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In defense of the European Parliament: China is not a market economy

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Sometimes the driest debates lead to the hottest arguments. That paradox was on full display on May 12th when the European Parliament set out to air its grievances with China’s pretense of receiving Market Economy Status (MES) by the end of the year.

In a non-legislative resolution backed by 546 MEPs, the Parliament sent out a strong signal that it would use a “non-standard methodology” in treating China’s exports to the EU as long as Beijing doesn’t satisfy the five basic criteria required to qualify as a market economy. Even if the EP’s resolution carries no legal value in and of itself, China’s reaction was swift, with the Foreign Minister accusing the EU of breaking its WTO promises, and China’s former chief WTO negotiator Long Yongtu saying the resolution is protectionist and goes against globalization.

However, both Chinese officials are wrong – and while the European Parliament has too often succumbed to populist temptation or petty power plays in its institutional tug-of-war with the other European institutions, the majority of MEPs were clearly in the right.

The first issue that needs explaining is what this rather technical brouhaha is all about. Essentially, the MES China covets would be the ultimate status symbol for the leadership as it would bestow recognition upon the country that it is playing according to market-rules – and that by extension the Party’s third way, “Socialism with Chinese Characteristics” philosophy has paid off. On the practical side, the MES enhances the access of Chinese exports to third countries, including the European Union, and would make it far harder for regulators to slap China with anti-dumping tariffs and other retaliatory trade measures. With the European bloc beset by grave uncertainties in the steel and aluminum sector, which have suffered after world prices were driven down by unfair Chinese overproduction, concerns about relaxing protective levies have spiked.

Indeed, according to the European Commission, China produces 325 million metric tons of excess steel a year, or twice Europe’s entire production. This production spree has put at risks tens of thousands of jobs across the continent, most poignantly the 15,000 British jobs that Tata Steel will axe if it cannot sell its UK assets this year. Trade and worker unions alike have been turning the screws on the Brussels bureaucrats and have threatened with massive strikes if their industry isn’t protected from China’s avalanche of underpriced steel.

In this tense context, it’s obvious why the European Parliament caved in. But putting aside the pressures coming from the street, the EP’s justification was nevertheless sound: China is very far off from respecting the minimum standards for a market economy, as they are set out under European law. Concluding otherwise would be not just a probable death sentence for large swathes of Europe’s industrial production, but also in blatant contradiction of European regulations.

The EU’s five criteria are concerned with a) the nature and frequency of governmental intervention in the decision-making process of companies, b) the lack of government distortions in “the operation of enterprises linked to privatization;” c) the use of non-discriminatory, transparent company laws; d) an effective, transparent legal system protecting property rights; e) and a “genuine financial sector which operates independently from the state.” According to a 2009 paper, China had fulfilled only one criteria – the one linked to privatizations – with a lot more ground to cover for the remaining four.

Indeed, as recently as April, the European Commission expressed its deep concerns with China’s overbearing state in handling the affairs of state owned companies (SOEs), when it investigated a proposed joint venture between China General Nuclear Power Corporation and EDF. After regulators concluded that Chinese SOEs involved in the energy sector have no independent decision making powers whatsoever, the EC took the unprecedented step of analyzing the market impact of the deal by looking at the entire corpus of SOEs involved.

This decision is perhaps the most obvious example of China’s total disregard for market rules as it sets in stone the fact that 45 of the Fortune 500 companies, are under the direct control of the Chinese Communist Party with a combined worth of $4.5 trillion. The EC’s reasoning nullifies therefore any semblance of corporate independence in the Middle Kingdom and provides fodder to those arguing that the Chinese state is directly responsible for the overcapacity issues in the steel industry for example.

It is widely expected that the Commission’s reasoning will be rehashed in the upcoming review of yet another Chinese deal involving one of the SOEs from the energy sector – the proposed tie up between Syngenta and ChemChina, Beijing’s largest outbound investment to date, clocking in at $43 billion. The deal is already strained by delays and subdued market expectations, insofar that any further hand wringing stemming from regulatory concerns could easily derail ChemChina’s hopes of becoming the world’s largest agro giant.

Rebuffing critics, the European Parliament took the only course of action that was available to it and sent a strong message that China is simply not prepared to join the ranks of other market economies. At this point, even if the political will to award China MES exists in certain European quarters, the Parliament’s resounding “no” has undoubtedly made them reconsider.

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A Turbulent Journey of Cryptocurrency: From Increasing Popularity to Declining Desirability

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One of the most influential inventions in the past few decades is blockchain technology which led to the emersion of cryptocurrencies. Blockchain was first introduced by Stuart Haber and Scott Stornetta in the early 1990s, who were trying to resolve major issues related to digital information security by creating a block system that could prevent any modification, thus ensuring data integrity. However, this technology only became widely known in 2008 when Satoshi Nakamoto launched Bitcoin: the first generation of cryptocurrency as a peer-to-peer electronic cash system built on blockchain technology. Since then, blockchain has been growing rapidly, and cryptocurrencies’ emergence is considered a turning point that could radically transform the global financial regime. It became one of the hottest topics that stole much attention, not only from business entities but also from countless governments and international organizations. This article will further analyze the impacts of cryptocurrencies on the global political economy and the factors that led to their decline after 14 years of glory.

Cryptocurrencies: A Disruption Towards Global Political Economy?

Cryptocurrencies have become digital currencies that can remove delicacies in conventional financial transactions by using blockchain technology at its core. Today’s financial dealings are solely dependent on the existence of trusted third parties, and implementing completely non-reversible transactions, for example, is nearly impossible to conduct in the current mechanism since financial institutions are likely unwilling to mediate the disputes due to its high costs. Therefore, there would be no guarantee of protection against fraud for producers and consumers when making any money settlements, as the whole process is based on trust. Instead of trust, cryptocurrencies adopted cryptographic proof: employed peer-to-peer networks using proof-of-work in recording the public history of transactions to prevent double-spending; thus, it would be impractical to reverse the transactions that had been made. This way, the possibility of fraud can be minimalized or even eliminated. Further, as the peer-to-peer network also functions to remove the usage of trusted third parties, the transaction fees can be set to the lowest point, which is 0.1 percent of the total transaction amount.

Another prominent feature of cryptocurrencies is the idea of decentralization: creating a spectrum where people can take charge of their finances without central authority within the network. Blockchain technology which supports cryptocurrencies, enables the creation of a decentralized design that could grant users access to the payment system all the time without a single point of failure – no intermediary and control exist, thus transactions could always be sent and received instantly, even the users’ account could not be ‘frozen’ at all cost. After all, cryptocurrencies were built to liberate people from limited electronic transaction processes, and embedded decentralization reinstates this vision.

The first generation of cryptocurrencies was created to criticize a two-level money system consisting of central and commercial banks that combine public and private money into a hybrid money game. With this arrangement, the standard monetary system is weighted with political control and coercive power to achieve stability. However, what brought the hybrid money game into stabilization may also be the factor causing instability which was visible during the financial crisis of 2008. Bitcoin back then emerged as a political experiment to promote a whole new different of money game without coercive power and extensive institutional underpinning except from what could be provided by the computation coding. As the genesis of cryptocurrencies was the emergence of distrust towards existing money games, their popularity also increased in line with the failure of the monetary system. The Cyprus Crisis in 2012 was a turning point as people became more aware of covert political aspects within dominant money games. This led to a sharp increase in interest in Bitcoin-related apps, especially in the states suspected of having issues in their banking sectors.

The adoption of cryptocurrencies then started gaining a solid footing in the early 2010s when the followers of bitcoin launched a campaign of fighting the good fight against perceived oppressive and restrictive established money games. Starting as political challenges to overshadow the money system nationally and worldwide, cryptocurrencies developed into payment options accepted by numerous merchants such as e-Bay and Airbnb. Cryptocurrencies not only evolved as a modicum of exchange but also as tools to store value where people keep their wealth in crypto-assets. By 2021, the market capitalization of crypto-assets has tripled to an all-time high of USD 2.5 trillion. Significant economic activity has also been generated due to the rapid growth and dissemination of cryptocurrencies. For instance, there are chances for new enterprises like manufacturers of mining hardware as well as a rapidly expanding market for investors. Initial Coin Offerings (ICO) and tokenization have gained significant market traction, popularizing cryptocurrencies as a means of financing.

The development of cryptocurrencies contributes to introducing an auditable and transparent payment system. Their existence might challenge the current well-established money games, yet at the same time, it also lays a strong foundation for achieving the idea of a cashless society. Cryptocurrencies could play a significant role in bridging the transitions. However, despite the countless benefits of its rapid growth, cryptocurrencies are still considered disruptive innovations within the global political-economic context. The fast expansion of the crypto ecosystem is accompanied by the emergence of new entities, some of which have poor operational, cyber risk management, and governance framework. Consequently, the crypto ecosystem is exposed to significant downtime risks due to poor designated systems, the hacking-related risk targeting consumers’ funds, and the imbalance distribution of crypto assets which could result in investor losses. Those risks might look insignificant on a small scale, but as crypto popularity increases, they threaten global financial stability.

Further, the transparency offered by cryptocurrencies has become a double-edged sword. Transactions are recorded in a public ledger validated using a computation machine; therefore, transparency can be warranted. However, the protocols are designed to ensure that the computer solving the problem is unaware of whose transaction it is currently working on, which led to the creation of an anonymity nature. This characteristic, along with the lack of regulations for their field operations, made cryptocurrencies have interesting potential for passing the law or conducting illicit actions such as money laundry, dark market payment, or even terrorism financing. Anonymity also presents a loophole for people to avoid tax on their transactions or their wealth. With cryptocurrencies, criminal conduct could never be easier, and these shortcomings would potentially shatter the stability of the global political economy.

The Declining of Cryptocurrencies: Why Now?

After experiencing a peak point in 2021, the value of cryptocurrencies plummeted at the beginning of the year and worsened by the end of 2022. The fall has been sharp and extreme: only in March 2022, the market was projected to be worth more than USD 3 trillion; recently, it is barely valued at less than USD 1 trillion. After 14 years of glory and predicted to be the future form of money games, cryptocurrencies cannot maintain their stability; however, why now? According to Hütten & Thiemann, the vision of radically decentralizing the financial system became one of the prominent factors that brought cryptocurrencies to downfall. When the existence of cryptocurrencies has more and more disruptive potential, further formal regulations are increasingly being applied. Powerful institutions started building a legal framework for cryptocurrencies and establishing infrastructure to integrate the developing technology makes cryptocurrencies lose their political objectives and have to forego their normative demands.

The failure of adoption also contributes to their declining desirability. Instead, as the modicum of exchanges, cryptocurrencies were more popular as speculative assets where people benefit from their high volatility. As merchants have less commitment to using cryptocurrencies and only use them as payment options among many other payment methods, cryptocurrencies have stagnated in their real-life adoption. Further, the increasing integration of cryptocurrencies and stricter rules imposed by powerful entities has made the crypto ecosystem bestowed by political power. It means that cryptocurrencies’ values would be affected by the dynamic of the global political situation, such as rising inflation or war in Ukraine. In the end, after 14 years of popularity, cryptocurrencies might give up the long-life dream of decentralized money games. Instead, they could end up as game-changers to significantly improve central banks’ functions, away from their original visions.

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The suffocating economy of Iran

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Iran’s economy is on a roller coaster. The past year saw a dramatic rise in inflation rates and a historic fall in the value of the rial. The protests which followed the death of a 22-yar old Kurdish woman Mahsa Amini have magnified the creaks in the country’s economy.

On  January 22, The Iranian rial was selling at an exchange rate of 450,000 against the greenback, an all-time low. The rial has lost 29% of its value since the time the protest started. Iran’s statistical agency reported an inflation rate of 48.5% in December 2022, the highest level since 1995. November data recorded food inflation of above 70% in 12 provinces of the country.

Reports from the country suggest that more than half of the population is living below the poverty line due to spiraling prices. As per the latest forecast, the World Bank predicts a GDP growth of 2.9% for Iran in 2022 which will slow down to 2.2% in 2023 and 1.9% in 2024 owing to “slower growth in key trading partners and new export competition from discounted Russian oil”. However, the government’s response to the bleak economic indicators so far had been subtle and unperturbed.

Causes

The unilateral withdrawal of the US from the nuclear deal in 2018 and the sanctions that followed on oil exports and international banking has put heavy stress on the country’s economy.

 The country’s government debt-to-GDP ratio rose to 45% in 2020. According to World Bank, Iran’s unemployment rate reached 12.2% in 2020 before narrowly dipping to 11.5% in 2021. Iranian daily Etemad had reported that at least 23 workers have committed suicide since March 2022 in the country due to reasons like dismissal, punishment, or threats.

The government lifted import subsidies for essential goods in April 2022, to ease the pressure off the strained government budget, which subsequently triggered rapid spikes in food prices during May-June.

The Federal Reserve in November tightened its control over Iraqi commercial banks to restrict the illegal siphoning of dollars to Iran and other Middle-East countries. The new regulations blocked a huge chunk of daily dollar wire transfers to Iran. The Taliban takeover in 2021 had previously blocked access to hard currency to Iran via the Afghan route.

Amid the uprising, European Parliament approved a resolution designating the Iranian militia, Islamic Revolutionary Guard Corps (IRGC) a ‘terrorist’ organization. It also called for sanctions on Supreme Leader Ayatollah Ali Khamenei, President Ebrahim Raisi, and others. The US and UK too imposed fresh sanctions on Iran.

Response

Iran retaliated on January 25th by imposing sanctions on 34 British and European individuals and entities.

Former Central Bank of Iran governor Ali Salehabai had been sacked in December due to failure to control the rapid depreciation of the rial. According to analysts in the region, the Central Bank is injecting dollars into the market to thwart further depreciation.

In late January, the Central Bank decided to raise the maximum amount of currency that can be sold to individuals annually from 2000 euros to 5000 euros, to instill confidence and ward off fears about the availability of currency. The cap was initially introduced to stabilize the currency after the US pull-out of the nuclear deal in 2018.

Iran has not resorted to austerity to tide over the crisis. Instead, President Ebrahim Raisi presented a noticeably enlarged national budget in January to boost growth. Valuing 21,640 trillion rials, the budget is 40% larger than the previous one. The Islamic Revolutionary Guards Corps (IRGC) was allocated $3 billion registering a 28% rise over the last year, in a taunting message to the west.

Recently, Iran introduced gold coin certificates in the stock market to raise cash and mitigate inflation. The government is desperate to raise cash as the government budget is posting a deficit of $9.75 billion. Critics point out unrealistic revenue estimates riding on oil sales and over-optimistic tax collection figures.

To raise revenue, Iran has increased its oil exports to China to more than 1.2 million barrels per day over the past three months. The sanctions have in effect caused Iran to warm up to western rivals like China and Russia. Iran and Russia are reportedly in talks over the introduction of a stablecoin, backed by gold, to bypass western sanctions in cross-border transactions.

Iran’s response to the looming economic crisis was devoid of any extreme desperation. The government took all necessary steps to keep the dread within bounds. The present security situation in the country could go haywire if the economy collapses.

It remains to be seen how fast the government can ensure reliable alternate arrangements in place to sustain the economy. If not immediately, chances are high that the country may drift to panic mode.

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Prospects of Vietnam’s Economic Growth in 2023

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The ongoing  war in Ukraine and increasing commodity prices across the world have impacted the developing countries. Countries in Asia which were recovering from the COVID-19 impact on their economies have to rework their recovery process by looking for alternate supply chains and reducing their financial responsibilities towards social sector through budgetary management. Among the developing economies in Asia , Vietnam showed an economic growth of nearly 3 per cent  even when many of the countries were witnessing  recession and reduced production because of adverse impact of COVID-19 .The stimulus packages that the governments across the world have to give to the manufacturing sector to accelerate production and meet the demands of the people. In a report released by World Bank in August last year it was stated that the Vietnamese economy is likely to grow by nearly 7.2 per cent in 2023 and it is going to sustain itself in 2024 with a likely growth projection of 6.7 per cent. These are encouraging signs .Few of the sectors which might be accelerating the growth process would be in the field of footwear and electronics. Vietnam itself has been undertaking strong anti corruption measures so as to facilitate stronger economic fundamentals and recovery from the COVID-19 impact.

The economic growth of Vietnam has been accelerating and the agricultural sector has been productive in ensuring food security for Vietnamese citizens. As per one of the estimates this sector contributed more than 14 per cent in national gross domestic product and has engaged more than 35 per cent of youth in the year 2020. This sector also earned valuable foreign exchange of more than U.S. dollar 48 billion. One of the interesting achievements of Vietnam has been increasing life expectancy, and its universal health coverage which covers more than 87 per cent of the population.

As per the plan of action which has been envisaged  for Vietnamese economy by its leadership it aspires to become a high income country by the year 2045. It is expected that with the sound economic fundamentals and more than 5.5 annual average per capita growth for the next 2 and a half decades it can reach that milestone. Vietnamese population is also young and is adapting itself for digital economy and building core fundamentals for its membership in different regional economic organisations such as RCEP and CPTPP.The bilateral free trade agreement with EU is also facilitating its growth in several sectors.

There have been significant structural improvements ushered through policy documents in terms of improving financial architecture, accepting global norms related to climate and environment, comprehensive security for population against poverty , and extensive investment in infrastructure development both in rural and urban areas.

In one of the articles written  in Bloomberg it has acknowledged that Vietnam is  now is one of the Asia’s  fastest growing economies which has grown to 8.02% last year and it even surpassed  government assessment of 6 to 6.5 per cent growth. The article also acknowledged the fact that manufacturing has been growing to near 10 per cent mark in comparison to last year and there is strong development in the services sector as well. Among the economies Vietnam’s  inward foreign direct investment has also been doing quite well and it has received nearly US  $27.72 billion last year .Asian Development Bank has forecasted that Vietnam is going to grow at the rate of 6.3% in the year 2023. Also the unemployment rate has reduced and with inflation clearly under 5 per cent , showcases that the long term decisions which we have taken with the initiation of Doi Moi(economic liberalisation process )  in 1986 has been bearing fruits.

In terms of sectoral assessment, the real estate as well as construction  sector ,the growth was about 7.78 per cent last year and the services sector growth was closer to 10 per cent. There have  been increase in exports last year as well and an increase of 10.6% was noticed. One of the core arguments which have been given with regard to Vietnam’s impressive growth has been related to trade liberalization, increased deregulation and improvement in the ease of doing business, investment in human resources and stable government were seen as critical attributes for this impressive growth in Vietnamese economy.

Major companies in footwear, electronics, and mobile production have invested in Vietnamese economy and few of the companies have shifted base from China to Vietnam. Improved  congenial economic environment has been appreciated by companies such as Adidas, Nike and Samsung to list few.

Owing to the development of new kind of digital technologies and better consumer awareness Vietnam is preparing itself for a major impetus in the E- commerce sector and therefore has been making extensive changes in digital based economy and more stress on science and technology development. Vietnam has acknowledged the fact that with the changes in sectoral composition of the economy, it is pertinent to develop necessary skill power and human resources which can seamlessly integrate Vietnam into global value chains and also help the services sector in exploring new markets.

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