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Economy

Crossing the chasm: Economics and economic policy

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Contemporary economists the world over are trained in textbooks that are overwhelmingly American in thought and methods.

The conclusions of standard textbooks are straightforward; the market must be free in order to achieve resource allocation efficiency, the political economy must be anchored in privatization, liberalization, globalization and the smaller the government the better.

And it’s almost a cardinal sin for any advocacy for state planning, state owned enterprises, industrial policy, regional development, export development, and foreign direct investment (FDI) development programming, etc.

And if these state interventions are not eliminated and free market institutions installed or restored, the economies involved will run the risk of collapsing under the weight of state intervention and inefficiency. If China has not collapsed yet then it is collapsing soon – just ask Gordon Chang! (He made the prediction in 2001 and has since been changing his expected timing of the coming collapse of China!)

These are the same advice that orthodox economists have doled out to countries in Africa, Latin America and China for that matter. Absence of adherence to these policy prescriptions, the economies involved are predicted to be leading to underdevelopment, or even if by chance economic development does take hold, the end results would still be the same: rampant corruption, inequality of income distribution, environmental degradation, and unhealthy economic speculations and bubbles of all sorts especially in real estates.

By this line of argument, it appears that liberal political economy is the cause that determines economic prosperity. In other words, if Western, or to be more precise, American style political economy is made to prevail then economic development will take off. But there is no evidence for that. In fact, the reverse is more likely. All present day developed countries have gone through periods of corruption, primitive socio-economic inequality, environmental degradation, unproductive speculations, protectionism and/or colonizing others in the case of European powers, on their path to sustainable economic development. Evidence for this latter hypothesis has been convincingly presented in two books by two distinguished economists; Brad DeLong of UC Berkeley in Concrete Economics and Ha-Joon Chang of the University of Cambridge in 23 Things They Don’t Tell You about Capitalism.

China is a classic case in point. The country is a one-party state and obviously not a liberal democracy, the government is heavily involved in the economy, state owned enterprises (SOE) account for about 30% to 40% of the country’s GDP and 20% of total employment, party cells are embedded in SOE’s and many institutions, and Marxism is still being promoted at least nominally. All these, from a Western liberal perspective, point to a scenario of the worst of all worlds as far as economic development is concerned.

But is it true?

Take the case of the Philippines, it was a colony of the US and has taken much heavier doses of liberal economic policy remedies longer than China, the same goes for many Latin American countries. And Ukraine and Russia both pursued liberalization of their economies way more thoroughly than China. But what happened to these economies compared to China is beyond dispute! In fact, the two most populous countries on earth – China and India – unlike others, have leveraged state economic planning for their mixed economies for economic growth with significant achievements. In the case of India,  state owned enterprises account for 45% of the manufacturing sector, followed by services (35%), energy (12%), and mining (8%).

I started this paper by questioning the conclusions of standard economics textbooks on economic development. But my argument in this essay is not to promote state owned enterprises either. I simply use the cases of China, India and others to highlight my main argument that economic development policy must be based on real life economics and not on ideological beliefs; be it left or right. Here’s what I think economic policy should be based on.

First of all, market does not dictate resource allocations but company management does. Corporations when faced with challenges and opportunities make their choices of what to avoid and what to pursue. This is the essence of the Nobel Laureate Ronald Coase’s well known “The Nature of the Firm” argument that if market is so efficient why you would need companies.

Economic theory concerns itself with modelling the relationship between inputs and outputs but has nothing to say about how inputs get grinded into outputs.This explains why the public sector has been the driving force in China’s early economic reforms. Because after a long period of absence from private enterprise operations (from 1949 to early 1980’s), the public sector was the only place where management talents could be found. Deng Xiaoping’s gradualism in market and ownership reforms colloquially termed “touching the stones to cross the river” in Chinese was the right call for China.

Secondly, “market” does not exist in a vacuum. Contrary to conventional wisdom, “market” is more a public good than a private good. An above-ground market exists because of government acting as the enforcer of rules and regulations. Similarly, an underground market exists because one or a group of gangsters acting as enforcers of underground rules and regulations.

Last but not least, market and government are not mutually exclusive and they affect and influence each other. Market does not come into being naturally. Market is created. The existence of market depends on political stability, societal trust and the availability and refinement of social and physical infrastructures. This latter point has been particularly documented in Mariana Mazzucato’s research that reveals that “every technology that makes the iPhone so ‘smart’ was government funded: the Internet, GPS, its touch-screen display and the voice-activated Siri.”

Academic economists enjoy the beauty of economic theories the same way that mathematicians enjoy the beauty of mathematics, or philosophers enjoy the beauty of logical arguments in their quest for “truth”. These are worthwhile pursuits because they are beautiful in and of themselves.

But we should not get carried away by extending too far economic theories into economic practice.

Professor of economics and strategy Conestoga College Institute of Technology and Advanced Learning, Ontario, Canada.

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Economy

Business disorder between Europe and U.S.

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The European Union remains cautious in the economic battle with the White House. U.S. President Donald Trump continues to pursue his protectionist policies in international trade system. This has led to raising concerns and serious discontent among the United States’ European partners.

Disputes between the United States and other countries around the world are continuing on trade and economic issues. The fact is that U.S. President Donald Trump intends to exacerbate tensions until the presidential elections of 2020. Many international experts and analysts believe that a major part of the economic approach to the world of Trump has an electoral and political goal.

Many international analysts now talk about the conflicts between the United States and Europe over imposing sweeping steel and aluminum tariffs as a transatlantic “trade war”.

Conflicts that may extend in the near future and affect the widespread relations between Washington and Europe.

On the other hand, the authorities of Germany, Britain and France have not taken a proper approach to the policies of the President of the United States.Though politicians such as Emmanuel Macron, Angela Merkel and Theresa May seek to manage the situation and prevent the exacerbation of tensions with Washington, but people, business owners and European opposition parties are so angry at Trump and the U.S. government that the European troika’s authorities aren’t capable to control or even hide it.

One of the most important reasons for the continuation of Trump’s economic policies in the world is the passivity of European leaders against the White House. Under such circumstances, Europe has threatened to retaliate against the U.S. if Trump imposes steel and aluminum tariffs on European exports.

After Trump made his first announcement on the tariffs, European Commission President Jean-Claude Juncker threatened to put tariffs on American goods in response to Trump’s decision. That could decrease demand for those products inside EU borders and consequently lead to U.S. workers losing their jobs. But practically, European countries did not do anything about this.

Although some European citizens thought that the Chancellor of Germany would have a more determined approach than other European politicians, this was also a mistake!The German Chancellor stated that European Union member states must give the EU trade commissioner a clear mandate for negotiations with the United States over a long-term exemption from U.S. metal tariffs. Markel added: “Of course, we think it’s important that there are exemptions not only for a limited period of time … So far, we have had a very united stance, namely that we view these tariff demands as unjustified and that we want a long-term exemption.”

The fact is that Merkel’s implicit threat, which she didn’t address directly and explicitly because of her conservative policy towards the United States, is the same as the “European countermeasures” against the United States.

For months now, there have been months of anti-European measures taken by the White House and customs duties on European aluminum and steel. However, European countries have preferred to keep Silent instead of confronting Washington!
Indeed, the prolonged U.S.-EU talks on steel and aluminum tariffs is going to increase the dissatisfaction and anger among the European public opinion. It will also affect the performance of American companies in Europe.

First published in our partner Tehran Times

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Economy

Citizen Capitalism: How a Universal Fund can provide Influence and Income to all

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In the face of growing wealth inequality worldwide, more and more people are discussing alternatives to the current laissez-faire capitalism status quo.  Tamara Belinfanti, Sergio Gramitto and the late Lynn Stout offer up their own solution in Citizen Capitalism: How a universal fund can provide influence and income to all.

Our authors have devised up a concept they call the Universal Fund.  It’s like a sovereign wealth fund, but is privately created and funded via private ordering. That means that the Universal Fund is to be created from donations of stocks by companies and philanthropists.  The government would hence be uninvolved; the Universal Fund is not a socialist venture.  Rather, it is in part modeled on the structure of NGOs like the Sierra Club and the Red Cross. The Fund would provide an annual dividend to every citizen, with no maximum income cap.  Though it may seem absurd to send welfare payments to the wealthy, it’s politically savvy framing.  A free public college bill was passed in ultraconservative Tennessee thanks to having no maximum income cap; conservative detractors weren’t able to use the “class warfare” and “welfare queen” arguments. It should be noted that charitable tax deductions, estate tax reductions and lowered tax brackets would act as a de facto government incentive for the wealthy to donate to the Universal Fund.

The goals of the Universal Fund would be to decrease wealth inequality, encourage long-term investment and increase civic engagement in corporate culture.  On the last point, the authors remind us that, “The top 10% [of wealthiest Americans] hold more than 90% of all shares.”  Even in regards to the other 10% of shares owned, most of them are passively owned.  Most small-time investors don’t have time to vote in the annual general meetings of every company in which they are invested in.  Thus, boardroom votes are dominated by two shareholder proxy advisory firms and individual investors who own a substantial percentage of shares, as well as fund portfolio & hedge fund managers.

These Wall Street elites naturally tend to vote based upon their elitist interests.  Thus, they usually make decisions that are insane in terms of employee welfare, long-term corporate growth, executive pay and the environment. For example, `the authors remind us of the recent case of Martin Shkreli, the hedge fund manager who acquired Turing Pharmaceuticals and then raised AIDS medication prices from $13.50 to $750. This is the embodiment of the Reagan-era Golden Rule of maximizing shareholder value.  Not only is this Gordon Gekko truism objectively crazy, it’s actually legally unfounded.  Contrary to what you hear on CNBC or Fox Business, there’s no legal requirement that companies only focus on maximizing shareholder value.  The book relates the following quote from Supreme Court Justice Samuel Alito comments in the recent case Burwell v. Hobby Lobby:“Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so.”

CITIZEN CAPITALISM points to the ongoing successes of the sovereign wealth funds of Norway and Alaska, an ultraliberal and an ultraconservative society, respectively.  The Alaskan fund generally provides each citizen with a dividend payment of a few thousand dollars each year, via the state’s oil revenues.  The Government Pension Fund Norway is a more pertinent example, since it’s funded through a $1T stock portfolio.  Norway is not only able to fund its citizens’ pensions through the Fund, but also exert a moral influence on the market.  The Fund boycotts various egregious companies, like cigarette manufacturers, and will sell its shares in a company that gets exposed for abusive practices, like say employing child labor.  Our authors likewise want the Universal Fund to use a carrot-and-stick approach in regards to corporate ethics.

The thesis of CITIZEN CAPITALISM is, as the title suggests, rooted in optimism for capitalism.  Though they write about the success of socialist program in Alaska specifically, a conservative state in the US, the authors are convinced that a sovereign wealth fund bill could never be passed in Congress.  Recent polls and election results, however, show that Americans are starting to overwhelmingly favor ambitious government-program proposals like Medicare for All and a Green New Deal.  As I wrote before, the Universal Fund would mostly be feasible due to tax incentives; these government incentives would likely need to be greatly expanded in order to encourage enough stock donations to build the Fund to a substantial size.  Even America’s greatest philanthropists still stockpile billions of dollars in their offshore bank accounts.  Thus, one shouldn’t expect the Universal Fund or other private UBI schemes to become a replacement for state management of wealth inequality through programs like public school funding and marginal taxation.  Nonetheless, CITIZEN CAPITALISM is a stimulating little primer for rethinking the relationship between Wall St and Main St, managing the looming crises of a rapidly aging workforce and automation, plus the balancing of private and public sectors in regards to solving societal problems.

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Working for a brighter future

Cyril Ramaphosa

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Authors: Cyril Ramaphosa and Stefan Löfven*

We stand at a crossroads as seismic shifts take place in the world of work.

Technological advances are changing the nature of many jobs, and leading to the need for new skills. The urgently required greening of economies to meet the challenge of climate change should bring further employment possibilities. Expanding youth populations in some parts of the world, ageing populations in others, may affect labour markets and social security systems.

On one path, countless opportunities lie ahead, not only to create jobs but also to improve the quality of our working lives. This requires that we reinvigorate the social contract that gives all partners a fair stake in the global economy.

On the other path, if we fail to prepare adequately for the coming challenges, we could be heading into a world that widens inequalities and leads to greater uncertainty.

The issues are complex. As co-chairs of the Global Commission on the Future of Work  we, and our fellow members of the Commission – leading figures from business and labour, think tanks, government and non-governmental organizations – have been examining the choices we need to make if we are to meet the challenges resulting from these transformations in the world of work and achieve social justice.

We call for a new, human-centred approach that allows everyone to thrive in a carbon neutral, digital age and affords them dignity, security, and equal opportunity. It must also meet the changing needs and challenges facing businesses and secure sustainable economic growth.

The opportunities are there to improve working lives, expand choice, close the gender gap and reverse the damage that has been wreaked by global inequality.

But it will need committed action on the part of governments and social partners to turn those opportunities into reality.

So how do we achieve this? Three areas of increased investment are needed:

First, we have to invest more in people’s capabilities: This means establishing an effective lifelong learning system that enables people to skill, reskill and upskill – a system that spans early childhood and basic education through to adult learning. It also means investing in the institutions that will support people as they go through transitions in their working lives – from school leavers to older workers. Making gender equality a reality and providing social protection from birth to old age are also critical. These social investments will not only increase productivity. They will also allow for a more inclusive growth, where informal workers and business can both benefit from and contribute to a sound formal economy.

Second, we must invest more in the institutions of work – including the establishment and implementation of a Universal Labour Guarantee. This will ensure that all workers enjoy fundamental rights, an “adequate living wage”, limits on their hours of work and safe and healthy workplaces. Linked to this, people need to have more control over their working time – while meeting the needs of enterprises – so that they can fulfill the full range of their responsibilities and develop their capabilities.

Collective representation through social dialogue between workers and employers needs to be actively promoted. Workers in the informal economy have often improved their working conditions by organizing. Unions need to expand membership to informal workers, whether they work in the rural economy, on the city streets of an emerging economy or on a digital platform. This is a critical step towards formalization and a tool for inclusion.

We’re also calling for governance systems for digital labour platforms that will require these platforms and their clients to respect certain minimum standards.

Finally, we need to invest more in decent and sustainable work. This includes incentives to promote investments in key areas, such as the care economy, the green economy, and the rural economy, as well as high-quality physical and digital infrastructure. We must also reshape private sector incentive structures to encourage a long-term, human-centred approach to business. That includes fair tax policies and improved corporate accounting standards. We need to explore new measures of country progress to track important aspects of economic and social advancement.

Beyond these critical investments, there is a further opportunity: to place discussions about the future of work at the heart of the economic and social debates taking place at the high table of international policy-making. This could revitalize the multilateral system at a time when many are questioning its legitimacy and effectiveness.

Yet none of this will happen by itself. If change is the opportunity, we must seize the moment to renew the social contract and create a brighter future by delivering economic security, equal opportunity and social justice – and ultimately reinforce the fabric of our societies.

Stefan Löfven, Prime Minister of Sweden, co-chairs of the ILO Global Commission on the Future of Work

ILO

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