Friday, October 22, 2004

PBS's The Commanding Heights

Stiglitz Monthly Column: Project Syndicate

Saturday, October 16, 2004

10 16

Dilip 10 16

People in the United States don’t experience the Lexus/Olive Tree differences as much as people in other countries…for many, the corporate culture are the Olive Tree, how corporations deal with technological change.

How is globalization affecting American culture in a broad sense? Is the Lexus the American culture? Business in the U.S. isn’t done, as in other countries, with reciprocal favors. Networking is not gift-giving, has the odor of corruption, pandering or sycophantism. Cronie-capitalism.

Friedman doesn’t give a lot of attention to the Olive Tree, and it isn’t a part of the American view…the pursuit of the Lexus may be the American Olive Tree. How does a company like Disney maintain its Olive Tree while necessarily downsizing? Adobe downsized by phone.

Countries don’t have this sort of bottom line, but the budget doesn’t have to be balanced every quarter, or even every year. Sycamore has a lot of reserve cash but isn’t a growth company, no one would invest in it, but Amazon is a growth company in debt. China may be running deficits to promote jobs, protect its Olive Tree. IBM isn’t concerned about political stability, but a country like China must be. Olive Tree-stability is necessary for the pursuit of the Lexus.

In Europe, Social Democratic economies support a workforce that may be unemployed for longer periods of time than an American worker or professional. John Gray, when he worked for Thatcher, believed that the British economy was too bloated, and wanted to make changes…but he wanted to resist the American influence of unfettered free market capitalism. Stiglitz and Gray are concerned about regulating transitional governments like Russia and China. Bhagwati’s goal in becoming an economist was to reduce poverty, he pursues policies of poverty reduction. As soon as ex-communist countries opened up, they needed the help of countries with market economy know-how. In this post-Cold War era, the U.S. had a great deal of influence in how the future of ex-communist countries were shaped…East and West Germany were a good example of this sort of ideological exchange…the FRG sent its philosophy professors to GDR. But old apparatchiks were given control of governments because they knew how to run gov’ts…Putin is former KGB, Yeltsin was an old party boss. Stiglitz believes that post-Cold War policies of U.S. and economic organizations were disastrous for these countries and developing countries. The three policies:

1) Privatization
2) Deregulation
3) Direct Foreign Investment

The market fundamentalists believe in no regulation…but how to regulate is a difficult matter. Policies like Child Labor and Workman’s Comp are accepted regulation, transparent to the workforce in the United States, but not in Bangladesh. Industries like utilities are regulated by principle of fairness…what is seen as fairness in utilities may not be the same as in the health care industry, or in utilities in India. Balance between regulation, productivity and fairness is sought…Regan/Thatcher market fundamentalists adopted the three policies and turned them into an ideology, and it led to trouble for the former communist countries.

In Japan, aggregate demand hasn’t risen because Japanese are inclined to save rather than spend in times of economic crisis…a cultural factor that makes solution to Japan’s economic crisis unique. Stiglitz and Bhagwati disagree on how to stimulate economies, either communist to free market or impoverished to prosperous. Stiglitz believes that the IMF, World Bank acted counter to their founding principles, China insulated itself from their influence and did better in the post-Cold War era than Russia. Abstract “violence” of economic policies, taking people from work to practices like prostitution or crime, is the responsibility of developed countries. The flight of capital from Thailand resulted from an .85 difference in Thai bonds and U.S. Treasury bonds…Thai economy proved to be unhealthy, and the quick flight of capital from Thailand resulted in economic ruin, the “Former Rich”. Diversification of sources of capital was supposed to have stabilized the economy, but currency speculation motivated the activity that led to the Asian crisis…Asia should not have been exposed to the volatility of currency markets. The Thai government did not have the reserves to stem the tide of decline, the IMF and Thai government couldn’t buy them in sufficient quantities when the price of the bhat spiraled as a result of flight. The IMF and Thai government were left with valueless currency, and the multinational banks that lent to Thailand were bailed out, rather than the Thai government or Thai national banks. Stiglitz wants a principle of fairness that protects the most vulnerable.

In False Dawn, John Gray has two arguments: Global free market is a political project and not an iron law of historical development, and global laissez-faire has become a threat to peace between states.

Gray’s 8 points:

1) Free markets are creatures of strong governments and can’t exist without them;
2) Democracy and Free Markets are competitors;
3) Socialism has broken down irretrievably;
4) Former communist states are not adopting Western economic models;
5) Free Market and Marxism/Leninism have much in common;
6) Fusion of American exceptionalism and global laissez-faire = Globalization;
7) Chronic insecurities of late-modern capitalism corrode institutions of bourgeoisie life;
8) Washington consensus on global free market capialism = downturn of worldwide markets, though the U.S. can’t fix world’s problems alone.

Gray believes that capitalism does not work to preserve the cohesion of society. Social Market Capitalism and Free Market Capitalism are not the same; the choice between them is political and cultural, based on values, a political choice. European social market capitalism is not as committed to employment as social welfare. Japanese form of capitalism assures jobs, but at the expense of efficiency; many middlemen in every transaction ensures employment and stability (Japan is now competing with Korea, Taiwan, China and may not be able to insulate itself as it once did). Can all three systems simultaneously flourish?

Gray argues that the market has social features; markets will function even under imperfect conditions, and in fact develop within the framework of a society, they have a social context. Markets evolve into socially-mediated entities, though there may be a “model” of efficiency.

Where did the idea of free-market come from? In mid-Victorian England, traditions of individualism and Parliament’s Enclosure Acts privatization of common land. Since Parliament wasn’t accountable to citizens, free-market was not a choice, or a natural evolution. Through Enclosures and the repeal of the Corn Laws (protective tariffs), bread and labor were commoditized. The rich bought parcels of commons, which shrank as a result. Those who once used the commons became laborers. This was a short-lived phenomenon, and social welfare measures were applied, e.g., Anti-corn league.

Henry Clay (U.S. 1777-1852) believed that market economics are fundamental, but regulation is a good thing, and the free-market creates instability, which is an enemy of democracy.

Gray suggests that the former Soviet Union and China are not adopting Western economic systems, though these systems have much in common; insisting these countries adopt Western economic systems immediately would be a mistake. Chinese diasporic communities lend to and support each other; Chinese capitalism evolved without the Short-Horned cattle of the electronic herd, and relies on domestic financial resourcese, to its advantage.

Gray believes that Regan/Thatcher and Marx/Lenin have a lot in common. They both believe that people are economic rational animals, and most decisions are economically motivated. The difference between them is the motivation: Marxism/Leninism suggests that a totally planned and regulated economy is rational, while Regan/Thatcherites believe the opposite. Gray believes that either extreme leads to disaster.

According to Gray, globalization is an American creation.

Gray supports the Tobin tax, which is a tax on foreign currency transactions, putting a penalty on short-term currency speculation. Revenues collected would go to stabilize economies affected by currency speculation crises like Asia’s.
Bourgeoisie values are corroded by globalization; the concept of a career is gone, and Gresham’s Law-like global economics is ruthless in its efficiency and makes socially responsible capitalism less sustainable.

Friday, October 15, 2004

Comparative Ladders of Advantage

A good explanation of comparative ladders of advantage:

Thursday, October 14, 2004

Janes Intelligence Website

From "About Jane's"

Jane’s Information Group is a world leading provider of intelligence and analysis on national and international defence, security and risk developments. Jane’s is an independent organisation with an unrivalled reputation of accuracy, authority and impartiality. Jane’s delivers partners and clients a strategic advantage from intelligence acquired by an unique worldwide network of independent analysts. Governments, militaries, business leaders and academics in over 180 countries rely on Jane’s providing timely and insightful information on threat and security issues. . Jane’s offers a full range of off-the-shelf information solutions as well as specific tailor-made consultancy services in these areas:

-Country by country internal and external security and threat assessments
-Defence news and analysis
-First responder toolkits to homeland threats
-Orders and formations of worldwide armies, navies and air forces
-Military systems and equipment
-Airport news, equipment and services information
-Worldwide geopolitical intelligence and news analysis
-Terrorism intelligence, news and assessment services
-Risk assessments for businesses and industry looking at markets and nations
-Worldwide national rail and urban transportation systems
-Police and law enforcement news and equipment information

Monday, October 11, 2004

10 8

Dilip 10 8

While Lexus and Olive Tree has a broad focus, and globalization appears to be a natural force that can’t be controlled, e.g. the electronic herd, Stiglitz focuses on the economic issues of globalization…something has gone wrong with the economic policies of developed nations and financial institutions like the IMF with relation to developing countries. According to Stiglitz, globalization, or the reduction of barriers to international trade and greater integration of national economies can be potentially good for developing countries and the poor, but we have to manage globalization. A market-driven economy must be managed, but how to manage it? Who will manage it? The governments of countries and economic organizations, IMF, the World Bank, and the WTO, whose policies effect developing countries, and who are influenced by the U.S. and G-7. In the last 20 years, policies of the economic organizations have been counterproductive, have hurt rather than helped the world’s poor.

According to Lou Dobbs, Indian workers are not loyal and will change companies…Vietnamese workers are loyal, perhaps because of cultural factors…Argentina is becoming an outsourcing destination, we get beef and agricultural products from this big country, and Buenos Aires has the second-most psychoanalysts in the world, after Paris…Argentina is far more European, many British settled there…historical speculation suggested that Argentina would become the wealthiest country of the New World. Squalor and poverty are not apparent. In India, an IT worker makes $12,000, while an Argentine makes $6,000. Why? A simple comparison does not tell the story, a graph will not explain where next to outsource. Is there a cultural explanation for Argentina’s desirability as a country to which to outsource? The explanation is not a simple one.

What is the underlying idea behind the Golden Arches Theory of Conflict Management? A country with a clientele that can afford to eat at McDonalds has a lot to lose if it goes to war, whereas a country that has the same condition in peace as war will be more inclined to go to war. McDonald’s is a sign of something to lose…what is it? A middle class. In developing countries, the middle class eats at McDonalds, i.e. a country with a McDonalds has a middle class whose consumer behavior/tax base it doesn’t want to lose. Any country with a vibrant middle class will think twice before going to war. (Security Moms are new swing in this election in U.S.) How to create a middle class? India and China have 200 million in their middle class, can buy American goods and do business with American companies in their countries…they are more stable and less likely to succumb to religious fundamentalism, and will be ready for democracy if it hasn’t already been attained. (Dilip isn’t concerned about the rise of the BJP because India has a middle class that won’t want a major conflict) Why hasn’t a middle class developed in the Middle East, Africa, other poor countries? Immigrants who come to the United States and do well were middle class in their countries of origin…refugees from poor countries do poorly…a socialization leads to success and a middle class…immigrants from upper class origins do even better, are even more confident than Americans when operating in the U.S.

Stiglitz suggests that economic growth is good, but it must be measured by two criteria:
1) efficiency
2) the quality of goods and services available to consumers

If the GNP of Ghana goes up 10%, but goods and services are not cheaper and better than before, and the efficiency of production isn’t better, the 10% increase isn’t important to development…it may benefit only a small portion of the population, and jobs may be lost…equity is important, the policies of the international economic organizations do not necessarily bring growth with equity. Market Liberalization, Privatization (Deregulation), and Fiscal Austerity are the constraints of the IMF…all of these things have merit, but nationalized industries maintain employment, privatization would reduce employment in some countries…a sudden change has a great social and economic impact. The union ranks of apprentice, journeyman, and master stabilize the job market for plumbers (since training of 6 weeks to 6 months makes someone an adequate plumber). Economies are like boats…they can handle slow rates of change…Stiglitz suggests that countries should open capital markets and deregulate slowly. The electronic herd will not stampede slowly through a market, so policy management is needed. The policy of the IMF have been counterproductive and ideological, they’ve taken policies that run counter to the principles upon which they were established, i.e. abolishing poverty. John Maynard Keynes was influential in the Bretton Woods agreement, established guidelines for government intervention management of the economy to stabilize demand…Regan Thatcher monetarism is now the rule of the IMF, markets should be left unregulated.

By what criteria do we say that globalization is a serious proposition?

Economically – under conditions of globalization, are national economies as autonomous as ever? If globalization is true, though there are separate national economies, they are more open to outside influence than before…we can’t talk about autonomous economies in the era of globalization. Skeptics say that national economies are still autonomous. What is the balance of exports/imports/internal consumption of GNP. Japan is a net importer, poor in natural resources…are they more dependent on a global economy?

Politics – Do governments control their own destinies and economies? The active role of American government in world politics has increased.

Culture – National cultural identity – not created by conquest, military might, a culture, almost a propaganda creates a national identity, unity, patriotism. Does the sense of being a part of a nation-state, cultural loyalty, beginning to erode? Cultural imperialism, American popular culture is displacing local popular culture disconnects youth from national culture, some think this must be controlled…Japan plays a similar role in the far East. In the U.S., 9/11 led people to patriotism, but are American values less important than ever? According to some, multinational companies have turned culture into a commodity, culture is contrived and manufactured. Are the cultures whose proponents feel threatened violently retaliating to preserve their culture?

Stiglitz – At Bretton Woods, Keynes said that economies go into crisis when aggregate spending decreases, and governments should intervene with demand management policies (deficit spending, tax cuts). Monetarists suggest that the market is self-correcting, Keynes thought that the government should intervene because economies are too complex, people can’t wait for the market to correct itself. In some developing countries, the government took too active a role, but the IMF is full of Regan/Thatcher monetarists, and took management to the opposite extreme…in the last 20 years, governments were forced to liberalize their capital markets. A country capable of producing steel can start a government run steel company and create jobs, but it might not be competitive with other countries’ steel immediately. The IMF forced countries to open their markets right away to promote growth, but unemployment resulted because the country needed more time to become competitive, no one bought the steel at home or abroad. Russia and China had different transitions from communism to free market capitalism; Russia’s transition happened quickly, China did it at its own pace on its own terms, and foreign capital came to it. Deregulation is not an unmitigated blessing, but the ideology of the IMF promotes it when it shouldn’t be applied.

Most countries know that they can’t open their markets completely, but the IMF’s “conditionals” force them to, withhold money if they don’t. Countries accept because they need the money. China could turn them down because they are big and have leverage; Ethiopia is small and has no leverage.
Two other things about IMF: the imbalance of prices of developing countries exports and what they import from big countries…agricultural subsidies in the U.S. force the price/desirability of foreign agricultural products down. This happens because finance ministers are not accountable to their un-organized farmers or impoverished citizens, they don’t threaten to elect another administration. The IMF doesn’t have the same influence over governments who are accountable to a well-organized farm industry to get them to remove subsidies, and countries like the U.S. can pressure the IMF not to fight them on farm subsidies. South America was the model for these policies, but they didn’t work elsewhere in the world, they were not sensitive to the needs of individual countries. For some countries, the barrier to the Lexus is not the olive tree, but that the Lexus is too much too soon. Is it prudent to expect a growth that in the U.S. took 50 years to happen in 5? What rate of change can a country absorb?

Wednesday, October 06, 2004

Pegged vs. Floating Exchange Rates

A good explanation of Fixed (Pegged) vs. Floating Exchange Rates on Investopedia.

Monday, October 04, 2004

10 2

Delip – 10 2

The Lexus and the Olive Tree

The Lexus and the Olive Tree are symbols…

Lexus = Modernity, open borders/trade (Japan)

Olive Tree = closed borders, fight for home territory, identity based on land/nation (Isreal/Palestine)

If Globalization is an irresistible force, is the “Olive Tree” an immovable object?

Can politics control the effects of globalization?

Should people who identify with their homelands cope with globalization?

Section 1 – The System

How does globalization work? How do constituent parts work together? What motivates globalization? Here, Freidman talks about the technical and economic forces of globalization.

Section 2 – Plugging Into the System

How does one get into economic modernity? A country should be “wired”. How fast is your country or company? How much does it weigh? (are exports physically heavy? (walkmans at $50 each vs. jute at $.05 a pound)

Is your country too corrupt to be competitive? (kleptocracy?) Does it hinder the economy?

Globalization may lead to few players in any market, and therefore the world’s economy will be controlled by few - “Demolition Man” – all restaurants are Taco Bells.

“Winner Take All” - During the heyday of the Bulls the top 3 players made 80% of payroll…what is the morale of the other players, also necessary to win? Free agency made this possible. To what degree is this situation duplicated in companies and countries?

Section 3 – The Backlash

What to do?

How does the Muslim world adapt to modernity?
Olive tree-nations must adapt, however slowly…Democracy is an element of globalization.

What attention is paid to culture during globalization?

The World is 10 Years Old

What happened 10 years ago?

- Technological progress
- End of Cold War politics – capitalism wins
- The acceleration of change – “Post-modernity” “Late or High Modern”
- “Walls” fall

Modernity changes, and present day is different than Victorian England…Traditional vs. Modern society…modern society changes peoples sense of selves…immigrants differ from their more Americanized children…Nostalgia comes from alienation by modernity, a lack of meaning that results…

Modernity – can it be controlled? Can different cultures take different paths to modernity?

Information Arbitrage

“I am a tourist with an attitude engaging in information arbitrage.”

Information Arbitrage = shopping market basket of multiple perspectives

All global phenomena are interrelated, and not strictly economic/technological/political.

Arbitrage in economics = trading based on imbalances. Information on at least two markets is necessary…

There may be a cultural milieu in which information/transactions are not exchanged or conducted in the same way in both markets…keep a critical eye on information, multiple perspectives enable better decisions…

Global Elite – must be cosmopolitan

The Walls Came Tumbling Down

The Three Democratizations – Information, Finance and Technology
MIDS – Microchip Immune Deficiency Syndrome

Nations that do not democratize will suffer – Democratization can be measured

Golden Straight Jacket – market transparency, political democratization, market liberalization, currency speculation

Electronic Herd – Small Horn – individual investors. Long Horn – Corporate investors, pension funds. The herd will move capital to places it gets best return.

Max Weber – Protestant Ethic and the Rise of Capitalism – This is the world/life that counts, God’s work is done on Earth. Disciplined life is virtuous. Countries with this ethic work hard and save.

Capital is formed by saving. (?) The Labor Theory of Value.

- Mass production – more than one laborer, accumulates value
- Specialization – “Division of Labor”
- Surpluses create a need for managing resources – Surplus laborers – R&D

Surpluses were lent only locally or to familiar people: trust. “Stranger Sociability”

Credit is now easy to get!!! U.S. developed because of real estate lending…

Every country wants to attract capital…golden straightjacket gives the herd confidence to invest or give credit to a country.

Is anyone in charge? No!

The Yes Men fake WTO website