Well There Aren't Many Chinese In Africa

In reference to Professor Anderson’s talk, I was intrigued by the same points that Mark was regarding the width of borders and the effect of the percentage of Chinese population on growth. Borders do indeed disrupt markets, as Canada trades between provinces 22 times as much as it trades with the United States. With less distance to trade, there are fewer gaps in prices, creating what Professor Anderson called the “border effect.” I don’t doubt that this effect is evident, but we must account for other variables (which Professor Anderson did, but very briefly). He stated that economic size and free trade are also determinants, but he spent much more time on distance and the presence of borders. In Collier’s The Bottom Billion, he emphasizes the border effect as well, but a border is not the only prime factor that prevents trade.

In developed nations, the presence of borders takes precedent over many other factors, but in developing and third-world areas, even the rise of regional trading wouldn’t do much good. When all economies in surrounding areas are very small none can produce more than raw products (as manufactured products often have an extremely high tax), and many are landlocked, true global trade is needed.

Professor Anderson also claims that the number of people in the world living on $1.25 a day or less has decreased significantly; the poor must be better off. This comment made me pretty uneasy, as it is only a small fraction of the story. I am not an export on the topic in any sense, but I do know that globalization has benefited those in developed countries far more than those in Sub-Saharan Africa and South East Asia. While the number of people living on this amount of money has decreased, those that have jumped above this level have barely done so. However, those in developed countries have drastically increased their wealth by globalization. The most holistic trade agreements exist between developed nations, and we don’t see our trade agreements with Botswana being broadcasted in the upcoming election. Developing countries, if in trade agreements with the global powers, are not in many and there are not always beneficial to developing nations as a whole. This being said, we cannot simply take the fact that less are living on $1.25 a day and call globalization a success. Professor Anderson also emphasized that the informal environment is very important when the formal environment is weak, but developing areas have a much lower chance of success when we rely on their informal environments for much of anything.

While I was shocked the most (at first) by Professor Anderson’s claim that the share of the Chinese population in any country determines trade (although I was convinced by it), the more I thought about it, the more I realized developing nations are often thought of in absolute terms to churn out positive numbers. Then again, the Chinese population in Africa is very low, so maybe this claim can be used in absolute terms to give a correct answer for Africa.

Austerity for Africa

In response to Annelise’s post on Kenya’s public debt, I fail to see the IMF’s justification for practicing austerity for a developing country in the midst of building up infrastructure. I understand Rogoff’s point that countries turn to the IMF as a vendor of last resort once they are in financial crisis, but if the IMF continues to hand out aid this sparingly, it will only be perpetuating the problem; Kenya will be unable to develop and rise out of third-world status.

In light of Collier’s book The Bottom Billion, countries like Kenya are severely underinvested in, resulting in Africa having twice as much public capital as private capital. This should, in theory, result in a high inflow of private capital because returns on capital would be extremely high, but “the perceived risk of investment in the economies of the bottom billion remains high” (Collier, 88). This means Kenya and other African countries are receiving little private investment, so they must rely on public investment and international aid from the IMF; additionally, lack of private capital produces extreme capital flight. “The most capital-scarce region in the world exported its capital” (Collier, 92). This being said, austere measures by the IMF will only worsen Kenya’s situation and even if it results in a positive current account balance, it will be virtually zero.

This does not mean the IMF and other agencies should simply give developing countries large amounts of money; that is possibly worse than austerity. However, if given with conditionally and increased international governance, as Stiglitz suggests, developing countries will become less reliant on public aid in the long run. Part of the IMF’s argument is that other government policies can adjust to fiscal austerity, but when domestic governance is corrupt and of low quality, taking away conditioned aid will only lead to a worse economic situation. I agree with Annelise that the IMF is only thinking in the short-term; they are not considering the repercussions that come from austerity.

The IMF and other international agencies must continue to invest heavily with the aim to increase Kenyan infrastructure further to build a sustainable economy. Once this happens, Kenya and other developing areas will raise their income to a point to where citizens have an incentive not to emigrate, government cannot take advantage of it’s people and it’s economy (or lack thereof), foreign private investment will be attracted, and they will become independent of the IMF’s aid. 

Is Friedman Right?

In a recent article by the Economist, the currency manipulation of China was brought up; a recent topic of discussion in IPE and the presidential debate. The candidates have been debating who would be tougher on China (although Romney has flipped-flopped yet again), by insisting that after being elected they would place restrictions on Chinese products. Krugman refutes this by claiming in the past two years, China has undergone inflation and their currency has appreciated relative to the dollar. Because of these statistics, the famous claim that China is undervaluing its currency to benefit its export market and harm the export markets of other industrial countries is faulty.

The article goes a step further and counters the claim that we even needed to be tougher than we were on China during the Obama administration. He claims that being even tougher would have been counterproductive and harmed us more. This could have perhaps been true, as China could have reacted by stopping the purchase of US bonds, thus raising the price of our borrowing and the interest rate we would have to pay lenders. This raises a peculiar situation, as we cannot upset China too much or else we will lose an incredibly large lender, but to what extent should we stand for China’s currency manipulation?

In another article by the Economist, an even more alarming view is presented by stating that “the dollar’s influence has declined in 38 cases” from 2005-2008, and these were pre-crisis years. They claim that East Asia is now on the yuan standard, their currencies adjusting similarly to the yuan, in the current economy. Other areas of the world still react more to the dollar, but the Economist claims that the Chinese currency will continue to increase “as its economy and trading activity grow in size,” and the Chinese currency will surpass the dollar by 2035.

This statement is pretty striking to me, and makes me question whether Friedman’s worries about Asia and other developing areas surpassing the US may be true on a financial level as well as a production level. Regardless of whether this statistic is accurate, East Asia is gaining influence quickly both in finance, manufacturing, service industry, and intellectual property. We may not need to panic just yet, but we must come to terms with the fact that we are not the unchallenged giant we like to think we are.

Sub-Saharan Africa Development: A Hope or Reality?

In response to Annelise’s post, it is personally shocking how quickly the status of Sub-Saharan Africa has flipped in relation to South Africa. In my book for class, The Bottom Billion, published in 2007, Collier emphasizes how Sub-Saharan African countries are in a stagnant existence of poverty and resource dependence. I’m not sure how drastically their status on development has turned around over the last few years, but if the Economist’s article is correct, they have made substantial progress.

I completely agree that the quality of governance has a large impact on the success of economies, and Africa has historically been the poster-child for bad government. While government may be becoming more legitimate as there is less dependence on natural resources, we cannot disregard that government in Africa is still of lower quality than developed countries. Additionally, governments may be becoming less corrupt in some areas, in Ghana especially, but in Eastern Africa, elections in Kenya and Tanzania still create mass uprisings and make these countries inherently unsafe to travel too. Collier emphasizes that most areas that are landlocked with few natural resources or access to industrial markets have failed to become independent countries, but in Africa, they have succeeded. Thus, many African countries started with a disadvantage for development, and they will need ample time to catch up; something we must take into consideration.

While the IMF and other international agencies are increasing their presence in Africa, as Annelise states, they are not consistently invested in. Collier explicitly notes this, as some African countries do not even have an IMF representative. Wolf and Stiglitz actually agree on this issue, by claiming that the IMF will not come up with a solution in African countries by visiting for merely 3 weeks; they must increase their investment here if they are to enhance the economic standing of African countries. Rogoff’s article indicates that the IMF has increased its communication and commitment to developing countries, but this must be taken in context with the reading of Stiglitz and Wolf; a 3-week visit does not mean investment.

Annelise also emphasizes investment confidence, a prevalent topic in Africa today. Wolf specifically emphasizes the need for foreign direct investment in today’s IPE. It is true that the IMF and other governing organizations may be too optimistic about Africa’s development, as investment without regulation can spur the wrong kind of development. This point directly relates to the moral hazard argument presented by many critics of the IMF; additional funds given to developing countries can be used unjustly. The aftermath of this can readily be seen in South Africa, as they are currently on the decline from a sub-par education system, high unemployment, and corrupt governance.

The best way to develop Africa is an unending debate that began in colonial times and will undoubtedly spread into the foreseeable future. The IMF and other international agencies should not merely visit these regions; they must actually invest in understanding the unique situation of each African country, as each has specific setbacks and resources. International loans are not inherently bad, but unless we increase regulation and the responsibility of lenders as well as borrowers, the hope for Sub-Saharan Africa’s development may not become a reality.

Freeman and Blinder Enter the Debate

In last night’s presidential debate, the candidates discussed the issue of outsourcing and what they will do to make the American economy an attractive venue for businesses. Romney emphasized how he will do this, but it is only possible if other nations play by the rules (aka China). He pinned them as a “currency manipulator,” by pegging their currency to the dollar, and advocated for placing tariffs on them. Obama said he would bring back US companies by closing loopholes that allow US companies to invest overseas and not having to pay taxes on their profit.

The most intriguing part of their debate was, to me, how they defined what jobs we should bring back to the US. Obama emphasized manufacturing jobs, which Romney then said were not high-skill, to which Obama replied later that we need high-skill and high-wage jobs like manufacturing. It seems to me that if we take out the political lingo and get down to the basic concepts, both want to bring back high-skill jobs to the US; the oh-so-comical jargon is preventing them from realizing their common goals.

In regard to manufacturing, I was reminded of Freeman’s article on factor price equalization in Beijing. In his article, US wages have gone down for manufacturing and we have a high opportunity cost for domestic production; a topic neither Obama nor Romney addressed. While both advocated for a reversal of outsourcing, they did not identify their methods for preventing this detrimental effect of the return of US jobs. Neither did they address the problem of offshoring people who are not in the manufacturing sector, as Blinder does in his article on the offshoring of jobs that do not demand personal relationships. He claims that with the rise of technology, more and more jobs will be transferred to the developing world and the US will not be prepared for “the coming industrial revolution.” To recap: neither candidate addressed the repercussions that bringing back manufacturing jobs will have on the US or the effect that offshoring service-oriented jobs is having.

Romney said that we will create new industry, but he did not say what this industry could possibly be. Obama said we need more engineers. In this context alone, Obama comes off as a Freidman supporter, who claims that we must create more engineers (and does so with an incredibly high level of urgency). If Romney would explain what this new industry could be, his argument would be more credible, and if Obama could explain why we need more engineers but not more people-oriented sectors, so would his. While both candidates addressed the problems of outsourcing, it seemed to be fairly inconclusive as to what will actually be done and how we will be prepared to handle any repercussions. 

Government Aid vs. Development

In response to Simone’s post titled “Austerity = Free Market Economy?” I would agree that free market economies are indeed indicative of global financial growth, thus they allow for financing and investment in the private sector.

However, even if investors do not care what the government supports, they are constricted (to varying degrees) of the government’s stance and involvement in the economy. We discussed this issue primarily with the contrasting views of Stiglitz and Wolf, concluding that investors and other private actors cannot function as they please without some influence of the government’s stance.

I do not believe that increasing governmental aid necessarily helps the economy, and it can create dependence and decrease output. If we do not rely primarily on aid but on sustainable economic development, I don’t think government intervention is automatically harmful. Aid within a country can create dependence just as it can when given to foreign states; the analogy that giving a man a fish is not nearly as productive as teaching him to fish holds in the international and state-based economy. We must not consider government aid as “handouts” to companies only although it could potentially take this form. Greece is undoubtedly suffering and there is dependence on the government, as many capitalists and entrepreneurs emigrated out of the country when or before the financial crisis hit. Continuing to give its citizens government aid will only exacerbate the problem, but that does not mean we should cut off all funds and let citizens fend for themselves. If we do not raise their capability and give high-quality government intervention, we cannot expect capitalist competition to emerge from nothing. Having the government run the economy is not at all what I am suggesting, but by completely isolating citizens and corporations from guidance and capability raising endeavors, we will see the same if not worse effects from giving them continued aid. 

Outsourcing as a Cause of Homelessness

Over Reading Days I went to Charlotte, NC for the Nabor’s trip and we worked with the Urban Ministry Center. The organization predominantly deals with homelessness, an issue we didn’t fully address when talking about off shoring. While different authors had varying opinions on what/whom off shoring would affect, they neglected to mention the possibility that outsourcing could go so far as to make more Americans homeless.

Wolf may be right that protecting US jobs could lead to less productivity, but that doesn’t mean we can simply account for these lost jobs in a statistic and move on unharmed. While sitting in on an information session our first morning there, the program director told us that a large number of people waiting for services have recently had their jobs outsourced. While the stigmas we typically attach to alcoholism, mental illness, and drug addiction are still prevalent, I had never thought someone would be homeless as a result of outsourcing.

As wages continue to decrease, as Freeman addresses, employees at the low-value level become more impoverished, and as jobs are outsourced, they simply lose their jobs all together. I’m not sure of the whole story for each person, but one man I worked with was trained in metalworking and utilities and had to work at a temp agency to find work. I for one don’t think it’s fair for someone who has learned a trade and constantly looking for work to find that he can work at maximum 3 times a week. IPE is often concerned with efficiency of the global market, but when we totally neglect fairness and accept homelessness as an expected outcome, I see a larger issue.

Some of the authors may be right and we may crease new needs for ourselves to fill the labor supply, but that does not mean that everyone who lost a job to outsourcing will be trained in the correct skill set for whatever industry we think of next. It is easy to discuss these issues in the classroom and analyze statistics, but it is another to see an endless line of people on the streets of Charlotte who possibly had steady jobs that weren’t lost to the “typical causes,” but to off-shoring to the third world. 

Sanction vs. Survival

Last night I only managed to catch the last half of the debate where Ryan and Biden repeatedly backstabbed each other, even when responding to a question regarding why this presidential election has been full of derogatory comments towards the opposing party. I now fully understand the comment in class about how much we learn from debates by simply watching their mannerisms, although Ryan’s profound widow’s peak was also distracting. This morning I turned to the New York Times to find some more substantial issues in the debate I had missed and found “Two Rivals Clash on Fiscal Affairs and Iran,” a topic much more prevalent to IPE than the abortion clip I tuned in on.

They brought up the cause of the sanctions, as we discussed in class, as being based in “Iran’s ability to obtain nuclear weapons.” Ryan continued to push that we aren’t tough enough in our sanctions, and that the administration is being too lenient. While I fully accept the argument that we must protect our nation from nuclear attack, there is a fine line between protecting our nation and forcing Iranian citizens to starve by not having access to food sources. Humanity trumps the definition of a nation-state, a concept that many politicians on both sides of the spectrum seem to neglect. When Ryan was asked if he would protect other nations for humanitarian reasons, he claimed he would only do so if it were in our national security interest. On another spectrum, the blog for the Council of Foreign Relations states “nearly all Americans agree that foreign policy issues are not important in this election.” While domestic policies are undoubtedly at the forefront of the elections, we cannot neglect foreign policy, as many are seemingly inclined to do.

One thing the candidates differ on only slightly are their beliefs on foreign policy (Washington Post) and both support the sanctions, and there is recent evidence that  “the sanctions are creating the kind of economic hardship that the Obama administration hopes will generate pressure on Iran’s government to give up its uranium-enrichment program.” While this was a wanted effect of the sanctions, it forces us to return to the humanitarian issue of the Iranian citizens. Again, while national security is vitally important, we cannot neglect humanitarian suffering that we are causing and we will not successfully combat these issues if both parties instinctively tear down the other to attract more voters.

The Never-ending Resource Curse

The Guardian recently released an article claiming that resource-rich African countries have failed to make a large dent on their poverty levels, and countries without many resources actually have less poverty. The resource curse that has stricken many African countries for centuries, beginning with imperialism, continues to be an issue. The World Bank’s chief economist for Africa reemphasizes that “resource-rich African countries have to make the conscious choice to invest in better health, education, and jobs;” it will not happen on its own.

Nigeria specifically has immense reserves that have resulted in massive inequality and corruption by elite government officials, and it is capable of continuing production at these levels for over 40 more years. Foreign direct investment remains strong in these countries, only fueling the process. The World Bank reports that “oil-rich countries systematically perform worse than any other country groups in terms of voice and accountability, political stability, rule of law and the control of corruption.” An evident solution is higher transparency in natural resources and the government, but this is currently optional under the Extractive Industries Transparency Initiative.

This argument is one that has been documented and addressed endlessly over the past decades and each argument formulates its own proposals. However, it seems that no deliberate actions have been taken against these operations in African countries. Policy remains opaque and direct investment remains high without international governance. This goes back to one of Stiglitz’s main arguments of multilateralism and the need for an overarching system to address the injustices of these resource-rich countries.

Curiously, the IMF website seems to have motives parallel to the needs of Nigeria and other African countries, as it strives to step into developing countries to enhance their economy in order to reduce their poverty and dependence on resources. They aim to create sustainable economic growth, unlike resource usage growth, and promote employment and reduce poverty at the same time. The motives and future projects of the IMF include supporting developing countries and reinforcing multilateralism, but we have yet to see tangible outcomes of these efforts. Their aims seem to be parallel to Stiglitz’s and go beyond foreign aid to the sphere of development and sustainability as an international institution. However, there may not be an international system in place strong enough to implement IMF efforts; governance may exist without implementation. 

Economic Implications In A Humanitarian Issue

Today I attended a lecture on a student's encounter of his summer in Palestine. While it dealt more with relations between Israel and Palestine on a civil and military basis, it has some weight in IPE as well. There are currently about 700,000 refugees in the West Bank, often living in refugee camps with high unemployment rates, water crises, rudimentary sewage systems, and low education levels. These living standards are far below humanitarian levels and are exacerbated by Israeli control. Israel dictates the water sources, so there is severely unequal distribution, with Israeli citizens receiving subsidies on water and Palestinians receiving water only about every 15 days, much less subsidies. Many refugees also have mental health disorders, including PSTD, trauma from minors being in adult prisons, and trauma from house demolitions.
One large irony in this is that the United States finances and provides the knowledge base to Israel. Through our efforts, these immoral acts are sustained. Furthermore, the economy in the area is not stable enough to sustain new industries, so a severely high unemployment rate persists. Even when people obtain a high education, they are forced to sneak into Israel illegally for work, even if just for construction jobs. People are being forced to work far below their capability, as engineers and teachers are working service industry and manufacturing jobs.
This problem is undoubtedly a humanitarian concern revolving around military occupation, but there are also economic aspects. The most prevalent are the domestic aspects, as the economy is all but perfectly competitive, so the demand for jobs does not result in the creation of those necessary jobs.
This case study specifically heightens the claim we have discussed that not every economy would benefit from an American economy. When we observe a political state in which refugee camps, unjust government practices, and severe inequality exist, we cannot apply a textbook solution. The international sphere requires heightened governance, as Stiglitz suggests, to even begin to combat these issues. We cannot allow for market forces to correct all issues in an advanced economy, much less an almost nonexistent one.
While the US aid to Israel is given under moral intentions, without an international body to ensure the funds are well spent, we are inadvertently funding the Palestinian situation. This concern is humanitarian, but if we neglect the economic implications, we will only allow this cycle to continue and no solutions will be found.