Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Trade Page 11 of 13

The Venezuela edition of “imports will kill’ya”

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On January 30, 2015

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So, the New York Times has an article on how Venezuelan stores are running out of basic goods, because they import so much, and with the drop in oil prices, they don’t have enough hard currency to buy what they need.

Repeat after me for the 100th time, “all resource booms end.”

All of them.  Always.  Gold, oil, rubber: it always ends.  Period.  The question is only when.

Back around 2004, myself and Stirling pointed on the late (and defunct) BOP News that Chavez was screwing up his revolution.  That’s not a way of saying I disapprove of his goals, I very much agree with what he was doing in general terms. But in specific, he was not making his country independent of high oil prices.

What a country needs it must either be able to produce, or have product it knows it can sell to someone who can produce what it needs, and who is a reliable partner. (No Western country is a reliable partner to an actual left wing revolutionary government.)

Period.

If you do not, things may go well for a long time, but you are ALWAYS vulnerable to the hegemonic economic state and its allies.  Right now that’s the West.  For a long time, if the West were jerks to you, you could run to the USSR, but right now there is no complete replacement, though China, as leader of the BRICS, is coming on strong.

Note that when the USSR fell, Russian support for Cuba almost entirely went away.

It was a huge shock, but Cuba survived it.

Chavez was a great friend of Castro’s, but he did not learn from Castro.  He did not figure out how his country could survive being cut off from what amounted to essentially it’s only source of support (in his case, oil sales).

Now Venezuelans pay the price.

Learn the lesson.

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Exchange Rates 101

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On December 18, 2014

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In light of the collapse of the Ruble I think it’s worth revisiting what controls exchange rates.

Supply and Demand.

Yeah, if you know something about the subject you’re probably shaking your head.

Supply and Demand doesn’t set prices in many cases in the way that an Economics 101 course tells you.

Such texts will say that the exchange rate is based on exports and imports.

For many countries, that isn’t true; or not all the time.  The US dollar can move up even when the trade balance is south (as it has been for decades now.)  The same is true of many other economies.

Britain hardly exports anything any more.  But people want to live in London.  Or they want the city to invest their money, or they want to buy art at Sothebys, or they just want a relatively safe place they can run to if the politics in their country go south.

People likewise want Manhattan real-estate; a US passport, and so on.  A vacation or home in Paris or the South of France.

They want to buy stocks in important companies which are defining the future, like Apple, or Tesla, or Google, even if those companies manufacture overseas.

They want money in China to take advantage of China’s high growth rate and returns, while Chinese want money out for diversification and to have a safe place to go if the politics turn against them.

People don’t want vacation homes in Russia, by and large.  They may want to take advantage of growth opportunities (which exist in certain sectors), but before the sanctions they were scared of corruption (with good reason) and post sanctions they are worried about getting returns out.  Since most of Russia’s exports are of hydrocarbons, and since people don’t want to move money into Rubles otherwise, the value of the Ruble in terms of other currencies moves up and down with the price of hydrocarbons.

There are other factors, for example if you offer high returns, that can matter (raising returns didn’t matter to Russia, because the potential value was swamped by fears of further ruble and oil devaluation.) Speculation of future gain or loss in the futures and options markets can raise or lower the value of your currency as well.  You can fix your currency and you can make it stick if your economy is strong enough in specific ways (mostly having to do with producing what you need).  China did this for years, and so have many other countries.  This can lead to black market currency markets and problems, but that can be better than the alternatives (as Russia may now be finding out.)

But if you float your currency, the bottom line is that excahnge rates (with a few exceptions) to rise and fall based on how much people want from  your country which they have to buy with your currency.

Japan refuses to eliminate agricultural tariffs, and spikes the TPP (Take 2)

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On October 13, 2014

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The Trans Pacific Partnership trade agreement in in trouble, and one of the reasons is Japan has refused to eliminate agricultural tariffs.  Japan is entirely correct in this.

Japan’s agriculture is not efficient: it costs more to grow food in Japan than it does in many other nations.  If Japan removed its tariffs, its agricultural sector would either be eliminated or forced to consolidate and specialize in crops it has a comparative advantage in.  Whatever these are (perhaps silk), they wouldn’t be staple food crops.  Japan would thus lose what ability it has to feed itself and would have to buy even more food on world markets than it does today.

Regular readers will recognize this pattern from the article on why the third world is even more impoverished today than it was 40 years ago. Now Japan is by no means a third world country, and money would be loaned to it to buy said food, but Japan is not a healthy economy either.  The Japanese recently lowered the value of the Yen significantly, and  their exports didn’t increase.

Contrary to economic dogma that sort of thing happens fairly often: people simply are already buying as much of what Japan makes as they want.

Japan is not what it was 30 years ago, or even 10.  It runs an export deficit and it is barely running a current account surplus any more . Even when the economy was healthy, having to buy much of its energy was painful, having to buy its food would be even more so.

But more importantly, it would make Japan vulnerable to anyone who controlled foreign currency loans they need to buy the food, and to the major food producers.  Japan can print money, to be sure, and has, but there comes a point where you can’t, where people won’t take it.  Japan isn’t there yet, but they risk being there someday soon.  And bear in mind that as global warming bites, food will become more and more scarce. Right now we have a huge food surplus, that will not remain the case.

Countries which cannot produce what the rest of the world needs, nor produce what they need, are always in great danger from other nations which can cut them off.  They give up power over their own fate, and others will take advantage of it to force them to do as they wish, including opening up their markets to allow the commanding heights of the economy to be purchased.

Japan has been badly run for decades, and made the same mistake the US did when its bubble collapsed: they did not wipe the debts off the books, but instead extended and pretended.  That lead to the long “bright depression”, but it is now leading them into a much worse period.

They are, however, doing something right in refusing to remove their tariffs.  To be sure, they are doing so for domestic political reasons (the small rural farmers are politically powerful), but that doesn’t mean it isn’t still the correct thing to do.

Since the TPP is, overall, a terrible trade agreement (they virtually all are) let us hope the Japanese stick to their guns and that it does scupper the agreement.  It’ll be best for them, and for us.

(An earlier article on the same topic disappeared except for the title.  This is a rewrite, but with additional detail.)

(Article changed to indicate that Japan is still (barely) running a current account surplus, not a deficit.) -10/14/2014)

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The Result of Austerity and Neo-Liberalism is the Rise of the Neo-Fascist Right

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On May 27, 2014

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includes, as expected, the rise of the neo-fascist right.  The UK Independence Party and France’s National Front won national elections to the European Parliament.

This doesn’t mean they would win national elections proper, the EU vote is often a protest vote, but the results are still impressive.

This the natural reaction to austerity.  When times get tough, and when the “mainstream” parties have no answers which work, people will vote for alternatives.  In Greece, to the Greek’s credit, this was SYRIZA, an actual left wing party (though the fascist Golden Dawn party did do reasonably well).

When I was a child, living in the city of Vancouver, I told my father I didn’t see a lot of racism.  I’ve always remembered his response “wait till times get bad.  People will  hate those who are different.”

My father was a child of the Great Depression.

The neo-liberal left of Europe and North America offer no solutions.  They cannot offer solutions, it is not possible under neo-liberalism to fix the problems neo-liberalism has created: they are a result of neo-liberalism’s genuine beliefs about how the world economy should be run.

You can not, under the neo-liberal model of globalization, tax the rich effectively: they can go somewhere else.  You cannot hold wages up, because jurisdictions can always be played against each other.  You cannot fix the environment and stop the mass wiping out of species and the probable death of a billion humans, because jurisdictions can be played against each other.  That countries no longer produce the majority goods they need themselves, nor in many cases even the food, means jurisdictions cannot unilterally do the right thing, even if they wanted to (which they don’t.)

Because the oligarchs also control the means of ideological dissemination, you also can’t effectively communicate either the problems or good solutions.  Because the oligarchs control the means of political production (ie. the process of producing and nominating political candidates), you can’t get into power the people who would actually want to change the neo-liberal political order (and if by some miracle you could, expect them to be treated as Argentina or Venezuela have been treated or destroyed as Howard Dean was.)

Neo-liberalism is an effective ideology and set of policy prescriptions: not because it produces good outcomes for the majority of people (that’s not its purpose), but because it creates a constituency (oligarchs and their supporters/retainers) who are able to maintain it in power.

All ideologies eventually come to an end, however.  The oligarchs hate real left-wingism far more than they do fascism.  They have crushed the left.  Because no new coherent ideology can arise due to oligarchical control over the mechanisms of dissemination, all that remain are old ideologies.

Given no real and viable left-wing parties to vote for; given the failure of what they are told are left-wing policies (as with Obama being called a left-winger when his economic policy has been to give trillions to oligarchs); people will vote for the only other option: the hard right—the neo-fascists.

They are, at least, against the status quo.  The UK-IP wants to leave the EU.  They want less “free” trade.  And so on.  Given no other option for actual change, people opt for the parties actually offering it, even if those parties are noxious.

And so, the hard right rises because of the failure of the so-called center-left, which is not left wing at all, but is for more slightly less cruel neo-liberalism.

But neo-liberalism cannot be made kind. It is antithetical to one of the fundamental purpose sof neo-liberalism, which is to drive down wage rises and inflation by playing jurisdictions against each other.

And so the hard right rises.

Remember, the economies in Germany and Italy under Hitler and Mussolini, for ordinary people, improved immensely.  (Unless you were a Jew, gay, a socialist, a gypsy, etc…  But that’s a price those who won’t pay it, are willing to pay.)

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Why Nations Can’t Resist Austerity

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On April 25, 2014

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Free trade, as practiced, is designed to destroy local autonomy by making nations dependent on foreign goods, and by removing decision making from democratically elected bodies and pushing them to transnational tribunals, secret courts and laws which cannot be changed without opting out from treaties, something most countries are reluctant to do, because they need the trade once they are enmeshed.

Keynes believed that most production of basics should be local: you should manufacture most of what your country needs, in your country.  You should also, ideally, be able to feed your own population.

If you can’t make what you need or what your people (and more importantly, elites) really want, then you’re screwed.  In the modern world you need hydrocarbons, you need food, and you need the machinery which turns hydrocarbons into the industrialized lifestyle.

Your prosperous citizens probably want food your country doesn’t produce: summer vegetables in winter, possibly meat you can’t provide in large enough quantities, and so on.  They want electronic goods like smartphones that due to patents are quite expensive, and which you probably can’t make domestically.

Your elites want a vacation in Paris, a home in London, a German car, a French mistress, a New York Apartment, and a variety of luxuries that their own country doesn’t make.

If you want or need these things; if you do not have a taste for what your country can produce, in terms of basics and luxuries; if you do not ensure your country can feed itself, generate electricity and make cars or other forms of transit, you MUST do what those who control the trade regime want you to, or you will find yourself cut off from all these things.

Distributed production of necessities (which includes basic lifestyle goods and luxuries and machine goods) is anti-democratic and anti-national control in a world where the primary decision making units which are amenable to pressure from the commons, whether democratic or not, is exerted almost entirely on national and local units.

If you want to not do austerity when the Troika demands it, you must be in a position to tell the Troika to go stuff itself. If you have made yourself vulnerable, by losing your ability to feed yourself; by not developing local industry or exporting it; by your citizens acquiring a a perceived or real need for foreign goods; or by your local elites wanting to be “transnational elites” who want foreign luxuries and who feel as at home in Paris, New York and London as in their own country, then you cannot refuse to do what those who control the trade and international monetary regime tell you to do.

This is always the devil’s bargain offered in international regimes: “you can get all the stuff we have if only you open up”.  It’s true, and for many countries it works for a while.  The less you had, the shorter period it works for (countries who only have to be convinced to give up their ability to feed themselves by switching to cash crops and forcing subsistence farmers get a few years), but once you’ve given away your autonomy, the deal will, at some point, always turn bad.  Those with the whip hand, will always eventually drive you down unless you have as much power over them as they have over you.

And knowing that your elites are no longer yours, but theirs, they will always find someone to do it for them, because your elites will be eager to sell you out for the flat in New York, the vacations in the south of France, the German automobile, the French mistress, the Swiss boarding school for their children, and for the fine luxury goods their own country cannot make.

If you get yourself into this position, you must overthrow your elites, and you must figure out how to become independent again.  You must make deals with other blocs: the Russians and the Chinese, for the transition period, and figure out how to move your production of what matters back to local, and if you no longer can, how to feed yourself. You must inculcate in your elites and peoples a desire for what you make locally – local lovers, the food of your nation, the luxuries you can produce.

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Mandela’s NeoLiberal Compromise

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On December 10, 2013

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South Africa may no longer have apartheid, but the majority of the population still lives in poverty, the heights of the economy are controlled largely by whites, and rich blacks are concentrated in the upper ranks of the ANC and their families.  The rape rate is possibly the highest in the world, with a quarter of men admitting to having committed a rape and a quarter of women to having been raped, while murder is rampant.

The ANC had originally intended to purse socialist policies, including taking away the wealth of the richest whites.  Nelson Mandela decided not to do that.  There are varying accounts of why, from outright bribery to being convinced, but let’s go with convinced.  The story is that once Mandela was released from prison, as he traveled the world, it was explained to him that if white flight occurred, his country would mimic Zimbabwe’s fate, and taking away the wealth of the richest whites and distributing it would cause that white flight.

So most of the redistributive part of the ANC’s program was jettisoned.  Blacks were to have political freedom, but whites would control the economy.  (Though you certainly don’t want to be a poor white in S. Africa.)  Tax rates in S. Africa are typical: low for individuals, lower for corporations.

Bear in mind that when Mandela made this decision the prices of commodities, S. Africa’s main exports, were substantially depressed.

Mandela was in a bind, take that advice as ‘warnings’ and you probably read it better: “if you do this, we will disapprove. We cannot allow such redistribution to work, so it won’t.”

Mandela chose to take what was on the table, political freedom absent redistributive justice.

Was it the right decision?

Yes.  Not because it isn’t theoretically possible to do redistribution and make it work, but because at the time it was harder, and because the ANC wasn’t up to the job.  Given how they have botched far simpler policy areas, like HIV, given their rampant corruption, the idea that redistribution could be managed by them in a fair way, while maintaining economic growth and avoiding being crushed by the outside reaction is not credible.  These are not competent people, they are noticeably incompetent.

S. Africa has significant advantages in its mineral wealth (though that can also be a curse).  Resources that the rest of the world must have give you leverage to do what you want, and tell everyone else to take a hike (see Saudi Arabia).  But pulling that off requires finesse and it is harder to do if you have a redistributionist ideology, because international elites are happy to tolerate regressive regimes but do not want fair regimes to succeed, lest they show other countries that inequality and unfair trade deals are not inevitable.

Venezuela, though good has been done, is botching their experiment; so is Argentina.  S. Africa could never have pulled it off.

Much of this is probably also down to Mandela’s age: he was in his late seventies when he was President.  He did not have ten good years left to finesse through this sort of change, he did not have competent heirs or time to create them; instead he had the ANC, whose leaders were corrupt at best.

When the attempt is made at real redistributive justice, as it must be, it will be easiest done if a number of countries do it at about the same time, supporting each other, and acting as a bloc. If key resource nations like Canada, Russia, much of South America and S. Africa were to get together, it would be very difficult to bully them, because they control key resources which cannot be substituted away from except at great cost, and in some cases, at all.

Trade is key in the sense that countries must be able to buy certain key things they can’t make.  If producers work together, in solidarity, they can gain policy independence internally.  But this can only be done as a group, or great costs will be inflicted by the oligarchical forces of the developed world who do not want to, ever, see 90% tax rates create good economies ever again.

 

On Bangladesh’s Textile Disasters

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On May 12, 2013

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My father worked in Bangladesh for 8 years in the 80s, and in East Pakistan (what Bangladesh was called pre-independence) in the 50s.  I have relatives who live in India, and I spent my summers and many Christmas vacations in Bangladesh.  My mother spoke fluent Hindi (though that isn’t the language spoken in Bangladesh) as she grew up in Darjeeling and Calcutta.

Let’s run through the points.

The first is the simplest: I find it interesting that there is so much textile manufacture in Bangladesh. There was none to speak of in the 80s.  Let me put it crudely, Bangladesh is way down the chain, there are very few poorer, more corrupt countries in the world outside of Africa.  The textile industry is running out of cheap places to make clothes if they’re in Bangladesh.

The second is this: Bangladesh’s government will never enforce safety regulations in the textile industry. It is impossible, it will not happen.  Nothing happens, nothing gets done in Bangladesh without baksheesh—bribes.  Bribes are the actual salary of government employees, they are not paid enough to live decently on without them.  Textile factories will be throwing off so much money, in Bangladeshi terms, that virtually anyone can be bought, and with so much money at stake, anyone who can’t be bought will be otherwise dealt with.

Which means that if textile manufacturing jobs are to made safer it must be done by the companies buying the textiles, like Joe Fresh.  Only they can do it, because they control the money spigot. If unsafe work circumstances will cost the people running the factories money, they will fix it, assuming that the audits are thorough and rigorous, by incorruptible people.  Those people will have to be outsiders (outsiders aren’t necessarily incorruptible, but locals can be gotten to too easily) though they will need local fixers on staff.

My prediction is that some nominal steps will be taken, but only nominal ones. You don’t do textile manufacture in a country like Bangladesh because you want safe, you do it because you want cheap.  Really, really cheap.  Bet on the big headline disasters being only the tip of the iceberg, with routine maimings and horrible work conditions being part of the daily life of the workers.

All that said, if you live in Bangladesh, odds are you have no options.  These jobs may be horrible but they are jobs, and pay better than most of your other options.  That’s why the textile companies are there, no one who has other options would work in their hellhole sweatshops.

Ultimately that comes back to us and our corporate leaders.  We want cheap clothes, they want outsize profits (they don’t pass most of the “cost savings” on.)  If you aren’t dirt poor yourself, I suggest you look at the label, and if it’s made in a third world country (including China), don’t buy it.  It’s not much, but it’s about as much as you can do.  And, generally speaking the quality of clothes will be better.

If you really want to do something about this, tie work safety to allowing clothes made in such countries to be imported to developed nations, and have the inspectors be government employees of the country where the clothes will be exported.  That goes against everything our current government and corporate leaders are willing to do, however, and also offends the sensibilities of many on the left  so just get used to the fact that a lot of blood stains your clothes, just like lots of blood is mixed in to your oil and is used to fertilize your food.

The Reagan Play

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On December 10, 2012

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The Reagan play, in the last period of high oil prices was this: crush the economy and bring new sources of hydrocarbons online.

This is also Obama’s play: fracking and  other unconventional hydrocarbon sources are being ramped up massively, while austerity crushes resource demand.  China is  buying a lot less resources.

I called for falling oil prices before and was wrong about when it would happen, but I remain convinced it will happen.  The hardest thing to do is to predict not what, but when.

This does not mean that hydrocarbon prices in the long run are going to drop, they aren’t.  But in the mid terms, for a few years, they will.

This won’t do much good for ordinary Americans, because they won’t see almost any of the gains, their lords and masters will take most of it.

This crash will lead to challenges for many countries, most interestingly South American countries like Venezuela and Argentina which have been riding the resource boom and engaging in resource socialism.  They need to diversify their economies.  I doubt Venezuela will manage it, Argentina may, if the people running Argentina learn some humility.  This will also hurt the oil patch up here in Canada (primarily Alberta) and upset the political calculations of our Conservative party.  Russia, various Middle Eastern countries and so on will also have their problems.

All resource booms end.  All of them.  The question is only when.  The widespread slowdown, and especially the Chinese slowdown (which is hitting S. America hard), indicates we are likely close to the end of this boom period.

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