Caucus Position-Japan

As one of the world’s leading exporters, Japan is pleased to participate in the WTO discussion of trade liberalization in agriculture, automobiles, and finance. While Japan endorses most of the proposed resolutions, it is the feeling of our government that some may benefit from modification.

Japan emphatically supports Resolution I, which promotes the free trade of agricultural products, automobiles, and all materials involved in the production of the aforementioned goods regardless of country of origin. The total agricultural consumption in Japan exceeds 10 trillion yen, but domestic farmers can only meet at most 44% of this demand (Tokyo Foundation, Nov. 2013, web). This is due to the limited amount of land in Japan suitable for cultivation. Therefore, the freer trade of agricultural products would help our nation better cope with the chronic inability of domestic producers to meet the nation’s agricultural demand. Additionally, Japan would experience major benefits through the liberalization of the automobile trade. It is a principle of international commerce that a nation should specialize in industries in which it has comparative advantages and trade with others whose specialties are in different fields of production. Evidently, Japan’s comparative advantage lies in its automotive industry. With oil prices rapidly falling, global demand for Japanese cars will continue to increase (Bloomberg, Nov. 2014, web). Accordingly, the trade liberalization will help facilitate the international auto market.

Japan also [p1] supports the liberalization of global financial industries. As a member state of OECD, Japan embraces the organization’s Codes of Liberalization of Capital Movements (OECD, web). Furthermore, the nation agrees with the principle that the market should be the main determinant of currency exchange rates. Since the introduction of the floating exchange system in 1973, the effective rate of yen has been decided on the basis of underlying conditions for supply and demand in the exchange market (International Economics, web). Japan intends to keep the system floating and thus endorses Resolution VI. Having experienced the financial crisis of 1997 however, Japan questions the soundness of Resolution V. The total abolition of control on international capital flow might result in another global financial crisis in the future. For this reason, it is our desire to further discuss on this particular topic.

With its championship of free trade, Japan is willing to adopt the prohibition of non-tariff barriers as stated in Resolution II. However, Japan must express its reservation about Resolution IV, which would restrict Japan’s subsidies to its agricultural industry if adopted. Currently, the agricultural population in Japan is 2.53 million, most of who are small-scale farmers (Tokyo Foundation, Nov. 2013, web). These farmers will find themselves in significant disadvantage when trade liberalization initiates global competition against large farming corporations such as those in the US. The domestic producers in Japan have long been receiving government subsidies, and eliminating these benefits suddenly will threaten their livelihood. Thus, Japan urges the participants of WTO to seek a more gradual approach to reducing subsidies.

Concerning Resolution III, Japan recommends a more cautious approach. While Japan is one of the biggest importers of GMO food, its public remains largely skeptical of the products (Library of Congress, web). Even if a GMO was not demonstrated to be unsafe for human consumption, the Japanese government would still prefer to require the product be re-tested thoroughly before entering the domestic market. This is not only to protect consumer safety, but also to prevent any potential threat to biodiversity in Japan. Additionally, the labeling of any imported GMO products is expected in accordance with the nation’s Cartagena Act of 2003 (Library of Congress, web).

In conclusion, Japan remains open to further debates on its abovementioned positions. Japan hopes to contribute to WTO’s goal of achieving universal free trade by the year of 2020.

Sources

Bloomberg. “Japan’s Exports Rise Most in 8 Months in Recovery Sign”. Web.

http://www.bloomberg.com/news/2014-11-20/japan-s-exports-exceed-estimates-to-rise-most-in-eight-months.html

International Economics. “Historical Exchange Rate Regime of Asian Countries”. Web. http://intl.econ.cuhk.edu.hk/exchange_rate_regime/index.php?cid=9

Library of Congress. “Restrictions on Genetically Modified Organisms: Japan”. Web.

http://www.loc.gov/law/help/restrictions-on-gmos/japan.php

OECD. “OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations”. Web.

http://www.oecd.org/daf/inv/investment-policy/codes.htm

Tokyo Foundation. “Japan’s Agriculture and the TTP”. November, 2013. Web.

http://www.tokyofoundation.org/en/articles/2013/japan-agriculture-and-tpp

Common Pollution Tax: Is it fair?

In chapter 6, Stiglitz proposes that a better alternative framework for curbing global pollution: imposing a common carbon emission tax on all countries of the world. Although his reasoning for such a bold proposal is economically logical, I am a little skeptical about the fairness of it.

Stiglitz himself acknowledges, "[but] the level of emission could well differ from country to country, depending on their circumstances...[a] very hot country might, for example, use more energy for air-conditioning than a country with more moderate temperature" (181). We all know that most impoverished developing countries today are tropical/sub-tropical countries, hence in the exact situation that Stiglitz is exemplifying. Would it be really just to levy heavy tax on the countries whose GDP is so low that its citizens can barely meet daily needs simply because they happen to be living near the Earth's equator?

Also, since Lindesy mentioned G-20 on her blog, here is a picture of Putin and Obama holding koala bears at the summit.

Eric Rosengren: Fed, Inflation, and Unemployment

Since Lindsey has already done a fantastic job of recapitulating Eric Rosengren's talk today, I do not feel compelled to make another summary on my blog.

What particularly interested me was Rosengren's opinion regarding the Fed's recent end of QE. As Lindsey stated on her blog, Fed wants to take a patient approach as to first address the 'slacks in labor market' before attempting to raise the interest rates. I was initially surprised to hear this since the unemployment rate has been relatively much lower since 2008 (5.8% currently, which is quite close to full employment according to Rosengren himself). However, Rosengren argued that much of the drop in unemployment rate was due to the increase in number of people settling for part-time jobs (so 20 hours per week or less). Fed seeks to increase the meaningful matches between jobs and people and thus it is very resolved in continuing to target for the true full employment.

A short blog post regarding today's reading

On page 1391 of the "Colonial Origins of Development", Acemoglu asserts that the prevalent outbreak of Malaria should have insignificant direct effect on a nation's economic performance since many natives would naturally develop immunity. However, I think his argument may be overly simplistic and therefore want to provide a brief criticism on this blog post.

I have read Sach's paper on Malaria that Acemoglu criticizes in this article. Basically, Sach believes that Malaria hinders economic growth precisely because the disease discourages investment in human capital, particularly among children . Since new born infants are yet to develop immunity against Malaria (and Acemoglu also acknowledges this), the child mortality rate remains quite high in tropical/sub-tropical regions where the outbreak is frequent. What is interesting is that the birth rate in these areas is also very high. The reason for this phenomenon is that families living in Malaria infected regions want to ensure that they have a desirable number of 'surviving' children. While this decision at household level seems rational, large number of children per family increases the 'dependency burden', which in turn slows down the macroeconomy. With limited (financial) resources, each household is constraint to provide quality education for all the children, thus reducing the investment in human capital (and we all know what happens to a country with little capital).

Although this is a minor criticism on Acemoglu's research, I just wanted to point out that he cannot discredit Sach solely on the basis of adult immunity.

Japan's Dilemma: Deflation and Sales Tax

Last Thursday, we read an Economist article "The pendulum swings to the pit", which discusses the often overlooked danger of deflation. The Japanese economy since 2008 is probably the best example that illustrates this point. Having experienced the bitterness of liquidity trap, the Japanese central bank and Prime Minister Abe have strived to avoid deflation at any cost; they are currently targeting the inflation rate of 2%.

Furthermore, Japan is now grappling with the newly proposed sales tax rate. Due to deflation, their national debt has grown enormously in real value (in fact, Japan now has the largest debt among the industrialized nations). One particular way that the government has choses to ease the burden is to raise the nationwide sales tax. Last April, they increased the tax rate from 5% to 8%. The hike discouraged consumption, causing an unexpectedly deep 7.1 percent annualized contraction in the second quarter.

However, what is astounding is that the Japanese retail sale growth has accelerated despite the raise for three straight months now. Seeing this growth as an encouraging sign for recovery, the PM is now proposing another hike up to 10% early next year. His decision is causing concern among many who believe that the nation's economy is not strong enough yet to withstand another round of tax increase. Standard & Poor also worries that the country's credit rate might suffer if the tax hike results in crippling the economic recovery.

I find Japanese government in a similar situation to IMF during the Asian Meltdown. As evident to many Keynesians, tax increase will always depress consumption, leading to a recession. It is also too evident that the proposal is not only unpopular but also very risky. However, the Japanese government currently has no better alternative options. Already struggling with the government deficit, it cannot possibly push for an expansionary policy through increase in fiscal spending. Like US Fed, Japan's central bank has been pushing for monetary easing (buying government debt), yet its effectiveness has diminished as to now downgrade the country's credit.

At this point, it is very likely that Japan will end up with the 10% sales tax in 2015. It will be certainly interesting to observe how the economy copes with the change next ear.

Book Review: "Price of Inequality" by Joseph E. Stiglitz

In his recent book The Price of Inequality, Joseph Stiglitz condemns America for its “1 percent problem”. For the past thirty years, the nation has become increasingly divided; the upper class has seen the rapid growth in their income while the lower class has lagged behind. This gap in wealth has expanded so dramatically that by 2007, “the average after-tax income of the top 1 percent had reached $1.3 million, but that of the bottom 20 percent amounted to only $17,800” (Stiglitz, 5).  

Unequal distribution of wealth has always existed in our society. In the past, the relatively higher incomes of the wealthy were justified on the basis of marginal productivity theory. According to the theory, the wealthy owned “a scarce and valuable skill, the market will reward [them] amply, because of [their] contribution to output” (37).  However, there is no compelling evidence that the productivity of the top 1 percent have increased so significantly over time as to justify their outsized bonuses while the average wage for typical laborers has stagnated.

Evidently, the unequal distribution of wealth today requires a new explanation. Stiglitz accuses the failure of market as the main contributor of inequality. A shrewd economist, he acknowledges that the free market capitalism does not always work perfectly. There are negative externalities, imperfect information, and agency problems that cause the market to fail. Stiglitz argues that these distortions of market occur because private incentives and social returns are not in alignment (42). In other words, the private interest of a corporation does not necessarily reflect what is good for society as a whole.

Stiglitz argues that it is the responsibility of government to design policies—taxes and regulations—that make these discrete interests align. However, the top 1 percent has successfully manipulated the political system to favor the persistence of inequality by lobbying, threatening to outsource jobs, and electing the like-minded political representatives to power. As a result, there have been many policies that favor the wealthy such as regressive tax, bank deregulation, and lax corporate governance. Such laws have diminished opportunities for the poor and perpetuated the rent seeking behavior among the top 1 percent. 

One might wonder whether Stiglitz is advocating for minimum government intervention since the wealthy have actively utilized policies to their advantage. Quite contrary, Stiglitz asserts there should be a stronger government that can curb the influence of top 1 percent and create a more competitive economy. He strongly believes that greater equality can lead to a sustainable long-term economic growth as it was when “America grew together—with growth in income in every segment” for thirty years after WWII (5).  Furthermore, greater equality can induce trust among different social sectors and thus save our ‘democracy in peril’ (153). 

In Stiglitz’s view, inequality is problematic because it begets instability. The 2007—2008 Financial Crisis not only revealed the magnitude of inequality but also aggravated it. By transferring money from the bottom up to top, inequality reduced total demand in the economy and therefore increased unemployment (106). Amidst the economic instability, banks engaged in predatory lending, in which they made too many reckless loans. When the housing bubble bursted, the wealth of the bottom and the middle evaporated with the value of their homes. On the other hand, the top 1 percent only lost part of their wealth thanks to the massive government bail out and the Fed’s prompt action to lower interest rates.  In fact, their recovery from the crisis was so successful that “the wealthiest 1 percent...had 225 times the wealth of the typical American, almost double the ratio in 1962 or 1983” (10). In the end, the financial crisis that resulted from the pervasive inequality eventually further deepened it.

What seems particularly interesting to me about this interpretation of the recent financial crisis is Stiglitz’s overly sympathetic attitude toward the borrowers. While he acknowledges that people did spend far more money than they could afford, Stiglitz seems to only portray them as victims. He asserts that many banks took advantage of the “least educated and financially unsophisticated in our society...[by] selling them costly mortgages and hiding details of the fees” (240). Undoubtedly, the US financial system prior to the crisis played an important role in encouraging such excessive consumptions. However, I believe that borrowers also share some responsibility in triggering the recession by underestimating the risk of their investment and poorly budgeting.

In the last chapter, Stiglitz sets out a reform agenda in the last chapter ranging from curbing the excess power at the top to creating more opportunities and investment in the bottom. It is understandable that the deep-seated inequality in our society necessitates a holistic remedy that he recommends. However, I still believe that some changes might be more urgent than others. If I were to have one-on-one with Stiglitz, I would like to ask him what reform policies he thinks should be prioritized among others. It would be interesting to hear what he believes to be the most pressing issue.

In general, Stiglitz does a magnificent job in analyzing the inequality and market failure in the modern US economy. However, I cannot help but feel that Stiglitz could have better organized his book. For instance, there were quite numerous instances in which he accuses the top 1 percent of exploiting politics but does not thoroughly explain ‘how’ they did so each time. He does enlist various mechanisms they use in later chapters, yet these explanations are rather scattered throughout the book. I would have preferred if Stiglitz dedicated a chapter or two to focus mainly on describing how those ruling the economy also influenced politics. Although such a task would have been very difficult given the broad topic he chose to discuss, organizing the book in this way might have helped readers better understand and adopt his argument.

Asia's Crash, South Korea, and IMF

Having grown up during 90s in South Korea, I remember my parents promising me that they'd buy the new toy I desperately wanted when 'IMF is over'. As a kid, I vaguely understood that economy was adverse and IMF as some kind of an evil force which everyone hated. Reading Krugman's chapter on Asia's Crash, I realized how little I know about my country's experience during the time of hardship. Therefore, I decided to use this blog post as an opportunity to teach myself about Korea during the Asian economic crisis.


Basically, Kruman argues that the devaluation of Baht in Thailand initiated panic among foreign investors to pull out capital. The shock spread throughout the entire Asia (a phenomenon which economists call 'contagion') and reached as far as South Korea. While all the affected Asian countries faced severe devaluation, Korea actually held back for quite a long time; Korean won was depreciated only by 8% against the dollar, compared to Thai baht by 42% and Indonesian rupiah by 37%.1 However, its relative more highly valued currency put Korea in a competitive disadvantage in export.


Korea had to finally let go of Won's value by October. Interestingly however, it was actually not the depreciation that gained a momentum, but the series of bankruptcy that mainly contributed to the recession1. South Korea suffered from a crony capitalism. Just as in Thailand and Japan, banks in Korea lent too freely to even the riskiest investments.2 Their main customers were corporations called 'chaebols' 재벌. Chaebols refer to wealthy Korean families that own large corporate business and have formidable political connections. A string of bankruptcy that started with Hanbo Steel in January (which also caused the fall of Kia Group, the eight largest corporation in Korea at that time) led to the insolvency of several financial institutions.1. 


In December, South Korea finally agreed to receive a $57 billion support package from International Monetary Fund.3 This bail out package led to what came to be a life long trauma for many South Koreans (Hence the name 'IMF Crisis'). The severe austerity policies that IMF imposed as conditions to be met for additional loans caused major banks and industrial business to close, thus engendering a soaring unemployment rate. However, South Korea was enable to bounce back its economy quickly and therefore 'graduated early' from the IMF programs as many South Koreans say.


Fortunately, South Korea's economy recovered pretty quickly; by 1999, Won had stabilized, inflation slowed, and currency account was in surplus.5 Many economists have praise the South Korea's resilience as 'miracle'. Although there are still controversies regarding IMF's role, I believe that its stabilization of exchange rate and fiscal policy reform did contribute to a long-term growth. However, the nation's economic resilience would not have been possible without the astonishing degree of self-sacrifice among South Koreans. The nationwide "gold collection" campaign in which millions of citizens came out to donate their wedding rings, athletic medals, and other personal treasures, helped the nation sell more than 300kg of gold ingots to in international markets4. My parents were one of these generous donators. In Korea, family friends and relatives give small gold rings for a baby's first birthday. The gold rings traditionally symbolize a charm for the baby's longevity and life-long fortune. Like many families, my parents willingly gave up these rings so that my sister and I can live in a better future. Looking back, I now realize that my parents promised me something much more nobler than a toy: "ending the IMF Crisis".  

Sources 

http://web.stanford.edu/class/e297c/trade_environment/global/hkorea.html

http://fas.org/man/crs/crs-asia2.htm

http://www.nytimes.com/2011/01/07/world/asia/07seoul.html?_r=0

http://news.bbc.co.uk/2/hi/world/analysis/47496.stm

http://graduateinstitute.ch/files/live/sites/iheid/files/sites/political_science/shared/political_science/1849/southkorea&imf.pdf

HK, Corporations, and Democracy

So while reading Wolf and Stiglitz on multinational corporations, I came across a few interesting points.

One of the propositions that Wolf criticizes in this chapter is the claim that "corporates dominate politics"; meaning, transnational corporations are so powerful today as to subvert democracy. Wolf claims that this concern is simply absurd because it incorrectly defines democracy. According to Wolf, the critics of corporations wrongly "think of a democracy as a system allowing an active body of homogeneous citizens to reach collective decisions on all the matters that concern them, through deliberation and, ultimately, voting" (Wolf 244-245). Although this is probably the kind of democracy that most people have in mind, Wolf asserts that this 'democracy of the Greek polis' is highly inefficient and only brings about "exaggeration, misrepresentation or downright deceit" (245). 

Instead, he argues that the governance that we now live is 'pluralist democracy' in which "organizations with the largest interests and the great ability to eliminate free riders dominate" (245), corporations being one of those interests. Based on this claim, Wolf concludes that "corporations have influence...BUT the view that they run contemporary state is nonsense" (245). 

This last sentence actually made me question the validity of it. As we discussed in last week's class, HK has a very interesting political system: 'One Country, Two Systems'. Although officially under Chinese government, HK is run by a chief executive (not to be confused with mayor or governor). Interestingly, this chief executive -though candidates are pre-selected by the Chinese government- is elected by an electoral college composed of business tycoons that represent different constituencies. (If interested in learning more information on this, watch the video attached below. VlogBrothers make succinct but decent recaps of current events). It is not really hard to imagine that an individual chosen by group of business owners will necessarily represent corporate interests.

So HK in my opinion is a pretty solid example to weaken Wolf's point. However, if I were to have one on one with Wolf, he might argue that HK is a special case. As he thoroughly explains in page 246, countries more than often have dominance over corporations (i.e.  EU's decision to prevent General Electric from purchasing Honeywell in 2001). 

However, wealthy multinational corporations still tend to have more resources and influence and thus have comparative advantage in better representing their position, particularly in poor developing countries. As Stiglitz rightfully points out in chapter 7, LDCs find themselves with no choice but to succumb to the corporate interests. For instance, "[in] Thailand and Peru, corporations threatened to move elsewhere if environmental regulations were enforced; in Peru, one mining company went so far as to pressure government not to test children living near their mining operations to see if they had been exposed to health hazards" (Stiglitz, 195). 

In other words, Wolf is right in asserting that corporations are not as powerful as governments of US and other wealthy nations. However, they do have power and resources to control the LDCs' governments that are desperate for foreign investment. The point is, it might not be as nonsensical as Wolf assumes to argue that corporations do run contemporary states in some degree.  

Hong Kong's Occupy Central Protest

This is the kind of current event that Siglitz would read about and say "case in point: political stability determines economic stability".


http://www.npr.org/blogs/goatsandsoda/2014/09/28/351845664/the-experts-missing-from-the-ebola-response-anthropologists?utm_source=facebook.com&utm_medium=social&utm_campaign=npr&utm_term=nprnews&utm_content=20140928

Reality check is like a slap in the face

I am not going to make a substantial blog post about today's readings, but wanted to copy and paste this part of "It's a Flat World After All" by Fiedman for future reference.

"Americans and Western Europeans would be better off thinking about how you can raise your bar and raise yourselves into doing something better. Americans have consistently led in innovation over the last century. Americans whining -- we have never seen that before.''

There is no harsher truth than these words; quit crying and step up America. 

Stiglitz vs. Wolf: reflecting on few points

I thought I would enlist few points that I wish we discussed more in depth from last week.

1) While Wolf acknowledges that not everyone has equally benefitted from globalization (as opposed to its initial promise), he seems to be tolerant of the disparity between advanced and developing nations. He explains, "most opponents of the market economy compare the worst of today with the best [and]..that may seem fair enough. But it makes as much sense to compare the worst of today with the normal in the past." (Wolf 57). This almost sounds to me that Wolf is convincing his readers, "okay, maybe there have been losers. But look on the bright side; look at how much even the poorest countries have come so far since the dark age." I believe this kind of attitude has danger in itself as it lowers our threshold of what can be considered as improvement. For instance, just because Ethiopia now has several internationally (mostly by UK) funded hospitals in its capital, it does not rule out the reality that majority of population in rural areas are still suffering from curable diseases. Many developing countries have not advanced significantly even in comparison to its own past (i.e. Sierra Leone). Moreover, globalization has probably made it easier for LDCs (less developed countries) to compare their abject situation to the wealth of the northern hemisphere. Amidst the

2) Another point that was briefly brought up during the last week's class (but not discussed to my heart's content) was on China's participation in global economy. It was very interesting that both Wolf and Stiglitz cite China as their case in point for supporting their argument. According to Wolf's point of view, free trade is guaranteed to result in economic growth. China, as he argues, could boost their economy precisely because they opened their market to the international community. On the other hand, Stiglitz argues that success of economic liberalization depends on a set of restrictive and calculated political decisions. His assertion actually relates very nicely to professor Casey's Development Economics class that day (which conveniently was right before IPE). Professor Casey told me that China still pushes for very restrictive policies that limit foreign investment significantly. Although these practices go against the principle of economic liberalization, they have actually helped protect China's economy from the whim of global market. For instance, the Chinese government requires foreign investors go through an arduous process of contracting and further requires a non-negligible portion of their returns re-invested back in China, thus ensuring further growth. The government also strictly prohibits the flow of 'hot, short-term' capital flows into the country in order to prevent sudden withdrawal of capitals at any sign of financial crisis. At this point, it seems to me that Wolf is theoretically centered (maybe too much?), while Stiglitz is more political & practical oriented.

Globalization: sowing the seed of its own destruction?

From the last class, what really stayed with me the most was professor Dickovick's question "is liberal economy sowing the seed of its own destruction?". Analyzing the cycle of global economy since the late 18th century, Wolf asserts that industrialization has necessarily engendered nationalism (manifested in various forms such as universal suffrage and social security). It seems helplessly ironic that the industrialization- probably the most common product of globalization- 'inevitably' brings about the collective sentiment of anti-globalization in nations.

It is certainly fascinating to reflect on the relationship between liberalism and nationalism. Wolf seems to believe that these two ideologies are completely antithetical. In my opinion, however, nationalism can actually be quite compatible with the liberal economy. Take Scotland as an example. Although the current campaign for independence is purely driven by Scottish nationalism, it will be arduous to think that Scotland will completely cut off its tie with the rest of the world (especially with the rest of Europe) even if it does achieve its goal. Rather, they would find themselves mired in increasing number questions starting from whether to use Euro or British Pound (since England will be a foreign nation after their independence) as their new currency.

When we realize that nationalism and liberalism are not polar-opposite of each other, we can also consider the possibility that one might be in fact reinforcing another. In many nations, as Wolf argues, liberalism has resulted in rallying strong opposition against western culture (to be specific, American culture). ISIS and other terrorist organizations whose aim is to fight against Western influence and promote traditional and national culture can be the most eminent example of such phenomenon. I wonder then if can be somewhat rational to argue that global terrorism is a byproduct of globalization (so, liberalization=> terrorism?).

So did Wolf accidentally self-contradict himself in that liberal economy would necessarily beget nationalism by industrializing a nation? We will only find out as we continue reading what he has to say in the later chapters.