Tag: World Bank

The Liberal International Order

A monopolist enjoys a bigger profit than would a competitive supplier of the same items by restricting the supply in order to charge a higher price. This assumes that he can increase the price by more than the reduction in his sales, but I will skip these economic details in order to get to my point.

Monopoly is good for the producer and bad for the consumer. Monopoly is generally impossible without help from government to restrict competition. The United States has flourished economically, in part, because we have chosen the competitive model—the level playing field of commerce—as the social and economic model we aim for domestically and promote internationally. Many other nations have also embraced this model and our leadership in promoting it. We extend and promote the rule of law on which a level playing field is built through the Bretton Woods Institutions created after World War II (the IMF, World Bank and World Trade Organization) and other international bodies and agreements. Our leadership in promoting these values is now in jeopardy for a variety of reasons that include our aggressive use (and misuse) of our military power and our unilateralism.

Chas Freedman is the most articulate champion I know of, of the wise use of American diplomacy to promote the above and other values that have characterized our country’s governance. Chas was Nixon’s interpreter during the President’s first trip to China in 1972. His three decades as a U.S. diplomat included Ambassadorship to Saudi Arabia during Operations Desert Shield and Desert Storm and a term as Assistant Secretary of Defense for International Security Affairs. The following challenge to the United States is taken from his latest book American’s Continuing Misadventures in the Middle East and was contained in his August 29, 2012 address to the American Foreign Service Association’s Adair Memorial Lecture at the American University School of International Service, Washington D. C. He enumerates the conditions for our continued (or restored) leadership of the liberal international order that has served us and the world so well. Chas concentrates more wisdom into fewer words than anyone I know:

“Americans believe that societies that respect the rule of law and rely upon democratic debate to make decisions are more prosperous, successful, and stable than those that do not. Recent efforts to impose our freedoms on others by force have reminded us that they can be spread only by our setting an example that others see as worthy of emulation. Freedom cannot be sustained if we ourselves violate its principles. This means that we must respect the right of others to make their own choices as long as these do not harm us. It also presupposes a contest of ideas. Our ideas will not prosper unless we maintain solidarity with others who value and also practice them.

“That is why a first priority of American diplomacy must now be to re-forge the unity of the Atlantic community behind the concept of the rule of law. This cannot be done unless we confront and correct our own lapses from the great traditions of our republic. To re-empower our diplomacy by inspiring others to look to our leadership, we much restore our respect for our Bill of Rights as well as our deference to the dignity of the individual both at home and abroad. Let me be specific.

“We must revive the Fourth Amendment’s ban of search and seizures of persons, houses, papers, and other personal effects without probable cause. No more ‘extraordinary rendition.’ No more universal electronic eavesdropping, warrantless seizure of paper and electronic records at the border, and intrusive inspection of anything and everything in the possession of passengers using public transportation.

“We must reinstate the Fifth Amendment’s protections against deprivation ‘of life, liberty, or property, without due process of law.’ No more suspension of habeas corpus or executive branch assertions of a right to detain or even kill people, including American citizens, without charge or trail.

“We must return to respect for the Sixth Amendment’s guarantee of the right of anyone accused of a crime to be informed of the charges and confronted with the witnesses against him and to be represented by a lawyer. No more ‘secret evidence.’

“We must reinstate the Eighth Amendment’s prohibition of ‘cruel and unusual punishments,’ including torture, and we must reaffirm our adherence to the several Geneva Conventions. We Americans can have no credibility as advocates for human rights if we do not practice what we preach.

“In short, the path to renewed effectiveness in American diplomacy lies not just in wise and dexterous statecraft and the professionalization of those who implement it abroad. It rests on the rebuilding of credibility through the rediscovery of the values that made our country great.”

Save Trade

I have written about the importance of trade to our standard of living many times because it seems to be under attack. The graph below, which reflects Angus Maddison’s data showing a massive increase in income throughout the world over the last two centuries and which is reproduced, courtesy of Human Progress, provides a dramatic visual depiction of the impact of Trade.

Once households were able to trade what they produced for what they needed, the increase in their output as they specialized in what they were best at was truly staggering. But it is not surprising when you reflect on how limiting it would be if you had to be self sufficient in everything.

Following the disastrous imposition of high tariffs by the U.S. in 1930 (Smoot-Hawley Tariff Act) to save American jobs and the great depression and world war that followed, representatives of all 44 Allied nations came together under U.S. leadership at Bretton Woods in 1944 anticipating the end of World War II. They established the International Monetary Fund (IMF), the World Bank, and what is now the World Trade Organization (WTO) in order to establish, protect, and further a liberal international economic order (i.e., to protect and promote free markets globally).  Trade again flourished, as it had previously at the end of the nineteenth century, leading a resumption of dramatic growth in wealth and income across the globe.

The United States was the natural (indispensable) leader in promoting this liberal order for several reasons. By the end of WWII the U.S. was the largest economy in the world. And while the size of the United States and the guarantee of free trade within its boarders provided in the U.S. Constitution assured substantial trade within the U.S., opening the rest of the world to trade was very beneficial to all countries (win-win). The Boeing Company, for example, sells more of its planes abroad than domestically because the world market is larger than the U.S. market. So the U.S. is the natural leader because it is the largest trader. But more than that, most other countries respect the commitment of the U.S. to the rule of law and a level playing field for commerce. Thus they gladly accept our leadership.

The world is far from the ideal level playing field for trade but is much closer to that model than it was at the end of WWII. The WTO (the successor of the General Agreement on Trade and Tariffs – GATT) and regional and bilateral trade agreements keep moving us closer and closer to such a world. It is a very desirable goal for the United States and for the rest of the world (look at the above graph again). As with technical progress and the increasing productivity it brings, some capital and labor (workers) will need to move to new activities and we need to insure that displaced workers do not suffer in the process (we seem to care less about the displaced capitalists assuming, I guess, that they can take care of themselves).

While it is still early, President-elect Trump seems uncommitted to the U.S. leadership of our increasingly liberal (freer) international economic order. In fact, he is threatening to throw it away by unilaterally imposing tariffs on imports and behaving like a bully internationally. We need to recall the terrible consequences of the Smoot-Hawley tariffs and resist any moves in that direction.

It is true that following WWII the U.S. often gave favorable terms to Europe (the Marshall Plan) and less developed countries in order to promote their reconstruction and development (“Trade not Aid” we used to say). The world’s economies are now growing into better balance and the U.S. is no longer as dominant as it once was. The international rules of the game (trade agreements) can and should seek a better balance of mutual benefits. But we would be making a very serious mistake to give up our leadership of the world order and abandon our commitment to free and fair global commerce.

US Global Leadership – More on AIIB

Following the end of the second of two devastating World Wars within three decades, the world came together to establish international institutions and norms meant to prevent another world war and to promote the shared economic and political interests of all peace loving countries. The United States led this effort and has dominated the resulting global governance structure (the UN, IMF, World Bank, WTO to name a few of the best known). The one-country-one-vote structure of the UN has limited its effectiveness. The International Financial Institutions like the IMF, on the other hand, are governed on the basis of votes and financial contributions proportional to their economic importance. Their effectiveness and legitimacy depend, in part, on maintaining such relative voting strength as countries’ economies grow.

Resolving conflicts without world war has been a magnificent achievement. But the opening of the world to freer trade and finance with broadly agreed rules under which it is conducted are dramatically important achievements as well. Economic growth is not a zero sum game. Every country has benefited from global financial cooperation. Estimates (by Bradford DeLong and the World Bank) of Global World Product rose from $1.1 trillion dollars in 1900 to 4.1 trillion in 1950 but exploded there after reaching $41.1 trillion in 2010 (all in 1990 US dollars). According to the World Bank, global poverty has been cut in half in the last twenty years.

The dominant role of the US in International Financial Institutions reflects its economic size and military strength but equally the perception of the rest of the world that the liberal, free markets and trade model promoted by the US was indeed the right one for each country’s growth and prosperity. The world’s continued acceptance of the US’s leadership rests on the general belief that the US is an honest broker, fairly promoting rules that serve the general good rather than seeking special advantage for its own people and industries. The US cannot expect other countries to abide by such international norms of behavior if it is not willing to conform to them itself (i.e. subjugate its sovereignty to international agreements in these areas).

America’s record is not pure by any means. The increasing crony capitalist nature of our military industrial complex, about which we were so presciently warned by President Eisenhower, is hardly a model of competitive market capitalism. But the political structures established after WWII have generally worked well to coordinate national cross boarder activities peacefully and without wars. To cite one example, the International Telecommunications Union has developed rules and procedures for allocating radio spectrum, satellite orbits and technical telecommunications standards that have made possible efficient and interconnected global communications systems. You could not telephone anyone you want any where in the world from anywhere in the world (not to mention the Internet) without them.

The International Monetary Fund is another example of an international cooperative agreement, in this case for facilitating the financing of trade and capital movements (cross border investments). It has played an important role in removing economic restrictions on global trade and finance, though that role has been undermined to some extent and made more complex by the US abandonment of its obligations to redeem its currency for gold under the gold exchange standard imbedded in the IMF’s Articles of Agreement when President Nixon killed what was left of the gold standard.

Few countries want the leadership provided by the US replaced by China or anyone else, but as China and many other country’s economies and trade have grown relative to the US and especially to Europe, they rightly expect to have a larger role in organizations that act for the entire world. The US congress has very shortsightedly and foolishly refused to approve the adjustments in the governance of the IMF that would accomplish that. As a result it is undermining the foundation of the US’s leadership role. “Indeed, Treasury Secretary Jacob Lew made this point implicitly in testimony this week in which he also restated U.S. reservations about the AIIB: Our continued failure to approve the IMF quota and governance reforms is causing other countries, including some of our allies, to question our commitment to the IMF and other multilateral institutions that we worked to create and that advance important US and global economic and security interests.

…The IMF reforms will help convince emerging economies to remain anchored in the multilateral system that the United States helped design and continues to lead.” http://www.lobelog.com/washington-misses-bigger-picture-of-new-chinese-bank/#more-28547

While there are legitimate arguments over whether an Asian Infrastructure Investment Bank is a good thing or whether such funds would be better spent through the Asian Development Bank (China, which would lead the new AIIB, doesn’t have such a great record with the quality of its own infrastructure spending), the real issue is whether the world will remain united in the post WWII international order and presumably under US leadership of the International Financial Institutions it helped establish. The principles of inclusiveness and a level playing field that have always been the foundation of US promoted institutions clearly call for and would be promoted by supporting the expanded role of China in these institutions in keeping with its increasing involvement in the world economy. US opposition to the IMF governance reforms and its reaction against the AIIB appear duplicitous and are undermining the foundations of its leadership. “The decision by the UK, and subsequently, France, Germany, and Italy, to participate is therefore significant not only because they will be major shareholders, but also because the decision by traditional U.S. allies signals that Washington is increasingly isolated.” http://www.cfr.org/global-governance/bank-too-far/p36290

Everyone has a strong interest in having China join and work within the established liberal economic order rather than going its own way with a competing order. Recent US behavior hardly promotes that goal.

For my earlier comments on the AIIB see: https://wcoats.wordpress.com/2015/03/18/the-asian-infrastructure-investment-bank-aiib/

The Asian Infrastructure Investment Bank – AIIB

Last evening CCTV, the China Central Television company, contacted me about an interview about the AIIB at 8:15 am the next morning (i.e., this morning). I have appeared on their Biz Asia show several times in the past. I agreed to the interview and they arranged for a car to pick me up at 7:15am. Due to a mistake in scheduling the car, it did not arrive in time to get to the studio. Rather than go back to bed I am writing this note to share with you what I would have said.

Background

Frustrated with the slow pace of governance reform of the existing international financial institutions (IMF, World Bank, Asian Development Bank) in which China was under-represented in relation to its economic size, China began discussing the establishment of alternative institutions. The first was the New Development Bank of BRICS (Brazil, Russia, India, China, and South Africa) to be headquartered in Shanghai, China. The AIIB was launched with a signing ceremony in Beijing on October 24, 2014 that included, in addition to China, representatives from Bangladesh, Brunei, Cambodia, India, Kazakhstan, Kuwait, Laos, Malaysia, Mongolia, Myanmar, Nepal, Oman, Pakistan, the Philippines, Qatar, Singapore, Sri Lanka, Thailand, Uzbekistan, and Vietnam. It will focus on the development of infrastructure in developing countries in the Asian-Pacific region.

The United States, which has traditionally held the Presidency of the World Bank and on whose territory are housed the headquarters of both the World Bank and the International Monetary Fund, has been cool to these developments, which initially resulted in Australia, New Zealand, and European countries as well as the U.S. declining to join (as financiers). However, last week Britain’s Chancellor of the Exchequer, George Osborne, announced that the UK would join as a founding member and was quickly followed by Germany, France, and Italy. Australia and New Zealand are reconsidering their earlier lack of interest. If that weren’t embarrassing enough for the US, a US government official told the Financial Times, “We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power.”

CCTV Interview

Early this morning I received the following email from CCTV.

“Hello Warren,

“This is Qingzhao from China24 program, CCTVNEWS. Thanks for joining our studio AIIB discussion. You will discuss with two more guests in Beijing studio. They are Mr Ding Yifan, senior fellow of the Institute of World Development under the Development Research Center of the State Council. And John Ross, Senior Fellow of Chongyang Institute for Financial Studies, Renmin University of China. He is also the former adviser of ex-London mayor Ken Livingstone.  Question 3 and Question 5 are for you, please take a look.

“Q1: The first question is for you, Mr Ding. So far, the number of countries that have joined or are in the process of joining as a founding member have surpassed 30…Talk to us about the tangible benefits to Europe and Asia as more nations from the EU want to join the AIIB.

“Q2: John, the UK, Germany, France and Italy ALL applying to join as founding members of the AIIB. What’s the attraction for western countries to join in?

“Q3: Warren, following now FOUR western European nations wanting to join the Asian Infrastructure Investment Bank…U.S. Treasury Secretary, Jack Lew is urging HIS country’s lawmakers to pass reforms of the International Monetary Fund. Will IMF reforms finally be pressured to pass and if so, impact on attractiveness of AIIB?

“Q4: Mr Ding, with more western countries applying to join the AIIB, some people have concerns that their participation will, to some extent, weaken China’s role in the system. What’s your take? What’s the possibility of some countries turning out to be a Trojan horse?

“Q5: Warren, Washington views the AIIB as a rival to the U.S. led World Bank and IMF, but China has said the AIIB will COMPLEMENT existing multilateral institutions. What’s your take on AIIB’s role?”

Had I made it to their studio I would have said the following:

Question 3: Secretary Lew has been trying to get the IMF reforms passed by the US Congress for several years. Ironically the US was very instrumental in pressuring European countries to reduce their representation on the IMF’s Executive Board in favor of increasing the representation of the BRICS and other emerging market countries, by bringing IMF member country quotas closer to those calculated on the bases of their economic size and share in world trade. Europe has long been over represented and the emerging market countries under-represented on this basis. The US voluntarily accepted a smaller quota than this formula would produce long ago (thus reducing its financial contribution as well as its vote) and the proposed new amendments would not further reduce the US quota share. Moreover, the proposed doubling of the IMF’s quota resources would not increase the US financial contribution. Rather it would convert the large loan from the US to the IMF made during the recent financial crises from a loan to a quota increase. Thus it is strange for the US now to hesitate to support these reforms. Given that the International Financial Institutions (World Trade Organization, IMF, and WB) that the US helped create are part of the new post World War II world order of global trade from which the US and other market economies have so benefited, this strange US behavior is extremely short sighted.

I would like to think that Congress would get around to approving these reforms independently from the threats posed by China’s new institutions. Virtually every other IMF member country has, but the US enjoys veto power by virtue of its large quota of 17.5% and the requirement that any amendments to the IMF Articles of Agreement must be adopted by members collectively with 85% of the quotas. The reality seems to be the other way around. China was pressured to create competing institutions because the US has failed so far to endorse governance reforms in the existing one.

Question 5: The AIIB is more of a rival to the Asian Development Bank than to the World Bank, and is no rival to the IMF, which does not make development loans, at all. China claims that the AIIB is a compliment rather than a rival to the other development banks. It will have the virtue of a clear and relatively narrow mandate; while the World Bank is all over the map. Voting membership by the UK, Germany, France, etc. should help ensure that its loans meet the standards set by the ADB and the WB. The US has maneuvered itself out of that possibility, not that Congress would ever approve the funds for it anyway. On the other hand, establishing a new institution will absorb a lot of time and other resources in developing its staff, procedures and facilities that would not have been necessary if China had contributed the same funds for the same purposes to the ADB. The traditional Japanese Presidency of the ADB, whose headquarters are in the Philippines, is likely to yield to new governance provisions in the future, giving China a shot at the Presidency, just as the American and European leadership of the WB and IMF are likely to yield in the future as well.

In short, this is all political and the US has played it poorly to say the least. In the past US leadership internationally, whether through the institutions it helped build or in other ways, has been welcomed and accepted because the US stood for principles others could embrace and promoted and applied them fairly. More recently, and I mean for the last decade or two, and certainly in the case of the IMF and AIIB, it is behaving more like the king on the mountain leading others to want to knock it off. This promotes neither the American nor the global community’s interests.

Libya: Part II

What will happen next in Libya and what should we do?

As we attempt to save the Republic by trimming government back to size (back to what we can afford and back to what only government can do), surely we can forego a few of wars the neocons would like to plunge us into. Actually my warning cries as we were sliding into another one in Libya had much more to do with the unlearned lessons of the past about how best to influence future event for the better than with the wasting of more precious treasure (lives and other resources). To his rather bumbling credit, President Obama gave in to the pressures of the warmongers reluctantly and only partially in Libya. Our involvement has been largely supportive of more direct, though also limited, NATO support for the rebels.

But here we are at the beginning of Part II of the Libya drama. The rebels seem to have finally toppled the truly crazed Gaddafi. We can all cheer his demise, but what will follow? Who are the rebels and where are they planning? We actually know more about them than when we first chose to support them (a collection of different tribes, political philosophies, and religious views, some good and some bad). Who will emerge on top and what will the struggle for dominance of the new regime be like? Will the average Libyan be better off or worse off? It is impossible to know at this point.

Craig Whitlock reports some interesting reactions to the Libyan civil war from the area in yesterday’s Washington Post, “Libyan rebels renew hopes of Arab Spring”

“If the shooting quickly subsides and the Libyan rebels are able to build a functioning central government, it would give further encouragement to protesters in the streets of Damascus and Sanaa. But if Libya descends into factionalism or tribal warfare — with scenes reminiscent of Iraq after the fall of Saddam Hussein — then ardor for the Arab Spring could cool again.

“‘People are going to be looking at how this plays out very, very closely,’ said Jon B. Alterman, director of the Middle East program at the Center for Strategic and International Studies. ‘It’s easy to agree that the leader must go. It’s much harder to agree on what comes next.’

“Some Palestinian activists said that their aspirations, too, had been buoyed by the success of the Libyan rebels but that NATO’s involvement had taken the sheen off the results.

“‘It is getting a cautious welcome because it was achieved with foreign intervention rather than by the people themselves, as was the case in Egypt,’ said Hani al-Masri, a political analyst in Ramallah, West Bank. ‘Some people are calling it liberation through occupation. The Egyptian experience was inspiring. In Libya, we have to wait and see.’”

My pessimism about our ability to improve the world (and our safety) with armies does not mean that I think we should do nothing in Libya or elsewhere to promote a better world (rule of law, respect for human liberty and rights). We know a lot about the blessings of liberty and the institutions (not necessarily, or even very often, just like our own) that help promote and preserve it. We have an interest, both humanitarian and national self-interest, in doing our best to share our knowledge and to promote sound governance and free markets in Libya and elsewhere. This is often done best by international organizations such as the International Monetary Fund and the World Bank. It cannot be successfully imposed from outside. It must to the form of support and encouragement to the indigenous forces for good (if we think we know who they are).

I commend to you the op-ed piece on this subject in the The Washington Post by Stephen Hadley on August 18th: “Our chance to shape change in North Africa and the Mideast”.