A Note on Development Under Risk in the Arab World, Part 1

Conflict, Policy, Resources, and Development

(Part 1 in a Four-Part Series)

Ali Kadri

Of the countries that are off-track on the road to sound development, many are situated in the Arab World. The worst hit are either in-conflict, near-conflict, or post-conflict zones. Even when not undergoing the war disaster, the fragility of their development is further compounded by the prospects of war. In addition to the actual or potential woes of conflict, their slow rate of progress is characteristic of small risky markets or capital scarce structures that have adopted unconditional liberalisation measures. (Real capital is scarce, not financial capital.) For the most part, these countries still depend for their economic growth on export earnings from a primary product: namely oil. When oil prices fall, economic growth stumbles, and an already poor development showing suffers yet another setback.

Yesterday’s accomplishments are frequently erased by a combination of war dislocation or anti-developmental macroeconomic policies. The latter are policies whose interface with reality does not sufficiently mobilise idle resources, as in putting the unemployed into decent work. For the group of risk-laden and underachieving Arab countries, which comprises the overwhelming majority, the crunch on their course of development happens to be fourfold.

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WTO Takes a Wrong Turn for Development

Timothy A. Wise and Biraj Patnaik

In a self-congratulatory tone, lawyer and politician Amina Mohamed (who also served as the Chair of the Tenth WTO Ministerial Conference) called the recently-concluded World Trade Organization’s (WTO) negotiations “a turning point for world trade”. In her opinion piece in The Daily Nation she wrote that the international trade body “is now pointed in the right direction”.

With the general council of the WTO meeting Wednesday for the first time after the Nairobi Ministerial, most observers expect a stormy session with the developing countries likely to take on Director General Roberto Azevedo for his non-transparent role by which the Nairobi Ministerial Declaration (NMD) was drawn up.

The fate of the Doha Development Round (DDR) and the Doha issues now hangs in balance with the US, the EU and other developed countries expected to make a concerted push for new issues and a new architecture in view of the NMD.

Sadly, Mohamed’s apology echoes the triumphalist interpretation of the US negotiators, who claim they have effectively killed the DDR.

Unfortunately, Mohamed did not lead the WTO’s first African ministerial in the right direction on development issues so urgently needed by the countries in the continent. She turned the institution back to the time when rich countries set the agenda and wrote the agreements.

Let’s examine her claims to success.

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Unreal in Pampered India

Sunita Narain

Many years ago, when Delhi’s air pollution was as high as it is today, my colleague Anil Agarwal and I had gone to meet a high-ranking, responsible government official. This was in the mid-1990s, when air was black because we did not even have the most rudimentary fuel quality and emission controls. The official was genuinely stumped by our demand that government should take steps to control runaway pollution. He kept asking, “But is Delhi really polluted?” I was equally flummoxed; air was foul and black. How could he miss it?

Then I realised that his world was not mine to see. He travelled from his home, located in luxuriantly green Lutyens’ Delhi—also known as the New Delhi Municipal Council (NDMC), where government resides—to his office, also in the same verdant surroundings. Nowhere did he see any dirt; nowhere did he smell the air. And as it was not seen, it could not exist, so nothing needed to be done.

This incident came to my mind when I read that the Government of India had decided to select New Delhi—Lutyens’ Delhi—for the smart city makeover. Under this scheme, 20 cities have been selected based on “rigorous” criteria to improve urban living. The Government of India will now provide funds and expertise to make the city “smart”—defined as innovative approaches to improvement in urban services. This means that the government will spend on facilities to make its own living area even better and more removed from the squalor, poverty and pollution of the rest of India.

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Fiscal Policy: It’s the Same Old Story

John Weeks

For almost two years each successive ONS quarterly report on the UK economy brings much the same news 1) the Treasury fails to achieve the target for the overall fiscal balance set way back in the summer of 2010; and 2) the recovery from the Great Financial Crisis, always predicted at last to be robust and sustainable, shows continued vulnerability.

Much like a fire started with damp wood, the recovery flickers, belches smoke, but fails to ignite. The preliminary estimate of the Office of National Statistics for GDP came in at 0.5% higher than for the fourth quarter, an increase from 0.4% for quarters two and three (statistically non-significant and very much in the eye of the bean counters). This modest expansion calculates to an annual increase of 1.9%, bringing the Osborne-managed economy to 6.6% higher than the pre-crisis peak of 2008Q1 (see further discussion of GDP performance by Graham Gudgin).

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The TPP: Investor-State Dispute Procedures Are a Threat to Democracy

Mehrene Larudee

Mehrene Larudee is a Lecturer in the UMass Amherst Economics Department and Center for Popular Economics Staff Economist.

Much is wrong with the Trans-Pacific Partnership (TPP) Agreement, the final version of which was released November 5, after years of secret negotiations. Congress could vote on it any time in 2016. A feature that has been troublesome in existing agreements for twenty-some years is investor-state dispute settlement (ISDS). At the Center for Popular Economics (CPE) Summer Institute in August, I gave a short workshop on this very dangerous provision, hitting on some of the following points.

Indulge in some pure fantasy for a moment: Imagine that an international agreement is signed and ratified, guaranteeing every worker an ironclad legal right to her future wages. Imagine it says that if an employer lays a worker off, the worker has a right to file a complaint that will be judged by a panel of three long-time union activists, likely to award her full compensation—all the future pay she would have earned. Sweet? You bet.

But it’s fantasy.

Its opposite, however, is not. What could become all too real is a near-guarantee of future profits from foreign investment for investors that are based in one TPP country, investing in some other TPP country. That’s the investor-state dispute settlement provision of the TPP. It allows corporate power to take big bites out of democracy.

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What Awaits The Global Economy After Fed’s Move?

Erinç Yeldan

The long-awaited move is finally on the loose: The U.S. Federal Reserve (the “Fed”) had shown its intensions to start raising its policy interest rates for the first time since 2008. The “federal funds rate” has been increased by 0.25 to 0.50 percent in December 2015, with hints of further hikes coming in 2016. Just to put this decision in historical perspective, let’s just point out that this rate was on the order of 5.9% over 1971-2015, and climbed as high as 20% in 1980.

The decision to increase the interest rate came after three episodes of unprecedented monetary expansion over the last four years. The Fed had amassed–under the program dubbed with the esoteric name of “quantitative easing”—a total of 3 trillion dollars worth of assets from the finance markets, equivalent to roughly 20% of U.S. GDP.

Earlier this year, in a separate Triple Crisis blog on the Bretton Woods After 70 Years, I shared the outcomes of this massive expansion in liquidity: Interest rates fell all around the globe to virtually zero, but with barely a dent in the real sector. Unemployment barely fell to the pre-recent levels, and gross domestic product in U.S. and elsewhere remained stagnant.

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World Bank Researchers Punch South Africa’s Poor and Coddle the Rich

Subsidized white capitalists and oppressed activists are amongst those who must “not be named”

By Patrick Bond

“South Africa can claim to have one of the world’s most redistributive public purses,” argues Johannesburg Business Day newspaper associate editor Hilary Joffe, drawing upon World Bank research findings. But not only is this nonsense. The Bank’s silences about poverty and inequality speak volumes.

To illustrate this in next-door Lesotho, Stanford University anthropologist James Ferguson’s famous book The Anti-Politics Machine criticized the World Bank’s 1980s understanding of Lesotho as a “traditional subsistence peasant society.” Apartheid’s migrant labor system was explicitly ignored by the Bank, yet remittances from Basotho workers toiling in mines, factories and farms across the Caledon River accounted for 60 percent of rural people’s income.

Ferguson explained: “Acknowledging the extent of Lesotho’s long-standing involvement in the modern capitalist economy of South Africa would not provide a convincing justification for the ‘development’ agencies to ‘introduce’ roads, markets and credit.”

Using Michel Foucault’s discourse theory, Ferguson showed why some things cannot be named. To do so would violate the Bank’s foundational dogma, that the central problems of poverty can be solved by applying market logic. Yet the most important of Lesotho’s market relationships – exploited labor – was what caused so much misery.

Three decades on, not much has changed. Today, the Bank’s main South Africa research team reveals a similar “Voldemort” problem. Like the villain whose name Harry Potter dared not utter, some hard-to-hear facts evaporate into pregnant silences within the Bank’s latest “South African Poverty and Inequality Assessment Discussion Note.” Bank staff and consultants are resorting to extreme evasion tactics worthy of Harry, Ron and Hermione.

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Technology and the Future of Work

Jayati Ghosh

The latest fear factor to hit the world relates to the disappearance of jobs. Everywhere now the buzz is about how technology is going to transform work – and reduce it dramatically. The Davos World Economic Forum CEO Klaus Schwab (whose book The Fourth Industrial Revolution was released this week) is just the latest in a long line of recent predictors of this gloomy possibility. From 3-D printing to robots that will perform not just some basic services but even more skilled activities like those of accountancy and so on, the fear is that human labour will be increasingly displaced by machines, and so there will simply not be enough work to provide employment to all the people who need jobs.

But there is some confusion in all this doomsaying about the future (or lack of it) of work. Let’s distinguish first between two types of technological change: productive and disruptive. The first describes those changes that increase productivity and change the nature of economic activities. They certainly include increasing automation, as well as a host of new developments in biotechnology and other areas, which clearly reflect the “creative destruction” inherent in a lot of technological change.

There is little point fighting against such advance of technology or even trying to slow it down in some way, because that simply would not work and in any case is not really desirable. But that does not mean that we should be in despair simply because it would displace a lot of human work – in fact, where it replaces arduous work full of drudgery, or makes doing things more easily, we should celebrate it.

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Are the Peterson Institute Studies Reliable Guides to Likely TPP Effects?

More on the controversy about the economic effects of the Trans-Pacific Partnership Agreement (TPPA). This commentary by guest blogger Jomo Kwame Sundaram continues the discussion begun by Jeronim Capaldo and Alex Izurieta here. The three are co-authors of the Global Development and Environment Institute (GDAE) working paper, “Trading Down: Unemployment, Inequality and Other Risks  of the Trans-Pacific Partnership Agreement,” available here. –Eds.

Are the Peterson Institute Studies Reliable Guides to Likely TPP effects?[1]

Jomo Kwame Sundaram

Professor Robert Lawrence[2] poses three seemingly reasonable questions to conclude that his colleagues’ trade policy work on the likely consequences of the Trans-Pacific Partnership Agreement (TPPA) is superior to our macroeconomic policy exercise using the United Nations Global Policy Model (GPM). In doing so, he misrepresents the nature of our work as well as the significance of the differences, thus confusing the issues.

Our study does not purport to be a comprehensive analysis of the TPPA and its effects, as his colleagues’ studies claim to be. We have not used the GPM as a trade policy model to substitute for trade projections made by Professor Lawrence’s colleagues. In fact, despite our reservations, we accepted the earlier projections by the Peterson Institute for International Economics (PIIE) on the likely trade outcomes of tariff reductions as our starting point, but proceeded to show that their claims about the TPP’s likely growth and employment effects were problematic and did not necessarily follow.

Our model incorporates macro-financial dynamics as well as distribution and employment variations, which more realistically represent the world economy rather than their self-equilibrating, full employment model. But in line with the limited scope and purpose of our paper, we do not claim to have provided reliable and definitive projections of the TPP’s likely effects.

As is well known, the United States Department of Agriculture’s Economic Research Service (USDA-ERS) computable general equilibrium (CGE) model[3] projections of the TPP are far more pessimistic than the PIIE’s. If the differences between our results and the findings of the PIIE were simply due to using different models, then one would have to explain how the USDA-ERS model came to its very different conclusions. Clearly, CGE models can come to very different findings using different, in this case, more realistic specifications.

Crucially, we noted that by assuming full employment, the PIIE model assumes away important macroeconomic implications of the TPP. We show that using the PIIE trade projections, but with more realistic modelling, assumptions and specifications, the TPP would result in more modest growth, net job losses, greater pressure on wages and a declining labour share of income. These effects may well be eventually offset by other developments having nothing to do with the TPP, but they nevertheless remain the likely effects of the TPP.

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Capital Bleeds from Emerging Asia

C.P. Chandrasekhar and Jayati Ghosh

Everyone knows that 2015 was a terrible year for emerging markets – but exactly how bad it was has become clear only recently. Not only was it an annus horribilis in terms of net exports of goods and services, which declined sharply and even turned negative for some previously buoyant exporters, but it was also a time when capital flows reversed course. The downturns in both indicators have been much more widespread and substantial than they were initially expected to be, and even greater than mid-year assessments suggested.

In a previous edition of MacroScan, we used IMF data to show how net capital flows into developing Asia had declined significantly in 2014. This marked a break from the previous boom period when emerging markets – and especially those in developing Asia – could do no wrong in the eyes of global investors. But 2015 turns out to have been much more devastating for emerging markets across the world, including those in Asia. A new report from the Institute of International Finance (“Capital Flows to Emerging Markets”, IIF Washington D.C., 19 January 2016) indicates just how serious the swings in capital flows have been.

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