Book Plug/ Non-IPE Related

To those of you that care, which are probably pretty sparse, I have recently finished All the President's Men, by Bob Woodward and Carl Bernstein. It's an account of the Watergate scandal through they eyes of two of the chief actors in the drama, Woodward and Bernstein, who were reporters for the Washington Post.

Not related to IPE, but a recomended read for anyone looking to get an interesting insight into this critical period in American politics. Also, will be doing some background research on a potential paper topic, so any suggestions would be appreciated, but I don't think that would be strictly legal under the Honor System. Oh well.

Child and Convict Labor

I was watching the Colbert Report last night, and one of the guests was Marc Keilburger, co-founder of Free the Children, a non-profit whose aims are to eliminate child labor in developing countries. The general topic was child labor, especially in light of a Finance Bill in the Senate introduced by Sen's Baucus and Grassley that seeks to make imports made with convict and forced child labor illegal.

I am not totally sure of all of the details involved, such as where this bill is within the Senate and what chance it has of being passed, but this would be an exceedingly important rule if it were passed. Dave Sirota, on his blog The Smirking Chimp (the hyperlink tool hasn't been working recently), provides a general analysis of child labor in terms of comparative advantage, saying that weak governments create unnatural comparative advantages by allowing cheap and child labor. I'm not sure I completely agree with his argument, but a good point nontheless.

In refrence to our talk yesterday about Wolf's labor progression, the Colbert interview reminded me that groups like Free the Children will play an integral role in improving the productivity of developing labor. One of the big problems in social science is determining how and why X->Y, and one argument is that individual actors play an important role in this equation. This theory makes sense in this context, as the subtle increases in productivity and working conditions will be important steps in the evolution of labor.

Chinese Military Concerns

President Obama is in the middle of his trip to China, and most media outlets are covering the trip from various angles. Foreign Policy currently has an article up that addresses concerns about the size and strength of the Chinese military. While globalization has made the economic playing field relatively flatter, the US army is still the preeminent military force in the world. This article, however, describes how the Chinese military has made impressive strides, especially in their military technology sector. The author discusses how the US systematically underestimated the Japanese military prior to World War II, and raises similar concerns about the current situation in China.

Discussions of "new world orders" always seem a little to broad and void of detail, but the hypothetical situation where the Chinese military is of relatively equal strength with the US presents several interesting theoretical problems. The initial thought that comes to mind is a return of polar politics, much like during the Cold War. There is not, however, the similar economic differences between China and the US, as China has greatly liberalized its economy in recent years. The next concern that comes to mind is the trade relationship between the US and China. As the largest trading partners on the planet, greater conflict between the two could stagnate global trade. (Quick note: Decreased China-US trading may actually be a good thing for the global economy, re: the "global imbalances in trade" argument.) Another concern is a global competition for economic resources. This would be a sort-of "New Cold-War" mentality, where the main competition is over global economic spheres of influence.

Overall, this question is of increasing global importance. Many of the main questions in global politics might reflect this conflict in the coming decades.

IMF Position Paper

The 2008-09 global financial crisis was a period of global economic turmoil that experienced many asset pricing bubbles, especially within the housing market. Understanding the underlying causes of the crisis is necessary to correct the global financial system and broader economy. The IMF has identified main problems as “a failure in the global architecture in providing adequate warnings prior to the crisis and regulatory failures at a number of levels” (IMF Annual report, 9). Among these regulatory failures are excessive risk taking driven by low long-term interest rates, poor financial regulations in individual countries and globally, and weak crisis management response mechanisms. Another concern is the focus on keeping inflation down, while not recognizing that asset price bubbles pose a similar inflationary risk. The ensuing recorrection of asset prices demonstrated gross overvaluing and speculation characterized by the crisis.

The main cause for concern, however, is the ensuing credit crunch and global lending freeze. The IMF hopes to enact a number of policy changes to stimulate global lending. Most important was recapitalizing the banking sector and providing stimulus packages for countries that required it. The IMF has also created a device called the Flexible Credit Line (FLC), which allows quick lending to member nations in the event of a crisis. Along with the increased general lending capacity and expanded Special Drawing Rights (SDRs) capacity, the IMF now has increased lending power and liquidity to offer its member nations.

The combination of regulatory failure and the need for increased international lending points to a necessary expansion of the IMF’s role. The lack of international cooperation before and during the crisis signals that a global regulatory system is necessary, and the IMF should expand to ensure cooperation. If the IMF were to act as a global regulator, it would be able to mitigate risks by ensuring its member nations follow sounds macroeconomic policies. In IMF parlance, a “new international financial architecture” is needed moving forward, and the IMF should play a key role in this new structure.

Lords of Finance: The Bankers Who Broke the World

Liaquat Ahamed, in Lords of Finance, describes the period of the Great Depression through the lens of the chiefs of the heads of the central banks of Britain, France, Germany, and the United States. Extremely broad in scope and detail, Ahamed unveils the curiously parochial and cosmopolitan world of banking and finance during, before, and after the Great War into the 1920s and 30s. The main characters, Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve, Emile Moreau of the Banque de France, and Hjalmar Schacht of the Reichsbank, all played pivotal roles in shaping global finance.

Two main concerns hovered over the postwar period: the Gold Standard and German reparations. During the war, most nations had abandoned the Gold Standard in order to finance the war, yet the contemporary thinking was that a return to gold was necessary following the war, as the global economies would be less stable without gold. The state of German finances following the war had cascading effects for the global economy. As the United States receded into isolationism, global lending halted and the Deutschemark experienced hyperinflation. This prevented Germany from repaying its debts, and generally froze credit within continental Europe. Through a number of steps, decisions were made that allowed for European lending and market activity to reemerge, but underlying problems, including the undervalued franc, were essential to the collapse in 1929. In this vein, Ahamed essentially argues an accumulation of decisions, such as Britain reverting to the gold standard and wide-spread speculation within Wall-Street, caused the Great Depression. The problems were systemic, meaning that the financial system and corresponding policy decisions were at fault.

The essential strength of this book can also be considered a great weakness. The quote which precedes the introduction, “Read no history, nothing but biography, for that is life without theory,” attributed to Benjamin Disraeli, accurately depicts the vantage point of Ahamed’s work. Lords of Finance is a decidedly descriptive work, recounting the major decisions made by the world’s bankers with great intimacy and familiarity. On one hand, this is a major strength, as Ahamed provides an unbiased and accurate account of the events. However, the “amalgamation of decisions” argument can leave a bit to be desired. Perhaps my social science background begs for a more explicit causal flow, but it seems that Ahamed focuses too heavily on the historical aspect of his account, and not the financial and theoretical aspect of the Great Depression.

Overall, Lords of Finance is a captivating read that presents a clash between an old world order and an emerging one. Ahamed features as the guide, bringing the reader into a world of smoke-filled rooms where political and financial decisions were made in exclusive clubs. This account of the Great Depression in its depth, and provides unique insights into one of the most troubled times in modern history.

Who Stole the Punch?

As a follow/summary to the conversation I had with Professor Dickovick after class today, I'll first restate the main question: What should the role of central banks be with regard to interest rates following a bubble-burst? The natural thinking is that interest rates should be lowered, allowing for freer capital flows, which would stimulate the economy.

I proposed in class that after bubbles burst is not the time to lower rates, as that encourages banks to add more risks to their balance sheets, which is probably the reason you got into this whole mess anyway. However, after talking with Professor Dickovick, I realized that the reality is a bit more nuanced. Following a crisis, a credit crunch usually ensues. This freezes lending and investment, contracting the economy. Thus, even if the central bank lowers interest rates, people will be less likely to borrow money. However, as the economy improves, people are more willing to take on risk and borrow money. This is when the central bank needs to step in and raise rates. There is a saying that goes something like "a central bank needs to be the person that takes away the bowl of punch at the party," meaning that the bank needs to raise rates to avoid bubbles. This is to ensure sustainable growth, not a "bubble-cycle" of over-borrowing followed by a credit crunch.

Obviously, the above is much more nuanced in practice, but I think it's important this argument is made in whatever form.

The Saga Continues

If this section of IPE were a story, one of the main elements would be China's currency valuation and its affect on international trade. We have mostly been talking about China's currency in relation to US trade and its current account deficit, yet another (more?) important story is China's currency in relation to its Asian neighbors. The Chinese government has worked hard to keep the Yuan tied to the dollar, meaning that the Yuan has been steadily falling in recent months in comparison to other currencies in Asia. As we've discussed in class numerous times, this makes Chinese goods cheaper relative to its neighbors. As the economies in Asia are largely export-based, more expensive goods is obviously bad for their respective economies.

In response, the central banks have been buying up dollars and building up their foreign reserves. The long-term story here is that Asia is viewed by many as the next global financial center, and devaluing a currency to promote exports is not a long-term growth strategy. Furthermore, one wonders if the strategy that "there's no such thing as too much reserves" is accurate or not. Either way, countries like Singapore and South Korea are stuck between the proverbial rock and hard-place, and it seems that they may lose money either way.

Iranian Nuclear Talks- Kasparov Edition

Continuing the discussion about the Iranian nuclear deal, Mondays WSJ had an op-ed written by Garry Kasparov, the chess champion that ran for Russia's presidency, arguing the true intentions of the Russian government compliance in the talks. Mr. Kasparov argues that the Russian governments primary intention is to inflate oil prices, and instability within the Middle East provides such inflation. Applying economic sanctions to Iran provides Russia with the instability, and therefore price increase, it seeks.

The article generally talks about US-Russia relations, especially the differing approaches by each country. While the US has made repeated concessions to Russia, such as the nuclear defense system previously noted in this blog, Russia, according to Mr. Kasparov, only works with Western powers on human rights and democracy when it increases the wealth of the government and oil oligarchs. As such, the US must take a harder line when dealing with Russia.

It must be noted that Mr. Kasparov comes from a decidedly biased point of view. However, any dissenting views coming from Russia are refreshing, as so little dissent exists, or more truly, is allowed.

FP- Oil Issue

For those of you interested in oil politics, the Sep/Oct edition of Foreign Policy is a must read. Inside are 6 or so articles on a variety of topics related to oil and its geopolitical role and future. I might include some commentary on a specific article in the future, but for now be content with this advertisement.

Iranian Nuclear Talks

Haven't posted in a while, as midterms and such have been taking their toll. However, a major ongoing story is the talks between Iran and Western Powers, specifically the US, France, and Russia. The controversy is over Iran's uranium and its quest to become a nuclear power.

Iran currently has a stock of low-enriched uranium (LEU), some of which Iran has already agreed to send to Russia and France to convert the uranium so it cannot be used for weapons, and shipped back to Iran for medical research. Current talks seek to remove that majority of the LEU for similar purposes, although Iran has announces its intentions to continue its enrichment program it no agreement is made.

Similarly, the threat of "sanctions" has been placed on the table, the geopolitical catch-all threat, if Iran does not announce its intentions to cease uranium enrichment by years end. The manner in which this drama unfolds is very important for the future of world politics.

Iraq Oil Licenses

Another Economist article (I really need to broaden my online news sources), this time dealing with Iraq and its unwillingness to offer foreign oil companies licenses to drill in their fields. Addressed in Stiglitz, the so-called resource curse has been a major issue in IPE and development in the post-WWII world.

The article outlines the Iraqi governments attempts to avoid the pitfalls associated with resource cursed countries, such as offering drilling contracts that do not adequately compensate the host country. The government will auction off several of its oil fields in December to foreign companies, a long-awaited event for these companies. However, the government only offered $2 a barrel in a June auction, compared to the $4 a barrel the oil companies sought.

The current structure of state-run oil production in Iraq reflects similar resource cursed countries- a lack of central direction and plentiful infighting between the separate subsidiaries of the government. The government hopes to consolidate all oil production under one national company, yet making this a reality is still a long way off.,

Most troubling to the foreign companies is the political wavering by Iraq's new parliament. Whenever an election looms, the MPs feel "obliged to beat a nationalist oil drum [and] are unable to tell voters that the country will earn more from its oil only if foreigners are drawn in." The government's wet feet are indeed costing them a lot of money, as the US Department of Energy estimates that there are 41 million barrels of oil in Iraq's 10 oil fields, worth roughly $3 trillion at today's price.

Chinese Pirates!

Not really in the literal sense, but a relevant article to our current readings regarding intelectual property and piracy. For those of you that have tried to access T.V. shows on the internet for free, you'll be upset that there is a current lawsuit filled by the China Internet Video Anti-Piracy Alliance, a group including the American Motion Picture Association, to domestic Chinese companies such as Youku, which provide streaming videos, many of which are U.S. T.V. shows and movies.

The hope for Western firms is increased protection for copyrighted material. However, Youku is less worried about the piracy aspect, and is more worried about the loss of traffic and advertising revenue from global internet users.

IMF Increased Powers

WSJ has an article up about potential increases in the IMF's power. The underlying message is that the IMF is seeking to regain the trust of developing nations, as previous IMF policies have forced nations to cut tariffs and completely open their borders to qualify for loans.

Globalization and Climate Change- Developing Economies

Both Singer and Stiglitz deal heavily with both the practical and the ethical side of climate change both in the developed and the developing world (side note: where did these terms, developed and developing, originate? I think the world could do with better names). The crux of the problem is determining who is responsible past pollutions and who is responsible for ensuring climate change does not destroy the world.

The developed nations- the U.S., Western Europe, Canada, Australia, Japan, etc.- hold much of the burden for past pollution, as the Industrial Revolution was fueled by a perceived limitless supply of coal and petroleum used for the creation of infrastructure, technological innovation, and armament, which certainly are responsible for their "developed" status.

A much more difficult problem is current pollution, its potential damages to the climate, and the successive problems associated with climate change. Assigning blame and responsibility for current pollution is chiefly hard because there is so much of it and its scope is so broad. We can no longer dictate responsibility to a few nations, since a lot of nations are industrializing and energy usage is generally becoming more widespread.

The Economist has an article that has a general overview of the climate change problems associated with developing nations. Paramount is climate changes affect on the main industry of the developing world: agriculture. As the world's climate changes, rain patterns become more unpredictable, and floods and droughts are a more common occurrence. These changes lead to less fertile land and a lower crop yield. This negatively affects the developing world greater- at least in the immediate sense- because they do not have other industries in which they excel or the governmental infrastructure to provide overarching welfare. In other words, developing nations do not have the capacity to deal with economic change the way that developed nations do.

The other side of this proverbial coin is that, in terms of total carbon emissions, the developing world contributes half. As these nation try to rapidly industrialize, they, somewhat ironically, are using similar industrialization tactics the developing nations employed in the 19th century. This is now an equity and fairness problem, because the developed nations argue that everyone should now, since the discovery of the detriment of carbon emissions to the climate, play by the same emissions rules, yet developing nations argue the unfairness of allowing one group, the developed nations, to have industrialized through poor energy practices, while they are unable to industrialize in the same fashion.

Singer and The Economist article argue for a per-capita based regulation for climate control. Doing so acknowledges the historical pollution of the developed nations and aims to control future pollution by both developed and developing nations. Regardless, both the developed and developing nations are trapped in the mindset of assessing the costs of changing the way they use fuels, rather than understanding the underlying needs for overhauling the global energy system.

Missile Defense

Making headlines today is the collapse of a deal between the US, Poland, and the Czech Republic over a European-based US missile defense system. The proposed deal arose over concerns about Iran's improved nuclear weapons and ICBM program.

The main conflict at stake is between Washington and Moscow, who, when the plan was first proposed during President Bush's administration, expressed considerable outrage. In January 2009, Moscow dropped a similar missile defense shield plan in Kaliningrad, a military outpost in Central Europe. This action was meant to signify to the new Obama administration that Russia sought warmer relations with the US and its new president.

The public reasons given for the US's abandonment of this project are a misjudged estimate of Iran's nuclear capability, yet this decision typifies current US-Russia relations. Probability has it that Tehran, or a similar Middle East nation, will develop a nuclear program capable of attacking Western Europe and the Americas, thus a preemptive missile shield seems a relatively good idea. The article argues that the US hopes to put pressure on Russia to deal more harshly with Iran, as Russia has blocked economic sanctions against Iran on the UN Security Council.

The above, however, is a short-term concern, but Western and Central Europe have greater long-term concerns about the base and their relationships with Russia. Poland and the Czech Republic hope to have the base on their territory not because of Middle Eastern concerns, but to ensure a defense against Russia. Thus, Western and Central Europe look upon the US decision with disdain, as it potentially shows a lack of commitment to European security.

These tensions between Moscow and Washington illuminate their respective importance in the geopolitical environment. The most directly affected nations are Iran, Poland, and the Czech Republic, yet the commentary focuses on the US-Russia relationship because of the potential for disaster between the two nations. As the Russian government trends towards increased totalitarianism, look for similar issues to constantly arise in US-Russia relations.

Energy Politics

What is the greatest challenge facing the leading actors in the international political economy in the 21st Century?

The operational definition of economics provided by most textbooks describes the field as “the allocation of scarce resources.” Thus, the competition for, and the distribution of, these resources is a constant challenge for the actors in the current international political economy.

Rising global economic integration requires, among other things, a specific type of resource: natural resources. In the next century, the competition for scarce natural resources, such as water, oil, food, uranium, and others will be the marquee geopolitical challenge.

Obtaining natural resources that allow a nation to function, such as water, food, and oil, requires a necessarily political government strategy. Decisions such as who to pump oil from, where to import food from, and how to maintain a large enough supply of drinkable water require strategies that affect both national security and energy security. For instance, a country in need of oil may have to offer the government of an unfriendly nation monetary compensation for drilling on their soil. Doing so may enable the foreign government to fund weapons R&D and other military expenses, endangering both regional and international security as well as the security of supply. Nations rich in resources have the potential to make demands of other nations, especially when demand is unnaturally high. The worst-case scenario is a nation exchanging nuclear weapons, or an equivalent, for food, water, or oil, and becoming too powerful, leading to all sorts of bad things nobody wants to happen. All of these decisions and strategies are obviously international, political, and economic.

The growing alternative energy market offers similar challenges in the world of energy security and geopolitics. Viable alternative energies are attractive because they eliminate the need for a second party or nation to supply the raw materials. Wind and solar power are globally accessible, meaning that no nation has a monopoly on the resource (this is, of course, not completely true, as some areas are windier or have stronger sun, but in practice the theory holds). The main challenge is incorporating fuels that are more sustainable while not diminishing output capacity. Creating domestic sustainable fuels creates domestic jobs and international demand for the fuel or product, which will increase the security of elected officials.

However, not conforming to energy guidelines set by TGOs makes a country susceptible to economic exile through trade barriers, embargos, and tariffs, resulting in cascading economic and political effects. Similarly, developing nations such as China and India are heavily reliant on coal to fuel their economic industrialization, putting other nations in the uncomfortable position of trying to reduce China and India’s coal usage.

The above examples are only a small sample of the intricacies of the geopolitical energy situation. To sum up, the challenges associated with energy will be the most important in the next century largely because energy fuels modern society, making the nations that allocate and distribute energy immensely powerful.