we often think of China, India, South Korea, and the like. Interestingly, such impressions can turn attention away from other emerging significant players. As a recent piece in The Economist pointed out, "America needs to look again at its increasingly important neighbour:" Mexico.

Within the past few days, The Economist released a cluster of articles (here, here, and here) in a clear push to bring attention to this rapidly-growing nation. At the risk of generalizing too liberally, the impression of Mexico among Americans is less than optimal. There seems to be an unspoken consensus that our southern neighbor is, more or less, just a collection of smoke-filled cities racked by drug wars and poverty. When it comes to Mexico, the reactionary thoughts are border security and smuggling crackdowns; especially within the Republican Party, the only policy that even relates to Mexico involves keeping them out. In 2009, in the midst of an American recession, the swine flu epidemic, and continuous bloodshed from organized crime, the Pentagon predicted that if things kept on this way, Mexico would become a "failed state." At the time, the news came as no surprise.

With the quickened pace of progress today, however, Americans need to continually update their perceptions and stereotypes. As we have seen time and again, globalization, technology, and international trade can turn everything around for a country in a matter of just a few years. Since this grim projection three years ago, Mexico has started to turn things around, positioning itself to become one of the top 10 economies in the world by the end of the decade. At the moment, it is already ranked slightly ahead of South Korea in terms of GDP. Latin America's second-largest economy occupies a strong place in its region, yet it will continue to remain in the shadow of South American powerhouse, Brazil. Right? Wrong. Surprisingly, according to The Economist's statistics, Mexico's growth outpaced Brazil's last year, and it is projected to grow twice as fast this year (4%). Though there is nothing to indicate it will "pass" Brazil in the near future, Mexico is certainly working hard to change its current position in the world.

A brief overview of the growing private sector, foreign direct investment, and industry in this country depicts a Mexico yet unknown to many Americans. Though the U.S. doesn't exactly have an economic giant lying dormant just beneath its southern border, there is every indication that this country will become even more important for American markets. To begin, the Mexican auto industry seems to provide some of the most shocking facts. Though largely constituted by foreign companies, this sector of production has seen enormous growth recently. In Cuernavaca, there is a Japanese-run Nissan factory "the size of a village," which will soon be churning out thousands of New York taxicabs. "About 80% of the parts in each car are made in Mexico," and the factories largely rely on local suppliers, which helps provide protection from fluctuating foreign currencies. Audi is also constructing a $1.3 million plant in Puebla, and Mazda and Honda are getting on the bandwagon as well. Amazingly, Mexico will be the fourth-largest auto producer in the world. Oil has also been a huge commodity in the Mexican economy, although the national monopoly is becoming a huge problem.

Mexico's pro-free trade attitude, sparked by NAFTA in 1994, has been very beneficial for the national economy. Today, Mexico boasts free trade deals with 44 different countries, and trade accounts for a larger part of its GDP than any other country. This aspect, however, has proven to be a double-edged sword. Its economic success is thus quite vulnerable to the ills or well-being of its trade partners. In 2007-2008, "thanks to its wide-open economy and high exposure to the United States it suffered the steepest recession on the American mainland: in 2009 its economy shrank by 6%." Additionally, China's entry into the WTO ten years ago undercut some of Mexico's export industries. Still, however, free trade has allowed the country to become one of the most important exporters to the U.S. By 2018, experts predict that the U.S. will get more of its imports from its southern neighbor than from anywhere else (provided Mexico continues its progress). Also, China's extremely competitive production is beginning to lose its edge, which is allowing Mexico to reap more and more of the benefit. As Chinese currency appreciates, wages and prices increase. In a free market, this makes Mexican labor and goods comparatively more attractive to the international community.

Also, to destroy a common conception, net immigration across the border is zero. More and more people are going back into Mexico, and the economic outlook there continues to brighten. In light of this, immigration reform shouldn't mean higher walls or longer border waits. Rather, the facts indicate the necessity of a full overhaul of the system and of the general mentality behind it.

One of the biggest "buts" about all of this, however, is the fact that Mexico still has significant problems with cronyism, violence, and the remnants of instability. Unfortunately, much of these projections seem to be based on the hope that these problems will begin to disappear, and that newly-elected President Enrique Peña Nieto will achieve his goal of administrative transparency and 6% growth. Although the murder rate is down in this country, and many of the most dangerous cities are becoming substantially safer, there are still some factors that could encumber further growth. First, the telecommunication situation is lacking in Mexico, so communication is made a bit slower and more difficult. Also, there is a significant problem with unions and monopolization. In order to really boot his country into gear and reach the 6% growth rate, President Nieto will have to break the back of the concentrated monopolies in several industries. Rich tycoons--specifically in the energy sector--are quite comfortable controlling their sectors of the economy. Though these measures will not be popular among the heads of these companies, promotion of competition is the only way that Mexico can rid itself of the problems of monopoly. Additionally, the nationalized oil company, Pemex, has been nearly sucked dry of its finances by the former Mexican governments. Lastly, due to past volatility in its economy, the banking and credit situation is less than optimal. Banks tend to charge 25% interest rates, and demand huge amounts in collateral. Clearly, this situation and lack of confidence will, as the article noted, tie the hands of Mexican businesses and discourage future ventures.

Still, the situation in Mexico is significantly better than many Americans believe or even would admit. With Chinese prices rising, Mexico has an amazing opportunity to sell its goods to its Northern neighbor, and thus strengthen the mutually-beneficial relationship. Its sheer proximity to the U.S. puts it at a great advantage, because goods on trucks can arrive in a matter of hours. In contrast, Chinese goods have to travel across an entire ocean, and one statistic equated a day in transit with a 0.6% - 2.3% tariff. Moreover, the number of skilled workers in Mexico is rising, and it apparently turns out more engineers than Germany (in terms of sheer numbers).

So, what would be the consequences of a stronger, more competitive neighbor? For one, trade would be greatly facilitated, and the quality of goods traveling across the border would be higher. Perhaps there would also be a stronger trade agreement, which would make the North American continent an even more powerful economic force. Although the U.S. will remain a highly attractive business environment, Mexico's cheaper labor and free trade policy will undoubtedly bring in more foreign ventures. Whatever happens, the U.S. will certainly have to change its policies and attitude toward Mexico. If the country continues to grow--which will be Americans' better interest--the U.S. can't continue to turn its back and try to keep illegal immigrants from hopping borders. If it has a significant economic power cropping up right next door, immigration, border, and trade reform will all be in order. This will likely be an extremely touchy issue, with crime still occurring and drugs, guns, and people constantly being smuggled, but there must be a restructuring of the system. Only through this will both nations elevate each others' economic markets, and perhaps work to solve one of the biggest problems within North America.

In the next week or so, President Obama will meet with President Nieta to discuss future opportunities and potential cooperation between the two countries. This will certainly be something to watch, because it will be the first of hopefully many steps toward a repositioning of this vital trade relationship.

Pessimism and the Fiscal Cliff

Though I tend to only read the Daily Mail for celebrity news and updates in the English tabloids, I opened the site today and discovered a significantly more weighty headline: "INVESTMENT EXTRA: Why ordinary investors should not put their money in to the US." It's certainly not uncommon for the Brits to bash Americans, but most of this talk tends to be about the political system, the southern "cowboy" culture, or the inordinate number of fast food restaurants. This time, however, it wasn't just playful banter.

According to this piece by James Coney, the so-called "fiscal cliff" isn't just spreading worry throughout the U.S. public and private sector--it is also reaching important sources of capital overseas. Although the election of a new president tends to boost enthusiasm and confidence in the U.S. economy, on Wednesday, November 7th, people had already turned their attention to the impending crunch. Put simply, this fiscal cliff involves a large bundle of spending cuts and tax hikes that will all take effect on January 1, 2013.  A CNN article released that day called this the "single biggest problem facing the United States," using the explanatory metaphor of a speeding car driving off of a cliff.

If no policy changes are made to avert the impending fiscal cliff, many fear that it could spell the ruin of not only American markets and businesses, but also those across the international economy. Once the new year arrives, a slew of spending cuts are slated to take place, affecting the defense sector and including several other discretionary cuts. Unfortunately, this is the inevitable fallout of the failed budget summit a while back. Compounding this is a number of tax hikes, which are caused by the expiration of the Bush era tax cuts. Within this, there will be a lowering of the Alternative Minimum Tax, which would push millions of families over the threshold into a higher income tax bracket. Altogether, this is projected to cause a $7 million increase in taxes over the next ten years, and siphon anywhere from $5 trillion to $7 trillion out of the U.S. economy. If this country "falls" completely off of the fiscal cliff, experts estimate that it will cut the GDP by 3-4%, which will undoubtedly cause recession in an economy that is currently only growing at 2-3%.

Just after President Obama's reelection, there was an unusually low level of chatter about the actual election results. Instead, almost instantaneously, people shifted their attention to the hopeful resolution of this fiscal cliff. With the administration set for another four years, both Republicans and Democrats are calling for this problem to be fixed right away--not only to avert the crisis that would come crashing down on January 1, but also to avoid the immediate problems associated with lack of confidence. As Christine Lagarde, head of the IMF, noted, the fiscal cliff has already caused huge uncertainty across the world, with major financial players unsure of how things will unfold.

Last Wednesday, both sides of the aisle were noting the sudden jolt to the Dow Industrial Average, and began speculation that the U.S. economy was headed for another downturn. The Daily Mail piece highlighted this uneasiness, putting forth five concrete reasons why investors should not continue to direct their money to American industries. First, the fiscal cliff will be difficult to avoid, and with unemployment already at 8%, there will be "lower consumer spending and higher state benefits." Additionally, entitlement spending is only expected to increase, profit margins are inflated and vulnerable, and it is difficult to find reliable, skilled fund managers in the U.S. Finally, the article questioned why anyone would choose an American fund when "some of the best global funds already hold masses of American stocks."

 The fiscal cliff is engendering anxiety in East Asia as well. Far worse than any of the China rhetoric tossed around in the debates, the threat of another significant domestic downturn would hurt the vital economic relationships between China and the U.S. Chinese leaders have expressed concern that the U.S. will "drag them down with it," and have made calls for Obama to abandon the political posturing and develop a more "constructive" relationship with them. According to Shaun Rein of China Market Research Group, "Regardless the leader, China needs the U.S. economy to prosper in order to keep export flowing and U.S. investment in China high -- which are important ingredients Beijing needs as it attempts to boost Chinese wages and beef domestic spending." In other words, China sees the threat of the fiscal cliff as a sort of mutually-assured destruction.

Put frankly, articles like these should cause mild alarm. When public, international news sources are calling for investors not to put their funds toward American endeavors, people should realize that change needs to be accomplished--and soon. Realistically, however, it is unlikely that things will unfold in such a detrimental fashion come January 2013. The American news media is marked by its obsession with all things "doomsday," and such hugely important issues tend to get priority on the President and Congress' to-do list. While I do not believe the U.S. will go tumbling down the fiscal cliff, all the way into the gorge of recession and complete stagnation, it would not be right to write off these pieces as overly-exaggerating. Perhaps the biggest worry with the fiscal cliff is not what could happen at the turn of the year, but rather what is already happening now: a rapid decline in confidence.

What John Maynard Keynes called "animal spirits" are alive and well, functioning sometimes to the benefit and other times to the total destruction of an economy. As John Cassidy notes in his book (discussed in the previous post), group psychology can explain many of the happenings in markets and can predict the behavior of one or multiple players in a given situation. In many past recessions and depressions, a permeating lack of confidence--starting quietly and then reaching critical mass--has been the main factor that tips the scales. Once this cycle has begun, it is extremely hard to encourage consumers to loosen their fists and re-start a pattern of spending. In the Thai example that Krugman puts forward, once there was a bit of trouble with households and businesses, investors quickly lost faith and jumped ship. This left Thailand in shambles, with a devalued currency and a reeling economy.

Once investors begin to lose confidence in the U.S., it could spread like wildfire. If significant, public steps are not made to remedy this situation and avoid playing chicken with the fiscal cliff, the U.S. should not hope to get out of the recession anytime soon. And, depending on the severity of this sentiment, the global economy could potentially worsen instead of heal. The actual impact of the spending cuts and tax increases should not be the main worry; rather, it should be the fore-running consequences, and the possible cycle of lack of confidence that could greatly increase the negative impact of these policies. If the threat of the fiscal cliff is not eliminated and potential investors' worries not allayed, all of the major players in the global economy could feel its impact.

How Markets Fail: A Rational Evaluation of Recent Crises and Financial Governance

What exactly happened in the economic crisis in the late 1990’s and the financial crisis of 2007? What is the role of the U.S. government and The Federal Reserve in containing these crises? How should we understand financial markets? Although all of these are quite broad and undoubtedly tough questions, John Cassidy manages to come to grips with them all in his recent book, How Markets Fail. Cassidy presents a thorough overview of “utopian” economic theories, primarily based on Adam Smith’s precepts, then translates and applies them in plain English to the recent economic crises. First providing a basis of the knowledge that influenced Alan Greenspan, Ben Bernanke, and other influential players, he untangles the web of problems that created the bubbles, evaluates behaviors, and proposes uncomplicated solutions. Overall, How Markets Fail is an excellent book for readers of all backgrounds and all levels of expertise; it is incredibly simple, given its comprehensiveness, and it imparts a wealth of useful knowledge at all stages.

Cassidy begins his book by outlining various components and aspects of “utopian economics.” Although his definition is somewhat vague, the term generally refers to the belief—notably held by Alan Greenspan—that markets are perfectly self-regulating, and that they naturally achieve an optimum state without government intervention. The book chronicles the development of pro-free market thought, and notes the major contributions of several individuals, such as Friedrich Hayek, John Stuart Mill, and Milton Friedman. Of course, there is also significant discussion of Adam Smith, whose concept of the “invisible hand” led many to believe that all markets are best left to their own devices (Cassidy 31, 36). Cassidy then moves to later work in this field, discussing price signaling, natural resource allocation, and a general support of a “hands-off” philosophy (Cassidy 42-43, 50). While Smith was actually skeptical of unregulated financial markets, over time, his views morphed into the false belief that markets are perfectly efficient and balanced when left untouched. Although Cassidy fails to explain how this happened, he makes a key point about which many, including Greenspan, were mistaken. It is clear that the “invisible hand” is undeniable, but a bit more discussion of the balance of free market and “planning” forces would have cleared up ambiguities in Cassidy’s position and would have segued nicely into his next points.

In the second and third sections of How Markets Fail, Cassidy unapologetically brings this idealistic conception to earth. His practical evaluation of the lead-up to recent financial crises is refreshing and adeptly-argued, explaining things in simple terms of incentives, group competition, and general psychology. Through this, Cassidy demonstrates the need of some government regulation and ownership, citing intellectual property protection and federal defense as some of the many beneficial and sensible examples (Cassidy 133, 136). He then moves onto a discussion of “rational irrationality,” or the confusing, self-interested behavior of financial players in response to incentives. This mode of thinking is incredibly useful, and it fits neatly within the overall depiction of the crisis. Essentially, there is always an incentive for firms and analysts to choose the most desired investments or stock (known as the “Keynes beauty pageant”), which leads to a lack of diversification and increased risk in the case of failure (Cassidy 178). Moreover, in a competitive market, there is an ever-present “prisoner’s dilemma.” Though lending groups may begin conservative, lending only to responsible businesses in order to ensure stability for all, there is always an incentive for one to game the system and offer loans to slightly riskier clients. Once this happens, bidding begins, and firms start pushing for more precarious loans. Such a phenomenon was forecast almost prophetically by Hyman Minsky, and was evidenced especially by the rapid expansion of adjustable rate subprime loans (Cassidy 208, 258).

After explaining the structural incentives driving this irresponsible behavior, Cassidy tackles the bubbles themselves. In the beginning of the five stages—displacement, boom, euphoria, peak, and bust—big lenders see high stock prices, rapidly expanding financial markets, and a safety net of government backing. Firms such as Citi Group, Goldman Sachs, and others, tried to “surf” the housing bubble, extracting maximum profits and hoping to jump ship just in time. Banks took on sizeable risks creating innumerable types of pooled capital, diversified risks, and hybrid loans, knowing full well that taxpayers would foot the bill if the projects failed (Cassidy 161, 184). While this was happening, the Fed continued to believe that recent innovations had made the financial system “resilient,” and that there was nothing to worry about (Cassidy 268). By contrasting this vicious incentive system—which created self-destructive rational irrationality—with the Fed’s hands-off approach, Cassidy makes it very clear why the market failed. It was only after the government stepped in, bailed out firms, socialized Fannie Mae and Freddie Mac, and realized the need for an active Fed that things began to get better. In Cassidy’s view, only government can counterbalance rational irrationality and create a framework of incentives that would reward responsibility, measured risks, and a degree of financial conservatism (Cassidy 329). 

In all, Cassidy’s take on market failure is quite thorough and logical, and there are few areas in which any would say that it is lacking. His choice to begin with the fundamentals of free market thought, and then progress to realistic evaluation of human behavior in complex financial markets, creates a straightforward explanation of a difficult topic. Moreover, Cassidy deftly cracks the disillusioned belief in Smith’s almighty invisible hand, presenting an argument for government intervention that would be received on both sides of the aisle. Still, however, one might wonder if any of this counterbalancing or checking could be done by the private sector—either by specifically-designated entities, or perhaps by agreement of the most influential players in the financial system. Similarly, though he is clearly a proponent of tempered government intervention, Cassidy is a bit unclear on when the Fed and policymakers ought to leave the market to its own devices. Of course, knee-jerk regulation may create stability and stop “bubble-surfing,” but it could easily smother innovation and de-incentivize growth. By delineating here between crisis and normal business cycle, Cassidy might have drawn a clearer line and supplemented his argument with intelligent discussion of a hotly-debated question.

While his ending proposal for re-structuring and re-thinking is quite reasonable, Cassidy unfortunately neglects one of the largest obstacles in monetary policymaking: time lag. Presumably, a good portion of his recommendations would be implemented as preemptive measures, and would already be in place when crisis threatened again. Still, he fails to mention that even a more active Fed would encounter difficulties, because it would take time for the economy to react to its adjustments. Furthermore, Cassidy notes that the housing bubble was unexpected, because Bernanke and others believed the economy to be immune to such a thing. Given the comprehensive, multi-perspective approach of this book, it would be quite interesting to see Cassidy’s projections about future crises. Though he proposes a model to combat some of these rational irrationality behaviors, there is likely still room for a new strain of financial busts. What his book intends, however, it achieves remarkably well. How Markets Fail is not only a lesson in foundational economic thought and mechanisms of crises, but also human behavior and group mentality—lessons that apply in any era or policy system.

Changing Perceptions: Africa in Today's Global Economy

By now, it's no secret that the United States needs to pick up the pace in the global economy. With other countries, particularly China and India, producing more highly skilled people and experiencing faster economic growth than ever before, Americans all across the political spectrum have been calling for increases in overall competitiveness. Certainly, if growth and trade do not become main focal points in the next few years, the U.S. could start to see its position as the economic superpower disappear. It is important to continue to participate in the global market, and especially to become a known financial presence in rapidly growing economies. But, would anyone believe that some of America's biggest missed opportunities are in Africa?

A recent article in Foreign Affairs pointed out this phenomenon, discussing in detail President Obama's recent "failings" across the continent. Frankly, I was quite surprised at the claims the author makes about African countries' burgeoning growth and increasing significance to the U.S. For a part of the world which, to the Western world, is continually marked by unending civil wars, impoverished people, and countless dollars of foreign aid, it is rather unbelievable that it could present one of the most promising areas of global economic opportunity. Perhaps it is precisely this misunderstanding and off-base characterization of Africa that has led to the U.S. turning a blind eye to potential new trading partners. As globalization takes hold of each country in the international system--both developed and developing--Americans must cease to see Africa as a mere disease-ridden, politically corrupt, economically-troubled backwater of the world. If this mindset does not change with haste, other big powers within the economic system will gain a significant competitive edge.

Today, Africa is home to six out of the ten fastest-growing economies in the world. Moreover, democracy and free market economics have begun to spread throughout the continent, and about fifteen African countries are slated to hold elections this year. As author Todd Moss notes, "With their combination of liberal politics and market economics, countries such as Ghana and Botswana are attracting frontier investors. Huge potential markets like Nigeria and Ethiopia are leveraging modest reforms into big economic opportunities. These trends all suggest that Africa is on a path to prosperity, and that it is ripe for U.S. investment, trade, and partnership."

In addition to its economic growth and investment opportunities, Africa has also been experiencing insurgent activity and significant security threats. Islamic terrorist cells in Mali are becoming more of a concern to the international community, as are some groups in Somalia. And, of course, Libyan extremist groups have made their presence more than known in recent weeks. On top of all this, there have been issues with narcotics trafficking and other black markets.

According to the article, President Obama's policies and approach have largely neglected Africa as both an area of security concerns and economic growth. Surprisingly, the President has only spent a mere twenty hours on the continent--all occurring during his visit to deliver a speech on democracy in Ghana. Previous presidents, like Bill Clinton and George W. Bush, implemented trade-friendly legislation, initiatives for malaria and AIDS relief, and the Millennium Challenge Corporation, which developed compacts with several African countries to promote business and economic growth. Obama may have attempted to introduce similar policies, but these have largely ended up as low priorities and have been abandoned. For instance, the 2010 Global Climate Change Initiative, which "sought to expand renewable energy in Africa," has been overlooked, as well as the Global Health Initiative. Additionally, the position of USAID's assistant administrator to Africa was left unfilled for three years during Obama's administration, and the USAID administrator position was left unfilled for one.

Now, while this article was certainly interesting, it was unapologetically of one view, and I remain skeptical about some of the comparisons it draws. I would not pretend to know all U.S. efforts that have taken place in Africa, nor to know why they have or have not seen success under a given president. To me, by far the most interesting point made by Mr. Moss was that Africa remains largely overlooked as an avenue for new investments, partnerships, and mutual benefit. America's prevailing view of Africa as an impoverished and corrupt part of the world is now coming back to haunt it.

Before it is too late, the U.S. needs to fix this mistaken conception and ensure that it does not overlook or turn down opportunities for positive growth. Efforts in both the public and private sector to reach out to Africa would likely improve domestic economic growth and boost Africa's competitiveness in the global market. Perhaps just as important, however, is the need to keep pace with China. Already, China has set up huge investments in several African countries, and has begun to implement large projects for roads, energy, and business. With several important, burgeoning economies cropping up in Africa, there is no reason for the U.S. to overlook opportunities to expand its own activities and support growth elsewhere.

According to Moss, "Secretary Clinton, in a veiled attack on Beijing’s activities in Africa, claimed in August that the United States brings 'a model of sustainable partnership that adds value, rather than extracts it.' But instead of lecturing African countries to beware, the administration should reflect upon why China seems to be so attractive to the region as it gains self-confidence. Today’s Africa does not want charity. It seeks more investment and a measure of respect. China-bashing might be good political theater, but it makes for ineffective policy."

As many key players in the global economy flounder and weaken, the need to re-structure investment and trade has become more prominent. This past week, a piece in The Wall Street Journal noted the grim spreading of economic malaise from the Euro zone to U.S. corporations. Financial woes in several European countries have caused a decrease in corporate earnings, slapping even strong companies like Whirlpool with $35 million in regional operating losses. Already, businesses like General Motors, 3M, and Caterpillar have experienced falling sales in Europe, and Kimberly-Clark has elected to stop selling diapers altogether in Western and Central Europe. Notably, the Huggies producer says it will still distribute in Italy--presumably capitalizing on demand stemming from the still growing numbers of Berlusconi's illegitimate children. Or, perhaps, smartly offering Italians an alternative waste disposal method when their economy goes down the toilet.

At any rate, recent reports have indicated a clear and present slowdown across various sectors of industry. As the dollar strengthens against the Euro and European markets and demand falter, U.S. producers are struck with significant recoil force. With such a grim outlook in the Euro zone, many believe that things will get worse before they get better.

Keeping this in mind, perhaps it is time to re-allocate some resources and at least reconsider developing partnerships with small but promising economies. Although many African countries have a long way to go before they match the stability and financial might of Europe, current statistics suggest that increased investment and economic partnership with the U.S. would be mutually beneficial. Rather than clinging to slowing trade relationships, perhaps the U.S. government private businesses should reconsider programs and efforts in developing African countries. Not only would the continent welcome improvements in disease management and infrastructure, but it would also offer favorable business conditions and an entirely new market. Establishing these ties would not only enrich the U.S. and African economies, but also would allow the U.S. to be a financial presence in an area that is currently monopolized by Chinese investment. With its diverse resources, people, and recent economic growth, today's Africa must not be overlooked or misunderstood by Americans. If this country is to remain competitive and capable--as well as a force for global good--it must always be ready to do business with the "little guy."

China Bashing, Jobs, and Global Economic Policy

Well, after all the back-and-forth political ads, somebody had to bring up the tires in China. Toward the end of Tuesday's debate, the focus shifted in a decidedly economic direction, with both candidates responding to an undecided voter's question, "What plans do you have to put back and keep jobs here in the United States?" Although such debate answers tend to be ambiguous and diluted, I was pleasantly surprised by the clarity of both candidates' answers, as well as some references to global economic principles. While both occasionally ventured into some vaguely-worded speech, it was fairly clear from their responses how each proposed to bring jobs back to the United States.

The main issue Obama and Romney addressed was the offshoring of jobs within the U.S.--particularly manufacturing jobs going to China. As we have discussed many times in class, China is becoming a major worry for the United States because of its productive labor force, ability to produce cutting-edge technologies, exponential economic growth, and holding of many previously-American manufacturing jobs. Both candidates have addressed this issue in their ads, although both have done so somewhat differently. While the end goal is the same--bringing jobs back to the United States as well as creating new ones--the way in which each candidate would go about it seems to be quite different.

 When asked how he would combat outsourcing of American jobs, Romney responded with an answer that was comprehensive, firm, and exactly what one would expect from a staunch fiscal conservative. Acknowledging that nearly half a million jobs have been lost overseas within the last four years, Romney stated that we need to be "tougher" on China in a variety of ways. Though this "tough on China" business is a common refrain on both sides of the aisle when it comes to job creation, Romney drew on some of the points in his China ad and took the country to task on its intellectual property theft, currency-pegging, and other "unfair" practices. 

Both the Obama administration and the Romney camp agree that the U.S. has lost many valuable manufacturing jobs, and that the lionshare of these have gone to workers in China. Romney's solution to this problem, however, seems to be markedly different from Obama's. Clearly working within his policy strengths, Romney donned his "private sector" hat and spoke about the importance of small business to economic growth. He noted the importance of private sector innovation, as well as investment in new technologies and the interplay of governmental policies and small business success. The key to increasing jobs in America and halting the outflow of jobs, Romney asserted, is making the U.S. a more attractive business environment, which would create incentives for firms to set up and expand. In his depiction of the current state, he noted that domestic business taxes are almost double what they are in Canada, and that government regulations have increased drastically within the past four years. In order to bring jobs back into the U.S., Romney stated, these need to be reduced, reconsidered, and restructured so that companies have even more of an impetus for using American labor.

When his turn came to respond to the question, Obama did not take quite the same tack on job creation policies. While he may have mentioned small businesses and the private sector, his points focused much more closely on how to keep jobs within U.S. borders. In other words, I found his remarks to be decidedly anti-outsourcing or offshoring. Obama bashed his opponent for wanting to "expand tax breaks for companies overseas" and for having a plan that will create new jobs, but only in China, India, and other Southeast Asian countries. Instead, he promised to close loopholes in taxes, and focus on creating jobs by doubling exports. Though I applaud his desires to attract and create more opportunities for high-skilled, high-wage jobs domestically, I was surprised by his firm stance against anymore outsourcing. 

Without injecting too much bias, I have to respect Romney for his points on this topic and for his discussion of small business. Point for point, I found that he gave a much clearer idea of how he proposed to fix the job crisis in the U.S. and allow private businesses of any size to bring the economy back onto its feet. Perhaps my favorite aspect of his response, however, was his avoidance of language that implied a strong-arming approach to the problem. Said differently, never once did he hint at policies that would artificially retain U.S. jobs and provide a quick fix for what is truly a manifestation of market forces (policies like tariffs, subsidies, and the like). Instead, his approach provided a way to work within the complex web of incentives, competitive costs, and benefits. By constructing policies that do not de-incentivize offshoring, but rather incentivize inshoring, the U.S. would be working to its benefit without introducing destructive protectionist policies. Unfortunately, Obama did not appear to do the same. With his championing of tariffs--notably in the ad about Chinese tire manufacturing--there is every reason to believe that these would continue to be his job creation policy of choice. In my views and understanding of macroeconomic principles, the answer to stopping offshoring in the long run is not to force jobs to stay here, but rather to step back and allow companies to choose locations with the best business environment.

As Romney stated several times over at the end of this segment, "The government does not create jobs." Along this same line of reasoning, the government's role is to devise the best policies for private businesses to thrive. By doing this and focusing on working within a free market, private companies can expand, grow, and employ more people within a more profitable American environment.

One thing that was discussed quite vaguely, however, was an aspect of the prevalent China-bashing. Both Romney and Obama spoke about the problems currently arising with this country, such as the counterfeit of technology IP, hacking of computer systems/data theft, and currency pegging, yet disappointingly, neither candidate offered specific solutions to stop them. Instead, both claimed they would be "tougher on China" and would call the country out on its unfair trade practices. While this may have been convincing enough for some, I felt that this aspect of the debate turned into empty political showboating. Frankly, I was left wondering what that all meant, and how simply calling for change would effect any beneficial changes at all. Though Obama spoke about his administration putting pressure on Chinese currency, causing the devaluation to become less severe, I would be very interested to see the specifics of any of these strategies. While I do agree that China ought to trade "by the rules" and on a level playing field, I wished that both candidates went a bit deeper than just accusations and promises.

Overall, I was pleased that IPE topics got significant airtime in this debate, and that both Romney and Obama took the trade and job issues quite seriously. Although I found Romney's strategy much more specific, practical, and economically-sound than Obama's with respect to job creation, I am interested to see how pivotal their respective stances will be in the upcoming election. Certainly, this is one of the more important issues facing the U.S. today, and it will be quite interesting to see how the next administration addresses the challenges of the global economy.

The IMF and the Global Economy

While browsing around the morning news, I came across a somewhat unsettling headline: "IMF sees 'Alarmingly High' Risk of Deeper Global Slump." This post, originating on Bloomberg's website, detailed the most recent global growth forecasts and projections compiled by the IMF. Sadly, the findings seemed to be even more dismal than many had expected. According to the statistics, the world economy is expected to grow only 3.3% this year, which is the slowest rate since the 2009 recession. The IMF further stated that there are "'alarmingly high' risks of a steeper slowdown, with a one-in-six chance of growth slipping below 2 percent." In its World Economic Outlook report, the international lender noted that the big question is whether this is more normal, albeit uncomfortable, economic turbulence, or whether this expected slowdown in growth indicates something more lasting. The factor that the IMF predicts will tip the scales? According to the same report, "the answer depends on whether European and U.S. policy makers deal proactively with their major short-term economic challenges."

After reading about the IMF and discussing it a bit in class, the last statement got me thinking about some of the problems the IMF might face, as well as its overall effectiveness as a sort of global economic authority. First of all, I found it interesting that the slowing of overall international growth can be due to the actions within a very specific region or regions of the world. Certainly, huge economic powers like the UK, European Union, and the US are major players within the global market and are often at the heart of many economic activities. But, the sheer level of their influence is made starkly clear here. If they do not heed the recommendations of the IMF, economies and markets all across the world will suffer.

Within the report, the IMF "called for U.S. policy makers to find an alternative to planned automatic tax increases and spending cuts that would trigger a recession." Moreover, "Europeans must follow on their commitments for a more integrated monetary union, and many emerging markets can afford to cut interest rates or pause tightening to fight off risks to their economies." As the skilled economists predict, the EU and US must adopt specific strategies of economic growth before the global economy can recover from its current slump. Though these strategies certainly would not cure the problem--indeed, they may not have much of an immediate impact at all--they would likely lessen the duration and severity of the current slowdown.

Interestingly, these clear policy recommendations from an authoritative body are easier said than done. In both of these economies, but especially within the US, the recommended changes are highly politicized and debated. Because these changes are not actions that can be accomplished by the Fed alone or by the European Central Bank, there must be a large element of governmental compliance on the fiscal policy side. After reading this portion of the report, I immediately thought back to the importance of the economy in the upcoming election, as well as the veritable war being raged between the strategies of the two parties. On one hand, Romney has tended to champion tax cuts and increased consumer spending, but Obama has advocated for a more robust tax system and increased governmental spending. While both candidates have the primary goal of improving the domestic economic outlook, it is clear that their respective positions will also have an impact on the pace of the global economy as a whole.

Certainly, the IMF's recommendations are not aimed at a specific side of the party line, but rather have the goal of improving the state of the world's economy. As such, its prescriptions ought to be taken seriously.  The outcome of the US elections, however, may determine much more than who will govern the country for the next four years--it may determine whether the US helps or hinders international growth and recovery. While things are, of course, not this simple in reality, it is equally interesting and alarming to see how far-reaching the effects of domestic fiscal policy decisions can be.

In the same vein, I also wondered if major economic powers have a certain burden of cooperation or economic behavior. Though countries like the US, UK, and Germany are entitled to their own occasional downturns, recessions, and stagnant periods, these dips have much more influence on the world economy than perhaps a depression in Zimbabwe. As such, the expectations of their economic performance and policy responsibility must be much higher. A few ill-formed decisions or, as referenced above, party-driven mandates, may have an almost unfair effect on the state of global markets. This could happen if one of the countries were to impose significant protectionist policies as well. Its domestic economy or industries may benefit in the short term, but the rest of the world would be, in effect, screwed over. Therefore, because these powers have such leverage on the international economy, there must be at least an unspoken expectation that they adopt responsible strategies, remain essentially open for trade, and generally heed the advice of the IMF.

Through this consideration, however, I noticed an underlying implication of the IMF's powerlessness. It can make any recommendation it wishes, but it seems that even the most economically-floundering country could choose to turn a blind eye to them and instead fiddle while Rome burns. While the IMF is certainly an important authority when it comes to lending and economic stability, it cannot ultimately force any of its member countries to comply with its fact-based suggestions. Many times in the article, there were "calls to action" or "urgings," but never anything stronger. At the end of the day, it falls to the government and banking system within a country to consider IMF recommendations and make final decisions. And, when these decisions are tied up in political divisions and heated opposition, a guarantee of implementation is far from achievable. Thus, as the elections approach and the candidates' economic strategies continue to butt heads, one hopes that both have an eye to the international economy as well. The methods for stimulating growth will be markedly different depending on who is elected, and it will be quite interesting to see how they compare to the IMF's recommendations and what effect they have on global economic activity.

Protectionism.com

Web and software guru Bill Gates once said, "The Internet is becoming the town square for the global village of tomorrow." Indeed, none could or would dispute the fact that the Internet has created cross-cutting channels of communication, exchange, and activity that today encircle the entire globe. Arguably, the online revolution was one of the fundamental drivers of the current peak in globalization, and it continues to welcome more and more individuals into global society. Regardless of the minutiae, the Internet has helped to bring jobs, provide information, and enrich the lives of all its users. All told, this crucial development cannot possibly be more detrimental than it is beneficial. 

Unfortunately, countries like Iran, North Korea, China, and Saudi Arabia don't see things this way. While trolling through the recent articles on the LA Times page yesterday, I noticed one entitled "Google, Gmail Blocked as Iran Pushes 'National Internet.'" Essentially, Iran has denied its citizens access to Google and Gmail, continuing its trend of ruling web use with an autocratic iron fist. Many Western sites, such as YouTube, Facebook, and Google, are seen as "espionage tools" and are said to contain content impermissible under Shari'a Law. Some calls have even been made (largely within the government) to launch Iran's own "national Internet," cut off completely from the global web, and contained and controlled tightly within Iranian borders. Similar actions and localizations are supported in China, North Korea, Vietnam, and numerous other countries. In forceful efforts to monitor web traffic--especially to identify political dissenters or filter content from foreign sources--these states continue to move toward "big brother" models of Internet regulation. Although none of these would ultimately construct its own Internet, Greece and Norway have already advanced legislation that would require data generated within the country to be stored on servers located in the country. Such localization moves push back against the recent cloud computing revolution, discouraging foreign firms from conducting business within their borders.

So, what does international tech policy have to do with the international political economy? Trade barriers and protectionism. Though these certainly don't come to mind when we think of regimes choking off international trade with government-imposed tariffs, quotas, and regulatory barriers, moves to control the Internet are every bit as important. Largely imposed for the purposes of national defense or protection of jobs--two of the pro-protectionist arguments Coughlin outlines--these restrictions can be extremely detrimental to international trade. For instance, if the more heavy-handed policies are implemented, such as the establishment of a true "national Internet," that particular country would be cut off from an inestimably large portion of all international trade. Because so much business, research, and communication is done online today, such a creation would function like a tariff on steroids. Essentially, what some Iranian officials are calling for is a policy that would send them back to the Stone Age, and, without a doubt, destroy the country's general wealth and standard of living.

Even in a less-extreme case, countries with top-down web regulations might block some sites completely (e.g. Facebook in Southeast Asia), censor content of others, or force potential traders to set up shop within their country and comply with their specific regulations. On any and all accounts, these damage domestic ties with the global web community and, most importantly, discourage international trade. While they operate differently from tariffs and quotas, these strict regulations create strong trade barriers that are largely unique to the 21st century. As the Chinas, Russias, and North Koreas of the world attempt to make this "protectionism.com" the norm, one can only hope that few others will follow suit.

As Coughlin mentions at the end of his piece, "The costs of protectionist trade policies far exceed the benefits. The losses suffered by consumers exceed the gains reaped by domestic producers and government...Not only are there inefficiencies associated with excessive domestic production and restricted consumption, but there are costs associated with the enforcement of the protectionist legislation and attempts to influence trade policy." If you frame Coughlin's points in terms of Internet protectionist policies, keeping in mind their highly detrimental effects on free trade, these points ring especially true. When countries like Iran and China block off key sites, closely monitor web traffic, and consider establishing a "national Internet," nobody wins. These policies, whose intrusion on basic freedoms is another point entirely, cause both parties to ultimately lose out. Domestic consumers are forbidden from purchasing goods online (or even forbidden from finding them), foreign producers must deal with numerous restrictions, and neither information nor wealth is allowed to flow.

At the end of the day, countries with such autocratic, "big-brother" web policies shield their citizens from the rest of the world's activity, and consequently, forfeit free trade in the name of government surveillance. Indeed, the Internet may be the town square for the global village of tomorrow, but their corner of the marketplace will languish in disrepair.

Policymaking: The Biggest Challenge of the 21st Century

As it moves further into the 21st century, the international political economy will undoubtedly be met with a host of new obstacles, questions, innovations, and speed bumps. In these one hundred years, industries will shift, the global balance of power will likely change, and citizens and politicians alike will grapple with seemingly unanswerable questions. But, which of these challenges will be hallmark of this new era? What one issue or group of issues will constantly test the global economy and all the prominent actors within it? Though this question can only truly be answered in hindsight, a number speculative responses could seem quite plausible, given the numerous and complex issues that the world currently faces. All things considered, however, the strongest argument might be made for the business of domestic and international policymaking. In other words, the way in which each major economic actor forms its trade policies, industry regulations, and even domestic values will greatly affect the progress or deterioration of the international political economy.

As Wolf notes in Why Globalization Works, "the policies and capacities of states remain central to any understanding of how economic globalization works" (Wolf 16). Although "policymaking" is an extremely broad response, encompassing a myriad of different activities and areas, it is important to realize its overall role as a "make-or-break" component of the global economy. Today, globalization has created a world that is more interconnected than ever before, marked by international competition, price reduction, product innovation, glorification of free market principles. From a Western perspective, this phenomenon tends to be viewed in a very positive light, having raised the standard of living and created dramatic economic growth. The problem, however, is that not all global actors share these positive sentiments. According to Stiglitz, the 1999 WTO riots showed that "Globalization had succeeded in unifying people from around the world--against globalization. Factory workers in the United States saw their jobs being threatened by competition from China. Farmers in developing countries saw their jobs being threatened by the highly subsidized corn and other crops from the United States" (Stiglitz 7). Those who do not prosper in this system tend to view this global capitalism as "unjust, unstable and inefficient" (Wolf 126). And, not only does today's globalized economy create "losers," who are often struggling developing countries, but it also reveals the different values that back policies in various countries. For instance, the West may praise individuality, victory, and wealth, whereas other cultures support community, economic modesty, and even adherence to various religious codes.

Moving forward, the struggle will undoubtedly be to sustain the system and make it more workable for all players within it. While Wolf might argue that all countries--particularly the struggling developing ones--need to knock down all barriers and jump headlong into a free global market, the problem is nowhere near that simple. In fact, Stiglitz' premise rings true: the major players must find a way to construct policies that make globalization work. Though a few may believe otherwise, the global economic system is here to stay. When the Soviet Union attempted isolation and firm economic controls, it ultimately crumbled. This was "not because it was physically impossible to control cross-border movement of knowledge and ideas, but because the costs of doing so became unbearably high" (Wolf 121). If we take this point to be true, then the central challenge of the 21st century will be for major states and treaty organizations to find a way that addresses the problems of globalization yet still provides a way to sustain it.

So, why will global and domestic economic policies will be increasingly contentious and important in the international political economy? To those in developed, strong, and influential countries, globalization is viewed with optimism and praise. But, these major players cannot leave suffering areas like Africa and Southeast Asia to languish in economic misery forever. Something must be done to encourage their inclusion and adoption of policies that will benefit themselves as well as the global community. In addition to this, political tensions and self-interest consistently drive a wedge between even the most "compatible" economic partners. With China, Russia, and other non-Western countries experiencing recent economic booms, the reception has been somewhat chilled and wary. Although trade among the world's major economic players occurs, political tensions and defense concerns have spurred various tariffs, regulations, and other anti-free market measures. Within some of these countries, an explosive growth in the middle class can invite protectionist policies to "reward" them and guarantee stability in the industries (Wolf 124). Even now, the major economic actors may adopt small tariffs or red tape here and there in attempts to revitalize their economies or spur growth in a given sector. In any case, there are many reasons why the current policy framework is unsustainable--something has to give.

Though a solution to this problem would be quite difficult to construct at the moment, the main states, corporations, and governing groups in the international political economy must give it significant consideration in the coming years. The challenge, then, is to understand how different countries' policies affect the global market, and what forces are backing them. Even within the G20, national concerns and "selfishness" lead to tariffs and trade barriers--all of which reflect an imperfect market. Because the globalized world is not going to vanish or fall out of vogue, it is very important to develop and encourage policies that will make it progress successfully and smoothly into the coming years. While political tensions will always create friction between countries, thus impeding optimal economic relationships, there is a way to lessen other tensions and get more of the world on track to progress and prosperity. Given the current world of interconnectedness, technological advances, and international trade, major actors must evaluate how other players, as well as themselves, can adopt policies that are both fair and beneficial. Though we will not reach a utopian world of perfect markets and wealth for all, perhaps with this in mind, these entities will be able to address some of the problems that have plagued the international political economy of the 20th century.

International Trade and the Counter-Force of Globalization

Several days ago, an article in The Economist noted a sharp decline in global trade this year. Unsurprisingly, in times of stagnant economies, a slowdown of international trade is inevitable. In today's world, however, when buying power has been weakened and demand decreases, more than one economy must suffer the sometimes devastating effects of recession. Indeed, while many of us in the U.S. are well aware of the current economic downturn, we may not be so informed about its larger implications in the rest of the world.

Though many, like Martin Wolf, have championed the benefits of globalization--such as increased competition, reduced prices, cultural integration, and economic growth--others have made us well aware of its drawbacks. In Making Globalization Work, Joseph Stiglitz frequently points out the potential inequalities, struggles, and creation of "losers" in the global open market system. Because globalization links countries around the world culturally, technologically, and most importantly, economically, most activities are no longer confined to a single player or cluster of players. Not more than a century or two ago, an economic downturn in a sovereign, self-sufficient country would only have implications for its own people and operations. Nowadays, however, a shortage of raw materials, change of political outlook, or other shock could easily be felt by economies around the globe. Whether fortunately or unfortunately, this ripple effect applies directly to international trade, which now constitutes a hefty one-third of world GDP.

According to the web article, "The OECD reports that exports fell by over 4% in the second quarter of 2012 in Britain and India; Russia and South Africa lost more than 8%. That is particularly bad news for places like Singapore and Hong Kong, which are important trade hubs (see chart 1); open euro-zone countries like Ireland and Belgium are also highly exposed." The article goes on to mention that "If the global economy were the only factor in determining trade, a pick-up in world output would translate automatically into rising trade. The IMF, for example, thinks that trade will grow by 5.1% in 2013 on the back of a strengthening economy." Such predictions, however, are likely to be overshot and over-optimistic, due to the multiplicity of unpredictable factors in play. Because of its complex nature, the significant dip in trade reflects well the drawbacks of globalization.

Although the interconnected trade channels are often greatly beneficial, it is no secret that globalization creates some losers. Both developed and developing countries may end up with the short end of the stick, but unfortunately, pressures on industry subsidies and prices often hit developing countries the hardest (Stiglitz 16). Though proponents like Wolf sing the praises of the free market--and indeed I agree with him much of the time--the effects of decreased trade highlight the problems of what some call "a chaotic, uncoordinated system of global governance without global government" (Stiglitz 21). Because global trade is such a complex and encompassing phenomenon, it is nearly impossible to regulate, predict, or completely control. When one major economy experiences a recession, especially of a significant degree, globalization's many webs actually serve to exacerbate the problem. Without all these cross-cutting industries and ties, an economically-troubled state might struggle internally with its problems, but its counterpart across the ocean would be able to carry on totally unscathed. As Stiglitz points out, "globalization has made us part of a part of a global community...we may live locally, but increasingly we will have to think globally" (Stiglitz 22). With trade being such a huge part of world GDP, and with globalization greatly enabling trade, it is no wonder the statistics reflect significant declines in countries all around the world. While many tend to focus on the benefits of the relationship between economic growth and world trade, we must not forget that this can serve as a medium for serious shock waves (Wolf 108).

Upon reading this article, I was immediately reminded of the "U-shaped curve" used to describe globalization in the readings. Essentially, there is an acknowledged rise and fall of pro-globalization free market and open trade policies, with the early 20th century being widely pointed to as the height of globalization. Though this infrastructure has dipped and risen again since then, The Economist's article seemed to illuminate a self-reinforcing "sine curve" of globalization--essentially, hinting at an impending decline of some degree. Dips and peaks are common to any economy, and often they are characteristic of its natural functions and occasional shifts. While the global economy is no different, states or groups who have been connected by globalization and "lose out" during these downturns or shocks may dig their heels in and try to fight the market. Eventually, these pressures may create forces strong enough to take globalization down from a "peak."

For instance, an economic slowdown and corresponding decrease in trade can create counter-globalization sentiments. Trade finance may become a less attractive endeavor for banks, and they may cut their activity due to lack of capital or increased financial risk. Additionally, because market forces can bear heavily on some governments and national policies, countries who have specialized may find themselves unable to sell and profit off of key exports (Stiglitz 20). Or, global market forces may have forced them to keep the minimum wage at shockingly low levels. Regardless, these negative effects of globalization may incentivize protectionist or other anti-free market policies. This was confirmed in the article, which stated that "An agreement on “trade facilitation” (cutting red tape at borders) would more than offset the petty protectionism of some G20 members. But the tide of support for free trade is ebbing."

Economic crises and seemingly "unfair deals" brought about by globalization may drive some to vehemently oppose it. Even though most changes happen incrementally, with a tariff here and a trade barrier there, no country will ultimately be willing to take the fall for the sake of a free global market. In more extreme cases, the economically disgruntled may even turn to a version of nationalistic self-preservation, which could give rise to social ideologies along the lines of Fascism and Nazism (Wolf 122). Such events, as evidenced in the mid-1900's, can undo a large part of globalization's impact and permeation throughout the world. Still, the most troubling thing is the presence of an underlying line of rational reasoning behind such moves. This is clearly seen in the case of international trade, specialization, and global economic slowdowns. Put usefully but perhaps too simply, globalization appears to contain a very blatant self-contradiction. If the rational choice for some will always be opposing such networks and open policies, we ought not to expect a steady increase of globalization. Rather, barring no extreme setbacks, it will likely continue upward on a rocky path, characterized by fierce debate, conflicting national interests, and occasional steps back.