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Copyright © 2012. Nova Science Publishers, Incorporated. All rights reserved. Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A. Mancini,

Copyright © 2012. Nova Science Publishers, Incorporated. All rights reserved. Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

GLOBAL ECONOMIC STUDIES

GLOBALIZATION

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PARTNERSHIPS, MODERNIZATION AND FUTURE PERSPECTIVES

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GLOBAL ECONOMIC STUDIES Additional books in this series can be found on Nova‘s website under the Series tab.

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Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

GLOBAL ECONOMIC STUDIES

GLOBALIZATION PARTNERSHIPS, MODERNIZATION AND FUTURE PERSPECTIVES

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JOSEPH A. MANCINI EDITOR

Nova Science Publishers, Inc. New York Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

Copyright ©2012 by Nova Science Publishers, Inc. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. For permission to use material from this book please contact us: Telephone 631-231-7269; Fax 631-231-8175 Web Site: http://www.novapublishers.com NOTICE TO THE READER The Publisher has taken reasonable care in the preparation of this book, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. The Publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or in part, from the readers‘ use of, or reliance upon, this material. Any parts of this book based on government reports are so indicated and copyright is claimed for those parts to the extent applicable to compilations of such works.

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Independent verification should be sought for any data, advice or recommendations contained in this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage to persons or property arising from any methods, products, instructions, ideas or otherwise contained in this publication. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS. Additional color graphics may be available in the e-book version of this book.

Library of Congress Cataloging-in-Publication Data Globalization : partnerships, modernization and future perspectives / editor, Joseph A. Mancini. p. cm. Includes bibliographical references and index. ISBN 978-1-62257-863-4 (eBook) 1. Globalization--Economic aspects. 2. Globalization--Social aspects. I. Mancini, Joseph A. HF1359.G5867 2011 303.48'2--dc22 2011013682

Published by Nova Science Publishers, Inc. †New York Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

CONTENTS Preface Chapter 1

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Chapter 2

vii The Protection and Promotion of Cultural Diversity at the International Level: Current State and Future Perspectives Mira Burri-Nenova The ‗Whirlwind‖ of Globalization: Implications for Strategic Global Human Resource Management Michael Harvey and Miriam Moeller

Chapter 3

Globalization, Modernization and Education in Iran: An Overview Mohamad Tavakol and Lida Imani-Taleb-Azad

Chapter 4

Globalization, Modernization and Education in Muslim Countries: Some Basic Challenges M. Kazim Bacchus

Chapter 5

Globalisation and Partnerships: An Overview Jacques-Marie Aurifeille, Serge Svizzero and Clem Tisdell

Chapter 6

Business Partnerships in a Globalising World: Economic Considerations Clem Tisdell

1

19 31

47 69

75

Chapter 7

Globalization: The End of Industrial Relations? Jacques Rojot

Chapter 8

The Effect of Globalisation on the Image of Partner Brands Sinove Marde, Melisa Caid and Romain Cally

103

Chapter 9

Consumer Segmentation for Globalising Firms Jacques-Marie Aurifeille, Christopher John Medlin and Jaime Gil-Lafuente

117

Chapter 10

Economic Globalisation and Foreign Direct Investment in the South-West Indian Ocean: Are the Usual Determinants Still Relevant? Isabelle Soubaya

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89

127

vi Chapter 11

Chapter 12

Joseph A. Mancini Emerging Market under Globalization: The Reform and Development in China Li Xiaoxi, Liu Yimeng and Lin Yongsheng

141

Conceptualizing Rural Communities in the face of Globalization: The African Perspective Frank S. Arku and Cynthia Arku

169

Chapter 13

Globalization, Inequality and the Labour Market Yılmaz Akyüz, Heiner Flassbeck and Richard Kozul-Wright

179

Chapter 14

Consumer Segmentation for Globalising Firms Jacques-Marie Aurifeille, Christopher John Medlin and Jaime Gil-Lafuente

197

Chapter 15

Institutional Reforms and Governance Restructuring for Distribution of Gains under Globalization T. Lakshmanasamy and Kartik C. Roy

207

Globalization as the Hegemonic Concept of Neoliberal Ideology Erinç Yeldan

221

Chapter 16

Chapter 17

China-U.S. Trade Issues Wayne M. Morrison

233

Chapter 18

The Global Financial Crisis: Analysis and Policy Implications Dick K. Nanto

261

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Index

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413

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PREFACE There are probably few concepts less understood, more cursed and blamed for everything imaginable, and yet perhaps result in so many outstanding developments as globalization. Globalization is the process of denationalization of markets, politics and legal systems, i.e., the rise of the so-called global economy. The consequences of this political and economic restructuring on local economies, human welfare and environment are the subject of vigorous debate among businesses of all sizes, various international organizations, governmental institutions and the academic world. This book presents current research in the field of globalization. Chapter 1 – The Convention on the Protection and Promotion of the Diversity of Cultural Expressions, adopted under the auspices of the United Nations Educational, Cultural and Scientific Organization (UNESCO) in 2005, entered into force on 18 March 2007 after an incredibly swift ratification process. The Convention is the culmination of multiple-track efforts that spread over many years with the objective of providing a binding instrument for the protection and promotion of cultural diversity at the international level. These efforts, admirable as they may be, are not however isolated undertakings of goodwill, but a reaction to economic globalisation, whose advancement has been significantly furthered by the emergence of enforceable multilateral trade rules. These very rules, whose bearer is the World Trade Organization (WTO), have been perceived as the antipode to ― culture‖ and have commanded the formulation of counteracting norms that may sufficiently ― protect‖ and ― promote‖ it. Against this backdrop of institutional tension and fragmentation, the present chapter explicates the emergence of the concept of cultural diversity on the international policy- and law-making scene and its legal dimensions given by the new UNESCO Convention. It critically analyses the Convention‘s provisions, in particular the rights and obligations of the State Parties, and asks whether indeed the UNESCO Convention provides a sufficient and appropriate basis for the protection and promotion of a thriving and diverse cultural environment. Chapter 2 – The ― whirlwind‖ of globalization is affecting organizations in ways never before imagined. The shift in perspective from multinational corporations (MNCs) to a global organizational design brings to surface a new frontier of challenges to be conquered in the 21st century business environment. While the present MNC state encourages organizations to broaden their environmental awareness, the kaleidoscope of new economic/environmental

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Joseph A. Mancini

challenges surrounding an organization‘s short- and long-term decision-making procedures takes on a new meaning in the light of global success. The key to successfully tackling this issue is to identify and develop human capital such that it may provide flexibility/adaptability to master the complexities of an increasingly hypercompetitive business environment. Chapter 3 – Modernization and education have been closely intertwined in Iran since the nineteenth century. In fact, education has been an important means of creating a modern society by introducing new ideas and ways among the educated. Globalisation, on the other hand, is a more recent concept currently discussed among intellectual circles in the country. Thus, while modernisation has been a part of the Iranian educational system for some time, globalisation remains a challenge to be met via innovative approaches at every layer of the schooling system. In general, the need to address both modernisation and globalisation as inevitable realities in the contemporary scene has put considerable pressure on the educational system to cater to the changing global scene. This chapter illustrates how the Iranian educational system has addressed or seeks to address the demands of modernisation and globalisation at different periods of time. A historical overview of Iranian education demonstrates the gradual replacement of traditional education by modern schools aiming to promote educational progress. A comparative study of the general aims of the Iranian educational system before and after the 1979 revolution, that led to the establishment of the Islamic Republic, sheds additional light on the educational goals of a society marked by the interplay of tradition and modernity. Chapter 4 – Before examining how globalization and modernization affect education in Muslim countries it would be useful to first clarify the meaning of both these concepts, as they are used in this chapter and then explore their importance for educational developments in these societies. Globalization refers to a process that leads to a greater integration of the world economy, especially in trade and the flow of capital. It requires the removal of all trade barriers between nations with the aim of producing a single competitive world economy. Among its requirements are: • the elimination of tariffs directed at protecting local ‗infant industries‘ or the granting of public subsidies to industries to enhance their ability to compete on the world market; • the privatization of public enterprises, especially those that are a drain on the public treasury. The removal of these ‗protectionist‘ impediments to ‗free trade‘ is seen as necessary for countries to move towards a globalized competitive economy. The World Trade Organization (WTO), which replaced the United Nations Conference on Trade and Development (UNCTAD), was established in 1995 to facilitate movement towards this goal and in 2003 it had 146 members. Chapter 5 – Growing economic globalisation has increased international business competition and international economic interdependence. From this perspective, many firms have formed business partnerships and most nations have had to re-evaluate their economic interdependence. This book explores changes that have occurred or have been proposed in this regard. It provides new insights into business partnerships and international economic interdependence, given growing economic globalisation, and explores the managerial and socio-economic consequences of those ideas.

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The contributions in this book have been divided into four parts. Those in Part II concentrate on the specification of partnerships and reasons for business partnerships in the context of a globalisation. The idea of global networks in which some "hard" and "soft" forms of partnerships would appear and mix is introduced and discussed according to the partners involved (nations, unions, firms and consumers) and the economic activities (whether tangible or abstract). Globalisation also has a number of consequences for business coordination, in particular when they are based on outsourcing strategies in which cost reduction is balanced with knowledge transfers. These are amongst the issues explored in Part III. The difficulty to monitor and predict the effects of global partnerships tends to increase the importance of cultural and psychological variables such as trust and commitment. Therefore the role of attitudes and perceptions is very important. Whatever the agreement and the conjoined management among partner firms, the attitude of the other agents can produce asymmetric affects on these firms and considerably bias their partnership strategy. Such biases are particularly likely from consumers. Their attitude towards globalisation is not the only bias that may occur. Their loyalty is also an important issue in a globalising world, particularly in the service sector where lots of partnerships have been made on a global scale (eg banks, airlines, leisure). These are amongst the relationship marketing issues explored in Part IV. In Part V, the factors introduced in the previous chapters are considered from a regional and cultural perspective, where nations and regions themselves are engaged in global partnership. In this context, discrepancy often develops between the domestic and the international globalisation strategies, as well as between the capital and labour markets. The resulting complexity is particularly problematic for the developing and peripheral economies. Novel insights about partnership emerge, as studied in this concluding part of the book. Chapter 6 – Begins by considering how neoclassical and mainstream economists have modelled the business firm and outlines briefly the evolution of economic thought and that of managerial science about institutional structures involving firms, hierarchies, markets and interfirm cooperation. Subsequently, taking into account this thought, it considers whether growing economic globalisation is likely to result in more frequent business cooperation between firms, what types of alliances may be favoured, and why. Both factors favouring increased business cooperation as globalisation proceeds, as well as those that may retard it, are discussed. Chapter 7 – Globalization implies that productive capacities will shift in between countries. It is generally held that different categories within the labour force are and will be impacted differently. The role and impact of unions is likely to be negatively impacted. Thus, does globalization mean the end of Industrial Relations? The various reactions of the labour movement at an international level are analyzed. An alternative offering potential benefits for both parties, labour and management is tentatively proposed : workers‘s participation in management. Even though it leaves the fate of present days unions in the dark, it offers a track for renewed labour‘s influence within the globalization context. Chapter 8 – As globalisation has accelerated, a lot of firms have made alliances, with the aim of being more competitive. This trend is echoed in the development of partnerships within most industries. In marketing, many studies have been carried out concerning the benefits of global partnerships, most often from the viewpoint of firms. In contrast, less attention has been given to the consumer perspective. Therefore, the purpose of this research is to analyse whether the knowledge of a partnership existence between two firms has an

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effect on the brand's image as perceived by the consumer. An experiment was conducted testing consumers‘ brand images in two steps: before and after knowledge of the partnership's existence. The results show that the knowledge of a partnership's existence has an asymmetrical effect on the brand's image that benefits the less appreciated brand. Also, it increases the consumers‘ intention of buying the products of both brands. Chapter 9 – Consumer segmentation aims at identifying groups of consumers for which it is profitable to design a specific strategy. The cost and the strategic purpose of a segmentation implies to identify lasting segments. This robustness is particularly difficult to achieve nowadays, when billions of consumers from emerging economies are exposed to new consumption and lifestyle models. Consumers' values are often considered for segmentation, because of their personal meaning and of their general concern, However, values have generally been found to be poor predictors of consumers' choices. A new approach of human values is proposed to improve their predictivity without increasing the volume of collected data. It relies on the concept of Overall Value Concern (OVC), that is on the hypothesis that, over time, some people are more concerned with their values than other people. The hypothesis is tested empirically, using both the terminal and instrumental values of Rokeach's Value Survey (Rokeach, 1973). Chapter 10 – Globalisation is a great challenge for the take-off of less developed nations. Driven by three main factors, namely foreign direct investment, trade in goods and portfolio investments, its description and its analysis have become an important issue in the understanding of international economic relationships. With regard to foreign direct investment, the disparities within regions or organisations put in place to favour such flows are striking. We chose in this article to analyse foreign direct investment in the South-West Indian Ocean region and more precisely in any of the countries which are members of any of the three following organisations: the Indian Ocean Commission (IOC), the Common Market for Eastern and Southern Africa (COMESA), and the Southern African Development Community (SADC). We study whether the usual determinants (such as GDP or GDP per capita) are still relevant to explain investment flows for such countries. It appears that determinants other than market potential are significant in these countries. Chapter 11 – Globalization has been the significant trend of the world development in the 21st century. The process of Globalization has promoted the rise of emerging markets. China, as a typical emerging market economy, has been increasingly standing out of the world economy in recent years. This article tries to present an objective analysis on China‘s economic reform and practices under the globalization background, which include the positioning of China as an emerging market, China‘s experiences on rising out of the planned economy, China‘s economic performance in handling the Global Financial Crisis and the trend of China‘s new role in the global economy. Chapter 12 – The article discusses two views on the concept of globalization; globalization from above and globalization from below. While globalization from above advances the creation of wealth, globalization from below aims at improving people‘s lives. It indicates that globalization from above affects people of both developed and developing settings, however, the latter suffers disproportionately from the neoliberal policies accompanying globalization from above, because they are already fragile. And the most vulnerable of developing countries including Africa are the rural residents who often lack basic needs such as clean water, education and health facilities. This article shows how rural

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communities can become unsustainable when residents‘ views, realities and environmental conservation are overlooked. It suggests that rural people can have their needs better served if the framework guiding the function of actors seeks to engage them in the process of improving their lot, and they can obtain the capital support they need. Chapter 13 – The idea that globalization can create "losers" as well as "winners" has, after an initial resistance, begun to attract the attention of economic researchers and of policy makers, at both the national and multilateral levels. Much of the discussion to date has concerned countries and regions that have remained stuck at very low levels of income. A good deal of effort has been given to measuring the extent of global poverty and examining the processes of marginalization. While there can be little doubt that poverty alleviation is an important policy challenge, at a more fundamental level, auditing globalization must mean reexamining the links between income distribution and growth at different levels of economic development. Conventional economists have approached this issue by reviving the idea of economic convergence. In particular, trade and capital flows have been introduced into endogenous growth models thereby expanding the range of development paths facing poorer countries and giving greater emphasis to the conditional influence of policy measures. On this basis, a good deal of empirical testing has reported an improved global income distribution over the past two decades largely due to cross-country convergence brought forth by the strong growth performance of open developing economies.1 However, this conclusion has been widely criticized on both empirical and analytical grounds.2 While it is not the intention to review that debate here, it is apparent that much of the discussion of distribution and growth under contemporary globalization dynamics has paid insufficient attention to trends in functional incomes. In fact, growing wage inequality between skilled and unskilled workers appears to have been a universal trend over the past two decades; profit shares have risen in many countries and rentier incomes have also risen sharply. Although a full assessment of these trends has yet to be undertaken, there appears to be a close connection to the contemporary globalization process, and in particular from the divergence in bargaining power which has accompanied the greater mobility of capital. Chapter 14 – Consumer segmentation aims at identifying groups of consumers for which it is profitable to design a specific strategy. The cost and the strategic purpose of a segmentation implies to identify lasting segments. This robustness is particularly difficult to achieve nowadays, when billions of consumers from emerging economies are exposed to new consumption and lifestyle models. Consumers' values are often considered for segmentation, because of their personal meaning and of their general concern, However, values have generally been found to be poor predictors of consumers' choices. A new approach of human values is proposed to improve their predictivity without increasing the volume of collected data. It relies on the concept of Overall Value Concern (OVC), that is on the hypothesis that, 1 2

The convergence literature is vast, see for example Sachs and Warner (1995); Ben-David (1995); Sala-i-Martin (1996). For an assessment see Kozul-Wright and Rowthorn (2002). The extent of the partiality among conventional economists in examining the links between globalization and income distribution can be seen in the recent study by the CEPR (2002). Despite documenting a dramatic rise between 1970 and 1992 in the share of the top 10 per cent of the world's population from 50.8 to 53.4 per cent, the study concludes "the evidence suggests that globalization had positive effects on the world distribution through pushing up Asian growth" p. 67. As is clear from this remark, the interpretation of global trends in distribution hinge to a very large extent on assessments of China‘s recent economic record, see Berry and Serieux (2003).

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over time, some people are more concerned with their values than other people. The hypothesis is tested empirically, using both the terminal and instrumental values of Rokeach's Value Survey. Chapter 15 – An increasing number of countries around the world are rapidly integrating with the fast moving globalization and are fast reforming their domestic economies. A critical examination of market reforms and privatization programs in the wake of globalization raises more questions than it answers. There have been many achievements and more discontents. In this globalization era, the distribution of the benefits of globalization has become an important contentious issue in recent years. The fruits of globalization have not been reaching the developing countries, and more so in the less developed areas and among disadvantaged peoples within the developing economy. No doubt globalization has increased incomes and improved the living standards, but it has also left behind masses of population. Both the world and within-country income inequality has increased and many marginal groups have been simply left out of the mainstream process of development. Even within the rich group, it is not the top 20 per cent, or even the to 10 per cent, who are the winners from rising inequality. The big gains have gone to a much smaller, much richer than that group. In the US, between 1972 and 2001, the income at the 90th per centile of income distribution rose only 34 per cent, or about 1 per cent a year; but, income at the 99th per centile rose 87 per cent, income at the 99.99th per centile rose 497 per cent. A similar pattern has also been observed in India. Recently Piketty and Banerjee, using individual tax returns data, show that the ‗gradual liberalization of the Indian economy did make it possible for the rich (the top 1 per cent) to substantially increase their share in national income‘ and the top 0.1 per cent with big gains. Many attribute this rising income inequality to increasing skill components of highly educated workers. However, the winners are not a fairly large group, in fact, the real earnings of college graduates actually fell in recent years. It seems that only a minority of elites and influential groups have appropriated the globalization proceeds. Chapter 16 – The term ― globalization‖ stands out as the hegemonic concept of the neoliberal ideology, reflecting one of the main items in the current political economy agenda. This buzz-word seems to have a spiritual power in its own right as it provides a center-force directing our daily discourse on economic, social, political, and cultural relations. The concept is mostly revealed as part of a modern project on ― citizenship‖ along with references to such slogans as: ― being a citizen of the globalized village‖ and ―adjusting to the needs of the global markets‖. In this sense, the term itself carries a dual conceptual meaning: a definition, and a policy recipe. As a definition, the term refers to the increased integration of the world‘s commodity and finance markets and its cultural and social values. Within the context of this definition, liberalization of the commodity trade and financial flows yield the narrowest economic implications of the globalization process. At a more general level, this process entails― … a programme for destroying collective structures which may impede the pure market logic‖. In order to sanctify the power of the markets in the name of economic efficiency, this ― infernal machine‖ requires the elimination of administrative or political barriers which limit the owners of capital in their quest for maximization of individual profit, which, in turn has been upheld as the supreme indicator of rationality (ibid). Thus, the concept also covers a list of economic-political- and social actions that is regarded necessary for a country to ― embrace‖ globalization. Brought under the term ― Washington Consensus‖, these conditionalities are often imposed as part of the austerity programmes designed by the International Monetary Fund (IMF) and the World Bank.

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Chapter 17 – U.S.-China economic ties have expanded substantially over the past three decades. Total U.S.- China trade has risen from $5 billion in 1980 to $409 billion in 2008. In 2008, China was the second largest U.S. trading partner, its third largest export market, and its biggest source of imports. About 12% of total U.S. global trade is now with China. According to U.S. data, U.S. firms have invested around $28 billion in China (through 2007), some of which is aimed at the Chinese domestic market, while other investment has gone into export-oriented manufacturing facilities. With a huge population and a rapidly expanding economy, China is a potentially huge market for U.S. exporters. However, bilateral economic relations have become strained over a number of issues, including large and growing U.S. trade deficits with China ($266 billion in 2008), China‘s failure to fully implement its World Trade Organization (WTO) commitments (especially in regards to protection of intellectual property rights), its refusal to adopt a floating currency system, its use of industrial policies (such as subsidies) and other practices deemed unfair and/or harmful to various U.S. economic sectors, and its failure in some cases to ensure that its exported products meet U.S. health and safety standards. Further complicating the bilateral economic relationship is China‘s large holdings of U.S. debt, such as Treasury securities. In September 2008, China overtook Japan to become the largest foreign holder of such securities. Some analysts welcome China‘s purchases of U.S. debt securities, which help fund U.S. budget deficits, while others have expressed concerns that growing Chinese holdings of U.S. debt may increase its leverage over the United States. Chapter 18 – The world appears to be beginning to recover from the global recession that is causing widespread business contraction, increases in unemployment, and shrinking government revenues. Although the industrialized economies have stopped contracting, for many, unemployment is still rising. The United States likely hit bottom in June 2009, but numerous small banks and households still face huge problems in restoring their balance sheets, and unemployment has combined with sub-prime loans to keep home foreclosures at a high rate. Nearly all industrialized countries and many emerging and developing nations have announced economic stimulus and/or financial sector rescue packages, such as the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). Several countries have resorted to borrowing from the International Monetary Fund as a last resort. The crisis has exposed fundamental weaknesses in financial systems worldwide, demonstrated how interconnected and interdependent economies are today, and has posed vexing policy dilemmas. The process for coping with the crisis by countries across the globe has been manifest in four basic phases. The first has been intervention to contain the contagion and restore confidence in the system. This has required extraordinary measures both in scope, cost, and extent of government reach. The second has been coping with the secondary effects of the crisis, particularly the global recession and flight of capital from countries in emerging markets and elsewhere that have been affected by the crisis. The third phase of this process is to make changes in the financial system to reduce risk and prevent future crises. In order to give these proposals political backing, world leaders have called for international meetings to address changes in policy, regulations, oversight, and enforcement. On September 24-25, 2009, heads of the G-20 nations met in Pittsburgh to address the global financial crisis. The fourth phase of the process is dealing with political, social, and security effects of the financial turmoil. One such effect is the strengthened role of China in financial markets.

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In: Globalization Editor: Joseph A. Mancini

ISBN: 978-1-61324-531-6 ©2012 Nova Science Publishers, Inc.

Chapter 1

THE PROTECTION AND PROMOTION OF CULTURAL DIVERSITY AT THE INTERNATIONAL LEVEL: CURRENT STATE AND FUTURE PERSPECTIVES Mira Burri-Nenova World Trade Institute of the University, Switzerland

ABSTRACT

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The Convention on the Protection and Promotion of the Diversity of Cultural Expressions, adopted under the auspices of the United Nations Educational, Cultural and Scientific Organization (UNESCO) in 2005, entered into force on 18 March 2007 after an incredibly swift ratification process. The Convention is the culmination of multiple-track efforts that spread over many years with the objective of providing a binding instrument for the protection and promotion of cultural diversity at the international level. These efforts, admirable as they may be, are not however isolated undertakings of goodwill, but a reaction to economic globalisation, whose advancement has been significantly furthered by the emergence of enforceable multilateral trade rules. These very rules, whose bearer is the World Trade Organization (WTO), have been perceived as the antipode to ―cult ure‖ and have commanded the formulation of counteracting norms that may sufficiently ―p rotect‖ and ― promote‖ it. Against this backdrop of institutional tension and fragmentation, the present chapter explicates the emergence of the concept of cultural diversity on the international policyand law-making scene and its legal dimensions given by the new UNESCO Convention. It critically analyses the Convention‘s provisions, in particular the rights and obligations of the State Parties, and asks whether indeed the UNESCO Convention provides a sufficient and appropriate basis for the protection and promotion of a thriving and diverse cultural environment.



Senior research fellow and lecturer in international media law, World Trade Institute, University of Bern Law School, Switzerland. Contact: [email protected]

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INTRODUCTION ― Cultural diversity‖ has become one of the new buzzwords in international policy- and law-making. It is increasingly employed in various contexts – once as a term close to ― biological diversity‖,3 other times as correlated to the ― exception culturelle‖ and most often, as a generic concept that is opposed to the negative effects of economic globalisation.4 While no one has yet provided a precise definition of what cultural diversity is, and perhaps fortunately so, what we can observe is the emergence of the notion of cultural diversity as incorporating a distinct set of policy objectives and choices at the international level. These decisions are not confined, as one may expect, to the domain of cultural policy-making, but rather spill over to multiple fields of governance, because of the intrinsic complex linkages related to the concurrent pursuit of economic and other societal goals. Thus, policy domains such as media and intellectual property rights protection, but also less intuitively, telecommunications and antitrust law are affected. Accounting for these complex interdependencies, we look in the following at the recently adopted under the auspices of the United Nations Educational Scientific and Cultural Organization (UNESCO) international instrument for the protection and promotion of cultural diversity and explore its main tenets. It is our purpose to expose the real and potential effects of the UNESCO act, both in legal and political terms, and to see whether it indeed provides a sufficient and appropriate basis for the protection and promotion of a thriving and diverse cultural environment.

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OVERVIEW OF MAIN PROVISIONS OF THE UNESCO CONVENTION ON CULTURAL DIVERSITY The UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions (henceforth the UNESCO Convention or just the Convention) was adopted by the 33rd UNESCO General Conference in 2005 with an overwhelming majority of 148 votes with only two countries, the United States and Israel, opposing.5 After an incredibly swift ratification process (the fastest ever in the history of the UNESCO), the Convention entered into force on 18 March 2007.6 Despite this unequivocal acceptance of the Convention, its negotiation and drafting were rather lengthy and strenuous. They involved some hard bargaining and exposed yet again the starkly different perceptions of states when issues like culture, national identity, sovereignty, and economic freedom are at stake. The output of this process, which we discuss in this section, unmistakably bears the marks of lost (or won) power-plays and political compromise.

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Article 1 of the UNESCO Declaration of Cultural Diversity of 2 November 2001 states that, ―…[a ]s a source of exchange, innovation and creativity, cultural diversity is as necessary for humankind as biodiversity is for nature‖. 4 See below section 3. 5 Four countries, Australia, Honduras, Nicaragua and Liberia, abstained. 6 As of 5 March 2009, 96 countries had ratified the UNESCO Convention (see http://portal.unesco.org/la/ convention.asp?KO=31038andlanguage=E; last accessed 1 April 2009).

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THE CONVENTION‟S TEXTUAL BASIS The Convention‘s text consists of thirty-five Articles and an Annex dealing with conciliation procedures. Its scope of application is defined broadly and ambitiously in Article 3 as covering ― the policies and measures adopted by the Parties related to the protection and promotion of the diversity of cultural expressions‖.

Rights and Obligations of the Parties After an introductory part, which lays down the objectives7 and the guiding principles8 of the Convention, as well as contains the definitions of its underlying concepts,9 Part IV of the Convention follows. This Part (encompassing Articles 5 to 19) is critical to evaluating the command and the impact of the UNESCO Convention since it formulates the rights and obligations of the State Parties. Within these provisions, a key one is contained in Article 5, which affirms ― the sovereign right [of the Parties] to formulate and implement their cultural policies and to adopt measures to protect and promote the diversity of cultural expressions and to strengthen international cooperation to achieve the purposes of this Convention‖.10 Article 6 is a specification of this sovereign right with regard to measures promoting and protecting cultural diversity in a Party‘s territory and thus relates sensu stricto to domestic rules. Paragraph 2 of Article 6 provides a non-exhaustive list including eight categories of regulatory, institutional and financial measures that the Parties may choose to adopt. These measures are broadly defined and do not correspond to any particular typology of cultural policy tools.11

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Article 1 of the UNESCO Convention defines as its objective: (a) to protect and promote the diversity of cultural expressions; (b) to create the conditions for cultures to flourish and to freely interact in a mutually beneficial manner; (c) to encourage dialogue among cultures with a view to ensuring wider and balanced cultural exchanges in the world in favour of intercultural respect and a culture of peace; (d) to foster interculturality in order to develop cultural interaction in the spirit of building bridges among peoples; (e) to promote respect for the diversity of cultural expressions and raise awareness of its value at the local, national and international levels; (f) to reaffirm the importance of the link between culture and development for all countries, particularly for developing countries, and to support actions undertaken nationally and internationally to secure recognition of the true value of this link; (g) to give recognition to the distinctive nature of cultural activities, goods and services as vehicles of identity, values and meaning; (h) to reaffirm the sovereign rights of States to maintain, adopt and implement policies and measures that they deem appropriate for the protection and promotion of the diversity of cultural expressions on their territory; (i) to strengthen international cooperation and solidarity in a spirit of partnership with a view, in particular, to enhancing the capacities of developing countries in order to protect and promote the diversity of cultural expressions. 8 Article 2 of the UNESCO Convention formulates eight guiding principles. These are: (1) principle of respect for human rights and fundamental freedoms; (2) principle of sovereignty; (3) principle of equal dignity of and respect for all cultures; (4) principle of international solidarity and cooperation; (5) principle of the complementarity of economic and cultural aspects of development; (6) principle of sustainable development; (7) principle of equitable access; and (8) principle of openness and balance. 9 Article 4 of the UNESCO Convention. These definitions will be looked at, where appropriate, in the following discussion of the Convention (below section 3). 10 Emphasis added. 11 Pursuant to Article 6(2), such measures may include the following: (a) regulatory measures aimed at protecting and promoting diversity of cultural expressions; (b) measures that, in an appropriate manner, provide opportunities for domestic cultural activities, goods and services among all those available within the national territory for the creation, production, dissemination, distribution and enjoyment of such domestic cultural activities, goods and services, including provisions relating to the language used for such activities, goods and services; (c) measures aimed at providing domestic independent cultural industries and activities in the informal

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Articles 7 to 11 were supposed to build the counterpart to the extensively defined rights of the Parties and formulate corresponding obligations. The attempt to incorporate real obligations was however not politically possible and those that remain are mere best effort and good faith obligations expressed in the typical treaty language of ― shall endeavour‖, 12 duties‖ merely motivate the Parties to the ― shall encourage‖ or ―m ay‖. These so framed ― Convention to adopt a number of measures, including such that (i) promote access to and dissemination of cultural expressions;13 (ii) address specific situations where cultural expressions are under serious threat of extinction;14 (iii) ensure an appropriate exchange of relevant information;15 (iv) encourage an enhanced public awareness of the need to protect cultural diversity;16 and (v) the participation of the civil society.17 No strong normative effect can be expected from any of these provisions, except perhaps for Article 9(a), which obliges the State Parties to report to UNESCO every four years on the measures taken for the protection and promotion of cultural diversity. While the above-memtioned Articles 7-11 refer to the national level, Articles 12-19 extend some duties to the international level. These address the cooperation between the State Parties with a view to creating conditions conducive to the protection and promotion of cultural diversity. Many of the norms relate in particular to cooperation with or support of developing countries, including the establishment of an International Fund for Cultural Diversity,18 which is meant to cater for the culturally pertinent financial needs of developing and least developed nations. Very interestingly, one can find in this context also two of the most far-reaching obligations of the Convention. The first is embodied in Article 16 and creates a duty for developed countries to facilitate cultural exchanges with developing countries by granting preferential treatment to artists and other cultural professionals and practitioners, as well as to cultural goods and services from developing countries. The other duty that can be singled out is admittedly of lesser importance and obliges the State Parties to cooperate and assist developing countries in specific situations, where there is a risk of extinction or serious threat for cultural expressions (as defined by Article 8).19 It is worth noting that in previous versions of the Convention‘s text, the Parties could be obliged by the Intergovernmental Committee to take appropriate measures to preserve vulnerable cultural expressions20 (i.e. a sort of sector effective access to the means of production, dissemination and distribution of cultural activities, goods and services; (d) measures aimed at providing public financial assistance; (e) measures aimed at encouraging nonprofit organizations, as well as public and private institutions and artists and other cultural professionals, to develop and promote the free exchange and circulation of ideas, cultural expressions and cultural activities, goods and services, and to stimulate both the creative and entrepreneurial spirit in their activities; (f) measures aimed at establishing and supporting public institutions, as appropriate; (g) measures aimed at nurturing and supporting artists and others involved in the creation of cultural expressions; (h) measures aimed at enhancing diversity of the media, including through public service broadcasting. 12 The Preliminary Draft of the Convention (CLT-2004/CONF.201/CLD.2, Paris, July 2004), prepared by the International Group of Experts included not only rights but also obligations to protect and promote cultural diversity within their territories and internationally. 13 Article 7 of the UNESCO Convention. 14 Article 8 of the UNESCO Convention. 15 Article 9 of the UNESCO Convention. 16 Article 10 of the UNESCO Convention. 17 Article 11 of the UNESCO Convention. 18 Articles 14(d)(i) and 18 of the UNESCO Convention. 19 Article 17 of the UNESCO Convention. 20 Jan Wouters and Bart De Meester, ― The UNESCO Convention on Cultural Diversity and WTO Law: A Case Study in Fragmentation of International Law‖ (2008) Journal of Trade Law 41:1, pp. 205-240.

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supranational interference was prescribed). What is left now in the treaty text is the right to take such measures and the above-mentioned cooperation engagement.

Other Provisions Part V of the Convention contains two norms dealing with its relationship with other legal instruments – Articles 20 and 21. The latter provision, in a rather non-binding manner, encourages the Parties to promote the objectives and principles of the UNESCO Convention in other international forums and to consult each other for this purpose. The former, Article 20 of the Convention incorporates the critical ― conflict of laws‖ rules and had been for this reason at the centre of intense discussions throughout the negotiations. Its scope remains uncertain and controversial, as we explain in more detail in the next analytical section. The last two parts of the Convention deal with matters of institutional and organisational nature (Part VI: Articles 22 to 24) and final clauses (Part VII: Articles 25 to 35).21 The two organs foreseen under the Convention are the Conference of Parties (as a plenary and supreme body) 22 and the Intergovernmental Committee (as an executive body),23 with a specific role assigned to the UNESCO Secretariat.24 We look at elements of these provisions, where relevant in the critical assessment of the Convention following hereupon.

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THE UNESCO CONVENTION: AN APPRAISAL IN CONTEXT The UNESCO Convention is not a sudden act of international goodwill but the pinnacle of multiple-track efforts that spread over many years25 with the objective of providing a binding instrument for the protection and promotion of cultural diversity at the international level. The Convention is thus a crystallisation of some previous, mostly exhortatory acts26 in the fields of culture and trade,27 and of cultural heritage.28 On the other hand, it is also a clear

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The final clauses include: Article 25 – Settlement of disputes; Article 26 – Ratification, acceptance, approval or accession by Member States; Article 27 – Accession; Article 28 – Point of contact; Article 29 – Entry into force; Article 30 – Federal or non-unitary constitutional systems; Article 31 – Denunciation; Article 32 – Depositary functions; Article 33 – Amendments; Article 34 – Authoritative texts; and Article 35 – Registration. 22 Article 22 of the UNESCO Convention. 23 Article 23 of the UNESCO Convention. 24 Article 24 of the UNESCO Convention. 25 See Ivan Bernier, ― A UNESCO International Convention on Cultural Diversity‖ in Christoph Beat Graber, Michael Girsberger and Mira Nenova (eds.), Free Trade versus Cultural Diversity: WTO Negotiations in the Field of Audiovisual Services, Zurich: Schulthess, 2004, pp. 65-76; Americo Beviglia-Zampetti, ―WTORules in the Audio-Visual Sector‖ in Paulo Guerrieri, P. Lelio Iapadre and Georg Koopmann (eds.), Cultural Diversity and International Economic Integration: The Global Governance of the Audio-Visual Sector, Cheltenham, UK: Edward Elgar, 2005, pp. 261-284; Tania Voon, ―U NESCO and the WTO: A Clash of Cultures?‖ (2006) International and Comparative Law Quarterly 55:3, pp. 635-652; Tania Voon, Cultural Products and the World Trade Organization, Cambridge: Cambridge University Press, 2007, at pp. 173-216. 26 Rachael Craufurd Smith, ―TheUNESCO Convention on the Protection and Promotion of Cultural Expressions: Building a New World Information and Communication Order?‖ (2007) International Journal of Communication 1, pp. 24-55, at pp. 28-29. 27 See UNESCO, Agreement on the Importation of Educational, Scientific and Cultural Materials, done at Florence, 17 June 1950 (― Florence Agreement‖). The Agreement was updated with the Nairobi Protocol (done at Nairobi, 26 November 1976). More recent acts are the Council of Europe Declaration on Cultural Diversity, done at

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reaction to economic globalisation,29 whose advancement has been significantly furthered by the emergence of enforceable multilateral trade rules and whose bearer, the World Trade Organization (WTO), has been perceived as the very antipode to ― culture‖. In this sense and this should be stressed here, the UNESCO Convention as a legally binding agreement was meant above all to counterbalance the WTO and fill ― a lacuna in public international law regarding cultural values‖.30 In both of the above aspects, the UNESCO Convention has been celebrated as a remarkable success. Particularly contented are those state and non-state actors who can be collectively referred to as proponents of the ― exception culturelle‖ doctrine31 and who have fervently for many years now argued that cultural products are not just commodities but ― reflect who we are as a people, […] shape our society, develop our understanding of one another and give us a sense of pride in who we are as a nation‖.32 Beyond this rhetoric, however, the odd thing about the Convention is that when one looks at it closely and construes it as a treaty basis for any future undertaking aimed at protecting and promoting cultural diversity, most of the highly optimistic labels that cultural advocates put on it simply do not stick. Against the above overview of the Convention‘s main provisions, in the next section we offer a critical analysis of these33 in light of the initially stated objective of this chapter to assess whether the UNESCO Convention appropriately protects and promotes cultural diversity in the contemporary media environment.

Plenty of Rights, No Obligations

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As an act of international law, the UNESCO Convention contains certain rights and obligations,34 as we showed above. These obligations have varying degrees of binding intensity upon which the Parties have agreed. The UNESCO Convention has however Strasbourg, 7 December 2000 and the UNESCO Universal Declaration on Cultural Diversity, done at Paris, 2 November 2001. 28 See e.g. UNESCO, Convention Concerning the Protection of the World Cultural and Natural Heritage, done at Paris, 16 November 1972; UNESCO, Convention for the Safeguarding of the Intangible Cultural Heritage, done at Paris, 17 October 2003, and Council of Europe, European Landscape Convention, European Treaty Series No 176, done at Florence, 20 October 2000. 29 See e.g. Christoph Beat Graber, ― The New UNESCO Convention on Cultural Diversity: A Counterbalance to the WTO‖ (2006) Journal of International Economic Law 9:3, pp. 553-574. 30 Graber, ibid. at pp. 564-565. 31 See e.g. Frederick Scott Galt, ― The Life, Death, and Rebirth of the ‗Cultural Exception‘ in the Multilateral Trading System: An Evolutionary Analysis of Cultural Protection and Intervention in the Face of American Pop Culture‘s Hegemony‖ (2004) Washington University Global Studies Law Review 3:3, pp. 909-935. 32 Canadian Cultural Industries Sectoral Advisory Group on International Trade (SAGIT), New Strategies for Culture and Trade: Canadian Culture in a Global World, 1999, at Executive Summary, paras 1-2. 33 The UNESCO Convention has been discussed by a number of authors. See e.g. Michael Hahn, ― A Clash of Cultures? The UNESCO Diversity Convention and International Trade Law‖ (2006) Journal of International Economic Law 9:3, pp. 515-552; Graber, above note 27; Christoph Beat Graber, ―Subst antive Rights and Obligations under the UNESCO Convention on Cultural Diversity‖ in Hildegard Schneider and Peter van den Bossche (eds.), Protection of Cultural Diversity from an International and European Perspective, Antwerpen: Intersentia, 2008, pp. 141-162; Craufurd Smith, above note 24; Wouters and De Meester, above note 18; Rolf H. Weber, ― Cultural Diversity and International Trade – Taking Stock and Looking Ahead‖ in Kern Alexander and Mads Andenas (eds.), The World Trade Organization and Trade in Services, Leiden: Martinus Nijhoff, 2008, pp. 823-843, Christopher M. Bruner, ―Cult ure, Sovereignty, and Hollywood: UNESCO and the Future of Trade in Cultural Products‖ (2008) International Law and Politics 40, pp. 351-436, as well as the contributions to Nina Obuljen and Joost Smiers (eds.), UNESCO‘s Convention on the Protection and Promotion of the Diversity of Cultural Expressions: Making It Work, Zagreb: Institute for International Relations, 2006. 34 Articles 5-19 of the UNESCO Convention.

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precious few obligations and these are formulated as mere stimuli for the Parties to adopt measures for the protection and promotion of cultural diversity at the national and international levels, rather than as genuine duties. The only provision of real binding nature (Article 16) resembles the WTO‘s enabling clause35 and relates, as noted above, to the preferential treatment for developing countries, whereby developed countries must facilitate cultural exchanges with developing countries by granting preferential treatment to cultural workers, as well as to cultural goods.36 If one cautiously considers this binding norm, however, its potential scope and impact appears quite narrow. As one well-informed commentator noted, ― [i]ndeed, it can be argued that the main benefits are defined in terms of cultural cooperation and not in commercial terms. What Article 16 can facilitate are cultural exchanges, training, technical assistance and collaborations. The prospects for advancing the aims of expanding cultural industries and generating cultural exports are limited in scope and consequently it is difficult to see how Article 16 of the Convention, on its own, can adequately contribute to the protection and promotion of diversity of cultural expressions in a rapidly commercializing global cultural economy‖.37 Looking at the remaining duties under the UNESCO Convention, the vagueness of the core obligation embodied in Article 7(1) to ― endeavour to create […] an environment which encourages individuals and social groups: (a) to create, produce, disseminate, distribute and have access to their own cultural expressions, paying due attention to the special circumstances and needs of women as well as various social groups, including persons belonging to minorities and indigenous peoples; [and] (b) to have access to diverse cultural expressions from within their territory as well as from other countries of the world‖,38 is truly astounding. Furthermore, no ― punishment‖ for non-compliance is envisaged. Lack of action to achieve this ― environment‖ or any of the other best endeavour obligations contained in Articles 7-19, as Craufurd Smith notes, ― at worst, could result in a state being criticised by the Intergovernmental Committee or Conference of Parties […] on the basis of the state‘s own four yearly reports‖.39 And, while such reporting exercises have proven advantageous in different settings,40 they are unlikely to have any value here, since there exist neither any implementation criteria, nor any threat of sanctions.41 Even if these reporting obligations are to be taken seriously by the State Parties, the reporting requirements are constrained to the measures that the Party has taken and not to the state of the diversity of cultural expressions that these measures should address.42 Despite the extremely limited obligations on the Parties to take action to protect and promote cultural diversity, the Convention formulates an extensive block of rights to that end. 35

See GATT, Decision of 28 November 1979 (L/4903), Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries (―Enabl ing Clause‖). See also Bernard Hoekman, ―Mor e Favorable Treatment of Developing Countries: Ways Forward‖ in Richard Newfarmer (ed.), Trade, Doha, and Development: Window into the Issues, Washington, DC: World Bank, 2006, pp. 213-221; Seung Wha Chang, ―WT O for Trade and Development Post-Doha‖ (2007) Journal of International Economic Law 10:3, pp. 553-570. 36 Article 16 of the UNESCO Convention. For a comprehensive analysis, see Keith Nurse, Expert Report on Preferential Treatment (Article 16) in the UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions, 10 October 2008. 37 Nurse, ibid. at p. 24. 38 Emphasis added. 39 Craufurd Smith, above note 24, at p. 39 and Article 9(a) of the UNESCO Convention. 40 For instance, in the framework of the media rules in the European Union. 41 Craufurd Smith, above note 24, at pp. 37-38. 42 Craufurd Smith, ibid. at p. 37.

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As explained above, Article 6(2) of the UNESCO Convention provides a non-exhaustive list of measures that the Parties may adopt,43 depicting ― with variable clarity‖44 basically all known cultural policy measures that states put in place, ranging from any ― regulatory measures aimed at protecting and promoting diversity of cultural expressions‖45 to the concrete example of public service broadcasting.46 This ― all inclusive‖ approach signals that the Convention‘s object has been ― to endorse forms of market intervention rather than to preclude them‖.47 Admittedly, non-exhaustive lists are not a rare phenomenon in intergovernmental treatymaking. They allow, through some vagueness and constructive ambiguity, the bringing together of an array of (at times diverging) interests and the actual closing of the deal. Yet, what makes the UNESCO Convention peculiar in this regard is the complete lack of criteria and/or mechanisms that would make these definitions workable, separating the licit from the illicit cultural policy measures. This normative incompleteness is a striking feature of the UNESCO Convention and has been much criticised both by prominent negotiation Parties, notably the US,48 and by a host of scholars,49 who warn against protectionism, be it disguised or less so. It is indeed odd that while the Convention clearly acknowledges the dual nature of cultural goods and services and celebrates their cultural side,50 no attempt is made to provide guidance on how states might reduce the market- and trade-distorting effects of cultural policy measures. While a balance between the economic and cultural nature of goods, services and activities is undoubtedly complex, the UNESCO Convention could have at least made ― reference to principles such as proportionality or effectiveness, which could guide the application of these measures and serve to prevent more blatant forms of protectionism‖.51 This innate defect of normative incompleteness is aggravated by the lack of institutional or adjudicatory mechanisms that could procedurally clarify and complete the contract. The Convention‘s exponents still hope that the Intergovernmental Committee and the Convention‘s own dispute resolution will fill in some of the existing gaps, since both allow 43

See Article 6(2)(a)-(h) of the UNESCO Convention. Hélène Ruiz Fabri, ―Refl ections on Possible Future Legal Implications of the Convention‖ in Obuljen and Smiers, above note 31, pp. 73-87, at p. 80. 45 Article 6(2)(a) of the UNESCO Convention. 46 Article 6(2)(h) of the UNESCO Convention. For an overview of the domestic cultural policy measures, see Mary E. Footer and Christoph Beat Graber, ―TradeLiberalisation and Cultural Policy‖ (2000) Journal of International Economic Law 3:1, pp. 115-144, at pp. 122-126. 47 Craufurd Smith, above note 24, at p. 40. In this sense, it also diverges from the contemporary theory of regulation seeking the slightest possible interference. See e.g. Richard R. Nelson (ed.), The Limits of Market Organisation, New York: Russell Sage, 2005; Anthony I. Ogus, Regulation: Legal Form and Economic Theory, Oxford: Clarendon Press, 1994. 48 The US noted in this regard: ―Thisinstrument remains too flawed, too open to misinterpretation, and too prone to abuse for us to support‖. See ― Explanation of Vote of the United States on the Convention on the Protection and Promotion of the Diversity of Cultural Expressions‖, Statement by Louise V. Oliver, US Ambassador to UNESCO, Distributed by the Bureau of International Information Programs, US Department of State, available at http://usinfo.state.gov (last accessed 1 April 2009). 49 See above note 31. See also Mira Burri-Nenova, ―Tradeand Culture: Making the WTO Legal Framework Conducive to Cultural Considerations‖ (2008) Manchester Journal of International Economic Law 5:3, pp. 3-39 and Mira Burri-Nenova, ― Trade versus Culture in the Digital Environment: An Old Conflict in Need of a New Definition‖ (2009) Journal of International Economic Law 12:1, pp. 1-46. 50 The UNESCO Convention stresses that cultural goods and services have a distinctive nature as ―vehi cles of identity, values and meaning‖ and that they intrinsically ―em body or convey cultural expressions, irrespective of the commercial value they may have‖. See Articles 1(g) and 4(4) of the UNESCO Convention. 51 Craufurd Smith, above note 24, at pp. 40-41. 44

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evolutionary advances, depending upon the willingness of the Parties. It should be noted however that the dispute settlement is ultimately not compulsory52 and the tasks of the Intergovernmental Committee, as defined in Article 23(6), may not provide a solid legal basis for it to engage in interpretation of the Convention beyond commenting on the State Parties‘ reports.53

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Incompleteness of the UNESCO Convention Next to the almost entirely missing obligations and implementation criteria, one should note that the framework of the UNESCO Convention is not comprehensive enough to secure the protection and promotion of cultural diversity, leaving some critical elements outside its otherwise generously defined scope of application.54 Some of these missing elements are related to the centrality of state sovereignty, which is intrinsic to the UNESCO Convention. Indeed, the sovereignty of the State Parties in the cultural field is included as one of the eight guiding principles underpinning the Convention (Article 2(2)55) and all rights and obligations stemming from the Convention are attributed to states. While this is understandable for an intergovernmental treaty, cultural rights do not correspond to national boundaries.56 The subscription to human rights and fundamental freedoms57 may remedy this situation to some extent. It is nonetheless disappointing that specific cultural rights, which states must respect (such as access to education or use of language of choice) did not make it into the text, 58 in particular since they were acknowledged by the earlier but non-binding UNESCO Declaration on Cultural Diversity.59 Furthermore, while the Convention does mention indigenous peoples and traditional cultural expressions a few times,60 the relevant provisions remain declarative in nature and again address not the rights of the indigenous peoples themselves but those of the states whose territory is affected. The Convention in this sense ignores recent developments in international law, such as the UN Declaration on the Rights of Indigenous Peoples of 2007.61 Besides this ethnocentricity in the formulation of the rights,62 the 52

See Hahn, above note 31, at p. 533, who critically remarks that the UNESCO Convention‘s dispute settlement is ―w orth mentioning only as being reminiscent of the very early days of modern international law‖. 53 See Article 23(6)(c) of the UNESCO Convention. 54 As noted above in Article 3 of the UNESCO Convention. 55 The principle of sovereignty reads: ―St ates have, in accordance with the Charter of the United Nations and the principles of international law, the sovereign right to adopt measures and policies to protect and promote the diversity of cultural expressions within their territory‖. See also Craufurd Smith, above note 24, at p. 37. 56 In the narrow sense we mean here, above all, Article 27 of the International Covenant on Civil and Political Rights (CCPR) and Article 15(1)(c) of the International Covenant on Economic, Social and Cultural Rights (CESCR). See Asbjørn Eide, ― Cultural Rights as Individual Human Rights‖ in Asbjørn Eide, Catarina Krause and Allan Rosas (eds.), Economic, Social and Cultural Rights, 2nd ed., The Hague: Kluwer Law International, 2001, pp. 289-301; Elsa Stamatopoulou, Cultural Rights in International Law, Leiden: Brill, 2007. 57 Articles 2(1), 2(3) and 7 of the UNESCO Convention. On the relationship between the Convention and human rights, see Graber, above note 27, at pp. 560-563. 58 Craufurd Smith, above note 24, at pp. 28 and 37. 59 Article 5 of the UNESCO Declaration on Cultural Diversity states in the relevant part that, ―[a ]ll persons have therefore the right to express themselves and to create and disseminate their work in the language of their choice, and particularly in their mother tongue; all persons are entitled to quality education and training that fully respect their cultural identity; and all persons have the right to participate in the cultural life of their choice and conduct their own cultural practices, subject to respect for human rights and fundamental freedoms‖. 60 Recitals 8, 13 and 15 of the preamble, Articles 2(3) and 7(1)(a) of the UNESCO Convention. 61 United Nations Declaration on the Rights of Indigenous Peoples, adopted with General Assembly Resolution 61/295, 13 September 2007.

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UNESCO Convention establishes no specific rights for media organisations, journalists or individuals. Their interests are to be realised only through state action, if at all.63 A vital piece omitted from the regulatory domain of the UNESCO Convention, except for the brief remark in the preamble,64 is intellectual property rights (IPRs). This omission is particularly awkward since IPRs have as their core objective the protection and promotion of creativity and innovation, and are thus an indispensable element of all processes related to the creation, distribution of and access to cultural content.65 Seeking an interface with the highly sophisticated IPR system could have contributed to a more balanced IPR application, including providing for a thriving public domain, which is an essential prerequisite for cultural creativity.66 A significant drawback of the Convention in terms of the critical role it was supposed to play as a counterforce to purely economic globalisation (epitomised by the WTO Agreements) is to be found in its ― conflict of laws‖ provision.67 This crucial norm, as provided by Article 20 of the UNESCO Convention, has become victim of unfortunate negotiating and drafting and falls short of ensuring any meaningful interface with the rules of the WTO (or any of the other existing international agreements) in case of a conflict between them.68

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See Nicole Aylwin and Rosemary J. Coombe, ― Cultural Pluralism Protects Traditional Knowledge‖, 2006, available at http://www.wacc.org.uk/wacc/publications/media_development/2006_3/cultural_pluralism _protects_traditional_knowledge (last accessed 1 April 2009). See also Craufurd Smith, above note 24, at p. 54. 63 Craufurd Smith, ibid. at pp. 26 and 28. 64 Recital 17 of the UNESCO Convention‘s preamble recognises ―t he importance of intellectual property rights in sustaining those involved in cultural creativity‖. Intellectual property rights used to be part of the definition of cultural goods and services during the drafting of the Convention. Article 7(2)(b) of the Preliminary Draft (CLT2004/CONF.201/CLD.2, Paris, July 2004) provided further that Parties ―shal l ensure that intellectual property rights are fully respected and enforced according to existing international instruments, particularly through the development or strengthening of measures against piracy‖. For a full account of the existing IPR references during the negotiation of the UNESCO Convention, see Laurence R. Helfer, ―T owards a Human Rights Framework for Intellectual Property‖ (2007) UC Davis Law Review 40, pp. 971-1020, at pp. 1004-1006. 65 As Tomer Broude has observed, ― … intellectual property rights influence cultural change or stability in a number of ways. On one hand, they provide simplified channels of communication in the form of protected inventions, creative content, brands, titles, etc., which make the diffusion of knowledge more efficient. Such simplification is particularly necessary in cross-cultural exchanges, in which the heterophily of participants is increased due to cultural differences. In this respect, intellectual property rights may be expected to facilitate cultural exchange and indeed change. On the other hand, the exclusivity of intellectual property rights may raise the diffusion costs of new knowledge, hampering cultural exchange, or permitting it to occur only in knowledge areas in which the rights‘ holders consider the exchange to be cost-effective, thus making it contingent on their particular interests. Cultural shifts might then be restrained, having lower impact on the knowledge-receiving society. For the same reasons, intellectual property protection may also have a preserving effect on a knowledge-supplying society, if rights are used to protect cultural practices from dilution and abuse through duplication and diffusion‖. See Tomer Broude, ― Conflict and Complementarity in Trade, Cultural Diversity and Intellectual Property Rights‖ (2007) Asian Journal of WTO and International Health Law and Policy (AJWH) 2, pp. 346-368, at pp. 355-356. 66 The initiatives within the World Intellectual Property Organization in this context were not taken into account at all. For a fully-fledged analysis, see Neil W. Netanel, The Development Agenda, Oxford: Oxford University Press, 2009. 67 On the notion of ―c onflict‖, see Joost Pauwelyn, Conflict of Norms in Public International Law, Cambridge: Cambridge University Press, 2003, at pp. 5-11. 68 For all possibilities of conflict between the norms of the WTO, the commitments of the Members under them, and the measures taken under the UNESCO Convention for the protection and promotion of the diversity of cultural expressions, see Anke Dahrendorf, ―FreeTrade Meets Cultural Diversity: The Legal Relationship between WTO Rules and the UNESCO Convention on the Protection of the Diversity of Cultural Expressions‖ in Schneider and Van den Bossche, above note 31, pp. 31-84. See also Graber, above note 27; Wouters and De Meester, above note 18; Bruner, and Hahn, both above note 31.

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Article 20 provides simultaneously that, ― [n]othing in this Convention shall be interpreted as modifying rights and obligations of the Parties under any other treaties to which they are without subordinating this Convention to any other treaty‖, Parties shall parties‖,69 and that, ― foster mutual supportiveness between the Convention and the other treaties to which they are parties.70 Even without lengthy deliberations on the possible implementation and interpretation scenarios,71 it is evident that this rather paradoxical formulation involves no modification of rights and obligations of the Parties under other existing treaties. Notwithstanding this, Parties are to take into account the relevant provisions of the Convention when interpreting and applying other treaties or when entering into other international obligations.72 Interestingly in this context, Garry Neil has shown that the outcome of the only WTO case so far dealing with trade in cultural products, Canada−Periodicals,73 would have been identical even if the UNESCO Convention had been in force at the time the decisions were taken, and regardless of whether the US had or had not joined the Convention.74 Even if a new ― trade versus culture‖ WTO case emerges, which has been the hope of many observers as a final resolution of the conflict through the WTO jurisprudence, we think it highly unlikely that such a resolution would materialise. Glancing at the practice of the WTO adjudication until now, it is improbable that the Panel (and/or the Appellate Body) would dare to radically alter the ― delicate and carefully negotiated balance‖75 of the WTO Agreements. Most likely, the adjudicative bodies would follow the conventional (less imaginative but solid) analysis, which justifies the legal expectations and concentrates on the core trade-related questions that fall within the DSB‘s authority76 (even though the instance of US−Shrimp77 still offers fruitful soil for academic debates78). We deem it not very plausible in this regard that the WTO adjudicatory bodies would substantially ― soften‖ their standards79 with regard to applying provisions key to the overall 69

Article 20(2) of the UNESCO Convention. Article 20(1) of the Convention. 71 See in this regard e.g. Graber, above note 27, at pp. 565-568; Hahn, above note 31, at pp. 540-546. 72 Article 20(1) of the Convention. 73 WTO Panel Report, Canada–Certain Measures Concerning Periodicals (Canada–Periodicals), WT/DS31/R, adopted 14 March 1997 and WTO Appellate Body Report, Canada–Certain Measures Concerning Periodicals (Canada–Periodicals), WT/DS31/AB/R, adopted 30 June 1997. 74 Garry Neil, ― How Effectively Does the Convention Respond to the Cultural Challenges of Economic Globalization?‖, 6 March 2006, available at http://www.suisseculture.ch/doss/ridc/x-ridc.php (last accessed 1 April 2009), at pp. 19-21. 75 WTO Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, WT/DS48/AB/R, adopted 16 January 1998, at para 177 (referring to the specific context of the WTO Agreement on the Applications of Sanitary and Phytosanitary Measures (SPS Agreement)). 76 Article 3(2) of the DSU reads: ―Thedispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system. The Members recognize that it serves to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law. Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements‖. 77 WTO Panel Report, United States–Import Prohibition of Certain Shrimp and Shrimp Products (US–Shrimp), WT/DS58/R, adopted 15 May 1998, modified by WTO Appellate Body Report, United States–Import Prohibition of Certain Shrimp and Shrimp Products (US–Shrimp), WT/DS58/AB/R, adopted 12 October 1998. 78 See e.g. Graber, above note 27, at p. 567. 79 More than the deference the WTO adjudicatory bodies have already shown towards domestic regulators. See e.g. Eric H. Leroux, ―FromPeriodicals to Gambling: A Review of the Systemic Issues Addressed by WTO Adjudicatory Bodies under the GATS‖ in Marion Panizzon, Nicole Pohl and Pierre Sauvé (eds.), GATS and the 70

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functioning of the multilateral trade system, such as the general exceptions contained in Articles XX GATT and XIV GATS (in particular the chapeau test).80 Accounting for the vagueness of the UNESCO Convention‘s provisions, Acheson and Maule note in addition that, ― Panels of the WTO cannot take into account fuzzy concepts of cultural diversity without losing their legitimacy and ultimately their effectiveness‖.81 In any situation, the ongoing case against China and its measures affecting trading rights and distribution services for audiovisual entertainment products and certain publications82 offers a test bed for these speculations since China has made use in its argumentation of both the UNESCO Declaration on Cultural Diversity and its legally binding successor. Closing our critical glimpse of the UNESCO Convention, we concur with Craufurd Smith in saying that, what we have ― is a document that evades controversy, which establishes general objectives and frames them in purely exhortatory terms. As a political manifesto, with little legal substance, it is hardly an advance on the international declarations on cultural diversity which preceded it‖.83 Alternatively, and less sharply, one can plainly say that what made the adoption of the UNESCO Convention possible also emptied it of some of its valuable content. This shows on the one hand the complexity of the issues that arise whenever cultural diversity is to be addressed and on the other hand, in a political context, the starkly different sensibilities and motivation of the Parties when drafting a legally binding international instrument on cultural matters.84 Exploring the interface between the UNESCO Convention and other regimes, the Convention will certainly influence the existing international agreements indirectly in the process of their interpretation.85 Above all, the UNESCO Convention is likely to influence the political context of international agreements by changing the power-plays in negotiations and shaping the content of future agreements (since Parties are to take the Convention into account ― when entering into other international obligations‖86). With specific regard to the WTO, this has been one of the main stimuli (if not the only one) for a number of states to Regulation of International Trade in Services, Cambridge: Cambridge University Press, 2008, pp. 236-275, at pp. 266-270. 80 This is in contrast to the opinion expressed by Shaffer and Pollack. See Gregory Shaffer and Mark Pollack, ― How Hard and Soft Law Interact in International Regulatory Governance: Alternatives, Complements and Antagonists‖ (Paper presented at the Conference ― Trade-And? The World Trade Organization‘s Fuzzy Borders‖, Graduate Institute of International and Development Studies Geneva, 5-6 February 2009; on file with the author), at pp. 58-62. 81 Keith Acheson and Christopher Maule, ― Convention on Cultural Diversity‖ (2004) Journal of Cultural Economics 28, pp. 243-256, at p. 251. As Bruner also notes, ―[i ]f article 20 can be read to require nothing more than a good faith effort to interpret prior treaties in a manner consistent with the Culture Convention‘s goals, then there is real reason to doubt that a WTO dispute resolution panel would exert itself to locate outcome-determinative rules and principles in the Culture Convention – particularly when the little relevant WTO case law indicates that cultural products will not be treated differently from anything else subject to trade disciplines‖. See Bruner, above note 31, at p. 407 (footnotes omitted). 82 See Henry Gao, ―TheMighty Pen, the Almighty Dollar and the Holy Hammer and Sickle: Examination of the Conflict between Trade Liberalization and Domestic Cultural Policy with Special Regard to the Recent Dispute between the United States and China‖ (2007) Asian Journal of WTO and International Health Law and Policy (AJWH) 2, pp. 313-343, at pp. 332-337 (referring to the case China–Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363, 16 April 2007; current state: panel formed; reports not yet distributed). 83 Craufurd Smith, above note 24, at pp. 53-54 (footnote omitted). 84 Ibid. at pp. 30-32. See also Caroline Pauwels, Jan Loisen and Karen Donders, ― Culture Incorporated; or Trade Revisited? How the Position of Different Countries Affects the Outcome of the Debate on Cultural Trade and Diversity‖ in Obuljen and Smiers, above note 31, pp. 125-158. 85 Graber, above note 27, at pp. 567 and 571; Voon (2006), above note 23, at p. 652. 86 Article 20(1)(b) of the UNESCO Convention.

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pursue the adoption of the UNESCO Convention – in particular as recent free trade agreements (FTAs) of the US have increased the level of liberalisation in the particularly sensitive domains of audiovisual services, digital trade and of intellectual property rights protection and enforcement.87

DISCONNECTING TRADE AND CULTURE: THE UNESCO CONVENTION AS PART OF THE PROBLEM RATHER THAN THE SOLUTION As already noted, much of the political muscle that led to the adoption of the UNESCO Convention came from the strong opposition to the effects of economic globalisation and the lack of adequate solutions in the WTO Agreements that would give Members sufficient policy space for domestic cultural policy measures. This being said, one needs to qualify the statement and admit that categorising the WTO Agreements ― as solely trade-oriented and therefore culture-insensitive is not fully deserved‖.88 Indeed, if one looks into the evolutionary path of the trade and culture quandary, it was the predecessor of the WTO – the General Agreement on Tariffs and Trade (GATT) 1947 – that first89 accommodated some cultural concerns in the context of international trade after World War II when the older but much smaller European industries received state protection (mostly through import and screen quotas) against the incoming Hollywood supply.90 Article IV GATT was the response to these policies and while prohibiting quantitative restrictions of imports91 provided for some flexibility with regard to screening cinematograph films.92

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Craufurd Smith, above note 24, at p. 48. See also Sacha Wunsch-Vincent, The WTO, the Internet and Trade in Digital Products, Oxford: Hart, at pp. 201-232; Ivan Bernier, ― The Recent Free Trade Agreements of the United States as Illustration of Their New Strategy Regarding the Audiovisual Sector‖, April 2004, available at http://www.suisseculture.ch/doss/ridc/x-ridc.php (last accessed 1 April 2009). 88 Wouters and De Meester, above note 18, at p. 218. 89 In the context of UNESCO, it was only in the 1990s that the organisation took a concrete interest in protecting cultural diversity from the alleged negative effects of international trade and economic globalisation. Key steps in this process were the publication of the seminal report „Our Creative Diversity‟ by the World Commission on Culture and Development in 1995 and the 1998 Stockholm Conference on Cultural Policies for Development. For a detailed account, see Bernier, supra note 23 and Bruner, supra note 31, at pp. 378-383. 90 The European industries were also to a substantial degree destroyed by the wars. At the same time, Hollywood was flourishing and its productions, whose access to Europe was constrained due to the war, flooded the market after the war. See Bruner, supra note 31, at p 367, referring to Hernan Galperin, ―Cult ural Industries in the Age of Free-Trade Agreements‖ (1999) Canadian Journal of Communication 24:1, pp. 49-77, at p. 68. See also John Trumpbour, Selling Hollywood to the World: US and European Struggles for Mastery of the Global Film Industry, 1920-1950, Cambridge: Cambridge University Press, 2007. 91 Article XI GATT. 92 Article IV GATT covers ―i nternal quantitative regulations relating to exposed cinematograph films‖, which must take the form of ―scr een quotas‖ conforming to certain requirements (Article IV, paras (a) to (d)). Such quotas ―m ay require the exhibition of cinematograph films of national origin during a specified minimum proportion of the total screen time actually utilized‖ (Article IV(a) GATT) and may ―res erve a minimum proportion of screen time for films of a specified origin other than that of the Member imposing such screen quotas‖ (Article IV(c) GATT). On Article IV GATT, see Rostam J. Neuwirth, ―TheCultural Industries and the Legacy of Article IV GATT: Rethinking the Relation of Culture and Trade in Light of the New WTO Round‖ (Paper presented at the Conference ― Cultural Traffic: Policy, Culture, and the New Technologies in the European Union and Canada‖, Carleton University, 22-23 November 2002). On the most infamous South-Korean screen quota system, see Won-Mog Choi, ―Scree n Quota and Cultural Diversity: Debates in Korea-US FTA Talks and Convention on Cultural Diversity‖ (2007) Asian Journal of WTO and International Health Law and Policy (AJWH) 2:2, pp. 267-286.

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Next to the leeway for screen quotas expressly devised in Article IV GATT, plenty of other norms scattered within the body of the WTO law93 can be found relevant and allow certain flexibility as far as trade in cultural goods and services is concerned.94 In particular, the General Agreement on Trade in Services (GATS) offers more wiggle room than the GATT,95 since the GATS framework involves primarily a ― bottom-up‖ (or ― positive list‖) approach, whereby Members can choose the services sectors and sub-sectors in which they are willing to make national treatment or market access commitments, and can define the modalities of these commitments. In contrast, obligations under GATT regarding national treatment and quantitative restrictions apply across the board, subject to specified exceptions (a ―top -down‖ or ― negative list‖ approach).96 The existing scope for domestic measures regarding trade in culture was however never found sufficient.97 The inner tension between trade and culture has always been there, even within the GATT 1947, as the WTO‘s less far-reaching institutional predecessor.98 This tension exploded during the Uruguay Round (1986-1994), when France and Canada fought the ― exception culturelle‖ battle with the goal of exempting cultural services (in particular ment audiovisual ones) from the newly created agreement on services.99 The infamous ―Agree to Disagree‖ was a sort of ceasefire, whereby GATS covers all services sectors but permits commitment flexibilities.100 However, it did not provide a real solution and cultural proponents were well aware of this. The further liberalisation commitment101 was impending and the MFN exemptions made were at least theoretically limited in time. 102 A particularly

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The law of the WTO is contained in several agreements, attached as annexes to the WTO Agreement that encompass the General Agreement on Trade and Tariffs (GATT), the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). We refer to these as the WTO Agreements. They are contained in Annex 1 of the WTO Agreement. Other Annexes organise additional aspects of liberalisation such as the dispute settlement procedure (Annex 2), the trade policy review mechanism (Annex 3) and certain plurilateral agreements (Annex 4). 94 For an overview of all relevant provisions, see Christoph Beat Graber, ― Audiovisual Media and the Law of the WTO‖ in Graber et al., above note 23, at pp. 47-56. 95 Graber, above note 27, at pp. 555 and 569. 96 See generally by John H. Jackson, William J. Davey, Alan O. Sykes, Legal Problems of International Economic Relations, 5th ed., Eagan, MN: West, 2008. 97 See e.g. Sandrine Cahn and Daniel Schimmel, ― The Cultural Exception: Does It Exist in GATT and GATS Frameworks? How Does It Affect or Is It Affected by the Agreement on TRIPS?‖ (1997) Cardozo Arts and Entertainment Law Journal 15, pp. 281-314, at pp. 287-289. 98 See e.g. GATT, EEC–Directive on Transfrontier Television: Response to Request for Consultations under Article XXVII:I by the United States, DS4/4, 8 November 1989. Later WTO cases worth mentioning are WTO, Turkey– Taxation of Foreign Film Revenues: Request for Consultations by the United States, WT/DS43/1, 17 June 1996; WTO, Turkey–Taxation of Foreign Film Revenues: Request for Establishment of a Panel by the United States, WT/DS43/2, 10 January 1997; and Canada–Periodicals, above note 71. For an overview, see Hahn, above note 31, at pp. 528-530. 99 See Christoph Beat Graber, ― Audio-visual Policy: The Stumbling Block of Trade Liberalisation‖ in Damien Geradin and David Luff (eds.), The WTO and Global Convergence in Telecommunications and Audiovisual Services, Cambridge: Cambridge University Press, 2004, pp. 165-214; Martin Roy, ―A udiovisual Services in the Doha Round: Dialogue de Sourds, The Sequel?‖ (2005) Journal of World Investment and Trade 6:6, pp. 923952. 100 See Bruner, above note 31, p. 374; Galt, above note 29, at p. 914; Cahn and Schimmel, above note 95, at pp. 291-301. 101 See Part IV GATS. Article XIX therein states: ―Inpursuance of the objectives of this Agreement, Members shall enter into successive rounds of negotiations, beginning not later than five years from the date of entry into force of the WTO Agreement and periodically thereafter, with a view to achieving a progressively higher level of liberalization‖. 102 The GATS Annex on Article II Exemptions states (at para 6) that, ―[i] n principle, such exemptions [to MFN] should not exceed a period of 10 years. In any event, they shall be subject to negotiation in subsequent trade liberalizing rounds‖. The exemptions made should have thus theoretically expired in 2005.

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unpleasant blow to cultural exception backers was the Canada–Periodicals case,103 decided by the Panel and the Appellate Body to the benefit of the US and despite the fact that the Canada-US Free Trade Agreement (CUSFTA)104 envisaged a cultural exception clause.105 Against this backdrop, the UNESCO Convention could be interpreted as a sort of ―foru mshopping‖ – moving matters related to culture outside the WTO realm and seeking an impact on the negotiation processes within the WTO with a newly charged political strength. In this sense, while the Convention elevates ― the status of cultural diversity as a matter of international concern, just as international agreements on the environment and health have helped to underline the importance of these considerations in other international fora such as the WTO‖,106 we see this only partially as an advancement towards a better functioning global governance system. Indeed, and here lies our core argument, one can view the UNESCO Convention as part of the problem rather than the solution. It is a sign of extreme disconnection between issues of trade and culture – a disconnection that does none of these domains good and does not reflect the recent developments in contemporary media markets. Whereas there are a number of critique points that can be formulated, we address here only one that is in our opinion fundamental to the whole discussion of cultural diversity in a global and local context, and has to do with the understanding of the effects of trade upon culture. This understanding is also symptomatic of the formation of political antagonism, which is often detrimental to constructive solutions. While it is undoubted that ― trade generates complex and often contradictory effects‖,107 it is equally certain that trade is not a ― zero-sum‖ game,108 and there are various ways in which trade enhances cultural flows and exchanges. In the ― trade and culture‖ discourse however the common (and particularly loud) statements are that cultural diversity is impoverished and indeed almost extinguished as the globalised flow of easy entertainment coming from Hollywood dominates and homogenises.109 This (mis)conception110 is difficult to put right or

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103

See above note 96. Canada-US Free Trade Agreement, 22 December 1987-2 January 1988, 27 ILM 281 (1988). 105 In CUSFTA, the culture exception was coupled with a retaliation provision. Article 2005 CUSFTA provides that, ―[c] ultural industries are exempt from the provisions of this Agreement‖, but also that either party could ―t ake measures of equivalent commercial effect in response to [such] actions‖. The North American Free Trade Agreement (NAFTA; 17 December 1992, 32 ILM 289 (1993)) incorporated by reference CUSFTA this cultural exception. It exists only as between Canada and both the US and Mexico, but not between the US and Mexico. In practice, this provision comforting the Canadian cultural sector had little effect. See Cahn and Schimmel, above note 95, at p. 30. 106 Craufurd Smith, above note 24, at pp. 29-30. See also Voon (2006), above note 23, at p. 652. 107 The Multilateral Trade Regime: Which Way Forward?, The Report of the First Warwick Commission, Coventry, UK: University of Warwick, 2007, at p. 26. 108 For some classic thoughts in this regard, see Paul Krugman, ―C ompetitiveness: A Dangerous Obsession‖ (1994) Foreign Affairs 73:2, pp. 28-44. 109 For a critique of the cultural industries and on the homogeneity of content, see Christoph Beat Graber, Handel und Kultur im Audiovisionsrecht der WTO, Bern: Staempfli, 2003, at pp. 18 et seq. 110 See e.g. Anthony Giddens, Runaway World: How Globalisation Is Reshaping Our Lives, London: Routledge, 2002. With regard to culture, Giddens (at p. xxiv) holds: ―West ern, and more specifically American, cultural influence is visible everywhere – in films, television, popular music and other areas. Cultural standardisation is an intrinsic part of this process. Yet all this is relatively superficial cultural veneer; a more profound effect of globalisation is to produce greater local cultural diversity, not homogeneity. The United States itself is the very opposite of a cultural monolith, comprising as it does a dazzling variety of different ethnic and cultural groups. Because of its ‗push-down‘ effect […] globalisation tends to promote a renewal of local cultural identities. Sometimes these reflect wider world patterns, but very often they self-consciously diverge from them‖. Tyler Cowen also insists that global monopolies and imported technologies have led to promoting local creativity by generating new markets for innovative, high-quality artistic productions. See Tyler Cowen, Creative Destruction: How Globalization Is Changing the World's Cultures, Princeton: Princeton University Press, 2002, at p. 146 and 104

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at least soften. The discussion on ― trade values‖ and ― non-trade values‖ is extremely overpoliticised and often resembles a clash between two religions that find no communication path between them. In the specific sense of cultural policy-making, the above debate is additionally burdened with notions of cultural and national identity that lead to national sovereignty susceptibilities. In the sub-context of policy-making in audiovisual media, the discussion is further complicated since ― one‘s view on the role of media in society is intimately bound up with one‘s view of democracy and the proper bounds of governmental power‖.111 Ultimately, all these interrelated discourses are in a profound state of transition: endogenously (within the nation state), ― as the audiovisual sector moves from being a separable and quarantined domain of governance to its enactment as part of a whole-of-government modelling in which it emerges as a service industry in a ‗digital economy‘‖,112 and exogenously (outside the nation state), as liberalisation, migration and other forces of globalisation113 induce sweeping societal shifts that make modern society increasingly homogeneous across cultures and heterogeneous within them.114 Under these circumstances, it becomes outdated and increasingly inappropriate to apply notions of cultural diversity, which ― tend to favour ‗billiard ball‘ representations of cultures as neatly bounded wholes whose contents are given and static. These understandings downplay ‗the ways in which meanings and symbols of culture are produced through complex processes of translations, negotiation and enunciation‘, as well as by contestation and conflict‖.115 To be clear, these are precisely the perceptions of the UNESCO Convention, whose premise is that it is cultural diversity between nations and not within nations that needs to be protected and promoted, and this stance shapes the cultural policy measures taken by the State Parties.

Tyler Cowen, In Praise of Commercial Culture, Cambridge, MA: Harvard University Press, 1998, in particular at pp. 15-43. 111 Bruner, above note 31, at p. 432, referring also to Neil W. Netanel, ―TheCommercial Mass Media‘s Continuing Fourth Estate Role‖ in Niva Elkin-Koren and Neil W. Netanel (eds.), The Commodification of Information, The Hague: Kluwer Law International, 2002, pp. 317-339, at pp. 317-318; C. Edwin Baker, Media, Markets, and Democracy, Cambridge: Cambridge University Press, 2001, at pp. 125-216. 112 Tom O‘Regan and Ben Goldsmith, ―Maki ng Cultural Policy: Meeting Cultural Objectives in a Digital Environment‖ (2006) Television and New Media 7:1, pp. 68-91, at p. 88. For a comprehensive analysis of the changes in the media landscape due to the advent of digital technologies, see Mira Burri-Nenova, ― New Technologies, New Patterns of Consumer/Business Behaviour and Their Implications for Audiovisual Media Regulation‖ (2007) medialex: The Swiss Journal of Communications Law 4, pp. 171-179. 113 Madhavi Sunder, ―Cult ural Dissent‖ (2001) Stanford Law Review 54, pp. 495-567, at p. 498. 114 See e.g. Arjun Appadurai, Modernity at Large: Cultural Dimensions of Globalization, Minneapolis, MN: University of Minnesota Press, 1996, at p. 48; Arif Dirlik, The Postcolonial Aura: Third World Criticism in the Age of Global Capitalism, Boulder, CO: Westview Press, 1998, at p. 72. 115 Yudhishtir Raj Isar, ―Cult ural Diversity‖ (2006) Theory, Culture and Society 23:2/3, pp. 371-375, at p. 372, referring to Nick Stevenson, Cultural Citizenship: Cosmopolitan Questions, Maidenhead: Open University Press, 2003, at p. 62. In terms of trade and culture, Singh has also noted that, ―[t ]he cultural voices coming through on the international commercial networks rely less on some primeval notion on authentic diversity than on hybridity and innovation. They serve to illustrate not just the complexity of cultures and their transnational linkages but, more importantly, a distinctiveness that is confident of borrowing from genres around the world and more or less ulture or Commerce? A Comparative Assessment of unafraid of commercial processes‖. See J.P. Singh, ―C International Interactions and Developing Countries at UNESCO, WTO, and Beyond‖ (2007) International Studies Perspectives 8, pp. 36-53, at p. 50, referring to Nestor Garcia Caclini, Hybrid Cultures: Strategies for Entering and Leaving Modernity, Minneapolis: University of Minnesota Press, 1995; Ulf Hannerz, Cultural Complexity: Studies in the Social Organization of Meaning, New York: Columbia University Press, 1993; Ulf Hannerz, Transnational Connections: Culture, People, Places, London: Routledge, 1996.

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CONCLUDING REMARKS The UNESCO Convention on Cultural Diversity that has been at the core of this chapter‘s analysis is a major international endeavour that was meant to provide for the emancipation of certain ― non-trade‖ values – notably, a culturally diverse environment – to the international scene of policy- and rule-making. The UNESCO Convention has succeeded in some aspects of this ambitious exercise. It has certainly augmented the value of cultural diversity as a legitimate public interest objective and it is from now on likely to be taken seriously into account when related international agreements are negotiated and adopted. The Convention would also stimulate the State Parties to design specifically targeted domestic measures for the protection and promotion of the diversity of cultural expressions and has undoubtedly given international cooperation in the field, in particular with developing countries, more concrete dimensions. Yet, the UNESCO Convention is also somewhat disappointing. As we have shown above, it involves no real obligations for the State Parties, has no enforcement or adjudicatory mechanisms, no criteria to distinguish licit from illicit cultural policy measures and can thus be seen as a door wide open for protectionism. This is likely to be especially strongly felt in the context of the WTO, where Members could refuse to further open their markets by simply waving the banner of cultural diversity. Indeed, the case of ― trade versus culture‖ becomes very attractive for politicians as the popularity of globalisation wanes, in particular in industrialised countries,116 and as national values and interests, especially after the 9/11, gain prominence.117 Yet, the politically driven disconnect between trade and culture, while easily justified before the respective constituencies, is not necessarily beneficial for either the domain of trade or that of culture. The relationship between the two is somehow natural and it has in fact been explicitly recognised by the UNESCO Convention that cultural goods and services have a dual nature and constitute commodities that can be traded, as well as ― vehicles of identity, values and 118 meaning‖. A simple carve-out of cultural matters from the trade context and their transfer to the venue of UNESCO is unlikely to resolve the complex issues related to cultural exchanges, diversity, hybridity, global/local relationships, national identities, etc. This does not mean that cultural policy measures should be all together abandoned and that the free flow of goods and services alone will cater for a diversity of expressions. Yet, the benefits of the existing trade restrictions may very well prove not to outweigh their costs and may even be detrimental to the goal of cultural diversity.119 In this sense, one may indeed argue that it is within the mandate of the UNESCO Convention, the scope of which certainly goes beyond the plain reservation of ― shelf-space for domestic productions in television programs and cinemas‖,120

116

The Warwick Commission Report, above note 105, at p. 19 and chapter 1. For a critique of the cultural exception doctrine, see Galt, above note 29, at pp. 915-922. Article 1(g) of the UNESCO Convention. 119 ―[E] ven a cursory look at international trade in cultural products shows two contradictory but important trends. Developed countries at the forefront of efforts to ‗protect‘ cultural diversity are at the forefront of cultural trade as well. Developing countries as a whole, band-wagoning on the protections wagon, in fear of losing out from such trade, are actually gaining increased shares, even though they remain marginal‖. Singh, above note 113, at p. 42. See also the data exemplifying this statement, at pp. 43-45. 120 Hahn, above note 31, at p. 533. 117 118

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Mira Burri-Nenova

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to encourage the ratifying Parties to dismantle some trade barriers and to adopt a more differentiated approach towards the matters of trade and culture.

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Chapter 2

THE „WHIRLWIND” OF GLOBALIZATION: IMPLICATIONS FOR STRATEGIC GLOBAL HUMAN RESOURCE MANAGEMENT

1

Michael Harvey1 and Miriam Moeller2 Distinguished Chair of Global Business, University of Mississippi, U.S.A. Global Management, Bond University, Australia 2 University of Mississippi and Bond University, Australia

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ABSTRACT The ― whirlwind‖ of globalization is affecting organizations in ways never before imagined. The shift in perspective from multinational corporations (MNCs) to a global organizational design brings to surface a new frontier of challenges to be conquered in the 21st century business environment. While the present MNC state encourages organizations to broaden their environmental awareness, the kaleidoscope of new economic/environmental challenges surrounding an organization‘s short- and long-term decision-making procedures takes on a new meaning in the light of global success. The key to successfully tackling this issue is to identify and develop human capital such that it may provide flexibility/adaptability to master the complexities of an increasingly hypercompetitive business environment.

INTRODUCTION It is not difficult to get caught-up in the ― whirlwind‖ of globalization given the omnipresent nature of the phenomena and the ‗flattening‘ of global competition (Friedman, 2005). This is particularly true of business organizations in that they are a microcosm of the broader macro-environment who is trying to conquer their share of the global market. The focal point of the human resource function lies in the employing a qualified pool of 

Corresponding Author: 662.195.5830 (P). 662.915.5821 (F). [email protected]

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multicultural managers who are able to effectively manage operations around the world. Their capacity to create a sustainable competitive advantage is vital for the organizations‘ long-term survival. Consequently the underlying question is, ― to what degree is globalization going to impact human resource management in organizations attempting to effectively compete in the global marketplace?‖ In a recent study (Ringo and MacDonald, 2008), the authors conclude that there are five key issues facing the global human resource management in the next decade: 1.) Developing flexible/adaptive competencies in their global workforces; 2.) addressing the leadership gap which places future global growth at risk in many companies; 3.) cracking the code for how to find, motivate, and retain superior global management talent; and 4.) developing a new set of performance metrics for global management and; 5.) human resource management taking on a more strategic orientation to talent management and partnering with management to develop a strategic global human resource management (SGHRM) perspective. Each of these recommended modifications in the traditional human resource functions is being stimulated by the quickening pace of the globalization of business.

GLOBALIZATION AND THE EVOLVING NATURE COMPETITION

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What is driving the seemingly relentless globalization of business in the early part of the twenty-first century? Globalization represents a pervasive and profound change in how business is visualized and conducted. These changes are brought about by: (1) A reduction in national boundaries and a liberalization of trade regulations and/or policies that relate to conducting business in the global marketplace; (2) contemporaneously occurring events, opportunities, and strategic options available to organizations in a never ending cornucopia of options (e.g., markets, products, relationships, promotions, and the like) open to the global organization; (3) significant transfer of technology to the emerging world economies from the developed economies; (4) amalgamation of individual economies into regional trading blocks (e.g., EU, NAFTA, and the like); (5) rapid growth of knowledge-intensive economies/firms and the resulting advent of global e-commerce businesses through the use of the world-wide-web; and (6) declining computational, communication, and transportation cost globally. The implication of these changes for multinational corporations (MNCs) are as follow: The requisite attempts of multinational corporations (MNCs) to shift strategic focus from the traditional economies of scale to future goals of global economies of scope have rendered these organizations‘ current competitive advantage only temporarily sustainable in new hypercompetitive global marketplace (D‘Aveni, 1999; Fiegenbaum, Thomas, and Tang, 2001; Ngamkroeckjot and Johri, 2003). To gain and maintain at least a series of ‗momentary‘ competitive advantages in these highly volatile environments, the MNCs have resorted to focusing their strategies on the

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development of intangible assets (i.e., the specific local market and social knowledge of managers utilized in cross-border assignments), and integrating them into distinct competencies (Bogner and Barr, 2000; Harvey and Lusch, 1999; Lusch, Harvey, and Speier, 1998; Makadok, 1998).

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THE UNDERLYING FORCES WHICH WILL PERPETUATE THE GLOBALIZATION TREND Some practitioners may question the project longevity as well as the magnitude of changes that are anticipated relative to the globalization trend taking place in the marketplace today (Blyther and Zimmerman, 2004). It is human nature to think that ― this too shall pass‖, yet upon closer examination it becomes readily apparent that the globalization phenomena is just that true of a phenomena in the fullest sense of the word (Blyther and Zimmerman, 2004; Parayre and Hurry, 2001; Wiggins and Ruefli, 2005). There are four interrelated factors that insure the continued acceleration of globalization (Blyther and Zimmerman, 2004; Sengupta, 2002;Thomas and D‘Aveni, 2004a; 2004b): 1.) technological factors; 2.) political factors; 3.) global economic factors; and 4.) strategic organizational implications of the globalization phenomena. I. Technological Factors: There are a myriad of technological factors related to the globalization trend in the worldwide economy. There is an increased importance of the strategic role of technology in the competitive positioning of organizations in the global marketplace. Technology costs are raising, therefore organizations must look at amortizing the increased cost of RandD over a larger number of potential consumers. Along with the increase in the cost of RandD costs is the heightened risk of making larger investments in basic technologies, resulting in the difficulty to acertain the payback. In addition, the lifecycles of the basic technology and the resulting products are shortened given the hypercompetitive nature of global competition (e.g., each competitor searching for a means to maintain a momentary monopoly in a niche in the competitive marketplace). The most logical means of gaining this foothold on the competitive ladder is to introduce new products and services based upon modifications in technological elements of competitors (Mayer, 2002; Narula, 2003; Stiglitz, 2003b). Technological-based strategy has become a staple in the competitive arsenal of global competitors and helps to insure its continued use in the future. At the same time, competitors from all parts of the global marketplace can take the existing technology and improve upon it to ‗leap-frog‘ ahead of the competitors using the ‗dated‘ technology. This strategic one-upsman-ship naturally accelerates the rate of change in taking place through the modification of technologies. The onslaught of technology-based competition also increases the rapid growth of new knowledge and information becoming the foundation for global competition. In particular the speed and efficiency with which information is transferred may provide a competitive advantage in itself. As information/data is generated, it is disseminated throughout the competitive world increasing the ability of more competitors to be competitive with their counterparts in the global marketplace. II. Political Factors: As mentioned earlier, there is a liberalization of trade agreements and the resulting increase in the flow of goods and services among countries worldwide. The

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liberalization is due in part to the recognition that fundamental changes are taking place in the competitive arena; hence there is a necessity for countries/organizations to cooperate to be competitive. The emergence of strategic collectivism in the competitive arena is a relatively new competitive phenomenon and one that is based upon the formation of competitive coalitions (e.g., at the organization as well as the country level) which once formed are difficult to reverse. Given the new coalitions in the global marketplace, there is a tendency for inward foreign direct investment with partners rather than in other, non-partner countries and/or organizations. These internal coalition investment strategies can strengthen the ties between trading partners and among countries belonging to the same regional trading alliances. Uncoupling these major trading blocks due to the level of interdependency of the trade partners will become nearly impossible. The co-mingling of economic futures allows for a growing trend to address the intellectual property rights of member countries/organizations. Historically, these property rights have been overlooked in some countries to permit indigenous organizations to compete with companies from the developed world. It has become paramount to legitimize the competitive efforts of the emerging global companies by recognizing the property rights of cohort regional competitors as well as those in other competitive strategic market groups (Cerny, 1997; Nash, 2000; Petras and Veltmeyer, 2001). III. Global Economic Factors: The underlying economic fundamentals also provide the backdrop for increasing globalization of business. Key production factors (e.g., plant, equipment, capital, and the like) are relatively abundant through global capital markets. The leveraging of production capabilities allows heretofore competitive ‗have not's‘ the economic means to be competitive against other organizations worldwide. The fungible nature of factors inputs makes entry into the competitive arena more feasible for a larger number of competitors. At the same time that factor inputs are becoming ‗generic‘ countries as well as companies, in that they have productivity differentials that form the basis for trade (e.g., relative (economic) advantages). This economic condition encourages the off-shoring of labor to lowest labor cost countries as a common competitive strategy. This migration of employment encourages countries to utilize the least costly factor inputs to remain globally competitive. The fluctuation in exchange rates among countries provides additional incentives for global organizations to move capital and employment to advantageous geographic locations. Above all, the rapidly increasing population bases of emerging economies help to insure that these new economic engines will be key strategic factors in the future of global business (Garten, 1996; 1997; 1998). If there is a population shift underway in emerging economies, it is important for global organizations to recognize this demographic trend and modify future strategic options to include these countries in their future plans. An additional economic factor that provides the incentive to globalize business is the differences in business cycles (i.e., fluctuations among economic activity) among the countries of the world. The risk of economic downturn in one country can be off-set to a degree by better economic opportunities in other countries. While the global economy is interconnected, there is still a large degree of independence of countries due to their unique set of competitive relative advantage (e.g., raw materials {availability, cost, and access}, cost of labor, specialization of labor and the like). This economic uniqueness of countries is an

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important economic factor when evaluating the importance of globalization to countries/organizations. IV. Strategic Organization Factors: Globalization is at the heart of the new competitive posture of many organizations competing in the worldwide competitive arena. These organizations attempt to develop competitive advantage through some form of developing a global mindset (Kedia and Mukherji, 1999; Kefalas, 1998; Harvey and Novicevic, 2006; Paul, 2000), whereby a global frame-of-mind is described as ― the ability to scan the world from a broad perspective, always looking for unexpected trends and opportunities that may constitute a threat or an opportunity to achieve personal, professional or organizational objectives‖ (Rhinesmith, 1993, p. 24). This strategy attempts to destroy competitors‘ momentary competitive advantages, while at the same time developing the foundation for the organization to gain a long-term competitive position for itself. Moreover, this competitive strategy frequently will be attempting to consolidate competitive advantage through their global network organization. This interorganizational global network of companies once again provides the resources to effectuate global economies of ‗scope‘ strategy to reach markets throughout the world. The global competitive marketplace will shift from a tangible product-based marketing orientation to an intangible knowledge/service based orientation. These switches in marketing strategic focus will increase the value of soft resources (e.g., personnel, proprietary knowledge, learning, and the like) over the more conventional hard assets (e.g., products, brands, production facilities, and the like) which were the foci of marketing strategies for decades. The development of a global mindset for the management of the organization is an additional request to being strategically competitive in the global marketplace. This global strategic management ‗software‘ permits the management to make preemptive and difficult to imitate strategic behaviors that can allow the organization to be positioned in a unique manner relative to other competitors. These factors will help to insure that organizations will be competing in a global marketplace in the future and that globalization is not a transitory phenomenon that can be ignored or will dissipate in the foreseeable future. As a result, the acceleration of globalization poses an immense problem to human resource management. As stated in the beginning, the question becomes, ― what is the indirect and direct impact of globalization on the human resource management?‖

THE IMPACT OF GLOBALIZATION ON HUMAN RESOURCE MANAGEMENT It would appear that organizations must develop a cadre of managers who have a global mindset as a way of thinking within the global marketplace (Begley and Boyd, 2003; Kedia and Mukherji, 1999; Paul, 2000; Clapp, Luthans, and Avolio, 2008). These managers must develop a pluralistic management perspective that encourages and maintains multiple perspectives in order to solve complex global problems (Aguirre, 1997; Harvey, Novicevic and Speier, 1999; Reynolds, 1997). Two-thirds of the world‘s CEOs view the priorities within the intense change of the new global market place as being: 1.) foreign competition,

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representing the key factor in their firm‘s future business success, employment, as well as revenues to be generated increasingly outside their firm‘s home country; and 2.) the effective management of human resources, a critical factor to global success (Hambrick, Korn, Frederickson, and Ferry, 1989). With this in mind, Figure 1 illustrates some of the key interests and challenges in the shift from multinational to global, which will be discussed the following paragraphs. Characteristics

Managerial Mindset

Global Organization

-Global Mindset - Strive for integrated global system - Increased diversity (pluralism)

Business Positioning - Hypercompetitive - Economies of scope - Geocentric strategies

Challenges

- Utilization of managers - Conversion of managerial competencies into stock of capital - Development of cross-cultural competencies -Customer Demands - Speed and effectiveness of knowledge transfer - Development and innovation (foreign competition) - Financial implications - Strategic issues (i.e., business designs) - Performance

Managerial Mindset - Expatriate-driven - Centralization (control) - Collaboration with overseas partners

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MNC

Business Positioning - Increased environmental awareness - Economies of scale - Regocentric strategies

- Utilization of managers - Development of cross-cultural competencies - Customer Demands - Development/Innovation - Financial Implications - Strategic issues (i.e., business designs) - Performance

Figure 1. Characteristics and Challenges in MNCs and Global Organizations.

Given the globalization of the marketplace, the skill/competencies of global managers are becoming central to the development and dissemination of knowledge and in the enhancement of learning throughout the global network organizations (Hollenbeck and McCall, 2001; McCall and Hollenbeck, 2002). This integration of knowledge and emphasis on learning can in turn enable future strategic flexibility of the organization (Akhter, 2003; Blyther and Zimmerman, 2004; Bogner and Barr, 2000). There has been an on-going discussion centered on determining the value of developing an integrated SGHRM system to assist in the coordination of an organization‘s human resources and to focus on the competitive strategies of the MNE (Colbert, 2004; Martin and Beaumont, 2001; Napier, 1996; Wright and Sherman, 1998).

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The SGHRM orientation to human resource management changes the human resource managements‘ role from the more traditional functional perspective to a more strategic organizational asset. At the same time, the SGHRM process is being visualized as instrumental in the development of human capital in global organizations to provide a reserve of strategic capabilities to enact future strategic acts of the organization (Snell, Youndt, and Wright, 1996; Taylor and Beechler, 1996). In general, SGHRM systems provide the hallmark of the evolution of human resource management into the strategic realm in global organizations (Novicevic and Harvey, 2001; Ulrich, 1997; Wright and Snell, 1998). The primary challenge for SGHRM is thus not only how to develop/acquire managerial competencies appropriate for competing in a global context, but also how to convert them into stocks of capital that are then captured (i.e., not easily imitable by others) in the organization. If this conversion can be accomplished, the resulting increase in organizational capital may improve the global organizations performance. Past research has curiously neglected this topic of transforming skill/competencies into capital, although his topic is increasingly important as change becomes less episodic and more a continuous, thus requiring recombination of the global organizations dynamic capabilities on a worldwide basis (Harvey and Novicevic, 2003). Staffing flexibility is increased when a diverse management team with global experience helps to effectuate the emergence of a unique global mindset (i.e., a diverse set of experiences, perceptions, and insights into how to effectively compete in the global marketplace) (Kedia and Mukherji, 1999; Kefales, 1998; Paul, 2000; Clapp, Luthans and Avolio, 2008). A unique global mindset becomes specifically valuable when the structure of a global organization shifts from a multinational hierarchy to a global network organization to support the change from multi-domestic to global and transnational strategies (Baruch and Altman, 2002). Historically, the predecessor to the global organization has been structured as home country-centered, hierarchical organizations, which foster long-term expatriation and a planned repatriation process with predictable accompanying issues. Conversely, a global network organization comprised of loosely affiliated complex subsidiaries is structured more as a heterarchy (e.g., the delayering of the organizational hierarchy into distributing power in subsidiaries {Novicevic and Harvey, 2001}) with a reduced influence of the home country headquarters compensated by more dynamic transfers of host country nationals, third country nationals and inpatriated managers. Therefore, successful implementation of a corporate global/transnational strategy through a global network organization requires a commensurate change in the firm‘s strategic global human resource management (Bartlett and Ghoshal, 1992; Collings, Scullion, and Morley, 2007; Novicevic and Harvey, 2001; Schuler, Dowling, and DeCieri, 1993). The modifications in the traditional hierarchical IHRM system will need to address changes in key functional concerns of expatriate management as well as the repatriation process of these same managers. Past research confirms that the human resources are a valuable component for organizations attempting to develop a global strategic competitive advantage (Lepak and Snell, 1999; Wright, McMahan, and McWilliams, 1994). When human resources are employed strategically, firms compete more effectively in this new dynamic marketplace, especially when ― the productivity of superior resources depends upon the nature of their employment and the skill with which a strategy based on resource superiority is implemented‖ (Peteraf, 1993, 186). Yet, research into global human resource management is

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increasingly difficult to pursue, and complicated, as culture and its alignment with strategy may be very difficult to research through strictly quantitative methods. Essentially, the shift from a MNC to a global organizational design brings various similar but also multiple distinct challenges. Aside from the constant pressure to utilize managerial talent at appropriate locations, the necessity to continuously develop a manager‘s crosscultural competencies plays a central role in building a successful organization. General performance quandaries such as financial performance and meeting customer demands appear to be on top of the list in both organizational designs. The demarcation between these two designs, however, surfaces in the light of the need for more speedy and effective knowledge transferences as well as the long-term development and maturity of global human (managerial) capital. The ultimate challenge for global organizations, therefore, exists in identifying, selecting, and training/developing managers such that they may pose a sustainable competitive threat to other organizations in this increasingly hypercompetitive business world.

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Thomas, L. and D‘Aveni, R. (2004b). The rise of hypercompetition from 1950-2002: Evidence of increasing structural destabilization and temporary competitive advantage, Working Paper Series, Goizueta Business School, Emory University, GA. Ulrich, D. (1997). Judge Me More by My Future than My Past. Human Resource Management, 36: 5-8. Wright, R.M., McMahan, G. and McWilliams, A. (1994). Human Resources and Sustained Competitive Advantage: A Resource-Based Perspective, International Journal of Human Resource Management, 5(2): 301–326. Wright, P. and Snell, S. (1998). Toward a Unifying Theory in Exploring Fit and Flexibility in Strategic Human Resource Management, Academy of Management Review, 23:756-772. Wright, P. and Sherman, W (1999). Failing to Find Fit in Strategic Human Resource Management: Theoretical and Empirical Problems, in Wright, P., Dyer, L, Boudreau, J. and Milkovic, G. (Eds.), Research in Personnel and Human Resources Management, Supplement 4, Greenwich, CT: JAI Press: 53-74. Wiggins, R. and Ruefli, T. (2005). Schumpeter‘s ghost: Is hypercompetition making the best of times shorter? Strategic Management Journal, 26: 887-911.

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In: Globalization Editor: Joseph A. Mancini

ISBN: 978-1-61324-531-6 ©2012 Nova Science Publishers, Inc.

Chapter 3

GLOBALIZATION, MODERNIZATION AND EDUCATION IN IRAN: AN OVERVIEW Mohamad Tavakol1 and Lida Imani-Taleb-Azad 1

University of Toronto, Mississauga, Canada

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INTRODUCTION Modernization and education have been closely intertwined in Iran since the nineteenth century. In fact, education has been an important means of creating a modern society by introducing new ideas and ways among the educated. Globalisation, on the other hand, is a more recent concept currently discussed among intellectual circles in the country. Thus, while modernisation has been a part of the Iranian educational system for some time, globalisation remains a challenge to be met via innovative approaches at every layer of the schooling system. In general, the need to address both modernisation and globalisation as inevitable realities in the contemporary scene has put considerable pressure on the educational system to cater to the changing global scene. This chapter illustrates how the Iranian educational system has addressed or seeks to address the demands of modernisation and globalisation at different periods of time. A historical overview of Iranian education demonstrates the gradual replacement of traditional education by modern schools aiming to promote educational progress. A comparative study of the general aims of the Iranian educational system before and after the 1979 revolution, that led to the establishment of the Islamic Republic, sheds additional light on the educational goals of a society marked by the interplay of tradition and modernity. eans that a nation‘s According to Carnoy (Carnoy, 1999: 13-14), globalization ―m investment, production, and innovation are not limited by national borders.‖ He further emphasizes that the bases of globalisation are information and innovation in a rapidly changing world. Accordingly, the chapter addresses the impact of information and communication technology on Iranian education, and discusses the latter‘s response to the knowledge intensive nature of a globalised world. The discussion of the influence of international organisations on national policies is also in line with the increasing

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interdependence of the local and the global. The introduction of innovative programmes with regards to the education of refugee children, eradicating gender inequality in education, environmental education, teaching the fundamental values of global education, and nonformal education are examples of measures undertaken in Iran to address the rapidly changing needs of the society. Standards for education quality, as well as the provision of quality education, are also of prime concern in the globalisation era. It is indeed the common priority of both general and higher education in Iran as illustrated later. The discussion will focus on the primary concerns of Iranian universities, namely relevance, quality, quantity, and equity, point to the overlap of national priorities and global realities within the Iranian context. Although the Iranian educational system has a long way to go in terms of meeting the challenges of the globalisation era both at the general and higher education levels, it is clear that there is significant overlap in responding to the needs of a globalised world and addressing the priorities of the Iranian nation. This is indeed the point at which the local and the global meet to determine what the young Iranian generation needs in order to encounter the uncertainties of the future in terms of knowledge, skills, and abilities.

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CONTEXT The Islamic Republic of Iran with an area of 1,648,000 km2 is a semi-mountainous country situated on the high plateau of Asia, bordering Turkmenistan, Azerbaijan, Armenia and the Caspian Sea to the north, the Persian Gulf and Sea of Oman to the south, Afghanistan and Pakistan to the east, and Turkey and Iraq to the west. Iran covers a strategic region, bridging Central Asia and the Middle East. According to latest estimates, Iran‘s population is about 67 million, of which 67 percent live in urban and 33 percent in rural areas. Over half of the population is in the age group of 15-64 years and about 40 percent are under 14 years of age. Thus, Iran has one of the youngest populations in the world. The capital city of Tehran, with over 8 million people, is one of the most populated cities in the Middle East. Mashhad, Isfahan, Tabriz and Shiraz are some of the major cities and industrial centers, with Isfahan being one of the most important due to its history and heavy industry. These cities and other historical towns in Iran contain many sights and tourist attractions. Iran‘s official language and script is Persian. However, Turkish, Kurdish, Arabic, Lori, Gilak, Baluchi and Armenian dialects and languages are also used in some provinces. According to the latest general census (1996), 99.5 percent of the population is Muslim, and the remaining 0.5 percent is Christian, Jewish and Zoroastrian minorities, which are officially recognized and represented in the Islamic Consultative Assembly. Iran‘s major products are oil, gas, petrochemical products, minerals, nuts and fruits, caviar, surgham, leather and skin, rugs and handicrafts, which are also exported to other countries. Items such as textiles, sugar, meat, machinery and equipment are major imports. In recent years many industries have shown remarkable growth, such as cement, petrochemicals, chillers, food, medicine, automobiles, the products of which are exported to various countries all over the world. In terms of employment, in 2001, 42.7 percent were engaged in

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agriculture, 30.3 percent in industry and 27 percent in services (International Scientific Coopeation Bureau of the Ministry of Education, 2003: 10-12).

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HISTORICAL REVIEW The culture of ancient Iran emphasised the cultivation of citizens with fine morals. In old times, only parents and temples were in charge of education. Zoroastrians cherished education and believed that humanity was possible only in the light of knowledge and learning, and so training youth to be at the service of family and society. Sons usually followed their fathers‘ crafts and hence received relevant training by parents and masters. After the Islamic entrance to Iran, mosques became central sites for education and the Maktab as a school of that time provided education in literacy, mathematics and religious/Quranic knowledge. In the mid-nineteenth century, as new schools emerged in the West, some Iranian students who had graduated in Europe, tried to establish similar schools in Iran. Dar-ol-fonun (Technical Institute) was the first educational institution of this kind, founded by Amir Kabir to train experts for the government. That school offered courses in military, mines, engineering, medicine and mathematics. In the late 19th and early 20th centuries the number of modern schools increased markedly. The National Council of Schools was formed in 1898 and the Ministry of Education was established in 1910. In 1911, a law passed by the Parliament obliged the Ministry to establish a public education system (ibid, 16-17). Between 1946 and 1956 universities and colleges were established in major cities such as Mashhad, Shiraz, Isfahan, Tabriz and Ahwaz. Also, from 1953, remarkable technical and agricultural colleges emerged. In 1965 the curriculum of high schools was revised and the cycles and fields of high school were altered. For the high schools, four academic fields of mathematics, natural sciences, literature and housekeeping were designed. Technical training was limited to the first term of high school, and special schools, called vocational institutes, offered students three years of training, preparing them for employment in the job market as semi-skilled workers (Sarkararani, 2003: 292). Students who finished high school obtained a full diploma and could attend the University Entrance Examination instituted in 1965, and those who passed it could then continue their education in universities (ibid: 293). At the same time many Iranians started to study in Europe and America, while the government supported this trend. In May 1957, the approximate number of students studying in the West at government expense was 2,713 and those studying privately were estimated to be 1,540. In 1960 plans to establish teacher-training centres were adopted to meet the great demand for capable teachers. These centres trained high school graduates for a year, preparing them to teach in elementary schools. During this period the government undertook further responsibility for education, conducting such affairs as sending students abroad, establishing schools and systems of academic assessment, and compiling regulations governing high school fields of study and methods for vocational training. With the reforms of 1955 formal education periods gained their particular form and structure and their legal status. Yet the education system was unable to match the pressing economic, social and cultural needs. In 1964 a council of education with a team of experts was formed to review the problems in education. This led to the new educational system implemented in 1966 (ibid: 296).

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The general aims of the Education Ministry in the new system were: moral and spiritual training; artistic and cultural education; social education; economic education; political training; balanced growth and physical-psychological health; and, theoretical and practical education in order to channel intellectual assets and human civilization to posterity. In the light of these goals, the period of elementary education was divided into 5 years and the high school into 2 segments of 3 and 4 years; the first called ― Guidance‖ and the second ― High School‖. In 1967 the Bill for establishing the Ministry of Science and Higher Education was ratified, giving all the tasks and duties of higher education to this Ministry. In addition to collaborating with the Education Ministry, this ministry was in charge of higher education and research policies. In 1968 the High Council of Education, composed of 40 education officials and experts, was formed with the crucial goal of developing general policies of education in all areas (ibid: 306). After the Islamic Revolution, the educational system underwent major transformations. The philosophy, goals and policies of the academic system were revised to form a new educational system based on Islamic principles as well as new social, economic and political demands. (Education in Islamic Republic of IRAN, 2003: 17) The following tables provide an overview of the Iranian pre-university education. We should add here that student population is 16582293. Table 1. Number of Students in 2002-2003 Pre-primary 403712

Primary 7029165

Lower secondary 4865659

Secondary 3828600

Upper secondary 455157

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Table 2. Teaching Staff in 2001 All teaching staff Pre-primary mf f 13796 12667

All teaching staff Primary mf f 309260 168157

All teaching staff Lower secondary mf f 182751 83356

All teaching staff Upper secondary mf f 148216 68622

Table 3. Number of Schools in 2002-2003 pre-primary primary Lower secondary secondary Upper secondary Total Public 11177 66073 28048 15613 3099 124010 Non-profit 1283 2559 2586 2767 1502 10697 Total 12460 68632 30634 18380 4601 134707

Table 4. Pupil-Teacher Ratio pre- primary 23.9

primary 24.3

Secondary 27.4

Source: Education in Islamic Republic of Iran, 2003: 24.

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THE GOALS AND VALUES OF IRANIAN EDUCATION In 2000, the High Council of Education declared the goals of education at the primary (age 6-10), guidance cycle (age 11-13), and secondary school (age 14-17) levels. According to the educational authorities, the goal is the ‗overall development of school children on the basis of Islamic teachings and directives‘ (Ministry of Education, 2000a, 1). One can thus see the influence of religion on the schooling of children from the very beginning of their formal educational experience. The goals at all three levels have been classified into eight categories: religious, moral, scientific-academic, cultural-artistic, social, living, political, and economic. The goals in each category become more detailed and comprehensive as one goes up the grades. The educational objectives are the same for girls and boys with a few exceptions that will be discussed later. The analysis of educational goals helps one identify the values internalized in the young, the new citizens, whose principles and beliefs will determine the future of the country. Religious goals have been separated from moral objectives in Iranian education. At the primary school level, religious goals include familiarizing the pupils with God, fundamental principles of religion, the life of the prophets especially Prophet Mohammad, the great figures of Islam, the Qur‘an, praying, the mosque, holy war and martyrdom, life after death, and important holy places. Since the religious duties of girls begin earlier than boys, at age nine, the religious goals at the primary level include two items exclusively for girls – namely, obligatory prayers and issues related to puberty. The goals basically remain the same at the guidance cycle and secondary levels with the addition of velayat-e faqih (the governance of religious jurisprudence). The latter refers to the political rule of the clergy, a concept that legitimizes the unification of religion and state in post-1979 Iran. Whereas the religious goals of education point to the Islamic nature of Iranian society and the unique blend of religious and political leadership in the country, the moral goals are basically the same as in other countries. Universal values such as kindness, respect, order, discipline, honesty, truthfulness, politeness, patience, optimism, helpfulness, cleanliness, hard work, and courage are encouraged at all levels of education. The difference, however, is in the Iranian authorities‘ emphasis on chastity and modesty and the use of Islamic clothing. The latter means compulsory Islamic dressing for girls beginning at age six. At the guidance cycle level, different values are determined based on gender; girls are socialised to be ‗modest‘ while boys are expected to be ‗brave‘. Obedience to one‘s parents, observance of the law and constructive criticism are also included in the moral goals. At the guidance and secondary school levels, striving for the progress of the nation, security of the people, and national unity are included as moral values. Scientific-academic goals at all three levels emphasise the value of science and knowledge and teach respect for learning and books. Reasoning, creative and critical thinking, reflection and debate are included for students age eleven and above. The Persian language is the medium of education, and the need to know Arabic as the language of the Qur‘an, as well as a foreign language (usually English) to facilitate communication with others is emphasized (Mehran, 2003: 324-325). Persian is the official language of the country and the official medium of instruction in education. The cultural-artistic goals emphasize the identity of Iranians and the importance of the Persian language in bringing about cultural and linguistic unity among the people. Yet the

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Mohamad Tavakol and Lida Imani-Taleb-Azad

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Iranian identity is at all times linked to the Islamic one, reminding the schoolchildren of their Muslim roots. It is in the cultural-artistic goals determined for the guidance cycle level that the young pupils are, for the first time, exposed to ‗foreigners‘. Then the schoolchildren are taught not to blindly imitate the cultural experiences of other nations. The social values at the primary level emphasise the social skills needed to live in the larger society, such as responsibility, cooperation, respect for the rights of others, conformity to the law, respect for school regulations and societal rules, and a sense of duty towards family, friends, and neighbours. Students at higher levels of education are also expected to take into consideration their duty towards their country and their people and aim for the role of success of Iran in international arenas. Pupils aged 11-13 are expected to know the ― women and men in the family and society‖, indicating different expectations based on gender. Secondary school students are exposed to such values as service to the country, self-sacrifice, generosity, open-mindedness, social participation, benevolence, need to strive for justice and right, and the importance of forming a family and establishing strong sense of feelings. Goals related to practical living are part of Iranian education. The importance of physical and mental health, nutrition, exercise, familiarity with various diseases and preventive measures, and respect for and preservation of the environment are among the identified themes. The same can be said about some of the values included in the economic goals, such as disdain for laziness and self-indulgence, respect for private and public property, and reverence for hard work, considered as a form of worship in the teachings of Islam. There are, however, other elements within the economic goals that reflect the worldview of Iranian authorities. Schoolchildren are expected to be familiar with the ordinances of Islamic economics, strive for economic independence, support domestic products, and preserve national wealth. One of the slogans of the Islamic Republic is leading a simple life. Pupils are thus taught to shun luxury, opulence and excessive consumption (ibid: 325-326).

INFORMATION AND COMMUNICATION TECHNOLOGIES AND THEIR IMPACT ON EDUCATION The imperatives of the age of knowledge and information and the need to follow the achievements of technology and humanities in the country have all led to the government‘s recent decisions to invest in rapid expansion of information and communication technology (ICT). The Education Ministry is also preparing a charter to guide reforms in Iran‘s education system with the application of ICT as one of the pillars. The importance of an education suitable to the needs of individuals and society is felt today more than ever before, as the world linked by information networks requires a work force that knows how to use technology as a means to enhancing output and innovation. One of the obstacles for applying ICT in education is a centralised system that prescribes a uniform inflexible curriculum for every course topic and all students, whether urban, rural or nomad, with any talent, interest and socio-economic background. Thus, every action must be decided at the top and implemented nation-wide and stops after encountering an unforeseen obstacle.

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In such circumstances the use of ICT in education is possible only at a minimum level such as a course subject. In addition, due to centralisation, the ability to plan lessons and conduct the learning process, considered as one of the crucial skills in using technology for education, is not developed in teachers. The state sponsorship of all activities in producing academic material and software hinders the growth of the private sector in this field, whereas one prerequisite for the effective use of ICT in education is active participation of the private sector. Education faces two main difficulties: 



Non-cultivation of logical thinking, cognitive innovation, the spirit of investigation and skill of managing the learning process, all due to deficiencies in teacher training programmes and unsuitability of working conditions for promoting creativity in teachers. Low teacher motivation caused by strong centralized management governing administrative relations, low salaries, a sense of discrimination against teachers, and the low status of the teaching profession.

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Due to the key role of teachers and middle managers in the success of programmes for the use of ICT in education, a special solution has been devised to alleviate this situation (Nafisi, 2003: 3-5). The Office of Planning for the Development of ICT in Education has employed expert managers, developed operational programs, and defined executive projects. The following projects have been implemented or are in process of development: (3) Project of Research and Development: In order to preserve the dynamism of information activities and technology, three study groups are charged with reviewing the country‘s education system and reorganizing it with regard to modern approaches to information technology: comparative study group; analytical study group; and development study group, which work in collaboration with relevant specialized universities. (4) Project of Training Personnel: A course in Basic Concepts of IT, e-mail, wordprocessing, etc., which is general knowledge for the information age is offered for all teachers, experts and students in different phases. In the first phase, in 2001-2002, about 30% of high school teachers, 50% of art students, all teacher-training instructors, and half of the contracted experts were covered. It was conducted from the beginning of the new academic year for all fields of high school. Launching this project in the first year resulted in training 120,000 teachers and specialists. Complementary courses have been provided for diverse audiences of: 

Teachers: in this course teachers produce knowledge, using modern educational approaches (discovery, project-based). They get acquainted with cyberspace education, hence breaking the monopoly of classroom learning, consulting their counterparts the world over on their lesson plans and methods, and creating an inter-actional mode of learning.

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

Schools‘ technology officials: specialized courses about the Internet and site maintenance are provided for school technologists, and implemented in schools equipped with computer sites. Curriculum experts: in order to acquaint them with academic planning and textbook preparation, a special advanced course featuring specifications of lesson plans based on the world-wide web and Internet education has been developed. Experts attend these courses and after completing the course they can implement such courses themselves.

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(5) Establishing computer laboratories in 6,500 educational units, 60 teacher training centers and 40 technical institutes are results of the project for equipping schools with computer labs, in the first year of its implementation. (6) The project for creating electronic content deals with the contents offered on the world-wide web and is divided into three sections: information (providing data to diverse users including the Education Ministry personnel, schools and teachers); services (providing on-line services such as student registration, purchasing books, transfer of teachers); and educational resources (dealing with electronic books and audio-video clips, and, animation based on learning concepts of textbooks to facilitate learning and teaching). (7) The project for a National Network of Schools began in 2001. This project contains three layers of school, district, province; data sites; and the capital. Its audience comprises students, teachers, head masters and parents. This network was designed through the collaboration of domestic and foreign experts, connecting some 1,200 high schools in 6 provinces in the current year (Ministry of Education ICT Section, 2003: 1-7).

EDUCATION FOR REFUGEE CHILDREN The Literacy Movement Organization, a major organization in charge of the out-of- reach and adult education, provides classes for a significant number of refugee Afghan boys and girls who have acquired literacy and numeracy skills. The classes also include life skills such as conflict resolution, communication, pre-marriage information and handicrafts. Around 600 Literacy Movement teachers have been trained, 14 early childhood development centres were set up for younger Afghan children and 40 Afghans were trained as child educators. Finally, two mobile libraries were set up and 100 librarians trained. UNICEF, through the UK Department for International Development's (DFID) financial support provides educational services to Afghan refugee children. The number of children involved in the project continued to rise from 23,000 in the academic year (2001-2) to 24,500 in 2002-3 (UNICEF, 2004: 1-4).

INFLUENCE OF INTERNATIONAL ORGANIZATIONS ON NATIONAL POLICIES The Islamic Republic of Iran, as one of the countries that signed the Universal Declaration of Education For All (EFA) in Jomtien, Thailand, has endeavoured to reach the

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Declaration‘s goals during the 1990s. In order to legislate for the EFA and set the appropriate structure, the report of activities of EFA from 1990 to 2002 was presented to the President by the Education Minister. The issue of EFA was discussed in the Cabinet. Consequently, the government approved the EFA programme, and, all ministries were mandated to collaborate in the implementation of EFA. In the Education Ministry ― The National Council‖ of EFA was formed with representatives from the following organizations and sectors:

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             

Education and Research Commission of the Majlis (parliament) Organization of Management and Planning Ministry of Labor and Social Affairs Ministry of Science, Research and Technology Ministry of Health and Medical Education Ministry of the Interior Iran‘s Statistics Center Environment Protection Agency The Islamic Republic of Iran Broadcasting Organization The Youth National Organization Women Participation Center of the Presidency ISESCO National Commission National Commission for UNESCO UNICEF Office

The Education Minister directs the Council and the head of its secretariat is the ViceMinister in charge of General Education (Internal Reports of the Education Ministry, 2003: 26). The measures taken in EFA strategies are:       

Adoption of the EFA programme in the Cabinet and conveying the bill to all relevant organs; Allocating a special fund to support the EFA; Designing an independent organization for EFA inside the Education Ministry in order to sustain the support of other ministries in implementing the program; Identifying undeveloped areas and introducing educational and hygiene plans in such areas with special financial aids; Holding training workshops for experts and planners of Iran, Pakistan, Afghanistan and Turkmenistan in literacy and informal education; Identifying and utilizing experts from government and non-governmental organizations (NGOs) in preparing the National Action Plan; Informing civil society and the general public through the mass media regarding the programme‘s goals and strategies, and how ministries and NGOs contribute in preparing, supervising and evaluating the programme;

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Explaining the EFA programme to school authorities in 29 provinces, through various seminars; Incorporating the EFA in the Third and Fourth National Development Plans and emphasizing its activities; Mobilizing resources and facilities in the public and private sectors to realize the EFA goals, with the priority of deprived and underdeveloped regions; Forming quality committees within the technical committees in order to launch reforms in curriculum, academic programmes, teacher training, methods of teaching and assessment; Moving toward rationalization of procedures in education system and gradual introduction of school-based approach to financial-administrative affairs, human resources and curriculum (Internal Reports of the Education Ministry, 2004: 1-2).

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ERADICATION OF GENDER INEQUALITY One of the basic strategies of the Education Ministry in eradicating gender inequality is to improve access to education for the elementary grades, emphasizing the inclusion of girls in remote and deprived areas. The issue is quite palpable in the government‘s development plans and special funds are allocated each year to increase education outreach. However, due to socio-cultural barriers, especially in rural areas, girls have received less education than boys, causing the Ministry to pursue special plans and programmes. In the academic years 20002002, the project of attracting girls deprived of education was launched in six deprived provinces, resulting in the participation of 10,000 girls in the provinces of Azerbaijan, Kurdistan, Ardebil, Khuzistan, Baluchistan and Hormozgan. To implement the programme, a budget equivalent to 205 million US dollars was allocated for raising girls‘ education coverage, leading to the admission of some 25,000 girls to elementary schools. It is foreseen that the gap between the rate of enrolment for six yearold girls and boys will decline year by year. Also, in the EFA program special attention has been paid to citizenship training, life skills, education of religious minorities, environmental education, and education of out-of-school and exceptional children.

FEMALE EDUCATION IN IRAN Education is a means of creating empowered women familiar with their rights and capable of promoting their status in society. According to the National Report on Women‘s Status in the Islamic Republic of Iran published in 2001 by the Center for Women‘s Participation, the following goals have been specified for female education in Iran:  

Increase the self-confidence and raise the cultural awareness of school and college girls; Modify educational materials in order to portray the correct image of women‘s roles in the family, society, and education, and of the mutual rights of women, men, and the family at all levels;

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       

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Emphasize the participation of women specialists in planning and policy making at all levels of education; Develop and promote counseling services in high schools to prepare and guide students toward more appropriate fields of study in order to eliminate the concentration of female university students in certain majors; Utilize various forms of communication media such as newspapers and television to create the proper conditions for the acceptance of women in specialized jobs and toplevel management positions; Revise existing laws that are gender biased; Determine a particular quota for creating equal opportunities for women in a number of specific university majors; Reduce gender gaps in the fields of science, mathematics, and applied sciences; Remove limitations for girls‘ participation in the agricultural disciplines; Teach management skills to women with the aim of enhancing their participation in the sphere of decision-making; Expand and diversify technical and vocational training programs for women with a view to creating employment opportunities; Establish courses in women studies at universities for the purpose of eliminating incorrect traditional perceptions about women; Establish family studies courses at universities with a view to educating experts in legal and social issues.

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The above goals point to an alternative direction for women‘s role in society and new ways to educate them (Mehran, 2003: 284-285).

QUALITY OF EDUCATION A major issue in Iran‘s education system is the need to improve the quality of education. The Global Education Initiative (GEI) project was started in 2000 by UNICEF. GEI emphasises self-awareness, appreciation of others, tolerance, respect for life and altruism. It enhances the capacity for learning itself, and not just the accumulation of knowledge. In 2003, a Council of Policymaking in the Ministry of Education was established, at UNICEF‘s instigation, to lead reform in all aspects of education using the outcomes of the GEI project (UNICEF, 2004: 6-8). The learning and teaching process in the GEI emphasises student involvement and wholeperson development. There is now strong evidence world-wide to show that individuals have different learning style preferences. A broad range of learning opportunities is necessary to meet the learning needs of all students. No single style of teaching should dominate the classroom. However, in many classrooms the main skills involved are reading, listening and memorisation. The values implied are that knowledge comes from external sources, learning is passive and frequently uninteresting: personal ideas, emotions and contributions are neither welcome nor important and the role of teacher and student are seprarate and unchanging. The fundamental values of global education are respect for rights and freedoms, social responsibility, environmental awareness, and reliance on non-violent solutions. This will

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influence the quality and style of all classroom situations and will minimize the negative aspects of the transmission approach (Squire, 2002: 17).

IMPACT OF GLOBAL CHANGES ON THE ENVIRONMENT Under the future Action Plan of EFA, in the section on childhood care and pre-school education, some plans are provided that are topically related and form a comprehensive programme, including a plan for environmental education for pre-school children carried out with the collaboration of the Education Ministry and Environmental Protection Organization. The Environment Protection Organization plays an informative part for the Education Ministry in compiling educational programmes. It also prepares comprehensive programmes for changing the public culture in the field of environment preservation, developing and revising programmes, environmental regulations and standards, enhancing public participation in protecting the environment, and expanding communications and inter-sectoral collaborations.

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NON-FORMAL EDUCATION IN IRAN In the Islamic Republic of Iran, several ministries and governmental organisations contribute to non-formal education (NFE). For example, the Literacy Movement Organization (LMO), the Ministry of Labor and Social Affairs, the Ministry of Health and Medical Education and municipalities have introduced different measures in the field of NFE. Municipalities have taken measures to establish and run some cultural centers throughout the country, equipped with libraries, study halls, meeting halls and classrooms to teach educational, cultural and artistic courses. The Ministry of Education issues the license for the establishment of language institutes in order to promote and facilitate teaching of foreign languages to learners of different age groups. Presently, a large number of these institutes are actively conducting foreign language courses under the supervision of the Ministry of Education—mostly English, some French, and few other languages. In the Islamic Republic of Iran, the government plays the central role in non-formal education and considerable budget and facilities are allocated to such education. Governmental and non-governmental organizations cooperate with the Ministry of Education in this area. A broad spectrum of foundations, ministries, governmental and nongovernmental organizations are responsible for adult education, among which the Literacy Movement Organization (LMO), the Ministries of Jihad and Agriculture, the Islamic Republic of Iran Broadcasting are governmental ones. Due to the crucial role of the LMO in adult education, the supporting council of the organization was established in 1987. Under the President‘s chairmanship, the council holds seasonal sessions to devise and approve strategies and find practical solutions for the campaign against illiteracy. The achievement of certain objectives such as access to primary education for all, reduction of adult illiteracy rate, and the communication of social knowledge and ethical values to citizens are among the objectives of the council (Imani-Taleb-Azad, 2002: 41). To achieve universal coverage of NFE the following strategies have been implemented:

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Expansion of formal and non-formal education for rural women and girls; Development of technical-vocational education and making necessary arrangements also for the involvement of rural women and girls in the required fields of activity; Making efforts to establish and develop applied courses relevant to the needs of rural women; Developing new teaching methodology and materials which best meets the needs of rural women; Centralizing adult education policy-making with stress on literacy and delegation of executive power to regional and local units. Setting priorities with the co-operation of concerned bodies in the innovation and implementation of appropriate functional literacy methods for farmers, rural craftsmen, industrial and other workers and young mothers; Utilizing the cooperation of concerned bodies towards the revision of all laws and regulations so that illiterates become literate and benefit from social services (ibid: 41)

The future plans for NFE are: (1) Campaign toward total eradication of illiteracy   

Develop methods and materials for correspondence education Development of simple books and materials to prevent relapse to illiteracy Implementing policies regarding illiterate adults under 40 years to persuade them to join literacy classes

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(2) Holding follow up programmes for neo-literates   

Plan continued learning programs to help neo-literates get more exposed to sociocultural issues Encourage neo-literates to widen their world-view through reading books and newspapers etc. Broadcast special television or radio programmes for new literates (ibid: 41-42)

HIGHER EDUCATION Iran, like many others, is a country with varying sets of demands, requirements, limitations and pressures encompassing higher education (HE). Planning and development of higher education is, more and more, being conceptualised and realised on the basis of these factors for the sustainable development of the country. To achieve this goal higher education is expected to promote four major concerns: relevance, quality, quantity and equity (Tavakol, 1999: 18-19). Historically speaking, as a sort of HE establishment, in 1851, the Da -ol-fonun ― House of Technologies‖ was founded in Tehran. After the ― Constitutional Revolution‖ of 1906, several institutions for specialized training were gradually established: A Teacher Training School of Medicine (1918), School for Girls

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Mohamad Tavakol and Lida Imani-Taleb-Azad

and Boys (1919), School of Pharmacology (1924), College of Law (1920), College of Commerce (1926), Teacher Training College (1928), College of Agriculture (1930), School of Dentistry (1930), School of Midwifery (1932), and Boys and Girls College (1933). University of Tehran, as the first Iranian university, was established in 1934. In 1960s, new institutions of higher education came into exitence. After the Islamic revolution in 1979 the number of universities and institutions of higher education increased from 102 to 270, within ten years, and then reached 1349 by 2004. The student ratio, both in the governmental and non-governmental sectors, increased from 697 per one hundred thousand people to 3200 during the present year of 2004. In the same year, a total of 2.25 million students were enrolled in higher education. 56% of this, study at state universities and higher education institutions, and the remaining 46% at private institutions. From this student population about 7% are at postgraduate level and 93% at undergraduate level (Ministry of Science, Research and Technology, 2004: 27-31). By the 1999-2000 academic year, women constituted 45.3 percent of all students in Iran (IRPHE, 2002: 18). The number of Academic staff Members at Higher Education establishments have come to more than 52,000 in 2004. Table 5. Higher Education Student/ Teacher Ratio (2002-2003) Student/Academic Staff Ratio Public University Private University

10 51

Source: Iranian National Document for Higher Education Development, Ministry of Science, Research and Technology, Tehran, 2004: 10-18.

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Table 6. Distribution of Enrolled Students by Study Level (2003-2004)

2-Year Diploma B.A./B.Sc. M.A./M.Sc. P.D. (Professional Doctorate – in Medicine) Ph.D. Total

Public 410500 748200 52470 32300 14315 1257785

Private 310,000 638800 28550 11300 3110 991760

Total 720500 1387000 81020 43600 17425 2,249545

Source: Iranian National Document for Higher Education Development, Ministry of Science, Research and Technology, Tehran, 2004: 10-18.

In the Fourth National Development Plan, to be started next year, Higher Education is to facilitate the realization of the following objectives:     

Setting the grounds for accelerating economic growth; Interaction with World Economy; Economic Competitivity; Knowledge Based Development; Environmental Conservation;

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National Efficiency and Regional Balance; Promotion of Hygiene and Improvement of Living Standards; Promotion of Human Security and Social Justice; Cultural Development; National Security; Promotion of Just and Effective Jurisdiction; and Renovation of Government.

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REFERENCES Carnoy, M. (1999) Globalization and Educational Reform: What Planners Need to Know, Paris: UNESCO, IIEP. Imani Taleb-Azad, Lida (2002) IRAN, in 2002 ACCU-APPEAL Joint Planning Meeting on Regional NFE Programmes in Asia and the Pacific Final Report, Tokyo, Japan, 9-13 July, 2002. International Scientific Cooperation Bureau of the Ministry of Education (2003) Education in the Islamic Republic of Iran, Tehran 2003 (A Report), and Tehran: Ministry of Education. RPHE (2002) Higher Education in Iran-A National Report, Tehran: Institute for Research and Planning in Higher Education. Mehran, G. (2003) Khatami, political reform and education in Iran, Comparative Education, 39 (3) pp.311-329. Mehran, G. (2003) The paradox of tradition and modernity in female education in the Islamic Republic of Iran, Comparative Education Review, 47 (3) pp. 269-286. Ministry of Education ICT Section (2003), Synopsis of ICT activities in Education (an Internal Report), Tehran: Ministry of Education. Ministry of Science, Research and Technology (2004) Iranian National Document for Higher Education, Tehran: Ministry of Science, Research and Technology. Nafisi, A. (2003) The Ideal Perspective, Missions, General Aims, Strategies and Policies of ICT in Education, approved by the Strategic Council of ICT in Education (an Internal Report), Planning Management for Developing ICT, Tehran. Sarkararani, Mohammad-Reza (2003) Educational Reforms and Modernization: A Comparative Study of General Education in Iran and Japan. First Edition, Tehran: Rooznegar Publications. Squire, C. (2002) UNICEF Iran Programme Progress Report 2002, UNICEF Office in the Islamic Republic of Iran. Tavakol, M. (1999) The criticism of first and second development plans-higher education sector, in Proceedings of the First Seminar on 3rd Development Plan, Plan and Budget Organization Pub, Tehran. UNICEF (2004), UNICEF Iran Programme Progress Report 2003, Tehran: UNICEF Office in Iran.

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In: Globalization Editor: Joseph A. Mancini

ISBN: 978-1-61324-531-6 ©2012 Nova Science Publishers, Inc.

Chapter 4

GLOBALIZATION, MODERNIZATION AND EDUCATION IN MUSLIM COUNTRIES: SOME BASIC CHALLENGES M. Kazim Bacchus University of the West Indies, Jamaica

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THE MEANING OF GLOBALIZATION AND MODERNIZATION Before examining how globalization and modernization affect education in Muslim countries it would be useful to first clarify the meaning of both these concepts, as they are used in this chapter and then explore their importance for educational developments in these societies. Globalization refers to a process that leads to a greater integration of the world economy, especially in trade and the flow of capital. It requires the removal of all trade barriers between nations with the aim of producing a single competitive world economy. Among its requirements are: •

•

the elimination of tariffs directed at protecting local ‗infant industries‘ or the granting of public subsidies to industries to enhance their ability to compete on the world market; the privatization of public enterprises, especially those that are a drain on the public treasury.

The removal of these ‗protectionist‘ impediments to ‗free trade‘ is seen as necessary for countries to move towards a globalized competitive economy. The World Trade Organization (WTO), which replaced the United Nations Conference on Trade and Development (UNCTAD), was established in 1995 to facilitate movement towards this goal and in 2003 it had 146 members.

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Modernization Refers to •

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•

Changes that are introduced in organizations to make them more efficient and effective. For example, Muslim societies have been strongly guided by their traditional cultures that, by and large, tend to be backward looking rather than future oriented. However, recognizing that they cannot be content with living in the past, they have gradually been adopting new ideas, including those based on science and technology. Their willingness to be open to and assimilate new knowledge and practices is part of their modernization process. The outcomes of changing social relationships in societies that are moving from ‗traditional‘ to more technological methods of production and the new structural and cultural features that they acquire in the process of transition. These include democratic political systems, institutionalized support for human rights, the desire to prevent further destruction of the environment, freedom of people to express their views and gender and ethnic equality for all citizens.

While the modernization process, which has accompanied globalization, has resulted in significant changes in Muslim societies, it has also brought about disruptions in their social order. This is due to the changes being uneven, with middle class families drastically improving their life styles and consumption patterns, usually imitating the middle classes in Western societies while the rural majority are still living traditional lifestyles, sometimes in greater poverty than before. But, despite these changes, most Muslim societies continue to lack some of the features of modernity, though this is gradually changing because such features are not only important in their own right but are necessary to enhance the economic development of these societies. However, not all the changes in social relationships that occurred in the West are intrinsic features of modernity. For example, Japanese society has been modernized without a drastic reduction in the strength of family ties. Therefore, in their efforts to become more ‗modern‘, Muslim societies do not have to acquire slavishly all the features of Western societies but should conserve those traditional values, beliefs and social relationships that help to enhance the quality of life of their population.

SOME NEGATIVE OUTCOMES OF GLOBALIZATION The end of the Second World War brought increased opportunities for the worldwide expansion of trade and investment and this led to a re-alignment of global economic power among richer, mainly Western countries, which placed the USA in a position of world economic dominance. Their joint efforts resulted in their increased control of international economic and trade practices and this enhanced the activities of international organizations such as the World Bank, the IMF (the International Monetary Fund) and more recently the WTO (World Trade Organization) that were established earlier. These institutions directly influence world finance and commerce and their joint activities have contributed to the internationalization of world trade, though largely in the economic interest of the wealthier nations. This has important implications for Muslim and other developing countries. Some economists such as Thurow have argued that, with the world economy becoming more interconnected, there will be a movement away from the current ‗unipolar‘ to a ‗multipolar‘

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control (Thurow, 1996) with increasingly less concentration of power over trade in the hands of the Western countries. But this is yet to be achieved and the small group of wealthy nations still continues to dominate the global economy and its key institutions. In its present form, globalization has also been increasing the risk of environmental degradation and has negatively affected the exercise of local democracy. This is because the role of the nation state is diminishing, with the international organizations increasingly making decisions that relate to trade and industry worldwide. In their report entitled Does Globalization Help the Poor? the authors summarized some of its negative effects by indicating that, Globalization policies have contributed to increased poverty, increased inequality between and within nations, increased hunger, increased corporate concentration, decreased social services, and decreased the power of labor vis-à-vis global corporations (Barker and Mander, 2001). The philosophy of globalization also supports the idea that the public sector, which was previously the major source of wage employment in Muslim and other developing countries, should be considerably reduced in size - a policy on which the World Bank insisted as part of its structural adjustment policies. Countries are also expected to allow local industries, especially those operating at a loss, to close down despite the negative impact that this will have on the welfare of workers, their families and the social capital invested in local communities. This policy also has had a negative effect on unemployment which is already high in most Muslim countries and which has been exacerbated by their high birth rates and their inability to attract enough private enterprises, outside the oil industry, to foster alternative industrial development. Globalization supports the view that pressures should be exerted on governments to privatize even publicly owned and operated enterprises, which provide such services as electricity, water, gas, education and health. Admittedly, such privatization could result in the employment of workers based on their competence, merit and educational qualifications rather than their family or other connections. But, as private companies take over these enterprises they also try to use more up-to-date technology to improve their productivity. While this is likely to create a local industrial climate that is more supportive of the use of technology, it too could increase local unemployment, at least in the short-run, and create additional problems, especially for Muslim countries that have over 50 per cent of their population under 21 years of age, with large numbers being currently unemployed. Muslim countries such as Pakistan, Bangladesh and Indonesia are experiencing an initial increase in jobs resulting from multi-national corporations transferring some of their production units to these countries in search of cheap labor. But these countries cannot depend on low wages alone to keep these industries unless their lower labor costs increasingly result from a higher quality of the local labor and the development of democratic political systems that could ensure long-term social and economic stability. Globalization has also resulted in an increasing displacement of traditional occupations in Muslim countries with the growing use of scientific knowledge and technology, adding further to the unemployment situation. The negative effect of technology on employment, in the short run can be seen from the experience of the industrialized countries. For example, between 1975 and 1985, manufacturing output in the USA rose by 40 per cent but during this period there were 5 million fewer blue-collar workers in manufacturing industries. Therefore, the use of more sophisticated technologies, which will continue to expand in Muslim societies, will also result in the disappearance of their traditional sources of employment. But,

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on the other hand, it might create more pressures on these governments to facilitate alternative job creation ventures. The trading relationships within which globalization is currently taking place are essentially unfair and this negatively affects non-Western including Muslim societies. This is seen in the amount of subsidies that the rich nations provide for some of their industries – about US$350 billion per annum or about US $1 billion per day. These subsidies are contrary to the philosophy of free and fair trade that underpins globalization. Further, they are usually granted to agriculture, which is an industry that not only employs a substantial proportion of the work force in many economically less developed Muslim countries, but is one in which these countries might have a competitive advantage. For example, in countries like Bangladesh, Pakistan, Egypt, Indonesia and even Turkey, between 30 per cent and 40 per cent of their labor force are engaged in agriculture. The subsidies that farmers in the richer countries receive make it difficult for those in the poorer countries to compete with their agricultural products, sometimes even in their home markets. The rich nations have also been reluctant to lower significantly their tariffs against such products as textiles from the poorer countries including many Muslim countries. In addition, globalization has negatively affected the welfare of the population in the poorer Muslim countries through the growing demand for the commodification of nearly all goods and services, including water, health, education, culture and more recently life forms, which can now be patented, despite their importance for human welfare. This takes place even in cases where the knowledge originated in developing countries but was later acquired by institutions in the industrialized world. It is being done through the instrument of intellectual property rights largely at the insistence of the Western industrialized countries, which are the main producers of knowledge at the global level and this is obviously against the interests of the poorer countries. This increasing commodification of culture has been stimulated by the fact that cultural products - films, television programs, music, books and magazines - represent the largest single export of the USA and this is having adverse effects on indigenous cultural development in Muslim countries. This is because the local cultural products have difficulties in competing in the market place with the imported ones. Further, any assistance provided by these countries to promote their culture through subsidies for the production of, say, films, music and other cultural artifacts, are increasingly seen as being against the policies of the WTO. Therefore, the governments of Muslim societies are likely to become less financially supportive of local cultural activities and thereby, unable to prevent the erosion of their cultures, indirectly allowing for the cultural penetration by the richer countries through the massive export of their own cultural products. This might eventually result in a weakening of the sense of national identity, especially among the more affluent groups in Muslim societies who make the most use of these elements of foreign cultures. With increasingly borderless societies in the field of trade, the individuals who are the main beneficiaries of globalization are likely to shift their bonds of national allegiance and by so doing disengage themselves from their less favored fellows. Globalization therefore could tear at the ties that bind its citizens together because it bestows greater wealth on a few while often consigning the less skilled or educated to a declining standard of living. One outcome of this can be increasing inter-group conflict and general social instability in these societies, which could further threaten the very existence of the state.

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It will also affect any genuine efforts by different cultural sub-groups in these countries to understand and appreciate each other‘s culture. According to the underlying philosophy of globalization, whatever does not have a price in the market place is increasingly considered as having no value. Therefore, the governments of Muslim societies would need to take active steps to prevent further cultural erosion of their societies and help ensure the efflorescence of local cultures by getting ‗culture‘ exempt from WTO regulations. This would allow these governments to aid their nation‘s cultural development and help the young achieve a greater sense of pride in their nation. This could also contribute to a reduction in the level of conflict in these societies, develop greater harmony among the various local cultural groups and increase the understanding and tolerance, which Muslims have for other groups in their societies and vice-versa. Muslim societies undeniably have a glorious past and have made a tremendous contribution to the world in such fields as science and mathematics. The strategy suggested above could therefore help to develop greater national and international awareness of the past achievements of Muslim countries and their contribution to the world in certain key areas of knowledge. This is important in view of the way in which Muslims are being seen in the West, especially after the 9/11 incidents in the USA. Muslim societies also need to encourage greater interaction with other cultures and countries and to exchange ideas, especially with Western societies, where they are often most misunderstood. This is not only of value in itself but also because it could stimulate creativity and greater knowledge production in these societies. Globalization has also been accompanied by a decline in the economic conditions of the population in some countries, including poorer Muslim countries. For example, it was reported in The Guardian (a UK newspaper) that the UN Human Development Report of 1999 indicated that of the global GNP of US$23 trillion, only 22 per cent was shared by the developing countries which had 80 per cent of the world‘s population. Further, these ‗grotesque inequalities‘ in the distribution of wealth between countries has been increasing. Between 1960 and 1991 the richest 20 per cent of the world‘s population, most of whom live in the richer countries increased their share of the total global wealth from 70 to 85 per cent while the poorest 20 per cent, most of whom live in the developing world, including some Muslim countries saw their share of the global wealth fall from a meager 2.3 per cent to a disgraceful 1.4 per cent. In more concrete terms the Human Development Report of 1999 noted that the assets of the 3 richest persons in the world were more than the combined GNP of the 48 least developed counties while the assets of the 200 richest persons were more than the combined income of 41% of the world‘s population i.e. 2.3 billion people (1999: 37). One hundred countries with about 25 per cent of the world‘s population have actually suffered economic decline or stagnation and in seventy countries citizens were, on the average, poorer in the 1990s than they were in 1980 and in 43 countries poorer than they were in 1970. The 2002 UNDP (United Nations Development Programmed) Human Development Report again noted that over the past decade more than fifty nations have become poorer. Poverty has also been increasing in other countries where the percentage of the population living on US $1 per day has not been reduced during the 1990s. While this was happening it was reported that over the past twenty-five years, the pay of chief executive officers (CEOs) of major companies has increased from about 39 times the pay of the average worker to more than 1,000 times.

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Bangladesh provides a concrete example of a Muslim country that embarked on a trade liberalization program in the early 1990s. As a result, the country experienced a surge in its industrial growth, in its exports and a fairly noticeable increase in its GDP. But, as reported in the Pakistan newspaper Dawn (Oct. 21, 1995) an economist from Bangladesh pointed out that about 3.5 million of the country‘s workers were likely to lose their jobs because of the accompanying unrestricted import of foreign goods and the absence of measures to help them during the period of transition in which they would have to seek other jobs or acquire new skills. The newspaper also commented on the deepening of its rich/poor divide by noting that the "glitter of affluence‖ among the few with their ― snazzy foreign cars‖ and ―m obile phones‖ is increasingly in stark contrast to ― the deprived life-styles of the more than one billion South Asians who cannot afford even the minimum calorific requirements for a day‖ (Dawn, Oct. 21, 1995).

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REASONS FOR THE NEGATIVE OUTCOMES OF GLOBALIZATION IN MUSLIM SOCIETIES Among the reasons for these negative outcomes of globalization is that many accept the view that the process is inevitable and having its own inner logic. Therefore they argue that it should not be derailed by major ethical concerns but be allowed to proceed smoothly on its own. This means that governments should not interfere with the operations of the market place, even in the interest of the welfare of its own population. The only government policies that are deemed necessary are those that would facilitate the removal of obstacles that might interfere with the free flow of goods and capital between nations. International trade treaties therefore tend to focus on strategies, which might enhance the prosperity of global business without indicating a corresponding concern for the social obligations of the trans-national corporations. As Saul (2004) noted, business leaders, politicians and even academics seem to accept unquestioningly the view that the world requires that ― the public good should be treated as a secondary outcome of trade and competition and self-interest.‖ It is therefore obvious that how the wealth created by increasing globalization is being distributed has, so far, been of less concern to the richer countries that control the WTO. However, it is generally accepted that the rich would receive much of this newly created wealth as a reward for their efforts and to allow them to have funds for further investment. Hence measures like tax cuts that substantially benefit the rich have become increasingly common in the developed countries while there is a relatively steady erosion of workers‘ rights, working conditions and state expenditure on public goods such as transportation, the environment, education and health. Without changes that tip the balance of global wealth more towards the needs and aspirations of the poor, including those in the Muslim countries, globalization would not help these nations achieve human progress. Further, Islam imposes an obligation on the leaders of Muslim countries to ensure that the human welfare of their population should be one of their major concerns. But trade liberalization can only benefit the economically more marginalized groups if the challenges that these groups face are specifically taken into account when trade rules are being developed. For example, even if the state cannot indefinitely support an industry that produces goods and services for which there is no longer an adequate demand, it should see it

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as a moral obligation to help the citizens who are affected by this change, through ensuring that they and their families do not lack the basic necessities of life. It might even be argued that the state, in economically better-off Muslim countries, should provide such workers with re-training opportunities that would allow them to find other employment in order to reestablish their means of livelihood. In other words, Muslim governments need to develop public policies that will ensure that the economic gains that accrue from globalization would benefit their overall population and help with the reduction of poverty in their countries. They would also need to provide special funding for health and human resources development programs and, where necessary, even some subsidies for ventures that are likely to have a positive impact on increasing future national output and productivity. This could be considered legitimate as long as the richer countries continue to subsidize their industries such as agriculture. Trade agreements should also not allow foreign governments to override domestic environmental and health standards because of a desire to privatize these services. In review, the point being made here is that while the world is increasing its wealth through globalization, the process in its present form is adding to the commiseration of the poor in developing countries, including Muslim countries and this has left many individuals at starvation or near starvation levels. This not only threatens to increase global instability but also reduces the chances of the poorer countries ascending the development ladder. It also affects their ability to acquire new knowledge, which could improve the productivity of their workers. Further, as suggested above, some of the current outcomes of globalization are not always congruent with the teachings of Islam, which abhors the level of exploitation and injustice that has been accompanying globalization, since this can lead to social disorder. This occurs partly because globalization is not guided by any major moral principles and this is why it has resulted in increased and unjustifiable inequalities in the distribution of national and global resources. This imposes an obligation on the political leaders of Muslim countries and those who own most of their nation's wealth to ensure that all individuals have, at least, the basic necessities of life. Further, this should not depend simply on voluntary charitable acts of individuals but should be a moral obligation, on the part of the ‗collectivity‘ as manifested in the nation state.

GRAPPLING WITH GLOBALIZATION However, despite its dysfunctional aspects, globalization is considered to be a key factor in enhancing world economic growth. This is reflected in the fact that from about 1945 to just before 2000, international trade increased more than twelve-fold and between 1971 and 1999 the economically less developed countries improved their share of the world market from 19 to 29 per cent Those countries that have actively participated in the globalization process have experienced a faster rate of growth than those that have not. Further, globalization has increasingly become a reality that has to be faced and the only real option that the leaders of Muslim countries have is to play a more effective role in trying to influence this process so that its outcomes would be less discriminative against their population, particularly the poor. Such efforts were attempted by some developing countries at the WTO meeting in Cancun in September 2003 but the approach would need more concerted action by both Muslim and

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other political leaders to build a strong lobby to get the WTO to approve more equitable trade policies that take into account the needs of ordinary citizens. In addition, the population in these countries needs to be adequately prepared to fully exploit the existing and emerging economic opportunities that globalization is increasingly providing for workers. This ‗activistic‘ outlook is necessary and as George Bernard Shaw?? the famous Irish playwright suggested, the people who get on in the world are those who look for the circumstances they want and, if they cannot find them try to make them. To achieve these more beneficial outcomes of globalization Muslim countries will have to take a number of steps, especially in the field of education, to ensure that even if they do not always have a winning hand in international trade they can play the ‗game‘ with skill and ingenuity so as not to be perpetual losers and thereby increase the benefits that could accrue to their populations from globalization. This is particularly important for Muslim societies, which still have many other hurdles to overcome in order to improve their nations' chances for economic and social survival within a system that increasingly depends on the speed at which they can respond to change. This does not imply that the task would be an easy one, especially since the richer countries still control or strongly influence the decisions of the key international organizations, which they tend to regulate mainly in their own interest. But it is a challenge for which they must be better prepared, partly through the education that these countries provide for their population. Some of the strategies that might prove useful will be discussed later.

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THE MODERNIZATION OF MUSLIM SOCIETIES There are a number of structural deficiencies that Muslim societies have to overcome in their efforts to become more modernized, especially if they are seeking to maximize the benefits they can acquire from the increasing globalization of the world economy. Among these deficiencies are:

1. Lack of Democratic Institutions In many Muslim countries there is a lack of viable democratic political systems that would empower their citizens and ensure that their voices are heard and acted upon by their elected political representatives. There is a great need for Muslim societies to expand the scope of human freedom by granting civil liberties to all their citizens and guaranteeing these freedoms through good democratic governance. While Muslims, including those in Arab countries generally express strong support for democracy over authoritarian rule, their governments are still very reluctant to provide political institutions, which would allow their citizens to enjoy their full democratic rights. This preference by Muslim governments for a more autocratic social order is reflected in the fact that they tend to spend more of their nation‘s resources on State Repressive Apparatus (SRA) such as their military rather than education. Data from the 2001 UNDP Report for the years 1995 to 1997 suggest that most Muslim countries were spending a higher percentage of their nation‘s wealth on their military, even before the 9/11 incident in the

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USA, than on education. This is in contrast to the situation in the ten most developed countries, which had the highest scores on the HDI (Human Development Index) for 2001. Figure 5.1 indicates that none of these ten developed countries was spending a greater percentage of their GDP on the military than on education, which was almost the opposite situation with the Muslim countries for which data was available (Figure 5.2).

Key: 1=Belgium, 2=Japan, 3= Netherlands, 4= Iceland, 5= USA, 6=Australia, 7= Canada, 8= Finland, 9= Norway, 10 = Sweden Source of Data: UNDP Human Development Report (2002).

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Figure 5.1.

Key: 1=Indonesia, 2=Bangladesh, 3= Turkey, 4= Lebanon, 5= Pakistan, 6= Iran, 7= Syria, 8= Bahrain, 9= Oman, 10= Egypt, 11=Malaysia, 12=Kuwait, 13=Saudi Arabia, 14= Tunisia, 15=Jordan Source of Data: UNDP Human Development Report (2002) Figure 5.2.

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2. The Mass Media The mass media in many Muslim countries operates in an environment that restricts the freedom of individuals to express their opinions. This is also reflected in the harassment of journalists and the restrictions placed by these governments on both the local and foreign media. For example, newspapers in some Muslim countries are often strictly controlled by the state and the Economist (a UK weekly journal) recently reported that in Saudi Arabia, the Internet, the mobile phone and satellite television are still technically banned, though they are increasingly accessible, now to about 80 per cent of the population, without interference. Further, all web sites need official approval and it is estimated that 30,000 websites in the country have so far been blocked. Censorship is rife and newspapers and television channels are sometimes arbitrarily closed down. The authorities also impose other restrictions such as the confiscation of publications and the banning or unduly restricting of people from entering some Muslim countries, often citing the pretext of 'national security' or the need for public order (Economist, (2004) March 6-12). Other restrictions are often imposed by those who see themselves as custodians of public morality, often with no objections from, and even with the support of, these governments. One outcome of these repressive actions is that readership is limited and this is reflected in the number of books that are published in these countries. For example, in Arab countries the number of books published does not exceed 1.1 per cent of world book production although the population in these countries make up 5 per cent of the world population. There is also a lower ratio of newspapers, radio and television per 1,000 people than in the rest of the world. In Saudi Arabia there are currently less than 53 newspapers per 1,000 individuals as compared with 285 per 1,000 persons in the developed world. (Arab Human Development Report, 2003) Most media institutions are also state-owned, particularly radio and television. But freedom of expression is not only an important human right. It is also needed to allow the creativity and innovativeness of the population to flourish and to produce new knowledge through experimentation and research. In other words a climate of freedom is an essential prerequisite of a ‗knowledge society‘ and this demands freedom of thought and expression. In many Muslim societies the absence of such freedom is resulting in a growing threat to the legitimacy of the state, partly because of the desire by their leaders and other elites to retain their positions of dominance, often ignoring the popular clamor for more democratic political forms. This is often reflected in the increasing negative attitude of large sections of the population towards their political leadership and an erosion of loyalty and respect for the state in general. Further, in pluralistic societies, inter alia, these developments have encouraged a strengthening of the ties of loyalty among sub-group members (for example, among the Shias and among the Sunnis) often in opposition to each other in the society. The outcome has been inter-group conflict and increased social instability that have threatened the very existence of the state and of civil society. This is happening at a time when these countries are most in need of political stability for their future economic development. Muslim countries must therefore overcome this resistance to the democratization of their political institutions, with their young being educated to value the exercise of democracy. The lack of freedom of speech often leads to a strengthening of the popular demand for democratic rights because without such pressures, the leaders of these countries would not be motivated enough to introduce the

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necessary changes, even though they are also important for the development and modernization of Muslim societies.

3. Reducing the Rate of Population Growth in Muslim Societies All societies aspiring towards modernity are striving to improve the living standards of their population. But in Muslim as in other countries, a high rate of population increase is having a depressing effect on employment and any increase in the standards of living of the population. This is therefore another challenge that Muslim societies have to confront; especially since research evidence shows a negative association between rapid population growth and the rate at which per capita incomes increase. Lower rates of population growth, obviously, allow countries to buy more time to adjust to the changing realities of the globalized economy which can improve their ability to attack poverty, reduce unemployment, universalize primary education, protect their environment and build a base for future sustainable development. This is therefore an important issue to which education systems in these countries need to direct more attention.

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4. Education of Females in Muslim Societies Another feature of modern societies is the growing importance of gender equality and in fact the equality of all citizens, irrespective of their gender or ethnicity. Providing equal access to education and employment opportunities for females still represents a major hurdle for most Muslim societies. While females are increasingly being given a primary and secondary education there are countries, like Pakistan and Bangladesh with large Muslim populations, where girls are still heavily under-represented in schools as compared to boys. But this gap is greatest at the tertiary level, with relatively few Muslim girls pursuing tertiary level studies, especially in the scientific and technological fields. Some progress is gradually being made to bridge this gap and especially so in the representation of females in primary, secondary and university teaching and in the civil service. Nevertheless, they are still discriminated against in competition for jobs with males. These countries therefore need to overcome this deficiency and ensure that achievement rather gender or ascriptive qualities would determine the selection of individuals for employment. This would allow Muslim countries to utilize their human resources more efficiently to contribute to their national development.

5. The Protection of the Environment in Muslim Countries Most modern societies are concerned with preventing any further destruction of their environment. But in some Muslim countries there are currently large numbers of individuals who are without electricity and they attempt to meet their needs for energy by burning wood and, where available, coal. The continued use of these sources of energy can be catastrophic for the environment and this will continue, adding to the increasing threat of global warming. There are further problems caused by deforestation, soil erosion

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and soil exhaustion, the pollution of water sources, and so on. Therefore, the population in these countries needs to be assisted to pursue practices that would prevent further destruction of the environment. Their youths should also be educated to develop an appreciation of, and a respect for, the local and the global environment.

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6. Education in Knowledge-Based Muslim Societies Another aspect of modern societies is that they are increasingly becoming knowledgebased and are ushering in a new information age. Muslim societies therefore need to direct more efforts at providing enough high quality education for all sections of their population. Opportunities for lifelong learning should also be available to ensure the continued economic survival of their population. For this, they need to be equipped with knowledge and skills that would help them grapple more effectively with the changing economic realities of the 21st century and the globalization of the world economy. Production efforts in today‘s society are increasingly dependent on new knowledge, especially in the fields of science and technology. This will also contribute significantly to future economic growth of Muslim societies and will result in a further shift away from traditional production methods towards a new production model, which has been referred to as the ‗innovative mediated‘ or ‗knowledge intensive‘ production model. (Cogburn, 1998) This model of production is less dependent on inputs of capital, raw materials and unskilled labor and more on the application of knowledge and innovative approaches in dealing with issues and solving problems. This scientific and technological advance is reflected in the development of industries in such fields as biotechnology, genetic engineering, artificial intelligence and computer software. For example, it is estimated by automobile designers that 70 per cent of the value of a modern automobile is attributable to the knowledge embedded in its production and even agricultural production is increasingly influenced by the growth of scientific knowledge. Partly as a result of the environmentally deleterious effect of chemical fertilizers, more attention is being directed at the use of biotechnology in food production. This stems from the increasing understanding by scientists of the genetic code and genetic engineering, which is improving or changing conventional plant breeding techniques in order to increase output and develop new products. Therefore, while farming in Muslim countries has remained largely traditional, the application of scientific knowledge to the industry is important if farmers in these countries are to increase the benefits that they could enjoy from their labor. Such developments also make it important for the governments of Muslim countries to apply pressures on the richer countries to reduce their farm subsidies and open their markets, more widely, to agricultural imports. The continued integration of science and communication is also reducing the world to a global village. Therefore, in addition to being instantly exposed to worldwide news, the peoples of Muslim countries are increasingly confronted by new ideas, new commercial goods and even to the different life-styles of peoples in other countries. This often creates a greater restlessness, especially among the young in Muslim countries, since they often become dissatisfied with their own living conditions, especially with their country‘s high unemployment rates, fuelling their desire for a change or to migrate to other shores. The result is a continuing depletion of the more educated human resources in the Muslim

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countries. Many of their specialists, especially their doctors, migrate to seek employment abroad, especially in the USA. For example, around 25 per cent of 300,000 first degree graduates from Arab universities in 1995/96 emigrated and between 1998 and 2000 more than 15,000 Arab doctors have left their countries. A similar situation exists in Pakistan and is partly due to the high unemployment rate there. In addition, qualified personnel from Muslim countries also often find it difficult to effect changes in their own societies and this has also contributed to their desire to emigrate, thereby denying their countries the skills that are needed for their national development. But this integration of science and communication, which was quickened by the proliferation of satellites, fiber optics, facilities for high speed electronic transfers, computer modems and computer software is also having a positive impact on Muslim countries by opening up more learning possibilities for their population. This means that knowledge is becoming more readily available to them through such mechanisms as the Internet. The technology required to deliver this knowledge is also increasingly accessible and affordable. Some institutions such as the Massachusetts Institute of Technology (MIT) have decided to make all their courses available on the Internet. Muslim societies, especially those in the Arab World therefore need to facilitate the increased use of the Internet that would make it possible for their population to have access to these new sources of knowledge and information, especially since the frequency of use of the information media is lower among them than for the world in general. This increasing importance of new knowledge for the production process makes it necessary for Muslim countries to become more involved in Research and Development (RandD) activities. In a knowledge-based society it is important that stress be placed not only on knowledge diffusion but also on knowledge production and application. Therefore, in view of the growing knowledge gap that exists between Muslim countries and the West, the former need to improve their production of new knowledge, especially that which could assist in the economic development of the population. Further, globalization has made it possible for various phases of the production of a single commodity to be carried out in different countries, thereby internationalizing what used to be national production. If Muslim countries are to benefit from these joint production enterprises they will need to have an adequate supply of suitably educated personnel to undertake some of the required tasks. This need is seen particularly in the field of computing science and the production of computer programs, software and computer chips. The number of workers engaged in RandD activities in Muslim countries is currently very limited and this is evident from the fact that, between 1987 and 1997, high-income countries had 3,127 RandD scientists and engineers per 100,000 population while the number of knowledge workers in Muslim countries was relatively miniscule. For example, the number of scientists and engineers working in RandD in Arab countries was not more than 37 per 100, 000 population, which is much lower than even the global rate of 98 per 100,000. This results from low levels of RandD expenditure, which in the Arab countries does not exceed 0.2 percent of GNP. (Arab Development Report, 2003). Such activities are also held back by weak basic research and the almost total absence of advanced research, especially in various emerging scientific fields such as biotechnology, communication and information technology and molecular biology. Further, most of the funds voted for RandD work is spent on salaries while the researchers lack adequate institutional support to improve the quality of their work..

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The result is a stagnation of knowledge production, especially that stemming from scientific research and as a result very few scientific books and articles in the learned journals are from Muslim countries. However attempts are being made by some Muslim countries to improve this situation. For example, Malaysia has already taken significant steps in the development and strengthening its scientific and technological capability by cooperating with other countries and agencies. These include its work with the United Nations on climate change, its cooperation with countries in South East Asia in sharing scientific, technological and environmental information and its efforts, together with those of other countries to develop Information, Communication and Technology for industries such as the Construction Industry. Further, the new production model has also led to a realization that knowledge is not the monopoly of any particular group or groups and therefore efforts are being made to explore the value of the knowledge that non-Western societies, including Muslim countries, have acquired over the years. The search for the scientific basis of traditional knowledge is thus becoming more important in today‘s research efforts. But turning knowledge into valuable capital requires research and development in all areas. However, despite their past achievements in the fields of science and mathematics most Muslim countries of today have not been very successful in producing new scientific, technological and mathematical knowledge. Therefore, to benefit more fully from globalization and the increasing use of new knowledge in the production process Muslim countries must prepare their populations to make a greater contribution towards RandD activities by strengthening the scientific and technological aspects of their educational programs. This is particularly important for these countries, which are still using outdated technology. Their leaders must make efforts to remove existing political obstacles to knowledge acquisition and take steps to develop a more positive attitude to knowledge and its acquisition, which is necessary to enhance its production. In commenting on the current attitude to knowledge and the development of a vision for the future by Muslims in Arab societies, the Arab Development Report observed: Our inverted system portrays the pursuit of the simplest knowledge as presumption; aspirations for the future as impossible dreams; courage as overreaching audacity; inspiration as folly; chivalry as aggression; free speech as insolence and free- thinking as heresy (Arab Development Report, 2003).

This observation also applies to the population in other Muslim countries. Muslim countries could also benefit from the establishment of research networks that link the public, private and international sectors, which are engaged in knowledge production for the benefit for their populations. This would be in contrast to most research currently being carried out in Western societies, which aim at producing new knowledge that would essentially benefit the individual researcher or the company for which he/she works. The new production process also demands what Reich (1992, 84) calls ‗symbolic analysts‘ - i.e. workers with problem-identifying and problem-solving skills who are able to acquire new insights by looking at familiar problems from different and original perspectives and come up with more effective solutions to them. This is important because the emerging global economy will be replete with new and unidentified problems, with unknown solutions and untried means of putting them together. Muslim countries will therefore require

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individuals with an inquisitive and creative outlook who are able to use existing knowledge effectively while also creating new knowledge to deal with existing and future problems. The new production process also requires individuals who can work with others, both nationally and internationally, carrying out research, designing new production techniques, developing new computer software and jointly undertaking other production activities. Reich refers to the growing development of ‗enterprise webs,‘ which require entrepreneurs from different countries to link up with each other in pursuit of their joint economic interests. Such involvement in cooperative production efforts will increasingly transcend national borders and its success will depend on workers from different cultural backgrounds who could easily relate to, and work with, others. These efforts are being aided by the increasing use and the lower cost of worldwide communication, through telephones and the Internet. For example, between 1970 and 1990 the cost of international telephone calls fell about 90 per cent and has continued to decline since then. While there have been some improvements in the information field in some Muslim countries, access by the population to digital media is among the lowest in the world. For example, in the Arab countries there are just 18 computers per 1000 persons compared to the global average of 78 per 1000 individuals. In addition, the number of telephone lines in these countries is barely one-fifth of what it is in developed countries and only 1.6 per cent of their population has Internet access. (Arab Development Report, 2003) This indicates an inadequate level of preparedness of these countries for such trans-national cooperative ventures. There is therefore a need for a more effective communication infrastructure to be built, if the Muslim countries are to use information technology more effectively for knowledge diffusion and working on joint enterprises.

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GLOBALIZATION AND EDUCATION IN MUSLIM COUNTRIES The next issue that needs to be addressed is ― What contribution might education make in overcoming the hurdles that currently prevent Muslim societies from benefiting more fully from globalization?‖ First, there is a need to restructure Muslim economies so that they would be engaged in producing higher value-added exports in order to increase local job opportunities and prevent the heavy migration of their more highly educated personnel. For the oil producing Muslim countries this calls for a decisive move towards developing alternative but renewable energy resources through knowledge and technological capabilities and diversifying their economic structures and markets. It would also be necessary for these countries to evaluate the nature of the training that they provide for their professionals and other university graduates. Currently this tends to focus on improving their technical competence with little attention paid to the development of the moral imperative of service to the less fortunate members of their societies. The governments of Muslim countries therefore have to direct more efforts at upgrading their human resources if they are to overcome the economic, social and political hurdles that they face in the development and ‘modernization‘ of their societies. This requires major new educational investments from the pre-school stage to the university including postgraduate levels and lifelong learning. While some impressive gains have been made in many Muslim countries over the past few decades with the quantitative expansion of primary and secondary

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education facilities, many individuals in these countries, especially females, do not have adequate access to basic education. In addition, these countries still have high rates of illiteracy, especially among women. In providing a high quality basic education for their population Muslim countries need to focus on preparing them: • • • •

with the knowledge, skills, attitudes and dispositions to increase their earning capacities; to be involved in lifelong learning; to participate in strengthening the democratic process in their countries; to lead healthy lives, become more sensitive to the need of others and to prevent further environmental degradation of their societies.

This would require educational programs that include: •

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• •

•

Early Childhood Education or Early Childcare and Development (ECCD). In most Muslim countries child rearing practices tend to be inconsistent, with fathers tending to be autocratic while mothers are often overprotective. This makes the children, in later life, unwilling to exert their own initiative and they often tend to suppress their willingness to think for themselves and question and explore ideas. They also usually lack self-confidence and independence and even become autocratic in their relationship with others. They also tend to develop passive attitudes towards social problems, a reluctance to make decisions on their own and a tendency not to be selfcritical but arrive at decisions without fully considering the facts available to them. Therefore, their education at this age is important and even the parents need to be provided with education in child rearing approaches. Universal primary and even secondary education by making efforts to include those who have so far not been receiving formal education. Adult education which involves the development of multiple levels of literacy functional literacy, cultural literacy, technological literacy and possibly even computer literacy and not just the ability to read and write. It also includes the provision of skill training for recent school leavers and the retraining of those who have lost their jobs or need to improve their job skills and competencies. Health, environmental, human rights and civics education. There is still a general lack of recognition of the links that exist between health, cognition, school participation and academic achievement. Further, political leaders in some, countries, including Muslim countries are not yet quite convinced of the need to prevent further environmental degradation, about the importance of human rights and the need to prepare citizens to be more actively involved in the political process. As the Secretary General of the United Nations pointed out, ― The dignity of the individual is trampled or threatened where citizens do not enjoy the basic right to choose their own Government, or the right to change it regularly‖ (UNDP Report, 2002: 13). The denial of political rights often leads to conflicts and eventually to the loss of innocent lives.

Further, the Governments in Muslim and other developing countries need to develop a more holistic view of ‗human rights.‘ As Clare Short, former Secretary of State for Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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Development in the United Kingdom pointed out, ― Most people identify ‗human rights‘ with liberty and physical security" but ― too often, people are unaware that ‘human rights‘ include the economic and social rights necessary for dignified living‖. These include ― the right to adequate health, food, water, education and work. Both sets of rights are given equal priority in the Universal Declaration on Human Rights‘ (1998: 5). These are areas to which educators need to direct greater attention since the educational efforts made so far, in some Muslim countries, have not been significant.

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•

Tertiary education needs to be provided to an increasing percentage of the population. This is important because some Muslim countries have been experiencing a decline in enrolments in their higher education institutions. They also need to enroll more students, including females in the scientific and technological fields at the tertiary level. Their current focus of education, especially higher education tends to be on literary and artistic studies. While this contributes to their cultural development of these nations, their tertiary education institutions need to focus more on scientific and technological studies, if their citizens are to benefit more fully from the modernizing globalized world and close the growing knowledge gap between themselves and other countries, particularly the West.

The need for such a shift is reflected in the books published in Muslim societies. Most of these books are on religion and religious issues but more efforts need to be devoted to producing books on such ‗modern‘ subjects as science, technology, economics, mathematics, geology and other subjects. For example, currently 17 per cent of all books published in Arab countries are on religion as compared to 5 per cent of the books produced in other parts of the world. (Arab Human Development Report, 2003) In addition to their scholars being provided with adequate funding for RandD activities, their students should be encouraged to develop a positive attitude to open intellectual inquiry. The political and social context of many Muslim countries has not been very supportive of development and the promotion of science and this needs to be changed. Turning knowledge into development capital requires these countries to focus more attention on the production of new knowledge in all areas and particularly in the sciences. Therefore, it is necessary for Muslim societies to have their education systems strengthen the teaching of science and developing greater capacity for RandD activities, especially in areas that would be of direct benefit to their populations. This can be achieved through promoting basic research, and establishing centrally coordinated regional scientific facilities along with a network of research institutions whose work will permeate the entire fabric of their society. Useful links could also be established with international research centers.

IMPROVING QUALITY OF EDUCATION IN MUSLIM COUNTRIES Another issue that needs attention is how to improve the quality of education that institutions in these countries offer. Performance standards are currently not only poor but also deteriorating, with low and in some cases declining expenditure on education since the 1980s particularly in some Arab nations. To effect the required improvement, their educators

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need to begin disaggregating the concept ‗quality of education‘ into its various components and then decide on the aspects of ‗quality‘ on which their countries should focus. Quite often educators accept, without challenge, the view that one assesses ‗educational quality‘ simply on the basis of students‘ test scores. But this is a very limited perspective because test scores only indicate whether students have learned what they were taught or what others expect them to know. It does not suggest how well equipped the students are to cope with the changing realities of a globalized knowledge-based economy. Cogburn (1998: 27) even suggested that it is no longer sufficient to increase the efficiency of the existing educational systems by improving the quality of their various components. This is because, as he suggested, much of what is still being taught in educational institutions was developed to serve the economic demands of another age. As a result, students find themselves deficient not only in knowledge, but also in cognitive skills that are necessary for the evolving labor markets. Employers often complain that even university graduates especially from Muslim countries are not sufficiently challenged to acquire new skills and assimilate new knowledge. This was largely an outcome of the teaching strategies to which the students were exposed in their educational institutions. Therefore, the globalization of the economy and its concomitant demands on the workforce requires a different education - one that enhances the ability of learners to access, assess, adopt, and apply knowledge, to think independently, to exercise appropriate judgment, to collaborate with others and to make sense of new and changing situations. The aim of this education should no longer be simply to convey a body of knowledge, but to teach students how to learn, problem-solve and synthesize the old with the new. Even though the focus on science, mathematics and social studies is important, the instructional strategies used, which form part of the curriculum implementation process have to prepare students adequately for life in the emerging economy of the 21st century. Despite this, one finds the type of education that students in Muslim countries currently receive, with its almost exclusive emphasis on the acquisition of textbook knowledge through rote learning, is failing to equip them for these new and emerging realities. As previously indicated, the available evidence suggests that the quality of teaching in these countries is low and has been declining. For example, some years ago Calloids (1989) and Chapman and Carrier (1990) commented on the deterioration in the quality of the education that students in the developing countries including Muslim countries were receiving and noted that they perform poorly, especially when the tasks that they face require applying knowledge to new problems. This situation has deteriorated further since then, as a result of the focus on quantitative expansion of educational opportunities, often ignoring the concurrent need for qualitative improvements in instruction. In Pakistan one classroom observer noted that instruction is still predominantly teacher-centered, with teachers originating all questions, and responses usually involved a simple reiteration of what she/he had just said. Chorus answers were frequently accepted and encouraged (Allsop, 1991). Many teachers in developing countries, including most Muslim countries are usually satisfied if their students know, for example the formula for calculating ‗area‘ and can do their sums correctly, even if they do not fully understand the meaning of the concept ‗area‘. This is borne out by the various findings, which indicate that students in these countries face the greatest challenges in solving mathematical problems that require conceptual thinking. Such difficulties are often attributed to the poor preparation that their teachers receive. For example, Kizilbash, the former Director of the Ali institute of Education in Pakistan noted

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that over the last fifty years teacher education in the public sector in that country ― has remained traditional and status-quo oriented‖ and ― have not served as centers of activity for change in the school system.‖ Further, the tests given to teacher trainees to assess their level of professional competence are ‗pen and pencil tests‘ which only test ‗rote memory of facts‘ and ‗pieces of information‘ This, in turn in reflected in the instructional strategies that the teachers use in their classes. (Kizilbash, 1998: 103 and 108) Students are also taught to accept as ‗given‘ someone else‘s explanation of the reality around them, without being encouraged to make a critical analysis of their own experiences and compare this with other people‘s interpretation of that reality. These teachers tend to encourage their students to accept unquestioningly what is written in the textbooks rather than challenge or make criticisms of the information or the point of view expressed by the author. The sanctity of the written word is seen everywhere in these countries and what is written in books is regarded as ‗given‘ knowledge or as universally accepted truth that should not or cannot be challenged. But the emerging globalized economy needs individuals who are inquisitive and willing to challenge traditional practices where necessary, prepared to grapple with ideas, not simply to regurgitate information and acquire the ability to utilize and even create new knowledge. They also need to learn how to work effectively in groups. Therefore, an education that continues to emphasize the rote acquisition of available knowledge over original thought retards the students‘ capacity to use existing knowledge creatively. Most teacher educators of today recognize the growing importance of the information age and have suggested that teachers need to assist students to gain the skills and abilities that will allow them to acquire and utilize knowledge in various forms and from different countries. Therefore, as implied above, the instructional strategies currently used in schools in most Muslim societies need to be replaced by others in which teachers attempt to empower their students by teaching them to question existing and developing alternative interpretations of reality, after looking at an issue from different perspectives and reviewing all available evidence. But teachers‘ ability to empower their students would depend largely on their own empowerment. This requires the adequate professional preparation and regular upgrading of teachers‘ knowledge and teaching methodologies and the localization of decision-making in relation to aspects of the curriculum that are required to teach, within the school system itself rather that in a centralized Ministry of Education. Some religious groups in Muslim countries operate schools, with their focus being on teaching fundamentalist religious beliefs, rather than encouraging the transmission of quality education. This is done through discouraging intellectual freedom and refusing to permit their students the right to share different beliefs and interpretations of events. In some of these countries external commercial agencies are increasingly providing education for profit without due consideration being given to the cultural needs of the local population. Further, even at the tertiary level, these commercial operations are not involved in undertaking research on relevant local issues. This is therefore becoming a new form of ‗cultural imperialism‘ by which education is provided for students, with little or no consideration for the cultural context and their cultural needs. The outcome is a group of elites who have little or no knowledge about or concern for the less fortunate individuals in their societies and little ability to relate to them in a more effective way. Muslim societies therefore need to reform the teaching strategies used by their instructors and the autocratic structures of their various educational institutions, in order to encourage freedom of thought and ideas. This is necessary if these countries are to make effective use of

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the new knowledge that is increasingly becoming available on a global scale and at the same time make a valuable contribution to the further enhancement of knowledge, especially that which relates to the needs of their own societies. Their teachers and scholars should not shy away from welcoming and acquiring the truth regardless of its source, even if it came from nations or individuals that share different religious beliefs from those of Muslims. They need to remember that ‗nothing is more important than seeking the truth except the truth itself‘ and that they should not belittle the truth, or those who utter it or produce it. In fact, Muslim societies of the past were never closed social systems, especially when it came to the pursuit of knowledge and were open to ideas from all parts of the world. This is a practice that Muslim societies of today need to recapture. In review, it is clear that the changes arising from globalization and modernization are producing many challenges for Muslim countries and their educational implications need to be addressed in order to increase the efficiency and effectiveness of their educational programs. The basic challenge that these countries face is to equip their students with the skills, knowledge, outlook and vision that would prepare them to perceive more readily the economic opportunities that are emerging from these developments. Therefore, their citizens need to be equipped to question the existing popular interpretations of reality and have the type of education that would allow them to develop innovative solutions to their problems. In terms of the content of their instructional programs, the young need to be prepared to relate better to others from different cultural backgrounds because this is likely to equip them to engage more effectively in joint production enterprises, with individuals and groups from other countries. In addition, the young would need the skills, attitudes and commitments to change the social and political structures of their societies, make them more focused on reducing poverty and ensuring a more equitable distribution of the rewards of development, both locally and globally. This would also better prepare them to work towards greater democratization of their institutions and political systems through popular involvement in the political decision making process. This long-term outcome will be greater political stability in these countries, which is a pre-condition for their economic development. Further, their students would need to be made more aware of the importance of protecting the local environment, stemming the rate of population growth and developing a greater ‗rootedness‘ in their own culture so as to prevent its complete erosion by Western and other influences.

PREPARING TEACHERS FOR MUSLIM COUNTRIES The next question is ― With what strategies should teachers in Muslim countries be equipped in order to help achieve the goal of preparing their students to grapple more effectively with these current and emerging challenges, so that they would eventually be able to benefit more fully from these new global developments?‖ If these countries are to provide their students with a more relevant education for the globalized economy of the 21st century, they will need professionally well trained teachers who are able to prepare students for higher order thinking; develop in them an understanding of what they have learnt rather than simply memorizing and regurgitating facts; facilitate their acquisition of knowledge, experiences, attitudes and outlook which will be useful to them, not only inside but also outside the classroom; provide them with the opportunity to be more involved in their own learning; raise

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their students‘ expectations of themselves and develop in them greater confidence in their own abilities. These teachers will also need to know how to help their students learn for themselves and should be able to devote more class time to group work, group discussions, focused field trips, demonstrations and investigative projects, recognizing that an important part of their task is to prepare their students for lifelong learning and for working cooperatively with others, even those belonging to different cultures and sub-cultures. Teachers in Muslim countries also need to recognize that different students learn differently and therefore their teaching strategies should not be guided by the principle of ― one size fits all‖. These teachers must therefore be equipped to be more flexible in meeting the varied needs of their students, which means that both the curriculum they offer and the instructional strategies they use must be reassessed for their effectiveness in preparing all their students for the globalized economy of the 21st century. These teachers therefore need to view their task primarily as one of developing the various abilities or multiple intelligences of their students. This needs to be reflected in the instructional strategies they use and the educational experiences that they provide for their students, which would make their learning more challenging and enjoyable both for their pupils and for themselves. In other words, they should continuously strive to convert their schools into real and enjoyable learning communities and ensure that the experiences provided through their instructional programs are geared to preparing their students to look critically and inquisitively at happenings in the world around them. These new pedagogical approaches should, in Freire‘s terms (1971) contribute to the transformation of the conditions of "marginalization, subordination and oppression" that exist in these societies which is somewhat akin to providing students with what Habermas (1968), refers to as ― critical emancipatory knowledge‖. Finally, the teachers also need to be equipped to inquire regularly and systematically into their own pedagogical practices in an effort to improve constantly their professional competence. To achieve these goals the whole process of teacher education in Muslim countries needs to be substantially overhauled and this would include the re-training of practicing teachers who tend to believe that their previous training would effectively serve them throughout their professional careers. To reiterate the point, any effort at curriculum reform to meet the emerging needs of Muslim societies in this era of globalization and modernization cannot ignore the question of curriculum implementation and this means, as indicated above, that not only the curriculum content but also the instructional strategies and the training and re-training of teachers, all become a top priority for these countries. The education that students currently receive in most Muslim countries is obviously failing to prepare them for the realities of the globalized economy of the 21st century. Or one can even say that it is equipping them for an ‗unfit fitness,‘ which is not going to help them cope creatively with the challenges that they will face and help them escape from the cycle of poverty into which many of them are trapped. In addition to the teachers‘ use of more creative instructional strategies, their students will need to be introduced to a new blend of competition and cooperation combined with the entrepreneurial freedom of markets along with the social values of democracy and develop a concern for their fellow citizens both locally and internationally. In Muslim countries this would ideally be guided by the ‗true‘ values enshrined in their religion.

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REFERENCES Allsop, Terry (1991) A Report to the Aga Khan Foundation on a Visit to Karachi to assist the Task Force in Planning for the Institute for Educational Development, Oxford: Department of Educational Studies, Arab Human Development Report, (2003), New York: UNDP. Barker, D and Mander, J (eds.) (2001) Does Globalization Help the Poor?, San Francisco, USA: International Forum on Globalization. http//www.gdo ca/globalization poor html (Accessed, January, 2002). Calloids, F. (ed) (1989) The Prospects of Educational Planning, Paris: IIEP. Chapman, D.W. and Carrier C.A. (eds.) (1990) Improved Educational Quality, Westport, Connecticut: Greenwood. Cogburn, D. (1998) Globalization, knowledge, education and raining in the information age, International Forum on Information and Documentation 23, 4; 23-29. Friere, P (1971) Pedagogy of the Oppressed, New York: Herder and Herder. Habermas, J (1968) Knowledge and Human Interests, Boston: Beacon Press. Kizilbash, H (1998) Teaching Teachers to Teach, In P. Hoodbhoy (ed) (1998) Education and the State: Fifty Years of Pakistan, Karachi: Oxford University Press. Lockheed, M. E. and A.M.Vespoor. (1990) Improving Primary Education in Developing Countries, Washington, D.C: World Bank. Reich, R. (1992) The Work Of Nations, New York: Vintage Books. Saul, J.R. (2004) The collapse of globalism, Harper‘s Magazine March, 2004, 33-45. Short, Clare, (1998), Foreword. In J. Hausermann (ed.) Rights and Humanity, London: The Department of International Development of the UK Government. The Dawn (1995) Liberalisation deepens rich-poor divide in S. Asia, In Dawn Oct. 21, 13. The Economist, (2004) March 6th -12th. Thurow, L.C. (1996) The Future of Capitalism: How Today‘s Economic Forces Shape Tomorrow‘s World. New York: William Morrow and Co. UNDP, (1999) Human Development Report, New York: Oxford University Press. UNDP, (2002) Human Development Report: Deepening Democracy in a Fragmented World, New York: Oxford University Press. World Bank, (1985) The Dividends of Learning, Washington, D.C: World Bank.

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Chapter 5

GLOBALISATION AND PARTNERSHIPS: AN OVERVIEW

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Jacques-Marie Aurifeille1, Serge Svizzero2 and Clem Tisdell3 Franco-Australian Centre for International Research in Management Université de La Réunion 15 avenue Rene Cassin 97715 Saint Denis messag Cedex 9 France 2 Université de La Réunion, 15 avenue René Cassin 97715 Saint Denis messag Cedex 9 France 3 School of Economics The University of Queensland Brisbane QLD 4072 Australia

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1. INTRODUCTION Growing economic globalisation has increased international business competition and international economic interdependence. From this perspective, many firms have formed business partnerships and most nations have had to re-evaluate their economic interdependence (Aurifeille, Svizzero and Tisdell, 2006). This book explores changes that have occurred or have been proposed in this regard. It provides new insights into business partnerships and international economic interdependence, given growing economic globalisation, and explores the managerial and socio-economic consequences of those ideas. The contributions in this book have been divided into four parts. Those in Part II concentrate on the specification of partnerships and reasons for business partnerships in the context of a globalisation. The idea of global networks in which some "hard" and "soft" forms of partnerships would appear and mix is introduced and discussed according to the partners involved (nations, unions, firms and consumers) and the economic activities (whether tangible or abstract). Globalisation also has a number of consequences for business coordination, in particular when they are based on outsourcing strategies in which cost reduction is balanced with knowledge transfers. These are amongst the issues explored in Part III. The difficulty to monitor and predict the effects of global partnerships tends to increase the importance of cultural and psychological variables such as trust and commitment. Therefore the role of attitudes and perceptions is very important. Whatever the agreement and the conjoined

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management among partner firms, the attitude of the other agents can produce asymmetric affects on these firms and considerably bias their partnership strategy. Such biases are particularly likely from consumers. Their attitude towards globalisation is not the only bias that may occur. Their loyalty is also an important issue in a globalising world, particularly in the service sector where lots of partnerships have been made on a global scale (eg banks, airlines, leisure). These are amongst the relationship marketing issues explored in Part IV. In Part V, the factors introduced in the previous chapters are considered from a regional and cultural perspective, where nations and regions themselves are engaged in global partnership. In this context, discrepancy often develops between the domestic and the international globalisation strategies, as well as between the capital and labour markets. The resulting complexity is particularly problematic for the developing and peripheral economies. Novel insights about partnership emerge, as studied in this concluding part of the book.

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2. AN OVERVIEW OF PART II: GLOBALISATION AND PARTNERSHIPS: TOWARDS A GLOBAL NETWORK There are four contributions in this part. In the first (Chapter 2), Clem Tisdell differentiates partnerships according to their purpose, either defensive or offensive. The correlation of the globalisation and the partnership‘s growth is then discussed taking into account the greater difficulty of international partnerships in comparison with the domestic ones. Jacques Rojot, in Chapter 3, analyses the influence of globalisation on working conditions, the social classes and the unions. While some differences are observed among countries, the differentiation between social classes in each country increases. The consequences of this evolution and government influences are discussed from a macroeconomic perspective in which globalisation is a major factor. In Chapter 4, Ian Wilkinson and Louise Young, propose to reverse the usual perspective on partnerships. The authors claim that the relationships mostly pre-exist and determine a global network. Partners are managing within these relationships rather than managing the relationships. The importance and the imminence of the implicit relationships embedded in this framework are stressed with several examples of firm-consumer interaction and interdependence. Following the same approach, in Chapter 5, Gordon Boyce analyses four cases of industrial firms from which a distinction between hard (explicit) and soft (implicit) partnerships is drawn. How these hard and soft relations influence the performance of firms is discussed and a new interpretative scheme of partnership management is provided. In Chapter 6, Gillian Johnston and Marilyn Healy‘s approach of globalisation and partnerships concerns a fundamental element of globalisation: the supply chains. In such cases, partnerships can be viewed as a series of two-partner links rather than a concentric global network. After recalling that objective and convergent procedures are often lacking in the process of building supply-chains, the authors present and compare three means-end chain methods for understanding and improving the partnerships at work in a global supply chain.

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3. AN OVERVIEW OF PART III: BUSINESS TO BUSINESS COOPERATION

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One of the most stressed consequences of globalisation on business partnerships is outsourcing. After decades when most outsourcing was based on industrial production, it is getting clear that the service sector could become even more engaged in outsourcing. The classical concern for the coordination problems and the technical transfers involved in industrial outsourcing applies also to the service sector. However, another major issue is also at stake: "Customer Relationship Management" (CRM). In Chapter 7, Christine Jaeger and Jean-Louis Paucelle analyse the processes that lead a firm to entrust its CRM to outsourcers and consider the devices that enable the outsourced remote services to be managed. Their analysis is based on a game theoretic approach and empirically tested in the case of call centres, a domain where communication and information are essential and highly reactive. This analysis results in a taxonomy of partnerships where trust plays a major role. In Chapter 8, Jacques-Marie Aurifeille and Christopher John Medlin raise both methodological and theoretical issues on how the management of partnerships influences partners' performance. Following a clusterwise regression approach (Aurifeille and Medlin, 2001), the analysis leads also to the conclusion that trust is critical in explaining partnership performance. Marilyn Healey and Gillian Johnston complement and qualify this result in Chapter 9, by insisting on the bi-factoriality of trust which, as the authors demonstrate is not the contrary of distrust in business partnerships. Therefore, unpredictability appears to be the key factor, with a corresponding importance to be given to factors of a more sociological and geographical nature than trust. In Chapter 10, R. R. Ramsaram-Fowdar and M.N.S. Labiche analyse the roles of satisfaction and trust in the building of a lasting partnership. Their empirical study of 41 firms in the textile industry indicates that both factors are not correlated and that steady partnerships rely more on satisfaction than trust.

4. AN OVERVIEW OF PART IV: RELATIONSHIP MARKETING The contributions in Part IV mostly address consumer perspectives on globalisation. Several marketing issues are raised in which consumers both contribute and arbitrate partnerships. An essential question is the consumer‘s attitude towards globalisation and how it influences purchasing behaviours. Stephane Manin and Virginie Villeneuve address this issue in Chapter 11. Using a causal model, these authors examine the determinants of consumers‘ sensitivity to globalisation in relation to fundamental product attributes like brand quality and price. Furthermore their structural model identifies a specific measure of consumer sensitivity to globalisation. In Chapter 12, Sinove Marde, Melissa Caid and Romain Cally analyse in more depth the influence of global partnerships on the perception of partner brands. Using an experimental approach, the authors observe that, while a global partnership tends to boost the performance of each partner, it has an asymmetrical effect, with the less appreciated partner benefiting more than the other(s). Therefore the equality of gains from a partnership becomes an issue that does not depend only on trust and coordination. As a result of the influence of consumers on the success of a business partnership, firms are encouraged to target segments of consumers whose dispositions are in accordance with the type of

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partnership they intend to build. International segmentation variables must comply with several constraints such as personal meaning, insurability and cross-cultural operationality. As discussed in Chapter 13, some human values meet these requirements and, consequently, have often been considered in international segmentation. However, their predictivity was often found to be disappointing. The analysis by Aurifeille, Medlin and Gil-Lafuente sheds some light on this issue, by emphasizing the role of a specific kind of human values, often marginalised in the literature, namely instrumental values . Unlike terminal values, which describe a person‘s main goals in life (eg achievement), instrumental values refer to the qualities and assets a person employs to achieve these goals (eg intelligence, courage). After analysing their role in a globalising economy, the authors demonstrate empirically the validity of instrumental values for international segmentation. The emergence of a priority link between global partners and specific segments of consumers makes it possible to intensify their partnership. This is the assumption developed in Chapter 14, with Sanjay Parahoo, Jacques-Marie Aurifeille and Sanjeev Sobhee‘s study of consumer loyalty. Based on a study of firms‘ loyalty programs in the service sector (hotels, airlines), these authors illustrate how customer loyalty provides a powerful incentive to form and sustain global partnerships where a network of relations, like the one described in Chapter 4, extends to a variety of dimensions not all of them anticipated and formalized.

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5. AN OVERVIEW OF PART V: REGIONAL AND CULTURAL STUDIES OF INTERDEPENDENCE The contributions in this part address globalisation and partnership from a geopolitical and a cultural perspective, with countries considered both as partners and spaces where partnerships can be ruled and encouraged. In Chapter 15, Sanjeev Sobhee analyses how the causal links between exports and economic growth influence the globalisation of the economy of the Mauritius Island. Indeed, in spite of its geographic isolation, the Mauritius Island has known decades of economic growth mainly based on its increasing integration with the world economy. In this process, the author suggests a one-way causality, in which exports stimulate growth. In Chapter 16, Michel Dimou follows an interdisciplinary approach to study the industrial networks of the free-zones that peripheral countries create to take advantage of the globalising economy. The analysis is twofold. On the one hand, new technologies and industrial diversification have resulted in networks of activities whose complexity enables participating businesses to cope more readily with the turbulence of globalisation. Dimou points out that while in the early stages industrial firms in free-trade zones in developing countries, such as Mauritius, concentrate initially on labour-intensive industries paying low wages, they are forced to become technologically more sophisticated in the long-run due to global economic processes. Chapter 17 is dedicated to analysing the criteria underlying regional partnerships. Isabelle Soubaya analyses how investment flows amongst nations whose economic partnerships are formalized: the Indian Ocean Commission (IOC), the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC). She finds that foreign investment flows to the SouthWest Indian Ocean region depend less on the usual determinants such as GDP and GDP per

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capita (indicators of the size of the local market) than on other factors, and that foreign investment in this region may have been adversely affected by growing globalisation.

CONCLUSION Associating growing globalisation with the increasing importance of partnerships might be seen by some as a paradox and by others as obvious. It was therefore appropriate to stimulate discussion among economists and management researchers from various countries on this subject. The resulting book reflects and justifies this debate by uncovering several aspects of the complex dynamics operating within the emerging globalisation/partnership assemblages. In each part of the book, the two concepts shed a specific light on each other, thus enabling identification of latent organizational forms and partnerships at work across markets and institutions that have evolved or are evolving as a result of growing globalisation. Of course, the contributions in this book cannot reflect all aspects of globalisation and partnership. However, by presenting a selection of references and institutions the authors provide a lasting framework for investigating and understanding further the dialectic of globalisation and partnerships.

REFERENCES

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Aurifeille, J. M., and Medlin, C. J. (2001). A Dyadic Segmentation Approach to Business Partnerships. European Journal of Economic and Social Systems, 15 (2), 3-16. Aurifeille J. M., Svizzero S., and Tisdell C. (2006). Leading Economic and Managerial Issues Involving Globalisation. 292 pages. New York: Nova Science.

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Chapter 6

BUSINESS PARTNERSHIPS IN A GLOBALISING WORLD: ECONOMIC CONSIDERATIONS Clem Tisdell School of Economics The University of Queensland Brisbane QLD 4072, Australia

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ABSTRACT Begins by considering how neoclassical and mainstream economists have modelled the business firm and outlines briefly the evolution of economic thought and that of managerial science about institutional structures involving firms, hierarchies, markets and interfirm cooperation. Subsequently, taking into account this thought, it considers whether growing economic globalisation is likely to result in more frequent business cooperation between firms, what types of alliances may be favoured, and why. Both factors favouring increased business cooperation as globalisation proceeds, as well as those that may retard it, are discussed.

1. INTRODUCTION Neoclassical and mainstream economists have given little attention to the institutional structure of business firms and have virtually ignored possible partnerships and cooperation between firms. Cooperation between business firms is generally only discussed in standard economic texts as a ― desire to restrict competition and features in chapters about price agreements and market sharing‖ (Richardson, 1972, p.883). However, as Richardson (1972, p.895) points out, ― the dichotomy between firm and market, between directed and spontaneous coordination is misleading; it ignores the institutional fact of interfirm cooperation and assumes away the distinct method of coordination that this can provide‖.



Email: [email protected]

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The main issue discussed in this paper is whether globalisation is liable to encourage the formation of business partnerships; if so, why, and what forms such partnerships are likely to take. However, before considering these matters, it is useful to consider briefly the evolution of economic thought and that of management science about institutional structures involving firms, hierarchies, markets and interfirm cooperation, consider how firms can cooperate; that is, forms of interfirm business cooperation and why firms cooperate. The latter will provide some guidance about how globalisation might encourage the formation of business partnerships.

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2. INSTITUTIONAL STRUCTURES – FIRMS, HIERARCHIES, MARKETS AND INTERFIRM PARTNERSHIPS In neoclassical economics and in most standard microeconomic texts, the institutional structure of business firms is ignored. The firm is assumed to be able to maximise its profit without any difficulty and the firm has been described as a device or abstraction to facilitate the discussion of the market or price systems by neoclassical economists (Pitelis, 1993, p.7). Neoclassical economists place most of their emphasis on the workings of markets not on administration involving hierarchies or business firms. The position began to alter in the latter part of the 20th century, particularly as a result of the work of Williamson (1975). Although his focus was foreshadowed by Coase (1937), Coase‘s work had little impact until Williamson (1975) extended it greatly using a transaction cost approach. The historical development of this line of thought has been succinctly outlined by Kay (1993) and it has given rise to a new line of economic thought which has been called ‗neo-institutionalism‘. A hallmark of this approach is its recognition that even in market economies and just taking account of the private sector, much resource allocation and development activity occurs outside the market system. It occurs within hierarchies; of which business firms are one. The market does not coordinate all economic activity. Much economic activity requires direct managerial intervention. The type of transaction cost economics associated with neo-institutionalism resulted in issues such as the following being addressed: how do transaction costs influence the size of the firm; how do they influence, make or buy decisions, what type of managerial structures will minimise transaction costs in large firms, how can principal-and-agent problems be addressed in public companies and so on. Thus, the firm as an institution and its connection with markets became the prime focus of neo-institutional economists. While this new focus was a valuable addition to economic thought, it failed to go far enough in considering non-market institutional arrangements that help govern resource use and economic development. It left out of account interfirm cooperation. The theory continued to make a sharp dichotomy between resource-use decisions made within the firm and those coordinated by the market with little or no attention to interfirm partnerships. Nevertheless, by the mid-1990s, Williamson (1994) did find it necessary to give some attention to interfirm cooperation because for one thing, there was considerable speculation in the United States that the international competitiveness of Japanese industry might have its roots in the widespread practice of interfirm cooperation by Japanese firms (Williamson, 1994). Yet the

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study of interfirm cooperation and partnerships did not become a central focus for O.E. Williamson. Williamson (1994) continued to claim that economising was the major influence on the structure of economic organization and that business studies concentrating on ‗strategizing‘ lacked relevance and focus. On the other hand, Gulati (1995) has argued that an analysis of the structure of economic organizations based purely on economising is too narrow. He states, for example, that ― neither transaction costs nor social factors should dominate discussion of alliances and that in the final analysis, any explanation should encompass both‖ (Gulati, 1995, p.108). While there is increasing interest in economics in business alliances and networks (see, for example, Haugland and Gronhaug, 1996), economic studies of this subject are still in their early stages. This is despite the recognition of their importance by Richardson in an article that appeared in The Economic Journal in 1972. Nevertheless, inclusion of two books in The International Library of Critical Writings in Economics, published by Edward Elgar, relevant to business partnerships and cooperation suggest that the interest of economists in this subject is not fleeting. These are John Kay (2003) The Economics of Business Strategy, and Mark Casson and Marina Della Giusta (forthcoming) The Economics of Networks, Edward Elgar, Cheltenham, UK and Northampton, MA, USA. Figure 1 provides a schematic representation of the evolution of economic thought about the analysis of economic organization. It illustrates the growing attention first to the nature of firms and their institutional structure and then to interfirm institutional relationships involving varied types and forms of business cooperation. Interfirm cooperation can take a variety of forms, and it may vary in extent and intensity. It may involve formal contractual arrangements (or similar arrangements) or be informal (Håkansson and Johanson, 1988, Howarth et al., 1995). It need not be hierarchical in nature. In some cases, it evolves through continuing business contact which develops a code of mutual obligation between business partners (Macneil, 1980).

Figure 1. Stages in the analysis of the organisation of industry showing increasing relative attention to the institutional structure of individual firms and subsequently to non-market relationships between firms, that is, forms of interfirm cooperation. The relative size of the figures indicates the degree of attention given to institutional factors. Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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Formal types of business cooperation include franchising and joint ventures in a particular product area or geographical region. Such joint ventures may occur in relation to marketing, production or R&D. They may also involve reciprocal preferences in trading. For example, a buyer may give preference in purchasing supplies to a particular seller or sellers and vice versa, a seller may prefer a particular buyer. As a result both buyers and sellers may reduce their market transaction costs (Williamson 1975, 1985). If the reduction in transaction cost is mainly obtained by one set of traders, say sellers, then they may sell at a discount to a regular buyer that displays a preference in purchasing their products. As discussed elsewhere by Tisdell (1996, Ch.13), buyers and sellers may find it mutually advantageous if they have a partnership to exchange information about market requirements, new technologies and so on. Much exchange can be two-way but often the bulk of information is provided by the largest enterprise in the cooperating groups of firms.

3. WHY DOES INTERFIRM COOPERATION OCCUR? WHAT ARE THE OBSTACLES?

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Transaction cost economics takes the point of view that industrial organization tends to alter in a way that promotes economic efficiency particularly by minimising transaction costs. However, as suggested by Gulati (1995), and as apparent from Contractor and Lorange (1988) this may be a rather narrow view. The following appear to be some of the reasons why businesses may want to form partnerships: 1) To achieve a reduction in market transaction costs, and increase market access to buyers (Håkansson, 1982) 2) To make greater economic use of different sets of knowledge available to potential partners; for example, about the market. 3) To enable greater advantage to be taken of economies of scale or scope by expanding the size of operation of partners. 4) This may also facilitate greater specialisation and division of labour between partners. 5) This may enable partners to employ more specific assets. Because of reduced market variation and uncertainty, less flexibility may be needed in business operations and as a hedge against uncertainty. 6) Cooperation may enable partners to exploit synergies in R&D and in marketing, as well as other areas. 7) If learning by doing is important, it is also possible that a large buyer may favour a particular buyer or small set of buyers in order to accelerate learning by doing within supplying firms. This is akin to the infant industry argument sometimes advanced in favour of temporary trade protection. 8) By cooperating, some or all business partners may be able to reduce or overcome market constraints to their availability of resources, such as availability of credit or finance or raw materials.

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9) Related to point (4) is also the likelihood that business partnerships will enable partners to rationalise their specific assets (Håkansson and Snehota, 1995)

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Most of these reasons for business cooperation have been given limited consideration by economists. For example, Hayek (1945) argued that price is the only information that economic agents need to know to operate efficiently and maximise their profit. Consequently, the market system can coordinate economic activity effectively using little information. However, this assumes well defined homogenous products. In practice, variations of a product are often required to meet demands in different markets, and one must also consider efficient ways of seeking buyers. Thus efficient ways of seeking commodities requires much more market information than claimed by Hayek (1945) and mainstream economists, as has, for example, also been pointed out by Sawyer (1993). In any case, there is much empirical evidence to suggest that small and medium firms often cooperate with larger ones to obtain greater market access. For example, a survey of several hundred small-medium sized garment manufacturers in Bandung, West Java, Indonesia completed by Latif Adam (2005), revealed that the most frequent reasons given for their cooperation with larger enterprises was access to markets. Although less frequently mentioned, extra access to credit (finance) and to new technologies were also mentioned. Larger firms generally had wider and more specialised knowledge of markets for different types of garments, and used this when putting out orders to subcontractors. Figure 2 summarises the main benefits that may be conducive to the formation of business partnerships. One or more of these factors may be sufficient to provide economic benefits to all parties forming a business partnership.

Figure 2. Important factors that can favour the formation of business partnerships.

The fact that economic gains may be available to firms as a result of economic cooperation does not mean that cooperation will occur (see Tisdell, 1966, 1996, Ch.8). For one thing, there may be lack of trust between potential partners. A business partnership can

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jeopardise the economic future of one or both partners if one (or both) proves (prove) to be untrustworthy. The importance of trust for the formation of business partnerships has been stressed by Aurifeille and Medlin (2006), as well as by Dwyer et al. (1987) and by Morgan and Hunt (1994). McAllister (1998) provides an in-depth review of the literature on trust as a foundation for organizational cooperation, and Das and Teng (1998) specifically explore types of mechanisms that may be used to develop business confidence and trust as a basis for cooperative business partnerships. They also emphasize the importance of adequate control mechanisms as a means for establishing lasting cooperation. Granovetter (1985) points out that since about 1970, many institutional economists have become interested in trust, malfeasance and ‗opportunism‘ in economic relationships but he is critical of the manner in which they have dealt with the subject. In general, Granovetter (1985, p.482) objects to the emphasis of ― new institutional economics‖ (represented, for example, by North and Thomas, 1973; Williamson, 1975) that organizational structures arise primarily from ― the pursuit of self-interest by rational, more or less atomized individuals‖. In Granovetter‘s view, while this may explain the evolution of some organizational forms, it is a special case because it ignores social and cultural embeddedness. Therefore, he favours a wider approach of the type adopted, for example, by Max Weber (Granovetter, 1985, p.507). None of the above mentioned approaches mention efficiency or the competence of potential partners as an important consideration in the formation of business partnerships. However, if one partner is competent and capable and the other not, a partnership is unlikely to last. Thus, secondly, the economic efficiency or capability of a partner also has to be taken into account if lasting cooperation is to be achieved. If a partner is trustworthy but not efficient and punctual, this can put a partnership at risk. Ideal partners should be efficient/capable compared to others in the industry, and be trustworthy. Determining whether a potential partner is efficient and trustworthy is not straightforward. Usually repeated contact with partners is needed to establish this. Gulati (1995) suggests that most business partnership evolve from repeated business contact, and alliances are likely to be less formal the greater the number of previous alliances that partners have had. Although transaction cost economics has been widely used as an explanation of why or why not firms might form business partnerships, from the list provided in this section, it is clear that transaction cost economics does not explain all business partnership. As discussed by Bridge and Tisdell (2004, 2006), a pluralistic approach is needed in considering the organizational structures of firms and interfirm partnerships. For example, the Resource Based View (RBV) of firms developed by and fostered by Barney (1991, 2001, 2002; Barney et al., 2001) and others also helps to explain why some business partnerships may form or fail to do so. On the one hand, RBV is often used to explain why a firm with special economic capabilities or competence may not want to form partnerships with other businesses. Usually, this is attributed to the possibility that as a result of such partnerships, partner firms will learn about and acquire the capabilities of the most capable partner. As a result, the most capable partner no longer has such rare capabilities, and may consequently lose competitive advantage and economic rent in the long-term, particularly if its initial partners eventually become its business competitors.

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On the other hand, it is possible for businesses to have different but complementary competencies. These provide an incentive for their cooperation. For example, if the competencies of two firms are synergistic their cooperation can be expected to increase their competitive advantage. Nevertheless, for the reasons outlined above, such cooperation is not without business risks. Furthermore, neither transaction cost economies nor favourable synergies arising from the particular competencies of firms explain all business partnerships. From a very general point of view, there appear to be at least five strategic considerations that influence the prospect of a business partnership forming. These are:

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1) The extent of trust between the potential partners. 2) The size of the expected gains to each of the potential partners. 3) The degree of potential lock-in of the partners. For example, the degree of asset specificity, involved (Heide and John, 1988). 4) The relative cost or damage to each partner if the partnership fails and the probability of failure. 5) Uncertainty about these variables. The greater is the extent of trust between potential partners, the higher the anticipated gains of each from partnership, the lower the cost and probability of partnership failure, and the smaller is the degree of uncertainty, the more favourable are conditions for forming a partnership. The effect of potential lock-in is not so clearcut. Business partnerships (whether formal or informal) tend to limit, restrict or alter the future choices or options of partners (Håkansson and Snehota, 1989). They may reduce the scope of partners for independent action. Thus, they can reduce the flexibility of partners and create a degree of path-dependence for partners. (Araujo and Harrison, 2002). Depending on the circumstances, lock-in may be viewed by partners either as a positive or negative consequence of forming a partnership. Figure 3 summarises the general influences on the likelihood of formation of business partnerships identified above. As pointed out by Medlin (2004), timing is also an important influence on the development of business relationships and networks. While the potential of hold-up and of considerable damage to one or more partners as a result of anti-social behaviour of other partners has been seen as an obstacles to the formation of partnerships by some adherents of transaction cost economics, in many partnership situations, the recalcitrant partner may be damaged as well as the other partners. This is likely to deter anti-social behaviour and increase the stability of partnerships. Thus, depending on the pattern of damage associated with hold-up or anti-social behaviour in partnerships, hold-up possibilities can be conducive to the stability of partnerships. Although Nash (1950) developed the theory of games to take account of how the comparative threats of players might influence the sharing of gains from their cooperation, there does not appear to have been much analysis of how the relative threats of players might influence the sustainability of their cooperation, that is, in this context, the sustainability of business partnerships. In any case, both the potential for lock-in and for hold-up can be favourable or unfavourable to the formation of business partnerships depending on the circumstances.

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Figure 3. Five strategic considerations that influence the probability of business partnerships forming. Each one of these influences is complex.

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4. DOES GLOBALISATION STIMULATE THE FORMATION OF BUSINESS PARTNERSHIPS? Globalisation involves the extension of markets worldwide. From the point of view of an individual business, this has two somewhat different consequences: (1) it increases the degree of market competition that they face; (2) it extends the potential size of the market for the firm‘s products. Thus, as briefly discussed by Svizzero and Tisdell (2002), economic globalisation may stimulate both defensive and offensive (strategic) business behaviour, for example, in relation to R&D. If potential business partnerships exist that could enable partners to better meet increasing competition, then the economic incentive to form these partnerships will increase as globalisation proceeds. These partnerships are essentially defensive ones. They are more likely to be formed by firms in the same country than between firms in different countries but the latter may also occur. The available evidence suggests that international partnerships are more difficult to establish successfully than national ones (Gulati, 1995). This may be because there is greater knowledge of the qualities of potential national partners, cultural differences are less marked, and communication may be easier than in alliances involving international partners (Contractor, 1986; Axinn, 1988; Hawrysh and Zaichkowsky, 1990; Kale, 1991; Kale and McIntyre, 1991). However, the possibility of forming business a partnership is not the only possible means to cope with increased competition. For example, an alternative may be to reduce such inefficiencies as exist within the firm. A second possible reason for forming a business partnership as globalisation proceeds can be to more actively penetrate the larger available market. Such partnerships are more of a strategic nature than of an economic efficiency nature. They may, for example, exploit

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synergies in R&D or marketing of partners. Because of the larger market, the potential payoffs from successful cooperation of this type rise as globalisation evolves. Although the economic incentive for forming defensive and pro-active business partnership rises with growing globalisation, obstacles to establishing successful business partnerships remain. These obstacles include uncertainty about how trustworthy potential partners are and how efficient they are, or could potentially be. Considerable asymmetry of information exists. Globalisation does not reduce these obstacles. Furthermore, the cost of a failed partnership when globalisation is well established is liable to be much greater than when markets are relatively protected. Therefore, firms may be wise to be particularly cautious about forming new partnerships once globalisation becomes well established. Gulati (1995) suggests that it may be more difficult to form business partnerships between firms from different nations than in the same nation. He develops the hypothesis (Gulati, 1995, p.95) that alliances are more likely to be equity based if they are among firms of different nations. He is able to provide empirical evidence to support this hypothesis. He also finds that equity-based forms of alliances seem to be more common when the gains from cooperation are uncertain. Equity-based partnerships help to spread the risk involved in business cooperation. They can also provide economic incentives to each partner to contribute to the success of their joint venture. But the incentive-effect of sharing depends upon how the shares are determined (Tisdell, 1996, pp.197-201). If companies are multinational in nature and have subsidiaries in foreign countries, this may assist the formation of international partnerships. A subsidiary may have considerable knowledge about possible reliable partners in the country where it is located. Apart from seeking alliances of its own in its country of location, a foreign subsidiary may act as a go between for its parent company or other subsidiaries that wish to establish alliances in its country. Nevertheless, increasing globalisation will probably do more to simulate the formation of business alliances within a country than between countries. This is because as mentioned above, and for the reasons given, international business partnerships are more difficult to establish than national ones. Furthermore, in response to increasing business competition arising from growing globalisation, business managers may react in the first instance by adopting their easiest options which seem to be to increase the internal efficiency of their business and where mutually beneficial, to pursue domestic business partnerships. That is not to say there will be no stimulus to the formation of international business partnerships from growing globalisation. It is possible, however, that greater access to foreign markets could stimulate the formation of business partnerships for the marketing and distribution of imports within foreign nations. Many commodities require effective marketing and distribution within foreign countries if they are to tap their markets. To some extent marketing and distribution must be tailored to local conditions if significant market penetration is to be achieved. A local trading partner may be best placed in terms of local knowledge and contacts to market and distribute a foreign company‘s products. As the volume of international trade rises, as it has done substantially in recent decades (Tisdell, 2005; Tisdell and Sen, 2004), one would expect the number of international trading and marketing alliances to increase. Latif Adam (personal communication, 12/01/06) has suggested that host firms in developing countries are often eager to enter into business partnerships with foreign firms not only to penetrate larger markets, but also to learn, innovate, and develop new competencies

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frequently involving technology transfer. The benefits for the foreign firm may be greater access to the domestic market of the host country and cost reductions if the product is exported. Political changes have made such international partnerships easy to form and manage.

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CONCLUSION Neoclassical and mainstream economists have not given much attention to the institutional nature of economic organization. However, interest in this subject has increased. This interest has been simulated by the development of neo-institutional economics in the last part of the 20th century. The dominant stream of neo-institutional economic developed by Oliver Williamson relies on the hypothesis that structures of economic organization evolve to achieve (maximum) economic efficiency. In particular, it is considered to be likely that economic institutions will evolve that will minimise transaction costs. That presumably would also apply to forms of business cooperation. Nevertheless, not all business partnerships come into existence which could potentially benefit all their partners. Very often, as discussed by Tisdell (1966; 1996, Ch.8), coalitions fail to form that could bring about a Paretian improvement for all the partners, that is, make at least some partners better off without making any partner worse off. There are several reasons for this as outlined, for example, in Tisdell (1996, Ch.8) but lack of trust can be a major obstacle (Gulati, 1995). Uncertainties about payoffs may also be a stumbling block. Furthermore, alliances (by their nature) limit the behaviour of participants (Håkansson and Snehota, 1989) and can create specificity of assets. Some firms may therefore be hesitant about entering into interfirm cooperation because they are afraid of being locked into a particular development path (path-dependence) as a result of such cooperation. While the trustworthiness of partners is a major influence on whether business partnerships form and survive, adequate trust is not sufficient for lasting alliances. The size of the economic benefits form the synergistic relationship of businesses will be important as well as the relative economic competence of each of the parties to a cooperative business arrangement. If a party is trustworthy but economically inefficient compared to other economic agents, an alliance is likely to fail. It may fail economically because it is less competitive than other partnerships of a combination of more efficient businesses. Or it may be terminated by the more efficient partner(s) because this partner (they) seeks to replace less efficient partners with more efficient ones. In considering this matter, the more efficient partners will most likely assess the dynamics of the efficiency of their less efficient partners, for example, whether these partners are likely to increase their economic efficiency as a result of, for instance, learning or under pressure from the efficient partners, and how quickly. Nevertheless, business partnerships are probably not dissolved hastily, at least not before considering whether they can be salvaged. This is because the transaction costs and risks in forming replacement business partnerships are high and dissolution of an existing partnership results in the loss of any cooperative capital invested in it. In any case, the relative economic efficiency of partners needs to be considered as an influence on the formation and survival of business partnerships, and as a factor in their economic competitiveness in a globalising world.

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It has been argued that economic globalisation does provide a stimulus for the formation of business partnerships. Business partnerships can provide (1) a defence mechanism against increased market competition arising from globalisation; and (2) can act as a vehicle to exploit enhanced market opportunities arising from globalisation. However, business partnerships are not always an effective means to cope with or take advantage opportunities provided by economic globalisation. A poor partnership is likely to be worse economically than none at all. Therefore, it is still necessary to proceed cautiously in entering new partnerships as globalisation becomes more pervasive. In fact, a failed partnership may be more damaging to a business in a highly competitive environment resulting from globalisation than in a less competitive one. Therefore, even though there are greater economic incentives for entering into business partnerships in a globalising world, businesses have to be increasingly cautious about entering into partnership agreements as globalisation grows.

ACKNOWLEDGMENTS I wish to thank Dr Glyn Edwards for assisting me with a literature search, and Latif Adam for his comments on the first draft of this article. It has benefited from feedback received when it was presented at The University of Mauritius and from detailed suggestions provided by Dr Christopher Medlin of Adelaide University for which I am grateful.

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REFERENCES Adam, L. (2005). Draft of a chapter for a Ph.D. thesis in economics entitled The Economic Role of Formal and Informal Inter-Firm Networks in the Development of SMIEs: A Study of Symbiosis in the Indonesian Garment Industry submitted to The University of Queensland in 2006. Aurifeille, J. M., and Medlin, C. J. (2006). A dyadic approach to relationship performance of international business partners. In J.-M. Aurifeille, S. Svizzero, and C. Tisdell (eds.), Leading Economic and Managerial Issues Involving Globalisation (pp.93-103). Hauppage, New York: Nova Science Publishers. Araujo, L., and Harrison, D. (2002). Path dependence, agency and technological evolution. Technology Analysis and Strategic Management, 14 (1), 5-19. Axinn, C. N. (1988). Export performance: Do managerial perceptions make a difference? International Marketing Review, 5 (Summer), 61-71. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17 (1), 99-120. Barney, J. B. (2001). Is the resource-based ‗view‘ a useful perspective for strategic management? Yes. The Academy of Management Review, 26 (1), 41-56. Barney, J. B. (2002). Gaining and Sustaining Competitive Advantage (2nd edn). New Jersey: Prentice-Hall. Barney, J. B., Wright, M., and Ketchen, D.J. (2001). The resource-based view of the firm: ten years after 1991. Journal of Management, 27, 625-641.

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Bridge, A. J., and Tisdell, C. (2004). The determinants of the vertical boundaries of the construction firm. Construction Management and Economics, 22, 807-825. Bridge, A. J., and Tisdell, C. (2006). The determinants of the vertical boundaries of the construction firm: response. Construction Management and Economics, 24 (3), 233-236. Coase, R. H. (1937). The nature of the firm. Economica, 4, 386-405. Contractor, F. J. (1996). International, business: an alternative view. International Marketing Review, 3 (1), 74-85. Contractor, F. J., and Larange, P. (1988). Why should firms cooperate? The strategy and economics basis for cooperative ventures. In F. J. Contractor, and P. Lorange (eds.), Cooperative Strategies in International Business (pp.3-30). Lexington Books, Lexington, MA. Das, T. K., and Teng, B. S. (1998). Between trust and control: developing confidence in partner cooperation in alliances. The Academy of Management Review, 23, 491-512. Dwyer, F. R., Schurr, P. H., and Oh, S. (1987). Developing buyer-seller relationships. Journal of Marketing, 51 (2), 11-27. Granovetter, M. (1985). Economic action and social structure: the problem of embeddedness. American Journal of Sociology, 91, 481-510. Gulati, R. (1995). Does familiarity breed trust? The implication of repeated ties for contractual choice in alliances. The Academy of Management Journal, 38, 85-112. Håkansson, and Johanson, J. (1988). Formal and informal cooperation strategies in international industrial networks. In F.J.Contractor and P.Lorange (eds.), Cooperative Strategies in International Business (pp. 369-379). Lexington Books, Lekington, MA. Håkansson, H. (1982). International Marketing and Purchasing of Industrial Goods. Chichester, UK: Wiley. Håkansson, H., and Snehota, (1995). Developing Relationships in Business Networks. London: International Thomson Business Press. Håkansson, H., and Snehota, I. (1989). No business is an island: the network concept of business strategy. Scandinavian Journal of Management, 5 (3), 187-200. Haugland, S. A., and Gronhaug, K. (1996). Cooperative relationships in competitive markets. Journal of Socio-Economics, 25, 359-372. Hawrysh, B. M., and Zaichkowsky, J. L. (1990). Cultural approaches to negotiations; understanding the Japanese. International Marketing Review, 7 (2), 28-42. Hayek, F. (1945). The use of knowledge in society. American Economic Review, 35, 519-530. Heide, J. B., and John, G. (1988). The role of dependence belonging in safeguarding transaction-specific assets in conventional channels. Journal of Marketing, 52 (January), 20-35. Howarth, C. S., Gillin, M., and Bailey, J. (1995). Strategic Alliances: Resource-Sharing Strategies for Smart Companies. Melbourne: Pearson Publishing. Kale, S. H. (1991). Culture-specific marketing communications: an analytical approach. International Marketing Review, 8 (2), 18-30. Kale, S. H., and McIntyre, R. P. (1991). Distribution channel relationships in diverse cultures. International Marketing Review, 8 (3), 31-45. Kay, N. M. (1993). Markets, false hierarchies and the role of asset specificity. In C. Pitleis (ed.), Transaction Costs, Markets and Hierarchies (pp. 242-261). Blackwell Publishers, Oxford.

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McAllister, D. J. (1995). Affect- and cognition-based trust as foundations for interpersonal cooperation in organizations. The Academy of Management Journal, 38, 24-59. Medlin, C. J. (2004). Interaction in business relationships: a time perspective. Industrial Marketing Management, 33, 185-193. Morgan, R. M., and Hunt, S. D. (1994). Commitment-trust theory of relationship marketing. Journal of Marketing, 58 (3), 20-38 Nash, J. (1950). The bargaining problem, Econometrica, 18, 128-140. North, D., and Thomas, R. (1973). The Rise of the Western World. Cambridge, UK: Cambridge University of Press. Pitelis, C. (1993). Transaction costs, markets and hierarchies: the issues. In C. Pitelis (ed.), Transaction Costs, Markets and Hierarchies (pp. 7-19). Oxford: Blackwell Publishers. Richardson, G. B. (1972). The organisation of industry. The Economic Journal, 82, 883-896. Sawyer, M. C. (1993). The nature and role of the market. In C. Pitelis (ed.) Transaction Costs, Markets and Hierarchies (pp. 20-40). Oxford: Blackwell Publishers. Svizzero, S., and Tisdell, C. A. (2001). Reconciling globalisation and technological change: growing income inequalities and remedial polices. Intereconomics, 37, 162-171. Tisdell, C. A. (1966). Some bounds upon the Pareto optimality of group behaviour. Kyklos, 19, 81-105. Tisdell, C. A. (1996). Bounded Rationality and Economic Evolution: A Contribution to Decision Making, Economics and Management. Cheltenham, UK and Northampton, Mass., USA: Edward Elgar. Tisdell, C. A. (2005). An overview of globalisation and economic policy responses. In C.A. Tisdell (ed.), Globalisation and World Economic Policies (pp. 3-16). New Delhi, India: Serials Publications. Tisdell, C. A., and Sen, R. K. (2004). An overview of economic globalisation: its momentum and its consequences examined. In C. A. Tisdell, and R. K. Sen (eds.), Economic Globalisation: Social Conflicts, Labour and Environmental Issues (pp. 2-23). Cheltenham, UK and Northampton, Mass., USA: Edward Elgar. Williamson, O. E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications. New York: Free Press. Williamson, O. E. (1985). The Economic Institutions of Capitalism: Firms, Markets, Relations Contracting. New York: Free Press. Williamson, O. E. (1994). Strategizing, economizing and economic organisation. In R.P. Rumelt, D. E. Schendel, and D. J. Teece (eds.), Fundamental Issues in Strategy: A Research Agenda (pp.361-401). Boston, Mass: Harvard Business School Press.

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Chapter 7

GLOBALIZATION: THE END OF INDUSTRIAL RELATIONS? Jacques Rojot University of Paris II, France

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ABSTRACT Globalization implies that productive capacities will shift in between countries. It is generally held that different categories within the labour force are and will be impacted differently. The role and impact of unions is likely to be negatively impacted. Thus, does globalization mean the end of Industrial Relations? The various reactions of the labour movement at an international level are analyzed. An alternative offering potential benefits for both parties, labour and management is tentatively proposed : workers‘s participation in management. Even though it leaves the fate of present days unions in the dark, it offers a track for renewed labour‘s influence within the globalization context.

I. Globalization implies that productive capacities will shift in between countries. It is generally held that different categories within the labour force are and will be impacted differently (Reich, 1991). A worst case scenario (Giraud, 1996) holds that in the XVIIIth Century, the most densely populated parts of the world (Europe, China, India) shared about the same average standard of living, with, in each country, huge variations around this average. A gap between countries began to open in the XIXth Century and widened deeply during the first part of the XXth Century (until around about the 1970‘s). For instance, figures computed by the World Bank, depending on the unit used for the computations (GDP per head expressed in purchasing power or dollar equivalent) gives differences in average standards of living going from 20 to 1 or 82 to 1 between the USA and India (Giraud, 1996; World Bank, 1995). At the same time, notably at the end of the period considered, the deviation from the mean around the average was considerably reduced in each country,

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notably in the West. That is to say that, between developed and developing countries, inter country differences in standards of living increased considerably while intra countries differences were considerably reduced for the most developed ones. The argument further holds that, for the last thirty years, under the impact of globalization, this secular trend has reversed and that inter countries differences (between western countries and NIC, China and India) in average standard of living did and will considerably decrease, while intra countries differences will deepen to levels unknown since a long time. Under the effect of lower pay and benefits and/or long term unemployment, in particular, the middle class will be next to eradicated. However, Industrial Relations, since the mid 1930‘s, precisely had for effect, in the Western industrialized world, to bring into the middle class increasing numbers of members of the working class under new conditions of employment stability, disciplinary guarantees and good wages and benefits. The model had developed under different shapes in different countries according to local tradition, history, customs and ideology (for instance interest arbitration ― awards‖ in Australia, ― business unionism‖ in the USA, ― co-determination in Germany, etc…). Industrial Relations Theory (admittedly a middle range effort to theorization, while the deeper underlying portents could be found in Organization Theory) came under different models. The most influent ones were, in a somewhat static and descriptive fashion, Dunlop‘s Industrial Systems (Dunlop, 1958) and Flanders ― web of rules‖ (Flanders, 1968), taking into account the pioneering efforts of the Webbs (S. and B. Webb, 1897). Attempts to give a more dynamic accent to the model include notably Barbash‘s elements of industrial relations, pitting management‘s cost discipline against union‘s protectivism (Barbash, 1984) and Kochan, Katz and McKersie‘s (Kochan, Katz and McKersie‘s , 1986) transformation of American Industrial Relations introducing a strategic choice perspective for both sides in order to account for the late 1970‘s and mid 1980‘s changes. The latter efforts, aimed to North America, were shown to be perfectly compatible with European developments in the field (Rojot, 1988, 1990).

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As illustrated by Kaufman (2004), Industrial Relations, although this was by no means compulsory, came to be identified with union-management relations, among which collective bargaining played a prominent role. One of its essential features thus was the existence of powerful unions, as a countervailing power to management‘s influence. However, in parallel to the spread of globalization, trade union influence and density has dramatically decreased over the past thirty years, admittedly with large differences among countries (European Foundation). However, even though the rate of organization remains quite high in some European countries for historical or structural reasons (for instance the institutionalization of the labour movement in the political process, or its involvement in running social security schemes along the ― Ghent system‖), the union‘s influence has weakened. Examples of this trend can be found in the adoption of policies opposed by the unions, for instance as recently as last year in Germany (under a then social democrat government). Thus the union has either considerably lost strength or has been unable to oppose the trends operating towards the flexibilization of the labour market and/or the increasing gap in pay, benefit and conditions between segments of the labour force.

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II. In that framework, does globalization mean the end of industrial relations? The labour movement has not remained idle in facing these trends. Collective Bargaining stands as the favourite means of action of organized labour, even though it is a more complex issue that it generally appears (Rojot, 2004). Historically, within most developed countries, collective bargaining developed rapidly from local to national level (Ulman, 1955). At first sight, it seems perfectly logical that the same process take place internationally at a multinational level superseding the national one. As capital is becoming more and more international and mobile, as financial markets over the planet never close, it seems only natural for labour to find ways to face its traditional employer opponent. Especially when the latter is fast reaching a global dimension under many features such as the shape of the Multinational Corporation. Nevertheless, if internationalisation of capital seems natural, labour does not share the same innate drive (Lecher and Platzer, 1998) and this seems even more the case for collective bargaining. Indeed, the international level raises obstacles much more formidable that the ones which came in the way of national level bargaining. Notably, the following issues cast doubts on its successful achievement: the international solidarity of workers is much harder to come about than the national one. There are differences in structure, status and power of the actors which make actual coordination of action difficult. National Industrial Relations Systems remain very separate, with divergent legal, technical and social contexts shedding different light on labour relations issues. The lack of framework or forum for international labour relations, not only in legal but also in practical terms, as well as the unavailability of international enforcement mechanism makes the settlement of disputes impossible to reach. Also, the lack of representative character and of the capacity to commit themselves by the parties, for both the international employer‘s organizations and international unions, at an international level, is a major issue. Finally, there is, at least for the employer's side, a lack of positive incentives to engage into the process and to proceed to such activity because of the dangers it could see

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lurking in it for its freedom to operate internationally. Besides, most international employers associations, such as the international chamber of commerce, have no interest or mandate for being involved in labour issues. Unlike the Multinational Corporations, which emerged as a direct consequence of the internationalisation of industry and trade, the labour side has had to build from scratch its own international structure. Of course, International Worker Organizations are also nothing new. ― Workers of the world unite!‖ is a battle cry dating back to the early XIXth Century. However, even though the name ― Global Unions‖ is being used increasingly by the international labour movement for describing the major institutions of the international trade union movement, it appears that these organizations are relatively weak, gathering very different agendas from their national members and largely devoid of the power to constrain MNCs management into much. Blanpain and Engels (1998), for the EU, and Clauwaert and al. (2004) reach similar conclusions, even though the latter is working within the European Trade Union Institute. In fact, international collective bargaining never really took off at world-wide level. Actually, with the possible exception of the single case in 1967 of a United Auto Workers (UAW)-Chrysler collective agreement covering both the USA and Canada, under very specific conditions and limited to the two countries, it can persuasively be argued that no real "collective agreement" properly speaking has ever been signed yet at an international level, involving reciprocal duties and commitments by the parties with efficient means of enforcement (Rojot, J, A Le Flanchec and C. Voynnet-Fourboul, 2001). The EU environment offers an interesting case where public authorities (in that case the EU Commission) intervention for favoring EU wide collective bargaining came to interact with the parties‘ strategies. The past ten years have been characterized by some progress in the direction of a European social dialogue, which seems to be leading to significant changes in the building of a social and labor relations framework at the Community level (notably, several directives, the Single European Act, the European Charter of Fundamental Rights and the Social Protocol attached to the Maastricht Treaty). The more marking event in the area of European Social developments stems from a new directive, adopted on 22 September 1994 which provides for the creation of an EWC (European Works Council) or alternatively a procedure for the provision of information, exchange of views and dialogue, in every Community-scale Multinational Enterprise. Thus, the institutional dynamic from the part of the EU Commission has not been without results over time and significant steps have been achieved. However, one actor alone is not enough to bring about bargaining, particularly when it is not going to be one of the parties. In order to negotiate, as pointed out above, there has to be at least two willing partners. Thus, here again, going beyond formal consultation rests upon management goodwill. (Rojot, J, A Le Flanchec and C. Voynnet-Fourboul, 2001). Several other paths were possible for international action by unions facing multinationals, including cross national solidarity, consultative meetings, mutual help in training, sharing of information, sympathy strikes or other industrial action, coordinated strikes, coordinated bargaining, indirect pressure on national governments and/or international organizations to obtain regulation favourable to international labour interests. Actually, recent interesting innovative developments have involved contacts and agreements between various organizations, including but not limited to, multinational corporations and national unions: on the employer side sectoral groupings of employers have been involved, as well as global unions from the labor side. However, these contacts and the resulting agreements bear mostly upon part or all of a basic set of employee fundamental

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social rights, as they are spelled out in conventions of the ILO, and remain at the level of a declaration of intentions or hit, as ever, the problems of representativeness of the parties (Euro Commerce) or of enforcement (FIFA). Besides, as before (Rojot, 1978), their conclusion has rested on the employer's goodwill. Some cases of regulation of the activities of multinational corporations by national states must also be noted such as the regulation of bribes by national companies overseas by the US Government and the requirement that overseas subcontracting by national companies follow minimum social guarantees by the Swedish government.. Both the ILO and the OECD guidelines for multinational enterprises remain in existence (Blanpain and Engels, 1998). Both are still of a voluntary nature and have had quite a limited effect. Enforcement procedures of the OECD Guidelines were, and still are, non existent. Another track tried by the labor movement, to correct the effects of globalization upon wages and conditions in the developed countries of the West involved the idea of implementing fair labor standards in all countries, in order to control, at least marginally, the unfair cost advantage in manufacturing enjoyed by countries where wages and working conditions were maintained abnormally low and unsatisfactory by national governments wishing to attract foreign capital investments. This track has recently been the object of a renewed wave of interest, even though it is a relatively old idea. Baron Necker, a one time Prime Minister of Louis the XVIth, King of France, argued as early as 1788 that unless Sunday rest was observed in all countries simultaneously it would put the nations trying to enforce it unilaterally at a competitive disadvantage in world trade (Périgord, 1926). The reason why it was never successfully implemented since then (Mitchell, 1970) probably rests with the fact that it raises the dual problems of measurement and enforcement and that it requires an answer to difficult questions: what is fair? By whom standards? What is to be deemed hidden protectionism or fair competitive advantage? And who is going to do something about it? Nevertheless, this idea, advocated by American Labor as a quid pro quo for liberalization of international trade as well as by the ICFTU in the period after World War II has been more recently debated in various forums (Caire, 1994, 1996). Mercosur, for instance, the common market constituted in 1991 has set up an economic and social forum. Within the framework of ALENA, the NAALC agreement ratified in 1993 provided for a committee for cooperation in the area of work, with a procedure for the settlement of disputes in a set of a limited number of issues, such as safety and health, child's work and minimum wages. At the Marrakesch's 1994 meeting which created the new WTO the idea was discussed that the new organization should include a minimum social net. The European Parliament has adopted a resolution in favor of the introduction of fair labor standards in multilateral and international trade. The issue was also raised at the ILO, the World Summit for Social Development in Copenhagen in March 1995 and within the OECD. However, the basic problems inherent to an efficient working of fair labor standards remain as present as ever, as evidenced by the ambiguous position of the WTO at the December 1996 Singapore meeting and its failure to address the issue at later meetings. Some other developments are noticeable. On the one hand, the ILO has established core labor standards, besides its traditional conventions, that it is actively promoting. Drawn from eight basic conventions, they focus on the right to freedom of association, the prohibition of forced labor and compulsory work, the elimination of discrimination at work and the abolition of child labor. On the other hand, private developments have appeared. They include private international standards, such as the SA 8000 proposed by Social Accountability International,

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certification, such as the Fair Labor Association and reporting schemes such as the Global Reporting Initiative. One can also quote the results of activities of other organizations such as The Guidelines for Corporate Action on Child Labor of the Council on Economic Priorities, the Human Rights guidelines for companies proposed by the Amnesty International United Kingdom Business Group, the Ecumenical Committee for Corporate Responsibility (ECCR), the Interfaith Center on Corporate Responsibility (ICCR) and the Task Force on the Churches and Corporate Responsibility (TCCR). Better known are the business enterprises codes of conduct, some applying at corporate level, such as Philips, Nike, Levi-Strauss, etc., and some others at industry level, such as the sporting goods and the apparel industries. A recent study numbered 233 such codes (OECD 2000). However, it has been remarked that, notably because of the opposition between developed countries and developing countries which see these attempts to maintain high level labor standards as thinly disguised protectionism, the application of these codes and principles rests on management‘s commitment to corporate social responsibility and that their enforcement depends on a participation of governments still to be gained (Verma and Kuruvilla, 2004).

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III. Thus, even though many activities have been undertaken, the results seem, at best, meager and unpromising. Could a less traditional track be explored? Even though, to a large extent, it leaves the role (and the future) of present day unions in the dark, it opens a path for the reinforcement of Labor‘s influence. It is based on the implementation of some form of workers participation in developing countries (Rojot, 2003). The main argument is twofold. On the one hand, it maintains that the collective expression of employees through a specialized body as a rule and the protection of their moral and material interests as a principle are not only a ― good thing‖, worthy democratic goals to be pursued for their own sake, but also that they are the unavoidable end result of the productive process. Management, or Government cannot be fully trusted to safeguard the interests of employees. Absolute power corrupts absolutely, and a countervailing force will emerge to face managerial power, given any chance. The example of clandestine unions of the ― Solidarity‖ type in the former People‘s Republics in the Eastern bloc amply demonstrates that employee voice will emerge even in circumstances where the ― people‖ could not, in theory, conceivably protest against itself, i.e. a superstructure supposed to represent its own dictatorship. However, labour relations, either in industrial or industrializing economies, have two faces (Freeman and Medoff, 1984). Both are unavoidable, and it follows that conflict and cooperation cannot be suppressed and are complementary. To put it at its simplest, it is possible for labour and management to agree on ways to enlarge the pie together, but it is also impossible to fully agree between them on the ways of its division. Conflict is better dealt with conflict management techniques and cooperation with participative techniques (Goldman and Rojot, 2003). There is of course no clear cut border between the two, depending on the way they are dealt with. Indeed, almost all aspects of the employment relationship may be considered under a more cooperative or more conflictual angle. Collective bargaining, for instance, even

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though one of the preferred ways to solve conflicts on wages and conditions, may well be considered as a tool of « conflictual participation » (Walker, 1974). In the same way, some « Works councils » meant in the post world-war II period as a tool of joint cooperation between management and labour sometimes revealed themselves in practice as arenas of bitter conflict. On the other hand, the second strand of the argument holds that, given the circumstances, this voice for the collective expression of employees, particularly but not only under its conflictual mode, can be readily opposed by many employers; even though it constitutes a preferable alternative to exit (Hirschmann, 1972) or open conflict. Thus, it will be accepted only if it is seen as fulfilling a useful need not only from the side of labor, but also from the side of management. It is thus further argued that some types of workers participation may fulfill requirements from both sides if the concept of workers participation itself is clarified. It includes at least six different possible meanings (Rojot, 2003) discussed immediately below:

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Job and organization redesign and improvement of quality of life at work rest on a dual hypothesis. On the one hand, stands the idea that employees are motivated and will have a better performance because they value performing work which is useful, interesting, meaningful for them and for which they are well qualified in well designed jobs. Besides, when they understand the meaning and usefulness of their work they will develop a feeling of self esteem and achievement and will express their potential in performing it. Also the organization of work must allow them to use at best their capacities, to apply all their competencies to the tasks at hand and thus achieve a degree of self realization.

Examples include new forms of work organization, job enlargement and enrichment, redesign of job contents, new forms of organization development, ergonomics and health and safety, socio-technical systems, semi-autonomous work teams, team-work and quality circles in the widest definition (when understood to include the improvement of worker‘s working conditions). -

Involvement of employees into managerial decision making rests on the hypothesis that employees are motivated to perform at their best and invest themselves into their work if they feel that they have a significant input into decisions which concern their fate and their work. Besides, decisions in the making of which employees are involved are better understood and better implemented. Finally, nobody knows their jobs better and has better information on them than the job holders themselves and thus their potential to make them more efficient is equal if not vastly superior to management‘s.

Multiple variations take place around what is probably the more widespread mode of worker‘s participation. They include, health and safety committees, employees referendum, German style mitbestimmung, information and consultation schemes, works councils in the present modern meaning (at plant, company, group, European level), employee membership on the board, user involvement and quality circles in the narrowest definition (when

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understood as exclusively geared towards quality improvement of the firm‘s services or products) -

Employees sharing into profit or cost reduction holds that employees will be motivated to perform at their best and/or likely to contribute more to the success of the organization if they feel that they will financially benefit from their efforts. Examples include piece rate/wage individualization, suggestion box, profit sharing formula (based on profit, income, any index, for individual employees or teams), saving on losses or productivity gains formula, gain sharing, improshare, the Scanlon plan, the French compulsory profit-sharing Act. -

Employee ownership rests on the hypothesis that employees will invest themselves into their jobs and provide their best performance because they feel that they will invest in their own businesses, of which they own a part and which enrich them.

Examples include individual share holding plans (ESOP), matching savings and investment plans, collective share holding plans, LMBOs and deferred stock options (both generally exclusively for managers and even very senior managers), wage funds (in the Scandinavian meaning of the Meidner plan, involving employee ownership, but the voting of the shares by union run industry or country wide funds).

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Fostering employee identification with the company holds that employee will develop loyalty and have a sense of belonging and of commitment to their company when they feel that it has their interests and welfare at heart or when they feel that they belong to a working community which shares common values of which they are a valued member

Examples include cultural engineering, survey feed-back, organizational development, enterprise's projects and possibly total quality, even though the latter borrows features to several other types. -

Promotion of corporate citizenship rests on the hypothesis that labour is not a commodity like any other. If treated equitably, the employee will contribute equitably from his own part. If considered and treated as a responsible citizen of the organization, he will behave as an organizational citizen in a responsible manner

In addition to the other modes of participation, the employee is considered as somebody other than simply either a seller of skills on a labor market, or a member of a community, or an individual in a hierarchy. He is also, foremostly, a participant to a civic order. Thus he must be treated with dignity by his superiors, he must have his say in his life at work, he must benefit from guarantees in the exercise of hierarchical power, and he must have the potential to be recognized as an individual equal to any other with account being taken of his position and work duties. Examples include industrial democracy in the Scandinavian meaning; non union grievance procedure in US companies, internal mediation and/or open door policy;

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ombudsmen, employee delegates, 360° appraisal and/or subordinate appraisal of management. None of the six working hypotheses has been scientifically proven beyond a reasonable doubt. However, a dispassionate review of the (abundant) literature tends to indicate that such programs are often effective when sensible and applied by believers. It also underlines the critical part of careful implementation in the success of many programs. However, the results are apparently difficult to generalize across organizations. Also, some fundamental factors of success seem to lie in full organizational commitment, reliability of implementation and clarity and fairness of strategy.

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IV. A set of common features in developing countries, in terms of worker‘s participation, will appear of primary importance for the use of some worker‘s participation schemes. In the first hand, some have adopted a strategy for industrial development which had its emphasis on an export oriented industrialization strategy as opposed to an import substitution one (Kuruvilla, 1995). Secondly, some of these seem to have entered the second stage of such a strategy, where, instead of focusing on low cost production of light manufacturing goods for export, the emphasis is put upon a move to higher value products and on innovations in manufacturing process. Thus the dominant constraint has changed. Formerly the foremost need was the one to structure industrial relations in such a way as to bring about a decrease of industrial conflict in order either not to hamper economic development or to better attract foreign direct investment to low wage production areas. Government, which was the main actor in the industrial relations systems of the countries concerned, brought about a varying set of policies to that end in regulating the labour market, such as restrictions on union formation, prohibition of strikes in essential or export sectors, regulation of overtime and the like. However, now, the consequence of the strategic industrialization choice is that the countries have fallen within the constraints of globalization. The result is a growing pressure to remain competitive on a liberalized product market. In the stage of industrialization which they have reached, countries cannot reach this result on the basis of cost reduction alone, meaning foremostly control of labour costs, but must also engage in competition on the basis of higher quality. Additionally, they have now to use, to a larger and larger extent, manpower able to operate high technology complex production facilities. To that end they must pursue a labour market strategy aimed both towards increased skills development and labour flexibility (Kuruvilla and Erickson, 2000). In that light, it must be remarked that only a strong emphasis put upon education and a high level of literacy as well as a high percentage of the manpower having received at least a primary education (Gough, 2000) allows for such a strategy. In those circumstances, it should be noted that two contradictory imperatives are bearing on the firms in terms of human resource management and labor relations (Rojot, 1989). Firstly, the flexibility to manage the labour force in terms of volume implies to use all the classical tools of manpower adjustment in the traditional authoritarian, Taylorian fashion. Secondly and conversely, functional flexibility requires a high degree of mutual trust between labor and management.

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Indeed, there is a stronger need to nurture a willingly positive attitude from the part of employees in the face of constraints at micro-level emerging from the strategic option for high quality, high technology competitive products. In fact, to secure satisfactory implementation and running of highly complex and technical plants and equipment is possible only with the cooperation of the operators. In those technology-intensive environments, a large number of jobs are too complex to be clearly outlined and designed in advance by management and filled by operators who would have just to obey instructions. It is almost impossible for most descriptions of the new jobs to define in advance what actions are and likely to be required by the job holder. Furthermore, individual initiative is required, to carry out the jobs efficiently. But, if willing co-operation is necessary, management cannot simply demand (or even more simply pay) and obtain actual co-operation and initiative. Co-operation and initiative must be voluntary. They cannot be obtained otherwise, since authorithy and simple compliance with instructions is insufficient to fulfill complex jobs. Clearly, two imperatives on human resource management are in opposition. The key to the success of the firms' response to new circumstances may well lie in finding ways to manage that contradiction. Some of the outcomes offered by participation may provide them with the necessary tools. The rationale for the introduction of participation in decision making, under whatever form, even the weakest one of simple information before, or possibly after, acting, is multiple, here: on the one hand it insures a degree of regard for employees‘ « voice », their point of view is taken into consideration before decisions which concern their life at work are taken. On the other hand, it can improve efficiency: employees have an important input to provide on decisions related to work process and content, which they daily perform and know better than anyone else. Finally, and maybe more importantly the quality of decisions may be improved for several reasons: first, a process for making sure that an exchange of views will take place and is taking place extensively will air all concerns and will bring together to their reciprocal knowledge different strands of information that the different parties may not share fully. In that light a better informed decision will be taken that it would be without full information and without being exposed to the views of a party with a different standpoint. Second, a decision in which the ones who are usually only in charge of carrying out its results will have been involved in the design of has more chances of being implemented faster and better, because all concerned at all levels will have a better understanding of its why and wherefores, and thus be able to anticipate unforeseen consequences which otherwise would remain hidden. Third, the involvement of differing points of views will have the dual effect of, on the one hand, satisfying to the criteria of procedural justice, and thus to have its results better accepted by even those who stand to suffer from some of its consequences because they will have been fairly heard, and on the other hand to have some of its negative consequences for them mitigated because they were able to point them out thoroughly. When applied to quantitative numerical flexibility, the requirement of worker‘s participation may benefit to all, alleviating its consequences in many ways, such as limiting the numbers involved, instituting a sensible criteria and order for unavoidable dismissals, creating priorities in rehiring, substituting other flexibilities to redundancies, such as shorter work hours, transfers, early retirements, etc. When applied to qualitative flexibility, the benefits of requiring worker‘s participation before the decision are even more obvious and may be one of the best ways to gain the wilful cooperation of employees facing complex tasks and high technology machinery.

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Also, the intimate knowledge of his daily work by the worker at the bottom of the hierarchy is unequalled anywhere else in the organization. However, the consequences of that point extend well beyond the improvement of decisions and contribute to efficiency. It applies in many other ways such as, for instance, in bringing improvements in the production process what nobody else is better placed to think of. Besides, employees react in a variety of negative ways (from passive and uncooperative attitudes to low quality of work even if the labour market prevents more « active » reactions such as absenteeism, turnover and indiscipline) to a working life which is tedious and boring with monotonous and repetitive jobs as well as alienating with meaningless tasks set in an oppressive authoritarian hierarchy. This is much more the case if their level of general training and education creates a gap between their expectations born of their lives outside work and the realities of the job. Finally, individuals have a lot of varied and different talents, the organization can be structured to give them the opportunity and the management system can encourage them to make use of them in their work to the benefit of the enterprise. Even though there is no conclusive theoretical and empirical evidence, a thorough review of the literature nevertheless seems to establish some degree of relationship between profit and/or gain sharing by employees and an increase in productivity of the enterprises, particularly when the individual performances of the employees are largely interdependent and interrelated as well as uneasily directly observable. However the exact mechanism and links between employee performance and profit sharing remain unclear. Here again, therefore, we shall simply go deeper into the rationale for its use. On the one hand, a system of profit sharing fulfilling conditions of clarity and successful implementation reinforces the element of cooperation between employees and management and puts the accent onto it, relatively to the element of conflict. On the other hand, given that the profit becomes an element of importance to the employees it builds expectations and puts some pressure on management for increased efficiency. In addition, the other features of the internal environment circumstances of the developing countries must be taken in account. It is clear that in all of them social protection for the unemployed, notably in terms of unemployment compensation and retirement pensions, it is at best minimal if existing at all. In front of an aging population and relatively early retirement age, pension plans are lacking or not operational. Plans for stimulating self employment and creation of small and medium enterprises are also facing problems of adequacy to the task that they have to face (Bechterman, 2000). Here also some of the different aspects of some participative schemes might be of use. Thus, some elements of interest stem from the combination of profit sharing with two other elements: tax exemptions and enterprise savings plans. Clearly, tax exemptions for the sums distributed through profit sharing constitute a very strong incentive. For the employer, they become deductible from corporate taxable income and at the same time escape wages taxes of different types. In that sense they constitute a component of the wage which allows using more labour for the same amount of money and indeed a stimulus for employment. Tax advantages to the employees are generally linked to another feature: the amounts of profitsharing distributed are excluded from any tax, including income tax, if they are saved for a certain amount of time (several years) before being issued in cash. During that time, they are invested and of course accrue interest. In that sense they constitute forced savings which can be later used by the employee for various purposes: discretional spending of course, but also retirement income, subsistence during momentary unemployment, initial stake to invest into

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individual business creation. Thus, it can help mitigate the absence of retirement pensions, unemployment compensation and satisfactory plans for incitation to entrepreneurship. A further possibility includes the use of these frozen profit-sharing amounts into enterprise savings plans, instead of being invested in savings instruments. In that way the amounts concerned, while in the name of the employees, can be left at the disposal of the enterprise for investment and development. Such a system designed for complementary pensions has created in West Germany a powerful tool of growth of capital for enterprises. This could help develop young enterprises. The German example, however, has also demonstrated the need, in that case, to insure the sums concerned into a general fund for preserving the interests of the employees in case of failure of the enterprise in order that the employees amount of profit-sharing should not be lost then.

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V. In conclusion, worker‘s participation under locally adapted guises and shapes could well constitute an answer for labour facing the consequences of globalization. The role of the unions in the establishment of workers participative mechanisms is then to be considered with a particular attention. In many countries, unions are also a tool for a democratic society and free collective bargaining. However, for many of them, the new role to be adopted in the implementation of these mechanisms runs against their tradition and history as protest organizations in society. Wheeler (2002), in analysing the case of the USA distinguishes three categories of union tradition and role: pure and simple unionism (the dominant American model, either under the craft, industrial or occupational model), reformist unionism (with broader goals of social reform) and cooperationist unionism (involved in labour-management partnerships). A view broader than the North-American one would probably add radical unionism (present in other regions of the world and aiming at drastic societal changes). The point here however is that cooperationist unionism represents the small minority and probably requires very special conditions as well as public support to flourish. Post-Modern theoreticians have condemned labour movements to disappearance as a remnant of the now extinct ―m odernist‖ period. However they did so already some time ago (Touraine, 1984), and unions are still there. They have been buried several times already in the past, each of one too early. The question is now will they adapt to the new dominant forces?

REFERENCES Barbash, J., (1984). The Elements of Industrial Relations, Madison: The University of Wisconsin Press. Blanpain, R., and Engels, C. (1998). European Labour Law. In R. Blanpain (Ed.), The International Encyclopedia for Labour Law and Industrial Relations. Deventer: Kluwer. Bechterman, G. (2000). Labour Market Impacts of the East Asian Economic Crisis. Paper presented to the Fifty-Second Annual Conference of the Industrial Relations Research

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Association, 6-10 January, Boston. Joint Seminar with the North American Economics and Finance Association on International Perspectives on Unemployment. Caire, G. (1994). Labour Standards and International Trade. In ILO, International Labour Standards and Economic Interdependance. Geneva. Caire, G. (1996). Clause Sociale et Commerce International. Tiers-Monde, (Nov-Dec). Clauwaert, S., and al. (2004). Social Dialogue and Coordination of Collective Bargaining at European Level . In A. Ojeda-Aviles (ed.). Collective Bargaining in Europe. Ministerio de Trabajo y Asuntos Sociales, Madrid. Dunlop, J. T. (1958). Industrial Relations Systems. New-York: Holt. Flanders, A. (1965). Industrial Relations : What is wrong with the system ? An Essay on its Theory and Future. London: Faber and Faber. Freeman, R. B., and Medoff, J. L. (1984). What Do Unions Do? New-York: Basic Books Inc. Giraud, P. N. (1996). L‘inégalité du monde. Paris: Gallimard. Goldman, A., and Rojot, J. (2003). Negotiation : Theory and Practice. The Hague: Kluwer International. Gough, I. (2000). Welfare Regimes in East Asia and Europe. Paper presented at the parallel session to the Annual World Bank Conference on Development Economics Europe 2000. Paris, 27 June. Hanami, T. (1991). Managing Japanese Workers. Tokyo: The Japan Institute of Labour. Hirschmann, A. O. (1972). Exit, Voice and Loyalty. Cambridge: Harvard University Press. Kaufman, B., (2004). The Global Evolution of Industrial Relations : Events, Ideas and the IRRA. Geneva: International Labour Office. Kochan, T. A., Katz, H. C., McKersie, R. B. (1986). The Transformation of American Industrial Relations. New-York: Basic Books Inc. Kuruvilla, S. (1995). Industrialization Strategy and Industrial Relations Policy in South East Asia. Industrial and Labour Relations Review. Kuruvilla, S., and Erikson, C. (2000). The Impact of Globalization of Industrial Relations in Asia : A Comparative Review and Analysis. Paper presented to the 12 World Congress of the International Industrial Relations Association. Tokyo, May 29-June 2. Kuruvilla, S., and Venkataratnam, C. S. (1996). Economic Development and Industrial Relations : the Case of South and South East Asia. Industrial Relations Journal, March 27 (1). Lecher, W., and Platzer (1998). H-W, European Union – European Industrial Relations? London: Routledge. Mitchell, D. J. B. (1970). Essays in Labor and International Trade. Los Angeles: Institute of Industrial Relations, University of California Los Angeles. OECD (2000). Working party of the trade committee : Codes of Conduct : an inventory. Paris. Périgord, P. (1926). The International Labour Organization: A Studv of Labour and Capital in Cooperation. New-York: D. Appleton and Co. Reich, R. (1991). The Work of Nations. New-York: Knopf. Rojot, J. (1978). International Collective Bargaining : An Analysis and Case Study for Europe. Deventer: Kluwer. Rojot, J. (1988). The Myth of French Exceptionalism. In J. Barbash (ed.), Theories and concepts in Comparative Industrial Relations, Columbia: University of South Carolina Press.

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Rojot, J. (1989). Employer's response to technological change. In A. Gladstone and Al. (eds.), Current Issues in Labour Relations : an International Perspective. Berlin: Walter de Gruyter. Rojot, J. (1990). A view from abroad. In J. Chelius and J. Dworkin (eds.), Reflections on Transformation in Industrial Relations. New-Brunswick, N.J.: Rutgers University IMLR Press. Rojot, J. (2003). Worker Participation in Europe and East-Asia. In K. Marshall and O. Butzbach (eds.), New Social policies for Europe and Asia, Washington: The World Bank. Rojot, J. (2004). The right to bargain collectively : an International Perspective on its extent and Relevance. International Journal of Comparative Labour Law and Industrial Relations, 20 (4). Rojot, J., Le Flanchec, A., and Voynnet-Fourboul C. (2001). European Collective Bargaining, new prospects or much ado about little?, International Journal of Comparative Labour Law and Industrial Relations, 17 (3) (Autumn). Touraine, A., and al. (1984). Le mouvement ouvrier. Paris: Fayard. Ulman, L. (1955). The rise of the national trade union. Cambridge, Mass: Harvard University Press. Verma, A., and Kuruvilla, S. (2004). The role of national governments in international labour standards. Proceedings of the 56th annual meeting of the IRRA, San Diego, January 3-5. Walker, K.F. (1974). Worker's Participation un Management. Bulletin of the International Institute for Labour Studies, 12. Wheeler, H. N. (2002). The Future of the American Labour Movement. Cambridge: Cambridge University Press. Webb, S., and Webb, B. (1894). The History of Trade Uniosm. London: Longmans. Webb, S., and Webb, B. (1897). Industrial Democracy. London: Longmans. Wood, R., Hull, F., and Azumi, K. (1983). Evaluating Quality Circles : the American Application. California Management Review, XXVI (1) Fall, 37-53. World Bank (1995). Rapport sur le développement dans le Monde. Washington: World Bank.

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In: Globalization Editor: Joseph A. Mancini

ISBN: 978-1-61324-531-6 ©2012 Nova Science Publishers, Inc.

Chapter 8

THE EFFECT OF GLOBALISATION ON THE IMAGE OF PARTNER BRANDS Sinove Marde, Melisa Caid and Romain Cally Franco-Australian Center for International Research in Management University of La Reunion, Island, France

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ABSTRACT As globalisation has accelerated, a lot of firms have made alliances, with the aim of being more competitive. This trend is echoed in the development of partnerships within most industries. In marketing, many studies have been carried out concerning the benefits of global partnerships, most often from the viewpoint of firms. In contrast, less attention has been given to the consumer perspective. Therefore, the purpose of this research is to analyse whether the knowledge of a partnership existence between two firms has an effect on the brand's image as perceived by the consumer. An experiment was conducted testing consumers‘ brand images in two steps: before and after knowledge of the partnership's existence. The results show that the knowledge of a partnership's existence has an asymmetrical effect on the brand's image that benefits the less appreciated brand. Also, it increases the consumers‘ intention of buying the products of both brands.

INTRODUCTION Strategic alliances have become a key feature in many sectors of the economy (Goh, Uncles 2003). Forces in the global marketplace increasingly require firms to make alliances with local or foreign partners, in order to survive or be more competitive. In the specialised literature, many studies deal with this phenomenon. Most of the analyses made concern benefits gained from global partnerships, often from the point of view of firms. Less attention has been given to the consumer‘s perspective. However, consumers‘ perceptions are essential if we are to propose adequate marketing strategies. The focus of this paper is an empirical study of consumers‘ reactions to the knowledge of a partnership's

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existence. It is important to know if a partnership affects the consumer‘s image of the brands, as this information has important managerial implications. The first part of this chapter outlines the essential role of brand image for firms, in the context of globalisation. We analyse how the consumers‘ reaction to the image is likely to change with the knowledge of a partnership's existence, and what the consequences are for each partner. The second part presents an empirical illustration for Renault and Nissan, firms which have been in partnership since 1999. Finally, we discuss the results.

1. IMPACT OF PARTNERSHIP ON IMAGE OF PARTNER BRANDS

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1.1. The Problem In order to adapt to the process of globalisation and to be competitive, firms attempt to develop their brands and products on a global scale, by operating as if the entire world were a single entity (Levitt 1983). In this connection, they generally use several strategies, particularly strategic alliances. This strategy has known unprecedented growth worldwide in the past few years, since it is hard for firms to remain self-sufficient in a turbulent and changing environment (Crossnan, Inkpen 1995). A strategic alliance consists of an ― agreement among firms to work together to attain some strategic objectives‖ (Harrigan 1986) and also to obtain competitive advantages (Bronder, Pritzl 1992). However, although firms cooperate to have some advantages, they are rivals and retain a certain strategic autonomy. Consequently, in a partnership between firms, it is important to stress two interests: common interest and self-interest (Aurifeille, Medlin 2001). The first represents what is shared between the two firms, which contributes to the common performance. The second represents the personal characteristics of each partner, which provide individual advantages and also favour the success of the alliance. It may be the case for brand image. A brand image is the perception of a product or a brand by consumers. ― It is all the mental representations: affective and cognitive, that a consumer or a group of persons associate with a brand‖ (Kapferer, Thoening 1989). In other words, it is what people think and feel about it (Bullmore 1984). It is an illustration of the idea that consumers buy brands not only for their physical attributes and functions but also because of the images connected to the brands (Levy, Glick 1973). It is very important for firms to have a strong and positive image as it represents a key to achieve and sustain success in an increasingly competitive marketplace (Grewal, Krishnan, Baker, Borin 1998). For example, it enables consumers to differentiate a brand from its rivals. This is probably its most important role because in the context of strong competition, products are easy to copy (Aurifeille, 2004) and it becomes difficult to position oneself in relation to rivals. In the context of globalisation, where firms invest a lot to develop their image (Romaniuk, Sharp 2003) and have to make alliances to stay competitive, it appears interesting to analyse whether the knowledge of the existence of brand partnerships affects brand images, and how the exposure of such an alliance affects consumers‘ perceptions of the partner

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brands. The answers to these questions are important because they will help firms decide if they should let the public know about their partnerships. In the next section, the hypotheses concerning the knowledge of partnership existence and its consequences on brand image are presented.

1.2. The Knowledge of Partnership Existence and its Consequences on Brand Image Despite the prevalence of cooperation between firms and strong interest in this topic in marketing and business (Bucklin, Sengupta 1993), relatively little is known about the reactions of consumers to partner brands. Two main reasons could explain this lack of studies: 

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

When firms cooperate, they essentially consider the strategic aspects of cooperation, they do not consider the perceptions of consumers, which are nevertheless important, because consumers can buy the product or not, which leads to the success or failure of the partnership. Studies dealing with this subject come up against a problem of obtaining data. It is very difficult for consumers to give their opinions about partner brands, because they must think and conceive of an alliance from the perceptions they have of each brand. The difficulty becomes all the more important if consumers cannot think of a product that comes from the partnership.

Generally, consumers have a distinct image of each competitive brand because in a context of strong competition, firms pay a great deal of attention to the brand image, which becomes an essential characteristic of the firm‘s identity. For firms, it is necessary that their brand image appears independent for consumers because it is a vital element which enables consumers to differentiate it from the others. However, when consumers have to make purchasing decisions, their perceptions concerning each brand are compared and united to form the basis of their final choice. Indeed, the intention to purchase a brand is affected by attitudes towards other competing brands (Laroche, Brisoux 1989). In the case of partner brands, the process of comparison is amplified and one brand is clearly perceived in the context of the other and vice versa (Simonin, Ruth 1998). Thus, when consumers are informed of the partnership's existence, we would expect that their images of the partner brands get closer and tend to be identical. Indeed, the image of the partner brands is likely to be affected by their prior perception of each brand. Consumers would amalgamate their perceptions to form their new image of the brands in partnership. From this point of view, we can formulate the following hypothesis: H1: When consumers are informed of a partnership's existence, their brand images are less differentiated. As the partner brands make alliances to manufacture common products with the know-how of each partner, there is a risk that their images might become confused. Indeed, brand confusion occurs when there is an incorrect evaluation of a brand caused by the perceived physical similarity of the products (Mitchell, Walsh 2005). The consequence is that consumers cannot develop a correct interpretation of various facets of a product or service (Turnbull, Leek, Grace 2000).

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Confusion and a change in the image of partner brands would lead to a change in the behavioural response. Indeed, confusion is an uncomfortable state of mind that primarily arises in the pre-purchase phase and which negatively affects consumers‘ decision-making abilities (Walsh 1999). So, when images are confused in the minds of consumers, the consequence is an unstable behaviour towards the brands, because consumers cannot differentiate between them any more. The consequences can be negative for one brand if there is a purchase of substitution and for the two brands if consumers become uncertain in their choice. As a result, we consider that: H2: When consumers are informed of a partnership's existence, the global sales decrease. To validate this hypothesis, we chose data from the consumer, that is to say their intention to buy the brands, instead of economic data about global sales, because consumers‘ perceptions are at the centre of our analysis and it is what they think, say and foresee which are the most important. This could help firms to anticipate their behaviour and propose adequate marketing strategies. The validation of the two hypotheses will make it possible to understand the impact of strategic alliances on consumers‘ perceptions and also the consequences for their purchasing behaviour. The results of this part are important from a theoretical and managerial point of view. In the next section, we will analyse them.

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1.3. Theoretical and Managerial Interest In the context of growth in a partnership, it is interesting to analyse the brand image of each partner in order to direct marketing strategies and in particular competitive positioning and communication strategies. The positioning decision is often the crucial strategic decision for a brand because the position can be central to customers‘ perceptions and choice decisions (Aaker, Shansby 1982). Therefore, in this study we provide a way of analysing the consumers‘ perceptions of each brand in the case of a partnership. This could help firms to have adequate information coming from consumers to improve their positioning. Indeed, if a brand is better evaluated than its partner, there is an asymmetrical effect which disadvantages it in the partnership. Therefore, it is important that the firm should know the situation, in order to operate some balancing in the positioning. According to the positioning the firms choose, their communication strategies must follow and accentuate it. Indeed, an adequate way to communicate with consumers is to talk the way they talk and to show them what they want to see, that is to say, it is important to seek congruence between the advertisement and the discourse as well as the perceptions of consumers. Indeed, a product must deliver the benefits the consumers need (Urban, Hauser 1993). The results of our study will enable us to achieve this aim in the context of brand partnership. In this study, the questionnaire used produces different types of information which concern each brand separately, the brands together and the consumers. Indeed, respondents are invited to give their perceptions in two steps: first, before the documentary which introduces the alliance between the brands, and then after knowledge of the partnership's existence. Thus it is possible to:

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Determine the consumers‘ previous global perceptions of each brand, allowing each firm to have feedback from their customers.  Determine whether the knowledge of a partnership's existence affects the image of each brand. If so, is it positively or negatively? In addition to marketing strategy, regarding the global strategy of firms, we propose a new way of analysing the consumers‘ perceptions which could help firms to choose their partners, based on the other criteria generally used in firms. It is important to take into account financial, technical or technological criteria when firms make alliances, but it is just as important to know what the perceptions of consumers are, because they buy the product and firms must satisfy them. In the next section we present some empirical tests, to validate our hypothesis and justify the interest in the subject. 

2. EMPIRICAL STUDY 2.1. Experimental Framework The study concerns the choice of a car. We selected this product for several reasons:

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 



A car takes up a large part of a consumer's budget. The car industry is a global industry whose supply and demand tend to be identical in several countries, particularly in developed countries. In addition, nowadays all car firms make either permanent or sporadic alliances to stay competitive. Hence, it is important to analyse how consumers perceive these alliances and the consequences on purchasing behaviour, in order to propose a global marketing strategy. The car industry generates a lot of money. Global production has increased by 30% since the nineties, with 64.2 million cars manufactured (SESSI 2005). In Europe, this industry represents 3% of the Gross Domestic Product (Meot 2005). Moreover, it is a product which has become commonplace, and prices tend to be affordable for a lot of people in both developed and developing countries.

An experiment was carried out with 150 respondents. It had two steps: 

In the first step, we tested the respondents‘ global knowledge of partnerships in the car sector. For this, we proposed six pairs of car brands and we asked the respondents to note which pairs of cars they thought were in partnership and what their degree of certainty was about this. This was measured on a seven-point scale expressed from ― not sure at all‖ to ― very sure‖. Then, the respondents gave their perceptions concerning two brands: the French brand Renault and the Japanese brand Nissan. It is important to note that in this step, certain respondents did not know about the partnership between the two brands. These respondents represented about 54% of the sample. We chose these two brands as the respondents live in France and it is important for our study that respondents should be familiar with the brand.

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

Nevertheless, this group is famous and is ranked among the biggest car groups worldwide. In the second step a video clip was shown presenting the partnership between the two brands. A product from the alliance was presented. This film allowed all the respondents to know about the partnership. Then, we asked them to give their perceptions again of the same characteristics as those proposed in the first step. This procedure enabled us to have their perceptions before and after knowledge of the partnership.

The characteristics of brand image we have chosen come from a study proposed by Hsieh (2002). This author proposed a scale composed of four dimensions: sensory, utilitarian, symbolic and economic, with 12 items. Details of the items which compose these dimensions are presented in Appendix 1. This scale is adequate for two main reasons:  

It has been created using data from several countries, and so it is a global scale which can be adapted to our study. It concerns the product studied in this chapter, that is to say cars. It is therefore adequate, as in marketing most brand image scales are specific to a particular product or shop and not general to the other categories (Faircloth, Capella, Allford 2001).

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In our study, all these image attributes were assessed through seven-point bipolar semantic differential scales. From these, exploratory and confirmatory analyses were made to determine what the significant dimensions of the car image are, for our sample of respondents. Here are the results: Table 1. Results of the exploratory and confirmatory analyses – car image Dimensions of car image* Cronbach's  Fit statistics

Sensory Symbolic 0,82 0,70 Chi square (p) = 0,69 RMR = 0,03 RMSEA= 0,00 AGFI= 1 GFI = 1 CFI= 1

Utilitarian 0,83

Note: * For more details of these analyses, see Appendix 2.

Results obtained with Lisrel 8 (Joreskog, Sorbom 1993) are acceptable as the chi-square statistic is insignificant (χ2 (24) = 20.03, p = 0.69), and the goodness of fit index, the adjusted goodness of fit and the comparative-fit index are equal to 1, indicating perfect fit. Further, the indicators of residuals, the root mean square error of approximation and the root mean square (at 0.03) are low, showing that the residuals are weak. The dimensions extracted from the exploratory and confirmatory analysis tend to be identical to those proposed by the author. However, we have an exception for the economic dimension, which is not significant, and one item suppressed in the ― sensory‖ dimension. As

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a result, three dimensions with nine items will be used for our analysis1. In the next section the results of the analysis are presented, based on this image scale.

2.2. The Results In this section, the hypothesis tests are presented successively.

Hypothesis 1 This hypothesis makes it possible to determine whether the knowledge of partnership existence has an impact on the consumers‘ image of the brand. If so, what are the changes concerning the two brands and how do these changes operate? To test this hypothesis we only take into account the image dimensions which are significant before and after the video clip and which discriminate the two categories of respondents: those who know about the partnership and those who do not. Also, in order to see the evolution of brand perceptions, we opted for a general linear model, which is adapted to this study as it tests the differences between two distributions which are measured in the same way in different steps. The results are presented in Tables 2 and 3 below: Table 2. Averages and confidence intervals – Symbolic dimension before and after the knowledge of the partnership's existence

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Symbolic dimension before

Symbolic dimension after

Knowledge of partnership

Renault Averages Confidence intervals

Nissan Averages Confidence intervals

People/ do not know N = 82

F = 5.104 (p = 0.025) 4.4268 [4.12- 4.73]

F = 14.95 (p = 0.001) 3.7927 [3.44- 4.14]

People / know N = 68

4.8971 [4.63- 5.16]

4.7647 [4.41- 5.11]

Knowledge of partnership

Renault

Nissan

F = 5.841 (p = 0.017)

F =7.322 (p = 0.008)

People/ do not know N = 82

4.4390 [4.11- 4.76]

4.2561 [3.90- 4.60]

People/ know N = 68

4.9706 [4.69- 5.25]

4.8821 [4.60- 5.17]

F and Differences of averages F= 12.902 (p= 0.001) 0.6341 F= 0.444 (p = 0.508) 0.1324 F and Differences of averages F=1.156 (p = 0.285) 0.1829 F= 0.302 (p = 0.584) 0.0885

The table 2 concerns the symbolic dimension for the partner brands, with the consumers‘ perceptions before and after knowledge of the partnership. Two main results can be underlined: 1

See details in appendix 2.

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

We note that there is a difference between the two groups of respondents: those who do not know of the partnership and those who do. Respondents who knew about the alliance between Renault and Nissan perceived little difference between the two brands before and after the knowledge of the partnership. The other important result concerns the perceptions of the respondents who did not know of the partnership. For them, on the other hand, perceptions of the two partner brands are very different before but get closer after the knowledge of the partnership. Indeed, before the video clip, the gap between the brand perceptions is high: 0.6341. Thus, there is a significant difference between the brand perceptions, as the statistical results show: [F(1; 81)= 12.902; p= 0.001]. Renault is more highly evaluated than Nissan. However, after knowledge of the partnership, the gap between the brand perceptions decreases, and the F (Fisher) becomes non-significant [F(1; 81)= 1.156; p= 0.285]. Hence, there is no significant difference between perceptions of the two brands.

Results concerning the utilitarian dimension are presented in Table 3. Table 3. Averages and confidence intervals – Utilitarian dimension before and after the knowledge of the partnership's existence

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Utilitarian Dimension before

Utilitarian Dimension after

Knowledge of partnership

Renault Averages Confidence intervals

Nissan Averages Confidence intervals

F = 4.478 (p = 0.036)

F= 6.544 (p = 0.012)

People /do not know N = 82

4.8537 [4.58- 5.12]

4.1585 [3.97- 4.62]

People / know N = 68

5.25 [5- 5.5]

4.8676 [4.52- 5.22]

Knowledge of partnership

Renault

Nissan

F=4.308 (p = 0.040)

F= 4.925 (p =0.028)

People /do not know N= 82

4.8537 [4.60- 5.11]

4.6341 [4.34- 4.93]

People / know N= 68

5.22 [4.98- 5.46]

5.0735 [4.83- 5.32]

F and Differences of averages F= 8.881 (p = 0.004) 0.6952 F= 3.542 (p = 0.064) 0.3824 F and Differences of averages F= 2.222 (p = 0.140) 0.2196 F= 1.021 (p = 0.316) 0.1465

For this dimension, the trend is identical to the symbolic dimension, that is to say: 

For the two groups of respondents, the perception of Renault is more positive than the perception of Nissan, before and after knowledge of the partnership's existence. However, once they have this knowledge, even if the average for Renault remains more favourable, the average concerning the perception of Nissan shows a greater

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increase and gets closer to the perception of Renault. The F (Fisher) shows a nonsignificant difference between the brand perceptions. This trend is all the more important for respondents who did not know about the partnership.

To sum up, for the symbolic and utilitarian dimensions, we can say that before the knowledge of a partnership's existence, there is a greater difference between the perceptions of the two partners than afterwards. Knowledge of the alliance causes the perceptions of the partner brands to get closer. It is the brand the less favourably evaluated, that is to say Nissan, which gets closer to Renault. These results are all the more true for people who did not know the partnership existed. There is a small change concerning people who already knew the partnership existed, probably because some respondents were not completely sure of the alliance. As a result, the video clip confirms their opinions and leads them to new perceptions. Hence, we can conclude that hypothesis 1 cannot be rejected: H1: When consumers are informed of the partnership's existence, their brand images are less differentiated. In the second hypothesis, the consequences of these changes in perception are presented. This concerns the intention of purchasing the brand products.

Hypothesis 2 As the images of the two brands change, the intention of purchasing could also change negatively because with the knowledge of the partnership's existence, there is a risk that the brands' images become confused, and so weaker. Consequently, the intention to buy the brands could decrease for at least one brand. To test this hypothesis, we used the same statistical tool used in Tables 2 and 3. The results are presented in the table below:

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Table 4. Averages and confidence intervals – Intention to buy- before and after the knowledge of brand partnership existence

Intention to buy the brands N = 82 Before knowledge of partnership After knowledge of partnership Gap between intention to buy for each brand

Renault Averages Confidence intervals

Nissan Averages Confidence intervals

F = 4.329 (p = 0.041) 3.0610 [2.625- 3.497] 3.4390 [3.006- 3.872] 0.378

F = 4.481 (p = 0.037) 2.9390 [2.466 – 3.412] 3.3415 [2.874 – 3.809] 0.4025

In Table 4, we present only the results which concern people who did not know of the partnership. The result concerning people who knew of the partnership's existence is obvious: there is no significant difference between the intention to buy the brand Renault [F(1; 67) = 1.223; p= 0.273] and Nissan [F(1; 67) = 2.525, p = 0.117] before and after the video clip. Judging by the results, and with regard to those respondents who did not know about the partnership, the intention to buy increases for the two brands after knowledge of the partnership's existence. For the brand Renault there is a positive difference of 0.378, and for

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the brand Nissan a positive difference of 0.4025. These results do not validate our last hypothesis: H2 is rejected because when consumers are informed about the brand partnership's existence, their intention to buy the brands increases. This result can be explained by the positive brand perceptions. As the comparison is positive, that is to say it benefits the partner brands and more favourably Nissan, the intention to buy the brands is affected positively. It is possible that a negative comparison would provoke a negative intention of purchase for at least one brand. The knowledge of partnership existence affects the image of the two partners and also the intention of purchasing. But there are some differences in the degree of change for each brand. In the last section, we will discuss theses differences.

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2.3. Discussion of Results We underline one main result: why is there a difference in the change of image of the partners when consumers are informed of a partnership? It seems plausible that consumers who are informed of the existence of a partnership between two brands should have different perceptions for the purpose of evaluating them. These different perceptions create an asymmetrical effect: one brand would have a more favourable image than the other. Consumers would make an amalgam of their previous perceptions to form their new image. In the case of Renault and Nissan, the results are different: two dimensions of image change more favourably for Nissan, whereas they tend to be stable for Renault. This means that there is a levelling up of the perceptions of partner brands and not an average of brand perceptions. The image of Renault improves the image of its partner, as it is more highly evaluated by respondents before knowing about the partnership. This result can be explained by the fact that the respondents lived in France, the home country of Renault. Moreover, Nissan is a foreign - Japanese - firm with a lower profile than Renault, and generally consumers tend to favour national brands (Lillis, Narayana 1974; Shimp, Sharma 1987; Han 1988) over foreign brands. We note that for the brands two dimensions are significant, the symbolic and utilitarian ones. It is important to note that the items which compose these dimensions are abstract. The symbolic dimension is composed of two items: ― luxury features‖and ― prestige‖, while the utilitarian dimension is composed of three items: ―m ade to last‖, ― reliability‖ and ‖safe in an accident‖. These items do not concern the product of the brand directly, but they appear as advantages one obtains from using the product. For this reason, these are likely to change. Indeed, it is easier for respondents to conceive an alliance at an abstract level than at a concrete level, particularly when they do not have in mind a product which comes from the alliance. For example, if a brand makes an alliance, it is easier for a consumer to imagine that this brand will obtain an abstract gain such as a better reputation, than a concrete gain, for example a more beautiful design. In the last case, this would suppose that the consumer creates a fictitious product in his mind from two different brands, which is difficult and unlikely. According to the results, the knowledge of the partnership favours the two partners. This information can be used for firms to adopt appropriate marketing strategies. Concerning the

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policy of positioning, partner brands can adopt an identical positioning for their common products and their own products, as their images improve and tend to be identical when consumers become aware of the partnership's existence. Then, to accentuate this strategy, firms can put out advertisements which insist on two dimensions of the brand: the symbolic and the utilitarian dimensions, as consumers have an improved image of these abstract attributes.

CONCLUSION In this study we have analysed the effect of globalisation on the images of partner brands by answering several questions: Does the knowledge of a global strategy by the firms, that is to say the knowledge of their partnership, affect their images? If this is the case, how are the images affected? And what are the consequences for the intention to buy? From the results, we have showed that: 

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

Knowledge of the partnership's existence brings together and improves the image of the partner brands in two dimensions: symbolic and utilitarian; Knowledge of the partnership's existence does not have a negative impact on the intention to buy - it improves.

These results are very interesting: they can be used by firms in partnerships to propose common appropriate marketing strategies, as they can publicly show their alliance without harming their image. Although the findings presented above are significant, some limitations exist: in this study, the results came from an experiment using a video clip showing the partnership: it is possible that the product presented in the film, that is to say the ― Nissan Micra‖, was not sufficient to characterize the partnership. Therefore, an experiment with a longer film presenting several products of the alliance and also more time to think for the consumers would make it possible to overcome this drawback. Moreover, a mode of communication other than a film would be appropriate to confirm the results. In other studies, it would be interesting to know what the situation would be in other types of alliance. Here, we analysed the partnership between a national brand and a foreign brand. It is important to know what the results would be for a partnership between two national brands or between two foreign brands. Finally, the results concerning the changes of perception open out onto other research tracks. Are there some reasons which can explain the change of image or which can moderate the effect of knowledge of a partnership's existence on the consumers‘ perceptions? Some investigations in this field, using motivational variables like the involvement (Zaichkowsky 1985; Kapferer, Laurent 1985) or other affective variables, could provide interesting results.

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APPENDIX 1 Table A1. Brand image measurement in the car sector– (Hsieh 2002) Dimensions

Items - Exciting - Fun to drive - Good acceleration - Styling - Sporty - Luxury features - Prestige - Made to last - Reliability - Safe in accident - Good fuel economy - Good dealer service

Sensory

Symbolic Utilitarian

Economic

APPENDIX 2 Table A2. Dimensions of brand image from exploratory and confirmatory analyses Dimensions

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Sensory:

Symbolic : Utilitarian:

Items Exciting Good acceleration Styling Sportive Luxury features Prestige Made to last Reliability Safe in accident

Lambda 0.74 0.79 0.71 0.73 0.73 0.77 0.80 0.83 0.77

t- value 34.19 35.48 33.19 33.73 23.22 23.50 31.39 32.40 31.07

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Sinove Marde, Melisa Caid and Romain Cally

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Simonin, B. L., and Ruth, J. A. (1998). Is a company known by the company it keeps? Assessing the spillover effects of brand alliances on consumer brand attitudes. Journal of marketing Research, 35, February, 30-42. Turnbull, P. W., Leek, S., and Grace, Y. (2000). Customer Confusion: The Mobile Phone Market. Journal of Marketing Management, 16 (January-April), 143-163. Urban, G. L., and Hauser, J. R. (1993). Design and Marketing of new Products, Second Edition (pp. 213-216). Englewood Cliffs, NJ: Prentice Hall. Walsh, G. (1999). German Consumer Decision-Making Styles with an Emphasis on Consumer Confusion. Manchester, UMIST: Precinet Library, Theses collection M134. Zaichkowsky, J. L. (1985). Measuring the Implication Construct, Journal of Consumer Research, December, 12, 341-352.

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Chapter 9

CONSUMER SEGMENTATION FOR GLOBALISING FIRMS Jacques-Marie Aurifeille1, Christopher John Medlin2 and Jaime Gil-Lafuente3 1

2

Université de La Réunion, France University of South Australia, Australia 3 University of Barcelona, Spain

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ABSTRACT Consumer segmentation aims at identifying groups of consumers for which it is profitable to design a specific strategy. The cost and the strategic purpose of a segmentation implies to identify lasting segments. This robustness is particularly difficult to achieve nowadays, when billions of consumers from emerging economies are exposed to new consumption and lifestyle models. Consumers' values are often considered for segmentation, because of their personal meaning and of their general concern, However, values have generally been found to be poor predictors of consumers' choices. A new approach of human values is proposed to improve their predictivity without increasing the volume of collected data. It relies on the concept of Overall Value Concern (OVC), that is on the hypothesis that, over time, some people are more concerned with their values than other people. The hypothesis is tested empirically, using both the terminal and instrumental values of Rokeach's Value Survey (Rokeach, 1973).

INTRODUCTION Consumer segmentation is a fundamental operation of managers preparing and conducting marketing strategy. Segmentation aims at identifying groups of consumers that are profitable with the intention of designing specific marketing strategies. As firm resources are finite, only a limited number of marketing strategies are managed simultaneously. For global firms, this suggests segmenting their customers into groups whose characteristics transcend

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nationalities. In addition, the cost and the strategic purpose of a segmentation requires that firms identify stable segments. This robustness is particularly difficult to achieve in a globalising world, with billions of consumers from emerging economies continuously exposed to new consumption and lifestyle models (Aurifeille, Quester, Lockshin and Spawton, 2002). Among the possible segmentation variables, personal values have many assets. Values are "desired states of existence that a person tries to achieve" (McShane, 2004; Rokeach, 1973 p. 5, Khale 1983) like security, comfort, achievement (cf. appendix 1). Values crystallise at a young age because of education and personal experience. As a result, values are enduring and drive peoples' behaviours. For example, a consumer whose main value is "accomplishment" would look for products whose attributes he perceives to enable selfexpression. Because of their personal meaning and social connotations, values can also be used to position firm brands by attributing values to the firm and product that mimic the values of the targeted segment. It seems a high degree of similarity between a consumer's values and his attribution of values to the brand should result in a stronger association, with greater sensitivity to the advertisements and more proneness to buy the brand. Unfortunately, personal values have generally been found to be poor predictors of consumers' choices (Henry 1976 ; Kahle, Beatty, and Homer 1986; Mc Carty and Shrum 2000). In this paper a proposition is made and tested to improve the predictivity of the personal values. It is based on the existence of two types of values : the terminal and the instrumental (Rokeach, 1973). Although the latter are generally discarded in the segmentation studies, they may be more stable and better predictors of consumer behaviours than the terminal values. Thus, instrumental values could be a useful segmentation variable, in particular for globalising firms. The remainder of the paper is structured in the following manner. First, a range of issues explaining the inability of values to explain product purchase is discussed. Next, reasons are given why instrumental values should be considered for predicting consumer behaviours and defining global segments. Third, the hypotheses and methodology for their empirical test are presented. Fourth, the results of the study are analysed. Finally, future research and management implications are discussed.

1. ISSUES IN VALUE SEGMENTATION Values have a number of practical advantages over other concepts that explain fundamental dispositions and consumer choices (Dichter, 1960). First, values are universal and their number is limited (ranging from 9 according to Khale, 1983, to 36 according to Rokeach, 1973), meaning they apply across borders and cultures (Schwartz and Bilsky, 1990). Second, values are socially admissible and, thus, avowable. This means people are aware of their values and partially able to identifying a value hierarchy or at least rate them in questionnaires. Third, values are suitable for creating "brand personality", that is to position the brands so that they are differentiated and draw lasting sympathy from the consumers sharing the same psychological traits. Fourth, values names belong to everyday vocabulary, thus facilitating their operationalisation in advertising and communication strategies.

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Unfortunately, values have generally been found to be poor predictors of the chosen brands or products (Henry 1976 ; Kahle, Beatty, and Homer 1986; Mc Carty and Shrum 2000). Several reasons have been invoked to justify this weakness. 



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

Values may only operate when important decisions are taken (Rokeach 1973; Gutman 1990; Celsi, Olson, and Walker 1990; Peter and Olson 1993; Claeys, Swinnen, and Vanden 1995). The connection between values and choice depends on the consumer‘s perception of the brand or product (Homer and Khale 1988). This is because many contingent factors play a role in the linkage between value and product decision. For example, advertising, consumer expertise, product availability and price sensitivity play a part in the consumer decision process. The measurement of values may be inappropriate, with researchers arguing for both ranking or rating when quantifying the importance of values.

Theoretically, the function of personal values is to allow consistent decision making (Rokeach, 1973). As it is easier when the priorities are clear, this means each consumer‘s existing "value system" is hierarchical, or ranked, so that values can drive efficiently the behaviour. As an example of the need for a hierarchical value system, one can mention the intense value conflicts which break out when a person's value hierarchy is not adapted to extreme or highly unusual situations (Rokeach, 1973). However, some researchers have suggested that ranking many values is cumbersome and could generate bias in peoples' answers. As a solution, they suggest rating each value on an independent importance scale. This solution has also a statistical advantage in providing a parametric quantification, rather than an ordinal, and in avoiding the multi-colinearity problems associated with ranking (Rankin and Grube, 1980; Beatty, Khale, Homer and Misra, 1985; Alwin and Krosnick, 1985; McCarthy and Shrum, 2000). From a more psychological point of view, the rating of values allows respondents to differ in terms of their summed rates or their Overall Value Concern (OVC). Respondents whose values play an important role in their lives would tend to give them higher rates, thus generate a larger sum of the rates. These consumers will differ from those who are less concerned with their values and who would give lower rates to them. This difference has clear implications in marketing; for example, consumer with a lower OVC would pay less attention to the advertisements of brands whose image is positioned in terms of values. In this paper, a complementary explanation of values' lack of predictivity is proposed. It emphasizes the specificity of a group of values, generally discarded in the empirical segmentation studies: the instrumental values (Rokeach, 1973).

2. INSTRUMENTAL VALUES In his seminal work on personal values, Rokeach (1973) identified two types of values : the terminal and the instrumental. While terminal values are the goals that guide a consumer's life (eg. freedom, comfort, friendship, security …), instrumental values are the fundamental

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"modes of conduct" that the consumer will preferably rely on (eg. intelligence, courage, politeness, obedience…). Rokeach (1973) has identified 18 terminal values and 18 instrumental values (see appendix 1). Marketers often consider that instrumental values are just means to reach terminal values (Reynolds and Gutman, 1988). Therefore, instrumental values are deemed less stable and predictive than the more fundamental terminal values. Hence, in order to limit the respondents' task, marketers generally restrict their studies to the terminal values (Khale, 1983). However, several reasons explain why instrumental values could be better predictors than the terminal ones: 



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



The existence of a dependence between the terminal and the instrumental values is not supported in Rokeach's conceptualisation of values (Rokeach's, 1973). On the contrary, theoretical and empirical works suggest that that the two value types are functionally independent. According to Howard (1977) instrumental values should drive the choice of a brand while terminal values predict the choice of the product category. The functional difference of the two types of values was also empirically demonstrated in a paper specifically focusing on this issue (Aurifeille, 1992b). Therefore, consumers may react independently to the advertising of terminal and instrumental values. Instrumental values are constantly called upon. For example, someone whose primary instrumental value is "being logical" is likely to use it in a large number of decisions. Therefore, the explanation that terminal values are poor predictors because they are activated only in case of an important decision (section 1) is less justified for the instrumental values. Instrumental values do not concern ideal states of being. Therefore, it is easier to place these values in a hierarchy. Actually, the case is often met of consumers who respond with higher rankings for all the terminal values because all are desirable (peace, comfort, achievement, security, friendship…). Conversely, individuals tend to specialize on a limited number of instrumental values to solve the multiple problems of everyday life. Therefore, consumers should discriminate better among the instrumental values, thus providing larger information for segmentation. The few empirical studies where the instrumental values are considered indicate that these values are more stable than the terminal ones. For instance, the shift from communism to capitalism appears to have modified more deeply the consumers' hierarchy of terminal values than their hierarchy of instrumental values (Aurifeille, 1993a and 1993b).

To sum up, instrumental values should be a useful segmentation variable because of the more detailed, predictive and stable information that they convey. In the next section, the corresponding hypotheses are formalized and the methodology to test them is presented.

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3. HYPOTHESES

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Three hypotheses proceed directly from the above discussion: H1: Consumers discriminate more their instrumental values than their terminal values. If it is so, the variance of the rates that each consumer gives to the instrumental values will be greater than the variance of the rates he gives to the terminal values. Therefore, instrumental values would provide more information on the consumers' choices. H1 can be tested by comparing the means of the variance of the terminal and the instrumental rates. H2: The predictivity of the instrumental values is greater than the terminal values'. In the perspective of this paper, the variable to predict should be a chosen brand or product category. The brand choice would give a broader view on the influence of values, because it usually happens in the latest phase of the decision process, after the choice of a product category. Howard's theoretical approach (section2) also invites testing the prediction of brands. Moreover, from a strategic point of view, brands are more concerned than product categories with showing a personality that matches consumers' personal values (cf. section 1). However, the analysis of a specific set of competing brands is still a clear limitation to the generality of the empirical results. To minimize this limitation, the study could focus on global and oligopolistic brands, for example: the leading brands on the car market. H3: The consumers' instrumental value system is more stable than their terminal value system. In addition to predictivity, this stability is required to assess the strategic potential of instrumental values. The test of this hypothesis requires at least two data collections from the same respondents. The stability of a value system can then be computed by considering how the successive rates are correlated, with higher correlation indicating stronger stability of the value system.

4. EMPIRICAL STUDY The predicted variable is the brand of the car that respondents would buy at the moment of the interview. The choice was limited to the 6 leading brands in France. A convenience sample of 120 French car owners was selected, respecting the quotas by age and gender for this population. The personal importance of Rokeach's 18 terminal values and 18 instrumental values were quantified on a 7 point bipolar semantic scale, ranging from 1 ("Not important at all for me") to 7 ("Very important for me"). Two data collections were made with the same respondents, separated by two weeks. Of the 120 initial respondents, only 106 could participate in the second data collection. All respondents were interviewed at the same two moments. Although, the interval of two weeks is short, value changes have been often evidenced in shorter periods of time (Rokeach 1973) and the objective is to compare the stability of the value systems whatever the time period.

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Jacques-Marie Aurifeille, Christopher John Medlin and Jaime Gil-Lafuente Table 1. Frequency of the preferred brand

Brand Frequency Percent

1 16 13.3

2 23 19.2

3 27 22.5

4 29 24.2

5 25 20.8

Total 120 100

Hypothesis 1 The data comprises 226 observations: 120 from the first collection and 106 from the second collection. From the results of the test in table 2, it clearly appears that the average variance of consumer's rates given to the instrumental values (2.4258) is higher than that of the terminal values (1.5016). The mean difference is 1.47. With 225 degrees of freedom, the t-value is 20.22 corresponding to a 0.000 probability of no difference between the means, at the 95% confidence interval. Table 2. comparison of the average variance of consumer rates Values Terminal Instrumental

Mean 1.4722 2.3736

Standard deviation 1.095 1.581

Standard deviation of the mean .073 .105

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Therefore, H1 is supported: consumers discriminate more among the instrumental values than among the terminal values. Thus, instrumental values provide a more informative view on consumer's value choices.

Hypothesis 2 The prediction of the brands by the terminal and instrumental values is tested with an ANOVA including all the collected data. According to the usual practice and the operational aim of the research, values are translated into scores on the main dimensions of a principal component analysis. For the same reason, theses scores have been rotated using a varimax algorithm. Both the unrotated and rotated scores have been considered but no difference resulted in the predictivity tests. As for H1, the data from the two collections was analysed together. Two criteria were used to determine the data dimensionality: Cattell's scree graph and the chi-square test of no difference between the observed and estimated correlation matrices. The regressor was the maximum likelihood. Although the probability of no difference is low, the ratio of the chi-square on the number of degrees of freedom is much below 3, thus indicating an acceptable fit and confirming the dimensionality suggested by Cattell's criterion.

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Table 3. principal component analysis of the terminal and instrumental values - Value - KMO - Bartlett's test Terminal 0.81549 0.00000 Instrumental 0.84086 0.00000

Dimensions

1 2 3 4 (1st discarded) 1 2 3 4 (1st discarded)

Percent. of variance 28.0 10.6 8.6 5.9 30.0 8.7 7.7 7.1

Chi-square

Degrees of freedom

Probability

206.9811

102

0.000

228.338

102

0.000

A multivariate analysis of the variance of the value scores indicates how predictive the terminal and the instrumental values are: Table 4. predictivity of the values Value

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Terminal Instrumental

Wilk's lambda 0.93624 0.88770

F 1.20134 2.18421

Degrees of Freedom 12 12

Probability 0.278 0.011

Number of significant factors 0 2

This result clearly shows that instrumental values can discriminate the chosen brand. Two of the three value factors are discriminant, with probabilities 0.014 (1st factor) and 0.023 (third factor). Conversely, the terminal values do not predict the chosen brand. No factor is significantly associated with it. Hypotheses 2 is therefore supported by the empirical test.

Hypotheses 3 Among the 120 initial respondents, only 106 participated in the two data collection. Considering the first and second data collection, the correlation coefficient of the rates given to the terminal values was 0.2326 with a probability of 0.0000. Similarly, the correlation coefficient of the rates given to the instrumental values was 0.2654 with a probability of .0000. These results support the hypothesis H3 of a greater stability of the instrumental values. However, the stability levels are surprisingly low, with only 5 % (the R2) of variance shared between the rates given to the successive data collections. This result does not plead for using the values - either terminal or instrumental - to design a lasting segmentation strategy. It is plausible, however, that the less important values are responsible for this lack of stability. An appropriate weighing should then be found to account for the importance of values in the measure of stability.

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CONCLUSION This study has some limitations. It is based on a convenience sample and on a specific domain: the car brands. Although this domain is relevant for globalisation issues, it has two main defects:  

the importance of the product, that may increase the role of consumers' values, the necessity to use a buying intention rather than an actual buying, in order to study values longitudinally.

The study, therefore, should be replicated with more ordinary products and other samples. However, rather than testing the absolute characteristics of the instrumental values, the paper aimed at comparing their role with the terminal values'. The theoretical discussion indicates that the instrumental values could play a greater role in the understanding and modelling of consumers' behaviour. The empirical tests have confirmed this view: the instrumental values are better predictors of the chosen brands and they provide a more discriminate information on the consumers. Thus, instrumental values would have the general advantages of values without the limitations of the terminal ones. In particular, they could be conveniently used to create brand personalities that match the consumers' ones. Nevertheless, the empirical test reflected a low stability of the instrumental values, only slightly superior to the terminal values'. More research is needed on the measurement of instrumental values' stability and caution is still advised when using them to design a global segmentation.

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REFERENCES Alwin, D. .F. and Krosnick, J. A. (1985). The Measurement of Values in Surveys: a Comparison of Ratings and Rankings. Public Opinion Quaterly, 49 (4, winter), 535-52. Aurifeille, J. M. (2004). Uncovering Consumers' Choice Processes, A Means-end Process Clustering Method. European Journal of Economics and Social Systems, 18 (4), 125-145. Aurifeille, J. M. (1993). L'évolution des valeurs et ses implications en marketing : une enquête en Russie. Recherche et Applications en Marketing, 8 (4), 57-74. Aurifeille, J. M. (1992a). Value Changes and their Marketing Implications : a Russian Survey. European Advances in Consumer Research, 249- 261. Aurifeille, J. M. (1992b). Contribution of Instrumental Values to Advertising Conceptualization. Proceedings of the Workshop on Values and Lifestyles Research, European Institute for Advanced Studies in Marketing (EIASM), Bruxelles, 1992. Aurifeille, J. M., Quester P.G., Lockshin L., and Spawton T. (2002). Global vs international involvement-based segmentation. International Marketing Review, 19 (4), 369-386. Aurifeille, J. M., and Valette-Florence, P. (1995). Determination of the dominant chains. International Journal of Research in Marketing, 267-278. Beatty, S. E., Khale, L. R., Homer P. E., and Misra S. (1985), Alternative Measurement Approaches to Consumer Values. Psychology and Marketing, 181-200. Dichter, E. (1959). The strategy of Desire. New York: Doubleday and Co.

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Henry, W. A. (1976). Cultural Values Do Correlate With Consumer Behavior. Journal of Marketing Research, 8 (13), 121-7. Homer, P. M., and Kahle L. R. (1988). A Structural Equation Test of the Value-AttitudeBehavior Hierarchy. Journal of personality and social psychology, 54 (4), 638-46. Howard, J. A. (1977). Consumer Behavior: Application of Theory. New York: McGraw-Hill. Khale, L. R. (1983). Social Values and Social Change. New York: Praeger. Kahle, L. .R., Beatty, S. E., and Homer, P. (1986). Alternative Measurement Approaches to Consumer Values : The List of Values (LOV) and Values and Life Style (VALS). Journal of Consumer Research, 13 (December), 405-9. Mc Carty, J. A., and Shrum, L. J. (2000). The Measurement of Personal Values in Survey Research : A test of Alternative Rating Procedures. Public Opinion Quaterly, 64, 271-98. Van McShane, S. (2004). Organisational Behaviour (4th edition). McGraw-Hill. Rankin, W. L., and Grube, J. W. (1980). A Comparaison of Ranking and Rating Procedures for Value Measurement. European Journal of Social Psychology, 10, 233-46. Rokeach, M. J. (1973). The nature of human values. New York: Free Press. Reynolds, T. J., and Gutman, J. (1988). Laddering Theory, Method Analysis and Interpretation. Journal of Advertising Research, 28, 11-31. Schwartz, S. H., and Bilsky, W. (1990). Toward a theory of the universal content and structure of values: Extensions and cross-cultural replications. Journal of Personality and Social Psychology, 58, 878-891. Villeneuve-Anaudin, V., Manin, S. and Ramsamy, A. (2005). Managing the dream reality dilemma in advertising. Australian and New Zealand Marketing Academy, Broadening the boundaries, December, (7-12) Perth, Australie, Sharon Purchase Ed. ISBN : 0-64645502-8.

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Chapter 10

ECONOMIC GLOBALISATION AND FOREIGN DIRECT INVESTMENT IN THE SOUTH-WEST INDIAN OCEAN: ARE THE USUAL DETERMINANTS STILL RELEVANT? Isabelle Soubaya CERESUR, Faculty of Law and Economics University of Reunion, 15, Av. René Cassin, B.P. 7151 97715 Saint Denis Messag Cedex 9, France

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ABSTRACT Globalisation is a great challenge for the take-off of less developed nations. Driven by three main factors, namely foreign direct investment, trade in goods and portfolio investments, its description and its analysis have become an important issue in the understanding of international economic relationships. With regard to foreign direct investment, the disparities within regions or organisations put in place to favour such flows are striking. We chose in this article to analyse foreign direct investment in the South-West Indian Ocean region and more precisely in any of the countries which are members of any of the three following organisations: the Indian Ocean Commission (IOC), the Common Market for Eastern and Southern Africa (COMESA), and the Southern African Development Community (SADC). We study whether the usual determinants (such as GDP or GDP per capita) are still relevant to explain investment flows for such countries. It appears that determinants other than market potential are significant in these countries.

1. INTRODUCTION Most economists consider the globalisation phenomenon as one of the main issues of the last thirty years. But it is not new, as since the end of the nineteenth century, great importance has been given to economic integration. Driven by three factors, namely foreign direct investment (FDI hereon), trade in goods and portfolio investments, the description and

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understanding of globalisation have become important issues in the analysis of international economic relationships, especially for less developed nations. Moreover, investments by OECD firms have greatly increased in recent years. For instance, the number of multinational firms in the world has risen from 7,000 at the end of the sixties to about 62,000 in 2003, corporations which controlled around 927,000 foreign affiliates. Further, while in 2003 there were 14,192 parent firms and 580,638 foreign affiliates based in developing countries, developed countries had a completely different trend, as they hosted 45,077 parent companies and 102,560 foreign affiliates1. Africa has been responsible for only a small part of this expansion, as it accounts for 8% of the foreign corporations settled in developing countries (the corresponding figure is 1.9% worldwide), and for only 1% of foreign affiliates (compared to 0.7% worldwide). See Table 1. Table 1. Number of parent firms and foreign affiliates by region in 2003

World Developed countries Developing countries - Africa

Number of parent firms (PF) (a)

Number of foreign affiliates (b)

61 582

926948

45 077

102 560

73.2%

11.1%

14 192

580 638

23.0%

62.6%

1 163

6 849

(a) compared to (b) compared to the PF worldwide affiliates worldwide

2

1.9% (8.2%)3

0.7% (1.2%)3

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Source: UNCTAD, data computed by the author.

Thus, it appears that the huge increase in FDI, as a main vector, has favoured globalisation in developed countries but to a lesser extent in the developing countries4. Concerning the South-West Indian Ocean (SWIO hereon), although it is open to investments, the countries there have attracted relatively little. What can explain this low attractiveness? The question here is to know if globalisation is a linear process in this region. In other words, -

Do disparities exist between countries of the South-West Indian Ocean, possibly depending, amongst other things, on their inclusion in regional agreements? Are the usual determinants used in developed countries (such as GDP or GDP per capita) relevant in explaining investments in the South-West Indian Ocean region?5

1

It is not very surprising that the tendency is the opposite, as developing countries are known to attract resourceseeking investments. Indeed, they offer low labour cost. 2 These figures can be read as: 1.9% (resp. 0.7%) of the total parent firms (resp.affiliates) of the world are located in Africa (8% and 1% of developing countries‘ ones). 3 The figures in brackets correspond to the share compared to developing countries as a whole. 4 However a striking counter-example is China, which attracted $350 billion of investment in 2002; but China is not easily considered as simply a "country‖. 5 See Soubaya (2002) for a more detailed survey of FDI determinants.

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Two factors make this subject worthy of study: Firstly, most of the countries in the SWIO belong to the group of less developed countries. A lot of them have liberalized their FDI policies and benefit from bilateral and regional agreements that emphasize investment promotion. It would be interesting to see how these countries have reacted to this process of economic integration. The number of such agreements has been growing steadily and exceeded 212 in 2005. Among these, at least 70 have been signed between developing countries (UNCTAD, 2005). Secondly, the three biggest organisations in this area, the IOC, COMESA and SADC, together represented 455 million people in 2002. This non-negligible area contains as many people as the European countries, which nevertheless receive greater interest. These two factors mean that investments, as capital inflows, can increase revenue distribution (by the increase in production) and so contribute to economic growth in these countries. Indeed, in developing countries, a growing importance is being given to FDI because it is considered as the most stable component of capital flows, and can be a vehicle for technological progress thanks to the use of innovative production techniques. That is why we chose, in this paper, to improve our understanding of investment flows in the South-West Indian Ocean. Our discussion will be split into 2 parts. The first part will be devoted to a detailed analysis of investment flows in this region. This description starts from a general point of view, the situation of the South-West Indian Ocean region compared to other regions, then pays specific attention to the countries of the Indian Ocean Commission (IOC hereon) and finishes with a comparison of the IOC and two other preferential areas, namely the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC). In the last part of our paper, we will verify whether the investments in this region are explained by the same determinants as in developed countries.

2. GLOBALISATION IN THE SOUTH-WEST INDIAN OCEAN 2.1. General Point of View A first remark relates to the fact that the globalisation process is not uniform with regard to a country‘s position in terms of FDI. This heterogeneity can be observed firstly between developed and developing countries, as inward and outward investments (and trade flows) are higher in high-income countries than in developing countries. If we subdivide these two groups, the impact of globalisation is also different. For instance, within developing countries, the benefits have varied greatly. Latin America has attracted more investment than African countries. According to UNCTAD (2003), Africa received less than 7% of the FDI from LDC in 2002, which represents 1.7% of world FDI for the same year6. For Latin America, the corresponding shares are respectively 34.5% and 8.6%. 6

In 2004, these shares increased respectively to around 9% and 3%.

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Our region of interest in this paper, the South-West Indian Ocean, has benefited less from globalisation; even if there have been some positive effects, they varied between countries. Indeed, one particular aspect of this area is their relatively low attractiveness for FDI. Table 2 below illustrates this result. Data show that in 20007, developed countries attracted 82.3% of total world FDI, whereas the share of developing countries was 15.9% of the total flow. This low attractiveness is also observed for Sub-Saharan8 countries (Mauritius and Madagascar are part of this group according to the World Bank), which received 0.3% of total inward flows. If we focus now on the IOC share, this level falls further to 0.03%. Table 2. FDI inflows, by host region in 2000 (millions of dollars) World Developed Countries Western Europe European Union Others North America Others Developing Countries Eastern and Central Europe9 Sub-Saharan Africa8 IOC

FDI inflows 1 491 934 1 227 476 832 067 808 519 23 549 367 529 27 880 237 894 26 563 3836.38 404

FDI share (in %) 82.3% 55.8% 54.2% 1.6% 24.6% 1.9% 15.9% 1.8% 0.3% 0.03%

Source: UNCTAD, data computed by the author.

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Let us see how this organisation behaves with respect to FDI flows. After that, we will move on to a comparison with two other preferential areas, namely the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC).

2.2. The Positions of IOC Countries In 2000, the IOC members (Reunion excluded10) attracted only 0.03% of total FDI inflows11. This rate, computed from UNCTAD data, reminds us that even if, in absolute value, these countries increased their share in two decades from $10 million in 1980 to around $155 million in 2001, it corresponds to a low global interest from investors, at only two 7

We chose this rather distant year so as to compare with GDP information afterwards, for which we had information until this year. 8 According to the World Bank, Sub-Saharan Africa includes 32 countries: Angola, Benin, Burkina Faso, Burundi, Cameroon, the Central African Republic, Chad, Congo, Congo, the Democratic Republic of Ivory Coast, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique, Niger, Nigeria, Rwanda, Senegal, Sierra Leone, South Africa, Togo, Uganda, Zambia, and Zimbabwe. 9 Total FDI for Eastern and Central Europe and SSA does not equal the total of flows for developing countries. 10 Since the last modification of French national accounting in 1999, Reunion Island, as a French overseas department, is included in the data for France, whereas it was considered separately before that. So it is impossible now to quantify Reunion‘s share in terms of FDI. 11 This share fell to 0.002% in 2001 with an FDI inflow of $155 million. However, in 2000, total inward FDI in the IOC was $404 million because of a large FDI operation in Mauritius of $277 million, when France Telecom bought 40% of Mauritius Telecom.

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hundredths of a point of world capital flows. Within the IOC, disparities exist. Indeed, if we study the position of each member, they differ considerably. Globally, the inward and outward FDI flows are different in value because the IOC members received on average $33 million over the last ten years, whereas they invested only $6 million. See Table 3. Firstly, the flows vary considerably over this period; they are relatively low until the end of the eighties and increase from then on. Secondly, we can see that while Mauritius, Madagascar and Seychelles benefited overall from investments, Comoros experienced low flows. However, we have to notice that all net flows were negative indicating that these countries were mainly recipients. We can wonder whether this situation observed for IOC members is unusual. A way to answer that question is to compare its situation with that in other organisations. Several preferential areas are present in the same geographical area. Table 3. Investment flows for IOC members (millions of dollars) Inward Outward Inward Outward Inward Outward Inward Outward

Comoros Madagascar Mauritius Seychelles

1980 0 -1 1 10 3.81

1985 0 8 0.23 12 10.56

1990 0 1.10 22 1.35 41 0.54 20 1.13

1995 1 10 0.80 19 3.62 40 16

2000 1 70 1 27711 12.69 56 7.33

2001 1 108 068 12 2.33 34 11

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Source: UNCTAD, data computed by the author.

Graphical representation of the inflows and outflows from 1980 to 2001 gives a better appreciation of their evolution. From Figure 1 and Figure 2 below, we can notice two points. Com ores 100

Madagascar Maurice

80

Seychelles

60 40 20 0 1980

1985

1990

1995

2000

For simplicity, we have omitted the FDI inflow value for Mauritius for 2000, which was very high at $277 million. Source: UNCTAD, data computed by the author. Figure 1. FDI inflows in IOC countries from 1980 to 2001 (millions of dollars).

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We chose to focus on the COMESA and the SADC, these organisations being relatively close to the IOC. These two preferential areas were put in place in respectively 1994 and 1992 to achieve economic prosperity thanks to regional integration with a common market. We wonder whether the uneven impact of globalisation experienced by IOC members is unique or rather a common phenomenon for countries engaged in regional agreements in SubSaharan Africa.

40 Madagascar Maurice 30

Seychelles

20

10

0 1980

1985

1990

1995

2000

-10

Comoros was omitted as they reported $1.1million and $0.49 million respectively in 1990 and 1991. Source: UNCTAD, data computed by the author.

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Figure 2. FDI outflows in IOC countries from 1980 to 2001 (millions of dollars).

2.3. Comparison with the COMESA and SADC If we observe the investment flows and the forces acting between the different signatories to the two regional agreements, disparities also exist. Table 4 below show the top ten host countries which are members of at least one of the three organisations. We computed the average amount of investment flow for the period 1995 to 2000. It appears that on average the SADC and COMESA countries have much greater total investment flows than the IOC ones (58% and 44% compared to 3% for the IOC). We have to remark that nevertheless, in terms of total worldwide FDI flows, these shares fall to 0.2% for the SADC, 0.26% for the COMESA, and 0.03% for the IOC. If we examine individual attractiveness, South Africa heads the top ten host countries with on average, over the period [1995-2000], 30% of the FDI flows. It is the mining sector that is the most competitive. With the biggest reserves in the world, South Africa is a significant mining economy on the international scene. Furthermore, the South African mining sector plays an important role nationally in terms of employment and regional and rural development.

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Table 4. The top ten host countries12 for investment flows in 2000 Country or organisation Average share [95-00] Average share compared to the world [95-00] SADC 57.88% 0.2% COMESA 43.87% 0.26% IOC 3% 0.03% Rank Country Share 1 South Africa 30.23% 2 Egypt 15.73% 3 Angola 8.86% 4 Lesotho 7.46% 5 Sudan 6.65% 6 Uganda 5.86% 7 Mozambique 5.63% 8 Tanzania 5.45% 9 Zambia 4.73% 10 Zimbabwe 4.40% 14 Mauritius 2.12% Source: UNCTAD, data computed by the author.

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Table 5. The top ten host countries13 for investment flows in 2000 when South Africa, Egypt and Angola are excluded Rank 1 2 3 4 5 6 7 8 9 10

Country Sudan Mauritius Uganda United Republic of Tanzania Namibia Mozambique Ethiopia Kenya Zambia Lesotho

Share 17.61% 12.44% 11.41% 8.67% 6.87% 6.24% 6.06% 5.71% 5.48% 5.35%

Source: UNCTAD, data computed by the author.

Egypt, Angola and Lesotho14 come next but their shares remain relatively low compared to South Africa‘s, and no country in the IOC appears in these top ten countries. In fact the first IOC country is Mauritius, with 2% of total flows, putting it in 14th place. 12

These are the top ten host countries resulting from the groupings of the three regional agreements IOC, COMESA and SADC. 13 They are the top ten host countries resulting from the groupings of the three regional agreements IOC, COMESA and SADC, excluding South Africa, Egypt and Angola. 14 FDI in Angola is mainly in natural resources, led by petroleum extraction. In 2004, the share of this industry reached 90% of total inflows into Angola. The same situation applies to Egypt and Lesotho. This is a huge incentive for FDI from developed countries and this usually makes Angola the biggest recipient country in Africa. The price of this commodity being relatively erratic, some countries are trying to diversify their economy and to reduce their dependence on the hydrocarbons industry by opening up new industries to foreign participation.

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If we consider the factor endowments of the top three countries, namely South Africa, Egypt and Angola, they are special as great interest was given to these countries through petroleum exploration. In South Africa, this effect has been combined with the development of the manufacturing industry, generating even more FDI than natural resources. Moreover, the sustained peace in Angola has resulted in a further consolidation of foreign activities. Indeed, FDI in Angola is mainly in natural resources, led by petroleum extraction. In 2004, the share of this industry reached 90% of total inflows into Angola (UNCTAD, 2005). The same situation applies to Egypt and Lesotho. As these countries feature a special situation due to their endowments in natural resources, we can see that if we exclude them in summing the total inflows of FDI, the ranking changes, with the countries reporting quite different shares. In this new grouping, Mauritius appears in second place with 12% of the total FDI inflows. This analysis of the distribution of investment flows leads to the following consideration: the IOC countries are highly heterogeneous with regard to FDI. The question now is to find the reasons for this distortion. Therefore, we study in the following section the determinants of FDI in this region. We verify whether the FDI flows in these countries have the same determinants as the FDI in developed countries.

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3. THE ECONOMIC SITUATION OF SOUTH-WEST INDIAN OCEAN COUNTRIES: AN EXPLANATION OF THEIR LOW ATTRACTIVENESS? In order that globalisation should have a positive impact on developing countries as a whole, and that disparities should disappear, several conditions must be satisfied. The host country has to offer an adequate infrastructure, be politically and socially stable, offer factor endowments (labour resources for instance) of quality, and give incentives to foreign investors such as favourable monetary or fiscal policy, etc. In the South-West Indian Ocean region, very few countries satisfy these conditions, even if, in recent years, some nations have put in place economic reforms in order to facilitate their integration into the world economy. But let us see how two well-known performance determinants for developed countries work with developing countries. In the following, we will examine the relationship between FDI and GDP and between FDI and GDP per capita. The first indicator, the gross domestic product (GDP), measures the host market size and broadly reflects the potential demand of the country in which the firm delocalises. An investor is expected to evaluate market size before delocalising, and a sufficiently large market would constitute an incentive. This reason is obviously relevant if the production generated by the investment has to supply the market. Let us see how investment flows behave with respect to GDP for members of the COMESA, SADC or IOC. In Table 6, we list the GDP of the ten previously quoted countries with their investments flows, and rank them according to their FDI/GDP ratio.

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Table 6. Ranking of countries according to their GDP and FDI inflows in 2000 (in millions of dollars) FDI/GDP ratio (in %) 13.24% 9.96% 9.12% 6.32% 5.76% 4.40% 4.19% 4.12% 3.70% 3.40%

Lesotho Angola Seychelles Mauritius Eritrea Namibia Zambia Uganda Mozambique Sudan

FDI inflows 119 879 56 277 35 153 122 254 139 392

GDP 899 8828 614 4381 608 3479 2911 6170 3754 11516

Source: Data computed by the author from World Development Indicators and UNCTAD.

1000

14000

900

12000

800

FDI inflows

700

GDP

600

10000 8000

500 6000

400 300

4000

200 2000

100

ng ol a ey ch el le s M au r it iu s E rit re a N am ib ia Za m bi a U ga M nd oz am a bi qu e S ud an S

A

ho

0

so t Le

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0

Source: Data computed by the author from World Development Indicators and UNCTAD. Figure 3. The non-linear relationship between FDI and GDP (2000).

It appears that the relative importance of FDI15 differs between countries. Hence, in 2000, investment flows represent more than 13% of Lesotho‘s GDP with a level of investments at $119 million, whereas it was only 4% in Zambia with the same amount of FDI. Figure 3 below better illustrates this non-uniform relationship. A uniform relationship would be illustrated by the same differential between FDI and GDP for all countries. Thus, differences in GDP do not reflect differences in FDI level. The hierarchy is not respected if we consider investments as determined by GDP, i.e. the host country‘s demand. Another element often advanced as a determinant of FDI flow is the GDP per capita. This variable would measure the level of development and the level of skill of the host country, thus reflecting the purchasing power of the foreign consumers. As for GDP, a potential 15

This ratio can also be interpreted as a measure of openness to FDI.

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investor would evaluate the market size of the host country but also the level of development in the country. Would this determinant influence the FDI flows of the countries? We list the GDP per capita of the previously quoted countries and the level of FDI they receive. Here also, as for the GDP analysis, differences in GDP per capita do not reflect the differences in FDI flows. If we take a similar level of purchasing power, or of development, for instance the levels in Swaziland and in Egypt, the corresponding FDI inflows received by these countries are very different, going from a disinvestment for the former (-$19 million) to the highest inflow for the latter ($1235 million). Figure 4 shows this non-uniform relationship between GDP per capita and FDI inflows.

Source: Data computed from World Development Indicators and UNCTAD. Figure 4. The non-uniform relationship between FDI and GDP per capita (2000).

This determinant alone does not seem to explain the FDI in these countries. GDP and GDP per capita are obviously not the only determinants of investment flow in South-West Indian Ocean countries. Table 7. Ranking of countries according to their GDP per capita and FDI inflows for 2000 Seychelles Mauritius Botswana South Africa Namibia Swaziland Egypt Djibouti Angola Zimbabwe

GDP per capita (Dollars) 7675 3773 3430 2861 1980 1598 1454 875 672 585

FDI inflows (Millions of dollars) 56 277 57 888 153 -19 1235 3 879 23

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CONCLUSION Globalisation, seen in the light of changes in FDI flow, appears to be a non-linear process in the South-West Indian Ocean region. Indeed, even if both FDI outflows and inflows exist, these movements are quite insignificant. The consequences of these investments are nevertheless well-known and positive for host countries. The effects of investment on growth are often held to be potentially beneficent. That is why, facing diminishing FDI inflows, many governments accelerated the liberalisation of their FDI regimes, so that in 2002, some 236 regulatory changes were put in place to facilitate FDI. This setting up of incentives is supposed to attract potential investors. In Africa, progress towards the creation of functioning free trade and investment areas has been slow, even if, in the year 2002, 10 African countries introduced 20 regulatory changes in their investment regimes, introducing a more favourable investment climate. Despite the fact that several agreements, mostly sub-regional, have been concluded, most of them are quasi-inefficient. These countries did not succeed in attracting FDI. The share of inter-regional trade has remained very low in Africa and nowadays, the African integration agreements have the lowest level of trade flows in the world, with the share of inter-regional exports and intra-African trade lower than 5%. Moreover, these countries have substitute economies, with the same comparative advantages, which imply that economic integration did not have the expected effect of providing diversification and evolution of the composition of the trade flows. The similarity in factor endowments is thus a disadvantage for regional flows. Equally, regional flows based on comparative advantage differentials remained very low. The reasons proposed are therefore economic and institutional ones, and are based on the low level of growth and the inexistence of a significant increase in intra-regional trade and investment. One reason for that failure is that these economic integration processes did not succeed in overcoming their size problem. These big markets in terms of population are nevertheless very small compared to the world. Moreover, if we state that FDI in developing countries is mainly in the service sector (UNCTAD, 2004), which is mainly market-seeking, it is quite evident that they will not be attracted by South-West Indian Ocean countries. Moreover, tariff barriers are discriminatory with respect to third world countries in the sense that their trade flows escape in favour of internal trade even if these flows are higher than the former. As a consequence, tariff barriers have created less trade. Another reason comes from Tisdell (2005). This author suggests that globalisation16 does not have the expected result of increasing growth. In IOC countries, there would be little FDI inflow because of a higher capital return elsewhere which diverts investment in these countries. Potential investors who value capital return would be attracted by higher economic returns. This author has noticed that capital inflows following the deregulation of capital markets have not compensated the capital outflows because of, amongst others, the small market size, as mentioned above.

16

His article is about small isolated nations such as Pacific island countries.

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Isabelle Soubaya

ACKNOWLEDGMENTS Isabelle Soubaya would like to thank all the participants of the second French-Australian Workshop on ― Globalisation and Partnerships: Features of Business Alliances and International Cooperation‖. The usual caveat applies.

ANNEX Members of the IOC, COMESA and SADC IOC17

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Country Angola Botswana Burundi Comoros Congo, Democratic Republic of Djibouti Egypt Erythrea Ethiopia Kenya Lesotho Madagascar Malawi Mauritius Mozambique Namibia Reunion Rwanda Seychelles South Africa Sudan Swaziland Tanzania Uganda Zambia Zimbabwe

*

* * * *

COMESA18 * *a * * *a * * *a *a *a *a * *a * *a * * * *a *a

SADC19 * * *

* * * * * * * * * * *

17

Indian Ocean Commission. Common Market for Eastern and Southern Africa trade area. 19 Southern African Development Community. 18

a

Members of COMESA who are also members of the free

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REFERENCES Eden, L. (2001). Transfer Pricing, Intrafirm Trade and the BLS International Price Program. U.S. Bureau of Labor Statistics Working Paper, (334), 1-61. Ernst, and Young, (1999). Transfer Pricing: 1999 Global Survey. Ernst and Young International. Ludema, R. D., and Wooton, I. (1998). Economic Geography and the Fiscal Effects of Regional Integration. Centre for Economic Policy Research (CEPR) Discussion Paper (1822). Nunnenkamp, P. (2002). Determinants of FDI in Developing Countries: Has Globalization Changed the Rules of the Game? Kiel Institute for World Economics, Germany, July. Soubaya, I. (2002). Commerce Intra-firme et Investissements Directs: Aspects Théoriques et Application aux Multinationales Françaises. PhD thesis, University of Paris I - Panthéon Sorbonne, December. Soubaya I. (2005). International fiscal competition, transfer pricing and multinational firms‘ strategies. In J.M. Aurifeille, and C. Tisdell (eds.). Leading Economic and Managerial Issues Involving Globalisation. Nova science. Svizzero, S., Lasselle, L., and Tisdell, C. (2003). Is Regionalism the Outcome of Insufficient or Excessive Globalisation? In K. Sen, and C. Tisdell (Eds.), Economic Globalisation : Social Conflicts, Labour and Environmental Issues. Edward Elgar. Svizzero, S., and Tisdell, C. (2002). Reconciling Globalisation and Technological Change : Growing Income Inequalities and Remedial Policies. Intereconomics Review of European Economic Policy, 37 (3), 162-71. Tisdell, C. (2005). Globalisation and the Economic Future of Small Isolated Nations, Particularly in the Pacific. Working Paper of University of Queensland, 37 (December). Tisdell C., Svizzero, S., and Lasselle, L. (2003). Unequal Economic Gains of Nations from Globalisation. In K. Sen, and C. Tisdell (Eds.),Economic Globalisation : Social Conflicts, Labour and Environmental Issues. Edward Elgar. UNCTAD (2000). World Investment Report 2000: Cross-border Mergers and Acquisitions and Development. United Nations: New York. UNCTAD (2002). World Investment Report 2002: Transnational Corporations and Export Competitiveness. United Nations: New York. UNCTAD (2003). World Investment Report 2003: FDI Policies for Development: National and International Perspectives. United Nations: New York. UNCTAD (2004). World Investment Report 2004: The shift towards services. United Nations; New York. UNCTAD (2005). World Investment Report 2005: Transnational corporations and the internationalisation of RandD. United Nations: New York.

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In: Globalization Editor: Joseph A. Mancini

ISBN: 978-1-61324-531-6 ©2012 Nova Science Publishers, Inc.

Chapter 11

EMERGING MARKET UNDER GLOBALIZATION: THE REFORM AND DEVELOPMENT IN CHINA Li Xiaoxi, Liu Yimeng* and Lin Yongsheng Institute of Economic and Resources Management, Beijing Normal University, China

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ABSTRACT Globalization has been the significant trend of the world development in the 21st century. The process of Globalization has promoted the rise of emerging markets. China, as a typical emerging market economy, has been increasingly standing out of the world economy in recent years. This article tries to present an objective analysis on China‘s economic reform and practices under the globalization background, which include the positioning of China as an emerging market, China‘s experiences on rising out of the planned economy, China‘s economic performance in handling the Global Financial Crisis and the trend of China‘s new role in the global economy.

Keywords: China; Emerging Market; Reform; Development; Globalization

PREFACE It dated back to 1994 when the concept of emerging markets was introduced in the National Export Strategy of the U.S. Department of Commerce: ― Perhaps the most promising opportunities for U.S. firms in the next several decades can be found in the Big Emerging Markets (BEMs)…10 markets which are expected to account for over 40 percent of total global imports (excluding intra-EU trade) over the next 20 years. The BEMs are: Mexico, Argentina, Brazil, the Chinese Economic Area, India, Indonesia, South Korea, Poland,

*

Email: [email protected]

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Turkey, and South Africa.‖ The policy of targeting big emerging markets was then formulated in the U.S.1. IMF divided the world into two categories2: the advanced economies including U.S., Eurozone (inc. Germany, France, Italy and Spain), Japan, U.K., Canada, other advanced economies and the emerging industrial countries of Asia; the emerging and developing economies including Africa (inc. Sub-Sahara Africa), Central Europe and Eastern Europe, CIS (Russia and the other member states), the developing countries of Asia (China, India), ASEAN (Indonesia, Malaysia, the Philippines, Thailand, Vietnam), Middle East, Brazil and Mexico. The share of GDP contributed by the emerging markets (inc. the emerging industrial countries of Asia, the emerging markets worldwide and the developing countries) to the world has increased from 23.56% in 1990 to 33.31%3 in 2008, changing the global economic territory significantly. Jim O‘Neill, the chief economist of Goldman Sachs first introduced the term BRICs in The World Needs Better Economic BRICs in November 2001. The BRICs did not attract the world attention until Goldman Sachs released a report Dreaming with BRICs on October 1st 2003. According to the report, the GDP of BRICs will exceed that of the six industrial countries and the value of its stock market will grow by 66 times in 50 years. It will have a stock market three times greater and a middle class of 800 million people in 10 years, which exceeds that of U.S., Western Europe and Japan combined. The report predicts that the BRICs will lead the energy, natural resources and capital markets and become the most important consumption market of the world4. In 2007, Akashi Kadokura, chief of Institute of Japan for BRICs, introduced the concept of VISTA for the most promising emerging markets next to the BRICs. The term VISTA comes from the initials of Vietnam, Indonesia, South Africa, Turkey and Argentina5. The nine economies of BRICs and VISTAs have become the most active economies in the world. The above-mentioned countries are recognized worldwide as the emerging economies because they all have the institution of market economy and sustain a rapid economic growth. Next, we will analyze China, an emerging market and one of the BRICs in terms of its positioning as an emerging market, its experience in shifting from planned economy to market economy, its practice in handling the global financial crisis and its new roles in international economy etc.

1. POSITIONING OF CHINA: AN EMERGING MARKET China is an emerging market, which can be interpreted in two aspects. First, China is emerging as a new star in the world economy; Second, China is a market economy instead of a planned economy. We will discuss this from the following three dimensions in this part: the 1

Department of Commerce, USA (2004). National Export Strategy: the second annual report of the Trade Promotion Coordinating Committee. http://www.archive.org/details/nationalexportst00unit. 2 IMF (2004). World Economic Outlook: Advancing Structural Reforms. http://www.imf.org/external/pubs/ft/ weo/2004/01/. 3 Source: Calculated according to data of World Economic Outlook Database of IMF, April 2009. http://www.imf. org/external/pubs/ft/weo/2009/01/weodata/index.aspx. 4 Goldman Sachs (October 2003). Global Economics Paper No.99, Dreaming with BRICs: The Path to 2050. 5 Akashi Kadokura (2007). VISTA: Countries with New Potentials. Financial View, 2007 (12).

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role of emerging markets in the global economy, China‘s impact on the world supply and demand and China‘s role as a developing market economy.

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1.1. The Role of the Emerging Markets in Global Economy The emerging markets boast rapid economic growth and are making increasingly greater contributions to the global economic growth. Firstly, the emerging markets slow down the plunge of the global economy, stabilizing the economic fluctuation. During the international financial crisis, although the emerging markets are also experiencing a downslide economy, their decline was generally less than the developed economies. For instance, in the fourth quarter of 2008, the GDP growth of the developed countries was almost all minus: U. S. -0.8%, Eurozone -1.7%, UK -1.8%, Japan -4.4%, etc., while that of the emerging markets hits 3.63%: Russia 1.1%, Brazil 1.3%, India 4.8%, China 6.8%, etc. With the emerging markets sustaining an economic growth against a global recession, the severe recession of the developed countries was mitigated and the world average output was able to keep a growth of 0.2% in the same period6. The reason that the emerging markets helped against the downturn of the global economy lies in their maintained economic growth, and, more importantly, their growing share in the global economic aggregate (see Table 1). Table The table shows that the share of the total GDP of the emerging markets (Brazil, Russia, China, Vietnam, India, South Africa, Turkey, Argentina)in the world GDP has increased from 10.7% in 2000 to 17.1% in 2008, while that of the seven western countries (USA, Japan, Germany, France, UK, Italy, Canada)in the same period dropped from 66.5% to 53.2%. According to the GDP ranking list released by the World Bank7, the BRICs‘ GDP amounted to US $8.3 trillion in 2008, in which the GDP of China accounted for 46.5% by US $3.86 trillion, Russia and Brazil for 19.4% by US $ 1.61 trillion each, and India came last with 14.7% by US $1.22 trillion. Furthermore, the BRICs have all ascended in the GDP world ranking and become the top twelve GDP contributors in the world. It has been recognized that the emerging markets play a role as an economic stabilizer during the severe global economic fluctuation.

1. Contribution of Major Countries and Regions to World GDP (unit:%) Year

USA

Japan

Germany

G7

2000 2007 2008

31.1 25.2 23.6

14.8 8 8.2

6 6.1 6.1

66.5 55.3 53.2

9 Emerging markets 10.7 15.8 17.1

Brics

China

Brazil

Russia

India

8.2 12.7 13.8

3.8 5.8 6.4

2.1 2.4 2.7

0.8 2.4 2.7

1.5 2.2 2.0

Source: Calculated with reference of the data from World Bank DDP database and World Development Indicators Database.

6 7

Data source: Calculated with reference of the data from World Economic Outlook Database, IMF, April 2009. Data source: Calculated with the reference of the data of World Development Indicators Database, World Bank.

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Secondly, the emerging markets promote the global economic development. The emerging markets promote the global economic growth while developing their own economy. Take the BRICs. The BRICs have become the outstanding ones of the emerging markets because they are sustaining a rapid growth and enjoying increasingly stronger economic strength in past few years. The average growth of the BRICs is 10.7% from 2006 to 20088. The real growth rates of the BRICs are much higher than other countries in 2008. China boasts the highest growth of 9.0%, followed by India of 7.3%, Russia of 5.6% and Brazil of 5.1%. The BRICs shared 13.8% of the global economic aggregate and 13% of the global trade volume in 2008, which means that the contribution of the BRICs to the global economy growth is over 50%9. Goldman Sachs‘ latest forecast indicated that the global economy will suffer a contraction of 1.1% this year, while the BRICs will still grow by 4.8% and the global economy will increase by 3.3% next year, while the BRICs will probably enjoy a growth of 8.8%.10 As the economic drivers, the emerging markets accounted for 50% of the world GDP, 40% of the world trade volume and 70% of the world foreign exchange reserve in 2008. China, Russia and India hold the significant amount of foreign exchange reserves. The emerging markets are also boosting the global trade by their strong consumption capacity, The U.S. consumption market has been indispensable to the global consumption market all the time but now it is time to stress the role of the emerging markets in the growth of the global consumption demand. Since the outbreak of the global financial crisis, with the U.S. consumption being sluggish, the emerging markets have become a major impetus to the expansion of the global consumption market by a total of population accounting for over 50% of the world and a rising middle class. The high-end firms of the developed countries are more tending to transfer product lines to the emerging markets in recent years for the much cheaper labor force but more importantly, the strong absorbing market capacity there. Take China for example. Since the beginning of this year, China has been sending quite a few trade and investment promotion delegations to Europe, U.S. and the member countries of the Shanghai Cooperation Organization to bolster the trade and investment for the Chinese and foreign firms hit by the crisis, which promoted the economic development of these countries to some extent. Thirdly, the emerging markets accelerate the global technological progress and industry upgrading. International competitiveness is an aggregate indicator which reflects a country‘s progress on many aspects, including the breakthrough in technological progress and industry upgrading. The Global Competitiveness Report 2009-2010 (hereinafter referred to as Report) announced by World Economic Forum indicates that in the chosen 132 economies, China‘s competitiveness ranking ascended to the 29th, topping the other BRICs. The ranking of India and Brazil also ascended. The World Economic Forum holds that the global competitiveness indicator is determined by the infrastructure, efficiency, innovation and maturity which break down again to 12 items. The yearly Report 11 is an aggregate evaluation of a country. The

8

Data source: Calculated with the reference of the data of World Economic Outlook Database, IMF, April 2009. Data source: Calculated with the reference of the data of World Economic Outlook Database, IMF, April 2009. 10 Shang Jun, Fu Yunwei. Emerging markets step onto historical front on response to financial crisis. Ecnomic Information Daily, Sep. 16th, 2009. 11 Data source: Xinhua News Agency. http://news.xinhuanet.com/fortune/2009-09/08/content_12016501.htm 9

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considerable upgrade of the emerging markets‘ international competitiveness shows that their technological progress is contributing more and more to the global technological progress. The four countries of the BRICs focus on different aspects of economy and enjoy different strengths. China‘s manufacturing, Russia‘s energy industry, Brazil‘s mining industry and India‘s information technology are the pillar industry of each and have a strong competitive edge in the world. Facing the new world economic environment, the BRICs‘ dynamic growth lay a solid foundation for intensifying the advantages of their technology and industry. For instance, China‘s industry promotion program and RMB 4 trillion economic stimulus plan will lead to another round of industrial upgrading with huge potential in the rising industries including new energy, environmental protection, biomedicine and electronic information, etc. China is taking the lead in the economic recovery, which is crucial to the full recovery of the world economy and is conducive to forming a new world economic growth point. Fourthly, the emerging markets boost global economic cooperation. The boosting is through stronger cooperation between the emerging markets themselves and between the emerging markets and the developed countries. There are many examples about the reinforcement of the cooperation among the emerging markets. Here, we will only take the BRICs as an example. With complementary advantages with each other, the BRICs boast tremendous potential for collaboration. On behalf of the emerging markets, the BRICs are intensifying dialogues and cooperation with each other, and jointly claiming for and winning the interests for the developing countries. With more exchanges between their leaders, the BRICs have become a major power in responding to the global financial crisis, coordinating to reform the international financial system, making propositions in favor of the developing countries, making promotions in strengthening international financial regulation and reforming the international financial institutions. The emerging markets also strengthen the ties with the developed countries and seek mutual development by promoting the trade and investment liberalization, energy saving and environmental protection and new energy development. The emerging markets hold NorthSouth dialogues with the developed countries in a positive and constructive manner. The G20 summit and dialogues between leaders of G-8 and developing countries have become the important platforms for the major developing countries and developed countries to meet, coordinate and cooperate. During the world‘s joint fight against the global financial crisis, the emerging economies play the leading role and receive considerable attention for their rising international status and the increasingly active role in international activities. They actively advocate and protect the interests of the developing countries in the reform of international financial system, make significant contributions to creating a fair, equitable, inclusive and well-organized financial order and to establishing a healthy system for the development of the global economy.

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1.2. China: An Influencer of the World Market12 An important feature of emerging markets is their growing impact on the world market, which enables them to take a new role in the international stage. China is just one of them. Firstly, China takes a significant share in the world commodity export market. In 1950, China only ranked the 27th in the world in aggregate export, and remained the same rank within almost 30 years until with one rank higher to 26th in 1980. Thereafter, it has been ascending rapidly in the rank: 15th in 1990, 6th in 2001, 3rd from 2004 to 2006, and finally the second in 2007 and 2008. Aggregate export of China has increased by 146 times during 1979-2008, from US $ 9.75 billion in 1978 to US $ 1.43 trillion in 2008, with an annual average growth of 18.1%. By 2008, the export of China accounts for 8.9% of the world total export. More than 210 categories of China‘s industrial products rank first in the world. According to the data from the Ministry of Industry and Information Technology of China, export of the light industry products accounts for 20% of China‘s total export, among which many products take up more than half of the world market shares, such as household electric appliances, leather, furniture, down and feather products, ceramic, bicycle, and so on. China is also a predominant producer and exporter of rare earth products in the world. Recent data from WTO show that, although China‘s commodity export decreased by 21.7% in the first half of 2009 year on year, China has outpaced Germany and become the biggest commodity exporter in the world by an export of US $521.7 billion. Certainly, it must be noted that more than half of China‘s export in 2008 was created by the foreign funded firms. Secondly, China becomes an increasingly important commodity importer in the world. The aggregate import of China has increased by 103 times during 1979-2008, from US $ 10.89 billion to US $ 1.13 trillion, with an annual average growth of 16.7%. By 2008, the import of China accounts for 6.9% of the world aggregate imports. In the first half of 2009, with a decline of 25.4% year on year, China‘s import still amounts to US $424.54 billion. Based on international experiences, a country‘s consumption go up rapidly when its GDP per capita exceeds US $2,000. China‘s large population possesses enormous potential in purchasing power. With an annual average growth of 13.1% during the past five years, the consumption in China has the potential to be further promoted. It is estimated that by 2014, China will be the biggest market for luxuries, accounting for 23% of the world aggregate. The expenditure on international travel has increased from US $3.7 billion in 1995 to US $33.3 billion in 2007 in China, with a share up from 0.8% to 3.6% of the world aggregate. Furthermore, the rural consumption in China is still fairly low, which is expected to be improved significantly, with the urban-rural gap being reduced gradually. In particular, overseas group purchase is often promoted by Chinese government. For example, during Premier Wen's visit to Europe at the end of January and beginning of February in 2009, 38 cooperative agreements were signed between China and EU as well as the four European countries, amounting to RMB 15 billion and covering multiple fields including financial, information technology, logistics, aviation, energy, telecommunication, etc. Since the end of February, the Chinese purchasing delegation has been to Europe to put 12

Unless otherwise stated, the related data in this section are from a report by China‘s National Bureau of Statistics. See http://www.stats.gov.cn/tjfx/ztfx/qzxzgcl60zn/index.htm

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the agreements into effects. The delegation is consisted of people from multiple business lines such as energy, medicine, service, light industry, machine and electrical products, textiles, and so on, and signed the detailed purchase contracts on fields stated above.13 Thirdly, China‘s service trade share in the world also grows rapidly. In 2008, the aggregate service trade of China has increased to US $ 304.5 billion from US $ 4.4 billion in 1982, with a share of China‘s total foreign trade up to 10.6% from 9.4%. The share of China‘s service trade in that of the world has also increased from 0.6% in 1982 to 4.2% in 2008, up from 34th to 5th in rank. During 1983-2008, China‘s service trade had an annual average growth of 17.7%, 8.7 % higher than the world service trade growth in the same period, and grew by 21.3% in 2008, by 10.3% higher than that of the world (11.0%).14 Fourthly, China participates actively in international project contracting market. The contract amount of China‘s international project contracting has increased from US $ 33 million in 1979 to US $ 104.6 billion in 2008, among which the completed turnover has increased to US $ 56.6 billion from US $ 1.48 billion. It was under the background of the rapid growth of China‘s international economic cooperation that these achievements were obtained. In 1979, only 36 contracts were signed for international economic cooperation. This figure hit 3,100 in 1989 and 164,000 by 2008, and the contract amount increased from US $50 million in 1979 to US $ 2.21 billion in 1989 and US $113 billion in 2008. China has a strong team engaged in international economic cooperation, consisting of more than 1,000 firms with a complete range of business lines and excellent international competitiveness. In 2007, 49 Chinese firms appeared in the list of world Top 225 Contractors in the U.S. Engineering News Record (ENR), 14 of which were in the list of top 100 contractors. Last, China‘s supply and demand has a significant impact on world investing market. Through introducing foreign investment and promoting overseas direct investment (ODI), China has greatly enhanced its comprehensive competitiveness and also has a significant impact on the world investment. China began introducing foreign investment since the Reform and Opening-up and the actual utilized FDI only amounted to US $2.26 billion in 1983. While after 1992, China became the developing country with the largest foreign investment inflow. Since 2002, China has been listed in the top three countries in amount of utilizing foreign investment in the world, and ranks the 6th in 2007 in the world in attracting FDI. From 2001-2008, the actual utilized FDI in China was US $504.3 billion and so US $ 63 billion annually. In 2008, this figure was US $95.25 billion, 41 times of that in 1983. The number of foreign funded firms in China increased from 7 in 1980 to 280,000 at the end of 2007. The industrial structure of foreign investment is also multiple, covering varied fields from the general manufacturing to basic industries, infrastructure construction as well as the high-tech industries like the R&D center, integrated circuit, computer and communication products etc. China‘s overseas direct investment has been gradually expanded since 2000, indicating a significant improvement on China‘s ability to participate in the international economic cooperation. China‘s non-financial overseas direct investment was only US $2.9 billion in 2003, and increased by more than 10 times by 2008 to US $40.7 billion. Now, more than 13 14

Source: http://www.chinanews.com.cn. Source: website of the Department of Commerce.

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7,000 domestic investors have established over 10,000 firms in over 170 countries and regions throughout the world by overseas direct investing, with the invested fields being greatly broadened and the level upgraded. Resources, telecommunications, petrochemicals, financial etc. have been the major fields in China‘s overseas investments. Many overseas R&D centers and industrial agglomerations have been built, and the establishing of overseas economic and trade cooperative zones has been promoted substantially. By the end of 2008, China has become the world biggest foreign exchange reserve holder by an amount of US $1.9 trillion, providing a strong basis for overseas investments. Overseas investments help strengthen the international competitiveness of Chinese firms and 35 Chinese firms were listed as the World Fortune 500 Companies in 2008.

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1.3. China: A Developing Market Economy From 1978 to 2009, China has witnessed a quick marketization process, a historic transition from a planned economy to a market economy. With reference of the economic liberalization index developed by the Heritage Foundation of the U.S., we have launched a whole set of index system, which describes the primary aspects of a market economy and evaluate the marketization degree of China‘s economy using annual data. Our calculating results of China‘s market development degree are 69%15 by 2000 and 77.7%16 by 2006. It means that China‘s marketization has reached around 70% with 100% being assumed as a complete market economy criterion and indicates that a market economy framework has been established in China. Actually we herein take 60% as the preset threshold value of being a market economy. According to this criterion, any country with a marketization degree higher than 60% can be called a market economy. An economy with a marketization degree between 60-80% is defined as a mature market economy. China‘s index value in 2006 is much higher than 60%, which means China is already a market economy and stepping into the stage of a mature market economy. Correspondingly, 77 countries have acknowledged China‘s full market economy status by the year 2008. China is a developing market economy, which has two implications. First, China is transitioning from a primary market economy into a mature market economy, which stresses the degree of maketization under the same system. Thirty years ago, China was unable to develop its market economy because it did not choose to develop a market economy in the first place. Market economy, as a pattern with the least interference and the most freedom to economic growth, can be developed rapidly once chosen as a country‘s economic pattern, especially under today‘s economic globalization background. Second, it‘s as a developing country that China has been adopting a market economy system. This is in line with the meaning of ‗development‘ in the Development Economics. The concept of a developing market economy is better understood from the economic development point of view. Indeed, the difference between ‗developing‘ and ‗advanced‘ not only refers to the disparity of economic development between the developing countries and 15 16

Institute of Economic and Resources Management of Beijing Normal University. A Report On the Development of China‘s Market Economy 2003. China International Commerce and Trade Press, 2003, P217. Institute of Economic and Resources Management of Beijing Normal University. A Report On the Development of China‘s Market Economy 2008. Beijing Normal University Publishing House, 2008, P204.

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developed countries, but also implies different social systems adopted. In this sense, China needs to work hard to catch up with the developed countries and sustain rapid, stable and healthy economic development, in order to lay a solid foundation for the market economy. Now, it becomes obvious that the judgment of developing market economy is made from both the perspective of economic development and social system combined. In this view, development and reform supplement each other. Only when the economy is developed into a certain stage, the market economy system can be established and perfected. Meanwhile the full establishment of the market economy prepares an important system basis for a rapid economic growth. In April of 1998, EU passed the resolution to delete China from their non-market economy lists under its anti-dumping policies, giving China the treatment between the ‗nonmarket economies‘ and ‗market economies‘ as a special market economy, which indicates EU adjusted its judgment about China‘s market economy status in time. Peter Mandelson, UK Business Secretary and former EU Trade Commissioner said during his visit to China on September of 2009, that, talks over granting China the ―m arket economy status‖ should not be held back politically out of the prejudice or special trade interests in Europe17. On July 28th , 2009, Chinese Vice Premier Wang Qishan stated at the China-US Strategic and Economic Dialogue that, US and China should work together now on overcoming difficulties caused by the financial crisis, and he also urged US to recognize China‘s market economy status as early as possible18.

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2. EXPERICENCE: RISING OUT OF THE PLANNED ECONOMY People are concerned about how China became an emerging market. Certainly, the importance of the reform and opening-up therein over the past 30 years should be stressed because it is the key for China to have changed from a planned economy into an emerging market. In this part, such topics will be discussed as China‘s main reform phases, China‘s experiences in reform and development and difficulties China faces in its economic and social development.

2.1. Five Phases of China‟s Reform As an emerging market economy, China has been reforming its economic system for 30 years and been through several phases of reform and development. The shift it made from a planned economy to an emerging market economy involves several phases.

Phase One During the early reform and opening-up from 1978 to 1985, breakthroughs were made in the rural areas, the state-owned-firms carried out decentralization and interest concession, the urban and rural commodity markets revived and Special Economic Zones were established in the coastal areas. 17 18

Source: Xinhua News Agency, Shenzhen Branch, Sep.10, 2009. Source: Xinhua News Agency, Washington, July 28, 2009.

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China‘s economic system reform made breakthrough in rural areas first. In 1978, ― Baochandaohu‖ (households organized their own agricultural production independently while paid the fixed amount to the production community out of their final annual outputs as they agreed beforehand) began to emerge quietly in some places in China, which have broken the necessity of collective production of the planned economy that existed for a long time. Baochandaohu was actually promoted as early as in the 1960s, but was put to an end because Chairman Mao considered it as a capitalist practice. This time, Deng Xiaoping was resolutely in favor of it. Up to the end of 1983, the number of rural households joined Baochandaohu has accounted for more than 90% of the total peasant households in China. It is believed to be a breakthrough in China‘s reform and has greatly furthered the development of the rural economy. From 1978 to 1984, China‘s gross agricultural output increased by 55.4% and the grain output by 33.6%. From 1978 to 1983, rural net expenditure per capita increased by RMB 10819 and the living standard of rural households had been greatly improved. From the beginning of 1979, the rural fair trade has been resumed and the farmers were allowed to trade their agricultural products, through which the farmers were greatly motivated and the rural markets thrived. State-Owned Enterprises in China began to reform, too. Under the planned economy, the government was in charge of the firms‘ all operations such as production, distribution, property and employee. Now, many decisions are left to the firms themselves by power decentralization and interest concessions. For example, firms were allowed to retain some profits after their certain payments to the authorized governments for better development. Firms‘ enlarged discretion helped to improve their initiatives as well as their business returns, and the national fiscal revenue was also benefited significantly. The opening-up started with the establishment of Special Economic Zones (SEZs). From 1978 to 1983, 4 SEZs were established in China, indicating the first crucial step of the opening-up. The firms in SEZs were exempted customs and enjoyed the lower income tax rates. Foreign high-tech products were allowed for sale inland for the first time. The scope and coverage of market-orientation were expanded. Many management skills were introduced from Hong Kong. With the development of the export-oriented economy, the outward economic activities were burgeoning. These SEZs served as the ‗pacemakers‘, ‗laboratories‘ and ‗windows‘ for the subsequent reform and opening-up nation-wide.

Phase Two Phase 2 began from October 1984 and until the end of 1991. There are some major achievements. The deepening of rural reform: town and village enterprises (TVEs) emerged as a new force and grain purchase-and-sale system began to reform. In this period, the development of TVEs became the focus. In 1984, the firms run by rural communes were renamed as TVEs. In those 7 years, the gross output and profit of TVEs rose by a dozen and even several dozen times, while with a naturally fluctuating growth rate. The controlled grain purchasing and marketing system existing for a long time in the planned economy was also reformed. In 1985, the state monopoly purchase system of grain was replaced by market order system which was intended to purchase grain based on the current market price instead of the fixed

19

Source: Calculated with the reference of the data of China Statistical Yearbook 2008.

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prices by the government merely on basis of costs. In the mean time, the ban on the sale of extra grain was relaxed and farmers were given certain discretion to sale their extra grain. Opening wider to the outside world: 14 coastal cities were opened and Hainan was established to be a separate province. In 1984, after inspecting the SEZs, Deng Xiaoping suggested to further open the coastal cities. In May 1984, 14 coastal cities including Tianjin, Shanghai, Guangzhou etc. were opened officially, with economic power of these cities expanded and preferential policies provided for foreign investors to these cities, which represents the further expansion and spread of China‘s opening-up. At the First Session of the 7th NPC in 1988, sanction was given to the establishment of Hainan Province and Hainan Island was designated as the Hainan Special Economic Zone which became the biggest SEZ of China.

Phase Three The period 1992-2001 saw the preliminary establishment of the so-called socialist market economy in China. In 1992, the Communist Party of China set the socialist market economy system as a goal for the economic system reform. From then on, the marketization reform has been carried out forcefully. The main reform includes: Reform on SOEs was deepened. After 1992, the transformation into stock companies became the major form of SOEs‘ reform. In the mean time, with the focus of the reform shifting from invigorating one single SOE to invigorating the overall state-owned economy, a lot of large and competitive firms and groups emerged, and their transformation in business operation system was promoted as well as the profits increased. The position of private economy rose from ‗complementary‘ to ‗important component‘. At the 15th National Congress of the CPC in 1997, it was clearly pointed out that ― private economy is an important component of the socialist market economy‖, which represented a new historic breakthrough in the ownership system. An amendment to the Constitution, ratified later in 1999, clarified the position and role of the non-state economy. Government‘s role in management has been changed greatly and China‘s macroeconomic control system has taken shape initially. In the beginning of 1994, a major reform aimed at the establishment of macro-economy control system started. The fiscal and tax reform in 1994 was to clarify the relationship between the central and local governments, reform the profit distribution system of SOEs and the tax system, gearing from the pure decentralization and interest concessions to clearly defining the fiscal power by the public role of governments at all levels. At the national finance conference in 1998, it was requested to establish a public finance system. In 1994, the State Development Bank of China (SDBC), the Export-Import Bank of China (China Eximbank) and Agricultural Development Bank of China (ADBC) were established successively, distinguishing the policy banks from commercial ones. The Law of the People's Bank of China coming into effect in 1995 established the central bank status of PBC. Phase Four Phase 4 was from the end of 2001 through 2007. At the end of 2001, China entered WTO to be its 143rd member country, which represents a new era of China‘s opening-up. Through implementing its entry commitments, China‘s reform has been deepened continuously with growing marketization in all fields. The marketization is improved in the following aspects.

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Marketization of production factors has been further improved. As for the marketization of labor force, the Chinese government has long stood back from the labor resource allocation, leaving it more and more to the market itself instead of the public administration. As for the capitalization, QFII (Qualified Foreign Institutional Investor), share structure reform and QDII (Qualified Domestic Institutional Investor) were introduced successively after 2002, indicating the gradual developments of the stock market. At the same time, equity market, mediate and small firms sectors, Stock Transfer Agent System were established and made impressive progress. As for the land marketization, a series of regulations were released: Provisions on the Assignment of the Right to the Use of State-owned Land by Means of Bidding, Auction, and Listing and Provisions on Agreed Assignment of the Right to the Use of State-owned Land by the Ministry of Land and Resources (2002), Decision on Deepening Reform and Tightening Land Management by the State Council (2004). Hence, the marketized mechanism was initiated for the price of land-use right. Share the benefits of the reform, reform the income distribution system and improve the social security system gradually. The 17th National Congress of the CPC in 2007 saw the following statement: Fair and reasonale income distribution is the important indicator for the social equity. It should be ensured that all production factors including labor, capital, technology and managerial expertise to be distributed according to their respective contribution. The relation between the efficiency and equity in both primary distribution and redistribution should be handled properly, with particular emphasis on equity given to redistribution. The share of personal income in the total national income is to be gradually increased and the share of work remuneration in primary distribution be raised. Vigorous efforts are to be made to raise the income of low-income groups, to increase povertyreduction aids and the minimum wages, and to set up the mechanism of salaries in enterprises and payments security system. Chances will be created enabling more people to obtain income from property. Lawful income is to be protected, excessively high income be regulated and illegal gains be eliminated. Transfer payment is to be increased, the taxation regulation to be intensified, monopolies to be broken and equal opportunities to be created, which can help to rectify the distribution order and eliminate the widening trend of income disparity.

Phase Five The global financial crisis began in 2008 has affected China‘s economic development as well as its economic reform. Can we deny the capitalism just because the crisis started from the United States and Europe? Is China‘s transition to the market-oriented economy wrong? It is an ongoing debate around the world especially in China, which may indicate another phase for China‘s reform. Stressing the role of governments and the state-owned economy can only be the temporary approach to fight against the crisis and thus the market economy system will only be perfected rather than denied. Only keeping stick to the reform and opening-up can China secure its position in globalization, promote the harmonious development of the economy and society, and achieve sustained development eventually. The 17th National Congress of the CPC addressed the marketization combined to industrialization, urbanization, marketization, informatization and internationalization, which demonstrates the government‘s resolution and confidence in the economic reform.

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2.2. Experiences of the Economic Reform and Development China‘s reform and opening-up has promoted the economic development and facilitated the shift from a planned economy to a market economy, with valuable experiences obtained, which can be concluded as the following five aspects. Firstly, leading the reform requires the courage to abandon traditional ideology. To make China shift from a planned economy to a market economy, the top leaders‘ determination on the reform is crucial. For instance, China would not make any real step forward in the reform if the leaders ignored the reality, misjudged the role of capital, regarded the capitalists as exploiters, banned the cooperation between different social classes and persisted in annihilating the private economy. Secondly, the suitable national management system and institutions are necessary to be compatible with and further promote the productivity. Decades of practical experiences show that if the functional system of a country is not adaptive to its productivity, its economy will suffer stagnation or even retrogress, and vice versa. The economic development process also suggests that the government is playing a vital role in promoting economic development. The combined efforts from the government and the private, the coordination of macroeconomic controls and microeconomic behaviors, the cooperation of national capital and private capital, all guarantee a country‘s economic development. It is exceedingly important how the government sees its roles and improves its leadership and efficiency continuously. Thirdly, keeping favourable economic relations with foreign countries is vital for domestic economic development. International political and economic environment is essential for a country‘s economic development. Developing economy in a closed environment is prone to being conservative and complacent, and blocking the way of progress. By contrast, developing economy in an open environment, facing competitions from outside markets and seeing great accomplishments of other countries will help a country find its own weakness and get motivated for progresses. China opened up to the outside world after 1978 and introduced foreign investments, advanced technology and management skills. With the import and export volume rapidly expanded, China has paced its step on economic communications and exchanges with the outside world, which has accelerated its economic growth greatly. Fourthly, economic reform and legislation construction complement each other. China faces many legal problems during the process of reform and opening-up and the resolution requires knowledge of both economics and law. On one hand, the market economy rules are needed to be set up in order to protect and consolidate the achievements of economic reforms. On the other hand, regulations are needed to restrict administrative power and improve it in turn. China has already established an intact market economy legal system, including the legal systems for market entities, those regulating the activities of market entities as well as the macroeconomy. While despite all these progress, China‘s legal system for the market economy is still far from perfection. Finally, obtaining the sustainable growth is vital. Evaluating the result of the economic development requires looking into not only the economic output factors such as economic growth, but also the input factors. Less input and more output is preferable, but it is more important to sustain the balance between the input and output. Chinese government has made tremendous efforts for years on environmental

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protection and energy saving, but there is still a long way to go to reach the sustainable growth goal. History shows that people not only need money, but also fresh air, clean water and good living conditions for their offsprings, which is now the priority for every country. Still many efforts should be made by China to develop a green economy and to fulfill a coordinated development at all levels.

2.3. Challenges China Face for Further Economic and Social Development

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There are big issues currently existing in China and could not expect to be solved in 5-10 years. Here might be several examples:

Issues on Income Disparity The national income distribution is always the first and foremost issue of an economy. Now the income disparity in China, along with the economy growth, is getting more and more evident. First, from the perspective of aggregate income distribution in China, the data of National Bureau of Statistics (NBS) show that20 China‘s Gini Coefficient jumps from 0.317 in 1978 to 0.458 in 2007. As for the urban-rural income gap during 1997-2007, the income of the highest-income group (RMB 9,304) is 1.64 times of that of the lowest-income group (RMB 5,667) in urban area; whereas the income of the highest-income group (RMB 3,972) is 2.41 times of the lowest-income group (RMB 1,648) in rural area. The nominal urban-rural income gap ratio increases from 2.57:1 (1978) to 3.32:1 (2007). Furthermore, the income gap among regions is widening. In 2007, GDP per capita of Western China is merely 41.47% of that of Eastern China. The income disparity among sectors is huge, too: in 2007, average income of the highest-income sector, stock and securities industry, with the average annual income of RMB142,979, is 14.49 times of that of the lowest-income sector, agriculture, the average annual income of which is only RMB 9,861. The main reasons for a widening income disparity lie in that: (1) With the market mechanism adjusting the primary distribution of national income, the factor income disparity is widening, and so is that among the regions. (2) Effects of redistribution by fiscal policy barely show up. (3) The illegal and off-the-book income is out of control. The distribution beyond the control of the system deteriorates the income disparity. Although the government is making significant adjustments on the income distribution, and a social security system is under way, the income disparity is difficult to eliminate in the future 5-10 years. Issue of Modernization of Chinese Farmers The introduction of Urbanization, Urban and Rural Integrated Planning and Construction of New Countryside are all intended to improve the life quality and to modernize the production methods of the farmers. It‘s key to increase the income of rural households. Data show that the development of 700 million farmers is the bottleneck for China to reach the income level of mid-ranking 20

Data source: calculated with the data from China Statistical Yearbook and China Rural Statistical Yearbook of all years.

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developed countries (with US $8,000 of GDP per capita) in the middle of the century. In 2007, the average income of nearly 600 million urban households is US $1,767.32, whereas that of over 700 million rural households is only US $530.8221. The 16th National Congress in 2002 states the goal that GDP in 2020 quadruples that of 2000; and thereafter the 17th National Congress in 2007 further brings forward the goal that GDP per capita in 2020 quadruples that of 2000, which means an average growth rate of 5.4% per annum. To increase the income of farmers, it‘s important to arrange rural workers to work in town. However, with urban-rural labor market being segmented at present, rural workers can hardly enjoy the equal citizen treatment. Due to numerous reasons, only 30% of rural workers have signed employment contracts. In contrast, over 95% urban workers have signed employment contracts with State-owned Enterprises (SOEs), Collective Firms or Foreign Invested Firms. During January to September of 2008, the ratio of workers with contracts signed reaches 93% in the industrial enterprises above designated size, which was below 20% before the implementation of the Labor Contract Law. Some local governments merely change the rural hukou (the identity control policy managed by the local government authorities which bounds the holder to the certain administrative regions, originally intending to restrict the mobility of the holder especially from rural areas to urban areas) of farmers to urban hukou and take back the lands to which farmers were previously entitled the rights to use for nominal higher urbanization without regard to the employment and social security of these farmers. There are numerous issues to be tackled step by step.

Reform on Government Administrative Systems The key to reform on Chinese government administrative systems is how to deal with the relationship between the government and the market. First, government needs position itself appropriately. A proper positioning prevents the cross boundary activities. Otherwise, the market adjustment activities will be overstepped by administrative interventions, which has appeared frequently in the process of reform and development. The government administrative system is affected by three aspects of government positioning: The first is whether a big or small government should be pursued, which is about the administrative scope and the function of governments. The second is whether strong or weak the government needs to be, which indicates the administrative intensity and how governments should do. The third is whether good or bad the government actually can be, which involves how the public evaluate the government administrative capability and performance. Three important relationships need to be tackled: first, upper-lower relationship, namely the relationship between the central and local government; second, left-right relationship, namely coordination among different departments; third, the multiple upper-lower and leftright relationships. From top to bottom, there are relationships between different levels of the government and households; from left to right, there are relationships among provinces, among cities and among firms etc. These issues have not yet been solved so far during the reform, for the government is only getting to realize its functional position. Between the choice of government or market, the government usually tended to the administrative methods for faster effect, hence many issues have accumulated.

21

Data source: calculated with the data from China Statistical Yearbook 2008.

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Issue on the Sustainability of Economic Growth The developing countries have made significant progresses in poverty reduction and economic development but with heavy costs: air pollution is worsening, fresh water is increasingly scarce, soil desertification is accelerating, frost destruction is out of control, biodiversity is fading away and fishery is shrinking etc. Therefore, it‘s necessary to tackle economic development and environment issues altogether in order to solve the problem of sustainability. The topic of World Development Report 201022 is ‗development and climate change‘, and the suggestion of building a climate-smart world is also put forward. The developing countries can shift to low-carbon growth pattern to pursue development and reduce poverty, which demands financial and technical support from the developed countries; the developed countries should reduce carbon emission immediately, and it calls for cooperation among all countries to promote global sustainable development. Chinese government is also emphasizing a sustainable development, the environmental protection and resource saving, but in reality, the tendency to pursue GDP growth solely is hard to stop. The key lies in the lack of the expression of public opinion on specific issues and the local governments would rather sacrifice the environment for growth. It‘s a vital issue, but impossible to be solved in a short term. Coordination and INTERACTION between Domestic and Foreign Economy International relationship is sophisticated, with both advantages and disadvantages. From promoting two-way exchanges of the capital and technology to considering the opinions on domestic policies from international society and coordinating the domestic policies with those of the big international players, China has made a big step forward. Post-international financial crisis is placing the global economy at a new equilibrium. International relationship, de facto, the coordination of national interests with each other, is getting more difficult, but more important. The differences of strength and attitude between the developed and developing countries is just one of the difficulties. Currently, the number of projects in need of international coordination is increasing, instead of reducing; particularly such issue as the global environment, getting more and more complicated, takes more time for coordination. It will be a long term from bringing forward a problem, coordinating relationship to negotiation and communication.

3. PERFORMANCE: HANDLING THE GLOBAL FINANCIAL CRISIS As an emerging market, China is different from the developed countries in handling the global financial crisis in following three aspects: first, it is less affected because the financial derivatives and leverage are relatively underdeveloped in an emerging market; second, its overall economy sustains a positive growth; third, its measures work faster. Nevertheless, there are still uncertainties about the world economy, China should keep alert against possible

22

Source: The World Bank, World Development Report 2010, September of 2009. http://econ.worldbank.org/ WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTWDRS/EXTWDR2010/0,,menuPK:5287748~pagePK: 64167702~piPK:64167676~theSitePK:5287741,00.html

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new difficulties in its economy. Next, we will make detailed analysis on impacts of global financial crisis on China, China‘s countermeasures and effects and so on.

3.1. Impacts of the Global Financial Crisis on China Since the 3rd quarter of 2008, China has been increasingly affected by the global financial crisis.

Source: Statistical Communiqué of the People‘s Republic of China on the 2008 National Economic and Social Development.

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Figure 1. China‘s GDP Volume and Growth 2004 -2008.

First, the economy slowed down. The China Monthly Economic Indicators showed that the cumulative quarterly GDP growth rate in 2008 dropped sharply, with 10.6%, 10.4%, 9.9%, and 9% for Q1, Q1-Q2, Q1Q3 and Q1-Q4 respectively. If we take a long-term view, China‘s economy had a hard time in 2008 undoubtedly (see Figure 1). As shown in Figure 1, in the past 5 years, an inflection point appeared in 2007 in China‘s economic growth. China‘s GDP had two-digit growth from 2004 to 2007, with 10.1%, 10.4%, 11.6%, 13.0% respectively. However, it fell to one-digit growth of 9% in 2008. Secondly, the export volume plunged. In the fourth quarter of 2008, orders received by most export-oriented firms in Southeastern China decreased sharply and tended to be none. Some firms suffered from business stagnation with an unexpectedly rapid downslide. As the finance crisis spreads, the import and export volume of China dropped sharply (see Figure 2). As shown in Figure 2, both the commodity export and import in 2008 increased slightly year on year but with a sharp drop in the growth rate. From 2004 to 2007, the growth rates of China‘s export and import volume were 35.7%, 23.2%, 23.8% and 23.5% respectively, yet for 2008, it was only 17.8%, down by 5.7%. Thirdly, the unemployment rate rose sharply Factories went bankrupt and more workers lost their jobs as the export decreased. In late 2008, the urban registered unemployment rate in China reached 4.2%, up by 0.2% than 2007,

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reversed from the continuous improvement during the past few years before 2007. By the end of 2008, 20 million out of 130 million rural workers in urban areas have lost jobs and gone home.23

Source: Statistical Communiqué of the People‘s Republic of China on the 2008 National Economic and Social Development. Figure 2. China‘s Commodity Export and Import Volume and Growth 2004-2008.

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3.2. Macroeconomic Policies and Measures to Prevent the Economy from Getting Worse Chinese government took active actions to tackle the global financial crisis and a series of countermeasures were released to sustain the growth, enlarge domestic demand and adjust the structure. Proactive fiscal and moderately loose monetary policies were introduced to prevent the economic downslide and secure the growth; ten measures such as the Home Appliance Subsidy Program for Rural Areas and those in favor of rural finance were introduced to enlarge domestic demand; Ten Major Industry Revival Plans were presented to encourage innovation and technology R&D, save energy and turn the economic structure to be more green. In the first place, China carried out proactive fiscal policies and moderately loose monetary policies. Proactive fiscal policies include four aspects. Firstly, investments from the central government will guide and promote the local funds. Of the RMB 4 trillion stimulus plan, the central government will invest RMB 1.18 trillion, with the rest to be made by local governments. Secondly, advance the reform on tax and charge to cut tax structurally. Implement the VAT by consumption to ease the tax burden of firms. Reform the tax and charge of the product oil to promote energy saving and emission reduction. Thirdly, optimize 23

Chen Jiagui. China‘s Economic Prospect: Report of Spring, 2009: P4. Beijing: Social Science Literature Press, April, 2009.

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the fiscal expenditure structure with prior condition to social security system and improvement on the basic living conditions. Fourthly, vigorous promotion on technology innovation, energy saving and emission-reduction helps the economic structure adjustment and economic growth transformation. Moderately loose monetary policies contain five aspects.24 First, ensure the financial system liquidity sufficient and provide liquidity supports to financial institutions in time. Second, keep credit growing appropriately, strengthen the role of bank credit in the economic development, relax the restrictions to the credit scale by commercial banks and enlarge the credit scale reasonably. Third, strengthen discount-window guidance and policy steering and optimize the loan structure. Fourth, further develop the financing function of the security market. Fifth, improve the financial services of the central bank. Furthermore, complementary measures for expending the domestic demand were enforced. Chinese government introduced ten major measures25 to further expand the domestic demand and stimulate the economy. First, accelerate basic housing projects. Second, speed up the infrastructure construction in rural areas. Third, speed up major infrastructure construction projects such as railways, highways and airports, etc. Fourth, accelerate the development of health care and education. Fifth, strengthen the building of ecological environment. Sixth, encourage the independent innovation and structural adjustment. Seventh, step up the postearthquake reconstruction of the affected areas. Eighth, raise the income of both urban and rural households. Ninth, implement the reform on value added tax in all areas and industries, encourage enterprises to make technological transformation, and ease the burden of the firms by RMB 120 billion. Tenth, reinforce the financial support to the economic development. By the end of 2010, an investment of RMB 4 trillion will be required to complete the above projects. Moreover, many ministries and commissions also introduced some relevant measures. China‘s Banking Regulatory Commission has relaxed the bank entry to rural areas, in order to promote rural finance, offer better services for rural development and explore potential consumption of rural households. By the end of June 2009, 118 rural financial institutions have been opened, taking in capital of RMB 4.7 billion and deposit of RMB 13.1 billion. Those institutions have issued RMB 5.5 billion loans for farmers and RMB 8.2 billion for small and medium firms.26 Overall Work Plan for New-type Rural Financial Institutions 2009-2011 by China‘s Banking Regulatory Commission has been approved by the State Council, under which 1,300 rural financial institutions of new-type will be set up in the coming 3 years. China‘s Ministry of Commerce carried out Home Appliance Subsidy Program for Rural Areas to stimulate the rural consumption and domestic demand. Finally, make adjustment to economic structure through industrial policies. The Ten Major Industry Revival Plans are intended to encourage the products that are energy-saving, environment-friendly, clean and with high added value. The ten plans are as follows. (1) Auto industry revival plan. Restructure auto industry, encourage independent 24 25 26

Source: Website of PBC, Implement the moderately easy monetary policy and further enlarge domestic demand to promote the economic growth, http://www.pbc.gov.cn/detail.asp?col=100&ID=2914 Source: Measures for enlarging domestic demand and promoting economic growth arranged on State Council executive meeting, http://www.gov.cn/ldhd/2008-11/09/content_1143689.htm Source: the website of China‘s banking Regulatory Commission http://www.cbrc.gov.cn/chinese/home/jsp/ index.jsp

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innovation and technology improvement and implement the new energy auto strategy. (2) Iron and steel industry revival plan. Control the aggregate output, encourage corporation reorganization and strengthen the technological improvement with supports to R&D and technology introduction. (3) Textile industry revival plan. Focus on independent innovation, phase out backward technology, optimize layout and then push forward the industry adjustment and upgrade. (4) Equipment manufacturing industry revival plan. Strengthen independent innovation by investing more on technology improvement. (5) Ship manufacturing industry revival plan. Control the increasing of manufacturing capacity and promote the structure adjustment. (6) Petroleum chemical industry revival plan. Adjust industry structure, optimize industrial layout, enhance innovation ability and management skill to acquire more competitiveness. (7) Light industry revival plan. Further implement the Home Appliance Subsidy Program for Rural Areas and expand the subsidy. (8) Nonferrous metal industry revival plan. Strictly control the output and phase out the backward production capacity. (9) Electronic and information industry revival plan. Enhance independent innovation and perfect the industrial development environment. (10) Logistics industry revival plan. Accelerate corporation reorganization and build up large logistics firms which can offer quality services and compete globally. Meanwhile, some commercial banks such as the Industrial and Commercial Bank of China (ICBC) and China Merchants Bank (CMB) etc. launched green loans. Through strictly checking the borrowers‘ capability on clean and energy-saving technology and the extent of the production pollution problems, priority will be given to those environment-friendly and clean energy projects. Many firms have started seeking green production plans. Take Geely Auto. Geely sticks to an environment-friendly standard as the prerequisite of the whole production process, from material selection, assembling to emission design.

3.3. Effects of China's Economic Stimulus Policies27 The Chinese government adopted a package of economic stimulus policies and measures, which has helped sustain a stable growth of the economy. The economy is stabilizing and GDP growth rate is back again to the upward trend. The data show that China's economy is stabilizing: during the first half of 2009, the total fixed asset investment grew by 33.5% in volume and by 7.2% in growth rate year-on-year; GDP grew by 7.1%, up by 1% than during the first quarter of 2009. The second quarter alone saw a GDP growth rate of 7.9%, up by 1.8% than the first quarter. The employment is generally stable. During the first half of 2009, 5.69 million new jobs were created in urban area, completing 63% of the full-year target; at the end of the 2nd quarter of 2009, the number of rural workers increased by 3.78 million, 2.6% higher year on year. Consumers‘ confidence has gradually increased. The domestic-demand-expanding policy has been remarkably effective in improving the urban and rural household income and expanding the domestic demand through increasing the investment on the projects related to people's lives. According to a survey by National Bureau of Statistics of China, the per capita disposable income of urban households was RMB 8,856 27

Source: the official website of National Bureau of Statistics of China.

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in the first half of 2009, up by a real growth of 11.2% YOY which was 4.9 % higher than last year. The total retail sales of consumer goods increased by 15% nominally, down by 6.4% than last year, and the real growth rate was16.6%, 3.7% higher than the same period of last year. The efforts on energy conservation have begun to take effects. In recent years, China‘s energy consumption per unit GDP (RMB per ten thousand) was going down year by year: the year 2006, 2007 and 2008 saw a decrease of 1.79%, 4.04% and 4.59% respectively, the first quarter of 2009 saw a 2.89% decrease compared with the same period of last year28.

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3.4. A Comprehensive Assessment on the Current Difficulties Since there are still much uncertainties about the recovery of China's economy and the economic basis is not yet stable, we need to assess the current difficulties: the bubbles in the real estate and stock markets cannot be ignored; the increase in rural households‘ income is slow and the rural demand is still weak; the decline in the export and the problem of overcapacity are already evident. The bubbles in the real estate market and stock market can hardly be ignored. In July 2009, China Banking Regulatory Commission ordered the banks to ensure that the new loans flow to the real economy rather than the stock or real estate market, to strictly monitor the destination of the loans and strengthen loan risk control. However, in the first half of 2009, the bank loans rose by RMB 7.37 trillion29, three times as much as that of last year, and even higher by 47% than the full-year target made by the central government. From the beginning of 2009 to the end of July, China's Shanghai Stock Exchange Composite Index has risen by more than 88%, making China the fastest growing major stock market this year. Meanwhile, in the real estate market, the real estate investment rose by 9.9% YOY in the first half of 2009, the housing sales grew by 31.7%, and the National Real Estate Development Climate Index in June was 96.55. Without a corresponding increase in the household income, the significant growth in the housing sales and the soaring prices against the sluggish business inevitably indicate the bubbles. The rural household income increases slowly, resulting to the weak rural demand. Both the total income of farmers and their wage income grow slowly or at a declining rate. In the first half of 2009, the per capita cash income of rural households was the lowest growth level in the past 5 years. The agricultural product price plunge and the difficulty for farmers to work outside result to the slow income growth. The sharp fall in the income growth of rural households and a widening income disparity between urban and rural households will certainly weaken the rural demand with insufficient leverage, thereby hindering further recovery of the national economy. The decline in export and the problem of overcapacity is evident. The global economic downturn drew down the demand from major trade partners of China and affected China's exports and employment in turn. From November 2008 to June 28 29

Source: National Economic and Social Development Statistical Communiqué of every calendar year. Source: Website of PBC, The credit amount grew rapidly and the liquidity of bank system kept sufficient, http://www.pbc.gov.cn/detail.asp?col=100&ID=3299

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2009, China's export maintained a negative growth for eight consecutive months. According to the figures released by China's General Administration of Customs, in the first half of this year, China's aggregate import and export amounts to US $946.12 billion, down by 23.5%. The accumulated trade surplus was US $96.94 billion, down by 1.3% or US $1.3 billion net. With the new type of trade protectionism coming back worldwide, China's foreign trade is still facing many difficulties. At the same time, in the first half of 2009, China's Consumer Price Index (CPI) fell by 1.1%, in which it fell by 1.7% in June; Producer's Price Index for Manufactured Products (PPI) fell by 5.9%, in which it fell by 7.8% in June.30 The declining price reflects insufficient effective demand and the relative surplus of supply. It is expected that the problem of overcapacity will get worse in the second half of the year.

4. TREND: NEW ROLES IN INTERNATIONAL ECONOMY Looking forward, as a fast-growing emerging market, China will definitely contribute more to and play new roles in international economy as a new world-class market, an ideal investment destination, a new global investor, and a builder of a new international financial order.

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4.1. A New World-Class Market China is known as the factory of the world, while we will see that China is turning to a large world-class market, based on five principal elements: (1) A large domestic market. As a big country with 1.3 billion people, China has a lower-than-median GDP per capita among the middle-income nations and limited purchasing power per person. Nonetheless, any small number, when multiplied by 1.3 billion, will become extremely large. (2) The domestic demand is diversified. The Chinese household income structure is complicated and there is huge disparity in ladder-shaped distribution, leading to a multivariate domestic demand. (3) The urban consumer group is expanding gradually. (4) There is huge space for enhancing rural consumption level. 800 million farmers in China only consume a third of the national commodities and the expenditure is only a quarter of the urban level, indicating great potentials for further improvement. (5) Various emerging consumption patterns are burgeoning out. Green consumption is sought after; credit consumption is becoming a fashion; on-line consumption is growing in popularity and leasing consumption will expand greatly. All these show that the Chinese market has palpable advantages with fairly strong market absorption. Nearly every commodity category from any country all over the world could find the market of certain scale in China. The world will be exhilarated when China could import as much as US $1trillion. The day is in the near future. The robust growth of Chinese economy is promoting the personal income level and enlarging the potential of national consumption rate. Next, we will analyze the consumption potential of Chinese households.

30

Source: State Council Information Office of P.R. China held press conference on national economic situation of the 1st half of 2009, http://www.scio.gov.cn/xwfbh/xwbfbh/wqfbh/2009/0716a/

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Since the reform and opening-up 30 years ago, GDP per capita of China has been on the rise and the household income and wealth been growing rapidly (See Figure 3). As Figure 3 shows, since the launch of reform and opening-up 30 years ago, China‘s GDP per capita has increased from RMB 381 in 1978 to RMB 22,640 in 2008, up by 60 times than 30 years ago. On the other hand, however, the saving rate of Chinese households has declined from 62.1% in 1978 to 42.8% in 2008. China is now adjusting the economic structure. And to expand the domestic demand, China needs to promote the household income level and consumption rate where huge potential lies. We also see that, the urbanization rate in 2007 and 2008 in China is 44.94% and 45.7%31, respectively in the intermediate phase of urbanization, implicating a tremendous demand potential in the future. If the urban population grows up to two thirds of the total population from 450 million currently to 900 million and the share of the tertiary industry in GDP to 50%, the domestic demand will be released for a long run for the economic growth. In fact, China is now accelerating the process of urbanization. We have every reason to believe that the future demand of Chinese market will be extremely broad.

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4.2. An Ideal Investment Destination China‘s GDP per capita is only US $ 3,000, a level of the intermediate-level countries, with huge space for further promotion. China‘s abundant human capital and natural resources and vast areas are all advantages for attracting investments. We will discuss this by the following two points. First, China is in the intermediate phase of industrialization, requiring large amount of investment. Here is why. Chinese industrialization is in line with the U.S. intermediate phase of industrialization. We select four indicators to describe the industrialization degree and economic development phase (See Table 2). According to Table 2 and Categories of U.S economic development phases32, we can see that share of the secondary industry in GDP in China is in line with the period 1950-1960 of U.S. which is the U.S. post-industrialization phase, while the ratio of employment in China corresponds to that of the year 1900 of U.S. which is the U.S. primary phase of industrialization. Hence, we can infer that the current economic development in China is in the intermediate period of industrialization. For a big country with 1.3 billion people but the industrialization remaining in the intermediate phase, to complete the industrialization process, say, the gradual transition into later industrialization, post industrialization and even the modern industrial society, China needs to accelerate upgrading the industrial structure, expanding investment, and promoting the level of industrialization.

31 32

Data of 2007 are from China Statistic Book 2008, data of 2008 are from Chinese National Economic and Social Development Report 2008. Categories of economic development phrases in U.S.: pre-1870: agricultural society; 1870-1910: primary phrase of industrialization; 1910-1940: intermediate phrase of industrialization, where, 1910-1920 is the period for making shifts from the primary phrase of industrialization to the intermediate phrase; 1940-1970 is the latter period of industrialization; 1970-1992: post-industrialization; since 1992: modern society. Source: Li Xiaoxi, et al. Research on China‘s Economy Development Phrases and Relevant Strategies. Academic Journal of the Central University of Finance and Economics, 2007 (3).

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25000 20000 15000 10000 5000

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

0

Source: Data of 2008 extracted from ‗Chinese National Economy and Social Development Statistic Report 2008‘; other data from ‗Chinese Statistic Book 2008‘. Figure 3. GDP Per capita in China, 1978-2008 (Unit: RMB).

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Secondly, the international investors are very concerned whether China has a sound economic system for their investments. Over 30 years of reform and opening-up, in the process of economic transformation, China‘s economic system is gradually becoming matured. Moreover, factor markets, government management system and the reform of stateowned firms are all making progresses, providing institutional assurance for foreign investments.

4.3. A New Global Investor In the future reform and opening-up, China is sure to make shifts from commodity export to capital export, from capital agglomeration to capital radiation strategy, from a tradeoriented nation to a capital-oriented power.

Table 2. Comparison on Indicators of China 2007-2008 with the U.S Related Data Indicators Ratio of Secondary Industry in GDP (%) Ratio of Employment in the Secondary Industry(%) Ratio of Tertiary Industry in GDP (%) Ratio of Employment in the Tertiary Industry(%)

China Year Data 2008 48.8 2007 26.8 2008 40.1 2007 32.4

United States Data Year 38 1950-1960 30 1900 32-58 1820-1870 32 1900

Source: Data of China are from Chinese Statistics Book 2008 and Chinese National Economy and Social Development Statistic Report 2008; Ratio for Secondary/Tertiary Industry of GDP, employment in the Secondary/Tertiary Industry of the United States are from Chinese Modernization Report 2005.

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China‘s rapid economic development and growing comprehensive national strength help Chinese firms prepared for the international investment expansion. China‘s GDP per capita has exceeded US $3,000, which is fundamental to the outward investment. Meanwhile, the Chinese government encourages and supports the qualified firms of all-kind ownerships to make overseas direct investments (ODI) or multinational operation, actively involving in economic globalization as well as the integration of world economy. Since 2009, policies encouraging outward investments are released successively: The Administrative Rules Governing Overseas Investment by the Department of Commerce aims to encourage the cross-border investments or mergers and acquisitions. The Foreign Exchange Regulations Concerning the Overseas Direct Investment by Domestic Organizations issued by the State Administration of Foreign Exchange tends to replace the approval by registration system for the administration of the overseas foreign exchange of the investment by domestic firms. Thereafter, the Department of Commerce declared that based on The Administrative Regulations on Contracting Foreign Projects of 2008, The Administrative Regulation on Foreign Labor Cooperation and The Administrative Regulation on Overseas Investment Cooperation will be introduced soon. In addition, to protect the rights and interests of Chinese firms in overseas investment, China has established bilateral mechanisms for economic and trade committee with more than 100 countries and regions all over the world and signed 127 bilateral investment protective agreements. The introduction of these policies and regulations will provide an all-round administrative assurance for Chinese overseas investments. Based on the wealth accumulated from the rapid economic growth and the policies in favor of ODI, Chinese firms and households have started making large-scale international investment, which is growing rapidly (See Figure 4). As the above figure shows, China‘s ODI hits US $26.51 billion in 2007, up by 25.3% year on year. Moreover, the volume has been increased greatly since 2002. From 2002 to 2007, the non-financial ODI has been increasing by 56% per annum. Over the last year, due to the heavy hit of the global financial crisis, the real economy all over the world has sunk into deep recession. While foreign investors are laggard to invest in China, China‘s overseas investment becomes the highlight of global economy. China‘s nonfinancial overseas investments in 2008 hit US$ 40.7 billion, up by 63.6%33 year on year. In the second quarter of 2009, the overseas investment from China mainland (excluding Hong Kong and Macao) is US $10.8 billion (US$ 3.9 billion in the first quarter), up by 17%34.

4.4. A Builder of New International Financial System China advocates and participates actively in the reform of international financial system and in the optimization of the global financial supervision, striving for a new international new financial order. There are reasons for the reform of international financial system: (1) It does not reflect the changes in the economic powers in the world. Particularly, it does not enhance the share 33 34

Source: Statistical Communiqué of the People's Republic of China on the National Economic and Social Development 2008. Liu Zhendong, Zhang Xiaofang. Australia Becomes the First Choice for Chinese Overseas Merger and acquisition. Economic Information Daily, July 28, 2009.

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Li Xiaoxi, Liu Yimeng and Lin Yongsheng

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of developing economies in the international financial organizations, such as the discourse right for the emerging markets. (2) It lacks the supervision over the risk of cross-national finance, the arrangement of prewarning institutions, and effective supervision on the disordered flow of short-term capital. Early at the G20 summit in 2008, China has made a series of suggestions and policy proposals on reforming current international monetary and finance system, maintaining international financial stabilization, facilitating economic and financial policy coordination across the world, enhancing international currency and financial cooperation, and so on. The propositions have attracted much attention and been valued worldwide. Early in 2009, Zhou Xiaochuan, President of the People‘s Bank of China, had a detailed proposition about how the international financial system should be reformed, including creating a type of international reserve currency depegged from sovereign countries and remaining stable for a long-run, to avoid the inherent defect of the sovereign credit currency as the reserve currency. He also proposed that IMF should centrally manage some reserves for the member countries35. Overall, as a typical emerging market, China has been and will be more and more important in promoting the reform on international financial system and optimizing the global financial supervision.

Source: China‘s Overseas Direct Investment Statistical Report 2007, website of the Department of Commerce of China. Figure 4. China‘s ODI Volume, 1990-2007(Unit: US$ 100 million).

REFERENCES [1] [2] 35

Chen Jiagui, China‘s Economic Prospect: Report of Spring, 2009. Social Science Literature Press, Beijing, April, 2009. Department of Commerce, National Export Strategy: the second annual report of the Trade Promotion Coordinating Committee, 2004.

Zhou Xiaochuan. Thoughts on Reform of International Currency System. March 24, 2009. The official website of the People‘s Bank of China.

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Emerging Market under Globalization [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13]

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[14] [15] [16] [17] [18] [19] [20] [21]

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Goldman Sachs, Global Economics Paper No.99, Dreaming with BRICs: The Path to 2050, Oct.1, 2003. Goldman Sachs, Global Economics Paper No: 153: The N-11: More Than an Acronym, March, 2007 IMF. World Economic Outlook Database. April, 2009, Institute of Economic and Resources Management of Beijing Normal University, A Report on the Development of China‘s Market Economy 2003, China International Commerce and Trade Press, 2003. Institute of Economic and Resources Management of Beijing Normal University, A Report on the Development of China‘s Market Economy 2008, Beijing Normal University Publishing House, 2008. Li Xiaoxi. China: A New Development Concept. Chinese Economy Publishing House, 2008. Li Xiaoxi, et al. Discussion and Progress of Significant Theory Problems During the 30 Years of China‘s Reform and Opening-up[J]. Finance and Trade Economics, 2008(11). Edited by Li Xiaoxi, Volume of China Economy Marketization [M], Chongqing University Press, 2008. Li Xiaoxi, et al. Evaluation on China‘ s Monetary and Financial Policies, Beijing: Renmin Publishing House, 2007. Li Xiaoxi, et al. Research on China‘s Economy Development Phrases and Relevant Strategies [J]. Academic Journal of the Central University of Finance and Economics, 2007 (3). Liu Zhendong, Zhang Xiaofang, Australia has become the first-choice for Chinese overseas merger and acquisition, Economic Information Daily, July 28th, 2009. National Bureau of Statistics. China Monthly Economic Indicators [J], 2009 (2). National Economic and Social Development Statistical Communiqué of every calendar year. National Statistical Yearbook of every calendar year. Rao Huilin, Urban Economics (Volume I) [M], Northeast University of Finance and Economics Press, August 1999. Shang Jun, Fu Yunwei, Emerging markets step onto historical front on response to financial crisis, Economic Information Daily, Sep. 16th, 2009 Survey and Statistics Department of the People's Bank of China, Central Bank Macroeconomic Situation Analysis Report of the Second Quarter of 2009, July 28th, 2009. Wang Jian, Population Urbanization is the strategy direction for expending domestic demand [N], China Economic Herald, April 18th, 2009. Zhang Rongnan, Time for investment overseas [N], China Daily, June 22nd, 2009.

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Chapter 12

CONCEPTUALIZING RURAL COMMUNITIES IN THE FACE OF GLOBALIZATION: THE AFRICAN PERSPECTIVE 1

Frank S. Arku1 and Cynthia Arku2* Department of Rural and Community Development, Presbyterian University College, Akuapem Campus, Ghana 2 Northern Alberta Development Council, 15 Nipewon Road, Lac La Biche, Alberta, Canada

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ABSTRACT The article discusses two views on the concept of globalization; globalization from above and globalization from below. While globalization from above advances the creation of wealth, globalization from below aims at improving people‘s lives. It indicates that globalization from above affects people of both developed and developing settings, however, the latter suffers disproportionately from the neoliberal policies accompanying globalization from above, because they are already fragile. And the most vulnerable of developing countries including Africa are the rural residents who often lack basic needs such as clean water, education and health facilities. This article shows how rural communities can become unsustainable when residents‘ views, realities and environmental conservation are overlooked. It suggests that rural people can have their needs better served if the framework guiding the function of actors seeks to engage them in the process of improving their lot, and they can obtain the capital support they need.

Keywords: Globalization from below and above, rural, basic needs, Africa

1. INTRODUCTION: OVERVIEW OF GLOBALIZATION The globalization literature identifies globalization from below (GFB) and globalization from above (GFA, also known as corporate globalization) as two differing views. GFA has its roots in capitalism and GFB is people centered. *

Corresponding author: Email: [email protected]

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Corporate globalization or GFA according to Wolf (2004: 14) is ‗a phenomenon by which economic agents in any given part of the world are much more affected by events elsewhere in the world than before‘. Sumner (2005: 19-20) also defined corporate globalization from the economic point of view as ‗the process by which the perceived advantages of Western-style capitalism have been shared with an ever-widening group of developing countries‘. Thus, major agents of corporate globalization such as the World Bank, International Monetary Fund (IMF)) that aim to help ‗have-nots‘ and struggling economies through worldwide connectedness are working two agendas, of which one is hidden. Transnational corporations (TNCs) seeking to make rational economic decisions and going where ‗money‘ can be made is what capitalism is about (Daly, 1990; Nef and Robles, 2000). Although corporate globalization with an accumulative agenda and money code of value could be of benefit, this may be short-lived. For example, the economic growth in Indonesia, Taiwan, and Thailand which led to their portrayal as Asian Tigers with the best development models did not last. According to Sumner (2005), it was the Asian Meltdown that put an end to the growth. The west also sees the short term benefit of corporate globalization. Their TNCs frequently shut down their factories and re-locate in places where more profit can be made. The result is massive lay-offs (Leach and Winson, 1995). Also, farm communities, fishing villages and mining towns in Canada are reeling from resource depletion due to corporate globalization (Sumner, 2005). A case in point is the Regional Municipality of Wood Buffalo in Western Canada, where rural indigenous Aboriginal communities are in constant struggle with TNCs and government over elimination of their traditional way of life as fish from the waters become unsafe and wildlife is threatened to go extinct. On top of the devastating effects of capitalism-driven globalisation, the neo-liberal development policies accompanying it worsen the pains. The World Bank and IMF are described as the imposers of neo-liberal policies. Joseph Stiglizt, a former chairman of the Council of Economic Advisors noted the four steps in the neo-liberalization process meant to boost economies which are outlined by Sumner (2005: 22) below. The free trade in step four below could be either a state or non-state intervention, but often the latter is prominent in developing countries (Martinussen, 1997). 1. Privatization, which is also referred to as ‗briberization‘, in which national leaders receive 10 per cent commissions paid to Swiss bank accounts for every state industry they privatize; 2. Capital market liberalization in order to allow investment capital to flow in and out. But at the end of it all, money only flow out. When the nation‘s reserves are drained, the IMF steps in to demand nation to raise interest rates to 30 per cent, 50 per cent and 80 per cent resulting in demolished property values, savaged industrial production and drained national treasures; 3. Market-based pricing, which means raising prices on food, water, and cooking gas. This leads to what Stiglitz calls ‗the IMF rot‘, which causes new panicked flights of capital and government bankruptcies, resulting in foreign corporations picking off remaining assets at fire-sale prices; 4. The IMF/World Bank ‗poverty reduction strategy‘, which includes promoting free trade.

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The GFB on the other hand comprises ‗an array of transnational social forces animated by environmental concerns, human rights, hostility to patriarchy, and a vision of human community based on unity of diverse cultures seeking an end to poverty, oppression, humiliation, and collective violence‘ (Falk, 1993: 39). According to Brecher et al. (2000) GFB aims to:    

restore to communities the power to nurture their environments; enhance ordinary people‘s access to the resources they need; democratize local, national and transnational political institutions; and impose pacification on the conflicting power of centers.

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In pursuit of a life code of value, advocates of GFB put on demonstrations and conferences against their opponents. This is to create the awareness of how the activities of GFA is depriving a section of human society their basic human needs, and threatening the environment‘s ability to support life. They believe in preserving or extending life‘s vital range, rather than to maintain and enhance corporate profits. The GFB advocates also suggest that the earlier something is done about the situation the better. This is in order that that we do not suffer like the ancient people of Sumer and Ester Island who cared little about their environment degrading and saw two of their kingdoms collapse when their environment could not regenerate (Wright, 2004 ). Rees (2002: 251) observed that they were…‗no longer able to build the large canoes essential to maintaining their diet of porpoise and fish‘. Advocates of GFB include workers, women peasants, indigenous people and environmentalists that are not well organized, like their counterparts. However, their message is clear. They are life-centered, not money-centred1.

2. THE COST OF GLOBALIZATION TO RURAL PEOPLE Many neo-liberal instruments carried out with globalization affect rural people in several unfavourable ways. Neo-liberal economists are of the view that (see Martinussen 1997: 262): 1. All distortion interventions in the pricing mechanisms should be abolished in order to maximize growth and development; 2. Foreign trade should be liberalised to remove incentives for inward-outward looking and export-oriented economic activity; and 3. The public sector should be reduced in size by privatizing public undertakings and relinquishing as many economic tasks as possible to private companies. These three features of the neo-liberal approach are equivalent to the step four of Joseph Stiglizt‘s four steps noted earlier. His steps 1-3 can be referred to as preparatory stages for step 4.

1

Whatever enables life to be preserved. These include clean air, food, water, shelter, effective interaction, environmental space, and accessible learning conditions (McMurtry, 2001).

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These neo-liberal instruments are packaged and named differently. In the 1970s and early 1980s, it was broadly termed Structural Adjustment Programs (SAPs) in Africa. It is described more specifically as Economic Recovery Program (ERP) in Ghana (Donkor, 1997). The Bretton Woods institutions, including the World Bank and IMF with in-country government departments design the SAPs. Their goal is to enhance access to foreign exchange to enable countries to repay their debts by increasing exports (Griesgraber, 2000). New loans and relief on existing debt are often contingent on implementing the SAPs. They promote the SAP instruments drawing on the conviction that a relatively unregulated free market and private sector are the engines for growth. For that matter their prescriptions for SAP include:

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   

abolish minimum guarantee price of agricultural products; remove subsidies on agricultural inputs; privatize state-owned institutions; and remove subsidies on services including clean water.

These policy instruments can have impacts that rural people may find difficult to deal with. For example, removing subsidies on agricultural inputs means that the majority of rural Africans, south of the Sahara whose livelihoods depend on agriculture have to seek loans to buy expensive inputs, including fertilizers, pesticides and insecticides. However, most of these farmers do not have collateral the banks ask for to be eligible for loans. The result is that farmers are forced to reduce their farm sizes and earn less income that cannot meet their basic needs. Subsequently, what becomes the trend is migration to urban areas in search for non-existent jobs, leaving the vulnerable such as women, aged and children, to care for themselves. Hines and Lucas (2003) observed that when the South Korean government removed subsidies on agricultural inputs, the men had to abandon their farms for the cities and children and women were left behind. They added that the impact is felt everywhere in developing countries. As well, the vulnerable of developed countries live with the negative impacts of globalization. Leach and Winson (1995) found that when factories were shut down in Canada for relocation in the USA, women and seniors were laid off first. According to Sumner (2005) the SAP imposed on Canada were aimed at ‗belt tightening‘, ‗deficit reduction‘, and ‗rationalization‘, which produced increased levels of bankruptcies and homelessness among the poor. Irrespective of a country‘s level of development, essential services are missing when privatization goes with globalization. Governments of developing countries are asked to shift their role of providing essential services to the private sector. The private service providers charge exorbitant prices to make large profits. According to Sumner (2005) Canadian rural communities are in danger because of the government privatizing public services that are crucial to their well-being, such as postal services, telecommunications and public transport2. Sumner (2005:40) further observed that ‗…the remoteness of many rural communities from privatized water, gas, and electricity supplies might thereby incur disproportionate increases‘. Thus, rural Canadians may pay 2

Since profit maximization is the key to privatization, these services are not likely to be delivered effectively.

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higher prices for some of these services than their urban counterparts who are closer to the service centres.

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4. CONCEPTUALIZING SUSTAINABLE RURAL COMMUNITIES The phrase Sustainable Rural Communities (SRC) is contested because the concepts of sustainability, rurality and community are contested. Many attempts to define and theorize these concepts have evolved over the years. For Sumner (2005:121), ‗a sustainable rural community involves a rural community that is based on a set of structures and processes that build the civil commons‘. She added that structures are the difficulties and opportunities faced by decision-makers, while processes involve ongoing development, which among other things include collaborating and making decisions. McMurtry (2001) defined civil commons as society‘s communally owned resources and capacity for preserving life and growth that are universally accessible to its members. The civil commons include health care, parks, public education, sidewalks, and old-age pensions (Sumner, 2005). The civil commons in rural Africa can include basic human needs including food, clean water, health and educational facilities. Thus, Allen and Sachs (1991) maintain that the foremost objective of sustainability is for people to have their basic human needs. While access to food, for example, is the responsibility of individual households, access to clean water entails community-wide support since it is a social good. The majority of rural Africans do not own individual water systems, so they depend on communal boreholes and wells. Other amenities such as education and health care are communally owned in some rural communities. Involving rural people as beneficiaries to obtain and run these civil commons is paramount to sustainability. Their communities usually have a selection of members to assist to establish and manage community projects. Thus, the selected members, acting as the decision-making body or development committee work in collaboration with other local and external stakeholders, to obtain their civil commons. However, as the local decision-making body acts on behalf of the community members, they would face difficulties and opportunities. Sumner‘s (2005) earlier definition of SRC can be applied to the rural African context. What is meant by SRC from an African perspective? They are rural communities whose local leadership or committees collaborate with community and external stakeholders to undertake interests and needs that improve the living conditions of its members. As they address their needs, they must care to protect and preserve the environment to avoid using it beyond its regenerating capacity (see Wright, 2004). Sound environmental policies are therefore a key component of their SRC. Figure 1 shows a conceptualized SRC for developing countries (e.g., Africa)

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Figure 1. Conceptualized Sustainable Rural Communities in Africa.

The thickest arrow pointing to ‗local communities‘ and ‗external agencies‘ in Figure 1 shows that, both parties must participate in the decision-making process. To arrive at a consensus, both parties have to agree on the decision, which is referred to as joint decision. The local committee would serve as a mouth piece which conveys what the majority of the community has reported would like to see, taking into account other considerations (e.g., cultural and political values). The external agencies also relay information to the local committee for the community. The ‗joint decision‘ is placed in the middle of the arrows that connect ‗local committee‘ to ‗external agencies‘. If an external agency dominates in any decision, then the decision-making process falls short of a SRC. But if the local committee dominates in the decision-making, it is still a feature of SRC. This is because a strong community voice is encouraged as community members will be impacted by any decision.

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After both parties have agreed on a decision, the local committee and the external agency implement the decision which could be in the form of a project (s) - clean water, education and health facilities, and accessible roads3. Figure 1 depicts that access to these would improve the living conditions of all community members. There are opportunities and difficulties in the decision-making process in SRC as noted earlier. The two arrows marked ‗opportunities and difficulties‘ pointing up to local committees and down to clean water and education among others, shows that the community would benefit from these opportunities, and likewise meet difficulties in the process4. At any stage in the development process decisions around implementation, usage and maintenance of the projects, sound environmental policies have to be incorporated5 (see Figure 1). The policies as well as their enforcement must seek to protect plant and animal species, water bodies and the land‘s regeneration capacity.

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5. SUSTAINABLE RURAL COMMUNITIES IN THE FACE OF GLOBALIZATION Demand Responsive Approach (DRA) to obtaining water, ` for example, which is limiting universal access to water in rural communities in Africa, can be blamed on neoliberal policies of globalization. While rural people pay a fixed amount of the capital cost in addition to the full responsibility to operate and maintain the water systems within the DRA, they also pay cash each time they collect clean water. Privatizing water using the DRA is indirectly affecting achieving SRC. First, since the access to clean water depends on the ability to pay for the capital costs and to maintain the system, it means some rural communities will not have clean water because they cannot afford their portion of the capital cost. Although United Nations (UN) indicates that access to clean water is a fundamental human right. Second, the expectation to pay cash to collect water and in some cases travel long distances to nearest collection points means that some rural people may be unable to use clean water. Arku (2010) found in his study of the Volta Rural Water Supply Project in Ghana that some residents were not always collecting water from their community boreholes because they could not afford the water fees. They walked for several metres to collect unclean water from ponds. Third, DRA would not only deny rural communities access to clean water, it can potentially create partial participation from community members on decisions. As shown in Figure 1, projects are likely to be effective when communities fully participate from project conception to management of their uses. However, communities that are unable to afford their preferred type of service will settle for any type offered to them. Instead of stand-pipes that

3

Food is excluded from the list although it is among the most basic needs. The reason being that and as explained; it is not the responsibility of community members in Africa to find food for their neighbours. However, in a typical rural community, members who need food can easily walk to other members‘ homes and ‗wash their hands and start eating‘. 4 The arrows going to the opposite directions do not indicate that the committee members are not part of the community. 5 Human actions (e.g., practices) are important in achieving sound environmental policies.

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are less labour intensive to operate, they would choose to have a borehole because it is less costly. Also, since the decision on which water technology to go for largely depends on what is feasible cost-wise, environmental considerations important to residents are likely to be missed6. Not adhering to ways to conserve the environment is a deficiency in the SRC equation in Figure 1. Thus, neoliberal policies would render rural communities unsustainable as depicted in Figure 2. In Figure 2, a one way arrow pointing towards ‗local committees‘ symbolizes the external agency making the decisions for the community. Further, communities are likely to face difficulties when the external agencies make the decisions for them. A local committee may be unable to have a borehole placed at a site that will allow the least travel distance for residents for technical reasons. In situations where they are able to decide on a favourable site, some members may still have to walk a few hundreds of metres to collect clean water because they cannot afford as many boreholes as they need to have them near to their homes. With inadequate boreholes, the local committee has to manage traffic flow during peak collection periods. People can spend hours in queues awaiting their turn to collect water. How to raise adequate cash to operate and maintain the boreholes is also their difficulty or challenge, especially because not all community members can afford water fees (See Arku, 2007). Thus, Figure 2 shows the ‗Difficulties‘ affects the local committees and these culminate into members using both clean and unclean water.

Figure 2. Possible Effects of Neoliberal Policies on Sustainable Rural Communities.

6

Extra cash might be needed for meeting environmental policies in rural water supply projects, which development agencies may not be prepared to handle. Rees (2002) observed that the current approach to international development is putting more emphasis on economic than social and environmental concerns.

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Figure 3. The Worst Effects of Neoliberal Policies on Sustainable Rural Communities.

Since environmental considerations are not likely to be incorporated; environment is not included in Figure 2. ‗Improved living conditions‘ is also excluded since communities cannot thrive when they are unable to influence decisions that would meet their need for clean water, for example. Thus, unlike Figure 1, Figure 2 does not fit into the definition of SRC. A third illustration is the worst state represented in Figure 3 where nobody has access to clean water because they cannot afford their portion of the capital cost. In this situation, the local committee with external agencies cannot reach a positive decision to build a water facility. The overall result as illustrated in Figure 3 is that rural residents have to use unclean water in the absence of clean water. Figure 3 is described as the ‗Worst effects of Neoliberal policies on rural communities‘ because no relationship exists among the variables.

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6. CONCLUSION Money-centred GFA does not have much to offer rural communities. The vulnerable of both developed and developing economies bear the brunt of the impacts, particularly rural Africans. Not only do the neo-liberal policies with globalization deny rural people of their basic human needs, the low place of environmental conservation in the workings of GFA would deprive them of healthy and sustainable environments. The good news is that advocates of GFB are making their voice heard on their message that life matters, although they are not well organized. Making rural communities sustainable is a must. Since perpetrators of GFA are least concerned about the cost issues that prevent rural people from having what best meets their needs, governments need to take more action on their social obligation to offer decent life to its rural citizens. As well, the perpetrators of GFA can become more responsible if they make mandatory contributions towards community projects such as water, education and health that are life-centred. Engaging rural people in the process of meeting their needs is paramount for mitigating the impact of GFA.

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REFERENCES Allen, P. L., and Sachs, C. E. (1991). ― The social side of sustainability: Class, gender and race.‖ Science as Culture 2: 569-590. Arku, F. S. (2010). ― Time savings from easy access to clean water: Implications for rural men‘s and women‘s well-being‖ Progress in Development Studies 10(3): 233-246. Arku, F. S. (2007). ― Water, time and gender: Assessing the Impact of a Water Project in Ghana‖ A PhD thesis presented to the Faculty of Graduate Studies, University of Guelph. Brecher, J., Costello, T. and Smith, B. (2000). Globalization from below: The Power of Solidarity. Boston: South End Press. Daly, H. E. (1990). ― Towards some operational principles of sustainable development‖ Ecological Economics 2: 1-6. Donkor, K. (1997). Structural adjustment and mass poverty in Ghana. Sydney: Ashgate Publishing Company. Falk, R. (1993). ― The making of global citizenship‖ In Jeremy Brecher, J. C. and Cuter, J. (Eds.). Global visions: beyond the new world order. Boston: South End Press. Griesgraber, J. (2000). Effectives of ESAF as a debt relief mechanism. Washington D. C.: Center of Concern. Hines, C. and Lucas, C. (2003). ―Rural slavery that passes for free trade‖ Guardian weekly, November 6-12. Leach, B. and Winson, A. (1995). ― Bringing globalization down to earth: Restructuring and labour in rural communities‖ Canadian Review of Sociology and Anthropology 32 (3): 341-363. Martinnussen, J. (1997). Society, state and market: A guide to competing theories of development. London: Zed Books Limited. McMurtry, J. (2001). ― The life-ground, the civil commons and the corporate male gang‖ Canadian Journal of Development Studies 22: 819-854. Nef, J. and Robles, W. (2000). Globalisation, neoliberalism, and the state of underdevelopment in the New Periphery. Rees, W. E. (2002). ― Globalization and sustainability: Conflict or convergence?‖ Bulletin of Science, Technology and Society, 22(4): 249-268. Sumner, J. (2005). Sustainability and the civil Commons: rural communities in the age of globalization. Toronto: University of Toronto Press. Wolf, M. (2004). ―What liberal globalization means.‖ Why globalization works. New Haven: Yale University Press, pp. 13-19. Wright, R. (2004). A short history of progress. Toronto: House of Anansi Press Inc.

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Chapter 13

GLOBALIZATION, INEQUALITY AND THE LABOUR MARKET Yılmaz Akyüz, Heiner Flassbeck and Richard Kozul-Wright

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1. INTRODUCTION The idea that globalization can create "losers" as well as "winners" has, after an initial resistance, begun to attract the attention of economic researchers and of policy makers, at both the national and multilateral levels. Much of the discussion to date has concerned countries and regions that have remained stuck at very low levels of income. A good deal of effort has been given to measuring the extent of global poverty and examining the processes of marginalization (World Bank, 2001; UNCTAD 2002). While there can be little doubt that poverty alleviation is an important policy challenge, at a more fundamental level, auditing globalization must mean re-examining the links between income distribution and growth at different levels of economic development. Conventional economists have approached this issue by reviving the idea of economic convergence. In particular, trade and capital flows have been introduced into endogenous growth models thereby expanding the range of development paths facing poorer countries and giving greater emphasis to the conditional influence of policy measures. On this basis, a good deal of empirical testing has reported an improved global income distribution over the past two decades largely due to cross-country convergence brought forth by the strong growth performance of open developing economies.1 However, this conclusion has been widely criticized on both empirical and analytical grounds.2 While it is not the intention to review 1 2

The convergence literature is vast, see for example Sachs and Warner (1995); Ben-David (1995); Sala-i-Martin (1996). For an assessment see Kozul-Wright and Rowthorn (2002). The extent of the partiality among conventional economists in examining the links between globalization and income distribution can be seen in the recent study by the CEPR (2002). Despite documenting a dramatic rise between 1970 and 1992 in the share of the top 10 per cent of the world's population from 50.8 to 53.4 per cent, the study concludes "the evidence suggests that globalization had positive effects on the world distribution through pushing up Asian growth" p. 67. As is clear from this remark, the interpretation of global trends in distribution hinge to a very large extent on assessments of China‘s recent economic record, see Berry and Serieux (2003).

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that debate here, it is apparent that much of the discussion of distribution and growth under contemporary globalization dynamics has paid insufficient attention to trends in functional incomes. In fact, growing wage inequality between skilled and unskilled workers appears to have been a universal trend over the past two decades; profit shares have risen in many countries and rentier incomes have also risen sharply (UNCTAD 1997). Although a full assessment of these trends has yet to be undertaken, there appears to be a close connection to the contemporary globalization process, and in particular from the divergence in bargaining power which has accompanied the greater mobility of capital. In the two decades following the end of the Second World War full employment, steadily rising real wages and the strengthening of the welfare State were the common features of labour markets in all the leading industrial economies. This was supported by a multilateral regime of trade and capital flows established at the end of the Second World War to regulate international economic flows to ensure their consistency with domestic growth and employment goals. As a result, the deep insecurity that had marked the conditions of workers in these countries during the inter-war period had, by the end of the 1960s, become a distant memory. All that ended abruptly with the oil price shocks and the collapse of the Bretton Woods system in the early 1970s. In continental Europe, the return of labour market insecurity took the form of sharp and persistent rises in unemployment, while in the United States and the United Kingdom increasing wage inequality between skilled and unskilled workers became the dominant trend. The coincidence of high unemployment levels and growing wage inequality in the North with sharp increases in manufacturing imports from the South has led to concerns over a destructive link running from more open trade relations to the labour market. While recognizing that rapid trade liberalization and surges in imports can cause dislocations in the labour market, this paper argues that in today‘s globalizing world, the link between trade and employment cannot be properly examined independently of either overall demand conditions or the workings of global financial markets. This is also true for the impact of technological change, also part of the contemporary globalization process associated with the informationcommunication revolution, which is often suggested as an alternative explanation of recent labour market problems. The conventional analysis, in particular, ignores the dominant role played by finance capital in the current integration process. International capital flows have been growing a good deal faster than trade since the collapse of the Bretton Woods system, with a marked surge to developing countries in the 1990s. At the same time, financial shocks and crises have become a much more frequent occurrence in the international economic system. As a consequence, and particularly in the case of developing countries, financial liberalization and capital movements have been a growing influence on labour market performance. This paper adopts an integrated approach to labour market problems in the context of the globalization process. It begins with the links between trade and technology and labour market problems in the North. It rejects any strong direct link in either direction and concludes that a faster pace of accumulation holds the key to reducing unemployment in the industrial countries. The next section asks how liberalization has affected labour markets in developing countries. Although it finds significant differences between countries in the effects of trade liberalization on wages and employment, the impact of financial liberalization appears to have been generally negative for workers throughout the developing world. The final section draws some policy conclusions.

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2. EMPLOYMENT AND WAGE INEQUALITY IN THE INDUSTRIAL COUNTRIES 2.1. North-South Trade and Labour Markets

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An important factor behind rising rates of unemployment and increasing wage inequality in most industrialized countries over the past two decades has been the loss of jobs in manufacturing. This has largely been due to a displacement of unskilled labour on a significant scale in a number of industries in which developing countries have increased their market share. A number of arguments have been put forward to suggest a causal link between these two developments. First, given that the wage of unskilled workers in the South is a fraction of that paid in the North, increased trade between the two regions results in a dramatic fall in the relative price of labour-intensive goods in the North and in the wage of unskilled workers relative to that of skilled workers. Second, wage inflexibility and other market rigidities in the North determine whether workers whose jobs are destroyed by trade are absorbed into other sectors producing non-tradable and skill-intensive goods or join the ranks of the unemployed. Third, trade with the South tends to lead to significant productivity improvements because of defensive innovation and corporate restructuring in response to competition from southern exports, thereby compounding the disadvantages of unskilled workers there.3 However, despite the analytical elegance of these arguments, a closer look at the evidence shows that the growth of North-South trade does not provide a convincing explanation of the labour market problems in the industrial countries.

2.1.1. Manufacturing Trade and Unemployment The first question to address is whether the general trend of declining manufacturing jobs in industrial countries could be explained by manufactured exports from the South. While such exports have risen by more than 10 per cent per annum in volume since 1970, they are still small in relation to the developed countries‘ combined gross domestic product (GDP). At the beginning of the 1990s, imports of manufactures from developing countries by member countries of the Organisation for Economic Co-operation and Development (OECD) accounted for 1.8 per cent of GDP, whereas the figure in 1999 was 3.2 per cent. There are, however, notable differences among the major industrialized countries in the extent of penetration. In the United States, the penetration ratio rose from around 0.5 per cent at the beginning of the 1970s to over 1 per cent a decade later; and by 1999 it exceeded 4 per cent. In Western Europe where labour market problems appear to be more acute, the trend of increasing penetration has been less dramatic, rising from 0.5 per cent in the early 1970s to 2.7 per cent in 1999. In any event, for southern imports to have had a noticeable impact on employment, they must have significantly lowered the demand for labour through the trade balance. Assuming that the labour contents of exports and imports do not undergo significant changes, a deterioration of the trade balance (at any given level of domestic aggregate demand) will almost certainly lead to declining employment. In fact, over the past three decades the North

3

See e.g. Wood (1994), Chapter 7.

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consistently ran a surplus on manufacturing trade with the South, at least up to the end of the 1990s, when the Asian crisis turned this around. However, behind this evolution of the manufacturing trade balance for OECD countries as a whole lies a sharply diverging trade performance among the major countries. While the trade balance of the European Union (EU) with the developing countries moved substantially in line with the OECD average, the United States and Japan diverged widely from the average, but in opposite directions. Exports from Japan in the 1980s fell modestly but skyrocketed in the 1990s with imports rising only slightly. As a consequence, Japan recorded a very high surplus even after the Asian crisis. The United States, on the other hand, suffered greater export losses in the 1980s, while it already had a much sharper rise in imports than Japan, from 1981 onwards. The United States has had a deficit since 1984. In the 1990s this pattern continued: the United States recorded a large and rising deficit which reached unprecedented levels after the Asian crisis. Manufacturing employment in the North over this same period fell in three phases. Of the total fall in employment, around one-quarter occurred in the first half of the 1970s, was more than one-half from 1980 to 1985, and under a quarter during the 1990s. Manufacturing employment fell most dramatically during 1980–1985, when the manufacturing trade surplus shrank because of sharp import compression by developing countries in the aftermath of the debt crisis rather than because of an increase in their exports.4 It is also telling that Germany and Japan, the best performers in terms of exports and trade balances with the South, were clearly the worst performers in overall growth and employment, including manufacturing employment. Thus neither the evolution of manufacturing trade balances nor that of import penetration ratios suggests that there is any significantly close relation between North-South trade in manufacturing and unemployment. It is true that observing the evolution of import volumes and of import penetration by developing countries in the industrialized countries does not capture all the potential North-South trade dynamics. Even if these indicators were unchanged, rapidly industrializing developing countries could still be substituting for OECD countries in the markets for manufactures of third countries. This effect would be reflected in smaller exports from OECD countries or a reduction in their import penetration of developing-country markets. Data on the latter are not available, but trade figures do not indicate that this effect has been very strong in recent years. On the whole, OECD manufactured exports to developing countries other than the newly industrializing economies (NIEs) rose substantially in the 1990s and especially to those countries showing the biggest jumps in manufactured exports.5

2.1.2. The Skill Content of Trade, Relative Wages and Employment According to traditional trade theory, for low-skill manufactured imports from developing countries to have been an important influence on labour markets in the North, this rise would have had to be associated with a decline in the relative price of low-skill products. 4

It has been estimated that the reduction of the OECD trade surplus in manufactures with developing countries during the 1980s due to lower exports was more than double the reduction due to the rise of imports. See UNCTAD (1995), tables 28–29. Over the entire period 1970–1993 the swing in net manufactured exports, as a share of GDP, for the G-7 countries taken together has been in the same direction as the change in employment, but this does not hold for either individual countries or for shorter periods. 5 See UNCTAD (1999), Part Two, Chapter IV.

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Indeed, a good deal of effort has been spent on determining whether relative prices have changed in the predicted direction. The finding of a number of research studies that the international price of skill-intensive goods has fallen over the past two decades or so relative to the price of low-skill labour-intensive goods has been taken as evidence against a tradebased explanation of growing inequality. However, there have been strong methodological and empirical counter-arguments. In particular, price movements do not appear to offer consistent evidence about the effect of trade because of uncertainty as to how these prices would have moved in the absence of trade and the sensitivity of the findings to the products chosen and the measurement of their skill content.6 There can be little doubt that differences in the skill content of imports and exports of manufactures could be a source of labour market imbalances since jobs can be lost in the industrialized countries even when net exports to developing countries are rising.7 The observation that unemployment in the North is higher amongst workers with the lowest educational and professional attainment has given rise to the hypothesis that it is the lower skill, but higher labour, content of imports relative to exports that has contributed to rising unemployment and/or falling real wages in these occupational groups.8 According to this view, growing exports of skill-intensive goods to the South increase wages for skilled workers in the North but the industrialized countries cannot provide compensating job opportunities for those workers displaced by imports from low-skill manufacturing industries. Thus, to better identify the unemployment problem, the various subsectors of the manufacturing industry must be classified according to factor technology or skill content. Despite methodological problems regarding the measurement of skill content,9 the changing employment profile of the leading industrial countries over the past three decades is reasonably clear. In the ― high-skill‖ industries employment in the G-7 countries as a whole rose, but by only 1.5 per cent, from 1970 to 1993, while in the ―m edium-skill‖ industries it fell by 9.4 per cent. The most dramatic change has occurred in the ― low-skill‖ industries, where close to 27 per cent of jobs (some 5.8 million) were lost; that is, more than two-thirds of all jobs lost in manufacturing during this period. An analysis of North-South trade according to categories of skill embodied in the products reveals, not surprisingly, a deficit for the industrialized countries in low-skill goods since the mid-1980s, which is the outcome of both lower exports than at the beginning of that decade and increasing imports, especially from 1983 onwards. However, imports of such products have been levelling off since 1990, while exports have again risen in recent years, thus leading to a narrowing of the deficit.

6

See UNCTAD (1995), p. 133, and the references therein. See Rowthorn and Ramaswamy (1999). 8 A recent variant of this approach suggests that the growth of outsourcing by northern multinational corporations has become an increasingly important channel for exporting unskilled jobs; see Feenstra and Hanson (2001). The migration of unskilled workers from developing countries has also been cited as a possible source of labour market problems in the North. However, without denying a negative impact on some groups, most studies have found that the overall impact has been marginal, for a review see Stalker (2000), particularly Chapter 6. 9 The skill content of a sector is usually measured as the share of ―product ion‖ workers in total employment. However, classifying sectors is not without problems since it depends on the definition of sector size and the level of disaggregation. Discrepancies resulting from sector definition are of particular importance for some of the most dynamic subsections of manufacturing, such as communication equipment and semiconductors, and office and computing equipment, which, if treated separately, would fall within the high-skill industries, whereas if included in the more traditional and broadly defined ―non -electrical and electrical machinery‖ sector would be classified as part of the medium- or low-skill industries. 7

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The evolution of employment in the different skill categories thus appears not unrelated to that of trade – both have moved roughly in the same direction over the period as a whole and for the major OECD countries taken together – but the evidence does not suggest a very close relationship.10 This conclusion is confirmed by the evolution of employment and trade in the various subsectors within each category as well as by cross-country comparisons of sectoral employment changes. Between the early 1970s and the early 1990s, the greatest losses in employment occurred in the textile and clothing industries (ranging from 59 per cent in the United Kingdom to 29 per cent in Japan) and the ferrous metal industry (ranging from 70 per cent in the United Kingdom to around 30 per cent in Canada). These two subsectors alone accounted for the loss of more than 5.2 million jobs in the G-7 countries over the entire period 1970–1993, i.e. almost two-thirds of the total reduction in manufacturing employment. Other sectors typically losing employment were non-ferrous metals (particularly in Europe) and non-metallic mineral products (particularly in France and Italy). All these sectors are classified as low-skill. But employment fell considerably also in several medium-skill or even high-skill industries in some countries: scientific instruments in Italy, France and Canada (by 56 per cent, 28 per cent and 27 per cent respectively); the chemical industry in Italy (over 50 per cent); and fabricated metal products in the United Kingdom (about one-half). While employment losses are clearly concentrated in low-skill sectors, employment gains have not been the preserve of high-skill sectors. In fact, the best employment performance in the major industrialized countries was in the low-skill rubber and plastics industry. In five of the G-7 countries employment also rose in printing and publishing, which counts among the high-skill sectors, but also from a low base.11

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2.2. Technology, Wages and Unemployment An alternative explanation for rising unemployment and wage inequality lies in the development and diffusion of new technologies. This explanation appeals on a number of levels, not least in shifting any suspicion away from trade. More specifically, the idea that new technologies have accelerated the pace of sectoral change in employment from manufacturing to services, as well as a shift from unskilled to skilled labour within sectors, appears to offer a very direct link with the structural problems of contemporary labour markets. In particular, the bias in contemporary technologies towards a more intensive use of knowledge inputs is seen to favour skilled workers, simultaneously raising their productivity relative to that of the unskilled. On this account, these effects have led to unemployment of the low-skilled in countries where wages are sticky and to widening wage differentials in countries where wages are flexible. Skill-biased technological change has, in recent years, been associated with the increasing economic importance of collecting, storing, processing and distributing information. Not only has the industrial landscape already been transformed by the rise of the semiconductor and computer industries as well as of related services such as software design, 10

For example Rowthorn and Ramaswamy, op cit., estimate that less than one-fifth of jobs lost in Northern manufacturing since 1970 can be attributed to North-South trade. A similar figure has been cited in other studies. 11 UNCTAD (1995), pp. 139–143. Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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but also the tremendous productivity improvements in these industries have brought about rapid falls in the price of information-based technologies. Coupled with improvements in the speed, capacity and accuracy of generating and managing information, this has led to the widespread use of computers, integrated circuits and robotics in both industry and households. Similar trends in satellite technology and fibre optics have advanced carrying capacity, increased the locational coverage of these technologies and enlarged the application of related services. Information-technology goods have also become one of the most rapidly growing components of world trade. These trends have coincided with a relatively fast rate of high-tech investment in such industries as electronics, machinery and chemicals, where, correspondingly, the demand for highly educated workers with problem-solving skills appears to be greatest. There is also evidence that the use of computers and the research and development intensity of jobs are both positively linked to higher wages, and it seems likely that the relative wage of skilled labour was further increased by the slower expansion of the number of college graduates in the 1980s.12 These various pieces of evidence have been taken as confirmation of the skill-biased technology explanation of growing wage inequality in the North in the 1980s and 1990s. However, firm- and industry-level studies, while pointing to a labour-saving bias in new production techniques, do not find a great impact of new technologies on either job creation or job destruction, which suggests that productivity improvements, along with price reductions and product improvements, have generated compensating income growth and employment.13 Moreover, shifting from partial evidence to a more general explanation of labour market problems is not so simple. In the United States productivity growth in skillintensive industries did not accelerate relative to other industries until the latter half of the 1980s, well after inequality (and unemployment) had begun to increase. There is also some evidence to suggest that the rising relative wages of skilled workers was strongly biased towards professional business services and legal services and that the wages of more obviously technology-using professions, such as computer specialists and engineers, actually fell relative to those of high-school graduates during the first phase of the information technology revolution.14 Furthermore, although the higher premiums for educational attainment are consistent with a shift in demand towards more skilled labour, this cannot explain the declining ratio of unemployed unskilled to skilled labour in many industrial countries, including the United States, during the second half of the 1980s and the first half of the 1990s. Indeed, if skillbiased technological change had been the operative force in labour markets, then in countries where labour markets were less flexible, such as in Western Europe, there should have been a clear and steady rise in the ratio of unskilled to skilled unemployment. This, however, does not appear to have been the case.15 Finally, it is far from obvious that the pace of technological change has accelerated dramatically in the last 20 years compared with the 1950s or 1960s, when the labour force profile was also steadily shifting towards higher skills while unemployment fell to historically low levels and the relative wage of skilled and unskilled workers showed no clear trend. 12

See Berman, Bound and Grilliches (1992); Krueger (1993); Bartel and Lichtenberg (1987). See Freeman and Soete (1995). 14 See Pierce and Welch (1994); and Krugman (1994). 15 See Nickell and Bell (1995). 13

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These decades were marked by a backlog of new technologies from the inter-war period, the introduction of which had a profound impact in such basic activities as transportation, as well as giving rise to new industries in such areas as consumer durables. It seems unlikely that the process of skill upgrading has accelerated over the past two decades at the kind of pace that would be required in order to explain the dramatic shifts in labour market performance.

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2.3. Investment and Employment The evidence showing a direct link from either trade or technology to rising unemployment or increasing wage gaps in the North is not convincing. Rather, macroeconomic conditions, and particularly those relating to investment remain the decisive influence on labour market performance. Trade with poorer countries and technological change have, in fact, been ubiquitous features of the post-war economic landscape in advanced industrial economies. There is little evidence to suggest they have become more pervasive influences on the performance of these economies over the past 25 years, at least on a scale which could explain the dramatic changes in employment levels and wage inequality during this period, particularly in the manufacturing sector. The fundamental flaw in both trade- and technology-based explanations of rising unemployment and inequality in the North is their assumption that there is always an adequate level of aggregate demand. In fact, because all technological change is embodied in human and physical capital, and because leading industrial economies must, faced with catching-up pressures from NIEs, invest in new capacity of one kind or another, any discussion of the impact of technological change or trade independently of the macroeconomic determinants of capital accumulation is unhelpful. Since 1973 the industrialized economies have suffered from a fundamental imbalance between investment in fixed capital, productivity growth and growth of the labour supply.16 Much of the rise in structural unemployment is related to the slowdown in investment, which in turn is closely linked to restrictive macroeconomic policies and deregulation of financial markets. Empirical evidence leaves no doubt that there is a positive correlation between investment and employment (UNCTAD, TDR, various years).This tends to confirm one of the main lessons from the 1930s, one which seems to have been forgotten in all the talk about ― fundamental reforms‖ and ― structural deficiencies‖ that a faster pace of capital investment is unlikely to occur without a substantial improvement in business expectations concerning future sales and the key determinants of the costs of and return on investment. Macroeconomic policies are vital for improving both sets of expectations. For one thing, the level of effective demand determines total sales and profits. For another, monetary policy can directly affect the degree of macroeconomic and financial volatility and instability and thus influence the risks and uncertainties associated with investment decisions. Without policies designed to bring about a faster expansion of demand and greater financial stability, there is little hope of finding a solution to the unemployment problem. During the 1990s, only the United States Federal Reserve, among the central banks of the leading industrial economies, was willing to systematically test the limits of expansionary policies compatible with stable 16

The details of this imbalance are spelt out in greater detail in UNCTAD (1995), Part Three, Chapter III; see also Rowthorn and Ramaswamy (1999).

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inflation. The resulting strong performance of investment in the United States in recent years, particularly in the high-technology sectors, has generated a rapid increase in productivity, particularly in manufacturing, thereby preventing the re-emergence of inflationary pressures despite the high rates of growth and low unemployment. The concern in other major industrial countries that faster demand expansion would only lead to faster inflation is difficult to justify in the current economic conditions. Not only is there a considerable slack in the labour market, but also the institutional changes that have been introduced since the beginning of the past decade and greater global integration of markets have made it much more difficult for a wage-price spiral to emerge. Given the reduced bargaining power of the unions and increased competition in the labour market, workers are wary of pricing themselves out of the market. There is also a greater realization that in today‘s environment of increased global competition, workers‘ jobs depend on the profitability of their companies. This has been a major factor in establishing a closer link between productivity and compensation. Indeed, one of the most significant features of the economic performance of all major industrial countries in the 1990s was a clear tendency for unit labour cost growth to fall and profit margins to rise. Inflation rates continued to fall in the United States and Western Europe throughout the 1990s, while in Japan the price level was actually falling. The fact that unit labour costs are the most important determinant of the inflation rate is of the utmost importance for any determined effort to tackle unemployment. If nominal wages rise at the same rate as productivity plus the target rate of inflation, increases in productivity can be translated into real income and demand with the minimum friction possible. The task of creating additional jobs would then become the responsibility of other policy measures, in particular monetary and fiscal policy. That is precisely the economic policy assignment which was so successfully pursued in the United States in the 1990s. It was not so much the flexibility of labour markets that was responsible for the large increase in jobs and decline in unemployment there, but rather the flexibility of monetary policy in interpreting its responsibilities.

3. TRADE, FINANCIAL FLOWS AND LABOUR MARKETS IN DEVELOPING COUNTRIES In recent years developing countries have striven hard, and often at considerable cost, to integrate more closely into the world economy. Because many of these countries had long histories of more inward-oriented development strategies, the expectation was a considerable acceleration in their economic growth, diminished vulnerability to external shocks and a more equitable distribution of income. Trade liberalization would ensure the best allocation of resources according to comparative advantage, securing the export revenues needed to import key ingredients of faster growth. Financial liberalization would attract foreign capital seeking high returns, allowing the developing countries to invest more than they could save without running into payments constraints, as well as bringing technology and organizational skills through increased flows of foreign direct investment. The growths of world trade, particularly following the completion of the Uruguay Round of trade negotiations, and, perhaps even more decisively, the recovery of financial flows to

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developing countries in the 1990s were taken as confirmation that a new era of prosperity was beginning to unfold. However, in the face of deep-seated imbalances and biases in the international trading and financial systems, the gains from integration in terms of faster growth, greater employment opportunities and reduced levels of poverty have so far proved disappointing. The humbling of the Asian tigers since 1997 has revealed the heightened vulnerability of even the strongest developing countries to external shocks. The extent to which liberalization policies have themselves contributed to this disappointing outcome will be considered below.

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3.1. Trade Liberalization and Labour Market Performance According to conventional analysis the immediate impact of trade liberalization should be to change relative prices in line with a country‘s resource endowments. Thus, a general move towards greater openness in the world economy should be reflected in narrowing wage gaps among countries. While it is recognized that there may be temporary adjustment costs, eventually demand for labour should shift towards less-skilled workers in the South narrowing the wage gap with skilled workers and triggering a process of wage convergence between developed and developing countries. Although a number of studies have reached the conclusion that trade liberalization in developing countries does not adversely affect employment conditions, these findings have been roundly criticized on both methodological and empirical grounds.17 The vague definition of openness and the failure to distinguish episodes of export promotion from those of import liberalization have resulted in misrepresentation of trade regimes, and made it difficult to make cross-country comparisons and interpret the findings. Moreover, the failure to present an explicit counterfactual and biases in country selection has raised serious doubts about the validity of these studies. Indeed, the more recent evidence from liberalization episodes in Latin America and sub-Saharan Africa suggests that an increase in unemployment has often accompanied liberalization programmes.18 In one study of changes in earnings of three different skill groups of labour in 10 Latin American countries in recent years, all except one of the countries experienced widening gaps between skilled workers and unskilled workers. With few exceptions, real earnings of unskilled workers fell during the periods covered, with declines exceeding 20 per cent in many cases.19 The gap in earnings between public employees and workers in larger firms on the one hand and skilled workers on the other hand also widened in most countries, though by a lower margin.20

17

The most prominent of these studies is Papageorgiou, Michaely and Choski, eds. (1990); see also Matusz and Tarr (1999). For critical reviews see Greenaway (1993); Buffie (2001), Chapter 6; and Helleiner (1995). 18 For discussions of these findings, see Gosh (2003); Amadeo (1996); Ravenna (1994); Rama (1994); Buffie, op. cit. 19 UNCTAD (1997b: 135). 20 ECLAC (1997: 60). Additional evidence is presented in Robbins (1996); Pissarides (1997); and Wood (1997). Despite the mounting evidence about the impact of trade liberalization on increased earnings inequality in Latin America, a recent study by the Inter-American Development Bank (IADB) reports a positive effect of trade liberalization on personal income distribution. However, no attempt is made to reconcile these findings with all this other evidence to the contrary; see Londoño and Székely (1997).

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Increased wage dispersion in manufacturing during the recent period of globalization has also been reported by the ILO, for a sample of 30 countries in Africa, Asia and Latin America which compares average real wages in 1975–1979 with those in 1987–1991.21 It was found that in about two-thirds of all the countries real average wages had fallen, and that the fall was correlated with a rise in wage dispersion. The economies in which wage dispersion diminished include the first-tier East Asian NIEs, where it was accompanied by significant increases in labour productivity. The only exception to diminishing wage dispersion in East Asia is Hong Kong (China). A number of explanations have been offered to reconcile the increased wage inequality with the mainstream trade theory based on comparative advantage. Perhaps not surprisingly technological factors have received particular attention. If trade liberalization and increased capital mobility accelerate the introduction of best-practice technology in developing countries, and if the use of such technology requires specially trained labour, the increase in demand for skilled labour may lead to a widening of the wage gap. However, a fairly sizeable shift in technology would be required, which should be reflected in a sharp increase in imports of capital goods as well as in an expansion of exports of skill-intensive products. But the greater openness observed in Latin America has not generally been associated with a significant increase in investment and technology transfer. Manufacturing investment in the region has also been sluggish since rapid trade liberalization began, even in the presence of massive inflows of capital. For the seven major Latin American countries taken together, investment in machinery and equipment was lower than in the early 1980s and there was little evidence by the end of the decade to suggest that ― investment rates had recovered to the point where high and sustained growth can be guaranteed‖.22 More important, the observed shift in wage differentials towards skilled labour has not been associated with any significant increase in the exports of more skill-intensive products.23 In some instances demand for skilled labour has increased relative to that for unskilled labour without a significant increase in investment to upgrade the industry and move exports towards technology-intensive products. Industries producing low-technology products have replaced less-educated with more-educated labour. This skill-upgrading may have been triggered by trade liberalization when the industries concerned were no longer able to compete with imports. Also, competitiveness could not be restored simply by lowering the wages of unskilled labour: it necessitated in addition the hiring of more skilled labour.24 The emergence of low-cost producers of labour-intensive manufactures from Asia during this period has no doubt changed the parameters in international trade for other exporters of such products. However, its effect has not been uniform. The first-tier East Asian NIEs, where about half of the exports consisted of such goods in the mid-1980s, have responded to this new competition by restructuring and upgrading their labour-intensive exports, and by shifting towards skill-intensive products.25 This upgrading began before imports were 21

ILO (1996), table 5.9 and related text. ECLAC (2000), p. 233. UNCTAD (1997b), p. 136. 24 Cragg and Epelbaum (1996). 25 Differences in the ability of different countries to respond to increased competition in labour-intensive products are also reflected by movements in the manufacturing terms of trade. During 1979-1994 the world price of manufactured exports of developing countries fell relative to that of the skill-intensive exports from industrial countries by about 2 per cent per annum. The decline was largest in LDCs, followed by ACP, Latin American and Mediterranean countries, while it was significantly smaller in East Asia; for the Republic of Korea, the 22 23

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liberalized in the second half of the 1980s. The share of labour-intensive products in the combined exports of the Republic of Korea and Taiwan, China fell from over 40 per cent in 1985 to 25 per cent in 1994, while the share of skill- and technology-intensive exports doubled, reaching over 56 per cent in 1994. It thus appears that the effect of trade liberalization on wages and income distribution differs among countries, depending on the domestic and international conditions under which it is implemented. While resource endowments are certainly important in determining comparative advantage, there are also other factors that influence the degree of competitiveness of various industries. In this respect, it is important to recall the textbook argument invoked to counter the idea that low-wage countries have an unfair competitive advantage in international trade relative to high-wage countries. It is not just relative wage costs, but unit labour costs, that determine international competitiveness. Two countries with similar relative endowments of skilled and unskilled labour can have different productivity levels in any given industry, depending on their success in learning and upgrading.26 Herein lays the main difference between trade liberalization in the first-tier East Asian NIEs and most other middle-income developing countries. In the former, liberalization followed the successful implementation of industrial and trade policies; protection and support were removed in large part because they were no longer needed. In the latter, on the contrary, liberalization has largely been triggered by the failure to establish efficient, competitive industries in labour- and/or skill-intensive sectors. Accordingly, the impact of increased competition brought about by trade liberalization on income distribution has been crucially different.

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3.2. Financial Liberalization and Labour Market Performance The 1990s have also witnessed a concerted push to open up the capital account in developing countries, accompanied by a rapid expansion of private capital flows into these countries. Differences among countries in their policy approach to capital flows and their macroeconomic effects have been examined in various studies.27 However, against a general backdrop of rapid liberalization and deregulation of financial markets, a large proportion of these flows consisted of liquid capital attracted by short-term arbitrage margins and prospects of speculative capital gain. These have proved extremely volatile and subject to bandwagon effects, capable of generating gyrations in security prices, exchange rates and trade balances, and ultimately culminating in severe financial crises. Such volatility was a particular danger in countries where the liberalization of capital flows was prompted by the need to finance growing external deficits, as was the case in much of Latin America. But the danger was also present in countries with good records of economic management and a track record of wellmanaged integration into the global trading system, as was the case in East Asia. The evidence from recent experience suggests that large swings in economic activity associated with financial boom-bust-recovery cycles have far-reaching consequences for manufacturing terms of trade indeed moved favourably during that period. See UNCTAD (1996), Part Two, Chapter III. 26 World Bank (1995), p. 58. 27 The G24 Discussion Paper Series offers a rich source of such studies; see also UNCTAD (1999); UNCTAD (1997a); and Helleiner, ed. (1998).

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growth and labour market conditions in developing countries.28 Surges in capital inflows often lead to a deviation of key macroeconomic aggregates such as savings, investment, fiscal and foreign balances, exchange rates, employment and wages from their longer-term, sustainable levels. The rapid exit of capital and financial crises, on the other hand, tend to lead to overshooting in the opposite direction. The recovery process, which restores aggregate income to pre-crisis levels, generally results in a different configuration of key macroeconomic variables from those prevailing before the outbreak of the crisis. In particular, they tend to result in large shifts in income distribution and poverty, which can be corrected only after many years of growth. The policy of reliance on capital inflows to support a consumption-led growth based, at least partly, on rising wages had a populist twist as it helped to correct some earlier distortions in income distribution at the expense of labour which followed the debt crisis of the early 1980s. Indeed, most Latin American episodes and the Turkish boom during 1989-93 and then again in 2000 had been preceded by a period of significant erosion of real wages and by large declines in the share of wages in industrial value added. This populist policy mix thus served to avoid hard policy choices and allowed price stability to be achieved without running into distributional conflicts. However, since this situation depended on maintaining capital inflows, the rapid exit of capital and the decline in economic activity laid bare the latent conflicts, often leading to a redistribution from wages to profits. Labour market conditions deteriorated in all countries with the outbreak of the financial crisis. Indeed, it appears that reduced incomes and employment in organized and informal labour markets have been the main social conduit of the adverse impact of financial crises on poverty and equality.29 Rising informalization and disguised unemployment appear to have been the trend almost everywhere in Asia, but despite such flexibility and generally declining participation rates, unemployment rose in all crisis-hit countries.30 The sharp deterioration in the conditions of labour, particularly among the unskilled, is a major reason why the reduction in poverty levels has so far lagged behind economic recovery in the crisis-hit countries of Latin America and East Asia. Indeed, empirical studies show that there is a significant asymmetry in the impact of growth and crises on poverty in developing countries: the poverty-alleviating impact of a given rate of growth is significantly weaker than the poverty-augmenting impact of a comparable decline in GDP.31 The persistence of widespread poverty and declines in wage incomes despite the recovery of output provide prima facie evidence that financial cycles result in regressive income 28

These experiences include the recent financial crises in East Asia, Latin America and Turkey and some earlier episodes of financial crisis in other parts of the developing world, including the Southern Cone crisis in Argentina and Chile in the early 1980s. Most of these episodes were examined in past issues of the TDR. For the Asian crisis see UNCTAD (1998), Chapters II and III, and UNCTAD (2000); the crisis in the Southern Cone UNCTAD (1998), Part One, Annex to Chapter III; and in Mexico and Argentina in 1994–1995, UNCTAD (1995), Part Two, Chapter II; see also the discussion of the Brazilian crisis in UNCTAD (1999), Chapter III. 29 This view is shared in almost all recent World Bank publications on the East Asian crisis. See also Diwan (2001). According to another study by Dollar and Kraay (2000) the incomes of the poor do not fall more than proportionately during economic crises. Studies on income distribution by the UNCTAD secretariat show that the economic crisis beginning in the early 1980s was associated with a rise in the share of the top 20 per cent at the expense of the middle classes rather than the poorest 20 per cent. It was also noted that crises could generate a process of ― equalizing downwards‖ in rural economies in Africa, but it is not clear whether such results could be generalized to emerging markets facing sharp declines in output due to financial crises; see UNCTAD (1997a), Part Two, Chapter III. 30 See Asian Development Bank (2000), p. 51; World Bank (2000a), pp. 117–119; Clerissi (1998). 31 World Bank (2000b), p. 54.

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distribution. However, it appears that for various reasons related to data problems as well as conceptual difficulties, the standard measures of income distribution cannot always capture such changes. In the Republic of Korea, for instance, data show that while in the first quarter of 1995 the incomes of the richest 10 per cent were about 7 times those of the poorest 10 per cent, they were more than 10 times higher in the first quarter of 1999.32 By contrast, Gini coefficients appear to have remained unchanged in Indonesia and Thailand, despite substantial increases in the poverty-stricken population in both countries.33 It is also extremely difficult to assess the equally important impact of financial crisis on wealth destruction, which appears to have hit primarily small- and medium-sized enterprises that provide extended family employment opportunities. The loss of income and employment in these sectors probably increases the share of population dependent on wage labour and leads to an increase in formal unemployment. It may also contribute to the rise in saving ratios and explain the lag in consumption observed after the crisis as attempts are made to keep family-owned businesses alive.

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4. CONCLUSION During the 1980s mass unemployment and growing wage inequality became a veritable scourge across much of the industrial world. These problems persisted in many countries during the 1990s. How they are dealt with in the new century will influence the future course of all economies, whether developed or developing, given their interdependence. Despite growing support for globalization, liberalization and outward-oriented development in the industrialized countries, labour market problems have been blamed on imports of manufactured products from the South. The solutions proposed range from erecting import barriers (― protectionism‖), to imposing higher labour standards on southern producers (― social clause‖), to lowering labour standards in the North (― flexible labour markets‖). Each of these responses – including the third, favoured by advocates of free markets and minimum government – would slow the industrialization of developing countries without resolving the labour market problems in the North. While trade provides only a superficial explanation of unemployment and wage inequality, the same can also be said for the most popular alternative – technological change. Both factors have tended to reduce the demand for unskilled labour in industrial countries but not on the scale or timing, consistent with the problem. Moreover, dislocations of labour as a result of new competition or new technology are nothing new in economic history, and, besides, demand for skilled labour has also been weak in many countries. What, then, has made it so difficult for the labour displaced by structural change to find remunerative work elsewhere in the economy? The root of the problem lies in the slow pace at which demand, output and investment in most industrialized countries have been expanding over the past two decades. Even if labour 32 33

Chang and Yoo (1994), pp. 32–33. One explanation is the fact that household surveys on income disregard relative price changes in countries (such as Indonesia) where the poor faced significantly higher inflation than the rich. Another is that household surveys undertaken in 1998 included questions about household incomes during the preceding year (i.e. 1997) and therefore failed to capture the full impact of the crisis. On these empirical issues, see World Bank (2000a), pp. 114–116.

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is made less costly and more skilled to employers, business will invest on the scale required to provide more and better jobs only if it is confident of buoyant sales. The strong labour market performance of some industrial countries during the 1990s provides ample evidence that unemployment and growing wage inequality in the North do not have an international origin. Notably in the United States, but also in some smaller European economies, trade with the South has been consistent with achieving the goal of full employment.34. With the resumption of rapid and sustained growth, full employment and opening of markets in industrial countries in areas of export interest to developing countries, the South would have a chance to tackle simultaneously its development challenges and its labour market problems. Such a strategy would mean ― all-boats-afloat‖; it would create jobs in the North while benefiting – not hurting – the South. At the same time it would remove the main threat to the liberalization of trade. With the obvious success of some countries in the North in reducing unemployment by demand management and high growth rates, the conventional policy approach needs to be reconsidered across the developed world if labour market security is again to become the norm for working people. The findings of this paper point to three broad policy conclusions. First and foremost, any effective answer lies in appropriate macroeconomic policies to increase productive investment and expand employment. Under these conditions both trade and technology can reinforce a virtuous circle of economic growth, job creation and productivity gains. This will certainly require better policy coordination among the leading industrial economies along with more effective governance of international capital flows than has been the case since the collapse of the Bretton Woods system, and a better managed exchange rate system among the G3 currencies.35 Second, improvement in labour market conditions will also require a reorientation of development policies at the national and global levels, particularly with respect to the speed and pattern of integration of developing countries into the global economy. Rapid and premature liberalization after the debt crisis of the 1980s, not underpinned by appropriate institutions and productive capacity, has been a source of steady deterioration in labour market conditions in many Latin American and African economies, frequently compounded by ineffective or misguided adjustment programmes. In Asia even countries with a history of strong output and employment growth fell victim to volatile capital flows and economic policy errors, with the burden of adjustment falling heavily on wages, employment and social conditions. Rapid financial liberalization, in many cases representing a reversal of years of more measured integration into the global economy, was a major factor. Finally, regaining control over financial markets and reduced reliance on external private capital flows will be a central policy challenge for all developing countries in the coming years. Policies to invigorate productive investment, stimulate technological upgrading and enter new markets will also be needed. For many developing countries, building and strengthening capacity in the manufacturing sector remains the surest way to increase productivity, allowing for both higher wages and export competitiveness. Experience shows that market forces cannot be relied upon to realize this goal and that a mixture of macroeconomic and industrial policies will be required in order to strengthen capital

34 35

For the success of smaller European countries see Rotschild (2000). See UNCTAD (2001), Part Two, for further details.

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accumulation and private entrepreneurship.36 Furthermore, the international community will have to face up to the pronounced external constraints on development and to the need for exports and development assistance, rather than unstable private capital flows, to underpin a return to rapid and sustained growth in developing countries. All of these are essential ingredients of a successful strategy for improving labour standards in developing countries.

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REFERENCES ADB (2000). Asian Development Outlook 2000. Asian Development Bank, Manila. Amadeo, E. J. (1996). ― The knife-edge of exchange-rate-based stabilization: Impact on growth, employment and wages‖, UNCTAD Review 1996. United Nations publication, Sales No. E.97.II.D.2. Geneva. Bartel, A. and F. Lichtenberg (1987). ― The comparative advantage of educated workers in implementing new technology‖ Review of Economics and Statistics, February. Ben-David, D. (1995). "Trade and convergence among countries," CEPR Discussion Paper, No. 1126, February. Berman, E., J. Bound and Z. Grilliches (1992). ― Changes in the demand for skilled labor within US manufacturing: Evidence from the annual survey of manufacturing‖ Quarterly Journal of Economics, February. Berry, A. and J. Serieux (2003). "All about the giants: Probing the influences on growth and income inequality at the end of the 20th century", CESifo Working Paper No. 840. Buffie, E. (2001). Trade Policy in Developing Countries, Chapter 6. Cambridge University Press, Cambridge. CEPR (2002). "Making Sense of Globalization", CEPR Policy Paper No. 8, p. 67. Chang, H-S. and C-G. Yoo (1994). ―The triumph of rentiers: The 1997 Korean crisis in a historical perspective‖, paper presented at the workshop on the World Financial Authority, New School for Social Research, New York, 6–7 July. Clerissi, G. L. (1998). ―Impact de la crise sur le marché du travail en Thaïlande‖, mimeo (Les Notes des Postes d‘Expansion Économique), Bangkok, November. Cragg, M. I. and M. Epelbaum (1996). ― Why has wage dispersion grown in Mexico? Is it the incidence of reforms or the growing demand for skills?‖ Journal of Development Economics, Vol. 51. Diwan, I. (2001). "Debt as sweat: Labour, financial crises and globalization", draft, July. World Bank, Washington, D.C. Dollar, D. and A. Kraay (2000). ―Growth is good for the poor‖, (preliminary draft), March. (www.worldbank.org/research). ECLAC (1997). The Equity Gap: Latin America, the Caribbean and the Social Summit, LC/G.1954, Santiago, March. ECLAC (2000). Equity, Development and Citizenship (LC/G.2071), Santiago, March. Feenstra, R and G. Hanson (2001). ― Global production sharing and rising inequality: A survey of trade and wages‖, NBER Working Paper No. 8372, July. Freeman, C. and L. Soete (1995). Work for All or Mass Unemployment? Computerized Technical Change into the Twenty-First Century. Pinter, London. 36

See further UNCTAD (2003), Part Two.

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Gosh, A. (2003). Jobs and Incomes in a Globalizing World, ILO, Geneva. Greenaway, D. (1993). ― Liberalizing foreign trade through rose-tinted glasses‖, Economic Journal, Vol. 103, pp. 208–222. Helleiner, G. (ed.) (1998). Capital Account Regimes in Developing Countries. Macmillan, London. Helleiner, G. (1995). Remarks in panel discussion, in V. Thomas et al.,eds. Restructuring Economies in Distress: Policy Reform and the World Bank. Oxford University Press, New York. ILO (1996). World Employment Report 1996/97. International Labour Office, Geneva. Kozul-Wright, R. and R. Rowthorn (2002). "Globalization and the Myth of Economic Convergence" Economie Apliquée, Vol. LV, No. 2. Krueger, A. (1993). ― How computers have changed the wage structure: Evidence from micro data 1984–89‖, Quarterly Journal of Economics, February. Krugman, P. (1994). ―Past and prospective causes of high unemployment‖, paper for economic symposium of the Federal Reserve Bank of Kansas City at Jackson Hole, 25– 27 August. Londoño J. L. and M. Székely (1997). ―Sorpresas distributivas después de una década de reformas: América Latina en los noventa‖, mimeo, IADB, February. Matusz, S. and D. Tarr (1999). ― Adjusting to trade policy reform‖ World Bank Discussion Paper, No. 2142. Nickell, S. and B. Bell (1995). ― The collapse in demand for the unskilled and unemployment across the OECD‖, Oxford Review of Economic Policy, Vol. 11, Summer. Papageorgiou, D., M. Michaely and A. Choski, (eds.) (1990). Liberalizing Foreign Trade in Developing Countries, Lessons of Experience, 1. World Bank, Washington, D.C. Pierce, B. and F. Welch (1994). ― Changes in the structure of wages‖, mimeo. A&M University, Texas. Pissarides, C. A. (1997). ― Learning by trading and the returns to human capital in developing countries‖, World Bank Economic Review, Vol. 11, No. 1, January. Rama, M. (1994). ― The labour market and trade reform in manufacturing‖, in M. Connolly and J. de Melo, (eds)., The Effects of Protectionism on a Small Country. World Bank, Washington, DC. Ravenna, A. (1994). ― Employment and wage effects of trade liberalization: The case of Mexican manufacturing‖, World Bank Discussion Paper, No. 1542. Robbins, D. J. (1996). ― HOS hits facts: Facts win evidence on trade and wages in the developing world‖, Development Discussion Paper, No. 557, Harvard Institute for International Development, Cambridge, MA, October. Rotschild, K. (2000). ―Euro pe and the USA: Comparing what with what?‖ Kyklos, Vol. 53. Rowthorn, R. and R. Ramaswamy (1999). "Growth, Trade and Deindustrialization", IMF Staff Papers, Vol. 46, No. 1, March. Sachs, J. and Warner A. (1995). "Economic Reform and the Process of Global Integration" Brookings Papers on Economic Activity, Vol. 1, pp. 1-118 Sala-i-Martin, X. (1996). "The classical approach to convergence analysis", Economic Journal, Vol. 106, July, pp. 1019-1043. Stalker, P. (2000). Workers without Frontiers. Riener, Colorado. UNCTAD (1995). Trade and Development Report (TDR), 1995. United Nations publication, Sales No. E.95.II.D.16, New York and Geneva.

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UNCTAD (1996). TDR, 1996. United Nations publication, Sales No. E.96.II.D.6, New York and Geneva. UNCTAD (1997a). International Monetary and Financial Issues for the 1990s, Vol. VIII. United Nations publication, Sales No. E.97.II.D.5, New York and Geneva. UNCTAD (1997b). TDR, 1997.United Nations publication, Sales No. E.97.II.D.8, New York and Geneva. UNCTAD (1998). TDR, 1998. United Nations publication, Sales No. E.98.II.D.6, New York and Geneva. UNCTAD (1999). TDR, 1999. United Nations publication, Sales No. E.99.II.D.1, New York and Geneva. UNCTAD (2000). TDR, 2000. United Nations publication, Sales No. E.00.II.D.19. UNCTAD (2001). TDR, 2001. United Nations publications, Sales No. E.00.II.D.10. UNCTAD (2002). The Least Developed Country's Report, 2002. United Nations publication, Sales No. E.02.II.D.13, New York and Geneva. UNCTAD (2003). TDR, 2003. United Nations publications, Sales, No E. 03 II.D.7. Wood, A. (1997). Openness and wage inequality in developing countries: The Latin American challenge to East Asian conventional wisdom, The World Bank Economic Review, Vol. 11, No. 1, January. Wood, A. (1994). North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-Driven World, Chapter 7. Oxford University Press, Oxford. World Bank (1995). World Development Report 1995. Workers in an Integrating World, Oxford University Press for the World Bank, New York. World Bank (2000a). East Asia: Recovery and Beyond, Washington, DC. World Bank (2000b). Global Economic Prospects and the Developing Countries, Washington, DC. World Bank (2001). Globalization, Growth & Poverty: Building an Inclusive World Economy, Oxford University Press for the World Bank, New York.

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In: Globalization Editor: Joseph A. Mancini

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Chapter 14

CONSUMER SEGMENTATION FOR GLOBALISING FIRMS Jacques-Marie Aurifeille1, Christopher John Medlin2 and Jaime Gil-Lafuente3 1

2

Université de La Réunion, France University of South Australia, Austraila 3 University of Barcelona, Spain

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ABSTRACT Consumer segmentation aims at identifying groups of consumers for which it is profitable to design a specific strategy. The cost and the strategic purpose of a segmentation implies to identify lasting segments. This robustness is particularly difficult to achieve nowadays, when billions of consumers from emerging economies are exposed to new consumption and lifestyle models. Consumers' values are often considered for segmentation, because of their personal meaning and of their general concern, However, values have generally been found to be poor predictors of consumers' choices. A new approach of human values is proposed to improve their predictivity without increasing the volume of collected data. It relies on the concept of Overall Value Concern (OVC), that is on the hypothesis that, over time, some people are more concerned with their values than other people. The hypothesis is tested empirically, using both the terminal and instrumental values of Rokeach's Value Survey (Rokeach, 1973).

INTRODUCTION Consumer segmentation is a fundamental operation of managers preparing and conducting marketing strategy. Segmentation aims at identifying groups of consumers that are profitable with the intention of designing specific marketing strategies. As firm resources are finite, only a limited number of marketing strategies are managed simultaneously. For global firms, this suggests segmenting their customers into groups whose characteristics transcend nationalities. In addition, the cost and the strategic purpose of a segmentation requires that

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firms identify stable segments. This robustness is particularly difficult to achieve in a globalising world, with billions of consumers from emerging economies continuously exposed to new consumption and lifestyle models (Aurifeille, Quester, Lockshin and Spawton, 2002). Among the possible segmentation variables, personal values have many assets. Values are "desired states of existence that a person tries to achieve" (McShane, 2004; Rokeach, 1973 p. 5, Khale 1983) like security, comfort, achievement (cf. appendix 1). Values crystallise at a young age because of education and personal experience. As a result, values are enduring and drive peoples' behaviours. For example, a consumer whose main value is "accomplishment" would look for products whose attributes he perceives to enable selfexpression. Because of their personal meaning and social connotations, values can also be used to position firm brands by attributing values to the firm and product that mimic the values of the targeted segment. It seems a high degree of similarity between a consumer's values and his attribution of values to the brand should result in a stronger association, with greater sensitivity to the advertisements and more proneness to buy the brand. Unfortunately, personal values have generally been found to be poor predictors of consumers' choices (Henry 1976 ; Kahle, Beatty, and Homer 1986; Mc Carty and Shrum 2000). In this paper a proposition is made and tested to improve the predictivity of the personal values. It is based on the existence of two types of values : the terminal and the instrumental (Rokeach, 1973). Although the latter are generally discarded in the segmentation studies, they may be more stable and better predictors of consumer behaviours than the terminal values. Thus, instrumental values could be a useful segmentation variable, in particular for globalising firms. The remainder of the paper is structured in the following manner. First, a range of issues explaining the inability of values to explain product purchase is discussed. Next, reasons are given why instrumental values should be considered for predicting consumer behaviours and defining global segments. Third, the hypotheses and methodology for their empirical test are presented. Fourth, the results of the study are analysed. Finally, future research and management implications are discussed.

1. ISSUES IN VALUE SEGMENTATION Values have a number of practical advantages over other concepts that explain fundamental dispositions and consumer choices (Dichter, 1960). First, values are universal and their number is limited (ranging from 9 according to Khale, 1983, to 36 according to Rokeach, 1973), meaning they apply across borders and cultures (Schwartz and Bilsky, 1990). Second, values are socially admissible and, thus, avowable. This means people are aware of their values and partially able to identifying a value hierarchy or at least rate them in questionnaires. Third, values are suitable for creating "brand personality", that is to position the brands so that they are differentiated and draw lasting sympathy from the consumers sharing the same psychological traits. Fourth, values names belong to everyday vocabulary, thus facilitating their operationalisation in advertising and communication strategies.

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Unfortunately, values have generally been found to be poor predictors of the chosen brands or products (Henry 1976 ; Kahle, Beatty, and Homer 1986; Mc Carty and Shrum 2000). Several reasons have been invoked to justify this weakness. 

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

Values may only operate when important decisions are taken (Rokeach 1973; Gutman 1990; Celsi, Olson, and Walker 1990; Peter and Olson 1993; Claeys, Swinnen, and Vanden 1995). The connection between values and choice depends on the consumer‘s perception of the brand or product (Homer and Khale 1988). This is because many contingent factors play a role in the linkage between value and product decision. For example, advertising, consumer expertise, product availability and price sensitivity play a part in the consumer decision process. The measurement of values may be inappropriate, with researchers arguing for both ranking or rating when quantifying the importance of values.

Theoretically, the function of personal values is to allow consistent decision making (Rokeach, 1973). As it is easier when the priorities are clear, this means each consumer‘s existing "value system" is hierarchical, or ranked, so that values can drive efficiently the behaviour. As an example of the need for a hierarchical value system, one can mention the intense value conflicts which break out when a person's value hierarchy is not adapted to extreme or highly unusual situations (Rokeach, 1973). However, some researchers have suggested that ranking many values is cumbersome and could generate bias in peoples' answers. As a solution, they suggest rating each value on an independent importance scale. This solution has also a statistical advantage in providing a parametric quantification, rather than an ordinal, and in avoiding the multi-colinearity problems associated with ranking (Rankin and Grube, 1980; Beatty, Khale, Homer and Misra, 1985; Alwin and Krosnick, 1985; McCarthy and Shrum, 2000). From a more psychological point of view, the rating of values allows respondents to differ in terms of their summed rates or their Overall Value Concern (OVC). Respondents whose values play an important role in their lives would tend to give them higher rates, thus generate a larger sum of the rates. These consumers will differ from those who are less concerned with their values and who would give lower rates to them. This difference has clear implications in marketing; for example, consumer with a lower OVC would pay less attention to the advertisements of brands whose image is positioned in terms of values. In this paper, a complementary explanation of values' lack of predictivity is proposed. It emphasizes the specificity of a group of values, generally discarded in the empirical segmentation studies: the instrumental values (Rokeach, 1973).

2. INSTRUMENTAL VALUES In his seminal work on personal values, Rokeach (1973) identified two types of values : the terminal and the instrumental. While terminal values are the goals that guide a consumer's life (eg. freedom, comfort, friendship, security …), instrumental values are the fundamental

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"modes of conduct" that the consumer will preferably rely on (eg. intelligence, courage, politeness, obedience…). Rokeach (1973) has identified 18 terminal values and 18 instrumental values (see appendix 1). Marketers often consider that instrumental values are just means to reach terminal values (Reynolds and Gutman, 1988). Therefore, instrumental values are deemed less stable and predictive than the more fundamental terminal values. Hence, in order to limit the respondents' task, marketers generally restrict their studies to the terminal values (Khale, 1983). However, several reasons explain why instrumental values could be better predictors than the terminal ones: 

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



The existence of a dependence between the terminal and the instrumental values is not supported in Rokeach's conceptualisation of values (Rokeach's, 1973). On the contrary, theoretical and empirical works suggest that that the two value types are functionally independent. According to Howard (1977) instrumental values should drive the choice of a brand while terminal values predict the choice of the product category. The functional difference of the two types of values was also empirically demonstrated in a paper specifically focusing on this issue (Aurifeille, 1992b). Therefore, consumers may react independently to the advertising of terminal and instrumental values. Instrumental values are constantly called upon. For example, someone whose primary instrumental value is "being logical" is likely to use it in a large number of decisions. Therefore, the explanation that terminal values are poor predictors because they are activated only in case of an important decision (section 1) is less justified for the instrumental values. Instrumental values do not concern ideal states of being. Therefore, it is easier to place these values in a hierarchy. Actually, the case is often met of consumers who respond with higher rankings for all the terminal values because all are desirable (peace, comfort, achievement, security, friendship…). Conversely, individuals tend to specialize on a limited number of instrumental values to solve the multiple problems of everyday life. Therefore, consumers should discriminate better among the instrumental values, thus providing larger information for segmentation. The few empirical studies where the instrumental values are considered indicate that these values are more stable than the terminal ones. For instance, the shift from communism to capitalism appears to have modified more deeply the consumers' hierarchy of terminal values than their hierarchy of instrumental values (Aurifeille, 1993a and 1993b).

To sum up, instrumental values should be a useful segmentation variable because of the more detailed, predictive and stable information that they convey. In the next section, the corresponding hypotheses are formalized and the methodology to test them is presented.

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3. HYPOTHESES Three hypotheses proceed directly from the above discussion:

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H1: Consumers discriminate more their instrumental values than their terminal values. If it is so, the variance of the rates that each consumer gives to the instrumental values will be greater than the variance of the rates he gives to the terminal values. Therefore, instrumental values would provide more information on the consumers' choices. H1 can be tested by comparing the means of the variance of the terminal and the instrumental rates. H2: The predictivity of the instrumental values is greater than the terminal values'. In the perspective of this paper, the variable to predict should be a chosen brand or product category. The brand choice would give a broader view on the influence of values, because it usually happens in the latest phase of the decision process, after the choice of a product category. Howard's theoretical approach (section2) also invites testing the prediction of brands. Moreover, from a strategic point of view, brands are more concerned than product categories with showing a personality that matches consumers' personal values (cf. section 1). However, the analysis of a specific set of competing brands is still a clear limitation to the generality of the empirical results. To minimize this limitation, the study could focus on global and oligopolistic brands, for example: the leading brands on the car market. H3: The consumers' instrumental value system is more stable than their terminal value system. In addition to predictivity, this stability is required to assess the strategic potential of instrumental values. The test of this hypothesis requires at least two data collections from the same respondents. The stability of a value system can then be computed by considering how the successive rates are correlated, with higher correlation indicating stronger stability of the value system.

4. EMPIRICAL STUDY The predicted variable is the brand of the car that respondents would buy at the moment of the interview. The choice was limited to the 6 leading brands in France. A convenience sample of 120 French car owners was selected, respecting the quotas by age and gender for this population. The personal importance of Rokeach's 18 terminal values and 18 instrumental values were quantified on a 7 point bipolar semantic scale, ranging from 1 ("Not important at all for me") to 7 ("Very important for me"). Two data collections were made with the same respondents, separated by two weeks. Of the 120 initial respondents, only 106 could participate in the second data collection. All respondents were interviewed at the same two moments.

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Table 1. Frequency of the preferred brand Brand Frequency Percent

1 16 13.3

2 23 19.2

3 27 22.5

4 29 24.2

5 25 20.8

Total 120 100

Although, the interval of two weeks is short, value changes have been often evidenced in shorter periods of time (Rokeach 1973) and the objective is to compare the stability of the value systems whatever the time period.

Hypothesis 1 The data comprises 226 observations: 120 from the first collection and 106 from the second collection. From the results of the test in table 2, it clearly appears that the average variance of consumer's rates given to the instrumental values (2.4258) is higher than that of the terminal values (1.5016). The mean difference is 1.47. With 225 degrees of freedom, the t-value is 20.22 corresponding to a 0.000 probability of no difference between the means, at the 95% confidence interval.

Table 2. Comparison of the average variance of consumer rates

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Values Terminal Instrumental

Mean 1.4722 2.3736

Standard deviation 1.095 1.581

Standard deviation of the mean .073 .105

Therefore, H1 is supported : consumers discriminate more among the instrumental values than among the terminal values. Thus, instrumental values provide a more informative view on consumer's value choices.

Hypothesis 2 The prediction of the brands by the terminal and instrumental values is tested with an ANOVA including all the collected data. According to the usual practice and the operational aim of the research, values are translated into scores on the main dimensions of a principal component analysis. For the same reason, theses scores have been rotated using a varimax algorithm. Both the unrotated and rotated scores have been considered but no difference resulted in the predictivity tests. As for H1, the data from the two collections was analysed together. Two criteria were used to determine the data dimensionality : Cattell's scree graph and the chi-square test of no difference between the observed and estimated correlation matrices. The regressor was the maximum likelihood. Although the probability of no difference is low, the ratio of the chi-square on the number of degrees of freedom is much below 3, thus indicating an acceptable fit and confirming the dimensionality suggested by Cattell's criterion.

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A multivariate analysis of the variance of the value scores indicates how predictive the terminal and the instrumental values are:

Table 3. Principal component analysis of the terminal and instrumental values  Value  KMO  Bartlett's test Terminal 0.81549 0.00000 Instrumental 0.84086 0.00000

Dimensions

1 2 3 4 (1st discarded) 1 2 3 4 (1st discarded)

Percent. of variance 28.0 10.6 8.6 5.9 30.0 8.7 7.7

Chisquare

Degrees of freedom

Probability

206.9811

102

0.000

228.338

102

0.000

7.1

Table 4. Predictivity of the values Value

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Terminal Instrumental

Wilk's lambda 0.93624 0.88770

F 1.20134 2.18421

Degrees of Freedom 12 12

Probability 0.278 0.011

Number of significant Factors 0 2

This result clearly shows that instrumental values can discriminate the chosen brand. Two of the three value factors are discriminant, with probabilities 0.014 (1st factor) and 0.023 (third factor). Conversely, the terminal values do not predict the chosen brand. No factor is significantly associated with it. Hypotheses 2 is therefore supported by the empirical test.

Hypotheses 3 Among the 120 initial respondents, only 106 participated in the two data collection. Considering the first and second data collection, the correlation coefficient of the rates given to the terminal values was 0.2326 with a probability of 0.0000. Similarly, the correlation coefficient of the rates given to the instrumental values was 0.2654 with a probability of .0000. These results support the hypothesis H3 of a greater stability of the instrumental values. However, the stability levels are surprisingly low, with only 5 % (the R2) of variance shared between the rates given to the successive data collections. This result does not plead for using the values - either terminal or instrumental - to design a lasting segmentation strategy. It is plausible, however, that the less important values are responsible for this lack of stability. An appropriate weighing should then be found to account for the importance of values in the measure of stability.

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CONCLUSION This study has some limitations. It is based on a convenience sample and on a specific domain: the car brands. Although this domain is relevant for globalisation issues, it has two main defects:  

the importance of the product, that may increase the role of consumers' values, the necessity to use a buying intention rather than an actual buying, in order to study values longitudinally.

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The study, therefore, should be replicated with more ordinary products and other samples. However, rather than testing the absolute characteristics of the instrumental values, the paper aimed at comparing their role with the terminal values'. The theoretical discussion indicates that the instrumental values could play a greater role in the understanding and modelling of consumers' behaviour. The empirical tests have confirmed this view: the instrumental values are better predictors of the chosen brands and they provide a more discriminate information on the consumers. Thus, instrumental values would have the general advantages of values without the limitations of the terminal ones. In particular, they could be conveniently used to create brand personalities that match the consumers' ones. Nevertheless, the empirical test reflected a low stability of the instrumental values, only slightly superior to the terminal values'. More research is needed on the measurement of instrumental values' stability and caution is still advised when using them to design a global segmentation.

REFERENCES Alwin, D. .F. and Krosnick, J. A. (1985). The Measurement of Values in Surveys : a Comparison of Ratings and Rankings. Public Opinion Quaterly, 49 (4, winter), 535-52. Aurifeille, J. M. (2004). Uncovering Consumers' Choice Processes, A Means-end Process Clustering Method. European Journal of Economics and Social Systems, 18 (4), 125-145. Aurifeille, J. M. (1993). L'évolution des valeurs et ses implications en marketing : une enquête en Russie. Recherche et Applications en Marketing, 8 (4), 57-74. Aurifeille, J. M. (1992a). Value Changes and their Marketing Implications : a Russian Survey. European Advances in Consumer Research, 249- 261. Aurifeille, J. M. (1992b). Contribution of Instrumental Values to Advertising Conceptualization. Proceedings of the Workshop on Values and Lifestyles Research, European Institute for Advanced Studies in Marketing (EIASM), Bruxelles, 1992. Aurifeille, J. M., Quester P.G., Lockshin L., and Spawton T. (2002). Global vs international involvement-based segmentation. International Marketing Review, 19 (4), 369-386. Aurifeille, J. M. and Valette-Florence, P. (1995). Determination of the dominant chains. International Journal of Research in Marketing, 267-278. Beatty, S. E., Khale, L. R., Homer P. E. and Misra S. (1985), Alternative Measurement Approaches to Consumer Values. Psychology and Marketing, 181-200.

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Dichter, E. (1959). The strategy of Desire. New York: Doubleday and Co. Henry, W. A. (1976). Cultural Values Do Correlate With Consumer Behavior. Journal of Marketing Research, 8 (13), 121-7. Homer, P. M. and Kahle L. R. (1988). A Structural Equation Test of the Value-AttitudeBehavior Hierarchy. Journal of personality and social psychology, 54 (4), 638-46. Howard, J. A. (1977). Consumer Behavior: Application of Theory. New York: McGraw-Hill. Khale, L. R. (1983). Social Values and Social Change. New York: Praeger. Kahle, L. .R., Beatty, S. E. and Homer, P. (1986). Alternative Measurement Approaches to Consumer Values : The List of Values (LOV) and Values and Life Style (VALS). Journal of Consumer Research, 13 (December), 405-9. Mc Carty, J. A. and Shrum, L. J. (2000). The Measurement of Personal Values in Survey Research : A test of Alternative Rating Procedures. Public Opinion Quaterly, 64, 271-98. Van McShane, S. (2004). Organisational Behaviour (4th edition). McGraw-Hill. Rankin, W. L. and Grube, J. W. (1980). A Comparaison of Ranking and Rating Procedures for Value Measurement. European Journal of Social Psychology, 10, 233-46. Rokeach, M. J. (1973). The nature of human values. New York: Free Press. Reynolds, T. J. and Gutman, J. (1988). Laddering Theory, Method Analysis and Interpretation. Journal of Advertising Research, 28, 11-31. Schwartz, S. H. and Bilsky, W. (1990). Toward a theory of the universal content and structure of values: Extensions and cross-cultural replications. Journal of Personality and Social Psychology, 58, 878-891. Villeneuve-Anaudin, V., Manin, S. and Ramsamy, A. (2005). Managing the dream reality dilemma in advertising. Australian and New Zealand Marketing Academy, Broadening the boundaries, December, (7-12) Perth, Australie, Sharon Purchase Ed. ISBN : 0-64645502-8.

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In: Globalization Editor: Joseph A. Mancini

ISBN: 978-1-61324-531-6 ©2012 Nova Science Publishers, Inc.

Chapter 15

INSTITUTIONAL REFORMS AND GOVERNANCE RESTRUCTURING FOR DISTRIBUTION OF GAINS UNDER GLOBALIZATION T. Lakshmanasamy and Kartik C. Roy

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1. INTRODUCTION An increasing number of countries around the world are rapidly integrating with the fast moving globalization and are fast reforming their domestic economies. A critical examination of market reforms and privatization programs in the wake of globalization raises more questions than it answers. There have been many achievements and more discontents. In this globalization era, the distribution of the benefits of globalization has become an important contentious issue in recent years. The fruits of globalization have not been reaching the developing countries, and more so in the less developed areas and among disadvantaged peoples within the developing economy (Birdsall and Nellis, 2002). No doubt globalization has increased incomes and improved the living standards, but it has also left behind masses of population. Both the world and within-country income inequality has increased and many marginal groups have been simply left out of the mainstream process of development. Even within the rich group, it is not the top 20 per cent, or even the to 10 per cent, who are the winners from rising inequality. The big gains have gone to a much smaller, much richer than that group. In the US, between 1972 and 2001, the income at the 90th per centile of income distribution rose only 34 per cent, or about 1 per cent a year; but, income at the 99th per centile rose 87 per cent, income at the 99.99th per centile rose 497 per cent (Dew-Becker and Gordon, 2005). A similar pattern has also been observed in India. Recently Piketty and Banerjee (2004), using individual tax returns data, show that the ‗gradual liberalization of the Indian economy did make it possible for the rich (the top 1 per cent) to substantially increase their share in national income‘ and the top 0.1 per cent with big gains. Many attribute this rising income inequality to increasing skill components of highly educated workers. However, the winners are not a fairly large group, in fact, the real earnings of college

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graduates actually fell in recent years. It seems that only a minority of elites and influential groups have appropriated the globalization proceeds. The agricultural sector of the poor countries is the worst affected section due to globalization. According to the FAO, some 450 million waged agricultural workers – the largest labour force in the world, accounting for 40 per cent of the 1.1 billion total workforce in agriculture– are suffering from a high incidence of poverty and hunger. Globalization has led to less and less permanent labour and marginalized the workforce; migrant workers and women are hit hard by globalization. The agricultural workers often earn well below the rates earned by industrial workers, with low levels of job protection, health, safety and environmental standards and social protection. The scenario among the farm households is even worse. According to the recent NSS data, as much as 48.6 per cent (an estimated 43.4 million) of farmer households are indebted. It is not surprising that so many farmers in Andhra Pradesh and Karnataka have resorted to suicide in recent years. The NSS also reports that more than 40 per cent of farm households will quit agriculture, if there is an option. Moreover, an assessment of reforms under globalization shows that most privatization programmes around the world appear to have worsened the distribution of assets and income, at least in the short run. Besides increasing economic inequality, the social and cultural changes are also so dramatic that many ethical issues have been recently raised. Given that globalization and its associated repercussions are here to stay, more serious questions are how the spread of prosperity can be accelerated and in what ways the poor people‘s access to the integrated world output can be enhanced. It has been argued that the gains of reform are not reaching the poor and the disadvantaged because of the many institutional deficiencies of the existing social and economic setup of the poor economies. The absence or inadequacy of many enabling institutions and rules such as property rights, corruption free environment, transparency, enforceable laws, and codes of conduct characterize these economies. Even the few usable institutions are appropriated by a few rich and corrupt individuals. The states have also few regulatory structures and the state itself indulges in rent-seeking activities. Hence, it is left to the civil society to draw the maximum benefit out of the ongoing reforms and ensure the distributional aspects using some form of social regulation. The social or informal institutional mechanisms in these societies have evolved over a long period and have sustained many changes and challenges to adapt better to any circumstances with mutual gains for its members at large. Understanding these informal institutional designs may help for better designing of formal institutions and provide a socially efficient way for the distributional aspects of the gains from reforms in the modernizing era. Developing countries need to design institutional mechanisms that could improve the governance structure that could ultimately pave the way for an equitable distribution of the proceeds of reforms. This paper emphasizes three such governance related reforms that are an absolute necessity for a better distribution of the proceeds of globalization. They are the measures for reducing corruption, increasing transparency and restructuring both government and corporate governance. There exists a strong positive relationship between transparency, good governance and economic stability. Many countries have shown that transparency is an important mechanism to sustain economic markets and institutions of governance. Greater openness and wider information sharing improve accountability and reduce the scope for corruption. Reduced corruption encourages greater entrepreneurship and improved organizational structure improves productivity. This process encourages more and more

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private initiatives and the marginalized as well as poor could take part in the mainstream economic activities and thereby claim a reasonable share in the proceeds of the economic progress. The remaining part of the article is organized as follows: the next section describes the importance of institutions in development. Section 3 deals with the issues of reducing corruption, increasing transparency and judicial reforms in governance restructuring. Section 4 presents the issues in state and corporate governance and restructuring, along with some empirical observations. Finally, section 5 provides some concluding comments.

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2. INSTITUTIONS REFORMS AND DEVELOPMENT In the pursuit to make the fruits of globalization reach the poor as well, the goals of development itself have been substantially changed in recent years. Increasing income levels or growth and distribution of income are no longer the sole objective of development. Increasing the quality of life, education, health and gender equity have become equally respectable objectives of development. More concerns have been on skills and capability formation and raising standards of living. Recognizing this and in order to cope with the upcoming challenges, many countries are implementing far-reaching structural reforms over the past two decades, such as restructuring the economy, encouraging private participation and establishing new approaches to regulation with an aim to promote competition and ensure quality, under the umbrella of LPG (liberalization, privatization and globalization). With reforms there have been genuine and unspectacular improvements; after being liberalized, an average Indian is twice as well off in the 21st century compared to 1980s. At the enterprise level, a typical firm has been able to raise its labor productivity, increase investment and lower prices. Economy has been growing at a faster rate. Globally, it has been estimated that the sum of estimated growth effects of trade openness, financial liberalization, privatization, and corruption lowering is a little less than four per centage points. Though there are structural reforms that increase the resources available in the economy and there are efficiency gains, the reforms have not produced distributional gains. It is argued that reforms and the associated privatization programs have worsened the distribution of assets and incomes. Benefits of reforms without a proper accompanying climate of open competition and rules of law may be very small or even zero. In cases where reforms have resulted in a strong concentration of ownership through privatization, a class of rent-seeking vested interests develops and captures the state to ensure policies work in their favour, and prevent competitive and transparent market as well as institutional development. As North (1990) asserts, the third world countries are poor because the institutional constraints define a set of payoffs to political/economic activities that do not encourage productive activity. Such institutional constraints are defined as political organizations (political parties, regulatory agencies, city councils), economic organizations (firms, trade unions, cooperatives, groups), and social organizations (clubs, civic associations). For a better understanding of the institutional environment under which the reform process can improve the performance, several issues of a local nature must be considered and conditions met for these measures to achieve their goals. For effective economic development markets are central, and in developing efficient markets, institutions play an important role in

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how markets affect standards of living and help protect their rights. Institutions are the rules and organizations, including informal norms, that coordinate human behaviour and activities. Effective institutions can make the difference in the success of market reforms. Weak institutions hurt the poor especially, and deny access to them for many market activities. Strong institutions provide opportunities for people and empower them. Strengthening the foundations for better institutions require overcoming the inequitable access to assets and the pervasive barriers to inclusion (World Bank, 2002). For markets to work adequately, the public institutions must serve five functions: protection of property rights, market regulation, macroeconomic stabilization, social insurance, and conflict management (Rodrik, 2001). Not all these institutions are there to serve the needs of the market economy. The governance structure is needed to ensure that markets can do their work. Effective public-private coordination requires institutions (informal and formal rules and organizations) that undertake the following functions: picking up signals (information, feedback, anticipation of future problems), balancing interests (transparency, voice, forums for negotiation) or alternatives, and executing agreed-on decisions (commitment and enforcement mechanisms) or implement solutions. Thus, the priority is to develop or strengthen the market-supporting institutions for an effective mixed economy with private (market) and public institutions. But the bad news is that the operational implications of this understanding for the design of development strategies are not that clear.

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3. RESTRUCTURING GOVERNANCE Many of the institutions that support markets are provided by the state. It is also clear that markets need public institutions that can play regulatory, stabilizing, and legitimizing functions, and increase the ability of people to participate in and shape economic opportunity. It is by now generally accepted that a critical task of government is to provide the ‗right‘ incentives to stimulate and guide the various actors in the economy. A corollary to this view is that development must focus on the institutional arrangements that provide the setting in which the incentive system will operate (Van Arkadie, 1990). The great lesson of the 1970s and 1980s was that governments that tried to occupy commanding heights of their economies witnessed stagnating growth and deteriorating performance. An important lesson of the past few decades is that authoritarian regimes are not necessary for growth; democracy, while not essential for growth, may improve development programs. What is less clear is drawing the right line between the invisible hand and government‘s helping hand. An understanding of the governance structure and institutions in economic success or failure is important. The ability of the state to provide the enabling environment (i.e., incentive compatible and market friendly institutions) – often referred to as governance – is therefore fundamental to vibrant and broad-based markets (World Bank, 2002). The World Bank (1989) defines governance as the ― exercise of political power to manage a nation‘s affairs‖. It encompasses the state‘s institutional and structural arrangements, decision making processes, policy formulations, implementation capacity, information flows, effectiveness of leadership, and the nature of the relationship between rulers and the ruled (government officials and the public). Good governance includes the creation, protection, and enforcement of property

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rights by providing a regulatory regime that works with the market to promote competition. It includes the provision of sound macroeconomic policies that create a stable environment for market activity. Good governance also means the absence of corruption, implying less bureaucratic discretionary control. Good governance matters for growth and poverty reduction. Excessive regulation undermines economic growth. Quality political institutions are important in creating incentives for governments to provide good governance. Political institutions such as constitutional rules, the division of power among levels of government, independent agencies, mechanisms for citizens to monitor public behaviour, and rules that inhibit corruption, all can restrain public bureaucrats from arbitrary action, and good governance will succeed. Institutions affect how responsive governments are to a broad spectrum of citizens in society, and how responsive they are to social and economic concerns. They do so by providing information, competition, and clarifying and enforcing rights among different government agencies and between the state and the governed. For good governance to be fostered, it is necessary, though not sufficient, to have credible arrangements for: (1) political and bureaucratic accountability (a critical dimension is transparency), (2) freedom of association and participation, (3) objective and efficient (sound) judiciary, (4) freedom of information and expression, and (5) capacity building (efficient public institutions or competent public agencies) (Landell-Mills and Serageldin, 1992). The failure to develop efficient institutions to facilitate an efficient market system can lead to coordination failures, in which social factions fail to coordinate on outcomes that would be of mutual benefit and ultimately result in government failure.

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3.1. Reducing Corruption and Rent-Seeking Corruption is a pervasive and almost built-in phenomenon in all societies. The negative effects of corruption are more dominant, than its positive aspects, so that it distorts allocative efficiency as most forms of corruption are associated with the political and bureaucratic structures that are the wheels of administration of modern economies. The development economics literature has largely ignored corruption either as an institution or as a bottleneck in the development process. The growing fields of information and institutional economics offer some insights to analyze the significance of corruption within the framework of incentive mechanisms. Many cross-country empirical evidences show that high levels of corruption are associated with low rates of economic development (Mauro, 1995; Aidt, 2003). India is characterized as one of the most corrupt countries, from top to bottom, in the world. According to Transparency International, India ranked 88th most corrupt country out of a total of 159 countries surveyed in 2005; on a 10 point scale, Indians score is a miserable 2.9, improving only by 0.1 from the previous year. The cleanest country is Iceland with a score of 9.7, followed by Finland (9.6), United states is ranked 14 with a score of 5, while Singapore has a score of 9.4. Anti-corruption laws, restructuring of administration particularly limiting the discretionary powers of the public agents, deregulation, and transparency and accountability are some of the suggested necessary but not sufficient reforms in fighting against corruption. More importantly, limiting the opportunities for corruption, recognizing and providing incentives for honesty and increasing the cost of being corrupt are needed to eliminate the root causes of corruption. This requires the non-law mechanisms that will facilitate an institutional, informational and incentive base for strengthening civil society and

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social attitudes as well as expectations of the public. Even these fundamental shifts may fail to control corruption as it is rampant at all levels of the social, political, legal and economic systems. Many countries seem to be unable to improve their institutions and curb corruption. Improved transparency and good governance structures at both firm and government levels are imperative for disseminating information that may ultimately lead the public to identify corrupt members of the governance system and are helpful in controlling corruption and fostering economic growth. As many empirical studies have shown, perhaps economic and political competition that involves transparency may reduce the level of corruption and its adverse effects.

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3.2. Increasing Transparency Transparency is fundamental for reforms and growth (Vishwanathan and Kaufmann, 2001). Transparency is more important in democratic countries and where trade is open, and these are the countries that have developed faster. Transparency also promotes greater financial stability which is the main requirement for privatization and distribution. Transparency is all about information sharing; it encompasses such attributes as access, comprehensiveness, relevance, quality and reliability of information dissemination. Such a creation of knowledge capital needs institutional infrastructures that could develop standards for quality, compliance, and enforcement, regulatory mechanisms for improving incentives for better disclosure; and installing countervailing regulations to minimize perverse incentives. Greater openness is needed for an efficient functioning of a transparent system. Empirically, recent attempts to measure transparency have used such proxies as a weak rule of law and corruption that links to a lack of openness; some attempts have also been made to construct some sort of index of financial transparency using the accounting and auditing standards in the financial sector.

3.3. Legal Reforms In many instances of modern economic development, it is common to prescribe complex state interventions to counter the market failure, without paying much attention to the fact that the governments also fail. In fact, the failure of the governments in poor countries to provide the basic framework of a market system is an important factor in keeping poor countries poor (Posner, 1998). Well-functioning markets also depend on the establishment of an environment in which legal rights, especially property and contractual rights, are enforced and protected; a reform in both legal and judicial aspects. Generally, the causes for judicial inefficiency are: (1) funding (too few resources and too little staff), (2) excessive and indiscriminate access, (3) lack of incentives, and (4) overly rigid and ineffective procedure. The suggested solutions are: (1) making judges accountable, (2) sharpening incentives for lawyers, (3) sharpening incentives for litigants, (4) creating competition among courts, (5) simplification of legal procedures through specialized courts and simplified procedural law, and (6) providing alternative dispute resolution. These judicial reforms are crucial for improving the speed and efficiency of judiciary (World Bank, 2002). Messick (1999) presents two hypotheses describing the link between good judiciaries and economic development. The

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first holds that well-functioning courts support economic development broadly by checking government abuses and upholding the rule of law. The second hypothesis links the judicial efficiency with economic development by facilitating fruitful exchanges between private individuals. There is growing empirical evidence to show that the rule of law does contribute to a nation‘s wealth and its rate of economic growth (Barro, 1991). Judicial reform is part of a larger effort to make the legal systems more market friendly. This broader legal reform movement encompasses everything from writing or revising commercial codes, bankruptcy statutes, and company laws through overhauling regulatory agencies and legislation that promotes faster private investments. Incentive oriented reforms that seek to increase accountability, competition, and choice appear to be the most effective. Integrating judicial reform with informal enforcement mechanisms with an aim to buttress the rule of law and assurance to entrepreneurs that contract will be enforced. The informal enforcement mechanisms that have drawn the most attention are reputation-based systems that permit merchants to carry on extensive trading relations over time and space in the absence of a court system that could ensure contract performance. There are many informal substitutes for the legal enforcement and protection of property and contract rights, such as arbitration, reputation, merger, bilateral monopoly, strong-arm tactics and altruism (Posner, 1998). These informal methods of coordinating and optimizing economic activities predate the state and formal legal institutions and even in highly legalized cultures, the vast majority of contracts and property disputes are resolved informally, perhaps because of the high expenses of legal proceedings.

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4. REFORMING GOVERNANCE It has now been increasingly recognized that lack of development is not just predatory states or market failure, but also the failure of government to provide the necessary institutions and infrastructure required for the functioning of the market to perform its role of resource allocation. There is a growing consensus that the state and the market are complements, and that the state, besides ensuring its own functions well, also has to reform other institutional arrangements that impede efficiency and market functioning. Further, the recent empirical evidence from cross-country growth literature demonstrates that the sources of economic growth are neither physical and human capital accumulation nor the state‘s control of economic resources, and identify improvement in total factor productivity and positive spillovers as the main engines of economic growth. This requires large private investment initiatives, supported by strong public institutions that facilitate market mechanisms. Reforming both the public and private sector institutions are complementary for providing a market friendly institutional environment for private initiatives and the distribution of gains from reforms.

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Table 2.1. Reforms and Performance (2004) Reforms Population (millions)

Measures

India 1063.7

China 1288.4

Brazil 176.6

Malaysia 24.8

Slovakia 5.4

South Korea 48.0

France 59.7

USA 291.0

Low

Lower middle

Lower middle

Upper middle

Upper middle

High

High

High

GNP per capita (US$)

530

1100

2710

3780

4920

12020

24770

37610

Starting a Business

No. of procedures

11

12

17

9

9

12

7

5

Time (days)

89

41

152

30

52

22

8

5

Cost(% of income per capita)

49.5

14.5

11.7

25.1

5.7

17.7

1.1

0.6

Minimum capital (% of income per capita)

0.0

1104.2

0.0

0.0

46.1

332.0

0.0

0.0

Difficulty of hiring index (0-100)

33

11

67

0

0

11

78

0

Rigidity of hours index (0-100)

20

40

80

0

20

60

80

0

Difficulty of firing index (0-100)

90

40

70

10

10

30

40

10

Rigidity of employment index (0-100)

48

30

72

3

10

34

66

3

Firing costs (weeks)

79

90

165

74

17

90

32

8

No. of procedures

6

3

14

4

5

7

10

4

Time (days)

67

32

42

143

22

11

193

12

Cost (% of property value)

13.9

3.1

2.0

2.2

3.1

6.3

5.8

0.5

Cost to create collateral (% of income per capita)

11.3

0.0

21.4

3.2

20.1

8.1

0.5

0.1

Legal rights index (0-10)

4

2

2

8

9

6

3

7

Credit information index (0-6)

0

3

6

6

3

5

3

6

Public registry coverage (per 1000 adults)

0

4

78

339

6

0

17

0

Public bureau coverage (per 1000 adults)

0

0

425

…

0

1000

0

1000

Protecting Investors

Disclosure index (0-7)

4

4

5

5

6

6

6

7

Enforcing Contracts

No. of procedures

40

25

25

31

27

29

21

17

Time (days)

425

241

566

300

565

75

75

250

Cost (% of debt)

43.1

25.5

15.5

20.2

15.0

5.4

11.7

7.5

Time (years) (insolvency)

10.0

2.4

10.0

2.3

4.7

1.5

1.9

3.0

Cost (% of estate) (insolvency)

8.0

18

8.0

18.0

18.0

4.0

8.0

8.0

Recovery rate (cents on dollars)

12.5

35.2

0.2

35.4

39.6

81.1

46.6

68.2

Income Group

Hiring and Firing Workers

Registering Property

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Getting Credit

Closing a Business

Source: World Bank (2005): Doing Business in 2005: Removing Obstacles to Growth.

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4.1. State Governance Public institutions that perform the regulatory and stabilization roles as well as that protect property rights, encourage competition and innovation, and that involve and empower people are necessary for private investment initiatives and for the efficiency of civic roles. Macroeconomic reforms coupled with micro-enterprise restructuring programmes that provide incentives for improvements could lead to greater firm performance. Increasing competition and deregulation in a privatized environment would benefit the marketization process of the economy. The process of taking economic activities to the market economy with public institutional support requires reforms in the non-economic sectors also. Postmarketization gains in performance will be limited and probably unsustainable unless accompanied by appropriate second generation reforms, chiefly institutional reforms in governance and people‘s participation. In the context of post-privatization reforms, Laffont and Tirole (1993) observe: ― A question for post-privatization world is the role of the public sector in the economy and in the regulation of firms. The alternative to state ownership is rarely purely private, unregulated firms. State ownership is only one form of the continuum of governance structures that reflect the level of state regulation of public and privately owned firms‖. Hence, the governance and regulatory mechanisms have to be properly designed to strengthen and foster the institution of public-private partnership. In this process, governments are recognizing that their policies and behaviour play a critical role in shaping both the climate and volume of investment, and they are making sustained changes. Governments influence the investment climate through the impact of its behaviour on the costs, risks and barriers to competition facing firms and markets. To build good market economy, governments have to restrain rent-seeking, establishing credibility, fostering public trust and legitimacy, and ensuring policy response to fit local conditions. A lot depends on the institutional structure of the economy and policies of the state. Foremost in the marketization and restructuring process are the radical changes in the role of bureaucracy of the state and its policy perspectives. The bureaucratic behaviour should be changed from one of retarding to rewarding; bureaucratic hurdles should be dismantle and its attitudes need to be market friendly. The reforms in policy implementation should create confidence among the investors and the public; the policy prescription and its implementation should be coordinated. This requires policy adjustments and fine-tuning in the areas of: setting priorities, managing individual reforms, maintaining momentum, and strengthening government capabilities. A lot depends on improving the basics for stability and security, regulation and taxation, finance and infrastructure, and workers and labour markets. International experience shows that some form of benchmark or target is necessary and the aim should be to attain this benchmark within a reasonable time period. This requires some form of measurement of performance of the public institutions and governance so that accountability can be ensured, just as the market sector uses certain parameters to perform well; thus what gets measured is done. Going beyond the basics, international rules and standards such as enhancing credibility, harmonizing rules and standards, addressing international spillovers are some of the areas in which both the market forces and the state need to intervene. As Shleifer (1998) sums up this literature ― a good government that wants to further ‗social goals‘ would rarely own producers to meet its objectives‖. It should provide an enabling platform for the private sector and the market to perform. Thus, the priority should be the development of market-supporting

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institutions for an effective mixed economy with private (market) and public institutions. Transformation of domestic institutions to the global changes consists of three parallel and interconnected processes: liberalization and macroeconomic stabilization, institution building, and microeconomic restructuring. While in the early 1990s, the structural adjustments and macroeconomic stabilization policies dominated the reforms agenda, current policies focus on microeconomic restructuring of enterprises. The third process, institution building, needs focus in which local-level factors need to be considered.

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4.2. Corporate Governance Improved corporate governance is crucial for privatization and for privatization to provide improved performance with accountability (Denis and McConnell, 2003). In the modern corporate governance world, there is specialization in investment and management; investors provide their resources to managers and managers (the so-called insiders) with strong investment projects and management capability promise returns to these contributions. The institutions of corporate governance are those organizations and rules that influence the expected returns to investing and giving authority over one‘s resources. Such institutions alter the payoffs to insiders and outsiders, affecting their actions and facilitating or constrain the grabbing hands of both. Effective governing structures improve information flows on good investment projects and make insiders accountable. An important insight from recent research on international corporate governance is that a country‘s legal system, in particular, the extent to which it legally protects investor rights, has a fundamental effect on the structure of markets in that economy, on the governance structures that are adopted by companies in that country, and on the effectiveness of those governance systems. Thus, rule of law and establishing property rights, disclosure, accountability and protection for financiers are essential for a good governance perspective that is at the heart of privatization and globalization. International governance structures are slowly evolving as governments, private investors and markets seek to strengthen their economies and firms, all of which require many institutional reforms that can effectively deliver the expected proceeds. As emphasized by Stern (2003) and World Bank (2005), building an appropriate investment climate for growth in developing countries is the need of the hour. The search for a magic formula that would guarantee faster economic growth, a long-standing but elusive quest, now provides important insights on how investment and productivity contribute to growth, and how investment climate determines the size of both the contributions (Easterly, 2001; Aghion and Durlauf, 2004; Hausmann, Pritchett and Rodrik, 2004). An environment with low barriers to the diffusion of new ideas, faster competitive processes, easy entry and exit all contribute to higher productivity and faster growth (Bartelsman, et..al., 2004). The World Bank‘s Doing Business in 2005 Report documents the reforms that are under way around the world to strengthen the private initiate in businesses (table 2.1). Many countries are simplifying some aspects of business regulations, apart from reforming general economic aspects and providing infrastructural and regulatory frameworks for efficient functioning of the private enterprises. There have been 89 such reforms; at present there are 7 reforms (comprising 24 indicators) - starting a business, hiring and firing workers, registering property, getting credit, protecting investors, enforcing contracts, and closing a business; three more reforms are to be added – dealing with licenses, trade logistics

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and corporate taxation – for the 2006 Report. The world‘s top reformer was France; Slovakia was the leading reformer, followed by Columbia. India also made substantial progress in improving credit markets (bankruptcy reforms). Most notable business regulations are in the areas of passing new decrees, launching one stop registration (Turkey), online business registration (Italy), face to face interactions (Russia), scrapping minimum capital requirements (France), new corporate form to forward company application electronically between government agencies (Spain), besides strengthening property rights or making it easier for businesses to raise financing, introducing flexible working hours, easing the hiring of workers, cutting the time to start a business, and reducing the time to recover debt in many developing economies. Many of these reforms in poor countries have been spurred by the desire of governments and donors to quantify the impact of the aid programmes. Following the 2000 Lisbon submit, the EU countries signed a charter agreeing to benchmark and reform the regulation of business startup. IDA also conditioned the borrowers to cut the time and cost of business startup. The borrowers from IDA improved the regulation dramatically; thus what gets measured gets done. The dramatic gain in this starting business reforms is the 56 per cent reduction in costs of starting a business, 26 per cent reduction in procedures, 8 per cent reduction in minimum capital, 41 per cent reduction (in time in top ten reformers), and it became easier to start a business in 35 countries. The major results are: (1) business in poor countries faces three times the administrative costs, and nearly twice as many bureaucratic procedures and delays associated with them as those in rich countries; (2) heavy regulation and weak property rights exclude the poor and weaker sections (low skilled) from doing business in poor countries 40 per cent of the economy is informal; and (3) ease of doing business (reforms) is associated with up to two per centage points (1.4-2.2 per cent) more annual economic growth. It should also be noted that economic growth is only one benefit of better business regulation and property protection, human development is another. About two thirds of world‘s people now live in a country with an average income more than that of the US a century ago, and the average material prosperity in some developing countries in 2000 was about 3-5 times greater than that of US in 1900. Further gains to such reforms come from: (1) businesses spent less time and money on dealing with regulations and financing and more on production and marketing, and (2) the governments spent fewer resources on regulation and more on social services. And as reforms involve simplification and governments would have more capacity and more money if they have reformed. India, though a major reformer, still has many hurdles for the private initiative. It is still difficult to fire employees, register property, enforce contract and close a business; they involve many procedures and time delays with high costs (table-1). Also, it should be noted that even the highly developed and industrialized countries are still going on reforming their business environment and the developing countries have to undergo a long way in catching them. According to the World Development Report 2005, just reducing business costs is not enough; reforms should provide the investment climate. Reform measures should also remove the barriers to competition, as well as provide incentives to innovate and the policy perspectives for business. Not only policies, but also bureaucratic attitudes with respect to implementation of policies need to bridge the gap between policy and its implementation. Governments need to tackle corruption and other forms of rent-seeking, build credibility, foster public trust and legitimacy, and ensure policy interventions to fit local conditions. Modern evidences show that it is not the volume of investment that matters, but the investment climate in which firms and entrepreneurs, big or small, local or MNC, have the

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opportunities for innovation, improve productivity and competition as well as create jobs and expand. World Bank investment climate surveys show that firms facing strong competitive pressure are at least 50 per cent more likely to innovate (introduce new products/upgrade products) than those reporting no such pressure. Driven by the quest for profits, private firms invest in new ideas and new facilities. They creating opportunities for people to apply their talents and improve their wellbeing, along with strengthening the foundations for economic growth and national prosperity. They are mainly determined by the investment climate – the location-specific factors that shape the opportunities and incentives for firms to invest productively, create jobs, and allow expansion (World Bank, 2005). A good investment climate encourages firms to invest by removing unjustified costs, risks and barriers to competition.

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5. CONCLUSION In order for the gains from globalization and economic development to reach the poor, and for an equitable distribution of the proceeds of economic reforms, effective and efficient institutional mechanisms are crucial. Such institutions, both formal and informal, in developing countries are either nonexistent or dysfunctional in most cases. The building of effective institutions depends largely upon the governance structure of the economy and the transparency with which the institutions can function efficiently. This paper emphasizes three such governance related institutional reforms. They are the measures for reducing corruption and rent-seeking, increasing transparency and accountability, and restructuring both government and corporate governance. There exists a strong positive relationship between good governance, transparency, and reduction in corruption, and that they facilitate economic markets and encourage greater entrepreneurship and productivity. More importantly, limiting the opportunities for corruption, particularly by non-law mechanisms, will facilitate an institutional, informational and incentive base for strengthening civil society and social attitudes. Transparency and accountability promote greater stability, which is the main requirement for privatization and equitable distribution. Improved corporate governance is crucial for privatization and for privatization to provide improved performance with accountability. The institutional reforms of both government and corporate governance depend on reforming the legal system, in particular, the extent to which the reforms and institutions legally protect the rights, and provide the opportunities for entrepreneurial initiatives. Rule of law and establishing property rights, disclosure, accountability and protection for investors are essential for a good governance perspective.

REFERENCES Aghion, P. and Durlauf, S. (2004). (Eds. ), Handbook of Economic Growth, Amsterdam: North Holland. Aidt, T. S. (2003). ― Economic Analysis of Corruption: A Survey‖, Economic Journal, 113: F632-F652.

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Bartelsman, E., Haltiwanger, J. and Scarpetta, S. (2004). ―Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries‖, mimeo, World Bank. Barro, R. J. (1991). ― Economic Growth in a Cross Section of Countries‖, Quarterly Journal of Economics, 106: 407-443. Birdsall, N. and Nellis, J. (2002). ―Winners and Losers: Assessing the Distributional Impact of Privatization‖, mimeo, Center for Global Development. Denis, D. K. and McConnell, J. J. (2003). ― International Corporate Governance‖, Journal of Financial and Quantitative Analysis, 38 (1): 1-36. Dew-Becker, I. and Gordon. R. J. (2005). ―Where Did the Productivity Go?‖, Cam. : NBER. Easterly, W. (2001). The Elusive Quest for Growth: Economists‘ Adventures and Misadventures in the Tropics, Cambridge: MIT Press. Hausmann, R., Pritchett, L. and Rodrik, D. (2004) ― Growth Accelerators‖, Cam. : NBER. Laffont, J-J. and Tirole, J. (1993) ― The Politics of Government Decision Making: A Theory of Regulatory Capture‖, Quarterly Journal of Economics, 106 (4):1089-1127. Landell-Mills and Serageldin, I. (1992). ― Governance and the External Sector‖, Annual World Bank Conference on Development Economics, 303-320. Mauro, P. (1995). ― Corruption and Growth‖, Quarterly Journal of Economics, 110 (3): 681712. Messick, R. (1999). ― Judicial Reform and Economic Development‖, World Bank Research Observer, 14 (1): 117-136. North, D. C. (1990). Institutions, Institutional Change and Economic Performance, Cambridge, MA. : Cambridge University Press. Posner, R. A. (1998). ― Creating a Legal Framework for Economic Development‖, World Bank Research Observer, 13 (1): 1-11. Piketty, T. and Banerjee, A. (2004). ―Top Indian Incomes, 1922-2000‖, CEPR Dicussion paper. Rodrik, D. (2001). ― Development Strategies for the 21st Century‖, in B. Pleskovic and N. Stern (eds. ): Annual World Bank Conference on Development Economics, 2000, Washington: World Bank, pp. 85-108. Shleifer, A. (1988). ― State vs Private Ownership‖, Journal of Economic Perspectives, 12 (1): 133-150. Vishwanathan, T. and Kaufmann, D. (2001). ‖Towards Transparency: New Approaches and Their Application to Financial Markets‖, World Bank Research Observer, 16 (1): 41-57. Van Akadie, B. (1990) ― The Role of Institutions in Development‖, Annual World Bank Conference on Development Economics,153-175. World Bank. (1989). World Development Report, 1989, Financial Systems and Development, Washington, D.C. World Bank. (2002). World Development Report, 2002: Building Institutions for Markets, Washington, D.C. World Bank. (2005). World Development Report, 2005: A Better Investment Climate for Everyone, Washington, D.C. World Bank. (2005). Doing Business in 2005: Removing Obstacles to Growth, Washington, D.C.

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In: Globalization Editor: Joseph A. Mancini

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Chapter 16

GLOBALIZATION AS THE HEGEMONIC CONCEPT OF NEOLIBERAL IDEOLOGY Erinç Yeldan

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1. INTRODUCTION The term ― globalization‖ stands out as the hegemonic concept of the neoliberal ideology, reflecting one of the main items in the current political economy agenda. This buzz-word seems to have a spiritual power in its own right as it provides a center-force directing our daily discourse on economic, social, political, and cultural relations. The concept is mostly revealed as part of a modern project on ― citizenship‖ along with references to such slogans as: ― being a citizen of the globalized village‖ and ―adjusting to the needs of the global markets‖. In this sense, the term itself carries a dual conceptual meaning: a definition, and a policy recipe. As a definition, the term refers to the increased integration of the world‘s commodity and finance markets and its cultural and social values. Within the context of this definition, liberalization of the commodity trade and financial flows yield the narrowest economic implications of the globalization process. At a more general level, this process entails― … a programme for destroying collective structures which may impede the pure market logic‖ (Bourdieu, 1998). In order to sanctify the power of the markets in the name of economic efficiency, this ― infernal machine‖ requires the elimination of administrative or political barriers which limit the owners of capital in their quest for maximization of individual profit, which, in turn has been upheld as the supreme indicator of rationality (ibid). Thus, the concept also covers a list of economic-political- and social actions that is regarded necessary for a country to ― embrace‖ globalization. Brought under the term ― Washington Consensus‖, these conditionalities are often imposed as part of the austerity programmes designed by the International Monetary Fund (IMF) and the World Bank. Accordingly, in a market economy under capitalist competition, the profit rate (or, more generally, the rate of return to capital) is heralded as the supreme objective and the state apparatus is to be re-organized to ensure highest profitability of capital. This re-organization

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aims at reducing the role of the public sector in regulation of the economy, and is dressed with the rhetoric of terms such as ―go vernance‖ and ―m arket-friendly, credible governments‖. The main dictum of the globalization rhetoric rests its arguments on the allegation that ― globalization is the natural product of human history and as such it is unavoidable‖. Thus, all countries should follow the necessary policies (often termed as structural reforms) to take advantage of this magical process. Only then the bounties of globalization would follow to those countries that succeeded implementation of such reforms. Given this logic, the main responsibility of the developing countries is to open their economies to international capital and to implement the necessary reforms warranted by the transnational companies (TNCs) and international financial institutions (the so-called IFIs). In this sense, the development strategy no longer encompasses indigenous targets on industrialization, fixed capital investments, or strategic trade policies; but is reduced to only one concept: adjust to the needs of international capital, or in the words of Dani Rodrik (1992), ― be a host to the most beautiful welcome party for foreign capital‖. It is through this logic that the economics profession has witnessed a deep transition in its terminology. Concepts such as ― under-development‖ or ― developing countries‖ are replaced by ― emerging markets‖ and ―m arket actors‖. Perceived from this angle, it is clear that the term globalization is an ideological concept, advocating the interest of capital, rather than a neutral concept of historical progress. As the main concept of the neoliberal ideology, the terms reflect the strategic interest of international capital. The main actors of this ideology are the TNCs, the IFIs, and the multi-national organizations such as the IMF, the World Bank and the World Trade Organization (WTO). Under the new era of globalization of capitalism, it is observed that the 500 largest TNCs account for 30% of global production and 70% of global commodity trade (UNCTAD, 1994; Petras and Weltmeyer, 2001). On the other hand, the volume of daily trade in the foreign exchange markets accelerated from US$ 190 billion in the 1970s, to US$1.2 trillion in early 1990s, and to US$1.2 trillion currently. This number has outpaced the annual volume of global commodity trade by 70-folds. According to Petras and Weltmeyer (2001: 17) for every 1$ of transaction carried out in the real sector, the finance sector utilizes a transaction volume reaching to 25-30 dollars. As the main actor of international finance, the banking sector has diversified its international operations rapidly and increased its international credits to the developing world from US$32 billion in 1972 to $90 billion in 1981 (Strange, 1994. 112). Thus, the term globalization reflects the main ideological concept of the TNCs and the IFIs to re-organize the global commodity and the financial markets to better serve their strategic interests, rather than a neutral term depicting miracles of technological advances as often alleged. In this sense, globalization is a cover-phrase disguising the ideological interest of globalizing capital and entails a set of strategic policies to re-arrange the role of the developing nations in the international division of labor and to consolidate the capital‘s supremacy over labor. This study extends the arguments set forth in the above introductory paragraphs and aims to discuss the underlying ideological purpose of the term ― globalization‖. The rest of the paper is organized under sections. In section II, I discuss the two recent waves of globalization of the last two centuries. Section III takes the globalization of finance a closer look. In section IV I discuss the concept of development strategy and argue that under the conditionalities of the globalization ideology, implementation of a viable developmental strategy is virtually not possible. Section five summarizes and concludes.

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2. THE TWO-WAVES OF GLOBALIZATION OF WORLD CAPITALISM As stated in the Introduction above, the term globalization is portrayed as a natural process of technological advances and integration of the world societies as a common, global village. Yet, the history of capitalism reveals that even if the term is analyzed in this simplistic (disguised) fashion, it does not apply only to the current era of human history and that over the course of its history, capitalism has lived through cycles of such internationalization, expansion and contraction. Indeed, the history of capitalism of the last two centuries reveal two independent long cycles of internationalization of capital. The first of these cycles roughly correspond to the post-industrial revolution era of 1870-1913. This era is observed to come to an end with the outbreak of the two major wars of the 20 th century and of the rise of the Soviet-system and the so-called ― welfare state‖ policies of the Western world. This interlude of seemingly ― tamed‖ capitalism and regulatory framework on global finance is finally broken down by the last quarter of the 20th century, and capitalism has entered a new cycle of (current) globalization. As such, even though one observes many important characteristic differences among the two, I will refer to the first one as the 19th century cycle, and the latter as the 20th century cycle of globalization. Leaving out the differences for the moment, the most important common feature of the two cycles of internationalization of capitalism is the rapid rate of economic growth witnessed over the last 250 years. The acceleration of growth was incepted in the weaning and cotton ginning industries in the 1730s. This was followed by the rapid advances achieved in rail road transportation (1820s) and trans-oceanic shipping based on steam power (1840s). Given these developments, the structural composition of labor force has changed rapidly and, in England for instance, the share of industrial labor in the total has increased from 30% in early 1800s, to 47% in 1840, and to 49% in 1870 (Baldwin and Martin, 1999). The rapid rise of growth rates was indeed phenomenal. The world economies were almost at the subsistence level of economic activity by the turn of the 1800s. Average rates of economic growth accelerated rapidly to 2 percent during the 19th century and rose above 3 percent over the 20th century course of development. During this process the rate of growth experienced by the leader of world capitalism is observed to have accelerated at each new round. While the rate of growth experienced by Netherlands, the then leader of world capitalism between 1580 and 1840, was only 0.2 percent; the upcoming leader, England, enjoyed a rate of growth of 1.2 percent during its reign 1820 through 1890. The rate of growth of the current leader, USA, averaged 2.2 percent over 1890 to 1990.1 We know that the other side of this underlying process of economic growth was a concomitant phase of de-industrialization of the regions which we refer today as the ― third world‖. For example, India, which was the leader of the world textile manufacturing until the 18th century, has been converted into a peripheral economy which imports 70 percent of its textile consumption in exchange for raw cotton by the 19th century.2 Thus, the first wave of 19th century globalization was invigorated over a relatively equal distribution of income in a world producing at roughly subsistence level of consumption. Yet, the initial conditions of world income distribution inherited by the second wave of globalization in the late 20th century rested upon a deeply unequal structure. 1 2

For further discussion and specifics see, Parente and Prescott, 1993. See, e.g., Collins and Williamson, 1999; Landes, 1969.

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Consequently one of the major distinguishing characteristics of the 20th century globalization regards the uneven distribution of world income upon which the consequent process of liberalization and deregulation are initiated. This second globalization wave is observed to deepen the existing/created unevenness of world income strata even further. As documented by the 1998 Trade and Development Report of UNCTAD, the world gini coefficient of income distribution was 0.66 in 1965; increased to 0.68 in 1980; and to 0.74 in 1990. The average of the lowest percentile of world income was 74$ in 1965, in comparison to the average of the highest percentile which was 2,281$. This gave a ratio of 1-to-31. By 1990, the figures for the comparable percentiles were calculated to be 283$ for the lowest, and 17,056$ for the highest group. This meant a ratio of 1-to-60. Concomitant to the intensified deterioration of the distribution of income strata, the 20th century globalization also witnessed a drastic change in the structure of the liquidity generation mechanism across the globe. While the liquidity mechanism of the 19th century was based mostly on the gold standard, the 20th century monetary systems mostly utilized fiat currencies. The fact that most of the major currencies of the world markets were based on nominal fiat values, which were effectively off-the gold standard after 1973 meant a system where ― countries give up the exchange rate as an instrument of monetary policy up-front and must accept whatever exchange rate the global system generates‖ (Adelman and Yeldan, 2000b: 102). Set across a system of freely mobile international capital flows, flexible exchange rates amplify the swings in the financial markets by allowing speculation on foreign exchange markets that are excessively large; excessively liquid; excessively volatile; imperfectly informed; and subject to herd psychology. Thus, it is this feature of the 20th century financial capital centers invited Adelman and Yeldan (2000b) to assert that ― the process of economic development is at risk because the nature of global institutions for short term capital flows is robbing developing countries of their autonomy‖ (p. 96). To be able to better evaluate this assertion, we need to capture the essence of the concepts of financial liberalization and development strategy more closely.

Source: Moseley, 2001. Figure 1. Profit Rates in US Manufacturing, 1947-1994.

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3. THE RISE OF FINANCE CAPITAL

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One of the most distinguishing features of the 20th century wave of globalization is the ascendancy of finance over industry under a regime of fiat currencies. This gave rise to an immense speculation activity driven by massive capital flows led by myopic expectations. This process has been the result of the demise of the Fordist production technologies in sustaining profitability of capital. The Fordist model was based on mass-production for a mass-consumption market. The need for mass-consumption has, in turn, necessitated a generally tolerant stance towards wage-labor by way of recognition of many labor rights. As a result, the strategy relied on the generation of a domestic mass consumption market based on strong wage incomes. The nature of technologies available back then enabled high productivity increases that led to sustained profitability for industrial capital. With the advent of wide spread production facilities across the globe, however, the Fordist mass-production-mass consumption strategy reached its limits. Led by intensified competition through technological reverse-engineering, imitation and cheap labor costs, developing countries mainly of East Asia started to capture market shares which traditionally belonged to the North. In Figure 1 below I depict the long run tendency of manufacturing profits in the US. The late 1960s clearly reveal the fall in rates of return to US manufacturing industry capital. As a response, pressures to sustain profitability amounted. As rates of return in industry fell, the returns to finance capital were intensified. Calls for ― financial liberalization‖ and ― structural adjustment reforms‖ to guarantee ― flexibility of labor markets‖ have echoed the ideological will of this transition. In the meantime, there were further developments at work in the international financial markets. Massive surplus dollars were accumulated as a result of three phenomena: (1) The US financed the war costs at Vietnam with rapid increases in liquidity; (2) Oil shocks of 1973 and 1978 have led to a massive accumulation of petro-dollars in the Western banks. This in turn necessitated a vent for ― re-cycling‖ The excessively big liabilities of the banking system. Thus, the foundations of the debt-trap were laid out. (3) Finally, the rapid population growth based on the so-called ― baby-boomers‖ reached their retirement age. The retirement funds of the now-old baby-boomers necessitated even higher rates in the global financial markets. This led to the emergence of various financial instruments to accommodate the increased pressures in finance, such as derivatives, repos, hedge funds, etc. These developments in the real and financial spheres have generated their own ideology, and the trinity of de-regulation, privatization and technological revolutions in banking and finance led to the supremacy of finance over industry in particular, and of capital over labor, in general. In the meantime, the economics profession witnessed the demise of the Keynesian demand management and the rise to hegemony of the neoliberal ideology. The demise of ― development economics‖ was recognized as a welcome event, and economics as a science has been transformed to an engineering technical subject of technocrats and mathematical wizards. This opened up a whole new episode in human history, as ― developing countries‖

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came to be referred to with the seemingly neutral concept ― new emerging markets‖, and ― development policy‖ was replaced by ―f inancial conditionality‖. Capital‘s assault on labor continued with new forms of industrial organization. With intensified policy changes towards flexibility and privatization, position of wage-labor eroded everywhere. This process was most visible in the US, the hegemonic center of global capitalism. In order to depict this phenomenon Figure 2 portrays the paths of real wages and real labor productivity in US manufacturing in the second half of the 20th century. As clearly visible, the Fordist period under the Keynesian policies is associated with real wages following to a large extend the movements in labor productivity up until 1970s. The late 1970s, however, reveal the extend of capital‘s gains against labor. As the real wage rate stagnates, its path remains significantly below the real average product of labor. This difference yields the increased exploitation of wage labor in the last quarter of the century. A different facet of this observation was at play across the Atlantic as well. Figure 3 below contrasts the US wage labor‘s position with that of a developing market economy, Turkey. The figure portrays comparable data and the verdict is exactly the same. Wage rates of the Turkish manufacturing labor follow the average real product until 1980, and under conditions of military dictatorship during the 1980s, a significant gap is created among the real wage earnings and real labor productivity by way of intensified exploitation of labor.

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Hourly average product of labor

Hourly real wages

Source: "The New Face of Capitalism: Slow Growth, Excess Capital and A Mountain of Debt" Monthly Review, editors, 2002. (www.monthlyreview.org/0402.editr.htm) Figure 2. Labor Productivity and Hourly Real wages in US Manufacturing (1950 = 100).

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900

800

Value added per Labor

700

600

500

400

real wages

300

200

100

0 1950

1955

1960

1965

1970

Source: TURKSTAT, Annual Manufacturing Surveys.

1975

1980

1985

1990

1995

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Figure 3. Labor Productivity and Real Wages in Turkish Manufacturing (1950-1997).

Clearly very similar processes had been operational both at the North and South under neoliberal globalization. The end of the Fordist technological organizations led to the demise of the welfare state which enabled a comparatively tolerant attitude towards wage labor. As this delicate balance on mass production for domestic consumption eroded, capital has found a new opportunity in financial returns. Overall this process has led to the demise of the welfare state and an outright hostile attitude against the rights of labor. As a result, share of labor in national incomes fell everywhere. According to Petras and Weltmeyer (2001) and Diwan‘s (1998) data, share of wage labor fell from 48% (1970) to 28% (1985) in Chile; from 41% (1970) to 25% (1989) in Argentina; from 37% (1970) to 27% (1989) in Mexico; from 40% (1970) to 17% (1986) in Peru. Similarly, according to calculations of Yeldan (2000, Chapter III) the share of wage labor in manufacturing value added was reduced from 28% in 1976 to 15% by 1987. This abrupt shift in the distribution of income against labor coincided with the assault against indigenous strategies for economic development. I now turn to this issue.

4. ECONOMIC DEVELOPMENT DEFINED PROPER First, let‘s highlight the distinguishing characteristics of the process of economic development proper from growth. Succinctly put, the term ― economic growth describes the process by which an economy dominated by agricultural activities carried on with low levels of capital per laborer is transformed into one in which industry and other non-farm activities produce the bulk of society‘s output using high levels of capital per worker‖ (Putterman, 2001: 142). As an extended outcome of this process, the proportion of output produced for

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consumption directly by the producer declines while the share of consumption produced by others increase. This phenomenon reflects the nature of commercialization embedded within the modern economic growth itself. Economic development, on the other hand, refers to that process of growth ― that translates into wide spread improvements in well-being‖ (ibid: 143). Following this vision, Adelman and Yeldan (2000b) note the following five determinants of economic development, as distinct from mere economic growth:

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(1) (2) (3) (4) (5)

self-sustaining growth; structural change in patterns of production and consumption; technological upgrading; social, political, and institutional modernization; widespread improvement in the human conditions.

Accordingly, prior to World War II, today‘s developing countries experienced only cycles in economic growth, but not economic development. These cycles were in turn very much under the discretion of the cycles in the industrial countries through their input demands of primary food and raw materials from the developing world. After the end of World War II, several new elements coincided to enliven economic development as a real possibility: (1) through a succession of movements for independence, most developing countries attained political autonomy; (2) this, in turn, coincided with a favorable international environment which granted a fairly strong economic autonomy in managing their industrialization targets. Yet, it is precisely this economic and, by extension, political autonomy that is under severe attack by the current stage of neoliberal global agenda, putting the underlying policies of economic development at risk. The new wave of globalization, with the unfettered workings of highly liquid and volatile flows of financial capital, restricts the autonomy of the developing countries to pursue strategic policies to attain indigenous industrialization targets. To understand why this is the case, we must look at the underpinnings of the current exchange rate and open capital account regimes, and explain how the free international movement of short term financial capital undermines the ability of countries to induce economic development targets, depriving them of even the basic instruments of stabilization and austerity. To be able to take better account of the disruptive mechanisms of this structural fragility, we have to note the famous tri-lemma underlying an open economy that the international economists are fond of. In an open economy, the monetary authority can independently choose only one of the three following instruments: the nominal exchange rate, the interest rate, and the stock of money, leaving the determination of the other two to the interplay of the market forces. In fact, the interest rate and the exchange rate lose their independent autonomy all together, and turn into a single variable whose value is characterized by their relative magnitudes vis-à-vis each other. In this setting, raising the net differential of the interest rate and the rate of depreciation of the exchange rate above the world market levels triggers a large foreign capital inflow, setting the structural foundations of a culminating financial crisis: the increased flow of foreign capital leads to an appreciation of the exchange rate, causing a deterioration of international competitiveness. Exports stagnate while import demand escalates. As this process continues, current deficit widens and foreign speculators

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lose confidence in the domestic currency. This might itself signal the confinement of the domestic asset markets to a vicious trap: in order to overcome the rising country risk and gain International creditworthiness, the central bank is compelled to raise the interest rates even further and start hoarding international reserves. In fact to market the economy as an attractive site for the international speculators, governments will necessarily be compelled to maintain interest rates at levels higher than they otherwise would prefer. This will set of a vicious circle of uncontrolled inflows of foreign capital, appreciation of the exchange rate, deterioration of the current account balance, erosion of the confidence… all of which necessitate even higher rates of interest calling for the re-commencement of the cycle. Elements of this vicious cycle are further studied in Kaminsky and Reinhart (1999), Diao, Li, and Yeldan (2000), Dornbusch, Goldfajn and Valdés (1995), Velasco (1987), Diaz-Alejandro (1985), and more recently referred to as the Neftci-Frenkel cycle in Taylor (1998) (following Neftci (1998) and Frenkel (1998)). The initial bonanza of debt-financed public (e.g. Turkey) or private (e.g. Mexico, Korea) spending escalate rapidly, and severe the fragility of the shallow financial markets in the home country. Eventually the bubble bursts and a series of severe and onerous macro adjustments are enacted through very high real interest rates, sizeable devaluations, and a severe entrenchment of aggregate demand, while the short term ―h ot money‖ flows have already rushed out of the country leaving it broke and deprived of the traditional tools of adjustment and austerity. Conversely, setting the net differential of the interest and the exchange rates bellow the world market levels set the stage for capital outflow, directly triggering the crisis. Yet, what is clearly at stake is not only the choice of economic development path. Countries that are dependent upon capital inflows need to adopt or maintain contractionary monetary policies in order to secure investor confidence and international creditworthiness. Thus, the governments of the emerging markets who seek to attract and maintain inflows of foreign capital are severely constrained in the ex ante sense to adopt a set of restrictive monetary and fiscal policies (Grabel, 1996). In this environment portfolio investors become the ultimate arbiters of national macroeconomic policy (Cizre-Sakallioglu and Yeldan, 2000; Frieden, 1991). Public policy became synonymous to populism and waste. Democratic institutions are put under siege through endless lists of conditionalities set forth by the IMF and the World Bank. The IFIs report rating scores in aligning the indigenous economies under the strategic realm of finance capital. Even direct political decisions are under scrutiny. Consider for example the rejected war motion by the Turkish parliament, disapproving the US troops to utilize the Turkish soil in the early days of the Iraq‘s invasion. In exchange for a total aid of 25 billion dollars, USA had asked permission from Turkey to use its borders with Iraq. The motion was rejected and a chaos ensued driven by the IFIs and their rating agencies. The following excerpt from Morgan Stanley Economic Forum on Turkey, is a critical example (March 4, 2003): ― the latest parliamentary decision to reject the much-debated ‗war motion‘ is such a risk that will no doubt disturb the fragile equilibrium...(Turkey) is unlikely to get the promised $24 billion that would ease pressure on the domestic debt market...‖ The report concludes with the stunning question: ― what happens if the parliament does not altogether vote for the economic reforms, arguing that 80 % of the Turkish population is against the IMF program?‖

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The report is not only concerned with the loss of 25 billion dollars liquidity for the Turkish financial centers, but also is concerned hat the people may further exercise their rights over the future of the IMF-led austerity program in Turkey. In the classic words of Diaz-Alejandro, a twist can also be mentioned: ―Good-bye Budget deficits, hello democracy deficit...‖.

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5. CONCLUSION In this paper I have argued that the new wave of globalization led by open capital markets and unfettered financial flows constrain the developmental states in pursuing strategic industrialization and development targets. Yet, history provides overwhelming evidence that successful long term economic development entails a state-led process of systematically transforming dynamic interactions between institutional change, technological progress, and structural change in the profile of production, distribution, and consumption. Nevertheless, the pace of industrialization and modernization that the developing countries can achieve are severely constrained under the post-Bretton Woods era of financial liberalization orthodoxy. Such efforts are restricted to a balanced budget, entrenched fiscal expenditures, and a relatively contractionary monetary policy with an ex ante commitment to high real interest rates. All of this signify reduced political autonomy in the developing world in exchange for market access to industrialized North, and itself is a bad bargain as far as development is concerned (Rodrik, 2001). The detrimental consequences of the free movement of short term capital flows are not limited to the erosion of the developmental objective. They are further held responsible for depriving the governments from the classic tools of austerity and setting the stage for fullfledged financial crises. As open capital markets replaced closed short term capital markets and regulated flows of foreign investment, governments became unable to employ their traditional policy instruments (interest rates, rate of monetary expansion, and exchange rates) unilaterally: Flexible exchange rates amplify the effects of these international capital flows, by allowing speculation on foreign exchange markets that are excessively large; excessively liquid; excessively volatile; imperfectly informed; and subject to herd psychology. In the words of the UNCTAD‘s 1998 Trade and Development Report, ― the ascendancy of finance over industry together with the globalization of finance have become underlying sources of instability and unpredictability in the world economy. (…) In particular, financial deregulation and capital account liberalization appear to be the best predictor of crises in developing countries‖ (pp. v and 55). Almost all recent episodes of financial-cum-currency instability disclose that the observed sharp swings in capital flows are mostly a reflection of large divergences in domestic financial conditions relative to those of the rest of the world. Reversals of capital flows are often associated with deterioration of the macroeconomic fundamentals in the recipient country. However, ― such deterioration often results from the effects of capital inflows themselves as well as from external developments, rather than from shifts in domestic macroeconomic policies‖. (ibid, p. 56). From a policy point of view, the very starkness of the picture of the diminished possibilities for attaining developmental targets painted throughout this paper implies that many of the remedies suggested for achieving sustained growth and avoiding future financial

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crises will do no such thing. These include: financial sector reform; better information; the creation of a new international institution to supervise international financial transactions and operate as a lender of last resort; cleaning up corruption in lending; getting government out of the targeting business; and improving the governance of the corporate sector. Notwithstanding the importance of these structural reforms, the single most important source in our analysis for a crisis to develop was short term financial markets open to international financial flows which are navigated by the herd behavior induced by the speculative and short sighted portfolio investors. In this vein, our readings of the recent history of failed developmental objectives and financial crises suggest that the primary basic remedy for attaining sustained development lies in regulating short-term international flows, and highlight once again the now classic dictum due to Keynes, ― above all, let finance be primarily national‖.

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REFERENCES Adelman, Irma and Erinc, Yeldan. (2000). ― Is This the End of Economic Development?‖ Structural Change and Economic Dynamics, 11:95-109. Baldwin, Robert, E. and Phillip, Martin. (1999). ― Two Waves of Globalization: Superficial Similarities, Fundamental Differences‖ NBER Working Paper, No. W6904, January. Bourdieu, Pierre (1998). ― The Essence of Neoliberalism‖ Le Monde Diplomatique, December. Cizre-Sakallıoğlu, Umit and Erinç, Yeldan. (2000). ― Politics, Society and Financial Liberalization: Turkey in the 1990s" Development and Change, 31(1): 481-508. Collins, William and Jeffrey, Williamson. (1999). ― Capital Goods Prices, Global Markets and Accumulation‖ NBER Working Papers, No. W7145, May. Diao, Xinshen, Wenli, Li, and Erinc, Yeldan. (2000). ― How the Asian Crisis Affected the World Economy: A General Equilibrium Perspective‖ Federal Reserve Bank of Richmond Economic Quarterly, 86(2): 35-59. Diaz-Alejandro, Carlos, F. (1985). ― Good-Bye Financial Repression, Hello Financial Crash‖ Journal of Development Economics, 19(1-2): 1-24, February. Diwan, Ishac, (1998). ― Labor Shares and Financial Crises‖ The World Bank, mimeo, (http://www.gdnet.org/conferencepapers). Dornbsuch, Rudiger, Ilan, Godfajn and Rodrigo, Valdés. (1995). ― Currency Crises and Collapses‖ Brookings Papers on Economic Activity, Vol 2: 219-270, June. Frieden, J. (1991). ― Invested Interest: The Politics of National Economic Policies in A World of Global Finance‖ International Organization, 45(4): 425-452. Frenkel, Roberto. (1998). ― Capital Market Liberalization and Economic Performance in Latin America‖ Center for Policy Analysis, New School for Social Research, Working Paper Series III No 1, May. Grabel, Ilene. (1996). ― Marketing the Third World: The Contradictions of Portfolio Investment in the Global Economy‖ World Development, 24(11): 1761-1776. Kaminsky, Graciela, and Carmen, Reinhart. (1999). ― The Twin Crises: The Causes of Banking and Balance-of-Payments Problems‖ American Economic Review, 89(3): 473500, June.

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Landes, S. David (1969). The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present, London: Cambridge University Press. Moseley, Fred. (2001). ― The Rate of Profit and Stagnation in the US Economy‖ in Baiman, Ron, Boushey, Heather and Saunders, Dawn (eds.) Political Economy and Contemporary Capitalism, London and New York: Sharpe, pp. 57-59. Neftçi, Salih. (1998). ― FX Short Positions, Balance Sheets, and Financial Turbulence: An Interpretation of the Asian Financial Crisis‖ Center for Policy Analysis, New School for Social Research, Working Paper Series III No 4, June. Parente, Stephen, L. and Edward, Prescott. (1993). ― Changes in the Wealth of Nations‖ Federal Reserve Bank of Minneapolis Quarterly Review, Spring. Petras, James and Henry, Weltmeyer. (2001). Globalization Unmasked: Imperialism in the 21st Century, London and New York: Zed Books. Putterman, Louis. (2001). Dollars and Change: Economics in Context, New Haven and London: Yale University Press. Rodrik, Dani. (2001). ― The Global Governance of Trade As if Development Really Mattered‖ Paper presented at the UNDP, Meetings New York, Oct 13-14, 2000. Rodrik, Dani.. (1997) Has Globalization Gone Too Far? Institute for International Economics, Washington, D.C. Strange, Susan. (1994). States and Markets, London and New York: Pinter Pub. Taylor, Lance. (1998). ― Lax Public Sector, Destabilizing Private Sector: Origins of Capital Market Crises‖ Center for Policy Analysis, New School for Social Research, Working Paper Series III No 6 July. UNCTAD (1998). Trade and Development Report, Geneva. UNCTAD (1994). Trade and Development Report, Geneva. Velasco, Andres (1987). ― Financial Crises and Balance of Payments Crises: A Simple Model of Southern Cone Experience‖ Journal of Development Economics, 27(1-2): 263-283, October.

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Chapter 17

CHINA-U.S. TRADE ISSUES Wayne M. Morrison Asian Trade and Finance, Asia

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SUMMARY U.S.-China economic ties have expanded substantially over the past three decades. Total U.S.- China trade has risen from $5 billion in 1980 to $409 billion in 2008. In 2008, China was the second largest U.S. trading partner, its third largest export market, and its biggest source of imports. About 12% of total U.S. global trade is now with China. According to U.S. data, U.S. firms have invested around $28 billion in China (through 2007), some of which is aimed at the Chinese domestic market, while other investment has gone into export-oriented manufacturing facilities. With a huge population and a rapidly expanding economy, China is a potentially huge market for U.S. exporters. However, bilateral economic relations have become strained over a number of issues, including large and growing U.S. trade deficits with China ($266 billion in 2008), China‘s failure to fully implement its World Trade Organization (WTO) commitments (especially in regards to protection of intellectual property rights), its refusal to adopt a floating currency system, its use of industrial policies (such as subsidies) and other practices deemed unfair and/or harmful to various U.S. economic sectors, and its failure in some cases to ensure that its exported products meet U.S. health and safety standards. Further complicating the bilateral economic relationship is China‘s large holdings of U.S. debt, such as Treasury securities. In September 2008, China overtook Japan to become the largest foreign holder of such securities. Some analysts welcome China‘s purchases of U.S. debt securities, which help fund U.S. budget deficits, while others have expressed concerns that growing Chinese holdings of U.S. debt may increase its leverage over the United States. The current global economic crisis could further challenge China-U.S. economic ties. Many analysts have expressed concern that the Chinese government may, in an effort to help its sagging export industries, implement new trade barriers, boost industrial subsidies, and/or depreciate its currency, which could harm some U.S. firms and workers. Many U.S. policymakers have urged China to lessen its reliance on exports for its economic growth and

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instead implement policies to promote domestic consumption. Central to this position is the belief that China should appreciate its currency and eventually adopt a floating exchange rate system, which would boost its imports. Several Members of Congress have urged the Obama Administration to take a more assertive approach in dealing with Chinese economic practices, including increasing the use of U.S. antidumping, countervailing, and safeguard provisions; bringing more dispute resolution cases against China to the WTO; and continuing pressure on China to appreciate its currency. Others have warned against using ― protectionist‖ measures to block imports of Chinese goods and have advocated using high-level bilateral talks (such as the Strategic Economic Dialogue that began during the Bush Administration in 2006) to resolve major trade disputes. Economic and trade reforms (begun in 1979) have helped transform China into one of the world‘s fastest growing economies. China‘s economic growth and trade liberalization, including comprehensive trade commitments made upon entering the World Trade Organization (WTO) in 2001, have led to a sharp expansion in U.S.-China commercial. Yet, bilateral trade relations have grown increasingly strained in recent years over a number of issues, including a large and growing U.S. trade deficit with China, the refusal by China to adopt a floating currency, its failure to fully implement many of its WTO obligations, especially in regards to protection of intellectual property rights (IPR), and problems relating to the health and safety of Chinese-made products. Several Members of Congress have called on the Obama Administration to take a tougher stance against China to induce it to eliminate economic policies deemed harmful to U.S. economic interests and/or are inconsistent with WTO rules. This report provides an overview of U.S.-China economic relations, surveys major trade disputes, and lists bills introduced in the 111th Congress that would impact bilateral commercial ties.

U.S. TRADE WITH CHINA1 U.S.-China trade rose rapidly after the two nations re-established diplomatic relations (in January 1979), signed a bilateral trade agreement (July 1979), and provided mutual mostfavored-nation (MFN) treatment beginning in 1980.2 In 1978 (before China‘s reforms began), total U.S.-China trade (exports plus imports) was $1 billion; China ranked as the 32nd largest export market and the 57th largest source of U.S. imports. In 2008, bilateral trade hit $409 billion, making China the second largest U.S. trading partner (after Canada), the third largest U.S. export market, and the largest source of U.S. imports. In recent years, China has been one of the fastest growing U.S. export markets and the importance of this market is expected 1

For more information on China‘s economy, see CRS Report RL33534, China‘s Economic Conditions, by Wayne M. Morrison. For general information on U.S.-China ties, see CRS Report RL33877, China-U.S. Relations in the 110th Congress: Issues and Implications for U.S. Policy, by Kerry Dumbaugh. 2 The United States suspended China‘s MFN status in 1951, which cut off most bilateral trade. China‘s MFN status was conditionally restored in 1980 under the provisions set forth under Title IV of the 1974 Trade Act, as amended (including the Jackson-Vanik freedom of emigration provisions). China‘s MFN status (which was redesignated under U.S. trade law as normal trade relations status, or NTR) was renewed on an annual basis through January 2002, when permanent NTR was extended to China (after it joined the WTO).

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to grow even further as living standards continue to improve and a sizable Chinese middle class emerges.

Source: USITC DataWeb. Figure 1. U.S. Trade With China: 2000-2008 $ billions.

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Table 1. U.S. Merchandise Trade with China: 1980-2008 and Projections for 2009* ($ in billions) Year 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 projection*

U.S. Exports 3.8 3.9 4.8 11.7 16.3 19.2 22.1 28.4 34.7 41.8 55.2 65.2 71.5 59.2

U.S. Imports 1.1 3.9 15.2 45.6 100.1 102.3 125.2 152.4 196.7 243.5 287.8 321.5 337.8 296.9

U.S. Trade Balance 2.7 0.0 -10.4 -33.8 -83.8 -83.1 -103.1 -124.0 -162.0 -201.6 -232.5 -256.3 -266.3 -237.7

Source: USITC DataWeb. * 2009 projections based on actual data for January-April 2009.

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The U.S. trade deficit with China has surged in recent years as imports from China have grown much faster than U.S. exports to China (although it grew by only $10 billion in 2008). That deficit rose from $34 billion in 1995 to $266 billion in 2008 (see Table 1 and Figure 1); it was significantly larger than that with any other U.S. trading partner and several trading groups. For example, it was nearly equal to the combined U.S. deficits with the countries that make up the Organization of the Petroleum Export Countries (OPEC) and the 27 countries that make up the European Union (EU27), and it was more than three times larger than the trade deficit with Japan (see Table 2). Some analysts view the huge U.S. trade deficit with China as an indicator that China‘s economic and trade policies are restrictive or unfair, while others contend that the growing deficit reflects a shift in export-oriented production from other countries (largely in Asia) to China. The global financial crisis has had a significant impact on U.S.-China trade flows. During the first four months of 2009, U.S. exports to, and imports from, China were down 17.2% and 12.1%, respectively over the same period in 2008. At this rate, the U.S. trade deficit with China could decline to $238 billion in 2009.

Table 2. U.S. Merchandise Trade Balances with Major Trading Partners: 2008 ($ in billions)

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Country or Trading Group World China Organization of Petroleum Exporting Countries (OPEC) European Union (EU27) Canada Japan Mexico Association of Southeast Asian Nations (ASEAN)

U.S. Trade Balance -800.0 -266.3 -175.6 -93.4 -74.6 -72.7 -64.4 -50.6

Source: USITC DataWeb.

Major U.S. Exports to China U.S. merchandise exports to China in 2008 were $71.5 billion, up 9.5% (compared to an 18.1% rise in 2007) over the previous year.3 In 2007, China overtook Japan to become the third largest U.S. export market and was third in 2008 (see Figure 2). U.S. exports to China in 2008 accounted for 5.5% of total U.S. exports (compared to 3.9% in 2003). The top five U.S. exports to China in 2008 were waste and scrap, semiconductors and electronic components, oilseeds and grain, aircraft and parts, and resins and synthetic rubber and fibers (see Table 3).4 China is a significant market for U.S. agricultural products. It was the fourth largest

3 4

The United States also exports a significant level of private services to China; these totaled $14.2 billion in 2007. Based on the North American industry Classification System, 4-digit level.

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destination for U.S. agricultural exports in 2008 at $12.1 billion, up 46.5% over the previous year. Major U.S. agricultural exports to China include soybeans, meat products, and cotton.5

Source: USITC DataWeb. Figure 2. Top Five U.S. Export Markets: 2008 $billions.

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Over the past few years, China has been one of the fastest growing U.S. export markets, as can be seen in Table 4. U.S. exports to China rose by nearly 240% from 2001 to 2008, which was higher than that of any other top 10 U.S. trading partner.

Table 3. Major U.S. Exports to China: 2008 ($ in millions and percent change) NAIC Number and Description

2004

9100 Waste and scrap 3344 Semiconductors and other electronic components 1111 Oilseeds and grains 3364 Aerospace products and parts 3252 Resin, synthetic rubber, and artificial & synthetic fibers & filament

2005

2008

Percent Change 2007 - 2008

2,508 3,565

2006 2007 $ millions 3,670 6,071 7,331 4,015 6,830 7,435

7,562 7,475

3.1% 0.5%

2,829 2,111

2,339 4,535

2,593 6,309

4,145 7,447

7,316 5,471

76.5% -26.5%

1,631

2,127

2,548

3,290

3,524

7.1%

Source: USITC DataWeb. Notes: North American Industry Classification system, 4-digit level. 5

Some U.S. analysts have expressed concern over the composition of U.S. exports to China, noting that much of it consists of scrap products, components, and food, as opposed to high-value assembled manufactured products (such as cars). Chinese official complain that U.S. export controls on high tech trade has a significant negative impact on the composition and size of U.S. exports to China.

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Table 4. U.S. Merchandise Exports to Major Trading Partners in 2001 and 2008 ($ in billions and % change)

Canada Mexico China Japan Germany United Kingdom Netherlands South Korea Brazil France World

2001

2008

163.7 101.5 19.2 57.6 30.1 40.8 19.5 22.2 15.9 19.9 731.0

260.9 151.5 71.5 66.6 54.7 53.8 40.2 34.8 32.9 29.2 1,300.1

% Change from 20072008 5.0 11.0 9.5 6.2 10.2 6.9 21.9 6.9 33.6 6.5 11.8

% Change from 20012008 59.4 49.3 272.3 15.6 31.9 31.9 106.2 56.8 106.9 46.7 77.9

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Source: USITC DataWeb. Ranked by top 10 U.S. export markets in 2008.

Many trade analysts argue that China could prove to be a much more significant market for U.S. exports in the future. China is one of the world‘s fastest-growing economies, and rapid economic growth is likely to continue in the near future, provided that economic reforms are continued. China‘s goals of modernizing its infrastructure, upgrading its industries, and improving rural living standards could generate substantial demand for foreign goods and services. Finally, economic growth has substantially improved the purchasing power of Chinese citizens, especially those living in urban areas along the east coast of China. China‘s growing economy and large population make it a potentially enormous market. To illustrate: 





6 7

China currently has the world‘s largest mobile phone network and one of the fastestgrowing markets, with an estimated 679 million mobile phone users (as of April 2009), compared to 87 million users in 2000. Boeing Corporation predicts that China will be the largest market for commercial air travel outside the U.S. for the next 20 years (2008-2027); during this period, China will buy 3,710 aircraft valued at $390 billion.6 On April 11, 2006, Boeing announced it had signed a general purchase agreement with China for 80 Boeing 737s. On September 6, 2007, China announced it would buy 55 Boeing aircraft valued at $3.8 billion. It is estimated that China in 2008 replaced the United States as the world‘s largest Internet user: 253 million users versus 221 million respectively (as of June 2008).7 Yet, the percentage of the Chinese population using the Internet is small relative to the United States: 19% versus 73%, respectively.

Boeing, Current Market Outlook, 2008-2027, New York Times, ― China Surpasses U.S. in Number of Internet Users,‖ July 26, 2008.

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The Chinese government projects that by the year 2020, there will be 140 million cars in China (seven times the current level), and that the number of cars sold annually will rise from 7.2 million units (2006) to 20.7 million units in 2020.8 According to some estimates, China is now the world‘s second largest market for new cars. General Motors (GM) and Ford reportedly sold 1.09 million and 306 thousand vehicles, respectively, in China in 2008.9

Major U.S. Imports from China China was the largest source of U.S. imports in 2008 at $338 billion, or 16.1% of total U.S. imports (up from 6.5% of total in 1996).10 U.S. imports from China rose by 5.1% in 2008 over the previous year (compared with an 11.7% rise in 2007). The importance (ranking) of China as a source of U.S. imports has risen dramatically, from eighth largest in 1990, to fourth in 2000, to second in 2004-2006, to first in 2007-2008. The top five U.S. imports from China in 2008 were computers and parts, miscellaneous manufactured articles (such as toys, games, etc.), communications equipment, apparel, and audio and video equipment (see Table 5).

Table 5. Major U.S. Imports From China: 2008 ($ in millions and percent change)

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NAIC Number and Description 3341 computer equipment 3399 Miscellaneous manufactured commodities 3342 Communications equipment 3152 Apparel 3343 Audio and video equipment

2004

2005 2006 2007 $ in millions

29,486

35,467

40,046

44,462

45,820

Percent Change 2007 - 2008 3.1%

23,712

26,449

28,888

34,827

35,835

2.9%

9,015

14,121

17,977

23,192

26,618

14.8%

10,530

16,362

19,228

22,955

22,583

-1.6%

12,421

15,287

18,789

19,075

19,715

3.4%

Source: USITC DataWeb Notes: North American Industry Classification system, 4-digit level.

2008

Throughout the 1980s and 1990s, nearly all of U.S. imports from China were low-value, labor- intensive products such as toys and games, consumer electronic products, footwear, and textiles and apparel. However, over the past few years, an increasing proportion of U.S. imports from China has comprised of more technologically advanced products, such as computers. According to the U.S. Census Bureau, in 2008, U.S. imports of advanced technology products from China totaled $91.4 billion (27.1% of total U.S. imports from China), compared with $29.3 billion in 2003 (19.2% of total U.S. imports from China). In addition, imports of advanced technology products from China accounted for 27.5% of total 8

China Daily, September 9, 2004. According to GM‘s website, it operates seven joint ventures and two wholly owned foreign enterprises and has more than 20,000 employees in China. 10 U.S. imports from China as a share of total imports in 2007 was 16.5%. 9

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U.S. imports of such products in 2008, compared with 14.1% in 2003, indicating that U.S. dependency on China for advanced technology products is rapidly increasing. U.S. exports of advanced technology to China in 2008 were $18.7 billion; these accounted for 26.2% of total U.S. exports to China and 6.8% of total U.S. advanced technology exports.11 Many analysts contend that the sharp increase in U.S. imports from China (and hence the growing trade deficit) is largely the result of movement in production facilities from other (primarily) Asian countries to China.12 That is, various products that used to be made in Japan, Taiwan, Hong Kong, etc., and then exported to the United States are now being made in China (in many cases, by foreign firms in China) and exported to the United States. An illustration of this shift can be seen in Table 6, which lists U.S. imports of computer equipment and parts from 2000-2008. For example, in 2000, Japan was the largest foreign supplier of U.S. computer equipment (with a 19.6% share of total shipments), while China ranked fourth (with a 12.1% share). In just eight years, Japan‘s ranking fell to fourth, the value of its shipments dropped by over half, and its share of U.S. computer imports declined to 7.7% (2008). China was by far the largest foreign supplier of computer equipment in 2008 with a 53.6% share of total U.S. imports. While U.S. imports of computer equipment from China rose by 452% over the past eight years, the total value of U.S. computer imports from the world rose by only 25%. Many analysts contend that a large share of the increase in Chinese computer production has come from foreign computer companies that have moved manufacturing facilities China.

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Table 6. Major Foreign Suppliers of U.S. Computer Equipment Imports: 2000-2008 ($ in billions and % change) Total China Malaysia Japan Mexico Singapore

2000 68.5 8.3 4.9 13.4 6.9 8.7

2002 62.3 12.0 7.1 8.1 7.9 7.1

2004 73.9 29.5 8.7 6.3 7.4 6.6

2006 83.8 40.0 11.1 6.3 6.6 5.6

2008 85.4 45.8 9.0 6.6 6.2 4.0

2000-2008 % change 24.7 451.8 83.7 -50.7 -10.1 -54.0

Source: U.S. International Trade Commission Trade Data Web. Note: Ranked according to top five suppliers in 2008.

China has become a major source of U.S. agricultural imports. It was the third largest supplier of such imports in 2008 (compared with 12th largest in 2000), at $4.7 billion. U.S. agricultural imports from China rose by 42.2% in 2008 and by 104.5% from 2004-2008. Major agricultural imports from China include seafood products, vegetables and fruit, and animal foods.

11 12

Note, these figures do not indicate the level of sophistication of these products. Many U.S. imports of advanced technology products are parts. Chinese data indicate that the share of China‘s exports produced by foreign-invested enterprises (FIEs) in China rose from 1.9% in 1986 to 55% in 2008.

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Investment Ties

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Investment plays a major role in U.S.-China commercial ties.13 China‘s investments in U.S. assets can be broken down into two categories: holdings of U.S. securities and foreign direct investment (FDI). The Treasury Department defines foreign holdings of U.S. securities as ― U.S. securities owned by foreign residents (including banks and other institutions) except where the owner has a direct investment relationship with the U.S. issuer of the securities.‖ These include long-term (LT) U.S. Treasury securities, LT U.S. government agency securities,14 LT corporate securities (some of which are asset-backed), equities (such as stocks), and short-term debt.15 The U.S. Bureau of Economic Analysis (BEA) defines FDI (in the United States) as ― the ownership or control, directly or indirectly, by one foreign resident of 10 percent or more of the voting securities of an incorporated U.S. business enterprise or the equivalent interest in an unincorporated U.S. business enterprise.‖16 BEA classifies FDI flows according to broad industrial sections, including mining; utilities; manufacturing (broken down into nine subsectors17); wholesale trade; information; depository institutions; finance (excluding depository institutions); professional, scientific, and technical services; nonbank holding companies; and other industries.

China’s Holdings of U.S. Securities18 The Treasury Department performs annual surveys of foreign holders of U.S. securities, the latest of which was released in February 2009 (preliminary data) for holding as of June 2008.19 China‘s total holdings of U.S. securities at the end of June 2008 were estimated at $1,205 billion, compared to $922 billion in June 2007 (an increase of 31%). From June 2002 to June 2008, China‘s holdings of U.S. securities as a share of total foreign holdings of U.S. securities rose from 3.9% to 11.7% and its ranking increased from fifth to second (after Japan at $1,250 billion). China is likely became the largest holder in late 2008 or early 2009 (see Table 7). From June 2002 to June 2008, China‘s U.S. securities holdings grew by nearly $1.1 trillion (or 5 66%), which was by far the largest increase in U.S. securities holdings of any other country.20 These holding are largely the result of China‘s currency policy (discussed below). The largest type of U.S. securities held by China are U.S. Treasury securities, which 13

U.S. data on FDI flows to and from China differ sharply from Chinese data on FDI flows to and from the United States. This section uses U.S. data. 14 Agency securities include both federal agencies and government-sponsored enterprises created by Congress (e.g., Fannie Mae and Freddie Mac) to provide credit to key sectors of the economy. Some of these securities are backed by assets (such as home mortgages). 15 LT securities are those with no stated maturity date (such as equities) or with an original term to maturity date of more than one year. Short-term debt includes U.S. Treasury securities, agency securities, and corporate securities with a maturity date of less than one year. 16 The 10% ownership share is the threshold considered to represent an effective voice or lasting influence in the management of an enterprise. See, BEA, International Economic Accounts, BEA Series Definitions, available at http://www.bea.gov/international. 17 These sectors include food; chemicals; primary and fabricated metals; machinery; computers and electronic products; electrical equipment, appliances and components; transportation equipment, and other manufacturing. 18 For additional information on this issue, see CRS Report RL34314, China‘s Holdings of U.S. Securities: Implications for the U.S. Economy, by Wayne M. Morrison and Marc Labonte 19 U.S. Treasury Department, Preliminary Report on Foreign Portfolio Holdings of U.S. Securities as of June 30, 2008, February 27, 2009. A final report expected in April 2009. 20 U.S. Treasury Department, Report on Foreign Portfolio Holdings of U.S. Securities, various editions. Note, 2002 was the first year in which surveys listed data as of June. Prior to that, survey data were listed as of March or December.

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are used to finance U.S. budget deficits; data for foreign holdings of these type of securities are reported on a monthly basis. China‘s holdings of U.S. Treasury securities rose from $118 billion (or 9.6% of total foreign holdings) at the end of 2002 to $727.4 billion (23.6% of foreign holdings) in December 2008. China‘s holdings as of April 2009 were $764 billion or 23.5% of total foreign holdings (see Table 8).21 Since September 2008, China has become the largest foreign holder of U.S. Treasuries. China‘s holdings in April 2009 were down by $4.4 billion over its March 2009 holdings.

Table 7. China‟s Holdings of U.S. Securities: June 2002-June 2008 ($ billions and percent change) 2002 188

2003 255

2004 341

2005 527

2006 699

2007 922

2008 1,205

2002-2008 % change 566%

Source: U.S. Department of Treasury. Notes: U.S. securities include short term and long-term debt, including Treasury securities, U.S. government agency securities, corporate securities, and equities.

Table 8. China‟s Holdings of U.S. Treasury Securities: 2002-2008 Year-End and April 2009 ($ billions and as a percent of total foreign holdings)

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China‘s Holdings ($billions) Holdings As a Percent of Total Foreign Holdings

2002

2003

2004

2005

2006

2007

2008

118.4

159.0

222.9

310.0

396.9

477.6

727.4

April 2009 763.5

9.6%

10.4%

12.1%

15.2%

18.9%

20.3%

23.6%

23.4

Source: U.S. Treasury Department. Notes: Data based on periodical surveys by the Treasury Department, which often revises estimates for the previous year but not for all years and thus should be interpreted with caution.

Many U.S. policymakers have raised concern over China‘s large and growing holdings of U.S. securities, stating that while such purchases have helped the United States meet its investment needs and have helped fund the growing U.S. Federal budget deficit, they could give China increased leverage over the United States on major political and economic issues. On the other hand, Chinese officials have expressed concern over the ― safety‖ of their large holdings of U.S. debt. Many analysts contend that China‘s economy is so dependent on a healthy and stable U.S. economy that China has no choice but to keep buying U.S. government debt. However, Chinese officials have expressed concern that growing U.S. government debt will spark inflation in the United States and a sharp depreciation of the dollar, which would diminish the value of China‘s dollar assets.22

U.S. Holdings of Chinese Securities The Treasury Department also does surveys on U.S. holdings of Chinese securities; these data are on a year-end basis. The last survey (issued in October 2008) estimated total U.S. 21

U.S. Treasury Department, Major Foreign Holders of U.S. Treasury Securities, June 15, 2009. Note, the Treasury Department often revises its estimates of foreign holdings for a given year, but not for previous years. 22 See China View, ―U .S. stimulus-related debt could hurt investors, China warns,‖ February 18, 2009. Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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holdings of Chinese securities at $97.2 billion in 2007 (98% of which were in equities), up from $13.7 billion in 2003. U.S. holdings of Chinese securities in 2007 were equal to about 1.3% of total U.S. holdings of foreign securities.23

Bilateral FDI Flows China‘s FDI in the United States is quite small relative to its holdings of U.S. securities: $1.1 billion (cumulative at the end of 2007) versus $922 billion (as of June 2007), respectively.24 In 2007, China ranked as the 30th largest source for FDI in the United States.25 On the other hand, total U.S. FDI in China in 2007 was $28.3 billion (nearly 26 times China‘s FDI in the United States), making China the 21st largest U.S. destination for FDI (see Table 9).26 Table 9. China‟s Cumulative FDI in the United States and U.S. FDI in China: 20022007 ($ in millions and percent change)

China‘s FDI in the U.S. U.S. FDI in China

2002

2003

2004

2005

2006

2007

2002-2007 percent change (%)

385

284

435

574

974

1,091

183.4

10,570

11,261

17,616

19,016

23,405

28,298

167.7

Source: U.S. Bureau of Economic Analysis. Notes: Data on a historical-cost basis.

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MAJOR U.S.-CHINA TRADE ISSUES Although China‘s economic reforms and rapid economic growth have expanded U.S.China commercial relations in recent years, tensions have arisen over a wide variety of issues, including the growth and size of the U.S. trade deficit with China (which many Members contend is an indicator that the trade relationship is unfair), concerns over unsafe Chinese food and consumer products, China‘s currency policy (which many Members blame for the size of the U.S. trade deficit with China and the loss of U.S. manufacturing jobs), China‘s mixed record on implementing its obligations in the WTO, including its, failure to provide adequate protection of U.S. intellectual property rights (IPR), and Chinese industrial policies used to promote and protect domestic industries. Legislation has been introduced to respond to several of these issues (see ― U.S.-China Trade Legislation in the 111th Congress‖).

23

U.S. Treasury Department, Report on U.S. Portfolio Holdings of Foreign Securities as of December 31, 2007, October 2008. 24 All BEA data is on a historical-cost, or book value, basis. 25 In comparison, total U.S. FDI in China in 2007 was $28.3 billion—nearly 26 times China‘s FDI in the United States –making China the 21st largest U.S. destination for FDI. 26 Chinese FDI data differ significantly from U.S. data. China estimates that cumulative U.S. FDI in China through 2007 was $56.6 billion (7.4% of total FDI in China) and that its FDI in the United States was $1.9 billion (equal to 1.6% of total Chinese FDI).

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Health and Safety Concerns over Certain Imports from China27 Reports throughout 2007 of tainted or unsafe food and consumer products (including seafood, pet food, toys, and tires) from China raised concerns in the United States over the health, safety, and quality of imports from China. Some analysts contend that China maintains a poor regulatory framework for enforcing its health and safety regulations and standards, and that this is proving to be a growing problem for U.S. consumers. Many U.S. policymakers have raised concern over how to press China to improve enforcement of its health and safety standards of its exports as well as the ability of U.S. regulatory agencies to ensure the health and safety of imports from China (and other countries). In 2007 and 2008, there were numerous recalls, warnings, and safety concerns involving Chinese products, as the following instances illustrate. The Food and Drug Administration (FDA) in March 2007 issued warnings and announced voluntary recalls on over 150 brands of pet foods (and products such as rice protein concentrate and wheat gluten used to manufacture pet food and animal feed) from China believed to have caused the sickness and deaths of numerous pets in the United States.28 In May 2007, the FDA issued warnings on certain toothpaste products (some of which were found to be counterfeit) found to originate in China that contained poisonous chemicals. In June 2007, the FDA announced import controls on all farm-raised catfish, basa, shrimp, dace (related to carp), and eel from China after antimicrobial agents, which are not approved in the United States for use in farm-raised aquatic animals, were found. The FDA ordered that such shipments will be detained until they are proven to be free of contaminants.29 On January 25, 2008, the FDA posted on its website a notice by Baxter Healthcare Corporation that it had temporarily halted the manufacture of its multiple-dose vials of heparin (a blood thinner) for injection because of recent reports of serious adverse events associated with the use of the drug, including 246 deaths from January 2007 to May 2008. Some analysts have speculated that an unlicensed drug company in China, which produces ingredients for the drug, may be the source of the problem.30 On September 12, 2008, the FDA issued a health information advisory on infant formula in response to reports of contaminated milk-based infant formula manufactured and sold in China, and later issued a warning on other products containing milk imported from China. On November 12, 2008, the FDA issued a new alert stating that all products containing milk imported from China would be detained unless proven to be free of melamine. On December 2, 2008, the Chinese government reported that melamine-tainted formula had so far killed six children and sickened 294,000 others (51,900 of whom had to be hospitalized and 154 were in serious condition).31 The National Highway Traffic Safety Administration (NHTSA) in June 2007 was informed by Foreign Tire Sales, Inc., an importer of foreign tires, that it suspected that up to 27

For additional information on this issue, see CRS Report RS22713, Health and Safety Concerns Over U.S. Imports of Chinese Products: An Overview, by Wayne M. Morrison. For a legal overview of FDA recalls, see CRS Report RL34167, The FDA‘s Authority to Recall Products, by Vanessa K. Burrows. 29 In addition, FDA has refused shipments of a variety of Chinese food and drug products. See CRS Report RL34080, Food and Agricultural Imports from China, by Geoffrey S. Becker. 30 New York Times, ―ChinaDidn‘t Check Drug Supplier, Files Show,‖ February 16, 2008. 31 On October 15, 2008, the Chinese government issued an urgent notice to recall all dairy products made prior to September 14, 2008, so that they could be tested. 28

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450,000 tires (later reduced to 255,000 tires) made in China may have a major safety defect (i.e., missing or insufficient gum strip inside the tire). The company was ordered by the NHTSA to issue a recall. The Chinese government and the manufacturer have maintained that the tires in question meet or exceed U.S. standards. The Consumer Product Safety Commission (CPSC) has issued alerts and announced voluntary recalls by U.S. companies on numerous products made in China. From JanuaryDecember 2007, over four-fifths of CPSC recall notices involved Chinese products. Over this period, roughly 17.6 million toys were recalled because of excessive lead levels. Recalls were also issued on 9.5 million Chinese-made toys (because of the danger of loose magnets), 4.2 million ― Aqua Dots‖ toys (because of beads that contained a chemical that can turn toxic if ingested) and 1 million toy ovens (due to potential finger entrapment and burn hazards).32 China is the dominant supplier of toys to the United States, accounting for 89% of total U.S. imports (2007). U.S. recalls of lead- tainted Chinese-made toys were sharply down in 2008, totaling about 2.5 million toy units.33 During the first five months of 2009, recalls of leadtainted Chinese toys totaled 1.1 million units.

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China’s Poor Regulatory System and Implications China is believed to have a rather weak health and safety regime for manufactured goods and agricultural products. Problems include:            

weak consumer protection laws and poorly enforced regulations, lack of inspections and ineffective penalties for code violators, underfunded and understaffed regulatory agencies and poor interagency cooperation, the proliferation of fake goods, the existence of numerous unlicensed producers, falsified export documents, extensive pollution,34 intense competition that often induces firms to cut corners, the relative absence of consumer protection advocacy groups, failure by Chinese companies to effectively monitor the quality of their suppliers‘ products, restrictions on the media,35 and widespread government corruption and lack of accountability, especially at the local government level.

32

For a list of company recalls of Chinese products, see the CPSC website at http://www.cpsc.gov/ cpscpub/ prerel/prerel.html. In addition, several U.S. retailers have announced that they have halted sales of certain Chinese products, due to health and safety concerns, which do not appear on the CPSC website. 33 Congressional concerns over product safety led to the enactment of the Consumer Product Safety Improvement Act of 2008 (P.L. 110-314) in August 2008. The law tightened requirements on children products, including mandatory testing. See CRS Report RL34684, Consumer Product Safety Improvement Act of 2008: P.L. 110314, by Margaret Mikyung Lee. 34 For example, many fish farmers in China are believed to feed various drugs to the fish to help keep them alive in polluted waters. See Washington Post, ―Farm ed in China‘s Foul Waters, Imported Fish Treated with Drugs; Traditional Medicine, Banned Chemicals Both Used,‖ July 6, 2007, p. A1. 35 China‘s media often reports on health and safety problems, but rarely criticizes the central government for such problems.

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Although China has criticized the United States for its actions against unsafe Chinese products,36 it has pledged to improve and strengthen food and drug safety supervision and standards, beef up inspections, require safety certificates before some products can be sold, and crack down on government corruption. The United States and China reached a number of agreements in 2007 to address health and safety concerns: 



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

On September 11, 2007, the CPSC and its Chinese counterpart, the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), signed a Joint Statement on enhancing consumer product safety. China pledged to implement a comprehensive plan to intensify efforts (such as increased inspections, efforts to educate Chinese manufacturers, bilateral technical personal exchanges and training, regular meetings to exchange information with U.S. officials, and the development of a product tracking system) to prevent exports of unsafe products to the United States, especially in regard to lead paint in toys. On September 12, 2007, the NHTSA signed a Memorandum of Cooperation with its Chinese counterpart on enhanced cooperation and communication on vehicles and automotive equipment safety. On December 11, 2007, the U.S. Department of Health and Human Services (HHS) announced that it had signed two Memoranda of Agreements (MOA) with its Chinese counterparts; the first covering specific food and feed items that have been of concern to the United States, and the second covering drugs and medical devices. Both MOAs would require Chinese firms that export such products to the United States to register with the Chinese government and to obtain certification before they can export. Such firms would also be subject to annual inspections to ensure they meet U.S. standards. The MOAs also establish mechanisms for greater information sharing, increase access of production facilities by U.S. officials, and create working groups in order to boost cooperation. In March 2008, the FDA announced that it would post eight FDA inspectors in China.

China‟s Currency Policy37 Unlike most advanced economies (such as the United States), China does not maintain a market- based floating exchange rate. Between 1994 and July 2005, China pegged its currency, the renminbi (RMB) or yuan, to the U.S. dollar at about 8.28 yuan to the dollar. In July 2005, China appreciated the RMB to the dollar by 2.1% and moved to a ― managed float,‖ based on a basket of major foreign currencies, including the U.S. dollar. In order to maintain a target rate of exchange with the dollar (and other currencies), the Chinese 36

37

In June 2007, China impounded U.S. shipments of apricots and orange pulp, claiming that they contained excessive bacteria. In July 2007, China had suspended some frozen chicken and pork products imported from the U.S., citing various health concerns. In August 2007, China rejected a shipment of U.S. pacemakers, due to quality concerns. Some analysts contend these have been retaliatory moves over U.S. recalls and detentions of Chinese products. For additional information on this issue, see CRS Report RS21625, China‘s Currency: A Summary of the Economic Issues, by Wayne M. Morrison and Marc Labonte.

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government has maintained restrictions and controls over capital transactions and has made large-scale purchases of U.S. dollars (and dollar assets). According to the Bank of China, from July 21, 2005, to June 23, 2009, the dollar-yuan exchange rate went from 8.11 to 6.83 yuan per dollar, an appreciation of 1 8.7%.38 During 2009, China‘s has kept the exchange rate with the dollar at about 6.83 yuan per dollar, indicating that it has abandoned (at least for now) its policy of gradual appreciation. Many U.S. policymakers and business representatives have charged that China‘s currency policy has made the RMB significantly undervalued vis-à-vis the U.S. dollar (with estimates ranging from 15% to 40%) and that this makes Chinese exports to the United States cheaper, and U.S. exports to China more expensive, than they would be if exchange rates were determined by market forces. They complain that this policy has particularly hurt several U.S. manufacturing sectors (such as textiles and apparel, furniture, plastics, machine tools, and steel), which are forced to compete against low-cost imports from China, and further contend that it has been a major factor in the size and growth of the U.S. trade deficit with China. Numerous bills have been introduced over the past few years to pressure China to either significantly appreciate its currency or to let it float freely in international markets. Chinese officials have argued that its currency policy is not meant to favor exports over imports, but instead to foster domestic economic stability. They have expressed concern that abandoning its currency policy could cause an economic crisis in China and would especially hurt its export industries sectors at a time when painful economic reforms (such as closing down inefficient state-owned enterprises and restructuring the banking system) are being implemented. Chinese officials view economic stability as critical to sustaining political stability; they fear an appreciated currency could reduce jobs and lower wages in several sectors and thus cause worker unrest. Section 3004 of the 1988 Omnibus Trade and Competitiveness Act (P.L. 100-418) requires the Secretary of Treasury to issue a report every six months on international economic policy (including exchange rate policy) and to determine if any country is manipulating its currency in order to prevent an effective balance of payments adjustment or to gain an unfair competitive advantage in international trade. After China reformed its currency in July 2005, the Bush Administration continued to press China to further reform its currency and its financial sector, but declined to cite China for currency manipulation. In April 2009, the Treasury Department under the Obama Administration issued its report on exchange rates, stating ― China‘s continued large current account surplus and accumulation of foreign exchange reserves suggest the renminbi remains undervalued.‖39 However, Treasury did not cite China as a currency manipulator. Further complicating the issue of China‘s currency policy is its large holdings of U.S. debt (such as Treasury securities). The Chinese government has had to make large-scale purchases of U.S. dollars to meet its exchange rate targets. Rather than hold dollars (which earn no interest), China has sought to invest its dollars in U.S. assets, primarily U.S. government debt securities. On the one hand, some analysts welcome China‘s purchases of U.S. debt securities, especially during the current financial crisis in the United States where efforts to stimulate the economy will likely require the government to issue large amounts of 38 39

Source: Calculated from Bank of China data using the official middle rate. Treasury Department, Report to Congress on International Economic and Exchange Rate Policies, April 2009. Copies of the past 8 Treasury reports can be found at: http://www.treas.gov/offices/internationalaffairs/economicexchange- rates.

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new debt. They warn that threatening China over its currency policy could induce the Chinese government to slow its purchases, or even sell off current holdings, of U.S. Treasury Securities, which could contribute to higher U.S. interest rates. On the other hand, some policymakers have expressed concern that growing Chinese holdings of U.S. debt may increase its leverage over the United States on a number of economic and non-economic issues, and some contend that China‘s currency policy was a contributing factor to the current global economic crisis.40

China and the World Trade Organization Negotiations for China‘s accession to the General Agreement on Tariffs and Trade (GATT) and its successor organization, the WTO, began in 1986 and took over 15 years to complete. During the WTO negotiations, Chinese officials insisted that China was a developing country and should be allowed to enter under fairly lenient terms. The United States insisted that China could enter the WTO only if it substantially liberalized its trade regime. In the end, a compromise was reached that requires China to make immediate and extensive reductions in various trade and investment barriers, while allowing it to maintain some level of protection (or a transitional period of protection) for certain sensitive sectors. China‘s WTO membership was formally approved at the WTO Ministerial Conference in Doha, Qatar on November 10, 2001. Taiwan‘s WTO membership was approved the next day. On November 11, 2001, China notified the WTO that it had formally ratified the WTO agreements, and on December 11, 2001, it formally joined the WTO. Under the WTO accession agreement, China agreed to:

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

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40

Reduce the average tariff for industrial goods and agriculture products to 8.9% and 15%, respectively (with most cuts made by 2004 and all cuts completed by 2010). Limit subsidies for agricultural production to 8.5% of the value of farm output and eliminate export subsidies on agricultural exports. Within three years of accession, grant full trade and distribution rights to foreign enterprises (with some exceptions, such as for certain agricultural products, minerals, and fuels). Provide non-discriminatory treatment to all WTO members. Foreign firms in China will be treated no less favorably than Chinese firms for trade purposes. End discriminatory trade policies against foreign invested firms in China, such as domestic content rules and technology transfer requirements. Implement the WTO‘s Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement upon accession. (That agreement establishes basic standards on IPR protection and rules for enforcement.) Accept a 12-year safeguard mechanism in cases where a surge in Chinese exports cause or threaten to cause market disruption to U.S. (or other WTO members) domestic producers, which allow temporary restrictions on those products. China

For additional information on this issue, see CRS Report RL34314, China‘s Holdings of U.S. Securities: Implicationsfor the U.S. Economy, by Wayne M. Morrison and Marc Labonte; and CRS Report RS22984, China and the Global Financial Crisis: Implications for the United States, by Wayne M. Morrison.

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also agreed that the United States (and other WTO members) could continue to apply a non-market economy methodology for measuring dumping in antidumping investigations of imports from China for 15 years. Fully open the banking system to foreign financial institutions within five years (by the end of 2006). Joint ventures in insurance and telecommunication will be permitted (with various degrees of foreign ownership allowed). WTO Implementation Issues

China‘s record on implementing its WTO commitments has been mixed. China‘s average overall tariff has dropped from 15.6% in 2001 to 9.9% in 2009 (the tariff rate on industrial goods and agricultural products is 8.9 and 15.2, respectively) and a number of non-tariff measures have been eliminated. However, there have been several areas where China‘s implementation is considered to be incomplete. The USTR‘s seventh annual China WTO compliance report (issued in December 2008) identified several areas of concern, including failure by the Chinese government to maintain an effective IPR enforcement regime (discussed below), industrial policies and national standards that attempt to promote Chinese firms (while discriminating against foreign firms), restrictions on trading and distribution rights (especially in regards to IPR products, such as movies, books, and music), discriminatory and unpredictable health and safety rules on imports (especially agricultural products), burdensome regulations and restrictions on services (including excessive capital requirements), and failure to provide adequate transparency of trade laws and regulations.41 The USTR‘s December 2008 China WTO report stated that China‘s failure to comply with key areas of its WTO commitments largely stemmed from its incomplete transition to a market based economy. A significant part of the economy, including the banking system and state owned enterprises (SOEs), are controlled by the central government—remnants of the old command economy that existed before reforms began in 1979. Although China agreed to make SOEs operate according to free market principles when it joined the WTO, U.S. officials contend that SOEs are still being subsidized, especially through the banking system. In addition, China is attempting to promote the development of several industries (such as autos, steel, telecommunications, and high technology products) deemed by the government as important to China‘s future economic development and has implemented policies to promote and protect them. When China joined the WTO, it agreed to provide a full description of all its subsidy programs, but to date has failed to fully do so. In addition, China agreed to make its stateowned enterprises operate according to market principles; yet such firms continue to receive direction and subsidies. Some major issues of concern to the United States include the following. 

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In November 2008, the government announced a $586 billion economic stimulus plan, which included policies that would be implemented to assist 10 pillar industries (including, autos, steel, shipbuilding, textiles, machinery, electronics and information, light industry, petrochemicals, non-ferrous metals, and logistics) to promote their long-term competitiveness. Government support policies for the 10 industries are expected to include tax cuts and incentives (including export tax

USTR, 2008 Report to Congress on China‘s WTO Compliance, December 23, 2008.

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rebates), industry subsidies and subsidies to consumers to purchase certain products (such as consumer goods and autos), fiscal support, directives to banks to provide financing, direct funds to support technology upgrades and the development of domestic brands, government procurement policies, the extension of export credits, and funding to help firms invest overseas.42 Some analysts contend that these new subsidy programs could violate China‘s WTO commitments. In December 2006, the Chinese government designated seven industries (military equipment, power generation and distribution, oil, telecommunications, coal, civil aviation, and shipping) as critical to the nation‘s economic security and stated it must retain ― absolute control‖ and limit foreign participation.43 On June 30, 2006, China announced a partial opening of its beef market, which had been completely closed to U.S. imports in 2003, due to concerns over mad cow disease. However, U.S. officials have expressed disappointment that China has failed to develop a science-based trading protocol for importing beef from the United States, which would enable the United States to resume beef trade with China.44 In July 2005, the Chinese government issued new guidelines on steel production, which reportedly include provisions for the preferential use of domestically produced steel-manufacturing equipment and domestic technologies; extensive government involvement in determining the number, size, location, and production quantities of steel producers in China; technology transfer requirements on foreign investment; and restrictions on foreign majority ownership. On June 14, 2006, Assistant U.S. Trade Representative for China Tim Stratford stated that China‘s steel guidelines were ― troubling, because it attempts to dictate industry outcomes and involves the government in making decisions that should be left to the marketplace.‖45 The U.S. steel industry has expressed growing fears that Chinese government policies have led to overinvestment and overcapacity in China‘s domestic steel industry, which could lead it to flood world markets with cheap steel.46 Such concerns led the USTR to begin a Steel Dialogue with China (which first met in March 2006) to discuss issues of concern to the U.S. steel industry. China‘s Automotive Industrial Policy, issued by the government in May 2004, includes provisions discouraging the importation of auto parts and encouraging the use of domestic technology, while requiring new automobile and automobile engine plants to include substantial investment in research and development facilities. New auto parts regulations that went into effect in April 2005 discriminate against imported auto parts by assessing an additional charge on imported parts if they are

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On May 18, 2009, China‘s State Council, announced plans to create 3 million new jobs in light industry over the next three years by providing financial support to small and medium-sized light industry firms with ―good development potential.‖ 43 China Daily, ― Nation Lists Sectors Critical to National Economy,‖ December 19, 2006. 44 In 2009, China imposed restrictions on pork imports from certain U.S. states because of concerns relating to the outbreak of influenza A(H1N1), or swine flu. 45 Statement of Timothy Stratford, Assistant U.S. Trade Representative for China Affairs, before the Congressional Steel Caucus, June 14, 2006. 46 China is now the world‘s largest steel producer, accounting for 31% of the world‘s steel production. Its steel production levels rose by 25% over the previous year. According to U.S. officials, China‘s excess steel capacity in 2006 could be larger than total U.S. steel production.

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incorporated into a vehicle that does not meet minimum levels of domestic content, discussed below.47 To date, the United States has initiated eight WTO dispute resolution cases against China, five of which have been resolved or ruled upon.48 China has filed three cases against the United States. These cases are summarized below.

Pending U.S. Cases against China 

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On June 23, 2009, the United States and the EU filed a case against China‘s export restrictions (such as export quotas and taxes,) on raw materials (bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus, and zinc). The United States charges that such policies are intended to lower prices for Chinese firms (steel, aluminum, and chemical sectors) in order to help them obtain an unfair competitive advantage. On December 19, 2008, the USTR filed a WTO case against China over its support for ― Famous Chinese‖ brand programs, charging that such programs utilize various export subsidies (including cash grant rewards, preferential loans, research and development funding to develop new products, and payments to lower the cost of export credit insurance) at the central and local government level to promote the recognition and sale of Chinese brand products overseas. On April 10, 2007, the USTR filed two IPR-related cases against China: the first case charges that China has failed to comply with the TRIPS agreement (namely in terms of its enforcement of IPR laws) and the second case charges that China has failed to provide sufficient market access to IPR-related products, namely in terms of trading rights and distribution services. On January 26, 2009, the WTO ruled that many of China‘s IPR enforcement policies failed to WTO obligations (see IPR section, below).

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On March 3, 2008, the USTR requested WTO dispute resolution consultations with China regarding its discriminatory treatment of U.S. suppliers of financial information services in China. On November 13, 2008, the USTR announced that China had agreed to eliminate discriminatory restrictions on how U.S. and other foreign suppliers of financial information services do business in China. On February 5, 2007, the USTR announced it had requested WTO dispute consultations with China over government regulations that give illegal (WTO-

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China applies higher tariffs on imported auto parts when a specific combination of parts is used to produce cars in China, or if the value of these parts amounts to 60% or more of the cost of a car made in China. This policy increases tariffs on some auto parts from about 10% to about 25% (which is the tariff China currently applies to imports of completed autos). Source: USTR 2007 Report to Congress on China‘s WTO Compliance, p. 61. 48 For an overview of the WTO dispute resolution process, see CRS Report RS20088, Dispute Settlement in the World Trade Organization (WTO): An Overview, by Jeanne J. Grimmett.

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inconsistent) import and export subsidies to various industries in China (such as steel, wood, and paper) that distort trade and discriminate against imports.49 China‘s WTO accession agreement required it to immediately eliminate such subsidies. On November 29, 2007, China formally agreed to eliminate the subsidies in question by January 1, 2008. On March 30, 2006, the USTR initiated a WTO case against China for its use of discriminatory regulations applied to imported auto parts (which often applies the high tariff rate on finished autos to certain auto parts), stating that the purpose of these rules was to discourage domestic producers from using imported parts and encouraging foreign firms to move production to China. On February 13, 2008, a WTO panel ruled that China‘s discriminatory tariff policy was inconsistent with its WTO obligations (stating that the auto tariffs constituted an internal charge rather than ordinary customs duties, which violated WTO rules on national treatment). China appealed the decision, but a WTO Appellate Body largely upheld the WTO panels decision. On March 30, 2006, the USTR initiated a WTO case against China for its use of discriminatory regulations applied to imported auto parts (which often applies the high tariff rate on finished autos to certain auto parts), stating that the purpose of these rules was to discourage domestic producers from using imported parts and encouraging foreign firms to move production to China. On February 13, 2008, a WTO panel ruled that China‘s discriminatory tariff policy was inconsistent with its WTO obligations (stating that the auto tariffs constituted an internal charge rather than ordinary customs duties, which violated WTO rules on national treatment). China appealed the decision, but a WTO Appellate Body largely upheld the WTO panels decision. On March 18, 2004, the USTR announced it had filed a WTO dispute resolution case against China over its discriminatory tax treatment of imported semiconductors. The United States claimed that China applied a 17% VAT rate on semiconductor chips that were designed and made outside China, but gave VAT rebates to domestic producers. Following consultations with the Chinese government, the USTR announced on July 8, 2004, that China agreed to end its preferential tax policy by April 2005. However, the USTR has expressed concern over new forms of financial assistance given by the Chinese government to its domestic semiconductor industry.

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On April 17, 2009, China brought a WTO case against the United States over a provision in the Omnibus Appropriations Act of 2009 that effectively prohibits the establishment or implementation of any measures that would allow poultry products to be imported from China.

Some programs give tax preferences, tariff exemptions, discounted loans, or other benefits to firms that meet certain export performance requirements, while others give tax breaks for purchasing Chinese-made equipment and accessories over imports.

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On 14 September 2007, China requested consultations with the United States on the preliminary anti-dumping and countervailing duty determinations on free sheet paper from China. On September 19, 2008, China initiated a WTO case against the United States in regards to its use of antidumping and countervailing measures against certain Chinese-made steel pipes, tires and laminated woven sacks.

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Violations of U.S. Intellectual Property Rights The United States has pressed China to improve its IPR protection regime since the late 1980s. In 1991, the United States (under a Section 301 case) threatened to impose $1.5 billion in trade sanctions against China if it failed to strengthen its IPR laws. Although China later implemented a number of new IPR laws, it often failed to enforce them, which led the United States to once again threaten China with trade sanctions. The two sides reached a trade agreement in 1995, which pledged China to take immediate steps to stem IPR piracy by cracking down on large-scale producers and distributors of pirated materials and prohibiting the export of pirated products, establishing mechanisms to ensure long-term enforcement of IPR laws and providing greater market access to U.S. IPR-related products. Under the terms of its accession to the World Trade Organization (WTO) in 2001, China agreed to immediately bring its IPR laws in compliance with the WTO‘s Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which include a commitment to establish an effective IPR enforcement regime. The U.S. Trade Representative‘s (USTR) office has stated on a number of occasions that China has made great strides in improving its IPR protection regime, noting that it has passed several new IPR-related laws, closed or fined several assembly operations for illegal production lines, seized millions of illegal audio-visual products, curtailed exports of pirated products, expanded training of judges and law enforcement officials on IPR protection, and expanded legitimate licensing of film and music production in China. However, the USTR has indicated that much work needs to be done to improve China‘s IPR protection regime, especially in terms of deterrence. Many business groups contend that poor IPR protection is one of the most significant obstacles for doing business in China. To illustrate: 

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According to IPR industry groups, China has some of the highest piracy rates in the world: 95% for entertainment software, 90% for records and music, and 82% for business software. Piracy in China for business and entertainment software alone is estimated to cost U.S. firms $3.5 billion in lost trade annually, which were was than losses from any other foreign country.50 The U.S. Customs and Border Protection (CBP) reported that China accounted for 81% ($221 million domestic value) of pirated goods seized by the agency in FY2008.51

Estimates made by the International Intellectual Property Rights Alliance for 2007. See CBP website at http://www.CBP.gov.

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The Chinese government estimates that counterfeits constitute between 15% and 20% of all products made in China and are equivalent to about 8% of China‘s annual gross domestic product. A study by the Motion Picture Association of America estimated that China‘s domestic film industry lost about $1.5 billion in revenue to piracy in 2005 (and that the combined losses of both foreign and Chinese film makers totaled $2.7 billion).52 It also found that about half of pirated films in China are Chinese movies. A Business Software Alliance study estimates that a 10 percentage point reduction in China‘s PC software piracy rates would raise its GDP by $20.5 billion and create an additional 355,179 jobs.

Opinions differ as to why the Chinese government has been unable (or unwilling) to make a significant reduction in the level of piracy in China. Some explanations put forward by various analysts include the following: 

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China‟s transformation from a Soviet-style command economy (in which the government owned and controlled nearly every aspect of the economic life) to one that is becoming more market-based is a very recent occurrence. IPR is a relatively alien or unfamiliar concept for most people in China to grasp (as is the concept of private property rights) and thus it is difficult for the government to convince the public that piracy is wrong.53 Chinese leaders want to make China a major producer of capital-intensive and hightechnology products, and thus, they are tolerant of IPR piracy if its helps Chinese firms become more technologically advanced.54 Although the central government may be fully committed to protect IPR, local government officials are often less enthusiastic to do so because production of pirated products generates jobs and tax revenue, and some officials may be obtaining bribes or other benefits which prompts them to tolerate piracy. The USTR‟s April 2009 report on IPR stated it was concerned by reports that government officials in China were urging more lenient enforcement of IPR laws because of the impact of the global financial crisis. As a developing country, China lacks the resources and a sophisticated legal system to go after and punish IPR violators, and establishing an effective enforcement regime will take time.55 As a practical matter, IPR enforcement in China will be problematic until Chineseowned companies begin to put pressure on the government to protect their own brands and other IPR-related products. U.S. trade officials note that the Chinese

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Reuters, ― China Piracy Costs Film Industry $2.7 Billion in 2005,‖ June 19, 2006. Some Chinese officials have noted that some individuals who were arrested for IPR piracy violations expressed shock at their arrest because in their minds they were not harming anybody. 54 On the other hand, IPR piracy may prevent foreign firms from investing in high-tech production in China. 55 Some critics of this argument note that China seems to be very efficient at going after political dissenters and others deemed to be ―t hreats‖ to social stability. 53

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government took aggressive action during the 2008 summer Olympics in Beijing to stop infringement activities. Chinese trade barriers and regulatory restrictions on IPR-related products and their distribution are so onerous that they prevent legitimate products from entering the market, or raise costs so high that they are unaffordable to the average individual, thus creating a huge demand for low-cost pirated products.

The U.S. WTO Cases against China on IPR On April 10, 2007, the USTR brought two IPR cases against China in the WTO involving a number of complaints: 56 

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The thresholds for criminal prosecutions of IPR violations in China are too high, meaning the government will only pursue cases it considers to be serious or excessively large, creating a safe harbor for smaller producers or violators. In addition, the thresholds for prosecuting IPR violations are based on the value of the pirated products rather than the value such legitimate products would fetch in the marketplace. Such thresholds make it very difficult to pursue cases against many commercial producers of illegal IPR-related products. China often allows seized imported pirated goods to re-enter the market rather than disposing of them. China‟s copyright laws fail to protect imported works (such as movies) that are under review by Chinese censorship authorities (and must be approved before the works can be distributed in China). As a result, pirated copies of the works can be widely distributed without violating copyright law and thus do not face prosecution. Chinese IPR laws do not appear to allow producers of pirated products to be prosecuted unless they also illegally distribute such products. China has not abided by its 2001 WTO accession agreement to liberalize its rules on trading rights and distribution services. As a result, U.S. IPR-related products face significant trade barriers in China, and such barriers are a major factor for causing the high rate of piracy in China.

On January 26, 2009, a WTO panel ruled on the case dealing with IPR enforcement issues, finding that China failed to protect IPR works under review by the government for content and in regards to the disposal of seized pirated products. However, the panel determined that it needed more evidence on the issue of thresholds for criminal prosecutions of IPR piracy before a determination could be made. The USTR, while admitting disappointment on the WTO findings on thresholds, noted that, right before it filed the WTO case on China‘s IPR enforcement, China lowered its threshold criminal copyright threshold from 1,000 to 500 infringing copies.

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See USTR April 9, 2007, Press Release and related documents at http://www.ustr.gov/index.html.

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Applying U.S. Countervailing Laws to China57 Many critics of Chinese trade policies contend that the Chinese government provides a significant level of subsidies to many of its industries, such as preferential bank loans and grants, debt forgiveness, and tax breaks and rebates.58 In addition, some analysts charge that China‘s currency policy constitutes a form of government export subsidy.59 Such critics contend that U.S. countervailing laws, which seek to address the negative impact foreign government subsides on exported products may have on U.S. producers in the United States, should be applied to nonmarket economies such as China.60 Until very recently, the Commerce Department contended that U.S. countervailing laws could not be applied to a non-market economy because of the assumption that most production and prices in such an economy are determined by the government, and thus it would be impractical to determine the level of government subsidy that might be conveyed to various exported products. However, in November 2006, the Commerce Department decided to pursue a countervailing case against certain imported Chinese coated free sheet paper products. On March 30, 2007, the Commerce Department issued a preliminary ruling to impose countervailing duties (ranging from 11% to 20%) against the products in question. Commerce contends that, while China was still a non-market economy for the purposes of U.S. trade laws, economic reforms in China have made several sectors of the economy relatively market based, and therefore it is possible to identify the level of government subsidies given to the Chinese paper firms in question.61 Thirteen countervailing cases have been brought against a number of other Chinese products since 2006.62 Many Members of Congress have called on the Administration to expand its use of countervailing measures against Chinese products. Some have proposed codifying the use of countervailing laws against non-market economies, and others have sought to make China‘s undervalued currency a factor in determining the level of countervailing duties (see ― U.S.th China Trade Legislation in the 111 Congress‖).

China Safeguard Provisions As noted earlier, when China entered the WTO, it agreed to allow the United States to continue to treat it as a non-market economy for 12 years (codified in U.S. law under Sections 421-423 of the 1974 Trade Act, as amended) for the purpose of safeguards.63 This provision 57

For additional information on this issue, see CRS Report RL33550, Trade Remedy Legislation: Applying Countervailing Action to Nonmarket Economy Countries, by Vivian C. Jones. 58 See USTR 2007 National Trade Estimates of Foreign Trade Barriers, April 2, 2007. 59 They charge that government intervention in currency markets to keep the value of the yuan low vis-a-vis the dollar, keeps the price of Chinese exports low. 60 The relief comes in the form of additional duties that are imposed on the imported products in question after a determination is made that a foreign government subsidized export to the United States has harmed a U.S. producer. The additional duties are intended to offset the impact of the subsidy. 61 Countervailing investigations have also been initiated of Chinese off-the-road tires (June 18, 2007) and Chinese steel pipe (June 14, 2007). 62 Inside U.S. Trade, ― China-Focused Trade Remedy Cases Expected To Increase,‖ November 26, 2008. 63 The U.S. International Trade Commission (USITC) is in charge of making market disruption determinations under the safeguard provisions for most products (with the exception of textiles and apparel, which are handled by the Committee for the Implementation of the Textile Agreements, an inter-agency committee chaired by the U.S. Commerce Department). Import relief is subject to presidential approval.

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enables the United States to impose restrictions (such as quotas and/or increased tariffs) on imported Chinese products that have increased in such quantities that they have caused, or threaten to cause, market disruption to U.S. domestic producers.64 The Bush Administration on six different occasions chose not to extend relief to various industries under the Chinaspecific safeguard (even though in four cases, the USITC recommended relief). Some Members have called for limits on the President‘s discretion to prevent import relief. On June 18, 2009, the USITC announced that it had determined that U.S. imports of passenger vehicle and light truck tires cause or threaten to cause market disruption to U.S. domestic producers of like or directly competitive products. The USITC will determine potential remedies and send these recommendations to the President.

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Textile and Apparel Products65 Various U.S. industry groups have called on the Administration to invoke special safeguard provisions (included in China‘s WTO accession package) that would enable the United States to restrict imports of certain Chinese products deemed harmful to U.S. industries. U.S. producers of textile and apparel products have been particularly vocal over the competitive pressures they face from China, especially since U.S. textile and apparel quotas on Chinese goods were eliminated in January 2005.66 According to the U.S. Commerce Department, China is the largest foreign supplier of textiles and apparel to the United States at $32.7 billion, or 35.1% (2008); from 2002 to 2008, U.S. textile and apparel imports from China rose by 274%.67 The sharp rise in textile and apparel imports from China, and U.S. industry contention that these imports were disrupting U.S. markets, led the Bush Administration to seek an agreement with China to limit its exports to the United States. On November 8, 2005, China agreed to restrict various textile and apparel exports to the United States (according to specified quota levels) from January 2006 through the end of 2008.

The U.S.-China Strategic and Economic Dialogue On September 29, 2006, President George Bush and Chinese President Hu Jintao agreed to establish a Strategic Economic Dialogue (SED) in order to have discussions on major economic issues at the ― highest official level.‖ According to a U.S. Treasury Department press release, the intent of the SED was to ― discuss long-term strategic challenges, rather than seeking immediate solutions to the issues of the day,‖ in order to provide a stronger foundation for pursuing concrete results through existing bilateral economic dialogues.68 The 64

Normally, safeguard provisions apply to all imported products. The China safeguard in U.S. trade law applies only to China. For additional information, see CRS Report RL34106, U.S. Clothing and Textile Trade with China and the World:Trends Since the End of Quotas, by Michael F. Martin. 66 For additional information on U.S.-China textile issues, see CRS Report RL32168, Safeguards on Textile and Apparel Imports from China, by Vivian C. Jones. 67 For more detailed data on U.S. imports of textile and apparel products from China, see Department of Commerce, Office of Textiles and Apparel Office website at http://www.otexa.ita.doc.gov/. 68 U.S. Treasury Department press release, December 15, 2006. 65

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first meeting was held in December 2006. Four subsequent rounds of talks were held (the last was in December 2008). While attending the G-20 summit in London on the global financial crisis on April 1, 2009, President Obama and Chinese President Hu agreed to continue the high-level forum, renaming it the U.S.-China Strategic and Economic Dialogue. The new dialogue will be based on two tracks. The first (the "Strategic Track‖) will be headed up by the Secretary of State on the U.S. side and focus on political and strategic issues, while the second track (the ― Economic Track‖) is headed up by the U.S. Treasury Secretary on the U.S. side and will focus on financial and economic issues. Areas of discussion will include the economic and trade issues, counterterrorism, law enforcement, science and technology, education, culture, health, energy, the environment (including climate change), non-proliferation, and human rights. The first round of talks are scheduled to be held at the end of July 2009.

U.S.-CHINA TRADE LEGISLATION IN THE 111TH CONGRESS Several bills have been introduced in the 111th Congress to address various concerns over China‘s economic policies: 

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H.Res. 44 would condemn China for its ― socially unacceptable business practices, including the manufacturing and exportation of unsafe products, casual disregard for the environment, and exploitative employment practices.‖ H.R. 471 would limit the President‘s discretion to deny relief under the special China safeguard provision. H.R. 496 would ensure that the Commerce Department continued to apply U.S. countervailing laws to non-market countries (such as China), establish an alternative method for determining countervailing duties on Chinese products, and would limit the President‘s discretion to deny relief under the special China safeguard provision. H.R. 499 would codify the application of U.S. countervailing laws to non-market economies, establish an alternative method for determining countervailing duties on Chinese products, and would require congressional approval before China (and other non-market economies) could be treated as a market economy. H.R. 1105 (P.L. 111-8) contains a provision to continue a prohibition on the U.S. Department of Agriculture from rulemaking that would allow imports of cooked chicken from China. H.R. 2310 would attempt to boost U.S. exports China, especially by small-andmedium sized firms. It would provide grants to States to establish and operate offices to promote exports to China, establish 50 China market advocate positions in U.S. Export Assistance Centers, and provide assistance to U.S. small- and medium-sized businesses (such as for trade missions to China). H.R. 2312 would authorize the Secretary of Energy to make grants to encourage cooperation between the United States and China on joint research, development, or commercialization of carbon capture and sequestration technology, improved energy efficiency, or renewable energy sources.

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H.Amdt. 119 to H.R. 1728 would require the requires the Secretary of HUD to study the effects of the presence of Chinese dry wall on foreclosures and the availability of property insurance for residential structures where Chinese dry wall is present. S.Res. 76 would express the sense of the Senate that the United States and China should work together to reduce or eliminate tariff and nontariff barriers to trade in clean energy and environmental goods and services. S.Res. 77 would express the sense of the Senate that the United States and China should negotiate a bilateral agreement on clean energy cooperation. S.Res. 91 would call on the Consumer Product Safety Commission, the Secretary of the Treasury, and the Secretary of Housing and Urban Development to take action on Potential safety issues relating to drywall imported from China. S. 739 would require the Consumer Product Safety Commission to study drywall imported from China in 2004 through 2007 in regards to potential safety hazards and to ban future drywall imports from China. S. 1254 would require the Treasury Department to identify currencies that are fundamentally misaligned and to designate currencies for ― priority action‖ under certain circumstances. Such action would include factoring currency undervaluation in U.S. antidumping cases, banning federal procurement of products or services from the designated country, and filing a case against that country in the WTO. S. 1191 would require the Secretary of Energy to prepare a report on climate change and energy policy in China and India.

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In: Globalization Editor: Joseph A. Mancini

ISBN: 978-1-61324-531-6 ©2012 Nova Science Publishers, Inc.

Chapter 18

THE GLOBAL FINANCIAL CRISIS: ANALYSIS AND POLICY IMPLICATIONS Dick K. Nanto* Industry and Trade

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SUMMARY The world appears to be beginning to recover from the global recession that is causing widespread business contraction, increases in unemployment, and shrinking government revenues. Although the industrialized economies have stopped contracting, for many, unemployment is still rising. The United States likely hit bottom in June 2009, but numerous small banks and households still face huge problems in restoring their balance sheets, and unemployment has combined with sub-prime loans to keep home foreclosures at a high rate. Nearly all industrialized countries and many emerging and developing nations have announced economic stimulus and/or financial sector rescue packages, such as the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). Several countries have resorted to borrowing from the International Monetary Fund as a last resort. The crisis has exposed fundamental weaknesses in financial systems worldwide, demonstrated how interconnected and interdependent economies are today, and has posed vexing policy dilemmas. The process for coping with the crisis by countries across the globe has been manifest in four basic phases. The first has been intervention to contain the contagion and restore confidence in the system. This has required extraordinary measures both in scope, cost, and extent of government reach. The second has been coping with the secondary effects of the crisis, particularly the global recession and flight of capital from countries in emerging markets and elsewhere that have been affected by the crisis. The third phase of this process is to make changes in the financial system to reduce risk and prevent future crises. In order to give these proposals political backing, world leaders have called for international meetings to address changes in policy, regulations, oversight, and enforcement. On September 24-25, 2009, heads of the G-20 nations met in Pittsburgh to address the global financial crisis. The *

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fourth phase of the process is dealing with political, social, and security effects of the financial turmoil. One such effect is the strengthened role of China in financial markets. The role for Congress in this financial crisis is multifaceted. While the recent focus has been on combating the recession, the ultimate issue perhaps is how to ensure the smooth and efficient functioning of financial markets to promote the general well-being of the country while protecting taxpayer interests and facilitating business operations without creating a moral hazard. In addition to preventing future crises through legislative, oversight, and domestic regulatory functions, On June 17, 2009, the Department of the Treasury presented the Obama Administration proposal for financial regulatory reform. The proposal focuses on five areas and includes establishing the Federal Reserve as a systemic risk regulator, creating a Council of Regulators, regulating all financial derivatives, creating a Consumer Financial Protection Agency, improving coordination and oversight of international financial markets, and other provisions. Treasury also has submitted to Congress proposed legislation to implement the reforms. The reform agenda now has moved to Congress. Legislation in Congress addresses many of the issues in the Treasury plan but also may focus on other financial issues. Congress also plays a role in measures to reform and recapitalize the International Monetary Fund, the World Bank, and regional development banks.

RECENT DEVELOPMENTS1

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November 14. Eurostat announced that the Euro Zone had officially emerged from recession during the third quarter 2009. The rebound was powered by Germany. November 12. The value of the dollar is down about 35% from 2002. After strengthening slightly more than 10% during the global financial crisis, it now is at its weakest since 1967. The weak dollar and more rapid growth abroad is likely to bolster U.S. exports. November 11. AIG claimed that the decision by Kenneth Feinberg (the administration‘s special master on pay) to slash salaries for 12 of its top executives by more than 90% was triggering high-level departures, upsetting employees‘ morale and reducing the chances the company will repay federal aid. Feinberg replied that AIG ― did not get‖ the fact it has been bailed out with billions of dollars in taxpayers‘ funds and had to show restraint on compensation. November 10. Senate Banking Committee Chairman Christopher Dodd released a draft of a financial regulation bill. October 7. A draft bill in the House of Representatives to impose rules on the largely unregulated financial derivatives market received cautious support from industry groups. September 24-25. At the Group of 20 Summit held in Pittsburgh, world leaders agreed to make the G-20 the leading forum for coordinating global economic policy; not to withdraw stimulus measures until a durable recovery is in place; to co-ordinate their exit strategies from the stimulus measures; to harmonize macroeconomic policies to avoid imbalances (America‘s 1

For a more complete list of major developments and actions, see Appendix A.

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deficits and Asia‘s savings glut) that worsened the financial crisis; and to eliminate subsidies on fossil fuels (only in the medium term). In trade, there was only a weak commitment to get the Doha round of multilateral trade negotiations at the World Trade Organizations back on track by 2010, and for the International Monetary Fund, the leaders pledged to provide the ― under-represented‖ mostly developing countries at least 5% more of the voting rights by 2011. The other large institutional change was the ascension of the Financial Stability Board, a group of central bankers and financial regulators, to take a lead role in coordinating and monitoring tougher financial regulations and serve, along with the International Monetary Fund, as an early-warning system for emerging risks. September 18. According to the Economist Intelligence Unit, the aggressive measures that governments have taken to counter the financial crisis have not only helped to prevent a more severe downturn but are now setting the stage for a recovery, albeit a weak one. However, the world economy could weaken again once the stimulus wears off, mainly because government debt has increased dramatically in many countries—eliciting rising concerns about the solvency of the state. This has made current levels of stimulus through government spending not sustainable. August 27. The Federal Deposit Insurance Corporation revealed that the number of U.S. banks at risk of failing reached 416 during the second quarter 2009.

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THE GLOBAL FINANCIAL CRISIS AND U.S. INTERESTS2 Policymaking to deal with the global financial crisis and ensuing global recession has now moved from containing the contagion to specific actions aimed at promoting recovery and changing regulations to prevent a reoccurrence of the problem. Other issues, such as health care and the war in Afghanistan, also are competing for attention. Some have expressed concern that the improving economic and financial outlook may cause regulatory reform of the financial system to lose some traction in the crowded policy agenda. This report provides an overview of the global aspects of the financial crisis, how it developed, proposals for regulatory change, and a review of how the crisis is affecting other regions of the world. The role for Congress in this financial crisis is multifaceted. The overall issue seems to be how to ensure the smooth and efficient functioning of financial markets to promote the general wellbeing of the country while protecting taxpayer interests and facilitating business operations without creating a moral hazard.3 The reality, however, is that financial interests are well entrenched, and the existing patchwork system of regulation (or non-regulation) has evolved over the past century largely in response to particular problems. If the United States were to ― start from scratch‖ in designing an optimal regulatory system, it likely would not select the one it has, but making dramatic changes to the existing system invariably will result in someone‘s ― ox being gored‖ and substantial bureaucratic inertia and lobbying activity.

2 3

Prepared by Dick K. Nanto, Specialist in Industry and Trade, Foreign Affairs, Defense, and Trade Division. A moral hazard is created if a government rescue of private companies encourages those companies and others to engage in comparable risky behavior in the future, since the perception arises that they will again be rescued if necessary and not have to carry the full burden of their losses.

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Congress also has a role to play in preventing future crises through legislative, oversight, and domestic regulatory functions. In addition, Congress has been providing funds and ground rules for economic stabilization and rescue packages and informing the public through hearings and other means. Congress also plays a role in measures to reform the international financial system, in recapitalizing international financial institutions, such as the International Monetary Fund, in replenishing funds for poverty reduction arms of the World Bank (International Development Association) and regional development banks, and in providing economic and humanitarian assistance to countries in need. The current crisis began as a bursting of the U.S. housing market bubble and a rise in foreclosures. As it ballooned into a global financial and economic crisis, some of the largest and most venerable banks, investment houses, and insurance companies have either declared bankruptcy or have had to be rescued financially. In October 2008, after the bankruptcy of Lehman Brothers, credit flows froze, lender confidence dropped, and one after another the economies of countries around the world dipped toward recession. The crisis exposed fundamental weaknesses in financial systems worldwide, and despite coordinated easing of monetary policy by governments, trillions of dollars in intervention by central banks and governments, and large fiscal stimulus packages, recovery appears to be just beginning. This financial crisis which began in industrialized countries quickly spread to emerging market and developing economies. Investors pulled capital from countries, even those with small levels of perceived risk, and caused values of stocks and domestic currencies to plunge. Also, slumping exports and commodity prices have added to the woes and pushed economies world wide either into recession or into a period of slower economic growth. For the United States, the financial turmoil touches on the fundamental national interest of protecting the economic security of Americans. It also is affecting the United States in achieving national foreign policy goals, such as maintaining political stability and cooperative relations with other nations and supporting a financial infrastructure that allows for the smooth functioning of the international economy. Reverberations from the financial crisis, moreover, are not only being felt on Wall Street and Main Street but are being manifest in world flows of exports and imports, rates of growth and unemployment, government revenues and expenditures, and in political risk in some countries. The simultaneous slowdown in economic activity around the globe indicates that emerging market and developing economies have not decoupled from industrialized countries and governments cannot depend on exports to pull them out of these recessionary conditions. This global financial and economic crisis has brought to the public consciousness several arcane financial terms usually confined to the domain of regulators and Wall Street investors. These terms lie at the heart of both understanding and resolving this financial crisis and include: 

4

Systemic risk (“Too big to fail”): The risk that the failure of one or a set of market participants, such as core banks, will reverberate through a financial system and cause severe problems for participants in other sectors. Because of systemic risk, the scope of regulatory agencies may have to be expanded to cover a wider range of institutions and markets.4

International Monetary Fund, 2009 Global Financial Stability Report: Responding to the Financial Crisis and Measuring systemic Risks, Summary Version, Washington, DC, April 2009, p. 1ff.

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Deleveraging: The unwinding of debt. Companies borrow to buy assets that increase their growth potential or increase returns on investments. Deleveraging lowers the risk of default on debt and mitigates losses, but if it is done by selling assets at a discount, it may depress security and asset prices and lead to large losses. Hedge funds tend to be highly leveraged. Procyclicality: The tendency for market players to take actions over a business cycle that increase the boom-and-bust effects, e.g. borrowing extensively during upturns and deleveraging during downturns. Changing regulations to dampen procyclical effects would be extremely challenging.5 Preferred equity: A cross between common stock and debt. It gives the holder a claim, prior to that of common stockholders, on earnings and on assets in the event of liquidation. Most preferred stock pays a fixed dividend. As a result of the stress tests in early 2009, some banks may increase their capital base by converting preferred equity to common stock. Collateralized debt obligations (CDOs): a type of structured asset-backed security whose value and payments are derived from a portfolio of fixed-income underlying assets. CDOs based on sub-prime mortgages have been at the heart of the global financial crisis. CDOs are assigned different risk classes or tranches, with “senior” tranches considered to be the safest. Since interest and principal payments are made in order of seniority, junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk. Investors, pension funds, and insurance companies buy CDOs. Credit default swap (CDS): a credit derivative contract between two counterparties in which the buyer makes periodic payments to the seller and in return receives a sum of money if a certain credit event occurs (such as a default in an underlying financial instrument). Payoffs and collateral calls on CDSs issued on sub-prime mortgage CDOs have been a primary cause of the problems of AIG and other companies.

The global financial crisis has brought home an important point: the United States is still a major center of the financial world. Regional financial crises (such as the Asian financial crisis, Japan‘s banking crisis, or the Latin American debt crisis) can occur without seriously infecting the rest of the global financial system. But when the U.S. financial system stumbles, it may bring major parts of the rest of the world down with it.6 The reason is that the United States is the main guarantor of the international financial system, the provider of dollars widely used as currency reserves and as an international medium of exchange, and a contributor to much of the financial capital that sloshes around the world seeking higher yields. The rest of the world may not appreciate it, but a financial crisis in the United States often takes on a global hue.

5

6

See Jochen Andritzky, John Kiff, Laura Kodres, Pamela Madrid, and Andrea Maechler, Policies to Mitigate Procyclicality, International Monetary Fund, IMF Staff Position Note SPN/09/09, Washington, DC, May 7, 2009. See, for example, Friedman, George and Peter Zeihan. ―TheUnited States, Europe and Bretton Woods II.‖ A Strafor Geopolitical Intelligence Report, October 20, 2008.

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Policy and Legislation7 Early U.S. policy was aimed at containing the contagion and in dealing with the ensuing recession. The two largest legislative actions were the Troubled Asset Relief Program aimed at providing support for financial institutions8 and the American Recovery and Reinvestment Act of 2009 aimed at providing stimulus to the economy.9 Policy proposals to change specific regulations as well as the structure of regulation and supervision at both the domestic and international levels have been coming forth through the legislative process, from the Administration, and from recommendations by international organizations such as the International Monetary Fund,10 Bank for International Settlements,11 and Financial Stability Board (Forum).12 On June 17, 2009, the Obama administration announced its plan for regulatory reform of the U.S. financial system.13 In Congress, numerous bills have been introduced that deal with issues such as establishing a commission/select committee to investigate causes of the financial crisis, provide oversight and greater accountability of Federal Reserve and Treasury lending activity, deal with problems in the housing and mortgage markets, provide funding for the International Monetary Fund, address problems with consumer credit cards, provide for improved oversight for financial and commodities markets, deal with the U.S. national debt, and establish a systemic risk monitor. The United States, however, cannot be a regulatory island among competing nations of the world. In an international marketplace of multinational corporations, instant transfers of wealth, lightning fast communications, and globalized trading systems for equities and securities, if U.S. regulations are anomalous or significantly more ―b urdensome‖ than those in other industrialized nations, business and transactions could migrate toward other markets. Hence, many have emphasized the need to coordinate regulatory changes among nations. The vehicle for forming an international consensus on measures to be taken by individual countries is the G-20 along with the International Monetary Fund and new Financial Stability Board14 (based in Switzerland), although some developing nations prefer the more inclusive 7

Also see the section entitled Regulatory and Financial Market Reform in this report. CRS Report RL34730, Troubled Asset Relief Program: Legislation and Treasury Implementation, by Baird Webel and Edward V. Murphy. 9 CRS Report R40537, American Recovery and Reinvestment Act of 2009 (P.L. 111-5): Summary and Legislative History, by Clinton T. Brass et al. 10 For analysis and recommendations by the International Monetary Fund, see ―G lobal Financial Stability Report, Financial Stress and Deleveraging, Macro-Financial Implications and Policy,‖ October 2008. 246 p. 11 For information on Basel II, see CRS Report RL34485, Basel II in the United States: Progress Toward a Workable Framework, by Walter W. Eubanks. 12 Now called the Financial Stability Board. For recommendations by the Financial Stability Forum, see ―Reportof the Financial Stability Forum on Enhancing Market and Institutional Resilience, Follow-up on Implementation,‖ October 10, 2008. 39 p. 13 U.S. Department of the Treasury, Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation, Washington, DC, June 2009, 85 p. 14 The following countries and territories are represented on the Financial Stability Board: Argentina, Australia, Brazil, China, Canada, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Switzerland, Turkey, the United Kingdom, and the United States. The following institutions, standard-setting bodies and other groupings are also members of the FSB: the Bank for International Settlements, European Central Bank, European Commission, International Monetary Fund, Organisation for Economic Co-operation and Development, World Bank, Basel Committee on Banking Supervision, International Accounting Standards Board, International Association of Insurance Supervisors, International Organization of Securities Commissions, Committee on the Global Financial System, and Committee on Payment and Settlement Systems. 8

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G-30. The third G-20 Summit was held in Pittsburgh on September 24-25, 2009. World leaders there focused on tougher regulation of the financial sector, including limits on bonus payments for bankers, and attempted to decide what comes next, now that there are tentative signs of recovery. Among the issues that were on the U.S. agenda included measures to ease global economic trade imbalances, to prevent a repeat of financial crises through a process of regular consultations, and to have increased cooperation on policies that will ensure a rebalancing of world growth. The April 2009 G-20 London Summit called for a greater role for the IMF and for it to collaborate with the new Financial Stability Board to provide early warning of macroeconomic and financial risks and actions needed to address them.15 The leaders also agreed that national financial supervisors should establish Colleges of Supervisors consisting of national financial supervisory agencies that oversee globally active financial institutions. (See ― G-20 Meetings‖ section of this report.) Still, work at the international level remains advisory. At the April 2009 G-20 London Summit, a schism arose between the United States and the U.K., who were arguing for large and coordinated stimulus packages, and Germany and France, who considered their automatic stabilizers (increases in government expenditures for items such as unemployment insurance that are triggered any time the economy slows) plus existing stimulus programs as sufficient. In the communiqué, the G-20 leaders decided to add $1.1 trillion in resources to the international financial institutions, including $750 billion for the International Monetary Fund, $250 billion to boost global trade, and $100 billion for multilateral development banks. On June 24, 2009, President Obama signed H.R. 2346 into law (P.L. 111-32). This increased the U.S. quota in the International Monetary Fund by 4.5 billion SDRs ($7.69 billion), provided loans to the IMF of up to an additional 75 billion SDRs ($116.01 billion), and authorized the United States Executive Director of the IMF to vote to approve the sale of up to 12,965,649 ounces of the Fund‘s gold.16 On June 17, 2009, the Department of the Treasury presented the Obama Administration proposal for financial regulatory reform. This was followed by twelve titles of proposed legislation to implement the reforms. The proposals focus on five areas (and proposed legislation) as indicated below. Legislation in Congress also addresses these issues. 1. Promote robust supervision and regulation of financial firms. a. A new Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation (chaired by Treasury and including the heads of the principal federal financial regulators as members).17 15

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In addition to the mandate of the Financial Stability Forum (to assess vulnerabilities affecting the financial system, identify and oversee action needed to address them, and promote coordination and information exchange among authorities responsible for financial stability), the Financial Stability Board is to (1) monitor and advise on market developments and their implications for regulatory policy; (2) advise on and monitor best practice in meeting regulatory standards; (3) undertake joint strategic reviews of the policy development work of the international standard setting bodies to ensure their work is timely, coordinated, focused on priorities and addressing gaps; (4) set guidelines for and support the establishment of supervisory colleges; (5) manage contingency planning for cross-border crisis management, particularly with respect to systemically important firms; and (6) collaborate with the IMF to conduct Early Warning Exercises. An SDR is a Special Drawing Right, a type of international currency created by the IMF that can be converted into a national currency for use. One SDR currently is worth about $1.55 dollars. Title I of proposed legislation, Financial Services Oversight Council Act of 2009, submitted by Treasury; see http://www.financialstability.gov/docs/regulatoryreform/07222009/titleI.pdf.

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Dick K. Nanto b. New authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability, even those that do not own banks.18 c. Stronger capital and other prudential standards for all financial firms, and even higher standards for large, interconnected firms.19 d. A new National Bank Supervisor (a single agency with separate status in Treasury to supervise all federally chartered banks).20 e. Elimination of the federal thrift charter and other loopholes that allowed some depository institutions to avoid bank holding company regulation by the Federal Reserve.21 f. The registration of advisers of hedge funds and other private pools of capital with the SEC.22 2. Establish comprehensive supervision of financial markets. a. Enhanced regulation of securitization markets, including new requirements for market transparency, stronger regulation of credit rating agencies, and a requirement that issuers and originators retain a financial interest in securitized loans.23 b. Comprehensive regulation of all over-the-counter derivatives.24 c. New authority for the Federal Reserve to oversee payment, clearing, and settlement systems.25 3. Protect consumers and investors from financial abuse. a. A new Consumer Financial Protection Agency (an independent entity) to protect consumers across the financial sector from unfair, deceptive, and abusive practices.26 b. Stronger regulations to improve the transparency, fairness, and appropriateness of consumer and investor products and services.27

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18

Title II of proposed legislation, ―BankHolding Company Modernization Act of 2009, submitted by Treasury; see http://www.financialstability.gov/docs/regulatoryreform/07222009/titleII.pdf. 19 Title VI of proposed legislation submitted by Treasury; see http://www.financialstability.gov/docs/ regulatoryreform/ 07222009/titleVI.pdf. 20 Title III of proposed legislation, Federal Depository Institutions Supervision and Regulation Improvements Act of 2009, submitted by Treasury; see http://www.financialstability.gov/docs/regulatoryreform/title-III_Natl-BankSupervisor_072309.pdf. 21 Title III of proposed legislation, ―Federa l Depository Institutions Supervision and Regulation Improvements Act of 2009,‖ submitted by Treasury, see http://www.financialstability.gov/ docs/regulatoryreform/title-III_NatlBankSupervisor_072309.pdf. 22 Title IV of proposed legislation, Private Fund Investment Advisers Registration Act of 2009, submitted by Treasury, see http://www.treas.gov/press/releases/reports/title%20iv%20reg%20advisers%20priv%20 funds%207%2015%2009%20fnl.pdf. 23 Title IX, Subtitle C of proposed legislation, ―Inves tor Protection Act of 2009, Subtitle C—Improvements to the Regulation of Credit Rating Agencies,‖ submitted by Treasury; see http://www.financia lstability.gov/ docs/regulatoryreform/titleIX_subtC.pdf and Subtitle E—Improvements to the Asset-Backed Securitization Process; see http://www.financialstability.gov/docs/ regulatoryreform/07222009/ titleIX.pdf. 24 Title VII of proposed legislation, ―O ver-the-Counter Derivatives Markets Act of 2009,‖ submitted by Treasury, see http://www.financialstability.gov/docs/regulatoryreform/titleVII.pdf. 25 Title VIII of proposed legislation, ―Paym ent, Clearing, and Settlement Supervision Act of 2009,‖ submitted by Treasury; see http://www.financialstability.gov/docs/regulatoryreform/title-VIII_payments_072209. pdf. Title IX, Subtitle D, ―I nvestor Protection Act of 2009,‖.Subtitle D—Executive Compensation, submitted by Treasury; see http://www.treas.gov/press/releases/docs/tg_218IX.pdf. 26 Title X of proposed legislation, ―C onsumer Financial Protection Agency Act of 2009,‖submitted by Treasury; see http://www.financialstability.gov/docs/regulatoryreform/title-III_Natl-Bank-Supervisor_ 072309.pdf and Title X1, Improvements to the Federal Trade Commission Act,‖ submitted by Treasury; see http://www. financialstability.gov/ docs/TITLE-XI.pdf.

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c.

A level playing field and higher standards for providers of consumer financial products and services, whether or not they are part of a bank.28 4. Provide the government with the tools it needs to manage financial crises. a. A new regime to resolve nonbank financial institutions whose failure could have serious systemic effects.29 b. Revisions to the Federal Reserve‘s emergency lending authority to improve accountability.30 5. Raise international regulatory standards and improve international cooperation. Treasury proposed international reforms to support U.S. efforts, including strengthening the capital framework; improving oversight of global financial markets; coordinating supervision of internationally active firms; and enhancing crisis management tools.

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Treasury also proposed the creation of an Office of National Insurance within the Department of the Treasury.31 The following is a brief listing of the major regulatory issues that are now being or have been addressed by Congress. (Appendix D also provides a sketch of problems raised and possible policy options.) Systemic Risk Regulator. With respect to macro-prudential supervision and systemic risk, the Treasury Plan proposed that the U.S. Federal Reserve serve as a systemic regulator. In Congress, H.R. 3996 would create a Financial Services Oversight Council to monitor systemic risk. H.R. 1754/S. 664 would create a systemic risk monitor for the financial system of the United States, to oversee financial regulatory activities of the federal government, and for other purposes.32 Among its provisions are to establish an independent Financial Stability Council, to require the Federal Reserve to promulgate rules to deal with systemic risk, and to transfer authorities and functions of the Office of Thrift Supervision to the Comptroller of the Currency. (The Treasury Plan would call this combined agency the National Bank Supervisor.) Too Big to Fail (systemically significant financial companies). The question of what to do about financial firms that become so large that they cannot be allowed to become insolvent without putting the financial system and the economy at risk. It is related to the issue of 27

Title IX of proposed legislation, ―Inves tor Protection Act of 2009,‖ submitted by Treasury; see http://www. treas.gov/ press/releases/docs/tg205071009.pdf. Title X of proposed legislation, ―C onsumer Financial Protection Agency Act of 2009,‖submitted by Treasury; see http://www.financialstability.gov/docs/regulatoryreform/title-III_Natl-Bank-Supervisor_ 072309.pdf and Title X1, Improvements to the Federal Trade Commission Act,‖ submitted by Treasury; see http://www. financialstability.gov/ docs/TITLE-XI.pdf. 29 Title XII of proposed legislation, ―Resol ution Authority for Large, Interconnected Financial Companies Act of 2009‖, submitted by Treasury; see http://www.financialstability.gov/docs/regulatoryreform/title-XII_resolution authority_072309.pdf. 30 Title XII of proposed legislation, ―A dditional Improvements for Financial Crisis Management,‖ submitted by Treasury; see http://www.financialstability.gov/docs/regulatoryreform/07222009/titleXIII.pdf. 31 Title V of proposed legislation, ―O ffice of National Insurance Act of 2009,‖ submitted by Treasury, see http://www.financialstability.gov/docs/regulatoryreform/07222009/title%20V%20Ofc%20Natl%20Ins%207-222009%20fnl.pdf. 32 For discussion, see CRS Report R40417, Macroprudential Oversight: Monitoring the Financial System, by Darryl E. Getter. CRS Report R40877, Systemic Risk and the Federal Reserve, by Marc Labonte. 28

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systemic risk. Under H.R. 3996 mentioned above, the Financial Services Oversight Council would identify financial companies and financial activities that should be subject to heightened prudential standards. S. 2746, Too Big to Fail, Too Big to Exist Act, would require the breakup of such companies. H.R. 2897, the Bank Accountability and Risk Assessment Act of 2009, would require premium assessments by the FDIC to reflect relative degrees of risk by banks.33 Credit Rating Agencies. In Congress, several bills deal with concerns over the perceived failures of credit rating agencies34 in assigning ratings to derivatives and other financial products. H.R. 3890, the Accountability and Transparency in Rating Agencies Act, was ordered reported from the House Financial Services Committee on October 27, 2009. It would amend the Securities Exchange Act of 1934 to enhance oversight of nationally recognized statistical rating organizations. Other bills include H.R. 74, H.R. 1181, H.R. 1445, S. 927, and S. 1073.

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Derivatives Regulation. The issue of regulation of over-the-counter derivatives is addressed in CRS Report R40646, Derivatives Regulation in the 111th Congress. The bills that include broad derivatives reform provisions include H.R. 3795, reported out of both the House Financial Services (October 15, 2009) and House Agriculture (October 21, 2009) committees, H.R. 977, reported out of the House Agriculture Committee on February 12, 2009, and H.R. 2454 (the capand-trade bill) that passed the House on June 26, 2009. Other derivatives bills include H.R. 1754, H.R. 2448, H.R. 2869, H.R. 3145, H.R. 3153, H.R. 3300, S. 221, S. 272, S. 447, S. 664, S. 807, S. 961, S. 1225, S. 1399, and S. 1412. Investor Protection. H.R. 3817, The Investor Protection Act of 2009, would provide the Securities and Exchange Commission with additional authorities to protect investors from violations of the securities laws. Ordered to be reported by the House Financial Services Committee on November 4, 2009. H.R. 3818, Private Fund Investment Advisers Registration Act of 2009, would require advisers of certain unregistered investment companies (hedge funds) to register with and provide information to the Securities and Exchange Commission. Ordered to be reported on October 27, 2009. Commissions. Bills have been introduced that would provide for the establishment of commissions or special committees to study the causes of the financial crisis. S. 386 (P.L. 111-21, Section 5) established a 10-member Financial Crisis Inquiry Commission in the legislative branch to examine the causes of the current U.S. financial and economic crisis, taking into account fraud and abuse in the financial sector and other specified factors. It authorized $5 million for the Commission and requires the Commission to submit a final report on its findings to the President and Congress on December 15, 2010, requires the Commission chairperson to appear before the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs within 120 days after the submission of such report, and terminates the Commission 60 days after the submission of 33

See CRS Report R40526, Insolvencies of ―Systemically Significant Financial Companies‖ (SSFCs): Proposal for Federal Deposit Insurance Corporation (FDIC) Resolution, by M. Maureen Murphy. CRS Report R40843, Bank Failures and the Federal Deposit Insurance Corporation, by Darryl E. Getter. 34 See CRS Report R40613, Credit Rating Agencies and Their Regulation, by Gary Shorter and Michael V. Seitzinger

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such report. It also requires Republican approval before the commission could issue subpoenas. Other bills related to commissions or special committees include H.Res. 345/S.Res. 62, H.R. 74, H.R. 768, H.R. 2111, H.R. 2253/S. 298, and S. 400. Housing and Mortgages. Numerous bills have been introduced related to the housing market, mortgages, and foreclosures. They address issues such as: the Troubled Assets Relief Program and its operation35 and foreclosure prevention initiatives. S. 896, Helping Families Save Their Homes Act of 2009, became P.L. 111-22 on May 20, 2009. It contained various measures intended to prevent mortgage foreclosures. S. 386, Fraud Enforcement and Recovery Act of 2009 or FERA became P.L. 111-21 on May 20, 2009. It amends the federal criminal code to include within the definition of ― financial institution‖ a mortgage lending business or any person or entity that makes, in whole or in part, a federally related mortgage loan. For details on housing and mortgages, see the CRS reports cited in the footnote below.36

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Consumer Protection. The protection of consumers from allegedly unscrupulous practices in mortgage, credit card, other financial markets also has risen as a priority issue with the Obama Administration. On July 15, 2009, the Consumer Financial Protection Agency Act of 2009 (H.R. 3126) was introduced,37 and on October 29, 2009, it was marked up and ordered to be reported by both the House Financial Services Committee and the House Energy and Commerce Committee. This bill would establish an agency structure quite different from that proposed by the Obama Administration. The proposed Agency‘s Director (rather than a four-person board), a Presidential appointee, would hold virtually all of the CFPA‘s powers. The bill also would exempt entities such as retailers, merchants, and sellers of primarily non-financial goods when providing a nonfinancial good or service directly to a consumer. It also would exempt accountants, income tax preparers, attorneys, real estate brokers and agents, automobile dealers and sellers, providers of retirement plans, and others when they are engaged in the normal activities of their respective businesses. Oversight, Investigations, Reports. Several bills would provide for oversight, reports, or other investigations into activities related to the financial crisis. In the 110th Congress, P.L. 110-343 (§125(b)(1)(B)) established the Congressional Oversight Panel and provides for monthly reports on the Troubled Asset Relief Program (TARP).38 H.R. 2424, the Federal Reserve Credit Facility Review Act of 2009, would authorize reviews by the Comptroller General of the United States of any credit facility established by the Board of Governors of the Federal Reserve System or any federal reserve bank during the current financial crisis, and for other purposes. H.R. 1207 would reform the manner in which the Board of Governors of the Federal Reserve System is audited by the Comptroller General of the United States and 35

CRS Report RL34730, Troubled Asset Relief Program: Legislation and Treasury Implementation, by Baird Webel and Edward V. Murphy. CRS Report R40224, Troubled Asset Relief Program and Foreclosures, by N. Eric Weiss et al. 36 CRS Report R40210, Preserving Homeownership: Foreclosure Prevention Initiatives, by Katie Jones. CRS Report R40498, Overview of the Securities Act of 1933 as Applied to Private Label Mortgage-Backed Securities, by Kathleen Ann Ruane. CRS Report RL33879, Housing Issues in the 110th Congress, coordinated by Libby Perl. 37 CRS Report R40696, Financial Regulatory Reform: Analysis of the Consumer Financial Protection Agency (CFPA) as Proposed by the Obama Administration and H.R. 3126, by David H. Carpenter and Mark Jickling. CRS Report R40857, Consumer Financial Protection by Federal Agencies, by Mark Jickling. 38 The reports are at http://tarptracker.org/cop.

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the manner in which such audits are reported. S. 1223 would require congressional approval before any Troubled Asset Relief Program (TARP) funds are provided or obligated to any entity, on and after May 29, 2009, whose receipt of such funds would result in federal government acquisition of its common or preferred stock. Executive Compensation. The issue of compensation for executives of firms that have received government support during the financial crisis. The American Recovery and Reinvestment Act of 2009 (Title VII of P.L. 111-5) restricts the compensation of executives of companies during the period in which any obligation arising from financial assistance provided under the Troubled Assets Relief Program (TARP) remains outstanding and requires the Secretary of the Treasury to develop appropriate standards for executive compensation.39 Some proposals, dubbed ― say on pay,‖ would give shareholders a greater voice in compensation and governance decisions. Among legislative initiatives, S. 1074 would provide for greater influence by shareholders in selecting corporate officers and H.R. 3269 (passed the House on July 31, 2009) would authorize federal regulators of financial firms to prohibit incentive pay structures that are seen to encourage inappropriate risk-taking and require them to adopt say on pay.

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Fiscal Stimulus and Monetary Policy. For legislation related to a fiscal stimulus and monetary policy, see CRS Report R40 104, Economic Stimulus: Issues and Policies, by Jane G. Gravelle, Thomas L. Hungerford, and Marc Labonte, and CRS Report RL34427, Financial Turmoil: Federal Reserve Policy Responses, by Marc Labonte. Fannie Mae, Freddie Mac, and GSEs. For policy related to these issues, see CRS Report RS2 1663, Government-Sponsored Enterprises (GSEs): An Institutional Overview, by Kevin R. Kosar; CRS Report RS22950, Fannie Mae and Freddie Mac in Conservatorship, by Mark Jickling; and CRS Report R40800, Options To Restructure Fannie Mae and Freddie Mac, by N. Eric Weiss. International Monetary Fund. For policy related to the IMF, see CRS Report RS22976, The Global Financial Crisis: The Role of the International Monetary Fund (IMF), by Martin A. Weiss and CRS Report R40578, The Global Financial Crisis: Increasing IMF Resources and the Role of Congress, by Jonathan E. Sanford and Martin A. Weiss. Insurance Regulation. For policy discussion, see CRS Report R4077 1, Insurance Regulation: Issues, Background, and Legislation in the 111th Congress, by Baird Webel.

SENATOR DODD‟S DRAFT FINANCIAL REGULATION BILL On November 10, 2009, Senate Banking Committee Chairman Christopher Dodd released a draft of a financial regulation bill. The bill‘s provisions include:

39

CRS Report RS22583, Executive Compensation: SEC Regulations and Congressional Proposals, by Michael V. Seitzinger.

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establishment of a Consumer Financial Protection Agency; ending ― too big to fail;‖ establishment of a Financial Stability Agency to address systemic risks; creation of a single federal bank regulator, the Financial Institutions Regulatory Administration; providing corporate shareholders with a ― say on pay;‖ resolution authority to unwind troubled financial firms; protecting investors through regulation of over-the-counter derivatives and registration of advisors for hedge funds; and creating an office within Treasury to monitor the insurance industry and an SEC Office of Credit Rating Agencies.

Four Phases of the Global Financial Crisis

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The global financial crisis as it has played out in countries across the globe has been manifest in four overlapping phases. Although each phase has a policy focus, each phase of the crisis affects the others, and, until the crisis has passed, no phase seems to have a clear end point.

Contain the Contagion and Strengthen Financial Sectors The first phase has been intervention to contain the contagion and strengthen financial sectors in countries.40 On a macroeconomic level, this has included policy actions such as lowering interest rates, expanding the money supply, quantitative (monetary) easing, and actions to restart and restore confidence in credit markets. On a microeconomic level, this has entailed actions to resolve immediate problems and effects of the crisis including financial rescue packages for ailing firms, guaranteeing deposits at banks, injections of capital, disposing of toxic assets, and restructuring debt. This has involved decisive (and, in cases, unprecedented) measures both in scope, cost, and extent of government reach. Actions taken include the rescue of financial institutions considered to be ― too big to fail‖ and government takeovers of certain financial institutions, government facilitation of mergers and acquisitions, and government purchases of problem financial assets. Nearly every industrialized country and many developing and emerging market countries have pursued some or all of these actions. Although the ― panic‖ phase of containing the contagion has passed, operations still are continuing, and the ultimate cost of the actions are yet to be determined. In the United States, traditional monetary policy almost has reached its limit as the Federal Reserve has lowered its discount rate to 0.5% and has a target rate for the federal funds rate of 0.0 to 0.25%. The Federal Reserve and Treasury, therefore, have turned toward quantitative monetary easing (buying government securities and injecting more money into the economy) and dealing directly with the toxic assets being held by banks.41 40 41

See CRS Report RL34412, Containing Financial Crisis, by Mark Jickling. See Board of Governors of the Federal Reserve System, Federal Reserve Press Release, March 18, 2009. U.S. Department of the Treasury, U.S. Treasury and Federal Reserve Board Announce Launch of Term Asset-Backed Securities Loan Facility (TALF), Press Release tg-45, March 3, 2009. CRS Report RL3 1416, Monetary Aggregates: Their Use in the Conduct of Monetary Policy, by Marc Labonte.

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What has been learned from previous financial crises is that without a resolution of underlying problems with toxic assets and restoring health to the balance sheet of banks and other financial institutions, financial crises continue to drag on. This was particularly the case with Japan.42 Even Sweden, often viewed as a successful model of how to cope with a financial crisis, had to take decisive action to deal with the nonperforming assets of its banking system.43 In the United States, the Treasury, Federal Reserve, Federal Deposit Insurance Corporation, Office of Thrift Supervision, and Comptroller of the Currency have worked together to contain the contagion. Under the $700 billion Troubled Asset Relief Program44 (TARP, H.R. 1424/P.L. 110-343), the Treasury has invested in dozens of banks, General Motors, Chrysler and the insurer A.I.G. The investments are in the form of preferred stock that pays quarterly dividends. On March 23, 2009, The U.S. Treasury released the details of its $900 billion Public Private Partnership Investment Program to address the challenge of toxic (legacy) assets being carried by the financial system.45 The U.S. Federal Reserve also has conducted about $1.2 trillion in emergency commitments to stabilize the financial sector. Its interventions have included a safety net for commercial banks, the rescue of Bear Stearns, a lending facility for investment banks and brokerages, loans for money-market assets and commercial paper, and purchases of securitized loans and lending to businesses and consumers for purchases of asset-backed securities.46

Coping with Macroeconomic Effects The second phase of this financial crisis is less uncommon except that the severity of the macroeconomic downturn confronting countries around the world is the worst since the Great Depression of the 193 0s. The financial crisis soon spread to real sectors to negatively affect whole economies, production, firms, investors, and households. Many of these countries, particularly those with emerging and developing markets, have been pulled down by the ever widening flight of capital from their economies and by falling exports and commodity prices. In these cases, governments have turned to traditional monetary and fiscal policies to deal with recessionary economic conditions, declining tax revenues, and rising unemployment. Figure 1 shows the effect of the financial crisis on economic growth rates (annualized changes in real GDP by quarter) in selected nations of the world. The figure shows the difference between the 2001 recession that was confined primarily to countries such as the United States, Mexico, and Japan and the current financial crisis that is pulling down growth rates in a variety of countries. The slowdown—recession for many countries—is global. The implication of this synchronous drop in growth rates is that the United States and other nations may not be able to export their way out of recession. Even China is experiencing a 42

Eric S. Rosengren, Addressing the Credit Crisis and Restructuring the Financial Regulatory System: Lessons from Japan, Federal Reserve Bank of Boston, Paper given at the Institute of International Bankers Annual Washington Conference, Boston, MA, March 2, 2009. 43 Thomas F. Cooley, ― Swedish Banking Lessons,‖ Forbes.com, January 28, 209. 44 For details, see CRS Report RL34730, Troubled Asset Relief Program: Legislation and Treasury Implementation, by Baird Webel and Edward V. Murphy 45 U.S. Department of the Treasury, Treasury Department Releases Details on the Public Private Partnership Investment Program, Press Release tg-65, March 23, 2009. 46 For details, see CRS Report RL34427, Financial Turmoil: Federal Reserve Policy Responses, by Marc Labonte. ―The Fed‘ s Trillion,‖ The Washington Post, May 5, 2009, p. A14.

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― growth recession.‖ There is no major economy that can play the role of an economic engine to pull other countries out of their economic doldrums.

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Source: Congressional Research Service. Data and forecasts (August 15) by Global Insight. Figure 1. Quarterly (Annualized) Economic Growth Rates for Selected Countries.

In July-August 2009, there was a growing consensus among forecasters that the world had seen the worst of the global recession and that economies would hit bottom in 2009 and begin a weak recovery as early as the second half of 2009. On June 24, the Organization for Economic Cooperation and Development revised its world economic outlook upwards for the first time in two years. Most of this improved outlook, however, was in higher growth in China (7.7%) and other developing countries and less negative growth in the United States (2.8%) for 2009. The outlook for the Eurozone (-4.8%) and Japan (-6.8%) for 2009 was slightly worse. The OECD reported that housing prices were falling in all OECD countries except for Switzerland. 47 On November 14, 2009, Eurostat (the EU‘s statistics agency) reported that the euro area had officially emerged from recession during the third quarter of 2009.48 In response to the recession or slowdown in economic growth, many countries have adopted fiscal stimulus packages designed to induce economic recovery or at least keep conditions from worsening. These are summarized in Error! Reference source not found. and 47 48

Norma Cohen, ― OECD Sees Strongest Outlook since 2007,‖ Financial Times, June 24, 2009, FT.com. Matthew Saltmarsh, ―EuroZone Officially Out of Recession,‖ The New York Times, November 14, 2009, p. Internet edition.

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Appendix B and include packages by China ($586 billion), the European Union ($256 billion), Japan ($396 billion), Mexico ($54 billion), and South Korea ($52.5 billion).The global total for stimulus packages now exceeds $2 trillion, but some of the packages include measures that extend into subsequent years, so the total does not imply that the entire amount will translate into immediate government spending. The stimulus packages by definition are to be fiscal measures (government spending or tax cuts) but some packages include measures aimed at stabilizing banks and other financial institutions that usually are categorized as bank rescue or financial assistance packages. The $2 trillion total in stimulus packages amounts to approximately 3% of world gross domestic product, an amount that exceeds the call by the International Monetary Fund for fiscal stimulus totaling 2% of global GDP to counter worsening economic conditions world wide.49 If only new fiscal stimulus measures to be done in 2009 are counted, however, the total and the percent of global GDP figures would be considerably lower. An analysis of the stimulus measures by the European Community for 2009 found that such measures amount to an estimated 1.32% of European Community GDP.50 The IMF estimated that as of January 2009, the U.S. fiscal stimulus packages as a percent of GDP in 2009 would amount to 1.9%, for the euro area 0.9%, for Japan 1.4%, for Asia excluding Japan 1.5%, and for the rest of the G-20 countries 1.1%.51 At the G-20 London Summit, a schism arose between the United States and the U.K., who were arguing for large and coordinated stimulus packages, and Germany and France, who considered their automatic stabilizers (increases in government expenditures for items such as unemployment insurance that are triggered any time the economy slows) plus existing stimulus programs as sufficient. In their communiqué, the leaders noted that $5 trillion will have been devoted to fiscal expansion by the end of 2010 and committed themselves to ― deliver the scale of sustained fiscal effort necessary to restore growth.‖ In the communiqué, the G-20 leaders decided to add $1.1 trillion in resources to the international financial institutions, including $750 billion more for the International Monetary Fund, $250 billion to boost global trade, and $100 billion for multilateral development banks. The additional lending by the international financial institutions would be in addition to national fiscal stimulus efforts and could be targeted to those countries most in need. Several countries have borrowed heavily in international markets and carry debt denominated in euros or dollars. As their currencies have depreciated, the local currency cost of this debt has skyrocketed. Other countries have banks with debt exposure almost as large as national GDP. Some observers have raised the possibility of a sovereign debt crisis52 (countries defaulting on government guaranteed debt) or as in the case of Iceland having to nationalize its banks and assume liabilities greater than the size of the national economy. Since November 1, 2008, the IMF, under its Stand-By Arrangement facility, has provided or is in the process of providing financial support packages for Iceland ($2.1 billion), Ukraine ($16.4 billion), Hungary ($25.1 billion), Pakistan ($7.6 billion), Belarus ($2.46 billion), Serbia ($530.3 million), Armenia ($540 million), El Salvador ($800 million), Latvia ($2.4 49

Camilla Anderson, IMF Spells Out Need for Global Fiscal Stimulus, International Monetary Fund, IMF Survey Magazine: Interview, Washington, DC, December 28, 2008. 50 David Saha and Jakob von Weizsäcker, Estimating the size of the European stimulus packages for 2009, Brugel, JVW/ DS, 12 December 2008. 51 Charles Freedman, Michael Kumhof, Douglas Laxton, and Jaewoo Lee, The Case for Global Fiscal Stimulus, International Monetary Fund, IMF Staff Position Note SPN/09/03, March 6, 2009. 52 Steven Pearlstein, ― Asia, Europe Find Their Supply Chains Yanked. Beware the Backlash,‖ The Washington Post, February 20, 2009, pp. D1, D3.

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billion), Seychelles ($26.6 million), Mongolia ($229.2 million), Costa Rica ($735 million), Guatemala ($935 million), and Romania ($17.1 billion). The IMF also created a Flexible Credit Line for countries with strong fundamentals, policies, and track records of policy implementation. Once approved, these loans can be disbursed when the need arises rather than being conditioned on compliance with policy targets as in traditional IMF-supported programs. Under this facility, the IMF board has approved Mexico ($47 billion), Poland ($20.5 billion), and Columbia ($10.5 billion).53

Regulatory and Financial Market Reform The third phase of the global financial crisis—to decide what changes may be needed in the Policy and Legislation,‖ above.) In order to financial system—also is underway. (See ― coordinate reforms in national regulatory systems and give such proposals political backing, world leaders began a series of international meetings to address changes in policy, regulations, oversight, and enforcement. Some are characterizing these meetings as Bretton Woods II.54 The G-20 leaders‘ Summit on Financial Markets and the World Economy that met on November 15, 2008, in Washington, DC, was the first of a series of summits to address these issues. The second was the G-20 Leader‘s Summit on April 2, 2009, in London,55 and the third was the Pittsburgh Summit on September 24-25, 2009, with President Obama as the host.56 In this third phase, the immediate issues to be addressed by the United States and other nations center on ― fixing the system‖ and preventing future crises from occurring. Much of this involves the technicalities of regulation and oversight of financial markets, derivatives, and hedging activity, as well as standards for capital adequacy and a schema for funding and conducting future financial interventions, if necessary. In the November 2008 G-20 Summit, the leaders approved an Action Plan that sets forth a comprehensive work plan. The leaders instructed finance ministers to make specific recommendations in the following areas:     

Avoiding regulatory policies that exacerbate the ups and downs of the business cycle; Reviewing and aligning global accounting standards, particularly for complex securities in times of stress; Strengthening transparency of credit derivatives markets and reducing their systemic risks; Reviewing incentives for risk-taking and innovation reflected in compensation practices; and Reviewing the mandates, governance, and resource requirements of the International Financial Institutions.

Most of the technical details of this work plan have been referred to existing international standards setting organizations or the National Finance Ministers and Central Bank 53

International Monetary Fund, IMF Financial Activities—Update June 18, 2009, Washington, DC, June 18, 2009, http://www.imf.org/external/np/tre/activity/2009/061809.htm. 54 The Bretton Woods Agreements in 1944 established the basic rules for commercial and financial relations among the world‘s major industrial states and also established what has become the World Bank and International Monetary Fund. 55 Information on the London G-20 Summit is available at http://www.londonsummit.gov.uk/en/. 56 For details, see http://www.pittsburghsummit.gov/.

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Governors. These organizations include the International Accounting Standards Board, the Financial Accounting Standards Board, Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the Financial Stability Forum (Board). At the London Summit, the leaders addressed the issue of coordination and oversight of the international financial system by establishing a new Financial Stability Board (F SB) with a strengthened mandate as a successor to the Financial Stability Forum with membership to include all G-20 countries, Financial Stability Forum members, Spain, and the European Commission. The FSB is to collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them. The Summit left it to individual countries to reshape regulatory systems to identify and take account of macroprudential (systemic) risks, but agreed to regulate hedge funds and Credit Rating Agencies.57 The results of the Pittsburgh Summit are summarized in the G-20 section of this report. For the United States, the fundamental issues may be the degree to which U.S. laws and regulations are to be altered to conform to recommendations from the new Financial Stability Board and what authority the Board and IMF will have relative to member nations. Although the London Summit strengthened regulations and the IMF, it did not result in a ― new international financial architecture.‖ The question still is out as to whether the Bretton Woods system should be changed from one in which the United States is the buttress of the international financial architecture to one in which the United States remains the buttress but its financial markets are more ― Europeanized‖ (more in accord with Europe‘s practices) and more constrained by the broader international financial order? Should the international financial architecture be merely strengthened or include more control, and if more control, then by whom?58 What is the time frame for a new architecture that may take years to materialize? For the United States, some of these issues are being addressed by the President‘s Working Group on Financial Markets (consisting of the U.S. Treasury Secretary, Chairs of the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission) in cooperation with international financial organizations. Appendix C lists the major regulatory reform proposals and indicates whether they have been put forward by various U.S. and international organizations. Those that have been proposed by both the U.S. Treasury and the G-20 include the following: 





57 58

Systemic Risk: All systemically important financial institutions should be subject to an appropriate degree of regulation. Use of stress testing by financial institutions should be more rigorous. Capital Standards: Large complex systemically-important financial institutions should be subject to more stringent capital regulation than other firms. Capital decisions by regulators and firms should make greater provision against liquidity risk. Hedge Funds: Hedge funds should be required to register with a national securities regulator. Systemically-important hedge funds should be subject to prudential

Group of Twenty Nations. ― London Summit – Leaders‘ Statement,‖ 2 April 2009 http://www.london summit.gov.uk/ resources/en/PDF/final-communique Friedman, George and Peter Zeihan. ―T he United States, Europe and Bretton Woods II.‖ A Strafor Geopolitical Intelligence Report, October 20, 2008.

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regulation. Hedge funds should provide information on a confidential basis to regulators about their strategies and positions. Over-the-Counter Derivatives: Credit default swaps should be processed through a regulated centralized counterparty (CCP) or clearing house. Tax Havens: Minimum international standards—a regulatory floor—should apply in all countries, including tax havens and offshore banking centers.

Among the proposals put forward by the Treasury but not mentioned by the G-20 included creating a single regulator with responsibility over all systemically important financial institutions with power for prompt corrective action, strengthening regulation of critical payment systems, processing all standardized over-the-counter derivatives through a regulated clearing house and subjecting them to a strong regulatory regime, and providing authority for a government agency to take over a failing, systemically important non-bank institution and place it in conservatorship or receivership outside the bankruptcy system. (For the June 17, 2009, Obama Administration proposal for financial market regulation, see the ― Policy‖ section of this report.)

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Dealing with Political, Social, and Security Effects59 The fourth phase of the financial crisis is in dealing with political, social, and security effects of the financial turmoil. These are secondary impacts that relate to the role of the United States on the world stage, its leadership position relative to other countries, and the political and social impact within countries affected by the crisis. For example, on February 12, 2009, the U.S. Director of National Intelligence, Dennis Blair, told Congress that instability in countries around the world caused by the global economic crisis and its geopolitical implications, rather than terrorism, is the primary near-term security threat to the United States.60

Political Leadership and Regimes The financial crisis works on political leadership and regimes within countries through two major mechanisms. The first is the discontent from citizens who are losing jobs, seeing businesses go bankrupt, losing wealth both in financial and real assets, and facing declining prices for their products. In democracies, this discontent often results in public opposition to the existing establishment or ruling regime. In some cases it can foment extremist movements, particularly in poorer countries where large numbers of unemployed young people may become susceptible to religious radicalism that demonizes Western industrialized society and encourages terrorist activity. The precipitous drop in the price of oil holds important implications for countries, such as Russia, Mexico, Venezuela, Yemen, and other petroleum exporters, who were counting on oil 59

See CRS Report R40496, The Global Financial Crisis: Foreign and Trade Policy Effects, coordinated by Dick K. Nanto. 60 Dennis C. Blair, Annual Threat Assessment of the Intelligence Community for the Senate Select Committee on Intelligence, Director of National Intelligence, Washington, DC, February 12, 2009. See also, U.S. Senate, Committee on Foreign Relations, ―Forei gn Policy Implications Of The Global Economic Crisis,‖ Roundtable before the Committee On Foreign Relations, February 11, 2009.

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revenues to continue to pour into their coffers to fund activities considered to be essential to their interests. While moderating oil prices may be a positive development for the U.S. consumer and for the U.S. balance of trade, it also may affect the political stability of certain petroleum exporting countries. The concomitant drop in prices of commodities such as rubber, copper ore, iron ore, beef, rice, coffee, and tea also carries dire consequences for exporter countries in Africa, Latin America, and Asia.61 In Pakistan, a particular security problem exacerbated by the financial crisis could be developing. The IMF has approved a $7.6 billion loan package for Pakistan, but the country faces serious economic problems at a time when it is dealing with challenges from suspected al Qaeda and Taliban sympathizers, when citizen objections are rising to U.S. missile strikes on suspected terrorist targets in Pakistan, and the country faces a budget shortfall that may curtail the ability of the government to continue its counterterror operations.62 The second way that the crisis works on ruling regimes is through the actions of existing governments both to stay in power and to deal with the adverse effects of the crisis. Any crisis generates centrifugal forces that tend to strengthen central government power. Most nations view the current financial crisis as having been created by the financial elite in New York and London in cooperation with their increasingly laissez faire governments. By blaming the industrialized West, particularly the United States, for their economic woes, governments can stoke the fires of nationalism and seek support for themselves. As nationalist sentiments rise and economic conditions worsen, citizens look to governments as a rescuer of last resort. Political authorities can take actions, ostensibly to counter the effects of the crisis, but often with the result that it consolidates their power and preserves their own positions. Authoritarian regimes, in particular, can take even more dictatorial actions to deal with financial and economic challenges.

Economic Philosophy, Protectionism, and State Capitalism In the basic economic philosophies that guide policy, expediency seems to be trumping free- market ideologies in many countries. The crisis may hasten the already declining economic neoliberalism that began with President Ronald Reagan and British Prime Minister Margaret Thatcher. Although the market-based structure of most of the world economies is likely to continue, the basic philosophy of deregulation, non-governmental intervention in the private sector, and free and open markets for goods, services, and capital, seems to be subsumed by the need to increase regulation of new financial products, increased government intervention, and some pull-back from further reductions in trade barriers. Emerging market countries, particularly those in Eastern Europe, moreover, may be questioning their shift toward the capitalist model away from the socialist model of their past. State capitalism in which governments either nationalize or own shares of companies and intervene to direct parts of their operations is rising not only in countries such as Russia, 61

Johnston, Tim. ―A sia Nations Join to Prop Up Prices,‖ Washington Post, November 1, 2008, p. A10. ―R ecord Fall in NZ Commodity Price Gauge,‖ The National Business Review, November 5, 2008. 62 Joby Warrick, ―Expert s See Security Risks in Downturn, Global Financial Crisis May Fuel Instability and Weaken U.S. Defenses,‖ Washington Post, November 15, 2008. P. A01. Bokhari, Farhan, ―Paki stan‘s War On Terror Hits Roadblock, Global Economic Crisis Prompts Military To Consider Spending Cutbacks,‖ CBS News (online version), October 28, 2008.

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where a history of command economics predisposes governments toward state ownership of the means of production, but in the United States, Europe, and Asia. Nationalization of banks, insurance companies, and other financial institutions, as well as government capital injections and loans to private corporations have become parts of rescue and stimulus packages and have brought politicians and bureaucrats directly into economic decision-making at the company level. While state ownership of enterprises may affect the efficiency and profitability of the operation, it also raises questions of equity (government favoring one company over another) and the use of scarce government resources in oversight and management of companies. When taxpayer funds have been used to invest in a company, the public then has an interest in its operations, but protecting that interest takes time and resources. This has already been illustrated in the United States by the attention devoted to executive compensation and bonuses of companies receiving government loans or capital injections and by the threatened bankruptcy of Chrysler and General Motors. The ideological debate over the role of the government in the economy also has been manifest in public opposition to a larger government role in health care.63 In the G-20 and other meetings, world representatives have been vocal in calling for countries to avoid resorting to protectionism as they try to stimulate their own economies. Still, whether it be provisions to buy domestic products instead of imports, financial assistance to domestic producers, or export incentives, countries have been attempting to protect national companies often at the expense of those foreign. Overt attempts to restrict imports, promote exports, or impose restrictions on trade are limited by the rules of the World Trade Organization (WTO), but there is ample scope for increases in trade barriers that are consistent with the rules and obligations of the WTO. These include raising applied tariffs to higher bound levels as well as actions to impose countervailing duties or to take antidumping measures. Certain sectors also are excluded from trade agreements for national security or other reasons. Moreover, there are opportunities to favor domestic producers at the expense of foreign producers through industry- specific relief or subsidy programs, broad fiscal stimulus programs, buy-domestic provisions, or currency depreciation. Several countries have imposed trade related measures that tend to protect or assist domestic industries. In July, 2009, the WTO reported that in the previous three-month period, there had been ― further slippage towards more trade-restricting and distorting policies‖ but resort to high intensity protectionist measures had been contained overall. There also had been some trade- liberalizing and facilitating measures, but there had been no general indication of governments unwinding or removing the measures that were taken early on in the crisis. The WTO also noted that a variety of new trade-restricting and distorting measures had been introduced, including a further increase in the initiation of trade remedy investigations (anti-dumping and safeguards) and an increase in the number of new tariffs and new non-tariff measures (non-automatic licenses, reference prices, etc.) affecting merchandise trade. The WTO also compiled a list of new trade and trade-related policy measures that had been taken since September 2008. These included increases in steel tariffs by India, increases in tariffs on 940 imported products by Ecuador, restrictions on ports of entry for imports of certain consumer goods by Indonesia, imposition of non-automatic licensing requirements on 63

David M. Herszenhorn and Sheryl G. Stolberg, ― Health Plan Opponents Make Their Voices Heard,‖ The New York Times, August 4, 2009, p. A12.

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products considered as sensitive by Argentina, increase in tariffs on imports of crude oil by South Korea, re-introduction of export subsidies for certain dairy products by the European Commission, and a rise in import duties on cars and trucks by Russia.64 China has announced a number of policy responses to deal with the crisis, including a pledge to spend $586 billion to boost domestic spending. However, China has also announced rebates of value added taxes for exports of certain products (such as steel, petrochemicals, information technology products, textiles, and clothing) and ― Buy Chinese‖ for its stimulus 65 package spending. Also, despite calls to allow its currency to appreciate, the Chinese government has depreciated its currency vis-à-vis the dollar in recent months arguably to help its export industries. In the United States, the Buy America provision in the February 2009 stimulus package66 has been widely criticized. Even though the provision applies only to steel, iron, and manufactured goods used in government funded construction projects and language was included that the provision ― shall be applied in a manner consistent with United States obligations under international agreements,‖ many nations have protested the Buy America language as ― protectionist‖67 and as possibly starting down a slippery slope that could lead to WTOinconsistent protectionism by countries. A concern also is rising among developing nations that a type of ― financial protectionism‖ may arise. Governments may direct banks that have received capital injections to lend more domestically rather than overseas. Borrowing by the U.S. Treasury to finance the growing U.S. budget deficit also pulls in funds from around the world and could crowd out borrowers from countries also seeking to cover their deficits. Also of concern to countries such as Vietnam, China, and other exporters of foreign brand name exports is that private flows of investment capital may decline as producers face rising inventories and excess production capacity. Why build another factory when existing ones sit idle?

U.S. Leadership Position Another issue raised by the global financial crisis has been the role of the United States on the world stage and the U.S. leadership position relative to other countries. How this will play out with the Obama Administration is yet to be seen, but the rest of the world seems to be expressing ambivalent feelings about the United States. On one hand, many blame the United States for the crisis and see it as yet another of the excesses of a country that had emerged as the sole superpower in a unipolar world following the end of the Cold War. Although not always explicit, their willingness to follow the U.S. lead appears to have diminished. On the other hand, countries recognize that the United States is still one of a scant 64

World Trade Organization, Director-General, Report to the TPRB from the Director-General on the Financial and Economic Crisis and Trade-Related Developments, Report No. WT/TPR/OV/W/2, July 15, 2009. 65 World Trade Organization, Director-General, Report to the TPRB from the Director-General on the Financial and Economic Crisis and Trade-Related Developments, Report No. WT/TPR/OV/W/2, July 15, 2009, p. 60. 66 H.R. 1 (P.L. 111-5) Sec. 1605 provides that none of the funds appropriated or otherwise made available by the act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States provided that such action would not be inconsistent with the public interest, such products are not produced in the United States, and would not increase the cost of the overall project by more than 25%. 67 ―Euro pe Warns against ‗Buy American‘ Clause,‖ Spiegel Online International, February 3, 2009, Internet edition.

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few that can bring other nations along and induce them to take actions outside of their political comfort zone. In determining solutions to the financial crisis, the United States presence and leadership appears to be indispensible. The combination of U.S. military power, extensive economic and financial clout, its diplomatic clout, and its veto power in the IMF has put the United States at the center of any resolution to the global financial turmoil. During the early phase of the crisis, European leaders (particularly British Prime Minister Gordon Brown, French President Nicolas Sarkozy, and German Chancellor Angela Merkel) played a major role and were influential in crafting international mechanisms and policies to deal with initial adverse effects of the crisis as well as proposing long-term solutions. Also, dealing with the financial crisis has enabled countries with rich currency reserves, such as China, Russia, and Japan, to assume higher political profiles in world financial circles. If China68 helps to finance the various rescue measures in the United States, Washington may lose some leverage with Beijing in pursuing human and labor rights, product safety, and other pertinent issues. Also, the inclusion of China, India, and Brazil in the G-20 Summits rather than just the G-7 or G-8 countries as originally proposed, seems to indicate the growing influence of the non-industrialized nations in addressing global financial issues.69 However, as the crisis has played out and with rising approval of the Obama Administration abroad, it appears that the U.S. image is on the rise. According to a July 2009 Pew Research poll, the image of the United States (a key factor in the ability to sway world opinion) has improved markedly in most parts of the world. Improvements in the U.S. image were most pronounced in Western Europe, where favorable ratings for both the nation and the American people have soared, but opinions of America have also become more positive in key countries in Latin America, Africa, and Asia.70

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International Financial Organizations The financial crisis has brought international financial organizations and institutions into the spotlight. These include the International Monetary Fund, the Financial Stability Board (an enlarged Financial Stability Forum), the Group of Twenty (G-20), the Bank for International Settlements, the World Bank, the Group of 7 (G-7), and other organizations that play a role in coordinating policy among nations, provide early warning of impending crises, or assist countries as a lender of last resort. The precise architecture of any international financial structure and whether it is to have powers of oversight, regulatory, or supervisory authority is yet to be determined. However, the interconnectedness of global financial and economic markets has highlighted the need for stronger institutions to coordinate regulatory policy across nations, provide early warning of dangers caused by systemic, cyclical, or macroprudential risks71 and induce corrective actions by national governments. A

68

For details, see CRS Report RL343 14, China‘s Holdings of U.S. Securities: Implications for the U.S. Economy, by Wayne M. Morrison and Marc Labonte. 69 The G-7 includes Canada, France, Germany, Italy, Japan, United Kingdom, and the United States. The G-8 is the G-7 plus Russia. The G-20 adds Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea, and Turkey. 70 Pew Research Center, Confidence in Obama Lifts U.S. Image Around the World, A Pew Global Attitudes Project, Washington, DC, July 23, 2009, http://pewglobal.org/reports/display.php?ReportID=264. 71 See CRS Report R40417, Macroprudential Oversight: Monitoring the Financial System, by Darryl E. Getter.

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fundamental question in this process, however, rests on sovereignty: how much power and authority should an international organization wield relative to national authorities? As a result of the global financial crisis, the IMF has expanded its activities along several dimensions. The first is its role as lender of last resort for countries less able to access international capital markets. It also is attempting to become a lender of ― not-last‖ resort by offering flexible credit lines for countries with strong economic fundamentals and a sustained track record of implementing sound economic policies. The second area of expansion by the IMF has been in oversight of the international economy and in monitoring systemic risk across borders. The IMF also tracks world economic and financial developments more closely and provides countries with the forecasts and analysis of developments in financial markets. It additionally provides policy advice to countries and regions and is assisting the G-20 with recommendations to reshape the system of international regulation and governance. Although the London Summit provided for more funding for the IMF and international development banks, some larger issues, such as governance of and reform of the IMF are now being determined. (For further discussion of the IMF, see sections below on ― The Challenges‖ and ― International Policy Issues.‖ On June 24, 2009. President Obama signed H.R. 2346 into law (P.L. 111-32). This increased the U.S. quota in the International Monetary Fund by 4.5 billion SDRs ($7.69 billion), provided loans to the IMF of up to an additional 75 billion SDRs ($116.01 billion), and authorized the United States Executive Director of the IMF to vote to approve the sale of up to 12,965,649 ounces of the Fund‘s gold. H.R. 2346 was the $105.9 billion war supplemental spending bill that mainly funds military operations in Iraq and Afghanistan but also included the IMF provisions. On June 26, the President released a signing statement that included: However, provisions of this bill within sections 1110 to 1112 of title XI, and sections 1403 and 1404 of title XIV, would interfere with my constitutional authority to conduct foreign relations by directing the Executive to take certain positions in negotiations or discussions with international organizations and foreign governments, or by requiring consultation with the Congress prior to such negotiations or discussions. I will not treat these 72 provisions as limiting my ability to engage in foreign diplomacy or negotiations.

This signing statement has been addressed in H.Amdt. 311 to H.R. 3081, the Fiscal 2010 State- Foreign Operations spending bill passed on July 7, 2009. The Washington Action Plan from the G-20 Leader‘s Summit in November 2008 contained specific policy changes that were addressed in the April 2, 2009 Summit in London. The regulatory and other specific changes have been assigned to existing international organizations such as the Financial Stability Forum (now Financial Stability Board) and Bank for International Settlements, as well as international standard setting bodies such as the Basel Committee on Banking Supervision, International Accounting Standards

72

White House, Office of the Secretary, Below is a statement from the President upon signing H.R. 2346 on June 24, 2009:, Washington, DC, June 26, 2009, http://www.whitehouse.gov/the_press_office/Statement-from-thePresidentupon-signing-HR-2346/.

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Board, International Organization of Securities Commissions, and International Association of Insurance Supervisors.73

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Effects on Poverty and Flows of Aid Resources The global crisis is causing huge losses and dislocation in the industrialized countries of the world, but in many of the developing countries it is pushing people deep into poverty. The crisis is being transmitted to the poorer countries through declining exports, falling commodity prices, reverse migration, and shrinking remittances from citizens working overseas. This could have major effects in countries which provide large numbers of migrant workers, including Mexico, Guatemala, El Salvador, India, Bangladesh, and the Philippines. The decline in tax revenues caused by the slowdown in economic activity also is increasing competition within countries for scarce budget funds and affecting decisions about the allocation of national resources. This budget constraint relates directly to the ability to finance official development assistance to poorer nations and other programs aimed at alleviating poverty. In the United States, the economic downturn and the vast resources being committed to provide stimulus to the U.S. economy and rescue trouble financial institutions could clash with some policy priorities of the new Administration. In foreign policy, President Obama and top officials in his Administration—including Secretary of State Clinton and Secretary of Defense Gates— have pledged to increase the capacity of civilian foreign policy institutions and levels of U.S. foreign assistance. However, financial constraints could impose difficult choices between foreign policy priorities—for example, between boosting levels of nonmilitary aid to Afghanistan and increasing global health programs–or changes to planned levels of increases across the board. The global reach of the economic downturn further complicates the resource problem, as it both limits what other countries can do to address common international challenges and potentially exacerbates the scale of need in conflict areas and the developing world.

NEW CHALLENGES AND POLICY IN MANAGING FINANCIAL RISK74 The Challenges The actions of the United States and other nations in coping with the global financial crisis first aimed to contain the contagion, minimize losses to society, restore confidence in financial institutions and instruments, and lubricate the economic system in order for it to return to full operation. Attention now is focused on stimulating the economy and stemming the downturn in macroeconomic conditions that is increasing unemployment and forcing many companies into bankruptcy. As of early 2009, as much as 40% of the world‘s wealth 73

Progress on these items as of mid-March 2009 is summarized in: U.K. Chair of the G20, Progress Report on the Immediate Actions of the Washington Action Plan, Annex to the G20 Finance Ministers‘ and Central Bank Governors‘ Communique - 14 March, London, March 14, 2009. 74 Prepared by Dick K. Nanto, Specialist in Industry and Trade, Foreign Affairs, Defense, and Trade Division. Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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may have been destroyed since the crisis began,75 although equity markets have recovered somewhat since then. There still is uncertainty, however, over whether the nascent economic recovery will fade once the government stimulus measures end. It also is unknown whether the current crisis is an aberration that can be fixed by tweaking the system, or whether it reflects systemic problems that require major surgery. What has become evident is that entrenched interests are so strong that even relatively ― small‖ changes in, for example, the structure of financial regulation in the United States, is difficult. The world now is working its way through the third phase of the crisis. The goal is to change the regulatory structure and regulations, the global financial architecture, and some of the imbalances in trade and capital flows to ensure that future crises do not occur or, at least, to mitigate their effects. Judging from policy proposals to cope with the financial crisis in both the United States and in Europe, it appears that solutions are taking a multipronged approach. They are being aimed at the different levels in which financial markets operate: globally, nationally, and by specific financial sector. On the global side, there exists no international architecture capable of coping with and preventing global crises from erupting. The financial space above nations basically is anarchic with no supranational authority with firm oversight, regulatory, and enforcement powers. Since financial crises occur even in relatively tightly regulated economies, the likelihood that a supranational authority could prevent an international crisis from occurring is questionable. International norms and guidelines for financial institutions exist, but most are voluntary, and countries are slow to incorporate them into domestic law.76 As such, the system operates largely on trust and confidence and by hedging financial bets. The financial crisis has been a ― wake-up call‖ for investors who had confidence in, for example, credit ratings placed on securities by credit rating agencies operating under what some have referred to as ― perverse incentives and conflicts of interest.‖ Between 2007 and November 2009, for example, the credit rating agency, Standard & Poor‘s, has downgraded nearly $1.5 trillion of U.S. residential-mortgage-backed bonds from AAA to junk.77 The financial crisis crossed national boundaries and spread from individual financial institutions to the wider economy. Not only did countries of the world not directly complicit in the original financial problems suffer ― collateral damage,‖ but the ensuing downturn in economic activity affected millions of ―in nocent bystanders‖ because of their being connected through trade, financial, and investment flows. To some extent, the International Monetary Fund, World Bank, or the Organization for Economic Cooperation and Development monitored the global economy, but they tended to focus on macroeconomic flows and not on macroprudential regulation. Since the onset of the crisis, the IMF has undertaken more programs to provide macroprudential oversight. The global financial crisis resulted from a confluence of factors and processes at both the macro- financial level (across financial sectors) and at the micro-financial level (the behavior of individual institutions and the functioning of specific market segments). This joint influence of both macro and micro factors resulted in market excesses and the emergence of 75

Edmund Conway, ―WE F 2009: Global crisis ‗has destroyed 40pc of world wealth‘,‖ Telegraph.co.uk, January 29, 2009, Internet edition. 76 For example, see CRS Report RL34485, Basel II in the United States: Progress Toward a Workable Framework, by Walter W. Eubanks. 77 Leslie Scism, ―S& P Gauges Bond Loss Potential on Mortgages,‖ The Wall Street Journal, November 9, 2009, p. C1.

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systemic risks of unprecedented magnitude and complexity.78 In the United States, regulation tends to be by function. There has been no macroprudential or systemic regulation and oversight.79 Separate regulatory agencies oversee each line of financial service: banking, insurance, securities, and futures. This is microprudential regulation under which no single regulator possesses all of the information and authority necessary to monitor systemic and synergistic risk or the potential that seemingly isolated events could lead to broad dislocation and a financial crisis so widespread that it affects the real economy.80 Also no single regulator can take coordinated action throughout the financial system. In a report on systemic regulation, the Council on Foreign Relations explained the problem as follows:

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One regulatory organization in each country should be responsible for overseeing the health and stability of the overall financial system. The role of the systemic regulator should include gathering, analyzing, and reporting information about significant interactions between and risks among financial institutions; designing and implementing systemically sensitive regulations, including capital requirements; and coordinating with the fisca authorities and other government agencies in managing systemic crises. We argue below that the central bank should be charged with this important new responsibility.81

Analysis by the European Central Bank suggests three main considerations on the way in which systemic risks should be monitored and analyzed. First, macroprudential analysis needs to capture all components of financial systems and how they interact. This would include all intermediaries, markets, and infrastructures underpinning them. Second, macroprudential risk assessment should cover the interactions between the financial system and the economy at large. Third, financial markets are not static and are continuously evolving as a result of innovation and international integration. Several financial crises in history have resulted from financial liberalizations or innovations that were neither sufficiently understood nor managed.82 A related consideration in policymaking is that centers of financial activity, such as New York, London, and Tokyo, compete with each other, and multinational firms can choose where to conduct particular financial transactions. Unless the regulatory framework and the supervisory arrangements in the United States, Europe, and other large financial centers are broadly compatible with each other, business may flow from the United States to the area of minimal regulation and supervision. The interconnectedness of financial centers across the world also implies that systemic risk can be amplified because of actions occurring in different countries, often out of sight or reach of national regulators. One challenge is that the world economy depends greatly on large financial (and other) institutions that may be deemed ― too large to fail.‖ If an institution is considered to be ― too big to fail,‖ its bankruptcy would pose a significant risk to the system as a whole. Yet, if there 78

Lucas Papademos, ― Strengthening macro-prudential supervision in Europe,‖ Speech by Lucas Papademos, Vice President of the ECB, Brussels, Belgium, March 24, 2009. See CRS Report R40417, Macroprudential Oversight: Monitoring the Financial System, by Darryl E. Getter. 80 See CRS Report R40249, Who Regulates Whom? An Overview of U.S. Financial Supervision, by Mark Jickling and Edward V. Murphy 81 Squam Lake Working Group on Financial Regulation, A Systemic Regulator for Financial Markets, Council on Foreign Relations, Center for Geoeconomic Studies, Working Paper, May 2009, p. 2. 82 Lorenzo Bini Smaghi, ―Loren zo Bini Smaghi: Going forward – regulation and supervision after the financial turmoil,‖ Bank for International Settlements, BIS Review, 77, 2009. 79

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is an implicit promise of governmental support in case of failure, the government may create a moral hazard, which is the incentive for an entity to engage in risky behavior knowing that the government will rescue it if it fails. Another challenge is that innovative financial instruments may not be well understood or regulated. Some of the early proposals have been designed to bring hedge funds, off-balance sheet financial entities, and, perhaps, credit default swaps under regulatory authority. A further challenge is that existing micro-prudential regulation, by and large, did not identify the nature and size of accumulating financial and systemic risks and impose appropriate remedial actions. Even though some analysts and institutions were sounding alarms before the crisis erupted, there were few regulatory tools available to cope with the accumulation of risk in the system as a whole or the risks being imposed by other firms either in the same or different sectors. There also seemed to be insufficient response to these risks either by market participants or by the authorities responsible for the oversight of individual financial institutions or specific market segments. Under a free-enterprise system, a fundamental assumption is that markets will selfcorrect, and that individuals, in pursuing their own financial interests, like an ― invisible hand,‖ tend also to promote the good of the global community. If losses occur, investors and institutions naturally become more prudent in the future. A complex challenge remains to determine how much further regulation and oversight is necessary to moderate behavior by institutions that may be in their own financial interest but may pose excessive risk to the system as a whole. Also, how can supervisory authorities preclude a repeat of the same mistakes in the future as personnel and firms change and as memories of financial crises become distant? Also, how should the system be improved to fill gaps in information and technical expertise in order to compensate for faulty or incomplete methods of modeling risk or to provide more resilience in the system to offset human error? For other nations of the world, what has become clear from the crisis is that U.S. financial ailments can be highly contagious. Foreign financial institutions are not immune to ill health in American banks, brokerage houses, and insurance companies. The financial services industry links together investors and financial institutions in disparate countries around the world. Investors seek higher risk-adjusted returns in any market. In financial markets, moreover, innovations in one market quickly spread to another, and sellers in one country often seek buyers in another. The revolution in communications, moreover, works both ways. It allows for instant access to information and remote access to market activity, but it also feeds the herd instinct and is susceptible to being used to spread biased or incomplete information. The linking of economies also transcends financial networks.83 Flows of international trade both in goods and services are affected directly by macroeconomic conditions in the countries involved. In the second phase of the financial crisis, markets all over the world have been experiencing historic declines. Precipitous drops in stock market values have been mirrored in currency and commodity markets. Another issue is the mismatch between regulators and those being regulated. The policymakers can be divided between those of national governments and, to an extent, those of international institutions, but the resulting policy implementation, oversight, and regulation 83

For an analysis of global production networks, see CRS Report R40 167, Globalized Supply Chains and U.S. Policy, by Dick K. Nanto.

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almost all rest in national governments (as well as sub-national governments such as states, e.g. New York, for insurance regulation). Yet many of the financial and other institutions that are the object of new oversight or regulatory activity may themselves be international in presence. They tend to operate in all major markets and congregate around world financial centers (i.e., London, New York, Zurich, Hong Kong, Singapore, Tokyo, and Shanghai) where client portfolios often are based and where institutions and qualified professionals exist to support their activities. The major market for derivatives, for example, is London, even though a sizable proportion of the derivatives, themselves, may be issued by U.S. companies based on U.S. assets. A further issue is to what extent the U.S. government and Federal Reserve as ― domestic lenders of last resort‖ should intervene in the day-to-day activities of corporations that have received federal support funds. Traditionally, financial regulations have been aimed at ensuring financial stability, transparency, and equity. Issues such as executive compensation and bonuses,84 or, in the case of General Motors, whether executives travel by private jet, traditionally have not been subject to regulation. Yet once the government provides public support for companies, public pressure rises to intervene in such matters. A fundamental issue deals with the nature of regulation and supervision. Banking regulation tends to be specific and detailed and places requirements and limits on bank behavior. Federal securities regulation, however, is based primarily on disclosure. Registration with the Securities and Exchange Commission is required, but that registration does not imply that an investment is safe, only that the risks have been fully disclosed. The SEC has no authority to prevent excessive risk taking.

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ORIGINS, CONTAGION, AND RISK85 Financial crises of some kind occur sporadically virtually every decade and in various locations around the world. Financial meltdowns have occurred in countries ranging from Sweden to Argentina, from Russia to Korea, from the United Kingdom to Indonesia, and from Japan to the United States.86 As one observer noted: as each crisis arrives, policy makers express ritual shock, then proceed to break every rule in the book. The alternative is unthinkable. When the worst is passed, participants renounce crisis apostasy and pledge to hold firm next time.87 Each financial crisis is unique, yet each bears some resemblance to others. In general, crises have been generated by factors such as an overshooting of markets, excessive leveraging of debt, credit booms, miscalculations of risk, rapid outflows of capital from a country, mismatches between asset types (e.g., short-term dollar debt used to fund long-term local currency loans), unsustainable macroeconomic policies, off-balance sheet operations by

84

CRS Report RS22583, Executive Compensation: SEC Regulations and Congressional Proposals, by Michael V. Seitzinger. 85 Prepared by Dick K. Nanto. See also, CRS Report RL34730, Troubled Asset Relief Program: Legislation and Treasury Implementation, by Baird Webel and Edward V. Murphy. 86 For a review of past financial crises, see Luc Laeven and Fabian Valencia. ―Syst emic Banking Crises: A New Database,‖ International Monetary Fund Working Paper WP/08/224, October 2008. 80p. 87 Gelpern, Anna. ― Emergency Rules,‖ The Record (Bergen-Hackensack, NJ), September 26, 2008.

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banks, inexperience with new financial instruments, and deregulation without sufficient market monitoring and oversight. As shown in Figure 2, the current crisis harkens back to the 1997-98 Asian financial crisis in which Thailand, Indonesia, and South Korea had to borrow from the International Monetary Fund to service their short-term foreign debt and to cope with a dramatic drop in the values of their currency and deteriorating financial condition. Determined not to be caught with insufficient foreign exchange reserves, countries subsequently began to accumulate dollars, Euros, pounds, and yen in record amounts. This was facilitated by the U.S. trade (current account) deficit and by its low saving rate.88 By mid-2008, world currency reserves by governments had reached $4.4 trillion with China‘s reserves alone approaching $2 trillion, Japan‘s nearly $1 trillion, Russia‘s more than $500 billion, and India, South Korea, and Brazil each with more than $200 billion.89 The accumulation of hard currency assets was so great in some countries that they diverted some of their reserves into sovereign wealth funds that were to invest in higher yielding assets than U.S. Treasury and other government securities.90

Figure 2. Origins of the Financial Crisis: The Rise and Fall of Risky Mortgage and Other Debt.

Following the Asian financial crisis, much of the world‘s ― hot money‖ began to flow into high technology stocks. The so-called ― dot-com boom‖ ended in the spring of 2000 as the value of equities in many high-technology companies collapsed. After the dot-com bust, more ― hot investment capital‖ began to flow into housing markets—not only in the United States but in other countries of the world. At the same time, 88

From 2005-2007, the U.S. current account deficit (balance of trade, services, and unilateral transfers) was a total of $2.2 trillion. 89 Reuters. Factbox—Global foreign exchange reserves. October 12, 2008. 90 See CRS Report RL34336, Sovereign Wealth Funds: Background and Policy Issues for Congress, by Martin A. Weiss.

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China and other countries invested much of their accumulations of foreign exchange into U.S. Treasury and other securities. While this helped to keep U.S. interest rates low, it also tended to keep mortgage interest rates at lower and attractive levels for prospective home buyers.91 This housing boom coincided with greater popularity of the securitization of assets, particularly mortgage debt (including subprime mortgages), into collateralized debt obligations (CDOs).92 A problem was that the mortgage originators often were mortgage finance companies whose main purpose was to write mortgages using funds provided by banks and other financial institutions or borrowed. They were paid for each mortgage originated but had no responsibility for loans gone bad. Of course, the incentive for them was to maximize the number of loans concluded. This coincided with political pressures to enable more Americans to buy homes, although it appears that Fannie Mae and Freddie Mac were not directly complicit in the loosening of lending standards and the rise of subprime mortgages.93 In order to cover the risk of defaults on mortgages, particularly subprime mortgages, the holders of CDOs purchased credit default swaps94 (CDSs). These are a type of insurance contract (a financial derivative) that lenders purchase against the possibility of credit event (a default on a debt obligation, bankruptcy, restructuring, or credit rating downgrade) associated with debt, a borrowing institution, or other referenced entity. The purchaser of the CDS does not have to have a financial interest in the referenced entity, so CDSs quickly became more of a speculative asset than an insurance policy. As long as the credit events never occurred, issuers of CDSs could earn huge amounts in fees relative to their capital base (since these were technically not insurance, they did not fall under insurance regulations requiring sufficient capital to pay claims, although credit derivatives requiring collateral became more and more common in recent years). The sellers of the CDSs that protected against defaults often covered their risk by turning around and buying CDSs that paid in case of default. As the risk of defaults rose, the cost of the CDS protection rose. Investors, therefore, could arbitrage between the lower and higher risk CDSs and generate large income streams with what was perceived to be minimal risk. 91

See U.S. Joint Economic Committee, ― Chinese FX Interventions Caused international Imbalances, Contributed to U.S. Housing Bubble,‖ by Robert O‘Quinn. March 2008. 92 For further analysis, see CRS Report RL34412, Containing Financial Crisis, by Mark Jickling, U.S. Joint Economic Committee, ―TheU.S. Housing Bubble and the Global Financial Crisis: Vulnerabilities of the Alternative Financial System,‖ by Robert O‘Quinn. June 2008. 93 Fannie Mae (Federal National Mortgage Association) is a government-sponsored enterprise (GSE) chartered by Congress in 1968 as a private shareholder-owned company with a mission to provide liquidity and stability to the U.S. housing and mortgage markets. It operates in the U.S. secondary mortgage market and funds its mortgage investments primarily by issuing debt securities in the domestic and international capital markets. Freddie Mac (Federal Home Loan Mortgage Corp) is a stockholder-owned GSE chartered by Congress in 1970 as a competitor to Fannie Mae. It also operates in the secondary mortgage market. It purchases, guarantees, and securitizes mortgages to form mortgage- backed securities. For an analysis of Fannie Mae and Freddie Mac‘s role in the subprime crisis, see David Goldstein and Kevin G. Hall, ― Private sector loans, not Fannie or Freddie, triggered crisis,‖ McClatchy Newspapers, October 12, 2008. 94 A credit default swap is a credit derivative contract in which one party (protection buyer) pays a periodic fee to another party (protection seller) in return for compensation for default (or similar credit event) by a reference entity. The reference entity is not a party to the credit default swap. It is not necessary for the protection buyer to suffer an actual loss to be eligible for compensation if a credit event occurs. The protection buyer gives up the risk of default by the reference entity, and takes on the risk of simultaneous default by both the protection seller and the reference credit. The protection seller takes on the default risk of the reference entity, similar to the risk of a direct loan to the reference entity. See CRS Report RS22932, Credit Default Swaps: Frequently Asked Questions, by Edward V. Murphy.

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In 2007, the notional value (face value of underlying assets) of credit default swaps had reached $62 trillion, more than the combined gross domestic product of the entire world ($54 trillion),95 although the actual amount at risk was only a fraction of that amount (approximately 3.5%). By July 2008, the notional value of CDSs had declined to $54.6 trillion and by October 2008 to an estimated $46.95 trillion.96 The system of CDSs generated large profits for the companies involved until the default rate, particularly on subprime mortgages, and the number of bankruptcies began to rise. Soon the leverage that generated outsized profits began to generate outsized losses, and in October 2008, the exposures became too great for companies such as AIG..

Risk

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The origins of the financial crisis point toward three developments that increased risk in financial markets. The first was the originate-to-distribute model for mortgages. The originator of mortgages passed them on to the provider of funds or to a bundler who then securitized them and sold the collateralized debt obligation to investors. This recycled funds back to the mortgage market and made mortgages more available. However, the originator was not penalized, for example, for not ensuring that the borrower was actually qualified for the loan, and the buyer of the securitized debt had little detailed information about the underlying quality of the loans. Investors depended heavily on ratings by credit agencies.

Source: Factiva database. Figure 3. Selected Stock Market Indices for the United States, U.K., Japan, and Russia.

95

Notional value is the face value of bonds and loans on which participants have written protection. World GDP is from World Bank. Development Indicators. 96 International Swaps and Derivatives Association, ISDA Applauds $25 Trn Reductions in CDS Notionals, Industry Efforts to Improve CDS Operations. News Release, October 27, 2008. Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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The second development was a rise of perverse incentives and complexity for credit rating agencies. Credit rating firms received fees to rate securities based on information provided by the issuing firm using their models for determining risk. Credit raters, however, had little experience with credit default swaps at the ― systemic failure‖ tail of the probability distribution. The models seemed to work under normal economic conditions but had not been tested in crisis conditions. Credit rating agencies also may have advised clients on how to structure securities in order to receive higher ratings. In addition, the large fees offered to credit rating firms for providing credit ratings were difficult for them to refuse in spite of doubts they might have had about the underlying quality of the securities. The perception existed that if one credit rating agency did not do it, another would. The third development was the blurring of lines between issuers of credit default swaps and traditional insurers. In essence, financial entities were writing a type of insurance contract without regard for insurance regulations and requirements for capital adequacy (hence, the use of the term ― credit default swaps‖ instead of ― credit default insurance‖). Much risk was hedged rather than backed by sufficient capital to pay claims in case of default. Under a systemic crisis, hedges also may fail. However, although the CDS market was largely unregulated by government, more than 850 institutions in 56 countries that deal in derivatives and swaps belong to the ISDA (International Swaps and Derivatives Association). The ISDA members subscribe to a master agreement and several protocols/amendments, some of which require that in certain circumstances companies purchasing CDSs require counterparties (sellers) to post collateral to back their exposures.97 It was this requirement to post collateral that pushed some companies toward bankruptcy. The blurring of boundaries among banks, brokerage houses, and insurance agencies also made regulation and information gathering difficult. Regulation in the United States tends to be functional with separate government agencies regulating and overseeing banks, securities, insurance, and futures. There was no suprafinancial authority. Copyright © 2012. Nova Science Publishers, Incorporated. All rights reserved.

.

The Downward Slide The plunge downward into the global financial crisis did not take long. It was triggered by the bursting of the housing bubble and the ensuing subprime mortgage crisis in the United States, but other conditions have contributed to the severity of the situation. Banks, investment houses, and consumers carried large amounts of leveraged debt. Certain countries incurred large deficits in international trade and current accounts (particularly the United States), while other countries accumulated large reserves of foreign exchange by running surpluses in those accounts. Investors deployed ― hot money‖ in world markets seeking higher rates of return. These were joined by a huge run up in the price of commodities, rising interest rates to combat the threat of inflation, a general slowdown in world economic growth rates, and increased globalization that allowed for rapid communication, instant transfers of funds, and information networks that fed a herd instinct. This brought greater uncertainty and

97

For information on the International Swaps and Derivatives Association, see http://www.isda.org. In 2008, credit derivatives had collateralized exposure of 74%. See ISDA, Margin Survey 2008. Collateral calls have been a major factor in the financial difficulties of AIG insurance.

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changed expectations in a world economy that for a half decade had been enjoying relative stability. An immediate indicator of the rapidity and spread of the financial crisis has been in stock market values. As shown in Figure 3, as values on the U.S. market plunged, those in other countries were swept down in the undertow. By mid-October 2008, the stock indices for the United States, U.K., Japan, and Russia had fallen by nearly half or more relative to their levels on October 1, 2007. The downward slide reached a bottom in mid-March 2009, although there still is concern that the subsequent slow recovery in stock values has been a ― bear market bounce‖ and that these stock markets may again go into sustained decline. the close tracking of the equities markets in the United States, Japan, and the U.K. provides further evidence of the global nature of capital markets and the rapidity of international capital flows. Declines in stock market values reflected huge changes in expectations and the flight of capital from assets in countries deemed to have even small increases in risk. Many investors, who not too long ago had heeded financial advisors who were touting the long term returns from investing in the BRICs (Brazil, Russia, India, and China),98 pulled their money out nearly as fast as they had put it in. Dramatic declines in stock values coincided with new accounting rules that required financial institutions holding stock as part of their capital base to value that stock according to market values (mark-to-market). Suddenly, the capital base of banks shrank and severely curtailed their ability to make more loans (counted as assets) and still remain within required capital-asset ratios. Insurance companies too found their capital reserves diminished right at the time they had to pay buyers of or post collateral for credit default swaps. The rescue (establishment of a conservatorship) for Fannie Mae and Freddie Mac in September 2008 potentially triggered credit default swap contracts with notional value exceeding $1.2 trillion. In addition, the rising rate of defaults and bankruptcies created the prospect that equities would suddenly become valueless. The market price of stock in Freddie Mac plummeted from $63 on October 8, 2007 to $0.88 on October 28, 2008. Hedge funds, whose ― rocket scientist‖ analysts claimed that they could make money whether markets rose or fell, lost vast sums of money. The prospect that even the most seemingly secure company could be bankrupt the next morning caused credit markets to freeze. Lending is based on trust and confidence. Trust and confidence evaporated as lenders reassessed lending practices and borrower risk. One indicator of the trust among financial institutions is the Libor, the London Inter-Bank Offered Rate. This is the interest rate banks charge for short-term loans to each other. Although it is a composite of primarily European interest rates, it forms the basis for many financial contracts world wide including U.S. home mortgages and student loans. During the worst of the financial crisis in October 2008, this rate had doubled from 2.5% to 5.1%, and for a few days much interbank lending actually had stopped. The rise in the Libor came at a time when the U.S. monetary authorities were lowering interest rates to stimulate lending. The difference between interest on Treasury bills (three month) and on the Libor (three month) is called the ― Ted spread.‖ This spread averaged 0.25 percentage points from 2002 to

98

Thomas M. Anderson, ― Best Ways to Invest in BRICs,‖ Kiplinger.com, October 18, 2007.

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2006, but in October 2008 exceeded 4.5 percentage points. By the end of December, it had fallen to about 1.5%. The greater the spread, the greater the anxiety in the marketplace.99 As the crisis has moved to a global economic slowdown, many countries have pursued expansionary monetary policy to stimulate economic activity. This has included lowering interest rates and expanding the money supply. Currency exchange rates serve both as a conduit of crisis conditions and an indicator of the severity of the crisis. As the financial crisis hit, investors fled stocks and debt instruments for the relative safety of cash—often held in the form of U.S. Treasury or other government securities. That increased demand for dollars, decreased the U.S. interest rate needed to attract investors, and caused a jump in inflows of liquid capital into the United States. For those countries deemed to be vulnerable to the effects of the financial crisis, however, the effect was precisely the opposite. Demand for their currencies fell and their interest rates rose. Figure 4 shows indexes of the value of selected currencies relative to the dollar for selected countries. For much of 2007 and 2008, the Euro and other European currencies had been appreciating in value relative to the dollar; but the crisis pushed them down until the dollar began to decline. The Japanese yen continues to appreciate, while the Chinese RMB has risen slightly but, by and large, has been constant. Other currencies, such as the Korean won and Icelandic krona, had been steadily weakening over the previous year and experienced sharp declines as the crisis evolved. Recently, however, the won has recovered somewhat.

Source: Data from PACIFIC Exchange Rate Service, University of British Columbia. Figure 4. Exchange Rate Values for Selected Currencies Relative to the U.S. Dollar.

99

For these and other indicators of the crisis in credit, see http://www.nytimes.com/interactive/2008/10/08/ business/economy/20081008-credit-chart-graphic.html.

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Table 1. Stimulus Packages by Selected Countries

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Date Announced 17-Feb-09

Country

$Billion

Status, Package Contents

United States

787.00

4-Feb-09

Canada

32.00

7-Jan-09

Mexico

54.00

12-Dec-08

European Union

39.00

13-Jan-09

Germany

65.00

24-Nov-08

United Kingdom

29.60

5-Nov-08

France

33.00

16-Nov-08

Italy

52.00

Infrastructure technology, tax cuts, education, transfers to states, energy, nutrition, health, unemployment benefits. Budget in deficit. Two-year program. Infrastructure, tax relief, aid for sectors in peril. Government to run an estimated $1.1 billion budget deficit in 2008 and $52 billion deficit in 2009. Infrastructure, a freeze on gasoline prices, reducing electricity rates, help for poor families to replace old appliances, construction of low-income housing and an oil refinery, rural development, increase government purchases from small- and medium-sized companies. Paid for by taxes, oil revenues, and borrowing. Total package of $256 billion called for states to increase budgets by $217 billion and for the EU to provide $39 billion to fund cross-border projects including clean energy and upgraded telecommunications architecture. Infrastructure, tax cuts, child bonus, increase in some social benefits, $3,250 incentive for trading in cars more than nine years old for a new or slightly used car. Proposed plan includes a 2.5% cut in the value added tax for 13 months, a postponement of corporate tax increases, government guarantees for loans to small and midsize businesses, spending on public works, including public housing and energy efficiency. Plan includes an increase in income taxes on those making more than $225,000 and increase National Insurance contribution for all but the lowest income workers. Public sector investments (road and rail construction, refurbishment and improving ports and river infrastructure, building and renovating universities, research centers, prisons, courts, and monuments) and loans for carmakers. Does not include the previously planned $15 billion in credits and tax breaks on investments by companies in 2009. Three year program. Measures to spur consumer credit, provide loans to companies, and rebuild infrastructure. Feb. 6, 2009, $2.56 billion stimulus package that is part of the three-year program. Included payments of up to $1,950 for trading in an old car for a new, less polluting one and 20% tax deductions for purchases of appliances and furniture. Additional $1 billion allocated in March 2009 for building a bridge and increasing welfare aid.

(3.56)

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Table 1. Continued

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Date Announced 20-Nov-08

Country

$Billion

Russia

20.00

Status, Package Contents

Cut in the corporate profit tax rate, a new depreciation mechanism for businesses, to be funded by Russia‘s foreign exchange reserves and rainy day fund. 10-Nov-08 China 586.00 Low-income housing, electricity, water, rural infrastructure, projects aimed at environmental protection and technological innovation, tax deduction for capital spending by companies, and spending for health care and social welfare. 13-Dec-08 Japan 250.00 Increase in government spending, funds to stabilize the 6-Apr-09 Japan 146.00 financial system (prop up troubled banks and ease a credit crunch by purchasing commercial paper), tax cuts for homeowners and companies that build or purchase new factories and equipment, and grants to local government. The April 2009 package included increasing the safety net for non-regular workers, supporting small businesses, new car purchase subsidies, revitalizing regional economies, promoting solar power and nursing and medical services. 3-Nov-08 South 14.64 $11 billion for infrastructure (including roads, universities, Korea schools, and hospitals; funds for small- and mediumbusiness, fishermen, and families with low income) and tax cuts. Includes an October 2008 stimulus package of $3.64 billion to provide support for the construction industry. 9-Feb-09 South 37.87 The government announced its intention to invest $37.87 Korea billion over the next four years in eco-friendly projects including the construction of dams; ― green‖ transportation networks such as low-carbon emitting railways, bicycle roads, and other public transportation systems; and expand existing forest areas. 28-Nov-08 Taiwan 15.60 Shopping vouchers of $108 each for all citizens, construction projects to be carried out over four years include expanding metro systems, rebuilding bridges and classrooms, improving, railway and sewage systems, and renew urban areas. 26-Jan-09 Australia 35.2 $7 billion stimulus package in October 2008 was cash handouts to low income earners and pensioners. January‘s $28.2 billion package includes infrastructure, schools and housing, and cash payments to low- and middle- income earners. Budget is in deficit. 23-Dec-08 Brazil 5.00 Program established in 2007 to continue to 2010. Tax cuts (exempt capital goods producers from the industrial and welfare taxes, increase the value of personal computers exempted from taxes) and rebates. Funded by reducing the government‘s budget surplus. Source: Congressional Research Service from various news articles and government press releases. Notes: Currency conversions to U.S. dollars were either already done in the news articles or CRS using current exchange rates.

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For a country in crisis, a weak currency increases the local currency equivalents of any debt denominated in dollars and exacerbates the difficulty of servicing that debt. The greater burden of debt servicing usually has combined with a weakening capital base of banks because of declines in stock market values to further add to the financial woes of countries. National governments have had little choice but to take fairly draconian measures to cope with the threat of financial collapse. As a last resort, some have turned to the International Monetary Fund for assistance. As economies weakened, governments moved from shoring up their financial institutions to coping with rapidly developing recessionary economic conditions. While actions to assist banks, insurance companies, and securities firms recover or stave off bankruptcy continued, stimulus packages became policy priorities. In the fourth quarter of 2008, economic growth rates dropped in some countries at rates not seen in decades.(See Figure 1) China alone has estimated that 20 million workers have become unemployed. Table 1 shows stimulus packages by selected major countries of the world. While the $787 billion package by the United States is the largest, China‘s $586 billion, the European Union‘s $256 billion, and Japan‘s $396 billion packages also are quite large.

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EFFECTS ON EMERGING MARKETS100 The global credit crunch that began in August 2007 has led to a financial crisis in emerging market countries (see box) that is being viewed as greater in both scope and effect than the East Asian financial crisis of 1997-98 or the Latin American debt crisis of 200 12002, although the impact on individual countries may have been greater in previous crises. Of the emerging market countries, those in Central and Eastern Europe appear, to date, to be the most impacted by the financial crisis. The ability of emerging market countries to borrow from global capital markets has allowed many countries to experience incredibly high growth rates. For example, the Baltic countries of Latvia, Estonia, and Lithuania experienced annual economic growth of nearly 10% in recent years. However, since this economic expansion was predicated on the continued availability of access to foreign credit, they were highly vulnerable to a financial crisis when credit lines dried up.

WHAT ARE EMERGING MARKET COUNTRIES? There is no uniform definition of the term ― emerging markets.‖ Originally conceived in the early 1980s, the term is used loosely to define a wide range of countries that have undergone rapid economic change over the past two decades. Broadly speaking, the term is used to distinguish these countries from the long-industrialized countries, on one hand, and less-developed countries (such as those in Sub-Saharan Africa), on the other. Emerging market countries are located primarily in Latin America, Central and Eastern Europe, and Asia. 100

Prepared by Martin A. Weiss, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division.

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Since 1999, the finance ministers of many of these emerging market countries began meeting with their peers from the industrialized countries under the aegis of the G-20, an informal forum to discuss policy issues related to global macroeconomic stability. The members of the G-20 are the European Union and 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States. For more information, see ― When are Emerging Markets no Longer Emerging?, Knowledge@Wharton, available at http://knowledge.wharton.upenn.edu/article.cfm? articleid=1911. Of all emerging market countries, Central and Eastern Europe appear to be the most vulnerable. On a wide variety of economic indicators, such as the total amount of debt in the economy, the size of current account deficits, dependence on foreign investment, and the level of indebtedness in the domestic banking sector, countries such as Hungary, Ukraine, Bulgaria, Kazakhstan, Kyrgyzstan, Latvia, Estonia, and Lithuania, rank among the highest of all emerging markets. Throughout the region, the average current account deficit increased from 2% of GDP in 2000 to 9% in 2008. In some countries, however, the current account deficit is much higher. Latvia‘s estimated 2008 current account deficit is 22.9% of GDP and Bulgaria‘s is 21.4%.101 The average deficit for the region was greater than 6% in 2008 (Figure 5).

Source: International Monetary Fund. Figure 5. Current Account Balances (as a percentage of GDP).

101

Mark Scott, ― Economic Problems Threaten Central and Eastern Europe,‖ Business Week, October 17, 2008.

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Due to the impact of the financial crisis, several Central and Eastern European countries have already sought emergency lending from the IMF to help finance their balance of payments. On October 24, the IMF announced an initial agreement on a $2.1 billion two-year loan with Iceland (approved on November 19). On October 26, the IMF announced a $16.5 billion agreement with Ukraine. On October 28, the IMF announced a $15.7 billion package for Hungary. On November 3, a staff-level agreement on an IMF loan was reached with Kyrgyzstan,102 and on November 24, the IMF approved a $7.6 billion stand-by arrangement for Pakistan to support the country‘s economic stabilization.103 The quickness with which the crisis has impacted emerging market economies has taken many analysts by surprise. Since the Asian financial crisis, many Asian emerging market economies enacted a policy of foreign reserve accumulation as a form of self-insurance in case they once again faced a ― sudden stop‖ of capital flows and the subsequent financial and balance of payments crises that result from a rapid tightening of international credit flows.104 Two additional factors motivated emerging market reserve accumulation. First, several countries have pursued an export-led growth strategy targeted at the U.S. and other markets with which they have generated trade surpluses.105 Second, a sharp rise in the price of commodities from 2004 to the first quarter of 2008 led many oil-exporting economies, and other commodity-based exporters, to report very large current account surpluses. Figure 6 shows the rapid increase in foreign reserve accumulation among these countries. These reserves provided a sense of financial security to EM countries. Some countries, particularly China and certain oil exporters, also established sovereign wealth funds that invested the foreign exchange reserves in assets that promised higher yields.106 While global trade and finance linkages between the emerging markets and the industrialized countries have continued to deepen over the past decade, many analysts believed that emerging markets had successfully ― decoupled‖ their growth prospects from those of industrialized countries. Proponents of the theory of decoupling argued that emerging market countries, especially in Eastern Europe and Asia, have successfully developed their own economies and intra-emerging market trade and finance to such an extent that a slowdown in the United States or Europe would not have as dramatic an impact as it did a decade ago. A report by two economists at the IMF found some evidence of this theory. The authors divided 105 countries into three groups: developed countries, emerging countries, and developing countries and studied how economic growth was correlated among the groups between 1960 and 2005. The authors found that while economic growth was highly synchronized between developed and developing countries, the impact of developed countries on emerging countries has decreased over time, especially during the past twenty years. According to the authors:

102

Information on ongoing IMF negotiations is available at http://www.imf.org. International Monetary Fund, ―I MF Executive Board Approves Stand-by Arrangement for Pakistan.‖ Press Release No. 08/303, November 24, 2008. 104 Reinhart, Carmen and Calvo, Guillermo (2000): When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options. Published in: in Peter Kenen and Alexandre Swoboda, eds. Reforming the International Monetary and Financial System (Washington DC: International Monetary Fund, 2000) (2000): pp. 175-201. 105 ―N ew paradigm changes currency rules,‖ Oxford Analytica, January 17, 2008. 106 See CRS Report RL34336, Sovereign Wealth Funds: Background and Policy Issues for Congress, by Martin A. Weiss. 103

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Source: IMF. Figure 6. Global Foreign Exchange Reserves ($ Trillion).

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In particular, [emerging market] countries have diversified their economies, attained high growth rates and increasingly become important players in the global economy. As a result, the nature of economic interactions between [industrialized and emerging market] countries 107 has evolved from one of dependence to multidimensional interdependence.

Despite efforts at self-insurance through reserve accumulation and evidence of economic decoupling, the U.S. financial crisis, and the sharp contraction of credit and global capital flows in October 2008 affected all emerging markets to a degree due to their continued dependence on foreign capital flows. According to the Wall Street Journal, in the month of October, Brazil, India, Mexico, and Russia drew down their reserves by more than $75 billion, in attempt to protect their currencies from depreciating further against a newly resurgent U.S. dollar.108 A key to understanding why emerging market countries have been so affected by the crisis (especially Central and Eastern Europe) is their high dependence on foreign capital flows to finance their economic growth (Figures 7-8). Even though several emerging markets have been able to reduce net capital inflows by investing overseas (through sovereign wealth funds) or by tightening the conditions for foreign investment, the large amount of gross foreign capital flows into emerging markets remained a key vulnerability for them. For

107

Cigdem Akin and M. Ayhan Kose, ―Cha nging Nature of North-South Linkages: Stylized Facts and Explanations.‖ International Monetary Fund Working Paper 07/280. Available at http://www.imf.org/external/ pubs/ft/wp/2007/ wp07280.pdf. 108 Joanna Slater and Jon Hilsenrath, ― Currency-Price Swings Disrupt Global Markets ,‖ Wall Street Journal, October 25, 2008.

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countries such as those in Central and Eastern Europe which have both high gross and net capital flows, vulnerability to financial crisis is even higher.

Source: IMF.

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Figure 7. Capital Flows to Latin America (in percent of GDP).

Source: IMF. Figure 8. Capital Flows to Developing Asia (in percent of GDP).

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Source: IMF. Figure 9. Capital Flows to Central and Eastern Europe (in percent of GDP).

Once the crisis occurred, it became much more difficult for emerging market countries to continue to finance their foreign debt. According to Arvind Subramanian, an economist at the Peterson Institute for International Economics, and formerly an official at the IMF:

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If domestic banks or corporations fund themselves in foreign currency, they need to roll these over as the obligations related to gross flows fall due. In an environment of across-theboard deleveraging and flight to safety, rolling over is far from easy, and uncertainty about rolling over aggravates the loss in confidence.109

As emerging markets have grown, Western financial institutions have increased their investments in emerging markets. G-10110 financial institutions have a total of $4.7 trillion of exposure to emerging markets with $1.6 trillion to Central and Eastern Europe, $1.5 trillion to emerging Asia, and $1.0 trillion to Latin America. While industrialized nation bank debt to emerging markets represents a relatively small percentage (13%) of total cross-border bank lending ($36.9 trillion as of September 2008), this figure is disproportionately high for European financial institutions and their lending to Central and Eastern Europe. For European and U.K. banks, cross-border lending to emerging markets, primarily Central and Eastern Europe accounts for between 21% and 24% of total lending. For U.S. and Japanese institutions, the figures are closer to 4% and 5%.111 The heavy debt to Western financial institutions greatly increased central and Eastern Europe‘s vulnerability to contagion from the financial crisis.

109

Arvind Subramanian , ―TheFinancial Crisis and Emerging Markets,‖ Peterson Institute for International Economics, Realtime Economics Issue Watch, October 24, 2008. 110 The Group of Ten is made up of eleven industrial countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States). 111 Stephen Jen and Spyros Andreopoulos, ―EuropeMore Exposed to EM Bank Debt than the U.S. or Japan,‖ Morgan Stanley Research Global, October 23, 2008.

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In addition to the immediate impact on growth from the cessation of available credit, a downturn in industrialized countries will likely affect emerging market countries through several other channels. As industrial economies contract, demand for emerging market exports will slow down. This will have an impact on a range of emerging and developing countries. For example, growth in larger economies such as China and India will likely slow as their exports decrease. At the same time, demand in China and India for raw natural resources (copper, oil, etc) from other developing countries will also decrease, thus depressing growth in commodity-exporting countries.112 Slower economic growth in the industrialized countries may also impact less developed countries through lower future levels of bilateral foreign assistance. According to analysis by the Center for Global Development‘s David Roodman, foreign aid may drop precipitously over the next several years. His research finds that after the Nordic crisis of 1991, Norway‘s aid fell 10%, Sweden‘s 17%, and Finland‘s 62%. In Japan, foreign aid fell 44% between 1990 and 1996, and has never returned to pre-crisis assistance levels.113

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Latin America114 Financial crises are not new to Latin America, but the current one has two unusual dimensions. First, as substantiated earlier in this report, it originated in the United States, with Latin America suffering shocks created by collapses in the U.S. housing and credit markets, despite minimal direct exposure to the ― toxic‖ assets in question. Second, it spread to Latin America in spite of recent strong economic growth and policy improvements that have generally increased economic stability and reduced risk factors, particularly in the financial sector.115 Repercussions from the global financial crisis have varied by country based in part on policy differences, but also on exposure to two major risks, the degree of reliance on the U.S. economy, and/or dependence on commodity exports. Investors, nonetheless, were initially very hard on the region as a whole, perhaps historically conditioned to be leery of its capacity to weather short-term financial contagion, let alone a protracted global recession. A year after the crisis began, however, it appears that the financial and economic repercussions have stabilized, and that in many Latin American countries, a return to growth is evident. While the downturn was, and still is, very severe by many measures, relatively sound macroeconomic fundamentals and policy responses by many Latin American countries and international financial organizations may have ameliorated what could have been a deeper and longer regional decline. Nonetheless, it is still early in the recovery process to predict an unencumbered reversal of economic fortune and some countries face a steeper climb out of recession than others. The economies of Latin America and the Caribbean grew at an average annual rate of nearly 5.5% for the five years 2004-2008, lending credence to the once prominent idea that 112

Dirk Willem te Velde, ―TheGlobal Financial Crisis and Developing Countries,‖ Overseas Development Institute, October 2008. 113 David Roodman, ―H istory Says Financial Crisis Will Suppress Aid,‖ Center for Global Development, October 13, 2008. 114 Prepared by J. F. Hornbeck, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division. 115 United Nations. Economic Commission on Latin America and the Caribbean. Latin America and the Caribbean in the World Economies, 2007. Trends 2008. Santiago: October 2008. p. 28.

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they were ― decoupling‖ from slower growing developed economies, particularly the United 116 States. Domestic policy reforms have been credited with achieving macroeconomic stability, stronger fiscal positions, sounder banking systems, and lower sovereign debt risk levels. Others note, however, that Latin America‘s growth trend is easily explained by international economic fundamentals, questioning the importance of the decoupling theory. The sharp rise in commodity prices, supportive external financing conditions, and high levels of remittances contributed greatly to the region‘s improved economic welfare, reflecting gains from a strong global economy. In addition, all three trends reversed even before the financial crisis began, suggesting that Latin America remains very much tied to world markets and trends.117 Latin America has experienced two levels of economic problems related to the crisis. First order effects from financial contagion were initially evident in the high volatility of financial market indicators. All major indicators fell sharply in the fourth quarter of 2008, as capital inflows reversed direction, seeking safe haven in less risky assets, many of them, ironically, dollar denominated. Regional stock indexes fell by over half from June to October 2008. Currencies followed suit in many Latin American countries. They depreciated suddenly from investor flight to the U.S. dollar reflecting a lack of confidence in local currencies, the rush to portfolio rebalancing, and the fall in commodity import revenue related to sharply declining prices and diminished global demand. In Mexico and Brazil, where firms took large speculative off-balance sheet derivative positions in the currency markets, currency losses were compounded to a degree requiring central bank intervention to ensure dollar availability.118 Debt markets followed in kind, as credit tightened and international lending contracted, even for short-term needs such as inventory and trade finance. Borrowing became more expensive, as seen in widening bond spreads. In 2008, bond spreads in the Emerging Market Bond Index (EMBI) and corporate bond index for Latin America jumped by some 600 basis points, half occurring in the fourth quarter. This trend suggests first, that Latin America was already beginning to experience a slowdown prior to the financial crisis, and second, that the crisis itself was a sudden subsequent shock to a deteriorating economic trend in the region. Some countries, including Brazil, Mexico, and Colombia, had continued access to international debt markets. Many others, however, have had to rely more heavily on domestic debt placements. Signs of financial market stabilization appeared by the summer of 2009. Both regional stock and currency indexes recovered 60% of their losses by September 2009, indicating renewed interest and confidence in Latin America‘s ability to weather the downturn and perhaps emerge from it ahead of many developed economies, including the United States.119 Overall, after spiking in the fall of 2008 at around 800 basis points, sovereign bond spreads have retreated to under 400 basis points, still off the 200 basis point level prior to the crisis, but a significant trend reversal. The exceptions are in Argentina, Ecuador, and Venezuela, all 116

Decoupling generally refers to economic growth trends in one part of the world, usually smaller emerging economies, becoming less dependent (correlated) with trends in other parts of the world, usually developed economies. See Rossi, Vanessa. Decoupling Debate Will Return: Emergers Dominate in Long Run. London: Chatham House, 2008. p. 5. 117 Ocampo, Jose Antonio. The Latin American Boom is Over. REG Monitor. November 2, 2008. 118 International Monetary Fund. Global Markets Monitor, June 15, 2009, and Fidler, Stephen. Going South. Financial Times. January 9, 2009. p. 7. 119 International Monetary Fund. Global Markets Monitor, September 18, 2009.

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of which share a heavy dependence on commodity exports and weak economic policy frameworks. In each of these countries, bond spreads rose to over 1,500 basis points as the crisis unfolded, and although the spreads have narrowed to a range of 750 to 950 basis points, the difference still reflects a lack of confidence in their financials systems and their capacity to service debt.120 The more serious effects of the global crisis for Latin America appear in second order effects, which point to a deterioration of broader economic fundamentals. These will take much longer to recover than financial indicators. GDP growth for the region is expected to be a negative 2% in 2009, with an estimated growth of 3.4% in 20 10.121 The fall in global demand, particularly for Latin America‘s commodity exports, has been a big factor, as seen in contracting export revenue. Latin American exports are expected to fall by 11% in 2009, the largest decline since 1937. Similarly, imports may fall by 14%, reflecting the decline in world demand in general. The trade account, along with rising unemployment, point to the most severe aspects of the crisis for Latin America.122 Remittances have also fallen, ranging between 10% and 20% by country. Although still important financial inflows, the decline in remittances is expected to diminish family incomes and fiscal balances, contributing to the regional slowdown. 123 Public sector borrowing is expected to rise and budget constraints may threaten spending on social programs in some cases, with a predictably disproportional effect on the poor. Social effects are also seen in the rising unemployment throughout the region. Policy responses have materialized from many quarters, including multilateral organizations, which have adopted programs to ameliorate the credit crisis and stimulate demand. The International Monetary Fund (IMF), World Bank, Inter-American Development Bank (IDB), Andean Development Corporation (CAF), and Latin American Reserve Fund (LARF) have all increased lending to the region, particularly on an expedited and short-term basis. The goal is to provide credit to the private sector and to support, in selective cases, bank recapitalization. Funds will also be made available for public sector spending (infrastructure and social programs) as a form of fiscal stimulus, primarily through the World Bank and IDB. The United States took steps to provide dollar liquidity (reciprocal currency ― swap‖ arrangement) on a temporary bilateral basis to many central banks of ― systemically important‖ countries with sound banking systems. In Latin America, this group includes Mexico and Brazil, each of which had access to a $30 billion currency swap reserve with the U.S. Federal Reserve System, initially through April 30, 2009, but which was extended to February 1, 2010. The swap arrangement is intended to ensure dollar availability in support of the large trade and investment transactions conducted with the United States, and perhaps more importantly, reinforce confidence in the financial systems of the two largest Latin American economies.124 120

Ib id, and International Monetary Fund. Regional Economic Outlook. Western Hemisphere: Grappling with the Global Financial Crisis. Washington, D.C. October 2008. pp. 7-10 and IMF. Global Markets Monitor, October 1, 2009. 121 United Nations. Economic Commission on Latin American and the Caribbean. Economic Survey of Latin America and the Caribbean, 2008-2009. July 2009. 122 Ibid. 123 Orozco, Manual. Understanding the Continuing Effect of the Economic Crisis on Remittances to Latin America and the Caribbean. Inter-American Development Bank. Washington, DC. August 10, 2009. 124 Board of Governors of the Federal Reserve System. Federal Reserve Press Release. October 29, 2008 and Minutes of the Federal Open Market Committee April 28-29, 2009.

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National governments are also relying on monetary, fiscal, and exchange rate policies to stimulate their economies. The capacity to undertake any of these options varies tremendously among the Latin American countries. Fiscal capacity is constrained in many countries by high debt levels, as well as the recession itself. Among the countries adopting a fiscal stimulus, estimates of their size range from 2.5% GDP in Mexico to 6.0% for Argentina and 8.5% for Brazil. Direct government spending is the primary vehicle for fiscal stimulus, but Brazil has devoted 20% to tax cuts or increased benefits (transfers).125 Many countries are also limited in their use of monetary policy to expand liquidity. In particular, reducing interest rates is difficult for those experiencing significant currency depreciations, which can increase inflationary pressures. Nonetheless, those countries with flexible exchange rates have relied on currency depreciations to shoulder much of the adjustment process, without experiencing severe financial instability.126 There has been some concern that countries may eventually resort to nationalistic policies that will reduce the flows of goods, services, and capital, but these types of policies have generally been avoided, and the risk of their use likely diminishes as economies improve. The magnitude of the global economic downturn and adequacy of policy responses vary by country, as illustrated by three examples discussed below.

Mexico The Mexican economy contracted for four consecutive quarters beginning in the fourth quarter of 2008, and the government forecasts an economic decline of 7%-8% for 2009. This would be the worst recession in six decades, making Mexico the hardest hit country in Latin America. Output fell in both industry and service sectors, with the 13% decline in industrial production over the past year the worst recorded since the 1995 ― peso crisis.‖ Remittances, which amounted to $25 billion in 2008, may fall by 15% in 2009. Mexico faces a number of problems: heavy reliance on the U.S. economy, falling foreign investment, and low (until recently) oil prices, and declining oil output, the largest source of national revenue. The United States accounts for half of Mexico‘s imports, 80% of its exports, and most of its foreign investment and remittances income.127 A nascent recovery was measurable by the summer of 2009, signaling for many analysts the possibility of a solid turnaround in the downward trend. Analysts are forecasting a sharp increase in economic growth in the second half of 2009, with an annual expansion in economic activity of 3.3% for 2010. The sustainability of such a trend will depend heavily on recovery of the U.S. and global economies.128 The financial crisis hit Mexico hard and fast. At the outset, Mexico experienced a run on the peso, which caused its value to fall at one point by 40% from its August 2008 high (currently down by 20% from September 2008). The decline was unrelated to investments in U.S. mortgage-backed securities. Investor portfolio re-balancing away from emerging markets, the dramatic fall in commodity prices, and decline in U.S. demand for Mexican exports were the main causes. The peso also suffered from large private positions taken in the 125

United Nations, ECLAC, Economic Survey of Latin America and the Caribbean 2008-2009, p. 38. International Monetary Fund. Regional Economic Outlook – Western Hemisphere: Stronger Fundamentals Pay Off. Washington, D.C. May 2009. p. 18-22. 127 Global Outlook. Mexico. March 17, 2009 and International Monetary Fund, Global Markets Monitor, June 16, 2009. 128 IHS Global Insight. Mexico: Economic Recovery Gets Under Way in Mexico. September 30, 2009. 126

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belief that the peso‘s strength would not be eroded by the U.S. financial crisis. Many firms had gone beyond hedging to taking large derivative positions in the peso. As the peso began to depreciate, companies had to unwind these off-balance-sheet positions quickly, accelerating its fall. One large firm had losses exceeding $1.4 billion and filed for bankruptcy, indicative of the severity of the problem. The Mexican government responded by selling billions of dollars of reserves and using a temporary currency swap arrangement with the U.S. Federal Reserve to assure dollar liquidity, but the peso remains the hardest hit of all emerging market currencies.129 In the non-financial sectors, industrial production was severely hit by the fall in U.S. demand for Mexican exports. The industrial sector, however, rebounded with 2.8% monthly growth in July 2009, and is expected to lead the recovery as it did the recession. Mexico‘s long-term economic prospects, however, hinge on recovery of U.S. aggregate demand. Because Mexico‘s trade is poorly diversified, the effects of the U.S. downturn were particularly noticeable, with Mexican exports to the United States on a monthly basis falling 37% from October 2008 to February 2009, hitting the lowest level since January 2005. U.S. imports from Mexico began to recover in June 2009, and are up nearly 15% from February 2009, but stand at only 70% of the peak reached in October 2007. The trade effect has been compounded by a nearly 20% annual decline in remittances from Mexican workers living in the United States. Employment figures for the formal economy at home are also registering large job losses.130 To date, the Mexican government has adopted supportive monetary and fiscal policies. The central government has increased liquidity in the banking system, including multiple cuts in the prime policy lending rate. It has also increased its credit lines with the World Bank, International Monetary Fund, and Inter-American Development Bank. Mexico‘s fiscal stimulus amounts to 2.5% of GDP and is targeted on infrastructure spending and subsidies for key goods of household budgets, particularly those reducing energy costs. Government programs to support small and medium-sized businesses, worker training, employment generation, and social safety nets have been maintained and expanded in some cases.131 The costs of these responses has placed additional strain on Mexico‘s public finances. The overall fiscal deficit is expected to reach 3.5% of GDP for 2009 and 2010, estimated to be near the maximum that Mexico can afford. Recent downward revisions of Mexico‘s credit rating (still investor grade) reflect growing concern over Mexico‘s financial position in light of weak economic fundamentals and Mexico‘s recovery relying so heavily on a U.S. economic rebound. Mexico appears to have reached the financial limits of its fiscal and monetary responses, but some analysts speculate that at the margin, lagged effects of these policies may continue to support Mexico‘s nascent recovery.132

129

Ibid., and The Wall Street Journal. Mexico and Brazil Step In to Fight Currency Declines, October 24, 2008 and Latin America Monitor: Mexico. December 2008. CRS trade calculations based on U.S. Department of Commerce data. Latin American Newsletters. Latin American Mexico and NAFTA Report, March 2009, p. 10 and United Nations. Economic Commission on Latin America and the Caribbean, Economic Survey of Latin America and the Caribbean, 2008-2009, p. 38. 131 Ibid and United Nations. ECLAC. The Reactions of the Governments of the Americas to the International Crisis: An Overview of Policy Measures up to 31 March 2009. April 2009. 132 Latin American Newsletters. Latin American Mexico and NAFTA Report, May 2009, p. 8-10 and IHS Global Insight. Economic Recovery Gets Under Way in Mexico. September 30, 2009. 130

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Brazil Brazil entered the financial crisis from a position of relative macroeconomic and fiscal strength, and although it has not been immune to the global contraction, data suggest Brazil will experience only a two-quarter recession, with recovery solidly in place by in the second half of 2009. The economy grew by 5.1% in 2008 and is expected to contract by less than 1.0% over the full year 2009. Second quarter growth registered 1.9% on an annualized basis, indicating a technical end to recession. Commodity price rebound has contributed to growth in Brazilian output and exports, and industrial production has begun to rise as well. Still, a number of indicators in the real economy remain weak and fiscal pressures from the stimulus package present a short-term financial burden.133 Financial repercussions sparked the crisis and affected Brazil in ways similar to Mexico. Brazil‘s stock market index tumbled by half in 2008 as investors fled both equities and the Brazilian currency (the real). The Brazilian government sold billions of dollars to fight a rapidly depreciating currency, which fell at one point by over 35% from its August 2008 high. Brazil, like Mexico, also has a large currency derivatives market, where speculative trades contributed to the real‘s decline, although to a lesser degree than in Mexico. Brazil‘s central bank agreed to the temporary currency swap arrangement with the U.S. Federal Reserve. It also has some $200 billion in international reserves, which have served as an effective cushion against financial retreat from the financial markets. Brazil also has a sound and wellregulated banking system and experienced central bank leadership and staff that has helped maintain confidence in the financial system in the face of rising defaults and declining balance sheet quality.134 Financial indictors have all improved, reflecting a return to stability and portending a near-term broader economic recovery. Brazil‘s real has appreciated against the U.S. dollar, fully recovering any losses over the past year. The stock index has recovered 17% from January 2009 and the bond spreads on Brazilian debt are only 200 basis points above U.S. treasuries, reflecting confidence in Brazil‘s economic prospects. Brazilian government debt was upgraded from speculative to investment grade by the major ratings agencies in late September, lending further support for confidence in the country‘s financial and economic outlook.135 The real (nonfinancial) economy faces deeper challenges. Domestic demand is still weak and the unemployment rate has risen from 6.8% in December 2008 to an estimated 9.2%. July employment figures, however, showed a net job increase of 292,000 across all sectors, indicating the real economy is beginning to experience recovery as well. Although Brazil also experienced declines in exports, the recovery of commodity prices and strong demand from China, now the largest consumer of Brazil‘s exports, have helped improve Brazil‘s trade account. Capital inflows, which were strong in 2008, have also slowed, despite Brazil‘s recent solid macroeconomic performance and its investment grade rating. As with other countries, the extent to which global demand diminishes will ultimately affect all these variables. Brazil,

133

Business Monitor International. Latin American Monitor: Brazil. September 2009 and International Monetary Fund. Global Markets Monitor, September 17, 2009. 134 Canuto, Otaviano. Emerging Markets and the Systemic Sudden Stop. RGE Monitor. November 12, 2008 and Wheatley, Jonathan. Brazilian Economy Is the Real Lure for the Yield-Hungry. Financial Times. May 7, 2009. 135 International Monetary Fund. Global Markets Monitor, June 15, 2009 and Business Monitor International. Latin American Monitor: Brazil. September 2009.

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however, has a large internal market and is well-positioned on the macroeconomic front, which has helped soften the effects of the global financial crisis.136 On the fiscal side, Brazil enacted a sizeable fiscal stimulus estimated at 8.5% of GDP. Tax cuts and direct government spending have been credited with ameliorating the effects of the global downturn. Brazil has maintained fiscal support for its social programs, expanded unemployment insurance, and made provisions for low-income housing and other support. To accommodate its increased fiscal commitments, it has reduced its primary fiscal surplus target from 3.8% to 2.5% of GDP, and will likely see its deficit and debt positions deteriorate in the short term. Observers, however, are beginning to raise concerns over Brazil‘s growing deficit, and have suggested that the government has reached the edge of its capacity for fiscal stimulus.137 In addition to a fiscal response, Brazil has emphasized enhancing financial sector liquidity through monetary policy. The Central Bank has injected billions of dollars into the banking system, lowered reserve requirements, and reduced the key short-term interest rate many times, from 13.75% to 8.75%. The Brazilian government has authorized state-owned banks to purchase private banks, approved stricter accounting rules for derivatives, extended credit directly to firms through the National Development Bank (BNDES) and the Central Bank, and exempted foreign investment firms from the financial transactions tax.138 Unibanco, one of Brazil‘s largest banks, has also procured a $60 million credit extension from the World Bank‘s International Finance Corporation to support trade financing.

Argentina Argentina, because of its shaky economic and financial position at the outset of the crisis, has been poorly positioned to deal with a protracted downturn compared to most other Latin American countries. Although until recently it has experienced dramatic economic growth since 2002, this trend reflects a rebound from the previous severe 2001-2002 financial crisis and rise in commodity prices that benefitted Argentina‘s large agricultural sector. This trend ended when Argentina experienced a contraction of -0.8% for the second quarter of 2009 (on an annualized basis). The collapse of commodity prices in late 2008 diminished export and fiscal revenues and Argentina is also experiencing declines in investment, domestic consumer demand, and industrial production. Installed capacity utilization fell from 79% in October 2008 to 67.4% in January 2009, recovering to 74.6% by August 2009. Particularly hard hit were motor vehicles, metallurgy, and textiles. Economists forecast the economy will contract by 2% to 4% in 2009 and recovery will be slow with unemployment still rising to nearly 9.0% in the summer of 2009.139 Argentina has been financially isolated from global markets since its 2001 crisis and is also hampered by a litany of questionable policy choices, which combined with the global recession and a prolonged draught, has further diminished confidence in its financial system. 136

Business Monitor International. Latin American Monitor: Brazil. September 2009. Business Monitor International. Latin American Monitor: Brazil. September 2009, Soliani, Andre and Iuri Dantas. Brazil Freezes 37.2 Billion Reais of 2009 Budget. Bloomberg Press. January 27, 2009, and Brazil-U.S. Business Council. Brazil Bulletin. September 28, 2009. 138 United Nations. Economic Commission on Latin American and the Caribbean. Economic Survey of Latin America and the Caribbean, 2008-2009. July 2009. 139 Latin American Newsletters. Latin American Economy & Business, January 2009, pp. 10-11, Global Insight. Argentina. June 12, 2009, and República Argentina. Instituto Nacional de Estadística y Censos. Utilización de la Capacidad Instalada en la Industria. August 2009. 137

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Although the banks remain liquid and solvent, the stock market fell at one point by 37% from last fall and the peso has depreciated by 18%. Among the highly questionable policies that have diminished confidence in the country is the 2002 historic sovereign debt default and failure to renegotiate with Paris Club countries and private creditor holdouts. Others include government interference in the supposedly independent government statistics office (particularly with respect to inflation reporting), price controls, high export taxes, and nationalization of private pension funds to bolster public finances.140 These policies have isolated the economy from international capital markets despite the need to finance a growing debt burden and public and private sector investments. Price controls and export restrictions (quotas and taxes) have led to market distortions, protests over government policies, and declining consumer confidence. Argentina‘s exports declined by 21% year-over-year in the first six months of 2009.141 In response to falling demand for Argentine exports and the government‘s questionable financial policies and position, Argentina‘s currency has depreciated by 20% from September 2008, in spite of exchange rate intervention. In recognition that industrial production and exports fell rapidly and have stagnated until very recently, Argentina has also adopted administrative trade restrictions to limit imports, some of which it has reversed rather than face disputes in the World Trade Organization. These affected Brazilian goods in particular, including textiles and various machinery exports, raising tensions between the two major trade partners of the regional customs union, Mercosur.142 Risk assessment was swift and punishing. Bond ratings have fallen, yields on short-term public debt exceeded 30%, and the interest rate spread on Argentina‘s bonds rose to over 1,700 basis points, but have since settled around 750-800 basis points, nearly four times higher than Mexico‘s or Brazil‘s spreads. The interest rate spread on credit default swaps peaked at 4,500 basis points in December 2008, indicating the high cost required to insure against bond defaults. All these indicators point to a global perception of Argentina as a highrisk country, likely reinforcing its ostracism from international capital markets.143 Argentina has adopted a number of policies to address the domestic effects of the global economic crisis. The first initiative is a large fiscal stimulus equal to 9% of GDP focused almost entirely on public works spending, exasperating fiscal problems in the short run. Given Argentina‘s large expected public spending outlays for the coming year, the high and growing cost of its debt, falling revenues from imports, and its inability to access international credit markets, it had to take dramatic action to finance these programs. It did so by nationalizing, with the approval of the Congress, the private-sector pension system, effective January 1, 2009. The pension system provided $29 billion in assets immediately and access to an estimated $4.6 billion in annual pension contributions. In addition, Argentina has conducted two bond swaps (with 15.4% yields) for guaranteed loans maturing in 2009 to

140

Benson, Drew and Bill Farles. Argentine Bonds, Stocks Tumble on Pension Fund Takeover Plan. Bloomberg. October 21, 2008 and International Monetary Fund. Global Markets Monitor. March 17, 2009. 141 Latin American Monitor. Latin American Economy and Business. August 2009. 142 Global Insight. Argentina: S&P Lowers Argentina‘s Rating to B-. November 3, 2008 and Latin America Weekly Report. Lula May Accept Argentine Protectionism. March 12, 2009. p. 8. 143 International Monetary Fund. Regional Economic Outlook. Western Hemisphere: Grappling with the Global Financial Crisis. Washington, DC. October 2008. p. 8, and IMF. Global Markets Monitor, October 1, 2009.

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2011.144 Although these two moves have provided Argentina with increased fiscal capacity to meet short- and perhaps medium-term financing needs, the costs entail increased fiscal outlays in the future and heightened investor skepticism. Analysts estimate that Argentina has little room for additional fiscal expansion given its history of fiscal largesse over the past six years, which could temper a budding recovery.145

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Russia and the Financial Crisis146 Russia tends to be in a category by itself. Although by some measures, it is an emerging market, it also is highly industrialized. As the case with most of the world‘s economies, the Russian economy has been hit hard by the global economic crisis. However, unlike the emerging economies of East Asia and some major developed economies, Russia‘s recovery from the crisis is proceeding slowly, reflecting fundamental structural problems, including a high dependence on production of oil and other commodities and a very weak banking system. The long-term challenge for Russian policymakers will be to address these problems once the immediate effects the global crisis have receded. For about a decade (1999-2008) Russia experienced impressive growth rates and economic stability that allowed it to emerge from the chaos of the immediate post-Soviet period (1992- 1998) and to improve the standard of living of most Russian citizens. The growth was due in part to a rapid decline in the value of the ruble in the late 1990s that stimulated demand for and production of domestic goods and services as substitutes for imports. However, for most of the period, economic growth was rooted in the surge in world oil prices and resulting export revenues. The economic growth came to an abrupt end with the global financial crisis and recession, which led to a decline in demand for energy and thus in world oil prices. Russia has also been adversely affected by the world-wide credit crunch. Because low interest credit was not available domestically, many Russian firms and banks depended on foreign loans to finance investments. As credit tightened, foreign loans became harder to obtain. The economic downturn has been showing up in Russia‘s performance indicators. Although Russia‘s real GDP increased 5.6% in 2008, it increased more slowly than it did in 2007 (8.1%) and grew only 1.2% in the fourth quarter of 2008. Russia‘s GDP declined 9.8% during the first quarter of 2009 and 10.9% during the second quarter.147 Declining revenues have forced the government to tighten fiscal policy but still incur budget deficits for the first time since 1999, a projected deficit of 8.0% of GDP by the end of 2009.148 And for the first time since 1998, the government will likely have to obtain budget financing through the international debt market but the size of the bond issue will depend on world oil prices which have begun to rise. 144

Ibid., Latin American Brazil & Southern Cone Report, January 2009, p. 10, IMF. Global Markets Monitor. March 2, 2009, and United Nations. Economic Commission on Latin American and the Caribbean. Economic Survey of Latin America and the Caribbean, 2008-2009. July 2009. 145 IHS Global Insight. Argentine Economy Contracts 0.8% in Q2. October 1, 2009. 146 Prepared by William H. Cooper, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division. 147 Economist Intelligence Unit. November 12, 2009. However, GDP grew modestly in the third quarter causing Finance Minister Kudrin to declare the recession over. 148 Ibid.

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The Russian government has responded to the crisis with various measures to prop up the stock market and the banks and to stimulate domestic demand. In mid-September 2008, the government made available $44 billion in funds to Russia‘s three largest state-owned banks to boost lending and another $16 billion to the next 25 largest banks. It also lowered taxes on oil exports to reduce costs to oil companies and made available $20 billion for the government to purchase stocks on the stock market. In late September 2008, the government announced that an additional $50 billion would be available to banks and Russian companies to pay off foreign debts coming due by the end of the year. On October 7, 2008, the government announced another package of $36.4 billion in credits to banks.149 In 2009, the government changed strategies by focusing on macroeconomic measures rather than measures to assist specific industries or firms. For example, the government reduced the corporate tax rate from 24% to 20% and the tax rate on small companies to try to stimulate investment.150 The government expects to rein in expenditures.151 While, on the one hand, cutting expenditures might be considered fiscally responsible, on the other hand, it could retard government investment in necessary items such as modernizing the infrastructure and in pensions and other social income transfers, contributing to a drag on the rest of the economy. The IMF projects that Russia‘s real GDP will decline over 7.5% in 2009.152 INS Global Insight, and the Economist Intelligence Unit (EIU), both private economic forecasting firms, project Russia‘s GDP to decline in 2009 by 7.5%-8.0% and 7.4%, respectively.153 These forecasts are supported by data showing a continuing decline in both domestic and external demand (exports), among other things, although the rates of decline have slowed possibly indicating bottoming out, if not a full-fledged economic recovery. INS Global Insight, Inc. and the EIU each forecast modest recoveries in 2010 of 1.5% and 2.5%, respectively. Russia remains highly dependent on oil and natural gas exports as a source of income. If world oil prices continue to be depressed or increase only modestly, the Russian economy would likely experience slow growth, if any. Many economists have argued that, in the long run, for Russia to achieve sustainable growth, it must reduce its dependence on exports of oil, natural gas, and other commodities and diversify into more stable production. In September 2009, President Medvedev published an article –― Russia, Forward‖—in which he criticized Russia‘s failures to diversify and modernize its economy and pledged to change Russian economic policy in order to remedy the situation. He reiterated these views in his address to the state on November 12, 2009.154 It is not clear if Prime Minister Putin, Medvedev‘s successor and presumptive holder of power in Russia, shares these views.

149

Economist Intelligence Unit. Country Report–Russia. October 2008. p. 6 Economist Intelligence Unit. Country Report—Russia. June 2009. p. 5. 151 Ibid. p. 6. 152 IMF. World Economic Outlook. October 2009. 153 INS Global Insight. June 3, 2009. Economist Intelligence Unit. Country Report—Russia. June 2009. p.7. 154 Available on Kremlin website http://www.kremlin.ru. 150

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EFFECTS ON EUROPE AND THE EUROPEAN RESPONSE155 Some European countries156 initially viewed the financial crisis as a purely American phenomenon. That view changed as economic activity Europe declined at a fast pace over a short period of time. Making matters worse, global trade declined sharply, eroding prospects for European exports providing a safety valve for domestic industries that are cutting output. In addition, public protests, sparked by rising rates of unemployment and concerns over the growing financial and economic turmoil, have increased the political stakes for European governments and their leaders. The global economic crisis is straining the ties that bind together the members of the European Union and has presented a significant challenge to the ideals of solidarity and common interests. In addition, the longer the economic downturn persists, the greater the prospects are that international pressure will mount against those governments that are perceived as not carrying their share of the responsibility for stimulating their economies to an extent that is commensurate with the size of their economy. Since the start of the financial crisis, the European Union has taken a number of steps to improve supervision of financial markets. These actions include: 

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Strengthened the Committee of European Securities Regulators. The Committee is an advisory body without any regulatory authority within the European Commission. The January 23, 2009 Directive strengthened the Committee‘s authority to mediate and coordinate securities regulations between EU members. Strengthened the Committee of European Banking Supervisors. The Committee is an advisory body without any regulatory authority that coordinates on banking supervision. The January 23, 2009 EU Directive broadened the role of the Committee to include supervision of financial conglomerates. Strengthened the Committee of European Insurance and Occupational Pensions Supervisors. The Committee is an advisory body without any regulatory authority within the European Commission in the areas of insurance, reinsurance, and occupational pensions fields. The January 23, 2009 Directive authorizes the Committee to coordinate policies among EU members and between the EU and other national governments and bodies. The European Parliament and the European Council approved on April 23, 2009, new regulations on credit rating agencies that are expected to improve the quality and transparency of the ratings agencies. Approved direct funding by the European Union to the International Accounting Standards Committee Foundation, the European Financial Reporting Advisory Group, and the Public Interest Oversight Body. The European Commission proposed a set of measures to register hedge fund managers and managers of alternative investment funds and measures to regulate executive compensation.

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Prepared by James K. Jackson, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division. 156 For additional information, see CRS Report R40415, The Financial Crisis: Impact on and Response by The European Union, by James K. Jackson. Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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Expressed support for a new European Systemic Risk Council and a European System of Financial Supervisors.

European countries have been concerned over the impact the financial crisis and the economic recession are having on the economies of East Europe and prospects for political instability157 as well as future prospects for market reforms. Worsening economic conditions in East European countries are compounding the current problems facing financial institutions in the EU. Although mutual necessity may eventually dictate a more unified position among EU members and increased efforts to aid East European economies, some observers are concerned these actions may come too late to forestall another blow to the European economies and to the United States. Governments elsewhere in Europe, such as Iceland and Latvia, have collapsed as a result of public protests over the way their governments have handled their economies during the crisis. The crisis has underscored the growing interdependence between financial markets and between the U.S. and European economies. As such, the synchronized nature of the current economic downturn probably means that neither the United States nor Europe is likely to emerge from the financial crisis or the economic downturn alone. The United States and Europe share a mutual interest in developing a sound financial architecture to improve supervision and regulation of individual institutions and of international markets. This issue includes developing the organization and structures within national economies that can provide oversight of the different segments of the highly complex financial system. This oversight is viewed by many as critical to the future of the financial system because financial markets generally are considered to play an indispensible role in allocating capital and facilitating economic activity. Within Europe, national governments and private firms have taken noticeably varied responses to the crisis, reflecting the unequal effects by country. While some have preferred to address the crisis on a case-by-case basis, others have looked for a systemic approach that could alter the drive within Europe toward greater economic integration. Great Britain proposed a plan to rescue distressed banks by acquiring preferred stock temporarily. Iceland, on the other hand, had to take over three of its largest banks in an effort to save its financial sector and its economy from collapse. The Icelandic experience has raised important questions about how a nation can protect its depositors from financial crisis elsewhere and about the level of financial sector debt that is manageable without risking system-wide failure. According to reports by the International Monetary Fund (IMF) and the European Central Bank (ECB), many of the factors that led to the financial crisis in the United States created a similar crisis in Europe.158 Essentially low interest rates and an expansion of financial and investment opportunities that arose from aggressive credit expansion, growing complexity in mortgage securitization, and loosening in underwriting standards combined with expanded linkages among national financial centers to spur a broad expansion in credit and economic growth. This rapid rate of growth pushed up the values of equities, commodities, and real estate. Over time, the combination of higher commodity prices and rising housing costs pinched consumers‘ budgets, and they began reducing their expenditures. One consequence 157 158

Pan, Phillip P., Economic Crisis Fuels Unrest in E. Europe, The Washington Post, January 26, 2009, p, A1. Regional Economic Outlook: Europe, International Monetary Fund, April, 2008, p. 19-20; and EU Banking Structures, European Central Bank, October 2008, p. 26.

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of this drop in consumer spending was a slowdown in economic activity and, eventually, a contraction in the prices of housing. In turn, the decline in the prices of housing led to a largescale downgrade in the ratings of subprime mortgage-backed securities and the closing of a number of hedge funds with subprime exposure. Concerns over the pricing of risk in the market for subprime mortgage-backed securities spread to other financial markets, including to structured securities more generally and the interbank money market. Problems spread quickly throughout the financial sector to include financial guarantors as the markets turned increasingly dysfunctional over fears of under-valued assets. As creditworthiness problems in the United States began surfacing in the subprime mortgage market in July 2007, the risk perception in European credit markets followed. The financial turmoil quickly spread to Europe, although European mortgages initially remained unaffected by the collapse in mortgage prices in the United States. Another factor in the spread of the financial turmoil to Europe has been the linkages that have been formed between national credit markets and the role played by international investors who react to economic or financial shocks by rebalancing their portfolios in assets and markets that otherwise would seem to be unrelated. The rise in uncertainty and the drop in confidence that arose from this rebalancing action undermined the confidence in major European banks and disrupted the interbank market, with money center banks becoming unable to finance large securities portfolios in wholesale markets. The increased international linkages between financial institutions and the spread of complex financial instruments has meant that financial institutions in Europe and elsewhere have come to rely more on short-term liquidity lines, such as the interbank lending facility, for their day-to-day operations. This has made them especially vulnerable to any drawback in the interbank market.159 Estimates developed by the International Monetary Fund in January 2009 provide a rough indicator of the impact the financial crisis and an economic recession are having on the performance of major advanced countries. Economic growth in Europe is expected to slow by nearly 2% in 2009 to post a 0.2% drop in the rate of economic growth, while the threat of inflation is expected to lessen. Economic growth, as represented by gross domestic product (GDP), is expected to register a negative 1.6% rate for the United States in 2009, while the euro area countries could experience a combined negative rate of 2.0%, down from a projected rate of growth of 1.2% in 2008. The drop in the prices of oil and other commodities from the highs reached in summer 2008 may have helped improve the rate of economic growth, but the length and depth of the economic downturn has challenged the ability of the IMF projections to accurately estimate projected rates of economic growth. In mid-February, the European Union announced that the rate of economic growth in the EU in the fourth quarter of 2008 had slowed to an annual rate of negative 6%.160 By mid-summer 2009, the pace of economic growth had picked up in both France and Germany. Central banks in the United States, the Euro zone, the United Kingdom, Canada, Sweden, and Switzerland staged a coordinated cut in interest rates on October 8, 2008, and announced

159

Frank, Nathaniel, Brenda Gonzalez-Hermosillo, and Heiko Hesse, Transmission of Liquidity Shocks: Evidence from the 2007 Subprime Crisis, IMF Working Paper #WP/08/200, August 2008, the International Monetary Fund. 160 Flash Estimates for the Fourth Quarter of 2008, Eurostat news release, STAT/09/19, February 13, 2009. Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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they had agreed on a plan of action to address the ever-widening financial crisis.161 The actions, however, did little to stem the wide-spread concerns that were driving financial markets. Many Europeans were surprised at the speed with which the financial crisis spread across national borders and the extent to which it threatened to weaken economic growth in Europe. This crisis did not just involve U.S. institutions. It has demonstrated the global economic and financial linkages that tie national economies together in a way that may not have been imagined even a decade ago. At the time, much of the substance of the European plan was provided by the British Prime Minister Gordon Brown,162 who announced a plan to provide guarantees and capital to shore up banks. Eventually, the basic approach devised by the British arguably would influence actions taken by other governments, including that of the United States. On October 10, 2008, the G-7 finance ministers and central bankers,163 met in Washington, DC, to provide a more coordinated approach to the crisis. At the Euro area summit on October 12, 2008, Euro area countries along with the United Kingdom urged all European governments to adopt a common set of principles to address the financial crisis.164 The measures the nations supported are largely in line with those adopted by the U.K. and include: 

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Recapitalization: governments promised to provide funds to banks that might be struggling to raise capital and pledged to pursue wide-ranging restructuring of the leadership of those banks that are turning to the government for capital. State ownership: governments indicated that they will buy shares in the banks that are seeking recapitalization. Government debt guarantees: guarantees offered for any new debts, including interbank loans, issued by the banks in the Euro zone area. Improved regulations: the governments agreed to encourage regulations to permit assets to be valued on their risk of default instead of their current market price.

In addition to these measures, EU leaders agreed on October 16, 2008, to set up a crisis unit and they agreed to a monthly meeting to improve financial oversight.165 Jose Manuel Barroso, President of the European Commission, urged EU members to develop a ― fully integrated solution‖ to address the global financial crisis, consistent with France‘s support for a strong international organization to oversee the financial markets. The EU members expressed their support for the current approach within the EU, which makes each EU member responsible for developing and implementing its own national regulations regarding supervision over financial institutions. The European Council stressed the need to strengthen the supervision of the European financial sector. As a result, the EU statement urged the EU members to develop a ― coordinated supervision system at the European level.‖166 This 161

Hilsenrath, Jon, Joellen Perry, and Sudeep Reddy, Central Banks Launch Coordinated Attack; Emergency Rate Cuts Fail to Halt stock Slide; U.S. Treasury Considers Buying Stakes in Banks as Direct Move to Shore Up Capital, the Wall Street Journal, October 8, 2008, p. A1. 162 Castle, Stephen, British Leader Wants Overhaul of Financial System, The New York Times, October 16, 2008. 163 The G-7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. 164 Summit of the Euro Area Countries: Declaration on a Concerted European Action Plan of the Euro Area Countries, European union, October 12, 2008. 165 EU Sets up Crisis Unit to Boost Financial Oversight, Thompson Financial News, October 16, 2008. 166 Ibid.

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approach likely will be tested as a result of failed talks with the credit derivatives industry in Europe. In early January 2009, an EUsponsored working group reported that it had failed to get a commitment from the credit derivatives industry to use a central clearing house for credit default swaps. As an alternative, the European Commission reportedly is considering adopting a set of rules for EU members that would require banks and other users of the CDS markets to use a central clearing house within the EU as a way of reducing risk.167

The “European Framework for Action” On October 29, 2008, the European Commission released a ― European Framework for Action‖ as a way to coordinate the actions of the 27 member states of the European Union to address the financial crisis.168 The EU also announced that on November 16, 2008, the Commission will propose a more detailed plan that will bring together short-term goals to address the current economic downturn with the longer-term goals on growth and jobs in the Lisbon Strategy.169 The short-term plan revolves around a three-part approach to an overall EU recovery action plan/framework. The three parts to the EU framework are: 

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A new financial market architecture at the EU level. The basis of this architecture involves implementing measures that member states have announced as well as providing for (1) continued support for the financial system from the European Central Bank and other central banks; (2) rapid and consistent implementation of the bank rescue plan that has been established by the member states; and (3) decisive measures that are designed to contain the crisis from spreading to all of the member states. Dealing with the impact on the real economy. The policy instruments member states can use to address the expected rise in unemployment and decline in economic growth as a second-round effect of the financial crisis are in the hands of the individual member states. The EU can assist by adding short-term actions to its structural reform agenda, while investing in the future through: (1) increasing investment in R&D innovation and education; promoting flexicurity170 to protect and equip people rather than specific jobs; (3) freeing up businesses to build markets at home and internationally; and (4) enhancing competitiveness by promoting green technology, overcoming energy security constraints, and achieving environmental goals. In addition, the Commission will explore a wide range of ways in which EU members can increase their rate of economic growth. A global response to the financial crisis. The financial crisis has demonstrated the growing interaction between the financial sector and the goods-and servicesproducing sectors of economies. As a result, the crisis has raised questions

167

Bradbury, Adam, EU Eyes Next Step on Clearing, The Wall Street Journal Europe, January 7, 2009. p. 21. Communication From the Commission, From Financial Crisis to Recovery: A European Framework for Action, European Commission, October 29, 2008. 169 The Lisbon Strategy was adopted by the EU member states at the Lisbon summit of the European Union in March 2001 and then recast in 2005 based on a consensus among EU member states to promote long-term economic growth and development in Europe. 170 The combination of labor market flexibility and security for workers. 168

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concerning global governance not only relative to the financial sector, but the need to maintain open trade markets. The EU would like to use the November 15, 2008 multi-nation G-20 economic summit in Washington, DC, to promote a series of measures to reform the global financial architecture. The Commission argues that the measures should include (1) strengthening international regulatory standards; (2) strengthen international coordination among financial supervisors; (3) strengthening measures to monitor and coordinate macroeconomic policies; and (4) developing the capacity to address financial crises at the national regional and multilateral levels. Also, a financial architecture plan should include three key principles: (1) efficiency; (2) transparency and accountability; and (3) the inclusion of representation of key emerging economies. European leaders, meeting prior to the November 15, 2008 G-20 economic summit in Washington, DC, agreed that the task of preventing future financial crisis should fall to the International Monetary Fund, but they could not agree on precisely what that role should be.171 The leaders set a 100-day deadline to draw up reforms for the international financial system. British Prime Minister Gordon Brown reportedly urged other European leaders to back fiscal stimulus measure to support the November 6, 2008 interest rate cuts by the European Central Bank, the Bank of England, and other central banks. Reportedly, French Prime Minister Nicolas Sarkozy argued that the role of the IMF and the World Bank needed to be rethought. French and German officials have argued that the IMF should assume a larger role in financial market regulation, acting as a global supervisor of regulators. Prime Minister Sarkozy also argued that the IMF should ― assess‖ the work of such international bodies as the Bank of International Settlements. Other G-20 leaders, however, reportedly have disagreed with this proposal, agreeing instead to make the IMF ― the pivot of a renewed international system,‖ working alongside other bodies. Other Ministers also were apparently not enthusiastic toward a French proposal that Europe should agree to a more formalized coordination of economic policy. In an effort to confront worsening economic conditions, German Chancellor Angela Merkel proposed a package of stimulus measures, including spending for large-scale infrastructure projects, ranging from schools to communications. The stimulus package represents the second multi-billion euro fiscal stimulus package Germany has adopted in less than three months. The plan, announced on January13, 2009, reportedly was doubled from initial estimates to reach more than 60 billion Euros172 (approximately $80 billion) over two years. The plan reportedly includes a pledge by Germany‘s largest companies to avoid mass job cuts in return for an increase in government subsidies for employees placed temporarily on short work weeks or on lower wages.173 Other reports indicate that Germany is considering an emergency fund of up to 100 billion Euros in state-backed loans or guarantees to aid companies having problems getting credit.174 171

Hall, Ben, George Parker, and Nikki Tait, European Leaders Decide on Deadline for Reform Blueprint, Financial Times, November 8, 2008, p. 7. 172 Benoit, Bernard, Germany Doubles Size of Stimulus, Financial Times, January 6, 2009, p. 10; Walker, Marcus, Germany‘s Big Spending Plans, The Wall Street Journal Europe, January 13, 2009, p. 3. 173 Benoit, Bernard, German Stimulus Offers Job Promise, Financial Times, December 16, 2008. p. 1. 174 Walker, Marcus, Germany Mulls $135 Billion in Rescue Loans, The Wall Street Journal Europe, January 8, 2009. p. 1.

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Overall, Germany‘s response to the economic downturn changed markedly between December 2008 and January 2009 as economic conditions continued to worsen. In a December 2008 article, German Finance Minister Peer Steinbruck defended Germany‘s approach at the time. According to Steinbruck, Germany disagreed with the EU plan to provide a broad economic stimulus plan, because it favored an approach that is more closely tailored to the German economy. He argued that Germany is providing a counter-cyclical stimulus program even though it is contrary to its long-term goal of reducing its government budget deficit. Important to this program, however, are such ― automatic stabilizers‖ as unemployment benefits that automatically increase without government action since such benefits play a larger role in the German economy than in other economies. Steinbruck argued that, ― our experience since the 1970s has shown that ... stimulus programs fail to achieve the desired effect.... It is more likely that such large-scale stimulus programs—and tax cuts as well—would not have any effects in real time. It is unclear whether general tax cuts can significantly encourage consumption during a recession, when many consumers are worried about losing their jobs. The history of the savings rate in Germany points to the opposite.‖175 France, which has been leading efforts to develop a coordinated European response to the financial crisis, has proposed a package of measures estimated to cost over $500 billion. The French government is creating two state agencies that will provide funds to sectors where they are needed. One entity will issue up to $480 billion in guarantees on inter-bank lending issued before December 31, 2009, and would be valid for five years. The other entity will use a $60 billion fund to recapitalize struggling companies by allowing the government to buy stakes in the firms. On January 16, 2009, President Sarkozy announced that the French government would take a tougher stance toward French banks that seek state aid. Up to that point, France had injected $15 billion in the French banking system. In order to get additional aid, banks would be required to suspend dividend payments to shareholders and bonuses to top management and to increase credit lines to such clients as exporters. France reportedly was preparing to inject more money into the banking system.176 On December 4, 2008, President Sarkozy announced a $33 billion (26 billion euros) package of stimulus measures to accelerate planned public investments.177 The package is focused primarily on infrastructure projects and investments by state-controlled firms, including a canal north of Paris, renovation of university buildings, new metro cars, and construction of 70,000 new homes, in addition to 30,000 unfinished homes the government has committed to buy in 2009. The plan also includes a 200 Euro payment to low-income households. On December 15, 2008, France agreed to provide the finance division of Renault and Peugeot $1.2 billion in credit guarantees and an additional $250 million to support the car manufacturers‘ consumer finance division.178 In an interview on French TV on January 14, 2009, French Prime Minister Francois Fillon indicated that the French government is

175

Steinbruck, Peer, Germany‘s Way Out of the Crisis, The Wall Street Journal, December 22, 2008. Parussini, Gabrielle, France to Give Banks Capital, With More Strings Attached, The Wall Street Journal Europe, January 16, 2009, p. A17. 177 Gauthier-Villars, David, Leading News: France Sets Stimulus Plan, The Wall Street Journal Europe, December 5, 2008, p. 3. 178 Hall, Ben, France Gives Renault and Peugeot E.U.R 779m, Financial Times, December 16, 2008, p. 4. 176

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considering an increase in aid to the French auto industry, including Renault and Peugeot.179 The auto industry and its suppliers reportedly employ about 10% of France‘s labor force.

The de Larosiere Report and the European Plan for Recovery

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When the European Union released its ― Framework for Action‖ in response to the immediate needs of the financial crisis, it was moving to address the long-term requirements of the financial system. As a key component of this approach, the EU commissioned a group within the EU to assess the weaknesses of the existing EU financial architecture. It also charged this group with developing proposals that could guide the EU in fashioning a system that would provide early warning of areas of financial weakness and chart a way forward in erecting a stronger financial system. As part of this way forward, the European Union issued two reports in the first quarter of 2009 that address the issue of supervision of financial markets. The first report,180 issued on February 25, 2009 and commissioned by the European Union, was prepared by a High-Level Group on financial supervision headed by former IMF Managing Director and ex-Bank of France Governor Jacques de Larosiere and, therefore, is known as the de Larosiere Report. The second report181 was published by the European Commission to chart the course ahead for the members of the EU to reform the international financial governance system.

The de Larosiere Report The de Larosiere Report focuses on four main issues: (1) causes of the financial crisis; (2) organizing the supervision of financial institutions and markets in the EU; (3) strengthening European cooperation on financial stability, oversight, early warning, and crisis mechanisms; and (4) organizing EU supervisors to cooperate globally. The Report also proposes 31 recommendations on regulation and supervision of financial markets. As the financial crisis unfolded, the de Larosiere Report concludes, the regulatory response by the European Union and its members was weakened by, ― an inadequate crisis management infrastructure in the EU.‖ Furthermore, the Report emphasizes that an inconsistent set of rules across the EU as a result of the closely guarded sovereignty of national financial regulators led to a wide diversity of national regulations reflecting local traditions, legislation, and practices. While micro-prudential supervision focused on limiting the distress of individual financial institutions in order to protect the depositors, it neglected the broader objective of macro- prudential supervision, which is aimed at limiting distress to the financial system as a whole in order to protect the economy from significant losses in real output. In order to remedy this obstacle, the Report offers a two-level approach to reforming financial market supervision in the EU. This new approach would center around new oversight of broad, system-wide risks and a higher-level of coordination among national supervisors involved in day-to-day oversight. 179

Abboud, Leila, France Considers New Measures to Aid Auto Companies, The Wall Street Journal Europe, January 15, 2009, p. 4. 180 Report, The High-Level Group on Financial Supervision in the EU, Chaired by Jacques de Larosiere, February 25, 2009. 181 Driving European Recovery, Communication for the Spring European Council, Commission of the European Communities, April 3, 2009.

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The de Larosiere Report recommends that the EU create a new macro-prudential level of supervision called the European Systemic Risk Council (ESRC) chaired by the President of the European Central Bank. A driving force behind creating the ESRC is that it would bring together the central banks of all of the EU members with a clear mandate to preserve financial stability by collectively forming judgments and making recommendations on macroprudential policy. The ESRC would also gather information on all macro-prudential risks in the EU, decide on macro- prudential policy, provide early risk warning to EU supervisors, compare observations on macroeconomic and prudential developments, and give direction on the aforementioned issues. Next, the Report recommends that the EU create a new European System of Financial Supervision (ESFS) to transform a group of EU committees known as L3 Committees182 into EU Authorities. The three L3 Committees are: the Committee of European Securities Regulators (CESR); the Committee of European Banking Supervisors (CEBS); and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). The ESFS would maintain the decentralized structure that characterizes the current system of national supervisors, while the ESFS would coordinate the actions of the national authorities to maintain common high level supervisory standards, guarantee strong cooperation with other supervisors, and guarantee that the interests of the host supervisors are safeguarded. The main tasks of the ESFS authorities would be to: provide legally binding mediation between national supervisors; adopt binding supervisory standards; adopt binding technical decisions that apply to individual institutions; provide oversight and coordination of colleges of supervisors; license and supervise specific EU-wide institutions; provide binding cooperation with the ESRC to ensure that there is adequate macro-prudential supervision; and assume a strong coordinating role in crisis situations. The main mission of the national supervisors would be to oversee the day-to-day operation of firms.

Driving European Recovery ― Driving European Recovery,‖ issued by the European Commission, presents a slightly different approach to financial supervision and recovery than that proposed by the de Larosiere group, although it accepts many of the recommendations offered by the group. The recommendations in the report were intended to complement the economic stimulus measures that were adopted by the EU on November 27, 2008, under the $256 billion Economic Recovery Plan183 that funds cross- border projects, including investments in clean energy and upgraded telecommunications infrastructure. The plan is meant to ensure that, ― all relevant actors and all types of financial investments are subject to appropriate regulation and oversight.‖ In particular, the EC plan notes that nation-based financial supervisory models are lagging behind the market reality of a large number of financial institutions that operate across national borders. The European Commission praised the de Larosiere report for contributing ― to a growing consensus about where changes are needed.‖ Of particular interest to the EC were the 182

Level 3 committees represent the third level of the Lamfalussy process the EU uses to implement EU-wide policies. At the third level, national regulators work on coordinating new regulations with other nations. and they may adopt non-binding guidelines or common standards regarding matters not covered by EU legislation, as long as these standards are compatible with the legislation adopted at Level 1 and Level 2. 183 A European Economic Recovery Plan: Communication From the Commission to the European Council, Commission of the European Communities, COM(2008) 800 final, November 26, 2008. The full report is available at http://ec.europa.eu/commission_barroso/president/pdf/Comm_20081126.pdf.

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recommendations to develop a harmonized core set of standards that can be applied throughout the EU. The EC also supported the concept of a new European body similar to the proposed European Systemic Risk Council to gather and assess information on all risks to the financial sector as a whole, and it supported the concept of reforming the current system of EU Committees that oversee the financial sector. The EU plan, however, would accelerate the plan proposed by the de Larosiere group by combining the two phases outlined in the report. Using the de Larosiere report as a basis, the EC is attempting to establish a new European financial supervision system. These efforts to reform the EC‘s financial supervision system would be based on five key objectives: 

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First, provide the EU with a supervisory framework that detects potential risks early, deals with them effectively before they have an impact, and meets the challenge of complex international financial markets. At the end of May 2009 the EC presented a European financial supervision package to the European Council for its consideration. The package included two elements: measures to establish a European supervision body to oversee the macro-prudential stability of the financial system as a whole; and proposals on the architecture of a European financial supervision system to undertake micro-prudential supervision. Second, the EC will move to reform those areas where European or national regulation is insufficient or incomplete by proposing: a comprehensive legislative instrument that establishes regulatory and supervisory standards for hedge funds, private equity and other systemically important market players; a White Paper on the necessary tools for early intervention to prevent a similar crisis; measures to increase transparency and ensure financial stability in the area of derivatives and other complex structured products; legislative proposals to increase the quality and quantity of prudential capital for trading book activities, complex securitization, and to address liquidity risk and excessive leverage; and a program of actions to establish a more consistent set of supervisory rules. Third, to ensure European investors, consumers, and small and medium-size enterprises can be confident about their savings, their access to credit and their rights, the EC will: advance a Communication on retail investment products to strengthen the effectiveness of marketing safeguards; provide additional measures to reinforce the protection of bank depositors, investors, and insurance policy holders; and provide measures on responsible lending and borrowing. Fourth, in order to improve risk management in financial firms and align pay incentives with sustainable performance, the EC intends to strengthen the 2004 Recommendation on the remuneration of directors; and bring forward a new Recommendation on remuneration in the financial services sector followed by legislative proposals to include remuneration schemes within the scope of prudential oversight. Fifth, to ensure more effective sanctions against market wrongdoing, the EC intends to: review the Market Abuse Directive184 and make proposals on how sanctions could be strengthened in a harmonized manner and better enforced.

The Market Abuse Directive was adopted by the European Commission in April 2004. The Directive is intended to reinforce market integrity in the EU and contribute to the harmonization of the rules against market abuse and

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The British Rescue Plan On October 8, 2008, the British Government announced a $850 billion multi-part plan to rescue its banking sector from the current financial crisis. Details of this plan are presented here to illustrate the varied nature of the plan. The Stability and Reconstruction Plan followed a day when British banks lost £17 billion on the London Stock Exchange. The biggest loser was the Royal Bank of Scotland, whose shares fell 39%, or £10 billion, of its value. In the downturn, other British banks lost substantial amounts of their value, including the Halifax Bank of Scotland which was in the process of being acquired by Lloyds TSB. The British plan included four parts:  

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A coordinated cut in key interest rates of 50 basis, or one-half of one percent (0.5) between the Bank of England, the Federal Reserve, and the European Central Bank. An announcement of an investment facility of $87 billion implemented in two stages to acquire the Tier 1 capital, or preferred stock, in ― eligible‖ banks and building societies (financial institutions that specialize on mortgage financing) in order to recapitalize the firms. To qualify for the recapitalization plan, an institution must be incorporated in the UK (including UK subsidiaries of foreign institutions, which have a substantial business in the UK and building societies). Tier 1 capital often is used as measure of the asset strength of a financial institution. The British Government agreed to make available to those institutions participating in the recapitalization scheme up to $436 billion in guarantees on new short- and medium-term debt to assist in refinancing maturing funding obligations as they fall due for terms up to three years. The British Government announced that it would make available $352 billion through the Special Liquidity Scheme to improve liquidity in the banking industry. The Special Liquidity Scheme was launched by the Bank of England on April 21, 2008 to allow banks to temporarily swap their high-quality mortgage- backed and other securities for UK Treasury bills.185

On November 24, 2008, Britain‘s majority Labor party presented a plan to Parliament to stimulate the nation‘s slowing economy by providing a range of tax cuts and government spending projects totaling 20 billion pounds (about $30 billion).186 The stimulus package includes a 2.5% cut in the value added tax (VAT), or sales tax, for 13 months, a postponement of corporate tax increases, and government guarantees for loans to small and midsize businesses. The plan also includes government plans to spend 4.5 billion pounds on public works, such as public housing and energy efficiency. Some estimates indicate that the additional spending required by the plan will push Britain‘s government budget deficit in 2009 to an amount equivalent to 8% of GDP. To pay for the plan, the government would increase income taxes on those making more than 150,000 pounds (about $225,000) from establishing transparency and equal treatment of market participants in such areas as accepted market practices in the context of market manipulation, the definition of inside information relative to derivatives on commodities, and the notification of the relevant authorities of suspicious transactions. 185 The Bank of England, Financial Stability Report, April 2008, p. 10. 186 Scott, Mark, Is Britain‘s Stimulus Plan a Wise Move? Business Week, November 24, 2008; Werdigier, Julia, Britain Offers $30 Billion Stimulus Plan, The New York Times, November 25, 2008.

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40% to 45% starting in April 2011. In addition, the British plan would increase the National Insurance contributions for all but the lowest income workers.187 On January 14, 2009, British Business Secretary Lord Mandelson unveiled an additional package of measures by the Labor government to provide credit to small and medium businesses that have been hard pressed for credit as foreign financial firms have reduced their level of activity in the UK. The three measures are: (1) a 10 billion pound (approximately $14 billion) Capital Working Scheme to provide banks with guarantees to cover 50% of the risk on existing and new working capital loans on condition that the banks must use money freed up by the guarantee to make new loans; (2) a one billion pound Enterprise Finance Guarantee Scheme to assist small, credit-worthy companies by providing guarantees to banks of up to 75% of loans to small businesses; and (3) a 75 million pound Capital for Enterprise Fund to convert debt to equity for small businesses.188 In an effort to address the prospect that large banks or financial firms may become insolvent or fail and thereby cause a major disruption to the financial system, the British Parliament in February 2009 passed the Banking Act of 2009. The act makes permanent a set of procedures the U.K. government had developed to deal with troubled banks before they become insolvent or collapse. Such procedures are being considered by other EU governments and others as they amend their respective supervisory frameworks.

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Collapse of Iceland‟s Banking Sector The failure of Iceland‘s banks has raised some questions about bank supervision and crisis management for governments in Europe and the United States. As Icelandic banks began to default, Britain used an anti-terrorism law to seize the deposits of the banks to prevent the banks from shifting funds from Britain to Iceland.189 This incident raised questions about how national governments should address the issue of supervising foreign financial firms that are operating within their borders and whether they can prevent foreignowned firms from withdrawing deposits in one market to offset losses in another. In addition, the case of Iceland raises questions about the cost and benefits of branch banking across national borders where banks can grow to be so large that disruptions in the financial market can cause defaults that outstrip the resources of national central banks to address. On November 19, 2008, Iceland and the International Monetary Fund (IMF) finalized an agreement on an economic stabilization program supported by a $2.1 billion two-year standby arrangement from the IMF.190 Upon approval of the IMF‘s Executive board, the IMF released $827 million immediately to Iceland with the remainder to be paid in eight equal installments, subject to quarterly reviews. As part of the agreement, Iceland has proposed a plan to restore confidence in its banking system, to stabilize the exchange rate, and to improve the nation‘s 187

Falloon, Matt, and Mike Peacock, UK Government to Borrow Record Sums to Revive Economy, The Washington Post, November 24, 2008. Real Help for Business, press release, Department for Business, Enterprise and Regulatory Reform, January 14, 2009; Mollenkamp, Carrick, Alistair MacDonald, and Sara Schaefer Munoz, Hurdles rise as U.K. Widens Stimulus Plan, The Wall Street Journal Europe, January 14, 2009, p. 1. 189 Benoit, Bertrand, Tom Braithwaaite, Jimmy Burns, Jean Eaglesham, et. al., Iceland and UK clash on Crisis, Financial Times, October 10, 2008, p. 1. 190 Anderson, Camilla, Iceland Gets Help to Recover From Historic Crisis, IMF Survey Magazine, November 19, 2008. 188

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fiscal position. Also as part of the plan, Iceland‘s central bank raised its key interest rate by six percentage points to 18% on October 29, 2008, to attract foreign investors and to shore up its sagging currency.191 The IMF ‘s Executive Board had postponed its decision on a loan to Iceland three times, reportedly to give IMF officials more time to confirm loans made by other nations. Other observers argued, however, that the delay reflected objections by British, Dutch, and German officials over the disposition of deposit accounts operated by Icelandic banks in their countries. Iceland reportedly smoothed the way by agreeing in principle to cover the deposits, although the details had not be finalized. In a joint statement, Germany, Britain, and the Netherlands said on November 20, 2008, that they would ― work constructively in the continuing discussions‖ to reach an agreement.192 Following the decision of IMF‘s Executive Board, Denmark, Finland, Norway, and Sweden agreed to provide an additional $2.5 billion in loans to Iceland. Between October 7 and 9, 2008, Iceland‘s Financial Supervisory Authority (FSA), an independent state authority with responsibilities to regulate and supervise Iceland‘s credit, insurance, securities, and pension markets took control, without actually nationalizing them, of three of Iceland‘s largest banks: Landsbanki, Glitnir Banki, and Kaupthing Bank prior to a scheduled vote by shareholders to accept a government plan to purchase the shares of the banks in order to head off the collapse of the banks. At the same time, Iceland suspended trading on its stock exchange for two days.193 In part, the takeover also attempted to quell a sharp depreciation in the exchange value of the Icelandic krona. The demise of Iceland‘s three largest banks is attributed to an array of events, but primarily stems from decisions by the banks themselves. Some observers argued that the collapse of Lehman Brothers set in motion the events that finally led to the collapse of the banks,194 but this conclusion is controversial. Some have argued that at the heart of Iceland‘s banking crisis is a flawed banking model that is based on an internationally active banking sector that is large relative to the size of the home country‘s GDP and to the fiscal capacity of the central bank.195 As a result, a disruption in liquidity threatens the viability of the banks and overwhelms the ability of the central bank to act as the lender of last resort, which undermines the solvency of the banking system. On October 15, 2008, the Central Bank of Iceland set up a temporary system of daily currency auctions to facilitate international trade. Attempts by Iceland‘s central bank to support the value of the krona are at the heart of Iceland‘s problems. Without a viable currency, there was no way to support the banks, which have done the bulk of their business in foreign markets. The financial crisis has also created problems with Great Britain because hundreds of thousands of Britons hold accounts in online branches of the Icelandic banks, and they fear those accounts will default. The government of British Prime minister Gordon Brown has used powers granted under antiterrorism laws to freeze British assets of Landsbanki until the situation is resolved.

191

Iceland Raises Key Rate by 6 Percentage Points, The New York Times, October 29, 2008. Jolly, David, Nordic Countries Add $2.5 Billion to Iceland‘s Bailout, The New York Times, November 20, 2008. 193 Wardell, Jane, Iceland‘s Financial Crisis Escalates, BusinessWeek, October 9, 2008; Pfanner, Eric, Meltdown of Iceland‘s Financial system Quickens, The New York Times, October 9, 2008. 194 Portes, Richard, The Shocking Errors Behind Iceland‘s Meltdown, Financial Times, October 13, 2008, p. 15. 195 Buiter, Willem H., and Anne Sibert, The Icelandic Banking Crisis and What to Do About it: The Lender of Last Resort Theory of Optimal Currency Areas. Policy Insight No. 26, Centre for Economic Policy Research, October 2008. p. 2. 192

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IMPACT ON ASIA AND THE ASIAN RESPONSE196 Many Asian economies have been through wrenching financial crises in the past 10-15 years. Although most observers say the region‘s economic fundamentals have improved greatly in the past decade, this crisis has provided a worrying sense of deja vu, and an illustration that Asian policy changes in recent years—including Japan‘s slow but comprehensive banking reforms, Korea‘s opening of its financial markets, China‘s dramatic economic transformation, and the enormous buildup of sovereign reserves across the region— have not fully insulated Asian economies from global contagion. However, in the second quarter of 2009, there were signs that many Asian economies were rebounding sharply from the slowdowns and contractions they suffered in the previous months. Many observers have attributed this recovery to the rapid implementation of large fiscal and monetary stimulus programs that were possible because of the comparatively strong fiscal positions that most Asian governments were in, and the fact that many Asian banking systems are considered healthy. Still, Asian governments remain deeply concerned about the state of their economies, and those in countries whose economies depend heavily on exports worry about the sustainability of their recoveries if the United States and other developed economies recover more slowly. This has been reflected in bilateral relations between the United States and some, including China, whose officials are seen as increasingly assertive in their discussions with U.S. economic officials on policies the United States should follow to emerge from the recession. In the early months of the crisis, Asian nations did not have to deal with outright bankruptcies or rescues of major financial institutions, as Western governments did. With only a few exceptions— most notably in South Korea—leverage within Asian financial systems was comparatively low and bank balance sheets were comparatively healthy at the outset of the crisis. Nearly all East Asian nations run current account surpluses, a reversal from their state during the Asian financial crisis of the late 1990s. These surpluses have been one reason for the buildup of enormous government reserves in the region, including China‘s $2.1 trillion and Japan‘s $996 billion—the two largest reserve stockpiles in the world. Such reserves have given Asian governments resources to provide fiscal stimulus, inject capital into their financial systems, and provide backstop guarantees for private financial transactions where needed. So overall, Asian economies were much healthier at the outset of the current crisis than they were before the Asian Financial Crisis of 1997-1998, when several Asian countries burned through their limited reserves quickly trying to defend currencies from speculative selling. The initial stage of the crisis, which centered around losses directly from subprime assets in the United States, gave way to a broader global crisis marked by slowing economies and dried-up liquidity. Asia and the United States are deeply linked in many ways, including trade (primarily Asian exports to the United States), U.S. investments in the region, and financial linkages that entwine Asian banks, companies and governments with U.S. markets and financial institutions. As a result, even though Asian banks disclosed relatively low direct exposures to failed institutions and toxic assets in the United States and Europe, Asian economies were caught in a second phase of the crisis. With Western economies slowing and global investors short of cash and pulling back from any markets deemed risky, many Asian 196

Prepared by Ben Dolven, Asia Section Research Manager, Foreign Affairs, Defense, and Trade Division.

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economies suffered sharp slowdowns or dipped into recession in the fourth quarter of 2008 or the first quarter of 2009. However, several Asian countries—including China, Japan, South Korea, Thailand, Malaysia, Taiwan and Singapore—implemented large fiscal stimulus programs that have shown signs of stimulating domestic investment and consumption. Japan announced several stimulus packages that amounted to 5% of the nation‘s GDP, while China implemented a package worth 12% of GDP. China also mandated an easing of lending by its state banks, opening up credit lines that had been frozen in the crisis‘s early stages. By early August, China, Indonesia, South Korea and Singapore had each reported second quarter GDP growth of at least 2.5% over the previous quarter.197 China‘s rebound has been particularly striking. The country‘s industrial production in the January-July period was up 11% from the same period a year earlier.198 Stock markets around the region are up, most by amounts larger than in the United States. Between January and July, markets in China, Hong Kong, Taiwan, South Korea, Singapore, and Indonesia were each up by more than 40%. Still, in Asia, a belief that held sway in recent years that Asian economies were starting to ― decouple‖ from the United States and Europe, generating growth that didn‘t depend on the rest of the world, has given way to a realization that a crisis that originated in the West can sweep up the region as well. Most Asian economies are showing signs of recovery, some of it based on purely domestic conditions or trade within the region, but Asian officials continue to stress that the strength of their economies is highly dependent on recoveries in the United States and Western Europe.

Source: International Monetary Fund. World Economic Outlook, October, 2009. Figure 10. Asian Current Account Balances are Mostly Healthy.

197 198

An Astonishing Rebound, The Economist, August 13, 2009. Ibid.

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One worrying development is that Pakistan, already coping with severe political instability, has been forced to seek emergency loans from the IMF because of dwindling government reserves. This points to the limits of bilateral solutions to the crisis: For much of October and early November, Pakistan reportedly sought support from China, Saudi Arabia and other Middle Eastern states before being forced to the IMF.199 On November 13, well into discussions with the IMF, Pakistan officials announced they had received a $500 million aid package from Beijing, far short of the $10 billion-$15 billion that Pakistani leaders say they need over the next two years.200 Then on November 15, Pakistani and IMF officials confirmed that Pakistan would receive $7.6 billion in emergency loans, including $4 billion immediately to avoid sovereign default. But this remains short of what Pakistan says it needs.201

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Asian Reserves and their Impact Some analysts argue that substantial Asian reserves could be one source of relief for the global economy.202 Japan has contributed funding for the IMF support package of Iceland, and on November 14, 2008, Prime Minister Taro Aso said Japan would lend the IMF $100 billion to support further packages that might be needed before the IMF increases its capital in 2009.203 Many wonder if China and other reserve-rich developing nations will find ways to use those reserves to support financially-strapped governments. As noted previously, Pakistan reportedly approached China and several Gulf states for such support. One key question is whether Asian countries will seek to play a larger role in setting multilateral moves to shore up regulation, and international support for troubled countries. Five Asian countries—Japan, China, South Korea, India and Indonesia, were present at the G20 summit. But Asian approaches to multilateral regulation are still unclear. At an October 25-26 meeting of the Asia Europe Forum (ASEM), Chinese Premier Wen Jiabao said China generally agrees with many European governments which seek an expansion of multilateral regulations. ― We need financial innovation, but we need financial oversight even more,‖ Wen reportedly told a press conference.204 In late January, speaking at an annual gathering of economic and political leaders in Davos, Switzerland, Wen blamed the crisis on an ― excessive expansion of financial institutions in blind pursuit of profit,‖ a failure of government supervision in the financial sector, and an ― unsustainable model of development, characterized by prolonged low savings and high consumption.‖205 Many analysts saw this as a criticism of the United States, which has much lower savings and higher consumption rates than China. Previous Asian attempts to play a leadership role have been unsuccessful. In 1998, in the midst of the Asian Financial Crisis, Japan and the Asian Development Bank proposed the 199

Despite Ambivalence, Pakistan May Wrap Deal by Next Week, The Wall Street Journal, October 28, 2008. IMF ‗Has Six Days to Save Pakistan,‘ Financial Times, October 28, 2008. Pakistan Says it will Need Financing Beyond IMF Deal, The Wall Street Journal, November 17, 2008. 202 See, for instance, Jeffrey Sachs, The Best Recipe for Avoiding a Global Recession, Financial Times, October 27, 2008. 203 The moved was announced in a November 14 opinion piece by Japanese Prime Minister Taro Aso, Restoring Financial Stability, printed in The Wall Street Journal. 204 Leaders of Europe and Asia Call for Joint Economic Action, New York Times, October 25, 2008. 205 Chinese Premier Blames Recession on U.S. Actions, Wall Street Journal, January 29, 2009. 200 201

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creation of an ― Asian Monetary Fund‖ through which wealthier Asian governments could support economies in financial distress. The proposal was successfully opposed by the U.S. Treasury Department, which argued that it could be a way for countries to bypass the conditions that the IMF demands of its borrowers and go straight to ― easier‖ sources of credit. Two years later, in 2000, Finance Ministers from the ASEAN+3 nations (the 10 members of the Association of Southeast Asian Nations206, plus Japan, South Korea and China) announced the Chiang Mai Initiative (CMI), whose primary measure was to provide a swap mechanism that countries could tap to cover shortfalls of foreign reserves. This was a less aggressive proposal than the Asian Monetary Fund. Although a small portion of the swap lines could be tapped in an emergency, most would likely be subject to IMF conditions for recipients.207 On October 26, Japan, China, South Korea, and ASEAN members agreed to start an $80 billion multilateral swap arrangement in 2009, which would allow countries with substantial balance of payments problems to tap the reserves of larger economies. There remains, however, disagreement within the region about whether the IMF should play an active role in setting conditions for countries that use these swap lines. Asian leaders have sought to start other regional discussions. On October 22, a Japanese government official floated the idea of a pan-Asian financial stability forum, modeled after the Financial Stability Forum at the BIS, which was discussed in May at a meeting of Finance Ministers from Japan, South Korea and China.208 On December 13, the leaders of Japan, China, and South Korea held a trilateral summit in Fukuoka, Japan, agreeing on bilateral swap lines between South Korea and the two others—a new renminbi-won swap line worth the equivalent of $28 billion and an expansion of an existing yen-won swap line to the equivalent of $20 billion.209 Beyond this measure of support for South Korea, however, the summit did not provide broader multilateral initiatives.

National Responses So far, the national-level responses among Asian governments include the following:

Japan Japan was part of the early moves among major economies to flood markets with liquidity, in the ― crisis containment‖ part of the global response, and the Bank of Japan has continued its aggressive monetary stimulus in the months since. Alongside other major central banks, the Bank of Japan pumped tens of billions of dollars into financial markets in late September and early October. It followed these moves with an announcement on October 14 that it would offer an unlimited amount of dollars to institutions operating in Japan, to ensure that Japanese interbank credit markets continued to function. The BOJ did not lower 206

ASEAN‘s members are Indonesia, Singapore, Malaysia, Thailand, the Philippines, Brunei, Vietnam, Cambodia, Laos and Burma (Myanmar). 207 For a fuller discussion of the Chiang Mai Initiative, see East Asian Cooperation, Institute of International Economics, http://www.iie.com/publications/chapters_preview/345/3iie3381.pdf. 208 Japan, China, S. Korea Eye Financial Stability Forum, Reuters, October 20, 2008. 209 Asian Leaders See Growth Driver, The Wall Street Journal, December 15, 2008.

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interest rates in the crisis‘s early stages, but on October 31, it joined other global central banks, including the U.S. Federal Reserve, by cutting a key short-term interest rate to 0.3%, from 0.5%, and on December 19 it cut the rate to 0.1%. For a time, Japan was considered relatively insulated, because of its well capitalized banks, substantial reserves and current account surplus. Japan spent nearly $440 billion between 1998 and 2003 to assist and recapitalize its banking system, and most observers say Japan‘s financial system emerged from the experience fairly sound. Healthy capital positions helped Mitsubishi UFG Group, Japan‘s largest bank, and Nomura, the country‘s largest brokerage, to buy pieces of distressed U.S. investment banks as the crisis was deepening in October. Mitsubishi UFG bought 21% of Morgan Stanley for $9 billion, and Nomura purchased the Asian, European and Middle Eastern operations of Lehman Brothers. But as Western economies began to slow, Japan‘s financial insulation thinned. The Japanese economy is highly exposed to slowdowns in export markets, particularly in the U.S. and Europe. The U.S. accounted for 20.1% of Japan‘s exports in 2007. Japan has sought to provide fiscal stimulus: The government unveiled a $107 billion stimulus package in August, and on January 27, the Japanese parliament passed a second package, valued at $54 billion. The package—and, more broadly, Prime Minister Taro Aso‘s response to the crisis—has been the subject of severe infighting within Aso‘s ruling Liberal Democratic Party. Aso‘s government currently faces extremely low support ratings of around 20%, and he now faces an August 30 Parliamentary election in which the LDP could lose its hold on power, which it has held almost continuously since the 1950s.210

China211 Despite China‘s large-scale holdings of U.S. securities, its exposure to the fallout from the U.S. sub-prime mortgage crisis is believed to have been relatively small. China‘s numerous restrictions on capital flows to and from China limit the ability of individual Chinese citizens and many firms to invest their savings overseas. Most of Chinese investment flows are controlled by government entities, such as state-owned banks, State Administration of Foreign Exchange (which administers China‘s foreign exchange reserves), and the China Investment Corporation (a $200 billion sovereign wealth fund created in 2007),212 and stateowned enterprises. Such entities have maintained relatively conservative investment strategies. The Chinese government generally does not release detailed information on the holdings of its financial entities, although some of its banks have reported on their supposed level of exposure to sub-prime U.S. mortgage securities. Such entities have generally reported that their exposure to troubled sub-prime U.S. mortgages has been minor relative to their total investments, that they have liquidated such assets or have written off losses, and that they continue to earn high profit margins.213 210

Japan Passes Contentious Stimulus Budget, Associated Press, January 27, 2009. The section on China was prepared by Wayne M. Morrison, Specialist in Asian Trade and Finance, Foreign Affairs, Defense, and Trade Division. 212 For an overview of the China Investment Corporation, see CRS Report RL34337, China‘s Sovereign Wealth Fund, by Michael F. Martin. 213 China‘s holdings of Fannie Mae and Freddie Mac securities are likely to be more substantial, but less risky (compared to other sub-prime securities), especially after these two institutions were placed in conservatorship by the Federal Government in September 2008. 211

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However, China‘s economy has not been immune to the effects of the global financial crisis, given its heavy reliance on trade and foreign direct investment (FDI) for its economic growth. Numerous sectors have been hard hit.214 To illustrate: 





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

The real estate market in several Chinese cities exhibited signs of a bursting bubble, including a slowdown in construction, falling prices and growing levels of unoccupied buildings. China‘s trade plummeted. Both exports and imports declined each month from November 2008 to October 2009 on a year-on-year basis (see Figure 11). The 26.4% decline in exports (year-on-year basis) in May 2009 was the biggest monthly decline ever recorded (since such data were collected). The level of FDI flows to China fell for 10 straight months from October 2008 to August 2009 on a year-on-year basis. For example, FDI flows to China dropped by nearly a third in January 2009). Numerous Chinese press reports in 2008 and early 2009 indicated sharp reductions of production and employment in China. The Chinese government in January 2009 estimated that 20 million migrant workers had lost their jobs in 2008 because of the global economic slowdown.

Source: Global Insight and China‘s Customs Administration. Figure 11. Monthly Change in Chinese FDI and Trade: April 2008-October 2009 year-on-year basis.

214

China‘s economy was already slowing down before the global financial crisis hit. This was in large part the result of government efforts to slow the rate of inflation. China‘s real GDP growth fell from 13% in 2007 to 9% in 2008. The global financial crisis has sharply diminished economic growth. Thus, the Chinese government has abandoned its anti- inflation policies and instead has sought to stimulate the economy.

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China responded to the crisis on a number of fronts. On September 27, 2008, Chinese Premier Wen Jiabao reportedly stated in a speech that ― What we can do now is to maintain the steady and fast growth of the national economy and ensure that no major fluctuations will happen. That will be our greatest contribution to the world economy under the current circumstances.‖215 On October 8, 2008, China‘s central bank announced plans to cut interest rates and the reserve- requirement ratio in order to help stimulate the economy. The announcement coincided with announcements by the U.S. Federal Reserve and other central banks of major economies around the world to lower their benchmark interest rates, although, neither China‘s central bank or the media stated that these measures were taken in conjunction with the other major central banks. On October 21, 2008, China‘s State Council announced it was considering implementing a new economic stimulus package, which would include an acceleration of construction projects, new export tax rebates, a reduction in the housing transaction tax, increased agriculture subsidies, and expanding lending to small and medium enterprises.216 On November 9, 2008 the Chinese government announced it would implement a twoyear $586 billion stimulus package, mainly dedicated to infrastructure projects. The package would finance programs in 10 major areas, including affordable housing, rural infrastructure, water, electricity, transport, the environment, technological innovation and rebuilding areas hit by disasters (especially, areas that were hit by the May 12, 2998 earthquake).217 Table 2 provides a breakdown of China‘s stimulus program spending priorities. In addition, the government directed banks to loosen credit requirements, which resulted in sharp increase in bank lending. It is estimated that Chinese banks made $1.27 trillion in new loans during the first nine months of 2009.218 China‘s stimulus package and easy monetary policies appear to have produced positive results for China‘s economy. For example:

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

  

China‘s real quarterly GDP on a year-on-year basis, which rose by only 6.1% in the first quarter of 2009, increased by 7.9% in the 2nd quarter, 8.9% in the 3rd quarter of 2009, and is projected by the IMF to grow by 10.1% in the 4th quarter. China‘s monthly FDI flows on a year on year basis, showed positive growth for three straight months (August-October 2009). During the first 10 months of 2009, investment in real estate development was up 18.9% on a year-on-year basis. Although China‘s trade in 2009 has not rebounded to 2008 growth levels, it has shown gradual growth since around February 2009.

The IMF in October 2009 projected China‘s real GDP would rise by 8.5% in 2009 (and by 9.0% in 2010), a level significantly higher than most of the other major world economies (see Figure 12).

215

Chinaview, September 27, 2008. Global Insight, Country Intelligence Analysis, China, October 20, 2008. 217 China Xinhua News Agency, November 12, 2008. 218 Global Insight, Country Intelligence, China, October 15, 2009. 216

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Table 2. China‟s Central Government November 2008 Domestic Stimulus Package

Transport infrastructure investment Post-earthquake reconstruction Public housing Rural infrastructure Research and development and structural change Environmental development Healthcare and education Totals

In Chinese Yuan (billions) 1,500

In U.S. Dollars (billions) 220

As a Percent of Total Stimulus Package 37.5

As a Percent of China‟s 2008 GDP 5.0

1,000 400 370 370

146 59 54 54

25.0 10.0 9.3 9.3

3.3 1.3 1.2 1.2

210 150 4,000

31 22 586

5.3 3.8 100.0

0.7 0.5 13.3

Source: Global Insight. Notes: Ranked according to planned spending levels.

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Despite these positive growth projections, some economies warn that long-term economic growth will depend largely on the ability of the government to rebalance the economy away from trade and fixed investment to domestic consumption. Many have also raised concerns that easy money policies could lead to overcapacity n some industries, create asset bubbles in certain sectors, such as in real estate and the stock market, and result in a sharp increase in the amount of nonperforming loans held by China‘s banks. For example, in June 2009, a Chinese government agency estimated that 20% of new bank credit was going into China‘s stock markets. Some analysts contend that China‘s refusal to appreciate its currency against the dollar could result in growing trade frictions with the United States.

Source: International Monetary Fund, World Economic Outlook, October 2009. Figure 12. IMF‘s Projected Real GDP of Major Economies in 2009 % growth over 2008 levels. Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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South Korea South Korea, Asia‘s fourth largest economy, was deeply affected by the crisis, with both the South Korean stock market and the won tumbling throughout the months, sometimes precipitously. On October 28, the won reached its lowest point since 1998, when South Korea was in the middle of its IMF support package. Oxford Analytica estimates that foreign investors withdrew a net $25 billion from the Korean stock market between January and late September.219 Experts say South Korean banks have large dollar-denominated debts, and therefore need to protect their holdings of dollars. This has contributed to the won‘s fall, and in early October, President Lee Myung-bak invoked patriotism to encourage Korean banks to stop hoarding dollars and buy won.220 South Korea has announced several packages to stimulate the economy and shore up the domestic banking industry. The government announced a broad economic rescue package on October 19, 2008, promising to guarantee $100 billion in South Korean banks‘ foreigncurrency debt and provide another $30 billion to directly support South Korean banks. (The total amount was equivalent to 14% of the country‘s GDP.) Struggling with its plunging stock market and currency, President Lee‘s government has also announced policies to spend up to $9.2 billion to support real-estate developers struggling with unsold apartments, and to provide further financial support to small businesses. On October 27, Korea‘s central bank cut its prime interest rate by 0.75 percentage points to 4.25%, the largest cut it has made since it began setting base interest rates in 1999. The rate has since been cut two more times, to 3%. On December 17, the government said it would launch a $15 billion fund to boost the capital of Korean banks. South Korea has been an enormous economic success, and has bounced back strongly from the Asian Financial Crisis that forced it to turn to the IMF for a $58 billion support package in December 2007. After contracting by 6.9% in 1998, South Korea‘s GDP bounced back by 9.5% and 8.5% in the ensuing two years. Since 2002, GDP growth has been in the 3%-6% range. However, President Lee has said the current situation is more severe than the 1997 crisis. Economically, South Korea is an outlier within Asia. It is one of the few Asian countries that is running a current account deficit ($12.6 billion in January-August 2008). Its banks are unusually leveraged, with loan-deposit ratios of more than 130%, higher than that in the United States and the EU, and the only East Asian country over 100%.221 Pakistan Pakistan‘s economy went into a steady decline in 2008. After several years of strong and comparatively stable growth, Pakistan quickly slid into a severe economic crisis in 2008.222 Growth in real GDP declined sharply from about 8% to 3-4%; inflation rose to nearly 24%; and Pakistan‘s rupee depreciated by over 23% against the U.S. dollar. Pakistan‘s unemployment rate rose, and the United Nations reported that 10 million Pakistanis were undernourished. In the words of Pakistan President Asif Ali Zardari, ― The greatest challenge this government faces is an economic one.‖223 219

SOUTH KOREA: Seoul Faces Growth and Liquidity Tests, Oxford Analytica, October 8, 2008. Lee Warns Against Dollar Hoarding, Korea Times, October 8, 2008. 221 See Merrill Lynch, ― Asia: Risks Rising‖, October 3, 2008. 222 For more information about Pakistan‘s economic crisis, see CRS Report RS22983, Pakistan‘s Capital Crisis: Implications for U.S. Policy, by Michael F. Martin and K. Alan Kronstadt. 223 ―Paki stan‘s Zardari to Give Up Powers,‖ AFP, September 20, 2008. 220

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Rising trade and current account deficits generated a ― capital crisis‖ in the autumn of 2008. Pakistan‘s foreign reserves slid from $14.2 billion in October 2007 to $4.1 billion at the end of October 2008. According to President Zardari‘s chief economic advisor, Shaukat Tarin, Pakistan needed $4 to $5 billion by the end of November 2008 to avoid defaulting on maturing sovereign debt obligations. In addition, even if Pakistan does secure the money it needs by the end of November, Tarin stated that Pakistan requires $10 to $15 billion in assistance over the next two to three years to continue to service its account deficits and outstanding debt.224 Several factors, in addition to the current global financial crisis, are contributing to the recent downturn in Pakistan‘s economy. Pakistan‘s continuing struggle against Islamist militancy in its tribal areas along the border with Afghanistan has led to high federal deficits and uncertainty about the stability of the Pakistan government. A recent escalation of bombings and violence in Pakistan has raised the risk for and scared off many foreign investors and businesses. This has worsened the nation‘s capital shortage. In addition, the flight from risk that has followed the U.S. financial crisis has apparently contributed to some capital flight from Pakistan, especially among overseas Pakistanis and investors from the Middle East. Pakistan has sought the required assistance from several countries (including China, Saudi Arabia, and the United States), international financial institutions (including the Asian Development Bank (ADB), the International Monetary Fund (IMF), the Islamic Development Bank (IDB), and the World Bank), and an informal group of nations called the ― Friends of Pakistan.‖ Although the ADB, the World Bank and others did offer some support, the total amount was insufficient to avoid the default risk. As a consequence, Pakistan reluctantly began negotiating a loan with the IMF. On November 15, Tarin announced that Pakistan had reached a tentative agreement with the IMF to borrow $7.6 billion over the next 23 months.225 The first installment of the loan—up to $4 billion—was expected by the end of November; Pakistan is to repay the loan by 2016.226 Assuming Pakistan and the IMF formally conclude the agreement, the $7.6 billion loan is well short of the estimated $10 billion to $15 billion Pakistan says it needs over the next two years to avoid a financial crisis. Some observers speculate that the IMF agreement will spur help from other potential donors, such as China, Saudi Arabia, and the United States. However, given the continuing economic problems of the potential donor nations, Pakistan may not be able to secure the full amount of assistance it says it needs. As a result, the IMF loan may end up being only a short-term patch to a long-term economic problem. In the meantime, Pakistan has announced some changes in economic policy designed to alleviate their capital crisis. On September 19, 2008, acting finance minister Naveed Qamar released new economic policies designed to bring about macroeconomic stability and avoid seeking IMF assistance that included the elimination of fuel, electricity and food subsidies, and a reduction in the government deficit.227 On November 3, 2008, Tarin announced reforms of Pakistan‘s tax system, including the politically sensitive taxation of large landowners, to

224

Simon Cameron-Moore, ―Paki stan Needs $ 10-15 Bln Fast, Says PM‘s Adviser,‖ Reuters, October 21, 2008. ―IM F Okays $7.6 Bln Package for Pakistan: Tareen,‖ Associated Press of Pakistan, November 15, 2008. 226 Jamie Anderson, ―Paki stan Turns to IMF for Financial Aid,‖ Money Times, November 16, 2008. 227 ―Paki stan Unveils Package for Economic Stability,‖ Reuters, September 19, 2008. 225

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reduce the incidence of tax evasion.228 There has also been talk of cutting Pakistan‘s defense budget. According to some analysts, the new economic policies may foster popular discontent and threaten political stability. The elimination of fuel, electricity and food subsidies may cause significant harm to Pakistan‘s poor, many of whom are already undernourished. The tax on large landowners may undermine support for Zardari‘s Pakistan People‘s Party among its party members and its coalition partners. A cut in Pakistan‘s defense budget also could harm its military efforts against Islamist militants and weaken the military‘s political support for the current coalition government.

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International Policy Issues In making policy changes, Congress faces several fundamental issues. First is whether any longterm policies should be designed to restore confidence and induce return to the normal functioning of a self-correcting system or whether the policies should be directed at changing a system that may have become inherently unstable, a system that every decade or so creates bubbles and then lurches into crisis.229 For example, in Congressional testimony on October 23, 2008, former Federal Reserve Chairman Alan Greenspan stated that a ― once-in-acentury credit tsunami‖‗ had engulfed financial markets, and he conceded that his free-market ideology shunning regulation was flawed.230 In a recent book, the financier George Soros stated that the currently prevailing paradigm, that financial markets tend towards equilibrium, is both false and misleading. He asserted that the world‘s current financial troubles can be largely attributed to the fact that the international financial system has been developed on the e basis of that flawed paradigm.231 Could this crisis mark the beginning of the end of ―fre market capitalism?‖ On the other hand, the International Monetary Fund has observed that market discipline still works and that the focus of new regulations should not be on eliminating risk but on improving market discipline and addressing the tendency of market participants to underestimate the systemic effects of their collective actions.232 A second question deals with what level any new regulatory authority should reside. Should it primarily be at the state, national, or international level? If the authority is kept at the national level, how much power should an international authority have? Should the major role of the IMF, for example, be informational, advisory, and technical, or should it have enforcement authority? Should enforcement be done through a dispute resolution process similar to that in the World Trade Organization, or should the IMF or other international institution be ceded oversight and regulatory authority by national governments? 228

Farhan Bokhari, ―Paki stan Vows to Target Rich Tax Evaders as IMF Concludes Talks on Vital Loan,‖ Financial Times, November 3, 2008. 229 For an analysis of bubbles, see CRS Report RL33666, Asset Bubbles: Economic Effects and Policy Options for the Federal Reserve, by Marc Labonte. 230 Lanman, Scott and Steve Matthews. ―G reenspan Concedes to ‗Flaw‘ in His Market Ideology,‖ Bloomberg News Service, October 23, 2008. 231 Soros, George. The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means (PublicAffairs, 2008) p. i. Soros proposes a new paradigm that deals with the relationship between thinking and reality and accounts for misconceptions and misinterpretations. 232 International Monetary Fund. ― The Recent Financial Turmoil—Initial Assessment, Policy Lessons, and Implications for Fund Surveillance,‖ April 9, 2008.

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As of mid-2009, the primary role of the IMF in the financial crisis appears to be twofold. The first is of lender of last resort, and the second is to provide analysis and advice to member countries. The IMF has been tracking economic and financial developments worldwide in order to provide policymakers with forecasts and analysis of developments in financial markets. It also is providing policy advice to countries and regions and is assisting the Group of 20 and other international organizations with recommendations to reshape the system of international regulation and governance. The June 17 Treasury proposal for financial regulation cedes no sovereignty to the IMF. It calls for international reforms to support U.S. efforts. Even the IMF recognizes that its authority over countries comes primarily through its advisory capacity and through the conditions it places on loans to borrowing countries.

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Bretton Woods II The second question above is central for those calling for a new Bretton Woods conference. U.K. Prime Minister Gordon Brown called for such a conference to have the specific objective of remaking the international financial architecture.233 In the declaration of the G-20 Summit on Financial Markets and the World Economy, world leaders stated: We underscored that the Bretton Woods Institutions must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges. Emerging and developing economies should have greater voice and representation in these institutions. G-20 Meetings The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. The members include the finance ministers and central bankers from the member nations. A G-20 leaders‘ summit is a new development. On September 24-25, 2009, a G-20 Summit was held in Pittsburgh. At the summit, the G20 members agreed to support six broad policy goals: 1. The new G-20 ― Framework for Strong, Sustainable and Balanced Growth‖ will launch by November 2009. This framework promotes shifting from public to private sources of demand, establishing a pattern of growth that is sustainable and balanced, avoiding destabilizing booms and busts in asset and credit prices, and adopting macroeconomic policies that are consistent with stable prices. In order to achieve this framework, the G-20 members agreed to implement a ― cooperative process of mutual assessment.‖ This cooperative process is comprised of: shared policy objectives; a medium-term policy framework and an assessment of the impact national policies have on global economic growth and financial stability; and actions to meet common objectives. Within this framework, the G-20 members agreed to:  implement responsible fiscal policies, attentive to short-term flexibility considerations and longer-run sustainability requirements;  strengthen financial supervision to prevent the re-emergence in the financial system of excess credit growth and excess leverage and undertake macro 233

Gerstenzang, James. ― Bush will Meet with G-20 After Election,‖ Los Angeles Times, October 23, 2008.

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prudential and regulatory policies to help prevent credit and asset price cycles from becoming forces of destabilization;  promote more balanced current accounts and support open trade and investment to advance global prosperity and growth sustainability, while actively rejecting protectionist measures;  undertake monetary policies consistent with price stability in the context of market oriented exchange rates that reflect underlying economic fundamentals;  undertake structural reforms to increase potential growth rates and, where needed, to improve social safety nets; and  promote balanced and sustainable economic development in order to narrow development imbalances and reduce poverty. 2. To strengthen the regulatory system for banks and other financial firms by raising capital standards, implementing strong international compensation standards, improving the over-the- counter derivatives market, and holding large global firms accountable for their risks. As components of this process, the G-20 agree to: building high quality bank capital and mitigating procyclical actions; reforming compensation practices to strengthen financial stability; improving over-the-counter derivatives markets; and addressing cross-border resolutions and systemically important financial institutions. In addition, the G-20 leaders indicated their support for efforts to improve the financial system by taking actions against non-cooperative jurisdictions, including using ― countermeasures against tax havens,‖ and by tasking the Financial Action Task Force (FATF) to issue a list of high risk jurisdictions by February 2010. 3. To modernize the global architecture by designating the G-20 as the premier forum for international economic cooperation, by establishing the Financial Stability Board (F SB), by having the FSB include major emerging economies, and by having the FSB coordinate and monitor progress in strengthening financial regulation. Also, the G-20 agreed to shift the IMF quota share to dynamic emerging markets and developing countries of at least 5%, using the current IMF quota formula. The change in quotas is keyed to the IMF ‘s quota review that is scheduled to be completed by January 2010. In addition to reviewing the quotas, the G-20 indicated its support for reviewing the size of any increase in IMF quotas, the size and composition of the Executive Board, ways of enhancing the Board‘s effectiveness, the Fund Governors‘ involvement in the strategic oversight of the IMF, and the diversity of IMF staff, and the appointment of department heads and senior leadership through an open, transparent and merit-based process. The G-20 countries also agreed to contribute over $500 billion to a renewed and expanded New Arrangements to Borrow facility in the IMF. Additional IMF funding will also be available through gold sales and through additional Special Drawing Rights (SDRs). The G-20 also called for reforming the mission, mandate, and governance of the development banks, including the IMF, which the G-20 indicated must play a ― critical role in promoting global financial stability and rebalancing growth.‖ They also called on the World Bank to play a leading role in responding to problems

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whose nature requires globally coordinated action, such as climate change and green technology, food security, human development, and private-sector led growth. 4. To take new steps to increase access to food, fuel, and finance among the world‘s poorest economies, while clamping down on illicit outflows. The G-20 also agreed to improve energy market transparency and stability, and to improve regulatory oversight of energy markets. 5. To phase out and rationalize over the medium term inefficient fossil fuel subsidies while providing targeted support for the poorest. Agreed to stimulate investment in clean and in renewable energy and in energy efficiency, and to take steps to diffuse and transfer clean energy technology. 6. To maintain openness and move toward greener, more sustainable growth. In addition, the G-20 countries are addressing a number of issues related to correcting abuses in the financial markets, particularly those involving non-bank financial institutions and complex financial instruments. Analysts and policymakers generally agree that the lack of regulation of new non-bank financial institutions, such as hedge funds and private equity firms, and the lack of transparency of new complex financial instruments, such as derivatives, were key factors in the current financial crisis. The G-20 leaders also called for common principles for reforming financial markets. These principles include: strengthening the transparency and accountability of firms and financial products, extending regulation to all financial market institutions, promoting the integrity of financial markets (such as bolstering consumer protection) and consistent regulations across national borders, and reforming international financial institutions to better monitor the health of the financial system. The G-20 London Summit reiterated the need for financial supervision, regulation, and transparency of financial products.234 The role of the G-20 in dealing with the global financial crisis began on November 15, 2008, with the G-20 Summit on Financial Markets and the World Economy that was held in Washington, DC. This was billed as the first in a series of meetings to deal with the financial crisis, discuss efforts to strengthen economic growth, and to lay the foundation to prevent future crises from occurring. This summit included emerging market economies rather than the usual G-7 or G-8 nations that periodically meet to discuss economic issues. It was not apparent that the agenda of the emerging market economies differed greatly from that of Europe, the United States, or Japan. The G-20 Washington Declaration to address the current financial crisis was both a laundry list of objectives and steps to be taken and a convergence of attitudes by national leaders that concrete measures had to be implemented both to stabilize national economies and to reform financial markets. The declaration established an Action Plan that included high priority actions to be completed prior to March 31, 2009. Details are to be worked out by the G-20 finance ministers. The declaration also called for a second G-20 summit that was held in London on April 2, 2009. Since the attendees now include the Association for Southeast Asian Nations, the G-20 no longer refers to just 20 nations. At the April 2009 G-20 London Summit, leaders agreed on establishing a new Financial Stability Board (incorporating the Financial Stability Forum) to work with the IMF to ensure 234

G-20, Leaders‘ Statement: The Pittsburgh Summit, September 25, 2009, http://www.pittsburghsummit.gov/ mediacenter/129639.htm.

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cooperation across borders; closer regulation of banks, hedge funds, and credit rating agencies; and a crackdown on tax havens. The leaders could not agree on the need for additional stimulus packages by nations, but they considered the additional funding for the IMF and multilateral development banks as key stimulus directed at developing and emerging market economies. The leaders reiterated their commitment to resist protectionism and promote global trade and investment.235 At the November G-20 summit, the leaders agreed on common principles to guide financial market reform: 







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

Strengthening transparency and accountability by enhancing required disclosure on complex financial products; ensuring complete and accurate disclosure by firms of their financial condition; and aligning incentives to avoid excessive risk- taking. Enhancing sound regulation by ensuring strong oversight of credit rating agencies; prudent risk management; and oversight or regulation of all financial markets, products, and participants as appropriate to their circumstances. Promoting integrity in financial markets by preventing market manipulation and fraud, helping avoid conflicts of interest, and protecting against use of the financial system to support terrorism, drug trafficking, or other illegal activities. Reinforcing international cooperation by making national laws and regulations more consistent and encouraging regulators to enhance their coordination and cooperation across all segments of financial markets. Reforming international financial institutions (IFIs) by modernizing their governance and membership so that emerging market economies and developing countries have greater voice and representation, by working together to better identify vulnerabilities and anticipate stresses, and by acting swiftly to play a key role in crisis response.

At the London Summit, the leaders reviewed progress on the November G-20 Action Plan that set forth a comprehensive work plan to implement the above principles. The Plan included immediate actions to:  

 

 235

Address weaknesses in accounting and disclosure standards for off-balance sheet vehicles; Ensure that credit rating agencies meet the highest standards and avoid conflicts of interest, provide greater disclosure to investors, and differentiate ratings for complex products; Ensure that firms maintain adequate capital, and set out strengthened capital requirements for banks‘ structured credit and securitization activities; Develop enhanced guidance to strengthen banks‘ risk management practices, and ensure that firms develop processes that look at whether they are accumulating too much risk; Establish processes whereby national supervisors who oversee globally active financial institutions meet together and share information; and

G-20, Meeting of Finance Ministers and Central Bank Governors, United Kingdom, 14 March 2009, Communiqué, March 14, 2009.

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Expand the Financial Stability Forum to include a broader membership of emerging economies.

The leaders instructed finance ministers to make specific recommendations in the following areas:     

Avoiding regulatory policies that exacerbate the ups and downs of the business cycle; Reviewing and aligning global accounting standards, particularly for complex securities in times of stress; Strengthening transparency of credit derivatives markets and reducing their systemic risks; Reviewing incentives for risk-taking and innovation reflected in compensation practices; and Reviewing the mandates, governance, and resource requirements of the International Financial Institutions.

The leaders agreed that needed reforms will be successful only if they are grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively-regulated financial systems. The leaders further agreed to:  

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 

Reject protectionism, which exacerbates rather than mitigates financial and economic challenges; Strive to reach an agreement this year on modalities that leads to an ambitious outcome to the Doha Round of World Trade Organization negotiations; Refrain from imposing any new trade or investment barriers for the next 12 months; and Reaffirm development assistance commitments and urge both developed and emerging economies to undertake commitments consistent with their capacities and roles in the global economy.

The International Monetary Fund236 Policy proposals for changes in the international financial architecture have included a major role for the IMF. As a lender of last resort, coordinator of financial assistance packages for countries, monitor of macroeconomic conditions worldwide and within countries, and provider of technical assistance, the IMF has played an important role during financial crises whether international or confined to one member country. The financial crisis has shown that the world could use a better early warning system that can detect and do something about stresses and systemic problems developing in world financial markets. It also may need some system of what is being called a macro-prudential framework for assessing risks and promoting sound policies. This would not only include the regulation and supervision of financial instruments and institutions but also would incorporate cyclical and other macroeconomic considerations as well as vulnerabilities from increased 236

Prepared by Dick K. Nanto and Martin A. Weiss. For further information see CRS Report RS22976, The Global Financial Crisis: The Role of the International Monetary Fund (IMF), by Martin A. Weiss.

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banking concentration and inter-linkages between different parts of the financial system.237 In short, some institution could be charged with monitoring synergistic conditions that arise because of interactions among individual financial institutions or their macroeconomic setting. However, the IMF ‘s current system of macroeconomic monitoring tends to focus on the risks to currency stability, employment, inflation, government budgets, and other macroeconomic variables. The IMF, jointly with the Financial Stability Board, has recently stepped up its work on financial markets, macro-financial linkages, and spillovers across countries with the aim of strengthening early warning systems. The IMF has not, however, traditionally pressed countries to counter specific risks such as how macroeconomic variables, potential synergisms and blurring of boundaries among regulated entities, and new investment vehicles affect prudential risk for insurance, banking, and brokerage houses. The Bank for International Settlements makes recommendations to countries on measures to be undertaken (such as Basel II) to ensure banking stability and capital adequacy, but the financial crisis has shown that the focus on capital adequacy has been insufficient to ensure stability when a financial crisis becomes systemic and involves brokerage houses and insurance companies as well as banks.

THE INTERNATIONAL MONETARY FUND

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The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton Woods, New Hampshire, agreed on a framework for international economic cooperation. The IMF came into existence in December 1945 and now has membership of 185 countries. The IMF performs three main activities:   

monitoring national, global, and regional economic and financial developments and advising member countries on their economic policies (surveillance); lending members hard currencies to support policy programs designed to correct balance of payments problems; and offering technical assistance in its areas of expertise, as well as training for government and central bank officials.

The financial crisis has created an opportunity for the IMF to reinvigorate itself and possibly play a constructive role in resolving, or at the least mitigating, the effects of the global downturn. It has been operating on two fronts: (1) through immediate crisis management, primarily balance of payments support to emerging-market and less-developed countries, and (2) contributing to longterm systemic reform of the international financial system.238 The IMF also has a wealth of information and expertise available to help in 237

Lipsky, John. ― Global Prospects and Policies,‖ Speech by John Lipsky, First Deputy Managing Director, International Monetary Fund, at the Securities Industries and Financial Markets Association, New York, October 28, 2008. World Bank. ―TheUnfolding Crisis, Implications for Financial Systems and Their Oversight,‖ October 28, 2008. p. 8. 238 See CRS Report RS22976, The Global Financial Crisis: The Role of the International Monetary Fund (IMF), by Martin A. Weiss.

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resolving financial crises and has been providing policy advice to member countries around the world. IMF rules stipulate that countries are allowed to borrow up to three times their quota239 over a three-year period, although this requirement has been breached on several occasions in which the IMF has lent at much higher multiples of quota. In response to the current financial crisis, the IMF has activated its Emergency Financing Mechanism to speed the normal process for loans to crisis-afflicted countries. The emergency mechanism enables rapid approval (usually within 48- 72 hours) of IMF lending once an agreement has been reached between the IMF and the national government. As of April 2009, the IMF, under its Stand-By Arrangement facility, has provided or is in the process of providing financial support packages for Iceland ($2.1 billion), Ukraine ($16.4 billion), Hungary ($25.1 billion), Pakistan ($7.6 billion), Belarus ($2.46 billion), Serbia ($530.3 million), Armenia ($540 million), El Salvador ($800 million), Latvia ($2.4 billion), and Seychelles ($26.6 million). The IMF also created a Flexible Credit Line for countries with strong fundamentals, policies, and track records of policy implementation. Once approved, these loans can be disbursed when the need arises rather than being conditioned on compliance with policy targets as in traditional IMF-supported programs. The IMF board has approved Mexico for $47 billion under this facility. Poland has requested a credit line of $20.5 billion. The IMF also may use its Exogenous Shocks Facility (ESF) to provide assistance to certain member countries. The ESF provides policy support and financial assistance to lowincome countries facing exogenous shocks, events that are completely out of the national government‘s control. These could include commodity price changes (including oil and food), natural disasters, and conflicts and crises in neighboring countries that disrupt trade. The ESF was modified in 2008 to further increase the speed and flexibility of the IMF‘s response. Through the ESF, a country can immediately access up to 25% of its quota for each exogenous shock and an additional 75% of quota in phased disbursements over one to two years. The increasing severity of the crisis has led world leaders to conclude that the IMF needs additional resources. At the 2009 February G-7 finance ministers summit, the government of Japan lent the IMF $100 billion dollars.240 At the April 2009 London G-20 summit leaders of the world‘s major economies agreed to increase resources of the IMF and international development banks by $1.1 trillion including $750 billion more for the International Monetary Fund, $250 billion to boost global trade, and $100 billion for multilateral development banks. For the additional IMF resources, $250 billion was to be made available immediately through bilateral arrangements between the IMF and individual countries, while an additional $250 billion would become available as additional countries pledged their participation. The increased resources include the $100 billion loan from Japan, and the members of the European Union had agreed to provide an additional $100 billion. Subsequently, Canada ($10 billion), South Korea ($10 billion), Norway ($4.5 billion), and Switzerland ($10 billion) agreed to subscribe additional funds. The Obama Administration 239

Each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy. A member‘s quota determines its maximum financial commitment to the IMF and its voting power. The U.S. quota of about $58.2 billion is the largest. 240 IMF Signs $100 Billion Borrowing Agreement with Japan, IMF Survey Magazine: In the News, February 13, 2009.

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has asked Congress to approve a U.S. subscription of $100 billion to the IMF‘s New Arrangements to Borrow. China reportedly has said it is willing to provide $40 billion through possible purchases of IMF bonds.241 The sources for the remaining $145.5 billion of the planned increase in the NAB have not been announced. The IMF reportedly is considering issuing bonds, something it has never done in its 60year history.242 These would be sold to central banks and government agencies and not to the general public. According to economist and former IMF chief economist Michael Mussa, the United States and Europe previously blocked attempts by the IMF to issue bonds since it could potentially make the IMF less dependent on them for financial resources and thus less willing to take policy direction from them.243 However, several other multilateral institutions such as the World Bank and the regional development banks routinely issue bonds to help finance their lending. The IMF is not alone in making available financial assistance to crisis-afflicted countries. The International Finance Corporation (IFC), the private-sector lending arm of the World Bank, has announced that it will launch a $3 billion fund to capitalize small banks in poor countries that are battered by the financial crisis. The Inter-American Development Bank (IDB) announced on October 10, 2008 that it will offer a new $6 billion credit line to member governments as an increase to its traditional lending activities. In addition to the IDB, the Andean Development Corporation (CAF) announced a liquidity facility of $1.5 billion and the Latin American Fund of Reserves (FLAR) has offered to make available $4.5 billion in contingency lines. While these amounts may be insufficient should Brazil, Argentina, or any other large Latin American country need a rescue package, they could be very helpful for smaller countries such as those in the Caribbean and Central America that are heavily dependent on tourism and property investments.

APPENDIX A. MAJOR RECENT ACTIONS AND EVENTS OF THE GLOBAL FINANCIAL CRISIS244 2009 November 19. Treasury Secretary Timothy F. Geithner testified before the Joint Economic Committee regarding the economic collapse of 2008 and the subsequent bailout of Wall Street firms by TARP (PL 110-343). Rep. Peter A. DeFazio, D-Ore., previously, and Rep. Kevin Brady, R-Texas, at the hearing, expressed lack of confidence in Treasury actions and Geithner. The Treasury Secretary replied that regulators simply had no other choice, given the panic and near meltdown of the financial system that started with the failure of Lehman Brothers Holdings Inc. ― The judgment made at the time was that we had the ability 241

―China Urges World Monetary Systems Diversification ,‖ Dow Jones Newswire , April 2, 2009, http://www.djnewswires.com/eu. 242 Timothy R. Homan, ―IM F Plans to Issue Bonds to Raise Funds for Lending Programs ,‖ Bloomberg.com, April 25, 2009. 243 Bob Davis, ―IM F Considers Issuing Bonds to Raise Money,‖ Wall Street Journal, February 1, 2009. 244 Prepared by J. Michael Donnelly, Information Research Specialist, Knowledge Services Group. Opinions are those of the sources and not those of CRS. Source: Various news articles, reports, and blog excerpts. Beginning July 1, 2009, source information is provided.

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to prevent that, and that was the necessary and prudent thing to do,‖ he said. ― In acting that way, we were going to save the economy from even greater devastation than you saw in the wake of Lehman‘s collapse.‖ CQ Today.

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November 19. Fed auditing provision added to U.S. systemic risk bill. The House Financial Services Committee approved a series of amendments designed to enhance oversight of the Federal Reserve Board and create a government fund to pay for the failure of systemic institutions. The Committee voted to broaden the ability of the Government Accountability Office (GAO) to audit the Federal Reserve, despite concerns from the central bank that such scrutiny might lead investors to believe that its decisions on interest rates and other monetary policy would now be subject to political interference. This is due to Committee approval of a measure proposed by Representative Ron Paul of Texas that would allow Congress to order audits of all the Fed's lending programs as well as of its basic decisions to set monetary policy by raising or lowering interest rates. Rep. Paul has proposed this legislation before to no effect. The panel added these provision to a bill, HR 3996, designed to stem economic risks posed by the failure of major financial institutions and create an orderly process for restructuring such institutions. It also approved by voice vote an amendment that would cap the Fed‘s emergency lending authority at $4 trillion. The Committee approved several amendments which would give the Federal Reserve Board oversight of systemically crucial companies and let the Federal Deposit Insurance Corp. resolve them. American Banker, New York Times, CQ Today. November 18. Parent banks reaffirm commitment to Romania, European Commission and IMF say. The parent banks of the nine largest banks operating in Romania reaffirmed their commitment to maintain their exposure to the country and ensure adequate capital levels over 10 percent for their affiliates. The nine parent banks with subsidiaries in Romania are: Erste Group Bank, Raiffeisen International, Eurobank EFG, National Bank of Greece, UniCredit Group, Société Générale, Alpha Bank, Volksbank, and Piraeus These banks emphasized the need for the availability of appropriate investment instruments. All parent banks complied with their commitments to provide additional capital needs for 2009 as of end-September 2009, thus ensuring the capital-adequacy ratio of their affiliates to remain above 10 percent. IMF press release. November 12. Foreclosure filings were down 3% in October, the third consecutive month-overmonth dip, according to RealtyTrac, the online seller of foreclosed homes. Foreclosure rates are still up 18% compared with October 2008. But the month-over-month decrease followed a 4% drop in filings during September and a 1% fall in August. James Saccacio, RealtyTrac‘s CEO, said ― The fundamental forces driving foreclosure activity in this housing downturn—high-risk mortgages, negative equity, and unemployment—continue to loom over any nascent recovery.‖ Broad economic distress, such as the rising unemployment rate, has RealtyTrac spokesman Rick Sharga thinking that declining foreclosures may be artificial rather than a real trend. ― Processing delays and legislative actions are slowing down foreclosures,‖ not actual improvement in the market, he said. The slowdowns include banks taking time to judge whether some loans are eligible for the Making Home Affordable program, President

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Obama‘s foreclosure-prevention initiative that was passed last spring. New state-level regulations have also lowered foreclosure statistics. Those factors may have especially delayed bank repossessions. RealtyTrac reported 77,077 REOs in October, down 12.2% compared to September, when nearly 88,000 homes were lost. For the year, there have been a total of 700,929 properties taken back by banks. Foreclosures require a double trigger, said Sharga. The first is that mortgage borrowers must have experienced a financial setback, such as medical bills, divorce, unemployment, and the like. The second trigger is owing more on the mortgage than the home is worth. Millions of borrowers are in that position: More than 20% of borrowers are underwater, according to Zillow. Most will continue to pay off their mortgages. However, if a family member loses their job or someone gets sick or the loan resets to a much higher interest rate, that‘s when the home may be lost. The ― sand states,‖ Nevada, California, Florida, and Arizona, continued to suffer the worst foreclosure problems. Nevada had the highest foreclosure rate in the nation, one filing for every 80 housing units. In second place was California, where filings dipped 1% to one filing for every 156 households. The state, by far the most heavily populated, had more filings, 85,420, than any other. Florida, with 51,911 filings, had the third highest foreclosure rate, one for every 168 households. Arizona was fourth with one for every 200. Las Vegas is still the worst hit metro area. More than one in every 68 households received a filing during October, five times the national average. CNNMoney.com November 12. The American dollar is in the midst of a large fall in its value, or depreciation, as measured against other major currencies. The decline has been steady since 2002 and our currency is down about 35% from that peak. After strengthening slightly more than 10% during the global financial crisis of the past 18 months, the dollar is again falling back toward its pre- crisis lows, representing its weakest international value since 1967. There is a definite possibility that the dollar could soon decline further or faster. In addition to a financial crisis, we also have a large current-account deficit, meaning that we buy more from the world than we sell. The deficit was $100 billion in the latest available (second quarter) data, which is around 3% of gross domestic product, and we finance that with capital inflows from abroad. (The current-account deficit is down from around 6%, but two-thirds of the decline is due to the lower price of oil.) In the past, many of those inflows have been private investments of various kinds, but as investors around the world question whether U.S. government debt, and its dollars, are really worth the paper, it is increasingly difficult for us to finance our deficit with the outside world. The 1980s classic, Stephen Marris‘s ―Defic its and the Dollar: The World Economy at Risk,‖ stresses that a rapidly falling dollar would push up United States inflation, resulting in higher interest rates and a deep recession (pp. lx-lxi). Writing in the latest edition of Foreign Affairs, Fred Bergsten emphasizes that such outcomes are still possible today. A weakening dollar will cause inflation fears, so yields on long-term government bonds will rise to compensate investors for inflation, and we will need to pay more and more to finance our large debts. The idea that the American dollar might follow emerging markets such as Russia in 1998 and Argentina in 2002, or Britain in the 1970s—and so depreciate by 50% or more in a relatively short time—is certainly implausible now. But such a ― doom scenario‖ is not unrealistic in the future without change. In this context, the American government needs to control its budget deficit to keep this adjustment on track, and to stop confidence in the dollar

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from falling further. Our government collects far too little in taxes for what it spends. There is no choice but to raise taxes soon and rein in spending. Peter Boone and Simon Johnson, New York Times/Economix November 12. Wen Jiabao, China‘s premier, pledged U.S.$ 10 billion in cheap loans to Africa over the next three years, and refuted claims that the Asian powerhouse is only looking to exploit Africa‘s resources. The loan pledge for Africa was double a U.S.$5 billion commitment made in 2006. Wen said eight new Chinese policy measures aimed at strengthening relations with Africa were ―m ore focused on improving people‘s livelihoods,‖ underlining what he called Beijing‘s ― selfless‖ engagement in Africa, the Washington Post reported. He said China will construct 100 new clean-energy projects on the continent and gradually lower customs duties on 95% of products from African states with which it has diplomatic ties. The IMF has expressed concern about African governments taking on too much debt from Chinese lenders. But Wen said China would write off some loans it had made to the poorest and most heavily indebted countries. African heads of state, including Zimbabwe‘s Robert Mugabe and Sudan‘s Omar Hassan alBashir, lauded China‘s support. But others said African nations needed to devise their own development plans to take full advantage of Chinese finance. Last year, European Union lawmakers assailed China for courting ― oppressive‖ African governments, such as Sudan, to satisfy its soaring demand for oil and raw materials. ― China is very stung by criticism from so- called Western quarters in recent years,‖ Martyn Davies, CEO of Frontier Advisory, a Johannesburg-based research and strategy consulting company, told Bloomberg news. China is trying ― to have a softer approach‖ in an effort to rebut the notion that its interest in Africa is ― extractionist in nature.‖ The pattern of trade—raw materials going to China and Chinese finished goods flooding Africa—has angered some Africans. ― We are sick and tired of the old model, where China comes to Africa and extracts raw materials and goes back to China,‖ Zimbabwean Deputy PM Arthur Mutambara said in the Zimbabwe Times in September. ― We are not now interested in that.‖ Source: Global Development Briefing. November 12. Senegal has hailed the completion of an assembly plant for Chinese buses in its western city of Thies, Agence France-Presse (AFP) reports. The construction of the plant was funded by a loan of 11 billion CFA francs/U.S. $24.7 million from China, and spearheaded by Chinese company King Long. The Chinese buses to be assembled at the plant are part of a partnership with Senegalese company Senbus, which supplies the public transport system in Dakar. AFP reports that King Long‘s operations in Senegal are replacing those of India‘s Tata Motors, which assembled more than 500 minibuses over 2005–2008 for public transport. The significance of this project is that Senegal continues to benefit from its diplomatic ties to China. Since 2005, when it changed its position on Taiwan to favor China‘s ― One China‖ policy, Senegal has been the recipient of numerous aid and loan packages. IHS Global Insight. November 11. Strong data from China released November 11, especially in factory output and retail sales, underscored the speed of the giant economy‘s rebound, thanks to extensive government stimulus measures that have put the economy on track to grow more than 8% in 2009. Industrial output and retail sales for October jumped 16.1% and 16.2%, respectively, from a year earlier. The increases also were higher than in September, showing that the pace

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of recovery was continuing to increase. Separately, the customs office said exports in October had been 13.8% below the level of a year earlier, while imports had fallen 6.4%, more than expected. China‘s trade surplus for the month swelled to $24 billion, nearly double the level in September. The data confirmed a picture that has been emerging over the past few months: buoyed by a huge stimulus package announced a year ago, as well as by lower interest rates and greatly increased lending by state-owned banks, China has recovered much more forcefully than other leading economies. The World Bank and the International Monetary Fund upgraded their growth forecasts for the country—to 8.4% and 8.5% for this year. Data also out Wednesday, showed that bank lending had slowed to 253 billion yuan, or $37 billion, in October, from 516.7 billion yuan in September. China said Wednesday that it would consider major currencies in guiding the yuan, suggesting a departure from an effective peg to the dollar that has been in place since the middle of last year, Reuters reported from Beijing. It was the first time since a revaluation and establishing of exchange rate changes in July 2005 that the People‘s Bank of China had strayed from the language of keeping the yuan ― basically stable at a reasonable and balanced level‖ in quarterly reports. The comments came before a visit to China next week by President Barack Obama and amid growing pressure from other countries for Beijing to be more flexible in handling the yuan in the face of dollar weakness. New York Times November 11. The relationship between AIG and some of its U.S. government paymasters has come close to breaking point over compensation at the stricken company. Tensions between the new board of AIG, and Kenneth Feinberg, the administration‘s special master on pay, came out into the open during a three-hour meeting in New York last week. AIG‘s directors, led by chief executive Robert Benmosche, told Mr. Feinberg his recent decision to slash salaries for 12 of its top executives by more than 90% was triggering highlevel departures, upsetting employees‘ morale and reducing the chances the company will repay federal aid. Mr. Feinberg replied that AIG ― did not get‖ the fact it has been bailed out with billions of dollars in taxpayers‘ funds and had to show restraint on compensation. Financial Times November 10. The U.S. government lost the first major criminal trial spawned by the financial crisis as two former Bear Stearns hedge-fund managers were acquitted of securities fraud. Wall Street Journal October 7. A U.S. House of Representatives‘ plan to impose rules on the enormous and largely unregulated financial derivatives market is getting a cautious thumbs up from industry groups, who had worried that the bill could cripple some businesses. House Financial Services Committee Chairman Barney Frank, D-MA, released draft legislative text late last week that would apply federal scrutiny to specially tailored financial instruments that are used by companies from airlines to manufacturers to insure against unanticipated costs and other risks. Currently, much of the $580 trillion market in so-called over-the-counter derivatives operates outside of government oversight. Congressional lawmakers, along with the Obama administration, are looking to change that after some companies, notably insurance giant American International Group Inc., took huge losses on bad derivatives bets during the financial crisis. Frank‘s proposal would give broad authority to regulators to require that a third-party clearinghouse approve such derivative contracts and guarantee that both parties to

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these contracts will fulfill their terms. The goal is to limit threats to the broader financial system. If a clearinghouse accepts the particulars of a derivative contract, it will cover any losses if one of the parties defaults. For companies that are big participants in this market, the bill would encourage the use of clearinghouses by imposing higher amounts of collateral be held in reserve for trades that aren‘t cleared. When setting the rules for what derivatives need to be cleared, the bill requires regulators to consider trading liquidity, total exposure, and questions of systemic risk. Congressional Quarterly. CQ Today.

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October 7. The idea of a tax credit for companies that create new jobs, something the federal government has not tried since the 1970s, is gaining support among economists and Washington officials grappling with the highest unemployment in a generation. The proposal has some bipartisan appeal among politicians eager both to help their unemployed constituents and to encourage small-business development. Legislators on Capitol Hill and President Obama‘s economic team have been quietly researching the policy for several weeks. ― There is a lot of traction for this kind of idea,‖ said Representative Eric Cantor of Virginia, the Republican whip. ― If the White House will take the lead on this, I‘m fairly positive it would be welcomed in a bipartisan fashion.‖ In addition to the economists working on the proposal, some heavyweights support the concept, including the Nobel laureate Edmund S. Phelps, Dani Rodrik of Harvard, and former Labor Secretary Robert B. Reich. New York Times. October 7. A U.S. Federal Reserve report found that U.S. banks are slow to take losses on their commercial real estate loans that have been hit by slumping property values and rental payments, the Wall Street Journal said. Citing a September 29 presentation made by Fed analyst K.C. Conway to banking regulators, the paper said the report‘s remarks suggested that regulators were preparing for a rerun of housing-related losses that plagued many banks after the residential property bubble burst. Conway is a senior real estate analyst at the Federal Reserve Bank of Atlanta. The Journal said a Fed official had confirmed the authenticity of the document, but added it did not represent the central bank‘s formal opinion. Conway‘s report predicted that commercial real-estate losses would reach roughly 45% next year, the Journal said. CNBC.com/Reuters. October 6. The Reserve Bank of Australia (RBA) emerged as the trend-setter among the G-20 with its decision to increase the official cash rate from 3% to 3.25%. Australia‘s economy stared down recession and it was the only developed nation to grow in the first half of 2009, despite the global economic downturn, with the help of massive counter-cyclical macroeconomic stimulus. At the start of the rate-cutting cycle the official cash rate (OCR) stood at 7.25%, then between September 2008 and April 2009, the OCR was reduced 425 basis points to the 49-year low of 3.00%. Monetary policy was then supported by an aggressively expansionary fiscal stance implementing two major stimulus packages worth a cumulative A$50 billion/U.S.$41 .2 billion, and an expansionary fiscal year 2009/10 budget. The combination of monetary and fiscal stimulus fuelled private consumption and business investment and allowed the Australian economy to grow by 0.6% quarter on quarter in the three months to June. Beyond macroeconomic stimulus, growth has also been driven by continued strong demand from China for commodities exports such as coal and iron ore.

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Following a string of better-than-expected data releases the RBA moved to a neutral policy bias at its August meeting. IHS Global Insight.

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October 6. The U.S. dollar‘s value plunged on October 6, while the price of gold simultaneously hit a record high ($1,045 per ounce). The near-term causes of the latest round of dollar decline are obvious. Australia‘s central bank raised interest rates slightly on October 6. By itself, this would not be an exciting development, but it comes fast on the heels of the G-20 Pittsburgh summit in which all participants (including Australia) seemed to imply that ― tightening monetary policy‖ (i.e., raising rates) was some way off. So if Australia begins to tighten—an implication that its economy is picking up—market participants reckon that more commodity producers and other parts of the Pacific Rim will soon feel the need to do likewise. At the same time, the United States has signaled that interest rates here will remain low for the foreseeable future. If you can borrow in dollars and buy Australian (or Korean or Chinese, etc) government debt, you are in what is known as a positive ― carry trade‖—because of low interest rates here, you pay close to zero to borrow the dollars and you can invest in Australia at more than 3% interest (or you can plunge into speculative Chinese automotive stocks). The United States could counteract all of this by making warning noises about potential intervention in the currency market: If you borrow heavily in dollars to lend in Chinese renminbi, you can be easily rattled by the prospect that G-7 industrialized nations will intervene in a coordinated manner to strengthen the dollar. But the G-7 met this weekend and made no statement about the dollar—despite what must have been considerable pressure from Japan, France, Germany, and Italy, all of which are always worried about a rapid weakening of the dollar because they are so dependent on exports. The U.S. officials can continue to allow the dollar to float because ... we‘re not currently afraid of inflation. Simon Johnson, The Daily Beast. October 6. IMF Managing Director Dominique Strauss-Kahn told policymakers from 186 countries gathered for the IMF-World Bank Annual Meetings in Istanbul that global cooperation had saved the world from a far worse crisis and leaders should now seize the opportunity to shape a post-crisis world. A year ago, people feared the worst. But after concerted action to combat the crisis, the world had pulled back from the brink. ― Even if it is much too early to declare victory, we have at least stepped onto the road to recovery.‖ Strauss-Kahn told the world‘s economic and monetary policymakers they have an historic opportunity to create the conditions necessary for ― a virtuous cycle of peace and prosperity‖ if they continue to work together and with the IMF on key policy measures. Strauss-Kahn noted the ― profound change‖ that formal and informal cooperation among nations had brought, adding that ― in the face of crisis, countries came together to face common challenges with common solutions, focusing on the global common good.‖ The IMF chief pointed to fiscal stimulus amounting to nearly 2% of world gross domestic product in the past year as a critical factor in staunching the crisis, and he stated that countries are moving to address key weaknesses in their financial sectors, which will further underpin recovery if they stay the course on these reforms. He asked the Fund to address four key reform areas—the IMF ‘s mandate, its financing role, multilateral surveillance, and governance. These ― Istanbul Decisions,‖ he said, will be a focal point of IMF activities for the coming year. The four decisions comprise: (1) a review of the mandate of the IMF, through all macroeconomic and financial sector policies that affect

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global stability; (2) assessing how to build on the success of the Flexible Credit Line (FCL) and provide insurance to more countries as the lender of last resort and reduce the need for countries to self- insure against crisis by building up large reserves; (3) endorsement of the G20 proposal for the IMF to help with their mutual assessment of policies. This represents a new kind of multilateral surveillance for the IMF; and endorsement of IMF governance reform agreed by the G-20. This would shift quota shares toward dynamic emerging markets and developing countries by at least 5% from over-represented to under-represented countries, by January 2011. IMF press release. October 6. The General Motors path out of bankruptcy isn‗t proving to be as smooth as its quick trip through it. In the past week, the company‘s plans to sell its Saturn brand to auto retailer Penske Auto Group fell through, forcing GM to start winding down a network of about 350 dealerships. Then, its plans to sell Hummer to a Chinese industrial company missed a target date of closing by Sept. 30. CNN.com.

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October 6. The Obama administration‘s pay czar is planning to clamp down on compensation at firms receiving large sums of government aid by cutting annual cash salaries for many of the top employees under his authority, according to people familiar with the matter. Instead of awarding large cash salaries, Kenneth Feinberg is planning to shift a chunk of an employee‘s annual salary into stock that cannot be touched for several years. This move would mark the government‘s first effort to curb the take-home pay of managers from auto executives to financial traders. Mr. Feinberg is expected to issue by mid-October his determination on compensation packages for 175 of the most-highly compensated executives and employees at the seven firms he oversees. The companies are: American International Group Inc., Bank of America Corp., Citigroup Inc., General Motors Co., GMAC Financial Services Inc., Chrysler LLC and Chrysler Financial. Wall Street Journal. October 2. American nonfarm payroll employment continued to decline in September, losing 263,000 jobs, and the unemployment rate rose from 9.4% in July to 9.7% in August, and now to 9.8% in September, the U.S. Bureau of Labor Statistics reported. The largest job losses were in construction, manufacturing, retail trade, and government. Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8%. Though the job market continued to worsen, the pace of deterioration remained markedly slower than earlier in the year, when roughly 700,000 jobs a month were disappearing. U.S. Bureau of Labor Statistics, New York Times. October 1. International Monetary Fund (IMF) releases its World Economic Outlook (WEO). Key WEO projections include: World growth. After contracting by about 1% in 2009, global activity is forecast to expand by about 3% in 2010 (see table). Advanced economies are projected to expand sluggishly through much of 2010. Average annual growth in 2010 will be only modestly positive at about 11/4, following a contraction of 31/2% during 2009. Emerging and developing economies. Real GDP growth is forecast to reach 5 percent in 2010, up from 13/4% in 2009. The rebound is driven by China, India, and a number of other emerging Asian countries. Economies in Africa and the Middle East are also expected to post solid growth of close to 4%, helped by recovering commodity prices.

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Visit the World Economic Outlook on the internet at http://www.imf.org/ external/pubs/ft/weo/ 2009/02/index.htm.

September 28. According to an IMF staff study of 15 emerging market countries with IMF- supported programs, recent IMF programs in these countries are delivering the support needed to help these countries weather the worst of the global financial crisis, through increased resources, supportive policies, and more focused conditionality. ― What this study tells us is that, with IMF support, many of the severe disruptions characteristic of past crises have so far been either avoided or sharply reduced,‖ IMF Managing Director Dominique Strauss-Kahn said. The study finds that support from the IMF has enabled countries to lessen the effects of the crisis by avoiding currency overshooting and bank runs—traits of past crises. At a time when capital flows were severely curtailed, the IMF provided large-scale

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financial assistance to countries in need. The IMF has sharply increased the resources it has available to lend, from about $250 billion to $750 billion, following pledges made by the Group of Twenty leading emerging and advanced economies after the London Summit in April 2008. As part of its efforts to support countries during the global economic crisis, the IMF also conducted a major overhaul of how it lends money by offering higher loan amounts and tailoring loan terms to countries‘ circumstances. The IMF has been instrumental in bringing down borrowing costs for emerging markets that had spiked following the bankruptcy of Lehman Brothers. September 28. World Trade Organization, WTO, Director-General Pascal Lamy, in his address to the WTO Public Forum, said the G20 must now ―walk the talk‖ on Doha (multilateral trade negotiations). He stated that G20 leaders at their Pittsburgh Summit agreed that ― their negotiators now embark on the work programs that we have established for the next three months, and that they then assess our collective ability to achieve our 2010 target‖. World Trade Organization. September 24-25. G20 Pittsburgh summit. The leaders of the Group of Twenty (G20) met in Pittsburgh to ― turn a page on the era of irresponsibility‖ by adopting reforms to ―m eet the needs of the 21st century economy.‖ The final communiqué pledged   

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

 

not to withdraw stimulus measures until a durable recovery is in place; to co-ordinate their exit strategies, while also acknowledging that timing will vary from country to country depending on the forcefulness of measures in place; for macroeconomic policies to be harmonized to avoid imbalances—America‘s spendthrift ways and deficits; Asia‘s savings glut—that made the financial crisis so much worse; for the G20 to replace the narrower, Western-dominated G8 as the primary global economic facilitator, providing China, India and Brazil a permanent seat at the table. In return, it is hoped that they will be more flexible in other areas, such as climate change and trade; for the G20 to eliminate subsidies on fossil fuels, but only ―inthe medium term‖; and for trade, a weak commitment to get the Doha round back on track by next year.

The governance structure of the rejuvenated IMF also is to change with ― underrepresented,‖ mostly developing, countries getting at least 5% more of the voting rights by 2011. The Financial Stability Board (FSB), a group of central bankers and financial regulators, also was broadened to include the big developing countries, and from now on it is to take a lead role in coordinating and monitoring tougher financial regulations and serve, along with the IMF, as an early-warning system for emerging risks. The FSB is to help ensure that the rules governing big banks are commensurate with the cost of their failure. The main tool for this could be higher capital requirements. All agree that banks need more capital and that a greater share of it should be pure equity, the strongest buffer against loss. The G20 communiqué also supported forcing banks to hold especially high levels of capital in good times so they are better prepared to ride out the bad—though it did not endorse an American proposal for big banks to hold more than smaller ones. The G20 has set a deadline of the end of 2012 for new standards to be adopted, with exact figures to be decided by the end of 2010.

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France and Germany had pushed hard for firm numerical limits on bonuses as a proportion of revenues or capital. The communiqué was closer to the Americans‘ position to tie bankers‘ pay more closely to long-term value creation—more paid in restricted shares, with employers able to claw back a portion if trades lead to big losses and multi-year bonus guarantees to be avoided. The Economist.

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September 25. Why did hedge funds, supposedly the bad boys of the financial world, come through last year‘s crisis in relatively good shape? HedgeFund Intelligence data shows that U.S.- based funds suffered an average loss of 12.7% in 2008. That‘s nothing like the 38.5% decline for the Standard & Poor‘s 500. Losses for banks were much higher still. Some hedge funds got pounded because they made bad bets or because investors decided to pull out their money. Nearly 500 funds disappeared last year, according to HedgeFund Intelligence, but that‘s out of a universe of roughly 7,000. The salvation of the hedge fund industry was that its existential crisis came 10 years earlier, with the 1998 implosion of Long-Term Capital Management. After that fund went down, the hedge funds‘ lenders got nervous and tightened their standards. As a result, in the past decade the supposedly go-go hedge funds were actually less leveraged than many banks. To see how the borrowing mania hit banking, look at confidential numbers for big Swiss banks, once renowned for their caution. Debt ratios at the two largest banks rose in the past dozen years from 90% to 97%—meaning that they had 97 Swiss francs of borrowed money for every three francs of capital. In the banks‘ trading accounts, the use of borrowed money was even greater. One study calculated that by 2006, the traders at big Swiss banks were borrowing 400 times their capital—which was about 100 times as high as the leverage ratio of a typical hedge fund. Washington Post. September 24. The Shared National Credit Program (SNC) 2009 Review, an annual interagency report, stated that U.S. credit quality deteriorated to record levels with respect to large loans and loan commitments. The report says that the level of losses from syndicated loans facing banks and other financial institutions tripled to $53 billion in 2009, due to poor underwriting standards and the continuing weakness in economic conditions. According to the report, classified assets rated ‗special mention‘, ‗substandard‘, ‗doubtful‘ and ‗loss‘, touched $642 billion, representing 22.3% of the SNC portfolio, compared with 13.4% a year ago. The report also said foreign banks held about 38% of the $2.9 trillion in loans, while hedge funds, pension funds, insurance companies and other entities held about 21%. The report also said that non-banks continued to hold a ― disproportionate share‖ of classified assets compared with their total share of the SNC portfolio. They hold 47% of loans seen as ‗substandard‘, ‗doubtful‘ and ‗loss‘. The SNC review is prepared by the Federal Reserve Board of Governors, Federal Deposit Insurance Corp (FDIC), Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). Reuters. September 24. The U.S. National Association of Realtors reported sales of existing U.S. homes fell a seasonally adjusted 2.7% in August following four months of increasing sales. Economists said it was too soon to say whether the drop represented a hiccup in the market or a sign of deeper problems for the housing market. In August, median home prices across the country fell by nearly $4,000, to $177,700, and were down 12.5% from a year earlier. New York Times.

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September 24. Former Federal Reserve chairman Paul Volcker testified before the House Financial Services Committee that the Obama administration‘s proposed overhaul of financial rules would preserve the policy of ― too big to fail‖ and could lead to future banking bailouts. He endorsed a stricter separation between banks that hold deposits and investment banks. He said the ― safety net‖ should be limited clearly to commercial banks, while investment banks should be excluded. He urged lawmakers to make clear that nonbank companies would not be saved with federal money. Mr. Volcker said he did not differ with the administration on most of its proposals and that he took ― as a given‖ that banks would be bailed out in times of crisis. But he said he opposed bailouts of insurance companies like the American International Group, the automakers‘ finance arms and others. ― The safety net has been extended outside the banking system,‖ Mr. Volcker said. ―T hat‘s what I want to change.‖ New York Times. September 24. China has been an essential player in fostering global economic recovery. As one of the first countries to announce a massive stimulus package last November, China brought increased stability to markets when it was needed. Today‘s conventional wisdom holds that in order to ensure a stable global recovery, Chinese consumers must increase their consumption patterns to fill the economic void left by their battered American counterparts. In regards to stimulating domestic consumption, assertions that the Chinese aren't spending enough may be overblown. For example, Morgan Stanley released a report last week arguing that China‘s under- consumption is over-stated, and that Chinese consumption is likely to increase. This week, China took two steps towards assuming a greater international leadership role in putting the global economy back on its feet. First, Hu Xiaolian, deputy governor of China‘s central bank, proposed the formation of a multinational sovereign wealth fund to assist developing countries gain access to capital. Second, in a speech to the U.N. yesterday, Chinese president Hu Jintao announced that China will take an active role in providing assistance to the developed economies most hit by the crisis. The English-language China Daily reports: that China will increase support for those hit hard by the global financial crisis, earnestly implement relevant capital increase and financing plans, intensify trade and investment cooperation and help raise their capacity for risk-resistance and sustainable development. Crisis Talk (World Bank). September 24. The McKinsey Global Institute in its sixth annual survey of the world‘s capital markets says that the mature financial markets of North America, Europe and Japan may have reached an ― inflection point,‖ beyond which their growth will be much slower than the breakneck expansion of the past two decades. In emerging markets, though, they still see plenty of room to grow. The report estimates that the total value of global financial assets— including stocks, bonds, government debt and bank deposits—fell by $16 trillion in 2008, the largest setback since at least 1990. Financial globalization also took a big hit, as total global capital flows fell to $1.9 trillion in 2008, down 82% from 2007. Among developed nations, the shrinkage of financial markets was particularly pronounced. The total value of U.S. financial assets declined $5.5 trillion in 2008 to $54.9 trillion, putting an end to a two-decade run during which the value of the U.S. financial markets, expressed as a percentage of the country‘s annual economic output, grew more than twice as much as it did in the previous 80 years. In Russia, the total value of financial assets stood at only 68% of gross domestic product as of the end of 2008, compared to nearly 4 times GDP in the U.S. The ratio of financial

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assets to GDP for all of Eastern Europe was 99%, for Latin America 119%, for India 162%, and for emerging Asia 232%. Wall Street Journal. Real Time Economics. September 24. In preparation for the Pittsburgh G20 meeting, U.S. negotiators propose to press Group-of-20 world leaders to raise the stakes in the Doha Development Agenda negotiations by directing their negotiators to start identifying the ― gaps‖ in the still incomplete modalities texts in agriculture, nonagricultural market access and services. The fate of the Doha agreement would largely depend on two major players—the United States and China, commented one envoy. He argued that if there is an agreement between the two members, others—including India, Brazil, and South Africa—will follow. Brazil is considering hosting another Group-of-20 trade ministerial summit November 28 and 29 near Geneva for what trade diplomats describe as a crucial final attempt to increase pressure on key members to enter into hard bargaining on the few issues left in Doha negotiations on agriculture and market-opening for industrial goods. The ministerial reportedly will take place just before the scheduled biennial meeting of the World Trade Organization on November 30. Washington Trade Daily.

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September 23. Representative Barney Frank, of Massachusetts announced a plan that preserved the core of the White House‘s proposal for a new U.S. consumer financial protection agency, while jettisoning a smaller though symbolically significant provision. The agency‘s core mission would be to protect consumers from deceptive or abusive credit cards, mortgages and other loans. Mr. Frank also announced an ambitious schedule to complete the House‘s work on the legislation over the next two months. The Obama administration embraced the changes. New York Times. September 23. Switzerland and the United States have signed a treaty to increase the amount of tax information they share to help crack down on tax evasion, Swiss officials said Wednesday. The agreement follows a model set out by the Paris-based Organization for Economic Cooperation and Development, OECD, designed to make it harder for taxpayers to hide money in offshore tax havens. U.S. tax authorities will be able to request information on Americans suspected of concealing Swiss bank accounts, the Swiss Finance Ministry said. Associated Press. September 23. The United Steelworkers union filed a new petition asking for U.S. duties on coated paper from both China and Indonesia. The steelworkers union is joined in its latest trade case by paper manufacturers NewPage Corp of Miamisburg, Ohio; Appleton Coated LLC of Kimberly, Wisconsin; and Sappi Fine Paper North America of Boston, Massachusetts, which together employ about 6,000 union workers at paper mills in nine states. ― Neither the companies nor the union will tolerate being obliterated without asking our government to investigate and enforce the rules of fair trade,‖ Steelworkers President Leo Gerard said in a statement. Reuters. September 22. The United States wants world leaders to agree this week to launch a major rethink of the world economy in November as they try to strengthen the global economy after its near meltdown, Reuters news service reported. Documents outlining the U.S. position ahead of the September 24-25 Pittsburgh summit of Group of 20, G20, leaders

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said exporters, which include China, Germany and Japan, should consume more, while debtors like the United States must boost savings. ― The world will face anemic growth if adjustments in one part of the global economy are not matched by offsetting adjustments in other parts of the global economy,‖ said the document obtained by Reuters. President Obama, cutting through the coded diplomatic courtesies, made the case more bluntly for a change in business as usual. ― We can't go back to the era where the Chinese or Germans or other countries just are selling everything to us, we're taking out a bunch of credit card debt or home equity loans, but we're not selling anything to them,‖ he said on September 20. European Central Bank President Jean-Claude Trichet said on September 21 that persuading Europe, the United States and China to accept International Monetary Fund advice on economic polices may be difficult. G7 sources told Reuters there was a renewed determination to act to stem the global imbalances because the crisis had underlined the interconnectedness of the financial system and how joint action could be more effective. China has long been the target of calls from the West to get its massive population to spend more. It may be reluctant to offer a significant change in economic policy when Chinese President Hu Jintao meets Obama this week. Washington Trade Daily. September 16. Reports on industrial production and consumer prices today showed the U.S. economy is emerging from the economic slump without spurring inflation. Output at factories, mines, and utilities climbed 0.8% last month, exceeding the median estimate of economists surveyed by Bloomberg News, data from the Federal Reserve in Washington showed. The Fed revised July‘s increase up to 1% from the previously reported 0.5%. The back-to- back gain was the biggest since late 2005. The Labor Department said the cost of living climbed 0.4%, and was down 1.5% from August 2008. Another report today showed an index of homebuilder confidence climbed in September for a third consecutive month. The National Association of Home Builders/Wells Fargo‘s measure climbed to 19, the highest level since May 2008, from 18 in August, the Washington-based group said. A reading below 50 means most respondents view conditions as poor. Bloomberg.com. September 16. Japan‘s parliament named Yukio Hatoyama as the country‘s new Prime Minister, a move that formalizes the first change of government by a political party with a solid majority for over half a century. Mr. Hatoyama is president of the center-left Democratic Party of Japan, DPJ. He told a news conference after his appointment, ― History has not changed yet. Whether history will really change will hinge on our future works.‖ The DPJ‘s rise to power marks the end of the Liberal Democratic Party's, LDP ‘s, almost unbroken rule since 1955. Although the LDP helped to engineer Japan‘s economic revival in the post-war era, the party has not had the same success in reviving the country‘s economy following the bursting of an asset bubble in the early 1990s. The LDP also become mired in a number of financial scandals that chipped away at voter trust. The DPJ hopes to steer the economy back to prosperity while restoring trust in politics. Hatoyama‘s coalition government, with its two junior partners the Social Democratic Party and the People‘s New Party, is expected to try to boost domestic demand by giving money to families with children, cutting highway tolls and gasoline taxes and offering increased aid to the unemployed. Wall Street Journal.

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September 16. New York Attorney General Andrew Cuomo subpoenaed five members of Bank of America Corp.‘s board of directors amid a probe of the bank‘s purchase of Merrill Lynch & Co., said a person close to the investigation. The board members will be asked to testify under oath, the person said. The Wall Street Journal reported on its website today the five directors are Thomas May, chief executive officer of NStar; William Barnet III, a Spartanburg, South Carolina, developer; retired Morehouse College President Walter Massey; Boston investment firm owner John Collins; and retired Army General Tommy Franks. The bank will ― cooperate with the attorney general‘s office as we maintain that there is no basis for charges against either the company or individual members of the management team,‖ according to a statement by the Charlotte, North Carolina-based Bank of America. The subpoenas reflect continuing pressure on bank Chief Executive Officer Kenneth Lewis after U.S. District Judge Jed Rakoff in New York this week refused to accept a settlement between the bank and the Securities and Exchange Commission. The $33 million agreement would have resolved the SEC‘s claim that the bank deceived investors in November about bonuses to be paid to executives at Merrill Lynch & Co. Bank of America bought Merrill in January. Bloomberg.com.

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September 16. Investors turned the most bearish on the U.S. dollar in 18 months as signs of a recovery in the global economy reduced demand for the currency as a refuge, a survey of Bloomberg users showed. The world‘s main reserve currency will fall and Treasury yields will rise over the next six months, according to 1,851 respondents in the Bloomberg Professional Global Confidence Index. Sentiment toward the greenback fell to 30.8 in September, from 38.8 in August, according to the survey. The reading is the lowest since it dropped to 30.3 in March 2008, and has tumbled from a high of 68.86 a year ago. The measure is a diffusion index, meaning a reading below 50 indicates Bloomberg users expect the dollar to weaken. Bloomberg.com. September 16. When the U.S. Congress passed an $8,000 tax credit for first-time home buyers last winter, it was intended as shock therapy during a crisis. Now the question is becoming whether the housing market can function without it. As many as 40% of all home buyers this year will qualify for the credit. It is on track to cost the government $15 billion, more than twice the amount that was projected when Congress passed the stimulus bill in February. New York Times. September 15. The heads of the Organization for Economic Cooperation and Development, OECD, the United Nations Conference on Trade and Development, UNCTAD, and the World Trade Organization, WTO, have drafted a joint report to G-20 leaders meeting in Pittsburgh later this month concerning protectionist acts by G-20 nations. The report states that G-20 and advanced developing countries have refrained from extensive use of restrictive trade and investment measures in recent months but have continued – ― in a limited way‖ – to apply tariffs and non-tariff instruments that have hindered trade flows. The report also said that trade rules and investment agreements have prevented wide-scale protectionist policies. But tariffs, nontariff measures, subsidies and burdensome administrative procedures regarding imports have been applied in recent months and have acted as ― sand in the gears of international trade that may retard the global recovery,‖ the report said. ― It is urgent that

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governments start planning a coordinated exit strategy that will eliminate these elements as soon as possible,‖ the statement continued. Washington Trade Daily. September 15. One year ago, Lehman Brothers filed for bankruptcy, triggering the most acute phase of the financial crisis. The precipitating cause of Lehman‘s demise was a decision—by Treasury Secretary Henry Paulson, Federal Chairman Ben Bernanke and New York Fed President Timothy Geithner—to send a message. Paulson is quoted in David Wessel‘s ― In Fed We Trust‖ as saying: ― I'm being called Mr. Bailout. I can't do it again.‖ Geithner, for his part, was more circumspect, saying, ― There is no political will for a federal bailout.‖ This made sense on the surface. Not only is it questionable public policy to use taxpayer money to bail out private companies, but, more important, it creates a moral hazard: the incentive for those companies to take excessive risks with the knowledge that the government will save them should things go wrong. The plan backfired. The chaos that ensued forced the government to step in to protect almost every financial instrument involved in the credit markets, from money market funds to commercial paper to asset-backed securities, and to ride to the rescue of some of America‘s largest banks. In the process, the government created moral hazard on an epic scale, transforming a vague expectation that certain financial institutions were ― too big to fail‖ into a virtual government guarantee. Moral hazard had at least three aspects: Bank employees and managers had asymmetric compensation structures. In good years, they stood to make huge amounts of money; in bad years, even if the bank lost money, they would still make healthy sums. This gave employees the incentive to take excessive risks because they could shift their potential losses to shareholders. Shareholders had the same payoff structure. Banks are highly leveraged institutions; every dollar contributed by shareholders is magnified by 10 to 30 dollars from creditors. This meant that in good years, shareholders benefited from profits magnified by leverage, but should things go wrong, they could shift their potential losses to creditors. As a result, paying bank executives in stock did not mitigate their behavior; in fact, the most senior executives at both Bear Stearns and Lehman had and lost enormous amounts of money tied up in their companies. Creditors had only limited incentives to watch over major banks. Ordinarily, creditors should demand high interest rates on loans to highly leveraged institutions. However, the expectation that large banks would not be allowed to fail made creditors more willing to lend to them. Washington Post. September 14. President Obama sternly admonished the financial industry and lawmakers to accept his proposals to reshape financial regulation to protect the nation from a repeat of the excesses that drove Lehman Brothers into bankruptcy and wreaked havoc on the global economy last year. But with the markets slowly healing, Mr. Obama‘s plan to revamp financial rules faces a diminishing political imperative. Disenchantment by many Americans with big government, along with growing obstacles from financial industry lobbyists pressing Congress not to do anything drastic, have also helped to stall his proposals. Big institutions and community banks have unified against a central provision of the plan to create a new consumer finance protection agency. Lawmakers, particularly in the Senate but also in the House, have been skeptical of a second major plank that would give the Federal Reserve more explicit authority to monitor the markets for systemwide problems. Opponents prefer an

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enlarged role for a council of regulators. The Obama plan creates such a council, but makes the Fed the first among equals and acknowledges, as the Treasury secretary, Timothy F. Geithner, has said, that you cannot put out a fire by committee. New York Times. September 14. Euro zone industrial output fell in July and employment dropped again in the second quarter, pointing to continued weakness in the economy despite signs that euro zone recession may be ending. Industrial output in the 16 countries using the euro fell 0.3% month on month in July for a 15.9% year-on-year fall, the European Union‘s statistics office Eurostat said on Monday. The annual numbers showed clearly the contractions in output are becoming smaller. In June, production was 16.7% lower than a year earlier and in May it was 17.6% , better than the 21.3% in April. Eurostat also said employment in the euro zone fell 0.5% in the second quarter against the previous three months, and was 1.8% lower than the year before. This points to continued weakness of the labor market, as companies scale down production capacity because of weak demand. Economists say that more people without jobs mean less demand in the economy and therefore a slower recovery. Reuters.

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September 14. U.S. President Barack Obama announced on September 11 that he will impose duties of 35% on $1.8 billion of automobile tires from China. Then on September 14 the President defended his decision, saying he was simply enforcing a trade agreement and not resorting to protectionism. His decision sparked a complaint by China to the World Trade Organization. China also said it will begin dumping and subsidy probes of chicken and auto products from the United States. Bloomberg.com, Washington Trade Daily. September 11. U.S. poverty increased, median household income fell, and the percentage of Americans with employer-based health coverage continued to decline in 2008, according to Census data for 2008 issued today. The figures reflect the initial effects of the recession. Median household income declined 3.6% in 2008 after adjusting for inflation, the largest single-year decline on record, and reached its lowest point since 1997. The poverty rate rose to 13.2%, its highest level since 1997. The number of people in poverty hit 39.8 million, the highest level since 1960. These data include only the early months of the recession. Poverty is expected to rise more in 2009 but would be worse without the Recovery Act. Though the increases in poverty in 2009 are likely to be large, they would have been much greater without the economic recovery legislation. A Center analysis issued on September 9 that examines the effects of seven Recovery Act provisions finds those provisions will keep an estimated 6.2 million Americans—including 2.4 million children—from falling into poverty and will reduce the severity of poverty for 33 million others. Economist‘s View. September 11. The U.S. government is concerned about overall demand for U.S. Treasury securities, not appetite from individual countries, said David Dollar, the U.S. Treasury Department‘s economic and financial emissary to China. ― The interest rate on longThat says that term treasury bonds is at a very low level by historical standards,‖ Dollar said. ― the market has confidence the U.S. will get the fiscal problem under control.‖ Chinese Premier Wen Jiabao said in March that the Asian nation was ― worried‖ about the safety of its investment in U.S. debt, as a weakening dollar erodes the value of its record U.S. $2.1 trillion of foreign-exchange reserves.

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President Barack Obama is relying on China to sustain buying of Treasuries amid record amounts of debt sales to fund a $787 billion stimulus spending package. Treasuries of all maturities have lost 2.8% so far this year, after returning 14% in 2008, indexes from Merrill Lynch & Co. show. The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, fell September 11 to its lowest level since September, 2008. Chinese investors have doubled their holdings of U.S. government bonds in the past three years to $776 billion as of June, according to Treasury data. Diversification of currency reserves by China ―m akes some sense‖ due to their huge scale, said Dollar, who was formerly the World Bank‘s country director for China and Mongolia and was named emissary to China in June. ― It is healthy to have a variety of different reserve-type of currencies,‖ he said. Bloomberg.com. September 11. General Motors is hoping to jump-start its revitalization by guaranteeing car buyers that if they don't like their new Chevrolet, GMC, Buick or Cadillac, they have 60 days to bring it back for a full refund. Associated Press.

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September 11. The People‘s Republic of China announced that it has developed its own large- body jetliner. The government-owned Commercial Aircraft Corp. of China, or Comac, unveiled a model of the C9 19, whose fuel efficiency will challenge Boeing Co. and EADS Co.‘s Airbus. Analysts say it‘s unlikely any of the world‘s airlines—including China‘s own domestic carriers— will ever want to buy one. This project began in 2007, when the State Council, China‘s Cabinet, first outlined plans to build a 150 seat regional jet to lessen the nation‘s dependence on Airbus and Boeing. The creation of Comac was approved in February 2007, and the new firm was given an initial investment of 19 billion yuan/U.S. $2.7 billion. Comac produced the C9 19, a narrow- body, single-aisle regional jet that will seat as many 200 passengers. A prototype is planned to take off five years from now. MarketWatch. September 10. The U.S. is starting to pare back its emergency support for banks and financial markets, Treasury Secretary Tim Geithner declared, saying that the financial system no longer needed extensive government props. Almost a year since the collapse of Lehman Brothers triggered a financial panic that tipped the world into a deep recession, Secretary Geithner said it was time to move from crisis response to recovery. Banks have repaid more than $70 billion in emergency bail-out funds and Secretary Geithner said ― we now estimate that banks will repay another $50 billion over the next 12 to 18 months.‖ He also said, ― we must continue reinforcing recovery until it is self-sustaining and led by private demand.‖ Financial Times.

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September 10. General Motors is expected to sell its Saab Co. subsidiary to Swedish sports car maker Koenigsegg Automotive AB and Beijing Automotive Industry Holdings Co. Ltd., China‘s fastest-growing carmaker. Beijing Automotive will take a minority stake in the team bidding for Saab and help the unprofitable GM division find opportunities to expand in China, the group said. Bloomberg. September 9. China National Petroleum Corp., parent of the state-run oil and natural gas giant PetroChina, announced that it had received a low-interest $30 billion loan to finance overseas acquisitions—the latest sign that Beijing was deploying its vast cash reserves to ensure that its economy had the resources it needed to keep growing. The five-year loan from the China Development Bank, a state-run lender, serves a long-term strategy to protect growth and stability. This year, China has spent $12 billion on overseas oil and refining assets alone. The deals include the one that Athabasca Oil Sands announced late last month, in which PetroChina will acquire 60% in two oil sands projects in northeastern Alberta for $1.7 billion, with further plans to build a pipeline to the coast to transport crude to China. China‘s strategy has an eye on Australia. On September 8, China Railway Materials closed deals to buy stakes in FerrAus and United Minerals, two miners of iron ore in Australia, while China Guangdong Nuclear Power agreed to acquire Energy Metals, a uranium explorer in the country. Half of Australia‘s iron ore exports are already exported to China‘s steel mills, and more than half its wool is exported to the mainland as well. New York Times. September 9. China is stepping up efforts to internationalize its parochial currency, the yuan or renminbi. That‘s prompted concern about the future of the U.S. dollar, the dominant global currency for trade and investment. But just how far can China push others to use the

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yuan? One precedent for what China is doing with its currency is Japan, which also tried to broaden international use of the yen in earlier decades as its economy took on greater global heft. Tomo Kinoshita, an economist for Nomura, says Japan‘s experience with the yen could help predict how far China will get with the yuan, since the two economies are of similar size and share a heavy focus on exports. Japanese companies had definite success in convincing many of their trading partners to do business in the yen rather than the dollar – something that China is also now starting to look at. But the use of yen in trade eventually hit an upper limit: according to Nomura‘s figures, the share of Japan‘s exports that are settled in yen has been roughly stable for the past two decades, at 35% to 40% of the total. Similarly, Japan has paid for about 20% to 25% of its imports in yen for the last decade or so. Chinese exporters adjust their prices to match prevailing levels in their target markets—what‘s called pricing-tomarket – to a similar degree as exporters from Japan and the Czech Republic. That level is typically associated with 20% to 30% of exports being priced in the exporter‘s currency, they say, based on comparative figures from other countries. So in the near term, an ― upper bound‖ for the use of yuan in China‘s exports is likely to be about a third of total exports, the Hong Kong Monetary Authority paper concludes. Wall Street Journal. Real Time Economics. September 9. The World Bank issued its annual Doing Business report, which ranks 183 economies on the ease of doing business by comparing quantitative measures of regulations of the life cycle of a small or medium-size enterprise. Regulations related to registering property, employing workers, dealing with construction permits, and paying taxes are measured. Getting electricity and worker protection were added to this year‘s metrics. In 2008-2009 more governments implemented regulatory reforms aimed at making it easier to do business than in any year since 2004, when Doing Business started to track reforms through its indicators. Doing Business recorded 287 such reforms in 131 economies between June 2008 and May 2009, 20% more than in the year before. The top slots are occupied by the usual suspects: Singapore, New Zealand, Hong Kong, United States, United Kingdom, and Denmark are the easiest places to do business. Each country was in the top six last year. Indonesia is the top reformer of business regulations in the East Asia and Pacific region, but judicial reform is urgently needed to attract new investment. Reuters/Forbes and World Bank Crisis Talk. September 8. Gold bullion surged as high as $1,009.70 in New York, within 3% of the record of $1,033.90 set in March 2008. Silver climbed to a 13-month high as a weaker dollar and concern that inflation may accelerate boosted the appeal of precious metals. Gold is headed for a ninth annual gain. Crude oil and all six industrial metals on the London Metal Exchange rallied as the U.S. Dollar Index fell as much as 1.2% to an 11-month low. Raw materials typically rise when the greenback falls. Equity indexes climbed from Tokyo to London and New York. ― The market thinks inflation is coming,‖ Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois, said by telephone. He has been trading gold for more than 30 years and believes gold won‘t stay above $1,000 for long. ― With interest rates so low, money is chasing money and the dollar is getting murdered.‖ Bloomberg. September 8. Lawyers and tax advisers from London to Hong Kong have had a surge in inquiries from expatriate Americans worried about whether they have correctly declared Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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offshore assets ahead of the September 23 deadline. Concerns have been fuelled by the Swiss government‘s decision to reveal the names of 4,450 wealthy Americans who hold offshore accounts at UBS, the country‘s biggest bank. Financial Times. September 2. The U.S. Institute for Supply Management‘s survey of factories and industry had been edging higher this spring, as the blistering pace of economic declines began to level off. In August, the group‘s manufacturing index turned positive, rising to 52.9, from 48.9 in July. A reading above 50 indicates expansion and growth; a number below 50 means economic contraction. Four industry groups said their payrolls were growing while nine reported decreases. Manufacturing jobs have been devastated by the recession, with some two million positions lost since the downturn‘s official beginning in December 2007. New York Times.

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September 2. European Union finance ministers will press for clearly defined restrictions on bonus pay for bankers when they hold talks with their U.S. and other G20 counterparts this month. ― The bankers are partying like it‘s 1999, and it‘s 2009,‖ said Anders Borg, finance minister of Sweden, which holds the EU‘s rotating presidency. ― Obviously, there‘s a need for stronger muscles and sharper teeth. It won‘t be satisfactory for Europe to end up with broad principles and guidelines.‖ Financial Times. September 2. Senior International Monetary Fund and World Bank economists at a Washington panel discussion on Tuesday said the world recovery was starting to gain momentum, though a number of challenges remain. The IMF now expected the global economy to expand at slightly less than 3% in 2010, said Jörg Decressin, an IMF forecaster, a upward revision from the IMF‘s July estimate of 2.5%. ― The recovery is for real but it is very heavily policy dependent,‖ he said at a session at the Carnegie Endowment for International Peace. At some point, he said, private demand would have to replace the boost to the global economy from government monetary and fiscal expansion. Hans Timmer, a World Bank forecaster, didn‘t give an estimate, but said the strength of the recovery depends ― on how sustainable the rebound in developing countries is.‖ He especially cited the role of China in boosting global demand. Wall Street Journal‘s Real time Economics. September 1. Nine of 10 U.S. cities are forced to cut spending as sales and income taxes decline reports the National League of Cities. Future prospects look grim with property taxes expected to drop in 2010 and 2011. To combat declining revenues, 62% of cities are delaying or canceling infrastructure projects, the study found. CNNMoney.com. August 31. India‘s gross domestic product accelerated to 6.1% from a year earlier in the April- June quarter from 5.8% in the previous quarter as government spending helped to overcome the worst of the global downturn but drought threatens to stall the recovery. The worst effects of the global financial crisis may have passed for Asia‘s third-largest economy. India‘s relatively low dependence on exports meant that it weathered the global economic storm better than other countries. Associated Press. August 31. The Chinese government has been struggling to find enough infrastructure projects to finance in Sub-Saharan Africa, according to the Business Day. The China-Africa Development Fund was founded in June 2007 after the 2006 Beijing Summit of the Forum on Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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China-Africa Cooperation and established offices for the Southern African Development Community in Johannesburg, South Africa in March 2009. However, the fund is finding it increasingly challenging to fund infrastructure programs in most African states because of the ― lack of essential facilities like sound telecommunications systems.‖ IHS Global Insight. August 31. Mauritius, Seychelles, Zimbabwe and Madagascar have signed an interim trade agreement with the European Union (EU). These south-east African economies have had full access to the European consumer market since 2008 (except for rice and sugar, with trade barriers being gradually removed). The countries have agreed to phase out tariffs on all European imported goods over the next 15 years. The agreement excludes trade on certain agricultural products, such as milk, meat, vegetables, textiles, footwear and clothing. Zambia and the Comoros have agreed to sign an interim agreement with the EU at a later date. The EU imports mostly textiles, clothes, sugar, fish products and copper from Eastern and Southern Africa, while European exports to the region consist mostly of mechanical and electrical machinery and vehicles. IHS Global Insight.

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August 31. The Croatian central budget in January–May 2009 posted a deficit of 4.5 53 billion kuna/U.S. $810 million. The gap was a sharp, negative turnaround from the same period of 2008, when the budget had been in surplus by 3.936 billion kuna/U.S. $824 million. Over the first five months of 2009, budgetary revenues declined 8.6% year on year, undermined by a sharp decline in economic activity, which caused tax revenues to fall 17.8% year on year. Meanwhile, government expenditures grew at an annual rate of increase of 9.3%. Croatia remains on track to post a deficit for the year as a whole of less than 4% of GDP, quite manageable in comparison to other economies of the region in 2009. IHS Global Insight. August 28. The International Monetary Fund implemented a general allocation of Special Drawing Rights, SDRs, equivalent to about U.S. $250 billion. This was the allocation initially requested at the G-20 meeting this spring in London. It was formally approved by the IMF ‘s Board of Governors on August 7, and is designed to provide more global liquidity to the world economy by supplementing IMF members‘ foreign exchange reserves. It represents a quick multilateral response to the world financial crisis. Nearly $100 billion of this $250 billion will go to emerging markets and developing countries, and over $18 billion to lowincome countries. This general allocation is made in proportion to members‘ existing quotas and will count immediately toward their reserves. Member nations can either hold them in their reserves or sell all or part of their allocations to others in order to finance immediate hard currency imports. It is also possible to buy SDRs from another member. Separately, the IMF will implement, on September 9, a special, one-time allocation of 21.5 billion SDRs, about U.S. $33 billion. This allocation, which is sometimes called the Fourth Amendment Allocation because it required an amendment to the Fund‘s Articles of Agreement, will mean that every member country has an SDR allocation. IMF Press Briefing. August 28. The IMF Executive Board completed the first review of the Latvian program. This enabled immediate disbursement of about €195.2 million/U.S. $278.5 million, bringing the level of total disbursements from the IMF under the stand-by arrangement to € 780.7 million/U.S. $1.2 billion. IMF support for Latvia is part of a coordinated package together

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with the European Union, the World Bank, Nordic countries and other program partners. The program was originally approved in December 2008. Latvia‘s economic strategy is centered around keeping the exchange rate peg and achieving euro adoption as soon as possible. The very dramatic economic downturn over the last few months required program revision. The most important is that the fiscal deficit ceiling has been revised upward to up to 13% from the original target of 5%. This allows for 1% of GDP in additional resources for social safety nets. IMF. August 28. Toyota will shut down the joint venture it operated with General Motors in Fremont, California, in March 2010, eliminating 4,700 jobs. The plant, which makes Corolla compact cars and Tacoma pickups for Toyota and, until last week, Pontiac Vibe hatchbacks for GM, was the Japanese company‘s only U.S. auto plant with a union workforce. Sagging sales and GM‘s bankruptcy are blamed. Los Angeles Times.

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August 28. The inspector general of the U.S. Securities and Exchange Commission said in a report that the SEC has ― historically been slow to act‖ in regulating the nation‘s credit ratings agencies before the financial crisis and recommended a broad range of improvements to the SEC‘s oversight. The report also called for further evaluation of several controversial policies, such as the ability of debt issuers to shop among different rating agencies for the highest possible rating. The financial crisis raised serious questions about the rating agencies, including Moody‘s, Fitch and Standard and Poor‘s, which often gave top ratings to mortgagebacked securities that now may be worthless. The audit report found that the commission delayed adopting rules on the rating agencies, and sometimes failed to follow the rules that existed. August 28. Iceland decided Friday to repay Britain and the Netherlands the $5.7 billion it borrowed to compensate savers in those countries who lost money in the collapse of an Icelandic Internet bank last year. The Icelandic government overcame heavy opposition to the compensation plan, securing backing from a majority of lawmakers by pledging to link the pace of debt repayment to the rate of growth in the island nation. Iceland will begin repaying £2.3 billion (U.S. $3.8 billion) to Britain and 1.3 billion euros ($1.9 billion) to the Netherlands from 2016, with payments spread over nine years. Iceland must settle the claims arising from the collapse of the Icesave online bank before it can draw on $4.6 billion in promised bailout funds from the International Monetary Fund and Nordic countries. Iceland was an early victim of the credit crunch, which sent its debt-fueled economy into a tailspin. Landsbanki collapsed in October, as did Glitnir and Kaupthing, the country‘s two other leading banks. New York Times. August 27. U.S. Gross Domestic Product shrank at a seasonally adjusted 1% annual rate from April through June, unrevised from an estimate on second-quarter GDP a month ago. This was far less than the 6.4% decline experienced in the first quarter of 2009. Wall Street economists expected the second quarter revision to be a decline of 1.5%. Corporate earnings rose by the most in four years, the department also said. This means that the U.S. economy took a first step toward recovering from the worst recession since the 1930s in the second quarter as companies reduced inventories, spending started to climb and profits grew. Bloomberg, Wall Street Journal.

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August 27. The Federal Deposit Insurance Corporation, FDIC, revealed that the number of U.S. banks at risk of failing reached 416 during the second quarter. The numbers were published as part of a broader survey on the nation‘s banking system. The number of institutions on the government‘s so-called ― problem bank‖ list surpassed 400 in the latest quarter, climbing to its highest level in 15 years, since June 1994. The FDIC, which insures bank deposits, has been hit by a wave of relatively large and costly failures recently, prompting concerns about the size of the agency‘s insurance fund. The FDIC reported that the fund decreased by $2.6 billion, or 20%, during the quarter to $10.4 billion. The number of banks under scrutiny by regulators has moved steadily higher since the recession began in late 2007. A year ago, the number of banks on the FDIC‘s watch list was 117. At the end of this year‘s first quarter, the number stood at 305. CNNMoney.com. August 27. The U.S. banking system will lose some 1,000 institutions over the next two years, said John Kanas, whose private equity firm bought BankUnited of Florida in May. ― We‘ve already lost 81 this year,‖ Kanas told CNBC. ― The numbers are climbing every day. Many of these institutions nobody‘s ever heard of. They're smaller companies.‖ Failed banks tend to be smaller and private, which exacerbates the problem for small business borrowers, said Kanas, the former chairman and CEO of North Fork bank. ― Government money has propped up the very large institutions as a result of the stimulus package,‖ he said. ― There‘s really very little lifeline available for the small institutions that are suffering.‖ CNBC.com.

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August 27. European companies are objecting against proposed reforms of the derivatives markets, saying that new rules requiring contracts to be routed through clearing houses could impose a huge drain on corporate cash. U.S. companies ranging from Caterpillar and Boeing to 3M – which use derivatives contracts to hedge interest rate, currency and commodity price risks – have been lobbying lawmakers to highlight the potential higher costs of a proposed overhaul of rules on derivatives. Financial Times. August 26. Toyota Motor Corp, the world‘s largest automaker, said it would halt a production line in Japan as it cuts excess capacity to return to profitability amid an industrywide sales slump. Car plants around the world are idle or running below capacity as the industry copes with a slide in sales that sent General Motors Co and Chrysler Group LLC into bankruptcy and has Toyota headed for a record loss this year. Total cuts could reach 700,000 cars, or 7% of Toyota‘s global capacity. Nikkei business daily reported that Toyota planned to reduce its global capacity by 10%, or 1 million vehicles, as early as the current financial year to March 2010. Reuters. August 26. Eighteen of the 20 cities tracked by Standard & Poor‘s Case-Shiller U.S. Home Price Index showed improvement in June, up from eight in May, four in April and only one in March. In a convincing sign that the worst housing slump of modern times is coming to an end, prices are starting to rise in nearly all of the nation‘s large cities. The trend, displayed in newly released data for June, is both pronounced and wide-ranging. It is affecting the high-priced coastal cities, with a 3.8% jump for the month in San Francisco and a 2.6% rise in Boston; the industrial Midwest, with Cleveland prices up 4.2%; and even the epicenter of the crash, the Sun Belt, with Phoenix homes up 1.1%. New York Times.

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August 25. The White House Office of Management and Budget (OMB) now forecasts a $9 trillion U.S. federal deficit from 2010-1019. The Congressional Budget Office (CBO) in its Budget and Economic Outlook: An Update, http://www.cbo.org/ftpdocs/105xx/doc10521/ 08-25- BudgetUpdate.pdf, is more optimistic, projecting a 10-year budget deficit of $7.14 trillion. The Congressional Budget Office (CBO) estimates that the federal budget deficit for 2009 will total $1.6 trillion, which, at 11.2% of gross domestic product (GDP), will be the highest since World War II. That deficit figure results from a combination of weak revenues and elevated spending associated with the economic downturn and financial turmoil. The deficit has been boosted by various federal policies implemented in response, including the stimulus legislation and aid for the financial, housing, and automotive sectors. New American Foundation says the U.S. needs renewed economic growth—not austerity. That is the true lesson to be drawn from new government projections of long-term federal budget deficits. Congressional Budget Office, New American Foundation.

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August 18. Israel emerges from recession with GDP growth of 1% in Q2, after two quarters of negative growth. Seasonally adjusted GDP rose at a 1% annual rate. The second quarter‘s growth was driven in large part by an increase in exports of goods and services which rose at a 5.8% annual rate. Excluding diamonds and start-up companies, exports rose at an even higher rate of 7.1%. IHS Global Insight. August 18. U.S. industrial production increased by 0.5% in July, while manufacturing output rose by 1.0%. The industrial production report was good for the first time in almost a year and a half, with no hidden causes for concern. Total output of mines, utilities, and factories rose 0.5%, and would have been much better if electric utilities did not have to dial back output because of the milder-than-normal summer, pushing utility output down 2.4%. The motor vehicle industry provided the biggest upward push to output, and boosted the manufacturing sector to a 1.0% gain. The good showings were not confined to vehicles. Core manufacturing (excluding high technology and motor vehicles) recorded an output gain of 0.1%. While that seems tepid, this was only the second increase since March 2008; the other was a feeble bounce-back last October, when refining and chemicals were recovering from hurricane outages. The output gains lifted total capacity utilization to 68.5%, and the manufacturing operating rate to 65.4%. Both readings were noticeable improvements over June, but still 11–12 percentage points below a year ago. IHS Global Insight. August 17. Demand for U.S. Treasuries grew in June, despite sales by China. Foreign investors bought $90.7 billion more in long-term U.S. securities than they sold in June. In May, foreign investors sold $19.4 billion more securities than they bought. China, the largest U.S. creditor, reduced its June U.S. Treasury holdings by $25.1 billion or 3.1% to $776.4 billion from May‘s $801.5 billion. China Daily reported the 3.1% decrease was the largest percentage cut in nine years. China‘s June holdings were still larger than April‘s $763.5 billion and $767.9 billion in March. Japan, the second largest holder of U.S. Treasuries, increased its holdings to $711.8 billion, up $34.6 billion from May. Britain, the third largest holder, held $214 billion in June, up $50.2 billion from May. UPI.com and Wall Street Journal‘s Real Time Economics.

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August 17. Economists typically say every recession is different in its own way, but recoveries are all alike, driven by the housing sector and consumer spending. If so, this recovery may be on very shaky ground. Consumer spending, roughly 70% of economic activity, and housing, about 20% of GDP, have been hit with the equivalent of 100-year storms. ― Is the consumer back in the game? No, not yet,‖ says John J. Castellani, chief economist and president of the business roundtable. ― When we look at our members who are tied to the housing market, they are nowhere near a recovery, while our [consumer products] companies are still moving to downscale.‖ Between June 2007 and December 2008, for instance, inflation-adjusted personal wealth fell by 22.8%—the most since the Federal Reserve began collecting data almost 60 years ago. Some $6 trillion in housing wealth alone was lost in 2008. Consumer spending shrank for two consecutive quarters for the first time in half a century. ― Consumers simply have to retrench, save more, spend less,‖ says David Jones of DMJ Advisors. ― That in itself will give us a much slower, longer and uneven recovery.‖ CNBC.com.

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August 17. Japan returned to growth in the second quarter, as gross domestic product expanded a seasonally adjusted 0.9% quarter on quarter between April and June. This follows a year of contraction, and is its first rise since the first quarter of 2008 and the equivalent of 3.7% growth on an annual basis. Economists warned that the recovery remained vulnerable to any faltering in export demand or tightening of the government‘s fiscal stimulus. Financial Times. August 17. U.S. Banks and other financial institutions are lobbying against fair-value accounting for their asset holdings. They claim many of their assets are not impaired, that they intend to hold them to maturity anyway and that recent transaction prices reflect distressed sales into an illiquid market, not what the assets are actually worth. Legislatures and regulators support these arguments, preferring to conceal depressed asset prices rather than deal with the consequences of insolvent banks. This is not the way forward. While regulators and legislators are keen to find simple solutions to complex problems, allowing financial institutions to ignore market transactions is a bad idea. Financial Times. August 17. Being in debt is about to get a lot more expensive for millions of Americans. Credit card issuers have been rushing to raise rates in advance of August 20, when the first provisions of the U.S. Credit Card Accountability Responsibility and Disclosure Act (CARD) will go into effect, with other protections starting in February 2010. Starting this week, card issuers need to give you more time to pay your bills. Also, instead of mailing bills 14 days before the due date, issuers must send bills 21 days in advance of the payment date. That will mean fewer people will get hit with late fees because of postal delays. Another provision effective this week requires card issuers to give you 45 days‘ notice when they plan to raise your rate, instead of the current 1 5-day advance notice. That‘s behind the rash of notifications sent in recent weeks, advising you that no matter what your credit history, you'll be paying higher rates. Next year‘s requirements include a ban on marketing to students or anyone under age 21. They'll be required to have a parent or guardian as a co-signer. Individual bankruptcies are up 36% for the first half of this year, compared with last year. And that translates into more defaults on card balances. Bank of America, the largest bank in the country, reported its default rate jumped to 13.8% in June from 12.5% in May. Other

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issuers such as JPMorgan Chase, Citigroup, Capitol One, Discover and American Express have reported default rates around the 10% level. Chicago Sun Times. August 17. China attracted foreign direct investment of $5.36 billion in July, a 35.7% decline from a year earlier, according to data released Monday by the Ministry of Commerce. July‘s figures marked the tenth straight monthly decline, and far outpaced June‘s one-year drop of 6.8%. In the January-July period, foreign direct investment totaled $48.3 billion, a decrease of 20.3% from that period a year earlier. Dow Jones Newswires.

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August 16. Nearly three years into the deepest U.S. housing slump in generations, lenders are modifying only a small number of problem mortgages, and rising foreclosures are restraining the economy‘s recovery. The Obama administration has stepped up pressure on lenders and their mortgage servicers, who act as bill collectors on behalf of investors who own mortgage bonds. The administration on August 4 unveiled the first of what will be monthly ― name and shame‖ exercises, publishing data on the loan-modification efforts of about three dozen companies. The administration thinks that about 2.7 million U.S. homeowners are at least two months behind on their mortgage payments, roughly equal to the population of Kansas. Yet only 9% of eligible borrowers had been offered trial loan modifications through June. Borrowers from across the nation say they were encouraged, directly or indirectly, by their lenders to fall behind on their mortgage payments in order to qualify for loan modifications. The modifications never came. For example, 47% of South Florida homeowners are behind on mortgages. The U.S. mortgage lending industry reports in June 2009 it helped about 10% of eligible homeowners complete ― workout plans‖ to stay in their homes. Of 3.1 million eligible homeowners, with loans 60 days or more past due, 310,000 completed plans. Of the 3.1 million eligible homeowners, 96,000, or 3%, received loan modifications. McClatchy Washington Bureau. August 14. German GDP expanded 0.3% in the second quarter, the first increase since the first quarter of 2008. This represents a clear reversal from the 3.5% contraction in the first quarter, which was a post-reunification record low. Net exports boosted activity as imports fell more rapidly than exports, while consumer spending and housing investment also provided positive growth impulses. IHS Global Insight. August 14. Hong Kong‘s economy grew by 3.3% on a seasonally adjusted quarter-toquarter basis in the second quarter of 2009. The territory benefited from strong growth in mainland China and better conditions in the West, the government said Friday. Higher demand for Hong Kong‘s exports, particularly from mainland China, where massive stimulus spending and relaxed monetary policy is driving growth, helped explain the turnaround. Exports dropped 12.4% in the second quarter compared to the same period last year. Washington Post. August 3. America‘s manufacturing base has not entirely vanished. Americans continue to make things. Manufacturing employment has shrunk considerably since peaking in the late 1970s, but this has largely been a product of productivity growth. America remains the world‘s largest manufacturer, responsible for 20% of global manufacturing. China‘s share is currently around 12%. This ratio has been moving steadily in favor of China, and it seems

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fairly clear that within a decade China‘s share will overtake America's. America, with 5% of the world‘s population, produces 20% of the world‘s manufactures; China, with 20% of the world‘s population produces 12% of the world manufactures. Developed nations tend to devote between 20% and 30% of employment to industry; China as a developing nation employs 50% of workers to industry. Free Exchange Economist.com.

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July 31. China is spearheading the recovery in both the auto market and the global economy. Car sales in China accelerated to a 48% year on year surge in June, lifting purchases above an annualized 7.0 million units for the first time on record, and well above the 5.9 million unit peak reached in March 2008 prior to the sharp global economic downturn. Noteworthy, our data only include cars. If trucks and buses are included, vehicle purchases in China are on the way to exceed 10.5 million units this year and surpass the United States as the world‘s largest vehicle market.... Auto sales in China have been increasing rapidly since 2001, and this pace is expected to continue well into the next decade. General Motors might be well positioned to take advantage of this growth. GM—the top-selling brand in China— padded its lead this year, with first-half sales soaring 38% to 814,000 units—a level fast approaching the 948,000 vehicles it sold in the United States. As recently as 2004, GM sold roughly 10 vehicles in the United States for each model sold in China. Highlighting the importance of China in GM‘s revival strategy, the company expects to double its sales to 2 million units over the next five years, and plans to launch more than 30 new models in the country. Other automakers, including Nissan and Honda, also continue to expand their assembly facilities in China. Scotiabank. Global Auto Report. July 31. French recession less severe but recovery tepid, IMF reports. The IMF projects French real GDP to drop by 3% in 2009, followed by a gradual recovery starting in 2010. France has been shielded from the worst effects of the crisis by its generous social safety net, which has protected domestic demand, and the country‘s limited reliance on exports, which has shielded it from the worst effects of falling global demand. Relatively rigid labor markets and high social protection are likely to slow the pace of recovery. Credit default swap spreads of French banks have increased considerably, but somewhat less than for other European banks. The relative resilience of French banks can be partly attributed to their conservative lending practices and to the consistent supervision of all lending institutions. The authorities also undertook a number of measures to recapitalize banks and support liquidity. This has resulted in no French bank coming under majority state ownership. Strong automatic stabilizers and appropriate fiscal stimulus measures have helped cushion the downturn in France. A fiscal stimulus package—worth more than 1 1/2 percent of GDP for 2009–10— contains measures that are mostly front loaded and relatively well diversified, with an emphasis on temporary investment expenditures and various tax breaks. IMF Survey Magazine, by Erik De Vrijer and Boriana Yontcheva. July 31. U.S. real Gross Domestic Product declined 1.0% in the second quarter, much shallower than the 6.4% decline in the first quarter. These figures are consistent with a return to modest growth in the second half of 2009. However, revised historical data show that the recession has been deeper than previously thought and weak positive growth in the second half may not be sufficient to prevent employment from continuing to fall. Major factors for U.S. second quarter GDP growth include:

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Business fixed investment and exports declined much less steeply than in the first quarter. Government spending bounced higher, probably in part due to the stimulus package, although the biggest contributor was a sharp rise in defense spending, often volatile. Inventories fell more sharply than in the first quarter, but were a smaller drag on growth. Foreign trade boosted growth as imports fell faster than exports. Some of the import decline reflects the big drop in inventories. Consumer spending fell 1.2%, after a small 0.6% increase in the first quarter. Inflation was near zero. The GDP price index rose 0.2%.

Historical revision reveals this recession to be deeper than previously thought. The decline in real GDP from its peak in the second quarter of 2008 stands at 3.9%, which is the most severe drop in postwar history. Real GDP rose just 0.4% in calendar 2008, rather than rising 1.1% as previously announced. Consumer spending declined 0.2% in calendar 2008, instead of rising 0.2% as previously announced. The saving rate in 2008 was 2.7%, rather than 1.8%. Previous years were also revised up. However, the saving rate for the first half of 2009 is lower than previously reported because personal incomes decreased more than previously thought, not good for future spending prospects. IHS Global Insight.

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July 31. U.S. Treasury Secretary Timothy Geithner issued a stern warning to U.S. regulators to end turf battles and support President Obama‘s plan to overhaul financial regulation. Geithner told Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro, and Federal Deposit Insurance Corp. Chairman Sheila Bair to end public criticism and stop airing concerns over their potential loss of authority. A Treasury Department spokesman said the message to regulators was to work together to get reform done. Reuters. July 8-10. The G8 Summit in Italy included a dialogue with five developing countries (Brazil, China, India, Mexico, and South Africa). The summit resulted in declarations or statements dealing with Responsible leadership for a sustainable future, Non Proliferation, Counter Terrorism, Promoting the global agenda, Energy and Climate, G8-Africa Partnership on Water and Sanitation, and Global Food Security. During the summit, on July 9, China pressed for new international exchange rules. China criticized the dominant role of the U.S. dollar as a global reserve currency and urged diversification of the reserve currency system aiming at relatively stable exchange rates among leading currencies. Chinese state councilor Dai Bingguo‘s remarks caused concern among western leaders, some of whom fear that even discussion of long-term currency issues could unsettle markets and undercut economic recovery. (G-8 Chair‘s Summary and Financial Times) July 10. A new General Motors emerged from bankruptcy protection (filed for bankruptcy on June 1) as a leaner automaker and with 60.8% government ownership. The new company will include the Chevrolet, Cadillac, Buick, and GMC Brands, with its overseas operations. About 4,100 of its 6,000 U.S. dealerships will remain with the new company, while other dealerships will be shed over the next 14 months. The company will have only a fraction of the $54 billion in unsecured debt it previously held. Other holdings, contracts and

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liabilities that GM needed to divest as part of the bankruptcy process will be held by the old company, to be known as Motors Liquidation Co. (GMGMQ). The process of disposing of those assets and liabilities could take two to three years. These holdings include about 16 U.S. plants and facilities that employ about 20,000 workers. Some of the plants will stay open through 2012. The federal government will initially hold 60.8% of the stock in the new company, with a union-controlled health care trust fund owning 17.5%, the Canadian and Ontario governments owning 11.7% and bondholders of the old GM eventually getting about 10%. (CNNMoney.com) July 10. Treasury Secretary Timothy Geithner urged Congress to rein in the $592 trillion derivatives market with new U.S. laws that are ― difficult to evade.‖ The complexity of overthe- counter derivatives contracts and industry growth let corporations take on excessive risk and caused a ― very damaging wave of deleveraging‖ that exacerbated the global credit crisis, Geithner said in prepared testimony at a joint hearing of the House Agriculture and Financial Services committees. Geithner repeated the President‘s call to force ― standardized‖ contracts onto exchanges or regulated trading platforms, and regulate all dealers. Contracts would be subject to new disclosure rules, and ― conservative‖ capital and margin requirements, as well as business- conduct standards, would be imposed on market participants. The market, which grew almost seven-fold since 2000, complicated government efforts throughout the credit crisis to assess potential losses at U.S. banks and corporations because regulators lacked adequate data to measure their risk, Geithner said. (Bloomberg)

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July 9. The U.S. House of Representatives passed 111th Congress bill H.R. 3081 that contained H.Amdt. 311, a provision designed to overrule the President with respect to his signing statement of June 24, 2009. That Presidential statement rejected certain congressional conditions on the funding for the International Monetary Fund contained in 111th Congress bill H.R. 2346, The Supplemental Appropriations Act, 2009, P.L. 111-32. (CQ Today) July 9. A report from the McKinsey Global Institute (MGI) found that big oil investors and Asia‘s central banks and sovereign wealth funds are poised to grow twice as fast as other institutional investors, underscoring how financial power is continuing to shift away from the West. According to MGI, petrodollar investors—including central banks, sovereign wealth funds, and individual magnates based mostly in the Middle East and Russia—will see the value of their foreign assets soar to at least $9 trillion by 2013, up from an estimated $5 trillion at the end of 2008. Similarly, foreign financial assets held by Asia‘s sovereign investors will collectively swell to $7.5 trillion by 2013, up from $4.8 trillion in 2008. The projected rate of growth between 2009 and 2013 will be the slowest since 2000, but, ― impressive‖ nonetheless. What explains these two group‘s ability to sail right through financial turmoil that wrecked some of the West‘s biggest and boldest investors? Mostly, it‘s the nature of the assets they hold. As the economy rebounds, oil prices will go up responding to growing demand for gasoline products tied to greater economic activity. Likewise, when global trade picks up again, Asian reserves will resume building up, reflecting those countries‘ ample trade surpluses. In other words, both petrodollar and Asian investors have a hedge over other institutional investors not so much because of the investment decisions they‘ll make but

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because their existing portfolios will benefit from ― structural flows that will bring money in,‖ as the world economy heads toward recovery. At least some of these structural advantages may wind down in the long run –China, for example, is slowly steering its economy more towards satisfying domestic demand—but in the short-term, they‘ll help tick the financial power balance increasingly toward the economic power centers in the developing world. One risk connected to continued growth in petrodollars and Asian sovereign investment assets is that so much idle money will end up, again, feeding assets bubbles around the world as it did in the run-up to the current recession, warns the MGI report. (Wall Street Journal—Real Time Economics)

Top 10 Wealth Managers Rank 1 2 3 4 5 6 7 8 9 10

Bank Bank of America UBS Citi Wells Fargo Credit Suisse JPMorgan Morgan Stanley HSBC Deutsche Bank Goldman Sachs

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Source: Scorpio Partnership via Reuters via CNBC.COM.

Assets in Million $ 1,501 1,393 1,320 1,000 612 552 522 352 231 215

July 8. The International Monetary Fund (IMF) and Canada have signed an agreement to provide the Fund with up to the equivalent of US$10 billion/about SDR 6.5 billion. The Fund can now add these resources to those already available from borrowing agreements with Japan and Norway to provide balance of payments assistance to its members in the current crisis. (IMF) July 6. The world‘s top wealth management firms were reported by Reuters from a survey of 14,000 private bankers and 7,000 wealthy individuals by Scorpio Partnership. Private wealth managed by banks and investment managers around the world dropped nearly 17% to $14.5 trillion in 2008 from 2007. (CNBC.com) July 6. U.S. manufacturing output from factories has contracted for four consecutive quarters and analysts now expect manufacturing output to fall as much as 12% this year, the worst contraction since 1946. Nearly 1.7 million manufacturing workers—or one in eight— have lost their jobs in the last 18 months alone. (Reuters) July 5. A bankruptcy judge said late Sunday, July 5, that General Motors Corporation (GM) can sell the bulk of its assets to a new government-backed company, clearing the way for the automaker to quickly emerge from bankruptcy protection. GM and the government are reportedly preparing to complete the sale transaction within this week. Chrysler‘s assets were recently sold to a new company led by Italian automaker Fiat. If GM is able to execute its sale this week, both automakers would have completed their trips through bankruptcy in about 40

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days—an unusually speedy process. The government and GM have argued that a quick sale was critical to preserve the automaker‘s value. (AP and Washington Post) July 2. The American economy lost 467,000 jobs in June and the unemployment rate edged up to 9.5% in a sobering indication that the most painful downturn since the Great Depression continues. The number of unemployed persons, 14.7 million and the unemployment rate (9.5%) were little changed in June. Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.2 million, and the unemployment rate has risen by 4.6 percentage points. ― The numbers are indicative of a continued, very severe recession,‖ said Stuart G. Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. (U.S. Bureau of Labor Statistics and New York Times)

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July 2. Eurozone unemployment rose above 15 million in May; unemployment rate at 10 year high of 9.5%, the highest level since February 1999. The number of jobless across the Eurozone spiked up by a further 273,000 in May. This followed increases of 398,000 in April and 423,000 in March. May witnessed the 14th successive monthly rise in unemployment. This took the number of Eurozone jobless up to 15.0 million, the highest level since the bloc‘s inception in January 1999. It was also up by 3.95 million from the five-and-a-half-year low of 11.063 million seen in March 2008. (IHS Global Insight) July 2. The Federal Deposit Insurance Corporation (FDIC) plans to issue new rules that could make it slightly easier for private equity firms to buy failed banks. Under a new directive the agency is expected to demand that investment firms like the Carlyle Group or Kohlberg Kravis Roberts provide support to the banks they acquire if the banks get into more trouble and need additional capital. The new rules represent a balancing act for the F.D.I.C, which is responsible for protecting depositors from losses. Government officials have been eager to recruit private investors to stretch out Congressional bail-outs. Bank regulators remain concerned about permitting comparatively high-risk investor groups take control of banks with billions of dollars in government-guaranteed deposits. The agency has seized 45 failing banks this year, and more than 60 since last fall. (New York Times) July 2. China‘s tax administration reports that the total value-added tax (VAT) refund for exporting goods rose 23.4% year on year during the first five months, hitting 290 billion yuan/U.S.$42.5 billion, as a result of progressive rebate rate increases since last year. China has introduced seven consecutive export tax rebate hikes since the second half of last year to rein in the freefall of the country‘s exports. (IHS Global Insight) July 1. Planned job cuts announced by U.S. employers totaled 74,393 in June, down 33% from 111,182 in May, according to a report released on Wednesday by global outplacement firm Challenger, Gray & Christmas, Inc. June marked the fifth consecutive month of declining planned layoffs at U.S. firms, hitting the lowest level since March 2008 and providing another hopeful sign that the U.S. economy is attempting to end its worst recession in decades. (Reuters) July 1. The contraction in euro zone manufacturing output moderated for the fourth consecutive month in June, a fresh sign that the severe economic downturn in the currency block is gradually bottoming out, final data from Markit Economics showed. However, there Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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were marked differences in the pace of recovery in the region‘s largest economies, with Germany, Spain, and Italy still suffering sharp downturns in manufacturing, while France and the Netherlands moved closer to stabilization. (Wall Street Journal) July 1. Asian economic data from Japan, China and South Korea indicate possible stabilization, or a hesitant steps with a considerable distance to full recovery. In Japan, the Tankan survey of big manufacturers, conducted quarterly by the Bank of Japan, bounced back from a record low it hit in March, recording minus 48 in its June survey. Below 50 indicates economic recession, while above 50 indicates growth. In China, an important official purchasing managers‘ index, rose for the fourth month in a row in June. And South Korea reported that exports in June were 11.3% lower than a year earlier, up from a 28.5% fall recorded in May. (New York Times)

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July 1. Home prices in 20 major U.S. metropolitan areas fell in April at a slower pace than forecast, the S&P/Case-Shiller home- price index showed today. Today‘s Case-Shiller numbers are the latest sign that that the worst of the housing slump may be passing. Sales of existing homes posted gains in April and May, while housing starts jumped in May from a record low. Home prices saw a ― striking improvement in the rate of decline‖ in April and trading in funds launched today indicates investors believe the U.S. housing slump is nearing a bottom, said Yale University economist Robert Shiller. ― At this point, people are thinking the fall is over,‖ Shiller, co-founder of the home price index that bears his name, said in a Bloomberg Radio interview today. ― The market is predicting the declines are over.‖ (Bloomberg) July 1. California‘s lawmakers failed to agree on a balanced budget by the start of its new fiscal year, clearing the way to suspend payments owed to the state‘s vendors and local agencies, who instead will get ― IOU‖ notes promising payment. The notes will mark the first time in 17 years the most populous U.S. state‘s government will have to resort to the unusual and dramatic measure. Democrats who control the legislature could not convince Republicans late Tuesday night to back their plans to tackle a $24.3 billion budget shortfall or a stopgap effort to ward off the IOUs. The two sides agree on the need for spending cuts but are split over whether to raise taxes. Democrats have pushed for new revenues while Republican lawmakers and Governor Arnold Schwarzenegger, also a Republican, have ruled out tax increases. (CNBC) July 1. The Turkish economy declined by 13.8% year on year in the first quarter of 2009. The drop was the largest ever recorded for the country. This follows a 6.2% year on year fourth- quarter decline, placing the Turkish economy officially in recession. This deep contraction is among the steepest in the region, surpassed by only Estonia and Latvia. (IHS Global Insight) July 1. Ukraine‘s GDP dropped by 20.3% in the first quarter, following a decline by 7.9% in the final quarter 2008. The first quarter‘s decline was the steepest since 1994, when the economy slumped by 22.3% for the year as a whole. The key driving force for the downturn was gross fixed capital formation, which fell -48.7% year on year. (IHS Global Insight)

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July 1. China granted a U.S. $950 million credit line to Zimbabwe. According to Agence France-Presse, the loan will be used primarily in assisting the Zimbabwean government to rebuild its shattered economy, which is expected to cost around US$10 billion in the near term. The Zimbabwean prime minister also received pledges of US$500 million from Europe and the United States. (IHS Global Insight) June 30. The United Kingdom‘s first quarter GDP contraction was deeper than previously reported at 2.4% quarter on quarter and 4.9% year on year. These statistics represent the sharpest decline since the second quarter of 1958 and the deepest since quarterly records began in 1948. Consumer spending, investment, exports, and imports all fell substantially and inventories were slashed. The revised data show that the recession began in the second quarter of 2008 rather than the third, and has been deeper than previously thought. Problems unique to the United Kingdom included the sharp housing-market downturn, high levels of consumer debt, and the relative importance of the financial sector.

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June 30. In the first quarter of 2009, Croatian GDP shrank by 6.7% year-on-year, its greatest economic contraction in over 16 years. This represents its most severe economic downturn since its post-Yugoslav violence in 1992. The Croatian economy was undermined by severe downturns in household consumption and fixed capital formation. Exports of goods and services dropped 14.2% year on year. Imports of goods and services fell an even sharper 20.9% year on year. The Croatian kuna depreciated by 1.8% over this period. Lack of export orders forced manufacturers to begin laying off thousands of workers. June 30. The International Monetary Fund (IMF) approved an increase of 40% in financial assistance for Belarus, bringing total support to some US$3.5 billion. The increase in financial support of US$679 million will supply Belarus with vital liquidity relief. This increase signals the IMF‘s trust in Belarus‘s ability and willingness to pursue responsible macroeconomic policy and further structural reforms. In the longer term, challenges remain extensive and economic and financial risks high. June 30. Iran was reported to plan to scrap domestic gasoline subsidies for private vehicles. No time frame for implementation was given. It was announced that the government would still provide gasoline subsidies for fishing vessels and domestic trucks. Iranians currently purchase up to 20 gallons per month at the subsidized price of US$0.40 per gallon, and unlimited quantities at $1.60 per gallon. Iran‘s gasoline imports of 130,000 barrels per day and profitable crude oil exports are considered to be potential sanctions targets over Iran‘s nuclear program. June 29. Kosovo formally joined the IMF and World Bank. This gives Kosovo increased international legitimacy, which is important since support for its 2008 unilateral declaration of independence has been questioned by some. It is hoped that membership in the international financial institutions will bring new investment to the country, the poorest in Europe. It suffers widespread corruption and massive infrastructure problems. Kosovo has an unemployment rate near 60%, and a massive trade deficit. Almost half its population lives in poverty.

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June 26. United States real GDP declined a revised 5.5% in the first quarter. Profits from current production increased US$48.1 billion, or increased 3.8% quarter on quarter. It is the first quarterly increase since the second quarter of 2007. All profits came from the financial sector. Earnings in other industries declined. June 26. The French gross domestic product contracted by 1.2% quarter on quarter during the first three months of 2009. This follows a revised contraction of 1.4% during the final quarter of 2008, and falls of 0.2% and 0.4% during the third and second quarters of last year. Investment and exports continued to perform particularly badly during the first quarter. June 26. New Zealand‘s gross domestic product contracted 0.7% quarter-on-quarter in the three months through March and by 2.2% for the year, marking it as the deepest recession on record. In March growth contracted for the fifth consecutive quarter. A slump in domestic demand despite positive net exports has driven New Zealand‘s economic drop.

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June 25. American International Group (AIG) announced that it has reached a deal to reduce its debt to the Federal Reserve Bank of New York by $25 billion. AIG said that it would give the New York Fed preferred stakes in Asian-based American International Assurance (AIA) and American Life Insurance Company (Alico), which operates in more than 50 countries. Under the agreement, AIG will split off AIA and Alico into separate company-owned entities called ― special purpose vehicles,‖ or SPVs. The New York Fed will receive preferred shares now valued at $25 billion—$16 billion in AIA and $9 billion in Alico—and in exchange will forgive an equal amount of AIG debt. The Fed is now in the insurance business. June 24. H.R. 2346 (P.L. 111-32) established a $1 billion program to provide $3,500 to $4,500 rebates for the purchase of new, fuel-efficient vehicles, provided the trade-in vehicles are scrapped (Cash for Clunkers program). On August 7, H.R. 3435 (P.L. 111-47) increased the amount by $2 billion, tapping funds from the economic recovery act (American Recovery and Reinvestment Act (P.L. 111-5)). June 24. H.R. 2346 was signed to become P.L. 111-32, increasing the U.S. quota in the International Monetary Fund by 4.5 billion SDRs ($7.69 billion), providing loans to the IMF of up to an additional 75 billion SDRs ($116.01 billion), and authorizing the United States Executive Director of the Fund to vote to approve the sale of up to 12,965,649 ounces of the Fund‘s gold. On June 18, Congress had cleared H.R. 2346, the $105.9 billion war supplemental spending bill, that mainly funds military operations in Iraq and Afghanistan through September but also included the IMF provisions. The President‘s signing statement rejected certain congressional conditions on the funding, but a provision in H.R. 3081 that passed the house on July 9, 2009, was designed to overrule the President on this issue. June 24. The United States and the European Union lodged a complaint in the World Trade Organization (WTO) against China, accusing Beijing of unfairly helping their domestic steel, aluminum, and chemical industries by limiting overseas exports of raw materials. The United States and the EU allege that while Chinese companies get primary access low priced raw materials from domestic producers, non-Chinese companies must buy the products in the open market, where prices are higher due to the lack of Chinese output restricting supplies.

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EU Trade Commissioner Catherine Ashton said that the Chinese restrictions on raw materials ― distort competition and increase global prices.‖ China responded that the curbs were put in place to protect the environment, and retaliated with a request for the WTO to investigate U.S. restrictions on the import of Chinese poultry products. The case represents the first trade action taken by the United States against China, or any country, under President Barack Obama. The U.S. president is aware that China is the largest creditor to the United States. Washington frequently complains about China flooding the world market with cheap exports, rather than holding them back. June 24. The International Monetary Fund (IMF) approved an increase in assistance to Armenia. Armenia may now immediately withdraw an additional U.S. $103 million under its stand-by program approved in March. June 23. The Chinese Ministry of Commerce (MofCOM) reported new measures to promote domestic consumption. The government plans to subsidize consumer durable tradeins, reduce electricity prices for commercial enterprises, and promote credit cards. The tradein of home appliances and automobiles will be emphasized.

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June 23. The IMF froze Bosnia and Herzegovina‘s 1.2 billion euro/U.S. $1.66 billion stand-by arrangement when the country failed to implement agreed fiscal tightening. The IMF suspended the loan following the Bosnian government agreement with protests by war veterans and invalids to reverse planned cuts in benefits and pensions. The situation may be reviewed by the IMF in September. June 23. Airbus displayed the first A320 aircraft made outside Europe at a factory in Tianjin, China. It was delivered to Dragon Aviation Leasing and will be used by Sichuan Airlines, a regional Chinese airline. Airbus began assembling the A320 in Tianjin in September, shipping components from Europe to China. The company has invested nearly U.S. $1.47 billion in the plant, a joint venture that is 51% owned by Airbus and 49% owned by a Chinese aviation consortium. Another 10 aircraft will be assembled this year in China, with Airbus planning to assemble four planes per month by the end of 2011. Airbus decided to construct the China plant based on predictions the country will purchase up to 2,800 passenger and transport planes over the next twenty years. Passenger travel is expected to expand five-fold during the next 20 years. The company‘s target is to gain more than 50% market share from now until 2012, a significant increase from its 39% market share in 1995. June 23. The World Bank approved an U.S. $8 million grant for Guinea-Bissau‘s poverty reduction and reform program. The grant will be provided under the country‘s Interim Strategy Note (ISN), for the 2009-2010 period. The grant aims to improve economic management, foster economic growth and strengthen the delivery of basic services. It also seeks to support the government‘s reform agenda, targeting greater efficiency, transparency, and accountability in the management of public finances. Guinea-Bissau continues to be one of the most fragile states in sub-Saharan Africa, trapped in a cycle of political instability, weak institutional capacity and poor economic growth since the 1998-1999 civil war. The World Bank‘s grant is part of a broader initiative to support the country‘s stabilization and recovery.

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June 18. Congress cleared H.R. 2346, the U.S. $105.9 billion war supplemental spending bill, sending it to the President‘s desk. House leaders advanced the measure on June 16, on a 226-202 vote. The Senate voted, 91-5, on June 18 to adopt the report, clearing the bill. The legislation mainly funds military operations in Iraq and Afghanistan through September. It includes $5 billion in borrowing authority for the International Monetary Fund (IMF). June 17. The U.S. Treasury released a white paper containing proposals to reorganize the financial regulatory system. Key areas of reform include systemic risk, securitization, derivatives, and consumer protection. Visit the full document at http://www. financialstability.gov/docs/regs/ FinalReport_web.pdf. June 1. General Motors Corp. declares bankruptcy, filing for chapter 11. By asset value, GM was the second largest industrial bankruptcy in history, after WorldCom in 2002. Costs to the U.S. government to save GM Corp. and Chrysler LLC now exceed $62 billion. GM‘s bankruptcy filing declared assets of $82 billion and liabilities of $172 billion. On the same day Chrysler‘s sale of assets to Italian Fiat SpA was approved by bankruptcy court.

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May 13. The U.S. Treasury in a two-page letter to Congress outlined plans to regulate the over- the-counter (OTC) derivatives market, in order to quantify and regulate risks that led to the global financial crisis. According to Treasury Secretary Tim Geithner, the CFTC and SEC are reviewing the participation limits in current law to recommend how the Commodity Exchange Act and the securities laws should be amended. Treasury is coordinating with foreign governments to promote the implementation of similar measures to ensure U.S. regulation is not undermined by weaker standards abroad. May 12. Standard & Poor‘s (S&P) lowered Mexico‘s credit rating outlook to negative from stable. Economists are reducing forecasts for real GDP growth in 2009. The central bank now estimates a 3.8%-4.8% annual contraction in 2009. S&P forecasts a 5.5% drop for Mexican real GDP this year. The Mexican economy is hampered by oil and trade. Mexico has long relied on oil revenues which are now falling. International oil prices and domestic production are down. The Constitution keeps the oil industry a state monopoly and the financial weakness of the state oil company, Pemex, has prevented development of deep water reserves in the Gulf of Mexico. Mexico‘s total trade, imports plus exports, equaled 62% of total Mexican GDP in 2008. Over 85% of Mexico‘s total trade is with the United States. In the United States, trade accounts for less than 30% of GDP. In the first quarter of 2009, Mexico‘s exports to the United States fell at a 26% annual rate, less than Canada‘s exports decline to the United States of 37%. April 30. Chrysler, the third-largest U.S. vehicle manufacturer, filed for bankruptcy. The firm announced that it would shut four of its U.S. plants, located at Sterling Heights, Michigan; St. Louis, Missouri; Twinsburg, Ohio; and Kenosha, Wisconsin, by the end of 2010. Production at these, and five other U.S. plants (Newark, Delaware, Conner Avenue Detroit, North St. Louis, and its axle plant in Detroit) will be shifted to Canada and Mexico. The U.S. auto industry has been losing jobs for years. In 2008, the industry employed 711,000 people in the United States, down from 1.3 million in 1999. In 2008 U.S. automakers closed 230,000 jobs. Standard & Poor‘s estimates that even including component

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manufacturers, the U.S. auto industry accounts for just over 1% of non-farm employment. Outside Mexico, all of Chrysler‘s North American plants are temporarily closed while Chrysler is reorganized. The new company to emerge is likely to be 20% owned by the Italian firm Fiat, with a majority stake held by the U.S. United Autoworkers Union (UAW). Chrysler is the first bankruptcy filing by a major U.S. auto company since Studebaker in 1933. In Mexico, Chrysler is the fourth largest vehicle maker after Volkswagen, General Motors and Nissan. Chrysler claims that Mexican production may be unaffected. In the first quarter of 2009, total output of 33,998 units was 51% less than the same period of 2008. Mexico‘s total automobile production fell 41% annually in the first quarter of 2009, to 291,800 units. May 7. The government‘s ― stress tests‖ indicated that ten of the largest U.S. banks would have to raise a combined $74.6 billion in capital to cushion themselves against economic under- performance. May 5. The European Commission lowered its growth forecast for the European Union to -4% in 2009 and -0.1% in 2010. May 4. The International Monetary Fund approved a 24-month $17.1 billion Stand-By Arrangement for Romania. The total international financial support package will amount to $26.4 billion, with the European Union providing $6.6 billion, the World Bank $1.3 billion, and the European Bank for Reconstruction and Development, the European Investment Bank, and the International Finance Corporation a combined $1.3 billion.

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April 30. Chrysler announced merger with Fiat and filed for bankruptcy. Separately, the Financial Accounting Standards Board changed the mark-to-market accounting rule to give banks more discretion in reporting value of assets. April 28. Swine flu epidemic hits Mexican economy. April 22. The International Monetary Fund projected global economic activity to contract by 1.3% in 2009 with a slow recovery (1.9% growth) in 2010. Overall, the advanced economies are forecast to contract by 3.8% in 2009, with the U.S. economy shrinking by 2.8%. April 21.The IMF estimated that banks and other financial institutions faced aggregate losses of $4.05 trillion in the value of their holdings as a result of the crisis. Of that amount, $2.7 trillion is from loans and assets originating in the United States, the fund said. That estimate is up from $2.2 trillion in the fund‘s interim report in January, and $1.4 trillion last October. April 14. The IMF granted Poland a $20.5 billion credit line using a facility intended to backstop countries with sound economic policies that have been caught short by the global financial crisis. On April 1, Mexico said that it was tapping the new credit line for $47 billion. April 2. At the G-20 London Summit, leaders of the world‘s largest economies agreed to tackle the global financial crisis with measures worth $1.1 trillion including $750 billion more for the International Monetary Fund, $250 billion to boost global trade, and $100 billion

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for multilateral development banks. They also agreed on establishing a new Financial Stability Board to work with the IMF to ensure cooperation across borders; closer regulation of banks, hedge funds, and credit rating agencies; and a crackdown on tax havens, but they could only agree on additional stimulus measures through IMF and multilateral development bank lending and not through country stimulus packages. The leaders reiterated their commitment to resist protectionism and promote global trade and investment. April 1. The U.S. Conference Board‘s Consumer Confidence Index inched 0.7 of a point higher in March, virtually unchanged from the 42-year low reached in February. The present situation index has fallen from a cyclical peak of 138.3 in July 2007 to 21.5 this month. Its record low was 15.8 in December 1982, when the unemployment rate stood at a post-war high of 10.8%.

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April 1. Japan‘s economy shrank 3.3%, or by 12.7% in annual terms. This marked the deepest contraction in the economy since the first quarter of 1974, when the global economy was reacting to the oil shock, and the second-biggest decline in growth in the post-war era. Japan has experienced a record decline in exports. Total exports fell 13.9% in quarterly comparisons and by a stunning 45.0% in annual terms. These declines were mirrored by the Bank of Japan‘s quarterly business confidence survey, or tankan. The tankan results for the first quarter of 2009‘s headline Diffusion Index (DI) of business conditions for large manufacturing companies dropped to a reading of -58 in the three months through March from the -24 results recorded in the December quarter. The DI surveys respondents‘ business conditions expectations over the next three to six months. The reading for the first quarter was the worst on record. April 1. Mexico‘s President Felipe Calderón claimed yesterday that his country was willing to take up a new credit line from the International Monetary Fund (IMF). He confirmed that government finances were ― in order‖, allowing the country to boost central bank reserves via a new IMF borrowing of some US$30–40 billion as soon as this week. The IMF has failed to attract any borrower for a US$100-million loan offering last year. Potential borrowers may be concerned over conditionality requirements for loans and the negative message sent out when any economy requires IMF financing. The new Flexible Credit Line (FCL), launched recently by the IMF to attract developing nations, offers eligible countries easy access to large loans. Countries will be able to either immediately draw funds from the FCL, or keep it as an easily accessibly pool of finance. March 31. The Organization for Economic Cooperation and Development (OECD) in a new survey reports worsening economic prospects. It is now expected that the global recession will worsen by an average GDP contraction of 4.3% in the OECD area in 2009 before a policy- induced recovery gradually builds strength through 2010. International trade is forecast to fall by more than 13% in 2009 and world economic activity will shrink by 2.7%. Specific forecasts include: U.S.: -4% in 2009 and 0% in 2010; Japan: -6.6% in 2009 and 0.5% in 2010; Eurozone: - 4.1% in 2009 and -0.3% in 2010. Brazil‘s GDP is expected to decline by 0.3% in 2009 while Russia‘s is projected to fall 5.6%. Growth in India will ease to 4.3% in 2009 and in China to 6.3%. By the end of 2010 unemployment rates across OECD nations may reach 10.1% from 7.5% in the first quarter of 2009. The unemployed in the 30

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advanced OECD countries would increase by about 25 million, the largest and most rapid growth in OECD unemployment in the post-war period. March 31. U.S. housing prices continue to fall. The Standard & Poor‘s S&P/Case-Shiller 20-City Composite Index fell 19.0% annually in January 2009, the fastest on record. High inventories and foreclosures continued to drive down prices. All 20 cities covered in the survey showed a decrease in prices, with 9 of the 20 areas showing rates of annual decline of over 20%. As of January 2009, average home prices are at similar levels to what they were in the third quarter of 2003. From their peaks in mid-2006, the 10-City Composite is down 30.2% and the 20- City Composite is down 29.1%. March 31. The World Trade Organization (WTO) predicted that the volume of global merchandise trade would shrink by 9% this year. This will be the first fall in trade flows since 1982. Between 1990 and 2006 trade volumes grew by more than 6% a year, easily outstripping the growth rate of world output, which was about 3%. Now the global economic machine has gone into reverse: output is declining and trade is shrinking faster.

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March 30. The central banks of China and Argentina reached an agreement for a 70 billion yuan/U.S. $10 billion currency swap for three years, the sixth such swap China has concluded with emerging economies including South Korea, Hong Kong, Indonesia, Belarus and Malaysia. The move may provide capital to these emerging markets and may in the longterm promote the Chinese yuan‘s international role. For Argentina, these moves may help to offset challenges in securing foreign exchange financing. March 24. The Executive Board of the International Monetary Fund (IMF) approved a major overhaul of the IMF ‘s lending framework, including the creation of a new Flexible Credit Line (FCL). The changes to the IMF‘s lending framework include:      

modernizing IMF conditionality for all borrowers, introducing a new Flexible Credit Line, enhancing the flexibility of the Fund‘s traditional stand-by arrangement, doubling normal access limits for nonconcessional resources, simplifying cost and maturity structures, and eliminating certain seldom-used facilities.

― These reforms represent a significant change in the way the Fund can help its member countries—which is especially needed at this time of global crisis,‖ said IMF Managing Director Dominique Strauss-Kahn. ― More flexibility in our lending along with streamlined conditionality will help us respond effectively to the various needs of members. This, in turn, will help them to weather the crisis and return to sustainable growth.‖ March 23. The U.S. Treasury released the details of its Public Private Partnership Investment Program to address the challenge of legacy toxic assets (mortgages and securities backed by loans) being carried by the financial system. The Treasury and the Federal Deposit Insurance Corporation with funding from the TARP and private capital are to purchase

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eligible assets worth about $500 billion with the potential to expand the program to $1 trillion. March 20. The European Union announced additional support for the IMF‘s lending capacity in the form of a loan to the IMF totaling €75 billion, about US$100 billion.. The EU‘s common strategy is released. It focuses on regulating hedge funds, private equity, credit derivatives and credit rating agencies, and vowed to crack down on tax havens. March 19. The U.S. Federal Reserve announced a plan to purchase longer-term Treasury securities. The Fed is now trying not just to influence the spread between private interest rates and Treasuries (through its mortgage-backed securities purchases, for example), but also to pull down the entire spectrum of interest rates by driving down the rate on benchmark Treasuries. Key points of yesterday‘s Fed announcement include: The federal funds rate, with a current target range of 0.0%–0.25%, is likely to remain exceptionally low for ― an extended period.‖ Last month, the Fed said the low rate would apply ―f or some time.‖ The Fed will purchase: 

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

up to an additional US$750 billion of agency mortgage-backed securities, for a total of US$1.25 trillion, and up to an additional US$100 billion of agency debt for a total of up to US$200 billion.

It followed the central banks of the United Kingdom and Japan by announcing its intention to purchase longer-term Treasury securities (up to US$300 billion worth) over the next six months. It has launched its Term Asset-Backed Securities Loan Facility (TALF) program to support credit for households and small businesses, and may expand that program to other lending. The Fed anticipates that fiscal and monetary stimulus, plus policies aimed at stabilizing the financial sector, will contribute to a gradual resumption of growth—although it has not said when. This announcement caused the 10-year Treasury yield to fall from just over 2.9% to under 2.6%. Mortgage rates should follow Treasury yields down and spark another refinancing wave. Economists question whether lower rates will revive home purchases as well as refinancing. March 18. The Federal Reserve announced that it would buy approximately $1.2 trillion in government bonds and mortgage-related securities in order to lower borrowing costs for home mortgages and other types of loans. March 11. Chinese total exports experienced their biggest fall on record in February declining 25.7% on the year in February, to US$64.9 billion. Imports also declined 24.1% on the year, And China‘s trade surplus shrank to a three-year low of US$4.84 billion from US$39.1 billion in January. For the first two months of the year combined, exports fell 21.1% from the same period of 2008. Trade contracted despite investment being supported by the

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recent rapid expansion of credit and by the release of funds under the government‘s four trillion yuan/US$580 billion fiscal stimulus package. March 10. Finance Minister Najib Razak announced a large Malaysian fiscal stimulus package. The 60 billion ringgit/US$ 16.3 billion package is the government‘s second supplementary budget, after the initial 7 billion ringgit stimulus already implemented. The package equals 9.0% of gross domestic product (GDP). March 10. Philippines‘ exports experienced a record contraction in January as global demand continued to decline. Official data showed that total exports fell 41% year-on-year to US$2.49 billion. In December, exports contracted by a revised 40.3% in annual terms. Shipments of electronics, which account for more than half of total exports, almost halved, shrinking 48.4% in annual terms to US$1.35 billion. March 10. United Kingdom industrial production suffered the largest annual drop since January 1981 in January. Manufacturing output plunged by 2.9% month on month and 12.8% year on year in January 2009, according to the Office for National Statistics (ONS). This followed a drop of 1.9% monthly in December and marked the eleventh successive monthly decline in manufacturing output.

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March 10. China‘s official registered unemployment rate hit a three-year high of 4.2% in 2008. Although during the post-Asian Financial Crisis slowdown, between 1979 and 1982, unemployment was mostly concentrated in the state sector, this time the private sector has experienced worse unemployment, with migrant labor being fired first, with no social programs for relief. The number of business failures is estimated to be 7.5% of the country‘s Small and Medium sized Enterprises (SMEs), or nearly 500,000 firms. February 24. U.S. President Barack Obama used his first address to a joint session of Congress to outline how the economic recovery can work. He outlined the rationale behind the economic stimulus and the financial sector rescue plans, conceding costs and risks, but warning of the greater danger of inaction. President Obama promised to reduce the federal budget deficit by half by the end of his first term. On the same day, U.S. Federal Reserve Chairman Ben Bernanke testified to Congress that if the financial system is stabilized soon, the recession will end in 2009 and the economy will grow in 2010. February 24. The Latvian government fell over fiscal adjustment measures that are required for Latvia to comply with the IMF-led rescue program terms. This caused Standard & Poor‘s (S&P) to reduce its sovereign rating for Latvia from BBB- to BB+. S&P has thus cut the Baltic State to junk bond status. Latvia‘s ratings among various rating institutions currently vary significantly, from BB+ to BBB+. February 23. The Dow Jones Industrial Average lost 3.4% to close at 7113.78, its lowest level in 12 years, and just under half the high it reached 16 months ago. Banking stocks led the index down, and losses were experienced in most sectors. The U.S. market declines have influenced international declines as well. Japan‘s Nikkei 225 ended down 1.5%, Australia‘s S&P/ASX 200 was off by 0.6%, Taiwan‘s Taiex lost 1.1%, and China‘s Shanghai Composite

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fell 4.6%. Equities are wiping huge amounts off the market value of companies and investments including pensions worldwide. February 23. The Chilean Finance Ministry announced that the Central Bank of Chile will conduct U.S. dollar auctions in March 2009, to finance a US$3 billion stimulus plan announced by President Michelle Bachelet in January. US$1 billion will be directed into fiscal spending transactions. These resources will be drawn from the country‘s sovereign wealth fund, which currently holds around US$20.11 billion. February 20. Several Netherlands local and provincial councils have announced that they are planning to launch local stimulus packages to combat the country‘s economic crisis. The Dutch government is planning to invest €94 million in the local economy and infrastructure projects, including new street lighting and an upgrade of the sewage network. Rotterdam is planning to launch further measures to augment the € 200 million package announced in January for the construction industry. Amsterdam plans to invest € 200 million in its construction industry, while Utrecht is still exploring options.

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February 18. The German government agreed on a revised bank bailout plan. The first version, from October 2008, cost 480 billion euro/U.S. $603.7 billion, has not delivered appropriate results. The new text must be ratified by parliament before taking effect. To ensure the stability of the German financial sector the new plan considers three factors. Expropriation would be a last resort only. Acceleration of state holdings of bank shares, changes to current stock corporation regulations are proposed. The stabilization fund for the financial markets would increase its debt guarantee time period. February 17. President Obama signed a US$787 billion economic stimulus bill, 111th Congress bill H.R. 1, following House and Senate final votes on the conference report on February 13. As passed, the stimulus package includes some US$575 billion in government spending and US$212 billion in tax cuts. February 17. U.S. automakers General Motors Corp. and Chrysler LLC submitted recovery plans to the U.S. government requesting U.S. $21.6 billion more in loans to enable their recovery. February 17. Eastern Europe‘s deepening recession is putting pressure on those West European banks with local subsidiaries, Moody‘s Investors Service reports. The countries with the deepest fiscal deficits—the Baltic states, Bulgaria, Croatia, Hungary and Romania— have the highest external vulnerability. Moody‘s says Kazakhstan, Russia and Ukraine are also under pressure despite low public external debt. The Austrian banking system is the most exposed; banks there and in Belgium, France, Germany, Italy and Sweden account for 84% of total West European claims. Exposure is heavily concentrated among certain banking groups: Raiffeisen, Erste, Societe Generale, UniCredit and KBC. Modern banking has just emerged in Eastern Europe. Eastern subsidiaries are more vulnerable in times of stress, with deteriorating asset quality and vulnerable liquidity positions. EU member countries have failed to coordinate national stimulus programs, and there appears to be no willingness to finance large cross-border rescue packages.

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February 16. Russian President Dmitry Medvedev replaced the governors of Pskov, Orel and Voronezh, as well as the Nenets Autonomous Region. The terminations suggest that the Kremlin is using the economic crisis as an excuse for getting rid of governors with whom the federal leadership was already unhappy. As local development levels and production profiles vary greatly, the crisis is having diverse effects on Russia‘s regions. Russian economic activity as a whole may suffer substantially in the crisis, but inequality across Russian regions may be reduced. February 16. The Japanese economy contracted by 3.3% quarterly in December, the Cabinet Office reported on preliminary figures. At an annual rate, GDP fell by 12.7%, and is now performing at its worst since 1974. February 16. In preparation for the London Leaders‘ summit in April, world leaders are drafting responses to the global financial crisis. The extent to which they agree on the causes of the crisis will be critical to policies proposed. Broad consensus on key features of the financial crisis now includes: 

 

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

Maturity. It emerged from a market-led process of change that spanned around 30 years, not two or three, and culminated in the long boom that began in the early 1990s. Regulatory failure. For many reasons, neither regulation nor regulators policed these processes. Opacity. A major contributory factor was the complexity and opacity of the activities and the balance sheets of major financial institutions. Credit boom. The boom resulted from countries‘ competitive deregulation of financial markets over some 30 years.

How these ingredients interacted to cause the crisis remains under debate. The G20 are likely to promote global measures that address both the underlying causes and more immediate responses. February 14. Finance ministers and central bank governors of the Group of Seven (G7) industrialized nations met in Rome to discuss the financial crisis and economic slowdown. In order to prevent a resurgence of protectionism, the G7 communique pledged members to do all they could to combat recession without distorting free trade. February 13. The U.S. federal government‘s monthly budget statement reported a deficit of US $83.8 billion in January 2009, compared with a US $17.8-billion surplus a year earlier. Both higher outlays and falling tax receipts led to the deficit. The deficit for the first four months of the 2009 fiscal year ballooned to a record US$569 billion. The Troubled Asset Relief Program (TARP) added about US$42 billion to the deficit in January, bringing TARP spending so far this fiscal year to US$284 billion. February 13. Eurozone GDP declined by 1.5% quarterly and 1.2% annually in the fourth quarter of 2008, the sharpest contraction since the bloc came into being in January 1999.

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February 12. Ukraine‘s Finance Minister Viktor Pynzenuk resigned; Fitch downgraded its long-term foreign and local currency issuer rating from ― B+‖ to ― B‖; and an International Monetary Fund (IMF) mission left Ukraine last week. The IMF, which has not concluded its US $1.9 billion part of the Ukrainian aid package, called for immediate and serious crisis management. The IMF mission announced last week that a successful implementation of the financial rescue for the country is in jeopardy. February 12. The Irish government reported a 7-billion-euro (US$9 billion) bank rescue plan for two of the country‘s largest banks, the Allied Irish Bank and the Bank of Ireland. Each bank will receive 3.5 billion euro in recapitalization funds. The government attached conditions including preference shares that the government will obtain, with a fixed annual dividend of 8%, partial control over the appointment of the banks‘ directors, and executive pay reductions with no bonuses.

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February 12. China‘s State Council approved a stimulus plan yesterday for the shipbuilding industry, urging banks to expand trade finance for the export of vessels, and extending fiscal and financial support for domestic buyers of long-range ships until 2012. The government will also encourage industry restructuring, and force the replacement of outdated ships. The funds will facilitate shipping research and technology. Mergers and acquisitions will be encouraged for industry consolidation. This is the latest Chinese industry stimulus plan, following support for textiles, automotive, steel, and machinery industries over the past few weeks. February 12. Chinalco, the Aluminum Corporation of China, announced an investment of US$19.5 billion in Australian mining group Rio Tinto. This investment is China‘s largestever overseas purchase. Chinalco will buy $7.2-billion worth of convertible bonds as well as Rio Tinto assets worth $12.3 billion. Rio Tinto assumed substantial debt in its purchase of Canadian aluminum maker Alcan in 2007. February 12. The Swiss government presented a second economic stimulus plan worth 700 million Swiss francs (US$603 million). The funds are directed at infrastructure (390 million francs), regions (100 million francs), environment and energy (80 million francs), research (50 million francs), renovation of state buildings (40 million francs), and the tourism sector (12 million francs). The first rescue package worth some 900 million francs launched in November did not have its desired effectiveness. February 12. Kuwait‘s Sovereign Wealth Fund lost 15% in 2008. The emirate‘s sovereign wealth fund lost nine billion dinars (US$30.9 billion) in 2008 as a result of the global economic downturn. One example of losses was the US$5-billion capital injection into Citibank and Merrill Lynch in 2008, which fell to US$2.2 billion before returning to its current value of US$2.8 billion. These figures come days after the government unveiled a US$5.14-billion stimulus package which will be funded by the country‘s foreign-exchange reserves, as well as the Kuwait Investment Authority. February 12. Australian legislature rejected fiscal stimulus package as Australian unemployment climbed to two-year high. The US$28 billion package failed over environmentalists‘ objections. Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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February 5. The Bank of England‘s Monetary Policy Committee reduced its key interest rate by 50 basis points from 1.50% to 1.00%. Interest rates are now at their lowest level since the Bank of England was founded in 1694. February 3. British Prime Minister Gordon Brown and Chinese Premier Wen Jiabao said that coordination was necessary in order to avert the global financial crisis, at the end of Premier Wen‘s five-day tour of Europe. Prime Minister Brown said that the United Kingdom is planning to double annual exports within the coming 18 months, from £5 billion to £10 billion. He stressed that the United Kingdom will benefit from China‘s recent stimulus packages, particularly the aerospace, hi-tech manufacturing, education, pharmaceuticals, and low-carbon technologies industries. China and the European Union (EU) have agreed to hold summit talks soon to increase economic cooperation. February 3. Chinese President Hu Jintao will travel to Mali, Senegal, Tanzania, Mauritius, and Saudi Arabia from February 10 to February 17, 2009. Despite the global economic downturn the Chinese government is increasing investment in Africa and the Middle East. Chinese-African trade has been increasing by an average of 30% per year, almost reaching US$107 billion in 2008.

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February 3. China will give Senegal several cooperation projects, including a museum, a theater, a children‘s hospital, and repair of sports stadiums worth some 80 million yuan or U.S. $11.5 million. This brings the total of pledged Chinese investments to Senegal in 2009 to US$117.3 million, including projects for power services, transport equipment and information technology infrastructure. February 2. The government of Kazakhstan announced nationalization of two banks, BTA Bank, the nation‘s largest bank, and Alliance Bank, the nations third-largest bank. The government reported it is considering a possible sale of half of its stake in BTA Bank to Russia‘s Sberbank. The Kazakh government now owns 78.1% of BTA Bank. February 2. A survey conducted jointly by the Afghan government and the United Nations forecast that opium production in Afghanistan will decline for the second consecutive year in 2009. The report estimates that the total area of poppy fields under cultivation declined to 378,950 acres, a 19% decline from the previous year. The survey also indicated that poppy cultivation in the main producing regions of the south and the southwest fell for the first time in five years. The decline was largely attributable to recent sharp falls in global prices for opiates following saturation of the market and the negative impact of drought. Farmers had also shifted production to staple grains after global prices surged in the first half of 2008. The survey indicates that prices for dry opium tumbled 25% in 2008 while wheat and rice prices rose 49% and 26% respectively. Afghanistan accounts for 90% of the world‘s supply of opium with proceeds from trafficking providing a main source of income for insurgents in the border regions with Pakistan. February 2. Ireland average prices for housing declined by 9.1% in 2008 compared with a fall of 7.3% in 2007. Also, Moody‘s Ratings Services revised its sovereign outlook for Ireland to negative from stable on the basis of mounting fiscal pressures, economic

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deterioration, and the government‘s potentially damaging exposure to the banking sector. This follows a similar revision from Standard & Poor‘s in January. January 30. The U.S. Bureau of Economic Analysis (BEA) announced that preliminary real gross domestic product (GDP)—the output of goods and services produced by labor and property located in the United States – for 2008 rose 1.3%, down from 2.0% in 2007. Real GDP decreased at an annual rate of 3.8 percent in the fourth quarter of 2008, the largest decline since the first quarter of 1982. January 30. South Korea reported that industrial output fell 9.6% in December. Total output tumbled by 18.6% in annual terms compared with the 14.0% decline in November, which was the second-largest decrease in production since the series began in 1970. January 30. Finland reported that industrial output declined by 15.6% year-on-year in December, after falling by a revised rate of more than 9.0% in November. Production decreased in all main industrial sectors. Also, the Finnish government announced an increase in government expenditure of 1.2 billion euro to support the flagging economy. Additional funds are to be allocated to construction, renovation and transport infrastructure projects.

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January 29-February 1. The World Economic Forum (WEF) met in Davos, Switzerland. Chinese Premier Wen Jiabao and Russian Premier Vladimir Putin blamed the U.S.-led financial system for the global financial crisis. European Central Bank (ECB) President JeanClaude Trichet noted the ECB is drafting guidelines for European governments‘ establishment of ― bad banks‖ to consolidate toxic assets. January 29. Thailand‘s parliament approved a $3.35 billion stimulus package aimed at boosting its economy battered by months of street protests. Final approval was expected in February. January 28. The International Monetary Fund (IMF) revised its forecast for world economic growth down to 0.5% for 2009. This would be the lowest level of growth since World War II and down by 1.7 percentage points since the IMF forecast in November 2008. The IMF indicated that despite wide-ranging policy actions by governments and central banks, financial markets are still under stress and the global economy is taking a turn for the worse. The IMF urged governments to take decisive action to restore financial sector health (by providing liquidity and capital and helping to dispose of problem assets) and to provide macroeconomic stimulus (both monetary and fiscal) to support sagging demand. January 28. Canada announced a $32 billion stimulus package that included infrastructure spending and tax cuts. January 28. The U.S. House of Representatives passed the American Recovery and Reinvestment Act of 2009 (H.R. 1, Obey). The cost of the bill was estimated at $819 billion. January 26. Australia announced a $2.6 billion stimulus package.

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January 22. Malaysia announced it is preparing a second economic stimulus package to fend off the threat of recession. Singapore unveiled a $13.7 billion stimulus package. January 21.The Philippines announced a $633 million increase to bring its stimulus program to $6.9 billion. January 15. The U.S. Senate voted to release the second half of the Treasury‘s Troubled Assets Recovery Package (TARP) to stabilize the U.S. financial system, granting Presidentelect Barack Obama authority to spend $350 billion to revive credit markets and help homeowners avoid foreclosure. The Treasury Department announced it would fund a rescue of Bank of America which guarantees $118 billion in troubled assets. January 6. Chile announced a $4 billion stimulus package. January 1. Belarus devalued its national currency, the Belarusian ruble, by over 20%. The National Bank announced that it will tie its currency immediately to a basket of three currencies—the U.S. dollar, the euro and the Russian ruble.

2008

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December 31. The International Monetary Fund (IMF) gave tentative approval to Belarus for a US$2.5 billion 15 month Stand By Arrangement. Final approval will be decided by the IMF executive board in January. December 30. South Korea reported that the industrial output index declined by 14.1% annually and by 10.7% monthly. The monthly contraction was the largest in 21 years. The slump in production is closely tied with the sharp reverse in exports, which fell by 18.3%. December 30. Monetary Union Pact approved by Gulf Cooperation Council (GCC)— Bahrain, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates. Representatives from five of the six members of the GCC approved a draft accord for a monetary union yesterday at a summit in Muscat. GCC finance ministers did not agree on the ultimate location of the future central bank. The draft accord prepares for the creation of a monetary council, and the framework for a future monetary union. December 26. The Japanese Ministry of Economy, Trade and Industry released preliminary figures showing that industrial production shrank at a record rate and unemployment rose. Total industrial output contracted 8.1% from October to November 2008. This marked the largest decline in industrial production in 55 years. December 23. Poland‘s Monetary Policy Council reduced its main policy rate by 75 basis points. The Polish main policy rate has been reduced by 1% in two months, and now stands at 5.00%.

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December 23. Japanese Cabinet approves record fiscal plan for FY2009. The ¥88.5 trillion (US$980.6 billion) fiscal package for FY2009, which begins April 1, 2009, marks a 6.6% increase in spending from initial targets. December 23. After the IMF submitted a positive review of Iraq‘s economic reconstruction, the Paris Club of sovereign lenders completed the third and final step of debt forgiveness for Iraq, reducing Iraq‘s public external debt with its members by 20% or US$7.8 billion. Most of Iraq‘s remaining debt consists of official loans from Gulf Arab states and former communist countries, which may be forgiven or discounted if Iraq‘s economy continues to improve. Under former President Saddam Hussein, Iraq‘s debt totaled $125 billion. December 23. New Zealand Real GDP declined 0.4% in quarterly seasonally adjusted terms. This marks the third consecutive quarterly decline in Real GDP. The economy fell into its first recession in more than a decade in the March, 2008. The rate of contraction deepened from the first two quarters of the year during which growth shrank by 0.3% and 0.2% respectively. In annual terms, the economy grew 1.7% in the year through September 2008.

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December 23. The central People‘s Bank of China lowered interest rates for the fifth time in four months. Benchmark one-year lending and deposit rates were both lowered by 27 basis points to 5.31% and 2.25% respectively. These rates were lowered by their biggest margin in 11 years a month ago, lowered by 108 basis points. December 22. U.K. Real GDP contracted by 0.6% quarterly in the third quarter of 2008. The Office for National Statistics (ONS) revised the decline in real GDP from its previous estimate of 0.5% quarterly. This marks the first time that the British economy has contracted since the second quarter of 1992. It had stagnated in the second quarter of 2008 and is therefore on the brink of recession, defined as two successive quarters of contracting quarterly GDP. Prior to that, GDP growth had moderated to 0.4% in the first quarter of 2008 from 0.6% in the fourth quarter of 2007 and 0.8% in the third quarter. Annual GDP growth fell to a 16year low of 0.3% in the third quarter of 2008 from 1.7% in the second quarter and a peak of 3.3% in the second quarter of 2007. Industrial production contracted by 1.4% quarterly, and 2.5% annually in the third quarter, with manufacturing output down by 1.6% quarterly and 2.3% annually. This marks the third successive quarterly decrease in industrial production, meaning that the sector is already in recession. December 22. Russia reports that industrial output growth slowed to 0.6% annual growth in October, then contracted by 8.7% annually in November, the worst monthly report since the economic collapse which followed the ruble crisis of 1998. Critical to Russia‘s economic slowdown is the unwillingness of Russian banks, which are heavily exposed to foreign currency denominated external debt, to lend. December 21. Eurostat reports that Eurozone industrial orders fell 5.4% monthly in September and 4.7% monthly and 15.1% annually in October. December 21. Canada reports that its federal government and the province of Ontario will contribute some C$4 billion (US$3.3 billion) to the short-term automotive rescue Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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announced by the U.S. administration. The United States will provide US$13.4 billion in emergency loans to General Motors and Chrysler. General Motors is to receive C$3 billion of the Canadian funds, while Chrysler is to receive C$ 1 billion. Ford declines injections. Limits on executive compensation are a requirement for funds. December 21. Zimbabwe reports its domestic debt level increased from Z$1 trillion on August 8 to Z$ 179.6 trillion (US$194 million at the current official inter-bank exchange rate) on September 8. This represents a monthly increase of 17,800%. Interest payments now account for roughly 90% of total debt.

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December 19. President Bush announced an automotive rescue plan for General Motors Corp. and Chrysler LLC that will make $13.4 billion in federal loans available almost immediately. The money will come from the $700 billion fund set aside to rescue banks and investment firms in October. The government attached several conditions to the three-year loans and set a deadline of March 31 for the automakers to prove they can restructure enough to ensure their survival or recall the loans. As part of the rescue, GM is required to reduce debt by two-thirds via debt-forequity swaps, pay half of the contributions to a retiree health care trust using stock, make union workers‘ wages competitive with foreign automakers and eliminate the union jobs bank, which pays laid-off workers. December 19. An international rescue package of 7.5 billion euro (US$10.6 billion) for Latvia was announced. The IMF reports a 27-month stand by arrangement between Latvia and the IMF, worth 1.7 billion euro (US$2.4 billion). The remainder of the rescue package includes 3.1 billion euro from the European Union (EU), 1.8 billion euro from Nordic countries, 400 million euro from the World Bank, 200 million euro from the Czech Republic, and 100 million euro each from the European Bank of Reconstruction and Development, Estonia and Poland. Latvia nationalized its second largest bank, Parex Bank. Latvia will implement measures to tighten fiscal policy and stabilize its economy. December 19. The Bank of Japan lowered the benchmark rate by 20 basis points to 0.3%. This marks the second consecutive monthly cut. December 18. Turkey reduces rates for the second consecutive month. The Central Bank of the Republic of Turkey (CBRT) announced a 125-basis-point cut to their overnight borrowing rate from 16.25% to 15.00%, and their overnight lending rate by 125 basis points, from 18.75% to 17.50%. Turkish interest rates are the highest in Europe, even after the rate cuts. December 18. Mexican industrial output decreased an annual 2.7% in October, the sixth consecutive monthly decline. More than 80% of Mexico‘s exports go to the United States. December 18. Norwegian Central Bank cut its main policy interest rate by 175 basis points to 3.0%, the third decrease since October. December 17. U.S. housing starts plummeted 18.9% in November, to a seasonally adjusted annual rate of 625,000 units. This was a record monthly low.

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December 16. The U.S. Federal Open Market Committee (FOMC) voted unanimously to lower its target for the federal funds rate more than 75 basis points, to a range of 0.0% to 0.25%. Long term bond yields dropped from 2.50% to 2.35%. December 15. The Bank of Japan‘s tankan survey of business confidence fell from minus 3 in the third quarter to minus 24 points in the fourth quarter of the year. The 21 point contraction was the steepest in the index since the oil shocks of the 197 0s, and marked the lowest level in the index since 2002. December 12. Ecuador‘s President Rafael Correa announced that Ecuador will stop honoring its external debt; the country should expect lawsuits from bondholders in the short term. This is not the same as declaring the entire Ecuadorean economy in default. December 11. 27 European Union (EU) governments‘ leaders approved a 200 billion euro (US$269 billion) economic stimulus package. The cost is approximately 1.5% of the EU‘s total GDP. Member states will pay major shares; supranational EU institutions, such as the European Investment Bank (EIB), will contribute the remaining 30 billion euro. December 11. Taiwan‘s central bank cut its leading discount rate by three quarters of a percentage point to 2.0%, marking the biggest reduction since 1982. It was also the fifth rate cut in two-and-a-half months.

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December 11. The central Bank of Korea reduced the seven-day repurchase rate by one percentage point to a record low of 3.00%. Interest rates have been reduced by 225 basis points in two months, 100 basis points in October and 125 basis points in November. December 5. November U.S. nonfarm employment loss of 533,000 jobs was the largest in 34 years, compared with the 602,000 decline in December 1974. The U.S. Bureau of Labor Statistics also reported the unemployment rate rose from 6.5 to 6.7 percent. November‘s drop in payroll employment followed declines of 403,000 in September and 320,000 in October, as revised. November 25. U.S. real GDP fell 0.5% in the third quarter of 2008. The announcement by the U.S. Bureau of Economic Analysis also reported U.S. second quarter GDP increased 2.8%. BEA attributed the third quarter decline to a contraction in consumer spending and deceleration in exports. November 24. The U.K. announced a fiscal stimulus package valued at £20 billion (US$30.2 billion) aimed at limiting the length and depth of the apparent U.K. recession. The package included a temporary reduction of value-added tax from 17.5% to 15.0%. November 24. The IMF Executive Board approved a 23-month Stand-By Arrangement for Pakistan in the amount of $7.6 billion to support the country‘s economic stabilization program. November 24. The Central Bank of Iceland‘s currency swap arrangement with Sweden, Norway, and Denmark is extended through December 2009. On the same date, Standard & Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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Poor‘s Ratings Services, S&P, reduced its long-term Iceland sovereign credit rating from BBB to BBB-, while maintaining its short-term Iceland sovereign currency rating at A-3. November 24. The U.S. Treasury, Federal Reserve, and Federal Deposit Insurance Corp. said that they will protect Citigroup against certain potential losses and invest an additional $20 billion (on top of the previous $25 billion) in the company. The government is to receive $7 billion in preferred shares in the company. November 19. The IMF Executive Board agreed to a $2.1 billion loan for Iceland. Following the decision of IMF‘s Executive Board, Denmark, Finland, Norway, and Sweden agreed to provide an additional $2.5 billion in loans to Iceland. November 15. At a G-20 (including the G-8, 10 major emerging economies, Australia and the European Union) summit in Washington, the G-20 leaders agreed to continue to take steps to stabilize the global financial system and improve the international regulatory framework.

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November 15. Japan announced that it would make $100 billion from its foreign exchange reserves available to the IMF for loans to emerging market economies. This was in addition to $2 billion that Japan is to invest in the World Bank to help recapitalize banks in smaller, emerging market economies. Also, the IMF and Pakistan agreed in principle on a $7.6 billion loan package aimed at preventing the nation from defaulting on foreign debt and restoring investor confidence. November 14. The President‘s Working Group on Financial Markets (Treasury, Securities and Exchange Commission, Federal Reserve, and the Commodity Futures Trading Commission) announced a series of initiatives to strengthen oversight and the infrastructure of the over-the- counter derivatives market. This included the development of credit default swap central counterparties—clearinghouses between parties that own debt instruments and others willing to insure against defaults. November 13. The African Development bank conference on the financial crisis ended with a pessimistic outlook for Sub-Saharan Africa, due to declines in foreign capital, export markets and commodity-based exports. November 13. Eurostat declared that Eurozone GDP declined by 0.2% in the third quarter of 2008, as well as the second quarter. Since recession is defined as two successive quarters of contracting GDP, this means that the Eurozone is technically in recession. November 12. United States Treasury Secretary Paulson announced a change in priorities for the US$700 billion Troubled Asset Relief Program (TARP) approved by Congress in early October. The first priority remains to provide direct equity infusions to the financial sector. Roughly US$250 billion has been allocated to this sector. This scope was broadened to include non-banks, particularly insurance companies such as AIG, which provide insurance for credit defaults. Paulson noted that TARP would be used to purchase bank stock, not toxic assets. Paulson‘s new plan also would provide support for the asset-backed commercial paper market, particularly securitized auto loans, credit card debt, and student loans. Between August and November 2007 asset-backed commercial paper outstanding contracted by nearly

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US$400 billion. Paulson rejected suggestions that TARP funds be made available to the U.S. auto industry. November 12. The Central Bank of Russia raised key interest rates by 1%. Swiss Economics Minister announced the Swiss government would inject 341 million Swiss Francs/US$286.6 million for economic stimulus. The State Bank of Pakistan raised interest rates by 2%, to reduce inflation. It also injected 320 billion rupees/US$4 billion into the Pakistan banking system. November 11. IMF deferred their decision to approve US$2.1 billion loan for Iceland. This was the third time the IMF board scheduled then failed to discuss the Iceland proposal. The tentative Iceland package required Iceland to implement economic stabilization. That economic stabilization was the required trigger for implementation of EU loans to Iceland from Norway, Poland and Sweden. Iceland is reportedly involved in disputes over deposit guarantees with British and Dutch depositors in Icelandic banks. November 10. The United States government announced further aid to American International Group, AIG. AIG‘s September $85 billion loan was reduced to $60 billion; the government bought $40 billion of preferred AIG shares, and $52.5 billion of AIG mortgage securities. The U.S. support of AIG increased from September‘s $85 billion to $150 billion.

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November 9. G-20 meeting of finance ministers and central bank governors in Sao Paulo, Brazil, concluded with a communiqué calling for increased role of emerging economies in reform of Bretton Woods financial institutions, including the World Bank and the International Monetary Fund. November 9. China announced a 4 trillion Yuan/U.S. $587 billion domestic stimulus package. primarily aimed at infrastructure, housing, agriculture, health care, and social welfare spending. This program represents 16% of China‘s 2007 GDP, and roughly equals total Chinese central and local government outlays in 2006. November 8. Latvian government took over Parex Bank, the second-largest bank in Latvia. November 7. Iceland‘s President Grimsson reportedly offered the use of the former U.S. Air Force base at Keflavik to Russia. The United States departed Keflavik in 2006. November 7. United States October employment report revealed a decline of 240,000 jobs in October, and September job losses revised from 159,000 to 284,000. The U.S. unemployment rate rose from 6.1% to 6.5%, a 14-year high. November 7. Moody‘s sovereign rating for Hungary is reduced from A2 to A3. Despite IMF assistance, financial instability may require ― severe macroeconomic and financial adjustment.‖ Moody‘s reduced its ratings of Latvia from A3 to A2, before the Latvian statistical office announced Latvian GDP fell at a 4.2% annual rate in the third quarter of 2008. Moody‘s also announced an outlook reduction for Estonia and Lithuania.

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November 6. IMF approved SDR 10.5 billion/U.S. $15.7 billion Stand-By Arrangement for Hungary. U.S. $6.3 billion is to be immediately available. November 6. International Monetary Fund announced its updated World Economic Outlook. Main findings include that ― global activity is slowing quickly‖, and ― prospects for global growth have deteriorated over the past month.‖ The IMF now projects global GDP growth for 2009 at 2.2% , 3/4 of a percentage point lower than projections announced in October, 2008. It projects U.S. GDP growth at 1.4% in 2008 and -0.7% in 2009. November 6. The European Central Bank, ECB, reduced its key interest rate from 3.75% to 3.25%. In two months the ECB has reduced this rate from 4.25% to 3.25%. The Danish Central Bank lowered its key lending rate from 5.5% to 5%. The Czech National Bank reduced its interest rate from 3.5% to 2.75%. In South Korea, the Bank of Korea reduced its key interest rate from 4.25% to 4%. During October the Bank of Korea reduced its rate from 5.25% to 4.25%. November 4. United States Institute of Supply Management‘s manufacturing index fell 4.6 points in October to 38.9, after previously falling in September. The export orders component of the manufacturing index fell 11 points in October to 41, following a drop of 5 points in September. 41 is the lowest level in this export index in 20 years. Exports have been the strongest sector in U.S. manufacturing during the past year.

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November 4. Australia. Reserve Bank of Australia lowered its overnight cash rate by 75 basis points to 5.25%, the lowest Australian rate since March 2005. November 4. Indian Prime Minister Manmohan Singh established a Cabinet-level committee to evaluate the effect of the financial crisis on India‘s economy and industries. This follows the November 2 Indian and Pakistani Central banks‘ actions to boost liquidity. India cut its short- term lending rate by 50 basis points to 7.5% and reduced its cash reserve ratio by 100 basis points to 5.5%. November 4. Chilean President Michelle Bachelet announced a U.S. $1.15 billion stimulus package to boost the housing market and channel credit into small and medium businesses. November 3. IMF announced agreement with Kyrgyzstan on arrangement under the Exogenous Shocks Facility to provide at least U.S. $60 million. The agreement requires the approval of the IMF Executive Board to become final. November 3. Russian Prime Minister Vladimir Putin reported measures to support the real economy. The measures will include temporary preferences for domestic producers for state procurement contracts, subsidizing interest rates for loans intended to modernize production; and tariff protection for a number of industries such as automobiles and agriculture. The new policy aims to support exporters.

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October 31. Three of the six Gulf Cooperation Council, GCC, countries, Bahrain, Kuwait and Saudi Arabian central banks reduced interest rates to follow the actions of the U.S. Federal Reserve and other central banks. October 31. Kazakhstan government will make capital injections into its top four banks, Halyk Bank, Kazkommertsbank, Alliance Bank and BTA Bank. October 31. The U.S. Commerce Department reported that consumer spending fell 0.3% in September after remaining flat in the previous month. On a year-to-year basis, spending was down 0.4%, the first such drop since the recession of 1991. Consumer spending has not grown since June. October 30. The U.S. Bureau of Economic Analysis reported that U.S. real gross domestic product decreased 0.3 per cent in the third quarter of 2008 after increasing 2.8 per cent in the second quarter of 2008. October 29. The U.S. Federal Reserve lowered its target for the federal funds rate 50 basis points to 1 per cent. It also approved a 50 basis point decrease in the discount rate to 1.25 per cent. The Federal Reserve also announced establishment of temporary reciprocal currency arrangements, or swap lines, with the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, the Monetary Authority of Singapore, and the Reserve Bank of New Zealand. Swap lines are designed to help improve liquidity conditions in global financial markets.

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October 29. IMF approved the creation of a Short-Term Liquidity Facility, established to support countries with strong policies which face temporary liquidity problems. October 28. The IMF, the European Union, and the World Bank announced a joint financing package for Hungary totaling $25.1 billion to bolster its economy. The IMF is to lend Hungary $15.7 billion, the EU $8.1 billion, and the World Bank $1.3 billion. October 28. The U.S. Conference Board said that its consumer confidence index has dropped to an all-time low, from 61.4 in September to 38 in October. October 27. Iceland‘s Kaupthing Bank became the first European borrower to default on yen- denominated bonds issued in Japan (samurai bonds). October 26. The IMF announced it is set to lend Ukraine $16.5 Billion. October 24. IMF announced an outline agreement with Iceland to lend the country $2.1 billion to support an economic recovery program to help it restore confidence in its banking system and stabilize its currency. October 23. President Bush called for the G-20 leaders to meet on November 15 in Washington, DC to deal with the global financial crisis.

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October 22. Pakistan sought help from the IMF to meet balance of payments difficulties and to avoid a possible economic meltdown amid high fuel prices, dwindling foreign investment and soaring militant violence. G-20. The Group of 20 Finance Ministers and Central Bank Governors from industrial and emerging-market countries is to meet in Sao Paulo, Brazil on November 8-9, 2008, to discuss key issues related to global economic stability. October 20. The Netherlands agreed to inject €10 billion ($13.4 billion) into ING Groep NV, a global banking and insurance company. The investment is to take the form of nonvoting preferred shares with no maturity date (ING can repay the money on its own schedule and will have the right to buy the shares back at 150% of the issue price or convert them into ordinary shares in three years). The government is to take two seats on ING‘s supervisory board; ING‘s executive-board members are to forgo 2008 bonuses; and ING said it would not pay a dividend for the rest of 2008. October 20. Sweden proposed a financial stability plan, which includes a 1.5 trillion Swedish kronor ($206 billion) bank guarantee, to combat the impact of the economic crisis. October 20. The U.N.‘s International Labor Organization projects that the global financial crisis could add at least 20 million people to the world‘s unemployed, bringing the total to 210 million by the end of 2009.

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October 19. South Korea announced that it would guarantee up to $100 billion in foreign debt held by its banks and would pump $30 billion more into its banking sector. October 18. President Bush, President Nicolas Sarkozy of France, and the president of the European Commission issued a joint statement saying they agreed to ― reach out to other world leaders‖ to propose an international summit meeting to be held soon after the U.S. presidential election, with the possibility of more gatherings after that. The Europeans had been pressing for a meeting of the Group of 8 industrialized nations, but President Bush went one step further, calling for a broader global conference that would include ― developed and developing nations‖—among them China and India. October 17. The Swiss government said it would take a 9% stake ($5.36 billion) in UBS, one of the country‘s leading banks, and set up a $60 billion fund to absorb the bank‘s troubled assets. UBS had already written off $40 billion of its $80 billion in ― toxic American securities.‖ The Swiss central bank was to take over $31 billion of the bank‘s American assets (much of it in the form of debt linked to subprime and Alt-A mortgages, and securities linked to commercial real estate and student loans). October 15. The G8 leaders (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States, and the European Commission) stated that they were united in their commitment to resolve the current crisis, strengthen financial institutions, restore confidence in the financial system, and provide a sound economic footing for citizens and businesses. They stated that changes to the regulatory and institutional regimes for the world‘s financial sectors are needed and that they look forward to a leaders‘ meeting with key

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countries at an appropriate time in the near future to adopt an agenda for reforms to meet the challenges of the 21st century. October 14. In coordination with European monetary authorities, the U.S. Treasury, Federal Reserve, and Federal Deposit Insurance Corporation announced a plan to invest up to $250 billion in preferred securities of nine major U.S. banks (including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase). The FDIC also became able to temporarily guarantee the senior debt and deposits in non-interest bearing deposit transaction accounts (used mainly by businesses for daily operations).245 October 13. U.K. Government provided $60 billion and took a 60% stake in Royal Bank of Scotland and 40% in Lloyds TSB and HBOS. October 12-13. Several European countries (Germany, France, Italy, Austria, Netherlands, Portugal, Spain, and Norway) announced rescue plans for their countries worth as much as $2.7 trillion. The plans were largely consistent with a U.K. model that includes concerted action, recapitalization, state ownership, government debt guarantees (the largest component of the plans), and improved regulations.

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October 8. In a coordinated effort, the U.S. Federal Reserve, the European Central Bank, the Bank of England and the central banks of Canada and Sweden all reduced primary lending rates by a half percentage point. Switzerland also cut its benchmark rate, while the Bank of Japan endorsed the moves without changing its rates. The Chinese central bank also reduced its key interest rate and lowered bank reserve requirements. The Federal Reserve‘s benchmark short- term rate stood at 1.5% and the European Central Bank‘s at 3.75%. October 5. The German government moved to guarantee all private savings accounts and arranged a bailout for Hypo Real Estate, a German lender. A week earlier, Fortis, a large banking and insurance company based in Belgium but active across much of Europe, had received €11.2 billion ($8.2 billion) from the governments of the Netherlands, Belgium and Luxembourg. On October 3, the Dutch government seized its Dutch operations and on October 5, the Belgian government helped to arrange for BNP-Paribas, the French bank, to take over what was left of the company. October 3. U.S. House of Representatives passes 110th Congress bill H.R. 1424, Financial Institutions Rescue bill, clearing it for Presidential signing or veto. President signs bill into law, P.L. 110-343, the Emergency Economic Stabilization Act of 2008, sometimes referred to as the Troubled Assets Relief Program, TARP. The new bill‘s title includes its purpose: ― A bill to provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers...‖

245

U.S. Treasury. ― Joint Statement by Treasury, Federal Reserve and FDIC.‖ Press Release HP-1206, October 14, 2008.

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October 3. Britain‘s Financial Services Authority said it had raised the amount guaranteed in savings accounts to £50,000 ($88,390) from £35,000. Greece also stated that it would guarantee savings accounts regardless of the amount. October 3. Wells Fargo Bank announced a takeover of Wachovia Corp, the fourth-largest U.S. bank. (Previously, Citibank had agreed to take over Wachovia.) October 1. U.S. Senate passed H.R. 1424, amended, Financial Institutions Rescue bill. September/October. On September 30, Iceland‘s government took a 75% share of Glitnir, Iceland‘s third-largest bank, by injecting €600 million ($850 million) into the bank. The following week, it took control of Landsbanki and soon after placed Iceland‘s largest bank, Kaupthing, into receivership as well. September 26. Washington Mutual became the largest thrift failure with $307 billion in assets. JPMorgan Chase agreed to pay $1.9 billion for the banking operations but did not take ownership of the holding company. September 22. Ireland increased the statutory limit for the deposit guarantee scheme for banks and building societies from €20,000 ($26,000) to €100,000 ($130,000) per depositor per institution.

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September 21. The Federal Reserve approved the transformation of Goldman Sachs and Morgan Stanley into bank holding companies from investment banks in order to increase oversight and allow them to access the Federal Reserve‘s discount (loan) window. September 18. Treasury Secretary Paulson announced a $700 billion economic stabilization proposal that would allow the government to buy toxic assets from the nation‘s biggest banks, a move aimed at shoring up balance sheets and restoring confidence within the financial system. An amended bill to accomplish this was passed by Congress on October 3. September 16. The Federal Reserve came to the assistance of American International Group, AIG, an insurance giant on the verge of failure because of its exposure to exotic securities known as credit default swaps, in an $85 billion deal (later increased to $123 billion). September 15. Lehman Brothers bankruptcy at $639 billion is the largest in the history of the United States. September 14. Bank of America said it will buy Merrill Lynch for $50 billion. September 7. U.S. Treasury announced that it was taking over Fannie Mae and Freddie Mac, two government-sponsored enterprises that bought securitized mortgage debt. August 12. According to Bloomberg, losses at the top 100 banks in the world from the U.S. subprime crisis and the ensuing credit crunch exceeded $500 billion as write downs spread to more asset types.

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May 4. Finance ministers of 13 Asian nations agreed to set up a foreign exchange pool of at least $80 billion to be used in the event of another regional financial crisis. China, Japan and South Korea are to provide 80% of the funds with the rest coming from the 10 members of ASEAN. March. The Federal Reserve staved off a Bear Stearns bankruptcy by assuming $30 billion in liabilities and engineering a sale of Bear Sterns to JPMorgan Chase for a price that was less than the worth of Bear‘s Manhattan office building. February 17. The British government decided to ― temporarily‖ nationalize the struggling housing lender, Northern Rock. A previous government loan of $47 billion had proven ineffective in helping the company to recover. January. Swiss banking giant UBS reported more than $18 billion in writedowns due to exposure to U.S. real estate market. Bank of America acquired Countrywide Financial, the largest mortgage lender in the United States.

2007 July/August. German banks with bad investments in U.S. real estate are caught up in the evolving crisis, These include IKB Deutsche Industriebank, Sachsen LB (Saxony State Bank) and BayernLB (Bavaria State Bank).

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July 18. Two battered hedge funds worth an estimated $1.5 billion at the end of 2006 were almost entirely worthless. They had been managed by Bear Stearns and were invested heavily in subprime mortgages. July 12. The Federal Deposit Insurance Corp. took control of the $32 billion IndyMac Bank (Pasadena, CA) in what regulators called the second-largest bank failure in U.S. history. March/April. New Century Financial corporation stopped making new loans as the practice of giving high risk mortgage loans to people with bad credit histories becomes a problem. The International Monetary Fund warned of risks to global financial markets from weakened US home mortgage market.

APPENDIX B. STIMULUS PACKAGES ANNOUNCED BY GOVERNMENTS Date Announced 17-Feb-09

Country

$Billion

Status, Package Contents

United States

787.00

4-Feb-09

Canada

32.00

Infrastructure technology, tax cuts, education, transfers to states, energy, nutrition, health, unemployment benefits. Budget in deficit. Two-year program. Infrastructure, tax relief, aid for sectors in peril. Government to run an estimated $1.1 billion budget deficit in 2008 and $52 billion deficit in 2009.

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Appendix B. Continued Date Announced 7-Jan-09

Country

$Billion

Status, Package Contents

Mexico

54.00

12-Dec-08

Europea n Union

39.00

13-Jan-09

Germany

65.00

24-Nov-08

United Kingdo m

29.60

5-Nov-08

France

33.00

16-Nov-08

Italy

52.00

22-Nov-08

Netherla nds

7.50

11-Dec-08

Belgium

2.60

27-Nov-08

Spain

14.30

14-Jan-09

Portugal

2.89

20-Nov-08

Israel

5.40

Infrastructure, a freeze on gasoline prices, reducing electricity rates, help for poor families to replace old appliances, construction of low-income housing and an oil refinery, rural development, increase government purchases from small- and medium-sized companies. Paid for by taxes, oil revenues, and borrowing. Total package of $256 billion called for states to increase budgets by $217 billion and for the EU to provide $39 billion to fund cross-border projects including clean energy and upgraded telecommunications architecture. Infrastructure, tax cuts, child bonus, increase in some social benefits, $3,250 incentive for trading in cars more than nine years old for a new or slightly used car. Proposed plan includes a 2.5% cut in the value added tax for 13 months, a postponement of corporate tax increases, government guarantees for loans to small and midsize businesses, spending on public works, including public housing and energy efficiency. Plan includes an increase in income taxes on those making more than $225,000 and increase National Insurance contribution for all but the lowest income workers. Public sector investments (road and rail construction, refurbishment and improving ports and river infrastructure, building and renovating universities, research centers, prisons, courts, and monuments) and loans for carmakers. Does not include the previously planned $15 billion in credits and tax breaks on investments by companies in 2009. Awaiting final parliamentary approval. Three year program. Measures to spur consumer credit, provide loans to companies, and rebuild infrastructure. February 6, announced a $2.56 billion stimulus package that was part of the three-year program that includes payments of up to $1,950 for trading in an old car for a new, less polluting one and 20% tax deductions for purchases of appliances and furniture. Tax deduction to companies that make large investments, funds to companies that hire temporary workers, and creation of a program to find jobs for the unemployed. Increase in unemployment benefits, lowering of the value added tax on construction, abolishing taxes on energy, energy checks for families, faster payments of invoices by the government, faster government investment in railroads and buildings, and lowering of employer‘s fiscal contributions. Public works, help for automobile industry, environmental projects, research and development, restoring residential and military housing, and funds to support the sick. Funds to be provided to medium and small-sized businesses, money for infrastructure, particularly schools, and investment in technological improvement. Public works to include desalination plants, doubling railway routes, adding R&D funding, increasing export credits, cutting assorted taxes, and aid packages for employers to hire new workers.

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21-Dec-08

0.59

5-Dec-08

Switzerl and Sweden

26-Jan-09

Norway

2.88

20-Nov-08

Russia

20.00

3-Dec-08

Egypt

8.51

10-Nov-08

China

586.00

13-Dec-08

Japan

250.00

6-Apr-09

Japan

146.00

3-Nov-08

South Korea

14.64

9-Feb-09

South Korea

37.87

16-Dec-08

Vietnam

6.00

28-Jan-09

Indonesi a Philippin es

6.32

29-Jan-09

Thailand

3.35

22-Jan-09

Singapor e

13.70

21-Jan-09

2.70

7.01

405

Public works spending on flood defense, natural disaster and energy- efficiency projects. Public infrastructure and investment in human capital, including job training, vocational workshops, and workplace restructuring.; extension of social benefits to part-time workers. Investment in construction, infrastructure, and renovation of state-owned buildings, tax breaks for companies. Cut in the corporate profit tax rate, a new depreciation mechanism for businesses, to be funded by Russia‘s foreign exchange reserves and rainy day fund. Infrastructure, Industrial Development Authority, Export Development Fund, investment funds for small- and mediumsized enterprises, funds for industrial modernization, training, technology transfer centers, export promotion, land development Low-income housing, electricity, water, rural infrastructure, projects aimed at environmental protection and technological innovation, tax deduction for capital spending by companies, and spending for health care and social welfare. Increase in government spending, funds to stabilize the financial system (prop up troubled banks and ease a credit crunch by purchasing commercial paper), tax cuts for homeowners and companies that build or purchase new factories and equipment, and grants to local government. Increasing safety net for non-regular workers, support for small businesses, revitalizing regional economies, promoting green car purchases, promoting solar power and nursing and medical services. $11 billion for infrastructure (including roads, universities, schools, and hospitals; funds for small- and medium-business, fishermen, and families with low income) and tax cuts. Includes an October 2008 stimulus package of $3.64 billion to provide support for the construction industry. The government announced its intention to invest $37.87 billion over the next four years in eco-friendly projects including the construction of dams; ―gree n‖ transportation networks such as low-carbon emitting railways, bicycle roads, and other public transportation systems; and expand existing forest areas. Tax cuts, spending on infrastructure, housing, schools, and hospitals. (Proposed) Tax incentives for companies and individuals, cuts in fuel and electricity prices, spending on infrastructure. Stimulus package wrapped into the current budget. More spending on infrastructure, agriculture, education, and health, cash for poor households, and tax cuts. Partial funding by borrowing from government corporations and from the nation‘s social security system. Cash for low earners, tax cuts, expanded free education, subsidies for transport and utilities. Personal income tax rebate; cut in maximum corporate tax rate; subsidies for employee wages; training; cash handouts to low-income workers; increase in public sector hiring; assuming 80% of the risk on private bank loans; boosting aid to welfare recipients, government pensioners, and students; invest in infrastructure.

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Appendix B. Continued Date Announced 30-Nov-08

Country

$Billion

Status, Package Contents

Malaysia

1.93

8-Dec-08

India

4.00

28-Nov-08

Taiwan

15.60

31-Dec-08

Sri Lanka

0.14

26-Jan-09

Australia

35.2

7-Jan-09

Mexico

54.00

23-Dec-08

Brazil

5.00

5-Dec-08

Argentin a Chile

3.80

High impact infrastructure projects including roads, schools, and housing. Government budget in deficit. Expect a second, larger stimulus package in February or March 2009. Stimulus package includes $70 million to finance exports of textiles and handicrafts; value added tax rate cut at different levels and across products. Public works spending includes funding for various sectors, including: housing, automobile, infrastructure, power, and medium and small industries. In addition, import duties on naptha was revoked, export duty on iron ore was removed, levy on exports of iron were reduced. Shopping vouchers of $108 each for all citizens, construction projects to be carried out over four years include expanding metro systems, rebuilding bridges and classrooms, improving, railway and sewage systems, and renew urban areas. Cuts in prices for diesel, kerosene, and furnace oil; lifting of surcharge on electricity, incentive for exporters not to retrench workers, lifting of tax on rubber exports, and subsidies for tea farmers. $7 billion stimulus package in October 2008 was cash handouts to low income earners and pensioners. January‘s $28.2 billion package includes infrastructure, schools and housing, and cash payments to low- and middle- income earners. Budget is in deficit. Infrastructure, a freeze on gasoline prices, reducing electricity rates, help for poor families to replace old appliances, construction of low-income housing and an oil refinery, rural development, increase government purchases from small- and medium-sized companies. Paid for by taxes, oil revenues, and borrowing. Program established in 2007 to continue to 2010. Tax cuts (exempt capital goods producers from the industrial and welfare taxes, increase the value of personal computers exempted from taxes) and rebates. Funded by reducing the government‘s budget surplus. Low-cost loans to farmers, automakers, or other exporters.

6-Jan-09

4.00

Infrastructure, subsidies for copper producer, lower employer contributions for small- and medium-sized companies, and income tax rebates. Funded from copper windfall earnings saved in sovereign wealth funds and by issuing bonds.

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APPENDIX C. COMPARISON OF SELECTED FINANCIAL REGULATORY REFORM PROPOSALS246 This appendix provides a comparison, in graphic form, of selected proposals for regulatory reform that have been put forward in the wake of the global financial crisis. Seven such proposals are covered in the table below. They are, in chronological order: U.S. Department of the Treasury, Blueprint for a Modernized Financial Regulatory Structure, March 2008. (This study was completed under Secretary Henry Paulson, during the Bush Administration.) Counterparty Risk Management Policy Group (CRMPG), Containing Systemic Risk: The Road to Reform, Aug. 6, 2008. (The CRMPG, a group of commercial and investment bankers, began this study at the suggestion of the President‘s Working Group on Financial Markets. Its focus is on market participants, rather than regulators.) Congressional Oversight Panel (COP), Special Report on Regulatory Reform: Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers, and Ensuring Stability, January 2009. (The COP was created by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) to oversee the Troubled Asset Relief Program.)

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Group of Thirty, Financial Reform: A Framework for Financial Stability, January 15, 2009. (The Group of Thirty is a private, nonprofit body composed of senior representatives of the private and public sectors and academia, which aims to deepen understanding of international economic and financial issues.) Group of 20 (G-20), G-20 Working Group on Enhancing Sound Regulation and Strengthening Transparency: Final Report (Draft), February 2009. (The G-20 is made up of the finance ministers and central bank governors of 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the U.K., and the United States, and also the European Union.) Financial Services Authority (FSA), The Turner Review: A Regulatory Response to the Global Banking Crisis, March 2009. (The FSA is the UK regulatory agency with jurisdiction over banking, securities, insurance, and derivatives. Adair Turner has been FSA chairman since September 2008.) U.S. Department of the Treasury, Financial Regulatory Reform: A New Foundation, June 2009. (Treasury has released draft legislative language containing many of these recommendations.) The table below lists a number of specific recommendations contained in the above reports and studies, and indicates by an ― X‖ which ones contain each recommendation. The absence of an ― X‖ does not necessarily mean that the authors of the report oppose the 246

Prepared by Mark Jickling, Specialist in Financial Economics.

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Systemic Risk Create (or designate) a single regulator with responsibility over all X systemically-important financial institutions, regardless of their legal form. All systemically-important financial institutions should be subject to X X an appropriate degree of regulation. The systemic risk regulator should have prompt corrective action X powers with regard to failing systemically-important firms. Firms‘ internal risk controls should be made more robust and should X take systemic risk into account. Corporate boards should assume more responsibility for their firms‘ risk management practices. Systemically-important banks should be restricted in certain risky X activities, such as affiliation with non-financial firms, proprietary trading, etc. Financial institutions‘ use of stress testing should be more rigorous. X Regulation of critical payment systems should be strengthened. X International monitoring for systemic risk should be enhanced, and a X X more formal mechanism should be created. Capital Standards Large complex systemically-important financial institutions should be X subject to more stringent capital regulation than other firms. Minimum capital standards should be raised throughout the banking X X system, or for all financial institutions. Capital standards should be adjusted to avoid procyclicality, that is, X firms should be required to build up capital during good times, and be allowed to hold less capital during cyclical contractions. Regulators‘ and firms‘ capital decisions should make greater X X provision against liquidity risk. Hedge Funds and Other Private Pools of Capital Hedge funds should be required to register with the Securities and X Exchange Commission (SEC) or other national securities regulator. Systemically-important hedge funds should be subject to prudential X regulation. Hedge funds should provide information on a confidential basis to X X regulators about their strategies and positions. Over-the-Counter (OTC) Derivatives Credit default swaps should be processed through a regulated X X centralized counterparty (CCP) or clearing house. All standardized OTC derivatives should be processed through a X regulated CCP or clearing house. OTC derivatives dealers should be subject to a strong regulatory X regime. Non-standard (or customized) OTC derivatives should be reported to X a central trade repository or to a regulator.

X

X

X

X

X

Treasury (2008)

X

X

X

X

X

X

X X

CRMPG

COP

G- 20 X

Group of 30

FSA

Recommendation

Treasury (2009)

recommendation—each study has its own scope and focus. In some cases, studies identify issues as needing further study; in others, an issue may be identified as a problem contributing to the financial crisis without a specific recommendation for reform being made. (In neither of these cases would an ― X‖ appear in the table.)

X X X X

X

X

X

X

X

X

X

X

X

X

X X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

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X X

X

X

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The Global Financial Crisis Resolution Authority for Non-Bank Financial Institutions To avoid disorderly liquidations, a government agency should have X authority to take over a failing, systemically-important non-bank institution, and place it in conservatorship or receivership, outside the bankruptcy system. Money Market Funds SEC (or other national regulator) should impose limits on risk-taking X to make money market funds less vulnerable to runs. Funds that offer bank-like services should be chartered as special purpose banks, insured, and regulated. Compensation Structures in Financial Firms Pay practices should discourage excessive risk-taking, via incentives X X for fostering longterm stability rather than maximizing annual performance bonuses. Regulators should consider compensation structures when assessing X firms‘ risk management practices. Credit Rating Agencies Credit rating agencies (CRAs) should be registered and regulated X X X with the appropriate government agency. CRAs should be held more accountable for the accuracy of their ratings, through afterthe-fact audits or independent evaluations. The rating process for complex financial instruments, such as X X structured securitized products, should be made more transparent, or such instruments should be subject to additional mandatory risk disclosures. CRA revenues (especially when securities issuers pay for ratings) X should be subject to oversight, greater disclosure, or limits. Accounting Standards Fair value, or mark-to-market, accounting standards should be X modified to reduce their procyclical impact. Current rules for accounting consolidation (specifying when assets and liabilities may be held off the balance sheet) should be replaced by a principles-based standard reflecting the concepts of control and risk exposure. Other Regulatory Structure Issues There should be a single banking regulator for prudential supervision. There should be a single regulator for consumer financial products. X Financial regulators should play a greater role in macroeconomic X X policy-making. Insurance companies should be chartered and regulated at the federal level. Government-sponsored enterprises—a clear line should be drawn between public and private firms. Minimum international standards—a regulatory floor—should apply X X in all countries, including tax havens and offshore banking centers.

409

X

X X

X

X

X X

X X

X

X

X X

X X

X

X X

X

X X

X

Source: Prepared by CRS. (An ― X‖ indicates that a report includes the recommendation at the left)

APPENDIX D. SUMMARY OF POLICY TARGETS AND OPTIONS This appendix lists the major problems raised by the crisis, the targets of policy, and the policies already being taken or possibly to take by various entities in response to the global financial crisis. The length and breadth of the list indicates the extent that the financial crisis

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410

Dick K. Nanto

has required diverse and draconian action. Policies or actions not yet taken or are being considered are marked by a ― ?‖ in the table. Many of these items are discussed in later sections of this report and are addressed in separate CRS reports. Table D.1. Problems, Targets of Policy, and Actions Taken or Possibly to Take in Response to the Global Financial Crisis

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Problem

Targets of Policy Actions Taken or Possibly To Take Containing the Contagion and Restoring Market Operations Bankruptcy of financial Financial institution,  Capital injection through loans or stock purchases institutions Financial sector  Increase capital requirements  Takeover of company by government or other company  Allow to go bankrupt Excess toxic debt Capital base of debt  Write-off of debt by holding institution holding  Purchase of toxic debt through Public Private Partnership institution Investment Program government at a discount (March 23, 2009, Treasury announcement)  Ease mark-to-market accounting requirements (April 2, 2009, Financial Accounting Standards Board)  Restructure mortgages  Nationalize debt holding institutions? Credit market freeze Lending institutions  Coordinated lowering of interest rates by central banks/Federal Reserve  Guarantee short-term, uncollateralized business lending  Capital injection through loans or stock purchases Consumer runs on Banks  Guarantee bank deposits deposits in banks and Brokerage houses  Guarantee money market accounts money market funds  Buy underlying money market securities to cover redemptions Declining stock markets Investors Short  Temporary ban on short sales of stock sellers  Government purchases of stock? Global recession, rising National  Stimulative monetary and fiscal policies unemployment, governments  Increased lending by International Financial Institutions (April decreasing tax revenues, 2009 G-20 declaration to increase IMF funding) declining exports  Trade policy?  Support for unemployed  Cash for Clunkers rebates for buying new cars with better gas mileage (June 2009) Coping with Long-Term, Systemic Problems Poor underwriting Credit rating  More transparency in factors behind credit ratings and better standards Overly high agencies Bundlers of models to assess risk? ratings of collateralized collateralized debt  Regulation of Credit Rating Agencies (April 2, 2009 London debt obligations by rating obligations Summit) companies Corporate leveraged  Changes to the IOSCO Code of Conduct for Credit Rating lenders Agencies? Lack of transparency in  Strengthen oversight of lenders? ratings  Strengthen disclosure requirements to make information more easily accessible and usable? Incentive distortions for Mortgage originators  Require loan originators and bundlers to provide initial and originators of mortgages Fannie Mae/ Freddie ongoing information on the quality and performance of (no penalty for mortgage Mac securitized assets or to retain a 5% interest in the security defaults due to faulty All participants in (June 17 Treasury Plan) lending practices) the originate-to Strengthened oversight of mortgage originators (June 17 distribute chain Treasury Plan)  Penalties for malfeasance by originators? Shortcomings in risk Investors  More prudent oversight of capital, liquidity, and risk management Banks, securities management? practices companies  Raise capital requirements for complex structured credit Severe under estimation Regulatory agencies products and to account for liquidity risk (June 17 Treasury of risks in the tails of

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The Global Financial Crisis default distributions and insufficient regard for systemic risk Risk models that encourage pro- cyclical risk taking Banks had weak controls over off-balance sheet risks

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Regulators are ― stove piped.‖ Do not deal adequately with large complex Financial institutions

411

Plan)  Strengthen authorities‘ responsiveness to risk?  Set stricter capital and liquidity buffers for financial institutions (June 17 Treasury Plan) Bank structured investment vehicles Bank sponsored conduits Regulatory agencies Financial intermediaries engaged in acombination of banking, securities, futures, or insurance

Hedge funds and private equity are largely unregulated Information on Credit Default Swaps not public

Regulatory agencies

Consumers being ― victimized‖ in credit card, mortgage, and other financial markets Lack of consistency in regulations among nations and need for new regulations to cope with new risks and exposures

Bank regulatory agencies

Countries unable to cope with financial crisis

IMF, Development Banks National monetary authorities and governments

Countries slow to recognize emerging problems in financial systems Lack of political support to implement changes in policy

National monetary and banking authorities Governments IMF Regional organizations National political leaders

National regulatory and oversight authorities Bank for International Settlements International Monetary Fund Financial Stability Board (Financial Stability Forum)

 Strengthen accounting and regulatory practices?  Raise capital requirements for off-balance sheet investment vehicles?  create an independent agency to monitor systemic risk (March 20 and June 17, 2009 Treasury Announcements and plans)  Create a Financial Services Oversight Council or other organization to improve interagency coordination and cooperation (June 17,2009 Treasury plan)  extend regulation and oversight to hedge funds and private equity (April 2, 2009, London Summit, June 17, 2009 Treasury Plan)  create clearing counterparty for credit default swaps (March 26, 2009 Treasury Announcement)  create a Consumer Financial Protection Agency (June 17, 2009 Treasury Plan)  Implement G-20 Action Plan (November 15, 2008 G-20 Summit)  Implement Basel II (Bank for International Settlements‘ capital and other requirements for banks) (in process by countries)  Bretton Woods II agreement?  Greater role for the Financial Stability Board/ Forum and International Monetary Fund (April 2, 2009 London Summit, June 17 Treasury Plan)  Establish colleges of national supervisors to oversee financial sectors across boundaries (November 15, 2008 G-20 Summit)  Increased resources for the IMF and World Bank (April 2, 2009 London Summit) (H.R. 2346, provided for increase in quota and loans to the IMF)  Loans and swaps by capital surplus countries  Creation of long-term international liquidity pools to purchase assets?  Increased IMF and Financial Stability Board/ Forum macroprudential/systemic oversight, surveillance and consultations (April 2, 2009 London Summit, June 17 Treasury Plan)  Build more resilience into the system?  Increase reporting requirements?  Establish colleges of national supervisors to oversee financial sectors across national borders (Nov. 15, 2008, G-20 Summit)  G-20 international summit meetings  Bilateral and plurilateral meetings and events

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APPENDIX E. BRITISH, U.S., AND EUROPEAN CENTRAL BANK OPERATIONS, APRIL TO MID-OCTOBER 2008 May

Bank of England

Federal Reserve

Announced that expanded three-month longterm repos would be maintained in June and July.

Expanded size of Term Auction Facility (TAF). Extended collateral of Term Securities Lending Facility (TSLF). Introduced 84-day TAF. Primary Dealer Credit Facility (PDCF) and TSLF extended to January 2009. Authorized the auction of options for primary dealers to borrow Treasury securities from the TSLF.

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July

September

Announced that expanded three- month longterm repos would be maintained in September and October. Announced long-term repo operations to be held monthly. Extended drawndown period for Special Liquidity Scheme 9SLS).

Expanded collateral of PDCF. Expanded size and collateral of TSLF. Announced provision of loans to banks to finance purchase of high quality asset-backed commercial paper from money market mutual funds.

October

Extended collateral for one-week U.S. dollar repos and for three-month long-term repos. Extended collateral of all extended-collateral sterling long-term repos, U.S. dollar repo operations, and the SLS to include bankguaranteed debt under the UK Government bank debt guarantee scheme. Announced Operations Standing Facilities and a Discount Window Facility, which together replace existing Standing Facilities.

Announced payment of interest on required and excess reserve balances. Increased size of TAFs. Announced creation of the Commercial paper Funding Facility.

Source: Financial Stability Report, October 2008, the Bank of England. p. 18.

European Central Bank

Announced that it would conduct operations under the 84-day TAF to provide US dollars to European Central Bank counterparties. Announced that supplementary three-month longer-term refinancing operations (LTROs) would be renewed in August and September. Announced six-month LTROs would be renewed in October, and three-month LTROs would be renewed in November and December. Conducted Special Term Refinancing Operation.

Increased size of six- month supplementary LTROs. Announced a reduction in the spread of standing facilities from 200 basis points to 100 basis points around the interest rate on the main refinancing operation. Introduced swap agreements with the Swiss National Bank.

Coordinated Central Bank Announcements Expansion of agreements between Federal Reserve and European Central Bank.

Expansion of agreement between Federal Reserve and European Central Bank. Establishment of swap agreements between Federal Reserve and the Bank of England, subsequently expanded. Bank of England and European Central Bank, in conjunction with the Federal Reserve, announced operation to lend U.S. dollars for one week, subsequently extended to scheduled weekly operations. Announced schedules for TAFs and Forward TAFs for auctions of U.S. dollar liquidity during the fourth quarter. European Central and Bank of England announced tenders of U.S. dollar funding at 7-day, 28-day, 84-day maturities at fixed interest rates for full allotment. Swap agreements increased to accommodate required level of funding.

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INDEX # 2001 recession, 274 20th century, 76, 84, 194, 223, 224, 225, 226 21st century, vii, x, 19, 58, 64, 66, 67, 141, 209, 354, 401 9/11, 17, 51, 54

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A A(H1N1), 250 abolition, 93 abstraction, 76 abuse, 8, 10, 268, 270, 323 access, 3, 4, 7, 9, 10, 13, 22, 40, 42, 57, 59, 61, 62, 64, 78, 79, 83, 84, 171, 172, 173, 175, 177, 178, 208, 210, 212, 230, 246, 284, 288, 298, 305, 306, 311, 323, 340, 344, 356, 366, 379, 383, 384, 402 accountability, 208, 211, 213, 215, 216, 218, 245, 266, 269, 319, 340, 341, 380 accounting, 130, 144, 146, 208, 212, 245, 250, 277, 294, 310, 341, 342, 370, 382, 409, 410, 411 accounting standards, 277, 342, 409 accuracy, 185 achievement, 72, 91, 95, 118, 120, 198, 200 acquisition of knowledge, 66 acquisitions, 165, 273, 363, 389 adaptability, viii, 19 ADC, x, 72, 127, 129, 130 adjustment, 97, 155, 159, 160, 178, 188, 193, 225, 229, 247, 307, 347, 386, 397 adult education, 38, 42, 43 adults, 43, 214 advancement, vii, 1, 6, 15 adverse effects, 50, 212, 280, 283 adverse event, 244

advertisements, 113, 118, 119, 198, 199 advertising, 118, 119, 120, 125, 198, 199, 200, 205 advisory body, 314 advocacy, 245 aerospace, 390 affect, 113 affluence, 52 Afghanistan, 32, 39, 263, 284, 285, 336, 379, 381, 390 Africa, x, 72, 127, 128, 129, 130, 132, 133, 134, 136, 137, 138, 142, 169, 172, 173, 174, 175, 188, 189, 191, 280, 283, 298, 348, 352, 365, 366, 373, 390, 396 age, 32, 35, 36, 37, 42, 49, 58, 62, 64, 65, 68, 99, 118, 121, 173, 178, 198, 201, 225, 370 agencies, 60, 65, 174, 176, 177, 211, 217, 229, 241, 267, 268, 270, 287, 292, 293, 309, 314, 320, 341, 345, 367, 377, 383, 385, 410, 411 agent, 76 AGFI, 108 aggregate demand, 181, 186, 229, 308 aggregates, 191 aggression, 60 aging, 99 aging population, 99 agricultural exports, 237, 248 agricultural sector, 208, 310 agriculture, 33, 50, 53, 154, 172, 208, 248, 333, 357, 397, 398, 405 Air Force, 397 airlines, ix, 70, 72 airports, 159 algorithm, 122, 202 allocative efficiency, 211 alternative, ix, 82, 86, 89, 95, 180, 184, 192, 212, 215 alternatives, 210

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414

Index

altruism, 41, 213 amalgam, 112 American Recovery and Reinvestment Act, xiii, 261, 266, 272, 379, 391 American Recovery and Reinvestment Act of 2009, xiii, 261, 266, 272, 391 Angola, 130, 133, 134, 135, 136, 138 annual rate, 304, 316, 366, 367, 369, 381, 388, 391, 394, 397 ANOVA, 122, 202 antagonism, 15 antidumping, 234, 249, 253, 281 antitrust, 2 anxiety, 295 apparel, 94 apparel industries, 94 apparel products, 257 appendix, 109, 118, 120, 198, 200 appetite, 361 Appropriations Act, 252, 374 Arab countries, 54, 56, 59, 61, 63 arbitrage, 190, 291 arbitration, 90, 213 Argentina, 141, 142, 143, 191, 227, 266, 282, 283, 289, 299, 305, 307, 310, 311, 345, 347, 384, 406, 407 argument, 78, 90, 94, 95, 190 Armenia, 32, 276, 344, 380 arrest, 254 artificial intelligence, 58 ASEAN, 142, 236, 330, 403 Asia, 32, 45, 68, 101, 102, 142, 189, 190, 191, 193, 196, 225, 236, 263, 276, 280, 281, 283, 298, 300, 302, 303, 327, 328, 329, 335, 354, 357, 365, 374 Asian countries, 240, 327, 328, 329, 335, 352 Asian crisis, 182, 191 assault, 226, 227 assessment, xi, 5, 33, 40, 115, 179, 180, 208, 311, 338, 352 assets, 21, 23, 34, 51, 72, 78, 79, 84, 86, 118, 170, 198, 208, 209, 210, 241, 242, 247, 265, 273, 274, 289, 290, 291, 292, 294, 300, 304, 305, 311, 316, 317, 326, 327, 331, 355, 356, 363, 365, 370, 374, 375, 381, 382, 384, 389, 391, 392, 396, 400, 401, 402, 409, 410, 411 assignment, 187 Association of Southeast Asian Nations, 236, 330 asymmetry, 83, 191 attention, ix, xi, 75, 76, 77, 84, 100, 103, 105, 119, 129, 179, 180, 189, 199 attitudes, ix, 69, 99, 105, 115, 116, 212, 215, 217 attractiveness, 128, 130, 132 attribution, 118, 198

audit, xi, 179, 212, 346, 367 auditing, xi, 179, 212 audits, 272, 346, 409 Australia, 69, 75, 90, 117, 197 Austria, 401 authenticity, 350 authorities, 35, 36, 40, 56, 92, 155, 255, 267, 269, 270, 280, 284, 287, 288, 294, 322, 324, 357, 372, 401, 410, 411 authority, 11, 216, 228, 268, 269, 273, 278, 279, 283, 284, 286, 287, 288, 289, 293, 314, 326, 337, 338, 346, 349, 352, 360, 373, 381, 392, 401, 409 automobiles, 32, 380, 398 automotive sector, 369 autonomy, 104, 224, 228, 230 availability, 78, 119, 199 awareness, 3, 40, 51, 171 Azerbaijan, 32, 40

B bacteria, 246 Bahrain, 55, 392, 399 bail, 360, 363, 376 balance of payments, 247, 300, 330, 343, 375, 400 balance sheet, xiii, 261, 274, 288, 289, 305, 309, 327, 341, 388, 402, 409, 411 balanced budget, 230, 377 Baltic states, 387 Baluchistan, 40 ban, 151, 259, 370, 410 Bangladesh, 49, 50, 52, 55, 57, 285 bank debt, 303, 412 bank failure, 403 Bank of England, 319, 324, 390, 401, 412 bankers, 267, 355, 365, 375 banking, 159, 222, 225, 247, 249, 265, 274, 279, 287, 299, 305, 306, 308, 309, 310, 312, 314, 320, 324, 325, 326, 327, 331, 335, 343, 350, 355, 356, 368, 387, 391, 397, 399, 400, 401, 402, 403, 407, 408, 409, 411 banking industry, 324, 335 banking sector, 222, 299, 324, 326, 391, 400 bankruptcies, 170, 172, 292, 294, 327, 370 bankruptcy, 213, 217, 264, 279, 281, 285, 287, 291, 293, 298, 308, 352, 354, 360, 367, 368, 373, 375, 381, 382, 402, 403, 409 banks, ix, xiii, 70, 151, 161, 172, 186, 225, 241, 250, 261, 263, 264, 265, 268, 270, 273, 274, 276, 281, 282, 288, 290, 291, 293, 294, 297, 298, 303, 310, 311, 312, 313, 315, 316, 317, 318, 320, 324, 325, 326, 327, 328, 331, 333, 334, 335, 339, 341, 343, 344, 345, 346, 347, 350, 354, 355, 356, 360, 363,

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Index 367, 368, 370, 372, 374, 375, 376, 382, 383, 387, 389, 390, 391, 393, 394, 396, 397, 398, 399, 400, 401, 402, 403, 405, 408, 409, 410, 411, 412 bargaining, xi, 2, 87, 91, 92, 94, 100, 180, 187, 357 barriers, viii, xii, 18, 27, 40, 47, 137, 192, 210, 215, 216, 217, 221, 233, 248, 255, 280, 281, 342, 366 barriers to entry, 27 base, 57, 87, 184, 186, 211, 213, 218, 265, 291, 294, 298, 335, 371, 397, 410 basic education, 62 basic needs, x, 169, 172, 175 basic research, 59, 63 basic services, 380 basis points, 305, 309, 311, 350, 390, 392, 393, 394, 395, 398, 399, 412 bauxite, 251 BBB, 386, 396 BEA, 241, 243, 391, 395 beef, 246, 250, 280 behavior, 231 behaviors, 23, 153 Beijing, 141, 148, 158, 166, 167, 255, 283, 329, 348, 349, 363, 365, 379 Belarus, 276, 344, 378, 384, 392 Belgium, 55, 287, 303, 387, 401, 404 beneficiaries, 50, 173 benefits, ix, xii, 7, 17, 54, 58, 79, 84, 90, 98, 103, 106, 112, 115, 129, 152, 207, 252, 254, 296, 307, 320, 325, 380, 403, 404 bias, ix, 70, 119, 184, 185, 199, 351 biodiversity, 2, 156 biotechnology, 58, 59 birth rate, 49 blame, 243, 282 blood, 244 blue-collar workers, 49 board members, 359, 400 bondholders, 374, 395 bonds, 50, 286, 292, 311, 345, 347, 356, 361, 362, 371, 385, 389, 399, 406 bonuses, 281, 289, 320, 355, 359, 389, 400, 409 boreholes, 173, 175, 176 borrowers, 160, 217, 282, 330, 347, 368, 371, 383, 384 Bosnia, 380 Botswana, 136, 138 bounds, 16, 87, 155 brand image, x, 103, 104, 105, 106, 108, 111, 114, 115 brand perception, 109, 110, 111, 112, 115 Brazil, 141, 142, 143, 144, 145, 214, 238, 266, 283, 290, 294, 297, 299, 301, 305, 306, 307, 308, 309,

415

310, 311, 312, 345, 354, 357, 373, 383, 397, 400, 406, 407 breakdown, 333 breeding, 58 Bretton Woods conference, 338 Bretton Woods system, 180, 193, 278 bribes, 93, 254 Britain, 324, 325, 326, 347, 367, 369, 402 budding, 312 budget deficit, xiii, 233, 242, 282, 296, 312, 347, 369, 386, 403 budget surplus, 297, 406 building societies, 324, 402 Bulgaria, 299, 387 Bureau of Labor Statistics, 352 bureaucracy, 215 Burkina Faso, 130 Burma, 330 burn, 245 Burundi, 130, 138 business costs, 217 business cycle, 22, 265, 277, 342 business environment, vii, 19, 217 business partners, viii, ix, 69, 71, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85 business strategy, 86 businesses, vii, 20, 72, 78, 80, 81, 84, 85, 96, 192, 216, 217, 258, 271, 274, 279, 296, 297, 308, 318, 324, 325, 336, 349, 398, 400, 401, 404, 405 buyer, 78, 86, 265, 291, 292 buyers, 78, 79, 288, 291, 294, 359, 362, 389

C Cabinet, 39, 363, 388, 393, 398 California, 101, 102 Cambodia, 330 Cameroon, 130 Canada, 92, 184 capacity building, 211 capital account, 190, 228, 230 capital accumulation, 186, 194, 213 capital flight, 336 capital flows, xi, 129, 131, 179, 180, 190, 193, 224, 225, 230, 286, 294, 300, 301, 331, 353, 356 capital goods, 189, 297, 406 capital inflow, 129, 137, 191, 228, 229, 230, 301, 305, 347 capital markets, 22, 137, 142, 230, 284, 291, 294, 298, 311, 356 capital mobility, 189 capital outflow, 137, 229

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416

Index

capitalism, 120, 152, 169, 170, 200, 222, 223, 226, 280, 337 Capitol Hill, 350 carbon, 156, 258, 297, 390, 405 Caribbean, 194, 304, 306, 307, 308, 310, 312, 345 case law, 12 cash, 99, 161, 175, 176, 251, 295, 297, 327, 350, 352, 363, 368, 398, 405, 406 Caspian Sea, 32 cast, 91 catching-up, 186 category a, 184 category b, 35, 312 catfish, 244 causality, 72 CBS, 280 ceasefire, 14 censorship, 255 Census, 239, 361 Central African Republic, 130 Central Asia, 32 central bank, 151, 159, 186, 229, 263, 264, 287, 305, 306, 309, 317, 318, 319, 322, 325, 326, 330, 333, 335, 338, 343, 345, 346, 350, 351, 354, 356, 374, 381, 383, 384, 385, 388, 391, 392, 395, 397, 399, 400, 401, 407, 410 Central Europe, 130, 142 centralisation, 37 ceramic, 146 certification, 94, 246 CFI, 108 Chad, 130 challenges, vii, 19, 24, 26, 32, 52, 64, 66, 67, 193, 208, 209, 257, 280, 285, 309, 338, 342, 351, 365, 378, 384, 401 changing environment, 104 changing global scene, viii, 31 channels, 86 chaos, 229, 312, 360 chemical, 58, 160, 184, 245, 251, 379 chemical industry, 160, 184 chemicals, 185, 241, 244, 369 Chiang Mai Initiative, 330 Chicago, 115, 371 chicken, 246, 258, 361 child labor, 93 child rearing, 62 childhood, 38, 42 children, 32, 35, 38, 40, 42, 62, 172, 244, 245, 358, 361, 390 Chile, 191, 227, 387, 392, 406 China, vi, x, xi, xiii, 12, 89, 128, 141, 142, 143, 144, 145, 146, 147, 148, 149, 150, 151, 152, 153, 154,

155, 156, 157, 158, 159, 160, 161, 162, 163, 164, 165, 166, 167, 179, 189, 190, 214, 233, 234, 235, 236, 237, 238, 239, 240, 241, 242, 243, 244, 245, 246, 247, 248, 249, 250, 251, 252, 253, 254, 255, 256, 257, 258, 259, 262, 266, 274, 275, 276, 282, 283, 290, 291, 294, 297, 298, 299, 300, 304, 309, 327, 328, 329, 330, 331, 332, 333, 334, 336, 345, 348, 349, 350, 352, 354, 356, 357, 358, 361, 362, 363, 365, 369, 371, 372, 373, 375, 376, 377, 378, 379, 380, 383, 384, 385, 386, 389, 390, 393, 397, 400, 403, 405, 407 Chinese firms, 147, 148, 165, 246, 248, 249, 251, 254 Chinese government, 146, 152, 153, 155, 156, 158, 159, 160, 165, 233, 239, 244, 245, 246, 247, 249, 250, 252, 254, 255, 256, 282, 331, 332, 333, 334, 365, 390 circulation, 4 CIS, 142 cities, 32, 33, 151, 155, 172, 332, 365, 368, 384 citizens, 33, 42, 50, 51, 53, 54, 62, 63, 66, 67, 211, 279, 280, 285, 331, 400 citizenship, xii, 40, 96, 178, 221 City, 195, 384 civil liberties, 54 civil service, 57 civil society, 4, 39, 56, 208, 211, 218 civil war, 380 civilization, 34 clarity, 8, 97, 99 classes, 38, 43, 48, 65, 70, 191, 265 classroom, 37, 41, 64, 66 clean air, 171 clean energy, 160, 259, 296, 322, 340, 404 cleaning, 231 clients, 293, 320 climate, 49, 56, 60, 137, 156, 209, 215, 216, 217, 258, 259, 340, 354 climate change, 60, 156, 258, 259, 340, 354 clothing, 35, 184, 282, 366 CNN, 352 coal, 57, 250, 350 codes, 94, 208, 213 coffee, 280 cognition, 62, 87 cognitive skills, 64 coke, 251 Cold War, 282 collaboration, 37, 38, 42, 145, 173 collateral, 172, 214, 265, 286, 291, 293, 294, 350, 412 collateral damage, 286 collective bargaining, 91, 92, 100

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Index collective production, 150 collectivism, 22 colleges, 33, 267, 322, 411 Colombia, 27, 305 color, iv command economy, 249, 254 commerce, 48, 92 commercial, 7, 8, 15, 16, 58, 65, 151, 159, 160, 213, 234, 238, 241, 243, 255, 274, 277, 297, 350, 356, 360, 380, 396, 400, 405, 407, 412 commercial bank, 159, 160, 274, 356 commercial ties, 234, 241 commitment, ix, 69, 94, 96, 97 commodity, xii, 59, 96, 133, 146, 149, 157, 162, 164, 221, 222, 264, 274, 285, 288, 300, 304, 305, 306, 307, 309, 310, 315, 344, 351, 352, 368, 396 commodity markets, 149, 288 commodity producers, 351 Common Market, x, 72, 127, 129, 130, 138 Common Market for Eastern and Southern Africa (COMESA), x, 72, 127, 129, 130 communication, 10, 16, 20, 31, 35, 36, 38, 41, 42, 58, 59, 61, 71, 82, 83, 106, 113, 118, 147, 156, 180, 183, 198, 246, 293 communication strategies, 106, 118, 198 communism, 120, 200 communist countries, 393 Communist Party, 151 communities, xi, 49, 67, 169, 170, 171, 172, 173, 174, 175, 176, 177, 178 community, 96, 150, 171, 173, 174, 175, 176, 177, 194, 288, 360 comparative advantage, 137, 187, 189, 190, 194 compensation, 99, 100, 187, 262, 272, 277, 281, 289, 291, 314, 339, 342, 349, 352, 360, 367, 394, 409 compensation package, 352 competence, 80, 84 competition, viii, 21, 23, 26, 52, 57, 67, 69, 75, 82, 83, 85, 97, 104, 105, 115, 139, 181, 187, 189, 190, 192, 209, 211, 212, 213, 215, 217, 221, 225, 245, 285, 380 competitive advantage, 20, 21, 23, 25, 29, 50, 80, 81, 85, 93, 104, 190, 247, 251 competitive markets, 86, 342 competitive process, 216 competitiveness, 76, 84, 144, 147, 148, 160, 189, 190, 193, 228, 249, 318 competitors, 21, 22, 23, 80 complement, 71, 153, 322 complementarity, 3 complexity, ix, 12, 16, 70, 72, 287, 293, 315, 374, 388 compliance, 7, 98, 212, 249, 253, 277, 344

417

components, xii, 185, 207 composition, 137, 223, 237, 339 compression, 182 computer, 38, 58, 59, 61, 62, 147, 184, 185, 239, 240 computer labs, 38 computer software, 58, 59, 61 computers, 185, 195 computing, 59, 183 concentration, 209 conception, 15, 175 conciliation, 3 concrete, 112 conduct, 94, 120, 200 conference, 151, 162, 329, 338, 358, 387, 396, 400 confidence, 80, 86, 109, 110, 111, 122, 202, 215, 229 confidence interval, 109, 110, 111, 122, 202 configuration, 191 confinement, 229 conflict, 5, 10, 11, 16, 38, 50, 51, 56, 94, 95, 97, 99, 210, 285 conflict resolution, 38 conformity, 36 confusion, 105, 106 Congo, 130, 138 Congress, iv, 101, 151, 152, 155, 234, 241, 243, 247, 249, 251, 256, 258, 262, 263, 264, 266, 267, 269, 270, 271, 272, 279, 284, 290, 291, 300, 311, 337, 345, 346, 359, 360, 374, 379, 381, 386, 387, 396, 401, 402 Congressional Budget Office, 369 congruence, 106 consciousness, 264 consensus, 174, 213, 266, 275, 318, 322, 388 conservation, xi, 161, 169, 177 consolidation, 134, 409 constituents, 350 Constitution, 151, 381 constraints, 187, 209 construction, 86, 115, 147, 153, 159, 282, 296, 297, 320, 332, 333, 348, 352, 364, 387, 391, 404, 405, 406 consulting, 37, 348 consumer choice, 118, 198 consumer goods, 161, 250, 281 consumer loyalty, 72 Consumer Price Index, 162 Consumer Product Safety Improvement Act, 245 consumer protection, 245, 340, 381 consumers, ix, x, xi, 21, 69, 70, 71, 103, 104, 105, 106, 107, 109, 111, 112, 113, 115, 117, 118, 119, 120, 121, 122, 124, 135, 197, 198, 199, 200, 201, 202, 204, 244, 250, 268, 271, 274, 293, 315, 320, 323, 356, 357

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418

Index

consumption, x, xi, 36, 48, 117, 118, 142, 144, 146, 158, 159, 162, 163, 191, 192, 197, 198, 223, 225, 227, 228, 230, 234, 320, 328, 329, 334, 350, 356, 378, 380 consumption patterns, 48, 162, 356 consumption rates, 329 contemporary scene, viii, 31 contingency, 267, 345 control, 80, 86, 93, 97, 193, 211, 212, 213 controversial, 5, 326, 367 convention, 2 Convention on the Protection and Promotion of the Diversity of Cultural Expressions,, vii, 1, 7 convergence, xi, 178, 179, 188, 194, 195, 340 conviction, 172 cooking, 170 cooperation, ix, 3, 4, 5, 7, 17, 36, 43, 60, 67, 75, 76, 77, 78, 79, 80, 81, 83, 84, 86, 87, 93, 94, 98, 99, 105, 145, 147, 153, 156, 166, 245, 246, 258, 259, 267, 269, 278, 280, 321, 322, 341, 351, 356, 383, 390, 411 cooperative agreements, 146 coordination, ix, 24, 69, 71, 75, 91, 153, 155, 156, 166, 193, 210, 211, 262, 267, 278, 319, 321, 322, 341, 390, 401 copper, 280, 304, 366, 406 copyright law, 255 corporate governance, 208, 209, 216, 218 corporate restructuring, 181 corporate sector, 231 corporations, 93, 128, 139 correlation, 70, 121, 122, 123, 186, 201, 202, 203 correlation coefficient, 123, 203 corruption, 208, 209, 211, 212, 217, 218, 231, 245, 246, 378 cost, ix, x, xi, xiii, 10, 20, 21, 22, 61, 69, 76, 78, 80, 81, 83, 84, 90, 93, 96, 97, 117, 118, 128, 175, 176, 177, 187, 189, 197, 211, 217, 243, 247, 251, 253, 255, 261, 273, 276, 282, 291, 311, 320, 325, 354, 358, 359, 378, 384, 387, 391, 395, 406 cost of living, 358 Costa Rica, 277 costs, 76, 87, 97, 186, 187, 188, 190, 214, 215, 217, 218, 225 cotton, 223, 237 Council of Europe, 5, 6 counseling, 41 counterbalance, 6 counterterrorism, 258 coverage, 185, 214 covering, 3, 92, 146, 147, 246 CPC, 151, 152 CPI, 162

creativity, 2, 10, 15, 37, 51, 56 credibility, 215, 217 credit, 78, 79, 216 credit history, 370 credit market, 217, 273, 294, 304, 311, 316, 330, 360, 392 credit rating, 268, 270, 286, 291, 293, 308, 314, 341, 367, 381, 383, 385, 396, 410 creditors, 360 creditworthiness, 229, 316 crises, xiii, 180, 190, 191, 194, 230, 231, 261, 262, 264, 265, 267, 269, 274, 277, 283, 286, 287, 288, 289, 298, 300, 304, 319, 327, 340, 342, 344, 353 crisis management, 267, 269, 321, 325, 343, 389 critical analysis, 6, 65 critical thinking, 35 criticism, 35, 45, 329, 348, 373 CRM, 71 Croatia, 366, 387 cross-border investment, 165 cross-country, xi, 179, 184, 188, 211, 213 CRS report, 271, 410 crude oil, 282, 378 crystallisation, 5 cultivation, 33, 37, 390 cultural differences, 10, 82 cultural heritage, 5 cultural identities, 15 cultural imperialism, 65 cultural influence, 15 cultural literacy, 62 cultural practices, 9, 10 cultural values, 6 culture, vii, 1, 2, 3, 5, 11, 13, 14, 15, 16, 17, 18, 26, 33, 42, 50, 51, 66, 258 currency, xiii, 166, 229, 230, 233, 234, 241, 243, 246, 247, 256, 259, 265, 267, 276, 281, 282, 283, 288, 289, 290, 298, 300, 303, 305, 306, 307, 308, 309, 311, 326, 334, 335, 343, 347, 351, 353, 359, 362, 363, 368, 373, 376, 384, 389, 392, 393, 395, 399 current account, 229, 247, 290, 293, 299, 300, 327, 331, 335, 336, 339 current account balance, 229 current account deficit, 290, 299, 335, 336 current account surplus, 247, 300, 327, 331 curriculum, 33, 36, 40, 64, 65, 67 customer loyalty, 72 Customer Relationship Management, 71 customers, 106, 107, 117, 197 Customs and Border Protection, 253 cyberspace, 37 cycles, 21, 33, 190, 191, 223, 228, 339

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Index cycling, 225 Czech Republic, 364, 394

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D damage, 81 damages, iv danger, 172, 190, 245, 386 data collection, 121, 123, 201, 203 database, 143, 292 dating, 92 deaths, 244 debt, 182, 191, 193, 214, 217, 225, 229 debt servicing, 298 debtors, 358 debts, 172, 313, 317, 335, 347 decentralization, 149, 150, 151 decision making, 95, 98, 119, 199, 210 decision-making process, 174, 175 decisions, 76, 95, 98, 99, 105, 106, 119, 120, 186, 199, 200, 210, 229 decoupling, 300, 301, 305 deduction, 404 defects, 124, 204 defence, 85 deficiencies, 37, 54, 186, 208 deficiency, 57, 176 deficit, 172, 182, 183, 228, 230, 236, 243, 290, 296, 297, 299, 310, 312, 320, 324, 336, 347, 366, 369, 388, 403, 406 definition, xii, 95, 183, 188, 221 deforestation, 57 delegates, 97 demand, 98, 107, 134, 135, 180, 181, 185, 186, 187, 188, 189, 192, 193, 194, 195, 225, 228 democracy, 16, 49, 54, 56, 67, 96, 210, 230 Democratic Party, 331, 358 democratization, 56, 66 demonstrations, 67, 171 denial, 62 Denmark, 326, 364, 395, 396 density, 91 Department of Agriculture, 258 Department of Commerce, 142, 147, 165, 166, 257 Department of Education, 68 Department of Health and Human Services, 246 deposit accounts, 326 depository institutions, 241, 268 deposits, 273, 325, 326, 356, 368, 376, 401, 410 depreciation, 228, 242, 281, 297, 326, 347, 405 depth, 71, 80, 316, 395 deregulation, 137, 186, 190, 211, 215, 224, 230, 280, 290, 388

419

derivatives, 156, 225, 262, 268, 270, 273, 277, 279, 289, 291, 293, 309, 310, 318, 323, 324, 339, 340, 342, 349, 368, 374, 381, 385, 396, 407, 408 designers, 58 desire, 75, 217 destruction, 48, 57, 156, 185, 192 deterrence, 253 developed countries, 4, 7, 52, 53, 55, 61, 91, 93, 94, 107, 128, 129, 130, 133, 134, 143, 144, 145, 149, 155, 156, 172, 181, 298, 300, 304, 343 developed nations, x, 4, 127, 128, 356 developing countries, x, xii, 3, 4, 7, 17, 48, 49, 50, 51, 53, 62, 64, 72, 83, 90, 94, 97, 99, 107, 128, 129, 130, 134, 137, 142, 145, 148, 156, 169, 170, 172, 173, 180, 181, 182, 183, 187, 188, 189, 190, 191, 192, 193, 195, 196, 207, 216, 217, 218, 222, 224, 225, 228, 230, 263, 275, 285, 300, 304, 339, 341, 352, 354, 356, 359, 365, 366, 373 developing nations, xiii, 222, 261, 266, 282, 329, 383, 400 development assistance, 194, 285, 342 development banks, 262, 264, 267, 276, 284, 339, 341, 344, 345, 383 development policy, 226 deviation, 89, 122, 191, 202 dialogues, 145, 257 diamonds, 369 dichotomy, 75, 76 diet, 171 differentiation, 70 diffusion, 10, 59, 61, 184, 216, 359 digital technologies, 16 dignity, 3, 62, 96 dimensionality, 122, 202 diplomacy, 284 direct funds, 250 direct investment, x, 97, 127, 147, 165, 187, 241, 371 directives, 35, 92, 250 directors, 323, 349, 359, 389 disappointment, 250, 255 disbursement, 366 discipline, 90 disclosure, 212, 216, 218, 289, 341, 374, 409, 410 discourse, xii, 106, 221 discrimination, 37, 93 diseases, 36 dislocation, 285, 287 disorder, 53 dispersion, 189, 194 displacement, 49, 181 disposable income, 160 disposition, 326

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Index

distortions, 191, 311, 410 distress, 321, 346 distribution, xi, xii, 3, 10, 12, 51, 53, 66, 83, 129, 134, 150, 151, 152, 154, 162, 179, 180, 187, 188, 190, 191, 192, 207, 208, 209, 212, 213, 218, 223, 224, 227, 230, 248, 249, 250, 251, 255 distribution of income, 187, 209, 223, 224, 227 divergence, xi, 180 diversification, 72, 137, 373 diversity, vii, 1, 2, 3, 4, 5, 6, 7, 9, 10, 12, 13, 15, 16, 17, 321, 339 division, 78, 94, 211 division of labor, 222 DNA, 28 doctors, 59 Doha, 7, 14, 248, 263, 342, 354, 357 domain, 71, 124, 204 domestic demand, 158, 159, 160, 162, 163, 167, 313, 358, 372, 375, 379 domestic investment, 328 dominance, 27, 48, 56 donors, 217, 336 Dow Jones Industrial Average, 386 draft, 85, 194, 262, 272, 349, 392, 407 draught, 310 drawing, 172, 210 dream, 125, 205 drought, 365, 390 drug safety, 246 drug trafficking, 341 drugs, 245, 246 dumping, 149, 249, 253, 259, 281, 361 duties, 92, 96 dynamism, 37

E early retirement, 98, 99 early warning, 267, 278, 283, 321, 342, 343 earnings, xii, 188, 207, 226, 265, 367, 406 East Asia, 60, 100, 101, 189, 190, 191, 196, 225, 298, 312, 327, 330, 335, 364 Eastern Europe, 142, 280, 298, 299, 300, 301, 303, 357, 387 e-commerce, 20 economic activity, 22, 76, 79, 171, 190, 191, 223, 264, 285, 286, 295, 307, 314, 315, 316, 366, 370, 374, 382, 383, 388 economic change, 298 economic competitiveness, 84 economic consequences, viii, 69 economic cooperation, 79, 145, 147, 339, 343, 390

economic crisis, 191, 233, 247, 248, 264, 270, 279, 311, 312, 314, 335, 354, 387, 388, 400 economic development, xi, 48, 56, 59, 66, 76, 97, 144, 148, 149, 152, 153, 156, 159, 163, 165, 179, 209, 211, 212, 218, 224, 227, 228, 229, 230, 249, 339 economic downturn, 22, 161, 285, 307, 312, 314, 315, 316, 318, 320, 350, 367, 369, 372, 376, 378, 389, 390 economic efficiency, xii, 78, 80, 82, 84, 221 economic fundamentals, 22, 284, 305, 306, 308, 327, 339 economic globalisation, vii, viii, ix, 1, 2, 6, 10, 13, 69, 75, 82, 85, 87 economic growth, 44, 53, 58, 72, 129, 142, 143, 144, 145, 148, 149, 153, 157, 159, 163, 165, 170, 187, 193, 211, 212, 213, 216, 217, 218, 223, 227, 228, 233, 234, 238, 243, 264, 274, 275, 293, 298, 300, 301, 304, 305, 307, 310, 312, 315, 316, 317, 318, 332, 334, 338, 340, 369, 380, 391 economic growth rate, 274, 293, 298 economic incentives, 83, 85 economic independence, 36 economic indicator, 299 economic institutions, 84 economic integration, 127, 129, 137, 315 economic landscape, 186 economic liberalization, 148 economic performance, x, 141, 187 economic policy, 87, 187, 193, 247, 262, 306, 313, 319, 336, 358 economic power, 48, 151, 165, 375 economic problem, 280, 305, 336 economic progress, 209 economic reform, x, 134, 141, 152, 153, 218, 229, 238, 243, 247, 256 economic reforms, 134, 153, 218, 229, 238, 243, 247, 256 economic relations, x, xiii, 80, 127, 128, 153, 233, 234 economic rent, 80 economic resources, 213 economic stability, 208 economic systems, 212 economic transformation, 164, 327 economic welfare, 305 economics, 36, 63, 75, 76, 77, 78, 80, 81, 84, 85, 86, 153, 211, 222, 225, 281 economies of scale, 20, 78 Ecuador, 281, 305, 395 editors, 226 education, viii, x, 9, 31, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45, 47, 49, 50, 52, 54, 57, 58,

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Index 61, 62, 63, 64, 65, 66, 67, 68, 97, 99, 118, 159, 169, 173, 175, 177, 198, 209, 258, 296, 318, 334, 390, 403, 405 educational attainment, 185 educational experience, 67 educational institutions, 64, 65 educational materials, 40 educational objective, 35 educational opportunities, 64 educational programs, 60, 62, 66 educational qualifications, 49 educational quality, 64 educational services, 38 educational system, viii, 31, 32, 33, 34, 64 educators, 38, 63, 64, 65 Egypt, 50, 55, 133, 134, 136, 138, 405 El Salvador, 276, 285, 344 election, 331, 400 electricity, 49, 57, 172, 296, 297, 333, 336, 337, 364, 380, 404, 405, 406 elementary school, 33, 40 eligible countries, 383 e-mail, 37 emergence, 72 emergency, 269, 274, 300, 319, 329, 330, 344, 346, 363, 394 Emergency Economic Stabilization Act, 401, 407 emerging markets, x, xiii, 27, 141, 142, 143, 144, 145, 146, 166, 191, 222, 226, 229, 261, 298, 299, 300, 301, 303, 307, 339, 347, 352, 354, 356, 366, 384 emigration, 234 emission, 156, 158, 160 empirical studies, 120, 191, 200, 212 employees, 94, 95, 96, 98, 99, 100, 188, 217, 239, 262, 319, 349, 352, 360 employers, 92, 95, 193, 355, 376, 404 employment, 22, 24, 25, 32, 33, 41, 49, 53, 57, 59, 90, 94, 99, 132, 155, 160, 161, 163, 164, 180, 181, 182, 183, 184, 185, 186, 188, 191, 192, 193, 194, 214, 258, 308, 309, 332, 343, 352, 361, 371, 372, 382, 395, 397 employment growth, 193 employment levels, 186 employment opportunities, 41, 57, 188, 192 employment relationship, 94 empowerment, 65 endowments, 134, 137, 188, 190 energy, 57, 142, 145, 146, 154, 158, 159, 160, 161, 258, 259, 296, 308, 312, 318, 324, 340, 348, 389, 403, 404, 405 energy consumption, 161 energy efficiency, 258, 296, 324, 340, 404

421

enforcement, xiii, 13, 17, 91, 92, 93, 94, 175, 210, 212, 213, 244, 248, 249, 251, 253, 254, 255, 261, 277, 286, 337 engineering, 33, 58, 96, 225, 403 England, 223, 390 enlargement, 95 entrapment, 245 entrepreneurs, 61, 213, 217 entrepreneurship, 100, 194, 208, 218 environment, vii, viii, 1, 2, 6, 7, 15, 17, 19, 26, 36, 42, 48, 52, 56, 57, 66, 85, 92, 99, 104, 145, 153, 156, 159, 160, 171, 173, 176, 177, 187, 208, 209, 210, 212, 213, 215, 216, 217, 228, 229, 258, 303, 333, 380, 389 environmental awareness, vii, 19, 41 environmental degradation, 49, 62 environmental protection, 145, 154, 156, 297, 405 environmental regulations, 42 environmental standards, 208 epidemic, 382 equality, 48, 57, 71, 191 equilibrium, 156, 229, 337 equipment, 22, 32, 98, 183, 189, 239, 240, 241, 246, 250, 252, 297, 390, 405 equities, 241, 242, 243, 266, 290, 294, 309, 315 equity, 32, 43, 83, 115, 152, 209, 265, 281, 286, 289, 323, 325, 340, 354, 358, 368, 376, 385, 396, 411 equity market, 152, 286 ergonomics, 95 Eritrea, 135 erosion, 50, 51, 52, 56, 66, 191, 229, 230 Estonia, 298, 299, 377, 394, 397 ethical issues, 208 ethnicity, 57 ethnocentrism, 115 EU, 20, 92, 141, 146, 149, 182, 217, 251, 275, 296, 314, 315, 316, 317, 318, 319, 320, 321, 322, 323, 325, 335, 365, 366, 379, 385, 387, 390, 394, 395, 397, 399, 404 Euro, 93 euro adoption, 367 Europe, 13, 33, 89, 101, 102, 107, 130, 144, 146, 149, 152, 180, 181, 184, 185, 187, 195, 232, 265, 276, 278, 281, 282, 286, 287, 300, 302, 303, 314, 315, 316, 317, 318, 319, 320, 321, 325, 327, 328, 329, 331, 340, 345, 356, 358, 365, 378, 380, 387, 390, 394, 401 European Central Bank, 266, 287, 315, 318, 319, 322, 324, 358, 391, 398, 401, 412 European Commission, 266, 278, 282, 314, 317, 318, 321, 322, 323, 346, 382, 400 European Community, 276 European Investment Bank, 382, 395

Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

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422

Index

European Parliament, 93, 314 European Union, 7, 13, 101, 130, 182, 236, 276, 298, 299, 314, 316, 318, 321, 344, 348, 361, 365, 366, 367, 379, 382, 385, 390, 394, 395, 396, 399, 404, 407 everyday life, 120, 200 evidence, xi, 41, 57, 64, 65, 79, 82, 83, 99, 179, 181, 183, 184, 185, 186, 188, 189, 190, 191, 193, 195, 213, 230, 255, 294, 300, 301 evolution, ix, 25, 70, 75, 76, 77, 80, 85, 109, 131, 137, 180, 182, 184, 185 exchange rate, 22, 190, 191, 193, 224, 228, 229, 230, 234, 246, 247, 295, 297, 307, 311, 325, 339, 349, 367, 373, 394 exchange rate policy, 247 exchange rate target, 247 exchange rates, 190, 191, 224, 229, 230 executive power, 43 exercise, 17, 36, 49, 56, 64, 96, 210, 230 expectations, 99 expenditures, 230, 264, 313, 315, 372 expertise, 119, 152, 199, 288, 343 exploitation, 53, 226 export competitiveness, 193 export control, 237 export market, xiii, 146, 233, 234, 236, 237, 238, 331, 396 export promotion, 188, 405 export subsidies, 248, 251, 252, 282 exporter, 146, 280, 364 exporters, xiii, 189, 233, 279, 282, 300, 320, 358, 364, 398, 406 export-led growth, 300 exports, 7, 52, 61, 72, 137, 161, 172, 181, 182, 183, 189, 194, 233, 234, 236, 237, 238, 240, 244, 246, 247, 248, 253, 256, 257, 258, 262, 264, 274, 281, 282, 285, 304, 306, 307, 308, 309, 311, 313, 314, 327, 331, 332, 349, 350, 351, 363, 364, 365, 366, 369, 371, 372, 373, 376, 377, 378, 379, 381, 383, 385, 386, 390, 392, 394, 395, 396, 406, 410 exposure, 104, 276, 293, 303, 304, 316, 331, 346, 350, 391, 402, 403, 409 expression, 94, 95 external constraints, 194 external financing, 305 external shocks, 187, 188 extinction, 4 extraction, 133, 134 extracts, 348 extremist movements, 279

F factor endowments, 134, 137 factor market, 164 factories, 170, 172, 297, 358, 365, 369, 375, 405 failure, 81, 93, 100, 105, 137, 188, 190, 210, 211, 212, 213 fairness, 97, 268 faith, 4, 12 families, 48, 49, 53, 296, 297, 358, 404, 405, 406 family, 192 family income, 306 family studies, 41 farm size, 172 farmers, 43, 50, 58, 150, 151, 154, 155, 159, 161, 162, 172, 208, 245, 406 farms, 172 FDA, 244, 246 FDI, 127, 128, 129, 130, 131, 132, 133, 134, 135, 136, 137, 139, 147, 241, 243, 332, 333 FDI inflow, 130, 131, 134, 135, 136, 137 fear, 17, 247, 326, 373 fears, 250, 316, 347 federal aid, 262, 349 federal funds, 273, 385, 395, 399 federal government, 269, 272, 350, 374, 388, 393 Federal Government, 331, 401 Federal Reserve Board, 273, 278, 346, 355 Federal Trade Commission Act, 268, 269 feedback, 85, 107, 210 feelings, 36, 282 fertilizers, 58, 172 fiber, 59 fiber optics, 59 fibers, 236 filament, 237 films, 13, 15, 50, 254 finance, xii, 78, 79, 180, 190, 215, 221, 222, 223, 225, 229, 230, 231 financial capital, 224, 228, 265 financial condition, 226, 230, 290, 341 financial crises, 190, 191, 194, 230, 231 financial crisis, xiii, 142, 143, 144, 145, 149, 152, 156, 157, 158, 165, 167, 191, 192, 228, 236, 247, 254, 258, 261, 262, 263, 264, 265, 266, 270, 271, 272, 273, 274, 277, 279, 280, 282, 283, 284, 285, 286, 288, 289, 290, 292, 293, 294, 295, 298, 300, 301, 302, 303, 304, 305, 307, 309, 310, 312, 314, 315, 316, 317, 318, 319, 320, 321, 324, 326, 327, 332, 336, 338, 340, 342, 343, 344, 345, 347, 349, 353, 354, 356, 360, 365, 366, 367, 381, 382, 388, 390, 391, 396, 398, 399, 400, 403, 407, 408, 409, 411

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Index financial development, 284, 338, 343 financial distress, 330 financial innovation, 329 financial instability, 307, 397 financial institutions, 159, 222, 249, 266, 267, 269, 273, 274, 276, 278, 279, 281, 285, 286, 287, 288, 291, 294, 298, 303, 315, 316, 317, 321, 322, 324, 327, 329, 339, 340, 341, 343, 346, 355, 360, 370, 382, 388, 397, 400, 408, 410 financial markets, xiii, 91, 180, 186, 190, 193, 222, 224, 225, 229, 231, 262, 263, 268, 269, 271, 277, 278, 284, 286, 287, 288, 292, 309, 314, 315, 316, 317, 321, 323, 327, 330, 337, 338, 340, 341, 342, 343, 356, 363, 387, 388, 391, 399, 403, 411 financial oversight, 317, 329 financial performance, 26 financial regulation, 145, 262, 263, 272, 286, 289, 338, 339, 354, 360, 373 financial resources, 345 financial sector, xiii, 212, 231, 247, 261, 267, 268, 270, 273, 274, 286, 304, 308, 310, 315, 316, 317, 318, 323, 329, 351, 378, 379, 385, 386, 387, 391, 396, 400, 411 Financial Services Authority, 402, 407 financial shocks, 180, 316 financial stability, 186, 212, 267, 268, 289, 321, 322, 323, 330, 338, 339, 400 financial support, 38, 159, 250, 276, 335, 344, 378, 382, 389 financial system, xiii, 145, 159, 165, 166, 188, 261, 263, 264, 265, 266, 267, 269, 274, 277, 278, 287, 297, 306, 309, 310, 315, 318, 319, 321, 323, 325, 327, 331, 337, 338, 339, 340, 341, 342, 343, 345, 350, 358, 363, 384, 386, 391, 392, 396, 400, 401, 402, 405, 411 financing, 217 Finland, 55, 211, 304, 326, 391, 396 fires, 280 firms, viii, ix, 69, 70, 71, 72, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 86, 97, 103, 104, 105, 106, 107, 112, 113, 117, 118, 128, 188, 197, 198, 209, 215, 216, 217 fiscal competition, 139 fiscal deficit, 308, 367, 387 fiscal policy, 134, 154, 187, 312, 394 fiscal year 2009, 350 fish, 170, 171, 245, 366 fishing, 170, 378 fitness, 67 flexibility, viii, 13, 14, 19, 24, 25, 78, 81, 97, 98, 187, 191, 225, 226, 318, 338, 344, 384 flight, xiii, 261, 274, 294, 303, 305, 336 flights, 170

423

flooding, 348, 380 fluctuations, 22, 333 focusing, 97, 120, 200 food, 32, 58, 63, 170, 171, 173, 175, 228, 237, 241, 243, 244, 246, 336, 337, 340, 344 food production, 58 food security, 340 footwear, 239, 366 force, vii, ix, xii, 1, 2, 5, 11, 14, 36, 50, 89, 91, 94, 97, 150, 185, 208, 221, 223, 322, 374, 377, 389 Ford, 239, 394 forecasting, 307, 313 foreclosure, 271, 346, 347, 392 foreign aid, 304 foreign assistance, 285, 304 foreign banks, 355 foreign capital flows, 301 foreign direct investment, x, 22, 97, 127, 187, 241, 332, 371 foreign exchange, 144, 148, 165, 172, 222, 224, 230, 247, 290, 291, 293, 297, 300, 331, 366, 384, 396, 403, 405 foreign exchange market, 222, 224, 230 foreign firms, 83, 144, 240, 249, 252, 254 foreign investment, 72, 147, 153, 164, 230, 250, 299, 301, 307, 310, 400 foreign language, 35, 42 foreign policy, 264, 285 formal education, 32, 33, 35, 42, 43, 62 formation, 15, 22, 76, 79, 80, 81, 83, 84, 85, 97, 209, 356, 377, 378 formula, 64, 96, 216, 244, 339 foundations, 42, 87, 210, 218, 225, 228 Fourth Amendment, 366 fragility, 228, 229 France, 14, 69, 93, 103, 107, 112, 121, 127, 130, 142, 143, 184, 201, 214, 217, 238, 266, 267, 276, 283, 296, 299, 303, 316, 317, 320, 321, 348, 351, 355, 372, 377, 378, 387, 400, 401, 404, 407 fraud, 270, 341, 349 Fraud Enforcement and Recovery Act, 271 free trade, viii, 13, 47, 137, 138, 170, 178, 388 free trade area, 138 freedom, 2, 48, 54, 56, 65, 67, 92, 93, 119, 122, 123, 148, 199, 202, 203, 211, 234 free-zones, 72 friction, 187 friendship, 119, 120, 199, 200 frost, 156 fruits, xii, 32, 207, 209 FSB, 266, 278, 339, 354 fuel, 114 fuel efficiency, 363

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424

Index

fuel prices, 400 full employment, 180, 193 fundamental forces, 346 funding, 53, 63, 212, 250, 251, 266, 277, 284, 314, 324, 329, 339, 341, 374, 379, 384, 404, 405, 406, 410, 412 funds, 40, 52, 59, 96, 158, 225, 262, 264, 265, 268, 270, 272, 273, 278, 281, 282, 284, 285, 288, 289, 290, 291, 292, 293, 294, 297, 300, 301, 311, 313, 314, 316, 317, 320, 322, 323, 325, 340, 341, 344, 349, 355, 360, 363, 367, 374, 377, 379, 381, 383, 385, 386, 389, 391, 394, 397, 403, 404, 405, 406, 408, 409, 410, 411, 412

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G Gabon, 130 GAO, 346 GATS, 11, 12, 14 GATT, 7, 12, 13, 14, 248 GDP, x, 52, 55, 72, 89, 127, 128, 130, 134, 135, 136, 142, 143, 144, 146, 154, 155, 156, 157, 160, 161, 162, 163, 164, 165, 181, 182, 191, 254, 274, 276, 292, 299, 302, 303, 306, 307, 308, 310, 311, 312, 313, 316, 324, 326, 328, 332, 333, 334, 335, 352, 356, 366, 367, 369, 370, 371, 372, 373, 377, 378, 379, 381, 383, 386, 388, 391, 393, 395, 396, 397, 398 GDP per capita, x, 73, 127, 128, 134, 135, 136, 146, 154, 155, 162, 163, 165 gender, 121, 201, 209 gender equality, 57 gender equity, 209 gender gap, 41 gender inequality, 32, 40 General Agreement on Tariffs and Trade, 13, 248 General Agreement on Trade in Services, 14 general knowledge, 37 General Motors, 239, 274, 281, 289, 352, 362, 363, 367, 368, 372, 373, 375, 381, 382, 387, 394 generation, 224, 225 genetic code, 58 Geneva, 194, 195, 196, 232 geology, 63 Germany, 90, 91, 100, 139, 142, 143, 146, 182, 238, 262, 266, 267, 276, 283, 296, 299, 303, 316, 317, 319, 320, 326, 351, 355, 358, 377, 387, 400, 401, 404, 407 GFI, 108 Gini coefficients, 192 glasses, 195 global competition, 19, 21, 187 Global Competitiveness Report, 144

global demand, 305, 306, 309, 365, 372, 386 global economy, vii, x, 22, 49, 60, 141, 143, 144, 145, 156, 165, 193, 286, 301, 305, 329, 342, 356, 357, 358, 359, 360, 365, 372, 383, 391 global education, 32, 41 Global Financial Crisis, vi, x, 141, 156, 157, 248, 261, 263, 272, 273, 279, 280, 291, 304, 306, 311, 342, 343, 345, 410 global management, 20 global markets, xii, 26, 221, 310 global networks, ix, 69 global recession, xiii, 143, 261, 263, 275, 304, 310, 383 global scale, ix, 66, 70, 104, 108 global supply chain, 70 global trade, xiii, 144, 233, 267, 276, 300, 314, 341, 344, 374, 382 global trends, xi, 179 global village, 58, 223 global warming, 57 globalisation, vii, viii, ix, 1, 2, 6, 10, 13, 15, 16, 17, 31, 32, 69, 70, 71, 72, 73, 75, 76, 82, 83, 85, 87, 103, 104, 113, 124, 127, 128, 129, 130, 132, 134, 137, 170, 204 globalisation strategies, ix, 70 globalised world, 31, 32 globalization, vii, viii, ix, x, xi, xii, 19, 20, 21, 22, 23, 24, 26, 28, 31, 47, 48, 49, 50, 51, 52, 53, 54, 58, 59, 60, 61, 64, 66, 67, 68, 89, 90, 91, 93, 97, 100, 141, 148, 152, 165, 169, 170, 171, 172, 175, 177, 178, 179, 180, 189, 192, 194, 207, 208, 209, 216, 218, 221, 222, 223, 224, 225, 227, 228, 230, 293, 356 Globalization, 179, 194, 195, 196, 221, 223, 231, 232 GNP, 51, 59, 214 goals, 72, 94, 100, 119, 180, 199, 209 God, 35 gold, 224 goods and services, 3, 4, 8, 10, 14, 17, 21, 50, 52, 238, 259, 288, 312, 369, 378, 391 governance, 2, 15, 16, 35, 54, 193, 208, 209, 210, 212, 215, 216, 218, 222, 231, 272, 277, 284, 319, 321, 338, 339, 341, 342, 351, 354 government, 70, 91, 92, 93, 94, 102, 137, 192, 208, 210, 212, 213, 215, 216, 217, 218, 222, 229, 230, 231 government budget, 320, 324, 343 government expenditure, 267, 276, 366, 391 government failure, 211 government intervention, 256, 280 government procurement, 250 government revenues, xiii, 261, 264

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Index government securities, 273, 290, 295 government spending, 263, 276, 297, 307, 310, 324, 365, 387, 405 governments, 49, 50, 51, 52, 53, 54, 56, 58, 61, 92, 93, 94, 102, 137, 150, 151, 152, 155, 177, 210, 211, 212, 215, 216, 217, 222, 229, 230, 263, 264, 274, 280, 281, 283, 284, 288, 290, 298, 307, 314, 315, 317, 325, 327, 329, 330, 337, 343, 345, 348, 360, 364, 374, 381, 391, 395, 401, 410, 411 governor, 356 grades, 35, 40 grants, 256, 258, 297, 405 graph, 122, 202 Great Britain, 315, 326 Great Depression, 274, 376 Greece, 346, 402 gross domestic product, 134, 181, 254, 276, 292, 316, 347, 351, 356, 365, 369, 370, 379, 386, 391, 399 Gross Domestic Product, 107, 367, 372 grotesque, 51 group work, 67 grouping, 134 groups, x, xi, xii, 78, 108, 110, 117, 129, 183, 188, 197, 207, 209 growth rate, 144, 150, 155, 157, 160, 161, 193, 223, 274, 298, 301, 312, 339, 384 Guangdong, 363 Guangzhou, 151 guardian, 370 Guatemala, 277, 285 guidance, 8, 35, 36, 76, 159, 341 guidelines, 93, 94, 250, 267, 286, 322, 365, 391 guiding principles, 3, 9 Guinea, 130, 380 Gulf of Mexico, 381

H hands, 216 harassment, 56 hard currency, 290, 366 harmonization, 323 harmony, 51 Harvard, 195 hazards, 245, 259 HE, 43 healing, 360 health, x, xiii, 15, 49, 50, 52, 53, 62, 63, 93, 95, 159, 169, 173, 175, 177, 208, 209, 233, 234, 244, 245, 246, 249, 258, 263, 274, 281, 285, 287, 288, 296, 297, 340, 361, 374, 391, 394, 397, 403, 405

425

health care, 159, 173, 263, 281, 297, 374, 394, 397, 405 health information, 244 hedging, 277, 286, 308 hegemony, 225 heterogeneity, 129 HHS, 246 high school, 33, 34, 37, 38, 41 higher education, 32, 34, 43, 44, 45, 63 higher quality, 97 highways, 159 hiring, 189, 214, 216, 405 historical data, 372 historical overview, viii, 31 history, 2, 32, 90, 100, 178, 192, 193, 222, 223, 225, 230, 231, 281, 287, 312, 320, 345, 358, 373, 381, 402 holding company, 268, 402 homelessness, 172 homeowners, 297, 371, 392, 405 homes, 175, 176, 291, 320, 346, 347, 355, 368, 371, 377 homogeneity, 15 Honduras, 2 honesty, 35, 211 Hong Kong, 150, 165, 189, 240, 266, 289, 328, 364, 371, 384 host, 8, 25, 83, 130, 132, 133, 134, 135, 137, 222, 277, 322 hostility, 171 hotels, 72 House, 43, 148, 167, 178, 262, 270, 271, 272, 305, 346, 349, 356, 357, 360, 374, 381, 387, 391, 401 House of Representatives, 262, 349, 374, 391, 401 household income, 160, 161, 162, 163, 192, 361 households, 185, 208 housing, 159, 161, 264, 266, 271, 275, 290, 291, 293, 296, 297, 304, 310, 315, 333, 334, 346, 347, 350, 355, 359, 368, 369, 370, 371, 377, 378, 384, 390, 394, 397, 398, 403, 404, 405, 406 Housing and Urban Development, 259 HUD, 259 hue, 265 human, vii, viii, x, xi, 3, 9, 19, 20, 21, 23, 24, 25, 26, 28, 34, 40, 48, 50, 52, 54, 56, 57, 58, 61, 62, 72, 97, 98, 117, 125, 163, 171, 173, 175, 177, 186, 195, 197, 205, 210, 213, 217, 222, 223, 225, 228, 258, 283, 288, 340, 405 human capital, viii, 19, 25, 163, 195, 213, 405 human condition, 228 human development, 217, 340 Human Development Index, 55 Human Development Report, 51, 55, 56, 63, 68

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426

Index

human nature, 21 Human Resource Management, v, 19, 23, 26, 27, 28, 29 human resources, 24, 25, 28, 40, 53, 57, 58, 61 human right, 3, 9, 48, 56, 62, 171, 175, 258 human rights, 3, 9, 48, 62, 171, 258 human values, x, xi, 72, 117, 125, 197, 205 human welfare, vii, 50, 52 Hungary, 276, 299, 300, 344, 387, 397, 398, 399 hybridity, 16, 17 hydrocarbons, 133 hygiene, 39 hypothesis, x, xi, 83, 84, 95, 96, 105, 106, 107, 109, 111, 112, 117, 121, 123, 183, 197, 201, 203, 213 hypothesis test, 109

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I Iceland, 55, 211, 276, 300, 315, 325, 326, 329, 344, 367, 395, 396, 397, 399, 402 ideal, 120, 162, 200 ideals, 314 ideas, viii, 69 identification, 73, 96 identity, 3, 8, 9, 17, 35, 105, 155 ideology, xii, 90, 153, 221, 222, 225, 337 illiteracy, 42, 43, 62 image, x, 40, 103, 104, 105, 106, 107, 108, 109, 112, 113, 114, 115, 119, 199, 283 images, x, 103, 104, 105, 106, 111, 113 imbalances, 183, 188, 262, 267, 286, 339, 354, 358 IMF, xii, 48, 142, 143, 144, 166, 167, 170, 172, 195, 221, 222, 229, 230, 265, 267, 272, 276, 277, 278, 280, 283, 284, 286, 300, 301, 302, 303, 306, 311, 312, 313, 315, 316, 319, 321, 325, 329, 330, 333, 334, 335, 336, 337, 338, 339, 340, 342, 343, 344, 345, 346, 348, 351, 352, 353, 354, 365, 366, 372, 375, 378, 379, 380, 381, 382, 383, 384, 385, 386, 389, 391, 392, 393, 394, 395, 396, 397, 398, 399, 400, 410, 411 imitation, 225 implementation, 94, 97, 98, 99, 100, 190, 210, 215, 217, 222 import controls, 244 import penetration, 182 import substitution, 97 imported products, 256, 257, 281 imports, xiii, 13, 32, 58, 83, 141, 146, 180, 181, 182, 183, 189, 192, 223, 233, 234, 236, 239, 240, 244, 245, 247, 249, 250, 251, 252, 257, 258, 259, 264, 281, 306, 307, 308, 311, 312, 332, 349, 359, 364, 366, 371, 373, 378, 381

improvements, 61, 64, 99, 181, 185, 209, 215, 228, 304, 367, 369 impulses, 371 incentives, 91, 134, 137, 210, 211, 212, 215, 217 incidence, 194, 208, 337 inclusion, 77, 128, 210 income, xi, xii, 27, 51, 59, 87, 96, 99, 129, 150, 152, 154, 155, 159, 161, 162, 172, 179, 185, 187, 188, 190, 191, 192, 194, 207, 208, 209, 214, 217, 223, 224, 227, 265, 271, 291, 296, 297, 307, 310, 313, 320, 324, 344, 361, 365, 366, 390, 404, 405, 406 income distribution, xi, xii, 152, 154, 179, 188, 190, 191, 192, 207, 223, 224 income inequality, xii, 194, 207 income tax, 99, 150, 271, 296, 324, 365, 404, 405, 406 income transfers, 313 increased competition, 82, 187, 189, 190 independence, 22, 62, 228, 378 India, xii, 87, 89, 141, 142, 143, 144, 145, 207, 211, 214, 217, 223, 259, 266, 281, 283, 285, 290, 294, 299, 301, 304, 329, 348, 352, 354, 357, 365, 373, 383, 398, 400, 406, 407 Indian Ocean Commission (IOC), x, 72, 127 Indians, 211 indicators, 73, 108, 182, 216 indigenous, 222, 227, 228, 229 indigenous peoples, 7, 9 individualization, 96 individuals, 7, 10, 36, 41, 50, 53, 56, 57, 61, 62, 65, 66, 80, 99, 120, 200, 208, 213, 254, 288, 375, 405 Indonesia, 49, 50, 55, 79, 141, 142, 170, 192, 266, 281, 283, 289, 290, 299, 328, 329, 330, 357, 364, 384, 405, 407 industrial policies, xiii, 159, 193, 233, 243, 249 industrial relations, 90, 91, 97 Industrial Relations, v, ix, 89, 90, 91, 100, 101, 102 industrial revolution, 223 industrial sectors, 391 industrialization, 97, 152, 163, 192, 222, 223, 228, 230 industrialized countries, xiii, 49, 50, 181, 182, 183, 184, 192, 217, 261, 264, 285, 298, 299, 300, 304 industries, viii, ix, 3, 7, 13, 15, 32, 47, 49, 50, 53, 58, 60, 72, 94, 103, 133, 145, 147, 159, 181, 183, 184, 185, 186, 189, 190, 223, 233, 238, 241, 243, 247, 249, 250, 252, 256, 257, 281, 282, 313, 314, 334, 379, 389, 390, 398, 406 industry, 16, 27, 28, 32, 33, 49, 50, 52, 58, 71, 76, 77, 78, 80, 87, 92, 94, 96, 107, 133, 134, 144, 145, 146, 147, 154, 159, 163, 170, 183, 184, 185, 189, 190, 225, 227, 230, 236, 249, 250, 252, 253, 254, 257, 262, 273, 281, 288, 307, 318, 321, 349,

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Index 355, 360, 365, 368, 369, 371, 372, 374, 381, 387, 389, 397, 404 industry consolidation, 389 inefficiency, 212 inequality, xi, xii, 49, 180, 181, 183, 184, 185, 186, 188, 189, 192, 193, 194, 196, 207, 208, 388 inertia, 263 infant industries, viii, 47 inflation, 187, 192, 242, 293, 311, 316, 332, 335, 343, 347, 351, 358, 361, 364, 370, 397 inflationary pressures, 187 influenza, 250 informal sector, 4 information exchange, 267 information sharing, 208, 212, 246 information technology, 37, 59, 61, 145, 146, 185, 282, 390 infrastructure, 61, 134, 144, 147, 159, 213, 215, 238, 264, 296, 297, 306, 308, 313, 319, 320, 321, 322, 333, 334, 365, 378, 387, 389, 390, 391, 396, 397, 404, 405, 406 ingredients, 187, 194, 244, 388 initiation, 281 injections, 273, 281, 282, 394, 399 injury, iv inner tension, 14 innovation, 181, 215, 218 input, 95, 98 INS, 313 insecurity, 180 insight, 216 inspections, 245, 246 inspectors, 246 instability, 186, 230 instinct, 288, 293 institution building, 216 institutional change, 187, 230, 263 institutional economics, 80, 84, 211 institutional infrastructure, 212 institutional reforms, 215, 216, 218 institutions, vii, 4, 43, 44, 48, 50, 54, 56, 59, 63, 64, 66, 73, 84, 92, 153, 159, 166, 171, 172, 193, 208, 209, 210, 212, 213, 215, 216, 218, 224, 229, 241, 264, 266, 273, 278, 283, 285, 286, 287, 288, 293, 303, 315, 316, 317, 322, 324, 327, 330, 331, 338, 340, 342, 345, 346, 360, 368, 370, 372, 386, 395, 408, 410, 411 instruments, 100, 184, 225, 228 insulation, 331 insurability, 72 insurance, 210 integrated circuits, 185

427

integration, viii, xii, 24, 47, 58, 59, 72, 127, 129, 132, 134, 137, 165, 180, 187, 188, 190, 193, 221, 223, 287 integrity, 323, 340, 341 intellectual property, xiii, 2, 10, 13, 22, 50, 233, 234, 243 intellectual property rights, xiii, 2, 10, 13, 22, 50, 233, 234, 243 intelligence, 72, 120, 200 intensity, 77, 185 intentions, 93, 115 interaction, 70 interactions, 217, 230 interagency coordination, 411 Inter-American Development Bank, 188, 306, 308, 345 interbank market, 316 interdependence, viii, 32, 69, 70, 192, 301, 315 interest, 77, 84, 90, 92, 93, 99, 104, 105, 107, 129, 130, 134 interest rates, 170, 229, 230, 248, 265, 273, 291, 293, 294, 295, 307, 315, 316, 324, 331, 333, 335, 346, 347, 349, 351, 360, 364, 385, 393, 394, 397, 398, 399, 410, 412 interface, 10, 12 interference, 5, 8, 56, 148, 311, 346 intermediaries, 287 internal environment, 99 international business partnerships, 83 International Covenant on Civil and Political Rights, 9 International Covenant on Economic, Social and Cultural Rights, 9 international division of labor, 222 international financial institutions, 145, 222, 264, 267, 276, 336, 340, 341, 378 International Financial Institutions, 277, 342, 410 international investment, 165 international law, 6, 9, 11 international meetings, xiii, 261, 277 International Monetary Fund, xii, xiii, 48, 170, 221, 261, 262, 263, 264, 265, 266, 267, 272, 276, 277, 283, 284, 286, 289, 290, 298, 299, 300, 301, 305, 306, 307, 308, 309, 311, 315, 316, 319, 325, 328, 334, 336, 337, 342, 343, 344, 349, 352, 358, 365, 366, 367, 374, 375, 378, 379, 380, 381, 382, 383, 384, 389, 391, 392, 397, 398, 403, 411 international segmentation, 72 international standards, 93, 277, 279, 409 international trade, 13, 17, 53, 54, 83, 92, 93, 189, 190, 247, 288, 293, 326, 359 internationalization, 48, 152, 223 interpretation, xi, 105, 179

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428

Index

interval, 121, 202 intervention, xiii, 8, 76, 92, 261, 264, 273, 280, 305, 311, 323, 351 interview, 121, 201 intra-regional trade, 137 inventions, 10 investment, x, xiii, 22, 28, 31, 48, 52, 72, 96, 100, 127, 128, 129, 132, 133, 134, 135, 136, 137, 144, 145, 147, 159, 160, 161, 162, 163, 165, 167, 170, 185, 186, 189, 191, 192, 193, 209, 213, 215, 216, 217, 230, 233, 242, 248, 250, 264, 270, 274, 282, 286, 289, 290, 293, 306, 307, 309, 310, 313, 314, 315, 318, 323, 324, 331, 333, 334, 339, 340, 341, 342, 343, 346, 350, 356, 359, 361, 363, 364, 371, 372, 373, 374, 375, 376, 378, 383, 385, 389, 390, 394, 400, 402, 404, 405, 407, 411 investment bank, 274, 331, 356, 402, 407 investment capital, 170, 282, 290 investment rate, 189 investments, x, 21, 61, 93, 127, 128, 129, 131, 134, 135, 137, 148, 158, 163, 164, 165, 213, 222, 241, 265, 274, 291, 296, 303, 307, 312, 320, 322, 327, 331, 345, 387, 390, 403, 404 investors, 130, 134, 137, 148, 151, 164, 165, 215, 216, 218, 229, 231, 242, 264, 268, 270, 273, 274, 286, 288, 292, 294, 295, 309, 316, 323, 326, 327, 335, 336, 341, 346, 347, 355, 359, 362, 369, 371, 374, 376, 377 invisible hand, 210, 288 IPR, 10, 234, 243, 248, 249, 251, 253, 254, 255 Iran, v, viii, 31, 32, 33, 34, 35, 36, 38, 39, 40, 41, 42, 43, 44, 45, 55, 378 Iranian educational system, viii, 31, 32 Iraq, 32, 229, 284, 379, 381, 393 Ireland, 389, 390, 402 iron, 280, 282, 350, 363, 406 Islam, 35, 36, 52, 53 Islamic Republic, viii, 31, 32, 34, 36, 38, 39, 40, 42, 45 isolation, 72 Israel, 2, 369, 404 issues, ix, xiii, 2, 12, 15, 17, 20, 25, 35, 41, 42, 43, 58, 63, 65, 69, 71, 76, 87, 91, 93, 118, 124, 127, 154, 155, 156, 177, 191, 192, 198, 204, 208, 209, 233, 234, 242, 243, 248, 250, 255, 257, 258, 259, 262, 263, 266, 267, 269, 271, 272, 277, 278, 283, 284,뫰321, 322, 337, 338, 340, 357, 373, 400, 407, 408 Italy, 142, 143, 184, 217, 266, 283, 296, 299, 303, 317, 351, 373, 377, 387, 400, 401, 404, 407 Ivory Coast, 130

J Jamaica, 47 Japan, xiii, 45, 55, 101, 142, 143, 182, 184, 187, 233, 236, 238, 240, 241, 265, 266, 274, 275, 276, 283, 289, 290, 292, 294, 297, 298, 299, 303, 304, 317, 327, 328, 329, 330, 331, 340, 344, 351, 356, 358, 364, 368, 369, 370, 375, 377, 383, 385, 386, 394, 395, 396, 399, 400, 401, 403, 405, 407 Java, 79 job creation, 50, 185, 193 job skills, 62 job training, 405 jobless, 376 jobs, 95, 96, 98, 99, 181, 183, 184, 185, 187, 193, 218 Joint Economic Committee, 291, 345 joint ventures, 78, 239 Jordan, 55 journalists, 10, 56 judges, 212 judiciary, 211, 212 jurisdiction, 407

K Kazakhstan, 299, 387, 390, 399 Kenya, 130, 133, 138 kerosene, 406 Keynes, 231 Keynesian, 225, 226 knowledge, ix, 69, 78, 79, 82, 83, 86, 98, 99, 103, 104, 106, 107, 108, 109, 110, 111, 112, 113 knowledge acquisition, 60 knowledge capital, 212 knowledge-based economy, 64 Korea, 13, 189, 190, 192, 214, 229, 266, 282, 289, 290, 327, 328, 330, 335, 377, 395, 398, 399 Kosovo, 378 Kuwait, 55, 389, 392, 399 Kyrgyzstan, 299, 300, 398

L labor, 92, 93, 94, 95, 96, 97, 194, 209, 222, 223, 225, 226, 227 labor force, 50, 144, 152, 223, 321 labor market, 64, 96, 155, 225, 318, 361, 372 labor markets, 64, 225, 372 labor productivity, 209, 226 labor relations, 92, 97

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Index labour, ix, 70, 72, 78, 89, 91, 92, 94, 96, 97, 99, 100, 102, 128, 134, 180, 181, 182, 183, 184, 185, 186, 187, 188, 189, 190, 191, 192, 193, 194, 195, 208, 215 labour force, ix, 89, 91, 97, 185, 208 labour market, ix, 70, 91, 97, 99, 180, 181, 182, 183, 184, 185, 186, 187, 191, 192, 193, 195, 215 labour-saving, 185 lack of confidence, 305, 306, 345 landscape, 16, 184 language, 115 languages, 32, 42 Laos, 330 later life, 62 Latin America, 129, 188, 189, 190, 191, 193, 194, 196, 231, 265, 280, 283, 298, 302, 303, 304, 305, 306, 307, 308, 309, 310, 311, 312, 345, 357 Latin American countries, 188, 189 Latvia, 276, 298, 299, 315, 344, 366, 377, 386, 394, 397 law enforcement, 253, 258 law-making scene, vii, 1 laws, 5, 10, 41, 43, 208, 211, 213, 245, 249, 251, 253, 254, 255, 256, 258, 270, 278, 326, 341, 374, 381 laws and regulations, 43, 249, 278, 341 lawyers, 212 layoffs, 376 LDCs, 189 lead, 16, 41, 53, 62, 71, 106, 142, 145, 181, 187, 189, 191, 211, 212, 215, 245, 246, 250, 263, 265, 282, 287, 308, 334, 346, 350, 354, 355, 356, 372 leadership, 20, 153, 173, 210, 279, 282, 309, 317, 329, 339, 356, 373, 388 learners, 42, 64 learning, 23, 24, 33, 35, 37, 38, 41, 43, 59, 64, 66, 67, 78, 84, 115, 171, 190 learning process, 37 Lebanon, 55 legislation, 153, 213, 262, 267, 268, 269, 272, 321, 322, 346, 357, 361, 369, 381 legislative proposals, 323 leisure, ix, 70 lender of last resort, 231, 283, 284, 326, 338, 342, 352 lending, 231, 266, 269, 271, 274, 276, 291, 294, 300, 303, 304, 305, 306, 308, 309, 313, 316, 320, 323, 328, 333, 343, 344, 345, 346, 349, 371, 372, 383, 384, 385, 393, 394, 398, 401, 410 lesson plan, 37, 38 liberalisation, 13, 14, 16, 137

429

liberalization, xii, 14, 20, 21, 93, 145, 170, 180, 187, 188, 189, 190, 192, 193, 195, 207, 209, 216, 221, 224, 225, 230 Liberia, 2 liberty, 63 librarians, 38 licenses, 216 life cycle, 364 life quality, 154 lifelong learning, 58, 61, 62, 67 lifestyle, x, xi, 117, 118, 197, 198 lifestyle model, x, xi, 117, 118, 197, 198 light, viii, 6, 19, 26, 31, 33, 34, 72, 73, 91, 97, 98, 137, 146, 147, 249, 250, 257, 308 likelihood, 79, 81, 122, 202 limitation, 121, 201 linear model, 109, 115 linkage, 119, 199 links, xi, 70, 72, 99, 179, 180, 212, 213 liquidity, 159, 161, 224, 225, 230, 278, 291, 306, 307, 308, 310, 316, 323, 324, 326, 327, 330, 345, 350, 366, 372, 378, 387, 391, 398, 399, 408, 410, 411, 412 Lisbon Strategy, 318 literacy, 33, 38, 39, 43, 62, 97 literature, xi, 179 Lithuania, 298, 299, 397 living conditions, 58, 154, 159, 173, 175, 177 living standard, xii, 207 living standards, xii, 207 loans, xiii, 159, 160, 161, 172, 251, 252, 256, 261, 267, 268, 274, 277, 281, 284, 289, 291, 292, 294, 296, 311, 312, 317, 319, 324, 325, 326, 329, 333, 334, 338, 344, 346, 348, 350, 355, 357, 358, 360, 371, 379, 382, 383, 384, 385, 387, 393, 394, 396, 397, 398, 400, 403, 404, 405, 406, 410, 411, 412 lobbying, 263, 368, 370 local conditions, 83, 215, 217 local government, 151, 155, 156, 158, 245, 251, 254, 297, 397, 405 localization, 65 location, 83, 218 logistics, 146, 160, 216, 249 longevity, 21 lower prices, 209, 251, 265 loyalty, ix, 56, 70, 72, 96 LPG, 209

M Maastricht Treaty, 92 machinery, 32, 98, 183, 185, 189, 241, 249, 311, 366, 389

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430

Index

macroeconomic policies, 186, 193, 211, 230, 262, 289, 319, 338, 354 macroeconomic policy, 229, 378, 409 macroprudential analysis, 287 mad cow disease, 250 magazines, 50 magnesium, 251 magnets, 245 magnitude, 21, 287, 307 major issues, 249 majority, 2, 48, 172, 173, 174, 213, 250, 324, 358, 367, 372, 382 Malaysia, 55, 60, 142, 214, 240, 328, 330, 384, 392, 406 malfeasance, 80, 410 man, 21 management, ix, 20, 23, 25, 26, 28, 37, 41, 70, 71, 73, 76, 85, 89, 90, 91, 92, 94, 95, 97, 98, 99, 100, 118, 150, 151, 153, 160, 164, 175, 190, 193, 198, 210, 216, 225, 241, 281, 320, 359, 375, 380 manganese, 251 mania, 355 manipulation, 247, 324, 341 manpower, 97 manufactured goods, 245, 282 manufacturing, xiii, 28, 49, 93, 97, 134, 145, 147, 160, 180, 181, 182, 183, 184, 186, 187, 189, 193, 194, 195, 223, 225, 226, 227, 233, 240, 241, 243, 247, 250, 258, 352, 365, 369, 371, 375, 376, 383, 386, 390, 393, 398 manufacturing companies, 383 marginalization, xi, 27, 67, 179 market, x, xii, 73, 75, 76, 77, 78, 79, 82, 83, 84, 85, 87, 93, 96, 97, 121, 127, 132, 134, 136, 137, 180, 181, 187, 191, 192, 193, 201, 207, 209, 210, 212, 213, 215, 221, 222, 225, 226, 228, 229, 230 market access, 14, 78, 79, 230, 251, 253, 357 market discipline, 337 market economy, x, 141, 142, 148, 149, 151, 152, 153, 210, 215, 221, 226, 249, 256, 258 market failure, 212, 213 market penetration, 83 market segment, 286, 288 market share, 146, 181, 225, 380 marketing, ix, 23, 70, 71, 78, 83, 86, 87, 103, 105, 106, 107, 108, 112, 113, 115, 116, 117, 119, 124, 150, 197, 199, 204, 217, 323, 370 marketing strategy, 107, 117, 197 marketplace, 20, 21, 22, 23, 24, 25, 103, 104, 250, 255, 266, 295 markets, ix, xii, 73, 75, 76, 79, 82, 83, 87, 137, 180, 182, 185, 187, 192, 193, 208, 209, 210, 212, 215, 216, 218, 221, 224, 229, 230

market-seeking, 137 marriage, 38 mass, 39, 56, 178, 192, 225, 227, 319 mass media, 39, 56 materials, 43, 78, 228, 253, 348, 364, 379 mathematical knowledge, 60 mathematics, 33, 41, 51, 60, 63, 64 matter, iv, 15, 84, 172, 254, 352, 370 Mauritania, 130 Mauritius, 72, 85, 130, 131, 133, 134, 135, 136, 138, 366, 390 meanings, 95 measurement, 93, 114, 115, 119, 124, 183, 199, 204, 215 measures, xi, 134, 179, 187, 192, 208, 209, 217, 218 meat, 32, 237, 366 media, 1, 2, 4, 6, 7, 10, 15, 16, 41, 56, 59, 61, 245, 333 median, 162, 355, 358, 361 mediation, 96, 322 medical, 246, 297, 347, 405 medicine, 32, 33, 147 Mediterranean, 189 Mediterranean countries, 189 medium of exchange, 265 membership, 95, 248, 278, 341, 342, 343, 378 memorizing, 66 memory, 65, 180 mental health, 36 mental representation, 104 merchandise, 236, 281, 384 mergers, 165, 273 metallurgy, 310 metals, 184, 241, 249, 364 methodology, 43, 118, 120, 198, 200, 249 metropolitan areas, 377 Mexico, 15, 141, 142, 191, 194, 227, 229, 236, 238, 240, 266, 274, 276, 277, 279, 283, 285, 296, 299, 301, 305, 306, 307, 308, 309, 311, 344, 373, 381, 382, 383, 394, 399, 404, 406, 407 middle class, 48, 90, 142, 144, 191, 235 Middle East, 32, 142, 329, 331, 336, 352, 374, 390 migration, 16, 22, 61, 172, 183, 285 militancy, 336 military, 33, 54, 226, 250, 283, 284, 285, 337, 379, 381, 404 military aid, 285 military dictatorship, 226 minimum wage, 93, 152 minimum wages, 93, 152 mining, 132 Ministry of Education, 33, 35, 38, 41, 42, 45, 65 Minneapolis, 16, 232

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Index minorities, 7, 32, 40 minority, xii, 100, 208 misconceptions, 337 mission, 291, 322, 339, 357, 389 missions, 258 Missouri, 381 mixed economy, 210, 216 mobile phone, 52, 56, 238 mobility, xi, 180 mode, 95, 113 modeling, 115 modelling, 16, 124, 204 models, x, xi, 90, 117, 118, 170, 179, 197, 198, 293, 322, 372, 410 modern economies, 211 modern society, viii, 16, 31, 163 modernisation, viii, 31 modernity, viii, 31, 45, 48, 57 modernization, 1, iii, viii, 47, 48, 57, 61, 66, 67, 228, 230, 405 modifications, 20, 21, 25, 371 molecular biology, 59 momentum, 87, 215, 365 monetary expansion, 230 monetary policy, 159, 186, 187, 224, 230, 264, 272, 273, 295, 307, 310, 346, 351, 371 monetary union, 392 money, 99, 107, 217, 228, 229 money supply, 273, 295 Mongolia, 277, 362 monopoly, 21, 37, 60, 150, 213, 381 moral hazard, 262, 263, 288, 360 moral imperative, 61 morale, 262, 349 morality, 56 mortgage-backed securities, 307, 316, 367, 385 mother tongue, 9 motion, 229 motivation, 12, 37 movement, ix, 89, 91, 92, 93, 213, 228, 230 Mozambique, 130, 133, 135, 138 multidimensional, 301 multinational corporations, vii, 19, 20, 92, 183, 266 multinational enterprises, 93 multinational firms, 128, 139, 287 multiples, 344 multivariate analysis, 123, 203 muscles, 365 music, 15, 50, 249, 253 Muslims, 51, 54, 60, 66 Myanmar, 330

431

N NAFTA, 15, 20, 308 Namibia, 133, 135, 136, 138 nation, 83 national borders, 31, 61, 317, 322, 325, 340, 411 national debt, 266 national identity, 2, 16, 50 national income, xii, 152, 154, 207, 227 national interests, 156 national origin, 13 national product, 59 national security, 56, 281 nationalism, 280 natural disaster, 344, 405 natural disasters, 344 natural gas, 313, 363 natural resources, 133, 134, 142, 163, 304 natural science, 33 natural sciences, 33 needs, 84 negative consequences, 98 negative effects, 2, 13, 49, 211, 254 negative equity, 346 negative outcomes, 52 negotiating, 10, 336 negotiation, 210 neoliberal, xii, 221, 222, 225, 227, 228 neoliberalism, 178, 280 net exports, 183, 379 Netherlands, 55, 223, 238, 266, 303, 326, 367, 377, 387, 400, 401, 404 network, 70, 72, 86 neutral, 222, 226, 351 New York, 194, 195, 196, 232 New Zealand, 125, 205, 364, 379, 393 NGOs, 39 Nicaragua, 2 Nigeria, 130 nontariff barriers, 259 North America, 15, 90, 101, 130, 236, 237, 239, 356, 357, 382 North American Free Trade Agreement, 15 Norway, 55, 304, 326, 344, 375, 395, 396, 397, 401, 405 nuclear program, 378 nursing, 297, 405 nutrition, 36, 296, 403

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O Obama, 234, 247, 262, 266, 267, 271, 279, 282, 283, 344, 347, 349, 352, 356, 357, 358, 360, 361, 362, 371, 380, 386, 392 Obama Administration, 234, 247, 262, 267, 271, 279, 282, 283, 344 obedience, 120, 200 obligation, 77 observations, 122, 202, 209 obstacles, 36, 52, 60, 81, 83, 91, 253, 360 occupational groups, 183 OECD, 93, 94, 101, 128, 181, 182, 184, 195 Office of Management and Budget, 369 officials, 34, 38, 210, 242, 246, 247, 248, 249, 250, 253, 254, 285, 319, 326, 327, 328, 329, 343, 350, 351, 357, 376 oil, 32, 49, 61, 158, 180, 250, 279, 296, 300, 304, 307, 312, 313, 316, 344, 347, 348, 363, 364, 374, 381, 383, 395, 404, 406 oil revenues, 280, 296, 381, 404, 406 oil sands, 363 omission, 10 opacity, 388 open economy, 228 open markets, 280 open-mindedness, 36 openness, 3, 135, 188, 189, 208, 209, 212, 340 operations, 20, 52, 65, 78, 150, 222, 253, 262, 263, 273, 280, 281, 284, 289, 316, 331, 348, 373, 379, 381, 401, 402, 412 opiates, 390 opportunism, 80 opportunities, 3, 20, 22, 23, 41, 48, 53, 54, 61, 66, 85, 141, 152, 173, 175, 183, 210, 211, 218, 281, 315, 363 oppression, 67, 171 optics, 185 optimism, 35 optimization, 165 organization, 77, 78, 84, 91, 93, 95, 96, 99, 221, 226 Organization for Economic Cooperation and Development, 275, 286, 357, 359, 383 organizational development, 96 organizations, 77, 87, 91, 92, 94, 97, 100, 209, 210, 216, 222, 227 organize, 222 organs, 5, 39 output index, 392 outreach, 40 outsourcing, ix, 69, 71, 183 Overall Value Concern (OVC), x, xi, 117, 119, 197, 199

overlap, 32 overseas investment, 148, 165 oversight, xiii, 261, 262, 264, 266, 269, 270, 271, 277, 278, 281, 283, 284, 286, 287, 288, 290, 315, 321, 322, 323, 337, 339, 341, 346, 349, 367, 396, 402, 409, 410, 411 overtime, 97 ownership, 96, 151, 209, 215, 241, 249, 250, 281, 317, 372, 373, 401, 402 ox, 263

P Pacific, 45, 137, 139, 351, 364 Pakistan, 32, 39, 49, 50, 52, 55, 57, 59, 64, 68, 276, 280, 300, 329, 335, 336, 337, 344, 390, 395, 396, 397, 400 parallel, 91, 101, 216 parents, 33, 35, 38, 62 Pareto, 87 Pareto optimal, 87 Paris Club, 311, 393 Parliament, 33, 93, 324, 325 participants, 10, 84, 138, 264, 288, 289, 292, 324, 337, 341, 350, 351, 374, 407, 410 partnership, ix, 70, 71, 72, 73, 78, 79, 80, 81, 82, 83, 84, 85, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 215 partnerships, viii, ix, 69, 70, 71, 72, 73, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 100, 103, 104, 107, 113 passive, 99 patriotism, 335 payroll, 352, 395 peace, 3, 120, 134, 200, 351 penalties, 245 pension plans, 99 pensioners, 297, 405, 406 pensions, 100 per capita income, 57 percentile, 224 perceptions, ix, 69, 85, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 115 performance, xi, 179, 180, 182, 184, 186, 187, 193 performance indicator, 312 performers, 182 permission, iv, 229 permit, 22, 65, 213, 317 perpetrators, 177 Persian Gulf, 32 personal, 188 personal communication, 83 personal computers, 297, 406

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Index personal values, 118, 119, 121, 198, 199, 201 personality, 118, 121, 125, 198, 201, 205 Perth, 125, 205 Peru, 227 petroleum, 133, 134, 279 Petroleum, 160, 236, 363 pharmaceuticals, 390 Philippines, 142, 285, 330, 386, 392, 405 phosphorus, 251 piracy, 10, 253, 254, 255 plants, 98, 250, 368, 374, 381, 404 plastics, 184, 247 platform, 215 playing, 153, 269 pluralism, 10 PM, 336, 348 Poland, 141, 277, 344, 382, 392, 394, 397 policy, vii, xi, xii, xiii, 1, 2, 3, 8, 13, 16, 17, 41, 43, 49, 87, 96, 113, 134, 142, 151, 155, 159, 160, 166, 172, 179, 180, 186, 187, 190, 191, 193, 195, 210, 215, 217, 221, 224, 226, 229, 230, 241, 243, 247, 251, 252, 256, 259, 261, 263, 267, 269, 272, 273, 277, 280, 281, 282, 283, 284, 285, 286, 288, 289, 291, 298, 299, 300, 304, 305, 307, 308, 310, 318, 322, 323, 327, 337, 338, 343, 344, 345, 346, 348, 350, 351, 356, 365, 383, 391, 392, 394, 398, 409, 410, 411 policy choice, 191, 310 policy instruments, 172, 230, 318 policy issues, 299 policy makers, xi, 179, 289 policy making, 41 policy options, 269 policy rate, 392 policy reform, 195, 305 policy responses, 87, 282, 304, 307 policymakers, 248, 288, 312, 338, 340, 351 politeness, 35, 120, 200 political instability, 315, 329, 380 political leaders, 35, 53, 54, 56, 62, 279, 329, 411 political parties, 209 political party, 358 political power, 210 political system, 48, 49, 54, 66 politics, vii, 28, 358 pollution, 58, 156, 160, 245 ponds, 175 pools, 268, 411 poor, x, xi, 85, 117, 118, 119, 120, 191, 192, 194, 197, 198, 199, 200, 208, 209, 210, 212, 217, 218 population, xi, xii, xiii, 22, 32, 34, 44, 48, 49, 50, 51, 52, 53, 54, 56, 57, 58, 59, 60, 61, 62, 63, 65, 66,

433

99, 121, 137, 144, 146, 163, 179, 192, 201, 207, 225, 229, 233, 238, 358, 371, 372, 378 population growth, 57, 66, 225 populism, 229 portfolio, x, 127, 229, 231, 265, 305, 307, 355 portfolio investment, x, 127 Portugal, 401, 404 positive correlation, 186 positive relation, 208, 218 positive relationship, 208, 218 postal service, 172 potential benefits, ix, 89 poultry, 252, 380 poverty, xi, 48, 49, 53, 57, 66, 67, 152, 156, 170, 171, 178, 179, 188, 191, 208, 211, 264, 285, 339, 361, 378, 380 poverty alleviation, xi, 179 poverty reduction, 156, 170, 211, 264, 380 power, xi, xii, 91, 92, 94, 96, 180, 187, 211, 221, 223 power generation, 250 precedent, 364 predictability, 11 prediction, 121, 122, 201, 202 predictors, x, xi, 117, 118, 119, 120, 124, 197, 198, 199, 200, 204 preference, 78 preferential treatment, 4, 7 prejudice, 149 premiums, 185 preparation, iv, 38, 64, 65, 357, 388 preparedness, 61 preservation, 36, 42 presidency, 365 president, 322, 356, 358, 364, 370, 380, 400 President, 39, 42, 166, 257, 258, 267, 270, 277, 278, 280, 283, 284, 285, 313, 317, 320, 322, 335, 336, 346, 349, 350, 357, 358, 359, 360, 361, 362, 373, 374, 379, 380, 381, 383, 386, 387, 388, 390, 391, 392, 393, 394, 395, 396, 397, 398, 399, 400, 401, 407 President Obama, 258, 267, 277, 284, 285, 347, 350, 358, 360, 373, 386, 387 pressure, 84, 92, 97, 99, 218, 229 prestige, 112 prevention, 271, 347 price changes, 192, 344 price index, 373, 377 price stability, 191, 339 prices, 107, 183, 190 prima facie, 191 primary school, 35 principal component analysis, 122, 123, 202, 203 principle, 94

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434

Index

principles, 5, 8, 9, 12, 34, 35, 53, 94, 178, 249, 317, 319, 340, 341, 342, 365, 409 prisons, 296, 404 private banks, 310 private enterprises, 49, 216 private firms, 218, 315, 409 private investment, 213, 215, 347 private sector, 76, 213, 215 private sector investment, 311 privatization, viii, xii, 47, 49, 172, 207, 208, 209, 212, 215, 216, 218, 225, 226 probability, 81, 82, 122, 123, 202, 203, 293 probability distribution, 293 probe, 359 problem-solving, 60, 185 problem-solving skills, 60, 185 procedural justice, 98 producers, 50, 189, 192, 215, 245, 248, 250, 252, 253, 255, 256, 257, 281, 282, 297, 379, 398, 406 product attributes, 71 product market, 97 production, 71, 78, 97, 99, 107, 129, 134, 183, 185, 194, 217, 222, 225, 227, 230 production networks, 288 productive capacity, 193 productivity, 96, 99, 181, 184, 185, 186, 187, 189, 190, 193, 208, 216, 218, 225, 226 productivity growth, 185, 186, 371 profession, 222, 225 professional careers, 67 professionals, 4, 61, 289 professions, 185 profit, xi, xii, 4, 34, 65, 76, 79, 96, 99, 100, 150, 151, 170, 172, 180, 187, 221, 297, 329, 331, 405 profit margin, 187, 331 profitability, 187, 221, 225, 281, 368 profits, 186, 191, 218, 225 program, 229, 230 project, xii, 21, 37, 38, 40, 41, 147, 175, 221, 282, 313, 348, 363 proliferation, 59, 245, 258 property rights, 10, 22, 208, 210, 211, 215, 216, 217, 218, 254 property taxes, 365 proportionality, 8 proposition, 118, 166, 198 prosperity, 52, 132, 188, 208, 217, 218, 339, 351, 358 protection, vii, xiii, 1, 2, 3, 4, 5, 7, 9, 10, 13, 17, 78, 94, 99, 154, 190, 208, 210, 213, 216, 217, 218, 233, 234, 243, 248, 253, 271, 291, 292, 323, 357, 360, 364, 372, 373, 375, 398

protectionism, 8, 17, 93, 94, 162, 192, 281, 282, 341, 342, 361, 383, 388 prototype, 363 provincial councils, 387 prudential regulation, 279, 288, 408 psychological health, 34 psychological variables, ix, 69 psychology, 125, 205, 224, 230 puberty, 35 public administration, 152 public awareness, 4 public debt, 311 public domain, 10 public education, 33, 173 public enterprises, viii, 47 public finance, 151, 308, 311, 380 public goods, 52 public housing, 296, 324, 404 public interest, 17, 282 public investment, 320 public opinion, 156 public policy, 360 public sector, 49, 65, 171, 215, 222, 306, 405, 407 public service, 4, 8, 172 public support, 100, 289 publishing, 184, 371 pulp, 246 punishment, 7 purchasing power, 89, 135, 136, 146, 162, 238

Q quality improvement, 96 quality of life, 48, 95, 209 quantification, 119, 199 Queensland, 69, 75, 85, 139 questioning, 280, 305 questionnaire, 106 quotas, 13, 14, 121, 201, 251, 257, 311, 339, 366

R race, 178 radiation, 164 radicalism, 279 radio, 43, 56 range, xi, 90, 118, 179, 192, 198 rash, 370 rate of return, 221 ratification, vii, 1, 2 rating agencies, 229, 286, 293, 367, 409, 410 rationality, xii, 221

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Index raw materials, 22, 58, 78, 228, 251, 348, 379 reactions, ix, 89, 99, 103, 105 readership, 56 reading, 41, 43, 358, 359, 365, 383 real assets, 279 real estate, 161, 271, 315, 332, 333, 334, 350, 400, 403 real income, 187 real time, 320 real wage, 180, 183, 189, 191, 226 reality, 53, 65, 66, 125, 153, 156, 205, 263, 322, 337 recall, 190, 244, 245, 394 recalling, 70 recession, 143, 165, 262, 264, 266, 274, 275, 304, 307, 308, 309, 312, 315, 316, 320, 327, 328, 347, 350, 352, 361, 363, 365, 367, 368, 369, 370, 372, 373, 375, 376, 377, 378, 379, 386, 387, 388, 392, 393, 395, 396, 399, 410 recognition, 3, 22, 62, 76, 77, 225, 251, 311 recombination, 25 recommendations, iv, 257, 266, 277, 278, 284, 321, 322, 323, 338, 342, 343, 407 reconcile, 188, 189 reconstruction, 159, 334, 393 recovery, 145, 161, 187, 190, 191, 262, 263, 264, 267, 275, 286, 294, 304, 307, 308, 309, 310, 312, 313, 318, 322, 327, 328, 346, 349, 351, 354, 356, 359, 361, 363, 365, 370, 371, 372, 373, 375, 377, 379, 380, 382, 383, 386, 387, 399 recovery plan, 387 recovery process, 191, 304 redistribution, 152, 154, 191 reduction, ix, 69, 78, 96, 97, 182, 184, 191, 217, 218 reflection, 230 reform, 41, 45, 65, 67, 100, 145, 149, 150, 151, 152, 153, 155, 158, 159, 163, 164, 165, 166, 195, 208, 209, 212, 213, 217, 231, 247, 262, 263, 264, 266, 267, 270, 271, 278, 284, 318, 319, 321, 323, 340, 341, 343, 351, 364, 373, 380, 381, 397, 407, 408 Reform, vi, 45, 141, 147, 149, 151, 152, 153, 155, 158, 166, 167, 195, 217, 219, 266, 271, 277, 319, 325, 407 reformers, 217 reforms, xii, 33, 36, 40, 134, 186, 194, 207, 208, 209, 210, 211, 212, 213, 215, 216, 217, 218, 222, 225, 229, 231, 234, 249, 262, 267, 269, 277, 315, 319, 327, 336, 338, 342, 351, 354, 364, 368, 384, 401 regenerate, 171 regeneration, 175 regional economies, 297, 405 regional integration, 132 regions of the world, 100, 263

435

regression, 71 regulation, 92, 93, 97, 209, 210, 211, 215, 217, 222, 225 regulations, xiii, 13, 20, 33, 36, 51, 152, 153, 165, 212, 216, 244, 245, 249, 250, 251, 252, 261, 263, 265, 266, 268, 277, 278, 286, 287, 291, 293, 314, 317, 321, 322, 329, 337, 340, 347, 364, 387, 401, 411 regulatory agencies, 209, 213, 244, 245, 264, 287, 411 regulatory changes, 137, 266 regulatory framework, 216, 223, 244, 287, 396 regulatory oversight, 340 regulatory systems, 277, 278 reinforcement, 94, 145 reinsurance, 314 relationship, ix, 70, 84, 85, 87, 99, 134, 135, 136, 184, 210 relationship marketing, ix, 70, 87 relationships, x, 70, 77, 80, 81, 86, 87, 127, 128 relative prices, 183, 188 relative size, 77, 344 relevance, 32, 43, 77, 212 reliability, 97, 112, 212 relief, 172, 178, 256, 257, 258, 281, 296, 329, 378, 386, 403 religion, 35, 63, 67 religious beliefs, 65, 66 remedial actions, 288 remittances, 285, 305, 306, 307, 308 renewable energy, 61, 258, 340 rent, 80, 208, 209, 215, 217, 218 repair, 282, 390 replacement, 84 repo, 412 representativeness, 93 reputation, 112, 213 requirements, viii, 7, 13, 43, 47, 52, 72, 78, 95, 217, 245, 248, 249, 250, 252, 268, 277, 281, 287, 289, 293, 310, 321, 333, 338, 341, 342, 354, 370, 374, 383, 401, 410, 411 research institutions, 63 researchers, xi, 59, 73, 119, 179, 199 Reserve Bank of New Zealand, 399 reserve currency, 166, 359, 373 reserves, 132, 144, 166, 170, 229, 247, 265, 283, 290, 293, 294, 297, 300, 301, 308, 309, 327, 329, 330, 331, 336, 352, 361, 362, 363, 366, 374, 381, 383, 389, 396, 405 residuals, 108 resilience, 288, 372, 411 resins, 236 resistance, xi, 56, 179, 356

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436

Index

resolution, 8, 11, 12, 93, 149, 152, 153, 212, 234, 251, 252, 269, 273, 274, 283, 337 resource allocation, 76, 152, 213 resource management, 20, 23, 25, 26, 28, 97, 98 resources, 23, 25, 38, 40, 53, 54, 61, 78, 85, 117, 133, 134, 171, 173, 187, 197, 209, 212, 213, 216, 217, 254, 267, 276, 278, 281, 285, 325, 327, 344, 348, 353, 363, 367, 375, 384, 387, 411 resource-seeking, 128 response, 13, 15, 31, 83, 86, 98, 102, 106, 144, 167, 181, 215, 225, 244, 263, 275, 288, 310, 311, 318, 320, 321, 330, 331, 341, 344, 363, 366, 369, 409 responsiveness, 410 restrictions, 13, 14, 17, 56, 97, 159, 245, 247, 248, 249, 250, 251, 255, 257, 281, 311, 331, 365, 380 restructuring, vii, 181, 189, 208, 209, 211, 215, 216, 218, 247, 273, 291, 317, 346, 389, 405 retail, 161, 323, 348, 352 retaliation, 15 retirement, 99, 225, 271 retirement age, 99, 225 retirement pension, 99, 100 returns, xii, 137, 187, 195, 207, 216, 225, 227 revaluation, 349 revenue, 129, 150, 254, 305, 306, 307 rewards, 66, 251 rhetoric, 6, 222 rights, vii, 1, 3, 4, 6, 7, 9, 10, 11, 12, 22, 36, 40, 41, 52, 54, 56, 62, 63, 93, 155, 165, 208, 210, 211, 212, 213, 214, 215, 216, 217, 218, 225, 227, 230, 248, 249, 251, 255, 263, 283, 323, 354 risk, xiii, 4, 20, 21, 22, 49, 80, 83, 105, 111, 161, 166, 224, 228, 229, 261, 263, 264, 265, 269, 272, 277, 278, 287, 288, 289, 291, 292, 293, 294, 304, 305, 307, 311, 316, 317, 318, 322, 323, 325, 336, 337, 339, 341, 342, 343, 346, 356, 368, 374, 375, 376, 403, 405, 408, 409, 410 risk assessment, 287 risk factors, 304 risk management, 323, 341, 408, 409, 410 risk perception, 316 risks, 81, 84, 186, 215, 218, 263, 267, 278, 283, 287, 288, 289, 304, 321, 322, 323, 339, 342, 343, 346, 349, 354, 360, 368, 378, 381, 386, 403, 410, 411 risk-taking, 272, 277, 342, 409 RMSEA, 108 robotics, 185 robustness, x, xi, 117, 118, 197, 198 Romania, 277, 346, 382, 387 root, 108, 192, 211 roots, 36, 76, 169 routes, 404 rowing, 87, 190

rubber, 184, 236, 237, 280, 406 ruble, 312, 392, 393 rule of law, 212, 213, 216, 342 rules, vii, 1, 3, 5, 6, 7, 10, 11, 12, 36, 52, 90, 153, 208, 209, 210, 211, 215, 216, 234, 248, 249, 252, 255, 262, 264, 269, 277, 281, 294, 300, 310, 318, 321, 323, 344, 349, 354, 356, 357, 359, 360, 367, 368, 373, 374, 376, 409 rural areas, 32, 40, 149, 150, 155, 159 rural development, 132, 159, 296, 404, 406 rural people, xi, 169, 171, 172, 173, 175, 177 rural women, 43 Russia, 142, 143, 144, 145, 217, 266, 279, 280, 282, 283, 289, 290, 292, 294, 297, 299, 301, 312, 313, 347, 356, 374, 383, 387, 388, 390, 393, 397, 400, 405, 407 Rwanda, 130, 138

S Saddam Hussein, 393 safe haven, 305 safety, xiii, 93, 95, 208, 233, 234, 242, 244, 245, 246, 249, 259, 274, 283, 295, 297, 303, 314, 356, 361, 372, 405 sales, 106, 186, 193 sample, 107, 108, 121, 124, 189, 201, 204 sanctions, 7, 253, 323, 378 SAP, 172 satellite, 185 satellite technology, 185 satisfaction, 71 saturation, 390 Saudi Arabia, 55, 56, 266, 283, 299, 329, 336, 390, 392, 399, 407 savings, 96, 99, 100, 178, 191, 263, 320, 323, 329, 331, 354, 358, 401, 402 savings account, 401, 402 savings rate, 320 schema, 277 school, viii, 31, 33, 35, 36, 37, 38, 40, 42, 57, 61, 62, 65, 67, 185, 297, 319, 404, 405, 406 schooling, viii, 31, 35 science, ix, 35, 41, 48, 51, 58, 59, 60, 63, 64, 75, 76, 139, 225, 250, 258 scientific knowledge, 49, 58 scope, xiii, 3, 5, 7, 9, 14, 17, 20, 23, 54, 78, 81, 150, 155, 208, 261, 264, 273, 281, 298, 323, 396, 408 scores, 122, 123, 202, 203, 229 SDRs, 267, 284, 339, 366, 379 seafood, 240, 244 search, 85, 216 second generation, 215

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Index Second World, 48, 180 secondary education, 57, 62 Secretary of Defense, 285 Secretary of the Treasury, 259, 272 securities, xiii, 154, 233, 241, 242, 243, 247, 266, 270, 274, 277, 278, 286, 287, 289, 291, 293, 298, 314, 316, 324, 326, 331, 342, 349, 360, 361, 369, 381, 384, 385, 397, 400, 401, 402, 407, 408, 409, 410, 411 Securities Act of 1933, 271 Securities Exchange Act, 270 securities firms, 298 security, xiii, 11, 35, 63, 91, 118, 119, 120, 152, 159, 190, 193, 198, 199, 200, 215, 250, 262, 264, 265, 279, 280, 300, 318, 410 self, 80, 95, 99, 104, 118, 198 self employment, 99 self esteem, 95 self-awareness, 41 self-confidence, 40, 62 self-expression, 118, 198 self-interest, 52, 80, 104 seller, 78, 96, 265, 291, 346 sellers, 78, 271, 288, 291, 293, 410 semiconductor, 184, 252 semiconductors, 183, 236, 252 seminars, 40 Senate, 259, 262, 270, 272, 279, 360, 381, 387, 392, 402 sensitivity, 71, 118, 119, 183, 198, 199 Serbia, 276, 344 series, 70, 229 service provider, 172 services, iv, 3, 8, 12, 13, 14, 21, 28, 33, 38, 41, 49, 53, 71, 96, 139, 159, 160, 172, 173, 184, 185, 217, 236, 241, 249, 251, 255, 259, 268, 269, 280, 288, 290, 297, 307, 318, 323, 357, 378, 390, 405, 409 sewage, 297, 387, 406 Seychelles, 131, 135, 136, 138, 277, 344, 366 shame, 371 Shanghai Cooperation Organization, 144 shape, 6, 91, 151, 210, 218, 351, 355 shaping, 215 shareholders, 272, 273, 320, 326, 360 shares, xi, 83, 96, 129, 132, 133, 134, 180 sharing, 75, 81, 83, 92, 96, 99, 100, 118, 194, 198 shelter, 171 shock, 254, 289, 305, 344, 359, 383 shock therapy, 359 shores, 58 short run, 208 shortage, 336

437

shortfall, 280, 377 short-term interest rate, 310, 331 showing, 77, 108, 113, 121, 182, 186, 201, 312, 313, 328, 348, 384, 392 shrimp, 244 Sierra Leone, 130 signals, 8, 210, 378 signs, 267, 327, 328, 332, 359, 361, 401 silicon, 251 similarity, 105, 118, 137, 198 Singapore, 93, 211, 240, 266, 289, 328, 330, 364, 392, 399, 405 Single European Act, 92 skilled workers, 33, 181, 183, 184, 185, 188 skills, 96, 97, 185, 187, 194, 209 skin, 32 slavery, 178 Slovakia, 214, 217 small businesses, 297, 325, 335, 385, 405 small firms, 152 social attitudes, 212, 218 social behaviour, 81 social benefits, 296, 404, 405 social capital, 49 social class, 70, 153 social context, 63, 91 social development, 149 social group, 7 social obligations, 52 social order, 48, 54 social organization, 209 social participation, 36 social problems, 62 social programs, 306, 310, 386 social psychology, 125, 205 social regulation, 208 social relations, 48 social relationships, 48 social responsibility, 41, 94 social safety nets, 308, 339, 367 social security, 91, 152, 154, 155, 159, 405 social services, 43, 49, 217 social skills, 36 social structure, 86 social welfare, 297, 397, 405 society, viii, 6, 10, 16, 31, 32, 33, 35, 36, 40, 41, 48, 56, 58, 59, 63, 86, 100, 152, 156, 163, 171, 173, 208, 211, 218, 227, 279, 285 sociology, 28 software, 23, 37, 59, 184, 253, 254 soil, 229 soil erosion, 57 solidarity, 3, 91, 92, 314

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438

Index

solution, 14, 15, 37, 119, 186, 199, 317 South Africa, 130, 132, 133, 134, 136, 138, 142, 143, 266, 283, 299, 357, 366, 373, 407 South Asia, 52 South Korea, 26, 141, 172, 214, 238, 276, 282, 283, 290, 297, 299, 327, 328, 329, 330, 335, 344, 377, 384, 391, 392, 398, 400, 403, 405, 407 Southeast Asia, 340 Southern African Development Community, x, 72, 127, 129, 130, 138, 366 sovereignty, 2, 3, 9, 16, 284, 321, 338 soybeans, 237 Spain, 142, 197, 217, 266, 278, 377, 401, 404 specialisation, 78 specialists, 37, 41, 59, 185 specialization, 22, 216 species, 175 specifications, 38 specificity, 81, 84, 86, 119, 199 spectrum, 211 speculation, 76, 224, 225, 230 speech, 56, 60, 333, 356 speed, 185, 193, 212 spending, 54, 99, 229, 276, 282, 284, 296, 297, 306, 308, 311, 316, 319, 324, 333, 334, 348, 356, 362, 365, 367, 369, 370, 371, 373, 377, 378, 379, 381, 387, 388, 391, 393, 395, 397, 399, 404, 405, 406 spillover effects, 116 spillovers, 213, 215, 343 Spring, 158, 166, 232, 321 Sri Lanka, 406 SSA, 130 stability, 10, 28, 49, 56, 66, 81, 90, 121, 123, 124, 186, 191, 201, 202, 203, 204, 208, 212, 215, 218, 247, 254, 264, 280, 287, 291, 294, 299, 304, 305, 309, 312, 323, 336, 337, 338, 340, 343, 352, 356, 363, 387, 400, 401, 409 stabilization, 166, 194, 210, 215, 216, 228, 264, 300, 305, 325, 377, 380, 387, 395, 397, 402 stabilizers, 267, 276, 320, 372 staffing, 26 stages, 72, 77 stakeholders, 173 standard of living, 50, 89, 312 standards, 89, 93, 94, 102, 192, 194, 209, 210, 212, 215 starvation, 53 state, vii, 6, 7, 8, 9, 12, 13, 16, 19, 26, 35, 37, 44, 49, 50, 52, 53, 56, 106, 137, 149, 150, 151, 152, 164, 170, 172, 177, 178, 208, 209, 210, 212, 213, 215, 221, 223, 227, 230, 247, 249, 263, 281, 310, 313, 319, 320, 326, 327, 328, 331, 337, 347, 348, 349,

363, 372, 373, 377, 381, 386, 387, 389, 398, 401, 405 state intervention, 170, 212 state-owned banks, 310, 313, 331, 349 state-owned enterprises, 247, 249, 331 states, 2, 8, 9, 12, 14, 77, 93, 118, 120, 142, 155, 198, 200, 208, 211, 213, 230, 250, 277, 289, 296, 318, 329, 347, 348, 357, 359, 366, 380, 393, 395, 403, 404 statistics, 108, 275, 311, 347, 361, 378 statutes, 213 steel, 160, 247, 249, 250, 251, 252, 253, 256, 281, 282, 363, 379, 389 steel industry, 160, 250 stimulus, xiii, 83, 85, 99, 145, 158, 160, 242, 249, 261, 262, 263, 264, 266, 267, 272, 275, 276, 281, 282, 285, 286, 296, 297, 298, 306, 307, 308, 309, 310, 311, 319, 320, 322, 324, 327, 328, 330, 331, 333, 341, 348, 350, 351, 354, 356, 359, 362, 368, 369, 370, 371, 372, 373, 383, 385, 386, 387, 389, 390, 391, 392, 395, 397, 398, 404, 405, 406 stock, 96, 228 stock exchange, 326 stock markets, 161, 294, 334, 410 stock value, 294 stockholders, 265 storms, 370 Strategic Economic Dialogue, 234, 257 strategic management, 23, 85 strategies, ix, 69, 86, 92, 103, 104, 106, 112, 113, 117, 139, 187, 197, 210, 227 strength, 91 stress, 43, 59, 104, 144, 265, 277, 278, 328, 342, 382, 387, 391, 408 structural adjustment, 49, 159, 216, 225 structural reforms, 209, 222, 231, 339, 378 structural unemployment, 186 structure, 25, 33, 39, 75, 76, 77, 86, 91, 92, 97, 125, 147, 152, 158, 159, 160, 162, 163, 195, 205, 208, 210, 215, 216, 218, 223, 224, 266, 271, 280, 283, 286, 293, 322, 354, 360 style, 41, 95, 170, 254 Styles, 116 Sub-Sahara Africa, 142 sub-Saharan Africa, 188, 380 subsidy, 160, 249, 250, 256, 281, 361 subsistence, 99, 223 substitutes, 213, 312 substitution, 97, 106 succession, 228 Sudan, 133, 135, 138, 348 suffering, 208 suicide, 208

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Index Sun, 368, 371 Sunnis, 56 supervision, 42, 165, 166, 246, 266, 267, 268, 269, 287, 289, 314, 315, 317, 321, 322, 323, 325, 329, 338, 340, 342, 372, 409 supervisor, 319 supervisors, 267, 319, 321, 322, 341, 411 supplier, 240, 245, 257 suppliers, 240, 245, 251, 321 supply, 70, 107, 134, 186 supply chain, 70 supporting institutions, 210, 216 surplus, 162, 182, 225, 310, 349, 366, 385, 388, 411 surveillance, 343, 351, 411 survival, 20, 54, 58, 84, 394 sustainability, 81, 156, 173, 178, 307, 327, 338, 339 sustainable development, 3, 43, 57, 156, 178, 356 sustainable growth, 153, 154, 313, 340, 384 sustained development, 152, 231 sweat, 194 Sweden, 55, 274, 289, 303, 304, 316, 326, 365, 387, 395, 396, 397, 400, 401, 405 Switzerland, 1, 266, 275, 303, 316, 329, 344, 357, 391, 401, 405 symbolism, 115 sympathy, 92, 118, 198 synthetic fiber, 237 Syria, 55 systemic risk, 262, 264, 266, 267, 269, 270, 273, 277, 284, 287, 288, 342, 346, 350, 381, 408, 410, 411 systems, 76, 95, 97, 121, 202, 213, 216, 224

T tactics, 213 Taiwan, 170, 190, 240, 248, 297, 328, 348, 386, 395, 406 takeover, 326, 402 talent, 20, 26, 36 Taliban, 280 Tanzania, 133, 138, 390 target, 71, 160, 161, 187, 215, 246, 273, 310, 352, 354, 358, 364, 367, 380, 385, 395, 399 targets, 222, 228, 230 tariff, 137, 248, 249, 251, 252, 259, 281, 359, 398 tax breaks, 252, 256, 296, 372, 404, 405 tax cuts, 52, 249, 276, 296, 297, 307, 320, 324, 387, 391, 403, 404, 405 tax deduction, 296, 297, 404, 405 tax evasion, 337, 357 tax increase, 296, 324, 377, 404 tax policy, 252

439

tax reform, 151 tax system, 151, 336 taxation, 152, 215, 217, 336 taxes, 99, 251, 296, 297, 311, 313, 348, 358, 364, 377, 404, 406 taxonomy, 71 taxpayers, 262, 349, 357, 401 teacher training, 37, 38, 40 teachers, 33, 37, 38, 64, 65, 66, 67 teaching strategies, 64, 65, 67 teams, 95, 96 technical assistance, 7, 342, 343 technical support, 156 techniques, 58, 61, 94, 129, 185 technological advances, 222, 223 technological change, 87, 102, 180, 184, 185, 186, 192 technological progress, 129, 144, 230 technological revolution, 225 technologies, 15, 72, 78, 79, 184, 185, 186, 225, 390 technology, 20, 21, 27, 28, 31, 36, 37, 38, 48, 49, 58, 59, 60, 63, 84, 97, 98, 145, 152, 153, 156, 158, 159, 160, 176, 180, 183, 185, 186, 187, 189, 190, 192, 193, 194, 239, 240, 248, 249, 250, 254, 258, 290, 296, 318, 340, 369, 389, 403, 405 technology transfer, 27, 84, 189, 248, 250, 405 teeth, 365 telecommunications, 2, 148, 172, 249, 250, 296, 322, 366, 404 telephone, 61, 364 telephones, 61 tension, vii, 1, 14 tensions, 243, 311 territory, 3, 7, 9, 142, 371 terrorism, 279, 325, 341 tertiary education, 63 test scores, 64 testing, x, xi, 103, 115, 121, 124, 179, 201, 204, 245, 278, 408 Texas, 195 textbook, 64, 190 textbooks, 38, 65 textiles, 32, 50, 147, 239, 247, 249, 256, 257, 282, 310, 311, 366, 389, 406 Thailand, 28, 38, 142, 170, 192, 290, 328, 330, 391, 405 theory, 76, 81, 87, 94, 115, 125, 182, 189, 205 Third World, 16, 231 thoughts, 15 threat, 193 threats, 81, 254, 350 time, x, xii, 87, 89, 92, 93, 99, 100, 113, 117, 121, 180, 193, 197, 202, 213, 215, 217

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440

Index

time allocation, 366 time frame, 278, 378 timing, 81, 192 Title I, 234, 267, 268, 269 Title II, 268 Title IV, 234, 268 Title V, 268, 269, 272 Togo, 130 total factor productivity, 213 tourism, 345, 389 Toyota, 367, 368 toys, 239, 244, 245, 246 tracks, 113, 258, 284, 362 trade agreement, 21, 234, 253, 281, 361, 366 trade deficit, xiii, 233, 234, 236, 240, 243, 247, 378 trade liberalization, 52, 180, 188, 189, 190, 195, 234 trade policies, 190, 222 trade policy, 14, 195 trade union, 91, 92, 102, 209 trading, 78, 83, 188, 190, 195, 213 trading bloc, 20, 22 trading partners, 22, 362, 364 tradition, 90, 100 traditional practices, 65 traditions, 321 trafficking, 390 trainees, 65 training, 7, 9, 26, 33, 34, 37, 39, 40, 43, 53, 61, 62, 67, 92, 99, 246, 253, 308, 343, 405 traits, 118, 198, 353 tranches, 265 transaction costs, 76, 77, 78, 84 transactions, 231, 247, 266, 287, 306, 310, 324, 327, 370, 387 transfer pricing, 139 transformation, 67, 90, 151, 159, 254, 402 transformations, 34 transition, 222, 225 transmission, 42, 65 transparency, 208, 209, 210, 211, 212, 218, 249, 268, 277, 289, 314, 319, 323, 324, 340, 341, 342, 380, 410 transport, 172, 333, 348, 363, 380, 390, 391, 405 transportation, 20, 52, 186, 223, 241, 297, 405 Treasury, xiii, 233, 241, 242, 247, 259, 262, 266, 267, 268, 269, 271, 273, 274, 278, 279, 289, 294, 324, 338, 345, 359, 360, 361, 362, 363, 373, 374, 381, 384, 385, 392, 396, 401, 402, 407, 408, 410, 411, 412 Treasury bills, 294, 324 Treasury Secretary, 345, 360, 363, 374, 381, 396, 402 treaties, 11, 12, 52

treatment, 7, 14, 149, 155, 234, 248, 251, 252, 324 trend, ix, xi, 90, 91, 103, 110, 111, 128, 180, 181, 185, 191 trial, 349, 371 triggers, 228 trust, ix, 69, 71, 79, 80, 81, 84, 86, 87, 97, 215, 217 trust fund, 374 trustworthiness, 84 turbulence, 72 Turkey, 14, 32, 50, 55, 142, 143, 191, 217, 226, 229, 230, 231, 266, 283, 299, 394, 407 Turkmenistan, 32, 39 turnover, 99, 147 twist, 191, 230

U U.S. Bureau of Labor Statistics, 139, 352, 376, 395 U.S. Department of Commerce, 141, 308 U.S. Department of the Treasury, 266, 273, 274, 407 U.S. economy, 242, 285, 304, 307, 358, 367, 376, 382 U.S. history, 403 U.S. policy, 233, 242, 244, 247, 266 U.S. Treasury, 241, 242, 243, 248, 257, 258, 273, 274, 278, 282, 290, 291, 295, 317, 330, 361, 369, 373, 381, 384, 396, 401, 402 UK, 5, 15, 28, 38, 51, 56, 68, 77, 86, 87, 143, 149, 324, 325, 407, 412 Ukraine, 276, 299, 300, 344, 377, 387, 389, 399 UN, 9, 51, 175 uncertainty, 78, 81, 83, 183 underwriting, 315, 355, 410 unemployment, 90, 99, 180, 181, 182, 183, 184, 185, 186, 187, 188, 191, 192, 193, 195 unemployment insurance, 267, 276, 310 unemployment rate, 58, 157, 309, 335, 346, 352, 376, 378, 383, 386, 395, 397 UNESCO, vii, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 15, 16, 17, 39, 45 unification, 35 uniform, 36, 129, 135, 136, 189, 298 unionism, 90, 100 unions, ix, 69, 70, 89, 91, 92, 94, 100, 187, 209 United Kingdom, 63, 94, 180, 184, 238, 266, 283, 289, 299, 303, 316, 317, 341, 364, 378, 385, 386, 390, 400, 404 United Nations, vii, viii, 1, 2, 9, 47, 51, 60, 62, 139, 175, 194, 195, 196, 304, 306, 307, 308, 310, 312, 335, 359, 390 United Nations Development Programme, 51 United Nations Educational, Cultural and Scientific Organization (UNESCO), vii, 1

Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

Index universal access, 175 universe, 355 universities, 32, 33, 37, 41, 44, 59, 296, 297, 404, 405 university education, 34 uranium, 363 urban, 32, 36, 146, 149, 154, 155, 157, 159, 160, 161, 162, 163, 172, 173, 238, 297, 406 urban areas, 155, 158, 172, 238, 297, 406 urban population, 163 urbanization, 152, 155, 163 Uruguay, 14, 187 Uruguay Round, 14, 187

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V Valencia, 289 validation, 106, 115 validity, 72, 188 value added tax, 159, 282, 296, 324, 404, 406 valueless, 294 values, x, xi, xii, 72, 96, 117, 118, 119, 120, 121, 122, 123, 124, 125, 197, 198, 199, 200, 201, 202, 203, 204, 205, 221, 224 valve, 314 variable, 118, 120, 121, 135, 198, 200, 201, 228 variables, ix, 69, 72, 81, 113, 118, 177, 191, 198, 309, 343 variance, 121, 122, 123, 201, 202, 203 variation, 78 variations, 79, 89, 95 VAT, 158, 252, 324, 376 vector, 128 vegetables, 240, 366 vehicles, 3, 8, 17, 239, 246, 310, 341, 343, 366, 368, 369, 372, 378, 379, 411 vein, 231 velocity, 26 Venezuela, 279, 305 venue, 17 vessels, 378, 389 vested interests, 209 veto, 283, 401 Vice President, 287 Vietnam, 142, 143, 225, 282, 330, 405 village, xii, 221 violence, 171, 336, 378, 400 vision, 60, 66, 171, 228 visions, 178 vocabulary, 118, 198 vocational education, 43 vocational training, 33, 41 voice, 94, 95, 98, 210

441

volatile environment, 20 volatility, 186, 190, 305 Volkswagen, 382 vote, 229, 267, 284, 326, 346, 379, 381 voting, 96, 241, 263, 344, 354 vouchers, 297, 406 vulnerability, 187, 188, 301, 303, 387

W wage differentials, 184, 189 wage rate, 226 wage structure, 195 wage-price spiral, 187 wages, 49, 72, 90, 93, 95, 99, 180, 183, 184, 185, 187, 189, 190, 191, 193, 194, 195, 226, 247, 319, 394, 405 war, 13, 35, 90, 95, 180, 186, 225, 229, 263, 284, 358, 379, 380, 381, 383, 384 Washington, xii, 6, 7, 68, 102, 149, 178, 194, 195, 196, 219, 221, 232, 245, 264, 265, 266, 274, 276, 277, 279, 280, 283, 284, 285, 300, 306, 307, 311, 315, 317, 319, 325, 340, 348, 350, 355, 357, 358, 360, 361, 365, 371, 376, 380, 396, 399, 402 Washington Consensus, xii, 221 waste, 229, 236 water, x, 49, 50, 58, 63, 154, 156, 169, 170, 171, 172, 173, 175, 176, 177, 178, 297, 333, 381, 405 weakness, 119, 153, 199, 321, 349, 355, 361, 381 wealth, x, 36, 50, 51, 52, 53, 54, 163, 165, 169, 192, 213, 266, 279, 285, 286, 290, 300, 301, 331, 343, 356, 370, 374, 375, 387, 389, 406 web, 20, 38, 56, 90, 381 web sites, 56 websites, 56 welfare, 49, 50, 52, 96, 180, 223, 227, 296, 297, 405, 406 welfare state, 223, 227 well-being, 172, 178, 228, 262 wells, 173 West Indies, 47 Western countries, 48 Western Europe, 130, 142, 181, 185, 187, 232, 283, 328 White House, 284, 350, 357, 369 wholesale, 241, 316 wildlife, 170 windows, 150 winter, 124, 204 Wisconsin, 100, 357, 381 women, 208 wood, 57, 252 wool, 363

Globalization: Partnerships, Modernization and Future Perspectives : Partnerships, Modernization and Future Perspectives, edited by Joseph A.

442

Index worldwide, xiii, 21, 22, 23, 25, 48, 49, 58, 61, 82, 104, 108, 128, 132, 142, 162, 166, 170, 261, 264, 338, 342, 387 worry, 327 writing, 213 wrongdoing, 323 WTO, vii, viii, xiii, 1, 4, 5, 6, 7, 8, 10, 11, 12, 13, 14, 15, 16, 17, 47, 48, 50, 51, 52, 53, 93, 146, 151, 222, 233, 234, 243, 248, 249, 250, 251, 252, 253, 255, 256, 257, 259, 281, 354, 359, 379, 384

Y Yale University, 178, 232, 377 Yemen, 279 yield, xii, 221, 385 young people, 279 yuan, 246, 256, 349, 363, 376, 384, 386, 390

Z Zimbabwe, 130, 133, 136, 138, 348, 366, 378, 394 zinc, 251

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workers, ix, xi, xii, 7, 43, 49, 52, 53, 54, 59, 60, 61, 89, 91, 94, 95, 100, 155, 157, 160, 171, 180, 181, 183, 184, 185, 187, 188, 194, 207, 208, 215, 216, 233, 285, 296, 297, 298, 308, 318, 325, 332, 357, 364, 372, 374, 375, 378, 394, 404, 405, 406 workforce, 64, 208, 367 working class, 90 working conditions, 37, 52, 70, 93, 95 working groups, 246 working hours, 217 workplace, 405 World Bank, xii, 7, 48, 49, 68, 89, 101, 102, 130, 143, 156, 170, 172, 179, 190, 191, 192, 194, 195, 196, 210, 212, 214, 216, 218, 219, 221, 222, 229, 231, 262, 264, 266, 277, 283, 286, 292, 306, 308, 310, 319, 336, 339, 343, 345, 349, 351, 356, 362, 364, 365, 367, 378, 380, 382, 394, 396, 397, 399, 411 World Development Report, 156, 196, 217, 219 world order, 178 World Trade Organization, vii, viii, xiii, 1, 5, 6, 12, 47, 48, 222, 233, 234, 248, 251, 253, 263, 281, 282, 311, 337, 342, 354, 357, 359, 361, 379, 384 World War I, 13, 93, 228, 369, 391 World War II, 228 worldview, 36

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