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At Last: Buffett Validates Abe’s Legacy

Published by Anonymous (not verified) on Sun, 06/09/2020 - 12:52pm in

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articles, finance

Published in Money Week 3/9/2020

As Japanese prime minister Shinzo Abe leaves office, his term cut short by illness, his policies have received an unexpected endorsement. Warren Buffett, the most successful investor in history, has just disclosed stakes in all five of Japan’s major trading houses.

The total amount invested, $6 billion, is slightly more than he put into gold-miner Barrick, also a recent surprise move for the Sage of Omaha.

Buffett is no stranger to Japan. Indirectly he owns the unlisted Tungaloy, which is a subsidiary of Iscar, an Israeli tool-maker. Veterans of the Japanese stock market will remember Tungaloy as Toshiba Tungaloy, Japan’s premier manufacturer of carbide cutting tools. Founded in 1929, the company is one year older than Warren Buffett. Iscar, now wholly owned by Buffett’s Berkshire Hathaway, bought Tungaloy in 2008.

In November 2011, Buffett made a highly publicized visit to Tungaloy’s Fukushima factory, which had been badly damaged by the devastating earthquake and tsunami. At a press conference, he had sympathetic and encouraging words for the Japanese people and noted the quality of Tungaloy’s operations.

Buffett at Fukushima in 2011 Buffett at Fukushima in 2011

One thing he did not do, however, was make any investments in Japanese stocks. Unsurprisingly, in fact. At the time, corporate Japan had a poor record of sustained profitability, as the economy had experienced two “lost decades” of deflationary stagnation after the bursting of the bubble economy.

Buffett is nicknamed “Snowball” – also the title of a fascinating biography of the man – because he believes in the importance of compounding, one of the foundational concepts of value investing. Just as a small snowball can grow larger and larger as it rolls down a hill, so constant good returns can accrete into a huge sum over time, if you buy at the right price.

As of 2011, there were no large companies with track records solid enough and stock prices cheap enough to match Buffett’s criteria. Nonetheless, he continued to follow Japanese companies closely.

In this 2014 photo of his office, a Japanese company handbook is clearly visible in the centre of his desk. Buffett is famous for studying companies for a lengthy period before he makes an investment –  over 50 years, in the case of IBM.  In the case of the Japanese trading houses, several years sufficed, it seems.

BuffettJapanHandbook_LI_Moment (3)BuffettJapanHandbook_LI_Moment (3)

In his statement, Buffett was unusually effusive, declaring himself “delighted to have Berkshire Hathaway participate in Japan’s future,” and hinted at exploring co-investment opportunities and increasing his stakes in the companies later. He also made it clear that this was his personal call, not a decision by one of his portfolio managers.

Outgoing Prime Minister Shinzo Abe must have been happy to hear the news.  Back in September 2013, he rang the bell for the start of trading at the New York Stock Exchange and exhorted investors to “buy my Abenomics,” referring to the package of reflationary measures that he had introduced at the start of that year.

It was a bold calculated bet, establishing that the performance of the Japanese stock market would be a crucial measure of Abe’s success. No previous Japanese leader had elevated the stock market in such terms. Indeed, politicians in most countries are leery of commenting on stock markets because their gyrations are so unpredictable.

In normal circumstances such caution is sensible. But when the Abenomics bull market started in November 2012, economic conditions in Japan were anything but normal. After the two lost decades, Japan’s nominal GDP was no higher than it had been twenty years previously and the Topix Index of stock prices was languishing at roughly the same level as in 1983.  As far as international investors were concerned, Japan had dropped off the radar screen.

Abe at the NYSE Abe at the NYSE

Put simply, Abe’s project of resurrecting Japan as a confident, independent geopolitical player would never succeed without economic revival – and that could not happen without a decisive end to the long drawn-out bear market in stocks.

So now that the Abe era has come to an end, how does his track record stack up? Between December 2012 and September 2020,  Topix  produced an annualized total return (including dividends) of 8.6% in dollar terms. That is a far cry from  the 14.7% generated by America’s S&P Index, which has been in one of the longest and strongest bull markets in history. However, if we compare Japan’s performance with the 5.9% generated by the rest of the world – as measured by the MSCI World ex USA Index –  it looks highly creditable.

Furthermore, the rise in Japan’s stock market has been driven by improved corporate fundamentals, not any inflation of valuations. From 1954 to 2012, Japanese profit margins moved in a 1-4% range, which is exceptionally low by international standards, but as of 2019, margins had soared to 6%. The biggest improvement was in not in the export sector, but amongst the overwhelmingly domestic non-manufacturers, as sectors like construction stopped taking on low-margin work.

The valuations speak for themselves. Until Covid-19 burst upon the scene, Topix’s price-to-earnings ratio was at fifty year lows. The current price-to-book-value ratio of 1.17% tells a similar story. And Japanese book value is mainly backed by tangible assets, including a vast stockpile of cash, rather than the “goodwill” from M&A activity and other intangibles that make up 70% of US book value.

Likewise, for the first time in living memory, Japanese stocks are offering a solid real dividend yield of 2.4%. Pre-Covid, this was enhanced by share buybacks amounting to 1-2% of market capitalization. Japanese pay-out ratios are still low by European, let alone American standards, so more progress is likely if and when corporate confidence recovers from the Covid shock.

Abe was not directly responsible for all these changes in corporate behaviour, but his espousal of governance reforms changed the weather in terms of the relationship between company managements and investors. Japan’s stewardship code and governance code are not compulsory, but peer pressure is a powerful force.

Today nearly all listed companies have Investor Relations departments and most are willing to answer in-depth questions about company operations – which was far from the case in the early years of this century. In a poacher-turned-gamekeeper move, some companies have recruited ex-investment bank personnel to staff their IR departments. A few are foreigners, which, again, would have been unthinkable in former times.

Abe also converted the Government Pension Investment Fund from a sleepy backwater whose main function was hoovering up Japanese government bonds into a sophisticated multi-strategy  asset manager. The G.P.I.F., usually reckoned the world’s largest pension fund, is now a trail-blazer for governance reform and the adoption of ESG principles in Japan and a role model for other domestic pension funds.

Abe’s record is by no means flawless. Two unnecessary hikes in the consumption tax, the last enacted just as the Covid virus was emerging in China, crushed the economy’s reflationary momentum. Inflationary expectations – as measured by 5-year inflation swaps – have round-tripped from sub-zero to 1.4% and back again. All the monetary policy innovations of Bank of Japan Governor Haruhiko Kuroda were for naught without expansionary fiscal policy working in tandem.

Overall, though, Abe leaves Japan’s investment scene in far better shape than he found it. If his successor continues in the same vein – hopefully adding fiscal policy to the mix –  investors should be well pleased, Warren Buffett included.

Star Casino To Roll Out Financial Education Program In NSW Schools

Published by Anonymous (not verified) on Wed, 19/08/2020 - 8:17am in

Star Casino

NSW Premier Gladys “Baccarat” Berejiklian has contracted the Star Casino to develop and deploy a financial education program for NSW schools. The move comes after reports surfaced of the Star Casino allowing underage people in to gamble.

“It’s a no-brainer for this government,” stated Gladys after losing the NSW Health budget on a face card double down. “The Star has proven how effective they are at educating our young Australians.”

It’s believed that the recent spate of under-age patrons at the state’s iconic gambling institution lead the government to green-light the Star as a preferred provider.

In a statement issued by the casino, they mentioned that young people were an “important target market” of theirs and they were keen to help shape the financial decisions of tomorrow’s gambler.

Last month the NSW Government announced a fine for the venue after they breached covid restrictions. It’s believed that Gladys personally visited the Pyrmont location to retrieve the sum, which she promptly “let ride” on roulette.

GK Kidd

@GKTweetsHard

You can follow The (un)Australian on twitter @TheUnOz or like us on https://www.facebook.com/theunoz.

We’re also on Patreon: https://www.patreon.com/theunoz

Contextualising the assault on universities

Published by Anonymous (not verified) on Wed, 05/08/2020 - 9:51pm in

At the turn of the millennium, the UK was an unambiguous ‘world-leader’ in two principle sectors, both of which had been closely associated with the promise of the ‘knowledge economy’ and ‘post-industrial society’, on which so many policy hopes had hung since the deindustrialisation of the 1970s and early 1980s. Both were dedicated to esoteric language processing and translation, overseen by the expert ‘symbolic analysts’ who scholars such as Robert Reich and Saskia Sassen declared would be the driving forces of the new economy. The Blair government celebrated these sectors with gusto, encouraging their expansion, and looking to them as contributors to macroeconomic growth.

Within a decade, one of these sectors had become dependent on the state to the tune of almost a trillion pounds (at peak), and triggered such a deep recession that the national debt doubled as a proportion of GDP, and wages experienced their longest period of stagnation since the industrial revolution. But within another decade, the government and much of the press were engaged in a sustained cultural assault on the other of these two sectors, painting it as divisive, a threat to liberty and offering ‘poor value’ to its customers. The sectors are, of course, banking and higher education, and it’s important to understand how these respective crises are entangled.

But first of all, take stock of how extraordinary the current cultural campaign against higher education is. It has become clear that The Times in particular will now grant the maximum profile possible to any opinion or news item that casts universities as censorious, ‘low value’, ‘biased’ and – the watch-word of this agenda – woke. The prominent coverage this week of a methodologically abysmal Policy Exchange report, claiming academics (and not just visiting speakers or student societies) are censored and dismissed for their political opinions, was only the latest in a long vendetta against a sector that is simultaneously awaiting a financial hurricane, caused by the pandemic.

The idea that universities are opposed to ‘free speech’ is now a common sense in the pages of the right-wing press and, latterly, the Johnson government. I explored the reasons for this line of attack in this Guardian essay, including the fear that younger people – half of whom have attended university – hold values and political preferences which are at odds with those of newspaper readers and the Conservative Party, including on issues such as Brexit.

The economic charge that certain degrees are ‘low value’ (in the sense that graduates do not earn enough to pay off their student debt, which now incurs a market rate of interest) developed in parallel to this cultural front, but has now joined up with it thanks to the exceptional circumstances of the pandemic. Gavin Williamson, the Education Secretary, recently announced that financial rescue packages would be on-hand for universities struggling with the fall in student numbers over the next year or so, but that it would come with conditions surrounding ‘free speech’ and the closure of certain degrees – to be decided not by one of the fiendishly complex, but nevertheless transparent, audit instruments (REF, TEF and OfS) created over recent decades, but by some mysterious new Higher Education Restructuring Regime Board, “composed of external experts”. Meanwhile, Michelle Donelan, the Universities Minister, has accused universities of “taking advantage of” students with “dumbed down” courses, and signaled that the government now wants to see fewer people go to university.

Another hint of the government’s plans emerged when Boris Johnson gave an interview to the Sunday Telegraph in July, in which he praised the recent Australian policy of raising the price of humanities degrees, as a way of deterring students from taking them. The notional justification for this is that these degrees are ‘low value’ in the sense that they don’t pay a graduate premium (though neither does nursing), and should be used to subsidise allegedly ‘high value’ degrees in STEM subjects. The policy therefore addresses the ‘low value’ of humanities degrees by making them even worse value, while papering over the inconvenient fact these degrees are already being used by universities to cross-subsidise STEM teaching.

As the economic justifications for policy reforms rapidly disintegrate, the government is left with little more than the cultural prejudices against certain scholarly and critical traditions – prejudices which are stoked on a daily basis with by newspapers attacks on ‘wokeness’, and deepened by the more concerning conspiracy theories regarding inter-sectionality (advanced by Douglas Murray) and critical theory (a longstanding, if ill-understood, scapegoat of the far-right). The current government’s inability to forge a coherent analysis of the place of universities in the economy and society is the fall-out of a decade of policy reforms, which repeatedly claim to be driving efficiency and student satisfaction, only to discover that they cost the tax-payer more money and lead to the ‘consumers’ of higher education being the victims of ‘market forces’.

 

Re-valuing and de-valuing knowledge

To understand this mess, we therefore need to return to the crisis triggered by that other ‘world-leading’ sector, with its disastrous aftermath that was deepened and prolonged by the dogma of George Osborne. So much of the current hysteria that surrounds higher education today centres on undergraduates and tuition (although Policy Exchange are clearly intent on opening up a new front in the domain of research and academic appointments), and it is no coincidence that it was these issues that provoked many of the most furious political clashes of the Coalition government of 2010-15, helping to forge the youth wing of Corbynism and trash the reputation of Liberal Democrats.

‘Top-up fees’ for university tuition were introduced by the Blair government in 1998, with the justification that many of the economic benefits of a degree return to its holder. They were tripled in 2006 to around £3,000 a year. The announcement that mobilised mass protests in 2010 was of a further tripling to £9,000 a year. The withdrawal of government support for tuition only saved the government just over £3bn a year, a tiny sum given the distress to students and the upheaval unleashed, but justified on the basis that the government deficit (which approached 10% of GDP at the time the policy was announced) had become unsustainable in the aftermath of the banking crisis, though this was later re-framed as the consequence of Labour spending prior to the banking crisis.

That period of 2009-12 was therefore the crucible for a new common sense, barely hinted at by the policy of ‘top-up’ fees, in which the value of university tuition is reflected in the graduate labour market. That saving of £3bn a year was the wedge with which to unleash a whole neoliberal orthodoxy, in which education is an investment in human capital,  whose returns are private and calculable. From here it was almost inevitable that a ‘market regulator’ (the Office for Students) would be created, new government audits of graduate employment would be established (the TEF) and economists (led by the IFS) would start to drill down into data on whether individual degrees were ‘worth’ their ‘price’. The Augar Review of May 2019 took as read something that a decade earlier would have been viewed as philistinism: that a university degree is only worth what its holders go on to earn.

Yet not only did the financial crisis facilitate a new common sense of the value of knowledge, it also created the material conditions in which knowledge was de-valued economically. As Keir Milburn and others have highlighted, the labour market impact of the ‘great recession’ that followed the banking crisis fell most heavily on those in early adulthood, at the same time as the cost of housing continued to rise, aided by the expansionary monetary policies that had been introduced to try and offset Osborne’s deflationary fiscal ones. Just at the historical moment when the ‘value’ of, say, a degree in English literature was being publicly re-framed in monetary terms, so the labour market value of that ‘asset’ was falling. The fact that policy-makers, politicians, economists and journalists now routinely use the term ‘low value degrees’ (an insult to teachers and students) is a simple offshoot of this pincer movement of Chicago School ideology and macroeconomic stagnation.

 

The invention of ‘woke’

Judged in both economic and educational terms, the reforms of the past decade look like a disaster, and policy-makers are now scrabbling around trying to deal with their consequences. As ever, market competition and consumer information (which combine in the form of league tables) are viewed as the tonic for everything, but universities and students are then blamed for their outcomes. See, for example, how lecturers and students are perennially incentivised to work harder and deliver better ‘outcomes’, but then accused of ‘grade inflation’ when this transpires. Without any apparent irony, one of the charges that the Education Secretary leveled against universities in July is that they spend too much time focusing on “administration”, though he made no mention of the fact that the last REF cost a quarter of a billion pounds to administer.

The more one looks inside the workings of universities, the more one sees evidence of perverse incentives and failed reforms that originate with central government. This is where the notion of ‘wokeness’ comes in: a catch-all pejorative term, that condemns an entire sector, while refusing all knowledge of what’s actually taking place. Central to this bogey-ethos is the place of some very marginal traditions of cultural studies, critical theory, post-colonial studies and literary theory, that (despite having zero or scant influence on the vast majority of disciplines) have now become a preoccupation for certain corners of the Right, especially in the pages of The Telegraph and The Spectator, and in online outlets such as Unherd and Spiked. Echoing the antisemitic theories regarding ‘cultural Marxism’, this conservative alliance is rapidly painting universities as ‘enemies within’ who sow ideological mischief, an agenda that suits Johnson’s new Brexit-based electoral strategy of collecting votes from over-50s and non-graduates.

As Asad Haider has helpfully laid out in the US context, the underlying reading of the history of ideas is absurd. But it is far from harmless. The charges being levelled against niche humanities subjects and social sciences (many of which were struggling in the context of the REF anyway) are being ratcheted up: not only ‘low value’ and exploitative of ‘consumers’, but carrying out a kind of brain-washing that is responsible for all the discord in an otherwise harmonious society. Just as Whitehall becomes referred to as ‘the blob’, an entire sector becomes obscured by a single piece of journalese. It’s a refusal to look at what’s actually taking place, which much of the time is a prosaic story of student stress, overwork, audit, managerial struggles and the normalisation of precarity of teaching contracts. With a further irony, the Johnson administration has taken to referring to various mediocre things as ‘world-leading’, while seeking to trash one sector that could claim this obnoxious status with some validity.

If the humanities and social sciences do have any particular privileged place in these political conflicts, beyond the paranoid fantasies of certain journalists and ideologues, it is that these are the disciplines that potentially see the current crisis most clearly for what it is: a crisis in valuation, which economics has so far been powerless to resolve, and politics will be unable to either, short of Orbanist efforts to stipulate what should and shouldn’t be taught. Academia has longstanding ways of valuing knowledge, which more or less work, albeit imperfectly. Peer review, marking, funding competitions and job talks can go horribly wrong, and are fraught with injustices, but they remain commonly understood ways of distinguishing merit. If you seek to trump those conventions with market mechanism, don’t be surprised if the outcome is a kind of chaos, in which nobody can agree on value any longer.

The critics of ‘wokeness’ will be interested to know that this was exactly what Jean-Francois Lyotard was warning against in his 1979 Postmodern Condition: “Knowledge is and will be produced in order to be sold, it is and will be consumed in order to be valorised in a new production: in both cases, the goal is exchange.” Markets and economics can’t offer a resolution to an epistemological crisis that they themselves caused. Gavin Williamson’s Higher Education Restructuring Regime Board may believe it can, purely on the basis of some murky presuppositions about which degrees ‘deserve’ to exist and which one’s don’t, as may Policy Exchange’s proposed Director of Academic Freedom. But once the bounds of ‘acceptable’ teaching and research are being set by the state, it’s hard to see that any argument has been won or any freedom is being upheld.

If the problem that these critics have is that of ‘relativism’, then maybe they’re onto something. But it’s not the epistemic ‘relativism’ of Derrida or Foucault that they ought to be focusing on, or the moral ‘relativism’ of a historical mentality that highlights demonstrable facts regarding the violence of empire. If the rug has been pulled out from under our capacity for judgement, look to the financial sector – the same sector that discovered that the value of a derivative was merely a construct of collective beliefs and whichever letters are awarded by a credit-rating agency. Just imagine a world in which newspapers waged a permanent war against the abuses and exploitation enacted by Britain’s other ‘world-leading’ sector, in which Ministers complained that it had grown too big, and various new boards and directors were invented to ensure that it used its freedom correctly.

The post Contextualising the assault on universities appeared first on Political Economy Research Centre.

The World Won’t Turn Japanese for Long: Inflation Is Coming

Published by Anonymous (not verified) on Tue, 30/06/2020 - 8:25pm in

Covid-19 has completed the job, already well underway in recent years, of turning the world Japanese. Almost everywhere, economies are shrinking and long-term interest rates sinking to previously unimaginable levels.

Ironically, Japan – once the poster child for deflationary stagnation – is in a good place, relatively speaking.  The IMF’s forecast of -5.2% GDP growth for Japan in 2020 looks ugly until you compare it with  -7.5% for the Eurozone, -6.5% for the UK and -5.9% for the US.

Likewise, Japan’s ten year bond yields may be a smidgeon above zero, but that’s a better return than you get these days from German, French, Danish and Swiss bonds, all of which sport deeply negative yields.

Bondscatchup

At first sight, the above seems a perfect illustration of the accelerationist view of the pandemic, as recently voiced by Jerome Powell, Chairman of the Federal Reserve Bank in recent testimony before Congress. “Existing trends have sped up a lot,” he noted, citing the surge in online shopping and tele-working.

It is a comforting hypothesis – the future has arrived a little quicker than expected, but the scenery is familiar. And in the short term at least, it has the merit of being observably true.

The giants of the internet haveindeed  gone from strength to strength; people are spending even more time on social media; Zoom is ubiquitous; restaurants and cinemas may be dying, but streaming and delivery meals companies are going gangbusters, etc. etc.

Yet shocks of historical magnitude do not tamely confirm a pre-existing consensus. They shatter it and create new realities. In the world of investment, that means new winners and losers.

Such was the case with the Japanese Century confidently predicted by highly-esteemed academics and think-tankers in the late 1980s, but cancelled by the collapse of the Tokyo stock market in the early 1990s and the ensuing “lost decades” of  stagnation. The winning investment thesis of Japan’s 1980s – “buy owners of idle real estate” – became a recipe for financial disaster in the 1990s.

The Global Financial Crisis of 2008 had similarly momentous consequences, not least discrediting globalization and technocratic rule and paving the way for the rise of populism. Across the developed world, nominal GDP growth fell to the lowest level in many decades, while the financial system was flooded by extraordinary amounts of liquidity created by the central banks.  The winners of the previous cycle – commodities, auto companies, banks, and cyclicals – plummeted and dominant internet companies became the only game in town.

None of this was easy to predict during the crisis or even in its aftermath; only in hindsight does the causality of events seems clear and inevitable. A global crisis would not be worthy of the name if it did not deliver unexpected outcomes and, ultimately, new configurations in financial markets.

The crucial point is not necessarily the trigger event itself, whether it be a financial meltdown or a pandemic, but the new beliefs it produces in policy-makers, investors and voters.

Some of these beliefs may turn out to be deeply misguided, such as the widespread view, from 2009 onwards, that the world was facing a government debt crisis, with Japan first in the firing line, and that fiscal austerity was therefore a priority. Nonetheless, that presumption proved hugely influential in forming the world we now live in. The fact it was wrong doesn’t change that.

Certain ideas can prove powerful enough to create intellectual regimes that last for many decades – such as Keynesianism, monetarism, Marxism, pacificism, environmentalism  – until they are finally tested to breaking point. At the beginning, they are minority obsessions which seem extreme and even absurd. Only when the previous regime has been discredited by a crisis do they have the space to proliferate. Then, if the analogy may be admitted, like an infectious disease they travel rapidly from host to host, with key institutions and individuals acting as vectors and “super spreaders.”

Covid-19 is on the brink of generating such an intellectual pandemic. Whether MMT  (Modern Monetary Theory)  is explicitly endorsed by political leaders is a second order question. By their actions, they have already legitimized the arguments of the MMT-ers, as recently acknowledged by President of the Dallas Fed Robert Kaplan.

The guiding principle of MMT holds that money is created by governments and they can create as much as they want, with inflation being the only constraint. This is exactly what has been tested in recent months. In order to offset the devastating economic effect of mandated lockdowns, governments have launched financial support programmes of eye-popping scale aimed at keeping companies with collapsing cashflows afloat and bolstering the finances of “furloughed” workers.

The volte-face has been too blatant to be ignored by anyone with a cursory interest in public affairs. Mainstream political parties, experts and technocratic institutions that previously trumpeted fiscal responsibility and agonized about debt-to-GDP ratios have suddenly conjured up financial resources equivalent to 20% and more of GDP. “We’ll do whatever it takes” has replaced “there is no such thing as a free lunch.”

The support programmes are labelled as temporary expedients, to be unwound as conditions normalize, but that was supposedly the case with the quantitative easing regime installed after the GFC of 2008 too. Rather than being unwound, QE has been repeated and intensified by new variations such as negative policy rates and Japan’s yield curve control, now under study elsewhere, which seeks to hold down the yields of ten year term bonds.

Even if conditions allow the stimulus to be withdrawn entirely, a crucial precedent will have been set. If vast amounts of money can be created and spent with no apparent ill-effects, why not a Green New Deal, as proposed by radical Democrats in the US, but also backed, to a greater or lesser extent, by Nobel Prizewinners Paul Krugman and Joseph Stiglitz and potential next president Joe Biden? Why not a British New Deal, with Prime Minister Boris Johnson chanelling FDR? With interest rates at the lowest levels in history, almost any project will have a positive return.

Japan was able to weather its years of crisis and shattered expectations thanks to its stock of social capital, itself the result of shared values and a high degree of homogeneity. Few other wealthy countries can boast the same resilience. The last few weeks have seen more civil disorder in the United States and the UK than Japan experienced in two “lost decades.”

In these and several other countries, the social contract – such as it is – only works when asset prices are rising and growth is positive. Decades of deflationary stagnation, accompanied by a Japan-style across-the-board declines of 75% in property values, would mean social collapse. Political leaders know this very well, which is why the post-Covid economic support measures keep on getting bigger. And unlike the Central Bank-created liquidity of the past decade, this money will not just circulate within the financial system, but will flow into the real economy.

Understandably, investors, like policy-makers, are currently fixated with the near-term deflationary effects of the lockdowns, which have destroyed jobs and consumer demand. But is also possible that supply may be destroyed too, through bankruptcies and regulation-driven constraints on the service sector, such as social distancing.

Even before Covid, there were signs that, in the midst of eye-catching deflationary signals such as evaporating bond yields, some longer-term factors were moving in the opposite direction – such as increased economic nationalism and rising minimum wages. These will intensify. Expect higher pay for key workers, slower and simpler supply chains and re-shoring of production of medical supplies and other strategically vital items.

Generally, it takes a crisis to catalyze lasting change in the intellectual zeitgeist. That was certainly the case in the 1970s, when the second oil shock overturned the post-war Keynesian consensus and prepared the ground for monetarism and several decades of disinflation. Covid could be the prompt for similar lasting change in the policy cycle and, as night follows day, stock market leadership.

In line with the biblical principle of the first becoming last and vice versa, we would expect highly rated companies with untested earnings power to fall from grace while beneficiaries of higher output prices and a steeper yield curve should see better times and more generous ratings.

The effects would be felt globally. Japan, which has experienced deflation the longest, could well be an unexpected winner from a turn in the cycle. Conversely, countries with insufficient domestic savings and fractured politics could find themselves in chronic crisis.

Green Structural Adjustment in The World Bank’s Resilient Cities

Published by Anonymous (not verified) on Tue, 16/06/2020 - 9:25am in

Cities across the world are facing a double-barreled existential problem: how to adapt to climate change and how to pay for it. Over the next thirty years, more than 570 coastal cities are poised to face frequent catastrophic flooding owing to sea level rise and more intense storms, while as many as 3.2 billion urban residents may run out of water by 2050. Other looming crises include soaring urban temperatures, the urgent need to transition away from fossil-fueled energy and transport systems, and plummeting rates of local biodiversity.

Responding to these problems will, international bodies project, require a virtually unprecedented buildout of infrastructure, from hardened municipal water and sewage systems, to urban afforestation, to renewable energy systems. This massive infrastructural program coincides with global economic conditions marked by the lingering ideological stranglehold of austerity, unprecedented levels of capital concentration, and now, myriad uncertainties produced by COVID-19.

In response to the twin problems of resilient infrastructure needs and public fiscal constraints, the World Bank and an array of partner institutions from the Rockefeller Foundation to USAID have been ramping up programs to facilitate private investment in urban resilience. From a baseline of $10 billion across 77 cities in 2016, the World Bank aims to ‘catalyze’ investment of more than $500 billion into urban resilience projects across 500 cities by 2025.

But the vast majority of this money is not being distributed in the form of grants, as would befit a just adaptation regime respecting the loss and damage that will be borne by people least responsible for climate change. Nor is it ‘vanilla’ development lending, where states borrow from the World Bank for approved projects while receiving ‘capacity building’ for administering the project. Instead, this resilience funding is targeted at reformatting municipal governments to enable them to execute urban resilience projects through private-sector oriented pathways. These initiatives are focused on cultivating cities that can plan investor-friendly infrastructure projects, then access global debt markets to finance infrastructure that is meant to achieve resilience.

We call the process through which vulnerable cities of the Global South are being rendered investable in response to climate change Green Structural Adjustment (GSA).

We use the term Green Structural Adjustment to signal connections between 20th Century Structural Adjustment and contemporary World Bank urban-climate programming. Structural Adjustment formally ended in 2002, after the Bank, along with the International Monetary Fund, administered more than 500 Structural Adjustment Programs (SAPs) in almost 100 countries in the 1980s and 1990s. While the language of structural adjustment was phased out in favor of the more gentle sounding ‘development policy lending’ in 2004, the underlying faith in the power of markets to create desirable change, a commitment to technocracy, and mistrust in Southern states to pursue the ‘right’ objectives through the ‘right’ governance mechanisms, persists. But there are important twists from the 20th Century formula: the unit of policy intervention is the city, rather than the nation-state; the aim is to create access to debt, rather than fixing sovereign balance of payments crises and overwhelming debt; and, the primary objective is climate resilience to secure development, a departure, at least rhetorically, from environmentally calamitous Structural Adjustment.

While 20th Century SAPs were often violently imposed – and successor policies administered by the IMF still are – the violence of GSA is less direct. The Bank is the herald of investors, bearing the message that if city governments are not reformed in investment-friendly ways, those cities will continue to be cut off from more than $100 trillion swirling on global capital markets. This is a modern, environmentally-inflected version of TINA; as the World Bank sees it, ““public investment alone, even when combined with [official development aid] is inadequate” to remake cities that can protect residents from environmental change; only financiers have the power to pay for resilient infrastructure at the scale necessary. So the criteria of investors, such as balanced municipal budgets, a regional or internationally recognized credit rating, and a pipeline of investable projects planned with accepted forms of environmental data must be achieved if cities are to gain access to these vast pools of capital.

The second connection between the SAPs and the GSA is causal; Structural Adjustment contributed to many of the problems that GSA aims to counter. For example, SAP-induced agricultural ‘rationalization’ contributed to rural-urban migration, driving urban growth, rates of informality, and associated vulnerability to environmental change. Trade liberalization facilitated hydrocarbon and raw material extraction and export, turbocharging rich world consumption and associated greenhouse gas emissions and degrading local environmental conditions. Meanwhile, spectacular levels of global inequality has led to unprecedented levels of wealth for the investor class.

It is precisely this concentrated wealth that GSA aims to channel into urban resilience, in line with the broader World Bank project of ‘Maximizing Finance for Development’. GSA offers a path to climate-proofed infrastructure provision operationalized in line with the ‘Wall Street Consensus’, an austerity-drenched logic of, and set of tools for, using public funds to subsidize private sector investments. In turn, these investments are to be channeled into familiar financial mechanisms, including public-private partnerships, municipal borrowing through labeled green bonds, or land-value capture, but using the World Bank balance sheet and expertise “in innovative ways to catalyze trillions”.

Our paper looks at examples from Can Tho (Vietnam), Jakarta, and Kampala, but these processes are playing out in cities in virtually every corner of the Global South. And the scope of these interventions is growing: if Bank spending gets close to the $25 billion per year it aims to leverage by 2025, GSA-aligned investments would be one of the biggest lines of ‘climate finance’ in the world.

While GSA operates at the interface of global institutions and the city, its practices have structural ramifications. Overaccumulated northern capital has been desperately seeking profitable investment in a high liquidity, low yield world. GSA, through its technical assistance and derisking activities, aims to produce a pipeline of investable frontiers. As more cities gain access to debt markets and their needs for adaptation grow, GSA offers a multi-sited spatial fix: physically fixing Northern capital in Southern infrastructure and staving off crises of overaccumulation, producing new geographies of accumulation and the ability to absorb the ravages of a changing climate.

It remains to be seen how much private investment in public infrastructure GSA ultimately will generate; to this point, GSA is still much more about beginning to restructure city governance than tracking trillions in Global North investment into Southern built environments and the (mal)adaptive impacts those infrastructures produce. As a World Bank staffer told us, ““right now less than 2% [of investable private capital] gets invested in urban infrastructure. So, these are pension funds, sovereign wealth funds, mutual funds, and they’re out there, they’re looking for reasonable returns, in a very low return market right now. So, we think there’s an opportunity to tap some of that”. This sums up GSA as it empowers technocrats and financiers to shape what kinds of infrastructure are realized and how it is financed, producing cities and infrastructure as investable enclaves while rents flow to investors.

Ultimately, we reject the reframing of ‘climate debts’ enabled by GSA from a radical claim to righting past and ongoing injustices that produce uneven climate risks into a technocratic syntax that heaps financial debt onto vulnerable cities in the Global South. There is much scope for (geographical) political economists to envision other modes for producing future-ready infrastructure, and the institutions to facilitate those futures. The move toward normalizing discourses of global green Keynesianism are welcome, but insufficient. Instead, our next steps are to figure out how the highly concentrated finance that the GSA mobilizes can be repurposed to facilitate the decommodification of climate resilience and mitigation.

Cover image: Jakarta, Indonesia (100 Resilient Cities)

The post Green Structural Adjustment in The World Bank’s Resilient Cities appeared first on Progress in Political Economy (PPE).

The Currency Market Is A Market. Act Accordingly.

Published by Anonymous (not verified) on Wed, 10/06/2020 - 11:00pm in

Tags 

finance

One recurrent line of discussion I have seen over the years are assertions or questions about currency values that follow this format: if some particular economic event happens, then the currency will rise (or fall). This seems to be the result of "all else equal" logic, but it is highly misleading. Foreign exchange markets are markets, and prices (exchange rates) should not be expected to follow simple rules. Otherwise, all foreign exchange traders would end up with above average profits, and we would have discovered a private sector magic money tree.

Interestingly enough, I think it would be a safe bet that one could find professors teaching undergraduate economics who will argue that currency values will follow simple "all else equal" rules in one lecture, and then go to another lecture and state that some version of market efficiency holds. Consistency is the hobgoblin of small minds, &c.

One could attempt to salvage "all else equal" arguments by stating that they are the sensitivities of some currency valuation model. The problem with that argument is straightforward: this model would have to do a convincing job of forecasting currency values. Someone in possession of said model would be able to generate a rather impressive track record doing directional currency trades. I do not claim to be in close contact with the forex community, but I saw little evidence of this happening.
Why are Currencies Hard to Model?A foreign exchange rate is a relative price: at what ratio will entities be willing to exchange one currency for another? At the minimum, we need to keep an eye on what is happening in those two currency areas, but we might also need to worry about events in other currency areas. For example, an emerging market crisis is often associated with a rise in the U.S. dollar,  which might rise versus the British pound -- even though the U.K. and U.S. economies might not be measurably effected by the turmoil elsewhere.

The following entities trade foreign exchange.

  • Firms and households that engage in foreign trade in goods, services, and tourism.
  • Investors with international portfolios.
  • Foreign exchange speculators.

In principle, the last group (speculators) are there to balance the flows among the previous two groups, but speculation can become the tail that wags the dog (for some time at least; speculator balance sheets and risk limits are finite). And as countries like the U.K. discovered during the Bretton Woods era, trading firms can engage in covert currency speculation just through the mechanisms of trade finance ("leads and lags").
If we assume that speculators cannot drive currency values too far away from fair value -- a staple of analysis in bond, equity, and derivatives markets -- we are stuck with the reality that there are two candidate values for fair value. The first is the level of the currency that balances trade flows. The second is the value that balances portfolio flows. The reality is that the market value of international portfolios dwarfs net trade flows -- so portfolio flows are dominant. This changes the currency valuation problem into the problem of the relative valuation of all financial assets. This is extremely complex, and so instead currency strategists do things like run carry portfolios or fool around with volatility strategies.Post-Script: Bond Valuations?The rates market (e.g., not looking at credit spreads) is much easier to deal with than the foreign exchange market. Bond valuation is driven by the cost of financing a long position, and for a government bond, that financing cost is typically close to the policy rate. Meanwhile, central bankers follow the economic cycle with a lag, in a fairly predictable fashion (e.g., the Taylor Rule).

The problem is that forecasting the economy is hard (the underlying message of Recessions: Volume I). As such, it is hard to outperform the market. Roughly speaking, the only easy money in directional rate trading is finding a critical mass of bond investors who do not believe that rate expectations matter for valuation, and take the other side of the trade. However, natural selection eventually closes that avenue for outperformance.
(c) Brian Romanchuk 2020

#Unis4all: An Open Letter to the U.S. Higher Education Community

Published by Anonymous (not verified) on Fri, 22/05/2020 - 9:00pm in

For a growing majority of outspoken administrators and faculty, the economic fallout associated with the COVID-19 crisis threatens to catapult U.S. higher...

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Not such a Great Equalizer after all

Published by Anonymous (not verified) on Sat, 09/05/2020 - 11:00pm in

Because it has no regard for borders, the coronavirus has been referred to as the Great Equalizer. But its impact is not equal by any stretch of the imagination. While China, Europe, and Northern America may recover relatively fast, emerging market economies are less resilient. The combined health, economic, and financial tolls they now endure may cause them to face the greatest recession in decades.

By Jack Gao | When COVID-19 hit, China’s strong state and centralized public administration allowed it to suppress the domestic spread. In Europe, welfare systems and appropriate policy responses made sure workers have less to worry about when economies reopen. The United States (despite Trump’s handling leaving much to be desired) enjoys a unique status of its own. The American economy and “exorbitant privilege” of the US dollar mean that policy responses can be put forth in short order, and with relatively few negative repercussions. For most emerging market economies, however, none of this can be taken for granted. The coronavirus is shaping up to be the “perfect storm” that many feared. It could sink the developing world into a deep economic recession.

No Doctors and No Food

Let’s start with public health. While the increase of new deaths in the epicenters—US, UK, Italy, Spain—appears to be slowing, the virus rages on in major developing nations. Russia, India, Mexico, and Brazil continue to report well above a thousand new daily deaths, and many of them are still on an upward trajectory. In India, a brief relaxation of the lockdown was met with a jump in deaths, underscoring that the fight to contain the virus will be an uphill battle.

Although health systems are being tested everywhere, the ones in developing countries were already under strain before COVID-19 reared its head. For example, the average number of health workers per 1000 people in OCED countries is 12.3. In the African region, this ratio is only 1.4.

As if the health crisis is not crushing enough, the United Nations warns of a “hunger pandemic” as an additional 130 million people could be pushed to the brink of starvation this year, with the vast majority of them in developing countries. The coronavirus may cross borders easily, but the suffering it causes is not equal across countries.

Locked Down and Out of Work

If the human toll of the pandemic is appalling, the economic damages to countries are unprecedented as well, as countries implement lockdown and “social distancing” to combat the virus. In the latest World Economic Outlook growth projections by the IMF, emerging market economies as a whole are expected to contract 1% this year, for the first time since the Great Depression. Literally all developing countries may be in economic decline as a result of COVID-19, with India and China eking out paltry growth. Still, these headline numbers mask the true extent of economic hardship.

Take working from home, for example. Economists have documented a clear relationship between the share of jobs that can be done at home and the national income level. In a developed country like the United States, some 37 percent of jobs can be performed at home—education, finance and IT being at the top of the scale. In some developing economies, less than 10 percent of jobs can be done remotely.

On top of all this, global remittances are collapsing. The amount of money transferred to migrants’ home countries may fall by 20 percent as workers see dwindling employment. This is terrible news for countries like Lesotho, where remittances are as much as 16% of GDP.

Where’d the money go?

The global financial system exacerbates these struggles with its core and periphery topology. During good times, foreign capital flows into emerging markets, looking for higher yields. But in bad times, when that capital is needed most, it swiftly disappears. This dynamic is now on full display. As investors started to realize the true scale of the pandemic and major central banks initiated new rounds of monetary easing, emerging economies saw capital flight as investors rushed to safer assets. An estimated 100 billion portfolio dollars fled emerging markets in the first quarter alone.

In the face of such severe dollar shortages and liquidity crunch in developing countries, the Federal Reserve had to expand central bank liquidity swaps and launch a new lending facility to come to the rescue. The impact of such international measures is still an open question. But with currency depreciation, higher borrowing costs, declining official reserves, and falling commodity prices, it appears that the financial stress emerging economies are under may be difficult to reverse.

The Triple Whammy

This way, developing countries face a health-blow, and economic-blow, and a financial-blow, all at once. An emerging market economy faced with just one of those would have resulted in a crisis. But amid COVID-19, all emerging economies were are confronted with all three crises at the same time. The damage done by this “triple whammy” could plague the developing world for years to come.

Jack Gao is a Program Economist at the Institute for New Economic Thinking. He is interested in international economics and finance, energy policy, economic development, and the Chinese economy.  He previously worked in financial product and data departments in Bloomberg Singapore, and reported on Asian financial markets in Bloomberg News from Shanghai. Jack holds a MPA in International Development from Harvard Kennedy School, and a B.S. in Economics from Singapore Management University. He has published articles on China Policy Review and Harvard Kennedy School Review.

The post Not such a Great Equalizer after all appeared first on Economic Questions.

Rethinking Microfinance in Post-War Sri Lanka: Mobilisation and Call for Reform

Published by Anonymous (not verified) on Tue, 14/04/2020 - 7:00am in

Tags 

Blog, finance

“First, it was the tsunami that destroyed our community. Then came the war. Now, it’s microfinance.”Jesudadan Rajitha, The Federation of Women’s Rural Development Societies.

As the COVID-19 pandemic charts its savage path around the world, it is predicted that millions have lost or will loose their income. Governments have announced various financial relief packages, including short-term debt moratoriums for the vulnerable. However, at the time of writing, there is a noticeable absence of widespread debt relief for a sector that is often characterized by its over-indebtedness: microfinance. In 2018, globally, there were approximately 139.9 borrowers with an estimated credit portfolio of US$124.1 billion. Of this, 80 percent of the borrowers were women. 65 percent were classified as rural borrowers. 

While the impact of the pandemic is widely exacerbating economic insecurity, the case of microfinance clients stands out. Microfinance has already created a crisis in several countries, including CambodiaSri Lanka, and India. While some banks have extended debt moratoriums for microfinance borrowers, many borrowers are under stress as they consider how to repay loans as livelihoods stall or disappear in the face of national shut-downs. 

In this blog post, co-authored with Nedha De Silva, we consider how microfinance is often treated as the panacea for crisis-induced economic insecurity for the poor, by examining the case of war-affected Sri Lanka. We conclude by considering how in the aftermath of the pandemic, microfinance should be delivered with careful planning, drawing on lessons from other crises. The question is, how can we remake finance models for the poor so that financial inclusion is genuinely empowering, without deepening existing inequalities?

Introducing an unregulated microfinance sector in post-war Sri Lanka

The civil war between Sri Lankan government and the Liberation of Tamil Tigers Eelam (LTTE) ended in 2009, after three decades of war primarily affecting the Northern and Eastern parts of the island. Post-war, microfinance was included as a post-conflict development and rebuilding strategy through government initiatives such as ‘Uthuru Wasanthaya’ (Northern Spring) and ‘Nagenahira Navodaya‘ (Eastern Re-Awakening). Historically in Sri Lanka, the provision of microfinance in various forms was introduced as a welfare provision. However, the growth of unregulated commercial providers within a broader context of neoliberal economic reform is a crucial feature of the post-war microfinance landscape. 

Microfinance was mainly marketed as providing livelihood opportunities for women to encourage economic and gender empowerment. However, this has resulted in ‘empowerment debt’, where the focal attention on economic empowerment leads to the side-lining of social, political, and structural forms of empowerment. By 2017-18, it was estimated there were over 2.8 million active borrowers, of which 85 percent are women, with a total loan portfolio of Rs. 94 billion rupees (this is an underestimate as this figure is derived from 37 institutions, which omits potentially thousands of informal operators).  In the immediate post-war period, a large number of the borrowers were war-affected minority Tamil and Muslim women in Northern Jaffna and Eastern Batticaloa. They have traditionally been denied any form of access to formal financial services due to the effects of war, gender stereotypes that position women outside of formal economic activity, and the lack of collateral such as land.

While microfinance practices aimed to break with gendered patterns of financial exclusion, they nonetheless reproduced gendered inequality. Loans are taken for everyday social reproduction rather than for investment or entrepreneurial ventures. Due to the impact of war and poverty (lack of fundamental infrastructure, training, and illiteracy), most entrepreneurial efforts become futile. Many continue to support their spouse’s economic generation activities. Processes such as collective loaning (‘group loans’) require spousal permission. Moreover, microfinance rests on the gendered assumption women are more prone to sharing their profit with the household, leading to the further feminization of responsibility and obligation. Also, it is assumed that women would continue her social reproductive and care roles alongside new economic activity. However, no social safety nets or welfare systems are introduced to help regenerate society in war-affected areas.

Predatory practices have pushed women into a vicious cycle of chronic insecurity. In Sri Lanka, there have been 172 suicides attributed to microfinance debt over the past three years. Predatory practices range from extreme interest rates up to 220 percent, a ‘fast track’ approach which ignores capacity to pay, lack of financial management training, weekly payments, and the use of gendered violence, shame, and outright harassment of recipients. Many take out cascading loans from multiple institutions to repay previous loans, making women more indebted at each instance. Some have reported rising tensions among family members, and among groups of women in the group loaning processes disrupting solidarity, social ties, and networks in communities. Moreover, it has caused tensions with local government officials, who often intervene in matters of conflict. 

However, over the past three years, women have mobilized to reform microfinance in Sri Lanka. Some have attempted to move back to traditional forms of savings, such as collective savings groups. Others demand a welfare-based development strategy that would not compromise their economic, political, and social freedom. Some of the demands include a more efficient state-funded microfinance industry that has more lenient administrative practices and faster loan provisions, as well as a new economic plan that prioritizes the needs of the marginalized in the post-war rural community. Groups such as the Cooperatives Movement in war-affected areas such as Jaffna and Batticaloa have organized and supported victims of predatory institutions by directing them to different activist organizations for support. They also advocate for rejecting microfinance in particularly vulnerable villages. Coordinated actions by different groups across the country, including clients of microfinance institutions, academics, activist groups, have supported the local movements. 

In response, the Sri Lankan government has issued a moratorium for different loan amounts, introduced an interest cap in 2018 of 35 percent with an installment plan. In addition, the Lanka Micro Finance Practitioners Association (LMFPA) has launched a Code of Conduct for members. However, it is voluntary nature, and only covers its relatively small membership. 

Where do we go from here?

At the heart of the Sri Lankan mobilisation, is the assertion that a neoliberal microfinance model as a post-war development strategy is unsuitable. Protest has centered on the need for greater regulation of the microfinance sector. Ironically, the contestation against the microfinance industry by Sri Lankan women and their allies, and some of the solutions they present, depicts a form of empowerment and political revitalization that offers us insight into how we can ‘rebuild better.’ That is, by including the voices and preferences of those most affected.

As we are publishing this blog post at a time of the COVID-19 pandemic, the Sri Lanka government has introduced a raft of relief measures announced to address the economic fallout of COVID-19. Although it includes some debt moratoriums, it does not at the time of writing, include suspension of microfinance debt payments or interest. While the current pandemic will bring its own complex challenges, we can draw on lessons from past crises, including the Sri Lankan post-war context and lessons from the Ebola pandemic, particularly in Sierra Leone. The later also examine how microfinance institutions recovered and where they failed their debtors. We need to examine closely, what approaches we can take to make microfinance work for, not against, crisis or conflict-affected communities. 

Nedha De Silva is a PhD student in the Monash Gender, Peace and Security Centre. Her research examines the role of the state in microfinance and its impact on women’s agency, security and everyday life. Her research interests include development and the role of women, post-colonial studies, economy and identity and sociology of religion.

The post Rethinking Microfinance in Post-War Sri Lanka: Mobilisation and Call for Reform appeared first on Progress in Political Economy (PPE).

Coronavirus Needs Not Kill Globalization

Published by Anonymous (not verified) on Tue, 31/03/2020 - 12:50am in

By Jack Gao | The COVID19 crisis is shaping up to be the most severe challenge the world has to confront since World War II. At present, almost 800,000 cases have been reported from virtually every country in the world, with the death toll nearing 40,000. Not only is much of the global economy frozen as we fight the virus, but national borders are also being shut down to contain its spread. As this battle goes on, many are already predicting that the world may never be the same again.

The knee-jerk reaction is to substantially roll back on the current globalization regime, so global pandemics may be eliminated for once and for all. But this reflex towards nationalism completely misses the point. Crises like this one reflect on the perversion of current globalization, not on globalization per se. We should not throw the baby out with the bathwater, but instead, take the crisis as an opportunity to improve on the version of globalization that prioritized some objectives but neglected others.

First of all, a more divided world in no way guarantees global pandemics will no longer happen. One only needs to turn to the 1918 Spanish flu pandemic that claimed 100 million lives or the even more lethal Black Death episode, both when the world was more divided, for some evidence. Periodic outbreaks of infectious diseases have plagued humanity throughout history, and, more than anything, it was progressing in science and healthcare that accounted for the gradual decline in fatality and damages, in spite of advances in globalization. In fact, we could reasonably argue that better health outcomes, nutrition access, sanitation facilities wrought by economic development are important reasons we have fewer and less deadly pandemics today, thanks to globalization. It’s wishful thinking that less globalization will result in fewer pandemics.

Second, when crises do strike, we are much better positioned to respond to them as a globally connected community. Although leaving much to be desired, information sharing has proved key to containing the coronavirus outbreak. China alerted the WHO by the end of last year of unusual pneumonia in Wuhan; within days, Chinese scientists posted the genome of the new virus, allowing virologists in Berlin to produce the diagnostic test of the disease for worldwide access. We often take for granted communications of this kind today, which we can ill-afford if balkanization was to rule the day.

Even as borders are shut to reduce human flow at the moment, global commerce continues to play a crucial role to ensure the supply of medical products and equipment as we fight the pandemic. For instance, the crisis may have already subsided in China, but Chinese companies are currently working around the clock as ventilator orders pour in from the rest of the world. Similarly, at least a few dozen pharmaceutical companies from around the world are racing to develop vaccines and treatments for the virus, knowing that they’ll have ready access to a global marketplace to recoup their investments. Just imagine how much harder this battle would be if countries were left to their domestic supply chains or scientific knowledge.

Finally, while much is still unclear about how the current outbreak unfolded, from the evidence we do have, it is national mishandling or in some cases deglobalization factors that contributed the lion’s share to its unbridled spread. China’s earlier misstep on information reporting, America’s testing debacle and obsession with travel bans, and UK’s initial flirtation with herd immunity are just a few examples of national blunders that hastened the transmission of the virus, which have little to do with globalization. Meanwhile, in a bid to have America go it alone, Trump’s elimination of epistemologist based in China, staff cuts at the CDC, and heightened tariffs on Chinese medical products may well have made this health crisis worse than it has to be.

Each crisis is an opportunity in disguise, the coronavirus is no different. It should be taken as a reminder that our disregard to some objectives and narrow-minded pursuit of others have tilted the world off-balance. In a globalization solely focused on promoting international trade and financial flows and centered around organizations such as the World Bank and the IMF, this outbreak caught the incumbent international regime completely off-guard. Either in funding, capacity, or power, the World Health Organization has been no match to its counterparts charged with commercial and financial affairs. Seen in this light, the outbreak should serve as a rude awakening to a world economy that prioritizes economic integration over public health, environmental, and climate concerns.

As the fight to contain the coronavirus continues, many believe this crisis will bring an end to globalization as we know it, some may even work hard to make sure this is so out of self-interest. However, it bears emphasizing that a balkanized and disintegrated world is neither feasible nor desirable. The coronavirus does not have to kill globalization, instead, it is our chance to rebalance the world economy to better serve collective social goals and tackle future challenges as a coordinated global community.

Jack Gao is a Program Economist at the Institute for New Economic Thinking. He is interested in international economics and finance, energy policy, economic development, and the Chinese economy.  He previously worked in financial product and data departments in Bloomberg Singapore, and reported on Asian financial markets in Bloomberg News from Shanghai. Jack holds a MPA in International Development from Harvard Kennedy School, and a B.S. in Economics from Singapore Management University. He has published articles on China Policy Review and Harvard Kennedy School Review.

The post Coronavirus Needs Not Kill Globalization appeared first on Economic Questions .

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