Failed Tennessee Volkswagen Unionization Reflects Wider Trend

The defeat of the United Auto Workers’ union at the Volkswagen factory in Chattanooga, Tennessee has sent tremors through the American industry. This turn of events is noteworthy in light of the fact that corporate management at Volkswagen was open to, and indeed supportive of, organized labor taking an active role in the plant.

The welcome reception the UAW received also meant that this was a perfect opportunity to make headway into the southern half of the United States where an increasing number of automobile plants are constructed to take advantage of lower labor costs and a cultural atmosphere historically hostile to trade unions. This hostility in the south is mirrored by a welcoming environment in the northern part of the United States.

Certainly the importance of labor unions in the twentieth century, in America as well as the rest of the industrialized world, cannot be overstated. Today, their principal value is found in creating a level playing field for labor in an economy increasingly dominated by capital ownership. Labor unions also provide a mechanism of communication and transparency between management and workers. Read more “Failed Tennessee Volkswagen Unionization Reflects Wider Trend”

Average European Never Bought Into “European” Idea

European Union flag
A couple and the stars of a European Union flag are reflected in a window in Paris, France (Mark Notari)

Advocates of closer union in Europe seem baffled by many voters’ resistance to such schemes. They look on the Front national in France, Geert Wilders’ Freedom Party in the Netherlands and the United Kingdom Independence Party with contempt, describing them as “populist” and fringe. Yet these parties’ skepticism of “ever-closer union” is quite sensible and far from new.

Former Socialist Party member of the European Parliament Olivier Duhamel argues in an interview with the French newspaper Le Monde that the fading of the European idea had allowed nationalist movements to flourish. “As globalization led to a crisis of identity, ‘Europe’ could have appeared as a response but its political inability to press its case on the world stage has disqualified it as an ideal.” Read more “Average European Never Bought Into “European” Idea”

City State Revival Likely to Skip Authoritarian China

Shanghai, China at night, May 4, 2012
Shanghai, China at night, May 4, 2012 (Mariusz Kluzniak)

City states might seem a thing of the past. Athens, Danzig, Venice — all became part of nation states. Except for Monaco and the Vatican in Rome, the only true city state remaining is Singapore although Hong Kong and Macau enjoy a high degree of autonomy within China. But as cities rise and become global cities, could the city state make a comeback? Read more “City State Revival Likely to Skip Authoritarian China”

Sub-Saharan Africa to See Prosperity At Last?

Aerial view of Abidjan, Côte d'Ivoire, April 1, 2011
Aerial view of Abidjan, Côte d’Ivoire, April 1, 2011 (UN/Basile Zoma)

Africa tends to provoke imagines of civil war, despots and starving children in the West. Are these images still applicable, if they ever were, to such a vast continent?

While Europe is still dealing with the effects of a sovereign debt crisis and China is trying to to keep its economy under control, Africa has grown at an annual rate of 4.8 percent over the last five years, a period that included the trauma of the global financial crisis. That means it has outperformed other developing regions — like Latin America, for example, at 3.3 percent. Five of the ten fastest growing economies in the world last year were African — Burkina Faso, Côte d’Ivoire, Ethiopia, Niger and Sierra Leone.

So do the images that we are used to seeing on our television screens still represent the whole of Africa? In many ways, yes, they are and likely will for some time. A religious war looms in Nigeria, South Africa is struggling with internal strife, Somalia, once the poster child of state failure, while making gains, is still not functioning. In North Africa, countries from Egypt to Libya are coping with the aftermaths of “Arab Spring” uprisings that destabilized and toppled governments.

At the same time, as Africa wrestles with these challenges, poverty is declining. Since 1996, the average poverty rate in sub-Saharan Africa has fallen by about 1 percentage point per year. Between 2005 and 2008, the portion of Africans in the region living on less than $1.25 a day fell for the first time, from 52 to 48 percent.

There are other indicators that point to improvement. Nigeria’s stock market is up nearly 20 percent, Ghana’s is up 24 percent and mobile phone uptake is booming. Africa’s stock markets are the last that remain uncorrelated with the major global exchanges. So when the Dow Jones rises or falls, so will the German Dax and the Hong Kong exchange, but not Africa’s. They still have their own lives, so to speak, and aren’t directly affected by global financial shocks and trends. Although as prosperity on the continent rises, so will the correlation between its stock markets and the rest of the world’s.

Further indications that Africa’s time has perhaps finally arrived lie in many governments’ falling debts and increasingly diverse sources of economic growth.

In sub-Saharan Africa, between 2004 and 2011, government debt as a percentage of gross domestic product fell from 55 to 33 percent, showing that the countries there are slowly getting their houses in order.

It also shows that they’ve recognized that a sustainable economy cannot be built on the export of perhaps one or two natural resources. An expanding set of small- and medium-sized businesses is bringing real economic diversification. According to World Bank statistics, these firms add some 20 percent to the continent’s economy and account for about half of all jobs created south of the Sahara desert. These successful enterprises are giving rise to internationally competitive companies.

While the rise of Africa could still be offset by problems that remain endemic, such as poor public services and institutions, the possibility of corruption in government, poor and patchy infrastructure and, especially in North and Saharan Africa, the threat of Islamic militancy, the continent is starting to overcome these problems. Its newfound economic dynamism is a sign of that.

Russia Fails to Diversify Economy Away from Energy

Gazprom managing chairman Alexei Miller speaks with Russian prime minister Dmitri Medvedev in Moscow, June 2012
Gazprom managing chairman Alexei Miller speaks with Russian prime minister Dmitri Medvedev in Moscow, June 2012 (Gazprom)

President Vladimir Putin and his deputy, Dmitri Medvedev, have talked for years about the need to reduce Russia’s dependence on oil and natural gas, but progress is slow.

Indeed, they have recently taken steps that run contrary to their stated goal.

Despite the economic reforms that were enacted during Putin’s first eight years in the Kremlin, including income tax cuts, fiscal consolidation and education and infrastructure investments, which helped fuel economic expansion, corruption and entrenched interests still block growth. The state maintains a heavy hand in key industries, as evidenced by Putin’s recent intervention in a dispute between the European Commission and Gazprom. The Russian leader shielded the energy giant from an antitrust probe. Read more “Russia Fails to Diversify Economy Away from Energy”

BRICS Expansion Could Produce G20 Minus Seven

In the last two decades, the linkages among nation states have deepened to an unprecedented level. In terms of commerce and finance, the world has recovered and surpassed the degree of interconnectedness that was achieved before the Great Depression. Moreover, new issues have emerged, creating new linkages, deepening the web that connects the international community and giving a much wider sense to the notion of globalization.

This has come at a price. As the 2008-2009 financial crisis demonstrated, the consequences of the actions of one state or one nonstate actor can resonate across the globe. The countries which are more likely to have a wider impact are, obviously, the most powerful ones.

It is in this context that the rise of a number of nations has caused both interest and alarm. Among them, Brazil, Russia, India and China are regarded as the emerging powers. Their growing power has enabled them to present the most credible challenge to the hegemony and legitimacy to run world affairs which the United States and their Western allies enjoyed after the Cold War.

The BRICs know it. Their leaders regularly meet to announce their agreement on certain issues and to let the world know that they can act in unison. By doing so, they increase their own power as well as the legitimacy of the group, helping them to provide an alternative forum to all states, including, if not especially, those that are not well regarded in the West.

One thing to note is that the BRICs are all developing countries when comparing their gross domestic product per capita levels with those of the Western powers. This characteristic and their growing international legitimacy has led them to become representatives of the interests of the developing world in certain negotiations with developed nations.

As a group, the BRICs have advanced the notion of reforming the current international system to give more say to the developing world. Among the most important demands are expansion of the United Nations Security Council and an increased voting shares for developing nations in the World Bank.

In the area of global commerce, the BRICs have demanded a decrease of trade barriers. With respect to climate change and efforts by the West to reduce green emissions, the BRICs argue that the current environmental problems are the largely consequence of the industrialized world’s actions and that they have no right to stop others from developing.

But the BRICs are not a coherent group. China and Russia are authoritarian states and sit on the UN Security Council while Brazil and india are democracies and looking to become permanent members. Would China and Russia still endorse the claim of expanding Security Council permanent membership if there was a strong possibility of doing so? Not likely.

Furthermore, China and India are very suspicious of one another and have territorial disputes. India also fears a Chinese monopoly of the Indian Ocean and has recently increased its investment in maritime capabilities. Energy relations among China, India and Russia are very complex. China and India need Russian oil and gas, allowing Moscow to trade energy concessions for strategic gains elsewhere at the detriment of the other two BRIC powers.

Unlike its peers, Brazil is not a nuclear power, which severely decreases its leverage on hard power issues. Brazil is also more adamant about trade liberalization while India seeks to protect its rice farmers.

In short, each one of these countries has its own particular interests and will not renounce to them in favor of an alliance.

While Brazil plays the role of model global citizen, Russia is far more focused on its security. China has serious domestic problems in terms of political accountability and sustainable growth. India struggles between its growth prospects and the institutional inefficiencies which prevent it from achieving them.

The BRICs’ sole factor of cohesion is a shared interest to promote change in the international community. This implies that its usefulness as a grouping in the future will depend on the following perception in the member states — will acting as a group benefit their own particular agendas?

Another question is whether these four countries are the only ones that can be qualified as the emerging powers and therefore legitimate representatives of the developing world? They answered that question by including South Africa in the group. Although it doesn’t compare in size and power to the BRICs, South Africa’s inclusion amply demonstrated there are other countries with sufficient assets and capabilities to be considered as rising powers.

Other clear examples are Indonesia and Turkey. The BRICs would do well to include them. After all, the only requirement for joining seem to be power and an opposition to the existing international system.

However, more members means more national interests to consider. Soon enough, an expanded BRICs could resemble a “G20 minus G7” which would hinder the very notion of promoting dialogue between the developing and the developed world.

Protectionism Makes Comeback as Recovery Stalls

Almost three years after the bricks of Wall Street crumbled, projections for growth in 2012 are more pessimistic than ever, as noted by the recently published Global Economic Prospects 2012 of the World Bank.

The effects of Europe’s spiraling debt crisis are felt across the developed and the developing world, countering the perception that emerging economies could be the motor of a global recovery. The imminent change of leadership in many countries, including China, France, Mexico and the United States, will make the foreseeable future a highly unstable one. In the upcoming months there will be an increase in populist policies and rising fiscal deficits. Governments may pay more attention to their constituencies which have been suffering the ongoing negative economic panorama.

As a result, protectionism could gain weight in the upcoming months and while it may be vilified by conventional wisdom which rightfully points out the benefits of free trade, there is a “human face” which legitimizes it.

Supporters of protectionism tend to justify their demands through what they regard as the direct negative effects of trade with other countries. Some of these effects are caused by the “unfair” practices of governments as China’s. Others are due to the abundance of cheap labor in countries as Mexico.

Whatever the reason, according to protectionists unchecked trade liberalization causes unemployment and income inequality. America’s disturbing trade deficit with China is one of the favorite arguments of trade critics in the United States. These opinions have a considerable impact in various segments of the population. The 2008 financial crisis only helped enforce the notion that Americans industry ought to be protected from unfair competition overseas.

According to theory, trade liberalization benefits an economy by expanding its production capabilities and diversifying the goods it can consume. Trade dynamics promoted by international competition lead to a decrease in prices, benefiting consumers and producers alike.

It also expands the labor pool, thereby reducing costs. Trade leads to specialization. Every country has a comparative advantage in producing certain type of goods due to its factor endowment. An economy will specialize in the production of goods which uses intensively its relative abundant factor. Thus, Germany, which is relatively abundant in high skill labor, specializes in the production of high end goods (computers, pharmaceuticals, etc.), while Vietnam, which is relatively abundant in low skill labor, specializes in the production of basic goods (agricultural products, clothes).

Through specialization, countries are able to increase their respective national income because they produce what they are more efficient in producing and trade it to the world. But then, what happens to those industries in which a nation is inefficient? Herein lays the main dilemma of trade which can fuel protectionism — specialization leads to the disappearance of inefficient industries. Theoretically, this should not be a problem, since workers in these industries will gravitate to other industries which are succeeding. Reality is more complex.

Skill biased technological change has made it very difficult for job displacement to occur. All types of jobs have modified their requirements in line with technological chance. A laid off worker will struggle to find another job because he doesn’t have the required set of skills. Retraining could take years. The protectionists argue that this is exactly why the state must design and implement policies to offset those effects of liberalization.

It’s easy for Americans to blame the Chinese for their trade deficit, to propose to punish China by turning its currency manipulation into an illegal subsidy and disregard recommendations to change domestic consumption patterns which, in fact, makes American society the main actor responsible for their current situation.

A more effective way to enable economic growth than either raise or reduce trade tariffs may be the implementation of an industrial policy. This refers to measures introduced by governments to channel resources into sectors which they view as critical to future economic growth. It implies benefiting some by hurting others (the financial resources have to come from somewhere else). Consequently, industrial policy should only be deployed to counter market failures and externalities which prevent the industries in which a country has comparative advantage from naturally becoming as efficient as they should be.

The successful examples of Japan, South Korea and the Southeast Asian “tiger” economies encourage governments around the world to intervene in their industries through subsidies, tariffs, taxes, etc. so as to increase their profitability. The idea is to benefit those sectors that the state believes have a comparative advantage over those of other countries and create national champions

There are problems with this analysis. Japan and South Korea both had the overt support of the United States which, due to Cold War dynamics, prevented their experiments from failing. For their part, the tigers, except Hong Kong, had authoritarian governments that facilitated the implementation of policies and they, too, enjoyed American support.

There are examples that demonstrate both successes and failures but, to be fair, the outcomes were contingent upon other variables which require closer analysis. China’s is the most recent case of an industrial policy, and, so far, it seems it has been successful.

This has caused alarm in the United States where China’s success is increasingly perceived as coming at the expense of American workers. The politicization of industrial policy that aims to “correct” market imbalances unfortunately often leads democratic governments to privilege certain interest groups, whether they’re corporations or unions, at the expense of their economy’s competitiveness as a whole. Perhaps, in this sense, China’s comparative advantage is its very authoritarianism?

Both supporters and detractors of protectionism tend to frame their arguments so as to cause the largest possible impact on public opinion. This is because protectionism has a “human face” embedded within it. For many sectors within society, protectionist policies are regarded as a solution to their grievances. With little regard for theory and the long-term negative effects of poorly planned protectionist policies, they suffer from what political analysts call “shortsightedness.”

Governments should always bear in mind how to increase efficiency and productivity when intervening and implementing protectionist policies. Industrial policy demonstrates that this is very difficult and that many other variables are at play. By politicizing trade, protectionism becomes the vilified entity that economists so hate — short-term solutions with long-term negative consequences.

This article would not have been possible without the insights received when attending Georgetown University’s course imparted by Professor Theodore H. Moran, “Globalization: Challenge for Developed Countries.”

Buchanan Predicts End of White America

Will tribalism trump globalism? That’s the bigger ideological struggle that can be derived from Patrick Buchanan’s latest book, Suicide of a Superpower (2011), which argues not just that the United States are disintegration but that the whole of Western civilization could dissolve.

The former Republican Party presidential hopeful and political commentator fears a Balkanization of America as the country becomes increasingly secular and people of European descent are dying it. “The death of European Christianity means the disappearance of the European tribe,” he writes, “a prospect visible in the demographic statistics of every Western nation.” Read more “Buchanan Predicts End of White America”

Is the World System Changing?

While the wars in Afghanistan and Iraq have drained American resources, the unrest in the Middle East might herald the beginning of a transformative period, one in which semiperipheral nations either replace the existing core states or increase their number by becoming core states themselves.

History demonstrates that global conflicts often prefigure the evolution of the international system. The failure of the Concert of Europe resulted in the First World War, which in turn culminated in the Treaty of Versailles and the League of Nations. The fundamental flaws within the peace treaty rendered the League of Nations impotent in the face of the rising tide of fascism during the 1930s that inspired the horrors of the Second World War.

From the devastation of World War II arose the United Nations with the Bretton Woods monetary system. The resistance toward concerted efforts at restructuring both the UN Security Council and the global economic consensus and trade regime as sustained by the International Monetary Fund and the World Trade Organization serves as a concrete representation of the latent conflict between the “global north” and the “global south.” Within the Security Council in particular, the “permanent five” aim to maintain the status quo in order to prolong their ability to assert and implement their interests, possibly at the expense of developing nations.

The “world system” however, as it was described by sociologist Immanuel Wallerstein (1930), may not be static but dynamic instead to the extent that the classification of various states as core, peripheral or semiperipheral can evolve over time. Modern day examples include Brazil, India and South Africa which are rising to the status of core power. China, it may well be argued, has already achieved that status.

Venezuelan economist Richardo Hausmann argued that the sustainable development of the peripheral states of the global south is dependent on their ability to overcome the natural barriers imposed by their geography. If Hausmann is correct, the continued growth of developing nations requires the investment and involvement of industrialized nations in the global north.

Global Economic Rebalancing This Century

Perhaps the fundamental cause of the 2008 financial crisis and recession was a wide divergence between the West’s willingness to consume and the East’s quick “catching up” in terms of mounting productivity and exports. The decades ahead may see a great economic rebalancing with emerging markets boosting domestic production and relying less on America’s spendthrift.

Wikistrat‘s latest “strategic issue” notes that Western countries are expected to grow about 600 percent in income across the twenty-first century while “the Rest” should roughly double that growth rate — “a very positive trend that directly contradicts the usual doom and gloom concerning a growing have/have-not gap.”

While Europe and the United States are slowly recovering from the recent downturn, countries in Latin America, East and South Asia are booming. The divergence in growth rates is likely to persist as the boomer generation in the West retires and consumption in emerging markets will rise. That is where the bulk of the world’s growing middle class is birthed. The primary question is, will it happen fast enough?

The Chinese national congress in March aimed to enhance internal demand while simultaneously ensuring balanced growth. Hundreds of millions of Chinese remain impoverished while China, too, is facing a huge retirement wave midcentury. Although welfare provisions exist, many Chinese know that they cannot rely on the state for a decent pension, compelling them to save whereas the government would like them to spend. Wikistrat warns that, “absent the rise of adequate social safety nets in China, the public will continue to save an unusually high percentage of its income.”

In the West, meanwhile, investment opportunities are less so easy money finds its way into developing markets, amplifying the risk of overheating. This is probably the largest near term threat to the rebalancing process. “If it were to create an asset bubble in the East and then prick it, the world economy would lose its primary engine of growth right now.”

Yet real estate and infrastructure are natural investments as some three billion people are expected to move into cities between now and 2050 while the planet witnesses its largest population growth ever. Estimates are that by 2030, more than $40 trillion will be spend on electricity, transportation and water infrastructure alone with $16 trillion in Asia, another $16 trillion in the Americas and the rest in Africa, Europe and the Middle East.

The challenge for especially China and India is managing that huge urbanization process while improving the lot of their agrarian populations at the same time. If they succeed in evening out this development, the world logically enters a period of even greater stability than that which it enjoys today. If they fail, it would “rob both of their ability to step up into the role of global superpower,” according to Wikistrat, “thereby keeping too much of the burden on the United States.”