Tuesday, 24 January 2012

China: The End of the Free Market?

By Carlos Fortin

The beginning of the Chinese New Year brings to mind a book by Ian Bremmer with the provocative title 'The End of the Free Market' *. Bremmer is president of a political risk research and consulting firm. His book is about the emergence, led by China, of ‘state capitalism’ as a major factor in today’s world economy and a potential threat to the very survival of the free market.

Bremmer defines state capitalism as a system ‘in which the state dominates markets primarily for political gain’. In it governments use
'state-owned companies to manage the exploitation of resources that they consider the state’s crown jewels and to create and maintain large numbers of jobs. They use select privately owned companies to dominate certain economic sectors. They use so-called sovereign wealth funds to invest their extra cash in ways that maximize the state’s profits’.
He also writes that:
‘The ultimate motive is not economic (maximizing growth) but political (maximizing the state's power and the leadership's chances of survival)’.
In addition to China, Bremmer maintains that Russia, Brazil and Saudi Arabia are further examples of state capitalism, while elements of the system can be found in a large number of other developing countries.

I am not terribly impressed with Bremmer's characterisation of state capitalism. It strikes me as somewhat simplistic in its almost psychological approach, and I find it difficult to think of non-trivial features of an economic system that is supposed to simultaneously encompass China and Saudi Arabia. But the phenomenon he is concerned with is real and important enough. To use his words again, after apparently being relegated to oblivion by the neoliberal revolution, ‘in the first decade of this new century, public wealth, public investment, and public ownership have made a stunning comeback’.

According to a special report in The Economist**, 
  • state companies make up 80 % of the value of the stock market in China, 62% in Russia and 38% in Brazil;
  • three Chinese state-owned companies rank among the world’s ten biggest companies by revenue, against only two European ones (Royal Dutch Shell and BP).
  • The thirteen biggest oil firms, which control more than three-quarters of the world’s oil reserves, are state-backed, as is the world’s biggest natural-gas company, Russia’s Gazprom.
And the approach, according to the Economist piece, is spreading:
  • the French government has set up a sovereign-wealth fund
  • South African government is talking about nationalising companies and creating national champions.
What we seem to be seeing, though, is not so much the omens of the end of the free market - arguably, the end of the unregulated free market is already here in the aftermath of the financial crisis of 2007-2008- but a re-emergence of the state as an economic actor to provide a sense of direction to the market, correct its failures and lead accumulation in strategic sectors. Whether this, as Bremmer would have it, is tantamount  to a full-fledged change of paradigm is doubtful.
** Wooldridge, A. (2011) "The Visible Hand", The Economist, 20 January 2011

Thursday, 19 January 2012

Global economic recovery - what will be the ‘new normal’?

By Stephen Spratt

Getting back to normal is taking a long time. Not so long ago there was much talk of recovery; yesterday the World Bank warned emerging economies to prepare for a ‘global economic meltdown’ if the Euro Crisis continues to deteriorate, as it very well might.

Concerns about the Eurozone – and developed countries generally – have tended to be tempered by confidence in emerging economies as drivers of global growth. Again, things are no longer looking so good. Brazil’s central bank is cutting interest rates to spur growth after a contraction in the economy at the end of last year. India is implementing an emergency $35 billion stimulus programme, after growth slowed from 9 to 7%. Even China is beginning to look vulnerable.

Most countries would be more than happy with the annualised growth rate of 8.9% that China achieved in the fourth quarter of 2011, but this was down from 9.7% in the first quarter, and the year as a whole saw the lowest growth rate since 2002. Forecasts for 2012 are worse, with most predicting further declines, and some suggesting growth could fall as low as 7.5%. Given that 8% has been considered the minimum needed to generate sufficient employment to avoid social unrest, this could be highly significant.

And it’s not just countries. After recent talk of a financial-sector led recovery, yesterday also saw Goldman Sachs announce sharply lower revenues, with earnings down 58% (article available by subscription only). This follows similar declines at JP Morgan and even worse results from Citigroup, where the investment banking division suffered a loss.

All the banks cited the problems in the Eurozone as central to their woes. The assumption appears to be that, once resolved, they can get back to ‘normal’. Lloyd Blankfein, CEO of Goldman Sachs, expressed this view in a statement yesterday: “This past year was dominated by global macro-economic concerns which significantly affected our clients’ risk tolerance and willingness to transact ... As economies and markets improve – and we see encouraging signs of this – Goldman Sachs is very well positioned to perform for our clients and our shareholders.”

I wonder... The profitability of banking has certainly been affected by problems in the Eurozone, but this does not make a return to the go-go years of bumper bonuses inevitable. Much of this was driven by investment – or ‘casino’ – banking’, where exotic financial instruments and absurd leverage levels combined to create and inflate bubbles from which traders profited hugely. Those days are gone, at least for now. In both the UK and US, regulators are moving to rein in these types of activities. In the Eurozone area, plans for a financial transaction tax continue. Whatever the new ‘normal’ in banking turns out to be, it is unlikely to deliver the astronomical – and largely illusory – returns that bankers have grown used to. It is noteworthy that the best performing US bank is Wells Fargo, which posted solid – if unspectacular – results based on ‘boring’ activities (article available by subscription only) such as taking deposits and lending to firms and individuals.

And I wonder about the prospects of China returning to double-digit growth rates too. While domestic factors are becoming more important for growth, exports remain key. At least in part, China’s success has been a function of the willingness of people in developed countries to buy their exports in ever larger quantities. With personal debt still at unprecedented levels, what appeared ‘normal’ may turn out to have been an historical anomaly.

Maybe banks and emerging markets will both have to get used to more modest returns, and develop different ‘business models’ that fit the new reality. Whatever the ‘new normal’ turns out to be, we can be sure of one thing – it won’t be the same as the last one. The World Bank is no doubt right to warn developing countries to ‘hope for the best but prepare for the worst’. The problem for policy-makers, however, is that no-one has much of an idea what either ‘the best’, or ‘the worst’ will actually look like; this makes ‘preparing’ for these outcomes even more difficult than it would normally be.

And that’s before we even consider the Eurozone...

Wednesday, 18 January 2012

Trade policy tensions among the Rising Powers

By Xavier Cirera

While the emergence of the Rising Powers has proved critical in rescuing the world economy during hard times for OECD countries, potential tensions in the future between the Rising Powers may jeopardise their future hegemony as drivers of the world economy.

Growth in Brazil and China has been mainly driven by exports. However, significant tensions have developed in recent times, especially in Brazil regarding Chinese imports. While trade flows between both countries have increased dramatically during the 2000s, 95% of Brazilian exports to China are primary commodities, whereas 95% of Chinese exports to Brazil are manufacturing products and capital goods. This, together, with the long term appreciation of the Brazilian Real, has encouraged manufacturing sectors in Brazil to successfully lobby the government to adopt protectionist measures against Chinese imports (article available by subscription only). In addition to specific taxes, there has been an increase in anti-dumping investigations, requests to MERCOSUR to increase the list of Brazilian sensitive sectors or to increase the share of domestic firms in government procurement. The concern of some Brazilian firms is not only related to competition in the Brazilian market but also to the loss of market share in neighbouring Latin American countries.

It is worth noting that the adjustment in Brazilian manufacturing firms had already started during the late 1980s and the 1990s with the gradual liberalisation of its economy. The key challenge for Brazilian firms is the adoption of innovation and quality policies in order to increase their productivity and diversify exports. In addition, imports of Chinese goods allow manufacturing firms to use cheaper inputs. As a result, the adoption of protectionist measures will not succeed in addressing the main competitiveness issues that the manufacturing sector faces. On the contrary, it is likely to exacerbate them.

But more important is the impact of any trade tensions on global trade policy issues. An escalation of these tensions may have an impact at the global scale, further threatening the already vulnerable world economy.

Friday, 13 January 2012

What will it take for the UK media to present positive images of development?

By Spencer Henson

Colleagues of mine have just produced a short film examining how the British media portrays developing countries. It features interviews with journalists and filmmakers, such as Jon Snow (journalist and news presenter, ITN), Caroline Nursey (director, BBC Media Action) and Richard Kavuma (journalist, The Observer, Uganda).

This film particularly interested me as it picks up on some of the issues that I’m researching using the UK Public Opinion Monitor (UKPOM) – a representative panel of the UK public who are surveyed about life in the UK. We’re interested in people’s beliefs, attitudes and values towards development – and how these impact on the choices they make in their lives.

Our research with UKPOM has shown that most of the UK public think they are uninformed about aid and development issues. What’s more, it’s clear that the UK public widely associate developing countries with images of disasters, famine, war and corruption. As the film shows, the media plays a key role here; it is where most UK people hear about the South.

Such media coverage is critical for the fundraising efforts of international development NGOs in times of emergency. However, it perpetuates views that are rather destructive in the longer term; concepts of ‘charity’, of nothing getting better (and hence aid not working) and of helplessness. The media also rarely do anything to bring forward the wider structural issues that underlie global poverty.

This begs the question, what will it take for the British media to present more positive images of global poverty and the South, and what will it take for the UK public to watch them?

Thursday, 12 January 2012

Business as a development actor

By Noshua Watson

This term, IDS' Globalisation team is teaching a new course called ‘Business as a Development Actor’. At IDS, we study the causes and effects of poverty at a number of levels: household, region, country, international, gender and so on.  But there is still a lot to be learned about the impact that business has on jobs, education, infrastructure, investment and innovation.

What I’m reading this week in order to prepare:
  1. Khanna, T., Palepu, K, G., and Sinha, J. (2005) ‘Strategies That Fit Emerging Markets’. A Harvard Business Review article that looks at how institutional voids in political, social, financial and cultural structures keep multinationals from investing in developing countries. (Restricted Access)
  2. Oxfam International (2009) ‘Oxfam Poverty Footprint: Understanding Business Contribution to Development, Briefings for Business No. 4’.  If business affects development, how are we going to measure it?
  3. Les nantis d’Haiti’. (2012). Le Monde’s slick and sarcastic indictment of Haiti’s business elites in its continued underdevelopment. Terrific photography! (in French)

Monday, 9 January 2012

Can the Rising Powers save our planet?

By Hubert Schmitz

Are the changes we observed in the world in 2011 leading to changes in the 2012 research agenda here at IDS? I think they should. 

I suggest that we pose a question which few of us would have thought sensible a year ago: Can the Rising Powers (China, India, Brazil) save our planet?

The Rising Powers and climate change

This may seem a surprising question given that the Rising Powers (in particular China) are responsible for the recent net increases in carbon emissions.  There are, however, indications that China, India and Brazil are now making major investments in climate change mitigation, largely because government and enterprises seek to establish competitive green industries. Given recent changes in the world economy this is of great significance.

The old industrial powers had expected to lead the green transformation, invest heavily in the green economy and revive job growth, but this now looks unlikely. With the partial exception of Germany, the old powers are stagnating economically and paralysed politically. In contrast, the Rising Powers show increasing confidence on the world stage and are set for continued growth.

Such diverging trends are bound to affect the dynamics of the green transformation. The capability to invest in green innovation is high and rising in the new powers, in both their public and private sectors. This contrasts with the high public indebtedness in the old powers and the patchy investment capacity in the private sector. The diverging capacities of the old and new powers have been visible for some time but the ramifications for the green transformation have only become clear (to me) more recently - while I was working with colleagues from India, China and the German Development Institute.

What does this mean for our research agenda?

I would suggest a collaborative programme examining the propositions
  • That China, India and Brazil have greater transformative power
  • That they can therefore provide quicker and cheaper solutions
  • And that - given their own factor endowment – they can provide solutions that are more appropriate for the income-poor and energy-poor countries of the world. 
I guess the outcome will differ by country and sector but that there will probably be a big net effect on whether and how the green transformation takes place. 

I think this will be a big and hot topic for quite a few years – too big for any single institute to take on. The first step will be most difficult: defining researchable questions and hypotheses.

Wednesday, 4 January 2012

A Chilean dilemma: compulsory or voluntary vote?

By Carlos Fortin

In the midst of the Chilean political and social turmoil that I have reported on in my last two blog posts, the Chilean Congress has passed legislation introducing a major change in the country's electoral system. It did this in the hope that it may help reverse the growing alienation of the population vis-à-vis the political process. It is however very far from clear that it will do so.

Until now Chile had had a system of voluntary registration and compulsory voting for those registered.  Registration is now automatic; all Chilean citizens are added to the electoral registry on turning 18. Voting, however, becomes voluntary.

The issue was intensely debated not only in Congress but in academia and the media. Those in favour of the change argued, to start with, from first principles: voting is a right, and forcing people to exercise it is a violation of their freedom. They then contended that the change will both result in a much enlarged potential electorate (in effect, the number of potential voters will increase from about 8 million to about 12 million); while those taking part in the political process will be a much more committed section of the population, as they will do so voluntarily. Legitimacy will thus increase also.

Those against the change, among whom I count myself, countered that voting is not only a right but also a civic obligation, comparable to jury duty, which nobody could  claim is a violation of individual freedom. As for legitimacy, any reduction in the level of actual voting will diminish it, no matter how committed are those who bother to vote, since the rest will have no incentive to find out about the issues and involve themselves in the democratic process.

At the theoretical level the argument is far from settled and, given its almost philosophical nature, it is unlikely to be in the foreseeable future (a good summary of the issues can be found in Emily Keaney and Ben Rogers, A Citizen's Duty. Voter Inequality and the Case for Compulsory Turnout*. But at the level of the concrete consequences of the change for political participation there is some empirical evidence that is highly relevant.

The Netherlands changed from compulsory to voluntary voting in 1970, and a sample survey study compared the levels and kinds of participation in the last election with compulsory voting (1967) and in the first election with voluntary voting (1970)**.

The results:
  1. Total turnout went down from 94.6% to 74.1%
  2. Youth turnout (21 to 29) fell considerably more than that of other age groups (from 93.5% a 61.4%, while that of other age groups went down from 94.8% to 77.6%)
  3. Voting among those with only primary education went down from 94% to 69.2% among voters with higher education the drop was from 96.7% to 87%
  4. The turnout of lower income groups fell from 93.6% to 73.1%; that of the higher income groups from 98.4% to 84.1%
  5. Male voting went down from 95.3% to 76.7%; female voting from 93.8% to 71.1%.
The change, at least in the short run, had therefore a regressive impact not only in terms of total participation, but also in the composition of the electorate, resulting in a reduced presence in the political process of the young, the poorer, the less educated, and women.

Not exactly, I would have thought, what Chilean democracy needs today.

*Keaney, E. and Rogers, E. (2006) A Citizen's Duty. Voter Inequality and the Case for Compulsory Turnout, London: Institute for Public Policy Research
**Irwin, G. (1974) ‘Compulsory Voting Legislation. Impact on Voter Turnout in the Netherlands’, Comparative Political Studies 7. 3: 212-315.