Yen and now: Japanese monetary concerns

In recent years, Japan has been faced by many environmental and financial crises have impeded the operation of their government.  With the Fukushima Daiichi nuclear disaster and the Sassago Tunnel disaster looming in recent memory, the current state of Japans infrastructure has been brought into question. Prime Minister Shinzo Abe promised a massive public spending budget to ail the woes of Japans lackluster infrastructure. Reaching nearly 13 trillion Yen or $150 billion, the aim of the public spending would be jolt the economic environment out of their current recession.  Currently Japan has the highest public debt to GDP ratio in the world, nearly 200%.  To alleviate the fiduciary problems facing the country, the Bank of Japan has been pressured to print more money. By printing more money the Bank of Japan will weaken the Yen, thusly making it more attractive to foreign investors and aiding domestic exporters, mainly within the automotive and electronic markets. Many officials within the Japanese government have cited the waste of revenue upon projects with have no economic benefits.  Presumably, deficit spending on domestic programs will aid the Asian nation in the short run, the price tag attached to these programs seems too high to warrant. Prime minster Shinzo Abe, proposed nearly 200 trillion Yen  (nearly $ 2 trillion dollars) in domestic projects over the next ten years. Furthermore, the weakened Yen, falling from 82 Yen per dollar to 88 Yen per dollar, has casted a doubt upon the primer ministers aspirations. Skeptics within the Japanese government state that the plan is inherently risky. Mainly the systemic risk emerges if government–bond yields increase without a corresponding rise in the inflationary expectations.  The Abe administration claims that if the consumer market for the government bonds weakens, the Bank of Japan may purchase these bonds to stabilize the Yen.  Only time will tell if Japans infrastructural problems can be aided by the government pro-active Keynesian policies.

The onset of Italian elections and their potential impact on the Euro

With the upcoming elections in Italy looming it seems that the euro crisis may come to fruition once again.  This time it is not financial markets that are threatening another recession, but a political one that could create another financial mess. The transfer of money between rich states is necessary in order to salvage the euro. Germany outlined two options for the struggling states, Greece and Italy, telling them that they can either borrow loans from Germany or allow the European Central Bank to print more money. However, this policy comes at a price: Germans demand austerity. With massive unemployment and stagnant economic growth in Italy, many citizens are fed up with austerity measures and demand new policy changes.

The article goes on to list a few of the candidates on this years ballot along with their own austerity measures.  However, economist Paul Krugman shows in his chart that the austerity policies they create only increased debt levels. He states that the more austerity measures Italy adopts, the more debt they'll incur because it hinders growth and does little to reduce borrowing costs. Countries that borrow in a currency they don't control can face defaults because they are unable to print it. Spain is another country facing similar issues, in which German chancellor has expressed cautious measures for support. Another issue arises with interest rates as investors demand higher interest rates, putting more strain on the government's budget leading to a "bank run on a country."

The article suggests that a way to end this cycle of reckless borrowing and spending is with a "lender-of-last-resort." The idea is that a lender, who is well endowed and confident about lending large loans, gives as much money to do "whatever it takes." In plain language, this means that the ECB will buy a country's bonds in unlimited amounts under certain conditions. This is called the "Outright Monetary Transactions." While the ECB (and Germany) have done everything necessary to keep the euro from sinking, there still remains a problem with fostering economic growth. Fears of further austerity policies and tight money in southern European economies have already begun. It will be interesting to see in the following months how the ECB and Germany will give southern European countries a plausible solution to reducing unemployment and debt and improve financial growth.

Mining Troubles Translate to Economic Troubles in South Africa

Over the past year, South Africa, a country that depends heavily on mining for its economic welfare, has seen serious cracks start to develop the security of its mining industry.  Today, South Africa is becoming a battleground not only between labor and capital, but also the state and mining firms.

Mining labor relations in South Africa have been tense to say the least over the past year, with many strikes even labor related violence.  In one such incident, 34 platinum miners were killed by police while on strike.  Beyond that, there is plenty of unrest over miners' pay, which is further complicated by dropping commodity prices.  In many ways, South African miners can be seen as the victims of trade as they find it difficult to secure adequate wages or losing their jobs as mines close.  This is somewhat reflective of the problem of factor mobility within the factor and sector models.  Although the factor model may predict that it would be somewhat easy for the laid off miners to find work in other industries, it is more difficult than that model seems to suggest and may be more indicative of the problems highlighted in the sector model.  Similarly to in America, there have also been mentions of helping South African miners find new jobs through new training, such as is highlighted in this video, which also mentions the problems with mining and labor in recent times, as well as the influence on other industries that mining has.

South African economic development has also proved challenging because of dwindling investment due to the labor unrest as the South African government fights to keep the mining industry from moving to other African countries.  The recent labor unrest made it so that "Many investors are still nervous about last year's strikes at many of South Africa's mines and the devastating effect they had on production."  South Africa is much more developed than most African nations; however, their economy could be endangered if much of the mining industry chooses to relocate to other countries.  One comparative advantage that South Africa does have other the over countries that may attract mining is its more developed infrastructure.

Whatever the future of South Africa's mining industry is, it speaks volumes about factor mobility within the region, the ability of firms to relocate in order to maintain advantages, the necessity of investment in South Africa's economy to keep it afloat, and the potential for other African countries to benefit through foreign investment in mining.

India’s Growth Comes at a Price for Some

As one of the fastest growing economies in the world, India is optimistic about it’s future.  Despite the fact that India’s economic growth suffered a decline to 5% in the 2012-2013 year, it is expected that growth will increase to about 6.1% to 6.7% in 2013-2014.  India doesn’t seem worried about it’s development, arguing that China and Indonesia are the only other Asian economies growing at a faster rate.

What’s India’s secret to growth?  For one, India has been placing substantial emphasis on developing it’s retail, insurance, and aviation sectors and also promoting it’s microfinance sector in attempt to gain foreign investment.  Why retail, insurance, and aviation? These sectors have proven more resilient to economic shocks than have other sectors such as agriculture.

However, India’s move towards retail, insurance, and aviation has come with a price: millions of dollars in lost business due to union workers going on strike.  This is a clear example of the “losers” who suffer from the distributional consequences of relocating capital from one sector to another.  This move also exemplifies the problem with factor mobility, which is the assumption that workers can easily move from one sector to another.

And that’s not all India is doing to get back on it’s feet.  India’s finance minister announced increased taxes on the wealthy, as well as an additional surcharge on large domestic businesses.

Although India is projected to reach it’s target of reducing it’s deficit and increasing growth, it definitely comes with a price for many in the domestic sphere, creating winners and losers in the process.

Labor in the U.S. and China - The Case of iPads and iPhones

This article from "The Economist" discusses the U.S.'s deficit with China and how statistics are actually  illusionary hyperboles created by the official data on U.S. imports from China. The article is based on a study done by UC-Berkeley, UC-Irvine, and Syracuse. The authors of the study conclude that despite the fact that most Ipads and Iphones are assembled in China, "the primary benefits go to the U.S. economy." I thought this was interesting because it connects to the article we read in class called Mr. China Comes to America. In the article James Fallows argues that:

"China’s economic and social maturing, tumultuous or smooth as it may turn out to be, will certainly affect the world division of labor. Some very low-skill jobs may move to very low-wage economies, such as Burma, India, and parts of Africa; some will move to inland China; some will be automated or done by robots; some will stay in China, but at higher costs."

Thus, my question is: considering the U.S. still receives the largest share from the production of iPads and iPhones in China (despite the higher labor costs), would Fallows still argue for bringing manufacturing back to America? Perhaps optimistically thinking, he would stick to his argument that in the long run the reindustrialization of the U.S. can be done through policy changes and reforms, opening up more options for the unemployed American workers. However, in the article from "The Economist" the graph below is presented:

This graph essentially reflects that the "main rewards from the production of iPads and iPhones in China, go to American shareholders and workers". Thus, why would American companies like Apple want to go through the trouble of shifting labor to poorer countries or even to America where more jobs can be created? In the long-run, perhaps Apple would want to transfer labor to the U.S. because the same thing that is happening in China now with labor becoming more expensive could eventually happen in poorer countries as well. Therefore instead of investing in manufacturers like Foxconn in poorer countries over and over again (as labor becomes more expensive), why not just invest in manufacturing iPads and iPhones in the U.S. which would bring more profits to American workers as well as the company? Well, the answer is simple: MNCs not always think in terms of the long-run; and especially because Apple and its workers in the U.S. seem to be making a large part of the profit already, I think that companies like Apple would keep moving labor to poorer countries instead of bringing manufacturing back to America. Because it may take centuries until labor costs can start increasing in other poor countries, like Bangladesh or even India. Thus, it may be cheaper to assembly iPads and iPhones in poorer countries than to reindustrialize the U.S which would require large investments along with large policy reforms and whatnot. The rich have a tendency to want to become richer. If moving from China to a poorer countries means they will save money as opposed to moving manufacturing back to the U.S., Apple will choose the former option.

Air Trade

The developments in globalization and international trade that have come about over the last half-century have been profound. The world we live in today is vastly different than what it was just 50 years ago. Today, goods of all types travel faster and more efficiently between nations than ever before. Other advantages to globalization include the increase in the amount of goods that are available, lower cost to consumers, and specialization among nations. While these advancements have radically changed our world both on a domestic and international level, they have not come without tradeoffs. It is no coincidence that an increase in environmental awareness and concern has arisen alongside globalization. The rise in the amount of fossil fuels that are being burned as a result of manufacturing and other mediums of globalization has led to drastic increases in the amount of carbon dioxide that is being emitted into our atmosphere. Many developed countries, including the United States, have implemented policies to reduce the harmful effects that come from externalities such as carbon emissions. In contrast, many developing or undeveloped countries have no such policies in place, greatly increasing the environmental harm that comes from their emissions. A growing concern among many environmental and political leaders is that there is no international standard for stabilizing carbon dioxide emissions.

In a February 2013 Economist article, proposals for carbon-based tariffs were evaluated based on their feasibility and likelihood of success. The article emphasizes the fact that as carbon is valued differently by different nations, those who value carbon higher “…will be at a competitive disadvantage because the cost of emitting carbon will be embodied in the overall price of goods, raising them relative to goods produced in countries with no or low carbon prices.” Because developing countries such as China and India are not implementing environmental protections to the level that many developed countries have, a majority of production has been moved to these countries partly to avoid costs associated with environmental impact. In an effort to counterbalance these movements, several proposals are highlighted in this article that would impose a carbon-based tariff on goods regardless of their country of origin. One such proposal is a tariff on imported goods based on the carbon emission level of the goods country of origin. Messrs Mattoo and Arvind Subramanian, both economists, estimate that with this type of policy, there would be a 21% tariff on goods produced in India and a 26% tariff on goods originating in China. Another concern with this model relates to the reality that goods are no longer manufactured solely in one nation, but components are assembled all over the world and then shipped to a final assembly location. Needless to say, a proposal like this would not only be difficult to enforce, but radically change the international economy. A more realistic model involves taxing imported goods based on the importing countries carbon emission level. This would tax goods at a uniform rate and would be easier to manage and enforce.

 These proposals and others like them emphasize important points. We live in a changing world and it will soon be impossible to ignore the environmental consequences that have come as a result of our massive increase in manufacturing and carbon emissions. Creating a tax that balances the necessity for managing carbon emissions with the consequences of the tariffs implementation is critical to maintaining a strong international economic market.

Regional Trade Agreements in Southeast Asia

Connecting to today's lecture on Regional Trade Agreements, this article by Simon Denyer, India looks to Burma to boost trade with south-east Asia, from The Guardian discusses the Southeast Asian economy and India's motivation to develop its economy as well as counter China as a major player in the region.

Denyer discusses the opportunity that a liberalizing Burma offers India, especially as a conduit to the rest of Southeast Asia. He quotes an Indian government official, "' Now we want to engage east, not just look east,' said Siddharth, a joint secretary in the ministry of commerce and industry."

Denyer notes that although Asian Highway Number One currently connects India with its neighbor Burma, there is not a significant amount of trade between the countries, and that is a missed opportunity, which Indian leaders recognize. By trading with its immediate neighbor, India would put itself in a better position to increase trade with regional partners. It is noted that,

"Thanks to a recently signed free-trade agreement, trade between India and [the ASEAN states] grew by about 40%, to $80bn, in the fiscal year that ended last March and now represents about 10% of the country's total overseas trade.
Plans to extend that trading bloc to take in countries including China and Australia under a broader regional framework are also advancing."

It seems that India is taking significant steps in the right direct towards leveraging its economic opportunity and engaging with regional neighbors.

For additional reading, a couple other articles:

From The Economist, "A walk on the wild side" provides insight into the current state of the Indian economy, including its debt problems and the setbacks this poses towards investment, a key driver for trade integration.

From the East Asia Forum, a 2011 article addressing issues which are still relevant to Southeast Asian regional trade, Regional trading agreements: Good or bad for India?

The Faults of Rich Countries in the WTO and RTA's

Today in lecture we discussed the lessons we can take away from trade. More specifically, we mentioned the faults of rich nations within general trade agreements, foreign aid, and regional trade agreements. The Guardian published an article on January 12, 2013 that addresses these issues in further depth. The arguments from this article are useful in furthering our understanding of problems within WTO trade agreements.

As we have determined early on in this course, trade liberalization is based on providing the optimal result for both nations negotiating. In lecture, we mentioned how Collier takes issue with the claim that trade is bad for developing countries. Although, we examined the counter argument that often times the richer nations impede the goals of developing countries through ties to aid or trade policies. This notion is included in the article from The Guardian, 

"The developed countries do not want to have these discussions," Flassbeck says. But without confronting issues such as these, which are key to emerging economies, the WTO may risk becoming irrelevant. "If they [developing countries] are not treated as equal partners, if their concerns are not listened to, why should they say 'we're willing to open our markets more'?"

This discussion relate to the negotiations taking place between the developed and developing nations in the WTO. Evidently, the impact of the WTO in providing the optimal trade policies for development is minimal, at least in these discussions. If the WTO fails to bring together the ideals of both sides, trade will ultimately not be beneficial for the developing countries that are members of the WTO.

The article goes on to discuss the possible reasonings behind why outsourcing has "probably passed its peak." The author includes the ideas of Simon Evenett, a professor at the St Gallen University. The articles details his argument, "He cites issues with intellectual property, product quality and the treatment of staff in far-away factories as complications that make the process less of a boon for the bottom line than it once appeared." Similarly, these ideas reaffirm what we discussed to be the faults of rich countries in lecture. More specifically, this issue of labor mobility and its effect for developing nations. 

In our readings, Collier states that his problem with RTA's is they they do not encourage diversification or outside trade. This principle is further explained in the article. The author concludes that RTA's do not allow the weaker nations to band together, as they can in WTO negotiations, which enables the richer countries to use their bargaining power to produce a better trade policy for them. Moreover, RTA’s are a mechanism for richer countries to in a sense, exploit individual developing economies. Also, the author mentions that RTA’s are accountable for making contradictory rules that can result in say 10 different versions of the same product being produced within the market. Furthermore, this represents a failure in export diversification. As we determined in lecture, export diversification is essential for poor countries because it provides them a sort of insurance in the global Markey. This argument supports that of Collier, in regards to the faults of RTA’s and the resulting consequences for developing countries.

Here is the link to the article:
http://www.guardian.co.uk/world/2013/jan/13/world-trade-organisation-new-director-general

Here are follow up links to other articles discussing these issues:
http://www.wto.org/english/news_e/pres12_e/pr676_e.htm

http://borgenproject.org/wto-failures/

http://www.wto.org/english/tratop_e/devel_e/a4t_e/aid4trade_e.htm

The Middle-Income Trap

Poor countries today have an advantage that rich countries did not have when they were working toward economic development, and that is the examples set and technologies created by rich countries today. This should mean that poor countries today have the ability to catch up to the rich countries, however, this type of global convergence does not always occur, there have only been 13 countries that have succeed in this.  These countries tend to either, not grow at all, or to grow rapidly and then stop before reaching the threshold of high-income countries. The case were they have rapid growth up to a certain point is now being referred to as the Middle-Income Trap .

The Middle-Income Trap claims that when a country get to $15,000 GDP per capita or $11,000 GDP per capita, a decrease in GDP per capita growth occurs averaging at about 2% per annum.  These findings are supported by Eichengreen, Park and Shin who claim that one of the factors that pays a role in the inability of middle-income countries to overcome this trap is the lack of secondary and tertiary education which creates high quality human capital and was one of the reasons that Korea had a successful transition to a high-income where as Malaysia and Thailand have not had the same success.

However, the Economist finds issue with the theory of the middle-income trap because one of the theory’s components is that middle-income countries do not have the technology of the high-income countries or the cheap labor of the low-income countries and thus cannot effectively compete with either. However, this is assuming that these countries have not been updating their institutions continuously, but instead waiting for the last under employed laborer to leave the farm before making changes, making them inefficient, which has not been found as the case.

Both sides give more points to support or deny the theory, but neither is able to answer the question of whether or not the middle-income trap will affect China in the coming years. In 2012 China’s Development Research Centre created a report for the World Bank stating all of the reforms that China will need to make in the next few decades to become a high-income economy and it was a shocking list. However, Greece, a country not held highly on its past or present economy was able to cross this threshold and overcome the middle-income trap, so what is stopping China, a country with an “awesome economy” from escaping this trap as well?

Environmental Trade Regulations

The last few decades have seen an increase in the concern for promoting environmentally friendly practices. Now it has extended into imposing trade regulations based on environmental concerns. While it seems a good idea to try and promote better practices through trade regulations, this may come with unintended consequences. And some have even argued that free trade with no regulations is actually the most beneficial for the environment.

An Economist article outlines the example of tariffs on carbon. First off, generating these tariffs would not only be complex but difficult to implement. One of the options would be a tax based on content-this would be the fairest, but also extremely difficult since its very hard to measure carbon content. And the countries which would be hit hardest, India and China, would experience huge deficits in their exports. While this may be good for the environment, it is not great for welfare, as the article stipulates that such a tax would probably cause about a global 1% decrease. An easier option would be to install more of a flat tax on all imports using carbon-this cuts some countries a break, but also penalizes countries like Brazil which try to use greener practices. And then there's the problem that much of the current climate debate is coming from countries which have already gone through the process of industrialization. Is it fair to possibly keep these developing countries in poverty by installing these regulations?

Another perspective is not to adopt any environmental regulations, but that free trade actually has the most potential to further the environmental cause. The article starts by reflecting the difficulties in even coming to a consensus on environmental trade regulations, a blaring example being the Kyoto protocol. And if the regulations become accepted, it probably means higher costs across the board for any energy using products. A closer look will expose that most goods consumers buy would fall into this category, therefore shrinking economic growth. Since the new technology surrounding environmentally sound practices is still relatively new, it is also among the more expensive. How are countries supposed to install this technology if regulations have caused a slump in economic growth?

The answer is almost ironic, but allowing more free trade should increase the desire and ability for countries to make their goods more environmentally friendly. Is it any wonder that the countries now concerned with environmental practices are those that are more economically developed? It just goes to show that as income rises, so does concern about the environment. And higher income should also allow these countries to adopt these environmental policies which incur greater costs.

Both the costs and benefits to imposing trade regulations based on environmental factors have made it very complicated to pass such restrictions through the WTO. Some of the more successful restrictions have been based around preserving plant and animal life. For more information on WTO restrictions and the environment, you can look here.

Are Manufacturing Jobs Coming Back to the US?

This article I found on the BBC goes along with what we've been talking about in class. I thought it was pretty interesting. It says some jobs are coming back, but the wages are much lower than they used to be.

Food for thought.

Put the Money in the Bag!

Yasuni National Park, Ecuador

There are two types of people who come to Yasuni National Park. There are the bird watchers and there are the oilmen. 

This excerpt from a Planet Money podcast entitled "Holding a Rainforest Hostage", captures the fundamental dilemma that the government of Ecuador faces in regards to whether they should protect their verdant tropical vegetation, or cash in on it.

Don't be mistaken, Ecuadorians love the rainforest. In fact, the people of Ecuador have such profound respect for nature that it is given guaranteed rights "to exist, persist, maintain and regenerate its vital cycles" under their constitution. Enforcement of these rights would not only protect Yasuni National Park from deforestation, but would also protect the inhabitants of one of the most ecologically diverse regions in the world.

Unfortunately for the critters and flora that reside deep in the jungle, there exists a threat below the surface of the canopy which threatens their survival. This of course is a whole ocean of oil that is just waiting to be turned into gold.

So how much "milkshake" could Ecuador potentially drink if they start drilling in Yasuni National Park? Conservative estimates believe that roughly 900 million barrels of oil could be extracted if the rainforest is cleared out. At the current price of $100/barrel, this would gross around $20 billion dollars. For a developing country that has a GDP of only $134.8 billion, this is quite a hefty sum. Consider also that Ecuador's oil exports (petroleum is the chief export) fund roughly two fifth of the country's public sector, which is crucial for human capital development and infrastructure spending.

So either Ecuador preserves the rainforest, but loses a chance to grow the economy, or the government can unleash the power of the market on Yasuni National Park and let the wildlife be at the mercy of the oil industry. These are two pretty bleak options, however President Rafeal Correa has cleverly hatched a third alternative.

Hold the rainforest hostage and demand ransom from the "rich" countries.

The option isn't actually as sinister as it sounds. Instead of "ransom", Mr. Correa would prefer the term "compensation", essentially it would be payment for preserving the rainforest instead of exploiting it. The government doesn't even want the full $20 billion to match the estimated oil worth, but just a relatively measly $3.6 billion (they have 12 years to do it). Even if this is extortion on some level, its pretty lenient/generous as far as black mail goes. Of course this has not stopped some in the global community from expressing outrage. The German Development minister, Dirk Niebel, dismissed the whole endeavor as preposterous, claiming that "only action must be rewarded".

I personally disagree with Dirk Niebel and think this policy is not only genius, but also justified. Why you might ask? It is because Yasuni National Park is not just valuable for its ecological diversity, but also for its use as a global carbon sink. According the most recent findings in climate science, tropical rainforests capture about 1.2 billion tons of dioxide a year! Since we know from the Jeffrey Frankel article from class that green house gases are transnational in a sense, the emissions from industrialized economies have been absorbed by Latin America's rainforests...free of charge! Does it not stand to reason that countries like Ecuador deserve just compensation for this environmental service? Shouldn't those that pollute the most have to "interalize" these "externalities" by paying for the preservation of this precious resource?

Well either way, the world has only 12 years to get the money to Ecuador...or else!

An Atlantic Century?

In the aftermath of the recent economic crises, we are beginning to see the rise of the US and the slow stabilization of Europe.  Additionally, both are moving closer together demonstrated most recently in Obama’s State of the Union address in which he mentioned the Transatlantic Free Trade Pact, a deal between the United States and the European Union that would lower barriers to trade.  Some such as Anne-Marie Slaughter, professor of politics and international affairs at Princeton, think that the world may be moving towards an "Atlantic Century", a period in which the world economy is dominated by trade over the Atlantic primarily between the Americas and Europe.  This is a seemingly tough case to make, especially with the rapid economic growth of Asian countries such as China and India.

However, in regard to increasing energy production in the Americas, there are numerous estimates that indicate that the U.S. and Europe will become decreasingly dependent on oil and natural gas imports from Russia and the Middle East.  First off, the U.S. has already taken over Russia as the world's largest gas producer and is expected to increase production significantly in the coming decade.  At a recent conference in Munich, US Special Envoy and Coordinator for International Energy Affairs Carlos Pascual projected that the U.S. will be able to import all of its energy needs from within the Americas by 2030.  Another estimate by the German Intelligence Agency predicts that the U.S. could start to export oil and gas by 2020.  In addition to the U.S., other countries in the Americas with large energy deposits include Mexico, Argentina, and Venezuela. 

This could have huge geopolitical implications. China would likely take the position that the U.S. currently holds as the world's number one energy importer, making it increasingly dependent on the Middle East.  If the U.S. enjoys such energy independence it might have less tolerance for the repressive oil-exporting regimes it once relied on.  Also, if Europe were to import its gas from the Americas, it could be sold to Ukraine in the case that Russia restricts the flow of gas to Ukraine for political reasons. 

It will take some time for any of this to unfold, but we are already seeing imminent signs of growing power in Atlantic relations.  The Transatlantic Free Trade Pact announced by Obama is only the beginning of the process, though there is ample evidence that such an agreement would have little economic impact due to the already low trade barriers between the EU and the U.S.  Regardless, it will be interesting to see if this century turns out to be the proposed "Atlantic Century".  

Resource Curse: Connecting Angola & Brazil

My post feeds off of Professor Karreth's links regarding the resource curse and compares the situation in Angola to that of Brazil. This article brought up the geological history of Angola and Brazil stating that the two countries were believed to once be connected on the supercontinent of Pangea and as such the two countries are virtually geological twins today.

 Brazil has been fueled by it's oil production economically, and according to the U.S. energy information administration was the largest producer of liquid fuels in South American in 2011. I was curious as to how this rich resource endowment had been affecting its political and economic status. This economist article discusses Petrobas, the large state-run oil company in Brazil, and states that the company is dominated by government appointed directors. This kind of incest also appears in Angola where the first article I listed states that the Angolan President's son and daughter are in charge of the Sovereign Wealth Fund being created in Angola, and the head of the Red Cross in Angola (respectively).
The Sovereign Wealth Fund is another dimension Angola and Brazil share, the following Economist article states that due to the governments disappointment in this quarter's GDP numbers they are being forced to 'raid' the sovereign debt fund they set up in 08'. Interestingly enough Angola's strategy to avoid the perils their sure-to-be short lived oil jackpot will certainty bring, is to diversify into other sectors (such as agriculture and fishery) and the $5 billion dollar sovereign wealth fund is an attempt to aid in the diversification process. As noted earlier one of three members on the board of this fund is the President's son.
The dimenstions on which Angola and Brazil present similarities is uncanny, and it is my thought that Brazil may forshadow the fate of Angola (at least in certain ways). Which wouldnt be all horrible, although Brazil is struggling at the moment, but this downturn is coming of the heels of years of substaintial growth. A Reuters article calls Brazil the "near China" due to its large and relatively recent growth trend. Brazil's prosperity was in large part due to the thriving middle class who are now demanding more high quality goods. This could be good for Angola as the first article states only 10% of their country can be considered middle class. But is it sustainable? Can any other correlations be drawn between Angola and Brazil to help substantiate this comparison?To disprove it?

Economics, Morality and Policy:Immigration Reform in America

Immigration reform has been one of several hot topic issues that frequently appears in news media, social media and political discourse.  On both sides of the debate are those who vehemently express their opinions, using the appeals of economic reasoning quantified through data and moral rationale expressed through the lenses of empathy and sympathy.  A group of eight legislators is currently in the process of creating a bipartisan immigration bill designed to address the nation's estimated 11 million illegal immigrants.  The word "amnesty" is likely the best single word one could choose to describe ongoing obstruction in this legislation's implementation.  While compulsively reading news feeds and intermittently checking Facebook on any given day I have noticed that it is rare to find an examination of facts that even pretends to attempt an unbiased view of the implications of immigration reform.  Within social media, the moral argument pervades a majority of posts occasionally accompanied by loosely reiterated rhetoric or numbers.  "The fact is that they broke the law by entering illegally" and "the vast majority of Americans were immigrants once, we were founded on the principle of acceptance" are likely arguments that we have all heard repeatedly in some form from each camp.  News articles perform more strongly by quoting numerous experts and officially compiled reports but generally follow a very clearly liberal or conservative origin of thought.

A post shared on Facebook by an acquaintance of mine earlier today linked this article about the negative fiscal impact of granting amnesty to the illegal immigrant population residing in America.  The article predicts that the net federal fiscal cost of these people, that is the total estimated amount of taxes paid minus the estimated costs of social benefits received will grow from over $10 billion measured in 2002 up to almost $29 billion.  An influx of unskilled, legal labor adds to the federal  budget burden because low-skilled labor is the most likely to utilize social programs while contributing a relatively low amount in the way of taxes.  Another argument is the direct effect of greater numbers of workers on the wages of the already poor, low-skill American labor force.  This is basic supply and demand. 

Contrastingly, an article I came across a few weeks ago on Google News, examining the economics of immigration addresses some economic reasoning explaining some of the benefits and seemingly counter-intuitive effects of granting amnesty.  One of the greatest social benefit costs in the United States is Social Security which is designed almost entirely for support of the elderly.  Immigrants typically are young, often very hard-working individuals who don't use this service and who pay taxes, whether legally or not.  So those who pay taxes using fake Social Security numbers create "pure profit for the Treasury."  It is also possible that more workers entering the states will lower the wages of American-born citizens, which can also lower the costs of doing business, leading to lower prices on goods which can lead to a higher relative wage.  Granting amnesty will also encourage more legal immigration.

International trade theory states that a country with an open economy will specialize in whatever goods it can make more efficiently than other countries.  Labor abundance is a factor that contributes to a country's ability to do so.  When a country first transitions from a less open economy to a more open one, labor essentially receives less income due to greater supply while owners of capital (rich people) receive higher returns due to the scarcity of capital relative to the amount of workers.  As the country realizes its comparative advantage in labor however, industry requiring intensive labor moves in until the demand for labor rises higher than its previous levels in that country.  To summarize, when people have the ability to move across borders to work, at first everyone's wages within that country drop but will eventually rise past their initial levels. 

This seems like a great argument for amnesty; put everyone on paper, make it official, encourage immigration, ensure that their children receive education(human capital investment) and can contribute to society.  But what about the debated effects on the welfare burden?  What about those who lose in the short run?  A generation of Americans may lose in order for the following generation to gain?  What about the fact that these illegal immigrants are human beings who deserve a chance to provide for their families? What if one or any of the points of either side is completely exaggerated, unfounded in evidence or completely wrong? 

Someone once said that it is a mistake to judge policy by its intent, rather than its outcomes.  This post hopefully created more questions than it answered.  I am at a point where I feel a little tired of hearing the opinions of people who choose their point of view, their political team, and subsequently gather information to support it.  In the democracy of the (ostensibly) most powerful nation on Earth, where public opinion literally can change the world it is imperative that we as voters and scholars examine every bit of information we can, read between the lines, and use logic over emotion to make our decisions.

More on the resource curse

Here is some more information on the resource curse, and efforts to combat it.

• A good overview is Michael L. Ross (1999). “The Political Economy of the Resource Curse.”  World Politics 51.2, pp. 297–322. [link].
• What is the second-most expensive place in the world to live for expats? Luanda, Angola... would you have known? Here is some background.
• International governance efforts: part 1, part 2.

Various news related to recent in-class discussions

Three items of interest:

• Since we discussed Brazil in the context of ISI, you might find this post by political economist Nate Jensen from Washington University in St. Louis interesting. Quick preview: BMW announced the opening of a car plant in Brazil...
• Nate Jensen also discusses a number of incentive programs for international investors, from a variety of perspectives.
• Some numbers on manufacturing output around the world, posted on a blog about industrialization and development in Sub-Saharan Africa that's generally worth following.

The New Political Economy

For those of you who don't know Dani Rodrik, last week in Psci 4193 we were assigned to read  Rodrik's "Why do More Open Economies Have Bigger Governments?" Dani Rodrik is a Harvard scholar who has, on many occassions, challenged the status quo in the field of political economics and succeeded. "Why do More Open Economies Have Bigger Governments?" is just one example where Rodrik argues that more trade causes risk, which leads to the demand for insurance as safety nets (I.e. bigger governments). This argument was contrary to the popular "race to the bottom" approach at which argued that deindustrialization was the cause of bigger governments. Rodrik's logic and presentation are without a doubt the best and most influential arguments that I have read concerning political and development economics. His articles are easy to read and shed light on modern and practical approaches to the world economy.

I highly recommend skimming through the article I have attached by Dani Rodrik called "Goodbye Washington Consnsus Hello Washington Confusion." This article was assigned to me last semester in Econ Development and out of a hundred readings this one was the most helpful and well argued paper all semester. http://www.hks.harvard.edu/fs/drodrik/Research%20papers/Lessons%20of%20the%201990s%20review%20_JEL_.pdf
This article is long so read the intro and the conclusion. I would also suggest that you start reading the secon paragraph on page four for some background on the Washington Consunsus  and his argument against efficiency gains at the bottom of page five. Much of Rodrik's analysis follows 
The World Banks: Learning from a Decade of Reform. He argues that the neoliberal conditions that were pushed on developing countries by the IMF is a failing approach and he shares his vision of what ought to be done. 

Rodrik comes highly recommended to any students studying economics who wish to broaden their 
understanding of the bigger picture side of the world economy. I hope this is helpful to someone because it was especially helpful to me. Only takes 5 min read it! 

Nationwide Protests in Greece

The eurozone crisis has devastated the Greek economy and pummeled the nation with massive debt, the highest unemployment rate in the region, and a dismal forecast for next year as well. Greece's intense economic struggle has not gone unanswered by the European Union and International Monetary Fund, which have bailed out Athens twice before with aid amounting to over €200 billion. But those loans come at a price. Greek Prime Minister Antonis Samaras must fulfill promises made to the IMF by implementing reforms he believes will decrease deficit spending and generate more income which can then be devoted to repaying Greece's creditors.

These reforms are wildly unpopular among Greek citizens. Anti-austerity demonstrators led a massive strike and took to the streets on Wednesday (February 20), calling for the government's resignation. These protestors believe they were given a bad deal. The conditions of the bailout have led to the Greek government cutting its spending, particularly in the public sector, and tax increases, enraging those affected and driving people to protest. The strike was called by Greece's two main unions (both in the private and public sector) in order to put pressure on Samaras's government. GSEE, one of the two major unions calling for the strike, was quoted saying the nationwide strike was:

"Our answer to the dead-end policies that have squeezed the life out of workers, impoverished society and plunged the economy into recession and crisis. Our struggle will continue for as long as these policies are implemented."

Today's protests came in the wake of similar anti-austerity protests in Bulgaria that took place over the past ten days. Demonstrators in Bulgaria were protesting the high unemployment, low salaries, falling living standards and widespread corruption in their nation, calling for the government's resignation. Unlike the demonstrations in Greece, however, the Bulgarian protests took a violent turn, leaving 28 injured this week. Bulgarian Prime Minister Boyko Borisov resigned today, saying, "I will not participate in a government where the police beat people up or where threats for protests replace political dialogue."

The surprise resignation of Borisov's government in Bulgaria may come as encouragement to protestors in Greece, who face an even higher unemployment rate (now 27% and 60% of young workers). The Greek government faces intense pressure from the population as well as its international creditors. The demonstrations today clearly highlight the complicated tug-of-war of the domestic and international demands on Samaras's government.

Change North of the 38th

For decades now, the North Korean government has taken many risks, most of which have failed and have since put the citizens into difficult living situations. The North Korean government has one of the most centrally planned economies in the world and one of the least open. According to the CIA one of the biggest issues is their military spending. They have spent so much money on this one area that other sectors like agriculture have failed miserably. Thus the country has had to rely on Food Aid from other countries, like the US and China.

This could all come to an end soon though. The US may quit supporting North Korea soon due to their continued proliferation and testing of nuclear weapons. Some argue that these are just being tested to grab the attention of the US, this is similar to an annoying child that won't settle down. If they want help from the US then they need to be willing to work with us. So how do we get the change we want to see in North Korea and help the citizens living there? An article from the Economist on the 9th of this month said it could happen naturally.

This natural transition could come as the black market in North Korea develops. Due to Kim Jong Uns massive military spending the people of North Korea are not able to get many of the items they need to survive. In order to live a lot of them get the necessities they need via the black market. This black market runs between both North Korea and China, as well as with South Korea. Through this new market some citizens are gaining wealth, wealth that had once been reserved for the Jong family and their inner circles. Now that others are getting trade from other countries and seeing the living conditions in their neighbors, a regime change could come sooner than later. 

China has much more to worry about if a regime change were to take place as they share a border along the Yalu river. If China were to quit sending aid and the regime collapsed they would most likely experience a massive influx of refugees unless South Korea were able to quickly act and unify the peninsula, as is their goal.

So obviously Kim Jong Un needs to change the countries current trajectory. There may not be a quick and easy way to do this. As most leaders have already stated, he needs to reduce his military spending and get rid of his nuclear weapons. This would make more countries apt to provide food and economic aid, but how might he attract more foreign direct investment into his country given his track record? One thing is for certain, it will be interesting to see what happens north of the 38th parallel in the coming months.   

Recently, the numbers of the Eurozone's last quarter came out, and proved to be a bit of a shock to analysts everywhere.  While most were expecting negative numbers, it turned out to be worse than most would have predicted.  The biggest shock was the EU's economic powerhouse, Germany, also took a hit in the last three months of 2012, as it's economic output decreased by 0.6%, according to a BBC editorial.  Overall, the entire Eurozone also saw a decrease in output of 0.6%.  These numbers mark the end of a "dismal" year for the European economy, and many analysts are watching to see how this will continue to play out.

If this economic crisis in Europe is starting to hit Germany, than one can only imagine the consequences for weaker nations, such as Italy.  This is especially true as the nation's presidential election draws near.  One of the greatest issues for the voters is how the new leader will fix the economic crisis that predecessors like Berlusconi created.  Even just days before the polls opened, many voters were still undecided about who they would choose-one statistic indicated as many as 30% of the eligible population of women did not have a set opinion yet.  This type of chaos indicates the fear many have  for the future of the their nation as well as the European community.  The new leader will essentially be responsible for saving Italy, and voters need to make the most prudent decision.

There is some good news in the Eurozone, however.  Spain, one of the nations largely responsible for Europe's financial crisis, is in some ways a lot better shape than it was in six months ago.  Outside investors are beginning to invest in the debt, and the primary deficit is also coming down.  One the other hand, however, growth and output is not getting better.  It's not a good situation for anyone.

This lack of growth in the European economy has negative implications for the community as well as the global market.  If the market continues to fail in Europe, it is likely that the nations will start enacting protectionism measures in order to save their businesses.  If they are failing while other markets are doing better, they will be less competitive on the global market and need to internalize in order to save themselves.  If the European community decreases its global trading, it would have serious consequences in other sectors too, including the United States.  Overall, it is important for the European community to come together and take measures to increase output again. 

Less is More: Currency Devaluation

Following the devastating tsunami, the Bank of Japan began injecting billions of dollars into its beleaguered economy, in addition to lowering interest rates.  The intended purpose of these maneuvers was to reverse the economic recession gripping Japan.  On the other side of the world in Mexico, Gruma SAB, the world's largest producer of tortillas, has experienced extreme volatility in its stock price over the past few weeks, brought on by lower-than-anticipated annual revenue.  Some analysts have even recommended against buying Gruma shares, a recently risky investment.

The events in Japan and Mexico may seem unrelated, but relationships between global economies are often difficult to spot.  Lowering the borrowing rate and buying back government-issued bonds allowed the Japanese to create a vast surplus of yen, intending to stimulate the economy and halt deflation.  By increasing the amount of yen in circulation, the Bank of Japan is decreasing the value of the yen in relation to other currencies.  Devaluing a currency encourages export and domestic production growth because domestic goods become 'cheaper' to produce.

Gruma SAB's market fluctuation is rooted in Venezuela's recent currency devaluation.  Venezuela accounted for 16% of Gruma's total revenue in 2011; however, the currency devaluation makes that same 16% worth less than before.  Although the currency devaluation was not intended to hurt Gruma SAB, or other international businesses, the Venezuelan import sector will suffer as goods become more expensive.

Much of the financial policy used to devalue currency is enacted through domestic legislation, but the nature of our increasingly interconnected global economy dictates that small splashes are capable of generating big waves.  The G-20 is a group of finance ministers and central bank officials from the world's twenty largest economies.  Its intended goal is to facilitate economic communication between countries and "ensure global economic stability."  On Saturday, the organization issued a statement promising to ". . .refrain from competitive devaluation" and  ". . .not target our exchange rates for competitive purposes."  The statement brought to light growing concern for the possibility of a 'currency war,' a conflict between two countries that continuously devalue their currency against their rival.

The economic relationship between China and the United States is of primary importance to each country, but bilateral diplomacy has been rocky over the past several years.  The United States has accused China of intentionally devaluing its currency, at the cost of US domestic production growth.  The protests culminated in the filing of a formal complaint with the WTO that accused China of illegally subsidizing auto exports.  China replied that the allegations were baseless.  The future of the trade dispute is unclear, but there is no doubting the dependency that each nation has on the other.

Currency devaluation can be good for domestic growth in the short term, but it hinders global economic development.  Japan is using it as a tool to help restore economic greatness, but the misfortune of Gruma SAB cannot be ignored.  Devaluation is a double-edged sword, but with careful oversight, economic stability is obtainable.

Immigration and The Amazon Advantage

The opportunity for economic gain is one of the most prominent motivators that drive people to emigrate from one country to another. Though the United States and parts of Europe have traditionally been the most popular destinations for those wishing to acquire a higher income and a better life, it appears as though the immigration trend is shifting towards the global south. As this AlJazeera article  points out, Brazil's flourishing growth, along with a troubled Eurozone and a weakened US economy, has created an "immigration influx in the Amazon". Brazil has the largest economy in Latin America, and ranks 6th compared to the rest of the world. Characterized by large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil's labor demand has rapidly increased and therefore attracted immigrants from as far as Bangladesh and Europe. In addition to a growing economy, Brazil boasts a low unemployment rate (4.6% as of December 2012), encourages FDI by maintaining high interest rates, and has made huge efforts to increase literacy rates by installing a much admired and emulated anti-poverty program, the Bolsa Familia. It's uncertain whether Brazil's immigration influx is a temporary trend fueled by an increased demand for labor or a catalyst for what will ultimately be a reversal of migration flows. I am more convinced of the latter, for there are increasing job opportunities and industry growth in multiple countries across the region(Mexico, Argentina, Chile...)

As immigration is one of the most prominent issues facing our nation today, it is useful to examine it from a purely economic perspective. Many share the sentiment that illegal immigrants take jobs away from Americans while simultaneously benefitting from social programs and transferring the burden onto taxpayers. Yet Adam Davidson of the New York Times reports that the only people who are negatively affected by illegal immigrants are the American adults who do not have a high school diploma, or those who are "unskilled". In this context, undocumented immigrants vie for the same jobs as the unskilled domestic workers and often end up receiving them, for they are willing to accept a lower wage. If one considers the immigration of highly skilled and educated people, however, then it is quite clear that their presence benefits everyone. Just as a country imports goods, it imports human capital as well. The more educated and skilled workers a country has, the more likely it is to innovate and grow. Immigrants add tremendous potential to this innovation-in fact "there has been a clear connection between immigration in the US and entrepreneurship, with immigrations creating companies (and jobs) at a disproportionate rate" (Surowiecki 2012). From an economic standpoint, immigration is positively beneficial for the whole economy. Thus, it would be wise for the US to implement policies conducive to attracting immigrants and reversing an immigration trend that is (literally) going south. 

A British Export Drought

In an Economist article, Better out than in, the author raises alarm at the diminishing rate of exports in Britain. Once a leading exporter, Britain now is in 11th place behind Belgium, Italy, and Netherlands. Britain has a large service sector, but it has a growing goods deficit, which is eliminating the surplus it gains from services and income. The country now has to borrow form abroad to close the gap between what the country buys and sells.

The lack of exporting has some concerned because a country that sells "goods abroad is a good way of developing a market for services." Exporting countries also tend to employ "more workers and offer better wages than non-exporters," as well as,  "invest more in research and development". A main reason for why Britain exports so little is that jobs are located in large international corporations. "Of Britain's 24m private-sector workers, 10m have jobs in firms that employ more than 250 worker", which resulted from a boom that happened between 1997 and 2007 where most jobs were specific to the domestic economy.

 The Economist sites an increase in exports and manufacturing as a possible cure to a struggling economy.  According to World Trade, Britain is number one in terms of trade and expansion and even the Economist writes that Britain's manufacturing is held in high regard, which means that policies aimed at trade could bring Britain out of its economic slump.

Controversy over Trans-Atlantic Trade Agreement

In President Obama’s state-of-the-union speech on Tuesday, he addressed key issues facing the future of America’s economy. Perhaps most noteworthy was his mention of two key trade agreements. First, he proposed to reach a deal on the Trans-Pacific Partnership a “proposed free-trade area involving ten other countries on the Pacific Rim”. The second was to begin a launch of talks between the United States and the European Union to establish a transatlantic free-trade zone. Regarding these proposed treaties, Obama believes they will “boost American exports, support American jobs, and level the playing field in the growing markets of Asia” (NY Times).

The mention of the Transatlantic Trade and Investment Partnership served as stamp of approval to prominent EU leaders such as German Chancellor Angela Merkel and British Prime Minister David Cameron who have been waiting for a sign of clear commitment from the US. Now that America is seemingly on board, it is predicted that trade could “generate economic growth of up to 1.5 percent on both sides of the Atlantic” (Spiegel). It could also be considered a politically smart move for Obama to reassure EU governments that the US is not turning away from the EU to pledge its allegiance to Asia.

But the promise of trade talks is not nearly enough to ensure the actions of the agreement. Even with the launch of talks, the two nations will need to overcome cultural and ethical differences regarding standards on genetically modified produce and production methods. Another barrier involves the US Congress approving the whole plan. The biggest hurdle could come from conservative lawmakers that “have little faith in European unity” and their eagerness to promote free trade. There is also the belief that the Transatlantic trade agreement is merely a “defense against the new economic superpower of China and an attempt to cement ‘Western values’" (Spiegel). In addition, the trade agreements have gained significant criticism with outcries from human rights activists. The claims are that the new deal will "impede access to medicines and degrade labor standards" (Huffington Post).

Taking in both the pros and cons of this transatlantic free-trade zone, it is still too early to foresee the impacts resulting from such a trade agreement. However, the promise of new export markets for American goods could pave the way for "limitless fruits of success".

The Plane truth - Manufacturing lands back in the USA

Many factors influence the changing trend of companies considering and planning on returning/setting up manufacturing facilities in the USA. In the case of Airbus in the USA, EADS of Europe sought a strategy largely based on location. "The US is the largest single-aisle aircraft market in the world - with a projected need for 4,600 aircraft over the next 20 years - and this assembly line brings us closer to our customers," Mr Breggier asserted on the decision to build a plant in Alabama.

In choosing Alabama ,EAD's and other potential companies would have considered the economic and infrastructure incentives that the government uses to entice capital investment into its state.The fact that states see the incentive costs and tax breaks as a good investment, provides that they have done their research and see that the benefits will far outweigh the costs. On further research Alabama actually features quiet low on the scale of how much is spent in total and more importantly per capita for state incentives. In the United States of Subsidies, using the interactive map you can visualize how much is actually spent. Alabama spends $58 a year / per person as compared to West Virginia spending $845 per person. As you click onto each state you can go further and see how much was allocated for particular companies , Airbus receiving two government grants totaling $125 million, compared to the well established BMW (Daimler) receiving $12 million in government grants.

Finally a large factor for the return of manufacturing to the USA is the ever changing state of the worlds wages , particularly in developing countries such as China.In figuring out the benefits of less wages in these developing countries,companies with large consumer bases in the USA need to assess if the overheads of a foreign manufacturing plant are all worth it.The amount of companies Reshoring manufacturing is well under 100 at the moment but quietly growing. General Electric being one of the larger examples , has returned its washing machine manufacturing from China back to Kentucky.

Based on a Boston Consulting survey it was found that 37% of companies, with capital of over $1 Billion dollars,plan on returning some,if not all of their manufacturing from China back to the USA. It can not only be good economically but in the case of Lenovo, a great public relations win as they proudly return part of their computer manufacturing back to North Carolina.These figures pose a good contrast to the picture that some corporations paint of the current political setup in the USA, not being conducive to business.In other words actions are speaking louder than words and it is clear that the trend is for re(growth) in the manufacturing industry for the USA.

Opportunities for Liberalizing Trade in Obama's Second Term

The United States economy has not seen an annual trade surplus since 1975.  This is arguably in large part due to our transition from liberal trade policies to closed trade policies.  In 2010 Barack Obama promised to double exports by 2015.   In his first term, there was an average annual trade deficit of $493 billion (CBO).  There is a lot of work to be done to turn this number around, because the US economy is not close to doubling exports by that year.  As we have discussed in class, it can be a lot of help to have policy that favors open trade so there will be incentives for industries to produce exports.  These policies would hope to make American goods more attractive in the global markets.

In a recently published memo to the president, Big Bets and Black Swans: Policy Challenges for President Obama’s Second Term, a left-center nonprofit think tank, The Brookings Institute, outlines steps the President should take towards making America open to free trade.  A “big bet” is something the President should put a lot of his time into and a “black swan” is a low probability event that could derail the administration’s attention.  The black swans mentioned are concerns with tensions in Korea, possible revolution in Saudi Arabia, Afghanistan after 2014 and a few more.  There is a great interactive in the link I provided that gives detailed information for each challenge.

One of the big bets mentioned is a Free Trade Game Changer.  This section argues that the President can start long-term economic growth by signing regional free trade agreements with the Asia-Pacific region (Trans-Pacific Partnership) and Europe (Trans-Atlantic Free Trade Agreement).  A TPP that includes Japan and South Korea could create annual income gains of $78 billion.  The TPP would hope to create a competitive high-quality trade environment, making countries in the region, possibly China, want to seek membership.  If there are more countries in the agreement, more trade will take place.  A trade agreement with the US and Europe (TAFTA) can increase trade by 20%.  This increase could generate $200 billon annually.  The article notes that an agreement between the US and EU will be able to collectively compete against the top Asian economies like China, India, and Japan.

Last Tuesday the President unveiled his support for the TPP and TAFTA during his State of the Union address so there is hope for these RTAs.  In an article by Foreign Policy magazine, Kati Suominen states that,

“Much like the United States, the EU has deals with Mexico, Canada, Colombia, Peru, Korea, Australia, and Chile, and it is currently completing bilaterals with Singapore, Malaysia, Vietnam, and Japan -- all likely future TPP members. Once wedded to each other, the United States and EU could next weave all these common deals into one mammoth FTA”

This large FTA hopes to give incentive for the Asian giants and Brazil to join.  She also goes on to argue that if trade is increased between the EU and US, there won’t be as much need for stimulus money due to both economies growing and being able to help the other out.

The Trans-Pacific Partnership and Trans-Atlantic Free Trade Agreement can give an opportunity to increase the United States’ presence in the global economy and start some serious growth.

Where's the Beef?

Over 100 years after Upton Sinclair horrified the world with his graphic exposé of the American meat industry, it seemed as though consumers could safely eat with the peace of mind that their meat met high government imposed standards. But not unlike the world of Sinclair’s turn-of-the-century butcher shop, today, Western Europe is reeling from its own scandal…of equine proportions.

Last month, it was revealed that burger patties, marketed as 100% beef, in fact, contained traces of horse meat, as well as horse and pig DNA. This discovery serves as both a major health and religious concern. So far, five EU countries have been affected: Britain, Ireland, France, Sweden, and The Netherlands. Produce in these countries falls under strict EU standards, not unlike in the United States. 

The extent of the contamination spans a variety of products and a cover-up that, some believe, dates as far back as August 2012. In the United Kingdom, the country's largest food supplier, Tesco, was sampled, and it was found that some of their burger patties were composed of almost 29% horse meat. A further investigation in Ireland found that 10 out of 27 hamburger products contained horse DNA, while 23 of the 27 samples contained pig DNA. But the term "hamburger products" is not limited to the beloved American  sandwich. Swedish producer Findus had to withdraw its lasagna products after some samples were found to contain 100% horse meat. 

But what led to the use of horse meat in otherwise bovine products? Forbes'  links the prevalence of horse meat in beef products to a 2007 ban on horse-drawn buggies on Romanian streets in an effort to spur modernization in the country. Since then, the cost of keeping a horse has outpaced the average national income and left many animals abandoned, which then find their way to local slaughterhouses. While Romanian butchers assert that the horse meat was properly labeled as such, the blame has shifted to a French whole-seller. 

This scandal highlights the dangers in globalization. National governments scramble to trace the source of the horse meat, blaming Romanian, and even Polish farmers, as well as French whole-sellers. Another real concern is the oversight that occurs when so many different governments and agencies across an entire continent are involved in the production of a food. For all the benefits of globalization, this slip in food standards is a major push toward the Buy Local movement. 

Game theory at work: How to get an A without taking the exam

How can you not take an exam and still make an A in it? See this interesting story from a programming class at Johns Hopkins for a great application of the fundamental cooperation and coordination problems we have been discussing in this class (with regard to trade liberalization and soon to the coordination of monetary policy). Especially interesting: the solutions the usual cooperation problems.

Quizzes and exams in our class are not curved...

The Dark Side of Political Economy [meta]

Dani Rodrik (whose study on trade openness and government budgets we will be reading this coming Tuesday) has just written a very interesting column about the relationship between political economists and politicians - strongly recommended reading.

Inside Foxconn

Following our discussion today, for a closer look into Foxconn (the manufacturer of many Apple products), see this series of posts by James Fallows of the Atlantic.

BP's Growing Concern over the Security of OPEC Member-States

The growing wave of political and social unrest in North Africa and the Middle East has encouraged the multinational energy supergiant British Petroleum (BP) to reevaluate the security measures and degree of involvement in OPEC member-states, most notably Algeria and Iran. Due to the UN sanctions imposed on Iran and the recent terrorist attack on the Algerian In Amenas gas plant, OPEC's overall production of oil is expected to decrease by 100,000 barrels a day in the first fiscal quarter of 2013, according to a recent article in Financial Times. The short-term will see rising gas prices as global demand is expected to grow while the supply is cut short. In the long-run, however, the effects are far more uncertain.

The recent In Amenas terrorist attack, which claimed the lives of 37 foreign workers, is expected to reduce Algeria's "production of liquids by some 57,000 barrels a day and gas by 9 bcm/year," according the the International Energy Agency (IEA). For a country where oil and gas accounts for 70% of the national budget, such an event is devastating both to the domestic economy and, on a larger scale, to the international oil-producing cartel to which it belongs. Moreover, the terrorist attack was conducted by an extremist terrorist group independent of al-Qaeda. This is important because the 2011 assassination of Osama bin Laden led many, especially BP, to believe that al-Qaeda, and terrorism at large, would surely decline in power and size in the future. Clearly, this is not quite the case.

This terrorist attack has encouraged BP to narrow its scope on Iran, which has seen incredible social unrest paired with growing animosity towards the United States and the First World at large over the past year. What makes Iran unique, among other things, in this situation is that this growing animosity has been reflected on the national level, most clearly the government's recent development of a nuclear program and the UN's subsequent economic sanctions. These sanctions have affected Iran's crude oil output dramatically: in January production hit rock-bottom at a devastating three-decade low of 2.65 million barrels/day.

As security is appearing to lessen in OPEC states, BP is torn over the future of its endeavors. No drastic action will occur in the short-term; this issue merely reflects the growing need for alternative energy. Apart from the recently-made-popular environmental costs of oil and natural gas energy, security is becoming a major factor as well. Although I–along with BP and all other multinational energy companies–hope that terrorist groups will not begin escalating attacks on U.S. and European commercial interests in the Middle East and Africa, this recent attack has shown that it is a definite possibility.