On Hillary Clinton Angling to be World Bank Chief

You've probably seen the headline that Hillary Clinton is agitating to become the White House's pick to succeed Bush-era appointee (and former USTR) Robert Zoellick as the World Bank president when his term runs out next year. While it's the rumour of the day (evening?), consider:

1. I'd believe it more emanating from Hillary Clinton herself.
2. If France's Christine Lagarde becoming the next in an unbroken run of European IMF chiefs weren't bad enough, how about Hillary Clinton among American World Bank heads? Whatever happened to more diverse voices at Bretton Woods institutions?

While I am more favourably disposed to Hillary Clinton than Barack Obama and still think she'd have done a better job as US president, I honestly don't see how, if true, another American rubber stamping would improve the World Bank's image as a truly global institution in representation. Would the Europeans have any choice but to back Missus Clinton as a quid pro quo for Geithner backing Lagarde? The West--the US and Europe--looks poised to keep the old order alive. Bloomberg already suggested as much a few days ago. Coincidence? I sure hope so:

U.S. Treasury Secretary Timothy F. Geithner says France’s Christine Lagarde and Mexico’s Agustin Carstens are both qualified to run the International Monetary Fund. He may have little choice but to support Lagarde.

Under an unwritten agreement that dates back to the end of World War II, the IMF has always been led by a European while the World Bank has been headed by an American. Backing a non- European for the IMF could mean relinquishing U.S. control of the World Bank -- an outcome members of Congress who decide on funding for development banks are not ready to contemplate.

“For the sake of influencing policy and lending, as well as maintaining congressional support, it is very important that the World Bank continue to be led by an American,” Representative Nita Lowey of New York, the top Democrat on the House Appropriations Committee panel that oversees foreign-aid spending, said in an e-mail. Congress has yet to approve the Treasury Department’s $3.4 billion international aid budget for next year, which includes funding for the World Bank.

“We would like to see the U.S. continue to play and have a leadership role in these institutions,” Representative Robert Dold, an Illinois Republican and vice chairman of the Financial Services Committee panel that oversees development banks, said in an interview.

Plus, there's a Foreign Relations Committee report that supports continued US dominance of such lenders, the point being that American would be more comfortable funding them if one of their own was in charge:

A March 2010 report by the staff of Senator Richard Lugar of Indiana, the top Republican on the Committee on Foreign Relations, recommended that the U.S. “preserve” its leadership at the World Bank “and senior level positions at the other” international financial institutions. “Having an American at the helm of the World Bank helps ensure continued U.S. support for the institution and facilitates communication” with the bank, the report said.

I'd take fright at the idea even if Bill Clinton's name was put forward. Once more, there are any number of folks from the developed world who can readily fill this position. Besides, the days when the US could easily write the cheques are long gone. Nowadays, it's more honestly the PRC and other LDCs lending the US to fund Bretton Woods institutions, and it may not be long before IMF headquarters are in Beijing due to China's growing contributions.

LDCs, band together to fight this rearguard movement. United we stand, divided we fall.

UPDATE: The White House vehemently denies that she is after the World Bank's top job. Hey, anything to scuttle this bid to maintain the status quo would help, so I thank Reuters in any event.

Divided We Fall: Mexican Agustin Carstens' IMF Bid

[NOTE: I highly recommend reading Agustin Carstens' manifesto for an LDC IMF head before moving on.] Although you may occasionally get the feeling that I'd happily back boxing legend Julio Cesar Chavez as the next IMF managing director, let's just say I am more a fan of third world solidarity than most of the rest. Following up on my previous post about a lack of LDC unity on the matter--aside from rhetoric (only) pointing toward consideration of an LDC IMF chief, we have a really sad case on our hands here.

As I trod through the lonely road of lost causes, let me just say that Banco de Mexico Governor Agustin Carstens would have been my choice for the post among declared candidates in the running to be the next IMF managing director. He certainly has the qualifications as a former IMF deputy managing director. As Mexico's central bank governor, he too has overseen the transformation of an economy that, in previous decades, suffered from chronic balance of payments crises. Nowadays, foreign investment is flooding into the country as the peso--that former symbol of chronic devaluation--is becoming positively muscular.

So what's the problem? Well again, there's next to no backing from other LDCs. Uruguay aside [?!], nobody has indicated support for Carstens despite him going on a roadshow to garner support:

Mexican central bank Governor Agustin Carstens, nominated to lead the International Monetary Fund, criticized European nations for publicly backing French Finance Minister Christine Lagarde before all the candidates are known. “I find it strange that they are advocating in some forums for an open, transparent, merit-based candidate and they have made up their minds before the candidates are on the table,” Carstens, 52, said in an interview today in Sao Paulo. “All the other countries are playing by the book.”

Carstens, who has won a single public endorsement abroad, from Uruguay, said he expects emerging markets to support his candidacy once there is a final list of nominees to serve as the IMF’s next managing director. He met with his counterpart from Brazil today before traveling to Buenos Aires in a bid to rally support among developing countries for his candidacy.

Still, there is hope that while he isn't yet a name to rival Christine Lagarde among the central banker / finmin crowd, he is building name recognition so that he will be the front-runner when Lagarde or whomever European candidate gets the nod steps down.

While Carstens’ campaign is unlikely to succeed, his strong credentials as a former IMF deputy managing director are impossible to overlook and may advance his bigger goal of giving emerging markets more say in how the world economy is run, Guillermo Le Fort, a former IMF economist from Chile, said in a telephone interview. “Carstens is making a principled stand,” Le Fort, who was also a director on the IMF’s board for Chile and five South American nations from 2000 to 2004, said. “If he’s successful in advancing the cause of emerging markets, the Europeans might feel red in the face and decide to hold more honest, open elections based on merit in the future.”

Any of the IMF’s 187 member nations has until June 10 to nominate candidates for the managing director’s position, the fund said in a May 20 statement. The IMF executive board, which will select a managing director by June 30, is aiming for consensus rather than a majority vote, according to the fund.

And as the title says, divided we fall, although Carstens may be wily in thinking longer term:

Emerging economies that advocate a merit-based selection process appear unlikely to break Europe’s hold on the top job because so far they have been unable to rally around a single candidate, Arturo Porzecanski, a professor of international economics at American University in Washington, said. “The likes of Brazil, Russia, China, India will not support one another -- never mind Mexico,” he said in a telephone interview June 1. “Emerging countries are not being supportive.”

Carstens’ trip is similar to that of a political campaign designed to gain support in emerging countries for his bid, Morris Goldstein, senior fellow at the Peterson Institute for International Economics in Washington, said in a May 31 telephone interview. Carstens’ meeting today in Sao Paulo with central bank President Alexandre Tombini followed a meeting yesterday in Brasilia with finance chief Mantega. He’ll be traveling to Ottawa after Buenos Aires to promote his candidacy.

Brazilian officials and Carstens share the view that IMF needs to continue to reform and give developing markets more representation, the Mexican official said. “What is clear is that we have very similar views on the challenges and the solutions that need to take place in the institution,” said Carstens about his meeting with Tombini.

Carstens could be building his reputation for a successful future run if his bid for the IMF top job fails this year, Kevin Gallagher, associate professor of international relations at Boston University, said in a telephone interview June 1. “He’s trying to carve out a space for emerging markets and let people know who he is,” Gallagher said. “He’s all of a sudden become a household name in this community. Maybe five years from now the world will think that maybe it will be Carstens’ turn.”

To be sure, Carstens’ campaign isn’t necessarily doomed, according to Goldstein, who was an IMF official for 24 years. “It’s a matter of whether he can get support first of all in the rest of the emerging market world,” he said. “If he were able to unite the emerging markets, he would have a real chance.”

It's put up or shut up time. Unfortunately, it seems LDCs are squandering a perfectly good opportunity with a more than viable candidate to break the US-Europe stranglehold on Bretton Woods institutions. It's a shame--a real shame.

LDCs Strike Back: The Coloured Man's IMF Burden

Before getting to the topic at hand, let me point out Desmond Lachman of the AEI and his scathing indictment of Dominique Strauss-Kahn's performance as IMF managing-director--but without offering an alternative. From my vantage focusing on global governance, this much is clear: the "mistake" of Dominique Strauss-Kahn was favouritism toward Europe by granting Greece, Ireland, and now Portugal access to IMF funds meant for balance of payments troubles for what were, in essence, fiscal woes. Is this prudent lending? You first have to consider if the IMF should have lent to these countries at all. Latvia, Ukraine, Hungary, Iceland, Pakistan, etc. definitely had BOP woes so I have no issue with their borrowing. Lending to the abovementioned EU states genuinely rankles me, however.

That said, recent events have forced us to reassess the future of leadership at the IMF and the World Bank a bit further down the line when Robert Zoellick's term ends. In my previous post on the white man's IMF burden, I pooh-poohed the argument that European dominance at the IMF should be continued given current circumstances in peripheral EU economies. And now the cavalry has arrived to back me up, by which I mean the major developing economies. Hence the current post title lacking originality.

Let us consider the 500-pound gorilla of China weighing in on the issue. Just today, John Ikenberry--a name that should be familiar to nearly all IR scholars--launched his new book Liberal Leviathan at LSE IDEAS. It is a distillation of his longstanding conviction that the United States' relative decline is cushioned by the bedrock of liberal institutions it has established, including the IMF contemporaneously enough. Fortunately, I had the chance to ask him about IMF succession. To him, the Chinese leadership's statements on the matter demonstrate a continuing unwillingness to be more proactive in international institutions and "free ride" on others' work. Ikenberry further suggests that the careful wording is meant to possibly encourage an IMF chief from an LDC but save China from embarrassment if s/he is not. Anyway, here's what PRC Foreign Ministry spokeswoman Jiang Yu had to offer:

"We've taken note of this situation, and it would not be appropriate to further comment," ministry spokeswoman Jiang Yu told a regular news briefing when asked about the arrest of Strauss on sexual assault charges.

"You also raised the issue of the selection of the Fund's senior leadership. We believe that this should be based on the principles of fairness, transparency and merit."

To this observer, the "fairness" bit generally references the rising economic clout of LDCs and specifically their increased contributions to the IMF. After all, China now has the third most quota allocations in the IFI. At a broader Global South level, however, there is no sign of them uniting behind a single candidate to replace DSK. Given that it's early days, let's not make too much of this (yet):

Emerging nations have yet to unite behind a candidate to take over as the head of the International Monetary Fund, even as they reiterate their long-held stance that the position should not be reserved for a European. Brazil and South Africa have expressed a desire for an end to the tradition of the IMF’s managing director’s job going to Europe, just as they oppose the convention that the head of the World Bank is always an American.

Chile and China also have said that the position should be filled “on merit”, without publicly putting forward any candidates themselves. The likely resignation from the IMF of Dominique Strauss-Kahn, now in jail in New York pending the hearings of charges of sexual assault against him, has brought the sensitivities surrounding the job to the fore.

For many emerging countries the sinecures at the top of the World Bank and the IMF symbolise the old order established after the second world war, which they argue is no longer representative of the global economy.

South Africa and India certainly have viable names, but they are not tooting their horns too loudly at the moment:

In South Africa, Pravin Gordhan, finance minister, said Europeans “must be alive to changes in the world”. Mr Gordhan floated the name of Trevor Manuel, who was a long-serving finance minister in South Africa and who is now head of the national planning commission, calling him “highly respected in the world”.

India has been more cautious on possible changes in the leadership of the IMF, making little public comment on the management of any succession. Montek Singh Ahluwalia, the influential deputy chairman of the planning commission, has sought to damp speculation that he could be a possible candidate for the position of IMF chief. “I am not putting my name forward for any of these things,” Mr Ahluwalia, a former senior official at the World Bank and IMF, said. “I am quite happy with what I am doing and I am not looking for a change.”

To me this is a no-brainer: all change at Bretton Woods institutions to LDC heads is long overdue given that Europeans have always headed the IMF while Americans the World Bank. Are the demonstrated leadership qualities of Dominique Strauss-Kahn and, er, Paul Wolfowitz really that great? Nuff said.

UPDATE 1: TIME has a pretty good take on the succession topic, too.

UPDATE 2: Obviously, I have no problem with Dani Rodrik championing Kemal Dervis for this post, though he must be kidding if the French and Germans would consider him as "European" in justification.

The White Man's IMF Burden (Merkel Edition)

As expected, jockeying for the appointment of the next IMF managing director has begun. In an odd twist on the American deficit lubber's argument that medium-term fiscal consolidation is a desirable objective but not one in the near term since the US is just recovering from a deep recession, we have Europeans offering the same. Here, Europeans who still hold voting rights out of proportion with their share of the world economy claim that while medium-term diversity among heads of Bretton Woods institutions is a desirable goal, it shouldn't happen immediately given the pressing woes of peripheral European economies Greece, Ireland, and Portugal.

Again, I must point out my longstanding objection that the IMF is primarily meant to handle balance-of-payments crises, not fiscal ones alike those being experienced by the troubled trio. What is more, I am not alone in sensing fairly blatant favouritism that is hampering IMF reform to reflect the changing global balance of economic activity as well as a simple misallocation funds. Why should poor countries' IMF contributions be used to assist rich countries that don't really qualify for assistance as per the IMF's articles of agreement concerning BOP difficulties? The IMF shouldn't be a pet EU institution. But enough righteous indignation; here are the Europeans on this issue:

Mr Strauss-Kahn’s arrest on sex charges at the weekend prompted some commentators to declare it may be an opportunity for emerging market countries to take charge of the multilateral lender. But European officials on Monday asserted their case for keeping the top job for a European, as is customary, with Angela Merkel, the German chancellor, leading the charge. Ms Merkel told reporters on Monday that finding a replacement for Mr Strauss-Kahn was “not a question for today”, but given the sovereign debt crisis on the eurozone periphery there were “good reasons” to propose a European candidate...

Didier Reynders, the Belgian finance minister, argued on Monday that “it would be preferable if we continued to hold these posts in the future”.

It becomes a question of, first, to what extent will developing countries protest the continuation of the (neocolonial, perhaps) status quo? Second and based on LDC reactions, to what length will Europeans go to preserve the unwritten tradition of appointing a European head? Various commentators have suggested the Europeans will strike a deal with the Americans who've traditionally appointed the World Bank president to keep things as they are--you scratch my back, etc. Either way, I predict a fight on our hands if history repeats itself:

The comments by Ms Merkel and Mr Reynders suggest that Europe will fight to maintain the tradition at the two institutions. The number two job at the IMF, held by an American, will also become vacant soon when John Lipsky, who is running the fund in Mr Strauss-Kahn’s absence, steps down at the end of August.

Emerging market countries argue that it is unacceptable for Europe and America to continue to stitch up the top jobs even as developing nations take a growing share of the global economy.

However, even European countries that were willing to consider an emerging markets candidate for the IMF this time are having second thoughts now that the fund is central to short-term European interests. Ms Merkel said that developing countries had a right to the top jobs in the “midterm”.

Just as you don't cure American debt addicts by continually providing their fix, so you shouldn't expect Europeans to change their ways by embedding outmoded habits even further. The time of Turkey's Kemal Dervis or a similarly qualified LDC candidate is long overdue. Certainly, you can't say developed nations have an automatic right to lead the IMF by virtue of their superior economic management in this day and age.

Repairing the Adulterated IMF Post-Strauss-Kahn

I wonder what our colleagues at the Bretton Woods Project would make of this. Before going to sleep last night, I caught news that IMF Managing Director Dominique Strauss-Kahn was held in New York en route to France on attempted rape charges [1, 2]. Having written about the big kahuna's peccadilloes before, this latest episode will probably surprise Americans more than those of us in Europe who've become accustomed to these sorts of allegations against DSK. Yet, alike with the Monica Lewinsky allegations, the magnitude of these claims invites initial disbelief. This news story has even topped Yahoo! News. When the IMF only receives popular coverage when an event like this happens, you know that it has a problem with getting the public to understand what it does as well as with the kind of attention it receives. Pick your news outlet of choice: it may be a slow weekend, but DSK is front-page on nearly every one.

Much comment has already been made about the incident. While innocent until proven guilty is the operating principle, you can certainly argue that this incident has damaged DSK's credibility mortally. There are of course many implications here:

1. His chances of being the Socialist Party standard-bearer for next year's French election against the UMP's Nicolas Sarkozy are now nugatory. Various polls have claimed that he led Sarkozy at various points in the run-up to 2012. Though he probably did not foresee the extent of it, offering DSK as IMF managing director was a Sarkozy masterstroke in neutralizing a potential rival on the domestic political scene. Segolene Royal partie deux, mon ami?
2. In his place, American First Deputy Managing Director John Lipsky--formerly of JP Morgan and a securitization cheerleader in his earlier days [1, 2]--takes control. This certainly isn't the outcome most of us wishing for more diversity in IMF leadership want. However, this is mitigated by Lipsky indicating that he will step down at the end of August. Fancy that: a guy most clearly associated with promoting securitization prior to the crisis now has to deal with the fallout from their abuse and misuse.
3. On the bright side, the unlikely return of DSK and the stopgap term of Lipsky will put to test IMF indications of reform (including from DSK himself) to make it reflect the world's changing centre of economic activity. Your truly will certainly hold it to account in choosing its next chief from a developing country instead of the unbroken tradition of having a European head and an American #2. Given the buildup in previous years, I can certainly assure you that developing countries will cause a ruckus if it doesn't happen this time around. All change at the top is long overdue.
   
4. A non-European head would still come too late to limit IMF "mission creep." I have written on why the IMF should not bail out Greece, Ireland and Portugal since the primary causes of their crises were not balance-of-payments difficulties which the IMF was designed to address. Hopefully, an LDC chief would resist calls from rich Western countries to misallocate funds meant for aforementioned BOP crises--especially contributions from LDC members. If the EU wants to bail out its own, fine, but don't use monies set aside for other purposes at the IMF.
   
5. DSK was already becoming antsy about Greece's similarly socialist leaders not living up to their end of the bargain. With this rapport now ended, the IMF's already limited powers of persuasion in keeping Greece in line will probably take another knock. Ironically, Sarkozy's efforts to keep EU bailouts a European affair will likely suffer a blow from his fiercest rival effectively discrediting himself via nasty entanglements. The IMF/EU/ECB troika with the possible exception of the ECB has taken its lumps. but is not terminally damaged to the point of not being able to work alongside each other.
   

Personal factors aside, IMF prescriptions will likely not change under whatever new leadership it will have in a couple of months. It may have eased somewhat on high neoliberal orthodoxy during his time in charge--especially when friends in high places rather than low places got in trouble--but conditionalities are still there that are quite harsh for the rest. Ask Greece. Still, one hopes that an LDC chief can signal a more truly cosmopolitan outlook for the organization in composition while returning to its core mission of handling BOP crises.

As for le grand seducteur, some people just want to party all the time. DSK is a socialist in the way Super Mario is a communist, and his hankering for the good life looks to have terminally ended his future political prospects. But hey, loving the limelight, he can always become an Eliot Spitzer-esque talking head.

UPDATE 1: The NYPD making DSK do the perp walk shows a good amount of confidence by the authorities in their case.

UPDATE 2: Yahoo! News now features three stories on the case. Is this a case of misplaced priorities or something else? You know something is up when the IMF shares top billing with the world's best known if deceased terrorist.

World Bank Lends for Worker Repatriation from Libya

Well this is a somewhat newer form of lending that just shows you the increasing prominence of migration not only in the headlines but in development work in general. Once more, it seems our friends from Bangladesh have felt the brunt of global events. If there is a country that has been terribly unlucky with fate practically from its very inception, it's Bangladesh.

Unfortunately, no one should be surprised that many of our Bangladeshi colleagues find themselves stuck amidst an ongoing conflict in Libya. Unlike, say, the Philippines with its comparatively sizeable apparatus for handling economic migration, the public management of migration flows is less formal in Bangladesh. To help resolve matters, the country has now been granted loans by the World Bank's concessional lending arm the International Development Association (IDA) to fund repatriation from Libya. While nearly half are now safely home, some 36,000 or so remain in Libya:

The World Bank today approved $40 million for the Repatriation and Livelihood Restoration for Migrant Workers Project in support to the Government of Bangladesh for repatriation of its migrant workers escaping the ongoing conflict in Libya. In addition to bringing them back to their home country, the project will provide a one-time cash grant to help returning migrant workers meet immediate needs.

“Migrant laborers have contributed mightily to sustained growth and development in Bangladesh. Their remittances fuel domestic investments throughout the country and boost consumption to alleviate poverty,” said Ellen Goldstein, World Bank Country Director for Bangladesh. “It is fitting that Government would support them in their time of need, and the World Bank is pleased to be able to respond to Government's request for support within just a few weeks’ time.”

Libya has been a host-country for migrant workers from Bangladesh as well as from other countries in South Asia, East Asia, Sub-Saharan Africa, and other countries in the Middle East and North Africa. An estimated 70,000-80,000 Bangladeshis were working in Libya before the crisis of which about 34,000 have since returned due to the security concerns.

The project will finance part of the cost of transport of returnees and provide a one-time $775 cash grant following their return to support their immediate needs while additional donor funds will help returning workers seek available employment opportunities.

“The crisis has created a very serious situation requiring humanitarian support by the international community,” Bernice Van Bronkhorst, Project Team Leader said. “For those who have only recently migrated, this crisis has not only rendered them penniless but heavily indebted. The project is designed to help them get back on their feet. ”

The $74.1 million project is supported by a $40.0 million World Bank Credit in conjunction with a government contribution of $4.6 million and $29.5 million by donors through the International Organization for Migration (IOM), which will implement the project on behalf of the Government of Bangladesh.

The credits from the International Development Association (IDA), the World Bank’s concessionary lending arm carries a maturity of 40 years with a 10-year grace period with a 0.75 percent service fee.

It's a sign of the times, I guess. Development concerns are a-changing, and migration is one of the more prominent items on today's checklist.

Robert Wade on De-Neoliberalizing the World Bank

Here's yet another interesting article from the new LSE house journal Global Policy. It all started in the second issue of this publication when Robert Wade, a famously "heterodox" economist in our development department, envisioned post-crisis options for developing states. In particular, he mentioned possibilities for something the World Bank has long disdained--industrial policy--correcting the belief that markets are self-obviously superior to states in such areas as disseminating information, determining prices, and allocating resources.

Well, the global financial crisis seems to have broken faith in these "neoliberal" beliefs. After all, a characteristically hypocritical North American nation fond of preaching the gospel of deregulation, liberalization, and privatization as the keys to economic heaven for errant developing countries suddenly began an unprecedented regime of reregulation (of financial services providers), deliberalization (of securities trading), and nationalization (of automakers and banks) when faced with its own crisis. Who's got "national champions" now, white man? Your industrial policy looks a lot like ours--but is far more encompassing in scale and scope. The picture to the right is the Storm Thorgerson-designed cover of Mars Volta's De-Loused in the Comatorium. While not my favourite listen, it may be an apt metaphor for what's happening with the excesses of neoliberalism--delousing subprime globalization as the Washington Consensus is left for dead.

It should thus be mentioned that no small amount of gloating has also emerged from those like Robert Wade and Ha-Joon Chang who've long argued for a more active role for states. To make a long story short, Justin Lin--the first non-G7 chief economist at the World Bank--did not disagree as much as you'd expect with Wade in his succeeding article in Global Policy. Rather, Lin had qualifiers on the extent to which industrial policy should be practised and under what circumstances. In turn, Wade has just issued his comment on Lin's reply. While it's true that the World Bank now has less influence over developing countries--again, many receive much more in the form of workers' remittances than official development aid provided by institutions like the Bank--its relaxation of a hardline market approach as represented by Lin's softer position represents a gradual meeting of minds according to Wade:
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Here are a few directions in which some vigorous pushing is needed, whether by the World Bank or others. First, on the supply side, is the distinction between ‘existing comparative advantage’ and ‘future’ or ‘latent’ or ‘dynamic’ comparative advantage. Most of the time Lin wishes to limit ‘interventions’ to helping firms exploit the opportunities offered in the existing comparative advantage – with the qualification that ‘economic development is a dynamic process that requires industrial upgrading’, a dynamic process that may change the existing comparative advantage and in which the government may have an important coordinating role. I wonder how to operationalize the distinction between existing and latent comparative advantage. Lin suggests that government and firms in country X should scrutinize the kinds of products and services produced in comparably endowed countries with per capita incomes roughly double X’s, and look for promising items or processes within this set. Indeed, Japanese, Korean and Taiwanese planners did do a lot of this ‘looking ahead down the river’ kind of exercise. But they often took target countries much more than twice as rich as they were at the time. And today, more than when the capitalist East Asians went through their fast-growth decades, there is more ‘vertical’ differentiation in the production of any one product, creating niches in the production of final products which, as final products, appear to be far beyond the ‘latent’ comparative advantage of country X (see my Governing the Market (Wade, 2004)).

This line of thinking invites serious attention to the rather neglected subject of industrial upgrading and diversification, including to the concept of stages of growth. It is remarkable how ideas about the transition from resource-based industries (for example, textiles and apparel) to heavy and chemical industries, to scale-sensitive assembly-based industries like automobiles and electronics, to Internet-based industries (all with very different appropriate roles of government) have largely disappeared from development economics. Here it is worth going back to the seminal work of the Japanese economist Akamatsu and his flying-geese theory of intra-industry evolution within one national economy and linked flying-geese theory of inter-country evolution in a hierarchical division of labor. Akamatsu published his main work before the Second World War. There is no better place to understand his arguments and see their application to development patterns of the past several decades than Terutomo Ozawa’s important new book, The Rise of Asia: The ‘Flying-Geese’ Theory of Tandem Growth and Regional Agglomeration (2009). Much of Lin’s thinking resonates with that of Akamatsu and Ozawa.

Another big hole in conventional development economics, which Lin and the World Bank could help to give more attention to, is on the demand side – above all, the tendency for wages to increase more slowly than productivity growth, which limits domestic demand and concentrates income and wealth at the top, distorting the economy by the efforts of the wealth holders to find ways to store their wealth (in natural resources, complex financial products, overseas bank accounts, political patronage). The World Bank could give its support to Rooseveltian measures like a legal minimum wage, cash transfers to the poor and guaranteed public sector employment at the minimum wage. The trouble is that its [Country Policy and Institutional Assessment] formula hard-wires in the assumption that a completely free, ‘undistorted’ labor market with virtually no worker protections is the ideal labor market for development. This needs to change.

A third – and for present purposes final – big hole in conventional development economics concerns the strong advantages of mobilizing domestic savings, as distinct from relying on foreign borrowing. For too long economists have presumed that foreign saving will help to raise domestic investment, downplaying its dangers – a presumption indirectly derived from the interests of western financial firms. No one was more adamant – and one eyed – about the need for free capital flows and for developing countries to borrow abroad to supplement domestic savings than Larry Summers, during and after his tenure as chief economist of the World Bank. One of the most eloquent arguments about the need for and methods for boosting domestic savings is set out by the Brazilian economist Luiz Carlos Bresser Pereira, in Globalization and Competition: Why Some Emergent Countries Succeed while Others Fall Behind (2010).
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IMHO, the intellectual terrain has shifted from "Should countries be allowed to use industrial policy?" to "How can industrial policy be gainfully applied?" While I still have some trouble with some of Wade's ideas (and Chang's for that matter), let's say we agree that Larry Summers is...not so great. Still, I'd certainly like to see examples other than Asian tigers being cited. If industrial policy can be made to work, then certainly there are other countries who've applied it to good effect, right?

'Apps for Development,' a World Bank Competition

In case you missed it, submissions have now closed and voting has just begun--hopefully including yours--for the World Bank-sponsored 'Apps for Development' competition. I am sure that electronics-literate readers should be familiar with apps--an abbreviation for applications common to devices such as cell phones, PDAs, and tablets. In this competition, apps must be developmentally relevant through the use of World Bank statistics and deal with at least one of the ten Millennium Development Goals. There is also serious prize money at stake, with a cool $15,000 going to the prizewinner, with a total of $45,000 at stake for various prizes.

Being a true pedant and browsing through the submissions, the competition is actually open to all software applications--such as those running on PCs. In the interest of fairness, perhaps the competition judges should factor in that laptop or desktop machines have more computing power. For instance, iPhones iPod Touches, and iPads do not quite match up to the iBook in hardware horsepower.

At any rate, it's certainly interesting to flip through the submissions. Since my particular interest is migration, for example, there's an interesting app which geographically displays from where workers' remittances come from and go to internationally.

Check them out and vote! My only qualm is that we can't actually download and try out these apps and must rely on the concept and video clips to form our minds.

Does China Lend More to LDCs Than World Bank?

In case you missed it, here's further proof of how far China has come in terms of winning friends and influencing people. Paramount Leader Hu Jintao pretty much came, saw, and conquered (veni, vidi, vici) his obsequious, occasionally backstabbing lodgers renting the PRC's subprime North American real estate whose (very dysfunctional) tenants association is led by--who else?--Barack "China Currency Coalition" Obama. Now hilariously lame get-tough-on-China campaign pledges aside, Obama and the rest of the administration toadies' eagerness to please their betters only further underlines who wears the pants in today's global political economy.

However, the hapless Yanks are not the only recipients of Chinese largesse. China is reported by many news outlets [e.g. 1, 2, 3, 4] to have surpassed that archetypal Washington-based institution the World Bank in loan volume provided to developing countries--with an important caveat I'll mention in a while. Of course, the kind of money China provides is strategic since its biggest lenders are not PRC aid bodies per se but trade finance bodies alike export-import (ExIm). While not particularly caring about its recipients' human rights records or any of that Western BS those folks used to package with freedom 'n' growth shtick, it's perhaps no coincidence Obama doesn't make any demand on that front, either. Beggars can't be choosers, and Washington is just one of the many mendicants jockeying for manna from, er, Beijing:

China has lent more money to other developing countries over the past two years than the World Bank, a stark indication of the scale of Beijing’s economic reach and its drive to secure natural resources. China Development Bank and China Export-Import Bank signed loans of at least $110bn (£70bn) to other developing country governments and companies in 2009 and 2010, according to Financial Times research. The equivalent arms of the World Bank made loan commitments of $100.3bn from mid-2008 to mid-2010, itself a record amount of lending in response to the financial crisis.

Their timing was exemplary in picking up the pieces when the Westerners fled:

The volume of overseas loans by the two banks indicates how Beijing is forging new patterns of China-led globalisation, as part of a broader push to scale back its economic dependency on western export markets.

The financial crisis allowed Beijing to push the commercial interests of its energy companies by offering loans to producer countries at a time when financing was hard to come by. The agreements include large loan-for-oil deals with Russia, Venezuela and Brazil, as well as loans for an Indian company to buy power equipment and for infrastructure projects in Ghana and railways in Argentina.

There has been much comment on this article claiming that China now lends more to LDCs than the World Bank before I came upon it, but there is an important caveat nonetheless which almost all missed by (1) not bothering to read the entire article and/or (2) not really understanding the structure of the Washington-based lender. The comparison is arguably incomplete insofar as the Financial Times writers only tallied loans from two out of three World Bank lending arms--the International Bank for Reconstruction and Development (IBRD) and the lender to the private sector the International Finance Corporation (IFC). They didn't include those made by the World Bank's concessional arm the International Development Association (IDA) that forks money over at obviously concessional (subsidized, well below market) rates. Then again, their argument is that China does the same in providing financial aid but they too ignored that part of the PRC loan portfolio for lack of publicly available data:

The World Bank figures are for the International Bank of Reconstruction and Development, the bank’s main lending arm, and the International Finance Corporation, which lends to the private sector. They do not include the International Development Association, which makes grants and low-interest loans. China also gives financial aid to other developing countries, but provides little detail.

I have two observations before ending. First, those claiming that China now lends more to LDCs than the World Bank cannot do so on the basis of this article since even its authors don't go that far for want of data. Second, it will probably provoke a further outcry from those who continually observe that China itself is still a pretty significant recipient of ODA from international development agencies. You can make the argument that China is a huge place with several noticeably underdeveloped pockets and that help may come more in the form of technical assistance, but it is undeniably jarring alongside the largesse it sets aside meant to win friends and influence people.

Maybe LDCs Aren't Being Inundated w/ Capital (Yet)

The general impression you get from certain developing countries is that easy money policies emanating from reserve currency-issuing ones like the unbelievably profligate United States are driving up their exchange rates and threatening to inflate various bubbles. It may be some surprise that, in 2009 at least, this scenario did not really happen as capital flows to the developing world fell from 2008 according to a just-released World Bank report:

Net global capital flows to developing countries fell 20 percent in 2009 to $598 billion (3.7 percent of gross national income [GNI]), from $744 billion in 2008 (4.5 percent of GNI) and were a little over half the 2007 peak of $1.11 trillion. This according to a new comprehensive dataset launched by the World Bank today on international capital flows titled “Global Development Finance 2011: External Debt of Developing Countries,” which reveals the impact of the financial crisis on 128 developing countries.

Global private flows (debt and equity) declined by 27 percent in 2009 despite a rebound in bond issuance, portfolio equity flows, and (mostly trade-related) short-term debt flows. Foreign direct investment (FDI) inflows across the globe fell 40 percent, to $354 billion - their sharpest drop in 20 years. All the largest recipients of FDI saw net inflow declines in 2009. Net debt flows from private creditors dropped by 70 percent from $182 billion in 2008 to $59 billion the following year, driven by the collapse in medium-term commercial bank lending to public and private borrowers.

Reflecting increased support to developing countries during the crisis, net capital inflows (loans and grants) from official creditors increased by 50 percent to $171 billion in 2009. This was driven by a sharp rise in gross disbursements on new loans extended by the international financial institutions. These rose to $98 billion (from $61 billion in 2008) in calendar year 2009, of which $31 billion came from IBRD and IDA, the highest in the history of these institutions.

It will be interesting to study the implications here when the 2010 figures come around: Did repatriation flows to distressed Western firms temporarily reduce capital flows to the developing world? Or, did the effects of free money policies kick in after a lag--especially once everyone recognized that countries like the US had no intention of shaping up anytime soon?

World Bank's Lin on Post-Crisis Industrial Policy

A few months back I featured Robert Wade's article in Global Policy concerning the prospects of industrial policy post-crisis. Yes, it was a bit of triumphalism about the follies of blind obeisance to American neoliberal diktat circa 1997. However, time moves on. World Bank Chief Economist Justin Yifu Lin has a new response in the same journal to Wade that takes (surprise!) issue with some of the latter's assertions, especially scepticism about the worth of neoclassical economics as well as the role of the market vis-a-vis that of the state. Let's just say Lin is more sanguine on neoclassical economics and the market as an engine of economic growth. Although Lin takes a somewhat softer line towards heterodox economics championed by Wade et al., let's just say this detente has limitations:

I do not share Wade’s severe assessment of neoclassical economics on two points. First, despite the absence of convergence among world economies, the progress made by developing countries in recent decades cannot be underestimated. The fact that the majority of states have remained in the same income category over two decades may be the reflection of general progress (a tide-lifting-all-boats phenomenon) rather than a sign of general stagnation. Although relative incomes among various groups of countries may not have changed much, the absolute levels of incomes have increased steadily in recent decades. This has contributed substantially to the reduction of world poverty (Ravallion and Chen, 2008). Clearly, an open world economy has offered opportunities for many developing countries throughout the world to achieve sustained growth and improve their living standards (Growth Commission, 2008). This is true even in many countries that have not moved up the convergence ladder.

Second, the market is an important resource allocation mechanism at any given level of development. Economic growth occurs when firms are given the incentive system to take advantage of existing opportunities determined by the country’s endowment structure. They can also create potential new business niches by identifying and exploiting the economy’s latent comparative advantage. They spontaneously enter industries and choose technologies consistent with the economy’s comparative advantage only when the price system reflects the relative scarcity of factors in the country’s endowment. Therefore, a competitive market system should be the economy’s fundamental mechanism for resource allocation at each stage of its development. However, economic development is a dynamic process that requires industrial upgrading and corresponding improvements in ‘hard’ (tangible) and ‘soft’ (intangible) infrastructure at each stage. Such upgrading requires coordination and entails large externalities to firms’ transaction costs and returns to capital investment. Thus, in addition to an effective market mechanism, the government should play an active role in facilitating industrial upgrading and infrastructure improvements.

And here is Lin's assessment of what industrial policy can do for development. To no one's real surprise, he does not afford it the commanding heights and instead gives it a more limited role:

A framework for conceptualizing the facilitating role of the government in industrial upgrading and economic diversification could involve a six-step process as follows. (1) Developing country governments can identify the list of tradable goods and services that have been produced for about 20 years in dynamically growing countries with similar endowment structures and a per capita income that is about 100 per cent higher than their own. (2) Among the industries in that list, the government may give priority to those in which some domestic private firms have already entered spontaneously, and try to identify and help remove the obstacles to their development. (3) Some of those industries in the list may be completely new to domestic firms; in such cases, the government could adopt specific measures to attract firms in the higher-income countries identified in the first step to invest in these industries. (4) Developing country governments should pay close attention to private enterprises’ successful self-discoveries of industries that are not included in the list identified in step (1) and provide support to scale up those industries. (5) In developing countries with poor infrastructure and an unfriendly business environment, the government can invest in industrial parks or export processing zones and make the necessary improvements to attract domestic private firms and/or foreign firms that may be willing to invest in the targeted industries. Finally (6) limited incentives may also be provided to domestic pioneer firms or foreign investors that work within the list of industries identified in step (1) in order to compensate for the non-rival, public knowledge created by their investments.

Also, don't miss my previous post on Lin debating with Ha-Joon Chang in the pages of the Development Policy Review. For those really into the topic, there's also a longer World Bank working paper co-authored by Lin on "Growth identification and facilitation : the role of the state in the dynamics of structural change." Happy reading! States and markets...the debate continues.

Ex-IMF Chief Economist: IMF HQ Should Be in PRC

Former IMF Chief Economist Simon Johnson should be familiar to readers of the fine Baseline Scenario blog which he writes together with James Kwak. While visiting the Bloomberg website, I came across a rather intriguing op-ed in which he discusses the Ireland crisis. Aside from the usual European political-economic gyrations to consider, he makes a seemingly off-the-wall suggestion that had me thinking: Given that they are the world's new moneybags compared to the hard-pressed Europeans and subprime-addled Americans, he believes the Chinese are well-placed bail out troubled Eurozone economies. What's more, he says doing so should buy the PRC some breathing room from constant EU and US complaints over unfair trade practices:

In fact, the Irish leadership has every incentive to delay until other countries can be dragged into turmoil. The crisis will become euro-zone wide, at which point all eyes will turn to some combination of the European Central Bank, the German taxpayer, and the IMF. But the ECB can’t pay and the German taxpayer won’t pay. Does the IMF have the resources to tackle Spain, let alone a bigger country like, say Italy or even France? The U.S. could add sufficient funding to the mix -- this is what it means to be a reserve currency -- but the mood in Washington has shifted against bailouts.

As an alternative, Europe could place a call to Beijing to find out if China would like to commit some of its $2.6 trillion in reserves to keep European creditors whole. This would be an enormous opportunity for China to vault to a leading global role. Perhaps it was a good idea to place Min Zhu, a top Bank of China official, in a senior position at the IMF.

If China offered to recapitalize the IMF, become the largest shareholder, and move the organization to Beijing (according to the Articles of Agreement, the IMF’s headquarters should be in the capital of the largest shareholder), wouldn’t that make for an interesting chess game?

Whoa, now you're talking. Simon Johnson is of course correct in pointing out that the IMF Articles of Agreement stipulate that the institution should be headquartered in the country of its largest funder. Remembering that the US was the world's largest creditor back in the day--the postwar period, to be exact--it certainly wouldn't have occurred to those present at Bretton Woods that Generalissimo Chiang Kai-Shek's pipsqueak communist rivals would soon become the world's largest creditors a couple of decades down the line. (Or even China's leaders, of course.) Here is the relevant IMF text:

Article XIII - Offices and Depositories

Section 1. Location of offices

The principal office of the Fund shall be located in the territory of the member having the largest quota, and agencies or branch offices may be established in the territories of other members.

Thinking about it more, doesn't it sound far-fetched to us that Beijing will become the host of IMF headquarters as China becoming the world's largest creditor did in 1944 to those at Bretton Woods? Times are a-changing, so I'm not one to rule out this happening in my lifetime. That said, there are formidable obstacles to this happening:

• Won't the Chinese swapping foreign exchange holdings for SDRs detract from "managing" foreign exchange levels?
• Wouldn't the Chinese be wary of bequeathing the opprobrium heaped on the US for being the hosts for this often-unpalatable lender-of-last-resort?
• Similarly, wouldn't China be wary of losing its self-proclaimed status as a champion of Third World causes and become the very embodiment of "economic imperialism"?
• If China's interest is in showing magnanimity towards fallen minor Eurozone countries (as it has already indicated before), why bother with the American-dominated IMF and just lend unilaterally?
• Despite being flat broke and rather pathetic , would the US readily countenance losing the IMF so easily as another signifier of American decline?
• Perhaps conveniently for certain countries, participation in IMF facilities like the General Agreements to Borrow (GAB) and New Agreements to Borrow (NAB) do not necessarily boost voting shares for emerging large contributors.

The geopolitics are certainly interesting: Will a weary nation relinquish one of the remaining levers it holds on the world economy so readily? Is the new contender willing and able to take up this mantle of leadership? All I can say is that the world economy certainly looks different from where I'm sitting 64 years after the halcyon days of John Maynard Keynes and Harry Dexter White. Bring on Beijing, baby!

Ratko Tales + IMF is America's Stooge, Kosovo Ed

Something that I enjoy at the LSE is attending presentations I know relatively little about. To paraphrase a certain song, I need to know a little bit about a lot of things lest I blog about the same topics over and over again. Variety is the spice of life. At LSE IDEAS, we have just held the well-received launch event of our sister Balkan International Affairs programme featuring Serbian Foreign Affairs Minister Vuk Jeremić and his Bulgarian counterpart Nickolay Evtimov Mladenov. This is a post in two parts:

I. When I last wrote about Serbia in these parts, I was planning my adventure to aid Serbia's EU accession by going on "Ratko Hunt 2010." Strangely enough, I've had no takers despite bounties worth millions of euros for his capture (since you'd probably wind up dead as a doorknob prior to enjoying any fruits of your mercenary work). That is, one of the preconditions for Serbia's process of joining the EU, among other things, is handing over the remaining one of the big three war criminals to the war crimes tribunal in the Hague. With Ratko still at large and rumoured to move around freely in Belgrade, let's just say things are not going swimmingly. Slobodan Milosevic is dead and gone, while Radovan Karazdic has long since been corralled. This, of course, leaves Ratko Mladic somewhere out there:

Serbia is still not co-operating fully with the United Nations war crimes tribunal in the hunt for fugitive former general Ratko Mladic, the chief prosecutor said yesterday, a key condition for eventual EU membership. Serbia’s past inability or unwillingness to find Mladic has long delayed its progress towards the EU, deterring foreign investment and diminishing EU accession funds. A UN war crimes court has indicted Mladic for genocide in the 1995 massacre of 8,000 Muslims in the Bosnian town of Srebrenica and the 1992-1995 siege of Sarajevo.

“While recognising a number of people are really doing an excellent job, we say at the same time there is room for improvement and in a number of areas, more can be done, and in a more professional way,” said Serge Brammertz, the chief UN war crimes prosecutor. In October, EU foreign ministers asked the bloc’s executive commission to consider starting entry talks with Serbia, but warned Belgrade any further progress would depend on its full co-operation with the war crimes tribunal. Mr Brammertz said he would send his latest six-month report on Serbia’s efforts to apprehend Mladic to the UN tomorrow, and the Security Council would discuss it on December 6th.

The bottom line for this story? Serbia's efforts towards joining the EU are lagging behind those of other former Yugoslavian entities:

The Mladic issue is the most prominent factor that has left Serbia lagging behind many other former Yugoslav republics. Slovenia is already an EU member; Croatia is close; and both Macedonia and Montenegro are further along than Belgrade. Even Albania, the region’s most isolated state under communism, is ahead of Belgrade. Only Bosnia and Kosovo, which remain international protectorates, trail Serbia in progress towards the EU.

II. And here's another titbit I picked up that I missed earlier. The matter of Kosovo being recognized as a nation is one of the remaining free-for-alls in terms of acknowledging new states. During the presentation there were some fireworks in store when a representative from Kosovo's consulate in London had a beef about the generally upbeat talk by the Serbian foreign minister. Let's just say they have...unresolved grievances. The UN will probably not recognize Kosovo as a nation after it declared independence in 2008 for as long as China and Russia remain in the P5. After all, they still have major issues with the way Western powers intervened.

As it stands, about a third of UN members recognize Kosovo, while two-thirds don't. Let's just say its membership in international organizations remains, erm, skimpy. Fascinatingly, however, I overlooked (sorry about this) Kosovo formally being made a member of the IMF at midyear 2009. As if we needed more proof that the IMF is an American bootlicker camp, well here you go:

Kosovo said the International Monetary Fund voted to accept it as a member, an important step in the former Serbian province's efforts to secure global recognition as an independent state -- and international aid. Kosovo's bid was actively opposed by Russia and Serbia, Russian and U.S. officials said. Serbia, for instance, wrote to all of the IMF's 185 members, asking them to reject Kosovo's bid. The fledgling Balkan nation of some two million unilaterally declared independence from Serbia in February 2008.

The U.S., France, Germany and the U.K. pressed for Kosovo's IMF membership. But admitting Kosovo has been a contentious issue at the IMF, a body that likes to work by consensus. Kosovo's deputy foreign minister, Vlora Qitaku, said Tuesday that -- as required -- a vote by more than half the IMF's member countries had produced a majority in favor of Kosovo's membership. IMF officials declined to comment Tuesday, because the results hadn't yet been made public.

The issue was pushed ahead partly by the weakness of Eastern Europe in the global crisis, as one economy after the other was forced to call for IMF aid. Pressure grew to bring Kosovo under the IMF umbrella so it could make sure of the same resource. Kosovo is widely expected to ask the IMF for financing.

Because the IMF is an international club, joining also is an important step on an arduous road to acceptance as a member of the international community, say government officials in Kosovo. A spokesman for the government said it expects to join the World Bank in early June, after a similar vote.

Other would-be nations have found the going tough as they sought membership in international bodies. Taiwan was booted out of the IMF in 1980 when China was admitted, and it hasn't applied to return since. Unlike Kosovo, Taiwan isn't recognized by the U.S. and most other major nations as a fully independent state, and an IMF application would be unlikely to succeed.

Unlike the United Nations, the World Trade Organization and some other international groups, the IMF's weighted-majority voting rules allowed Kosovo to join over the objections from Serbia, Russia and other countries that don't recognize Kosovo's independence. So far, 58 of the U.N.'s 192 member states have recognized Kosovo's independence.

Bratislav Grubacic, a veteran political analyst in Belgrade, said Serbia realized it wouldn't be able to block Kosovo's IMF membership and is focusing more on blocking Kosovo from the U.N. Serbia effectively lost Kosovo in 1999, after its troops were driven out of the mainly ethnic Albanian enclave by an extensive bombardment by the U.S.-led North Atlantic Treaty Organization.

Serbian officials couldn't be reached to comment Tuesday evening. A Russian official in Washington said Tuesday that Russia was against Kosovo's IMF admission. Russia has opposed Kosovo's independence bid, saying it breached international laws guaranteeing territorial sovereignty and that it would create a precedent for other breakaway regions. Russia has since recognized the breakaway enclaves of South Ossetia and Abkhazia in neighboring Georgia...

Kosovo's future prospects for joining the European Union, which its government wants to do, are uncertain, as that requires unanimity. Five of the EU's member states -- Greece, Cyprus, Spain, Romania and Slovakia -- don't recognize Kosovo.

Would Kosovo have squeaked into the IMF had voting reform been in progress prior to Kosovo's bid for membership? It's an interesting question. Note that Kosovo was cleared to join the World Bank at roughly the same time with the sponsorship of a certain North American nation.

World Bank Chief Zoellick Clarifies Gold Position

As a follow-up to my previous post, it is gratifying that my doubts about what many thought World Bank President Robert Zoellick said were valid. He certainly isn't advocating a return to the gold standard. The important clue, of course, is that he didn't mention gold right off the bat but as his fifth and final point in a list of five actions to get the world economy going again in a more harmonious manner. Again, he mentions gold in the context of forming a basket of references including many reserve currencies. In effect, the soaring price of gold is a wake-up call to those who should know better:

The soaring price of gold reflects international unease about the strength of large developed economies that must be taken seriously by the Group of 20 leading nations, according to Robert Zoellick, president of the World Bank. Mr Zoellick on Wednesday said the increasing use of gold as a monetary asset was an “elephant in the room” that was being ignored by policymakers in the debate over how to correct global trade and fiscal imbalances. The World Bank head added that the search for an alternative to the weak currencies of much of the developed world underlined the need for a co-ordinated package of growth measures based on free trade and structural reforms.

Mr Zoellick dismissed criticism of his proposal in Monday’s Financial Times for a new international monetary system involving multiple reserve currencies and including a role for gold as a reference point for market expectations of inflation and future currency values. He said critics had misunderstood his proposal as a call for a return to the gold standard – the framework of fixed exchange rates backed by gold which was replaced after the second world war by the Bretton Woods system of fixed but adjustable exchange rates.

Speaking at a Financial Times conference on infrastructure spending, Mr Zoellick said the price of gold, which this week surged past $1,400 a troy ounce, indicated that the world was heading towards a new monetary system in which the US dollar would be only one of a number of reserve currencies with flexible exchange rates. Others would include the euro, the yen, the pound and the renminbi, as China moved towards removing controls on the convertibility of the currency.

“Gold is now being viewed as an alternative monetary asset. This is not the same as a gold standard,” said Mr Zoellick. “Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi, and the renminbi is not free for exchange. “So, in relative terms, gold is appealing to people who ask where should I put my money. It is a hedge against uncertainty.”

Mr Zoellick said the use of gold indicated that the largest economies “need pro-growth policies, structural reforms, open trade and an anti-protectionist agenda”. He said that would build confidence in private sector development.

Again, my conviction is the same: as a Republican, Zoellick is using this opportunity in light of the upcoming G-20 summit to warn the US of its various fiscal and monetary shenanigans further diminishing international stature. Would the price of gold be going through the roof if the US were running conventional policies? Think about it for a moment. Zoellick is merely expressing sentiments others like China have expressed about a messed up system which is dominated by a messed up country run by pansies.

That said, I sure would like to hear Zoellick elaborate at greater length on how to reform the international currency system since the outline he provided basically just points out that people are using gold as another price reference. It's one thing to suggest that gold's price is being used as a reference, but another to incorporate it into a basket of reserve currencies alike the SDR.

World Bank President Bob Zoellick, Gold Fetishist?

What about Bob, indeed. Over the past day or so, the blogosphere and global markets have been alight over World Bank President Robert Zoellick alluding to gold serving as a reference point for international reserve holdings. Do a quick search of "Zoellick gold standard" and see for yourselves. Meanwhile, the rising price of spot gold--now past the $1,400 level--is being attributed to Zoellick's statement triggering a renewed gold rush. Before going any further, some context is necessary. On Sunday, Zoellick penned an op-ed in the Financial Times on how the G-20 must look beyond Bretton Woods II. Note that in Zoellick's usage, BWII isn't really referring to the now-infamous Dooley, Folkerts-Landau and Gerber concept. Instead, he is referring to the post-1971 international monetary system where the dollar-gold standard was superseded by the current system free of such restraints. For the sake of reference, here's what he said in its entirety in the last of his suggestions:

Fifth, the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

Is Zoellick really advocating the return to an international monetary system that involves referencing currencies to gold--a seeming return to a pre-Nixon era? While gold bugs may see this statement as another sign to buy yet more gold, I have my own share of doubts. While it certainly looks striking that the "World Bank president" would advocate something rather drastic, remember that Zoellick is a leftover appointee from the Bush administration who has served in many national posts including US trade representative under Dubya. When it was still very much a force to be reckoned with Zoellick was also aligned with the neoconservative Project for the New American Century. So, let's just say that despite being American, what he says doesn't necessarily jibe with views of the Obama administration.

The backlash against Zoellick is expectedly strong. Call it the revenge of the textbook toters. Among other arguments raised are that gold is too volatile to serve as a reference, that anchoring monetary policy to gold ignores the deflationary effects which set in during the Great Depression, and that the physical stock of gold cannot increase at a rate meeting growth in global trade. Then again, others are not so dismissive and call for a debate on the reintroduction of a gold standard in some form.

Me? I am honestly puzzled by Zoellick's motives in bringing up this matter. First, he's at the nominal development institution of the Bretton Woods twins (the World Bank) not the monetary institution that has more input on such matters (the IMF). Second, nobody's particularly keen on the idea, so it's a moot point. Perhaps the neocon in him is emerging to try and make the Obama administration look bad given his relatively esteemed international post. Hey, if Sarah Palin can play Whack-O-Bama, why not Bob? The WSJ noticed this odd monetary couple, too.

At any rate, Reuters offers some thoughts on the prospect of world markets warming up to a new gold standard:
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HOW MIGHT A NEW GOLD STANDARD WORK?

Zoellick's comments were vague, but analysts say he may be pushing for a system in which the World Bank's own currency--Special Drawing Rights or SDRs [that it also uses but the IMF issues, actually]--is changed to reflect the value of the dollar, euro, pound, yen and the yuan and somehow incorporate gold.

The suggestion does not set out, for example, how such a standard might work when monetary authorities need to make extraordinary provisions such as quantitative easing or sterilised currency intervention. It also does not make clear how it would prevent monetary authorities from trading around or outside of any bands that might be set.

IS IT A REALISTIC PROPOSAL?

The initial response, given the size of the gold market alone, is no. Gold is a precious metal by virtue of its limited supply, and annual gold supply could not keep pace with any increase in money supply, especially if central banks make use of quantitative easing to flush their economies with cash.

"Unlike the World Bank, we do not believe that a form of the gold standard will return. Very simply, there is not enough gold supply in the world for the metal to perform in this role," says UBS precious metals strategist Edel Tully. "As Paul Donavon, from UBS Global Economics points out, any reserve currency needs a supply that can grow as rapidly as global trade. Gold supply falls significantly short of this basic requirement."

WOULD THERE BE INTERNATIONAL SUPPORT FOR IT?

Zoellick's suggestion that gold be used as an international reference point of market expectations for price pressures and future currency values comes in the middle of a virtual international currency war. The U.S. dollar has fallen broadly this year, having lost nearly 13 percent against a basket of major currencies in the past five months. That has triggered an outcry from many key emerging economies, which have seen the competitiveness of their exports dwindle as well as a pick-up in so-called "hot money" inflows from speculative investors.

The United States continues to exert pressure on China to allow its yuan currency to appreciate and wipe out some of the competitive edge of the world's biggest exporter, and members of the G20 have rejected placing limits on currency and trade surpluses as a means of rebalancing the global economy.

With a distinct lack of accord over how to correct the surpluses of the emerging world and the deficits of the developed one, the chances of a deal on adopting a gold standard, in any form, appear limited. "It is conceivable for greater cooperation in the currency region, but gold may not necessarily be at the heart of any realignment of the currency system," says Daragh Maher, deputy head of global foreign exchange research at Credit Agricole CIB. "More cooperation, such as a (U.S. Treasury Secretary Timothy) Geithner-like approach, but not specific target levels (for current account imbalances) but something that would involve not tolerating imbalances domestically may be something to be considered," he says. With the Federal Reserve set to pump over half a trillion dollars into the U.S. economy, the rise in money supply and subsequent rise in inflation would make it difficult to hold enough gold.

Hans Redeker, global head of foreign exchange strategy at BNP Paribas, says the supply of money would depend on the amount of gold one holds. So an increase in money supply would have nothing to do with economic circumstances. "It's a step in the right direction, but it is not going to fly. People are desperately seeking ways to stem the wave of liquidity (from U.S. monetary easing), but bringing back the gold standard is not realistic," he says. Redeker adds that throwing gold into the global currency mix would not help stem excess liquidity by the United States, which is fuelling inflation especially in China and emerging Asia.
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If Zoellick's objective was making Obama look bad in pointing out the increasing folly of using the dollar as a global reserve currency given its issuer's nonchalance at debasing it, then consider Bob's job done. That is, even if the suggestion has few real policy implications with regard to incorporating gold in a basket of currencies. ImPalin' [sic?] US monetary policy sure is fun when your erstwhile political opponents are at the controls. The SGDR--who'd have thunk it?

World Bank: US Started World Currency War

Well, in so many words. As you know, I needn't be convinced who the aggressors are in "international currency war" [1, 2, 3] as the American game plan of further bulking up its central bank's balance sheet with junk assets purchased through debased currency are well-known. What I didn't expect, however, is that World Bank research would come to the same conclusion:

Inflows of capital are posing a growing risk to East Asian macro-economic stability, according to the World Bank’s half-yearly review of regional trends. The report comes amid concern in Asia that a likely fresh round of US Federal Reserve quantitative easing, dubbed “QE2”, will unleash a destablising wash of funds into the region.

Capital flows driven by easy monetary policies, low yields in advanced nations and confidence in East Asian prospects were helping to drive up asset valuations in some countries, “precipitating fears of a new bubble”, the World Bank said in its East Asia and Pacific Economic Update.

The report highlighted a rapid increase in equity prices as sparking memories of the market turmoil caused by Asia’s financial crisis in the late 1990s. “The authorities in East Asia need to take adequate precautions to ensure that they do not repeat the same mistake twice in slightly over a decade,” the report said.

Vikram Nehru, World Bank chief economist for East Asia and the Pacific, said the most immediate policy option for countries in the region would be to push forward with “unwinding” monetary easing policies adopted during the global downturn. “If these flows were to continue and to pose a threat, as we expect they probably will, then a…further tightening of the monetary stance will probably be appropriate,” Mr Nehru said.

So China has indeed tightened today, presciently enough. However, there is still reason to be wary that Asian countries may be cannon fodder for Yankee helicopter pilots dropping dollars like there's no tomorrow (which, as far as America goes, is a pretty accurate assessment IMHO). The report quoted above is from the East Asia and Pacific Update released just today. Here is the key part on the helicopter dropping leaving countries in the region vulnerable from dollarized aerial assaults. From p. 5:

The return of large capital inflows to the region, combined with rising inflationary pressures and climbing asset prices, presents an emerging policy challenge and a growing risk to macroeconomic stability. The large increase in inflows, driven by abundant global liquidity and low yields in advanced countries [I wonder who that may be], and reflective of foreign investor's confidence in East Asia’s growth prospects, has been mainly responsible for a substantial appreciation of exchange rates, despite sustained exchange market interventions by central banks. The surge in inflows, combined with ample domestic liquidity and rising confidence, has boosted equity and real estate prices in some countries. Most monetary authorities have refrained thus far from introducing new capital controls although some have liberalized rules for resident investment abroad. But should inflows remain strong, especially against a background of weak global growth, the authorities will be faced with the challenge of balancing the need for robust capital inflows (especially foreign direct investment) with ensuring competitiveness, financial sector stability, and low inflation.

So the World Bank is still wary about capital controls, but does mention that it's a path countries may take in trying to ward off dollar emissions. Best of luck, but the real key IMHO is for the rest of us to get together and put America in its place. Meanwhile, watch the skies. When will we finally get fed up with such abusive Yankee behaviour that involves externalizing homegrown woes?

3 Greek Riot Fatalities; Indonesia in May 98? 1500

It is a sad fact of life that we are often disconnected to those suffering calamities by increasing removes based on distance and dissimilarity from ourselves. Adam Smith profoundly stated this case in the Theory of Moral Sentiments given the hypothetical situation of China in its entirety being consumed by an earthquake (and a European caring little):

Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connection with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general. And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befall himself would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.

In this manner we can begin to understand some of the mass hysteria now ongoing with Greece. It seems every news article believes it necessary to begin with a reference to three fatalities that have occurred there caused by rioters. Being someone with a much longer memory, I simply wonder why the whitebread commentariat finds it so exceptional that something of this sort could happen in a tense environment.

Moreover, it pales in comparison to events that struck Indonesia back in May of 1998 when it too had financial troubles that required calling in the IMF. A few days ago, I made a somewhat lengthy post on how Malaysia has gone to great lengths to forestall a rehash of the race riots of 1971 via the implementation of its bumiputra or affirmative action policies. Whereas the global business class simply thinks of these policies as a form of backdoor protectionism, let us recall the outbreak of race riots in neighbouring Indonesia circa May 1998. Fuelled by massive discontent against strict IMF strictures, many rioters turned violent against the economically dominant ethnic Chinese, resulting in an estimated 1,500 deaths. Although bumiputra isn't something the neoliberal crowd would welcome, think of what could have likewise occurred had such policies not been in place as Malaysia combated financial crisis. An even stronger viewpoint would suggest that the Indonesian leadership of the time could have used ethnic hatreds to blunt anti-government sentiment.

Surprisingly, there is only limited research work into the May 1998 race riots in Indonesia. Still, some Indonesian researchers have used geographic information software (GIS) to study these incidents and come up with the following:

-> The highest concentration of damaged buildings overlaps with villages that have a dominant Buddhist (i.e., ethnic Chinese) population.
-> The damage to buildings was also concentrated in villages with dominant commercial activity [read: looting of shops owned by ethnic Chinese].
-> From the spatiotemporal aspect of the riots, a certain pattern emerges that shows the initial points of violence distributed in a wide area (average interpoint distances of 6.5 km). The start times of the riots at those initial points are relatively similar. Therefore, it can be concluded that the riots began in distributed points around Jakarta simultaneously.

From these results, it is suggested that there is a connection between the riot and ethnicity, especially toward ethnic Chinese and economic issues. There appeared to be a greater degree of destruction in those commercial areas with Businesses operated by ethnic Chinese residents. The implication of this is that the riot was ethnically motivated due to negative sentiment of the indigenous people to the relatively more prosperous ethnic Chinese.

In addition, the spatially dispersed distribution but spontaneous initial occurrences of the riot indicates an unnatural event. This implies that the riot might have been caused and designed intentionally. Typically, the spread of a spontaneous riot is like the ripples in a pond spreading out from the point of disturbance. In the May 1998 riot, however, there were several disturbances at the same time in several areas, from which a degree of intention is extrapolated.

While the events in Greece are indeed tragic, they measurably pale in comparison to those which occurred in Indonesia. The reasons which can be identified for comparable skittishness this time around is not really due to the magnitude of the violence. Rather, it's the prospect of further tumult in the world's foremost economic bloc and spillover effects into other economies given trends of global economic integration.

And then, of course, we have the Adam Smith-style arguments which are certainly worthy of a comment. These riots are occurring in Greece--a wellspring of European civilization that is not so far away as to be interesting enough. That many commentators are Westerners besides whose governments are incurring masses of debt also adds to the feeling of "gee, that could be us" as a British tabloid not so indiscreetly put it. In other words, it's not just a Malay-versus-Chinese melee in a faraway land but white-on-white violence inside the European Union.

Make no mistake: Greece is the "little finger" that keeps Westerners awake at night. OK, maybe Europeans in particular as Americans are, on the balance, famously incurious about the rest of the world and geographically illiterate besides. Hopefully, however, we are seeing the last few veneers of respectability of American-style debt accumulation being peeled away. In the meantime, it's better to keep matters in perspective.

UPDATE: Still we await the iconic IMF-related image in Greece alike the Camdessus-Suharto picture that preceded Indonesia's race riots and Suharto's eventual ouster.