Inter Press ServiceJomo Kwame Sundaram – Inter Press Service http://www.ipsnews.net News and Views from the Global South Tue, 15 Jan 2019 15:33:03 +0000 en-US hourly 1 https://wordpress.org/?v=4.8.8 Gloom Ahead of World Economic Stormhttp://www.ipsnews.net/2019/01/gloom-ahead-world-economic-storm/?utm_source=rss&utm_medium=rss&utm_campaign=gloom-ahead-world-economic-storm http://www.ipsnews.net/2019/01/gloom-ahead-world-economic-storm/#respond Tue, 15 Jan 2019 07:50:43 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=159629 In light of the uncertainty caused by the US-China trade war, the IMF expects the US economic growth to slow from a three-year high of 2.9 per cent in 2018 to 2.5 per cent in 2019, while China’s expansion has already slowed in recent years, albeit from much higher levels. Trump stimulus dissipates US President […]

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By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY & KUALA LUMPUR, Jan 15 2019 (IPS)

In light of the uncertainty caused by the US-China trade war, the IMF expects the US economic growth to slow from a three-year high of 2.9 per cent in 2018 to 2.5 per cent in 2019, while China’s expansion has already slowed in recent years, albeit from much higher levels.

Trump stimulus dissipates
US President Trump and the previous GOP-controlled US Congress claimed to be breathing new life into the US economy with generous tax cuts. The US economy is now overheating, with inflation rising above target, causing the Federal Reserve to continue raising the federal funds rate to dampen demand.

Anis Chowdhury

As most families hardly gained from the tax changes, US purchases of houses and consumer durables continued to decline through 2018. Instead of investing in expanding productive capacity, US companies spent much of their tax savings on a $1.1 trillion stock buy-back spree in 2018.

Hence, the positive impacts of tax cuts were not only modest, but are also diminishing. Nearly half of 226 US chief financial officers recently surveyed believe that the US will go into recession by the end of 2019, with 82 per cent believing that it will have begun by the end of 2020. Wall Street’s biggest banks, JP Morgan and Bank of America, are also preparing for a slowdown in 2019.

As if to confirm their concerns, both the Dow Jones Industrial Average and the S&P 500 had their worst ever December performance since 1931, when stocks were battered after the Great Crash.

European recession
Meanwhile, the European Central Bank is expecting sluggish 1.7 per cent regional growth in 2019. Europe is close to recession with the collapse of industrial output in Germany, France, UK and Italy.

Jomo Kwame Sundaram

Germany’s industrial output fell by 1.9 per cent month-on-month in November 2018, and was in negative territory in 5 of the 6 months before December. Its GDP fell by 0.2 per cent in the 3rd quarter of 2018. France’s industrial production fell 1.3 per cent in November 2018, reversing a 1.3 per cent growth recovery in October from a 1.7 per cent decline in September. Italy, Europe’s third largest economy, recorded negative growth in the 3rd quarter of 2018 as GDP fell by 0.1 per cent in July-September 2018 with weaker domestic demand.

As the UK remains mired in its Brexit mess, GDP growth was dragged down to 0.3 per cent in the three months to November with the biggest industrial output contraction since 2012. 2018 final quarter growth is expected to be 0.1 per cent, i.e., negligible.

Not preparing for the inevitable?
David Lipton, the first deputy managing director of the IMF, warned in early January 2019, “The next recession is somewhere over the horizon, and we are less prepared to deal with that than we should be . . . [and] less prepared than in the last [crisis in 2008].”

Although the IMF had projected 3.7 per cent global economic growth for 2019 in October 2018, Lipton’s statement suggests that the IMF is likely to revise its 2019 growth forecast downward.

There have also been growing concerns over the continued efficacy of unconventional monetary policy since the 2008-2009 global financial crisis (GFC). Undoubtedly, countries now have less fiscal space than in 2009, and overall borrowing, including public debt has risen since.

Reaping what you sow
The policy blunders since the GFC have only made things much worse. The ideologically driven case for fiscal consolidation did not boost investor confidence for a robust recovery, as promised.

Despite acknowledging false claims cited to justify fiscal consolidation, including the IMF’s admission that its early advice was based on faulty calculations, there was no recommended change in policy course.

Instead, all responsibility for recovery was put on the monetary authorities who resorted to unconventional policies, especially ‘quantitative easing’ (QE). However, the global economic recovery since then has remained tepid and easily reversible.

Additional liquidity, made available by QE, has largely been used to buy financial assets and for speculation, amplifying the financial vulnerability of emerging market economies, which have experienced increased volatility.

Governments also failed to take advantage of historically low, even negative real interest rates to borrow and invest to boost productive capacity in the longer term.

By mainly benefiting financial asset holders, QE has exacerbated wealth concentration. Meanwhile, cuts in public services and social spending have worsened social polarization, as tax cuts for the rich have failed to generate promised additional investments and jobs growth.

The failure to achieve a robust recovery has not only worsened the debt situation, but also made lives harder for ordinary people. Growing polarization has also worsened resentments, eroding trust, undermining solidarity and progressive alternatives.

Ethno-populist jingoism undermines cooperation
But lack of preparedness can hardly be due to ignorance as there have been many such predictions recently, certainly more than in 2007-2008, before the GFC.

The cooperation that enabled co-ordinated actions to prevent the Great Recession from becoming a depression has not only waned, but major countries are now at loggerheads, preventing collective action.

National political environments are also more hostile. In Europe, the rise of ethno-populist nationalism is making it harder to pursue EU-level policies and to act together to prevent and mitigate the next financial crisis and downturn.

The “new sovereigntists” and false prophets of American exceptionalism are undermining multilateral cooperation when needed most. Thus, a recession in 2019 may well elevate geo-political tensions, exacerbating the negative feedback loop for a ‘perfect storm’.

Anis Chowdhury, Adjunct Professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Rethinking Free Trade Agreements in Uncertain Timeshttp://www.ipsnews.net/2019/01/rethinking-free-trade-agreements-uncertain-times/?utm_source=rss&utm_medium=rss&utm_campaign=rethinking-free-trade-agreements-uncertain-times http://www.ipsnews.net/2019/01/rethinking-free-trade-agreements-uncertain-times/#comments Tue, 08 Jan 2019 16:28:47 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=159545 After US President Donald Trump withdrew from Obama’s Trans-Pacific Partnership (TPP), involving twelve countries on the Pacific rim, on his first day in office, Japan, Australia and their closest allies proposed and promoted the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) to draw the US back into the region to counter China’s fast-growing power and influence. […]

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By Jomo Kwame Sundaram
KUALA LUMPUR, Malaysia, Jan 8 2019 (IPS)

After US President Donald Trump withdrew from Obama’s Trans-Pacific Partnership (TPP), involving twelve countries on the Pacific rim, on his first day in office, Japan, Australia and their closest allies proposed and promoted the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) to draw the US back into the region to counter China’s fast-growing power and influence.

Jomo Kwame Sundaram

Geostrategic deal to re-engage US in East Asia
The modest projected gains claimed by the most popularly used trade models are based on dubious methodologies. President Obama had explicitly promoted the TPP for geostrategic reasons even though both US government cost-benefit analyses found very modest gains from the free trade agreement (FTA).

With miniscule real trade gains from the original TPP, US withdrawal has made benefits from the regional agreement even more trivial. Without the US market, the TPP’s supposed benefits largely disappeared with the CPTPP. Hence, while its proponents hope the CPTPP will re-engage the US as hegemon in the region, TPP advocates have become even more desperate for US participation.

The Peterson Institute for International Economics (PIIE), the main TPP and CPTPP advocate, claimed most (85%) growth gains from non-trade measures (NTMs), not trade liberalization per se. Such claims were largely refuted by the 2016 US International Trade Council (ITC) report.

The World Bank used PIIE consultants to make even more exaggerated claims of TPP gains in early 2017, ignoring most costs and risks. CPTPP advocates have made even more extravagant claims about supposed benefits since.

To make matters worse, besides the meagre trade gains, enhanced intellectual property rights (IPRs) and investor-state dispute settlement (ISDS) provisions will fetter developing countries’ ‘catch-up’ economic prospects. Besides raising costs, e.g., for buying medicines and technologies, strengthened IPRs will further limit technology transfer.

ISDS will enable foreign investors to sue CPTPP governments, not in national courts, but rather, private arbitration tribunals. Besides undermining national judicial sovereignty, small country governments with limited legal resources will be disadvantaged. Ironically, Trump’s US Trade Representative now rejects reciprocal ISDS for undermining US sovereignty!

From the frying pan into the fire
Informed analysts know that CPTPP losses, costs and risks are much greater than for the TPP while gains will be more trivial despite cheerleaders’ claims to the contrary. More worryingly, very few developing country negotiators have actually scrutinized and understood the likely implications of the 6350 page TPP agreement.

Some minor changes were made to the TPP agreement for the CPTPP. Several onerous provisions were amended, and some others suspended, leaving most unchanged. Only a few CPTPP governments secured ‘side letters’, exempting them from some specific clauses.

Thus, most onerous TPP provisions remain. The CPTPP has committed Malaysia to further trade liberalization, accelerating deindustrialization, besides constraining the growth of modern services, development finance and ‘policy space’.

With the economic slowdown of the last decade wrongly attributed to the end of trade expansion since 2009, and the more recent ‘populist-nationalist’ reversal of trade liberalization, wishful thinking has emerged that the CPTPP will somehow magically enhance economic growth and progress.

Developmental, multilateral FTA needed
Increased market access for exports typically requires trade liberalization by others, but trade liberalization also undermines food and industrial production. Recognizing such problems after the end of the Uruguay Round of trade talks led to the creation of the World Trade Organization (WTO) in the mid-1990s, most developing country members have since sought to ensure that WTO rules are more development-friendly, launching a Development Round at its Doha biennial ministerial conference in late 2001.

As trade liberalization advocate Jagdish Bhagwati has argued, bilateral and plurilateral FTAs have long undermined WTO-led trade multilateralism. At the national level, developing country governments should amend legislation and policy in line with their needs, especially for development, not at the behest of corporate lobbyists or geostrategic priorities.

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Taking Away the Ladderhttp://www.ipsnews.net/2018/12/taking-away-ladder/?utm_source=rss&utm_medium=rss&utm_campaign=taking-away-ladder http://www.ipsnews.net/2018/12/taking-away-ladder/#comments Tue, 18 Dec 2018 13:18:36 +0000 Jomo Kwame Sundaram and Anis Chowdhury http://www.ipsnews.net/?p=159312 The notion of the BRICS (Brazil, Russia, India, China, and later, South Africa) was concocted by Goldman Sachs’ Jim O’Neill. His 2001 acronym was initially seen as a timely, if not belated acknowledgement of the rise of the South. But if one takes China out of the BRICS, one is left with little more than […]

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By Jomo Kwame Sundaram and Anis Chowdhury
KUALA LUMPUR & SYDNEY, Dec 18 2018 (IPS)

The notion of the BRICS (Brazil, Russia, India, China, and later, South Africa) was concocted by Goldman Sachs’ Jim O’Neill. His 2001 acronym was initially seen as a timely, if not belated acknowledgement of the rise of the South.

But if one takes China out of the BRICS, one is left with little more than RIBS. While the RIBS have undoubtedly grown in recent decades, their expansion has been quite uneven and much more modest than China’s, while the post-Soviet Russian economy contracted by half during Boris Yeltsin’s first three years of ‘shock therapy’ during 1992-1994.

Jomo Kwame Sundaram

Unsurprisingly, Goldman Sachs quietly shut down its BRICS investment fund in October 2015 after years of losses, marking “the end of an era”, according to Bloomberg.

Growth spurts in South America’s southern cone and sub-Saharan Africa lasted over a decade until the Saudi-induced commodity price collapse from 2014. But the recently celebrated rise of the South and developing country convergence with the OECD has largely remained an East Asian story.

Preventing emulation
Increasingly, that has involved China’s and South Korea’s continued ascendance after Japan’s financial ‘big bang’ and ensuing stagnation three decades ago. They have progressed and grown rapidly for extended periods precisely because they have not followed rules set by the advanced economies.

Industrial policy — involving state owned enterprises (SOEs), technology transfer agreements, government procurement, strict terms for foreign direct investment and other developmental interventions — was condemned by the Washington Consensus, promoting liberalization, privatization and deregulation favouring large transnational corporations.

Anis Chowdhury

Well-managed SOEs, government procurement practices and effective protection conditional on export promotion accelerated structural transformation. When foreign corporations were allowed to invest, they were typically required to transfer technology to the host economy.

Countries have only progressed by using industrial policy judiciously when sufficient policy space was available, as was the norm in most developed countries. But such successful development practices have been denied to most developing countries in recent decades. Instead, the North now emphasizes the dangers of industrial policy, subsidies, SOEs and technology transfer agreements, to justify precluding their use by others.

Blocking the alternative
Instead, corporate-led globalization continues to be sold as the way to develop and progress.
Some advocates insist that global value chain participation will provide handsome opportunities for sustained economic development despite the evidence to the contrary.

Major OECD economies appear intent on tightening international rules to further reduce developing countries’ policy space under the pretext of reforming the multilateral trading system in order to save it.

Trump and other challenges to this neoliberal narrative do not offer any better options for the South. Nevertheless, their nationalist and chauvinist rhetoric has undermined the pious claims and very legitimacy of their neoliberal ‘globalist’ rivals on the Right.

Infrastructure finance
UNCTAD’s 2018 Trade and Development Report emphasizes the link between infrastructure and industrialization. It argues that successful industrialization since 19th century England has crucially depended on public infrastructure. Infrastructure investment is thus considered crucial for economic growth and structural transformation.

The ascendance of the neoliberal Washington Consensus agenda has not only undermined public interventions generally, but also state revenue and spending in particular, especially in the developing world. But even the World Bank now admits that it had wrongly discouraged infrastructure financing, which it now advocates.

Most Western controlled international financial institutions have recently advocated public-private partnerships to finance, manage and implement infrastructure projects. The presumption is that only the private sector has the expertise and capacity to be efficient and profitable. In practice, states borrowed and bore most of the risk, e.g., of contingent liabilities, while private partners reaped much profit, often with state guaranteed revenues.

Unexpected policy space
Infrastructure, including both its construction and financing, has been central, not only to China’s own progress, but also to its international development cooperation. China’s financial redeployment of its massive current account surplus has created an alternative to traditional sources of investment finance, both private and public.

The availability of Chinese infrastructure finance on preferential or concessionary terms has been enthusiastically taken up, not least by countries long starved of investible resources. Not surprisingly, this has resulted in over-investments in some infrastructure, resulting in underutilization and poor returns to investment.

The resulting debt burdens and related problems have been well publicized, if not exaggerated by critics with different motivations. Now threatened by China’s rise, Western governments and Japan have suddenly found additional resources to offer similar concessionary financing for their own infrastructure firms.

Thus, not unlike the US-Soviet Cold War, the perceived new threat from China has created a new bipolar rivalry. That has inadvertently created policy space and concessions reminiscent of the post-Second World War ‘Golden Age’ for Keynesian and development economics.

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Big Business Capturing UN SDG Agenda?http://www.ipsnews.net/2018/12/big-business-capturing-un-sdg-agenda/?utm_source=rss&utm_medium=rss&utm_campaign=big-business-capturing-un-sdg-agenda http://www.ipsnews.net/2018/12/big-business-capturing-un-sdg-agenda/#respond Tue, 11 Dec 2018 09:41:23 +0000 Jomo Kwame Sundaram and Anis Chowdhury http://www.ipsnews.net/?p=159154 Over the last two decades since the Global Compact, the United Nations has increasingly embraced the corporate sector, most recently to raise finance needed to achieve the Sustainable Development Goals (SDGs), i.e., for Agenda 2030. But growing big business influence has also compromised analyses, recommendations, policies and programme implementation, undermining the SDGs. Changing financing arrangements […]

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By Jomo Kwame Sundaram and Anis Chowdhury
KUALA LUMPUR & SYDNEY, Dec 11 2018 (IPS)

Over the last two decades since the Global Compact, the United Nations has increasingly embraced the corporate sector, most recently to raise finance needed to achieve the Sustainable Development Goals (SDGs), i.e., for Agenda 2030. But growing big business influence has also compromised analyses, recommendations, policies and programme implementation, undermining the SDGs.

Changing financing arrangements

Inadequate funding of the UN and its mandates by member States has required this search for additional finance, initially with philanthropy and ‘corporate social responsibility’ efforts by private business, but increasingly, by viewing profit-seeking investments as somehow contributing to achieve the SDGs.

Jomo Kwame Sundaram

While the global economy grew 47 fold from $1.35 trillion in 1960 to $63 trillion in 2010, the UN organization’s regular core budget fell to 0.0037 per cent of global income. Meanwhile, ‘core’ un-earmarked resources fell from nearly half of all UN financial resources in 1997 to less than a quarter today. A recent UN Secretary-General’s report estimated that over 90 per cent of all UN development system activities in 2015 were funded with non-core, earmarked project resources.

An earlier report found total non-core resources for UN-related activities increased 182 per cent in real terms between 1999 and 2014, mostly going through a growing number of UN ‘vertical’ trust funds, beyond Member States’ control, while core resources increased only 14 per cent.

Such ‘siloed’ trust funds – with funding rising three-fold over the last decade – enable both donor governments and corporate interests to determine UN funding, bypassing established decision-making processes. Thus, UN development financing increasingly serves donor priorities.

 

New development finance discourse

Influential quarters claim that in order to achieve Agenda 2030, financing needs have to rise “from billions to trillions” of US dollars, and that this can only be done by engaging the corporate sector.

According to a 2015 World Bank report, while the Millennium Development Goals (MDGs) needed billions in official development assistance, the SDGs require trillions in investments.

Anis Chowdhury

Although most development spending involves national public resources, most Organization for Economic Cooperation and Development (OECD) governments opposed international tax cooperation at the 2015 Addis Ababa third UN Financing for Development conference.

Thus, instead of helping boost national revenue enhancing capacities and capabilities, the Addis Ababa Action Agenda (AAAA) claimed that private capital had “the potential for scaling up to achieve the demands of the Sustainable Development Goals”.

 

Corporate funding for sustainable development?

The three major multilateral agreements of 2015 – the AAAA, the Agenda 2030 for SDGs and the Paris climate agreement – were all premised on private financing, stressing the need to mobilize funding from private business, finance and investment. This premise has been criticized by the Agenda 2030 Reflection Group which argued for public financing instead.

Multi-stakeholder partnerships have long been advocated by many OECD governments, UN agencies and former UN Secretary-General Ban Ki-moon. This envisaged big business working with governments in public-private partnerships (PPPs), blended finance and various other novel financing arrangements.

A 2015 UN Environment Programme (UNEP) report emphasized the need to “access private capital at scale, with banking alone managing financial assets of almost US$140 trillion and institutional investors, notably pension funds, managing over US$100 trillion, and capital markets, including bond and equities, exceeding US$100 trillion and US$73 trillion respectively.”

 

Public-private partnerships

The AAAA promoted PPPs and blended finance arrangements, while the Global Infrastructure Forum was set up at Addis to close the ‘infrastructure gap’ in developing countries, estimated by the outcome document at between “$1 trillion to $1.5 trillion” annually.

Thus far, PPPs have been more significant in developed and upper middle-income countries, as low-income countries are rarely able to attract large private investors. Warnings that PPPs and other such modalities, already problematic in OECD member countries, are even less likely to succeed in developing countries, where cost recovery is more difficult, have been largely ignored.

Instead, PPPs have often worsened national budgetary positions in the long-run due to the contingent liabilities governments are required to take on. Consequently, in most cases, governments bear the most risk, subsidize ventures and guarantee revenues to the private partner.

While PPPs have clearly contributed to national financial difficulties, such problems were largely ignored until recently. With changing international relations, they are now being highlighted as leading to national ‘debt bondage’ to China and other non-traditional sources of finance.

Meanwhile, the US and other developed countries have announced major new infrastructure financing initiatives of their own, to draw developing countries from financial reliance on China. This unexpected political rivalry will have mixed consequences for borrowing developing countries.

PPPs involve many unpredictable risks, primarily borne by governments, as well as side and spill-over effects, with the private partners typically setting most terms. Moreover, PPPs in social sectors, such as health and water, are less inclusive, disadvantaging the poor and the less accessible.

Meanwhile concerns have been raised, even by The Economist, about enthusiasm for blended finance as ‘aid’, which typically favours private partners from the donor country. Such aid diversion — from budgetary support, social programmes and essential services — prioritizes private profits, rather than the public interest.

 

Checks and balances?

The UN Global Compact’s 10 principles from the turn of the century remain the main intergovernmental framework governing non-state partnerships, but remains ill-equipped for meaningful accountability, especially as it pre-dates the SDGs, and hence, are inadequate now.

Promoted and often required by OECD governments, PPPs and blended finance have not received enough critical scrutiny in terms of compatibility with UN mandates, while their extra-budgetary funding status has exempted them from rigorous audit, review and impact assessment.

With financing gap concerns accepted as the rationale for multi-stakeholder partnerships, the private sector is increasingly calling the shots, with occasional lip service to civil society engagement merely providing legitimacy, rather than adequate checks and balances.

 

  • This article was amended on January 10 2019.  An earlier version under the sub-heading, “Corporate funding for sustainable development?”,  inadvertently implied that the Agenda 2030 Reflection Group stressed the need to mobilize funding from private business, finance and investment. In fact, the Group stressed the need for public funding, and criticized the view that the SDGs can only be implemented effectively via  PPPs, blended finance, etc.

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Havana Charter’s Progressive Trade Vision Subvertedhttp://www.ipsnews.net/2018/12/havana-charters-progressive-trade-vision-subverted/?utm_source=rss&utm_medium=rss&utm_campaign=havana-charters-progressive-trade-vision-subverted http://www.ipsnews.net/2018/12/havana-charters-progressive-trade-vision-subverted/#respond Tue, 04 Dec 2018 13:36:19 +0000 Jomo Kwame Sundaram and Anis Chowdhury http://www.ipsnews.net/?p=159015 In criticizing the ‘free trade delusion’, UNCTAD’s 2018 Trade and Development Report proposes an alternative to both reactionary nationalism, recently revived by President Trump, and the corporate cosmopolitanism of neoliberal multilateral discourse in recent decades by revisiting the Havana Charter on its 70th anniversary. From ITO to WTO Instead, it urges reconsideration of lessons from […]

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By Jomo Kwame Sundaram and Anis Chowdhury
KUALA LUMPUR & SYDNEY, Dec 4 2018 (IPS)

In criticizing the ‘free trade delusion’, UNCTAD’s 2018 Trade and Development Report proposes an alternative to both reactionary nationalism, recently revived by President Trump, and the corporate cosmopolitanism of neoliberal multilateral discourse in recent decades by revisiting the Havana Charter on its 70th anniversary.

From ITO to WTO
Instead, it urges reconsideration of lessons from the struggle from 1947 for the Havana Charter. Although often depicted as the forerunner of the General Agreement on Tariffs and Trade (GATT), the Charter was far more ambitious.

Jomo Kwame Sundaram

Initially agreed to 70 years ago by over 50 countries — mainly from Latin America, as much of the rest of the developing world remained under European colonial rule — it was rejected by the US Congress, with GATT emerging as a poor compromise.

As envisaged at Bretton Woods in 1944, over 50 countries began to create the International Trade Organization (ITO) from 1945 to 1947. In 1947, 56 countries started negotiating the ITO charter in Havana following the 1947 United Nations Conference on Trade and Employment in Havana, eventually signed in 1948.

The idea of a multilateral trade organization to regulate trade — covering areas such as tariff reduction, business cartels, commodity agreements, economic development and foreign direct investment — was first mooted in the US Congress in 1916 by Representative Cordell Hull, later Roosevelt’s first Secretary of State in 1933.

However, the US Congress eventually rejected the Havana Charter, including establishment of the ITO, in 1948 following pressure from corporate lobbies unhappy about concessions to ‘underdeveloped’ countries. Thus, the Bretton Woods’ and Havana Charter’s promise of full employment and domestic industrialization in the post-war international trade order was aborted.

In their place, from 1948 to 1994, the GATT, a provisional compromise, became the main multilateral framework governing international trade, especially in manufactures, the basis for trade rules and regulations for most of the second half of the 20th century.

The Uruguay Round from 1986 to 1994, begun at Punta del Este, was the last round of multilateral trade negotiations under GATT. It ended the postwar trading order governed by GATT, replacing it with the new World Trade Organization (WTO) from 1995.

Developmental fair trade?
The UNCTAD report urges revisiting the Havana Charter in light of new challenges in recent decades such as the digital economy, environmental stress and financial vulnerabilities. So, what lessons can we draw from the Havana Charter in trying to reform the multilateral trading order?

Anis Chowdhury

In light of economic transformations over the last seven decades, it is crucial to consider how the Havana Charter tried to create a more developmental and equitable trading system, in contrast with actual changes in the world economy since.

After all, the Charter recognized that a healthy trading system must be based on economies seeking to ensure full employment while distributional issues have to be addressed at both national and international levels.

Profitable, but damaging business practices — by large international, multinational or transnational firms, abusing the international trading system — also need to be addressed.

The Charter recognized the crucial need for industrialization in developing countries as an essential part of a healthy trading system and multilateral world order, and sought to ensure that international trade rules would enable industrial policy.

The GATT compromise exceptionally allowed some such features in post-war trade rules, but even these were largely eliminated by the neoliberal Uruguay Round, as concerns about unemployment, decent work and deindustrialization were ignored.

Paths not taken
The evolution of the international trading system has been largely forgotten. Recent and current tensions in global trade are largely seen as threatening to the post-Second World War (WW2) international economic order first negotiated in the late 1940s and revised ever since.

But the international order of the post-WW2 period ended in the 1970s, as policymakers in the major developed economies embraced the counter-revolutionary neoliberal reforms of Thatcherism and Reaganism against Keynesian and development economics after Nixon unilaterally destroyed the Bretton Woods monetary arrangements.

Besides international trade liberalization as an end in itself, financial liberalization and globalization were facilitated as financial markets were deregulated, not only within national economies, but also across international borders.

Industrial policy, public enterprise and mixed economies were purged by the new neoliberal fundamentalists as the very idea of public intervention for healthy, equitable and balanced development was discredited by the counter-revolution against economic progress for all.

With multilateralism and the Doha Development Round under assault, retrieving relevant lessons from the Havana Charter after seven decades can be crucial in steering the world between the devil of reactionary nationalist ‘sovereigntism’ and the deep blue sea of neoliberal corporate cosmopolitanism or ‘globalism’.

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Multilateralism Undermined by Globalization’s Discontentshttp://www.ipsnews.net/2018/11/multilateralism-undermined-globalizations-discontents/?utm_source=rss&utm_medium=rss&utm_campaign=multilateralism-undermined-globalizations-discontents http://www.ipsnews.net/2018/11/multilateralism-undermined-globalizations-discontents/#comments Wed, 28 Nov 2018 06:17:05 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=158915 On 24 October 1945, the world’s most inclusive multilateral institution, the United Nations, was born to “save succeeding generations from the scourge of war, … reaffirm faith in fundamental human rights, … establish conditions under which justice and respect for the obligations arising from treaties and other sources of international law can be maintained, and […]

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By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Nov 28 2018 (IPS)

On 24 October 1945, the world’s most inclusive multilateral institution, the United Nations, was born to “save succeeding generations from the scourge of war, … reaffirm faith in fundamental human rights, … establish conditions under which justice and respect for the obligations arising from treaties and other sources of international law can be maintained, and to promote social progress and better standards of life in larger freedom” (UN Charter: Preamble).

Thus, one major purpose of the UN is to foster international cooperation to resolve the world’s socio-economic problems and to promote human rights and fundamental freedoms (UN Charter: Article 1.3).

Anis Chowdhury

Hence, all Members are obliged to “refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state” (Article 1.4), and to give the UN “every assistance in any action it takes in accordance with [its] Charter” (Article 1.5).

For many, however, the world today is increasingly at odds with the ideals of the UN Charter. Wars and conflicts are causing unprecedented humanitarian crises, worsened by rising intolerance and xenophobia.

Important international organizations and treaties are being threatened by unilateral withdrawals, non-payment of dues, virtual vetoes and threats of worse. Meanwhile, bilateral and plurilateral trade and other agreements are undermining crucial features of the post-Second World War order.

Little incentive to cooperate
Before the opening of the General Debate of the UN General Assembly, Secretary-General António Guterres warned that “multilateralism is under attack from many different directions precisely when we need it most.”

Pundits have identified many causes such as the proliferation of multilateral institutions, often with overlapping mandates, undermining one another, sometimes inadvertently, but nonetheless effectively. Institutional resistance to reform has also frequently made them unfit for purpose.

While design of the post-war order at Bretton Woods, Yalta and San Francisco envisaged a post-colonial multilateral order, it was not long before new arrangements for hegemony, if not outright dominance prevailed as the old imperial powers reluctantly retreated from their colonies, often with privileges largely intact.

Jomo Kwame Sundaram

Without Roosevelt, the World War Two Allies were soon engaged in a bipolar ‘Cold War’, demanding the loyalty of others. By the 1960s, many ‘emerging countries’ sought national political and policy space through ‘non-alignment’ and the emerging bloc of developing countries called the Group of 77 (G77).

Profitable globalization
By the 1980s, the Thatcher-Reagan-led ‘neoliberal’ counter-revolution against Keynesian and development economics seized upon Soviet economic decline under Brezhnev to strengthen private corporate interests, by extending property rights, privatization, liberalization and globalization.

The new patterns of international economic specialization saw significant industrialization and growth, especially where governments pro-actively made the most of the new opportunities available to them, especially in East and South Asia.

Much of the new prosperity in the North was neither inclusive nor shared, resulting in new economic polarization unseen since the 1920s. Much of this was easily blamed on the ‘other’, with immigrants and cheap foreign imports blamed for stealing good jobs.

Meanwhile, a new generation of social democrats in the West embraced much of the neo-liberal agenda, even rejecting Keynesian counter-cyclical fiscal policies after failing to check the libertarian revolt against progressive taxation.

Successful in achieving their political ambitions, the ‘new social democrats’ offered a culturally alien, new ‘identity politics’ as ideological surrogate. This, in turn, later served to fuel the reactionary ascendance of ‘ethno-populism’ by the ‘new right’.

Thus, neoliberalism’s triumph – with enhanced corporate prerogatives, privatization, economic liberalization and globalization, in the embrace of Western social democratic leaders’ abandonment of their own purported class base – led to corporatist populist reactions, reminiscent of earlier fascist resurgences.

International solidarity undermined
Narrow reactionary ethno-nationalisms are rarely conducive to international cooperation, often depicted as a variant of their ostensible enemy – (neoliberal) globalism! This has not only weakened international solidarity, but also undermined multilateral engagement, let alone cooperation.

Roosevelt’s protracted leadership of the ascendant post-WW2 US and recognition of the urgent need to transcend the limited imperialist multilateralism of the League of Nations were crucial. Thus, despite its limitations, the UN system met the need for an inclusive post-colonial multilateralism after WW2.

Ironically, the ongoing undermining of multilateralism, especially with the rise of US ‘sovereigntism’ after the end of the Cold War, has gained new momentum as backlashes to globalization and its pitfalls have spread from developing countries to transition economies and declining industrial powers.

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Inequality undermines democracyhttp://www.ipsnews.net/2018/11/inequality-undermines-democracy/?utm_source=rss&utm_medium=rss&utm_campaign=inequality-undermines-democracy http://www.ipsnews.net/2018/11/inequality-undermines-democracy/#comments Wed, 21 Nov 2018 15:31:16 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=158785 Economic inequality – involving both income and wealth concentration – has risen in nearly all world regions since the 1980s. Gross economic inequalities moderated for much of the 20th century, especially after World War Two until the 1970s, but has now reached levels never before seen in human history. No more inclusive prosperity The World […]

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Inequality out in the open. Credit: A.D. McKenzie/IPS

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Nov 21 2018 (IPS)

Economic inequality – involving both income and wealth concentration – has risen in nearly all world regions since the 1980s. Gross economic inequalities moderated for much of the 20th century, especially after World War Two until the 1970s, but has now reached levels never before seen in human history.

No more inclusive prosperity
The World Inequality Report 2018 found that the richest 1% of humanity captured 27% of world income between 1980 and 2016. By contrast, the bottom half got only 12%. In Europe, the top one percent got 18%, while the bottom half got 14%.

OXFAM’s Reward Work, Not Wealth reported that 82% of the wealth created in 2016 went to the richest 1% of the world population, while the 3.7 billion people in the poorer half of humanity got next to nothing.

2016 saw the biggest increase in billionaires in history, with a new one every two days. Billionaire wealth increased by $762 billion between March 2016 and March 2017, with OXFAM noting, “This huge increase could have ended global extreme poverty seven times over”.

The latest World Inequality Report warns, “if rising inequality is not properly monitored and addressed, it can lead to various sorts of political, economic, and social catastrophes”.

The Global State of Democracy 2017: Exploring Democracy’s Resilience had anticipated this concern: “Inequality undermines democratic resilience. Inequality increases political polarization disrupts social cohesion and undermines trust in and support for democracy”.

Growing inequality undermining progress
Alexis de Tocqueville believed that democracies with severe economic inequality are unstable as it is difficult for democratic institutions to function properly in societies sharply divided by income and wealth, especially if little is done to redress the situation, or if it worsens.

De Tocqueville also maintained that there cannot be real political equality without some measure of economic equality. Poor citizens would not enjoy the same access to political and policy influence as the wealthy enjoy much more influence.

For Amartya Sen, the poor’s ‘substantive freedom’ or ‘capability’ to pursue goals and objectives is circumscribed. Those with more power not only block progressive redistribution, but also shape rules and policy to their own advantage.

For Robert Putnam, economic inequality also impacts civic norms, such as ‘trust’, critical for political legitimacy. Growing inequality exacerbates the sense of unfairness about a status quo run by and for wealthy plutocrats.

For Joseph Stiglitz, rising inequality weakens social cohesion. Declining trust increases apathy and acrimony, in turn discouraging civic participation. Economic inequality thus worsens ‘political anomie’, eroding community bonds besides contributing to anti-social behaviour.

Meaningful democracy needs active citizens’ participation in community affairs, typically greatest among the ‘middle class’. Growing economic polarization has hollowed out the middle class, reducing civic engagement, exacerbating the ‘democratic deficit’.

Exclusion and deprivation exacerbate alienation, causing greater abandonment of prevailing social norms. Meanwhile, the privileged indignantly see others as undeserving of ‘social transfers’.

Populism threatens multilateralism
Thus, de Tocqueville was concerned that growing inequality would gradually erode the ‘quality’ of democracy, even in high-income societies. The rise of ‘plutocratic populism’ has contributed to the latest identity politics in the US and Europe.

Public discourses and the media have blamed the ‘other’ – immigrants and the culturally different – for growing social ills. Thus, plutocrats often succeed in satisfying ‘their people’ with privileges and ‘rights’ in contemporary modes of ‘divide and rule’.

With the media, they often obscure plutocracy’s rule, sometimes even justifying its worst features, e.g., legitimizing high executive remuneration as ‘just rewards’ as tycoons secure generous tax breaks and investment incentives, at the expense of social spending and public services for all.

In today’s ‘winner-take-all’ economy, those on top successfully lobby for and secure lower taxes. Nonetheless, they indignantly denounce budget deficits as irresponsible and inflationary, threatening the value of all financial assets.

America divided
In the United States, the income share of the top 1% is now at its highest level since the Gilded Age, on the eve of the Great Depression. Meanwhile, the bottom half of Americans has captured only 3% of total growth since 1980. Disparities are reaching levels never before seen in the modern period.

Thus, around 2013, the top 0.01%, or 14,000 American families, owned 22.2% of US wealth, while the bottom 90% – over 133 million families – owned a meagre 4%! The richest 1% tripled their share of US income within a generation, with 95% of income gains since the 2008-2009 financial crisis going to the top 1%!

Meanwhile, legislative and other reforms as well as judicial appointments have stacked the legal system even more heavily against those with little power or influence. A recent survey found more than 70% of low-income American households had been involved in civil legal disputes in the previous year, such as eviction and employment law cases, with more than 80% lacking effective legal representation.

Lack of attention to those down and out has worsened the sense of abandonment and exclusion. Many Americans, especially in depressed regions, have become disillusioned and alienated, but also more susceptible to chauvinist politicians promising protection against ‘the other’, imports and immigrants.

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Lessons for the ‘Rest’ from ersatz miracleshttp://www.ipsnews.net/2018/11/lessons-rest-ersatz-miracles/?utm_source=rss&utm_medium=rss&utm_campaign=lessons-rest-ersatz-miracles http://www.ipsnews.net/2018/11/lessons-rest-ersatz-miracles/#comments Tue, 06 Nov 2018 11:35:21 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=158544 Of the ten fastest growing economies since 1960, eight are in East Asia. Two main competing explanations claimed to explain this regional concentration of catch up growth since the late 20th century, often referred to as the East Asian miracle. The dominant ‘neo-liberal’ Washington Consensus, sought to establish minimalist ‘night-watchman’ state, attributed this exceptional regional […]

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By Jomo Kwame Sundaram
KUALA LUMPUR, Malaysia, Nov 6 2018 (IPS)

Of the ten fastest growing economies since 1960, eight are in East Asia. Two main competing explanations claimed to explain this regional concentration of catch up growth since the late 20th century, often referred to as the East Asian miracle.

Jomo Kwame Sundaram

The dominant ‘neo-liberal’ Washington Consensus, sought to establish minimalist ‘night-watchman’ state, attributed this exceptional regional performance to macroeconomic stability, public goods provision, and openness to trade and investment.

Meanwhile, more heterodox economists focused on the need for states to adopt pragmatic, experimental ‘trial and error’, selective approaches to overcome market and coordination failures in order to accelerate growth, especially through industrialization.

In this view, the developmental states of Northeast Asia used their ‘embedded autonomy’ viz a viz the private sector to accelerate technological catch-up and achieve rapid growth. But what then is to be learnt from the more modest and mixed progress in Southeast Asia?

Southeast Asia and the ‘Rest’
The conventional wisdom about Southeast Asia, particularly Malaysia, Indonesia and Thailand (MIT), is that states there lacked the strength, autonomy and embeddedness viz a viz the private sector to successfully adopt Northeast Asian development strategies.

Selective interventions in MIT were said to be subject to too much rent-seeking and corruption, which were widely believed to have slowed growth elsewhere. But this view does not quite fit the facts, i.e., sustained rapid growth in MIT.

Michael Rock’s Dictators, Democrats and Development in Southeast Asia shows how weaker and less autonomous states in MIT, subject to corruption and rent-seeking, successfully achieved rapid growth by pursuing unorthodox interventionist policies.

MIT undoubtedly looks much more like the Rest than Northeast Asia. They are resource rich, but have avoided the ‘resource curse’. They have high levels of ethnic heterogeneity, but have avoided related growth tragedies.

Like the Rest, they have poorer governance—weaker and less competent states, with less autonomy from the private sector, more corruption and rent-seeking. Yet, they have avoided the growth slowdowns and lost decades experienced by many of the Rest.

Nation building first?
So, how did MIT succeed while the Rest did not? Economic take-offs in MIT were preceded by rentier capitalist political elites gaining state control and pragmatically implementing industrial development strategies.

The successes were certainly not primarily about free trade, laissez faire, or being FDI friendly and export-oriented. They were also not easy, took time, and encountered political resistance, instability and violence.

Development did not emerge on the political agenda until elites needed to protect their conservative ‘nation-building’ projects. To consolidate power, they recognized that development and growth were in their long-term political interest.

The inability of political elites to successfully complete their nation-building projects is therefore crucial to understanding ‘failed states’. Such conservative nation-building projects were typically led by ‘centre right’ coalitions composed of monarchies, the military, police, bureaucracy and business elite.

The losers were the Left and popular groups, among others. With the defeat of the Left and histories of openness to foreign trade and investment, elites forged pro-growth political coalitions enabling an open capitalist, but nonetheless interventionist growth strategy to work.

Pragmatic development
This development strategy was more pragmatic than ideological, and rooted in essentially ‘experimental’, ‘muddling through’ and ‘trial and error’ approaches. Thus, even though these were ‘open economies’, the governments were not dogmatic ‘free traders’.

As MIT governments used both markets and states to sustain growth, development policies were certainly not laissez faire, even though they were capitalist, with states far more interventionist than mere night-watchmen.

MIT states sought to promote domestic capitalists to compete in the global economy. Such promotion of rentier business elites was reciprocated with ‘kickbacks’ for political elites to secure political support.

The fact that MIT growth was primarily driven by domestic, not foreign investment, has important implications for development policy. MIT’s favoured capitalists generally responded by substantially increasing the investment to GDP ratio.

MIT growth was thus investment, rather than export-led. The shares of manufactures in GDP and exports are larger than expected while export concentration indices are less than believed, suggesting that selective industrial policies worked, albeit unevenly.

Policy context
This strategy has influenced the size distribution of firms as a small number of very large conglomerates dominate—government-patronized ethnic Chinese conglomerates which dominate the MIT economies and, exceptionally, Malaysia’s ‘government-linked companies’.

This political economy ‘ecosystem’ could have failed if MIT governments were not developmentalist, or if the elites were too greedy, or if the private sector did not invest, or if there were no checks or balances.

Ruling political elites in MIT have been opportunistically or pragmatically nationalistic despite quasi-neoliberal rhetoric to the contrary. They pursued economic development as necessary for regime consolidation, national power and achieving their goals.

Catching-up?
Many observers correctly argue that MIT economies have not been consistently good at catching-up, which is only to be expected from experimenting. Nevertheless, their industrial policies have been effective in upgrading some firms and industries.

There is evidence of learning in aircraft, wood processing and automotive industries in Indonesia, and of substantial learning in palm oil processing and electronics in Malaysia, and agro-processing, cement, automotive parts, and component supplies in Thailand.

MIT governments and capitalists also learned from setbacks and failures without necessarily admitting to them, e.g., when governments took too much, or when government incentives failed, and policies had adverse consequences, even if unintended.

Sustaining growth, industrialization and technological progress remain preconditions for continuing income increases. Yet, all three now seem caught in so-called ‘middle income traps’. Escaping these traps will depend on the governing elites’ understanding of past progress.

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Did post-Soviet Russians drink themselves to death?http://www.ipsnews.net/2018/10/post-soviet-russians-drink-death/?utm_source=rss&utm_medium=rss&utm_campaign=post-soviet-russians-drink-death http://www.ipsnews.net/2018/10/post-soviet-russians-drink-death/#comments Tue, 23 Oct 2018 13:42:57 +0000 Vladimir Popov and Jomo Kwame Sundaram http://www.ipsnews.net/?p=158322 Although initially obscured by The Economist, among others, the sudden and unprecedented increase in Russian adult male mortality during 1992-1994 is no longer denied. Instead, the debate is now over why? Having advocated ‘shock therapy’, a ‘big bang’, ‘sudden’ or rapid post-Soviet transition, Jeffrey Sachs and others have claimed that the sudden collapse in Russian […]

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By Vladimir Popov and Jomo Kwame Sundaram
MOSCOW and KUALA LUMPUR, Oct 23 2018 (IPS)

Although initially obscured by The Economist, among others, the sudden and unprecedented increase in Russian adult male mortality during 1992-1994 is no longer denied. Instead, the debate is now over why?

Having advocated ‘shock therapy’, a ‘big bang’, ‘sudden’ or rapid post-Soviet transition, Jeffrey Sachs and others have claimed that the sudden collapse in Russian adult male life expectancy was due to a sudden increase in alcohol consumption, playing into popular foreign images of vodka-binging Russian men.

In Russia, vodka is a killer. Credit: Pavol Stracansky/IPS

In fact, the transition to the market economy and democracy in Eastern Europe and former Soviet republics dramatically reduced life expectancy owing to greater stress exacerbated by the nature and impact of the early post-Soviet transition under Boris Yeltsin, especially during his first term.

 

Did post-Soviet Russians drink much more vodka?

While alcohol consumption did increase greatly after Gorbachev’s anti-alcoholism campaign (1985-1987) ended, it never reached the highest Soviet level in 1984.

While there has been a strong correlation between alcohol consumption and the adult male mortality rate, there have been several periods when per capita alcohol consumption levels and death rates moved in opposing directions. In 2002-2007, for example, death rates from deliberately inflicted (‘external’) causes, including murder, suicide and poisoning, fell despite rising alcohol consumption.

Similarly, from 1960 to 1970, alcohol consumption increased from 4.6 to 8.5 litres per capita, according to official statistics (and from 9.8 to 12 litres, according to other estimates), whereas life expectancy did not change much, rising from 69 years in 1960 to 70 in 1965, and then falling back to 69 again in 1970.

 

How did much poorer Russians afford more vodka?

Not surprisingly, claims of strong correlations between lower alcohol prices, higher alcohol consumption and adult male mortality focus on the price effect without considering the income effect. While increased alcohol intake has been attributed to the lower relative prices of spirits in the early 1990s, it ignores the fact that real incomes fell even more sharply.

In fact, Russian vodka consumption has fallen sharply, by more than half, in recent decades, from over 200 billion litres in the early 1980s and 1990s, to about 100 billion litres in 2015. Meanwhile, the wine and beer shares of alcohol consumption have increased markedly.

Some studies claim that at least 30 per cent of alcohol consumption in Russia is unrecorded, and official figures understate drinking low cost alcohol with high toxicity. But this claim has no empirical support, even if only indirect.

Thus, the impact of increased alcohol intake on cardio-vascular diseases remains moot, with per capita alcohol consumption and death rates moving in opposite directions at times. Death rates due to deliberately inflicted (‘external’) causes, including murder, suicide and poisoning, fell despite rising alcohol consumption during 2002-2007.

 

How does vodka kill?

Some Western observers attributed as much as a third of total deaths in Russia to alcohol related causes. These are the highest estimates available, but are doubted by most other experts.

This very high share is much greater than official statistics which suggest that less than four per cent of deaths were due to alcohol consumption, i.e., alcohol poisoning, liver cirrhosis, alcoholism, and alcoholic psychosis. Some independent researchers have an intermediate position, attributing about 12 per cent of all deaths to alcohol-related causes.

Other observers argue that average alcohol consumption levels are not necessarily a good indicator of health risks. One such argument is that not all consumption of alcohol, but only of hard spirits, particularly vodka in the case of Russia, is responsible for the increased mortality.

 

Why did Russian life expectancy fall after Gorbachev?

Russia has long had extensive post-mortem causes of death data, having done autopsies for more than 60 per cent of all deaths, i.e., more than anywhere else. Some public health experts argue that while cardiovascular disease was the main cause of death, much of this was due to lethal levels of alcoholism.

Deaths from alcohol poisoning are widely regarded as the better indicator of excessive alcohol consumption compared to official production figures as liquor may be produced illegally within a country or smuggled into it.

Deaths from alcohol poisoning increased from 10 per 100,000 inhabitants in 1990-1991 to nearly 40 in 1994, exceeding the number due to suicide and murder. By 2007, however, such alcohol related deaths had fallen to late Soviet levels, even though the overall mortality rate remained well above the rate from those times.

 

Stress kills

There is growing evidence that stress kills, using extensive data on earlier declines in life expectancy among men in all former Soviet republics and East European countries. In Georgia, Armenia and Eastern Europe, mortality increased, lowering life expectancy, without increased drinking.

Only a few causes of male deaths during 1980–2013 were alcohol-related, e.g., accidental poisoning by alcohol, liver cirrhosis, ischemic heart diseases, stroke, travel accidents, and other ‘external’ causes.

The continuous decline in adult male mortality in Belarus and Russia cannot be fully explained by anti-alcohol policies, although such interventions probably contributed to the large mortality falls in both countries during 2005–2006, and in Belarus in 2012. These mortality declines coincided with and probably accelerated to already declining alcohol-related mortality.

All statistics and estimates agree that per capita alcohol consumption in the 1990s was equal to or lower than in the early 1980s, while deaths due to ‘external’ causes doubled, and the total death rate increased by half.

Thus, simultaneous increases in the total death rate, the death rate due to external causes and to alcohol consumption were all probably due to another factor, namely stress.

Jomo Kwame Sundaram, a former economics professor, was assistant director-general for Economic and Social Development, Food and Agriculture Organisation, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

Vladimir Popov is Research Director at the Dialogue of Civilizations Research Institute in Berlin

 

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Developing Countries Losing Out To Digital Giantshttp://www.ipsnews.net/2018/10/developing-countries-losing-digital-giants/?utm_source=rss&utm_medium=rss&utm_campaign=developing-countries-losing-digital-giants http://www.ipsnews.net/2018/10/developing-countries-losing-digital-giants/#respond Wed, 17 Oct 2018 10:37:54 +0000 Jomo Kwame Sundaram and Anis Chowdhury http://www.ipsnews.net/?p=158224 A new United Nations report warns that the potential benefits to developing countries of digital technologies are likely to be lost to a small number of successful first movers who have established digital monopolies. According to the Trade and Development Report 2018 (TDR 2018), subtitled ‘Power, Platforms and the Free Trade Delusion’, while developing countries […]

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By Jomo Kwame Sundaram and Anis Chowdhury
KUALA LUMPUR and SYDNEY, Oct 17 2018 (IPS)

A new United Nations report warns that the potential benefits to developing countries of digital technologies are likely to be lost to a small number of successful first movers who have established digital monopolies.

Jomo Kwame Sundaram

According to the Trade and Development Report 2018 (TDR 2018), subtitled ‘Power, Platforms and the Free Trade Delusion’, while developing countries need to invest more in digital infrastructure, they must also address the ownership and control of data and their use.

Developing countries will need to protect, and extend, available policy space to successfully integrate into the global digital economy. Stronger competition and regulatory frameworks will also require multilateral cooperation.

Digital concentration
Libertarian ‘light-touch’ regulatory frameworks have allowed powerful corporations to largely evade strict regulatory supervision and oversight, expand exclusively into lucrative related areas and limit policymakers’ influence. Digital monopolies have thus profitably ‘mined’ and processed data.

Of the top 25 big technology firms in terms of market capitalization, 14 are US based, with three in the European Union, three in China, four in other Asian countries and one in Africa.

In 2015, the top three big US technology firms had average market capitalization of more than $400 billion, compared to $200 billion in China, $123 billion in other Asian countries, $69 billion in Europe and $66 billion in Africa.
Apple recently became the first company in the world to be valued at more than $1 trillion, matching the combined economic output of Saudi Arabia and South Africa.

Anis Chowdhury

Such concentration and market dominance have ensured lucrative rents for the big players in the sector. For example, Amazon’s profits-to-sales ratio increased from 10 per cent in 2005 to 23 per cent in 2015, while Alibaba’s increased from 10 per cent in 2011 to 32 per cent in 2015!

These trends are largely due to the extraction, processing and sale of data. Digital platforms use their control over data to organize and mediate transactions along value chains. Network effects allow these platforms to expand these ecosystems utilizing feedback-driven processes.

The resulting market power, with stronger ‘property rights’ on the control and use of data, has enabled rentier and other uncompetitive practices. Thus, one cannot but be circumspect about the hype over ‘big data’ and ‘data revolution’. They rarely promote inclusive development, especially when left to ‘market’ or ‘self-regulation’.

Digital democracy?
TDR 2018 recommends active policies to check anti-competitive rent capture by digital platforms, and misuse of data. Antitrust and competition policies, historically concerned with market structure and behaviour, increasingly emphasize maximizing consumer welfare, using price-based measures.

In our increasingly digitized world, consumers receive services in exchange for surrendering their data, at zero nominal prices, i.e., for free. The control and use of such data enables the lucrative rentier activities associated with their use and abuse.

Policy options include stricter regulation of restrictive business practices and breaking up large firms responsible for market concentration. The digital world’s monopolistic tendencies should be regulated, and firms’ abilities to exploit their dominance restricted, e.g., the recent measures taken by the European Union against Google.

Developmental digitization?
For developing countries, the regulatory challenges to realize developmental gains from digitization are greater. Some countries are already using localization measures to develop domestic digital capacities and digital infrastructure.

But in most cases, data are owned by those who gather and store them, mainly digital super platforms, which then have full, exclusive and unlimited rights over the resource.

National data policies should be designed to address four major issues: who can own data, how data can be collected, who can use such data, and on what terms. They should also address the question of data sovereignty, e.g., which data can leave the country, and consequently are not governed by domestic law. South-South and regional cooperation can help small developing countries build their digital skills, capacities and capabilities.

Developing countries need to protect and expand available policy space to implement development strategies that should include digital policies with regard to data localization, data flow management, technology transfers and custom duties on electronic transmissions.

The international community is just beginning to discuss rules and regulations to improve them, before agreement is reached at the World Trade Organization and other multilateral bodies.

A premature commitment to rules with long-term impacts on fast-changing matters should be avoided, especially where powerful business interests remain influential and often dictate the very terms for discourse.

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Improving Infrastructure Planning In Developing Countrieshttp://www.ipsnews.net/2018/10/improving-infrastructure-planning-developing-countries/?utm_source=rss&utm_medium=rss&utm_campaign=improving-infrastructure-planning-developing-countries http://www.ipsnews.net/2018/10/improving-infrastructure-planning-developing-countries/#respond Tue, 09 Oct 2018 10:44:46 +0000 Jomo Kwame Sundaram and Anis Chowdhury http://www.ipsnews.net/?p=158066 Infrastructure investment is necessary, but hardly sufficient to enable developing countries to transform their economies to achieve sustainable prosperity, according to this year’s UNCTAD Trade and Development Report: Power, Platforms and the Free Trade Delusion (TDR 2018), released in late September. For various reasons, infrastructure projects in developing countries are receiving broad endorsement. Multilateral financial […]

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Road networks facing dereliction in many African nations like Zimbabwe (Pictured) could receive a lifeline from the Programme For Infrastructure Development in Africa. Credit: Jeffrey Moyo/IPS

By Jomo Kwame Sundaram and Anis Chowdhury
KUALA LUMPUR and SYDNEY, Oct 9 2018 (IPS)

Infrastructure investment is necessary, but hardly sufficient to enable developing countries to transform their economies to achieve sustainable prosperity, according to this year’s UNCTAD Trade and Development Report: Power, Platforms and the Free Trade Delusion (TDR 2018), released in late September.

For various reasons, infrastructure projects in developing countries are receiving broad endorsement. Multilateral financial institutions – such as the Asia Infrastructure Investment Bank – are scaling up investment, and several international initiatives – such as the Belt and Road Initiative of China – prioritize infrastructure. Yet, such efforts may still not accelerate industrialization.

Nevertheless, most recent discussions still tend to ignore how infrastructure was central to successful industrialization, from eighteenth century Britain to twenty-first century China. The crucial link between infrastructure and industrialization has been largely lost in a discourse focusing on the bankability of projects, viewing infrastructure as a financial asset for international institutional investors.

Infrastructure as business opportunity
UNCTAD’s analysis of over 40 developing countries’ national development plans suggests too much emphasis on infrastructure projects – which appeared in 90 per cent of them – as business opportunities. But, there was too little emphasis on accelerating structural transformation.

Despite infrastructure spending being likened to traditional public goods such as highways, ports and schools, recent policy debate typically denigrates the public sector, instead favouring private finance. The prevailing bankability approach tends to avoid addressing how infrastructure can enhance productivity, structural transformation as well as economic and social change in much of the developing world.

But bankability will not close the financing gaps for infrastructure investment. The total annual financing needs for needed infrastructure were recently estimated at between $4.6 trillion and $7.9 trillion, requiring far more government investment than is currently the case.

Most developing countries must double current infrastructure investment levels of less than 3 per cent of gross domestic product (GDP) to around 6 per cent for significant transformational impact.

Infrastructure investment needs have been estimated at 6.2 per cent against actual spending of 3.2 per cent of the GDP of Latin America and the Caribbean in 2015. Projected needs in Africa are around 5.9 per cent of regional GDP in 2016-2040, more than the current 4.3 per cent. Current and projected investment needs in Asia during 2016-2030 are estimated at around 5 per cent of GDP.

Infrastructure for structural transformation
TDR 2018 advocates putting infrastructure investment at the centre of national developmental strategies with more political will, experimentation and planning discipline. However, projects only aiming to maximize returns on investment rarely serve national development needs.

Albert Hirschman’s discussion of ‘unbalanced growth’ showed that sequencing and experimentation could better balance public infrastructure and private investment, thus breaking vicious circles standing in the way of development.

Although most plans were aligned with broader national strategies, they were not well developed or oriented to longer term strategic goals, with possible challenges and obstacles not well recognized.

The plans rarely specify how infrastructure development would enable industrialization, or identify tools to ensure infrastructure investments accelerate structural transformation, economic diversification and growth.

This ‘disconnect’ is mainly due to ascendant financial interests and related policy advice insisting on engaging the private sector in infrastructure development and planning and transforming Agenda 2030 to achieve the Sustainable Development Goals into lucrative private investment opportunities.

Policymakers are instead urged by UNCTAD to better plan how to accelerate structural transformation. Infrastructure and development are better connected when projects are well designed and integrated into a wider development strategy promoting positive feedback among infrastructure, productivity and growth.

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Trade War Due To Deeper Malaisehttp://www.ipsnews.net/2018/10/trade-war-due-deeper-malaise/?utm_source=rss&utm_medium=rss&utm_campaign=trade-war-due-deeper-malaise http://www.ipsnews.net/2018/10/trade-war-due-deeper-malaise/#comments Tue, 02 Oct 2018 13:48:29 +0000 Jomo Kwame Sundaram and Anis Chowdhury http://www.ipsnews.net/?p=157923 The world economy remains tepid and unstable a decade after the 2008 financial crisis, while growing trade conflicts are symptoms of deeper economic malaise, according to a new United Nations publication. While the global economy has picked up since early 2017, growth remains hesitant, with many countries operating below potential. The year ahead is unlikely […]

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Workers stitch Hanes tee-shirts at a factory in the CODEVI free trade zone in Ouanaminthe, Haiti. Credit: Jude Stanley Roy/IPS

By Jomo Kwame Sundaram and Anis Chowdhury
KUALA LUMPUR and SYDNEY, Oct 2 2018 (IPS)

The world economy remains tepid and unstable a decade after the 2008 financial crisis, while growing trade conflicts are symptoms of deeper economic malaise, according to a new United Nations publication.

While the global economy has picked up since early 2017, growth remains hesitant, with many countries operating below potential. The year ahead is unlikely to see much improvement as the world economy is under stress again, with rising tariffs and volatile financial flows.

Underlying such threats to global economic stability is the failure to address fundamental weaknesses in global economic governance which have been fostering global economic inequities and imbalances.

Addressing new challenges
UNCTAD’s Trade and Development Report 2018: Power, Platforms and the Free Trade Delusion (TDR 2018) makes proposals to address recent economic trends and challenges.

Jomo Kwame Sundaram

The report examines how economic power is increasingly concentrated in fewer big international firms, its impact on the ability of developing countries to benefit from the international trading system, and the distribution of gains from new digital technologies.

TDR 2018 notes that since 2008, many advanced countries have shifted from domestic to external sources of growth, with the eurozone becoming a trade surplus region.

While advanced economies have not done enough to rebalance the global economy, ‘normalizing’ unconventional monetary policies could rile capital and currency markets, with potentially vicious economic consequences in the more vulnerable emerging market economies.

Among countries relying on domestic demand, too many depend on higher debt and asset price bubbles, instead of raising wages. Meanwhile, growth is constrained by the omnipresent threat of financial instability, although the bigger emerging market economies are doing better this year, and commodity exporters can benefit while prices are high.

Anis Chowdhury

While Brazil, India, China and South Africa depend heavily on domestic demand, many other developing economies do not. With downside, including financial risks rising in several countries, TDR 2018 warns of gathering economic storm clouds.

The current $250 trillion debt stock – 50 per cent higher than a decade ago – is thrice the size of annual global output. Private, particularly corporate debt has been mainly behind this borrowing spree, but without financing corresponding real investments. Meanwhile, growing indebtedness has increased inequality through the financial markets.

Horns of trade dilemma
International trade remains dominated by large firms through their control of global value chains, with the top one per cent of each country’s exporting firms accounting for more than half its exports.

The spread of such chains accelerated trade growth from the end of the 20th century until the 2008 financial crisis, with some developing countries growing fastest. But the ratio of trade to growth has been rising, with much more trade associated with the same output increase. This has mainly benefited large firms by increasing market concentration and intellectual property.

Meanwhile, except for China, manufacturing’s share of value added has generally declined as the shares of pre- and post-production activities have risen. Such rents captured at both ends of the value chain have affected income distribution more generally.

Recent tariff increases are disrupting a trading system increasingly involving such value chains, although trade growth in 2018 is likely to reach 2017 levels. However, heightened uncertainty and reduced investment could have more damaging medium term consequences, particularly threatening for countries already facing financial distress.

Distributional consequences
By changing the profitability of firms in tradeable sectors, tariff hikes have distributional consequences affecting demand. After decades of disruptive trade liberalization, tariff war will not restore the status quo ante, but could cause massive disruptions.

Instead, UNCTAD argues that through global policy coordination, governments could avert continuing deterioration of income distribution and employment, at the root of recent economic crises. Hence, while globalization has rarely produced ‘win-win’ outcomes, neither trade nationalism nor further trade liberalization are appropriate.

After all, free trade has limited policy space for developing countries and reduced protections for working people and small businesses, while further enriching big firms.

TDR 2018 deems trade wars symptomatic of the deteriorating economic system and multilateral architecture, due to corporate political capture and rising inequality, with money used to gain political power and political power used to make money. As inward-looking options do not offer a way forward for most, the challenge is to make multilateralism work for all.

To avoid the errors of the 1930s, UNCTAD urges addressing new challenges while referring to the 1948 Havana Charter, the first multilateral effort to create a managed international trading system.

This must involve trade promotion contributing to both full employment and rising wages, restricting rentier corporate behaviour, while ensuring sufficient policy space to achieve the Sustainable Development Goals.

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New Trade Realities Cause Concernhttp://www.ipsnews.net/2018/09/new-trade-realities-cause-concern/?utm_source=rss&utm_medium=rss&utm_campaign=new-trade-realities-cause-concern http://www.ipsnews.net/2018/09/new-trade-realities-cause-concern/#comments Wed, 26 Sep 2018 10:41:10 +0000 Jomo Kwame Sundaram and Anis Chowdhury http://www.ipsnews.net/?p=157776 Trade liberalization, a key dimension of recent globalization, has failed to promote broad structural transformation in developing countries and has instead contributed to increased worldwide inequality, a new United Nations report shows. The Trade and Development Report 2018: Power, Platforms and the Free Trade Delusion (TDR 2018) suggests that the profits surge and growing concentration […]

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The majority of Cambodia’s exports to the European Union (EU), are textiles such as garments and shoes. Credit: Michelle Tolson/IPS

By Jomo Kwame Sundaram and Anis Chowdhury
KUALA LUMPUR and SYDNEY , Sep 26 2018 (IPS)

Trade liberalization, a key dimension of recent globalization, has failed to promote broad structural transformation in developing countries and has instead contributed to increased worldwide inequality, a new United Nations report shows.

The Trade and Development Report 2018: Power, Platforms and the Free Trade Delusion (TDR 2018) suggests that the profits surge and growing concentration of large transnational corporations, have depressed labour’s global income share, worsening income inequality.

The UN report also finds that policies that helped China to successfully develop, diversify and upgrade are now being discouraged, if not blocked, by developed countries influenced by transnational corporations threatened by such policies.

Despite long-standing concerns in developing countries about the international trading system, heightened recent anxiety in developed countries has strengthened scepticism about the supposedly shared benefits of trade liberalization.

Jomo Kwame Sundaram

More positive attitudes to trade liberalization will require more than seductive, but also deceptive slogans such as ‘freer trade lifts all boats’. Instead, a new momentum based on a more inclusive and developmental trade agenda is needed, reflecting the raison d’etre of the United Nations Conference on Trade and Development (UNCTAD), the TDR’s author.

Trade-induced structural change?
While the growing role of developing countries in international trade has been important for recent globalization, the ‘rise of the Rest’ – mainly developing countries or the ‘South’ – is a mainly East Asian story.

TDR 2018 shows that rapid export growth mainly came from the first-tier East Asian newly industrialized economies, and then China. Meanwhile, developed countries’ share of world exports declined, from nearly three-quarters of gross merchandise exports in 1986, to just over half in 2016. Export shares in most other developing countries remained constant or declined, except when commodity prices rose.

China stands out among the BRICS, whose share of world income soared from 5.4 per cent to 22.2 per cent during this period. Without China, the share of Russia, India, Brazil and South Africa in global output only rose from 3.7 per cent in 1990 to 7.4 per cent in 2016.

Anis Chowdhury

In 2016, East Asia accounted for about 70 per cent of all developing countries’ manufactured exports. Only East Asian developing economies have headquarters of leading transnational corporations. Of the world’s top 2,000 transnational corporations, transnational corporations’ share of profits rose from 7 per cent in 1995 to over 26 per cent in 2015.

More exports, less diversity
As developing countries increasingly rely on global market access, their exports have generally become less diverse. TDR 2018 associates these trends with spreading global value chains and the challenges of ‘catching up’ without a strong ‘developmental state’.

In fact, such value chains have long characterized commodity trade. Since 1995, 18 of the 27 developing countries with the relevant data had increased shares of extractive industries in export value added.

But, except for China, spreading global value chains have seen declining shares of domestic value added in gross exports. Except in East Asia, there is little evidence of ‘upgrading’ in these chains. While growing demand from China has stimulated growth in many developing countries in recent decades, it has not enhanced or diversified their export profiles.

Unfair trade
Size matters for corporate behaviour, both at home and abroad. Trade has been dominated by big firms, especially since the mid-1990s. Among exporting firms, the top percentile accounted for 60 per cent of exports, while an average of ten firms accounted for 40 per cent of exports.

Unsurprisingly, new entrants and smaller exporters have low survival rates, with three quarters giving up exports after two years, with developing country firms faring worse than their developed country counterparts.

Besides ‘hollowing out’ due to ‘offshoring’ from advanced economies, the income shares of low and medium skilled production workers in most developing country value chains besides China have been declining due to fabrication’s falling share of value added.

Size also matters for profitability, with the rapid profit growth of the top 2,000 firms depressing global labour income share. Worsening inequality attributed to trade is due to more profits from ‘intangible assets’, higher headquarters’ incomes, and cutting production costs.

Many big international firms engage in trade resulting in greater income flows to low-tax or no-tax jurisdictions. Payments for intellectual property have risen sharply in the last two decades in countries such as Ireland, Luxembourg, the Netherlands and Switzerland. Transnational corporate incomes in such locations have been rising far more than where their products are made or sold.

Policy space
TDR 2018 concludes that the problem is not with trade per se, but rather with its management and regulation. Rhetoric about ‘win-win’ solutions typically obscures how benefits can be more broadly shared.

UNCTAD argues that South-South trade agreements are less susceptible to such abuses of corporate power and influence. In contrast, policy space has been increasingly constrained by typical free trade agreements, reflecting powerful corporate influences via opaque negotiations.

Such agreements augment corporate profits, especially through ‘non-trade’ provisions. Inter alia, such clauses enhance intellectual property rights, cross-border capital flows, investor-state dispute settlement procedures, and harmonization of regulatory standards.

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Another global financial crisis for developing countries?http://www.ipsnews.net/2018/09/another-global-financial-crisis-developing-countries/?utm_source=rss&utm_medium=rss&utm_campaign=another-global-financial-crisis-developing-countries http://www.ipsnews.net/2018/09/another-global-financial-crisis-developing-countries/#respond Tue, 18 Sep 2018 09:05:35 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=157656 George Soros, Bill Gates and other pundits have been predicting another financial crisis. In their recent book, Revolution Required: The Ticking Bombs of the G7 Model, Peter Dittus and Herve Hamoun, former senior officials of the Bank of International Settlements, warned of ‘ticking time bombs’ in the global financial system waiting to explode, mainly due […]

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By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY & KUALA LUMPUR, Sep 18 2018 (IPS)

George Soros, Bill Gates and other pundits have been predicting another financial crisis. In their recent book, Revolution Required: The Ticking Bombs of the G7 Model, Peter Dittus and Herve Hamoun, former senior officials of the Bank of International Settlements, warned of ‘ticking time bombs’ in the global financial system waiting to explode, mainly due to the policies of major developed countries.

Anis Chowdhury

Recent events vindicate such fears. Many emerging market currencies have come under considerable pressure, with the Indonesian rupiah, Indian rupee and South African rand all struggling since early this year. Brazil’s real fell sharply in June, and Argentina has failed to stabilize its peso despite seeking IMF aid. As Turkey struggles to stabilize its lira, many European banks’ exposure has heightened fears of another global financial crisis.

Why the vulnerability?
Some fundamental weaknesses are at the core of this vulnerability. These include the international financial ‘non-system’ since the collapse of the Bretton Woods system in 1971, and continuing to use the US dollar as the main international reserve currency.

This burdens deficit countries vis-à-vis surplus countries and ensures near-universal vulnerability to US monetary policy. Thus, most countries accumulate dollars as a precaution, i.e., for ‘protection’, eschewing other options, such as investing in socially desirable projects.

Policy makers not only failed to address these weaknesses following the 2008-2009 global financial crisis (GFC), but also compounded other problems. Having eschewed stronger, more sustained fiscal policy interventions, monetary policy virtually became the sole policy instrument. Major central banks, led by the US Federal Reserve, embarked on ‘unconventional monetary policies’, pushing real interest rates down, even into negative territory.

Jomo Kwame Sundaram

Emerging and developing economies (EDEs) offering higher returns temporarily experienced large short-term capital inflows. The external debt of emerging market economies has grown to over $40 trillion since the GFC. The combined debt of 26 large emerging markets rose from 148% of gross domestic product (GDP) at the end of 2008 to 211% in September 2017, according to the Institute of International Finance (IIF).

Easy money raised household and corporate debt, fuelling property and financial asset price bubbles. According to the International Monetary Fund (IMF) April 2018 Fiscal Monitor, global debt peaked at $164 trillion in 2016, or 225% of global GDP, compared to 125% before the GFC. The IIF reported that global debt rose to over $247 trillion in early 2018, i.e., equivalent to 318% of GDP.

Rising debt levels pose serious downside risks for the global economy. With easy money coming to an end, as the Fed continues to ‘normalize’ monetary policy by raising the policy interest rate, capital flight to the US is undermining emerging market currencies. When debt defaults increase with interest rates while income growth remains subdued, the world becomes more vulnerable to financial crisis.

Diminished capacities
Both developed and developing countries have less policy space than during the GFC. Most governments are saddled with more debt following massive financial bail outs followed by abandonment of efforts to sustain robust recovery.

According to the IMF’s April 2018 Fiscal Monitor, average public debt of advanced economies was 105% of GDP in 2017, constraining fiscal capacity to respond to crisis. Meanwhile, monetary policy options are exhausted after a decade of ‘unconventional’ monetary policies.

General government debt-to-GDP ratios in emerging market and middle-income economies almost reached 50% in 2017 — a level only seen during the 1980s’ debt crisis. The 2017 ratio exceeded 40% in low-income developing countries, climbing by more than ten percentage points since 2012.

Playing With Fire
by Yilmaz Akyuz, former South Centre chief economist, has highlighted the self-inflicted vulnerabilities of developing countries. Public debt-GDP ratios in EDEs are likely to rise due to falling commodity prices and stagnant global trade, while they have almost no monetary policy independence due to deeper global financial integration.

Weaker global growth
While corporate sectors have been busy with mergers, acquisitions and share buybacks with cheap credit, instead of investing in the real economy, the financial sector has successfully portrayed sovereign debt as ‘public enemy number one’.

Held hostage to finance capital, governments around the world have wasted the opportunity to improve productive capacities by investing in infrastructure and social goods when real interest rates were at historic lows. At around 24% of global GDP, the global investment rate remains below the pre-crisis level of around 27%, with investment rates in EDEs either declining or stagnant since 2010.

Failure to address the falling wages’ share of GDP, rising executive pay and asset price bubbles, due to ‘easy’ monetary policy, have continued to worsen growing income inequality and wealth concentration. Meanwhile, deep cuts in government spending and public services, while reducing top tax rates, cause anger and resentment, often blamed on ‘the other’, contributing to the spread of ‘ethno-populism’.

In turn, growing inequality limits aggregate demand, which has been maintained by unsustainably raising household debt, i.e., perverse ‘financial inclusion’.

Perfect storm?
Turbulence in currency markets is due to developing countries’ limited economic policy space. A decade after the GFC, developing countries still experience lower growth and investment rates.

Financial sectors of emerging market economies now have more and deeper links with international financial markets, also reflected in high foreign ownership of stocks and government bonds, with large sudden capital outflows causing financial crises.

Meanwhile, recent commodity price drops have accelerated the rising indebtedness of low-income countries. According to the IMF, 24 out of 60 (40%) are now either already facing debt crises or are highly vulnerable—twice as many as five years ago, with a few already seeking Fund bail-outs.

The problem is compounded by declining concessional aid from OECD countries. Also, more creditors are not part of the Paris Club, obliged to deal with sovereign debt on less onerous terms. Meanwhile, growing trade and currency conflicts are worsening the woes of those already worse-off.

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Great Recession, greater illusionshttp://www.ipsnews.net/2018/09/great-recession-greater-illusions/?utm_source=rss&utm_medium=rss&utm_campaign=great-recession-greater-illusions http://www.ipsnews.net/2018/09/great-recession-greater-illusions/#comments Tue, 11 Sep 2018 08:01:04 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=157551 In 2009, the world economy contracted by -2.2%. Growth in all developing countries declined from around 8% in 2007 to 2.6% in 2009 as the developed world contracted by -3.8% in 2009. The collapse of the Lehmann Brothers investment bank in September 2008 symbolized the US financial crisis that triggered the Great Recession of 2008-2009. […]

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By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Sep 11 2018 (IPS)

In 2009, the world economy contracted by -2.2%. Growth in all developing countries declined from around 8% in 2007 to 2.6% in 2009 as the developed world contracted by -3.8% in 2009. The collapse of the Lehmann Brothers investment bank in September 2008 symbolized the US financial crisis that triggered the Great Recession of 2008-2009.

Demonstrations against austerity measures in Athens (May, 2010). Credit: Nikos Pilos/IPS

Demise of Keynesian consensus
In its immediate aftermath, a new consensus reversed the neoliberal Washington Consensus of the last two decades of the 20th century. Proclaimed by the G20’s London Summit of 2 April 2009, it envisaged return to Keynesian macroeconomic policies, including large-scale fiscal stimulus, supported by expansionary monetary policy.

The new policies were largely successful in tempering the recession, although much more should have been done. But with modest recovery, public debt, not economic stagnation, was soon sold as public enemy number one again.

G20 leaders at the June 2010 Toronto Summit turned to ‘fiscal consolidation’, with monetary policy accommodation to ‘contain’ its contractionary consequences, and ‘structural’ (mainly labour market) reforms, ostensibly to boost growth, especially in advanced economies. Meanwhile, despite G20 leaders’ pledges eschewing protectionism, trade restrictions grew.

Synchronized fiscal consolidation precipitated some Eurozone sovereign debt crises. Soon, several Eurozone countries experienced double dip recessions, as unemployment in Greece and Spain rose well over 25% following punitive policies required to qualify for European Union and International Monetary Fund (IMF) funding which mainly went to creditors.

Economists’ complicity
Misleading, ideologically-driven empirical analyses claimed to support the new policy reversal. Alesina and his associates promoted the idea of ‘expansionary fiscal consolidation’, that contractionary government expenditure cuts would be more than offset by private spending expansion due to boosted investor confidence.

Then, Reinhart and Rogoff exaggerated the dangers of domestic debt accumulation. Although soon exposed for major methodological flaws and suppressing relevant information, these studies had served their purpose.

The IMF Fiscal Monitor ahead of the June 2010 G20 Summit grossly exaggerated public debt’s destabilizing effects, advocating rapid fiscal consolidation instead. Later, the IMF admitted it had underestimated the fiscal multiplier and hence potential growth from such debt!
Faltering recovery and rising unemployment in the Eurozone caused the public debt-GDP ratio to rise instead. Meanwhile, supposedly unavoidable short-term pain caused prolonged suffering for millions without the promised medium- and long-term gains.

UN ahead of the curve
Besides the Bank of International Settlements’ legendary William White, the United Nations was ahead of the curve, not only in warning of the impending crisis, but also by providing appropriate policy advice, albeit largely ignored.

For example, the United Nations 2006 and 2007 World Economic Situation and Prospects (WESP) warned of instability and growth slowdowns due to disorderly adjustment of growing macroeconomic imbalances among major world economies. WESP warned that falling US house prices could cause defaults to spike, triggering bank crises.

The IMF and the OECD simply ignored such warnings, projecting rosy futures, and a ‘soft landing’ at worst. The April 2007 IMF World Economic Outlook (WEO) emphatically dismissed widely held concerns about disorderly unwinding of global imbalances, claiming economic risks had subsided. The July 2007 issue claimed: “The strong global expansion is continuing, and projections for global growth in both 2007 and 2008 have been revised up”.

The OECD June 2007 Economic Outlook insisted that the US slowdown was not heralding a period of worldwide economic weakness. “Rather, a ‘smooth’ rebalancing was to be expected, with Europe taking over the baton from the United States in driving OECD growth… Indeed, the current economic situation is in many ways better than what we have experienced in years.”

Although the IMF’s November 2008 WEO belatedly acknowledged the crisis’ severity, it forecast global recovery of 2.2% in 2009, suggesting the worst was over, thus supporting the reversal from fiscal expansion to consolidation. Depicting the ‘green shoots’ of recovery as self-sustaining, fiscal stimulus was abandoned after selective financial bailouts.

The IMF and OECD recommendations of structural reforms and fiscal consolidation have since failed to provide the long awaited, sustained global economic recovery.

The President of the UN General Assembly set up a commission led by Nobel laureate Joseph Stiglitz to study the crisis’ impact, especially for development, and recommend policies to prevent future crises. Yet, most remain unaware of its wide-ranging findings and policy recommendations, including international financial architecture reforms and reregulating finance to better serve the real economy.

The UN Secretary-General proposed a Global Green New Deal in 2009 to accelerate economic recovery and job creation while addressing sustainable development, climate change and food security. It envisioned massive, multilateral, cross-subsidized public investments in renewable energy and smallholder food production in developing countries.

The UN also consistently advocated policy coordination and warned against prematurely ending recovery efforts.

Missed opportunity, heightened vulnerability
With UN and similar policy advice largely ignored, global economic recovery has remained tepid for the last decade. This has prompted the ‘secular stagnation’ thesis obscuring the role of political and policy failures and missed opportunities.

Unconventional monetary policy, e.g., ‘quantitative easing’, has also widened income and wealth gaps besides fuelling financial asset bubbles. Earlier capital inflows are now exiting following monetary policy normalization in the West and new fears of emerging market vulnerabilities.

Having failed to ensure robust recovery despite accumulating more debt, both developed and developing countries have less policy and fiscal space to address the looming problems threatening them.

Meanwhile, the redistributive potential of fiscal policy has been weakened by reducing progressive direct taxes and increasing regressive indirect taxes, while cutting social expenditure. Also, powerful vested interests have blocked attempts to limit obscene executive remuneration and enforce minimum wages, arguing that such measures discourage business and job creation.

Also, the hyped notion of ‘inclusive inequality’ has served to justify rising economic disparities, by arguing that deregulation has enabled wealth accumulation and middle class expansion.

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Revisiting privatization’s claimshttp://www.ipsnews.net/2018/09/revisiting-privatizations-claims/?utm_source=rss&utm_medium=rss&utm_campaign=revisiting-privatizations-claims http://www.ipsnews.net/2018/09/revisiting-privatizations-claims/#respond Tue, 04 Sep 2018 15:31:09 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=157453 Advocates made exaggerated claims that privatization would reduce governments’ fiscal problems while ensuring more efficient, productive and competitive economies by promoting private entrepreneurship, innovation and investments.

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Scene from Djibouti Port. Credit: James Jeffrey/IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Malaysia, Sep 4 2018 (IPS)

Several arguments have been advanced to justify privatization since the 1980s. Privatization has been advocated as an easy means to:
1. Reduce the government’s financial and administrative burden, particularly by undertaking and maintaining services and infrastructure;
2. Promote competition, improve efficiency and increase productivity in providing public services;
3. Stimulate private entrepreneurship and investment to accelerate economic growth;
4. Help reduce the public sector’s presence and size, with its monopolistic tendencies and bureaucratic support.

Moot case for privatization
First, privatization is supposed to reduce the government’s financial and administrative burdens, particularly in providing services and infrastructure. Earlier public sector expansion was increasingly seen as the problem, rather than part of the solution. Thus, reducing the government’s role and burden was expected to be popular.

Jomo Kwame Sundaram. Credit: FAO

Second, privatization was believed by some to be a means to promote competition, improve efficiency and increase productivity in service delivery. This belief was naïve, confusing the question of ownership with that of promoting competition.

It was believed that privatization would somehow encourage competition, not recognizing that competition and property rights are distinct, and not contingent issues. Associated with this was the presumption that competition would automatically result in greater efficiency as well as improved productivity, not recognizing economies of scale and scope in many instances.

Third, privatization was expected to stimulate private entrepreneurship and investment. There is also a popular, but naïve belief that privatization was going to stimulate private entrepreneurship when, in fact, the evidence is strong, in Malaysia and elsewhere, that privatization often crowds out the likelihood of small and medium-sized enterprises actually emerging to fill the imagined void, presumed to exist following privatization.

Admittedly, there is scope for new entrepreneurship with privatization as new ways and ideas offered by the private sector are considered – or reconsidered – as the new privatized entity seeks to maximize the profits/rents to be secured with privatization.

However, the private purchase of previously public property, in itself, does not augment real economic assets. Private funds are thus diverted, to take over SOEs, and consequently diminished, rather than augmented. Hence, private funds are less available for investing in the real economy, in building new economic capacities and capabilities.

Fourth, privatization was supposed to reduce public sector monopolies, but there is often little evidence of significant erosion of the monopolies enjoyed by privatized SOEs. Arguably, technological change and innovation, e.g., in telecommunications, were far more significant in eroding privatized monopolies and reducing costs to consumers, than privatization per se.

From the 1980s, if not before, various studies have portrayed the public sector as a cesspool of abuse, inefficiency, incompetence and corruption. Books and articles, often with clever titles such as ‘vampire state’, ‘bureaucrats in business’ and so on, provided the justification for privatization.

Undoubtedly, there were some real horror stories, which have been conveniently and frequently cited as supposedly representative of all SOEs. But other experiences can also be cited to show that SOEs can be run quite efficiently, even on commercial bases, confounding the dire predictions of the prophets of public sector doom.

Has privatization improved efficiency?
Although some SOEs have been better run and are deemed more efficient after privatization, the overall record has hardly been consistent. Thus, it is important to ascertain when and why there have been improvements, or otherwise. It is also important to remember that better-run privatized SOEs, in and of themselves, do not necessarily serve the national or public interest better.

Undoubtedly, most SOEs can be better run and become more efficient. But this is not always the case as some SOEs are indeed already well run. For instance, very few privatization advocates would insist that most SOEs in Singapore are poorly run.

As its SOEs are generally considered well-run, public ownership is not used there to explain poor governance, management or abuse; instead, public ownership is recognized there as the reason for public accountability, better governance and management.

Principal-agent managerial delegation dilemma
Hence, in different contexts, with appropriately strict supervision, SOEs can be and have indeed been better run. Privatization, in itself, does not solve managerial delegation problems, i.e., the principal-agent problem, as it is not a problem of public ownership per se.

With SOEs, the principal is the state or the government while the agents are the managers and supervisors, who may — or may not — pursue the objectives intended by the principal.

This is a problem faced by many organizations. It is also a problem for private enterprises or corporations, especially large ones, especially where the principal (shareholders) may not be able to exercise effective supervision or control over the agent.

Also, natural monopolies (such as public utilities) are often deemed inefficient due to the monopolistic nature of the industry or market. The question which arises then is whether private monopoly is better, even with regulation intended to protect the public interest.

The answer needs to be ascertained analytically on the basis of evidence, and cannot be presumed a priori. If an industry is a natural monopoly, what does privatization achieve? Often, it means a transfer to private hands, which can be problematic and possibly dangerous for the public interest.

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Advocates made exaggerated claims that privatization would reduce governments’ fiscal problems while ensuring more efficient, productive and competitive economies by promoting private entrepreneurship, innovation and investments.

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Has Globalization Enhanced Development Cooperation?http://www.ipsnews.net/2018/08/globalization-enhanced-development-cooperation/?utm_source=rss&utm_medium=rss&utm_campaign=globalization-enhanced-development-cooperation http://www.ipsnews.net/2018/08/globalization-enhanced-development-cooperation/#comments Tue, 21 Aug 2018 15:05:52 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=157295 Protracted economic stagnation in rich countries continues to threaten the development prospects of poorer countries. Globalization and economic liberalization over the last few decades have integrated developing countries into the world economy, but now that very integration is becoming a threat as developing countries are shackled by the knock-on effects of the rich world’s troubles. […]

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Colombo, Sri Lanka. Credit: Amantha Perera/IPS.

By Jomo Kwame Sundaram
KUALA LUMPUR, Aug 21 2018 (IPS)

Protracted economic stagnation in rich countries continues to threaten the development prospects of poorer countries. Globalization and economic liberalization over the last few decades have integrated developing countries into the world economy, but now that very integration is becoming a threat as developing countries are shackled by the knock-on effects of the rich world’s troubles.

 

Trade interdependence at risk

As a consequence of increased global integration, growth in developing countries relies more than ever on access to international markets. That access is needed, not only to export products, but also to import food and other requirements. Interdependence nowadays, however asymmetric, is a two-way street, but with very different traffic flows.

Jomo Kwame Sundaram

Unfortunately, the trade effects of the crisis have been compounded by their impact on development cooperation efforts, which have been floundering lately. In 1969, OECD countries committed to devote 0.7% of their Gross National Income in official development assistance (ODA) to developing countries. But the total in 2017 reached only $146.6 billion, or 0.31% of aggregate gross national income – less than half of what was promised.

In 2000, UN member states adopted the Millennium Development Goals to provide benchmarks for tackling world poverty, revised a decade and a half later with the successor Sustainable Development Goals. But all serious audits since show major shortfalls in international efforts to achieve the goals, a sober reminder of the need to step up efforts and meet longstanding international commitments, especially in the current global financial crisis.

 

Aid less forthcoming

Individual countries’ promises of aid to the least developed countries (LDCs) have fared no better, while the G-7 countries have failed to fulfill their pledges of debt forgiveness and aid for poorer countries that they have made at various summits over the decades.

At the turn of the century, development aid seemed to rise as a priority for richer countries. But, having declined precipitously following the Cold War’s end almost three decades ago, ODA flows only picked up after the 9/11 or September 11, 2001, terrorist attacks. The Monterrey Consensus, the outcome of the 2002 first ever UN conference on Financing for Development, is now the major reference for international development financing.

But, perhaps more than ever before, much bilateral ODA remains ‘tied’, or used for donor government projects, rendering the prospects of national budgetary support more remote than ever. Tied aid requires the recipient country to spend the aid received in the donor country, often on overpriced goods and services or unnecessary technical assistance. Increasingly, ODA is being used to promote private corporate interests from the donor country itself through ostensible ‘public-private partnerships’ and other similar arrangements.

Not surprisingly, even International Monetary Fund staff have become increasingly critical of ODA, citing failure to contribute to economic growth. However, UN research shows that if blatantly politically-driven aid is excluded from consideration, the evidence points to a robust positive relationship. Despite recent efforts to enhance aid effectiveness, progress has been modest at best, not least because average project financing has fallen by more than two-thirds!

 

Debt

Debt is another side of the development dilemma. In the last decade, the joint IMF-World Bank Heavily Indebted Poor Countries initiative and its extension, the supplementary Multilateral Debt Relief initiative, made some progress on debt sustainability. But debt relief is still not treated as additional to ODA. The result is ‘double counting’ as what is first counted as a concessional loan is then booked again as a debt write-off.

At the 2001 LDCs summit in Brussels, developed countries committed to providing 100% duty-free and quota-free (DFQF) access for LDC exports. But actual access is only available for 80% of products, and anything short of full DFQF allows importing countries to exclude the very products that LDCs can successfully export.

Unfortunately, many of the poorest countries have been unable to cope with unsustainable debt burdens following the 2008-2009 financial crisis. Meanwhile, there has been little progress towards an equitable and effective sovereign-debt workout framework despite the debilitating Argentine, Greek and other crises.

 

Technology gap

In addition to facing export obstacles, declining aid inflows, and unsustainable debt, the poorest countries remain far behind developed countries technologically. Affordable and equitable access to existing and new technologies is crucial for human progress and sustainable development in many areas, including food security and climate-change mitigation and adaptation.

The decline of public-sector research and agricultural-extension efforts, stronger intellectual-property claims and greater reliance on privately owned technologies have ominous implications, especially for the poor. The same is true for affordable access to essential medicines, on which progress remains modest.

An international survey in recent years found that such medicines were available in less than half of poor countries’ public facilities and less than two-thirds of private facilities. Meanwhile, median prices were almost thrice international reference prices in the public sector, and over six times as much in the private sector!

Thus, with the recent protracted stagnation in many rich countries, fiscal austerity measures, growing protectionism and other recent developments have made things worse for international development cooperation.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Demonizing State-Owned Enterpriseshttp://www.ipsnews.net/2018/08/demonizing-state-owned-enterprises/?utm_source=rss&utm_medium=rss&utm_campaign=demonizing-state-owned-enterprises http://www.ipsnews.net/2018/08/demonizing-state-owned-enterprises/#respond Tue, 14 Aug 2018 12:28:11 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=157208 To make the case for privatization from the 1980s, their real problems were often caricatured and exaggerated.

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Privatization has not provided the miracle cure for the problems (especially the inefficiencies) associated with the public sector. Credit: IPS

Privatization has not provided the miracle cure for the problems (especially the inefficiencies) associated with the public sector. Credit: IPS

By Jomo Kwame Sundaram
KUALA LUMPUR , Aug 14 2018 (IPS)

Historically, the private sector has been unable or unwilling to affordably provide needed services. Hence, meeting such needs could not be left to the market or private interests. Thus, state-owned enterprises (SOEs) emerged, often under colonial rule, due to such ‘market failure’ as the private sector could not meet the needs of colonial capitalist expansion.

Thus, the establishment of government departments, statutory bodies or even government-owned private companies were deemed essential for maintaining the status quo and to advance state and private, particularly powerful and influential commercial interests.

Jomo Kwame Sundaram. Credit: FAO

SOEs have also been established to advance national public policy priorities. Again, these emerged owing to ‘market failures’ to those who believe that markets would serve the national interest or purpose.

However, neoliberal or libertarian economists do not recognize the existence of national or public interests, characterizing all associated policies as mere subterfuges for advancing particular interests under such guises.

Nevertheless, regardless of their original rationale or intent, many SOEs have undoubtedly become problematic and often inefficient. Yet, privatization is not, and has never been a universal panacea for the myriad problems faced by SOEs.

 

Causes of inefficiency

Undoubtedly, the track records of SOEs are very mixed and often vary by sector, activity and performance, with different governance and accountability arrangements. While many SOEs may have been quite inefficient, it is crucial to recognize the causes of and address such inefficiencies, rather than simply expect improvements from privatization.

First, SOEs often suffer from unclear, or sometimes even contradictory objectives. Some SOEs may be expected to deliver services to the entire population or to reduce geographical imbalances.

Other SOEs may be expected to enhance growth, promote technological progress or generate jobs. Over-regulation may worsen such problems by imposing contradictory rules.

Privatization has never been a universal panacea. One has to understand the specific nature of a problem; sustainable solutions can only come from careful understanding of the specific problems to be addressed.

To be sure, unclear and contradictory objectives – e.g., to simultaneously maximize sales revenue, address disparities and generate employment — often mean ambiguous performance criteria, open to abuse.

Typically, SOE failure by one criterion (such as cost efficiency) could be excused by citing fulfillment of other objectives (such as employment generation). Importantly, such ambiguity of objectives is not due to public or state ownership per se.

Second, performance criteria for evaluating SOEs — and privatization — are often ambiguous. SOE inefficiencies have often been justified by public policy objectives, such as employment generation, industrial or agricultural development, accelerating technological progress, regional development, affirmative action, or other considerations.

Ineffective monitoring, poor transparency and ambiguous accountability typically compromise SOE performance. Inadequate accountability requirements were a major problem as some public sectors grew rapidly, with policy objectives very loosely and broadly interpreted.

Third, coordination problems have often been exacerbated by inter-ministerial, inter-agency or inter-departmental rivalries. Some consequences included ineffective monitoring, inadequate accountability, or alternatively, over-regulation.

 

Hazard

Moral hazard has also been a problem as many SOE managements expected sustained financial support from the government due to weak fiscal discipline or ‘soft budget constraints’. In many former state-socialist countries, such as the Soviet Union and Yugoslavia, SOEs continued to be financed regardless of performance.

Excessive regulation has not helped as it generally proves counter-productive and ultimately ineffective. The powers of SOEs are widely acknowledged to have been abused, but privatization would simply transfer such powers to private hands.

Very often, inadequate managerial and technical skills and experience have weakened SOE performance, especially in developing countries, where the problem has sometimes been exacerbated by efforts to ‘nationalize’ managerial personnel.

Often, SOE managements have lacked adequate or relevant skills, but have also been constrained from addressing them expeditiously. Privatization, however, does not automatically overcome poor managerial capacities and capabilities.

Similarly, the privatization of SOEs which are natural monopolies (such as public utilities) will not overcome inefficiencies due to the monopolistic or monopsonistic nature of the industry or market. The key remaining question is whether privatization is an adequate or appropriate response to address SOE problems.

 

Throwing baby out with bathwater

SOEs often enjoy monopolistic powers, which can be abused, and hence require appropriate checks and balances. In this regard, there are instances where privatization may well be best. Two examples from Britain and Hungary may be helpful.

The most successful case of privatization in the United Kingdom during the Thatcher period involved National Freight, through a successful Employee Stock Ownership Plan (ESOP). Thus, truck drivers and other staff co-owned National Freight and developed personal stakes in ensuring its success.

In Hungary, the state became involved in running small stores. Many were poorly run due to over-centralized control. After privatization, most were more successfully run by the new owners who were previously store managers.

Hence, there are circumstances when privatization can result in desirable outcomes, but a few such examples do not mean that privatization is the answer to all SOE problems.

Privatization has never been a universal panacea. One has to understand the specific nature of a problem; sustainable solutions can only come from careful understanding of the specific problems to be addressed.

 

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Excerpt:

To make the case for privatization from the 1980s, their real problems were often caricatured and exaggerated.

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Global Economy Vulnerable a Decade Afterhttp://www.ipsnews.net/2018/07/global-economy-vulnerable-decade/?utm_source=rss&utm_medium=rss&utm_campaign=global-economy-vulnerable-decade http://www.ipsnews.net/2018/07/global-economy-vulnerable-decade/#respond Mon, 30 Jul 2018 14:32:37 +0000 Anis Chowdhury and Jomo Kwame Sundaram http://www.ipsnews.net/?p=156954 Ten years ago, deteriorating confidence in the value of US sub-prime mortgages threatened a liquidity crisis. The US Federal Reserve injected considerable capital into the market, but could not prevent the 2008-2009 global financial crisis (GFC). The 2008 meltdown exposed the extent of finance-led international economic integration, with countries more vulnerable to financial contagion and […]

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By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY & KUALA LUMPUR, Jul 30 2018 (IPS)

Ten years ago, deteriorating confidence in the value of US sub-prime mortgages threatened a liquidity crisis. The US Federal Reserve injected considerable capital into the market, but could not prevent the 2008-2009 global financial crisis (GFC).

The 2008 meltdown exposed the extent of finance-led international economic integration, with countries more vulnerable to financial contagion and related policy ‘spillovers’ exacerbating real economic volatility. It also revealed some vulnerabilities of the post-Second World War (WW2) US-centred international financial ‘architecture’ – the Bretton Woods system – modified after its breakdown in the early 1970s.

Jomo Kwame Sundaram

Robert Triffin, the leading international monetary economist of his generation, had long expressed concerns about the use of a national currency as the major reserve currency. International liquidity provision using the greenback required the US to run balance-of-payments deficits, ensuring US monetary policy spillovers to the world economy while eroding confidence in the greenback.

The Bretton Woods system was under increasing strain from the late 1960s, as US President Johnson funded the increasingly unpopular Vietnam War by issuing debt, rather than through higher taxes. The system finally broke down when the Nixon administration unilaterally cancelled the US commitment to dollar (gold) convertibility in August 1971.

What emerged was a ‘non-system’ for Triffin. Since then, the US dollar, issued by fiat, has relied on the greenback’s own credibility and legitimacy to continue as de facto world currency.

Current ‘non-system’
In 1985, Triffin identified three systemic problems of the international financial ‘non-system’. First, “its fantastic inflationary proclivities, leading to world reserve increases eight times as large over a brief span of fifteen years” since the breakdown of the Bretton Woods system.

Second, “skewed investment pattern of world reserves, making the poorer and less capitalized countries of the Third World the main reserve lenders, and the richer and more capitalized industrial countries the main reserve borrowers of the system”.

Anis Chowdhury

Third, “crisis-prone propensities reflected in the amplitude” and frequency of financial crises such as the 1980s’ debt crisis causing developing countries’ ‘lost decades’. Other critics have identified further flaws.

First is the ‘recessionary bias’, due to the asymmetric burden of adjustment to payments imbalances. While deficit countries are under great pressure to adjust, especially when financing dries out during crises, surplus countries do not face corresponding pressures to correct their own imbalances.

Second is the cost of the perceived need of emerging and developing countries to ‘self-insure’ against the strong boom-bust cycles of global finance by building up large foreign exchange reserves and fiscal resources, especially after the 1997-1998 Asian financial crisis.

Such precautionary measures enabled emerging market economies to undertake strong counter-cyclical measures during the GFC. But they have huge opportunity costs as such reserves are generally held as presumably safe, liquid, low-yielding assets, such as US Treasury bonds.

Hence, Triffin complained that “the richest, most developed, and most heavily capitalized country in the world should not import, but export, capital, in order to increase productive investment in poorer, less developed, and less capitalized countries… [The] international monetary system is at the root of this absurdity.”

Reform appeals
There were renewed calls for reform of global economic governance in the wake of the GFC, especially by the 2009 UN Conference on the World Financial and Economic Crisis and Its Impact on Development.

Governance reform of the IMF and World Bank should ensure fairer, more equitable representation of developing countries. This should improve the accountability and credibility of the Bretton Woods institutions, enabling them to better address current financial and economic challenges in the world.

The UN also called for a “multilateral legal framework for sovereign debt restructuring”. Without a fair, legally binding, multilateral sovereign debt work-out mechanism, developing countries remain vulnerable to private creditors, including vulture funds.

There were renewed hopes for trade multilateralism and early successful completion of the Doha Development Round of the World Trade Organisation (WTO), giving developing countries better access to external markets, seen as vital for balanced global recovery and development. The promise to keep international trade open echoed G20 leaders’ unfulfilled commitment to eschew protectionism.

However, only a few of the modest promised reforms have been implemented, with limited changes in international financial governance, still dominated by G7 economies. After all, every financial crisis is followed by appeals for reforms, with complacency setting in with hints of recovery.

Less coping capability
Most developed country governments are now more heavily indebted than in 2008, when they bailed out large financial institutions, but failed to sustainably revive the world economy. Major monetary authorities do not have much policy space left after long pursuing unconventional expansionary policies.

Meanwhile, developing countries have been subject to increasing international integration, e.g., through global value chains, foreign financial institutional investments and increased short-term capital flows induced by the unconventional monetary policies of the US Fed, ECB and Bank of Japan, while debt-sustainability concerns for some are growing again.

These vulnerabilities have been compounded by growing trade protectionism, and dwindling precautionary reserve holdings of many developing economies as global trade has slowed. Even before President Trump’s election, developed countries had effectively killed the Doha Development Round, not least by opting for bilateral and plurilateral, instead of multilateral free trade deals.

Trump’s more explicit rejection of multilateralism in his efforts to eliminate major US bilateral trade deficits are now expected to further set back prospects for world economic recovery. Despite pious declarations to the contrary, most national policymakers typically turn from rhetoric about international cooperation to focus on domestic issues.

It has not been different this last time. A decade after the worst economic downturn since the 1930s’ Great Depression, the world economy remains vulnerable.

Anis Chowdhury, Adjunct Professor at Western Sydney University (Australia), held senior United Nations positions in New York and Bangkok.
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Globalization, Inequality, Convergence, Divergencehttp://www.ipsnews.net/2018/07/globalization-inequality-convergence-divergence/?utm_source=rss&utm_medium=rss&utm_campaign=globalization-inequality-convergence-divergence http://www.ipsnews.net/2018/07/globalization-inequality-convergence-divergence/#comments Thu, 26 Jul 2018 09:52:49 +0000 Jomo Kwame Sundaram http://www.ipsnews.net/?p=156886 Economic divergence among countries and regions was never pre-ordained. According to the late cliometrician Angus Madison and other economic historians, the great divergence between the global North and South, between developed and developing countries, began around five centuries ago, from the beginning of the European, particularly Iberian colonial conquests. From about two centuries ago, around […]

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Indonesia has one of the highest rates of income inequality in Southeast Asia, according to the World Bank. Credit: Sandra Siagian/IPS

By Jomo Kwame Sundaram
KUALA LUMPUR, Malaysia, Jul 26 2018 (IPS)

Economic divergence among countries and regions was never pre-ordained. According to the late cliometrician Angus Madison and other economic historians, the great divergence between the global North and South, between developed and developing countries, began around five centuries ago, from the beginning of the European, particularly Iberian colonial conquests.

From about two centuries ago, around the time of the Industrial Revolution, divergence accelerated with uneven productivity advances. During the 20th century, national level inequalities went down in many developed countries in the period after the First World War until around the 1970s with the rise of labour, peasant and other popular mobilizations.

Inequality, not only at the national level, but also at the international level, seems to affect the pattern of aggregate demand, particularly in developing countries, which in turn influences future investment and growth prospects and patterns.

Thus, the immediate post-Second World War period saw relatively high growth during what some Anglophone economists call the ‘Golden Age’, due to a combination of Keynesian policies at the national level in developed economies, and partially successful development policies in many newly-independent countries of Asia and Africa. However, this eventually came to an end in the 1970s for a variety of reasons.

Recent trends
Since then, inequalities have begun to grow again at the national level in many countries, but international divergence has declined in more recent decades. This recent convergence is due to significantly accelerated growth in some developing countries as expansion in some developed countries slowed. Among developing countries, growth was initially largely confined to East Asia and, to a lesser extent, South Asia, bypassing much of the rest of Asia, Africa and Latin America.

Africa suffered a quarter-century of stagnation from the late 1970s until the beginning of this century when commodity prices rose once again and China began investing in the continent. There was at least one lost decade in Latin America in the 1980s, and arguably, a second one for many on the continent in the following decade.

Such variation needs to be recognized. The recent convergence overall obscures very mixed phenomena of greater national-level inequalities in many economies, but also some international convergence due to more rapid growth in some major developing economies.

However, this convergence has begun to slow again, following the collapse of commodity prices since late 2014. This initially began with petroleum, but eventually affected almost all other commodities, especially mineral prices, slowing the decade of growth in Africa.

Divergence
The recent phenomena which many term globalization are often linked to international economic liberalization, but the strengthening of property rights has also been important. This has not only consolidated traditional property rights, but also extended property rights in novel ways, e.g., ostensibly to clarify supposedly ambiguous entitlements.

These have involved not only national legislation, but also free trade agreements and investment treaties at the international level, e.g., to consolidate ostensible asset-related entitlements, including so called intellectual property rights.

While few economic commentators may openly advocate increasing inequality, or blatantly espouse divergence, the consequences of many policies and positions associated with the conventional wisdom tend to increase divergence. For example, agricultural trade liberalization has undermined productive potential as only rich countries can afford subsidies, which most developing countries cannot afford.

For a long time, Africa used to be a net food exporter until the 1980s. Since then, it has become a net food importer. With trade liberalization, Africa was supposed to realize its true potential. Instead, Africa has lost much of its existing productive potential, not only in manufacturing, but also in agriculture.

To make matters worse, African farmers cannot compete with subsidized food imports from the EU and the USA. For example, as US consumers have a strong preference for chicken breasts, wings and legs from the US are not only flooding the Americas, but increasingly, Africa and Asia.

Convergence prospects
It is also important to consider the prospects for possible convergence in the long term due to the increased availability and affordability of capital. Besides recent Chinese international financing initiatives, quantitative easing, other unconventional monetary policies, recycling of petrodollars and private East Asian capital, as well as novel, and often illicit international financial flows may transform the horizon of possibilities.

Not unlike the Cold War and the aftermath of 9/11, the resurgence of European ethno-populism in reaction to growing economically and politically driven immigration into developed Western economies has reminded the world of the squalid conditions still prevailing in much of the global South, especially in Africa.

Perhaps more importantly, geography, rather than class, is increasingly viewed by many as the major determinant of income and welfare levels, with vastly different living standards associated with location rather than educational qualifications, occupation or productivity.

Thus, without the prospect of rapid convergence, not only nationally between wealth classes, but also internationally between rich and poor nations, the failure of economic globalization to deliver on its implicit promise of liberalizing cross-border human migration will haunt international relations, human rights and political liberalism for some time to come.

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