Commenting on recent the US and China tit-for-tat tariff disputes, Prof. Larry Backer says that the deep structures of economic integration cannot be undone by a series of shocks with offers of renegotiation.
As the US and China ratchet up a tit-for-tat tariff dispute, it has been said often in the last few weeks that no one wins a trade war.
The issue was discussed with Larry Backer, Professor of Law and International Affairs in Penn State University.
How will President Trump’s decision to boost tariffs impact US domestic steel and aluminum producers?
My apologies, the answer to this question will be the longest of this interview precisely because the simplest questions may pose the subtlest problems. In contrast to many experts, and others, who might be eager to provide a simple and direct answer to this simple and direct question, I can only offer complexity and contingency. At the greatest level of generalization, it is not clear, even to experts and policymakers, whether the tariff boost will have a positive or negative effect. Steel and aluminum production are now part of integrated production chains only a portion of which concerns steel and aluminum production. The idea appears to be that the tariffs will protect US based steel and aluminum production by making the import of like products more expensive—and thus US producers will substitute domestic production over foreign. That may well work for domestic production and consumption but may not work for domestic production for export—especially where other states match the tariff to equalize pricing (and reduce the foreign subsidy) that the tariff represents. And yet domestic production and consumption is an important element of US macro-economic policy and may produce positive short-term effects in terms of domestic investment and employment.
Yet the tariff discussion must also be understood within a more complex context produced by the deep embedding within global production and ownership chains. The key here is that there is no identity between the location of production (in this case steel and aluminum production) and the nationality of ownership (that is, the “citizenship” of the apex enterprise that owns or controls the steel or aluminum production chain with respect to which production might be located in any number of states). It has been reported, for example, that some US companies may be negatively affected because they are subsidiaries of foreign enterprises from which, for example they receive steel for finishing and then export. And the effect will have little to do with the nationality of the owners of steel production. Consider the irony of these tariffs if, as a result, foreign owned enterprises establish factories in the US for steel production, boosting US production while repatriating the profits of that enterprise back to the home states of parent company. That insight, in turn, produces some variations in the answer to the question you posed.
First, even if the tariffs have an effect (positive or negative), it is not clear that the extent of that effect will be large. Again, the issue of tariffs can only be viewed in a vacuum within the cloistered towers of those who find such detached analysis useful for purposes of advancing policy without relation to real world effects. Thus, the amplitude of the effect may be difficult to distill apart from the ecology within which tariffs may have both direct and indirect effects. This provides an opportunity to seek to distill effects using a variety of techniques all of which will be dependent of a set of assumptions and approaches that might well skew the results in ways that serve objectives. These effects, of course, are further complicated by the distinction between the effects on domestic production (an objective of the tariffs, of course) and the effects of the nationality of the benefits of this production. It is not clear how one deals with the situation where domestic production increases (and increases local economies) while the profits of that production are repatriated elsewhere.
Second, even if there is significant effect, it is not clear whether the effect will be generally felt or will affect different parts of the country, and different industrial sectors differently. To speak of the effects of the tariff boost generally produces an answer that aggregates effect. But aggregated effects only serve political interests, it does not reflect the reality within a large country like ours. It is much more likely that the effects will be felt differently, positively and negatively in different parts of the country and with respect to different industries and companies. Yet that might well have been the point—to ensure a targeted boost to economic activity within specific portions of the US with the hope that this boost in activity will then have indirect effect over a broader area.
Third, the answer to the question must take into account the time horizons for change and the sectors with respect to which differing time horizons might matter. Thus, for example, to the extent that the tariff is meant to foster greater steel and aluminum production, that effect will take years to be felt in terms of actual significant increases in production. Also important here is the question whether that production can be sustained. Tariffs as subsidies may have an immediate effect on decisions to invest in production (and hire labor to aid in its production), but eventually the sector and the heightened production will have to be economically viable—especially since over the middle and long term global consumers and producers may adjust their activities to take the tariffs into account.
Fourth, on the other hand, the immediate effects of the tariffs have already been felt—not in the changes to the location of steel and aluminum production (inside or outside the US), but in the reactions of financial markets, lenders, political leaders and the like. And perhaps that is the most telling part of tariff policy in the contemporary age—tariffs appear to have greater effects on global finance than on global production, on the allocation or distribution of the placement of portions of the production of commodities (in the long term), and on its value in mobilizing mass opinion to some political end or other. In that respect, tariffs may not pose the same problems that they produced a century ago in the European inter-War period. Globalization has substantially reduced the power of tariffs precisely because the borders necessary to make them effective have been substantially eroded—and it is unlikely that they will be reconstructed in the manner of 1920s thinking.
Fifth, the impact will vary from the short to the long term. Most people may be tempted to consider the question in light of immediate or short-term impact. Indeed, global analytics have tended to increasingly favor short term thinking and reaction rather than long term or strategic responses or adjustment. And the short-term impact—politically—will be significant. One sees that already as the “usual suspects” have already aligned themselves and their media outlets to amplify their support or opposition to the tariffs, and to begin to seek to mobilize mass opinion to some end or other. Yet it is the long term strategic adjustments that are far more important and most likely to be missed by a media and analytic culture with a short attention span.
How will it actually impact the aluminum and steel industries globally then?
There are two answers here. The direct answer is that impact will be a function of the way industry and states respond. Industry might be able to avoid the effects of the tariff by strategic shifting of the operations of their global production chains to minimize the effects of the tariffs—but such adjustments might take time. States, on the other hand, are less flexible. They will either support their own industries or risk losing them. If they do not reciprocate tariffs, they might be induced to apply enough support to their industries to wash out the price effects of tariffs. The indirect answer, however, may be more important. The impact to states and enterprises will depend on the ability of both to mitigate the effects of tariffs through changes in the ownership of the producers of tariffed goods. Thus, for example, if Chinese enterprises own or can acquire (direct or indirectly) steel and aluminum production facilities in the US, the net effect of the tariff will be small. Over the long term, and in the absence of waivers from tariff, there may be a gradual shift of production—but not necessarily to the US Instead the shift may move production to other states which have successfully negotiated tariff waivers.
You’ve mentioned some of the beneficiaries behind his decision are their other internal or external beneficiaries in addition to the companies in America, or is it just wholly these American companies who are going to benefit from this decision?
What is an American company today? The notion of national companies is now essentially obsolete in a context in which most economic activity is connected to global flows of production. Companies of a variety of nationalities are organized to manage and participate in global production (in steel and aluminum and other products). The economic enterprise that tends to manage or control the process of production and the role of other enterprises within that production process tends to be characterized as the representative or incarnation of a multinational enterprise, and to lend its nationality to that system of global production. But realistically, that represents an oversimplification of the realities of production. Thus, American apex companies may benefit from the tariffs.
On the other hand, US apex companies who have invested heavily in steel and aluminum production enterprises outside the US may suffer. Conversely, a Russian or Chinese enterprise that owned steel or aluminum production facilities in the US might profit significantly from the tariffs. Because of this quite large divide between the nationality of the place of production and the nationality of the ownership of production (up the production chain) it is difficult in many cases to point to a generalizable nationality for winners and losers. And that is the great insight of this effort—states can control generally the production of things within their territory and use their borders to exact a cost of entry (or exit). But that control of the consequences of production within or outside a state has absolutely nothing to say about the nationality for the beneficiaries of these policies. If all steel production abroad is owned by US companies, then steel import tariffs would affect US companies negatively because it adds costs to their global allocation of the elements of their production chains.
How much will this decision to increase tariffs affect countries like China, Japan and South Korea then?
There are two questions here. The first deals with reciprocal tariffs. This is a simple one—if the US raises tariffs on aluminum and steel, then other countries would seek to do the same on US steel and aluminum. Yet the impact on the US may be negligible if it is a net importer of these products. And thus, more effective may be what I might call retaliatory tariffs. Thus, if the US imposes tariffs on steel and aluminum that affects national industries elsewhere, those states might impose duties on US agricultural products or some other product in a sector where US exports are large. But in a global economy that might only produce short term pain, as those in control of production chains can, at some cost, realign their trade routes in ways that might soften the blows of tariffs. And again, where one thinks only of short term effect, one misses the essential element of a more benign long-term effect within a global context in which capital and investment still moves fairly freely. And, indeed, rather than approach the imposition of tariffs with retaliatory tariffs, China, Japan and Korea would be better off buying US: steel manufacturers, increasing production of un-tariffed steel and then exporting that commodity for finishing in their own home states.
How likely is the European Union to retaliate by imposing tariffs on US products?
This is an excellent question. While the initial emotional response, one fanned by the global media, might have tilted toward retaliatory tariffs on vulnerable US products, that course may not be followed once tempers are calmed. The principle reason for this is that the Trump Administration has made it clear that it would entertain bilateral negotiations on waivers of tariffs. This is not a small matter. Indeed, one can see in this Tariff imposition-negotiated waiver approach an essential feature of the Trump Administration’s movement away from its old approach of globalized system building multilateralism to the new America First Initiative. Thus, consider the dynamics of the tariff imposition in context. The United States has commenced building its own trade network in a manner that links up with the US enterprise’s management or control of certain production chains.
That requires a reorienting of trade relations from a multilateral form without a center to an aggregated bilateral form with the US at the center. To effect this reorientation of the foundations of trade the US must first re-center its position in global trade networks (not all of them but those of vital interest or with respect to which there is an ambition). To that end, certain shocks are necessary. These include withdrawal form multilateral agreements (including Paris and TPP) and the disruption of old free trade alignments. But mere withdrawal does not produce re-centering—the offer to renegotiate the terms of bilateral relations (and in the process restore relations or waive action) is the driving element of realignment. At the end of the process, if carried out systematically and with a clear long term vision, the US might well produce a trading system that looks substantially the same as the Chinese One Belt One Road Initiative. If that is the case, then the future of global trade is not manifested in tariffs, but through these tariff and other shocks, a new global trade system, built around control of production chains, will emerge in which most roads lead either to Washington, or to Beijing.
Will Mr. Trump’s acts result in a trade war between the US and world’s other economic powers? What can be the consequences of such possible war for world?
No trade war is likely. The deep structures of economic integration cannot be undone by a series of shocks with offers of renegotiation. And trade war does not seem to be the intent (though one must disregard certain of the President’s tweets to acquire assurance on that point). And America First Initiative is not the same as the isolationist policies adopted from near the end of the 1920s—it is rather the reverse, the effort to encourage muscular expansion but now oriented from key home states, rather than by building a community of similarly situated actors all competing in the global markets for engagement with portions of emerging production chains. And indeed, while the ineptitude of national leaders might, through comedies of errors and personal vanity, move key states toward trade wars, the result would not further state power. Trade wars are particularly dangerous in contemporary politics precisely because they would produce two types of instability. First, trade wars would produce instability among the lower reaches of production chains. Those states would suffer substantial impacts in employment that would lead to political unrest, and more likely substantial migration that would then destabilize neighbors and eventually the apex states to which migration will flow, particularly in the West. Second, trade wars would destabilize apex nations as well. The stability of the political orders in the United States and China depend in large part on the fulfillment of a promise of a baseline economic prosperity. Where that disappears then both states might well be subject to the vagaries of populism which, though it might not overthrow either’s system in a formal sense, would substantially corrupt them.
The US and the Europeans cooperation after world war was based on trade, security and military regimes like NATO. Don’t you think possible trade war between the US and Europe can spill over other security and military fields, too?
I agree, of course, that a trade war would spill over to other vectors of state to state relations. But only suicidal states and mad leaders without substantial popular or institutional checks, could possibly move the US-EU relationship dangerously in that direction. The US and its European allies have had tiffs and have made grand gestures of disapproval against each other with some regularity since the 1960s. One need only remember the antics of Charles De Gaulle (quite effective both within Europe and in the effect on NATO relations). And in any case, the bad behavior of states on the periphery of the US-EU “entente” may ensure the strength of the core alliance militarily and work against economic policy foolishness.
Rising of rightist in Europe is a threat to the future of the EU and from the other side this can result in more independent trade relation without the EU considerations. Considering this fact how do you see the future of EU?
Many people fear the ghosts of the past, and even more people believe that it is important to fight past battles over and over. But like the analogy with the trade wars of the 1920s, analogies with the rise of fascist movements in Europe in the 1930s may be misapplied in this case. Yes, indeed, the ultra-right movements have risen again after several generations of muscular suppression in Europe, and ridicule (effective) in the US But that suppression, in part, might well have contributed to the re-emergence of the virus of right wing extremism in the face of a largely unchecked left wing extremism that has tended to be the darling of the political and intellectual sets in the US and Europe since the great social rebellions of 1968.
That cultural moment plays differently in Eastern Europe, of course, and produces a return to the comforts of authoritarian nationalism that can easily be characterized as either left or right to suit the agenda of the commentator. At some point balance must be restored, of course, or the EU will flounder. And that may be likely in the medium term. For the moment, however, the rise of rightists as against an unchecked culture of leftism may produce the sort of instability that marked the early Weimar Republic. But at its base, the EU is suffering a version of 2nd generation malaise. The rising elite never experienced the trauma that produced European solidarity in the face of a half century during which Europe virtually committed suicide. They do not know hunger, and fear, nor do they worry about the penetration of larger powers to undermine their own autonomy and independence (those are worries left for the detritus of empire). And thus, they can indulge the privilege of dismissing the institutional structures on which their own prosperity and security are based. To that end, indeed, it is not the rise of the right, but the effects of ennui, that may have a substantial deleterious effect on the solidity of the EU.
The US also recently imposed tariffs and other measures against the People’s Republic of China. Do you see the possibility of a trade war or more adversarial relations between the US and China with respect to trade issues?
I would suggest that the recent and very quick tariff exchange between the United States and the People’s Republic of China illustrates the character of these tariff moves by the Trump Administration and the way that they have been received once governments finish producing the appropriate responses required for public consumption by their internal and external audiences. Consider what happened when in mid-March 2018 President Trump moved to levy tariffs on up to $60 billion of Chinese imports, in addition to those imposed on solar panels, steel and aluminum. Initially, the Chinese reacted aggressively and publicly in the expected way, utilizing all of their networks to aid in that effort. The Chinese indicated an intention to levy tariffs on about $3 billion of US imports, including soybeans or aircraft, major trade goods.
The effect was immediate—global financial markets fell dramatically over the course of a week. Yet, after the necessary public drama, one discovered that the tariffs imposed on both sides appeared to serve as an invitation for both the US and China to begin to renegotiate their trade relations. The Americans sent a letter indicating the changes that they sought in the wake of the tariff impositions, with an emphasis on trade and intellectual property issues, including what for the US amounted to coercive technology and know-how transfer rules. Premier Li Keqiang spoke publicly about the need for China and the United States to continue negotiations and reiterated pledges to better open their internal markets and perhaps to target purchases of specified US goods. Negotiations continue.
When news leaked of those steps, global markets responded appropriately. And thus one can begin to see the contours of the way in which tariffs have become an instrument rather than the objective of trade policy. The US may now use tariffs as a critically important tool in the reframing of US trade policy in the form of the “America First” Initiative. The object is not to destroy trade—the US President and his advisors have been very clear about that (it is only that people have chosen not to listen)—but to reframe the basis of the global trading system from the forms that emerged after the 2nd World War to a new form whose characteristics will be shaped both by the Chinese One Belt One Road Initiative and its American counterpart, the “America First” Initiative.
It was the Iranian leadership itself which almost a decade ago pointed to the end of the post-World War II era and its structures. Few paid attention at the time. That was a pity. For it seems that in retrospect they were correct and that the global community will continue to see manifestations of the new system emerge as the first order powers realign their visions, reach accommodations with each other and reorder the hierarchies of power and production for the first part of this century.
First published in our partner Mehr News Agency
Is Your Neighborhood Store Safe? Amazon and Store Closings
Amazon has reached the far corners of the earth… and the highest elevations. Delivery men venture 11,562 feet up in the Himalayas to leave a package. While the company may serve a useful purpose in remote regions, its phenomenal growth also reveals that no town is immune from its less desirable consequences. The online retailer’s omnipresence has been all too apparent in Chicago, New York, and London in recent months, where stores have been closing in droves.
Treasure Island Foods of Chicago, a family-owned business started by Christ Kamberos in 1963, announced at the end of September that after 55 years it was closing all remaining stores in just two weeks. Now, the lights are out and the shadows empty shelves are all that remain, with the scent of fresh sourdough and gyros cooking on the spit only in shoppers’ reminiscences as they walk by the darkened windows.
Julia Child once described Treasure Island as “America’s Most European Supermarket.” In my memory, it was unforgettable. The stores always had treasure troves for every season, from delicious green picholine olives from France, to liver pâté and English Blue Stilton at Christmas, and of course, Marmite. Not to mention exotic cookies and chocolates from all over the world: marzipan and chocolate from Switzerland and Austria, shortbread from Scotland, and crisp butter wafers from the Netherlands are a few examples. It was a haven for special gifts during the holidays.
Treasure Island was not alone in the struggle to survive amidst food delivery apps and Amazon. Not only were customers buying goods online, but Amazon was also shifting into the grocery market by taking over Whole Foods. Not surprisingly, Chicago’s other local grocery chain Dominick’s closed in 2014. The city lost one of its most beloved bakeries too in 2017 when the Swedish Bakery closed after 88 years in business. Gone were the days of mouth-watering rum balls, Princess Torte laden with green marzipan, and toska cake. In its final days an estimated 500 customers per day flocked in to have one last tasty treat.
Purchasing items online might be convenient but the trend has serious costs for many industries, not only food. Retail has been hit hard. Sears recently filed for bankruptcy and is closing 142 stores. So did Toys R Us, shuttering its outlets last summer. Luxury goods retailer Henri Bendel announced in September that its stores will be closing too, after 123 years.
What’s more the change is not just in the United States. In the UK, Marks & Spencer plans to close 100 stores by 2022. Debenhams and House of Fraser in London are also in trouble. In March of 2018, Sweden’s H & M reported the lowest first quarter profits in more than a decade, down 62%. When large international stores are being squeezed, one can understand how local shops are struggling to keep afloat. A recent Atlantic article observes that Manhattan is becoming a “rich ghost town.” So many store fronts once filled with interesting items are now empty, a trend that the author predicts will move to other cities. Will the choices for future shoppers be restricted to chain stores and dark unrented windows? Local small retailers unable to afford high rents are gradually being nudged out of existence. They need help.
Could Local Currencies Save Our Neighborhood Stores?
Switzerland has had the WIR since 1934 and Ithaca, New York introduced its own currency known as Ithaca Hours in 1991. Ithaca Hours started out with 90 individuals who were willing to accept the currency as a payment for their work, and expanded to become one of the largest local currency systems in the U.S. Ithaca’s example was an inspiration for municipal systems in Madison, Wisconsin, and Corvallis, Oregon.
The UK also has several local currencies including the Bristol Pound. The former Mayor of Bristol accepted his entire salary in Bristol Pounds, and more than 800 businesses accept the local currency.
Once local currencies are in circulation, consumers can continue using their national currency to purchase from large retailers and from online giants like Amazon. Their local currency, though, is typically used at local businesses.
As an example, were a Chicago currency implemented, consumers might use their U.S. dollars to purchase goods online but would use their Chicago currency to buy locally. Legislators and communities could thus lend a helping hand to local gems that remain in our towns. Lutz Cafe and Pastry Shop, for instance, established in 1948, is unique to Chicago, and creates some of the most delicious cakes in the world.
By 2003, there were over 1,000 local currencies in North America and Europe. Yet this is a mere fraction of the total number of cities. If local currencies expanded to a majority of towns, perhaps our beloved neighborhood stores would be able to survive the online onslaught.
The Benefits of Preserving Local Shops
Consumers lose a service every time a small shop shuts down. A local paint store, for instance, can provide advice on what paint to use for a particular purpose, how to use it, etc. Nowadays, in many towns, these stores have closed. Consumers’ options are limited to buying online without input from an expert, or from a large national chain, where they will be lucky to find advice comparable to that from a specialized store. The same holds true for many kinds of home repair.
Then there is the charm of familiar faces at the corner store. Growing up near Treasure Island as a child, I could scarcely forget the cherry-cheeked cherub-like server at the deli counter. After noticing this eight-year-old’s tendency to gorge on free olive samples once a week, he would always laugh heartily with those chubby cheeks and remark with a chuckle that I would end up eating all the olives before reaching the check out line. Ordering specialty olives online is just not the same. There may be no checkout line, but also no one to talk or joke with. The same is true for the automated Amazon Go stores. The nice deli server today is out of a job after decades of service.
Another hidden cost of online purchases is environmental. Aside from fossil fuel emissions, delivery of a parcel requires packaging, and often bubble wrap, made of low-density polyethylene, a form of plastic that comprises 20% of global plastic pollution. Reusable bags and a neighborhood store within walking distance are clearly better for the environment.
Amazon’s reach extends to places like Leh, India, high in the snow-covered Himalayas, where many of its goods may not be available in town. And one can appreciate and understand the value of online purchases in such rural communities. In fact that was exactly the original purpose of Sears with its iconic catalogue.
Yet in cities where one can readily buy the same items in stores nearby, we have to try to refrain from the convenience of one-click shopping. The more we purchase online items, the more we pollute the environment and kill local stores. Without small businesses, cities will eventually become homogenized with block after block of chain retailers, or dark empty windows, as has started to happen in Manhattan. The character of a quaint town or a trendy metropolis becomes obsolete.
Gone will be the unique gift shops and the luxury tailor. When the British high street becomes indistinguishable from U.S. ghost towns and when the only place to eat is a chain burger joint, the fun of traveling and the adventure of new places will be lost forever. The vibrant world of new flavors and experiences will be no more.
So please think twice before clicking an online purchase. You may be signing your local store’s death warrant.
Author’s note: this piece first appeared in CounterPunch.org
Azerbaijan: Just-in-time support for the economy
Over the last two decades, oil has been the defining factor for Azerbaijan; not only for its economic growth but also for its development. During the first ten years of the millennium, Azerbaijan experienced an explosion in wealth. As oil GDP, comprising half of the sectoral share of the economy, grew by an average of 21 percent per year, fueled by global upsurge of oil prices and increased production. Total GDP grew more than tenfold: from US$6 bn to US$66 bn. This was accompanied by rapid decline in poverty, from 49.6% to 7.6%, increase in real wages, and middle-class growth.
However, after the decline in global oil prices in 2014, nearly by half, the reduction of oil revenue caused a domino effect in the economy. The double devaluation of the Azerbaijani manat in 2015 erased half of the manat’s value against US dollar. and subsequent fiscal adjustment together with ongoing banking sector distress led to a 3.8% contraction in GDP (2016). This was accompanied with the rising of traditionally low levels of government debt (from 8.5% in 2014 to 22% in early 2018) primarily due to devaluation of manat.
On December sixth, 2016, Azerbaijani President Ilham Aliyev has signed a decree approving the “Strategic roadmaps for the national economy and main economic sectors.” The decree for reforms spanned across 11 sectors, from tourism to agriculture, and aimed to decrease the over-reliance to the oil and gas sector.
Azerbaijan – World Bank Partnership
Under very tight deadlines, Azerbaijani ministry of finance started working on a roadmap, that would reform the economy which had been impaired by a number of negative shocks such as lower oil prices, weak regional growth, currency devaluations in Azerbaijan’s main trading partners, and a contraction in hydrocarbon production. As a long-term partner of the World Bank Group (WBG), they reached out for support in developing a public finance strategy for the medium term at the beginning of 2016. To be able to broach such a broad project, different teams within WBG worked together closely to provide just-in-time support and to cover various facets of the macro-fiscal framework. Government Debt and Risk Management (GDRM) Program, a World Bank Treasury initiative targeting middle income countries funded by countries funded by the Swiss State Secretariat for Economic Affairs (SECO) worked on the debt management portion of the issue. The Macroeconomics, Trade and Investment Global Practice advised on macroeconomic and fiscal framework and debt sustainability analysis.
Providing a macro-fiscal outlook, analyzing debt sustainability and proposing debt management reforms
The ministry of finance and WBG joint teams had a thorough review of the macro-fiscal and borrowing conditions and honed in three interlinked issues:
- The need for sustainable financing: While the level of direct debt was expected to remain modest, the sharp increase in the issuance of public guarantees would lead the public and publicly-guaranteed (PPG) debt trajectory to be higher in the next five years.
- Fiscal Rules: Azerbaijan was exploring fiscal rules involving the use of the country’s oil assets, based on recommendations from the IMF.
- The country was facing high exchange-rate and interest-rate risks, due to 98% of the central government debt being in foreign currency and two thirds in variable interest rates.
With that in mind, the teams tested different borrowing strategies to cover the 2017-2021 period under baseline and different shock scenarios, analyzing debt sustainability, and the composition of the public debt portfolio weighing it against the national risk tolerance. They also recommended several measures to better enable the debt management operations: revising and submitting the Debt Management Law to parliament; improving the reporting system; improving the coordination between the ministry of finance; the central bank and the Sovereign Oil Fund; developing a credit risk assessment capacity in the ministry and improving the IT system, and eventually looking at developing a domestic debt market.
Azerbaijan develops the public finance strategy
In December 2017 Azerbaijan ministry of finance shared the debt management strategy, with the President’s office. The proposed strategy comprised a macroeconomic policy framework, a borrowing plan, and associated institutional and legal reforms. In August 2018, President Aliyev enacted and published the “Medium to long term debt management strategy for Azerbaijan Republic’s public debt”. The strategy outlines the main directions of the government borrowing during 2018-2025 based on sound analysis. It puts a limit of 30% of GDP for the public debt in the medium term, with a moderation to 20% of GDP by 2025. The authorities also envisage gradual rise in domestic debt, to develop the local currency government bond market. To reflect the changing macroeconomic outlook and financial conditions, the strategy document will be updated every two years.
“As World Bank, our mission is ending extreme poverty and building shared prosperity,” said Elena Bondarenko, the Macroeconomics and Fiscal Management team member. “It is our privilege to provide just-in-time support to our member countries when they most need it. Especially if we can help build resilience to the economy before further shocks cause major damage.”. “The work doesn’t stop here,” said GDRM Program Task Team Leader Cigdem Aslan. “The GDRM Program will continue its support through the implementation phase of the recommendation and help build capacity for the development of the domestic market for government securities.”
Knowledge economy and Human Capital: What is the impact of social investment paradigm on employment?
Social policy advocates claim the development of the European welfare state model on three phases as follows: traditional welfare state until 1970s; neo-liberal welfare state until the mid-1990s and finally social investment state model afterwards of the mid-1990s. At the first time, on the European Union level, to bring the social investment policy to the political agendas after the 1990s economic hardship, the European Council adopted the Lisbon Strategy in 2000. In fact, the Lisbon Strategy was successful with respect to the employment. In the latter, the social investment state paradigm has fostered once more in the Europe with the “Social Investment Package: Towards Social Investment for Growth and Cohesion” in 2013 by the European Commission that targeted to “prepare” individuals, families and societies for the competitive knowledge economy by investing in human capital from an early childhood together with increase female participation in the workforce.
Generally, social investment idea emerged as a link between social insurance and activation in employment policies and upgrading human capital. Hemerijck (2014) defined the concept of the social investment state to facilitate the “flow” of labour market transitions, raising the quality of human capital “stock” and upkeeping strong minimum income guarantee as social protection and economic stabilization “buffers”. The underlying idea of the social investment strategy has been argued to modernize the traditional welfare states and guarantee their sustainability in line with the response to the “new social risks” such as skill erosion, flexible market, insufficient social insurance and job insecurity.
Economic aim of social investment paradigm is divided into two types by Ahn& Kim (2014),in the following way:The social democratic approach based on the example of the Nordic countries and the liberal approach of the Anglo-American countries. To make the distinguish more clear, the social democratic approach aims to increase the employment for all working classes and strength human capital. On the other hand, liberal approach applies selective strategy which is more workfare policy oriented and covers vulnerable class. In this regard, cross country analyses show that the Scandinavian countries have been the forerunners of social investment and perform the childcare and vulnerable group targeted policies at their best.
Studies have viewed the social investment state approach as a new form of the welfare state and reshaped social policy objectives that addressed to promote labour market participation for a sustainable employment rather than simply to fight against unemployment. Since the beginning, the social investment strategy directs to protect individuals from social and economic threats by investing in human capital through labour market trainings, female (family – career) and child care policies, provision of universal access to education from the childhood. On doing so, the social investment as a long term strategy aims to reduce the risk of future neediness in contrast to the traditional benefit oriented welfare state that focuses on short term mitigation of risks. Or to put it differently, the social investment “prepares” children and families against to economic and social challenges rather than “repair” their positions in such problems later. In short, social investment policies are characterized as a predictor rather than a recoverer. Mainstream social investment argument is that redesigned welfare state model more focuses on work and care reconciliation policy as strengthening parental employment in the labour market is an important factor to exit poverty and support families especially mothers. On the other hand, human capital measures such as education and trainings improve life course employability, particularly for market outsiders as well as human investment guarantees better job security in today`s more flexible job market.
In reality, an economic development and employment is friendly to each other. Thus, income comes from the market through employment as a paid employment is foundation of household welfare. Likewise, a welfare is purchased in the markets. Arguably, unemployment leads to the poverty and social exclusion in the societies. Hereby, work based policy regarded as a sustainable anti-poverty strategy. The welfare states in order to guarantee households` net income and well-being in the post industrialized labour market have turned to invest in preventive measures such as human capital. The human capital (cognitive development and educational attainments) is a must for the dynamic and competitive knowledge economy. Educational expenditures yield on a dividend because they may/make citizens more productive but we need to push the logic much further (Andersen, 2002). In fact, social investment state by being more female and child care policy oriented predicts an importance of the education for a well-being of society and more developed economy in the future. Thus, employment policies need to link with family policies to be more effective in response to the unemployment, poverty and social exclusion. Social investment state as a new shape of the active employment policies invests in education particularly of women and children to prevent unemployment and poverty from the beginning. One hand, addresses to the ageing problem of European societies social investment strategies aim to mobilize motherhood with an employment. On the other hand, by promoting family polices, social investment strategy directs to reduce child poverty and safeguard child welfare in the line with better social and economic conditions of childhood.
What is certain that, social investment state implies human capital strategy. To increase an employment and long term productivity of individuals, social investment policies interchanged with the provision of social insurance. In other words, the social service policies took over the place of the cash benefit oriented policies. It is probably fair to say, the human capital strategies link social investment policies to employment outcomes. Simply, to see the correlation between the social investment paradigm and employment, human capital policy measures (education and trainings) are needed to be checked as a direct labour market value. Since they are the most effective activation measures in skill investment to respond to the knowledge economy, more educated and skilled manpower boosts the labour supply in turn results income equality which is a traditional goal of the social democracy. In this context, social investment state is addressed to reach high quality employment by its human investment orientation. As Andersen, (2002) argues, “We no longer live in a world in which low-skilled workers can support the entire family. The basic requisite for a good life is increasingly strong cognitive skills and professional qualifications”.
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