ADAM TOOZE Historian - Author - Critic - Blogger Tue, 25 Apr 2017 18:58:01 +0000 en-US hourly 1 ADAM TOOZE 32 32 America’s Political Economy: Hunger in America Tue, 25 Apr 2017 10:23:08 +0000 USDA food insecurity figures may severely understate the scale of the problem of hunger in 21s-century America, especially in rural areas.

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Food insecurity in the US.

This remarkable post has been rattling around in my head ever since I first clicked the link. I think it has been jogged back to the top of stack by a bizarre encounter last night on Broadway with a man railing about the fact that our local McDonalds franchise does not “honor the $ 1 meal deal”. He was furious and very articulate!

Who would care about a $ 1 meal deal?

According to the USDA: “An estimated 12.7 percent of American households were food insecure at least some time during the year in 2015, meaning they lacked access to enough food for an active, healthy life for all household members. That is down from 14.0 percent in 2014.”

Bad as those numbers are, do they underestimate the levels of hunger in the US? Jayson Lusk a Oklahoma State University agronomist and food policy expert has been conducting an in-depth survey of eating habits FooDS for the last four years. When he inserted USDA style questions about food insecurity into his more detailed survey forms, he found shocking results:

“Data from FooDS reveals a strikingly high level of food insecurity – much higher than what the USDA reports.  According to the criteria outlined at the above link, we found a whopping 46.7% or respondents were classified as having low or very low food security (22.9% of the sample had low food security and 23.8% had very low food security).”

How could this be? The main reason for the startlingly different result turns out to be a question of basic assumptions:

“In short, the USDA assumes that if you make enough money you can’t be food insecure. In their latest report, they indicate in footnote 5:

“To reduce the burden on higher income respondents, households with incomes above 185 percent of the Federal poverty line that give no indication of food-access problems on either of two preliminary screening questions are deemed to be food secure and are not asked the questions in the food security assessment series. ”

What if I take my FooDS data and just assume anyone that has an income that puts them at 185% of the poverty line (based on these criteria) is food secure despite the answers they gave on the survey? (note: my calculations are crude because I only measure household income in wide $20,000 ranges and I simply assign people to the midpoint of the income range they selected).

When I do this, I find that now “only” 22% are classified as having low or very low food security (9% of the sample had low food security and 13% had very low food security).  That’s still a lot higher than what the USDA reports, so maybe my internet survey still has some sample selection issues.  However, it’s still HALF the original measure.

What does this mean?  There are a lot of relatively high income people that would be classified as food insecure if the USDA simply asked them the same questions as everyone else.  There are a lot of relatively high income people that say “yes” to questions like “In the last 12 months, did you ever eat less than you felt you should because there wasn’t enough money for food?”

Upshot: even at income levels above poverty many households in the US struggle to put food on the table. And those in rural areas, especially those involved in farming are worst affected.

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Notes on the Global Condition: The UAE and the Geopolitics of the Horn of Africa Sun, 23 Apr 2017 11:43:14 +0000 The post Notes on the Global Condition: The UAE and the Geopolitics of the Horn of Africa appeared first on ADAM TOOZE.



Under the title “Horn of Africa: Pivot of the World” LMD published a great piece by Gérard Prunier last year on the truly mind-blowing force field in that part of the world. HIGHLY recommended. The Economist more recently published a shorter but fascinating piece about the independent geopolitical ambition of the UAE. Very worth reading! This is a meld of an earlier facebook post inspired by Prunier with new stuff from the Economist piece and elsewhere.

Ethiopia, is a population giant undergoing an experiment in “building capitalism from above”, which amongst other things has made it into the #4 exporter of cut flowers and a major arena in the global“land rush”. In 2015 people were worrying about potential implications for human rights. In the fall of 2016 the regime declared a state of emergency as it seeks to get grip on inter-ethnic protests triggered by … uneven and combined development around Addis.

To justify its crackdown, the Ethiopian regime accuses Egypt of fomenting terrorism over water rights on Nile triggered by Ethiopian dam construction.

Simultaneously, Addis is locked in power play with Eritrea over Djibouti, ocean access and Horn of Africa.

Beijing is pumping billions into a China-funded and China-operated regional railway infrastructure, linking Addis to Djibouti where China has constructed its first overseas military base.

Meanwhile, global logistics player Dubai Port Authority is playing Djibouti against the neighboring breakaway region of Somaliland. And this is no more than a first approximation of the complexity of this forcefield, with the nightmarish Saudi intervention in Yemen just across the Red Sea to the Northeast.

Plus the region is overshadowed by the worst drought in 50 years, which puts 18 million inhabitants of Ethiopia at risk of famine in near future.

The Economist fills in the backstory to the expansion of Dubai Port Authority. It is one of the vehicles for the remarkable ambition of the United Arab Emirates. To capture this we need to widen the map from the immediate surroundings of the Horn.


As the Economist puts it: “From Dubai’s Jebel Ali, the Middle East’s largest port, it is extending its reach along the southern rim of Arabia, up the Horn of Africa to Eritrea (from where the UAE’S corvettes and a squadron of Mirage bombers wage war in Yemen), and on to Limassol and Benghazi in the Mediterranean. Fears that Iran or Sunni jihadists might get there first—particularly as the region’s Arab heavyweights, Saudi Arabia and Egypt, seem to flounder—propel the advance. … If we waited to prevent these threats at our borders, we might be overrun,” explains Ebtesam al-Ketbi, who heads a think-tank in Abu Dhabi. The UAE also worries that rivals might tempt trade away from Jebel Ali, awkwardly situated deep inside the Gulf. Rapid port expansion at Chabahar in Iran, Duqm in Oman and King Abdullah Economic City in Saudi Arabia all pose a challenge.”

Apparently the prime mover in the UAE is Abu Dhabi’s 56-year-old crown prince, Muhammad bin Zayed. “He is the deputy commander of the UAE’s armed forces, and the younger brother of the emir of Abu Dhabi, who is also the president of the UAE. … Flush with petrodollars, he has turned the tiny country, whose seven component emirates have a combined population of almost 10m (only about 1m of whom are citizens), into the world’s third-largest importer of arms. He has recruited hundreds of mercenaries, and has even talked of colonising Mars. … “.

SERIOUSLY … UAE the world’s third largest arms importer. Not by much. But yes it is. UAE ahead of China!

And the Mars project is on a longer timeline but it is for real too!

Meanwhile, back on earth, “if you join the dots of the ports UAE controls … some even see the old Sultanate of Oman and Zanzibar, from which the emirates sprang, arising afresh.” What this means in real time is that UAE expeditionary forces are  in the business of putting down pro-democracy movements in Bahrain in 2011 and are one of the most active forces in the bloody war in Yemen.

In July 2015 it was UAE special forces that captured the Yemen port of Aden. “With the help of American SEALs, Emirati soldiers have since then taken the ports of Mukalla and Shihr, 500km (300 miles) east, and two Yemeni islands in the Bab al-Mandab strait, past which 4m barrels of oil pass every day. The crown prince has seen off Qatari interest in Socotra, a strategic Yemeni island, by sending aid (after a hurricane) and then construction companies, which a Western diplomat fancies may build an Emirati version of Diego Garcia, the Indian Ocean atoll where America has a large military base. While Saudi Arabia struggles to make gains in Yemen, Emirati-led troops earlier this year marched into Mokha port and are setting their sights on Hodeidah, Yemen’s largest port and the last major one outside Emirati control.”

On the other side of the Red Sea straits UAE is the main backer of break away Puntland and Somaliland that are seeking independence from the rump of Somalia. UAE ambition and money is transforming Somaliland as a possible gateway for landlocked Ethiopia. As the Economist describes the port city of Berbera, the former British colonial hub: “After the British came the Russians and in the 1980s NASA, America’s space agency, which wanted its runway, one of Africa’s longest, as an emergency stop for its space shuttle. Now the United Arab Emirates (UAE) is Berbera’s latest arriviste. On March 1st DP World, a port operator based in Dubai, began working from Berbera’s beachside hotel. Officials put little Emirati flags on their desks, and refined plans to turn a harbour serving the breakaway republic of Somaliland into a gateway to the 100m people of one of Africa’s fastest-growing economies, Ethiopia. Three weeks later the UAE unveiled another deal for a 25-year lease of air and naval bases alongside. The agreement, rejoiced a Somaliland minister in the hotel café, amounted to the first economic recognition of his tiny republic. It would fill the government’s coffers, and bolster its fledgling army. Businessmen sat at his table discussing solar power stations, rocketing land prices and plans for a Kempinski hotel.”

UAE moves cannily. Before making a major investment in Berbera – $ 442 m is in the agreement – it insisted that the deal be approved by both Somaliland and the President of the transitional authority currently governing Somalia. According to well informed sources: “In order to entice the TFG president into affixing his signature to the contract Somaliland’s president Ahmed Mahmoud Silanyo is said to have promised TFG’s Sheikh Sharif financial and voters for his presidential re-election bid that will occur this coming August when the mandate of the internationally fronted TFG expires.

Will the prospect of really big money and integration into networks of global trade and power bring about the consolidation that so far has eluded Somalia? What new reality will be shaped by this forcefield?

In Somaliland, a relatively successful experiment in regional democracy, the moves towards an embrace of UAE are causing intense tension. The port deal was one thing. The move to allow UAE to open a military base in Somaliland in the former Soviet airfield, thus dragging Somaliland deeper into the wars ongoing both in Somalia and Yemen, caused uproar in Somaliland’s parliament and the expulsion of the opposition including the parliamentary speaker. Good local TV coverage here.

How does this play out?

The imagery of lost African modernities is irresistible.

But that kind of image is apparently taken on shore. The main facility of Berbera port is actually only visible from offshore

As logistics sources make clear: “Maps from Oceans Beyond Piracy (OBP), which is an independent NGO working together with Somali authorities to support investors and donors for the development of Berbera Port, show that the port has recently emerged as an important and strategic logistics hub widely used by humanitarian agencies and industry alike.” The UAE is not buying into a wreck!

With China makings its play in Ethiopia and Djibouti, it would seem that UAE is America’s favored proxy. The Obama administration supplied 63 % of its hardware. General James Mattis America’s new Defense Secretary is a great fan. He dubbed the UAE “little Sparta”. And according to well-informed US sources he clearly intends to use Saudi but above all UAE resources in the escalated war in Yemen and Somalia. UAE was Mattis’s first stop on his first trip to the region. And it was a joint UAE/Seal team that carried out the disastrous botched operation in February. But the larger goal seems to be to put an end to the distracting conflict in Yemen to focus on suppression of AQ-affiliates and a pivot against Iran.


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Notes on the Global Condition: Conversation with a Bundesbanker Sat, 22 Apr 2017 11:44:30 +0000 A lunchtime exchange with Andreas Dombret on the Eurozone, trans-Atlantic relations and populism.

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Earlier in the week I was asked to provide comments on a speech by Bundesbank Executive Board member Andreas Dombret.

His wikipedia bio starts as follows: “Andreas Raymond Dombret (born January 16, 1960 in the United States[1]) is German-American banker. He was the Vice-Chairman of Bank of America Global Investment Banking in Europe, the Middle East and Africa as well as Head of the German, Austrian and Swiss branches. Since 1 May 2010, he has been a member of the Executive Board of the Deutsche Bundesbank with responsibility for Banking and Financial Supervision, Risk Controlling and the Bundesbank’s Representative Offices abroad.[2] Andreas Dombret holds dual German and American citizenships.”

So, he’s as connected a member of the trans-Atlantic banking/central banking fraternity as you can find.

Text of Dombret’s speech at Columbia is available at the Bundesbank website. Dombret strayed only slightly from this script. There were a few more references in his speech to populism and trans-Atlantic tensions, but the jist was very much the same.

I had prepared by reading up on Dombret’s recent speeches, which mainly concerned banking regulation and the on-going crisis in German banking, that being his brief. And I was thinking of asking him what he thought the minimum level of profits was that it was safe for society to ensure that private banks earned. If you have a big bit of crucial infrastructure that is privately operated, how hard do you want those corporations to be squeezed? What are the risks in terms of system maintenance and lack of reserves in case of shocks? If there is some minimum profit level, is there some maximum? Are we at a point where we are effectively defining socially acceptable rates of profit for private banks etc etc etc.? Is there an upper limit as well as a lower bound?

But Dombret went in a different direction, to address broad issues of the Eurozone and global trade. I take this as being part of a piece with German government efforts ahead of the G20 to stake out a defense of free trade and of its dramatic trade surplus. Apparently the SPD controlled economics ministry and Schäuble’s Finance Ministry have painfully agreed a position on this issue.

Of course, I don’t have any problem with Germany stepping up to the plate as a liberal hegemon of sorts. Dombret’s discussion of Dani Rodrik’s position has a passing similarity with arguments made recently by Martin Sandbu on the resilience of globalization. But there are such obvious contradictions even in Dombret’s short speech that I thought it was worth probing a little bit. So I put three questions to which I didn’t receive answers. But I thought it might be noting them down:

1. When Germany replies to the Trump administration’s attacks that it is not manipulating the Euro to boost its exports, is this a lesson in Eurozone/EU governance 101? Or is Schäuble conducting a barely veiled campaign against Draghi’s QE, which is unpopular amongst German conservatives, and also depresses the Euro against the dollar. Will American pressure be used to unhinge the tacit deal that Draghi seems to have struck with Merkel to allow a Eurozone-wide expansion? More generally do the pressures brought to bear on Europe by the US threaten delicate balances within the Eurozone and within Germany’s own political economy? How do German policy-makers manage those? Will they tie themselves to mast of ECB or attempt to manipulate the situation?

2. Dombret made the usual German case for fiscal union or a new regime of bank supervision and sovereign bond risk-weighting that will break the sovereign-bank nexus. I thought it was interesting that he should bring up the issue of sovereign debt as a long-term structural issue of the fiscal constitution and of banking regulation, but not mention Draghi’s QE bond-buying program and its effect in leveling the Eurozone sovereign bond market. A coincidental omission? What would happen in the eventuality that Portugal lost its last investment grade rating and thus dropped out of the bond purchase program?

3. In dealing with the US and Europe Dombret made no bones about his hostility to “populism”. Did this mean, I asked him, that central bankers were now claiming a right to speak out selectively against some political parties? Those being labelled populists were after all more or less legitimate parts of the political system from which central bankers claimed to keep their distance. What did he think of the example of the Bank of England offering analysis that clearly favored one side in the Brexit debate (the anti-populist side) and then, after the referendum result, putting all its firepower on the line to stabilize the ensuing panic. Was this a model for how central banks should relate to “populism”? How did it compare to the ECB in Greece in 2015? Did Europe’s central banks have a plan for the unlikely eventuality of a Le Pen win?

Predictably, the answers left something to be desired. What was most remarkable was Dombret’s mantra-like insistence that central bankers should stick to their  mandate, his equally mantra-like insistence that problems were complex and had no simple solutions (anti-populism) and his manifest preference for the simplest-possible mandate i.e. price stability pure and simple. Quite a set of juxtapositions.

Another interesting tension was that between his clear awareness of the threat of deflation and his enthusiastic embrace of fiscal austerity for the eurozone periphery.

A member of the Dombret team thanked me afterwards for the “interesting” questions. I certainly came away from the exchange with a new appreciation for the resilience of those who have to butt heads daily with the Bundesbank and its “common sense”.

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The Russian Revolution and the World. Notes on a Columbia panel. Sat, 22 Apr 2017 02:16:44 +0000 Whose 1917? Which Russian revolution?

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A propos of a panel at Columbia with Wang Hui, Susan Buck-Morss, and Harry Harootunian about the Russian revolution, a few remarks on thinking about the anniversary.

In commemorating 1917, even if October 1917 is at the center of our preoccupations, we are commemorating many anniversaries.

An event about “The Russian Revolution and the world” that confines itself without comment, apology, explication or apparently even second thought to October 1917 is clearly inadequate. At the very least we need to recognize the complexity of the February revolution in its amalgam of Menshevik, SR, Liberal, conservative nationalist and early, local Bolshevik elements. We should recognize the revolutions of the major regions and nationalities of the Tsarist empire. We should recognize the Greens and the Kronstadt rebellion. All of these have a legitimate claim to be considered part of the “Russian revolution (of 1917)”. If the focus of attention is indeed to be placed on the Bolsheviks, as well it may be, it is only against this broader backdrop that that choice acquires its political and historical meaning. Insisting on the complexity of 1917 is not an academic, pedantic or liberal quibble. It is only against that broader backdrop that the questions of “success” and “failure” and of “legacies” can be intelligently posed. To proceed otherwise, is historically and politically illiterate. Or it is simply to fall in with the cruder varieties of Bolshevik and Stalinist fellow travelling and/or their conservative and liberal opposites.

This question, as to which revolution or whose revolution we are commemorating goes directly to Wang Hui’s very striking remark that if we are uncertain as to who or what might constitute a revolutionary subject in the 21st century, that uncertainty also prevailed in 1917. If taken seriously that leads directly to a pluralistic and open-ended account of events in Russia and the Soviet Union between 1905 and the early 1930s, which would be well worth our time discussing. It would. for instance, allow a serious consideration of the SRs that is not possible if the “Russian revolution of 1917” is reduced to October.

And as Wang Hui observed the meaning of “failure” and its implications for the present cannot be avoided if we are to comprehend both the 20th century and the 21st.

But ….

Much as we wish to paint a nuanced and complex picture of 1917 and its legacies, there is a political seriousness to the historical event that should rule out the kind of cherry picking and reduction that results from moves like the following: “I prefer to think about the revolution as a marvelously fertile cultural revolution and to talk about what a wonderful impact constructivist impulses had on Taisho Japan, where they helped to stimulate a “wonderful culture” (sic).”

Speaking of cultural influences, has anyone ever seriously argued that the May 4 1919 movement in China was significantly indebted to the Bolshevik revolution of October 1917? Not what came after, not the broad amalgam of revolutionary nationalism and communism that formed in the 1920s, but the May 4 movement?

Can we really casually declare that decolonization is unimaginable without the Bolshevik revolution? Might we actually want to consider where and when that was more or less true and what kind of influence the Soviet project exerted, also in shaping the violent reactions to national liberation movements? Compare India and Indonesia, for instance.

How do you espouse some sub-Benjaminian, broken, non-teleological, anti-progressive, approach to history, or even a critique of history as such (though I may have misheard) and at the same time blithely propose a list of “lessons we have learned from history” that should be applied to current moment of anti-Trump resistance … how do you do that, without descending into utter arbitrariness?

What is the appropriate response to Warren Buffet’s famous declaration that “’There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning”? Is the appropriate lesson that the left should take from history that its aim should be to put an end to the “macho” (sic) business of class war?

Do we really want to say that the position of the white working-class in the post-industrial North/West is today structurally analogous to that of reactionary peasantry at the time of Marx’s writing? Is such a statement merely an intellectual provocation or something else?

Is it worth discussing whether the Mexican revolution and the Mexican constitution of 1917 and its concessions to the Zapatistas have greater actuality than the Russian revolution(s) of 1917? How would one arbitrate such a claim? How should the global enthusiasm for the 1994 Zapatista uprising weigh in the balance? Should that choice – Mexico or Russia’s 1917? – ever be posed as an alternative?

Please don’t all reply at once, I’m just trying to digest the experience.

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Notes on the Global Condition: The Easter 2017 Cocoa Crisis Sun, 16 Apr 2017 11:19:24 +0000 No Easter chocolate cheer on the Ivory Coast where the 2016-2017 cocoa price collapse is threatening to wreak havoc and derail a reform agenda.

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In 2016, Easter overtook both Valentine’s Day and Halloween as peak chocolate and candy season in the US. 90 million Easter bunnies will be consumed in a gigantic national binge with heated arguments raging about whether you start eating a bunny from the ears or the toes.


A staggering 87 of families prepare Easter baskets for their children in the US. But there will be precious little to celebrate this year for the peasant famers in Cote D’Ivoire and Ghana who produce the bulk of the world’s cocoa. Since my first chocolate post in February the global cocoa market has deteriorated sharply and is now recognized as having reached a crisis point.

Last year in a politically motivated move Cote d’Ivoire, which is the dominant producer, raised the price guaranteed to farmers. The Conseil du Cafe-Cacao, or CCC, set a guaranteed farmgate price of 1,100 CFA francs ($1.77) per kilogram. Most of two annual crops, the bigger of the two, were contracted in October 2016. This was  just before global cocoa prices plunged by 30 %. A steady increase in production has produced a glut which is now driving down prices, a collapse compounded by the unwinding of speculative positions.

Even leading hedge funds are losing money. Amongst the casualties is  CC+ the most famous cocoa hedge fund, run by Armajaro Asset Management LLP’s famed trader Anthony Ward. It lost money in 2016 for the first time since its inception a decade ago ..”. Ward earned the name “Chocfinger” with huge cocoa bets in 2002 and in 2010 when he made an attempt to corner the world market in cocoa. As Bloomberg reported: “Some of the biggest traders in the cocoa market struggled to navigate the wild swings last year. Olam International Ltd., the third-largest cocoa processor, said in February that trading conditions turned against them, especially in the fourth quarter.”

The result by early 2017 was a tense stand off between the authorities in Ivory Coast, merchants who had contracted to buy a large part of the harvest at prices which were now totally uncompetitive and the peasant producers.

As Bloomberg reported: “Beans have been piling up at ports and warehouses after a plunge of more than a third in future prices since July prompted some exporters to suspend purchases. Farmers’ associations representing 98,000 cocoa producers are threatening to strike as the backlogs and price slump means some producers are not receiving the certified amount. …  local cocoa shippers in the country said more than 80 percent of the contracts they bought cannot be fulfilled after wrongly speculating that prices would rise, according to a person familiar with the matter. Local exporters have told the CCC that they can’t honor commercial agreements for about 350,000 metric tons of beans, said the person, who asked not to be identified because the information is confidential. After prices plunged, exporters can only ship about 50,000 tons, said the person.” There was talk of re-auctioning 180,000 tons of cocoa to find new, lower prices, which will mean a heavy loss of the Ivorian cocoa authorities.

At the sharp end, as NPR reported in a brilliant segment, farmers find themselves holding unpaid IOUs. They grow cocoa but they live off little more than cassava.

The scene at the main cocoa port of San Pedro is vividly described by the NPR reporter Alex Duval Smith: “But right now, the port’s cranes are standing idle and the ships are nowhere to be seen. A musty smell hangs in the air around dozens of trucks still carrying fermented cocoa parked outside the Cargill processing plant near the harbor. Driver Daouda Traoré, 46, has been waiting to unload for three weeks. He is worried that rain will damage his load. “Cargill is the only plant buying beans at the moment so we are all backed up here,” he says. “The other factories in San Pedro are closed and not taking any beans.” He says factories are unwilling to pay the high price set by the government because it doesn’t offer them a big enough profit margin. “They are waiting to reopen when the international price goes up,” says Traoré, who claims he has never seen trucks backed up in San Pedro in such large numbers since he became a driver’s apprentice in 1988. But cocoa is being sold in this city, on the sly. … In Ivory Coast, it is illegal to undercut the price set by the government. And yet some farmers “are selling cocoa for as little as 600 francs (96 cents) per kilo,” says Blaise Koffi, 45, a union representative and a farmer. “They just have to, otherwise they cannot feed their families. But it is risky.” A farmer risks losing his licence if he is caught selling cocoa for less than the government price, he says. Koffi says that in recent years, the Ivorian government has created a stabilization fund as a buffer to protect farmers against market fluctuations. But farmers say they have yet to see that money.”It is there for times like these when we need help to make up for a low international price,” says Koffi. “We want the government to trigger payments from it now.” On 15 February, several hundred cocoa farmers demonstrated in the commercial capital, Abidjan. They tried to march on the “Caisse Stab,” a building that houses the offices for those stabilization funds. But the protesters were scattered by riot police using tear gas. After the incident, the government regulator – the Coffee and Cocoa Council (CCC) – agreed to discussions with farmers. The CCC said it was confident it could put pressure on plants in San Pedro to reopen and resume buying cocoa.”

At the national level, 30 % of Ivory Coast’s public debt is in dollars and Moody’s the credit ratings agency is already worrying about Ghana and Ivory Coast’s ability to service those with diminished export revenue. The report notes that the impact of the cocoa price fall on the current account balance will be more significant for Côte d’Ivoire than Ghana because cocoa exports accounted for around 43 per cent of its total merchandise exports in 2015, compared to 24 per cent in Ghana.

Through February and March one local report has it: “There was a “lack of response from Ivory Coast,” said Youssouf Carius, an economist based in the commercial capital, Abidjan. “When the market was expecting some answers, the CCC said nothing. Everybody ignored the crisis that was looming.” As London futures tumbled toward the end of last year, many of the hundreds of exporters that had bet on higher prices were forced to default on their contracts. With fewer buyers, beans started to pile up in the country, helping push prices even lower. The problem left the state facing losses of more than $300 million … ”

But with the second harvest of the year approaching Ivory Coast had to act. On 30 March 2017, instead of providing further support for farmers Ivory Coast cut the price paid to cocoa farmers by 36 percent to 700 CFA francs ($1.14) a kilogram for the second harvest down from 1,100 CFA francs in the autumn of 2016.

As Bloomberg reported: “The decision comes at a bad time for the government of President Alassane Ouattara. An army mutiny at the beginning of the year and a subsequent strike by public workers has weakened confidence in the economy and the price cut will affect an estimated 6 million people who earn a living from cocoa. … The government is being pragmatic,” said Laurent Assouanga, a history professor at Ivory Coast’s University Felix Houphouet-Boigny in Abidjan who has studied the industry. He also owns 10 hectares (25 acres) of cocoa. “When cocoa is piling up at ports, it’s bringing no revenue, neither to farmers nor to the state. The government could no longer afford the luxury of maintaining a high price.”

Production is likely to be cut. As Bloomberg reported: “Beans may also be smuggled into neighboring Ghana, which has said it will keep prices stable, the Rotterdam-based trader said. … “We might also see cocoa being withheld toward the end of the season if it looks likely that we could see a rise again in farmgate prices for the 2017-18 season,” Cocoanect said. … The government also said on Thursday that it would scrap a 5 percent registration tax. The export tax for cocoa will also be cut to 16.5 percent from 22 percent, according to two officials with knowledge of the matter, who asked not to be identified because the decision hasn’t been announced. If middleman and exporters don’t pay farmers the price set by the CCC, the regulator will consider a cocoa-purchasing system similar to Ghana, where the government directly buys the beans, Massandje Toure-Litse, managing director of CCC, said on Thursday.”

This would be a major step away from the liberalized system which Cote D’Ivoire introduced after a major scandal in 2010 concerning massive corruption in the cocoa and coffee supply chain. In 2013 14 cocoa barons were sentenced to prison for corruption running in excess of 500 m Euros. Not surprisingly it was a change heartily endorsed by the IMF. Massandje Toure-Litse who heads the CCC is formerly of Citigroup and World Bank and is widely seen as one of leading “reformers” of her generation. Feeding off rising cocoa prices and production the CCC was embarked on a wide-ranging development agenda, trying both to introduce higher standards with regard to labour and traceability of product and to rebalance marketing and processing arrangements. Whether this will survive the price crash is an open question.

CCC President Lambert Kouassi Konan is a man under fire. As a report from Ghana quoted him: “Producers may be dissatisfied with the price,” the CCC’s Konan said. “But they shouldn’t protest, as it may be seen as disruption to the public order.” Farmers at the meeting suggested Ivory Coast needs to produce forecasts for the harvest and be more transparent about plans to stabilize the market. The CCC didn’t answer questions about how much money is held in funds designed to mitigate market risks and support prices for farmers. It also didn’t say how much of the crop has already been sold. “The situation is difficult,” Konan said. “But it’s not the president that sets the price, it’s the market.”

Will relief come from an unexpected direction? This spring Germany has been rolling out its “Marshall Plan for Africa”. In March its minister for foreign development was in Cote d’Ivoire hailing the need for investment and the development of a fair trade network centered on cocoa and coffee. “Through their joint initiative PRO-PLANTEURS the Government of Côte d’Ivoire and the German Initiative on Sustainable Cocoa (a forum supported by the German government, the German confectionery industry, food retail sector and civil society) seek to improve the working conditions on the plantations. The aim is to put an end to child labour and achieve higher incomes. 20,000 family farms and their organisations benefit from trainings on raising the quality in cocoa production.”

At the African Development Bank in the commercial capital of Cote d’Ivoire Abidjan the mood was skeptical. The bank disburses $11 billion (10.5 billion euros) in credit every year with its board meeting weekly to consider 300 applications per annum. “At this particular meeting they have a guest. He is Gerd Müller, Germany ‘s development minister, who has been expounding on his African “Marshall Plan.” This is a 30-page discussion paper which envisages “a new level” in development cooperation with Africa in the areas of economic development, trade, education and energy. Müller is seeking partnership with Africa, that is his reason for his presence in Ivory Coast, he explains. “I see you as the voice of Africa,” Müller tells the bankers.“You are the experts.” The experts thank Müller politely for his display of initiative and his engagement with Africa. Then come words of criticism. “The strategy and the vision covers a lot of ground. I think the focus needs to be narrowed,” said one board member. The plan concentrates on creating jobs for young people and offering them a better future. “Is ‘Marshall Plan’ really the right name for this?” the board member asks. “There aren’t enough figures,” another banker observes. “Exactly how much could Germany contribute?”  Unlike the original Marshall Plan, which was enacted in Europe shortly after the end of World War II, Müller’s plan does not foresee handing out billions of dollars in loans. Instead, he wants to overhaul development aid, work closer with development partners and hold Africa’s elites more accountable for their actions. Müller wants to stop the illegal flight of capital out of Africa and close down the tax havens being used by multinational corporations. Boosting Africa’s private sector is also a key component of the German minister’s scheme. Unfair trade barriers would be dismantled and African products given better access to European markets. “I must take you up on that point, Minister,” said a banker from Nigeria. “Everybody at this table knows that the current agriculture policy is unfair to Africa. Statistically speaking, a cow in Europe receives more in subsidies than a farmer in Africa.” Müller nods but the question as to how exactly he intends to bring about a fairer system remains unanswered. Müller’s plan is currently just a discussion paper drawn up by the development ministry. He has no influence over trade policy, even though he may wish that he did. Many of his ideas have been bandied about in development policy circles for years, prompting Müller’s critics to describe the name “Marshall Plan” as misleading. Others believe that it is a brilliant move, because it guarantees Africa and Müller’s ministry a lot of attention in Germany.”

The German pivot to Africa is so abrupt and so transparently connected to the refugee crisis that it is hard, indeed, to avoid such cynical conclusions. Talk of Marshall Plans is jarringly out of step with the development of the global cocoa industry, defined by mass consumer demand, global multinationals, commodity markets and the struggles of small peasant producers in fragile post-colonial states.

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Notes on the global condition: Have we ever been global? Tyler Cowen and the “distance puzzle” Sat, 15 Apr 2017 12:40:02 +0000 Untangling how falling trade costs have and have not driven global integration.

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Tyler Cowen argued in a recent op ed that the impact of the backlash against deglobalization on global trade might not be as serious as many fear. His reasoning was original. We should not fear deglobalization Cowen argued, because we have exaggerated the extent of long-distance trade integration in the first place.

“Globalization probably won’t contract much because globalization, at least in the form of international trade, didn’t proceed as far as many people had thought. In fact, the ability of trade to surmount barriers of distance probably never went up in the first place.  … Just as the internet did not herald the “death of distance” but instead led to a concentration of talent in the San Francisco Bay Area, New York City, London and other megacities, so have contemporary technologies kept trade geographically clustered. The pessimistic reading of trade clustering is that human beings simply have not spread their wings very far. But these days, I find the gravity equation to be a comfort. Given that our ability to trade across great distances has not outraced our ability to trade nearby, I am not expecting any kind of a major trade snapback or correction. The evolution of trade, rather than throwing out fragile, delicate spokes, has instead made some fairly hardy connections, sturdy enough it seems to survive Trump’s rhetoric. … When trying to understand globalization looking forward, we must resist the temptation to believe the most puffed up reports about what we achieved in the past. The bright side is this: The continuing relevance of distance may be part of what is keeping our current world stable.”

So geography trumps Trump. This at least is the conclusion that Cowen draws from a wave of economic studies using so-called gravity equation models. They purport to show that when examined econometrically, the elasticity of trade with regard to distance is unchanged since the 1960s, or even, perhaps,  increasing. For every 1000 km of distance between trading partners, trade declines by as much, or more than it did decades ago.

The result is so counterintuitive that it has provoked more pushback than Cowen credits. But working through the argument is worthwhile because it reveals some interesting dimensions of globalization.

It is crucial to take the basic Cowen point on board. To a far greater extent than we generally credit, countries trade with their neighbors. This is reinforced by regional trade agreements. A huge portion of global trade is accounted for by trade between the US-Canada and Mexico in NAFTA and within the EU. But the effect operates even where there is no general regional trade agreement as between China and its big neighbors i.e. South Korea, Japan, Taiwan.

But then it gets more complicated: The elasticity of trade with regard to distance, is a function of the elasticity of trade with regard to cost and the elasticity of cost with regard to distance. These factors might potentially pull in different directions. If costs fall particularly fast for short-distance or regional trade, then the effect of a general cost reduction may be to increase shorter distance trade.

Recently, poor countries have tended to trade less over very long distances. In some cases this may be due to disproportionate reductions in local trade costs. More worryingly it might indicate the selective inclusion of middle income rather than truly low income countries in complex global value chains. Czechoslovakia and Mexico are key to transnational automotive production, not Mali.


This atrophying of very long distance rich-to-poor country connections is compounded by the dramatic decline in the significance of postcolonial and neo-imperial trading patterns. Those connections still had a major impact on global trade in the 1960s. In industries like cocoa/chocolate which I blogged about for Valentine’s they still do.

Some trade or no trade? Handling cases where there is zero trade requires some fiddly math, so in some of the gravity model tests, the instances of zero connection are excluded from the sample. That biases the result, because instances of zero trade tend to be very long distance especially lower down the income scale. Once you include the declining number of zero trade pairings, some studies show that the trade over very long distances has indeed been increasing since the 1960s.


But, finally, for my money the cleanest and most definitive resolution of the “distance puzzle” comes from a study by Yoto V Yotov, which points out that what the majority of studies have been looking at is not the effect of trade costs but relative international trade costs. If we allow for a general tendency to trade with closer trade partners, the question being asked is actually whether new cost-reducing technologies have been biased towards long distance or short distance international trade. The conclusion that the elasticity in distance has not changed is really a statement about the relatively even impact of globalization across all international trade. If we compare not between international trade flows but between international and domestic trade flows then the distance puzzle evaporates. Globalization has happened.

In the author’s words:

“In this note, I solve the distance puzzle and I demonstrate that globalization is in fact present in the gravity model.1 The idea is simple and intuitive. To develop my argument, I capitalize on the properties of the theoretical gravity model from Anderson and van Wincoop (2003) who show that the structural gravity system can only identify relative trade costs. This means that existing studies, which use international trade data only, measure international trade costs relative to other international trade costs. At each point of time, the effect of distance on international trade between a given pair of countries is estimated relative to the effect of distance on international trade for another pair of countries. Thus, assuming that the effects of globalization are spread evenly among the different pairs of trading partners, it should not be surprising that the estimates of the effects of distance and trade costs are stable over time. In short, my explanation for the persistence in the distance estimates from empirical gravity models is that these indexes are obtained exclusively from international trade data and, therefore, they cannot capture globalization.

To solve the puzzle, I argue that the appropriate measure of globalization is the increase in international economic integration relative to the integration of internal markets. Consequently, we need to evaluate the effects of bilateral distance and international trade costs relative to the effects of internal distance and internal trade costs in order to capture the effects of globalization. This intuitive measure should not be subject to the distance puzzle because external trade costs must have fallen relatively more than internal trade costs. The reason is that, though technological and communication breakthroughs affect both internal and external trade costs, institutional developments have been more significant when it comes to changes in external trade costs. Mechanically, the simple adjustment that solves the distance puzzle is based on a stricter adherence to the structural gravity theory, which requires that internal trade and internal distance are accounted for in standard gravity estimations. Once this is done and the effects of international distance are measured relative to the effects of internal distance, the distance puzzle disappears.”

Once we compare international with domestic trade rather than one international pair v. another, then the distance elasticity of trade does appear to have fallen consistently, independently of specification, by a substantial amount, in the region of 37 % (to be overly precise).

Together with Ingo Borchert, Yotov has recently expanded on the methodology of the earlier paper to produce a fascinating study of globalization that allows a comparison of declining distance elasticities across countries. It shows a remarkable pattern of differentiation with middle income countries benefiting most from the distance-reducing-and-trade-enhancing effects of globalization. For rich countries specializing in high value production that is less sensitive to trade costs, the effect dwindles. But the really alarming finding is about the poorest countries. In the US, perhaps unsurprisingly, the distance effect is particularly modest.


As the authors conclude “In combination, the four panels in Fig. 2 confirm that the estimated changes in gravity distance elasticities are indeed reflecting globalization effects and the associated changes in how and what countries are trading. In particular, one driving force appears to be a shift towards more sophisticated goods whose exports are less sensitive to distance frictions. Yet with the notable exception of China, low income countries as a group were markedly less transformative in that regard than middle income countries, raising the prospect of further decoupling the poorest nations from the dynamics (and gains) of globalization.”

Upshot: Yes, geography matters. Yes, trade with those closest to us is most important. But our eyes have not been deceiving us, the distance-annihilating effect of globalization is not an optical illusion. Those countries that have experienced the most rapid economic growth in the middle of the global income distribution have benefited from it. The poorest countries remain largely excluded from this integration effect. Globalization is not reducible to the natural logic of proximity. For better or worse globalization is a econo-techno-political artifact. As such it is vulnerable to the caprices of the government of the richest and most powerful country in the system. Those countries that will be most exposed to any fallout are not the very rich, but the rapidly rising middle income economies, on which the optimistic global narrative of the last few decades (such as it is) is based.

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America’s Political Economy: The top 0.01 % and “entrepreneurial income” Thu, 13 Apr 2017 13:02:45 +0000 New insights into inequality dynamics and the importance of "S-corporations" from Guvenen and Kaplan.

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News from the inequality front.

A fascinating new paper by Fatih Guvenen and Greg Kaplan digs deep into the income shares data.

If you start with the famous Saez 99/1 % income shares graph, it is clear that the action starts in the 1980s and what needs to be explained is the surge from the mid 1980s onwards.

If you dig into the sources it emerges that the story since the 1980s depends on which measures of income you use. Saez et al use IRS data which count a wide range of different income types, including capital income but not capital gains. These are attributed to tricky tax units not actual physical individuals. This could be a real issue, but doesnt turn out to be. What does matter is the definition of income. There is a stark difference in the story as told from IRS data and Social Security Administration (SSA) data reporting individual W2 labour incomes. Individual labour income disparity widens less radically and stops widening altogether from 2000. The action is in the “other income sources”.


As the authors put it: “Thus, the large and widening gap between the commonly reported IRS measure of top income shares and the SSA measure we report here is due to differences between the wage, salary, and self-employment income measured in the SSA data, and the broader measure of income measured in the IRS data. Given that the recent rise in top income shares is not from labor income, which components of income are driving this increase? Four main components of income are included in the total income measure but are excluded from the wage and salaries measure: (i) entrepreneurial income, (ii) dividends, (iii) interest, and (iv) rents. Figure 5 shows the share of total income that is accounted for by each of these categories of income accruing to the top 1 percent (left panel) and top 0.1 percent (right panel). Over this period, the category that has shown the biggest increase is entrepreneurial income (solid red line). With the exception of the mid-2000s, which saw a brief rise in interest and dividend income, essentially all of the differential trend in top shares between wage and salary income and total income can be attributed to the sharp rise in the share of entrepreneurial income of top earners in total income.

The authors: “In summary, essentially all of the increase in top income shares in IRS data over the last 30 years is due to an increase in entrepreneurial income, in particular income earned by pass-through entities such as S-corporations. For the period from 1981 to 2000, the effects of income shifting due to TRA86 (AT a tax code change that made it very attractive to shift business income from standard “c-corporations” to “s-corporations” that get declared as personal income tax liability thus avoiding corporation tax .. on this a future post!) likely explain the majority of the additional top share growth observed in the IRS total income data compared with the SSA wage and salary data. For the period post-2000, top income shares computed using only wage, salary, and Schedule SE income are either flat or declining, whereas top shares based on a broader measure of income show a continued increase. Almost all of this recent increase is due to an increase in the share of income accruing to S-corporations, whereas capital income such as interest and dividends have played a very minor role.”

And when you dig into who actually benefits from the income streams diverted from standard C-corporations to S-corporation pass throughs it turns out, perhaps not surprisingly, that it benefits a truly tiny group. Not the 1 % or even the 0.1% but the 0.01 %.

The authors: “To put these differences in perspective, observe that in 2012, the 90th percentile of the total income distribution was $112,000, the 99th percentile was $372,000, the 99.9th percentile was $1.55 million, and the 99.99th percentile was $7.2 million. This is a wide range of income levels even within the top 1 percent. Households with earnings at each of these income levels come from different backgrounds, work in different occupations, obtain their income from different sources, face different investment opportunities, and are subject to different types of risk. It is unlikely that a single mechanism simultaneously describes the evolution of incomes at this wide range of levels.”

As a bonus the authors add a further consideration. Increases in top income shares may be due to rapid income growth at the very top. Since we are talking about shares, they may also be due to slower growth at the “bottom”. One can describe the difference by taking a given “normal” growth rate and then comparing growth of the top 1 % and bottom 99 % relative to that benchmark. If you take 2 % as your benchmark then roughly half of the shift since 1981 is due to the much more rapid growth at the top and half due to below average growth at the bottom. If you break down the bottom 99 % the gap will be even more stark.

The big news here are the insights into how the richest 12,000 take their incomes. More on this in a future post.

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Notes on the Global Condition: “Unstable, unbalanced, uncoordinated and unsustainable”? How dangerous is the Sino-American economic imbalance? Tue, 11 Apr 2017 12:28:25 +0000 Summers, Bernstein, Wolf and Setser dig into the new balance of financial terror between China and the US.

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Apropos of the Xi Jinping-Trump encounter, there is a fascinating four way conversation going on about Sino-American economic relations between top Western wonks: Larry Summers, Jared Bernstein (ex of the Obama administration, Biden’s chief economist), Martin Wolf of the FT and Brad Stetser (ex-Roubini, CFR, ex Obama, one of the very best economic bloggers).

Everyone agrees that the agenda set by the Trump administration on commercial and currency policy is beside the point. The question is what should be at the center of attention and how great the risks of a Sino-American economic meltdown are.

The chain starts with Summers in full “financial statesman” mode waxing grand strategic about Sino-American economic relations in pages of Washington Post.

“If currency issues are invalid and commercial diplomacy is unlikely to have much positive effect on the U.S. economy, what should be the focus of economic policy with respect to China? It is difficult to overestimate the extent to which China is seeking to project soft power around the world by economic means. Xi’s speech in Davos , Switzerland, in January, quoting Abraham Lincoln and laying out a Chinese vision for the global economic system at a time when the United States is turning inward, was the rhetorical edge of a concerted strategy.

Of course there is Xi’s “One Belt, One Road” initiative, which envisions infrastructure investment and foreign aid to connect China and Europe. In a little-noticed development, the Asian Infrastructure Investment Bank, a Chinese-sponsored competitor to the World Bank, has announced that it will invest all over the world. Already, Chinese investment in Latin America and Africa significantly exceeds that by the United States, the World Bank and relevant regional development banks. And China will soon be the leading exporter of clean energy technologies.

This investment will, over time, secure Chinese access to raw materials, allow Chinese firms to gain economies of scale and help China to win friends. The United States has chosen not to join the Asian infrastructure bank, to undermine rather than lead global cooperation on climate change and, if the president gets his way, to sharply cut back foreign aid. In doing so, it is accelerating a loss of its preeminence in the global competition for prestige and influence. Perhaps this development is inevitable, but it is a mistake to accelerate it.

A truly strategic U.S.-China economic dialogue would revolve around the objectives of global cooperation and the respective roles of the two powers. It is important that such a dialogue start soon, but this move will require the United States to focus less on specific near-term business interests and more on what historians will remember a century from now.”

Jared Bernstein pushes back arguing that it worries him to find Summers in full “poli sci” mode “though he may have an important point”. What worries Bernstein is that there may be serious causes of ECONOMIC tension that may not be amenable to financial statesmanship of the Davos, Kissinger-Summers variety.

And the piquancy is that Bernstein can mobilize Summers against himself: “Larry is surprisingly blasé about a China problem: excess savings (really, an East Asia problem, as Brad Setser points out). I associate this problem with Summers’ own work on “secular stagnation”—persistent demand shortfalls even in recovery. Another way to view sec stag is as a function of excess savings: the globe is awash in more savings that we have good, productive uses for. That, in turn, can lead to depressed interest rates, credit bubbles, large trade surpluses in savings glut countries, which in turn force large trade deficits elsewhere, and high unemployment, depending on what offsets are in play in trade deficit countries. Larry himself has recognized this problem (as has Ben Bernanke since the mid-2000s in his seminal savings glut speech) and wisely called for public infrastructure investment to help offset it.

Our trade deficit with China is 1.6 percent of GDP; that’s a significant drag on demand. In terms of offsets, the Fed is pushing in the other direction (tightening) and the fiscal authorities…um…Congress…can’t find the light switch. We’re of course doing better than most other advanced economies, but here we are in year eight of an expansion and (slight) output gaps still persist.

Interestingly, a smart paper by Larry et al. provides an explicit role for such capital flows in dampening demand and making it harder for the US to hit higher growth rates (“We find capital flows transmit recessions in a world with low interest rates and that policies that trigger current account surpluses are beggar-thy-neighbor.”)

Apart from Summers own technical NBER paper Bernstein also references a really outstanding piece by Martin Wolf in the FT on precisely the issue of what is really at stake in the Sino-American relationship. I’m going to quote liberally but this kind of thing is really why it is worth paying for access to the FT.

Wolf: “US policymakers should worry about China’s capital account, not its current account. That is where danger now lies. Why does the capital account matter more? The answer is that this is where two interrelated aspects of an economy interact with the world economy: macroeconomic balances between savings and investment; and the financial system. In both respects, the Chinese economy is, to cite the celebrated words of former premier Wen Jiabao, “unstable, unbalanced, uncoordinated and unsustainable”. That was true in 2007, when he said it. It is truer today. As the Chinese authorities realise, but their western counterparts may not, the integration of China’s financial system into the global economy is fraught with peril.”

What Wolf is going to deliver, unremarked by Bernstein, is precisely the synthesis of concerns about grand strategic management AND macroeconomics that get split between the two Americans. I’m NOT a Wolf fan-boy. But the difference here is really telling.

Wolf goes on: “Annual gross savings in the Chinese economy amount to 75 per cent of the sum of US and EU savings, at over $5tn last year. China’s gross investment, at 43 per cent of gross domestic product in 2015, was still above its share in 2008, even though the economy’s rate of growth had fallen by at least a third. To sustain such high investment, the ratio of credit to GDP soared from 141 per cent of GDP at the end of 2008 to 260 per cent at the end of last year. The “shadow banking system”, in the form of “wealth management products” and other instruments, has exploded. Interbank lending has also soared. Last, but not least, the banking system is now the world’s largest. Financially, China is the wild east. Remember what the wild west did over the last century: the Great Depression and Great Recession originated in the interaction between US-led finance and the global economy. In view of its macroeconomic imbalances and financial excesses, China could deliver at least as much global financial mayhem.”

Compared to its remarkable 43 % investment rate, “In 2015, gross national savings were 48 per cent of GDP. World Bank data show that households contributed only a half of this. The rest came from corporate profits and government savings (AT a very interesting point to follow up on). International comparisons suggest that economic growth of 6 per cent warrants investment of little more than a third of GDP. This indicates that China’s surplus savings — surplus, that is, to domestic requirements — may be as much as 15 per cent of GDP.”

Why does all this matter for Sino-American relations and the world economy generally?
“Where might such surpluses go? The answer is abroad, in the form of current account surpluses. That is what happened before the financial crisis. It is likely that this is what would also happen now if the government relaxed exchange controls and brought credit and debt growth to a halt. Capital would pour out, the renminbi would tumble and, in time, a globally unmanageable current account surplus would emerge.”

So this is the new disaster scenario. The dikes break in China and we see a sudden domestic implosion and a huge correction in the balance of payments that ripples out across the world economy. This time it would not be an official build up of dollar reserves but a gigantic flow of private funds that would drive the exchange rate down and produce a huge trade surplus. As Setser puts it “The resulting outflow of private funds would push China’s exchange rate down, and give rise to a big current account surplus—even if the vector moving China’s savings onto global markets wasn’t China’s state. History rhymes rather than repeating.”

So, is it better that China should maintain its controls? Well, yes. But that has risks too. Wolf:
“Today’s credit growth and consequent financial fragility are a direct consequence of the desire to prevent this from happening. It has been the way to keep investment up at uneconomic levels. The Chinese authorities are in a trap: either halt credit growth, let investment shrink and generate a recession at home, a huge trade surplus (or both); or keep credit and investment growing, but tighten controls on capital outflows. … Why is the latter essential? With such large and growing stocks of liquid, risky or low-yielding financial assets, plus a huge flow of savings, not to mention the anxieties caused by the anti- corruption campaign, Chinese corporations and individuals have been desperate to take money out. This explains why, despite a persistent trade surplus, the country’s foreign exchange reserves fell from $4tn in June 2014 to $3tn in January 2017.”

Is there any way out? Market fundamentalists might be tempted to argue for shock therapy. The idea would be that there is unsatisfied demand for cross-border flows in both directions. There are Chinese would want to get their money out, but non-Chinese would want to invest their money in China. See the FDI discussion of my previous post. Those flows might cancel out, so we could float free of controls without overall disturbance.

Wolf is skeptical: “Suppose the Chinese authorities adopted, instead, the alternative policy of rapid liberalisation of both inflows and outflows, while relying on credit expansion to sustain domestic demand. It is possible, but unlikely, that the flow of money into China from abroad would match the outflow, as foreigners and Chinese both diversified their portfolios. Yet that would also cause three headaches. First, the domestic macroeconomic imbalances would persist. Second, the financial sector would become still more fragile. Finally, this vast, complex and fragile financial system would become fully integrated with the rest of the world’s, itself still far from fully stable. Instead of the Chinese financial crisis that many now think imminent, this would enormously increase the likelihood of another global crisis with China, not the US, at its heart.”

And then Wolf twists back one again to the geopolitical punchline: “These are huge challenges that need to be discussed in full between the US and China (and others). They have profound implications for trade, but they are not about trade policy at all. They require joint consideration of macroeconomic and financial policy. They also demand attention to the management of China’s external account: above all, exchange controls, the exchange rate and foreign currency reserves. Mr Xi has people in his government who at least understand these issues. Is the same also true for Mr Trump? The stability of the world economy depends on the answer. Alas, I suspect it is no.”

Wolf’s outstanding post elicited an intervention by Brad Setser at the CFR, which adds a further fascinating dimension. Setser does not deny the basic Wolfian diagnosis, but mines the Chinese balance of payments data to asses what instruments of control might be at Beijing’s disposal.

Setser: “I suspect that China’s regime was under less outflow pressure in 2016 than implied by the (large) fall in reserves, and thus there is more scope for a combination of “credit and controls” (Wolf: “The Chinese authorities are in a trap: either halt credit growth, let investment shrink and generate a recession at home, a huge trade surplus (or both); or keep credit and investment growing, but tighten controls on capital outflows”) to buy China a bit of time. Time it needs to use on reforms to bring down China’s high savings rate.”

Setser arrives at this conclusion by the kind of breakdown of balance of payments numbers, which he does better than anyone and must have made him a formidable contributor at Treasury. The question is who actually controls the funds that are leaving China. Are they the fear driven exodus of investors worried about (a) a market crash or (b) the anti-corruption drive? Or is it something else?

Setser: “All close observers of China know that China has been selling large quantities of reserves over the last 6 or so quarters. The balance of payments data shows a roughly $450 billion loss of reserves in 2016, with significant pressure in q1, q3, and q4. The annualized pace of reserve loss for those three quarters was over $600 billion (q2 was quite calm by contrast).

But close examination of the balance of payments indicates that Chinese state actors and other heavily regulated institutions were building up assets abroad even as the PBOC was selling its reserves. In other words, a lot of foreign assets moved from one part of China’s state to another, without ever leaving the state sector.

For a some time I have tracked the balance of payments categories dominated by China’s state—and, not coincidentally, categories that experienced rapid growth back in the days when China was trying to hide the true scale of its intervention. One category maps to the foreign assets the state banks hold as part of their regulatory reserve requirement on their deposit base. Another captures the build up of portfolio assets (foreign stocks and bonds) abroad, as most Chinese purchases of foreign debt and equity historically has stemmed from state institutions (the state banks, the CIC, the national pension fund). Even if that isn’t totally true now, portfolio outflow continues to take place through pipes the government controls and regulates.

These “shadow reserves” rose by over $170 billion in 2016, according to the balance of payments data. The state banks rebuild their foreign currency reserves after depleting them in 2015, and there were large Chinese purchases of both foreign equities and foreign debt.

And the overseas loans of Chinese state banks—an outflow that I suspect China could control if it wanted to—rose by $110 billion.”

As a result much of the foreign exchange that the central bank sold ended up in the hands of other state actors. My broadest measure of true official outflows* shows only $150 billion in net official sales of foreign assets in 2016.

“ That kind of outflow can easily be financed out of China’s large foreign exchange reserves for a time, or China could more or less bring the financial account into balance by limiting the buildup of foreign assets by the state banks and simultaneously cracking down on outward FDI (over $200 billion in outflows 2016, and largely from state and state-connected companies).

In other words, much of the reserve draw was offset by the buildup of other state assets—especially counting the assets state banks and state firms acquired abroad.**

That I suspect is why flows suddenly started to balance once China tightened its controls (and likely made it harder for one part of the state to bet against another part of the state). Of course, the renminbi’s relative stability against the dollar also helped—you do earn more on a bank deposit in renminbi than on a bank deposit in dollars.”

General questions about hegemonic leadership (Summers) –> reminders about macroeconomics (Bernstein) –> links between macroeconomics and finance and back to questions about managerial capacity (Wolf) –> in-depth accounting of link between macroeconomic accounts and managerial structure (Setser) … I’d call that a dialectical progression!

But the upshot remains the same: we have a lot riding on Beijing!

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Macrofinance and the State: Rethinking the Politics of the Global Financial Crisis Speaking at New School 18 April 6 PM Mon, 10 Apr 2017 00:03:31 +0000 If you are in New York and at a loose end!

The post Macrofinance and the State: Rethinking the Politics of the Global Financial Crisis Speaking at New School 18 April 6 PM appeared first on ADAM TOOZE.


The recent financial crisis has given rise to a resurgence of interest in the relationship of capitalism and democracy. This has given rise to calls to reimagine democracy. It has not sparked a similarly imaginative approach to the analysis of capitalism. Critiques of financialization have made a start, but they have not registered quite how unprecedented the dynamics of the 2007-2012 financial crisis were. Familiar macroeconomic categories, such as labour, production, competitiveness and trade continually reinsert themselves as the ground of the discussion. Meanwhile, in circles around the Bank of International Settlement and the Institute for New Economic Thinking, the shock of the crisis has given rise to a new approach to the financial system that centers not on national economic aggregates and imbalances but on the multi-currency balance sheets of transnational banks and shadow banks. This paper will explore some of the implications of this new economics for thinking about the state. It will argue that the specific logic of transnational financial crisis requires us to reconsider familiar approaches to the crisis-ridden relationship between capitalism and democracy.

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Notes on the Global Condition: Chinese Capital, the US and Germany Sun, 09 Apr 2017 13:25:50 +0000 China's FDI surge challenges both Germany and US to define national economic interests beyond the platitudes of "market economics". In the German case this raises the issue of Europe and trans-Atlantic relations.

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The surge in Chinese FDI in the US in 2016 was remarkable:

Chinese investment in the US skyrocketed last year

Combined with Xi Jinping’s visit, this triggered a flurry of recent reports about Chinese investment activity in the US and the tensions this may cause with the Trump administration. See the FT, WSJ, Bloomberg I, Bloomberg II, Skadden, Reuters, LA Times.

Though this is no doubt about the disruptive impact of the new President, this surge of concern about Sino-American relations around FDI  has a striking parallel in similar stories in Germany from the fall of 2016. In Germany the debate circulated around the attempted Chinese takeover of a chipmaker, which in a highly unusual move were blocked by German authorities (at American prompting), and heated exchanges between Berlin and Beijing during a visit to China by Sigmar Gabriel (SPD) then Minister for Economic Affairs.

First key takeaway: Trump’s an economic nationalist and tensions with China are likely to mount, but this is not a phenomenon limited to the US and its terrible new administration. These tensions are classic expressions of new dynamic of uneven and combined development unleashed by China’s astonishing growth.

The basic driver is the scale of China’s FDI surge. This is big and likely to get bigger. At least part of this FDI surge is linked to concerted industrial strategy on the part of Beijing. This creates considerable tensions in both Europe and the US and between them. It reveals fundamental asymmetries in international economic interactions which become increasingly difficult to live with as China becomes one of the major hubs of world trade. By the fall of 2016 China was Germany’s major trading partner outside the EU. 2016 was also the year in which Chinese FDI to Germany overtook German FDI in China.

As Gapper comments in the FT: “WTO accession was intended to bring global companies more access to China, and did so in sectors such as carmaking.” As everyone in Germany knows China is now essential to the future of VW, as it is to GM. The competition between the two in China is furious. As Gapper continues, despite allowing some key foreign investments, “China maintains a plethora of formal and informal limits on foreign ownership in healthcare, logistics, telecoms and other industries. China Oceanwide was free this week to buy Genworth Financial, a US insurer, for about $2.7bn, but overseas insurers still have only a tiny market share in China. Ownership limits had a legitimate purpose: to prevent China’s industries being trampled in a stampede of inward investment. But its rapid economic advance in the past 15 years has not led to much liberalisation: even when laws are relaxed, provincial governments and local officials favour Chinese companies in myriad ways. Germany is in a tough spot, lacking any broad mechanism to control China’s advance: the EU has no equivalent of the Committee on Foreign Investment in the US, which investigates sensitive takeovers. The EU has pressed China to allow European companies easier entry but Beijing is a hard bargainer and the imbalance suits it well.”

The scale of the Chinese foreign investment surge is dramatic. China has moved from being a net importer to a net exporter of FDI. After the US in 2016 China was the second largest source of M&A in the global economy. It has diversified the location of its investments from a heavy focus on developing and emerging markets to rich countries, first Europe, now the US as well.

The overwhelming majority of Chinese FDI is by private companies and it consists largely of M&A activity rather than greenfield investment. Key deal brokers are Chinese nationals who formerly worked for Western investment banks. AGIC, the firm that brokered the Krauss Maffei, is a private investment fund headed by Henry Cai ex of Deutsche Bank.

Much of the investment is driven simply by ordinary profit seeking commercial behavior. It is not easy to track and there are telling divergences between relatively coarse national economic data and more specialized databases built up by private think tanks and other monitors.

The trend should not be surprising, economist point to a historical regularity whereby the net balance of FDI shifts from the import of capital to the export of capital when countries reach ca. $ 15,000 in PPP adjusted modern dollars.

China’s FDI intensity is still very low and will likely increase with time, barring disasters (see below).

At the same time, however, one of the features of Chinese investment that provokes tension is that some of it is clearly strategically directed.

The first wave of reportage about Chinese FDI focused on its investments in energy and raw materials. Under the slogan “going out”, tens of billions were sunk into securing key inputs to the Chinese economy.

As the Rhodium group comments: “From 2005 to 2013, Chinese companies spent US$198 billion on global acquisitions in energy and basic materials assets, accounting for 67 percent of China’s total outbound M&A value in that period. … Chinese acquisitions mostly targeted resource-rich economies in the Middle East, Central Asia, Africa and Latin America. As Chinese investors gained appreciation for political risk and the unconventional oil and gas boom opened up new opportunities, investment shifted to politically stable, resource-rich countries such as Canada, Australia and the US. From 2008 to 2013, those three economies accounted for almost half of total Chinese outbound M&A.”

Under the Made in China 2025 program launched in 2015 China is trying to address the risks of the so-called “middle income trap” by focusing on technological upgrades to its manufacturing base.

This entails shifting the geographic focus of FDI to advanced economies.

In Europe, Chinese investment is increasingly focused on rich and large economies rather than cherrypicking bargains in bankrupt Greece.

Whereas in the first phase of opening it acquired technology through more or less “voluntary” transfers from foreign firms doing business in China – most notoriously the “transfer” of high speed rail technology from Siemens, Alstom and Kawasaki – it now seeks to build its technology base through foreign acquisitions.

A particularly pronounced instance is the microchip business. In 2015 China accounted for 29 % of global demand for chips, largely imported. Since 2013 it has been pursuing a policy to become more self-sufficient. From $ 1 bn in MA deals per annum the total surged to $ 35 bn in bids in 2015. The National IC fund and Tsinghua university emerged as aggressive acquirers of chip manufacturing capacity. One of the major targets for Chinese acquisition was the takeover of chipmaker Aixtron which operated both in Europe and the US and was blocked by both the Germans and the Americans.

There are at least three sources of tension in this complex relationship:

(1) the political tensions that may be caused by one sided, state-directed acquisition programs over the question of what is and what is not a “market economy”. As China has invested up the value chain it has focused its investment on the US and Germany. The US in the 1970s put in place a robust procedure for vetting foreign investments. The key agency here is the the cabinet level CFIUS, Committee on Foreign Investment in the United States, which has been busy recently:

Germany has no similar provisions. Germany is caught in the awkward position of having neither national safeguards nor EU level policy. The headline deals that have raised concerns in Germany were “Midea’s acquisition of robotics maker KUKA (EUR 4.4 billion); Beijing Enterprises’ acquisition of waste incineration and power generation company EEW Energy (EUR 1.4 billion); CIC’s investment in German property group BGP (EUR 1 billion); and China National Chemical Corporation’s acquisition of industrial machinery maker KraussMaffei Group (EUR 925 million).” They are not German national champions but they are in the ranks of significant technological innovators of the second tier, which Germany regards as the secret to its enduring success in manufacturing. As Rhodium comments “… the German political and business elites continue to be highly divided whether, and if so what specific changes to the government’s traditionally open approach to foreign investment are necessary.” There is talk of a “new realism in German-Chinese economic relations.”

Tough talk of course plays well at home, but if we are in a new age of realism then we do indeed have to be realistic. The account of Gabriel’s trip to Beijing in November 2016 by Deutsche Welle’s Frank Sieren is striking:

“The German economics minister was thoughtful and rather quiet on Tuesday in Beijing. He had just found out what it means to play “tit for tat” with an 800-pound heavy gorilla. At first, his Chinese interlocutors were shocked that Germany thinks it can behave like the US. Then they made it clear to Gabriel that he was on the way to harming Sino-German relations for good. Gabriel would prefer not to, so his tone later on that day at a reception at the German embassy in Beijing was conciliatory, even full of understanding. He said that he understood that China does not want to be the factory of the world forever and that Chinese companies are already providing competition to German companies. He said that he understood that China cannot open up its markets from one day to the next because Beijing has to ensure that there will be no social upheavals. Finally, as economics minister he made it clear in relation to Chinese companies in Germany that he is not only a minister for the German economy but a minister for the economy in Germany. Nonetheless, he said that problems had to be talked about in the open.”

Indeed, Germany’s problem is that it must map its future as top dog in Europe in relation to not one but two 800 pound gorillas. The Chinese takeover of the German chip company was unpopular not just in the German media but in security policy circles in the US. As Sieren continues:

“A Chinese investment fund wanted to take over the German chip equipment maker Aixtron but Washington does not want China and Germany to join hands in this area and put up strong competition to US companies. Therefore, it was not that surprising that it seems to have just clicked with the CIA that the systems can be used for military purposes, even though since its founding in 1983 Aixtron has sold over 3,000 of them for the semi-conductor industry all over the world, including to South Korea, Taiwan and China. Without anyone in the West ever having complained in the past. But this argument did not help Gabriel. He was forced to withdraw the approval that he had given for the takeover in September.

But out of this emergency situation it seems that he has done something virtuous. So as not to appear like a lackey of the US he circulated plans in the press to push for more EU regulation of foreign investment to prevent foreign takeovers of certain technology companies unless the same rights were given to EU companies. He particularly made it clear that this should be the case if a state was behind a deal, tactfully not mentioning China. However, the fact that his plans will not be easy to implement became abundantly clear when he arrived in Beijing. It seems from his circle that Gabriel’s personal views on state involvement are different. Qatar has shares in Volkswagen but this apparently is not so bad. It is also not surprising that reactions in Brussels were mixed. EU commissioner for the digital economy Günter Oettinger even “liked” it. But he will not be dealing with this matter in future since he is going over to budget and human resources. The Commission’s message was that nothing in this direction was currently in the pipeline. Of course, nobody wants to make too much effort considering there was no united position even in the question of China’s role in the South China Sea and there is no united position on China’s status as a market economy.

Some East European EU members seem to think that Beijing is more useful to them than Brussels. Gabriel’s understanding of legal matters seems too limited for a one-man attempt. In other cases, affected companies have sued and mostly won. It does not look as if the law will be changed, which does not make it easier for him. China is an important country for the German economy. … VW makes most of its profits from the Chinese market even if it cannot be a majority shareholder in a joint venture. There is pressure from Germany therefore.”

Against the backdrop of this superheated field of corporate and geopolitical competition two further factors of a more strictly economic variety may intrude:

(2) the Chinese balance of payments and Beijing’s effort to manage it. The Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC) vet foreign investments of more than $ 300 m and may shift the rules according to balance of payments or other pressures. If the pressure on China really builds up, Beijing may have to limit outflows. This effect should not be exaggerated since FDI is a very small element in balance of payments flows under modern conditions.

(3) More significantly, a collapse of China’s highly leveraged the level of leverage corporate debt bubble like that which struck the Japanese economy in the 1990s could bring the outward FDI surge to a halt. But that would be at the price of a major global crisis.

Takeaway 2: China’s FDI and its mixed economic regime challenges Europeans and the US to define national economic interest beyond the apparent simplicities of the “free market” paradigm.

Takeaway 3: For a second tier power as massively globally and regionally integrated as Germany is, this poses questions that are far trickier than they are for the US.

Takeaway 4: China is not the escape route to globalization that German strategists sometimes imagine, it forces Berlin straight back to the classic questions of Europe and trans-Atlantic relations.


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