2017 – Expect a Bumpy Year Ahead

Martin Khor

The new year has dawned. Everyone agrees 2017 will be very interesting.

It will also be most problematic. From politics to economics and finance, we’ll be on a roller-coaster ride.

With his extreme views and bulldozing style, President-elect Donald Trump is set to create an upheaval, if not revolution, in the United States and the world.

He is installing an oil company chief as the Secretary of State, investment bankers in key finance positions, climate sceptics and anti-environmentalists in environmental and energy agencies and an extreme rightwing internet media mogul as his chief strategist.

US-China relations, the most im­­por­­tant for global stability, could change from big-power co-existen­ce, with a careful combination of competition and cooperation, to outright crisis.

Trump, through his phone call with the Taiwanese president and after, signalled he could withdraw the longstanding US adherence to the One China policy and instead use Taiwan as a negotiating card in overall relations with China. The Chinese perceive this as an extreme provocation.

He has appointed as head of the new National Trade Council an economist known for his many books demonising China, including Death by China: Confronting the Dragon.

Trump seems intent on doing an about-turn on US trade policies. Measures being considered include a 45% duty on Chinese products, extra duties and taxes on American companies located abroad, and even a 10% tariff on all imports.

Thus 2017 will see protectionism rise in the United States, the extent still unknown. That is bad news for many developing countries whose economies have grown on the back of exports and international investments.

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Age of Uncertainty

C.P. Chandrasekhar and Jayati Ghosh

On 14 December 2016, in a widely predicted move, the US Federal Reserve announced that it is raising the federal funds rate by one quarter of a percentage point, taking its target band for short term interest rates to between 0.5 to 0.75 per cent. More importantly, it signalled a change in the stance of monetary policy, by suggesting that there are likely to be three more rate hikes over 2017, and predicting that the long term interest rate, which has been in decline, would rise to 3 per cent.

There has in recent times a growing consensus that the US Fed has continued with a loose monetary policy, with near zero interest rates and ample liquidity, for far too long. Low interest rates and large scale bond buying had led to asset price inflation that increased inequality and threatens another melt down in financial markets. Yet, each time the Fed was expected to reverse the low interest policy, it held back claiming that it feared it would abort a halting recovery from the Great Recession.

That fear has not gone away. While there is talk that the US economy has recovered enough to approach near-full employment with a tight job market, that view does not take account of the large numbers who had dropped out of the labour market during the recession and need to be brought back to restore pre-crisis employment levels. The real reason that the Fed has chosen this time to go the way it should on the interest rate front is the conviction that political circumstances have shifted focus from monetary to fiscal policy when it comes to spurring growth. The source of this conviction is the Trump campaign that promised to cut taxes and boost infrastructural spending to stimulate growth.

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Lessons from the Demise of the TPP

Jomo Kwame Sundaram and Anis Chowdhury

President-elect Donald Trump has promised that he will take the US out of the Trans-Pacific Partnership Agreement (TPPA) on the first day of his presidency. The TPP may now be dead, thanks to Trump and opposition by all major US presidential candidates. With its imminent demise almost certain, it is important to draw on some lessons before it is buried.

Fraudulent free trade agreement

The TPP is fraudulent as a free trade agreement, offering very little in terms of additional growth due to trade liberalization, contrary to media hype. To be sure, the TPP had little to do with trade. The US already has free trade agreements, of the bilateral or regional variety, with six of the 11 other countries in the pact. All twelve members also belong to the World Trade Organization (WTO) which concluded the single largest trade agreement ever, more than two decades ago in Marrakech – contrary to the TPPA’s claim to that status. Trade barriers with the remaining five countries were already very low in most cases, so there is little room left for further trade liberalization in the TPPA, except in the case of Vietnam, owing to the war until 1975 and its legacy of punitive legislation.

The most convenient computable general equilibrium (CGE) trade model used for trade projections makes unrealistic assumptions, including those about the consequences of trade liberalization. For instance, such trade modelling exercises typically presume full employment as well as unchanging trade and fiscal balances. Our colleagues’ more realistic macroeconomic modelling suggested that almost 800,000 jobs would be lost over a decade after implementation, with almost half a million from the US alone. There would also be downward pressure on wages, in turn exacerbating inequalities at the national level.

Already, many US manufacturing jobs have been lost to US corporations’ automation and relocation abroad. Thus, while most politically influential US corporations would do well from the TPP due to strengthened intellectual property rights (IPRs) and investor-state dispute settlement (ISDS) mechanisms, US workers would generally not. It is now generally believed these outcomes contributed to the backlash against such globalization in the votes for Brexit and Trump.

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TRIPS: The Story of How Intellectual Property Became Linked to Trade, Part 7

This is the final part of a seven-part series with Peter Drahos, a Professor in the RegNet School of Regulation and Global Governance at the Australian National University. He holds a Chair in Intellectual Property at Queen Mary, University of London and is a member of the Academy of Social Sciences in Australia. In 2004 he and his co-author Professor John Braithwaite won the Grawemeyer Award in Ideas Improving World Order for their book Global Business Regulation. Prof. Drahos is interviewed by Lynn Fries, producer at The Real News Network. Find the whole series here.

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Goodbye 2016, a Strange and Difficult Year

Martin Khor

The year will be remembered for the West ending its romance with globalisation, and its impact on the rest of the world.

Just a few days before Christmas, it is time again to look back on the year that is about to pass.

What a strange year it has been, and not one we can celebrate!

The top event was Donald Trump’s unexpected victory. It became the biggest sign that the basic framework and values underpinning Western societies since the second world war have undergone a seismic change.

The established order represented by Hillary Clinton was defeated by the tumultuous wave Trump generated with his promise to stop the United States from pandering to other countries so that it could become “great again”.

Early in the year came the Brexit vote shock, taking Britain out of the European Union. It was the initial signal that the liberal order created by the West is now being quite effectively challenged by their own masses.

Openness to immigrants and foreigners is now opposed by citizens in Europe and the US who see them as threats to jobs, national culture and security rather than beneficial additions to the economy and society.

The long-held thesis that openness to trade and foreign investments is best for the economy and underpins political stability is crumbling under the weight of a sceptical public that blames job losses and the shift of industries abroad on ultra-liberal trade and investment agreements and policies.

Thus, 2016 which started with mega trade agreements completed (Trans-Pacific Partnership) or in the pipeline (the Transatlantic Trade and Investment Partnership between the US and Europe) ended with both being dumped by the President Elect, a stunning reversal of the decades-old US position advocating the benefits of the open economy.

2016 will be remembered as the year when the romance in the West with “globalisation” was killed by a public disillusioned and outraged by the inequalities of an economic system tilted in favour of a rich minority, while a sizeable majority feel marginalised and discarded.

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Trekking the Gold Trail: Misinvoicing in Primary Commodity Exports

Léonce Ndikumana

Introduction

Exports of primary commodities are an important driver of growth in many developing countries. However, high resource endowment exposes these countries to the vagaries of large swings in commodity prices. And if “natural capital accounting” is applied so as to count the full cost of non-renewable resource depletion, the World Bank finds that 88 percent of African countries are net losers: the incoming profits and investment are less than the outgoing value of the minerals (World Bank, 2014). Moreover, resource-rich countries suffer from losses in foreign exchange and tax revenues resulting from under-reporting of export proceeds. Indeed, trade misinvoicing is a major concern in a global system characterized by lack of transparency and skewed distribution of gains from trade. Incentives for trade misinvoicing arise from the existence of opportunities for profit maximization and access to foreign exchange out of the control of the regulating authority. These opportunities are made possible by regulation of tariffs, customs procedures, export subsidies, and exchange controls, among others.

The issue of trade misinvoicing has been a long-standing concern in the economics profession since the seminal work by Jagdish Bhagwati in the 1960s.[1] The work was inspired by an even older strand of literature concerned with the consistency of partner data on international trade back in the 19th century.[2] Interest in the problem of trade misinvoicing gained momentum in the 1980s in the context of the debt crisis;[3] since then it has taken prominence in academia and in the policy arena.[4]

Trade misinvoicing is defined as either perverse discrepancies or excessive normal discrepancies in partner trade statistics estimated through the comparison of exports as reported by the exporter and imports as reported by the importer. There are perverse discrepancies when recorded imports are significantly lower than recorded exports plus the cost of transport, insurance, and duties. This could reflect either export overinvoicing or import underinvoicing.  Trade misinvoicing may be driven by factors associated with the country of origin or the destination of trade flows or both. Estimates of trade misinvoicing do not therefore permit to assign a priori the respective share of responsibility on the basis of the estimates of trade misinvoicing alone.

A recent report published by the United Nations Conference on Trade and Development (UNCTAD) (prepared by the author of this note) examines the extent of trade misinvoicing of primary commodity exports from five resource-rich developing countries—Chile, Côte d’Ivoire, Nigeria, South Africa, and Zambia (UNCTAD, 2016). The publication of the first version of the report in July 2016 generated interesting debates, partly motivated by the sheer values of export misinvoicing but also by what appears to be misconceptions regarding the nature of the data, the methodology and concepts used in the analysis. Some reactions to the report warrant a clearer exposition of the concepts and methodology of estimation of trade misinvoicing—which the new version of the report sought to clarify. Most fundamentally, there is a need for further improvements in the transparency of the reporting of trade statistics. The UNCTAD report and the debates that it has generated can be considered as a boost to further investment in knowledge generation in this area. This note presents some of the updated results using the case of gold exports from South Africa as an illustration, while responding to the main criticisms to the initial report. More detail is provided in the revised version of the report just published by UNCTAD (December 2016).

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TRIPS: The Story of How Intellectual Property Became Linked to Trade, Part 6

This is the sixth part of a seven-part series with Peter Drahos, a Professor in the RegNet School of Regulation and Global Governance at the Australian National University. He holds a Chair in Intellectual Property at Queen Mary, University of London and is a member of the Academy of Social Sciences in Australia. In 2004 he and his co-author Professor John Braithwaite won the Grawemeyer Award in Ideas Improving World Order for their book Global Business Regulation. Prof. Drahos is interviewed by Lynn Fries, producer at The Real News Network. Find the whole series here.

Full text below the break.

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The Shortcomings of Monetary Policy

Philip Arestis and Malcolm Sawyer

The conventional wisdom on monetary policy from the early 1990s through to the financial crises of 2007-2009 favored inflation targeting operated by an “independent” central bank. This approach to monetary policy was widely accepted by academics and central bankers, and widely implemented by the latter. In a relevant contribution, we questioned the effectiveness of this approach to monetary policy along many lines (Arestis and Sawyer, 2008). These included the weakness of the supposed link running from policy interest rate to the level of demand in the short run, and to the rate of inflation in the medium to long run; and hence that the central bank did not have an effective policy instrument to control inflation. Further, we questioned whether the lower inflation experienced during the late 1990s and early 2000s could be attributed to the adoption of inflation targeting, as non-inflation targetters appeared to do as well as targetters, if not better in some cases (see, also, Angeriz and Arestis, 2007, 2008). The promotion of inflation targeting was based on a flawed model of the economy (the “New Consensus Macroeconomics”).

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TRIPS: The Story of How Intellectual Property Became Linked to Trade, Part 5

This is the fifth part of a seven-part series with Peter Drahos, a Professor in the RegNet School of Regulation and Global Governance at the Australian National University. He holds a Chair in Intellectual Property at Queen Mary, University of London and is a member of the Academy of Social Sciences in Australia. In 2004 he and his co-author Professor John Braithwaite won the Grawemeyer Award in Ideas Improving World Order for their book Global Business Regulation. Prof. Drahos is interviewed by Lynn Fries, producer at The Real News Network. Find the whole series here.

Full text below the break.

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Can Developing Asia Hold its Ground?

C.P. Chandrasekhar and Jayati Ghosh

The recent and ongoing capital flight from Asian markets comes in the wake of a longer pattern of sell-off that has been evident for nearly two years now. And this in turn reflects a deeper unease about the pattern of growth in this hitherto very dynamic region, and the receding prospects of such growth being sustained for much longer.

Of course, it is true that the current instability in global financial markets is obviously a reflection of major political upheavals in the North and their likely economic impact. In particular, the election of Donald Trump has made it all but sure that monetary policy will be tightened in the United States in the coming months (despite the protestations of independence by the US Federal Reserve Chairperson Janet Yellen). If this is combined – as is widely anticipated – by aggressively expansionary fiscal policy based on increased military and infrastructure spending and lower taxes on the rich and on companies, then the US fiscal deficit is also likely to increase. This combination will inevitably attract footloose global capital back into the US, causing currency and asset market havoc in many emerging economies.

Indeed, this prospect is probably already being priced in by many investors and fund managers, which is why currencies of developing countries across the world have depreciated in the weeks since the US election. But it is also true that internal forces and processes have played a role in encouraging capital flight from several of the more important emerging markets, especially in the Asian region.

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