![[wage gap]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_sc0RnT1EkPcjXaKQHdsphbyG7-7fLjy--OT3eyHclGkvTMgscD0SFBczrgekWERSppEOG-47N0QTZ5h18xF2mSyH2HpW6EJv9oUWgIk8zdQBqsVPFh0bsjzwm-lVgoP_n05r14Hab7mDolVcSD=s0-d)
![[labor]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_tngCzGbtqu9SNFhx93yZ3acXxhTb58F46k7okF9VoEtEN8-ULhX5ahbJpcAXFFFxqQyQjdbBHw8Dli0X22draIkTrtAykBGfkWdwHuFQWOpxMfvrumyt3ZervcpHJJSMQ6DYqHllRIEOFgQ44D=s0-d)
What does this authoritarian moment mean for developing countries?
by Pranab Bardhan
As the petro-authoritarianism of Russia flexes its muscles and the economic prowess of China struts in Olympic glory, developing countries in the world might start rethinking about the lectures on democracy and development they have heard all these years from the West. This is at a time when advanced capitalist democracies are reeling under the shock of unregulated financial overreach and years of living beyond their means, a far cry from the end-of-history triumphalism of capitalist democracy of less than two decades back.
The Chinese case in particular is reviving a hoary myth of how particularly in the initial stages of economic development authoritarianism delivers much more than democracy. This is also backed by the memory of impressive economic performance of other East Asian authoritarian regimes (like those in South Korea and Taiwan in the recent past). The lingering hope of democrats had been that as the middle classes prosper in these regimes, they then demand, and in the latter two cases got, the movement toward political democracy.
But the relationship between authoritarianism or democracy and development is not so simple. Authoritarianism is neither necessary nor sufficient for economic development. That it is not necessary is illustrated not only by today's industrial democracies, but by scattered cases of recent development success: Costa Rica, Botswana, and now India. That it is not sufficient is amply evident from disastrous authoritarian regimes in Africa and elsewhere.
Even if we were not to value democracy for its own sake (or regard it as an integral part of development by definition), and look at it in a purely instrumental way, it is worth reiterating the several advantages of democracy from the point of view of development. Democracies are better able to avoid catastrophic mistakes, (such as China's Great Leap Forward and the ensuing great famine that killed nearly thirty million people, or a massive mayhem in the form of Cultural Revolution), and have greater healing powers after difficult times. Democracies also experience more intense pressure to share the benefits of development among the people, thus making it sustainable, and provide more scope for popular movements against industrial fallout such as environmental degradation. In addition, they are better able to mitigate social inequalities (especially acute in India) that act as barriers to social and economic mobility and to the full development of individual potential. Finally, democratic open societies provide a better environment for nurturing the development of information and related technologies, a matter of some importance in the current knowledge-driven global economy. Intensive cyber-censorship in China may seriously limit future innovations in this area.
All that said, India's experience suggests that democracy can also hinder development in a number of ways. Competitive populism– short-run pandering and handouts to win elections– may hurt long-run investment, particularly in physical infrastructure, which is the key bottleneck for Indian development. Such political arrangements make it difficult, for example, to charge user fees for roads, electricity, and irrigation, discouraging investment in these areas, unlike in China where infrastructure companies charge full commercial rates. Competitive populism also makes it difficult to carry out policy experimentation of the kind the Chinese excelled in: for example, it is harder to cut losses and retreat from a failed project in India, which, with its inevitable job losses and bail-out pressures, has electoral consequences that discourage leaders from carrying out policy experimentation in the first place. Finally, democracy's slow decision-making processes can be costly in a world of fast-changing markets and technology.
The hopes of democrats relying on the middle classes in authoritarian regimes have not always borne fruit. Latin American or South European history has been replete with many episodes of middle classes hailing a supreme caudillo. The police state in China shows no signs of loosening its grip soon, despite the spectacular progress in the opening of the economy. While there has been some relaxation in controls over individual expressions of thought, and some open middle class grumbling over pollution and forcible acquisition of property, the state never fails to clamp down on political activities that have even a remote chance of appearing to challenge the monopoly of power of the central authority. Most people in the Chinese middle class are complicit in this in the name of preserving social stability, as long as opportunities for money-making and wallowing in nationalist pride keep on thriving.
So markets and capitalism will not do their political cleansing job automatically. On the contrary, markets often sharpen inequality, and the resultant structures of political power, buttressed by corporate plutocrats and all-powerful lobbies, may even hijack or corrupt the democratic political process, a phenomenon not unknown in some industrial democracies. Thus both for democracy and development other social forces and movements for civil and economic rights for the common people have to be pro-active and eternally vigilant.The author is a professor of economics at the University of California at Berkeley
Bhagwati explains on FT why Doha round failed, and why the US (especially labor unions) is so enthusiastic about raising labor standards of developing countries. Years ago when China bid for her WTO membership, I was deeply shocked by the US that insisted in classifying China as a "developed country". Now I understand.
In the 1980s, Japan was feared in the US to be a lethal combination of Superman and the evil genius Lex Luthor in a classic case of what I have called the Diminished Giant Syndrome.Members of Congress famously smashed a Toshiba radio cassette recorder on the steps of Capitol Hill in protest in 1987. Great Britain at the turn of the 19th century had been marked by similar diffidence, despair and recrimination when Germany and the US were emerging on the world scene. There, Sir Howard Vincent entered parliament festooned with mops, pails and brushes marked "Made in Germany".US hegemony survived the exaggerated threat from Japan. But the US is now once again a fearful giant. Many Americans see trade as a peril rather than an opportunity. This has turned the US from what the economist Charles Kindleberger famously called an "altruistic" hegemon into a "selfish" hegemon.On the back of economic anxiety in the country, many in both political parties (although far more among Democrats) see freer trade now as a costly giveaway to others at the expense of the US. They ask: "What is in it for me?" Only an agenda for institutional change, one that addresses the true causes of the anxiety in the US today, has a chance of returning trade policy to sanity.The US role in the failed Doha trade talks illustrates the collapse of American leadership. Here, the US has been the central spoiler, refusing to cut its trade-distorting subsidies significantly even though they are universally recognised as intolerable. Its latest offer was to cap them at $14.5bn (€9.84bn, £7.76bn) but that well exceeded current payouts, estimated at $9bn. With only 2m farmers in the country, the US still attacked India for asking for an enhanced "special safeguard mechanism" to be used in case of an import surge, when India has far smaller, often subsistence, farms and nearly two-thirds of its population in rural employment.While making negligible concessions itself, the US was insisting on difficult concessions from India, made even more troublesome politically because of the insubstantial offer on US subsidies. Besides, when the Doha talks started, the developing countries were not even supposed to be making concessions in agriculture. Throughout the Doha negotiations, the office of the US trade representative and US Congress pointed a finger at others – at Brazil, then at India and then also China – but have never considered their own roles.The US has also muscled in to its bilateral preferential trade agreements (nearly all with small, developing nations) conditions unrelated to trade at the expense of their partner nations. Thus a country that is hardly an exemplar on labour rights, where the right to strike has been severely restrained since the Taft-Hartley legislation more than half a century ago, where union membership in the private sector has declined to less than 10 per cent of the labour force, and which has not ratified all the International Labour Organisation's core conventions, has had the effrontery to impose standards on others in these PTAs.Why?It is evidently not because it practises what it preaches and demands. Rather, it is because the labour lobbies believe, without any compelling evidence, that American wages have been stagnant because of competition from the developing nations. Further, they believe that if one could only stand Thomas Friedman of "flat earth" fame on his head and flatten the earth by raising these countries' labour costs up to US levels, that would help reduce competition. In short, this is what economists call "export protectionism".What is doubly offensive about this exercise of political muscle is that it is advanced in the language of altruism: not by saying frankly that it is because "our unions are worried about competition" but by pretending that it is "in your workers' interests". An altruistic hegemon would not be playing these games; a selfish hegemon will do little else.Senator Barack Obama does not quite get this. By asking, as part of his agenda for change, that the US should now impose even more draconian labour requirements in future PTAs, and that the North American Free Trade Agreement should be revised to incorporate yet tougher labour requirements, he is making export protectionism, and the reputation of the US as a selfish hegemon, worse, not better. Some change.Change is indeed in order, although along totally different lines. It must reflect a holistic view of the new reality that the US confronts. In particular, the economic anxiety that overwhelms US workers today stems from the increased fragility of their jobs.First, as with Japan in the 1930s, when one-dollar blouses flooded the world, India and China today are growing and exporting rapidly. They are like Gullivers in a Lilliputian world economy. They create tsunamis for specific industries where their exports concentrate.Second, competition has intensified. As exemplified by the Boeing-Airbus saga, the margins of competitive advantage have shrunk. No chief executive or any of his workers in tradable industries leads a happy life any more as there is always someone, from somewhere, breathing down his neck. I call this new phenomenon "kaleidoscopic comparative advantage". It leads to volatility of jobs, as you have an advantage today and can lose it tomorrow.Third, labour-saving technical change continuously threatens assembly-line jobs for the unskilled. The assembly lines continue but increasingly do not have workers on them; they are managed from a glass cage by skilled operators whose jobs increase instead.The agenda for institutional change has to address this fragility of jobs, enabling unskilled and skilled workers to face the new uncertainties. To illustrate: higher education will have to be recast to reduce the proportion of time spent on specialisation: this would enable an easier response to shifting skill requirements as the kaleidoscope turns. Unskilled workers will have to be helped and encouraged to acquire skills and therefore increase their ability to shift to other jobs, even as they continue to work.Senator Obama promises change but he needs a deeper understanding of the anxiety-causing "new epoch" to define his new agenda shorn of protectionism. John McCain, the Republican presidential candidate, admirably stands for free trade but shows no evidence whatsoever of comprehending that this needs to be situated in an institutional context that requires a serious overhaul. Who will ultimately offer us the right New Deal?
By Barry Eichengreen
One of the chief ways financial market participants make sense of events is by drawing parallels with the past. The subprime crisis, when it first erupted, was widely perceived as the most dangerous financial crisis since the 1930s. The implication was that it was critical to avoid the policy mistakes that transformed that earlier crisis into a macroeconomic disaster. The lesson drawn was that it was important to avoid an excessively tight monetary policy.
Now, with inflation rising, the popular parallel is not the deflationary 1930s but the stagflationary 1970s. Again the implication is that it is important for policymakers to avoid past mistakes. In this case past mistakes mean a monetary policy that allows inflation expectations to become unanchored.
In fact both analogies are misleading, precisely because market participants and policymakers are aware of this history. Their awareness means that financial history never repeats itself in the same way. Biochemists can replicate their experiments because molecules do not learn. Central bankers lack this luxury.
In the 1930s the critical mistake was the Federal Reserve's failure to recognise its lender-of-last-resort responsibilities. The result was not just financial distress but the collapse of the US price level, which fell by 21 per cent between 1929 and 1932. Since demand for commodities, including food and oil, was inelastic, their prices fell even faster than the overall price level, causing distress among primary producers.
And since other currencies were linked to the dollar by the fixed exchange rates of the gold standard, US deflation caused foreign deflation. As US demand weakened, other countries saw their currencies become overvalued. They were forced to raise interest rates in the teeth of a deflationary crisis. By raising interest rates, foreign countries transmitted deflation back to the US. Only when they delinked from the dollar and allowed their currencies to depreciate did deflation subside.
The difference now is that the Fed knows this history. Indeed Ben Bernanke, the Fed chairman, wrote the book on the subject. Seeing the analogy, his Fed has responded to the subprime crisis with aggressive lender-of-last-resort operations. If anything, it may have been too impressed by the analogy. Its mistake was to cut interest rates so dramatically at the same time that it extended its credit facilities. It would have been better to lend freely at a penalty rate. Higher interest rates would have made its emergency credit more costly and led to better-targeted lending and less inflation.
The Fed's response has forced other central banks that manage their exchange rates against the dollar, mainly in Asia, to import inflation rather than deflation. Their currencies have become undervalued rather than overvalued. As their real interest rates have fallen, these countries are now exporting inflation back to the US. Where global deflation led to the collapse of commodity prices in the 1930s – devastating those countries dependent on exporting commodities – our current inflation is having the opposite effect. This time, primary producers are the biggest beneficiaries.
What is the solution? Emerging markets need to tighten their monetary policy further to damp down inflation. They need to revalue against the dollar to fend off inflationary pressures coming from the US, just as they needed to devalue in the 1930s to protect themselves against US deflation. We have seen small steps in the right direction, such as the interest rate rises recently agreed by the Bank of Korea and Bank Indonesia, but more needs to be done.
The Fed's position is harder. If it now tightens, it risks compounding the recession. If it fails to do so, it risks undermining confidence and precipitating a dollar crash – which could still happen, in spite of the recent relief rally. Here the historical analogy is direct. In the 1930s the US needed expansionary policies to counter the depression but worried that moving too aggressively would demoralise markets and destabilise the dollar. Franklin Delano Roosevelt personally oversaw the process, setting the new dollar exchange rate each morning while taking breakfast in bed. In hindsight, his judgment looks sound.
One hopes that history will judge the Fed as favourably. James Bryce, the historian, had it right when he wrote that the chief practical use of history is to deliver us from plausible but superficial historical analogies. Or as Mark Twain more prosaically put it, the past may not repeat itself, but it rhymes.
The writer is professor of economics and political science at the University of California, Berkeley
Hundreds of millions of men and women all over the world have been tuned to their television sets and clued to their computer screens as they followed the Olympic extravaganza in Beijing. The pride taken by people of different countries in their own athletes as they compete against the best from other countries is truly remarkable. To Americans, the main interest this year has been Michael Phelps' pursuit of a record setting 8 gold medals in swimming-which he accomplished- the gold and silver medals won by two young American girls in the all around gymnastic finals, and the new basketball "dream team" that so far has easily won against China, Spain, and elsewhere. The Chinese have been thrilled by their successes in gymnastics and diving, the Australians by their swimmers, and the Rumanian's by the victory of their 38 year old mother in the women's marathon. Pictures were shown of how in 2004 the almost all black country of Zimbabwe with a history of significant racial conflict gave a wildly enthusiastic parade to a white Zimbabwe swimmer who won a gold medal during the Athens Olympics. And so it goes in other countries whose athletes have won medals.All the accolades given to Olympic medal winners-especially to those who get gold- provides plenty of incentive for young and talented athletes to train hard for the Olympics in the hope of becoming a medal winner. When practically all participants in the Olympics are working hard in their training regimes, and since various random factors, such as illness, injuries, and psychological state are extremely important, it becomes difficult to predict individual winners in many of the competitions. Yet it is rather easy to predict quite well the total number of medals won by different nations.
The article "A Tale of Two Seasons: Participation and Medal Counts at the Summer and Winter Olympic Games", published in 2004 in the Social Science Quarterly by Professor Daniel Johnson of Colorado College and a co-author, examines the determinants of how many medals were won by different countries in the summer and winter Olympics since the end of World War II. Their regression analysis shows that two very important variables are the total population and per capita incomes of different countries. Also important are whether a country has an authoritarian government-such as communism- a country's climate, and whether a country is the host country for a particular Olympics. These five variables taken together predict closely the total number of medals won by different countries in the winter as well as summer Games.
It is surely no surprise that population matters a lot since there are many more athletes to choose from in large countries. This is why the breakup of a big country, such as the Soviet Union, had a large effect on the number of medals won by Russia, if Russia is identified with the Soviet Union. Climate is also no surprise since, for instance, the warm climates of African nations makes it highly unlikely that they will be contenders during the winter Olympics in skiing and other cold weather sports. Yet countries with colder climates, such as Russia and Scandinavian countries, do well, given the other variables, in summer as well as the winter Games. Host country effects are somewhat more surprising, but they might be explained by greater familiarity of host athletes with the weather and other conditions of the Games, by the extra incentives provided by the cheers of their fans in attendance, and possibly by the greater preparation efforts of host country athletes.
It is further entirely reasonable that countries with higher per capita incomes, other things the same, do better in Olympic and other international competitions. Parents of promising athletes have more resources to hire coaches, buy equipment, and get other help in their quest to improve the performances of their children. High schools and colleges have more resources to spend on their athletic programs. Private groups establish Olympic and other committees with generous resources to help in the training of the most promising athletes. Companies sponsor athletic programs and offer other incentives- such as the $1 million that Speedo promised Michael Phelps if he succeeded in winning 8 gold medals at the Beijing Olympics.
The importance of communist and other single party countries on the surface is more surprising. It is not that these countries send more athletes to the Olympics than other countries with similar populations, etc- they do not- but authoritarian countries do better per athlete that they send. The reason appears to be that governments of these countries spend considerable resources and energies in finding young promising athletes, and in providing systematic training and equipment in centralized facilities. According to the NY Times' editorial of August 17th, China has spent billions of dollars on its state sports program since the 2000 Sydney Games. These countries also can sometimes use their authoritarian structure to force parents to let their children be taken to centralized facilities, and have refu'ed to allow athletes who win medals to retire. Such activities clearly help explain China's rapid rise to athletic prominence, but the same considerations were behind East Germany's success in earlier Olympics, and in the great success of the Soviet Union prior to its breakup.
Democratic governments would not be able to employ some of the techniques used by authoritarian governments, but still must decide on the proper role of their governments in preparing athletes for Olympic and other international athletic competitions. The strong interest of countrymen in cheering on athletes representing their countries seems like a positive "externality", especially from Olympic success. However, in private market economies, these so-called externalities from Olympic and some other international athletic achievements are internalized to a considerable extent by endorsements, requests for well-paid speeches, job offers, and other private advantages given to successful athletes. Many of these private advantages are not possible in government-controlled economies, which might explain why their governments are much more active in financing and training athletes.
Perhaps some externalities remain that justify considerable government involvement in democratic countries. Indeed, recently countries, such as Germany, have indicated that they plan to spend more in preparing their athletes for future Olympics. The Times' editorial opposes further government spending on the US Olympic program mainly because the government budget is in deficit and the economy has slowed down. I believe there are much better reasons for opposition to a much larger government involvement. The highly decentralized, mainly but far from entirely, privately financed approach to athletics found in countries like the United States and Great Britain is the right way to attract and train Olympic and other athletes in democratic countries with strong decentralized private economic and philanthropic sectors.
The contrast between the ECB's mandate to achieve price stability and the Fed's "dual mandate" to balance the goals of price stability and employment is not just an accident of legislative history but a reflection of fundamental differences between the two economies. Those differences make it more difficult to tame inflation expectations in Europe and therefore require the ECB's tougher policy.
The role of trade unions is the most important difference. Only 7.5 per cent of US private sector employees are union members and they are concentrated in automotive, airline, construction and other depressed industries. In contrast, more than 25 per cent of employees in the European Union are members of trade unions and in some EU countries the wages set in union contracts are automatically extended to other companies in the same industry.
Because of this union power, the ECB must persuade union members and their leaders that it is determined to bring inflation down to its target level of less than 2 per cent. The ECB's tough stance and exclusive emphasis on price stability is crucial to shifting inflation expectations and persuading unions to accept the rise in food and energy prices without pressing for offsetting wage gains.
In contrast, the Fed does not have to worry in the same way about union power and collective bargaining. Wage setting is decentralised and wage contracts do not have the formal links of wages to inflation that intensified the wage-price spiral of the 1970s.
Finally, the ECB recognises that it is still a very young institution that must prove to the European public that it will follow the successful anti-inflation tradition of the German Bundesbank. But a decade of relatively good performance is not a reliable guide to the future. The ECB is only now facing its first challenge of imported high inflation and the expanding membership of the European monetary union is bringing new voting representatives to the ECB whose views are yet to be tested.
Since the reform 30 years ago, China's economic takeoff has been anything but collectivism. The most famed and much researched agricultural reform, the so-called Individual Contract and Responsibility System, like many more reforms followed, has a distinct feature of letting people take more individual responsibilities and providing them with more incentives, which was a great breakaway from former collective farming and state-planned economy....What happens if collectivist societies, especially those in Asia, rise economically and come to rival the West? A new sort of global conversation develops. The opening ceremony in Beijing was a statement in that conversation. It was part of China's assertion that development doesn't come only through Western, liberal means, but also through Eastern and collective ones.
"Any changes to BBA Libor should be in response to market evolution and not as a result of a knee-jerk reaction," the BBA said in a report, which it issued following consultation with banks and Libor users such as central banks, derivatives traders and exchange operators. The BBA began the consultation in early June, when it announced its intention to find ways to boost confidence in Libor.
The decision to reject changes, the report said, stemmed in part from concerns that altering Libor could sow confusion in the market and cause legal problems, given the vast number of contracts based on the current Libor definition. Libor, which is set every day in 10 different currencies and 15 maturities, forms the basis for payments on some $350 trillion in loans and other financial instruments.
At the end of June, Hong Kong residents held 77.6 billion yuan, or about US$11.34 billion at current exchange rates, in Hong Kong bank accounts, three times the amount they were holding a year earlier.
China's well telegraphed, gradual upward adjustment of the yuan against the dollar has made the Chinese currency seem one of the few sure bets in global financial markets and it isn't just Hong Kongers latching onto it. Many investors and businessmen see it not only as a good trade, but as a matter of survival.
The yuan has risen 7.1% against the dollar this year. China's government maintains firm control over the range and direction of the exchange rate. The appreciation has slowed in recent weeks, but the broad direction is still clear. Forward markets price in another 4.4% gain in the next 12 months.
The flood of outside money pouring into the yuan helps explain why China's reserves have grown by an average of $1.6 billion a day this year. At the end of June, they stood at $1.81 trillion, up about 18% from the beginning of the year -- even though the country's trade surplus, long the main source of its foreign currency, is down 12% from a year earlier.
Recessions don't usually look like this, at least when it comes to productivity.
In the six U.S. recessions since 1970, worker productivity, or output per hour, grew a sluggish 0.8%, on average. But since the end of last year, even amid economic weakness, productivity is estimated to have grown an average 2.5% at an annual rate.
...
Productivity's path isn't just an academic debate. That productivity is staying strong even in bad times has important implications for economic growth, inflation, employment and, ultimately, living standards. For example, strong productivity growth, by countering inflation pressures from energy and commodities, allows the U.S. Federal Reserve to keep interest rates lower than it otherwise might, helping it stoke the economy.
But "it's a bit of a two-edged sword," said Chris Varvares of Macroeconomic Advisers, since efficiency gains could mean that companies can get by with fewer workers, exacerbating unemployment in the short run.
Some economists say the current healthy growth in productivity reflects a shift in the economy from less productive domestic sectors like home building and into exporting industries, which tend to be highly efficient. That shift has been aided by the weak dollar, which has made U.S. exports more competitive.
"It's a compositional story," said Dale Jorgenson, a productivity expert at Harvard University in Cambridge, Mass. Productivity, he explained, is "languid" in construction, so the decline of building as a share of the economy in recent quarters "is certainly going to be positive for productivity" on average.
![[chart]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_v0BYMEMzT2ZeHo3Ai-uVVuCIlF8cJ7Zqul5dnlem0mZ0-2Qqm1e7-8CJfvbRbli47IDeRou6zEN7lvpJgAaBWmRemK4U11Dr9gjIeNUcC1JFMuNtmUZDAHR1JTZIBXxd7_OtvjX0MLaeWmelD1jw=s0-d)
![[chart]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_v8P-ilm4wrpW3C7c2JnPBtqH_7hZ1ygF_Mx2MeuFvLSLXVsYQCGyp4nRN_TljHJO0N9e7oxWmJg5nk17_q7_FAiU6KuB89y6ukwAgcV7vMUjK8I2yqcjf3_nKyEvG9DqYfSv49s3EdwgDMT64B=s0-d)
