Monday, October 29, 2012

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."

Thursday, October 18, 2012

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.

Tuesday, October 9, 2012

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.